-----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, R9yGC8ax5xLIps5+9QnyFBu6L2q4wGFuJDNYW7byLg9Ndu91hn7DJ3G7MizAW1sd /W8zrt6rG/YwOTE55uYypw== 0000950135-96-003383.txt : 19960809 0000950135-96-003383.hdr.sgml : 19960809 ACCESSION NUMBER: 0000950135-96-003383 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960808 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENETICS INSTITUTE INC CENTRAL INDEX KEY: 0000731336 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 042718435 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14587 FILM NUMBER: 96605552 BUSINESS ADDRESS: STREET 1: 87 CAMBRIDGE PK DR CITY: CAMBRIDGE STATE: MA ZIP: 02140 BUSINESS PHONE: 6178761170 MAIL ADDRESS: STREET 1: 87 CAMBRIDGE PARK DRIVE CITY: CAMBRIDGE STATE: MA ZIP: 02140 10-Q 1 GENETICS INSTITUTE, INC. FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- FORM 10-Q Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For Quarter Ended June 30, 1996 Commission File Number 0-14587 ------------- ------- GENETICS INSTITUTE, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 04-2718435 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 87 CambridgePark Drive, Cambridge, MA 02140 - -------------------------------------------------------------------------------- (Address of principal executive offices) (zip code) Registrant's telephone number, including area code (617) 876-1170 ------------------------------ None - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- 29,560,000 shares of Common Stock, par value $.01 (including 16,836,890 shares represented by Depositary Shares) were outstanding on August 2, 1996. 2 GENETICS INSTITUTE, INC. INDEX
Page PART I - FINANCIAL INFORMATION Number - ------------------------------ ------ Item 1 - Financial Statements Consolidated Condensed Balance Sheets at June 30, 1996 and December 31, 1995 ................................. 3 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1996 and 1995 ........... 4 Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1995 ..................... 5 Notes to Consolidated Condensed Financial Statements ................... 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations .......................... 11 PART II - OTHER INFORMATION - --------------------------- Item 1 - Legal Proceedings ................................................ 15 Item 4 - Submission of Matters to a Vote of Security Holders .............. 15 Item 6 - Exhibits and Reports on Form 8-K ................................. 15 Signatures ................................................................ 16
-2- 3 GENETICS INSTITUTE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited - in thousands except share amounts)
June 30, December 31, 1996 1995 --------- ------------ ASSETS Cash and cash equivalents $ 117,832 $ 33,164 Marketable securities 229,440 217,670 Accounts receivable 50,669 40,876 Inventories: Materials and supplies 6,469 5,769 Work in progress 2,080 915 Finished goods 16,872 14,325 --------- --------- 25,421 21,009 Other current assets 6,316 5,844 --------- --------- Total current assets 429,678 318,563 Property, plant and equipment 184,607 174,826 Less accumulated depreciation (73,291) (65,710) --------- --------- 111,316 109,116 Other assets 5,348 6,132 --------- --------- $ 546,342 $ 433,811 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 11,051 $ 8,936 Accrued merger consideration -- 7,615 Other accrued expenses 32,383 27,145 --------- --------- Total current liabilities 43,434 43,696 Shareholders' Equity: Common stock, par value $.01; authorized 50,000,000 shares 295 268 Additional paid-in capital 691,680 604,013 Accumulated deficit (189,067) (214,166) --------- --------- Total shareholders' equity 502,908 390,115 --------- --------- $ 546,342 $ 433,811 ========= =========
The accompanying notes are an integral part of these financial statements. -3- 4 GENETICS INSTITUTE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited - in thousands except per share data)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1996 1995 1996 1995 ------- ------- -------- ------- REVENUE Product sales $32,979 $22,631 $ 62,339 $46,509 Royalties 17,503 13,396 43,528 23,959 Collaborative research and development 14,032 9,883 30,495 27,213 ------- ------- -------- ------- Total revenue 64,514 45,910 136,362 97,681 OPERATING EXPENSES Cost of sales 12,639 13,416 24,400 26,880 Research and development 38,051 31,621 69,657 58,545 General and administrative 7,497 5,068 14,284 9,468 ------- ------- -------- ------- Total operating expenses 58,187 50,105 108,341 94,893 ------- ------- -------- ------- INCOME (LOSS) FROM OPERATIONS 6,327 (4,195) 28,021 2,788 OTHER INCOME (EXPENSE), NET Investment income 3,303 4,506 7,678 8,683 (Loss) income of affiliates, net (1,948) 4,926 (4,293) 2,171 Other, net (382) 203 (1,084) (2,503) ------- ------- -------- ------- Total other income (expense), net 973 9,635 2,301 8,351 ------- ------- -------- ------- INCOME BEFORE INCOME TAXES 7,300 5,440 30,322 11,139 Provision for taxes on income 216 270 910 270 ------- ------- -------- ------- NET INCOME $ 7,084 $ 5,170 $ 29,412 $10,869 ======= ======= ======== ======= NET INCOME PER COMMON SHARE $ .23 $ .19 $ .96 $ .41 ======= ======= ======== ======= Average shares outstanding 31,221 26,696 30,710 26,662 ------- ------- -------- -------
The accompanying notes are an integral part of these financial statements. -4- 5 GENETICS INSTITUTE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited - in thousands)
Six Months Ended June 30, ----------------------------- 1996 1995 --------- --------- OPERATING ACTIVITIES Net income $ 29,412 $ 10,869 Adjustments to reconcile net income to net cash provided by (used in) operating activities - Depreciation and amortization 8,071 9,279 Equity in loss (income) of affiliates 4,293 (2,171) Compensation related to incentive plans 655 362 Changes in assets and liabilities (7,324) (20,224) --------- --------- Net cash provided by (used in) operating activities 35,107 (1,885) --------- --------- INVESTING ACTIVITIES Purchase of marketable securities (138,670) (108,359) Proceeds from sale/maturity of marketable securities 122,586 130,562 Payment of merger consideration (7,615) -- Additions to property, plant and equipment (15,296) (12,799) Investments in affiliates (4,293) (1,829) Other investing activities 775 (626) --------- --------- Net cash provided by (used in) investing activities (42,513) 6,949 --------- --------- FINANCING ACTIVITIES Proceeds from stock issuances 11,952 3,410 Proceeds from sale-leaseback transaction 5,035 -- Proceeds from exercise of warrants 75,087 -- --------- --------- Net cash provided by financing activities 92,074 3,410 --------- --------- Net increase in cash and cash equivalents 84,668 8,474 Cash and cash equivalents, beginning of period 33,164 21,793 --------- --------- Cash and cash equivalents, end of period $ 117,832 $ 30,267 ========= =========
The accompanying notes are an integral part of these financial statements. -5- 6 GENETICS INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) 1. Significant Accounting Policies Basis of Presentation: The accompanying consolidated condensed financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of these financial statements have been included. Such adjustments consisted only of normal recurring items. Interim results are not necessarily indicative of results for a full year. Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. The consolidated condensed financial statements should be read in conjunction with the Company's audited consolidated financial statements and related footnotes for the year ended December 31, 1995. The consolidated condensed financial statements include all accounts of Genetics Institute, Inc. and its wholly owned subsidiaries. Investments in 50% owned joint ventures are accounted for on the equity method. Under the equity method, investments in such affiliated joint ventures are recorded at cost and adjusted by the Company's share of the income and losses of and the investments in and distributions from such affiliates. All significant intercompany balances and transactions have been eliminated in consolidation. 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. 2. Transactions with American Home Products Corporation On September 19, 1991, the Company and American Home Products Corporation ("AHP") entered into an Agreement and Plan of Merger (the "AHP Transaction") that was consummated on January 16, 1992 through which AHP acquired a 60% interest in the Company. In connection with the AHP Transaction, the Company issued 9,466,709 new shares of Common Stock to AHP for an aggregate purchase price of approximately $300.0 million and, for shares of Common Stock owned, the Company's shareholders received a combination of cash and Depositary Shares subject to a call option. Under the terms of the call option, AHP has the right but not the obligation, to purchase the outstanding Depositary Shares that it does not own, in whole but not in part, at any time until December 31, 1996, at a call price of $83.16 per share for the period July 1, 1996 to September 30, 1996 and $85.00 per share for the period October 1, 1996 to December 31, 1996. Independent of its right to call the Depositary Shares, AHP is permitted to acquire additional Depositary Shares through open market purchases or privately negotiated purchases, provided that during the term of the call option its aggregate holdings do not exceed 75% of the Company's outstanding equity, subject to certain exceptions. AHP's ownership position decreased from approximately 62% at March 31, 1996 to approximately 60% as of June 30, 1996, due primarily to the issuance of Depositary Shares in connection with the exercise of warrants discussed in Note 7. The Company is engaged in collaborations with AHP in the development and commercialization of recombinant human interleukin-twelve (rhIL-12), an immune system modulatory protein, and the commercialization of Neumega[Registered Trademark] recombinant human interleukin-eleven (rhIL-11), a blood cell growth factor. A collaboration with AHP in the area of cellular adhesion discovery research ended as scheduled during the second quarter of 1995. Collaborative research and development revenue includes $0.9 million and $5.7 million, respectively, for the three and six month periods ended June 30, 1996 and $4.8 million and $7.9 million, respectively, for the three and six month periods ended June 30, 1995, relating to these collaborations with AHP. (Loss) income of affiliates, net, includes losses of $0.5 million and $1.7 million for the three and six month periods ended June 30, 1996 and $0.9 million and $1.5 million, respectively, for the three and six month periods ended June 30, 1995, -6- 7 GENETICS INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) relating to these collaborations with AHP. 3. Investments in Debt Securities The Company's investment portfolio of debt securities consists of cash equivalents classified as held-to-maturity and marketable securities classified as available-for-sale. The fair value of cash equivalents approximated the amortized cost of $117.2 million at June 30, 1996. Aggregate fair value, amortized cost and average maturity for marketable securities held at June 30, 1996 and December 31, 1995 are presented below. The average maturities presented below include estimates of the effective life for certain securities whose actual maturities will differ from contractual maturities because the borrowers have the right to call or prepay the obligations without call or prepayment penalties. Amortized Gross Unrealized Fair Cost Holding Gains (Losses) Value ---- ---------------------- -----
June 30, 1996 (In thousands) U.S. Government and Agency securities (average maturity of 2.9 years) $105,993 $ 683 $ (939) $105,737 Corporate and other debt securities (average maturity of 2.5 years) 123,988 394 (679) 123,703 -------- ------ ------- -------- $229,981 $1,077 $(1,618) $229,440 ======== ====== ======= ======== December 31, 1995 (In thousands) U.S. Government and Agency securities (average maturity of 3.5 years) $138,498 $2,823 $ (266) $141,055 Corporate and other debt securities (average maturity of 2.6 years) 75,400 1,292 (77) 76,615 -------- ------ ------- -------- $213,898 $4,115 $ (343) $217,670 ======== ====== ======= ========
The net unrealized holding loss on marketable securities at June 30, 1996 was $0.5 million. For the three and six month periods ended June 30, 1996, changes in net unrealized holding losses of $0.3 million and $4.3 million, respectively, are recorded in shareholders' equity. Gross realized gains and losses on sales of marketable securities for the quarter ended June 30, 1996 were $0.1 million and $1.2 million, respectively, and for the six months ended June 30, 1996 were $0.8 million and $1.5 million, respectively. Gross realized gains and losses on sales of marketable securities for the three and six month periods ended June 30, 1995 were not material to the results of operations. -7- 8 GENETICS INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) 4. (Loss) Income of Affiliates, Net (Loss) income of affiliates, net consists of the Company's share of benchmark payments or license fees received by the joint ventures, net of the Company's share of research and development expenses incurred by affiliated joint ventures (excluding any research and development or other services provided by the Company to the joint ventures). The Company's share of the joint ventures' revenues, which ranges from 50% to 62.5%, is generally distributed when received by the joint venture. The Company's share of the joint ventures' expenses, which ranges from 25% to 50%, is generally funded as incurred. Investments in such affiliates are accounted for on the equity method and amounted to $0.7 million and $1.6 million at June 30, 1996 and December 31, 1995, respectively. The more significant of these affiliates are GI-Yamanouchi, Inc. (GYJ), the GI-Yamanouchi European Partnership (GYEP) and IL-12 Partners. The GYJ and the GYEP are joint ventures with Yamanouchi Pharmaceutical Co., Ltd. (Yamanouchi) formed to develop and commercialize certain of the Company's product candidates in Japan and Europe, respectively. IL-12 Partners is a joint venture with AHP formed to develop and commercialize rhIL-12 worldwide except Japan. The Company's (loss) income of affiliates, net for the three and six months ended June 30, 1996 and 1995 was as follows (in thousands):
Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- 1996 1995 1996 1995 ------- ------ -------- ------- Combined net (loss) income of affiliated joint ventures $(6,301) $3,461 $(13,483) $(6,895) ======= ====== ======== ======= Company share of joint ventures' net (loss) income based on ownership percentage share of revenues and expenses (3,118) 2,275 (6,647) (2,644) Elimination of Company share of joint venture expenses attributable to services provided by or benchmarks paid to the Company 1,170 2,651 2,354 4,815 ------- ------ -------- ------- (Loss) income of affiliates, net $(1,948) $4,926 $ (4,293) $ 2,171 ======= ====== ======== =======
5. Contingencies The Company is involved in various legal proceedings including patent litigation of a nature considered normal to its business. Patent infringement proceedings are pending in Europe between Boehringer Mannheim GmbH ("Boehringer Mannheim"), the Company's licensee, and Ortho Pharmaceutical Co., Ltd. and certain Ortho affiliates, licensees of Kirin-Amgen, Inc.'s recombinant EPO patents, seeking injunctive relief and damages for infringement of their respective erythropoietin ("EPO") patent rights. The patents which are at issue in these suits have also been the subject of European Patent Office proceedings. In June 1994, a claim in the Company's European patent covering homogeneous EPO compositions (the '539 patent) was upheld by the Opposition Division of the European Patent Office. This decision has been appealed. In September 1994, an appellate hearing was held before the Board of Technical Appeals of the European Patent Office relating to oppositions to Kirin-Amgen's European recombinant EPO patent. The Board ruled that a modified version of certain of Kirin-Amgen's original claims in the patent filing was valid. However, it is uncertain whether Kirin- -8- 9 GENETICS INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) Amgen's claims cover the making, using or selling of Boehringer Mannheim's recombinant EPO. The Company can provide no assurance as to the outcome of these European proceedings. If as a result of these proceedings Boehringer Mannheim is forced to withdraw from any or all markets, the Company's future royalty income from Boehringer Mannheim, (which, excluding $11.4 million recognized in connection with the termination of an escrow arrangement, totaled $10.5 million for the six month period ended June 30, 1996), could be reduced or eliminated. In January 1996, the United States Patent and Trademark Office issued an order to show cause why it should not rule in a patent interference proceeding that the patents owned by Stryker Corporation ("Stryker") purporting to cover recombinant human bone morphogenetic protein-two ("rhBMP-2") do not interfere with the Company's rhBMP-2 patent estate, and that the Stryker patents are not invalid in view of certain prior art publications. In August 1992 and November 1994, respectively, the Company was issued U.S. patents covering rhBMP-7 currently in development by Stryker and Creative BioMolecules, Inc. ("Creative") under the name OP-1. Stryker also has pending patent applications directed to rhBMP-7. The Company can provide no assurance as to the outcome of any future interference or other legal proceeding with respect to these patents and patent applications. In July 1996, the Company, Stryker and Creative entered a cross-license agreement. Under this agreement, which covers both issued patents and pending patent applications, the Company and Yamanouchi Pharmaceutical Co., Ltd., its partner in the worldwide development of the Company's bone growth factors, obtained, among other rights, exclusive rights to rhBMP-2 under both their own and the Stryker/Creative patents; and Stryker and Creative obtained, among other rights, exclusive rights to OP-1 under both their own and the Company's patents. The cross-license agreement becomes effective as of July 15, 1996, upon expiration of the waiting period under the Hart-Scott-Rodino Act. The Company can provide no assurance as to the timing or outcome of such regulatory review. In the opinion of the Company, although the outcome of any currently pending litigation cannot be predicted with certainty, the ultimate liability of the Company in connection with pending litigation will not have a material adverse effect on the Company's financial position but could be material to the Company's future results of operations in any one accounting period. 6. Acquisition of SciGenics, Inc. In the fourth quarter of 1995, the Company acquired 100% of the callable common stock of SciGenics, Inc. ("SciGenics"). The acquisition was made pursuant to the terms of a cash tender offer in which the Company acquired approximately 67% of the callable common stock of SciGenics at $14.00 per share. The remaining equity interest in SciGenics was acquired upon the merger of a wholly owned subsidiary of the Company into SciGenics, with SciGenics being the surviving corporation. In the merger, each share of callable common stock of SciGenics not held by the Company was converted into the right to receive $14.00 in cash for a total purchase price of $29.3 million for the 2,090,909 shares acquired. As of December 31, 1995, SciGenics shareholders holding 543,908 shares indicated their intention to demand an appraisal of the fair value of their shares under Delaware law and the Company accrued merger consideration of $14.00 per share for those shares. During the first quarter of 1996, certain of these shareholders elected to forego the appraisal process and tendered their shares. On April 7, 1996, all appraisal rights expired without any appraisal actions being filed and as of June 30, 1996, substantially all SciGenics shares have been tendered for $14.00 per share. -9- 10 GENETICS INSTITUTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) 7. Warrants Approximately 2.1 million warrants for the purchase of the Company's Common Stock at an exercise price of $35.92 per share were outstanding at March 31, 1996. Substantially all of the warrants were exercised on or before May 31, 1996, the expiration date of the warrants, providing the Company with $75.1 million of proceeds. Upon exercise, each warrant was converted into six-tenths of a Depositary Share and $20.00 in cash, which represented the same consideration received by shareholders in the AHP Transaction. As a result of the warrant exercises, the Company issued 836,149 shares of Common Stock to AHP and 1,254,224 Depositary Shares to warrant holders which decreased AHP's total ownership position from approximately 62% at March 31, 1996 to approximately 60% at June 30, 1996. -10- 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Genetics Institute, Inc. and subsidiaries (the "Company") are principally engaged in discovering, developing and commercializing biopharmaceutical products using recombinant DNA and related technologies. The Company and American Home Products Corporation ("AHP") entered into a transaction (the "AHP Transaction") through which AHP acquired a majority interest in the Company effective January 16, 1992 (see Note 2 of Notes to Consolidated Condensed Financial Statements). Under the terms of a call option, AHP has the right, but not the obligation, to purchase the outstanding Depositary Shares that it does not own, in whole but not in part, at any time until December 31, 1996, at a call price of $83.16 per share for the period July 1, 1996 to September 30, 1996 and $85.00 per share for the period October 1, 1996 to December 31, 1996 (the "Call Option"). RESULTS OF OPERATIONS Three and Six Months Ended June 30, 1996 and 1995. The Company reported net income of $7.1 million for the second quarter ended June 30, 1996 and net income of $29.4 million for the six months ended June 30, 1996, compared with net income of $5.2 million for the second quarter ended June 30, 1995 and net income of $10.9 million for the six months ended June 30, 1995. The Company's revenues include product sales from the supply of recombinant human antihemophilic factor concentrate ("rhAHF") to Baxter Healthcare Corporation ("Baxter"), royalties on sales of products by licensees, and collaborative research and development revenue for activities conducted under agreements with the Company's joint venture partners and certain licensees. Revenue for the second quarter of 1996 totaled $64.5 million, an increase of 41%, or $18.6 million, from the second quarter of 1995. Six month revenue of $136.4 million increased 40% from prior year levels. Product sales increased 46%, or $10.3 million, to $33.0 million for the second quarter of 1996 and increased 34% for the first six months of 1996, due primarily to increases in the unit volume of rhAHF shipped to Baxter. Royalties increased 31%, or $4.1 million, to $17.5 million for the second quarter of 1996 primarily due to increases in the volume of Baxter's sales of Recombinate[Trademark] Antihemophilic Factor (Recombinant) and in the volume of licensees' sales of erythropoietin ("EPO"). Royalties for the first half of 1996 increased 82% to $43.5 million. In January 1996, the company expanded and restructured its license agreement with Boehringer Mannheim GmbH ("Boehringer Mannheim") for EPO. Under the amended agreement, the Company licensed Boehringer Mannheim to sell EPO in additional countries in the Asia-Pacific area and Boehringer Mannheim agreed to pay the Company license fees and future benchmark payments for the expanded territories. The restructuring also provides Boehringer Mannheim with greater financial responsibility for and control over the prosecution and settlement of patent suits against third party infringers, and Boehringer Mannheim agreed to release from escrow $8.0 million in royalties it previously withheld from the Company to finance such litigation expenses, and to cease to withhold any additional royalties for this purpose. The restructuring established a new royalty rate applicable to Boehringer Mannheim's original territories that cannot be decreased by any future EPO patent settlement or for any other reason. Royalties in the first quarter of 1996 included $11.4 million (including the $8.0 million released from escrow) relating to the termination of the escrow arrangement. Excluding this amount, royalties for the first half of 1996 increased 34%, or $8.2 million, to $32.1 million, primarily due to the increases in the volume of licensees' sales discussed above. Effective April 1, 1996, the Japanese government reduced the price of EPO products in Japan by 15.5% which may reduce the growth rate of EPO royalty income from Japan in the near-term. Collaborative research and development revenue increased 42%, or $4.1 million, to $14.0 million for the second quarter of 1996 and increased 12% for the first six months of 1996. Collaborative research and development revenue includes payments of $12.5 million in both the second quarter of 1996 and in -11- 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS the first quarter of 1995 relating to an agreement between the Company and Sofamor Danek Group, Inc. to commercialize recombinant human bone morphogenetic protein-two ("rhBMP-2") in North America for use in certain surgical procedures involving the spine. Collaborative research and development revenue for the first half of 1996 includes license fees and benchmark payments totaling $10.0 million, recorded in the first quarter of 1996, relating to the agreement with Boehringer Mannheim discussed above. Collaborative research and development revenue includes $0.9 million and $4.8 million for the second quarters of 1996 and 1995, respectively, and $5.7 million and $7.9 million for the first six months of 1996 and 1995, respectively, relating to collaborations with AHP in the development and commercialization of recombinant human interleukin-twelve ("rhIL-12"), an immune system modulatory protein, and in 1995 in the commercialization of Neumega[Registered Trademark] recombinant human interleukin-eleven ("rhIL-11") and in the area of cellular adhesion discovery research. Cost of sales includes royalties payable to third parties upon the receipt of certain royalty revenues from licensees. Such third party royalties totaled $2.3 million and $1.4 million in the second quarters of 1996 and 1995, respectively. Cost of sales excluding such third party royalties, as a percentage of product sales, was 31% and 53% for the second quarters of 1996 and 1995, respectively, and 31% and 52% for the first six months of 1996 and 1995, respectively. The significant improvement in gross margin in 1996 was primarily due to lower unit manufacturing costs. Research and development expense increased 20% to $38.1 million in the second quarter of 1996 as compared with the second quarter of 1995 and increased 19% for the first half of 1996, primarily due to the expansion of certain discovery research collaborations and increases in the cost of the Company's genomics discovery research program. General and administrative expenses increased 48% in the second quarter of 1996 to $7.5 million and increased 51% in the first half of 1996, primarily due to expansion of the Company's commercial operations function and to an increase in market development and other activities preparatory to the commercialization of BeneFIX[Trademark] recombinant Factor IX ("rFIX"). General and administrative expenses for 1996 are expected to continue to exceed those recorded in 1995 as the Company puts in place the commercial infrastructure necessary to market and sell BeneFIX[Trademark] rFIX in North America. Investment income decreased 27% in the second quarter and 12% in the first half of 1996 due to lower average balances of marketable securities and lower rates of total return in 1996 than in the corresponding periods in 1995. Losses of affiliates, net, of $1.9 million and $4.3 million were recorded in the three and six months ended June 30, 1996, respectively, and income of affiliates, net, of $4.9 million and $2.2 million were recorded in the three and six months ended June 30, 1995, respectively. Certain of the Company's product development activities in Japan are being conducted through GI-Yamanouchi, Inc. (the "GYJ"), a joint venture with Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi"). In the second quarter of 1995, the GYJ assigned its rights to the development and commercialization of rhBMP-2 in Japan to Yamanouchi and the Company recognized income of affiliates of $7.3 million in connection with this transaction. In addition, the Company is conducting certain rhIL-12 product development activities through IL-12 Partners, a joint venture with AHP. (Loss) income of affiliates, net includes $0.5 million and $0.9 million for the second quarter of 1996 and 1995, respectively, and $1.7 million and $1.5 -12- 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS million for the first six months of 1996 and 1995, respectively, relating to the rhIL-12 collaboration with AHP. LEGAL PROCEEDINGS The Company is engaged in various legal proceedings including patent litigation of a nature considered normal to its business. See Note 5 of the Notes to Consolidated Condensed Financial Statements which is incorporated by reference herein. LIQUIDITY AND CAPITAL RESOURCES Cash and marketable securities (recorded at fair market value) totaled $347.3 million at June 30, 1996, an increase of $96.4 million from December 31, 1995. For the first half of 1996, $35.1 million in cash was provided by operating activities. In addition, the Company received proceeds of $75.1 million from the exercise of warrants, $12.0 million from the issuance of stock (primarily from the exercise of stock options), and $5.0 million from the sale-leaseback of equipment. These sources of cash were offset primarily by investments of $15.3 million in plant and equipment and the payment of merger consideration of $7.6 million to complete the acquisition of SciGenics, Inc. In connection with the Company's acquisition of SciGenics, Inc. in the fourth quarter of 1995, the Company accrued merger consideration for shares held by shareholders who had indicated an intention to exercise appraisal rights. During the first quarter of 1996, certain of these shareholders elected to forego the appraisal process and tendered their shares for $14.00 per share, or $3.3 million in the aggregate. On April 7, 1996, all appraisal rights expired without any appraisal actions being filed and, during the second quarter of 1996, substantially all the remaining SciGenics shares were tendered for $14.00 per share, or $4.3 million. The Company expects that its available cash and marketable securities, together with operating revenues, investment income and lease and debt financing arrangements, will be sufficient to finance its working capital and capital requirements for the foreseeable future. Over the next several years, the Company's working capital and capital requirements will be subject to change depending upon numerous factors including the level of capital expenditures, changes in the amount of expenditures committed to self-funded research and development programs, results of research and development activities, competitive and technological developments, the levels of resources which the Company devotes to the expansion of its clinical testing, manufacturing and marketing activities and the timing and cost of obtaining required regulatory approvals for new products. FINANCIAL OUTLOOK The Company expects to be profitable for the second half of 1996 based on the current outlook for existing core business arrangements. However, the level of the Company's profitability for the second half of 1996 and thereafter depends upon a number of factors including: the volume and cost of bulk rhAHF concentrate manufactured by the Company and sold to Baxter; the Company's ability to -13- 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS manufacture sufficient quantities of bulk rhAHF concentrate to meet Baxter's requirements; the volume and price of Baxter's sales of Recombinate[Trademark] Antihemophilic Factor (Recombinant); licensees' sales of EPO and the impact of infringement litigation on EPO royalty income (as discussed in "Legal Proceedings" above); the success of the Company's development collaborations with others (including AHP) and the achievement of development benchmarks under existing collaborative arrangements; and the ability of the Company to consummate new collaborative agreements. For years after 1996, profitability will also depend on the successful completion of clinical trials, subsequent regulatory approvals for commercialization of biopharmaceuticals under development, including BeneFIX[Trademark] rFIX and Nuemega[Registered Trademark] rhIL-11, and the timing of any such regulatory approvals. Future sales increases for Baxter's Recombinate[Trademark] and licensees' EPO are primarily dependent on further penetration of existing markets, the effects of competitive products and changes in reimbursement rates or the basis of reimbursement by governmental agencies. Future sales increases for Baxter's Recombinate[Trademark] may also be dependent on obtaining regulatory approvals for changes in and improvements to the Company's rhAHF manufacturing processes. Increases in licensees' sales of EPO are also dependent on product approvals in and penetration of new markets and the timing and nature of additional indications for which the product may be approved. In addition, international sales of Baxter's Recombinate[Trademark] and licensees' sales of EPO will continue to be subject to changes in foreign currency exchange rates. Adverse developments with respect to these matters could have a material adverse effect on the Company's results of operations. In addition, the Company's consolidated results of operations have fluctuated from period to period and may continue to fluctuate as a result of these factors. Significant volatility of market valuations has been associated with the business and operations of biopharmaceutical companies. Developments involving the Company or its competitors concerning technological innovations, new commercial products, results of clinical trials, patents, proprietary rights and related infringement disputes, results of litigation, and the expense and time associated with obtaining requisite government approvals may have a significant impact on the Company's business and on its market valuation. As of June 30, 1996, four of the Company's proprietary product candidates were in human clinical trials. Phase I and phase II data are preliminary measurements of a product's safety and efficacy and do not necessarily assure positive phase III data or ultimate regulatory approval for commercial sale. The Company's market valuation could be subject to volatility based upon the outcome of clinical trials and as investors interpret the results of the Company's current and future clinical trials. In addition, the Call Option held by AHP, which expires on December 31, 1996, may have an impact on the volatility of the Company's market valuation. -14- 15 Part II - Other Information --------------------------- Item 1. Legal Proceedings - ------- ----------------- See Note 5 of Notes to the Consolidated Condensed Financial Statements provided in Part I of this Quarterly Report on Form 10-Q, which Note is hereby incorporated by reference. Item 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- At the Company's Annual Meeting of Shareholders held on May 14, 1996, the following proposals were adopted by the vote specified below:
Withheld Proposal For Authority -------- --- --------- 1. Election of Class III Directors: J. Richard Crout, M.D. 20,471,997 376,352 Fred Hassan 25,160,479 156,056 Gabriel Schmergel 20,438,504 408,917
For Against Abstain --- ------- ------- 2. Ratification of Arthur Andersen LLP as the Company's independent accountant for the current fiscal year 25,189,511 23,211 12,813 In addition, James G. Andress will continue to serve as Class I directors until the Company's 1997 Annual Meeting and Anthony B. Evnin, Robert I. Levy, Ph.D. and Thomas P. Maniatis, Ph.D. will continue to serve as Class II directors until the Company's 1998 Annual Meeting. Effective July 9, 1996, Benno C. Schmidt retired from the Company's Board of Directors and Anthony B. Evnin was elected Chairman.
Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) The Exhibits filed as part of this Form 10-Q are listed on the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is incorporated herein by reference. (b) No reports were filed on Form 8-K during the quarter ended June 30, 1996. -15- 16 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GENETICS INSTITUTE, INC. ------------------------ (Registrant) Date: August 8, 1996 By: /s/ Garen G. Bohlin ---------------- ------------------------------------ Garen G. Bohlin, Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) -16- 17 EXHIBIT INDEX -------------
Exhibit No. Description Page - ----------- ----------- ---- 11 Computation of Earnings Per Share 18 27 Financial Data Schedule (EDGAR)
-17- EX-11 2 COMPUTATION OF PER SHARE EARNINGS 1 GENETICS INSTITUTE, INC. AND SUBSIDIARIES EXHIBIT 11 Computation of Earnings Per Share (unaudited - in thousands except per share amounts) Primary and fully diluted earnings per share are computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding. Common stock equivalents consist of stock options and warrants.
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1996 1995 1996 1995 ------- ------- ------- ------- Primary Earnings per Share - -------------------------- Weighted average number of shares outstanding 28,203 26,696 27,710 26,662 Shares deemed outstanding from the assumed exercise of stock options and warrants reduced by the number of shares purchased with proceeds 3,018 -- 3,000 -- ------- ------- ------- ------- Total 31,221 26,696 30,710 26,662 ------- ------- ------- ------- Net income applicable to common shares $ 7,084 $ 5,170 $29,412 $10,869 ------- ------- ------- ------- Primary earnings per common share $ .23 $ .19 $ .96 $ .41 ======= ======= ======= ======= Fully Diluted Earnings Per Share - -------------------------------- Weighted average number of shares outstanding 28,203 26,696 27,710 26,662 Shares deemed outstanding from the assumed exercise of stock options and warrants reduced by the number of shares purchased with proceeds 3,018 570 3,000 444 ------- ------- ------- ------- Total 31,221 27,266 30,710 27,106 ------- ------- ------- ------- Net income applicable to common shares $ 7,084 $ 5,170 $29,412 $10,869 ------- ------- ------- ------- Fully diluted earnings per common share $ .23 $ .19 $ .96 $ .40 ======= ======= ======= =======
-18- EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIADTED CONDENSED FINANCIAL STATEMENTS OF GENETICS INSTITUTE, INC. FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 1 117,832 229,440 50,669 0 25,421 429,678 184,607 73,291 546,342 43,434 0 295 0 0 502,613 546,342 62,339 136,362 24,400 24,400 81,640 0 0 30,322 910 0 0 0 0 29,412 .96 .96
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