-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GC1dbsMPWBJmOYahgA5sdsFQS7zB8ZFPTxzzyrEcVrb9g7FIsNuARCQDQTslbOAD BTXZVMg3aACcIQPLIBSlWQ== 0000912057-00-016543.txt : 20000407 0000912057-00-016543.hdr.sgml : 20000407 ACCESSION NUMBER: 0000912057-00-016543 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20000406 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENOME THERAPEUTICS CORP CENTRAL INDEX KEY: 0000356830 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 042297484 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-32614 FILM NUMBER: 595118 BUSINESS ADDRESS: STREET 1: 1OO BEAVER ST CITY: WALTHAM STATE: MA ZIP: 02453 BUSINESS PHONE: 6178935007 MAIL ADDRESS: STREET 1: 100 BEAVER STREET CITY: WALTHAM STATE: MA ZIP: 02453 FORMER COMPANY: FORMER CONFORMED NAME: COLLABORATIVE RESEARCH INC DATE OF NAME CHANGE: 19920703 S-3/A 1 S-3/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 2000 REGISTRATION NO. 333-32614 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ GENOME THERAPEUTICS CORP. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2297484 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number)
100 BEAVER STREET WALTHAM, MA 02453 (781)-398-2300 (Address, of principal executive offices, including zip code) PHILIP V. HOLBERTON CHIEF FINANCIAL OFFICER GENOME THERAPEUTICS CORP. 100 BEAVER STREET WALTHAM, MA 02453 (781)-398-2300 (Name and address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ Please send copies of all communications to: PATRICK O'BRIEN MICHAEL LYTTON DAVID C. CHAPIN MARC A. RUBENSTEIN ROPES & GRAY PALMER & DODGE LLP ONE INTERNATIONAL PLACE ONE BEACON STREET BOSTON, MASSACHUSETTS 02110 BOSTON, MA 02108 (617) 951-7000 (617) 573-0100
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as possible after the effectiveness of the Registration Statement. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement under the earlier effective registration statement for the same offering. / / If this form is a post effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / / ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED APRIL 6, 2000 THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. 3,000,000 SHARES [LOGO] GENOME THERAPEUTICS CORP. COMMON STOCK $ PER SHARE - -------------------------------------------------------------------------- Genome Therapeutics Corp. is offering 3,000,000 shares of common stock. Our common stock is listed on the Nasdaq National Market under the symbol "GENE." On March 21, 2000, the last reported price of our common stock on the Nasdaq National Market was $24.6875 per share. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
PER SHARE TOTAL --------- -------- Price to Public................................ $ $ Underwriting Discount.......................... $ $ Proceeds to Genome Therapeutics................ $ $
Genome Therapeutics Corp. has granted an over-allotment option to the underwriters. Under this option, the underwriters may elect to purchase a maximum of 450,000 additional shares from Genome Therapeutics Corp. within 30 days following the date of this prospectus to cover over-allotments. - -------------------------------------------------------------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CIBC WORLD MARKETS WARBURG DILLON READ LLC DAIN RAUSCHER WESSELS TUCKER ANTHONY CLEARY GULL The date of this prospectus is , 2000 TABLE OF CONTENTS
PAGE -------- Prospectus Summary.......................................... 1 Risk Factors................................................ 5 Forward-Looking Statements.................................. 16 Price Range of Common Stock................................. 17 Use of Proceeds............................................. 17 Dividend Policy............................................. 17 Capitalization.............................................. 18 Selected Consolidated Financial Data........................ 19 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 20 Business of Genome Therapeutics............................. 26 Management.................................................. 44 Underwriting................................................ 46 Validity of Common Stock.................................... 47 Experts..................................................... 47 Where You Can Find More Information......................... 48 Index to Financial Statements............................... F-1
------------------------ Genome Therapeutics Corp.'s principal executive offices are located at 100 Beaver Street, Waltham, Massachusetts 02453. Our telephone number is (781) 398-2300. Our website can be found at www.genomecorp.com. Our website does not constitute part of this prospectus. "PathoGenome-TM- Database" is our trademark. All other trademarks or trade names referred to in this prospectus are the property of their respective owners. As used in this prospectus, the terms "we," "us," "our," and "GTC" refer to Genome Therapeutics Corp., and the term "common stock" refers to our common stock, $.10 par value per share. Unless otherwise stated, all information contained in this prospectus assumes no exercise of the over-allotment option granted to the underwriters. The underwriters are offering the shares subject to various conditions and may reject all or part of any order. i PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED IN OTHER PARTS OF THIS PROSPECTUS. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE SHARES. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY. OUR COMPANY OVERVIEW We are a leader in the commercialization of genomics-based drug discovery. We have over ten years of experience in genomic research and have been selected as the only commercial genomics company to participate in the Human Genome Project sponsored by the United States government. Our commercial strategy is to apply our broad understanding of human and infectious disease genomics and our integrated proprietary technologies to identify and validate novel drug targets for commercialization through alliances with pharmaceutical companies. We currently have six alliances to develop drugs to treat or diagnose a variety of human and infectious diseases. Our multi-year alliances with Wyeth-Ayerst, Schering-Plough, AstraZeneca, and bioMerieux combine our genomics expertise with our partners' small molecule drug libraries and world-class commercialization franchises. We are working with our partners to develop drugs for major indications such as osteoporosis, asthma, ulcers, drug resistant bacterial infections and fungal infections as well as genomic-based diagnostics for infectious diseases. Our depth of experience in the genomics field has permitted us to emerge as a leader in creating industrial scale genomics tools for product development. Our tools include: - high-throughput sequencing - sequence finishing - bioinformatics - functional genomics - assay development Our fully-integrated genomics technologies, highly automated processes and information systems are designed to rapidly generate comprehensive information about gene sequences, gene expression, and biological pathways that we use to identify and validate targets for the development of new therapeutic and diagnostic products. We are concentrating our product discovery efforts in two principal areas: human diseases believed to have a significant genetic component and infectious diseases caused by pathogens, including bacteria and fungi. We are pursuing the discovery of products based on our genomic discoveries both through strategic alliances with corporate partners and through internal research programs. In the area of human diseases, we have alliances with Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products Corporation, to develop treatments for osteoporosis and with Schering-Plough Corporation to develop treatments for asthma. In the area of infectious diseases, we have ongoing alliances with Schering-Plough to develop treatments for drug resistant bacterial infections, including STAPH. AUREUS, and to develop novel antifungals. We are working with AstraZeneca PLC to develop treatments for ulcers caused by H. PYLORI and have partnered with bioMerieux Incorporated to develop diagnostics for infectious diseases. As part of our emerging businesses, we are continuing to invest in our internal infectious disease franchise and build our pharmacogenomics program. We are typically entitled to receive a combination of up-front license fees, 1 research funding, milestone payments, and royalty payments on product sales in exchange for a license to our genetic research data and other information in our alliances. We have extensive experience in high-throughput sequencing. In addition to the sponsored genomic sequencing research done on behalf of the U.S. government, we also provide customized sequencing services to biotechnology companies and pharmaceutical companies that need industrial scale, high quality customized sequencing capability but may lack the expertise or in-house capacity to carry out the project. Since the launch of our GTC Sequencing Center in July 1999, we have entered into sequencing contracts with thirteen commercial, government and research customers. In 1997, we introduced our PathoGenome Database, a database consisting of genetic information from over thirty microbial organisms, a substantial part of which is proprietary to us. We have granted to six companies 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 are continuing to explore ways to leverage this genomic asset by pursuing alliances that will facilitate broader access to our PathoGenome Database. We are also internally funding programs to create additional value from our existing competitive strengths in genomics. We are seeking to develop new, more effective drugs through both our pharmacogenomics and infectious disease programs. We plan to work with collaborators to identify more appropriate patient populations using pharmacogenomics to enable the development of more effective, safer drugs and "rescue" promising drugs that could succeed in trials using pre-selected populations based upon genetically determined responsiveness. We are also mining our PathoGenome Database to identify genes that are novel targets for our internally funded infectious disease program. Our proprietary technology has enabled our scientists to discover genes that are essential for the survival of pathogenic organisms and to identify broad spectrum microbial targets that are essential in bacteria. 2 THE OFFERING Common stock offered......................... 3,000,000 shares Common stock to be outstanding after the offer...................................... 23,588,566 shares Use of proceeds.............................. We intend to use the net proceeds from this offering to fund research and development activities, including investment in our emerging pharmacogenomics program and expansion of our infectious disease franchise, and for general corporate purposes including capital expenditures, working capital, possible acquisitions and other general purposes. Nasdaq National Market symbol................ GENE
The share amounts in the table above are based on the number of shares outstanding at February 26, 2000 and exclude: - 2,386,628 shares of common stock issuable upon exercise of outstanding options at a weighted average price of $4.26 per share - 147,346 restricted shares of common stock granted but not yet issued 3 SUMMARY CONSOLIDATED FINANCIAL DATA The following financial data should be read in conjunction with, and are qualified by reference to, "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes included in this prospectus. The balance sheet data as of February 26, 2000 are presented: - on an actual basis - assuming our sale in this offering of 3,000,000 shares of common stock at an assumed public offering price of $24.6875 per share less our costs associated with this offering
TWENTY-SIX WEEK YEAR ENDED AUGUST 31, PERIOD ENDED ------------------------------ ----------------------------- 1997 1998 1999 FEB. 27, 1999 FEB. 26, 2000 -------- -------- -------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue: Contract research, licenses, subscription fees and royalties..... $ 16,653 $ 19,217 $24,018 $11,513 $13,840 Costs and expenses: Research and development.............. 26,524 31,977 26,700 13,486 11,750 Selling, general and administrative... 3,766 4,292 4,279 2,062 2,688 -------- -------- ------- ------- ------- Total costs and expenses............ 30,290 36,269 30,979 15,548 14,438 Loss from operations.................. (13,637) (17,052) (6,961) (4,035) (598) Interest income....................... 2,966 2,386 1,587 874 799 Interest expense...................... (631) (1,147) (954) (529) (396) -------- -------- ------- ------- ------- Net interest income..................... 2,335 1,239 633 345 403 -------- -------- ------- ------- ------- Net loss................................ $(11,302) $(15,813) $(6,328) $(3,690) $ (195) ======== ======== ======= ======= ======= Net loss per common share: Basic and diluted..................... $ (0.64) $ (0.87) $ (0.34) $ (0.20) $ (0.01) ======== ======== ======= ======= ======= Weighted average common shares outstanding: Basic and diluted..................... 17,618 18,212 18,383 18,335 19,396
AS OF FEBRUARY 26, 2000 ------------------------ ACTUAL AS ADJUSTED ---------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents, marketable securities and restricted cash...................................................... $35,891 $105,010 Working capital............................................. 22,797 91,916 Total assets................................................ 51,034 120,153 Long-term obligations, net of current maturities............ 5,760 5,760 Shareholders' equity........................................ 31,054 100,173
4 RISK FACTORS THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER CAREFULLY THE RISKS DESCRIBED BELOW BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING US. ADDITIONAL RISKS NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS WERE TO OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS WOULD LIKELY SUFFER. IN THAT EVENT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. RISKS RELATED TO OUR BUSINESS WE HAVE A HISTORY OF SIGNIFICANT OPERATING LOSSES AND EXPECT THESE LOSSES TO CONTINUE IN THE FUTURE. We have experienced significant operating losses since our inception and expect these losses to continue for the foreseeable future. We had a net loss of approximately $6,328,000 for the fiscal year ended August 31, 1999 and a net loss of approximately $195,000 for the twenty-six-week period ended February 26, 2000, and, as of February 26, 2000, we had an accumulated deficit of approximately $66,892,000. The losses have resulted primarily from costs incurred in research and development and from general and administrative costs associated with our operations. These costs have exceeded our revenues which to date have been generated principally from collaborations and government grants. We anticipate incurring additional losses this year and in future years and cannot predict when, if ever, we will achieve profitability. These losses may increase in the near future as we expand our research and development activities. In addition, our partners' product development efforts which utilize our products are at an early stage and, accordingly, we do not expect our losses to be substantially mitigated by revenues from milestone payments or royalties under those agreements for a number of years, if ever. USE OF GENOMIC INFORMATION TO DEVELOP OR COMMERCIALIZE PRODUCTS IS UNPROVEN. The development of new drugs and the diagnosis of disease based on genomic information is unproven. Our business strategy is based on the assumption that identifying and characterizing genes and sequencing select human genes and the genomes of select pathogens may help scientists better understand complex disease processes and develop drugs to treat these diseases. There is limited understanding of the roles of genes in diseases. Few therapeutic, vaccine or diagnostic products based on genomic information have been developed and commercialized. To date, no one has developed or commercialized any pharmaceutical, diagnostic or vaccine products based on our technologies. If we fail to identify genes useful for the discovery and development of such products, or if partners are unable to use the genomic information that we provide to them to develop such products, our current and potential customers may lose confidence in our products or their value for drug discovery, and our business may suffer as a result. WE RELY HEAVILY UPON EXISTING AND PROSPECTIVE ALLIANCE PARTNERS AND LICENSEES, AND A SIGNIFICANT PORTION OF OUR REVENUE HAS BEEN DERIVED FROM ONE ALLIANCE PARTNER. Our strategy for developing and commercializing therapeutic, vaccine and diagnostic products depends, in large part, on strategic alliances and licensing arrangements with pharmaceutical and biotechnology partners. We currently have alliances with AstraZeneca, bioMerieux, Schering-Plough, and Wyeth-Ayerst. We have received a substantial portion of our revenue from these alliances, and we expect to continue to do so. Under these arrangements we are entitled to receive payments and royalties based on the achievement by us and our partners of certain development milestones and the successful development of products arising from the collaborations. Although we have achieved many of the scientific milestones under our agreements, we cannot assure you that we will continue these 5 achievements in the future or that milestones dependent on our partners' development and commercialization activities will be attained. In addition, we cannot assure you that we will maintain our current collaborations or establish additional collaborations. Competition among genomics companies for collaborations with pharmaceutical companies is intense. This competition is enhanced by the trend towards consolidation among large pharmaceutical companies. Consequently, we cannot be sure that we will be able to enter into new collaborations or maintain our existing ones, and any new or renewed collaborations may be on terms less favorable to us than past collaborations. Our failure to maintain existing collaborations or to enter into additional collaborations would have a material adverse effect on our business. In particular, if funding from partners was not available or was reduced, we would need to devote additional internal resources to our research programs or possibly scale back or terminate some programs. Since 1996, we have received a significant amount of revenues based on payments under our alliances with Schering-Plough. We have two infectious disease alliances with Schering-Plough and a third alliance with Schering-Plough that relates to asthma genetics. The funded research phase under these agreements is scheduled to end in March 2000, September 2001 and June 2000, respectively. In addition, Schering-Plough is a subscriber to our PathoGenome Database. For the fiscal years ended August 31, 1997, 1998 and 1999 and the twenty-six week period ended February 26, 2000, revenues from Schering-Plough accounted for approximately 48%, 71%, 75% and 55%, respectively, of our total revenue. If Schering-Plough fails to extend the funded research phase of the agreements scheduled to end in June 2000 or September 2001, we would lose significant research funding, which could have a material adverse effect on us. Our strategy includes entering into multiple, concurrent alliances. We cannot assure you that we will be able to continue to manage multiple alliances successfully. The risks we face in managing multiple alliances include maintaining confidentiality among partners, avoiding conflicts between partners and avoiding conflicts between us and our partners. If we fail to manage our alliances effectively, or if any of the problems described above arise, one or more of the following could occur which could have a material adverse effect on our business: - use of significant resources to resolve conflicts - delay in research - legal claims involving significant time - expense - loss of reputation - termination of one or more alliances - loss of capital and loss of revenues If our partners develop products using our genomic information, we will rely on these partners for product development, regulatory approval, manufacturing and marketing of those products before we can receive some of the milestone payments, royalties and other payments to which we may be entitled under the terms of some of our collaboration agreements. Our agreements with our partners typically allow the partners significant discretion in electing whether to pursue any of these activities. We cannot control the amount and timing of resources our partners may devote to our programs or potential products. As a result, we cannot assure you that our partners will perform their obligations as expected. In addition, if a partner is involved in a business combination, such as a merger or acquisition, or changes its business focus, its performance in our agreement may suffer and, as a result, we may not 6 generate any revenues from the royalty, milestone and similar payment provisions of our alliance agreement with that partner. OUR ALLIANCE PARTNERS MAY NOT BE SUCCESSFUL IN DEVELOPING OR COMMERCIALIZING THERAPEUTIC, DIAGNOSTIC OR VACCINE PRODUCTS UNDER OUR AGREEMENTS WITH THEM. Development of therapeutic, diagnostic and vaccine products based on our discoveries will be subject to the high risks of failure inherent in the development or commercialization of health care products. These risks include the possibility that any such products will be found to be toxic, be found to be ineffective, fail to receive and maintain necessary regulatory approvals, be difficult or impossible to manufacture on a large scale, be uneconomical to market, fail to be developed prior to the successful marketing of similar products by competitors or infringe on proprietary rights of third parties. OUR CURRENT AND POTENTIAL ALLIANCE PARTNERS ARE PRIMARILY FROM, AND ARE SUBJECT TO RISKS FACED BY, THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES. We derive a substantial portion of our revenues from fees paid by pharmaceutical companies for our information products and services. We expect that pharmaceutical and biotechnology companies will be our primary source of revenues for the foreseeable future. As a result, we are subject to risks and uncertainties that affect the pharmaceutical and biotechnology industries and to reduction and delays in research and development expenditures by companies in these industries. These effects on the pharmaceutical and biotechnology industries may affect our ability to conclude deals with collaborative partners. In addition, our future revenues may be adversely affected by mergers and consolidation in the pharmaceutical and biotechnology industries, which will reduce the number of our potential customers. Large pharmaceutical and biotechnology customers could also decide to conduct their own genomic programs, rely on publicly available information or join consortia or seek other providers instead of using our products and services. THE GENOMICS INDUSTRY IS INTENSELY COMPETITIVE AND EVOLVING. There is intense competition among entities attempting to sequence segments of the human genome and identify genes associated with specific diseases and develop products and services based on these discoveries. We face competition in these areas from genomic, pharmaceutical, biotechnology and diagnostic companies, academic and research institutions and government or other publicly-funded agencies, both in the United States and abroad. One of our competitors has announced that it expects to complete the sequencing of the entire human genome before the end of 2000, which could adversely affect our business. Some of our competitors are developing databases containing gene sequence, gene expression, genetic variation or other genomic information and are marketing or plan to market their data to pharmaceutical companies. Additional competitors may attempt to establish databases containing this information in the future. In addition, some entities are attempting to identify and patent randomly sequenced genes and gene fragments, while others are pursuing a gene identification, characterization and product development strategy based on other genomic technologies. Numerous pharmaceutical companies also are developing genomic research programs, either alone or in partnership with our competitors. Competition among these entities to sequence genes, identify and characterize genes of interest, obtain patent protection and market this genomic information is intense and is expected to increase. In order to compete against existing and future technologies, we will need to demonstrate to potential customers that our technologies and capabilities are superior to those of our competitors. 7 Many of our competitors have substantially greater capital resources, sequencing capabilities, research and developmental staffs, facilities, manufacturing and marketing experience, distribution channels and human resources than us. These competitors may discover, characterize or develop important genes, drug targets or leads, drug discovery technologies or drugs before us or our customers or which are more effective than those developed by us or our customers, or may obtain regulatory approvals of their drugs more rapidly than our customers do, any of which could have a material adverse effect on any of our similar programs. Moreover, these competitors may obtain patent protection or other intellectual property rights that would limit our rights or our customers' ability to use our products to commercialize therapeutic, diagnostic or vaccine products. In addition, in our internal development efforts we may compete with our customers to whom we have granted access to our proprietary databases. Future competition will come from existing competitors as well as other companies seeking to develop new technologies for drug discovery based on gene sequencing, target gene identification, bioinformatics and related technologies. In addition, certain pharmaceutical and biotechnology companies have significant needs for genomic information and may choose to develop or acquire competing technologies to meet such needs. In the area of bioinformatics, we also face competition from providers of software. A number of companies have announced their intent to develop and market software to assist pharmaceutical companies and academic researchers in managing and analyzing their own genomic data and publicly available data. WE FACE RAPID TECHNOLOGICAL CHANGE IN THE GENOMICS INDUSTRY WHICH COULD RESULT IN DRUG DEVELOPMENT TECHNOLOGY SUPERIOR TO THAT WHICH WE ARE DEVELOPING. The field of genomics is characterized by significant and rapid technological change. Many of our competitors have greater research and development capabilities and experience, as well as greater financial resources than do we. They may develop techniques for genomic-based drug discovery that are superior to those we are developing and render our technologies non-competitive or obsolete even before they generate revenue. WE PLAN TO MAKE A SUBSTANTIAL INVESTMENT TO BUILD A NEW PHARMACOGENOMICS PROGRAM AND INCREASE OUR INVESTMENT IN OUR INFECTIOUS DISEASE FRANCHISE, BOTH OF WHICH ARE COMMERCIALLY UNPROVEN, AND ARE AREAS IN WHICH WE LACK EXTENSIVE OPERATING EXPERIENCE. The area of pharmacogenomics is relatively new and it has not been proven to be commercially viable. We intend to make a significant investment to build a new pharmacogenomics program. We lack extensive experience in utilizing pharmacogenomics in drug development programs or in marketing our pharmacogenomics capabilities to pharmaceutical companies. In the area of infectious disease, we plan to move further down the drug development process toward identifying and validating compounds internally. This activity will require increased research and development investment in an area where we lack experience. If our new product programs in either of these areas prove unsuccessful, our results of operations may be materially adversely affected. OUR INTELLECTUAL PROPERTY PROTECTION MAY BE INADEQUATE TO PROTECT OUR PROPRIETARY RIGHTS. Our success will depend, in part, on our ability to obtain commercially valuable patent claims and protect our intellectual property. Our patent position is generally uncertain and involves complex legal and factual questions. Legal standards relating to the validity and scope of claims in our technology field are still evolving. Therefore, the degree of future protection for our proprietary rights is uncertain. 8 The risks and uncertainties that we face with respect to our patents and other proprietary rights include the following: - the pending patent applications we have filed or to which we have exclusive rights may not result in issued patents or may take longer than we expect to result in issued patents - the claims of any patents which are issued may be limited from those in our patent applications as filed and may not provide meaningful protection - we may not be able to develop additional proprietary technologies that are patentable - the patents licensed or issued to us or our customers may not provide a competitive advantage - other companies may challenge patents licensed or issued to us or our customers - patents issued to other companies may substantially impair our ability to conduct our business - other companies may independently develop similar or alternative technologies or duplicate our technologies - other companies may design around technologies we have licensed or developed We may apply for patent protection for compositions and methods relating to gene expression and disease-specific patterns of gene expression that we identify and individual disease genes and targets that we discover. These patent applications may include claims relating to novel genes, gene fragments or encoded protein and to novel uses for known genes, gene fragments or proteins identified from the use of our genomic information and our databases. We may not be able to obtain meaningful patent protection for our discoveries. Even if patents are issued, their scope of coverage or protection is uncertain. For example, we or our collaborators have filed patent applications with respect to a number of full length genes and corresponding proteins and partial genes of H. PYLORI, of M. LEPRAE and several other organisms. These applications seek to protect these full length and partial gene sequences and corresponding proteins, as well as equivalent sequences and products and uses derived from these sequences and proteins. Some court decisions indicate that disclosure of a partial sequence may not be sufficient to support the patentability of a full length sequence. In addition, 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 or our collaborators. Because of this, we or our collaborators may not be able to obtain patents with respect to the genes of infectious agents such as H. PYLORI, or 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 us, the scope of coverage or protection afforded to such patent may be limited. OUR PROPRIETARY POSITION MAY DEPEND ON OUR ABILITY TO PROTECT TRADE SECRETS. We rely on trade secret protection for our confidential and proprietary information and procedures, including procedures related to sequencing genes and to searching and identifying important regions of genetic information. We currently protect such information and procedures as trade secrets. We protect our trade secrets through recognized practices, including access control, confidentiality agreements with employees, consultants, collaborators, and customers, and other security measures. These confidentiality agreements may be breached, however, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors. 9 WE MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES AND MAY BECOME INVOLVED IN EXPENSIVE INTELLECTUAL PROPERTY LITIGATION. The intellectual property rights of biotechnology companies, including our company, are generally uncertain and involve complex legal, scientific and factual questions. Our success in the functional genomics field may depend, in part, on our ability to operate without infringing on the intellectual property rights of others and to prevent others from infringing on our intellectual property rights. There has been substantial litigation regarding patents and other intellectual property rights in the genomics industry. We may become party to patent litigation or proceedings at the U.S. Patent and Trademark Office or a foreign patent office to determine our patent rights with respect to third parties which may include subscribers to our database information services. Interference proceedings in the U.S. Patent Office or opposition proceedings in a foreign patent office may be necessary to establish which party was the first to discover such intellectual property. We may become involved in patent litigation against third parties to enforce our patent rights, to invalidate patents held by such third parties, or to defend against such claims. The cost to us of any patent litigation or similar proceeding could be substantial, and it may absorb significant management time. If an infringement litigation against us is resolved unfavorably to us, we may be enjoined from manufacturing or selling certain of our products or services without a license from a third party. We may not be able to obtain such a license on commercially acceptable terms, or at all. The U.S. Patent and Trademark Office has begun issuing patents to third parties relating to single nucleotide polymorphisms, commonly referred to as SNPs. We believe that many patent applications covering SNPs have been filed with the U.S. PTO. Therefore, our ability to obtain patent protection on SNPs could be reduced. PUBLIC DISCLOSURE OF GENOMICS SEQUENCE DATA COULD JEOPARDIZE OUR INTELLECTUAL PROPERTY PROTECTION AND HAVE AN ADVERSE EFFECT ON THE VALUE OF OUR PRODUCTS AND SERVICES. The federally funded Human Genome Project and other research consortia engaged in similar research have committed to make available to the public basic human sequence data. These disclosures might limit the scope of our claims or make subsequent discoveries related to full-length genes unpatentable. We cannot be certain that such publication of sequence data has not affected and will not affect the ability to obtain patent protection. Customers may conclude that uncertainties about this type of protection decrease the value of our information products and services, and as a result, we may be required to reduce the fees we charge for these products and services. In addition, there has been recent public discussion questioning whether patent protection should be available for gene sequences. If we or our partners are unable to obtain patents for gene sequences, our business could be materially adversely affected. WE MAY NOT BE ABLE TO OBTAIN MEANINGFUL PATENT PROTECTION FOR DISCOVERIES UNDER OUR GOVERNMENT CONTRACTS. Under our government grants and contracts, the government has a statutory right to practice or have practiced any inventions developed under the government research contracts. In addition, under certain circumstances, such as inaction on our part or the part of our licensees to achieve practical application of the invention or a need to alleviate public health or safety concerns not reasonably satisfied by us or our licensees, the government has the right to grant to other parties licenses to any inventions first reduced to practice under the government grants and contracts. If the government grants such a license to a third party, our patent position may be jeopardized. In addition, the government has ownership rights in the data, clones, genes and other material derived from the material furnished to us by the government, while we have ownership rights in other technology developed solely by us. We are also obligated under certain government grants to submit sequencing 10 data and materials resulting from our research to public databases within 24 hours from the date such data and materials are developed. Our ability to obtain patent protection for our discoveries and inventions may be adversely affected by this publication. INTERNATIONAL PATENT PROTECTION IS UNCERTAIN. Patent law outside the United States is uncertain and is currently undergoing review and revision in many countries. Further, the laws of some foreign countries may not protect our intellectual property rights to the same extent as U.S. laws. We may participate in opposition proceedings to determine the validity of our or our competitors' foreign patents, which could result in substantial costs and diversion of our efforts. Finally, some forms of patent protection available in the United States are not available to us in foreign countries due to the laws of those countries. THE USE OF OUR GENOMIC PRODUCTS AND SERVICES BY OUR CUSTOMERS MAY BE SUBJECT TO GOVERNMENT REGULATION. The manufacture and marketing of products which may be developed by us or our collaborators are subject to certain U.S. Food and Drug Administration or other regulatory approvals. For example, any new drug developed by our efforts or the efforts of our customers must undergo an extensive regulatory review process. This process can take many years and require substantial expense. Also, changes in FDA policies and the policies of similar foreign regulatory bodies can increase the delay for each new drug, product license and biological license application. We expect similar delays in the regulatory review process for any diagnostic or agricultural product, where similar review or other approval is required. Even if marketing clearance is obtained, a marketed product and its manufacturer are subject to continuing review. Discovery of previously unknown problems with a product may result in withdrawal of the product from the market. Furthermore, we may be directly subject to regulations as a provider of diagnostic information. To the extent that such regulations restrict the sale of our products or impose other costs, our business may be materially adversely affected. OUR RESEARCH AND PRODUCT DEVELOPMENT DEPENDS ON ACCESS TO TISSUE SAMPLES AND OTHER BIOLOGICAL MATERIALS AND GENE DATA FROM INDIVIDUALS. To continue to build our database products, we will need access to normal and diseased human and other tissue samples, other biological materials and related clinical and other information, which may be in limited supply. We compete with many other companies for these materials and information. We may not be able to obtain or maintain access to these materials and information on acceptable terms. In addition, government regulation in the United States and foreign countries could result in restricted access to, or use of, human and other tissue samples. If we lose access to sufficient numbers or sources of tissue samples, or if tighter restrictions are imposed on our use of the information generated from tissue samples, our business may be harmed. Competition among genomics companies is also increasing for access to unique data from related individuals that we use to identify genes for specific human diseases. ETHICAL, LEGAL AND SOCIAL ISSUES RELATED TO THE USE OF GENETIC INFORMATION AND GENETIC TESTING MAY CAUSE LESS DEMAND FOR OUR PRODUCTS. Genetic testing has raised issues regarding confidentiality and the appropriate uses of the resulting information. For example, concerns have been expressed towards insurance carriers and employers using such tests to discriminate on the basis of such information, resulting in barriers to the acceptance of such tests by consumers. This could lead to governmental authorities calling for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to certain diseases, 11 particularly those that have no known cure. Any of these scenarios could reduce the potential markets for our products. WE RELY ON FUNDING FROM THE UNITED STATES GOVERNMENT. As of February 26, 2000, we had approximately $25.1 million of government research contracts outstanding under which we had not yet completed all of the services. Funding under our government grants and research contracts is subject to appropriation each year by the United States 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. The government's failure to fund our research in this area not only would end our participation in the program, but might adversely affect the industry-wide perception of genomics and the utility of genomic information. WE MAY NOT SUCCEED IN REALIZING ANY ADDITIONAL REVENUE FROM THE PATHOGENOME DATABASE. In 1997, we introduced the PathoGenome Database which consists of genetic information from more than thirty microbial organisms. Our strategy for our database depends on entering into subscription agreements with pharmaceutical, biotechnology and other companies for the use of our database. Each of the agreements that we have with our customers is for a specific term, and we expect that they may not be renewed upon expiration. If any agreements expire and are not renewed and we are unsuccessful in broadening access to our database, our business could suffer. OUR SALES CYCLE IS LENGTHY AND WE MAY SPEND CONSIDERABLE RESOURCES ON UNSUCCESSFUL NEGOTIATION EFFORTS OR MAY NOT BE ABLE TO COMPLETE DEALS ON THE SCHEDULE ANTICIPATED. Our ability to obtain new customers for genomic information products depends on our customers' belief that we can help accelerate their drug discovery efforts. Our negotiation cycle is typically lengthy because we need to educate potential customers and sell the benefits of our products and services to a variety of constituencies within companies. In addition, each agreement involves the negotiation of unique terms. We may expend substantial funds and management effort with no assurance that an agreement will result. Actual and proposed consolidations of pharmaceutical companies have affected and may in the future affect the timing and progress of our ability to conclude deals with collaborative partners. WE MAY NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE. We believe that the net proceeds of this offering together with existing cash and marketable securities, borrowings under equipment financing arrangements and anticipated cash flow from operations will be sufficient to support our current plans. However, we may choose to raise additional capital due to market conditions or strategic considerations even if we have sufficient funds for our operating plan. In particular, we may need additional funds to increase our research and development activities. We may seek funding through additional public or private equity offerings, debt financings or agreements with customers. If we raise additional capital by issuing equity or convertible debt securities, the issuances may dilute share ownership of existing investors and future investors may be granted rights superior to those of current shareholders. Additional financing may not be available when needed, or, if available, may not be available on favorable terms. If we cannot obtain adequate financing on acceptable terms when such financing is required, our business will be adversely affected. WE DEPEND ON KEY PERSONNEL IN A HIGHLY COMPETITIVE MARKET FOR SKILLED PERSONNEL. We are highly dependent on the principal members of our senior management and key scientific and technical personnel. None of our employees are bound by a long term employment agreement, a non-competition agreement or are the subject of key man life insurance, other than Robert J. 12 Hennessey who has a non-competition agreement. The loss of any of these personnel could have a material adverse effect on our ability to achieve our goals. Our future success is also dependent upon our ability to attract and retain additional qualified scientific, technical and managerial personnel. Our plan to build our pharmacogenomics program will require us to hire a number of new personnel with expertise in this area. We experience intense competition for qualified personnel and may not be able to continue to attract and retain skilled personnel necessary for the development of our business. OUR ACTIVITIES INVOLVE HAZARDOUS MATERIALS AND MAY SUBJECT US TO ENVIRONMENTAL LIABILITY. Our research and development involve the controlled use of hazardous and radioactive materials and biological waste. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and certain waste products. Although we believe that our safety procedures for handling and disposing of these materials comply with legally prescribed standards, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, we could be held liable for damages or penalized with fines, and this liability could exceed our resources. We believe that we are in compliance in all material respects with applicable environmental laws and regulations and currently do not expect to make material additional capital expenditures for environmental control facilities in the near term. However, we may have to incur significant costs to comply with current or future environmental laws and regulations. WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH. We expect to continue to experience growth in the number of our employees and customers and the scope of our operations. In particular, we plan significant growth in our sequencing and pharmacogenomics business. This growth may continue to place a significant strain on our management and operations. Our ability to manage this growth will depend upon our ability to broaden our management team and our ability to attract, hire and retain skilled employees. Our success will also depend on the ability of our officers and key employees to continue to implement and improve our operational and other systems, to manage multiple, concurrent customer relationships and to hire, train and manage our employees. In addition, we must continue to invest in customer support resources as the number of database customers and their requests for support increase. Our customers may have worldwide operations and require support at multiple U.S. and foreign sites. RISKS RELATED TO THE SECURITIES MARKET AND THIS OFFERING OUR STOCK PRICE IS HIGHLY VOLATILE. The market price of our stock has been and is likely to continue to be highly volatile due to the risks and uncertainties described in this section of the prospectus, as well as other factors, including: - conditions and publicity regarding the genomics or life sciences industries generally - termination of, or an adverse development in, our strategic alliances, subscription agreements, or commercial or governmental contract sequencing arrangements - price and volume fluctuations in the stock market at large which do not relate to our operating performance - comments by securities analysts, or our failure to meet market expectations - the level of investment in our new pharmacogenomics program - the timing of achievement of our development milestones and other payments under our strategic alliance agreements 13 The stock market has from time to time experienced extreme price and volume fluctuations that are unrelated to the operating performance of particular companies. In the past, companies that have experienced volatility have sometimes been the subject of securities class action litigation. If litigation were instituted on this basis, it could result in substantial costs and a diversion of management's attention and resources. MULTIPLE FACTORS BEYOND OUR CONTROL MAY CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS AND MAY CAUSE OUR BUSINESS TO SUFFER. Our revenues and results of operations may fluctuate significantly, depending on a variety of factors, including the following: - our success in concluding deals for, and changes in the demand for, our products - variations in the timing of payments from partners and customers and the recognition of these payments as revenues - the terms we are able to negotiate in our deals - the timing of our new product introductions, if any - changes in the research and development budgets of our customers and potential customers - the introduction of new products and services by our competitors - regulatory actions - expenses related to, and the results of, litigation and other proceedings relating to intellectual property rights - the cost and timing of our adoption of new technologies - the cost, quality and availability of cell and tissue samples, reagents and related components and technologies, including those supplied to us pursuant to contractual arrangements - our sales cycle for concluding alliances and other deals is lengthy We will not be able to control many of these factors. In addition, if our revenues in a particular period do not meet expectations, we may not be able to adjust our expenditures in that period, which could cause our business to suffer. We believe that period-to-period comparisons of our financial results will not necessarily be meaningful. You should not rely on these comparisons as an indication of our future performance. If our operating results in any future period fall below the expectations of securities analysts and investors, our stock price may fall, possibly by a significant amount. FUTURE ACQUISITIONS MAY ABSORB SIGNIFICANT RESOURCES AND MAY BE UNSUCCESSFUL. As part of our strategy, we may pursue acquisitions, investments and other relationships and alliances. Acquisitions may involve significant cash expenditures, debt incurrence, additional operating losses, dilutive issuances of equity securities, and expenses that could have a material adverse effect on our financial condition and results of operations. For example, to the extent that we elect to pay the purchase price for such acquisitions in shares of our stock, the issuance of additional shares of our stock will be dilutive to our stockholders. Acquisitions involve numerous other risks, including: - difficulties integrating acquired technologies and personnel into our business - diversion of management from daily operations - inability to obtain required financing on favorable terms - entering new markets in which we have little or no previous experience 14 - potential loss of key employees or customers of acquired companies - assumption of the liabilities and exposure to unforseen liabilities of acquired companies - amortization of the intangible assets of acquired companies It may be difficult for us to complete these types of transactions quickly and to integrate the businesses efficiently into our current business. Any acquisitions or investments by us may ultimately have a negative impact on our business and financial condition. FOLLOWING THE OFFERING, OUR SHAREHOLDERS MAY BE ABLE TO SELL SHARES WHICH COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. Upon completion of this offering, we will have approximately 23,588,566 shares of common stock outstanding, assuming no exercise of outstanding options to purchase common stock and excluding the restricted shares of common stock granted but not yet issued. Our officers and directors, in the aggregate, beneficially own 1,257,648 shares of common stock (including 1,207,148 shares issuable upon the exercise of outstanding options held by our directors and executive officers and their affiliates which are exercisable within the 60-day period following March 21, 2000) have agreed, with respect to 1,257,648 shares of common stock, not to sell or otherwise transfer such shares for a period of 90 days after the date of this prospectus, which is referred to as the lock-up period. Following expiration of the lock-up period, substantially all outstanding shares of our common stock will be eligible for an immediate resale as a result of having been registered for resale under the Securities Act, pursuant to the provisions of Rule 144 or otherwise. The shares not eligible for immediate resale will remain eligible for sale pursuant to Rule 144, subject only to the volume limitation and manner of sale restrictions of Rule 144. In addition, the shares of common stock issuable upon the exercise of outstanding options have been registered under the Securities Act and, upon exercise, will be eligible for immediate resale. The sale of shares of our common stock could adversely affect the prevailing market price of our common stock. SOME OF OUR SHAREHOLDERS HAVE REGISTRATION RIGHTS THAT COULD DILUTE OUR COMMON STOCK. Pursuant to an agreement between us and bioMerieux, in the event we elect to register any of our equity securities under the Securities Act for our shareholders, subject to certain exceptions and limitations, we are obligated to use our best efforts to include any shares requested to be registered by bioMerieux in the registration if the registration occurs after September 30, 2001. We are required to bear all registration expenses incurred in connection with the registration of these shares. We may have an obligation to pay the costs incurred by Robert J. Hennessey in connection with an underwritten public offering of some or all of Robert J. Hennessey's shares of common stock. 15 FORWARD-LOOKING STATEMENTS This prospectus and the 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 prospectus 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 factors, including those described in "Risk Factors" and elsewhere in this prospectus. 16 PRICE RANGE OF COMMON STOCK Our common stock is quoted on the Nasdaq National Market under the symbol "GENE." The following table sets forth for the periods indicated the high and low sale prices per share of our common stock, as reported by the Nasdaq National Market.
HIGH LOW ----------- --------- FISCAL YEAR ENDED AUGUST 31, 1998 First Quarter............................................. 9 7/8 7 1/4 Second Quarter............................................ 9 6 Third Quarter............................................. 9 1/2 6 1/2 Fourth Quarter............................................ 6 3/4 2 1/8 FISCAL YEAR ENDED AUGUST 31, 1999 First Quarter............................................. 3 7/8 1 3/4 Second Quarter............................................ 3 7/8 2 1/8 Third Quarter............................................. 4 5/16 3 Fourth Quarter............................................ 4 3/4 2 2/3 FISCAL YEAR ENDED AUGUST 31, 2000 First Quarter............................................. 5 2/5 3 3/8 Second Quarter............................................ 51 1/2 3 3/4 Third Quarter (through March 21, 2000).................... 75 3/8 20 1/8
There were approximately 1,203 shareholders of record of our common stock as of February 26, 2000. On March 21, 2000, the last sale price for our common stock as reported by Nasdaq was $24.6875. USE OF PROCEEDS We estimate that the net proceeds from the sale of the shares of common stock we are offering will be approximately $69.1 million. If the underwriters fully exercise the over-allotment option, the net proceeds of the shares we sell will be $79.6 million. For the purpose of estimating net proceeds, we are assuming that the public offering price will be $24.6875 per share. "Net proceeds" is what we expect to receive after paying the underwriting discount and other expenses of the offering. We intend to use the net proceeds to fund research and development activities, including investing in our emerging pharmacogenomics program and expanding our infectious disease franchise, and for general corporate purposes including capital expenditures, working capital and the possible acquisition of businesses, products or technologies that are complementary to our own. We do not have any understandings or agreements with respect to any such acquisitions. We have not yet determined the amount of net proceeds to be used for each of the purposes indicated above. Accordingly, our management will retain broad discretion in the allocation of net proceeds. Until we use the net proceeds of this offering, we will invest the funds in government securities and other short-term, investment-grade, interest-bearing instruments. DIVIDEND POLICY We have never paid any cash dividends on our capital stock. We expect to retain earnings to support operations and to finance the growth and development of our business. Therefore, we do not intend to pay any cash dividends on our common stock in the foreseeable future. Certain of our equipment lease facilities prevent us from paying any cash dividends while there are amounts outstanding under these facilities without consent of the lessor. 17 CAPITALIZATION The following table sets forth our capitalization as of February 26, 2000: - On an actual basis - On an as adjusted basis assuming our sale in the offering of 3,000,000 shares of common stock at an assumed public offering price of $24.6875 per share less our costs associated with this offering - Based on shares outstanding as of February 26, 2000, which excludes 2,386,628 shares of common stock issuable upon exercise of outstanding options at a weighted average price of $4.26 per share, and also excludes 147,346 restricted shares of common stock granted but not yet issued
FEBRUARY 26, 2000 ------------------------------- ACTUAL AS ADJUSTED ----------------- ----------- (IN THOUSANDS) Current maturities of long-term obligations.............. $ 4,407 $ 4,407 ================= ======== Long-term obligations, net of current maturities......... $ 5,760 $ 5,760 Stockholders' equity: Common stock, $0.10 par value, 34,375,000 shares authorized, 20,588,566 shares issued and outstanding and 23,588,566 shares issued and outstanding, as adjusted............................................. 2,059 2,359 Series B restricted stock, $0.10 par value, 625,000 shares authorized, no shares issued and outstanding.......................................... -- -- Additional paid-in capital............................. 96,862 165,681 Accumulated deficit.................................... (66,892) (66,892) Deferred compensation.................................. (975) (975) ----------------- -------- Total stockholders' equity............................ $ 31,054 $100,173 ----------------- -------- Total capitalization............................... $ 36,814 $105,933 ================= ========
18 SELECTED CONSOLIDATED FINANCIAL DATA This section presents selected historical data. You should read carefully the consolidated financial statements included in this prospectus, including the notes to the consolidated financial statements. The selected data in this section is not intended to replace the consolidated financial statements. We derived the selected consolidated financial data set forth below as of August 31, 1998 and 1999 and for the three years in the period ended August 31, 1999 from our consolidated financial statements which have been audited by Arthur Andersen LLP, independent public accountants, which we have included elsewhere in this prospectus. We derived the selected consolidated financial data set forth below as of August 31, 1995, 1996, 1997 and for the years ended August 31, 1995 and 1996 from our consolidated financial statements which have been audited by Arthur Andersen LLP which are not included in this prospectus. We derived the balance sheet data as of February 26, 2000 and the statement of operations data for the twenty-six week periods ended February 27, 1999 and February 26, 2000 from our unaudited consolidated financial statements. We believe that the unaudited historical financial statements contain all adjustments needed to present fairly the information included in those financial statements and that the adjustments made consist only of normal recurring adjustments. Historical results are not necessarily indicative of results that may be expected in the future.
TWENTY-SIX WEEK YEAR ENDED AUGUST 31, PERIOD ENDED ---------------------------------------------------- ------------------------------------- 1995 1996 1997 1998 1999 FEBRUARY 27, 1999 FEBRUARY 26, 2000 -------- -------- -------- -------- -------- ----------------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue: Contract research, licenses, subscription fees and royalties...................... $10,975 $19,471 $ 16,653 $ 19,217 $24,018 $11,513 $13,840 Costs and expenses: Research and development......... 7,892 14,074 26,524 31,977 26,700 13,486 11,750 Selling, general and administrative................. 2,644 5,047 3,766 4,292 4,279 2,062 2,688 ------- ------- -------- -------- ------- ------- ------- Total costs and expenses....... 10,536 19,121 30,290 36,269 30,979 15,548 14,438 Income (loss) from operations.... 439 350 (13,637) (17,052) (6,961) (4,035) (598) Interest income.................. 232 1,785 2,966 2,386 1,587 874 799 Interest expense................. (86) (214) (631) (1,147) (954) (529) (396) ------- ------- -------- -------- ------- ------- ------- Net interest income................ 146 1,571 2,335 1,239 633 345 403 Net income/(loss).................. $ 585 $ 1,921 $(11,302) $(15,813) $(6,328) $(3,690) $ (195) ======= ======= ======== ======== ======= ======= ======= Net income/(loss) per common share: Basic.......................... $ 0.05 $ 0.11 $ (0.64) $ (0.87) $ (0.34) $ (0.20) $ (0.01) ======= ======= ======== ======== ======= ======= ======= Diluted........................ $ 0.04 0.11 (0.64) (0.87) (0.34) (0.20) (0.01) ======= ======= ======== ======== ======= ======= ======= Weighted average common equivalent shares Outstanding Basic.......................... 12,962 18,130 17,618 18,212 18,383 18,335 19,396 Diluted........................ 13,037 -- -- -- -- -- --
AS OF AS OF AUGUST 31, FEBRUARY 26, ---------------------------------------------------- ------------ 1995 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- ------------ (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents, marketable securities and restricted cash...................................................... $ 9,011 $53,769 $ 47,844 $ 34,177 $25,062 $ 35,891 Working capital............................................. 5,499 25,905 35,709 20,823 15,641 22,797 Total assets................................................ 11,529 63,279 60,688 51,465 39,485 51,034 Long-term obligations, net of current maturities............ 892 3,228 7,149 8,479 5,925 5,760 Shareholders' equity........................................ 7,239 54,313 43,948 29,248 23,411 31,054
19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE FOLLOWING DISCUSSION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. OVERVIEW We are a leader in the commercialization of genomics-based drug discovery. We have over ten years of experience in genomics research and have been one of the original recipients of funding from the United States government under its genome programs. Our commercial strategy is to use our genomics and related proprietary technologies to identify and validate novel drug targets for commercialization through alliances with pharmaceutical companies. Our two areas of scientific focus are the discovery and characterization of novel targets for human diseases and serious infectious diseases. We also commercialize our sequencing capabilities through the GTC Sequencing Center, which we established in July 1999 to provide high quality, industrial scale sequencing to pharmaceutical and biotechnology companies on a contract basis. In May 1997, we introduced a non-exclusive genetic database, the PathoGenome Database, which provides subscribers with genetic information to identify gene targets. We believe that our genomic discoveries and information from our database will lead to the development of novel therapeutics, vaccines, and diagnostic products by us and our strategic partners. We receive payments from our collaborators based on license fees, sponsored research and milestone payments during the term of the collaboration. We also receive ongoing royalties from the licensing of certain parts of our intellectual property portfolio to third parties. In addition, subscribers to our PathoGenome Database pay access fees for the information they obtain. Once a product resulting from a research collaboration or a subscriber's use of the PathoGenome Database is commercialized, we are entitled to receive royalty payments based upon product revenues. We expect that our collaborations 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 the collaborators 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. Additionally, we sell, as a contract service business, high quality genomic information to third parties, including pharmaceutical companies, biotechnology companies, governmental agencies, and academic institutions. Our primary sources of revenue are collaborative agreements with pharmaceutical company partners, subscription agreements to our PathoGenome Database and government research grants and contracts. We have six collaborative research agreements. In August 1995, we entered into a collaboration 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 sponsored research under the collaboration 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 collaboration. We entered into a collaboration with Schering-Plough in December 1995. Under this collaboration, Schering-Plough can use our STAPH. AUREUS genomic database to identify new gene targets for the development of novel antibiotics. In December 1996, we entered into our second research collaboration with Schering-Plough to identify genes and associated proteins that Schering-Plough can utilize to develop new 20 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. 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. Under our strategic alliance agreements with Schering-Plough, for our fiscal years ended August 31, 1997, 1998, and 1999 and the twenty-six week periods ended February 27, 1999 and February 26, 2000, we recognized revenue accounting for approximately 48%, 71%, 75%, 74% and 55%, respectively, of our total revenue. 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 February 2000, we had a total of six 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. 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, the government named us as one of the nationally funded DNA sequencing centers of the international Human Genome Project. We are participating in an international consortium in a full-scale effort to sequence the human genome. We will receive funding from the National Human Genome Research Institute (NHGRI) under the Human Genome Project of up to $15.6 million over a three-year period, of which $5.0 million is guaranteed over the initial twelve months. In October 1999, NHGRI appointed us as one of the initial centers in the Mouse Genome Sequencing Network. We will participate in deciphering the genetic makeup of the mouse. We will receive funding from the NHGRI under this program of up to $12.9 million over a three-year period, of which $2.4 million is guaranteed over the initial seven months. These programs are subject to annual appropriations by the government based upon the availability of government funds and the achievement by us of certain milestones. Government grants as a percentage of total revenue will increase due to these grants received from NHGRI. We have incurred significant operating losses since our inception. As of February 26, 2000, we had an accumulated deficit of approximately $66.9 million. Our losses have resulted 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 contracts and 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. NEW ACCOUNTING PRONOUNCEMENT Staff Accounting Bulletin No. 101 (SAB 101), REVENUE RECOGNITION, was issued in December 1999. SAB 101 will require companies to recognize certain upfront non-refundable fees and milestone payments over the life of the related alliances when such fees are received in conjunction with alliances that have multiple elements. We are required to adopt this new accounting principle through a cumulative charge to our statement of operations, in accordance with Accounting Principles Board Opinion (APB) No. 20, ACCOUNTING CHANGES, no later than the first quarter of fiscal 2001. We believe that the adoption of SAB 101 will have an impact on our future operating results as it relates to the upfront non-refundable payments and milestone payments received in connection with our alliances. 21 The historical financial statements reflect payments of approximately $17.0 million received in fiscal year 1995 through February 26, 2000. Based on guidance currently available, upon the adoption of SAB 101, we will be required to record these fees as revenue over the life of the related agreement. RESULTS OF OPERATIONS TWENTY-SIX WEEK PERIODS ENDED FEBRUARY 27, 1999 AND FEBRUARY 26, 2000 REVENUE Revenues increased 20% from $11,513,000 for the twenty-six week period ended February 27, 1999 to $13,840,000 for the twenty-six week period ended February 26, 2000. This increase was the result of an increase in payments under our government research grant with the National Human Genome Research Institute to participate in the international Human Genome and Mouse Genome sequencing projects, which was partially offset by a decline in sponsored research funding. COSTS AND EXPENSES Total costs and expenses decreased 7% from $15,548,000 for the twenty-six week period ended February 27, 1999 to $14,437,000 for the twenty-six week period ended February 26, 2000. Research and development expenses decreased 13% from $13,486,000 in the twenty-six week period ended February 27, 1999 to $11,750,000 for the twenty-six week period ended February 26, 2000. Research and development expenses include research and development activities sponsored by us and research funded pursuant to arrangements with our corporate alliances and the U.S. government. The reduction was primarily attributable to our decision to focus on fewer internally funded programs. The reduction in these expenses consisted of decreases in payroll and related expenses, laboratory supplies and overhead expenses. Selling, general and administrative expenses increased 30% from $2,062,000 for the twenty-six week period ended February 27, 1999 to $2,688,000 for the twenty-six week period ended February 26, 2000. This increase stemmed from an increase in salaries and related expenses, legal fees, as well as, compensation expense related to issuance of stock options and restricted stock. INTEREST INCOME AND EXPENSE Interest income decreased 9% from $874,000 for the thirteen week period ended February 27, 1999 to $799,000 for the same period ended February 26, 2000. This decrease reflects a reduction in investment income resulting from our use of cash to fund our operations. Interest expense decreased 25% from $529,000 for the twenty-six week period ended February 27, 1999 to $396,000 for the twenty-six week period ended February 26, 2000 due primarily to a decrease in outstanding balances under our long-term obligations. FISCAL YEARS ENDED AUGUST 31, 1999, 1998 AND 1997 REVENUE Total revenues increased 25% from $19,217,000 in fiscal 1998 to $24,018,000 in fiscal 1999 and increased 15% from $16,653,000 in fiscal 1997 to $19,217,000 in fiscal 1998. This increase in both fiscal year 1999 and 1998 was primarily attributable to increased payments recognized under our alliance research agreements with Schering-Plough, as well as increased subscription fees earned under our subscription agreements to the PathoGenome Database. 22 COSTS AND EXPENSES Total costs and expenses decreased 15% from $36,270,000 in fiscal 1998 to $30,979,000 in fiscal 1999 and increased 20% from $30,290,000 in fiscal 1997 to $36,270,000 in fiscal 1998. Research and development expense, which includes internal research and development and research funded pursuant to arrangements with our corporate alliances and the U.S. government, decreased 17% from $31,977,000 in fiscal 1998 to $26,700,000 in fiscal 1999. The reduction in research and development expenses was primarily attributable to our decision to focus on fewer internally funded programs, specifically in the area of microbial genetics, human gene discovery and functional genomics. The decrease from fiscal 1998 to fiscal 1999 consisted primarily of decreases in payroll and related expenses, laboratory supplies and overhead expenses. Research and development expenses increased 21% from $26,524,000 in fiscal 1997 to $31,977,000 in fiscal 1998 due primarily to increases in both personnel and laboratory expenses associated with our expansion of our microbial genetics, human gene discovery and functional genomics research programs, as described above. Selling, general and administrative expenses decreased slightly from $4,292,000 in fiscal 1998 to $4,279,000 in fiscal 1999 and increased 14% from $3,766,000 in fiscal 1997 to $4,292,000 in fiscal 1998. The increase in selling, general and administrative expenses from fiscal 1997 to fiscal 1998 primarily represented increases in payroll and related expenses. INTEREST INCOME AND EXPENSE Interest income decreased 34% from $2,387,000 in fiscal 1998 to $1,587,000 in fiscal 1999 and decreased 20% from $2,966,000 in fiscal 1997 to $2,387,000 in fiscal 1998. Both of these decreases were due to the reduction in funds available for investment as a result of cash being utilized by us to fund our operations. Interest expense decreased 17% from $1,147,000 in fiscal 1998 to $954,000 in fiscal 1999 due to the decrease in our outstanding balances under long-term obligations. Interest expense increased 82% from $631,000 in fiscal 1997 to $1,147,000 in fiscal 1998 due to an increase in our financing arrangements as a result of the consolidation of our operations into our Beaver Street facility. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of cash have been payments received from our alliances, subscription fees, government grants and contracts, borrowings under equipment lending facilities and capital leases and proceeds from the sale of equity securities. We received payments of $19,705,000, $21,255,000 and $11,984,000 in fiscal 1998 and 1999, and for the twenty-six week period ended February 26, 2000, respectively, from our alliances consisting of sponsored research funding, subscription fees, milestone payments and expense reimbursement, all of which are included in research funding. In fiscal 1997, we received payments of $13,496,000 from our alliances consisting of an up-front license fee, sponsored research funding, subscription fee, milestone payments and expense reimbursement, all of which are included in research funding. As of February 26, 2000, we had cash, cash equivalents, restricted cash and short-term marketable securities of $35,891,000. We have various arrangements under which we finance certain office and laboratory equipment and leasehold improvements. We have an aggregate of $10,167,000 outstanding under our borrowing arrangement at February 26, 2000. This amount is repayable over the next 36 months and $4,407,000 of this amount is repayable within 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. At February 26, 2000, we had $1,996,000 available under one of these arrangements for future borrowings. 23 Our operating activities provided cash of $5,452,000 for the twenty-six week period ended February 26, 2000 due to a decrease in net loss and an increase in deferred revenue, and accrued expenses. The increase in deferred revenue represents payments received under the bioMerieux and Wyeth-Ayerst alliances prior to revenue recognition. The increase in accrued liabilities reflects an increase in payroll tax withholdings which is attributable to the exercise of non-qualified stock options during the period. Our operating activities used cash of approximately $3,184,000, $9,279,000 and $4,757,000 in fiscal 1999, 1998 and 1997, respectively, to fund our operations. Our investing activities provided cash of $4,773,000 for the twenty-six week period ended February 26, 2000 primarily through the conversion of our marketable securities to cash and cash equivalents. Our investing activities provided cash of approximately $10,241,000, $10,898,000 and $2,257,000 in fiscal 1999, 1998 and 1997, respectively, primarily through the conversion of marketable securities to cash and cash equivalents, partially offset by the purchase of equipment and additions to leasehold improvements. Capital expenditures, including property and equipment acquired under capital leases, totaled $2,376,000 for the twenty-six week period ended February 26, 2000. Our capital expenditures totaled $2,182,000, $8,735,000 and $7,213,000 for the fiscal years ended 1999, 1998 and 1997, respectively. Purchases consisted of equipment and additions to leasehold improvements. We currently estimate that we will acquire an additional $2,500,000 in capital equipment in fiscal 2000 consisting primarily of computer and laboratory equipment which we intend to finance the majority under existing equipment financing arrangements. Our financing activities provided cash of approximately $5,354,000 for the twenty-six week period ended February 26, 2000 primarily from the sale of equity securities to bioMerieux, exercise of stock options, partially offset by payments of long-term obligations. Our financing activities used cash of approximately $5,233,000 in fiscal 1999 primarily for payments of long-term obligations, partially offset by proceeds from the exercise of stock options. Our financing activities provided cash of approximately $756,000 and $422,000 in fiscal 1998 and 1997, respectively, primarily from proceeds received from long-term obligations partially offset by proceeds from the exercise of stock options, net of payments of long-term obligations. As of August 31, 1999, we had net operating loss and tax credits (investment and research) carryforwards of approximately $63,785,000 and $3,137,000, respectively, available to reduce federal taxable income and federal income taxes, respectively, if any. Net operating loss carryforwards and credits 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 limitation of the carryforward period. We believe that the net proceeds of this offering, together with our existing capital resources, are adequate to meet our cash requirements for at least one year. However, these are estimates which involve risks and uncertainty. Our actual future capital requirements and the adequacy of our available funds and the proceeds from this offering will depend on many factors, including those discussed under "Risk Factors" and the following: - progress of our genomic discovery programs; - the number and breadth of our alliances; - the costs and uncertainty of success of our emerging businesses in pharmacogenomics and infectious diseases; - the progress of the development and commercialization efforts of our alliance partners; 24 - the level of our activities relating to our programs and to the development and commercialization rights we retain in our arrangements with alliance partners; - competing technological and market developments; - the costs associated with obtaining access to tissue samples and related information; and - the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights. We may 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. We do not currently use derivative financial instruments. 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. 25 BUSINESS OF GENOME THERAPEUTICS OVERVIEW We are a leader in the commercialization of genomics-based drug discovery. Through the identification of genes and the characterization of the function of those genes, we are seeking to accelerate the discovery and development of products to treat and diagnose a number of diseases. The United States government has selected us to participate in a number of government sponsored gene discovery programs, including the Human Genome Project and the Mouse Genome Sequencing Network. Our depth of experience in the genomics field has permitted us to emerge as a leader in creating industrial scale genomics tools for product development. Our tools include: - high-throughput sequencing - sequence finishing - bioinformatics - functional genomics - assay development We have combined our genomics tools into an integrated platform of highly automated technologies which allows us to rapidly generate high quality genomic information that we use to identify and validate targets for the development of new therapeutic and diagnostic products. We concentrate our product discovery efforts in two principal areas: human diseases believed to have a significant genetic component and infectious diseases caused by pathogens, including bacteria and fungi. We are pursuing the discovery of products based on our genomic discoveries both through strategic alliances with corporate partners and through internal research programs. In the area of human diseases, we have alliances with Wyeth-Ayerst to develop treatments for osteoporosis and with Schering-Plough to develop treatments for asthma. In the area of infectious diseases, we have ongoing collaborations with Schering-Plough to develop treatments for drug resistant bacterial infections, including STAPH. AUREUS, and to develop novel anti-fungals. We are working with AstraZeneca to develop treatments for ulcers caused by H. PYLORI. We have also partnered with bioMerieux to develop diagnostics for infectious diseases. As part of our emerging businesses, we are continuing to invest in our internal infectious disease franchise and build our pharmacogenomics program. In addition to our drug discovery programs, we have formed the GTC Sequencing Center to provide industrial scale, high quality customized sequencing services to pharmaceutical companies and biotechnology companies on a contract basis. Since the launch of the GTC Sequencing Center in July 1999, we have entered into 11 sequencing contracts with pharmaceutical and biotechnology companies and other research institutions, in addition to our work in the United States government's genomics programs. We are also seeking to increase access to our PathoGenome Database beyond our initial six subscribers by making it available to a broader spectrum of users. SCIENTIFIC BACKGROUND Genes define the inherited characteristics of an organism and are found in all living cells, including human, animal and pathogen cells. Each gene is responsible for producing a specific protein that performs a specific biological function in the body. 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. Genetic defects in humans may lead to overproduction or underproduction of proteins, resulting in disease. Consequently, the identification and characterization of genes and the proteins associated with these genes may lead to new therapies and diagnostic tests. In the case of diseases caused by pathogens, the identification and characterization of the genes essential to the survival of the pathogen may lead to the development of new drugs and vaccines to combat the pathogen. An individual's genetic makeup may also predetermine his or her 26 susceptibility to types of treatments or specific drugs. This genomic profile may permit the application of pharmacogenomics to optimize the efficacy or minimize the toxicity of novel or existing drugs. While efforts to identify and characterize the genes responsible for various diseases by the Human Genome Project and genomics companies have resulted in the generation of tremendous amounts of gene sequence and other genetic information, the discovery of new products based on this information has been limited. The U.S. government and several private companies are spending enormous resources toward the completion of the entire human genomic sequence containing over 100,000 gene pairs. This has led to a further effort to identify those genetic abnormalities or mutations that have a relationship to a specific disease state. These mutations add millions of potential genetic sequence combinations to the universe of potential drug targets. Identifying genes that cause or are associated with a specific disease and determining how those genes contribute to the disease has been a formidable challenge. Therefore, industrialized discovery technologies that can convert this large amount of genomic data into actual drug candidates is critical to translate these early-stage discoveries into actual treatments for human disease. An integrated suite of technologies, tools and data management and analysis capabilities is required to bridge this gap between data inputs and drug candidates. We have designed an integrated platform of highly automated, industrial scale technologies that permits us to rapidly analyze and draw conclusions from high quality genomic information. Our approach will allow us and our collaborators to effectively use genomic information to identify and validate targets that will then be successfully developed into novel therapeutics and diagnostic products. OUR STRATEGY We intend to use our integrated suite of genomics technologies to accelerate drug discovery both in our internal research programs and those of our collaborators. The key elements of our strategy include: ESTABLISH AND EXPAND ALLIANCES WITH INDUSTRY LEADERS IN SPECIFIC DISEASES We believe our current alliances with Wyeth-Ayerst, Schering-Plough, AstraZeneca, and bioMerieux, all industry leaders in their fields, provide us the best opportunity to convert our genomics expertise into product opportunities. We have met or exceeded our development schedule with all of our collaborators and will continue to deliver high quality genomic information on a timely basis to our collaborators. We will also seek to expand these alliances. We will also seek to enter into additional alliances with partners that have franchises in the treatment of major disease indications. We believe companies that have major research efforts and/or commercial products focused on a particular disease will be motivated to utilize genomic information to develop novel products that will allow them to maintain their market leadership position. USE OUR CONTRACT SEQUENCING BUSINESS TO GENERATE NEAR-TERM REVENUE AND BUILD RELATIONSHIPS WITH POTENTIAL COLLABORATORS Our reputation for rapid, high quality sequencing has been recognized by the U.S. government, which has selected us as one of ten U.S. centers for the Human Genome Project and one of five initial centers for the Mouse Genome Sequencing Network, and the only commercial entity involved in either project. In order to leverage fully our sequencing capabilities, in July 1999 we launched the GTC Sequencing Center to provide high quality, industrial scale customized sequencing services to pharmaceutical and biotechnology companies on a contract basis. We intend to use our contract sequencing business to generate near-term revenues and as an opportunity to familiarize customers with our genomics capabilities. In this way, our customized sequencing business may permit us to broaden our business relationships with our biotechnology and pharmaceutical customers, extending our relationships into more comprehensive strategic alliances. 27 LEVERAGE PATHOGENOME DATABASE We intend to maximize the potential of our PathoGenome Database. In 1997, we introduced the PathoGenome Database, a database containing both proprietary and publicly available genetic information on over thirty microbial organisms. To date we have commercialized the PathoGenome Database through non-exclusive subscriptions to pharmaceutical companies, including Aventis (formerly known as Hoechst Marion Roussel), Bayer, Bristol-Myers Squibb, Schering-Plough and Scriptgen Pharmaceuticals. Going forward, we intend to increase access to the PathoGenome Database by making it available to a larger universe of scientific and other users. We are pursuing alliances that will facilitate broader access to our PathoGenome Database. We believe this will increase the value of the PathoGenome Database by enhancing our exposure to scientific and pharmaceutical researchers and solidifying our reputation as a leader in pathogen genomics. EXPAND INTERNAL DEVELOPMENT PROGRAMS IN PHARMACOGENOMICS AND INFECTIOUS DISEASES We have ongoing internal development programs to build businesses in pharmacogenomics and expand our existing infectious disease franchise. In the pharmacogenomics area, we intend to form alliances with pharmaceutical and biotechnology companies to use our integrated platform of technologies to detect genetic variations that affect individual drug response. We believe that our technology will allow us both to select the best leads for drug development and to "rescue" drugs that have foundered. In the field of infectious diseases, we plan to expand our internal program to pursue leads for novel drugs based upon the results of our genomic research. PHARMACEUTICAL AND DIAGNOSTIC PROGRAMS We are building on our experience and knowledge in high-throughput sequencing, bioinformatics, disease gene identification and functional genomics to identify and characterize genes that we believe will lead to discoveries of new or improved drugs, vaccines or diagnostic products that represent significant commercial opportunities. The following table describes our existing collaborations with pharmaceutical companies to develop drugs to treat human and infectious diseases and to develop infectious disease diagnostics. 28 PHARMACEUTICAL AND DIAGNOSTIC PRODUCT PROGRAMS
PARTNER PROCEEDS RECEIVED AS DISEASE INDICATION (DATE OF AGREEMENT) STATUS OF ALLIANCE OF FEBRUARY 26, 2000 POTENTIAL PROCEEDS* - ------------------ ------------------- ------------------- -------------------- ------------------- Osteoporosis Wyeth-Ayerst Functional studies $1.3 million $118.0 million Division of to confirm identity American Home of target gene Products ongoing; project (December 1999) planning commenced Asthma Schering-Plough Identification of $25.5 million $68.2 million (December 1996) candidate genes ongoing Ulcers AstraZeneca Target $13.5 million $23.3 million (September 1995) identification completed; program transferred to AstraZeneca for pre-clinical testing Drug Resistant Schering-Plough Validated targets $18.8 million $42.8 million Bacterial (December 1995) and screening Infections assays transferred to Schering-Plough Fungal Infections Schering-Plough Targets identified $9.7 million $36.0 million (September 1997) for screening; research program extended to September 2001 Infectious Disease bioMerieux PathoGenome $5.4 million $6.2 million Diagnostics (September 1999) Database delivered; guaranteed in first identification of year (includes gene markers completed equity ongoing investment)
- -------------------------- * Assumes receipt of all license fees, funded research and contingent payments for achieving milestones; excludes potential royalties 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 national direct expenditures for osteoporotic and associated fractures is $13.8 billion, and the cost is rising in the Unites States. 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 that 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-Registered Trademark-, a leading estrogen replacement therapy. As of February 26, 2000, we had received payments of $1.3 million under this alliance and have rights to receive, subject to the achievement of milestones, up to an additional $116.7 million in license fees, 29 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. ASTHMA. Asthma affects over 155 million people worldwide according to the World Health Organization. The incidence appears to be rising dramatically worldwide; in the United States, the incidence has doubled over the past two decades. Asthma affects approximately 4% to 10% of the United States population, and accounts for $12.6 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 origin of asthma. Schering-Plough is a leader in the field of allergy and respiratory care products, with products such as Afrin-Registered Trademark- nasal spray, the leading product in the branded nasal spray market, and the Claritin-Registered Trademark- line of antihistamines, which generated $2.3 billion of sales in 1998. As of February 26, 2000, we had received payments of $25.5 million under this alliance and have rights to receive, based on attainment of milestones, an additional $42.7 million of payments as well as potential royalties. We are using our proprietary genomics tools, bioinformatics and high-throughput sequencing to identify candidate genes believed to be involved in the development of asthma in certain individuals. 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 was $11.5 billion in 1999. 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. The most common forms of treatment of H. PYLORI, antibiotics and antisecretory drugs, do not eradicate 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 and vaccines. AstraZeneca is a leader in the field of products to treat peptic ulcer disease. Its anti-ulcer drug, Prilosec-Registered Trademark-, was the world's biggest selling prescription drug in 1999 with sales of $5.9 billion. As of February 26, 2000, 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. As of August 1999, we had completed our research obligations under this alliance and had turned over validated drug and vaccine targets to AstraZeneca for pre-clinical testing. 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. These infections are caused by antibiotic resistant organisms, many of which have multiple antibiotic resistance. Industry sources estimate that the market for anti-infective products worldwide was $58 billion in 1999. 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 traditional 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. 30 In December 1995, we formed an alliance with Schering-Plough to identify and validate gene targets for the development of drugs to target 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 February 26, 2000, we had received payments of $18.8 million under this alliance and have rights to receive, based on attainment of milestones, an additional $24.0 million of payments in addition to potential royalties. To date, we have delivered numerous validated drug targets to Schering-Plough for pre-clinical testing. Schering-Plough is continuing to screen validated targets to identify drug candidates. FUNGAL INFECTIONS. In the past twenty years, we 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 market for prescription antifungal drugs worldwide was approximately $1.8 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 tools to identify new, validated fungal targets for the development of drugs to treat fungal infections. Schering-Plough has extended our alliance through September 2001. Schering-Plough is a leader in the field of drugs targeted against fungal infections, with market leading products such as the Lotrimin AF-Registered Trademark- and Tinactin-Registered Trademark- lines of topical antifungals. As of February 26, 2000 we had received payments of $9.7 million under this alliance and have rights to receive, based on attainment of milestones, an additional $26.3 million of payments in addition to potential royalties. In the course of the program, we identified multiple essential fungal genes, and in October 1999, we delivered multiple assays for validated targets to Schering-Plough for drug candidate screening. INFECTIOUS DISEASE DIAGNOSTICS. The World Health Organization estimates that more than 17 million people die of an infectious disease 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. According to industry sources, the global market for IN VITRO diagnostics for infectious disease was approximately $3.2 billion in 1997. 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. We will receive a minimum of $6.2 million in the first year under this alliance. As of February 26, 2000, we had received payments of $5.4 million, including a completed equity investment, and have rights to receive future milestone payments and royalties based upon successful commercialization of diagnostic products. We have delivered the PathoGenome Database to bioMerieux and are currently identifying gene markers that can be employed in diagnostic product development. 31 GENOMIC SEQUENCING AND DATABASES We launched the GTC Sequencing Center in July 1999, capitalizing on our sequencing strengths by providing sequencing services to customers on a contractual basis. Our business focuses on providing customized sequencing services to biotechnology companies and pharmaceutical companies that need industrial scale, high quality customized sequencing capability. We have extensive experience in high-throughput sequencing. With approximately fifty full-time sequencers on staff and our highly automated sequencing center operating twenty-four hours per day, seven days per week, we are currently sequencing over 10 million base pairs (10 megabases) per day. The U.S. government has 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 five initial centers for the Mouse Genome Sequencing Network. We are the only commercial entity selected for either project. Since the launch of the GTC Sequencing Center in July 1999, we have entered into sequencing contracts with thirteen commercial, government and research customers, including the companies and institutions that we are able to disclose publicly as follows: SELECTED CONTRACT SEQUENCING CUSTOMERS AstraZeneca Aventis Biogen Cubist Pharmaceuticals Memorial Sloan-Kettering Cancer Center Phylos Human Genome Project Mouse Genome Sequencing Network Cancer Research Center--Queen's University, Ireland The GTC Sequencing Center is a key component of our strategy because it provides us with near-term revenues and the ability to defray a portion of the expenses associated with our sequencing operations. We believe the GTC Sequencing Center permits us to establish business relationships with a broader variety of participants in the biotechnology and pharmaceutical industries, which may lead to more comprehensive strategic alliances. PATHOGENOME 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 designed 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. The following six companies have subscribed to the PathoGenome Database: SUBSCRIBERS TO PATHOGENOME DATABASE Aventis Bayer bioMerieux Bristol-Myers Squibb Schering-Plough Scriptgen Pharmaceuticals 32 We received payments for access to the PathoGenome Database for a specified term for all subscribers, and we have rights to receive royalties from future product sales if the subscriber develops a product based on proprietary information in the PathoGenome Database. We are currently exploring opportunities to broaden access to the PathoGenome Database by commercial and academic researchers from all over the world. We are considering alliances to facilitate this access and extend the market for our PathoGenome Database. EMERGING BUSINESSES Expenditures for new drug development have been steadily increasing and there continues to be a shortfall in the number of new pharmaceutical product introductions in the market. In addition, adverse drug events together with poor side effect profiles may limit the success of existing pharmaceuticals. We are seeking to employ our platform of genomics technologies to develop new, more effective drugs through both our pharmacogenomics and infectious disease programs. PHARMACOGENOMICS. Understanding the differences in responses to drug therapy related to single nucleotide polymorphisms, commonly referred to as SNPs, in the genetic make-up of individuals can play a significant role in improving the overall safety and efficacy of drugs. We have developed a highly accurate and efficient platform to support our pharmacogenomics program. We are using our technology platform, based on our high quality, high throughput sequencing capability and a proprietary SNP screening assay, to search for genetic causes responsible for variations among individuals in response to drugs. As a first step in our pharmacogenomics program we have entered into a contract with a biotechnology company to determine genetic variations to validate that company's target. We plan to work with collaborators to identify more appropriate patient populations using pharmacogenomics to enable the development of more effective, safer drugs and the recovery of promising drugs that could succeed in trials using pre-selected populations based upon genetically determined responsiveness. INFECTIOUS DISEASES. We are mining the sequence information contained in our PathoGenome Database to identify genes that are novel targets and, as a result, good candidates for internally funded infectious disease drug development. Using our proprietary functional genomics technology, our scientists have been able to discover genes that are essential for the survival of pathogenic organisms. This technology, when combined with our bioinformatics capabilities, enables us to identify broad-spectrum microbial targets that are essential in bacteria. Thus, our gene discovery approach generates validated microbial targets that possess both selectivity and specificity, which are ideal attributes for drug intervention. These targets serve as the basis for our emerging 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 high-throughput compound screens. We will continue to pursue joint ventures similar to our joint venture with ArQule, a combinatorial chemistry company, where we have screened ArQule's proprietary chemical libraries against our assays to identify small molecule anti-infectives. In addition, we intend to build internal capabilities through the acquisition of novel compound libraries, technologies and/or products. It is anticipated 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 our internal infectious disease program. Under certain circumstances, we may have an obligation to give Schering-Plough a right of first negotiation to develop certain of our infectious disease related discoveries with us if we decide to seek a third party collaborator to develop such discovery. OUR TECHNOLOGY We have created an integrated high quality platform of genomic technologies that can identify and validate novel targets for drug, vaccine and diagnostic product development. Proteins, expressed by genes, are the targets of most current drugs. We believe identification of human disease genes and genes essential to the functioning of pathogens should enable the development of new drugs and other 33 products. We believe our technology platform will allow us to accelerate drug, vaccine and diagnostic development for both our human and infectious disease directed programs. Our integrated technology platform includes high quality, industrial scale sequencing and sequence finishing, bioinformatics, functional genomics technologies, and assay development. The following chart illustrates the principal steps in the discovery and development of novel targets for drug development using genomic-based discovery tools. As demonstrated by the chart, our integrated platform of technologies spans the drug discovery landscape, from gene identification to compound optimization. DRUG DISCOVERY & DEVELOPMENT PROCESS [LOGO] HIGH-THROUGHPUT SEQUENCING. We have developed a high-quality, industrial scale process for sequencing. The GTC Sequencing Center utilizes a fully automated process which makes use of DNA sequencing instruments and computers to sequence and analyze genes. Our current sequencing production is over 10 million base pairs (10 megabases) of raw sequence daily. 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, mouse and other genomes. SEQUENCE FINISHING. Finishing is the final step to organizing the genomic data once the 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%. 34 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 and application of genomic data mining and visualization software to strengthen 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, high throughput 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. ASSAY DEVELOPMENT. After determining that a gene target is susceptible to treatment by a small molecule drug and, in the case of a pathogen gene, essential for the survival or virulence of a pathogen, we then develop screening assays or tests for chemical compounds which interact with these targets. The development of screening assays involves confirming the consistency of the validated target under conditions that are pertinent to its viability for treatment of humans. Following successful completion of the assay development stage, we are then able to identify chemical compound leads that could enter into clinical testing and that could ultimately result in a marketable drug. STRATEGIC ALLIANCES The primary focus of our commercialization strategy is to pursue strategic alliances with pharmaceutical companies that are leaders in particular fields for the development and commercialization of products resulting from our genomic discoveries. This strategy provides us access to the substantial resources and product development expertise of our partners and permits us to benefit financially from the commercialization of products based on our gene discoveries, without incurring the substantial costs required for pharmaceutical product development and commercialization. We generally expect to license (either exclusively or non-exclusively) to a partner most rights in a specific field to therapeutic products and vaccines and, depending upon the gene, diagnostic products that may be developed by the partner from the particular genetic information that we provided to the partner. In exchange for a license to our genetic research data and other information in a certain area, we are typically entitled to receive a combination of: - up-front license fees - research funding - milestone payments - royalty payments on product sales To date, we have entered into strategic alliances with Wyeth-Ayerst, Schering-Plough (three distinct disease focused alliances), AstraZeneca, and bioMerieux. We also have government collaborations specifically focusing on our gene sequencing capability. Our strategic alliances are described in more detail below. 35 WYETH-AYERST/AHP. In December 1999, we entered into a strategic alliance with Wyeth-Ayerst to develop novel drugs and other therapeutics for the prevention and treatment of osteoporosis. Our alliance will focus on developing drugs utilizing targets based on the characterization of a gene associated with a unique high bone mass trait, the mirror image of osteoporosis. Under the agreement, we granted Wyeth-Ayerst an exclusive worldwide license to make, use and sell pharmaceutical and vaccine products based on this gene in the field of osteoporosis. We have commenced functional studies to confirm the identity of the gene responsible for the high bone mass trait. We are focusing on the validation of gene targets in preparation for drug development utilizing the extensive experience and capabilities of Wyeth-Ayerst in bone research. Under this agreement, Wyeth-Ayerst has agreed to pay us up to $118 million in up-front licensing fees, funded research and contingent payments for achieving milestones. We also have the right to receive royalty payments on Wyeth-Ayerst's sales of products based on technologies they have licensed from us under the agreement. As of February 26, 2000, we had received payments of $1.3 million under this alliance. Wyeth-Ayerst has the right to terminate the alliance prior to its completion in certain circumstances when we are not in breach under the agreement, including if Wyeth-Ayerst determines that the prospects for drug discovery under the alliance are minimal, or if Wyeth-Ayerst determines that third party intellectual property rights are likely to impair development or commercialization of a product under this alliance. In the event of such a termination all licensed intellectual property rights revert to us. Certain technologies licensed to Wyeth-Ayerst will be exclusively licensed by us from Creighton University and sublicensed to Wyeth-Ayerst. We will owe Creighton royalties under the license. SCHERING-PLOUGH. We have three strategic alliances in place with Schering-Plough, focusing on asthma, drug resistant bacterial infections and fungal infections. ASTHMA. In December 1996, we established a strategic alliance with Schering-Plough to use our genomics research abilities to help discover new pharmaceutical products to treat asthma. Under this alliance, we employ our high-throughput disease gene identification, bioinformatics, and genomics sequencing capabilities to identify genes and associated proteins that Schering-Plough can use to develop pharmaceuticals and vaccines for treating asthma. We are using our proprietary genomics tools, bioinformatics and high-throughput sequencing to identify candidate genes believed to be involved in the development of asthma in certain individuals. The research phase of this alliance is scheduled to end in June 2000. Under the agreement, Schering-Plough agreed to pay us up to $68.2 million in initial license fees, funded research and contingent payments for achieving milestones. Of the total potential payments, approximately $23.7 million represents license fees and funded research payments and $44.5 million represents milestone payments based on achievement of research and product development objectives. We have achieved a number of milestones under this agreement and have received payments as of February 26, 2000 of $25.5 million. In November 1998, Schering-Plough accelerated the program to increase funding and development in earlier years. The agreement also obligates Schering-Plough to pay us royalties based upon any sales of therapeutic products developed from this collaboration. Under the agreement, we granted Schering-Plough an exclusive worldwide license to make, use and sell pharmaceutical and vaccine products that may result from this collaboration. Under certain circumstances, we may have an obligation to give Schering-Plough a right of first negotiation to develop with us certain of our asthma related discoveries if we decide to seek a third party collaborator to develop such discovery. We retain the rights to make, use and sell diagnostic products resulting from our research under the agreement. DRUG RESISTANT BACTERIAL INFECTIONS. In December 1995, we entered into a strategic alliance with Schering-Plough to identify and validate gene targets for the development of drugs to target 36 STAPH. AUREUS and other pathogens that have become resistant to current antibiotics and are a primary cause of hospital-based infections. In March 1998, Schering-Plough elected to extend the research program through March 31, 2000. In August 1999, we delivered numerous validated drug targets to Schering-Plough for pre-clinical testing. Under this agreement, Schering-Plough has agreed to pay us up to $42.8 million in initial license fees, funded research and contingent payments for achieving milestones. We have achieved all of the research milestones under this agreement and have received payments of $18.8 million as of February 26, 2000. Subject to the achievement of additional product development milestones, Schering-Plough has agreed to pay us up to an additional $24 million in milestone payments. As part of this program, we granted Schering-Plough exclusive worldwide access to our proprietary STAPH. AUREUS genomic sequence database to make, use and sell pharmaceutical and vaccine products based on these databases and the technology developed during the course of the research program. We will be entitled to receive royalties on Schering-Plough's sale of therapeutic products and vaccines developed using the technology we licensed to Schering-Plough. We also granted Schering-Plough a non-exclusive license to use our bioinformatics systems for Schering-Plough's internal use in connection with the genomic databases licensed to Schering-Plough under our agreement and other genomic databases Schering-Plough develops or acquires. Subject to certain limitations, we retain the rights to make, use, and sell diagnostic products developed utilizing our genomic database licensed to Schering-Plough and the technology developed during the course of the research program. The research phase of this alliance is scheduled to end in March 2000. FUNGAL INFECTIONS. In September 1997, we established our third strategic alliance with Schering-Plough to use genomics to discover and develop new pharmaceutical products to treat fungal infections. In December 1999, Schering-Plough extended this alliance with us through September 2001. The alliance calls for us to use our bioinformatics, high-throughput sequencing and functional genomics capabilities to identify and validate genes and associated proteins as drug discovery targets that Schering-Plough can utilize to develop novel antifungal treatments. Schering-Plough receives exclusive access to certain genomic information developed in the collaboration related to two fungal pathogens, CANDIDA ALBICANS and ASPERGILLUS FUMIGATUS. In October 1999, we delivered multiple assays for validated targets to Schering-Plough, and Schering-Plough began high-throughput screening for new drug candidates. The research phase of this alliance is scheduled to end in September 2001. Under this agreement, Schering-Plough has agreed to pay us up to $36 million in initial license fees, funded research and contingent payments for achieving milestones. We have achieved all of the research milestones under this agreement and have received payments of $9.7 million as of February 26, 2000. Schering-Plough receives the exclusive worldwide right to make, use, and sell pharmaceutical products to treat human and animal diseases based on the technology developed during the course of the research program. We will be entitled to receive royalties on Schering-Plough's sale of therapeutic products and vaccines developed using the technology we licensed to Schering-Plough. Subject to certain limitations, we retain the rights to make, use and sell diagnostic products resulting from our research under the agreement. ASTRAZENECA. In August 1995, we entered into a strategic alliance with AstraZeneca to develop drugs, vaccines and diagnostic products effective against peptic ulcers or any other disease caused by H. PYLORI. In August 1999, we successfully concluded our research portion of the alliance and transitioned the program into AstraZeneca's pipeline for pre-clinical testing. In the course of our research, we identified and validated a number of undisclosed targets and vaccine antigens. We delivered these targets, as well as screening assays, to AstraZeneca for high-throughput drug candidate screening. 37 Under the alliance, we also granted AstraZeneca exclusive access to our H. PYLORI genomic sequence database. Under this agreement, AstraZeneca has agreed to pay us up to $23.3 million in license fees, funded research and contingent payments for achieving milestones. We have received approximately $13.5 million in license fees, milestone payments and research funding under this agreement through Feburary 26, 2000. Under the alliance, AstraZeneca holds the exclusive worldwide rights to make, use and sell products based on H. PYLORI technology licensed to AstraZeneca. We have rights to receive royalties on AstraZeneca's sale of any products protected by patent claims that we have licensed exclusively to AstraZeneca pursuant to the agreement, or resulting from a discovery enabled by our genomic database licensed to AstraZeneca. AstraZeneca has the rights to make, use and sell diagnostic products resulting from our research under the agreement. BIOMERIEUX. 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. Under the terms of the alliance, we granted bioMerieux all rights not previously granted to others in the area of pathogen genetics for the development of diagnostic products. We have delivered the PathoGenome Database to bioMerieux and are currently identifying gene markers that can be employed in diagnostic product development. Under this collaboration, bioMerieux has guaranteed us payments of at least $6.2 million in the first year, which includes a $3.8 million equity investment that has been completed. bioMerieux also agreed to fund research in the area of infectious disease diagnostics for four years. We will receive future milestone payments and royalties based upon successful commercialization of diagnostic products. As of February 26, 2000, we had received payments of $5.4 million under this alliance, including the completed equity investment. GOVERNMENT COLLABORATIONS Since 1989, various agencies of the United States government have awarded us a number of research grants and contracts under government genomics programs. The scope of our research covered by grants and contracts includes technology development, sequencing production, technology automation projects and disease gene identification projects. These programs strengthened our genomics technology base and increased the number and enhanced the expertise of our scientific personnel. As of February 26, 2000, we had approximately $25.1 million of government research grants and contracts outstanding under which we had not yet completed all of the services. These grants and contracts call for us to perform services through October 2002. These programs are subject to annual appropriations by the government based upon the availability of government funds and our achievement of certain milestones. The government may discontinue or reduce our funding at any time. In July 1999, the government named us one of ten 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 participate in an international consortium in a full-scale effort to sequence the human genome. We will receive funding from the NHGRI of up to $15.6 million over a three-year period of which $5.0 million is guaranteed for the initial twelve months. In October 1999, the government named us as one of five 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. We are the only commercial entity to have been chosen to participate in deciphering the genetic makeup of 38 the mouse. We will receive funding from the NHGRI of up to $12.9 million over a three-year period of which $2.4 million is guaranteed for the initial seven months. Under both these research contracts, the 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. PATENTS AND PROPRIETARY TECHNOLOGY Our ultimate commercial success depends in part on our ability to obtain patent protection on our methods, technologies and discoveries, including genes, proteins encoded by genes, patentable human single nucleotide polymorphisms or products based on genes or our proprietary gene technology. To that end, our policy is to protect our proprietary technology 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, 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 proposed 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 39 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 you 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 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, we or our collaborators may not be able to obtain a patent with respect to the genes of H. PYLORI or 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 us or our collaborators, the scope of coverage or protection afforded to such patent may be limited. We also rely upon 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 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. We believe that our principal competitors include Human Genome Sciences, Incyte Pharmaceuticals, Millennium Pharmaceuticals and Myriad Genetics. 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. 40 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 us or our collaborators. 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 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 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. 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 factors 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 we or our collaborators develop. The extent to which such regulation may apply to us or our collaborators 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. Products based on our technologies could potentially fall into all three categories. 41 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 We or our collaborators 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 we or our collaborators 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: - pre-clinical studies - obtain an investigational device exemption to conduct clinical tests - filing a pre-market approval application - FDA approval 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 or market pharmaceutical products in the near term. However, in the future, we may consider manufacturing and marketing if we believe they are appropriate under the circumstances. We have no recent experience in developing pharmaceutical products or in manufacturing or marketing pharmaceutical products. We may not have the resources to develop or manufacture or market by ourselves any products based on genes identified by us. In the event we decide to establish a manufacturing facility, 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 ELA for our facility. 42 HUMAN RESOURCES As of February 26, 2000, we had 174 full-time equivalent employees; 151 of these employees engaged in research and development activities and 23 of them conducted general and administrative functions. Thirty-six of our employees hold Ph.D. degrees and 49 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 fiscal 1999, we incurred aggregate rental costs, excluding maintenance, taxes and utilities, for our facility of approximately $900,000. 43 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Our directors and executive officers and their respective ages and positions as of March 15, 2000 are as follows:
NAME AGE POSITION - ---- -------- -------- Robert J. Hennessey....... 58 Chief Executive Officer Chairman of the Board of Directors Richard D. Gill, Ph.D. ... 43 President and Chief Operating Officer Philip V. Holberton....... 57 Treasurer and Chief Financial Officer Christopher T. Kelly...... 53 Senior Vice President, Strategic Planning and Business Development Marc B. Garnick, M.D. 53 Director (1) .................... Philip Leder, M.D. ....... 65 Director Lawrence Levy (1)(2)...... 76 Director Steven M. Rauscher 46 Director (1)(2).................. Norbert G. Riedel, Ph.D. 42 Director (2).....................
- ------------------------------ (1) Member of audit committee (2) Member of stock option and compensation committee Set forth below is information about the professional experience of each of our directors and executive officers. ROBERT J. HENNESSEY has served as Chief Executive Officer and President of Genome Therapeutics Corp. since March 1993 and became Chairman of the Board in May 1994. From 1990 to March 1993, Mr. Hennessey served as President of Hennessey & Associates, Ltd., a consulting firm, and from 1980 to 1990 he served as a Vice President of Sterling Drug, Inc., a pharmaceutical company. Mr. Hennessey is a director of Penwest Pharmaceuticals and Repligen, Inc. RICHARD D. GILL, PH.D., has served as President and Chief Operating Officer of Genome Therapeutics Corp. since December 1999. Dr. Gill joined us following ten years with BTG International Inc., a subsidiary of BTG plc. Dr. Gill was instrumental in establishing BTG USA in 1990 and served as Senior Vice President and General Manager of BTG's North American Biosciences business. Prior to BTG, Dr. Gill held positions of increasing responsibility in science and management with Unilever plc in the United Kingdom from 1980 to 1989. PHILIP V. HOLBERTON has served as Treasurer and Chief Financial Officer of Genome Therapeutics since July 1999. Since 1995, he has been an independent contractor, serving corporations as its Chief Financial Officer. He served as a contract Chief Financial Officer for BioSepra, Inc. from August 1998 to December 1999. From 1991 to 1995, he was Chief Financial Officer of Cambridge NeuroScience, Inc., a biotechnology company. CHRISTOPHER T. KELLY has served as Senior Vice President--Strategic Planning and Business Development of Genome Therapeutics since 1997. Prior to joining us, Mr. Kelly served as President and Chief Executive Officer of Spectral Pharmaceuticals, Inc., a company which he co-founded in 1993. Prior to Spectral, he served as Vice President of Commercial Development at Triplex Pharmaceutical Corporation. From 1986 to 1992, Mr. Kelly held senior strategic planning and business development 44 positions at Sterling Drug, Inc.. Mr. Kelly previously held senior marketing positions with Boehringer Mannheim Corporation, CooperBiomedical, Inc. and Hoffmann-LaRoche Inc. MARC B. GARNICK, M.D., a director of Genome Therapeutics Corp., currently serves as Executive Vice President and Chief Medical Officer at Praecis Pharmaceuticals, Inc. and Clinical Professor of Medicine at Harvard Medical School. He is on the faculty of the Harvard Medical School as a clinical Professor of Medicine and maintains a clinical practice at the Beth Israel Deaconess Medical Center. From 1987 to 1994, Dr. Garnick was Vice President, Clinical Development at Genetics Institute. From 1978 to 1996, Dr. Garnick held various academic and hospital appointments at Harvard Medical School, the Dana Farber Cancer Institute and the Brigham and Women's Hospital. PHILIP LEDER, M.D., a director of Genome Therapeutics Corp., has served as the John Emery Andrus Professor of Genetics and Chairman of the Department of Genetics at Harvard Medical School since 1980. He has also been a Senior Investigator of the Howard Hughes Medical Institute since 1986. Dr. Leder is a director of Monsanto Company, Inc. LAWRENCE LEVY, a director of Genome Therapeutics Corp., is Chairman of the Board of Directors and President of Northern Ventures Corporation, international management and business consulting firm. He has held this position since 1982. STEVEN M. RAUSCHER, a director of Genome Therapeutics Corp., has served as Chief Executive Officer of AmericasDoctor.com, an Internet based health information company, since January 2000. From 1995 to January 2000, he served as the Chief Executive Officer and a director of Affiliated Research Centers, Inc. From 1993 to 1995, Mr. Rauscher was President and Chief Executive Officer of Pharmedic Company, a biopharmaceutical company, and from 1976 to 1993, he was Vice President of Abbott Laboratories, a biopharmaceutical company. NORBERT G. RIEDEL, PH.D., a director of Genome Therapeutics Corp., currently serves as President of the Recombinant Strategic Business Unit for Baxter Hyland Immuno, a division of Baxter Healthcare Corp. From 1991 to 1998, Dr. Riedel served in various research and management positions at Hoechst Marion Roussel, Inc. where his most recent responsibility was Head of Global Biotechnology and the Hoechst Ariad Genomic Center. From 1984 to 1992, Dr. Riedel held various academic appointments at Harvard University, Boston University School of Medicine and Massachusetts Institute of Technology. 45 UNDERWRITING Genome Therapeutics has entered into an underwriting agreement with the underwriters named below. CIBC World Markets Corp., Warburg Dillon Read LLC, Dain Rauscher Incorporated and Tucker Anthony Incorporated are acting as representatives of the underwriters. The underwriting agreement provides for the purchase of a specific number of shares of common stock by each of the underwriters. The underwriters' obligations are several, which means that each underwriter is required to purchase a specified number of shares, but is not responsible for the commitment of any other underwriter to purchase shares. Subject to the terms and conditions of the underwriting agreement, each underwriter has severally agreed to purchase the number of shares of common stock set forth opposite its name below:
UNDERWRITER NUMBER OF SHARES - ----------- ---------------- CIBC World Markets Corp..................................... Warburg Dillon Read LLC..................................... Dain Rauscher Incorporated.................................. Tucker Anthony Incorporated................................. --------------- Total................................................... 3,000,000 ===============
This is a firm commitment underwriting. This means that the underwriters have agreed to purchase all of the shares offered by this prospectus (other than those covered by the over-allotment option described below) if any are purchased. Under the underwriting agreement, if any underwriter defaults in its commitment to purchase shares, the commitments of non-defaulting underwriters may be increased or the underwriting agreement may be terminated, depending on the circumstances. The underwriters have advised us that they propose to offer the shares directly to the public at the public offering price that appears on the cover page of this prospectus. In addition, the underwriters may offer some of the shares to other securities dealers at such price less a concession of $ per share. The underwriters may also allow, and such dealers may reallow, a concession not in excess of $ per share to other dealers. After the shares are released for sale to the public, the representatives may change the offering price and other selling terms at various times. We have granted the underwriters an over-allotment option. This option, which is exercisable for up to 30 days after the date of this prospectus, permits the underwriters to purchase a maximum of additional shares from us to cover over-allotments. If the underwriters exercise all or part of this option, they will purchase shares covered by the option at the public offering price that appears on the cover page of this prospectus, less the underwriting discount. If this option is exercised in full, the total price to public will be $ , and the total proceeds to us will be $ . The underwriters have severally agreed that, to the extent the over-allotment option is exercised, they will each purchase a number of additional shares proportionate to the underwriter's initial amount reflected in the foregoing table. The following table provides information regarding the amount of the discount to be paid to the underwriters by us:
TOTAL WITHOUT EXERCISE TOTAL WITH FULL EXERCISE PER SHARE OF OVER-ALLOTMENT OPTION OF OVER-ALLOTMENT OPTION ---------- ------------------------ ------------------------ Genome Therapeutics.................... $ $ $
We will pay all of the expenses of this offering, excluding the underwriting discounts and commissions referred to above, the total of which we estimate will be approximately $ million. 46 We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933. We, our officers and directors have agreed to a 90-day "lock-up" with respect to approximately 1,257,648 shares of common stock and other of our securities that we beneficially own, including securities that are convertible into shares of common stock and securities that are exchangeable or exercisable for shares of common stock. This means that for a period of 90 days following the date of this prospectus, we and such persons may not offer, sell, pledge or otherwise dispose of these our securities without the prior written consent of CIBC World Markets Corp. or, subject to certain exceptions, enter into any arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of common stock. Rules of the Securities and Exchange Commission may limit the ability of the underwriters to bid for or purchase shares before the distribution of the shares is completed. However, the underwriters may engage in the following activities in accordance with the rules: - - Stabilizing transactions--The representatives may make bids or purchases for the purpose of pegging, fixing or maintaining the price of the shares, so long as stabilizing bids do not exceed a specified maximum. - - Over-allotments and syndicate covering transactions--The underwriters may create a short position in the shares by selling more shares than are set forth on the cover page of this prospectus. If a short position is created in connection with the offering, the representatives may engage in syndicate covering transactions by purchasing shares in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over-allotment option. - - Penalty bids--If the representatives purchase shares in the open market in a stabilizing transaction or syndicate covering transaction, they may reclaim a selling concession from the underwriters and selling group members who sold those shares as part of this offering. - - Passive market making--Market makers in the shares who are underwriters or prospective underwriters may make bids for or purchases of shares, subject to limitations, until the time, if ever, at which a stabilizing bid is made. Stabilization and syndicate covering transactions may cause the price of the shares to be higher than it would be in the absence of such transactions. The imposition of a penalty bid might also have an effect on the price of the shares if it discourages resales of the shares. Neither we nor the underwriters makes any representation or prediction as to the effect that the transactions described above may have on the price of the shares. These transactions may occur on the Nasdaq National Market or otherwise. If such transactions are commenced, they may be discontinued without notice at any time. VALIDITY OF COMMON STOCK Ropes & Gray, Boston, Massachusetts will pass upon the validity of the shares of common stock we are offering. Palmer & Dodge LLP will pass upon legal matters in connection with the offering for the underwriters. EXPERTS The consolidated financial statements of Genome Therapeutics Corp. as of August 31, 1998 and 1999 and for the years ended August 31, 1997, 1998 and 1999 included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public 47 accountants, as indicated in their reports with respect thereto and are included herein in reliance upon the authority of said firm as experts in giving said reports. WHERE YOU CAN FIND MORE INFORMATION We have filed a registration statement on Form S-3 with the Securities and Exchange Commission for the stock we are offering by this prospectus. This prospectus does not include all of the information contained in the registration statement. You should refer to the registration statement and its exhibits for additional information. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete and you should refer to the exhibits attached to the registration statement for copies of the actual contract, agreement or other document. The SEC allows us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus, and the information that we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings we will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended. 1. Our Annual Report on Form 10-K for the fiscal year ended August 31, 1999 as filed with the SEC on November 24, 1999; 2. Our Annual Report on Form 10-K/A for the fiscal year ended August 31, 1999 as filed with the SEC on February 15, 2000; 3. Our Quarterly Report on Form 10-Q for the quarter ended November 27, 1999 as filed with the SEC on January 11, 2000; 4. Our Quarterly Report on Form 10-Q/A for the quarter ended November 27, 1999 as filed with the SEC on March 21, 2000; 5. Our Quarterly Report on Form 10-Q for the quarter ended February 26, 2000 as filed with the SEC on March 22, 2000; 6. Our Proxy Statement as filed with the SEC on January 27, 2000; and 7. Our Current Report on Form 8-K dated March 8, 2000. 8. Our Current Report on Form 8-K dated April 4, 2000. You may request a copy of these filings, at no cost, by writing or telephoning us at the following address: Genome Therapeutics Corp. 100 Beaver Street Waltham, Massachusetts 02453 Attention: Chief Financial Officer (781) 398-2300 You can read our SEC filings, including the registration statement, over the Internet at the SEC's website at HTTP://WWW.SEC.GOV. You may also read and copy any document we file with the SEC at its public reference facilities at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; Seven World Trade Center, Thirteenth Floor, New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of public reference facilities. 48 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE -------- Report of Independent Public Accountants.................... F-2 Consolidated Balance Sheets as of August 31, 1998 and 1999 and February 26, 2000 (unaudited)......................... F-3 Consolidated Statements of Operations for the Years Ended August 31, 1997, 1998 and 1999 and for the Twenty-six Week Periods Ended February 27, 1999 and February 26, 2000 (unaudited)............................................... F-4 Consolidated Statements of Shareholders' Equity for the Years Ended August 31, 1997, 1998 and 1999 and for the Twenty-six Week Period Ended February 26, 2000 (unaudited)................ F-5 Consolidated Statements of Cash Flows for the Years Ended August 31, 1997, 1998 and 1999 and for the Twenty-six Week Periods Ended February 27, 1999 and February 26, 2000 (unaudited)............................................... 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 subsidiaries (a Massachusetts corporation) as of August 31, 1998 and 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended August 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Genome Therapeutics Corp. and subsidiaries as of August 31, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Boston, Massachusetts October 6, 1999 F-2 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AUGUST 31, FEBRUARY 26, --------------------------- ------------ 1998 1999 2000 ------------ ------------ ------------ (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents................................. $ 10,978,176 $ 12,802,162 $ 28,381,795 Marketable securities..................................... 21,969,524 12,060,230 7,309,650 Interest receivable....................................... 742,411 448,192 454,467 Unbilled costs and fees................................... 150,299 35,328 81,077 Prepaid expenses and other current assets................. 721,239 324,211 669,342 Note receivable from former officer....................... -- 120,000 120,000 ------------ ------------ ------------ Total current assets.................................. 34,561,649 25,790,123 37,016,331 ------------ ------------ ------------ Equipment and Leasehold Improvements, At Cost: Laboratory and scientific equipment....................... 14,434,808 15,844,262 18,134,397 Leasehold improvements.................................... 7,913,570 8,205,701 8,217,451 Equipment and furniture................................... 1,334,268 1,344,703 1,359,887 ------------ ------------ ------------ 23,682,646 25,394,666 27,711,735 Less--Accumulated depreciation............................ 8,579,440 12,173,500 14,145,172 ------------ ------------ ------------ 15,103,206 13,221,166 13,566,563 Restricted Cash............................................. 200,000 200,000 200,000 Long-term Marketable Securities............................. 1,029,569 -- -- Note Receivable from Former Officer......................... 160,000 -- -- Other Assets................................................ 410,267 273,708 251,458 ------------ ------------ ------------ $ 51,464,691 $ 39,484,997 $ 51,034,352 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current maturities of long-term obligations............... $ 5,611,186 $ 3,934,547 $ 4,406,862 Accounts payable.......................................... 977,610 987,958 941,736 Accrued expenses.......................................... 2,450,400 2,322,780 4,229,858 Deferred revenue.......................................... 4,699,137 2,903,534 4,641,041 ------------ ------------ ------------ Total current liabilities............................. 13,738,333 10,148,819 14,219,497 ------------ ------------ ------------ Long-term Obligations, net of Current Maturities............ 8,478,558 5,925,086 5,760,357 ------------ ------------ ------------ Commitments and Contingencies (Note 4) Shareholders' Equity: Common stock, $.10 par value--Authorized--34,375,000 shares; Issued and outstanding--18,312,589, 18,542,146 and 20,588,566 shares at August 31, 1998 and 1999 and February 26, 2000 (unaudited), respectively............. 1,831,259 1,854,214 2,058,856 Series B restricted stock, $.10 par value-- Authorized--625,000 shares Issued and outstanding--none............................ -- -- -- Additional paid-in capital................................ 87,964,523 88,285,619 96,862,049 Accumulated deficit....................................... (60,369,289) (66,697,384) (66,891,890) Deferred compensation..................................... (178,693) (31,357) (974,517) ------------ ------------ ------------ Total shareholders' equity............................ 29,247,800 23,411,092 31,054,498 ------------ ------------ ------------ $ 51,464,691 $ 39,484,997 $ 51,034,352 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
TWENTY-SIX WEEKS ENDED YEARS ENDED AUGUST 31, --------------------------- ----------------------------------------- FEBRUARY 27, FEBRUARY 26, 1997 1998 1999 1999 2000 ------------ ------------ ----------- ------------ ------------ (UNAUDITED) Revenues: Contract research, licenses, subscription fees and royalties...... $ 16,652,764 $ 19,217,132 $24,018,165 $11,513,000 $13,840,173 Costs and Expenses: Research and development............. 26,523,824 31,977,381 26,699,910 13,485,667 11,749,546 Selling, general and administrative.......... 3,765,755 4,292,471 4,279,480 2,062,423 2,687,949 ------------ ------------ ----------- ----------- ----------- Total costs and expenses............ 30,289,579 36,269,852 30,979,390 15,548,090 14,437,495 ------------ ------------ ----------- ----------- ----------- Loss from operations...... (13,636,815) (17,052,720) (6,961,225) (4,035,090) (597,322) Interest income........... 2,965,866 2,386,523 1,586,798 874,405 799,267 Interest expense.......... (631,442) (1,147,186) (953,668) (529,060) (396,451) ------------ ------------ ----------- ----------- ----------- Net interest income... 2,334,424 1,239,337 633,130 345,345 402,816 ------------ ------------ ----------- ----------- ----------- Net loss.............. $(11,302,391) $(15,813,383) $(6,328,095) $(3,689,745) $ (194,506) ============ ============ =========== =========== =========== Net Loss per Common Share: Basic and diluted......... $ (.64) $ (.87) $ (.34) $ (.20) $ (.01) ============ ============ =========== =========== =========== Weighted Average Common Shares Outstanding: Basic and diluted......... 17,617,614 18,212,365 18,382,707 18,335,058 19,395,565 ============ ============ =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ------------------------ ADDITIONAL TOTAL NUMBER $.10 PAR PAID-IN ACCUMULATED DEFERRED SHAREHOLDERS' OF SHARES VALUE CAPITAL DEFICIT COMPENSATION EQUITY ----------- ---------- ----------- ------------ ------------ ------------- Balance, August 31, 1996................... 17,460,966 $1,746,097 $86,067,176 $(33,253,515) $ (247,000) $ 54,312,758 Exercise of stock options................ 321,963 32,196 824,264 -- -- 856,460 Deferred compensation from grant of stock options................................ -- -- 50,594 -- (50,594) -- Amortization of deferred compensation and other compensation expense............. -- -- -- -- 79,370 79,370 Net loss................................. -- -- -- (11,302,391) -- (11,302,391) ----------- ---------- ----------- ------------ ----------- ------------ Balance, August 31, 1997................... 17,782,929 1,778,293 86,942,034 (44,555,906) (218,224) 43,946,197 Exercise of stock options................ 529,660 52,966 930,615 -- -- 983,581 Deferred compensation from grant of stock options................................ -- -- 91,874 -- (91,874) -- Amortization of deferred compensation and other compensation expense............. -- -- -- -- 131,405 131,405 Net loss................................. -- -- -- (15,813,383) -- (15,813,383) ----------- ---------- ----------- ------------ ----------- ------------ Balance, August 31, 1998................... 18,312,589 1,831,259 87,964,523 (60,369,289) (178,693) 29,247,800 Exercise of stock options................ 228,757 22,875 322,121 -- -- 344,996 Issuance of stock under directors deferred stock plan.................... 800 80 -- -- -- 80 Deferred compensation from grant of stock options................................ -- -- 60,006 -- (60,006) -- Amortization of deferred compensation and other compensation expense............. -- -- -- -- 142,847 142,847 Compensation expense related to grant of stock options.......................... -- -- 3,464 -- -- 3,464 Reversal of deferred compensation related to termination of stock options........... -- -- (64,495) -- 64,495 -- Net loss................................. -- -- -- (6,328,095) -- (6,328,095) ----------- ---------- ----------- ------------ ----------- ------------ Balance, August 31, 1999................... 18,542,146 1,854,214 88,285,619 (66,697,384) (31,357) 23,411,092 Sale of common stock..................... 678,610 67,861 3,664,254 -- -- 3,732,115 Exercise of stock options................ 1,367,810 136,781 3,499,311 -- -- 3,636,092 Deferred compensation from grant of stock options................................ -- -- 1,528,698 -- (1,528,698) -- Amortization of deferred compensation.... -- -- -- -- 469,705 469,705 Reversal of deferred compensation related to termination of stock options........... -- -- (115,833) -- 115,833 -- Net loss................................. -- -- -- (194,506) -- (194,506) ----------- ---------- ----------- ------------ ----------- ------------ Balance, February 26, 2000 (unaudited)..... 20,588,566 $$2,058,856 $96,862,049 $(66,891,890) $ (974,517) $ 31,054,498 =========== ========== =========== ============ =========== ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
TWENTY-SIX WEEK PERIODS ENDED YEARS ENDED AUGUST 31, --------------------------- ------------------------------------------ FEBRUARY 27, FEBRUARY 26, 1997 1998 1999 1999 2000 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Cash Flows from Operating Activities: Net loss................................. $(11,302,391) $(15,813,383) $ (6,328,095) $(3,689,745) $ (194,506) Adjustments to reconcile net loss to net cash (used in) provided by operating activities-- Depreciation and amortization.......... 2,382,286 3,714,383 4,063,977 2,048,147 1,976,058 Loss on disposal of fixed assets....... 227,864 288,979 -- -- -- Deferred compensation.................. 79,370 131,405 146,311 86,575 469,705 Common stock issued for services rendered............................. -- -- 80 -- -- Changes in assets and liabilities-- Interest receivable.................. 16,046 538,200 294,219 223,817 (6,275) Unbilled costs and fees and accounts receivable......................... 1,488,729 19,481 99,417 40,413 (45,749) Prepaid expenses and other current assets............................. 144,663 (287,317) 412,582 172,542 (345,131) Loan to former officer............... (160,000) -- 40,000 -- Accounts payable..................... 424,112 (310,781) 10,348 (115,590) (46,222) Accrued expenses..................... 642,568 76,612 (127,620) (31,959) 1,907,078 Deferred revenue..................... 1,300,191 2,363,442 (1,795,603) 1,274,263 1,737,507 ------------ ------------ ------------ ------------ ------------ Total adjustments.................. 6,545,829 6,534,404 3,143,711 3,698,208 5,646,971 ------------ ------------ ------------ ------------ ------------ Net cash (used in) provided by operating activities............. (4,756,562) (9,278,979) (3,184,384) 8,463 5,452,465 ------------ ------------ ------------ ------------ ------------ Cash Flows from Investing Activities: Purchases of marketable securities....... (20,575,625) (30,820,944) (21,858,137) (11,135,157) (21,125,970) Maturities of marketable securities...... 24,530,000 46,761,250 32,797,000 19,608,000 25,876,550 Purchases of equipment and leasehold improvements........................... (1,370,028) (5,162,311) (834,351) (424,997) -- (Increase) decrease in restricted cash... (106,000) 101,500 -- -- -- (Increase) decrease in other assets...... (220,850) 18,722 136,559 23,990 22,250 ------------ ------------ ------------ ------------ ------------ Net cash provided by investing activities....................... 2,257,497 10,898,217 10,241,071 8,071,836 4,772,830 ------------ ------------ ------------ ------------ ------------ Cash Flows from Financing Activities: Proceeds from sale of common stock....... -- -- -- -- 3,732,115 Proceeds from exercise of stock options................................ 856,460 983,581 344,996 73,992 3,636,092 Proceeds from long-term obligations...... 2,500,000 4,011,000 -- -- Payments on long-term obligations........ (2,933,984) (4,238,341) (5,577,697) (2,829,361) (2,013,869) ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities............. 422,476 756,240 (5,232,701) (2,755,369) 5,354,338 ------------ ------------ ------------ ------------ ------------ Net (Decrease) Increase in Cash and Cash Equivalents.............................. (2,076,589) 2,375,478 1,823,986 5,324,930 15,579,633 Cash and Cash Equivalents, beginning of period................................... 10,679,287 8,602,698 10,978,176 10,978,176 12,802,162 ------------ ------------ ------------ ------------ ------------ Cash and Cash Equivalents, end of period... $ 8,602,698 $ 10,978,176 $ 12,802,162 $16,303,106 $ 28,381,795 ============ ============ ============ ============ ============ Supplemental Disclosure of Cash Flow Information: Interest paid during the period.......... $ 631,442 $ 1,147,186 $ 953,668 $ 529,060 $ 396,451 ============ ============ ============ ============ ============ Income taxes paid during the period...... $ 36,612 $ 24,700 $ 33,019 $ 11,700 $ 7,800 ============ ============ ============ ============ ============ Supplemental Disclosure of Noncash Investing and Financing Activities: Equipment acquired under capital leases................................. $ 5,843,037 $ 3,572,777 $ 1,347,586 $ 783,537 $ 2,376,272 ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-6 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Genome Therapeutics Corp. (GTC or the Company) is a leader in commercialization of genomics-based drug discovery. GTC has over ten years of experience in genomic research and has been selected as the only commercial genomics company to participate in the Human Genome Project sponsored by the United States government. The Company's commercial strategy is to apply its broad understanding of human and infectious disease genomics and its integrated proprietary technologies to validate novel drugs for commercialization through alliances with pharmaceutical companies. The accompanying consolidated financial statements reflect the application of certain accounting policies 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 subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. (B) UNAUDITED INTERIM FINANCIAL STATEMENTS The unaudited consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and include, in the opinion of management, all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation of interim period results. The results for the interim periods presented are not necessarily indicative of results to be expected for the full fiscal year. (C) REVENUE RECOGNITION Revenues are from contract research and licenses derived from alliances with pharmaceutical companies and from government grants and contracts. Upfront license fees are recognized as earned. Revenues from research and development and alliances are recognized over their respective contract periods. Subscription fees from the PathoGenome Database are recognized ratably over the life of the subscription. Milestone payments from research and development alliances are recognized when they are achieved. Unbilled costs and fees represent revenue recognized prior to billing. Deferred revenue represents amounts received prior to revenue recognition. Staff Accounting Bulletin No. 101 (SAB 101), REVENUE RECOGNITION, was issued in December 1999. The Company believes that SAB 101 will have an impact on future operating results. See Note 1(l) for additional discussion. (D) EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and 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. Equipment and all other depreciable assets' useful lives vary from three to seven years. The majority of the Company's equipment and leaseholds are financed through bank equipment lines of credit. F-7 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (E) NET LOSS PER COMMON SHARE The Company applies Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE, which establishes standards for computing and presenting earnings per share. Basic and diluted earnings per share were determined by dividing net loss by the weighted average common 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 and warrants that are not included in diluted net loss per common share were 4,869,938, 4,089,226, 3,301,008, 3,739,971 and 2,533,967 at August 31, 1997, 1998, 1999, February 27, 1999 and February 26, 2000, respectively. (F) 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. The Company has no significant 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, cash equivalents and marketable securities balances with several nonaffiliated institutions. The Company had revenues from the following significant customers:
NUMBER PERCENTAGE OF OF TOTAL REVENUES SIGNIFICANT ------------------------------ CUSTOMERS A B C ----------- -------- -------- -------- Year ended August 31, 1997......................................... 3 17% 27% 48% 1998......................................... 3 9 9 71 1999......................................... 3 4 4 75 Twenty-six week periods ended, February 27, 1999............................ 3 4 3 74 February 26, 2000............................ 2 -- 24 55
(G) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (H) FINANCIAL INSTRUMENTS The estimated fair value of the Company's financial instruments, which include cash equivalents, marketable securities, accounts receivable, accounts payable and long-term debt, approximates carrying value. F-8 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (I) RECLASSIFICATIONS The Company has reclassified certain prior year information to conform with current year's presentation. (J) COMPREHENSIVE LOSS The Company has adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130 requires disclosure of all components of comprehensive income on an annual and interim basis. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. Comprehensive loss is the same as net loss for all periods presented. (K) SEGMENT REPORTING The Company applies 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 how to allocate resources and assess performance. The Company's chief decision-makers, as defined under SFAS No. 131, are the chief executive officer, chief operating officer and chief financial officer. To date, the Company has viewed its operations and manages its business as principally one operating segment. As a result, the financial information disclosed herein represents all of the material financial information related to the Company's principal operating segment. All of the Company's revenues are generated in the United States and substantially all assets are located in the United States. (L) NEW ACCOUNTING PRONOUNCEMENT Staff Accounting Bulletin No. 101 (SAB 101), REVENUE RECOGNITION, was issued in December 1999. SAB 101 will require companies to recognize certain upfront non-refundable fees and milestone payments over the life of the related alliance when such fees are received in conjunction with alliances which have multiple elements. The Company is required to adopt this new accounting principle through a cumulative charge to the statement of operations, in accordance with Accounting Principles Board Opinion (APB) No. 20, ACCOUNTING CHANGES, no later than the first quarter of fiscal 2001. The Company believes that the adoption of SAB 101 will have an impact on its future operating results as it relates to the upfront non-refundable payments and milestone payments received in connection with alliances (see Note 8). The historical financial statements reflect payments of approximately $17.0 million received in the year ended August 31, 1995 through February 26, 2000. Based on guidance currently available, upon adoption of SAB 101, the Company will be required to record these fees as revenue over the life of the related agreement, as defined. (2) CASH EQUIVALENTS AND MARKETABLE SECURITIES The Company applies SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. At August 31, 1998 and 1999 and February 26, 2000, the Company's cash equivalents and F-9 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED) (2) CASH EQUIVALENTS AND MARKETABLE SECURITIES (CONTINUED) marketable securities 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 less than ninety days. Marketable securities are investment securities with original maturities of greater than ninety days. Cash equivalents are carried at cost, which approximates market value, and consist of money market funds, repurchase agreements and debt securities. Marketable securities are recorded at amortized cost, which approximates market value and consist of commercial paper and U.S. government debt securities. The Company has not recorded any realized gains or losses on its marketable securities. The aggregate fair market value and amortized cost of the marketable securities are as follows:
AUGUST 31, 1998 AUGUST 31, 1999 FEBRUARY 26, 2000 ------------------------- ------------------------- ----------------------- AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE COST VALUE ----------- ----------- ----------- ----------- ---------- ---------- Less than one year-- Corporate and other debt securities.......... $21,969,524 $21,958,963 $12,060,230 $12,043,522 $7,309,650 $7,295,043 =========== =========== =========== =========== ========== ========== Greater than one year-- Corporate and other debt securities (average maturity of 1 year in 1998)................ $ 1,029,569 $ 1,029,687 $ -- $ -- $ -- $ -- =========== =========== =========== =========== ========== ==========
The Company has $200,000 in restricted cash at August 31, 1998 and 1999 and February 26, 2000 in connection with certain capital lease obligations (see Note 5). (3) INCOME TAXES 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 August 31, 1999, the Company had net operating loss and tax credit carryforwards of approximately $63,785,000 and $3,137,000, respectively, available to reduce federal taxable income and federal income taxes, respectively, if any. Net operating loss carryforwards and credits 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%. F-10 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED) (3) INCOME TAXES (CONTINUED) The net operating loss carryforwards and tax credits expire approximately as follows:
NET OPERATING RESEARCH INVESTMENT TAX LOSS TAX CREDIT CREDIT EXPIRATION DATE CARRYFORWARDS CARRYFORWARDS CARRYFORWARDS - --------------- ------------- ------------- -------------- 2000.................................. $ 5,039,000 $ 273,000 $143,000 2001.................................. 3,829,000 84,000 75,000 2002.................................. 4,811,000 24,000 3,000 2003.................................. 2,254,000 -- -- 2004-2019............................. 47,852,000 2,498,000 37,000 ----------- ---------- -------- $63,785,000 $2,879,000 $258,000 =========== ========== ========
The components of the deferred tax assets at the respective dates are as follows:
AUGUST 31, --------------------------- 1998 1999 ------------ ------------ Net operating loss carryforwards................. $ 23,154,000 $ 24,237,000 Research and development credits................. 1,310,000 2,879,000 Investment tax credits........................... 347,000 258,000 Other, net....................................... 1,856,000 2,318,000 ------------ ------------ 26,667,000 29,692,000 Valuation allowance.............................. (26,667,000) (29,692,000) ------------ ------------ $ -- $ -- ============ ============
The valuation allowance has been provided due to the uncertainty surrounding the realization of the deferred tax assets. (4) COMMITMENTS (A) LEASE COMMITMENTS At August 31, 1999, the Company has operating leases for office and laboratory facilities, the last of which expires on November 15, 2006. Minimum lease payments and facilities charges under the leases at August 31, 1999 are as follows: Year ending August 31, 2000........................................................ $ 917,488 2001........................................................ 949,138 2002........................................................ 1,179,393 2003........................................................ 1,138,797 2004........................................................ 1,115,653 Thereafter.................................................. 2,603,526 ---------- $7,903,995 ==========
Rental expense was approximately $949,000, $1,085,000, $899,000, $483,036 and $412,557 in the years ended August 31, 1997, 1998 and 1999 and the twenty-six week periods ended February 27, 1999 and February 26, 2000, respectively. F-11 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED) (4) COMMITMENTS (CONTINUED) (B) EMPLOYMENT AGREEMENTS The Company has employment agreements with certain of its executive officers which provide for bonuses, as defined, and severance benefits upon termination of employment, as defined. (C) LOAN TO FORMER OFFICER On December 6, 1996, the Company loaned $160,000 to a former officer of the Company. The loan bears interest at prime plus 1% and has been amended to be due on June 30, 2000. The Company forgave and expensed $40,000 of the loan during the year ended August 31, 1999. (5) LONG-TERM OBLIGATIONS On February 23, 2000, the Company entered into an equipment lease line of credit under which it can finance up to $4,000,000 of computers and laboratory equipment. The Company, at its discretion, can enter into either an operating or a capital lease. Borrowings under operating leases are payable in twenty-four monthly installments and capital leases are payable in thirty-six monthly installments. As of February 26, 2000, the Company has borrowed $2,004,000 as a capital lease. Interest is payable at the prevailing three-year treasury rate plus 2.75%-3.66%, as defined. The Company had approximately $1,996,000 available under this line at February 26, 2000. On February 28, 1997, the Company entered into an equipment lease line of credit under which it financed $6,000,000 of laboratory, computer and office equipment. The lease is payable in 48 monthly installments from the point of takedown, at a variable interest rate of LIBOR (5.375% as of August 31, 1999) plus 2%. On March 9, 1998, the Company increased the equipment lease line of credit by $4,300,000 to $10,300,000. The additional borrowings under the equipment lease line of credit will be utilized to finance laboratory, computer and office equipment. Borrowings under the new credit line are payable in 15 quarterly installments commencing March 31, 1999, at a variable rate of LIBOR plus 1.75%. At any time during the term of this agreement, the Company may elect to convert to a fixed rate loan at the prevailing interest rate. The Company is required to maintain certain restricted cash balances, as defined (see Note 2). In addition, the Company is required to maintain certain financial ratios pertaining to minimum cash balances, tangible net worth and debt service coverage. On December 31, 1999, the line of credit expired, at which time the Company had utilized a total of $8,347,000 of the $10,300,000 available under this line of credit. On July 31, 1997, the Company entered into a financing arrangement under which it financed $6,000,000 of laboratory and office renovations at its Beaver Street facility. The principal amount of the loan will be repaid over 48 consecutive months commencing on July 1, 1998. The interest rates range from 7.19% to 8.16%. The Company is required to maintain certain financial ratios pertaining to minimum cash balances, debt to net worth and tangible net worth. The Company has entered into other capital lease line arrangements under which it financed approximately $9,725,000 of certain laboratory, computer and office equipment. These leases are payable in 36 monthly installments. The interest rates range from 7.52% to 10.29%. The Company is required to maintain certain financial ratios pertaining to minimum cash balances, tangible net worth, debt to tangible net worth and debt service coverage. F-12 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED) (5) LONG-TERM OBLIGATIONS (CONTINUED) Payments under long-term obligations at August 31, 1999 are as follows: Year ending August 31, 2000........................................................ $ 4,596,401 2001........................................................ 3,975,585 2002........................................................ 2,154,381 2003........................................................ 261,087 ----------- Total minimum lease payments................................ 10,987,454 Less--Amount representing interest.......................... 1,127,821 ----------- Present value of total minimum lease payments............... 9,859,633 Less--Current portion....................................... 3,934,547 ----------- $ 5,925,086 ===========
(6) SHAREHOLDERS' EQUITY (A) STOCK OPTIONS The Company has granted stock options to key employees and consultants under its 1988, 1991, 1993, 1995 and 1998 Stock Option Plans. The purchase price and vesting schedule applicable to each option grant are determined by the stock option and compensation committee of the Board of Directors. In addition, under separate agreements not covered by any plan, the Company has granted certain key employees and certain 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 in the years ended August 31, 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 value of options as they vest using the Black-Scholes option pricing model. The Company has charged $5,270, $12,648, $16,113, $3,162 and $35,433 to operations for the years ended August 31, 1997, 1998, 1999 and the twenty-six week periods ended February 27, 1999 and February 26, 2000, respectively, related to the grant of these options. The Company records deferred compensation when stock options 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 granted. Deferred compensation is being recognized as an expense over the estimated vesting period of the underlying options. In the years ended August 31, 1997, 1998 and 1999 and for the twenty six week period ended February 26, 2000, the Company recorded $50,594, $91,874, $60,006 and $1,528,698, respectively, of deferred compensation. The Company recorded compensation expense of approximately $79,000, $131,000, $146,000, $87,000 and $470,000 for the years ended August 31, 1997, 1998, 1999 and the twenty-six week periods ended February 27, 1999 and February 26, 2000, respectively. During fiscal 1999 and for the twenty-six week period ended February 26, 2000, in connection with the termination of an employee, the Company reversed $64,495 and $115,833 of unamortized deferred compensation due to the cancelation of the options. F-13 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED) (6) SHAREHOLDERS' EQUITY (CONTINUED) In September 1999 and in the twenty-six week period ended February 26, 2000, the Company granted to certain employees the right to receive 125,716 and 26,700 shares of common stock, respectively. The employees will receive the common stock in two equal installments on the anniversary of the grant date. The Company recorded deferred compensation of $631,309 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. In the twenty-six week period ended February 26, 2000, three employees resigned and forfeited 29,972 shares of restricted stock. In November 1998, the Board of Directors authorized a Stock Option Repricing Program (the Program). Under the terms of the Program, all current employees excluding the chairman, president and CEO had the option to request that the Company cancel their existing options and replace them with a new option to purchase 85%-90% of the original number of shares of common stock granted, at the new option exercise price and vesting schedule. The new exercise price was calculated using the Black-Scholes option pricing model, which was greater than the fair market value on the date of grant. The repriced shares could not be exercised for 12 months from the date of grant. The repriced options are reflected as grants and cancelations in the stock activity below. There were 866,688 common shares available for future grant at February 26, 2000. The following is a summary of all stock option activity:
NUMBER OF EXERCISE WEIGHTED SHARES PRICE RANGE AVERAGE PRICE ---------- ------------------ ------------- Outstanding, August 31, 1996............ 4,348,214 $ .20-14.50 $3.85 Granted............................... 797,950 6.19- 9.69 8.58 Exercised............................. (321,963) .88- 7.25 2.66 Canceled.............................. (178,513) 1.56-14.50 6.86 ---------- ------------------ ----- Outstanding, August 31, 1997............ 4,645,688 .20-14.50 4.63 Granted............................... 468,900 4.88- 9.50 6.30 Exercised............................. (529,660) 1.31- 8.31 1.86 Canceled.............................. (719,952) 2.03-14.50 7.77 ---------- ------------------ ----- Outstanding, August 31, 1998............ 3,864,976 .20-14.50 4.63 Granted............................... 1,016,379 2.31- 4.23 3.95 Exercised............................. (228,757) .20- 2.62 1.51 Canceled.............................. (1,351,590) .20-14.50 7.22 ---------- ------------------ ----- Outstanding, August 31, 1999............ 3,301,008 1.53-14.50 3.57 Granted............................... 735,149 .10-48.25 5.01 Exercised............................. (1,367,810) 1.53- 9.50 2.66 Canceled.............................. (281,719) 3.17- 9.50 5.89 ---------- ------------------ ----- Outstanding, February 26, 2000.......... 2,386,628 $ .10-48.25 $4.26 ========== ================== ===== Exercisable, February 26, 2000.......... 1,483,808 $ .10-14.50 $3.98 ========== ================== ===== Exercisable, August 31, 1999............ 2,426,749 $ 1.53-14.50 $3.16 ========== ================== ===== Exercisable, August 31, 1998............ 2,674,323 $ .20-14.50 $3.43 ========== ================== ===== Exercisable, August 31, 1997............ 2,795,938 $ .20-14.50 $2.78 ========== ================== =====
F-14 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED) (6) SHAREHOLDERS' EQUITY (CONTINUED) The range of exercise prices for options outstanding and options exercisable at February 26, 2000 are as follows:
WEIGHTED AVERAGE REMAINING OPTIONS OUTSTANDING OPTIONS EXERCISABLE CONTRACTUAL -------------------- -------------------- LIFE OF WEIGHTED WEIGHTED RANGE OF OPTIONS AVERAGE AVERAGE EXERCISE OUTSTANDING EXERCISE EXERCISE PRICES (IN YEARS) NUMBER PRICE NUMBER PRICE - --------------------- ----------- --------- -------- --------- -------- $ 0.10-$ 2.25 3.17 669,237 $ 1.65 675,737 $ 1.64 $ 2.31-$ 3.38 7.27 275,675 2.87 122,739 2.49 $ 3.52-$ 4.88 9.27 966,653 4.27 321,345 4.26 $ 5.34-$ 7.50 6.58 91,076 6.83 60,766 6.98 $ 8.31-$ 9.50 6.35 366,237 8.90 302,721 8.87 $14.28-$20.13 9.57 6,750 16.04 500 14.50 $21.59 9.95 3,750 21.59 -- -- $39.38-$48.25 9.97 7,250 40.29 -- -- ---- --------- ------ --------- ------ Total............... 6.74 2,386,628 $ 4.26 1,483,808 $ 3.98 ==== ========= ====== ========= ======
(B) PRO FORMA DISCLOSURE OF STOCK-BASED COMPENSATION The Company applies SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which 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 Accounting Principles Board 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 1997, 1998 and 1999 and for the twenty-six week periods ended February 27, 1999 and February 26, 2000 using the Black-Scholes option pricing model. The weighted average assumptions used for fiscal 1997, 1998, 1999 and for twenty-six week periods ended February 27, 1999 and February 26, 2000 are as follows:
TWENTY-SIX WEEK PERIODS ENDED YEARS ENDED AUGUST 31, ------------------------------------- ------------------------------------------------------------- FEBRUARY 27, FEBRUARY 26, 1997 1998 1999 1999 2000 ------------------ -------------------- ----------------- ----------------- ----------------- Risk-free interest rate............... 6.20%-6.73% 5.36%-6.20% 4.46%-6.15% 5.25% 6.15% Expected dividend yield.............. -- -- -- -- -- Expected life........ 7 years 7 years 7 years 7 years 7 years Expected volatility.. 65% 65% 65% 65% 65% Weighted average fair market value at grant date......... $4.93 $3.61 $4.21 $6.25 4.56
F-15 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED) (6) SHAREHOLDERS' EQUITY (CONTINUED) The total value of the options granted to employees during the years ended August 31, 1997, 1998, 1999, and the twenty-six week periods ended February 27, 1999, and February 26, 2000 was computed as $3,857,026, $1,635,318, $1,255,868, $1,031,915 and $3,318,856, respectively. Of these amounts, $2,951,660, $652,668, $966,309, $575,973 and $1,148,258 would be charged to operations for the years ended August 31, 1997, 1998 and 1999 and for the periods ended February 27, 1999 and February 26, 2000, respectively. The remaining amount, approximately $1,483,813, will be amortized over the remaining vesting periods. The pro forma effect of these option grants for the years ended August 31, 1997, 1998 and 1999 and for the twenty-six week periods ended February 27, 1999 and February 26, 2000 is as follows:
1997 1998 1999 --------------------------- --------------------------- ------------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA ------------ ------------ ------------ ------------ ----------- ----------- Net loss............. $(11,302,391) $(14,254,051) $(15,813,383) $(16,466,051) $(6,328,095) $(7,294,404) ============ ============ ============ ============ =========== =========== Net loss per share... $ (0.64) $ (0.81) $ (0.87) $ (0.90) $ (0.34) $ (0.40) ============ ============ ============ ============ =========== =========== FEBRUARY 27, 1999 FEBRUARY 26, 2000 ------------------------- ------------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA ----------- ----------- ----------- ----------- Net loss............. (3,689,745) (4,265,718) (194,506) (1,342,764) =========== =========== =========== =========== Net loss per share... (.20) (.23) (.01) (.07) =========== =========== =========== ===========
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. (C) 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 stock will be granted as services are performed by members of the Company's Board of Directors. Through February 26, 2000, the Company granted 25,702 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. In the twenty-six week period ended February 26, 2000, 800 shares were issued. (D) 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 (a) the time at grant of option or (b) the time at which the option is deemed exercised, whichever is less. No compensation expense will be recorded in connection with the plan. F-16 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED) (7) INCENTIVE SAVINGS PLAN 401(K) The Company maintains an incentive savings plan (the Plan) for the benefit of all employees. On October 1, 1996, the Company changed its matching contribution from 50% of the first 2% of salary and 25% of the next 4% of salary, limited to the first $50,000 of annual salary to 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 $165,778, $229,460, $241,587, $116,190 and $96,231 to the Plan for the years ended August 31, 1997, 1998, 1999 and for the twenty-six week periods ended February 27, 1999 and February 26, 2000, respectively. (8) ALLIANCES (A) ASTRAZENECA In August 1995, the Company entered into an alliance with AstraZeneca (Astra), formerly Astra Hassle AB, to develop pharmaceutical, vaccine and diagnostic products effective against gastrointestinal infection or any other disease caused by H. PYLORI. The Company granted Astra exclusive access to the Company's H. PLYORI genomic sequence database and exclusive worldwide rights to make, use and sell products based on the Company's H. PYLORI technology. The agreement also provides for a four-year research alliance to further develop and annotate the Company's H. PYLORI genomic sequence database, identify therapeutic and vaccine targets and develop appropriate biological assays. This research is being directed by a Joint Management Committee and a Joint Research Committee, each consisting of representatives from both parties. Under this agreement, Astra agreed to pay an initial license fee, expense allowance, milestone payments, and fund a research program for a minimum of two and a half years with an option to extend. On June 4, 1998, Astra exercised its option to extend the research program for a second time which will carry the agreement through August 1999. Under this agreement as extended, Astra agreed to pay the Company a minimum of approximately $13.5 million and, subject to the achievement of certain product development milestones, up to approximately $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. Of such fees, $500,000 are creditable against any future royalties payable to the Company by Astra under the agreement. The Company will also be entitled to receive royalties on Astra's sale of products (i) protected by the claims of patents licensed exclusively to Astra by the Company pursuant to the agreement, or (ii) 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 Astra is not actively pursuing commercialization of the technology. The Company has recognized $2,859,262, $1,653,623, $909,870, $423,369 and $22,119 in revenue under the agreement in the years ended August 31, 1997, 1998 and 1999 and for the twenty-six week periods ended February 27, 1999 and February 26, 2000, respectively, which consisted of milestone payments and collaborative research revenues. F-17 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED) (8) ALLIANCES (CONTINUED) (B) SCHERING-PLOUGH In December 1995, the Company entered into an alliance and license 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 new gene targets for development of antibiotics effective against drug-resistant infectious organisms. As part of this agreement, the Company granted Schering-Plough exclusive access to the Company's proprietary STAPH.AUREUS genomic sequence database. The Company also granted Schering-Plough a nonexclusive license to use the Company's bioinformatics systems for Schering-Plough's internal use in connection with the genomic databases licensed to Schering-Plough under the agreement and other genomic databases Schering-Plough develops or acquires. The Company also 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 agreed to pay an initial license fee and fund a research program for a minimum of two-and-a-half years with an option to extend. On March 4, 1998, Schering-Plough elected to extend the research program to the full term of the agreement which expires on March 31, 2000. Under the agreement as extended, Schering-Plough has agreed to pay the Company a minimum of $18.5 million in an up-front license fee, research funding and milestone payments. Subject to the achievement of additional product development milestones, Schering-Plough has agreed to pay the Company up to an additional $24.0 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 by the Company and on the technology developed in the course of the research program. The Company has also granted Schering-Plough a right of first negotiation if during the term of the research plan the Company desires to enter into an alliance with a third party with respect to the development or sale of any compounds that are targeted against, as their primary indication, the pathogen that is the principal subject of the Company's agreement with Schering-Plough. The Company will be entitled to receive royalties on Schering-Plough's sale of therapeutic products and vaccines developed using the technology licensed from the Company. Subject to certain limitations, the Company retained the rights to make, use and sell diagnostic products developed based on the Company's genomic database licensed to Schering-Plough or the technology developed in the course of the research program. The Company has recognized $3,364,810, $3,435,807, $2,490,802, $1,331,782 and $1,118,565 in revenue in the years ended August 31, 1997, 1998, 1999 and for the twenty-six week periods ended February 27, 1999 and February 26, 2000, respectively, under this alliance agreement, which consisted of a license fee, alliance research revenue and milestone payments. In December 1996, the Company entered into its second research alliance and license agreement with Schering-Plough. This agreement calls for the use of genomics to discover new therapeutics for treating asthma. As part of the agreement, the Company will employ its high-throughput positional cloning, bioinformatics, and genomics sequencing capabilities to identify genes and associated proteins that can be utilized by Schering-Plough to develop new pharmaceuticals. Under this agreement, the F-18 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED) (8) ALLIANCES (CONTINUED) 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 collaboration. Under this agreement, Schering-Plough agreed to pay an initial license fee and an expense allowance to the Company. Schering-Plough is also required to fund a research program for a minimum number of years with an option to extend. In July 1998, Schering-Plough amended the original agreement in order to accelerate the research effort being undertaken. In addition, upon completion of certain scientific developments, Schering-Plough will make milestone payments to the Company, as well as pay royalties to the Company based on 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 $68.2 million, excluding royalties. Of the total potential payments, approximately $23.7 million represents license fees and research payments, and $44.5 million represents milestone payments based on achievement of research and product development milestones. Under this second agreement, the Company has recognized $4,603,805, $7,099,911, $9,926,776, $4,784,771 and $3,757,294 in revenue in the years ended August 31, 1997, 1998, 1999 and for the twenty-six week periods ended February 27, 1999 and February 26, 2000, respectively, which consisted of a license fee, expense allowance, alliance research funding and milestone payments. On September 24, 1997, the Company entered into a third research alliance and license agreement with Schering-Plough to use genomics to discover and develop new pharmaceutical products to treat fungal infection. Under the 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 right to make, use and sell products based on the technology developed in the course of the research program. In return, Schering-Plough has agreed to fund a research program for a minimum number of years with an option to extend. If all milestones are met and the research program continues for its full term, total payments to the Company will approximate $36.0 million, excluding royalties. Of the total potential payments, approximately $13.0 million represents sponsored research payments and $23.0 million represents milestone payments based on achievement of research and product development milestones. Additionally, the Company entered into a subscription agreement with Schering-Plough to provide Schering-Plough with nonexclusive access to the Company's proprietary genome sequence database, PathoGenome-TM- and associated information relating to microbial organisms (see Note 9). 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. F-19 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED) (8) ALLIANCES (CONTINUED) Under the third agreement, the Company has recognized $2,432,005, $4,831,870, $2,024,786 and $2,274,970 in revenue for the years ended August 31, 1998 and 1999 and for the twenty-six week periods ended February 27, 1999 and February 26, 2000, respectively, which consisted of research funding and milestone payments. (C) 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 will participate in an international consortium in a full scale effort to sequence the human genome. The Company is entitled to receive research and development funding from the National Human Genome Research Institute (NHGRI) of up to $15.6 million over a three year period of which $5 million is expected to be received over the initial 12 months as the Company performs research under the project. As of August 31, 1999 and the twenty-six weeks ended February 26, 2000, the Company has recognized approximately $340,000 and $2,648,368, respectively, in connection with the international Human Genome Project. Funding under our government grants and research contracts is subject to appropriation each year by the United States Congress and can be discontinued or reduced at any time. In addition, the Company cannot be certain that it will receive additional grants or contracts in the future. The government's failure to fund the Company's research in this area not only would end the Company's participation in the program, but might adversely affect the industry-wide perception of genomics and the utility of genomic information. (D) 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, agreed to fund a research program for at least four years and pay royalties on future products. In addition, bioMerieux purchased $3.8 million of the Company's common stock at $5.53 per share. The total amount of guaranteed research and development funding and PathoGenome Database subscription for the first year (see Note 9), and the proceeds from the sale of the common stock, approximates $6.0 million. The research and development funding will be recognized ratably over the four year term of the agreement. For the twenty-six week period ended February 26, 2000, the Company recorded revenue of $519,094 under this agreement, which consists of research funding and the amortization of the upfront license fees. (E) MOUSE GENOME SEQUENCING NETWORK In October 1999, the NHGRI named the Company as a pilot center to the Mouse Genome Sequencing Network. The Mouse Genome Sequencing Network will be composed of several facilities that will be responsible for deciphering the genetic makeup of the mouse. The Company is entitled to receive $12.9 million in funding over the next three years with respect to this agreement of which the Company is expected to receive $2.4 million during the first fiscal period, which ends April 30, 2000 as the Company performs research under the project. For the twenty-six week period ended February 26, 2000, the Company recognized approximately $505,074 with respect to this agreement. Funding under F-20 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED) (8) ALLIANCES (CONTINUED) the Company's government grants and research contracts is subject to appropriation each year by the United States Congress and can be discontinued or reduced at any time. In addition, the Company cannot be certain that it will receive additional grants or contracts in the future. The government's failure to fund the Company's research in this area not only would end the Company's participation in the program, but might adversely affect the industry-wide perception of genomics and the utility of genomic information. (F) 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 calls 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 osteroporotic disease process to develop new pharmaceuticals. Under the terms of the agreement, Wyeth-Ayerst will pay the Company an up-front license fee, fund a multi-year research program, make milestone payments and pay royalties on sales of therapeutics products developed from this collaboration. 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. For the twenty-six week period ended February 26, 2000, the Company recorded revenue of $250,000 under this agreement, which consists of research funding and the amortization of the upfront license fee. (9) DATABASE SUBSCRIPTIONS The Company has entered into PathoGenome Database subscriptions with Bayer AG, Bristol-Myers Squibbs, Scriptgen Pharmaceuticals, Inc., Schering-Plough (see Note 8), Aventis, formerly Hoechst Marion Roussel, and bioMerieux (see Note 8). The database subscription provides nonexclusive access to the Company's proprietary genome sequence database, PathoGenome Database and associated information relating to microbial organisms. The subscription agreement calls for the Company to provide periodic data updates, analysis tools and software support. Under the subscription agreements, the customer has agreed to pay an annual subscription fee and royalties on any molecules developed as a result of access to the information provided by PathoGenome Database. The Company retains all rights associated with protein therapeutic, diagnostic and vaccine use of bacterial genes or gene products. The Company has recognized $666,667, $2,766,671, $4,845,832, $2,554,166 and $2,224,995 in revenue under these agreements in the years ended August 31, 1997, 1998, 1999 and for the twenty-six week periods ended February 27, 1999 and February 26, 2000, respectively, consisting of license and subscription fees. F-21 GENOME THERAPEUTICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (CONTINUED) (10) ACCRUED EXPENSES Accrued expenses consist of the following:
AUGUST 31, ----------------------- FEBRUARY 26, 1998 1999 2000 ---------- ---------- ------------ (UNAUDITED) Payroll and related expenses............. $1,109,626 $1,065,311 $2,685,496 Facilities............................... 469,932 438,453 716,724 Professional fees........................ 285,058 269,553 271,094 License and other fees................... 185,434 160,434 160,434 Employee relocation...................... 162,519 143,843 133,095 All other................................ 237,831 245,186 263,015 ---------- ---------- ---------- $2,450,400 $2,322,780 $4,229,858 ========== ========== ==========
F-22 - -------------------------------------------------------------------------------- [LOGO] GENOME THERAPEUTICS CORP. 3,000,000 SHARES COMMON STOCK ------------------ PROSPECTUS ------------------ , 2000 CIBC WORLD MARKETS WARBURG DILLON READ LLC DAIN RAUSCHER WESSELS TUCKER ANTHONY CLEARY GULL - ---------------------------------------------------------------- YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered, other than the underwriting discounts and commissions. All amounts shown are estimates, except the Securities and Exchange Commission registration fee and the National Association of Securities Dealers, Inc. ("NASD") filing fee.
ITEM AMOUNT - ---- -------- SEC Registration Fee........................................ $ 37,999 NASD Filing Fee............................................. $ 14,893 Nasdaq National Market Listing Fee.......................... $ 17,500 Transfer Agent and Registrar Fees........................... $ 15,000 Accounting Fees and Expenses................................ $ 50,000 Legal Fees and Expenses..................................... $250,000 Printing Expenses........................................... $ 90,000 Miscellaneous............................................... $ 24,608 -------- Total................................................... $500,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company is organized under the laws of The Commonwealth of Massachusetts. The Massachusetts Business Corporation Law provides that indemnification of directors, officers, employees, and other agents of another organization, or who serve at its request is any capacity with respect to any employee benefit plan, may be provided by the corporation to whatever extent specified in its charter documents or votes adopted by its shareholders, except that no indemnification may be provided for any person with respect to any matter as to which the person shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his action was in the best interest of the corporation. Under Massachusetts law, a corporation can purchase and maintain insurance on behalf of any person against any liability incurred as a director, officer, employee, agent, or person serving at the request of the corporation as a director, officer, employee, or other agent of another organization or with respect to any employee benefit plan, in his capacity as such, whether or not the corporation would have power to itself indemnify him against such liability. The Company's Restated Articles of Organization, as amended to date, provide that its directors shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that the exculpation from liabilities is not permitted under the Massachusetts Business Corporation Law as in effect at the time such liability is determined. The By-Laws provide that the Company shall indemnify its directors and officers to the full extent permitted by the laws of The Commonwealth of Massachusetts. In addition, the Company holds a Directors and Officer Liability and Corporate Indemnification Policy. II-1 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS The following is a list of exhibits filed as a part of this registration statement.
NUMBER DESCRIPTION - ------ ------------------------------------------------------------ 1 Form of Underwriting Agreement 4.1* Specimen Certificate for shares of common stock, $.10 par value, of the Registrant 5** Opinion of Ropes & Gray with respect to the validity of the securities being offered 10.1** Employment Agreement of Richard D. Gill, Ph.D. 10.2** Restricted Stock Award Agreement for Richard D. Gill, Ph.D. 10.3** Registration Rights Agreement between the Registrant and bioMerieux Alliance sa dated September 30, 1999 10.4** Employment Agreement of Christopher T. Kelly 23.1** Consent of Ropes & Gray (contained in its opinion filed as Exhibit 5) 23.2 Consent of Arthur Andersen LLP 24** Power of attorney (included on the page II-4 of this Registration Statement)
- ------------------------ * Incorporated by reference to the Registrant's Registration Statement on Form S-3 (File No. 33-00127). ** Previously filed (B) FINANCIAL STATEMENT SCHEDULES All schedules are omitted because they are not applicable or because the required information is contained in the Financial Statements or Notes to the Financial Statements. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under "Item 15--Indemnification of Directors and Officers" above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-2 The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the Offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 2 to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Waltham, Commonwealth of Massachusetts, on this 6th day of April, 2000. GENOME THERAPEUTICS CORP. BY: /S/ ROBERT J. HENNESSEY ----------------------------------------- Title:Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the registration statement has been signed by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- Chairman of the Board and /s/ ROBERT J. HENNESSEY Chief Executive Officer ------------------------------------------- (Principal Executive April 6, 2000 Robert J. Hennessey Officer) * Chief Financial Officer ------------------------------------------- (Principal Financial and April 6, 2000 Philip V. Holberton Accounting Officer) * Director ------------------------------------------- April 6, 2000 Marc B. Garnick * Director ------------------------------------------- April 6, 2000 Philip Leder * Director ------------------------------------------- April 6, 2000 Lawrence Levy * Director ------------------------------------------- April 6, 2000 Steven M. Rauscher * Director ------------------------------------------- April 6, 2000 Norbert G. Riedel
/s/ ROBERT J. HENNESSEY ------------------------------------------- Robert J. Hennessey *By: Attorney-in-Fact
II-4 EXHIBIT INDEX
NUMBER DESCRIPTION - ------ ------------------------------------------------------------ 1 Form of Underwriting Agreement 4.1* Specimen Certificate for shares of common stock, $.10 par value, of the Registrant 5** Opinion of Ropes & Gray with respect to the validity of the securities being offered 10.1** Employment Agreement of Richard D. Gill, Ph.D. 10.2** Restricted Stock Award Agreement for Richard D. Gill, Ph.D. 10.3** Registration Rights Agreement between the Registrant and bioMerieux Alliance sa dated September 30, 1999 10.4** Employment Agreement of Christopher T. Kelly 23.1** Consent of Ropes & Gray (contained in its opinion filed as Exhibit 5) 23.2 Consent of Arthur Andersen LLP 24** Power of attorney (included on the page II-4 of this Registration Statement)
- ------------------------ * Incorporated by reference to the Registrant's Registration Statement on Form S-3 (File No. 33-00127). ** Previously filed EX-1 2 EXHIBIT 1 Exhibit 1 FORM OF UNDERWRITING AGREEMENT 3,000,000 Shares GENOME THERAPEUTICS CORP. Common Stock UNDERWRITING AGREEMENT April , 2000 CIBC World Markets Corp. Warburg Dillon Read LLC Dain Rauscher Incorporated Tucker Anthony Incorporated c/o CIBC World Markets Corp. CIBC Oppenheimer Tower World Financial Center New York, New York 10281 On behalf of the Several Underwriters named on Schedule I attached hereto Ladies and Gentlemen: Genome Therapeutics Corporation, a Massachusetts corporation (the "Company"), proposes to sell to you and the other underwriters named on Schedule I to this Agreement (the "Underwriters"), for whom you are acting as representatives (the "Representatives"), an aggregate of 3,000,000 shares (the "Firm Shares") of the Company's Common Stock, $0.10 par value (the "Common Stock"). In addition, the Company proposes to grant to the Underwriters an option to purchase up to an additional 450,000 shares (the "Option Shares") of Common Stock from it for the purpose of covering over-allotments in connection with the sale of the Firm Shares. The Firm Shares and the Option Shares are together called the "Shares." 1. SALE AND PURCHASE OF THE SHARES. On the basis of the representations, warranties and agreements contained in, and subject to the terms and conditions of, this Agreement: (a) The Company agrees to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at $ per share (the "Initial Price"), the number of Firm Shares set forth opposite the name of such Underwriter on Schedule I to this Agreement, subject to adjustment in accordance with section 10 hereof. (b) The Company grants to the several Underwriters an option to purchase, severally and not jointly, all or any part of the Option Shares at the Initial Price. The number of Option Shares to be purchased by each Underwriter shall be the same percentage (adjusted by the Representatives to eliminate fractions) of the total number of Option Shares to be purchased by the Underwriters as such Underwriter is purchasing of the Firm Shares. Such option may be exercised only to cover over-allotments in the sales of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time on or before 12:00 noon, Boston time, on the business day before the Firm Shares Closing Date (as defined below), and only once thereafter within 30 days after the date of this Agreement, in each case upon written, facsimile, or telegraphic notice, or verbal or telephonic notice confirmed by written, facsimile, or telegraphic notice, by the Representatives to the Company no later than 12:00 noon, Boston time, on the business day before the Firm Shares Closing Date or at least two business days before the Option Shares Closing Date (as defined below), as the case may be, setting forth the number of Option Shares to be purchased and the time and date (if other than the Firm Shares Closing Date) of such purchase. No Option Shares shall be sold or delivered unless the Firm Shares have been or simultaneously are sold and delivered. 2. DELIVERY AND PAYMENT. Delivery by the Company of the Firm Shares to the Representatives for the respective accounts of the Underwriters, and payment of the purchase price by wire transfer of immediately available funds to the Company, shall take place at the offices of Ropes & Gray, One International Place, Boston, Massachusetts 02110, at 10:00 a.m., Boston time, on the third business day following the date of this Agreement, or at such time on such other date, not later than 10 business days after the date of this Agreement, as shall be agreed upon by the Company and the Representatives (such time and date of delivery and payment are called the "Firm Shares Closing Date"). In the event the option with respect to the Option Shares is exercised, delivery by the Company of the Option Shares to the Representatives for the respective accounts of the Underwriters and payment of the purchase price by wire transfer of immediately available funds to the Company shall take place at the offices of Ropes & Gray specified above at the time and on the date (which may be the same date as, but in no event shall be earlier than, the Firm Shares Closing Date) specified in the notice referred to in Section 1(b) (such time and date of delivery and payment are called the "Option Shares Closing Date"). The Firm Shares Closing Date and the Option Shares Closing Date are called, individually, a "Closing Date" and, together, the "Closing Dates." If the Representatives so elect, delivery of the Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. Unless otherwise agreed to, certificates evidencing the Shares shall be registered in such names 2 and shall be in such denominations as the Representatives shall request at least two full business days before the Firm Shares Closing Date or, in the case of Option Shares, on the day of notice of exercise of the option as described in Section 1(b) and shall be made available to the Representatives for checking and packaging, at such place as is designated by the Representatives, on the full business day before the Firm Shares Closing Date (or the Option Shares Closing Date in the case of the Option Shares). 3. REGISTRATION STATEMENT AND PROSPECTUS; PUBLIC OFFERING. The Company has prepared in conformity with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the published rules and regulations thereunder (the "Rules") adopted by the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-3 (No. 333-32614), including a preliminary prospectus relating to the Shares, and has filed with the Commission the Registration Statement (as hereinafter defined) and such amendments thereof as may have been required to the date of this Agreement. Copies of such Registration Statement (including all amendments thereof) and of the related preliminary prospectus have heretofore been delivered by the Company to you. The term "Preliminary Prospectus" means any preliminary prospectus (as described in Rule 430 of the Rules) included at any time as a part of the Registration Statement or filed with the Commission by the Company with the consent of the Representatives pursuant to Rule 424(a) of the Rules. The term "Registration Statement" as used in this Agreement means the initial registration statement (including all exhibits, financial schedules and information deemed to be a part of the Registration Statement through incorporation by reference or otherwise), as amended at the time and on the date it becomes effective (the "Effective Date") including the information (if any) deemed to be part thereof at the time of effectiveness pursuant to Rule 430A of the Rules, and as thereafter amended by post-effective amendments. If the Company has filed an abbreviated registration statement to register additional Shares pursuant to Rule 462(b) under the Rules (the "462(b) Registration Statement") then any reference herein to the Registration Statement shall also be deemed to include such 462(b) Registration Statement. The term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement at the time of effectiveness or, if Rule 430A of the Rules is relied on, the term Prospectus shall also include the final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules. The Company understands that the Underwriters propose to make a public offering of the Shares, as set forth in and pursuant to the Prospectus, as soon after the Effective Date and the date of this Agreement as the Representatives deem advisable. The Company hereby confirms that the Underwriters and dealers have been authorized to distribute or cause to be distributed each Preliminary Prospectus and are authorized to distribute the Prospectus (as from time to time amended or supplemented if the Company furnishes amendments or supplements thereto to the Underwriters). 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each Underwriter as follows: 3 (a) The Company and the transactions contemplated by this Agreement meet the requirements for using Form S-3 under the Securities Act. On the Effective Date the Registration Statement complied, and on the date of the Prospectus, on the date any post-effective amendment to the Registration Statement shall become effective, on the date any supplement or amendment to the Prospectus is filed with the Commission and on each Closing Date, the Registration Statement and the Prospectus (and any amendment thereof or supplement thereto) will comply, in all material respects, with the applicable provisions of the Securities Act and the Rules and the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules and regulations of the Commission thereunder. The Registration Statement did not, as of the Effective Date, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and on the other dates referred to above neither the Registration Statement nor the Prospectus, nor any amendment thereof or supplement thereto, will contain any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. When any related preliminary prospectus was first filed with the Commission (whether filed as part of the Registration Statement or any amendment thereto or pursuant to Rule 424(a) of the Rules) and when any amendment thereof or supplement thereto was first filed with the Commission, such preliminary prospectus as amended or supplemented complied in all material respects with the applicable provisions of the Securities Act and the Rules and did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. Notwithstanding the foregoing, none of the representations and warranties in this paragraph 4(a) shall apply to statements in, or omissions from, the Registration Statement or the Prospectus made in reliance upon, and in conformity with, information herein or otherwise furnished in writing by the Representatives on behalf of the several Underwriters for use in the Registration Statement or the Prospectus. With respect to the preceding sentence, the Company acknowledges that the only information furnished in writing by the Representatives on behalf of the several Underwriters for use in the Registration Statement or the Prospectus is the statements contained under the caption "Underwriting" in the Prospectus. (b) The Registration Statement is effective under the Securities Act and no stop order preventing or suspending the effectiveness of the Registration Statement or suspending or preventing the use of the Prospectus has been issued and no proceedings for that purpose have been instituted or to the Company's knowledge, are threatened under the Securities Act. Any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules has been or will be made in the manner and within the time period required by such Rule 424(b). (c) The documents incorporated by reference in the Registration Statement and the Prospectus, at the time they were filed (or, if any amendment with respect to any such document was filed, when such amendment was filed) with the Commission, complied in all material respects with the requirements of the Exchange Act and, when read together and with the other information in the Registration Statement and the Prospectus, do not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or 4 necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except to the extent that any statements in such documents have been superseded by statements specifically set forth in the Registration Statement and the Prospectus. (d) The consolidated financial statements of the Company (including all notes and schedules thereto) included or incorporated by reference in the Registration Statement and Prospectus present fairly the consolidated financial position, results of operations and cash flows and the stockholders' equity and the other financial information of the Company included therein at the respective dates and for the respective periods to which they apply; and such financial statements and related schedules and notes have been prepared in conformity with generally accepted accounting principles, consistently applied throughout the periods involved, and all adjustments necessary for a fair presentation of the results for such periods have been made; PROVIDED, HOWEVER, that the interim financial statements contained in the Registration Statement and Prospectus shall be subject to normal year-end adjustments in accordance with generally accepted accounting principles. (e) Arthur Andersen LLP, whose reports are filed with the Commission as a part of the Registration Statement, are and, during the periods covered by their reports, were independent public accountants as required by the Securities Act and the Rules. (f) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the Commonwealth of Massachusetts. Collaborative Securities Corporation and Collaborative Genetics, Inc. are the only subsidiaries of the Company; neither one is actively engaged in any business, and Collaborative Genetics, Inc. has no assets or liabilities. The Company has no other subsidiaries and does not control, directly or indirectly, any corporation, partnership, joint venture, association or business. The Company is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character or location of its assets or properties (owned, leased or licensed) or the nature of its business makes such qualification necessary except for such jurisdictions where the failure to so qualify would not have a material adverse effect on the assets or properties, business, results of operations or financial condition of the Company. The Company does not own, lease, or license any asset or property nor conduct any business outside the United States of America. The Company has all requisite corporate power and authority, and all necessary authorizations, approvals, consents, orders, licenses, certificates and permits of and from all governmental or regulatory bodies or any other person or entity, to own, lease and license its respective assets and properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus except for such authorizations, approvals, consents, orders, material licenses, certificates and permits the failure to so obtain would not have a Material Adverse Effect; no such authorization, approval, consent, order, license, certificate or permit contains a materially burdensome restriction other than as disclosed in the Registration Statement and the Prospectus; and the Company has all such corporate power and authority, and such authorizations, approvals, consents, orders, licenses, certificates and permits to enter into, deliver and perform this Agreement and to issue and sell the Shares (except as may be required under 5 state and foreign Blue Sky laws). For purposes of this Agreement, a "Material Adverse Effect" shall mean a material adverse effect upon the assets or properties, business, results of operations, prospects, or condition (financial or otherwise) of the Company. (g) The Company owns or possesses adequate and enforceable rights to use all patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, licenses, know-how, proprietary techniques, including processes and substances, and other similar rights and proprietary knowledge (collectively, "Intangibles") necessary for the conduct of its business as described in the Registration Statement and the Prospectus. The Company has not received any notice of, and to its best knowledge is not aware of, any infringement of or conflict with asserted rights of others with respect to any Intangibles which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect. The Company has not received any notice of and is not aware of any infringement of any of the Company's Intangibles by any third party which could have a Material Adverse Effect. (h) The Company has good and marketable title to each of the items of personal property which are reflected in the financial statements referred to in Section 4(d) or are referred to in the Registration Statement and the Prospectus as being owned by it and valid and enforceable leasehold interests in each of the items of real and personal property which are referred to in the Registration Statement and the Prospectus as being leased by it, in each case free and clear of all liens, encumbrances, claims, security interests and defects other than those described in the Registration Statement (collectively, "Liens"), except to the extent that the failure to have such good title or the existence of any such Lien does not and will not have a Material Adverse Effect. (i) There is no litigation or governmental or other proceeding or investigation before any court or before or by any public body or board pending or, to the Company's knowledge, threatened against, or involving the assets, properties or business of, the Company which, if determined adversely to the Company, would materially adversely affect the value or the operation of any such assets or properties or the business, results of operations, prospects or condition (financial or otherwise) of the Company. (j) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, except as described therein, (i) there has not been any material adverse change in the assets or properties, business, results of operations, prospects or condition (financial or otherwise), of the Company, whether or not arising from transactions in the ordinary course of business; (ii) the Company has not sustained any material loss or interference with its assets, businesses or properties (whether owned or leased) from fire, explosion, earthquake, flood or other calamity, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree; and (iii) since the date of the latest balance sheet included in the Registration Statement and the Prospectus, except as reflected in the Registration Statement or the Prospectus, the Company has not (A) issued any securities or incurred any liability or obligation, direct or contingent, for 6 borrowed money, except such liabilities or obligations incurred in the ordinary course of business, (B) entered into any transaction not in the ordinary course of business or (C) declared or paid any dividend or made any distribution on any shares of its stock or redeemed, purchased or otherwise acquired or agreed to redeem, purchase or otherwise acquire any shares of its stock. (k) There is no document or contract of a character required by the Securities Act or the Rules to be described in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which is not described, filed, or incorporated by reference in the Registration Statement, as required; and the description of any such documents or contracts in the Registration Statement or Prospectus is accurate. Each agreement listed in the exhibits to the Registration Statement or incorporated by reference which is material to the Company's assets or properties, business, results of operations, prospects, or condition (financial or otherwise) is in full force and effect and is valid and enforceable by and against the Company, as the case may be, in accordance with its terms, assuming the due authorization, execution and delivery thereof by each of the other parties thereto. The Company is not, nor, to the best of the Company's knowledge, is any other party, in default in the observance or performance of any term or obligation to be performed by it under any such agreement, and no event has occurred which with notice or lapse of time or both would constitute such a default, in any such case which default or event would have a Material Adverse Effect. No default exists, and no event has occurred which with notice or lapse of time or both would constitute a default, in the due performance and observance of any term, covenant, or condition, by the Company of any other agreement or instrument to which the Company is a party or by which it or its properties or business may be bound or affected which default or event would have a Material Adverse Effect. (l) The Company is not in violation of any term or provision of its charter or by-laws or of any franchise, license, permit, judgment, decree, order, statute, rule or regulation, where the consequences of such violation would have a Material Adverse Effect. (m) Neither the execution, delivery and performance of this Agreement by the Company nor the consummation of any of the transactions contemplated hereby (including, without limitation, the issuance and sale by the Company of the Shares) will give rise to a right to terminate or accelerate the due date of any payment due under, or conflict with or result in the breach of any term or provision of, or constitute a default (or an event which with notice or lapse of time or both would constitute a default) under, or require any consent or waiver under, or result in the execution or imposition of any lien, charge or encumbrance upon any properties or assets of the Company pursuant to the terms of, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company is a party or by which it or any of its properties or businesses is bound, or any franchise, license, permit, judgment, decree, order, statute, rule or regulation applicable to the Company or violate any provision of the charter or by-laws of the Company, except to the extent that the Company has obtained consents or waivers which are in full force and effect. 7 (n) The Company has an authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus. All of the outstanding shares of Common Stock have been duly and validly issued and are fully paid and nonassessable and none of them was issued in violation of any preemptive right, right of first refusal or first offer or other similar right. The Shares, when issued and sold pursuant to this Agreement, will be duly and validly issued, fully paid and nonassessable and none of them will be issued in violation of any preemptive or other similar right. Except as disclosed in the Registration Statement and the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, and there is no commitment or binding plan or arrangement to issue, any share of stock of the Company or any security convertible into, or exercisable or exchangeable for, such stock. The Common Stock and the Shares conform in all material respects to all statements in relation thereto contained in the Registration Statement and the Prospectus. (o) No holder of any security of the Company has the right to have any security owned by such holder included in the Registration Statement (other than Robert J. Hennessey, who has waived such right) or to demand registration of any security owned by such holder during the period ending 90 days after the date of this Agreement. Each director and executive officer of the Company (the "Locked-Up Holders") has delivered to the Representatives his enforceable written lock-up agreement in the form attached to this Agreement (the "Lock-Up Agreements"). (p) All necessary corporate action has been duly and validly taken by the Company to authorize the execution, delivery and performance of this Agreement and the issuance and sale of the Shares by the Company. This Agreement has been duly and validly authorized, executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except (i) as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles and (ii) to the extent that rights to indemnity or contribution under this Agreement may be limited by Federal and state securities laws or the public policy underlying such laws. (q) The Company is not involved in any labor dispute nor, to the knowledge of the Company, is any such dispute threatened, which dispute would have a material adverse effect on the assets or properties, business, results of operations, prospects or condition (financial or otherwise) of the Company. The Company is not aware of any threatened or pending litigation between the Company and any of its executive officers which, if adversely determined, could have a Material Adverse Effect. (r) No transaction has occurred between or among the Company and any of its officers or directors or five percent shareholders or any affiliate or affiliates of any such officer or director or five percent shareholders that is required to be described in and is not described in the Registration Statement and the Prospectus. 8 (s) The Company has not taken, nor will it take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of any of the Shares. (t) The Company has filed all Federal, state, local, and foreign tax returns which are required to be filed by it through the date hereof, or has received extensions thereof, and has paid all taxes shown on such returns and all assessments received by it to the extent that the same are material and have become due. There are no tax audits or, to the Company's knowledge, investigations pending, which if adversely determined would have a Material Adverse Effect; nor are there any material proposed additional tax assessments against the Company. (u) The Shares have been duly authorized for quotation on Nasdaq National Market. (v) The Company has complied with all the requirements and filed the required forms as specified in Florida Statutes Section 517.075. (w) To the Company's knowledge based on questionnaires delivered to the Company, there are no affiliations with the NASD among the Company's officers, directors or, to the best of the knowledge of the Company, any five percent or greater stockholder of the Company, except as set forth in the Registration Statement or otherwise disclosed in writing to the Representatives. (x) (i) The Company is in compliance in all material respects with all rules, laws, and regulations relating to the use, treatment, storage, and disposal of toxic substances and protection of health or the environment ("Environmental Law") which are applicable to its business; (ii) the Company has not received any notice from any governmental authority or third party of an asserted claim under Environmental Laws; (iii) the Company has received all permits, licenses, or other approvals required of them under applicable Environmental Laws to conduct their business and are in compliance with all terms and conditions of any such permit, license, or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses, or other approvals or failure to comply with the terms and conditions of such permits, licenses, or approvals would not, singly or in the aggregate, have a Material Adverse Effect; (iv) to the Company's knowledge, no facts currently exist that will require the Company to make future material capital expenditures to comply with Environmental Laws; and (v) to the Company's knowledge, no property which is or has been owned, leased or occupied by the Company has been designated as a Superfund site pursuant to the Comprehensive Environmental Response, Compensation of Liability Act of 1980, as amended (42 U.S.C. Section 9601, et. seq.) or otherwise designated as a contaminated site under applicable state or local law. The Company has not been named as a "potentially responsible party" under the CER CLA 1980. 9 (y) In the ordinary course of its business, the Company periodically reviews the effect of Environmental Laws on the business, operations and properties of the Company and its subsidiaries, in the course of which the Company identifies and evaluates associated costs and liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws, or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties). On the basis of such review, the Company has reasonably concluded that such associated costs and liabilities would not, singly or in the aggregate, have a Material Adverse Effect. (z) Neither the Company or any other person associated with or acting on behalf of the Company including, without limitation, any director, officer, agent or employee of the Company has not, directly or indirectly, while acting on behalf of the Company (i) used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity; (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; (iii) violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any other unlawful payment. (aa) The Company is not and, after giving effect to the offering and sale of the Shares and the application of proceeds thereof as described in the Prospectus, will not be an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"). (bb) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (3) access to assets is permitted only in accordance with management's general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any difference. (cc) The Company has not experienced, nor does it expect to experience, any material disruptions or losses in its business or operations due to the Year 2000 Problem (that is, any significant risk that computer hardware or software applications used by the Company did not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively as in the case of dates or time periods occurring prior to January 1, 2000); and there are no issues related to the impact of the Year 2000 Problem on the Company's business or operations that are of a character required to be described or referred to in the Registration Statement or Prospectus. 10 5. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the Underwriters under this Agreement are several and not joint. The respective obligations of the Underwriters to purchase the Shares are subject to each of the following terms and conditions: (a) The Prospectus shall have been timely filed with the Commission in accordance with Section 6(a)(i) of this Agreement. (b) No order preventing or suspending the use of any preliminary prospectus or the Prospectus shall have been or shall be in effect and no order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings for such purpose shall be pending before or threatened by the Commission, and any requests for additional information on the part of the Commission (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of the Representatives. (c) The representations and warranties of the Company contained in this Agreement and in the certificates delivered pursuant to Section 5(d) shall be true and correct when made and on and as of each Closing Date as if made on such date and the Company shall have performed all covenants and agreements and satisfied all the conditions contained in this Agreement required to be performed or satisfied by it at or before such Closing Date. (d) The Representatives shall have received on each Closing Date a certificate, addressed to the Representatives and dated such Closing Date, of the chief executive or chief operating officer and the chief financial officer or chief accounting officer of the Company to the effect that (i) the signers of such certificate have carefully examined the Registration Statement, the Prospectus and this Agreement and that the representations and warranties of the Company in this Agreement are true and correct on and as of such Closing Date with the same effect as if made on such Closing Date and the Company has performed all covenants and agreements and satisfied all conditions contained in this Agreement required to be performed or satisfied by it at or prior to such Closing Date and (ii) no stop order suspending the effectiveness of the Registration Statement has been issued and to the best of their knowledge, no proceedings for that purpose have been instituted or are pending under the Securities Act. (e) The Representatives shall have received on the Effective Date, at the time this Agreement is executed and on each Closing Date a signed letter from Arthur Andersen LLP addressed to the Representatives and dated, respectively, the Effective Date, the date of this Agreement and each such Closing Date, in form and substance reasonably satisfactory to the Representatives. (f) The Representatives shall have received on each Closing Date from Ropes and Gray, counsel for the Company, an opinion, addressed to the Representatives and dated such Closing Date, in a form reasonably acceptable to the Representatives. (g) The Representatives shall have received on each Closing Date from Hale and Dorr LLP, patent counsel for the Company, an opinion addressed to the Representatives and dated such Closing Date, to the effect that such counsel is familiar with the technology used by 11 the Company in its business relating to those technology areas handled by Hale and Dorr and has read the portions of the Registration Statement and the Prospectus headed: "Risk Factors - Our intellectual property protection may be inadequate..."; "Risk Factors - Our proprietary position may depend..."; "Risk Factors -- We may infringe the intellectual property rights..."; "Risk Factors - We may not be able to obtain..."; "Risk Factors - International patent protection is uncertain..."; "Business Strategic Alliances" and "Business - Patents and Proprietary Technology", and that, to the extent that the following opinions relate to the Company's technology and products as to which such counsel has knowledge: (i) such counsel has no knowledge of any facts which would preclude the Company from having clear title to the Company's patents or patent applications referenced in the Prospectus. To the best of such counsel's knowledge, the Company does not lack and will not be unable to obtain any rights or licenses to use any patent or know-how necessary to conduct the business now conducted or proposed to be conducted by the Company as described in the Prospectus, including without limitation the Company's business relating to technology and products (except with respect to the patents assigned to Schering Plough as to which such counsel need express no opinion).To our knowledge, we and the Company have complied with the required duty of candor and good faith in dealing with the U.S. Patent and Trademark Office (the "Office"), including the duty to disclose to the Office all information believed to be material to the patentability of each U.S. patent and pending application. We have no knowledge of any published patent applications which, if issued in the form published, would constrain or prohibit the business now conducted or proposed to be conducted by the Company as described in the prospectus, except as described therein. We have no knowledge of any facts that would form a basis for the belief that any of the patents or patent applications owned or licensed by the Company is unenforceable or invalid. To the best of such counsel's knowledge, the Company has not received any notice of infringement or of conflict with asserted rights of others with respect to any patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, licenses or know-how, proprietary techniques, including processes and substances, and other similar rights and proprietary knowledge which could result in any material adverse effect upon the Company. Such counsel is not aware of any patents of others which are infringed by specific products or processes of the Company referred to in the Prospectus in such manner as to materially and adversely affect the Company; (ii) to the best of such counsel's knowledge, there are no legal or governmental proceedings pending relating to trade secrets, trademarks, service marks or other proprietary information or materials of the Company other than review of or appeal proceedings relating to pending applications for patents, and to the best of such counsel's knowledge no such proceedings are threatened or contemplated by governmental authorities or others; (iii) such counsel does not know of any material contracts or other material documents relating to the Company's proprietary information, other than those filed as exhibits to the Registration Statement; and 12 (iv) the statements under the captions "Risk Factors - Our intellectual property protection may be inadequate..."; "Risk Factors - Our proprietary position may depend..."; "Risk Factors -- We may infringe the intellectual property rights..."; "Risk Factors - We may not be able to obtain..."; "Risk Factors - International patent protection is uncertain..."; "Business - Strategic Alliances" and "Business - Patents and Proprietary Technology", insofar as such statements constitute a summary of documents referred to therein or matters of law, are accurate summaries and fairly and correctly present, in all material respects, the information called for with respect to such documents and matters and such counsel has no reason to believe that the statements therein are untrue or that there is an omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that such counsel may rely on representations of the Company with respect to the factual matters contained in such statements, provided that such counsel shall state that nothing has come to the attention of such counsel which leads them to believe that such representations are not true and correct in all material respects. (h) All proceedings taken in connection with the sale of the Firm Shares and the Option Shares as herein contemplated shall be reasonably satisfactory in form and substance to the Representatives and their counsel and the Underwriters shall have received from Palmer & Dodge LLP a favorable opinion, addressed to the Representatives and dated such Closing Date, with respect to the Shares, the Registration Statement and the Prospectus, and such other related matters, as the Representatives may reasonably request, and the Company shall have furnished to Palmer & Dodge LLP such documents as they may reasonably request for the purpose of enabling them to pass upon such matters. (i) If the Shares have been qualified for sale in Florida, the Representatives shall have received on each Closing Date certificates, addressed to the Representatives, and dated such Closing Date, of an executive officer of the Company, to the effect that the signer of such certificate has reviewed and understands the provisions of Section 517.075 of the Florida Statues, and represents that the Company has complied, and at all times will comply, with all provisions of Section 517.075 and further, that as of such Closing Date, neither the Company nor any of its affiliates does business with the government of Cuba or with any person or affiliate located in Cuba. (j) The Company shall have furnished or caused to be furnished to the Representatives such further certificates or documents as the Representatives shall have reasonably requested. 6. COVENANTS OF THE COMPANY. (a) The Company covenants and agrees as follows: 13 (i) The Company shall prepare the Prospectus in a form approved by the Representatives and file such Prospectus pursuant to Rule 424(b) under the Securities Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Securities Act. (ii) The Company shall promptly advise the Representatives in writing (A) when any amendment to the Registration Statement shall have become effective, (B) of any request by the Commission for any amendment of the Registration Statement or the Prospectus or for any additional information, (C) of the prevention or suspension of the use of any preliminary prospectus or the Prospectus or of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or threatening of any proceeding for that purpose and (D) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. The Company shall not file any amendment of the Registration Statement or supplement to the Prospectus unless the Company has furnished the Representatives a copy for its review prior to filing and shall not file any such proposed amendment or supplement to which the Representatives reasonably object. The Company shall use its best efforts to prevent the issuance of any such stop order and, if issued, to obtain as soon as possible the withdrawal thereof. (iii) If, at any time when a prospectus relating to the Shares is required to be delivered under the Securities Act and the Rules, any event occurs as a result of which the Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or if it shall be necessary to amend or supplement the Prospectus (or to file under the Exchange Act any document which, upon filing, is incorporated into the Prospectus) to comply with the Securities Act or the Rules, the Company promptly shall prepare and file with the Commission, subject to the second sentence of paragraph (ii) of this Section 6(a), an amendment or supplement (or document) which shall correct such statement or omission or an amendment which shall effect such compliance. (iv) The Company shall make generally available to its security holders and to the Representatives as soon as practicable, but not later than 45 days after the end of the 12-month period beginning at the end of the fiscal quarter of the Company during which the Effective Date occurs (or 90 days if such 12-month period coincides with the Company's fiscal year), an earnings statement (which need not be audited) of the Company, covering such 12-month period, which shall satisfy the provisions of Section 11(a) of the Securities Act or Rule 158 of the Rules. (v) The Company shall furnish to the Representatives and counsel for the Underwriters, without charge, signed copies of the Registration Statement (including all exhibits thereto and amendments thereof), and to each other Underwriter a copy of the Registration Statement (without including all exhibits thereto and all amendments thereof), and 14 such number of documents incorporated into the Registration Statement (including all exhibits thereto and amendments thereof) and, so long as delivery of a prospectus by an underwriter or dealer may be required by the Securities Act or the Rules, as many copies of any preliminary prospectus and the Prospectus and any amendments thereof and supplements thereto as the Representatives may reasonably request. (vi) The Company shall cooperate with the Representatives and their counsel in endeavoring to qualify the Shares for offer and sale under the laws of such jurisdictions as the Representatives may designate and shall maintain such qualifications in effect so long as required for the distribution of the Shares; provided, however, that the Company shall not be required in connection therewith, as a condition thereof, to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction or subject itself to taxation as doing business in any jurisdiction. (vii) For a period of five years after the date of this Agreement, the Company shall supply to the Representatives and to each other Underwriter who may so request in writing, copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any class of its capital stock and to furnish to the Representatives a copy of each annual or other report it shall be required to file with the Commission. (viii) Without the prior written consent of CIBC World Markets Corp., for a period of 90 days after the date of this Agreement, the Company shall not issue, sell or register with the Commission (other than on Form S-8 or on any successor form), or otherwise dispose of, directly or indirectly, any equity securities of the Company (or any securities convertible into or exercisable or exchangeable for equity securities of the Company), except for the issuance of (A) the Shares pursuant to the Registration Statement, (B) shares of the Company's Common Stock pursuant to the Company's existing stock option plans or equity compensation plans, or (C) shares of Common Stock or securities convertible into or exercisable or exchangeable for equity securities of the Company in connection with licensing, research and development or other collaborative or strategic arrangements, PROVIDED THAT the transferee of any securities described in this clause (C) delivers to the Representatives a lock-up agreement of the type and on the terms described in paragraph 4(o) of this Agreement. In the event that during this period, (i) any shares are issued pursuant to the Company's existing stock option plan or bonus plan that are exercisable during such 90 day period (other than shares issued pursuant to options or other awards outstanding on the date of this Agreement) or (ii) any registration is effected on Form S-8 or on any successor form relating to shares that are exercisable during such 90 period, the Company shall obtain the written agreement of such grantee or purchaser or holder of such registered securities that, for a period of 90 days after the date of this Agreement, such person will not, without the prior written consent of CIBC World Markets Corp., offer for sale, sell, distribute, grant any option for the sale of, or otherwise dispose of, directly or indirectly, or exercise any registration rights with respect to, any shares of Common Stock (or any securities convertible into, exercisable for, or exchangeable for any shares of Common Stock) owned by such person. 15 (ix) On or before completion of this offering, the Company shall make all filings required under applicable federal securities laws and by the Nasdaq National Market (including any required registration under the Exchange Act). (x) The Company shall file timely and accurate reports in accordance with the provisions of Florida Statutes Section 517.075, or any successor provision, and any regulation promulgated thereunder, if at any time after the Effective Date, the Company or any of its affiliates commences engaging in business with the government or any person or affiliate located in Cuba. (xi) Without the prior written consent of CIBC World Markets Corp., for a period of 90 days after the date of this Agreement, the Company shall not, by amending, terminating or waiving any agreement between the Locked-Up Holder and the Company described in Section 4(o) or otherwise, permit any Locked-Up Holder to offer for sale, sell, distribute, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any Shares of Common Stock (or any securities convertible into, exercisable for, or exchangeable for any Shares of Common Stock). Without the prior written consent of CIBC World Markets Corp., for a period of 90 days after the date of this Agreement, the Company shall not, by amending, terminating, or waiving any agreement between bioMerieux Alliance SA ("bioMerieux") and the Company, permit bioMerieux to offer for sale, sell, distribute, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any of its shares of Common Stock. (xii) The Company will apply the net proceeds from the offering of the Shares in the manner set forth under "Use of Proceeds" in the Prospectus. (b) The Company agrees to pay, or reimburse if paid by the Representatives, whether or not the transactions contemplated hereby are consummated or this Agreement is terminated, all costs and expenses incident to the public offering of the Shares and the performance of the obligations of the Company under this Agreement including those relating to: (i) the preparation, printing, filing and distribution of the Registration Statement including all exhibits thereto, each preliminary prospectus, the Prospectus, all amendments and supplements to the Registration Statement and the Prospectus, and the printing, filing and distribution of this Agreement; (ii) the preparation and delivery of certificates for the Shares to the Underwriters; (iii) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the various jurisdictions referred to in Section 6(a)(vi), including the reasonable fees and disbursements of counsel for the Underwriters in connection with such registration and qualification and the preparation, distribution and shipment of preliminary and supplementary Blue Sky memoranda; (iv) the furnishing (including costs of shipping and mailing) to the Representatives and to the Underwriters of copies of each preliminary prospectus, the Prospectus and all amendments or supplements to the Prospectus, and of the several documents required by this Section to be so furnished, as may be reasonably requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold; (v) the filing fees of the National Association of Securities Dealers, Inc. in connection with its 16 review of the terms of the public offering; (vi) the furnishing (including costs of shipping and mailing) to the Representatives and to the Underwriters of copies of all reports and information required by Section 6(a)(vii); (vii) inclusion of the Shares for quotation on the Nasdaq National Market; and (viii) all transfer taxes, if any, with respect to the sale and delivery of the Shares by the Company to the Underwriters. Subject to the provisions of Section 9, the Underwriters agree to pay, whether or not the transactions contemplated hereby are consummated or this Agreement is terminated, all costs and expenses incident to the performance of the obligations of the Underwriters under this Agreement not payable by the Company pursuant to the preceding sentence, including, without limitation, the fees and disbursements of counsel for the Underwriters. 7. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any and all losses, claims, damages and liabilities, joint or several (including any reasonable investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted), to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other Federal or state law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment thereof or supplement thereto, (or in any document incorporated thereto) or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; PROVIDED, HOWEVER, that such indemnity shall not inure to the benefit of any Underwriter (or any person controlling such Underwriter) on account of any losses, claims, damages or liabilities arising from the sale of the Shares to any person by such Underwriter if such untrue statement or omission or alleged untrue statement or omission was made in such preliminary prospectus, the Registration Statement or the Prospectus, or such amendment or supplement thereto, in reliance upon and in conformity with information furnished in writing to the Company by the Representatives on behalf of any Underwriter specifically for use therein. This indemnity agreement will be in addition to any liability which the Company may otherwise have. Notwithstanding the foregoing, the Company shall not be liable to any Underwriter with respect to any preliminary prospectus or any preliminary prospectus supplement, to the extent that any such loss, claim, damage or liability of any Underwriter results solely from an untrue statement of a material fact contained in, or the omission of a material fact from, such preliminary prospectus, which untrue statement or omission was corrected in the Prospectus, if the Company shall sustain the burden of proving that (i) the Underwriter sold Shares to the person alleging such loss, claim, damage or liability without sending or giving or making available electronically, at or prior to the written confirmation of such sale, a copy of the Prospectus to such person, (ii) delivery of a Prospectus was required under the Securities Act, and (iii) the Company delivered to the Underwriter copies of such Prospectus in such quantities as it shall have reasonably requested. 17 (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, each director of the Company, and each officer of the Company who signs the Registration Statement, to the same extent as the foregoing indemnity from the Company to each Underwriter, but only insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which was made in any preliminary prospectus, the Registration Statement or the Prospectus, or any amendment thereof or supplement thereto, and which was furnished by such Underwriter to the Company in writing expressly for use in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendments or supplements thereto; provided, however, that the obligation of each Underwriter to indemnify the Company (including any controlling person, director or officer thereof) shall be limited to the net proceeds received by the Company from such Underwriter. (c) Any party that proposes to assert the right to be indemnified under this Section will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section, notify each such indemnifying party of the commencement of such action, suit or proceeding, enclosing a copy of all papers served. No indemnification provided for in Section 7(a) or 7(b) shall be available to any party who shall fail to give notice as provided in this Section 7(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice but the omission so to notify such indemnifying party of any such action, suit or proceeding shall not relieve it from any liability that it may have to any indemnified party for contribution or otherwise than under this Section. In case any such action, suit or proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and the approval by the indemnified party of such counsel, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses, except as provided below and except for the reasonable costs of investigation subsequently incurred by such indemnified party in connection with the defense thereof. The indemnified party shall have the right to employ its counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of counsel by such indemnified party has been authorized in writing by the indemnifying parties, (ii) the indemnified party shall have reasonably concluded that there may be a conflict of interest between the indemnifying parties and the indemnified party in the conduct of the defense of such action (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party) or (iii) the indemnifying parties shall not have employed counsel to assume the defense of such action within a reasonable time after notice of the commencement thereof, in 18 each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying parties. An indemnifying party shall not be liable for any settlement of any action, suit, proceeding or claim effected without its written consent. 8. CONTRIBUTION. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Section 7(a) or 7(b) is due in accordance with its terms but for any reason is held to be unavailable to or insufficient to hold harmless an indemnified party under Section 7(a) or 7(b), then each indemnifying party shall contribute to the aggregate losses, claims, damages and liabilities (including any investigation, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting any contribution received by any person entitled hereunder to contribution from any person who may be liable for contribution) to which the indemnified party may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares or, if such allocation is not permitted by applicable law or indemnification is not available as a result of the indemnifying party not having received notice as provided in Section 7 hereof, in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion as (x) the total proceeds from the offering (net of underwriting discounts but before deducting expenses) received by the Company, as set forth in the table on the cover page of the Prospectus, bear to (y) the underwriting discounts received by the Underwriters, as set forth in the table on the cover page of the Prospectus. The relative fault of the Company or the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact related to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 8, (i) in no case shall any Underwriter (except as may be provided in the Agreement Among Underwriters) be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter hereunder, and (ii) the Company shall be liable and responsible for any amount in excess of such underwriting discount; provided, however, that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as such Underwriter, and each person, if any, who controls the Company within the meaning of the Section 15 of the Securities Act or Section 20(a) of the Exchange Act, each officer of the 19 Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to clauses (i) and (ii) in the immediately preceding sentence of this Section 8. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this Section, notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties from whom contribution may be sought shall not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have hereunder or otherwise than under this Section. No party shall be liable for contribution, with respect to any action, suit, proceeding or claim settled without its written consent. The Underwriters' obligations to contribute pursuant to this Section 8 are several in proportion to their respective underwriting commitments and not joint. 9. TERMINATION. This Agreement may be terminated with respect to the Shares to be purchased on a Closing Date by the Representatives by notifying the Company at any time (a) in the absolute discretion of the Representatives at or before any Closing Date: (i) if on or prior to such date, any domestic or international event or act or occurrence has materially disrupted the securities markets in the United States; (ii) if there has occurred any new outbreak or material escalation of hostilities or other calamity or crisis the effect of which on the financial markets of the United States is such as to make it, in the judgment of the Representatives, inadvisable to proceed with the offering; (iii) if there shall be such a material adverse change in general financial, political or economic conditions or the effect of international conditions on the financial markets in the United States is such as to make it, in the judgment of the Representatives, inadvisable or impracticable to market the Shares; (iv) if trading in the Shares has been suspended by the Commission or trading generally on the New York Stock Exchange, Inc., on the American Stock Exchange, Inc. or on the Nasdaq National Market has been suspended or limited, or minimum or maximum ranges for prices for securities shall have been fixed, or maximum ranges for prices for securities have been required, by said exchanges or by order of the Commission, the National Association of Securities Dealers, Inc., or any other governmental or regulatory authority; or (v) if a banking moratorium has been declared by any state or Federal authority; or (b) at or before any Closing Date, that any of the conditions specified in Section 5 shall not have been fulfilled when and as required by this Agreement. If this Agreement is terminated pursuant to any of its provisions, the Company shall not be under any liability to any Underwriter except as set forth in Section 6(b), and no Underwriter shall be under any liability to the Company, except that no Underwriter who shall have failed or refused to purchase the Shares agreed to be purchased by it under this Agreement, without some reason sufficient hereunder to justify cancellation or termination of its obligations under this Agreement, shall be relieved of liability to the Company or to the other Underwriters for damages occasioned by its failure or refusal. 20 10. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters shall fail (other than for a reason sufficient to justify the cancellation or termination of this Agreement under Section 9) to purchase on any Closing Date the Shares agreed to be purchased on such Closing Date by such Underwriter or Underwriters, the Representatives may find one or more substitute underwriters to purchase such Shares or make such other arrangements as the Representatives may deem advisable or one or more of the remaining Underwriters may agree to purchase such Shares in such proportions as may be approved by the Representatives, in each case upon the terms set forth in this Agreement. If no such arrangements have been made by the close of business on the business day following such Closing Date, (a) if the number of Shares to be purchased by the defaulting Underwriters on such Closing Date shall not exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, then each of the nondefaulting Underwriters shall be obligated to purchase such Shares on the terms herein set forth in proportion to their respective obligations hereunder; provided, that in no event shall the maximum number of Shares that any Underwriter has agreed to purchase pursuant to Section 1 be increased pursuant to this Section 10 by more than one-ninth of such number of Shares without the written consent of such Underwriter, or (b) if the number of Shares to be purchased by the defaulting Underwriters on such Closing Date shall exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, then the Company shall be entitled to an additional business day within which it may, but is not obligated to, find one or more substitute underwriters reasonably satisfactory to the Representatives to purchase such Shares upon the terms set forth in this Agreement. In any such case, either the Representatives or the Company shall have the right to postpone the applicable Closing Date for a period of not more than seven business days in order that necessary changes and arrangements (including any necessary amendments or supplements to the Registration Statement or Prospectus) may be effected by the Representatives and the Company. If the number of Shares to be purchased on such Closing Date by such defaulting Underwriter or Underwriters shall exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, and none of the nondefaulting Underwriters or the Company shall make arrangements pursuant to this Section within the period stated for the purchase of the Shares that the defaulting Underwriters agreed to purchase, this Agreement shall terminate with respect to the Shares to be purchased on such Closing Date without liability on the part of any nondefaulting Underwriter to the Company and without liability on the part of the Company, except in both cases as provided in Sections 6(b), 7, 8 and 9. The provisions of this Section shall not in any way affect the liability of any defaulting Underwriter to the Company or to the nondefaulting Underwriters arising out of such default. A substitute underwriter hereunder shall become an Underwriter for all purposes of this Agreement. 11. MISCELLANEOUS. The respective agreements, representations, warranties, indemnities and other statements of the Company or its officers and of the Underwriters set forth in or made pursuant to this Agreement shall remain in full force and effect, regardless of any 21 investigation made by or on behalf of any Underwriter or the Company or any of the officers, directors or controlling persons referred to in Sections 7 and 8 hereof, and shall survive delivery of and payment for the Shares. The provisions of Sections 6(b), 7, 8 and 9 shall survive the termination or cancellation of this Agreement. This Agreement has been and is made for the benefit of the Underwriters and the Company and their respective successors and assigns, and, to the extent expressed herein, for the benefit of persons controlling any of the Underwriters, or the Company, and directors and officers of the Company, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser of Shares from any Underwriter merely because of such purchase. All notices and communications hereunder shall be in writing and mailed or delivered or by telephone or telegraph if subsequently confirmed in writing, (a) if to the Representatives, c/o CIBC World Markets Corp., World Financial Center, New York, New York 10281 Attention: Peter J. Crowley, and (b) if to the Company, to its agent for service as such agent's address appears on the cover page of the Registration Statement. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflict of laws. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Please confirm that the foregoing correctly sets forth the agreement among us. Very truly yours, GENOME THERAPEUTICS CORP. By: ----------------------------- Name: Robert J. Hennessey Title: Chief Executive Officer 22 Confirmed: CIBC WORLD MARKETS CORP. WARBURG DILLON READ LLC DAIN RAUSCHER INCORPORATED TUCKER ANTHONY INCORPORATED By: CIBC World Markets Corp., acting on its own behalf, on behalf of the Representatives and on behalf of the several Underwriters named in Schedule I annexed hereto By: ---------------------------------- Name: Peter J. Crowley Title: Managing Director and Head of Health Care 23 SCHEDULE I
NAME NUMBER OF FIRM SHARES ---- TO BE PURCHASED --------------------- CIBC World Markets Corp. Warburg Dillon Read LLC Dain Rauscher Incorporated Tucker Anthony Incorporated TOTAL
24 FORM OF LOCK-UP AGREEMENT March __, 2000 CIBC World Markets Corp. As Representatives of the Several Underwriters c/o CIBC World Markets Corp. One World Financial Center New York, NY 10281 Ladies and Gentlemen: The undersigned is a shareholder of Genome Therapeutics Corp. (the "Company") and wishes to facilitate the public offering (the "Offering") of Common Stock of the Company ("Common Stock") pursuant to a Registration Statement (the "Registration Statement") to be transmitted for filing with the Securities and Exchange Commission on or about March 15, 2000. In consideration of the foregoing, and in order to induce you to act as underwriters in the Offering, the undersigned hereby irrevocably agrees that it will not, directly or indirectly, sell, offer, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge or otherwise dispose of any Common Stock or any securities convertible into or exchangeable or exercisable for or any other rights to purchase or acquire Common Stock, whether now owned or hereinafter acquired by the undersigned or with respect to which the undersigned has the power of disposition or beneficial ownership, without the prior written consent of CIBC World Markets Corp. acting alone, for a period commencing on the date of the execution hereof until the expiration of 90 days after the date of the final prospectus relating to the Offering. The undersigned hereby waives any rights of the undersigned to sell Common Stock or any other security issued by the Company pursuant to the Registration Statement, and acknowledges and agrees that for a period commencing on the date of execution hereof until the expiration of 90 days after the date of the final prospectus relating to the Offering the undersigned has no right to require the Company to register under the Securities Act of 1933, as amended, such Common Stock or other securities issued by the Company and beneficially owned by the undersigned. The foregoing sentence shall not apply to transactions relating to shares of Common Stock or other securities acquired in open market transactions after the completion of the Offering. Notwithstanding the foregoing (i) gifts and tranfers by will or intestacy or (ii) transfers to (A) the undersigned's members, partners, affiliates or immediate family or (B) a trust, the beneficiaries of which are the undersigned and/or members of the undersigned's immediate family, shall not be prohibited by this agreement; provided, that the donee or transferee agrees in writing to be bound by the foregoing in the same manner as it applies to the undersigned. "Immediate family" shall mean spouse, lineal descendants, father, mother, brother or sister of the transferor and father, mother, brother or sister of the transferor's spouse and lineal descendants of any of the foregoing. The undersigned understands that the agreements of the undersigned are irrevocable and shall be binding upon the undersigned's heirs, legal representatives, successors and assigns. The undersigned agrees and consents to the entry of stop transfer instruments with the Company's transfer agent against the transfer of Common Stock or other securities of the Company held by the undersigned except in compliance with this agreement. This agreement shall automatically terminate in the event that the Underwriting Agreement relating to the Offering is not entered into by May 15, 2000. Very truly yours, ----------------------------------------- (FOR ENTITY PRINT NAME) By: -------------------------------------- (SIGNATURE) Name: ------------------------------------ (PRINT NAME OF SIGNER) Title: ----------------------------------- (PRINT TITLE OF SIGNING FOR ENTITY) EX-23.2 3 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. /s/ Arthur Andersen LLP Boston, Massachusetts April 6, 2000 -----END PRIVACY-ENHANCED MESSAGE-----