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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File No. 0-19222

GENELABS TECHNOLOGIES, INC.

Registrant’s telephone number, including area code: (650) 369-9500

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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o

There were 86,342,443 shares of the Registrant’s Common Stock issued and outstanding on November 10, 2003.

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FORWARD LOOKING STATEMENTS

     This quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Any statements herein that are not statements of historical fact may be deemed to be forward-looking statements including, but not limited to, Genelabs’ estimates with respect to its cash resources and related matters. We may identify these statements by the use of words such as believe, expect, anticipate, intend, potential, strategy, plan, and similar expressions. These forward-looking statements involve known and unknown risks and uncertainties. Our actual results may differ materially from those set forth in these forward-looking statements as a result of a number of different factors, including those described under the caption “Risk Factors” and elsewhere in this Form 10-Q. These forward-looking statements include, among others, statements regarding:

	•		estimates relating to the timing and completion of our pending clinical trials;
	•		the results of our confirmatory clinical trial of Prestara™;
	•		potential FDA actions with respect to our NDA for Prestara, including whether or not the Prestara NDA ultimately will receive marketing approval;
	•		if the NDA for Prestara is ultimately approved, our plans and ability to successfully commercialize Prestara for systemic lupus erythematosus;
	•		our ability to secure European and Japanese partners for Prestara;
	•		our ability to obtain approval of Prestara in Europe;
	•		estimates relating to our cash resources and our ability to obtain additional funding for our business plans;
	•		our ability to complete the divestment of our diagnostics business on a timely basis, if at all;
	•		our ability to secure and defend intellectual property rights important to our business; and
	•		the potential success of our research efforts, including our ability to identify compounds for preclinical development.

     All statements in this Quarterly Report on Form 10-Q that are not historical are forward-looking statements and are subject to risks and uncertainties, including those set forth in the Risk Factors section, and actual results could differ materially from those expressed or implied in these statements. All forward-looking statements included in this Form 10-Q are made as of the date hereof. We assume no obligation to update any such forward-looking statement for subsequent events or any reason why actual results might differ, except as required by the Securities Act.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

See notes to condensed consolidated financial statements.

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GENELABS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)

See notes to condensed consolidated financial statements.

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GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(increase/(decrease) in cash and cash equivalents)
(in thousands)
(Unaudited)

See notes to condensed consolidated financial statements.

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GENELABS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2003

1.

Significant Accounting Policies

     Basis of Presentation

     Genelabs Technologies, Inc. is a biopharmaceutical company pioneering the discovery and development of novel pharmaceutical products to improve human health. We have built drug discovery and clinical development capabilities that can support various research and development projects. We are currently concentrating our capabilities on developing a late-stage product for lupus and discovering novel lead compounds that selectively inhibit replication of the hepatitis C virus.

     The accompanying unaudited condensed consolidated financial statements include the accounts of Genelabs Technologies, Inc. and its wholly owned subsidiaries, Accelerated Clinical Research Organization, Inc., Genelabs Diagnostic, Inc. and Genelabs Europe B.V. Genelabs Technologies, Inc. and its subsidiaries are collectively referred to as Genelabs or the Company. All intercompany accounts and transactions have been eliminated. The Company operates in one business segment, the discovery and development of pharmaceutical products. Genelabs accounts for its diagnostics operation, Genelabs Diagnostics Pte. Ltd., referred to as GLD, as a discontinued operation.

     These financial statements have been prepared in accordance with generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month and nine month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

     These unaudited condensed consolidated financial statements are meant to be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

     The Company’s consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business for the foreseeable future.

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. It is possible that actual amounts will differ from those estimates.

2.

Comprehensive Loss

     During the three month and nine month periods ended September 30, 2003 and 2002, the Company’s comprehensive loss was the same as the net loss.

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3.

Stock-Based Compensation

     The Company grants employee stock options at an exercise price equal to the fair market value of the shares at the date of grant. The Company accounts for employee stock-based compensation using the intrinsic value method and, accordingly, recognizes no compensation expense for stock options granted to employees. The following table presents information showing the effects to the reported net loss and net loss per share if Genelabs had accounted for employee stock-based compensation using the fair value method (in thousands, except per share amounts):

4.

Restructuring Charges

     In February 2003, Genelabs reduced its workforce by approximately 20%, or 20 employees. The workforce reductions occurred in the drug discovery research and general and administrative areas. Genelabs did not make any reductions to its drug development staff working on its investigational drug Prestara™ for systemic lupus erythematosus. Termination and other costs associated with the reduction in workforce totaled $0.3 million, all of which had been paid out as of September 30, 2003.

5.

Private Placement Financings

     On May 2, 2003, Genelabs completed the sale of 8.1 million shares of its common stock at a price of $1.00 per share for gross proceeds of $8.1 million. In connection with the sale, Genelabs also issued warrants to purchase an additional 2.43 million shares of Genelabs common stock at an exercise price of $1.50 per share. Net proceeds from the placement were approximately $7.2 million.

     On August 1, 2003, Genelabs completed the sale of 1,666,667 shares of its common stock at a price of $1.595 per share for gross proceeds of $2,658,333. In connection with the sale, Genelabs also issued warrants to purchase an additional 1,666,667 shares of Genelabs common stock at an exercise price of $1.50 per share. Net proceeds from the placement were approximately $2.4 million.

6.

Subsequent Event

     On October 22, 2003, Genelabs completed the sale of 23 million shares of its common stock in a public offering at a price of $1.37 per share for gross proceeds of approximately $31.5 million. Net proceeds from the offering are estimated to be approximately $29.3 million. In connection with the

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offering, Genelabs also issued to the underwriter warrants to purchase 460,000 shares of our common stock at an exercise price of $1.42 per share.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     Genelabs Technologies, Inc., referred to as Genelabs or the Company, is a biopharmaceutical company pioneering the discovery and development of novel pharmaceutical products to improve human health. Genelabs is pursuing regulatory approval of Prestara™, our investigational drug for women with systemic lupus erythematosus, a disease for which no new drug has been approved in the past 40 years and for which current therapies are not adequate. We are also pursuing the discovery of novel compounds that selectively inhibit the replication of the hepatitis C virus, referred to as HCV. We believe that these high-risk, potentially high reward programs focus our research and development expertise in areas where we have the opportunity to be scientific pioneers and, if successful, we believe that these programs will yield products that will address diseases for which current therapies are inadequate. At the same time, our established capabilities can be utilized as we diversify our research and development programs.

     We have built drug discovery and clinical development capabilities that can support various research and development projects. We are currently concentrating our capabilities on:

	•		developing our late-stage product for lupus, Prestara™; and
	•		discovering novel lead compounds that selectively inhibit the replication of HCV.

Results of Operations – Third Quarter 2003 compared to Third Quarter 2002

     Summary

     Genelabs’ net loss was $4.8 million for the three months ended September 30, 2003 compared to a net loss of $4.3 million for the three months ended September 30, 2002. The increased net loss is mainly attributable to higher research and development expenses due to additional costs incurred for the development of Prestara for women with lupus.

     Contract Revenue

     We recorded contract revenue of $0.7 million in the third quarter of 2003, $0.4 million of which represents the recognition into income of a previously received up-front license payment from Watson Pharmaceuticals, Inc., referred to as Watson. This up-front license payment from Watson is being deferred and recognized as revenue over the term Genelabs’ management estimates that we have significant obligations to Watson, which extends to the submission of a complete response to the approvable letter from the U.S. Food and Drug Administration, or FDA, and the FDA reaching a final decision regarding approval of our New Drug Application, or NDA. The date upon which we may receive a final FDA decision on approval will vary based on, among other things, the time period necessary for the enrollment of a sufficient number of patients in the clinical trial, the results of the trial, and the length of time the FDA will take to review the data submitted after the conclusion of the trial. During the third quarter of 2003, based on updated information on the enrollment in our clinical trial measuring the bone mineral density of women with lupus, Genelabs revised its estimate of when it believes that an FDA decision on the NDA may be delivered from December 2004 to March 2005. Accordingly, beginning in the third quarter of 2003, the up-front payment from Watson is being amortized into revenue on a straight line-basis through March 2005.

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     Our contract revenue of $0.7 million in the third quarter 2003 compares to $0.8 million for the third quarter of 2002. The $0.1 million decrease in contract revenue in the third quarter of 2003 compared to the third quarter of 2002 was due to our change in estimate of the amortization period for the up-front payment received from Watson from a period ending December 2004 to a period ending March 2005.

     Research and Development Expenses

     Research and development expenses were $4.6 million and $3.7 million for the third quarter 2003 and 2002, respectively. Research and development expenses include related salaries and benefits, clinical trial and related clinical manufacturing costs, contract and outside service fees, supplies and chemicals used in laboratories and allocated facilities and overhead costs. Research and development costs are expensed as incurred. There are three major categories of costs for which management separately tracks its research and development, or R&D, activities, which are represented in the table below (in thousands):

     Drug development costs for Prestara, our investigational drug for lupus, were $1.2 million higher in the third quarter of 2003 compared to the third quarter of 2002. The significant increase in costs in the third quarter of 2003 compared to the third quarter of 2002 is due to the costs of conducting the clinical trial measuring the effect of Prestara on the bone mineral density of women with lupus and also costs related to the manufacturing of Prestara. During the third quarter of 2002, the primary emphasis of our drug development team was working with the FDA toward the goal of receiving an approvable letter following our receipt of a not-approvable letter in 2001. We subsequently received an approvable letter in August 2002, stating that approval of Prestara is contingent upon, among other things, the successful completion of an additional clinical trial providing sufficient evidence to confirm the positive effect on bone mineral density that was observed in our previous phase III clinical trial. We thereafter designed and initiated the current clinical trial measuring the effect of Prestara on the bone mineral density of women with lupus. Drug discovery costs were lower by $0.3 million in the third quarter of 2003 compared to the third quarter of 2002 primarily as a result of a reduction in the drug discovery workforce that was implemented in February 2003. In the third quarter of 2003, the majority of the drug discovery costs incurred were for our hepatitis C program, through which we are attempting to discover a new treatment for infection with HCV. In the third quarter of 2002, the majority of the drug discovery costs incurred were related to our DNA-binding program, specifically directed toward discovery of new antibacterials and antifungals. Support costs and other R&D, which is primarily comprised of costs necessary to maintain an R&D facility, such as rent, support staff, maintenance and utilities, is not tracked by management to specific R&D projects. These costs were approximately the same in the third quarter of 2003 and the third quarter of 2002.

     Genelabs began work on its current drug development program, Prestara™ for systemic lupus erythematosus, in 1993 when Genelabs licensed exclusive rights to patents related to Prestara from Stanford University. To develop this drug candidate, we have built internal clinical development capabilities including clinical trial design, monitoring, analysis and reporting, regulatory affairs and quality control and assurance. Direct costs incurred to build these capabilities and advance Prestara through clinical trials to its current approvable status with the FDA through September 30, 2003 have

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been approximately $40 million. The timeframe for completion of the current clinical trial of Prestara is primarily dependent on the timeframe for outside physicians to find qualified patients willing to enroll in a clinical trial for our investigational drug. Because the protocol for this clinical trial requires a treatment duration of six months, we expect the trial to conclude six months after enrollment of the last patient into the trial by our clinical investigators. We expect that analysis of the data and submission to the FDA will take approximately one quarter after completion of the clinical trial. However, unexpected results or incomplete patient records could require additional time. Subsequent to submission of the results to the FDA, the timing for action by the FDA is dependent on the FDA meeting their review time of six months or less as specified under the Prescription Drug User Fee Act, referred to as PDUFA. If the clinical trial results are positive and the FDA approves Prestara for lupus, Genelabs expects to continue work on this project, seeking approval in other countries and investigating other indications and potential uses of the investigational drug. If the clinical trial results are not positive and the FDA does not approve Prestara for lupus, Genelabs plans to evaluate the results and requirements for approval prior to making a decision on further development.

     Genelabs’ current drug discovery efforts have evolved from a program that started in 1995 and initially focused on DNA as a target for drug intervention. Since initiating this drug discovery program, Genelabs has built medicinal chemistry, combinatorial chemistry, computational modeling, molecular biology, assay development and high-throughput screening, drug metabolism, pharmacokinetics and toxicology capabilities. Genelabs has incurred direct drug discovery costs for these efforts through September 30, 2003 of approximately $32 million, which, in addition to building these drug discovery capabilities, includes the Company’s DNA-binding drug discovery efforts. These efforts generated lead compounds for fungal and bacterial infections as well as our preclinical candidate for Aspergillus, an often fatal systemic fungal infection, which we are presently seeking to partner, and our more recent efforts toward identifying a new drug to combat infection with HCV. Due to the nature of drug discovery research, we cannot reliably estimate the outcome of scientific experiments, many of which will impact the design and conduct of subsequent scientific experiments, and all of which provide additional information on both the direction of the research program and likelihood of its success. As such, the potential timing for key future events that may occur in our drug discovery programs cannot reliably be estimated and we cannot estimate whether a compound will advance to a later stage of development or when we may determine that a program is no longer viable for potentially producing a drug candidate. We also cannot reasonably predict the costs to reach these stages, and cannot predict whether any of our compounds will result in commercial products or lead to revenue for the Company. Management continually evaluates the status of our drug discovery research programs and expects to continue to devote resources toward our hepatitis C drug discovery program, while at the same time managing the level of expenditures to balance advancement of potential product candidates against Genelabs’ limited cash resources and the cash requirements for development of Prestara.

     General and Administrative Expenses

     General and administrative expenses were $1.1 million for the third quarter of 2003 compared to $1.3 million for the third quarter of 2002. Our general and administrative expenses consist primarily of personnel costs for executive management, finance, marketing, business development, human resources and legal departments, as well as professional expenses, such as legal and audit, and facilities costs such as rent and insurance. The decrease in general and administrative expenses in the third quarter of 2003 compared to the third quarter of 2002 was primarily due to lower personnel costs as a result of the reduction in workforce implemented in February 2003.

Results of Operations – First Nine Months 2003 compared to First Nine Months 2002

     Summary

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     Genelabs’ net loss was $13.3 million for the first nine months of 2003 compared to a net loss of $12.1 million for the first nine months of 2002. The increased net loss was primarily due to higher research and development expenses due to additional costs incurred for the development of Prestara for women with lupus and lower contract revenue from a previously received up-front payment that is being amortized into income.

     Contract Revenue

     Genelabs recorded contract revenue of $2.2 million for the first nine months of 2003, $1.5 million of which represents the recognition into income of a previously received up-front license payment from Watson. This up-front license payment from Watson is being deferred and recognized as revenue over the term Genelabs’ management estimates that we have significant obligations to Watson, which extends to the submission of a complete response to the approvable letter from the FDA, and the FDA reaching a final decision regarding approval of the NDA. The date upon which we may receive a final FDA decision on approval will vary based on, among other things, the time period necessary for the enrollment of a sufficient number of patients in the clinical trial, the results of the trial, and the length of time the FDA will take to review the data submitted after the conclusion of the trial. During the third quarter of 2003, based on updated information on the enrollment in our clinical trial measuring the bone mineral density of women with lupus, Genelabs revised its estimate of when it believes that an FDA decision on the NDA may be delivered from December 2004 to March 2005. Accordingly, beginning in the third quarter of 2003, the up-front payment from Watson is being amortized into revenue on a straight line-basis through March 2005.

     Contract revenue was $2.2 million in first nine months of 2003 compared to $2.8 million for the first nine months of 2002. The decrease in contract revenue in the first nine months of 2003 compared to the first nine months of 2002 was primarily due to our change in estimate of the amortization period for the up-front payment received from Watson to a period ending in March 2005.

     Research and Development Expenses

     Research and development expenses were $11.9 million for the first nine months of 2003 compared to $11.1 million for the first nine months of 2002. Research and development expenses include related salaries and benefits, clinical trial and related clinical manufacturing costs, contract and outside service fees, supplies and chemicals used in laboratories and allocated facilities and overhead costs. Research and development costs are expensed as incurred. There are three major categories of costs for which management separately tracks its research and development activities, which are represented in the table below (in thousands):

     Drug development costs for Prestara, an investigational drug for lupus, were $1.5 million higher in the first nine months of 2003 compared to the first nine months of 2002. The increase in costs in the first nine months of 2003 compared to the first nine months of 2002 is primarily due to the costs of conducting the clinical trial measuring the effect of Prestara on the bone mineral density of women with lupus and costs related to the manufacturing of Prestara. During the first nine months of 2002, the primary

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emphasis of our drug development team was working with the FDA toward the goal of receiving an approvable letter following our receipt of a not-approvable letter in 2001. We subsequently received an approvable letter in August 2002, stating that approval of Prestara is contingent upon, among other things, the successful completion of an additional clinical trial providing sufficient evidence to confirm the positive effect on bone mineral density that was observed in our previous phase III clinical trial. We thereafter designed and initiated the current clinical trial measuring the effect of Prestara on the bone mineral density of women with lupus. Drug discovery costs were lower by $0.3 million in the first nine months of 2003 compared to the first nine months of 2002 due to savings resulting from a reduction in the drug discovery workforce that was implemented in February 2003. In the first nine months of 2003 the majority of the drug discovery costs incurred were for our hepatitis C program, through which we are attempting to discover a new treatment for infection with HCV. In the first nine months of 2002, the majority of the drug discovery costs incurred were related to our DNA-binding program, specifically directed toward discovery of new antibacterials and antifungals. Support costs and other R&D, which is primarily comprised of costs necessary to maintain an R&D facility, such as rent, support staff, maintenance and utilities, is not tracked by management to specific R&D projects. These costs decreased $0.4 million in the first nine months of 2003 compared to the first nine months of 2002 due to a lower 2003 cost structure following the February 2003 reduction in workforce and a lower provision in 2003 for employee bonuses.

     General and Administrative Expenses

     General and administrative expenses were $4.0 million for the first nine months of 2003 compared to $4.2 million for the first nine months of 2002. Our general and administrative expenses consist primarily of personnel costs for executive management, finance, marketing, business development, human resources and legal departments, as well as professional expenses, such as legal and audit, and facilities costs such as rent and insurance. The decrease in general and administrative expenses in the first nine months of 2003 compared to the first nine months of 2002 was primarily due to lower personnel costs as a result of the reduction in workforce implemented in February 2003.

     Interest Income

     Interest income was lower in the first nine months of 2003 compared to the first nine months of 2002 due to lower cash and short-term investments balances and lower interest rates.

     Income from Discontinued Operation of Diagnostics Subsidiary

     We account for our subsidiary Genelabs Diagnostics Pte. Ltd., referred to as GLD, as a discontinued operation because we plan to sell this business. Income from the operations of GLD was higher in the first nine months of 2003 compared to the first nine months of 2002 because of increased sales revenue of GLD. We are presently in negotiations with potential purchasers of GLD and believe that GLD will be divested during 2003.

Liquidity and Capital Resources

     At September 30, 2003, the Company had cash, cash equivalents and short-term investment balances totaling $2.7 million compared to $6.6 million at December 31, 2002. The decrease in cash, cash equivalents and short-term investments during the first nine months of 2003 was primarily attributable to $13.7 million cash used in operations, partially offset by $9.9 million received from the sale of common stock. The cash used in operations funded our development of Prestara for lupus, the continued work on our HCV drug discovery program, and work toward the discovery of follow-on compounds to our antifungal preclinical drug candidate. On October 31, 2003, after giving effect to the

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public offering of common stock completed on October 22, 2003, Genelabs had cash, cash equivalents and short-term investment balances totaling approximately $30 million. Genelabs estimates that our current cash resources are adequate to provide liquidity at least through the end of 2004. However, we will require additional capital to carry out our business plans beyond the end of 2004 and expect to continue to rely on outside sources of financing to meet our capital needs. The Company is pursuing the sale of its diagnostics operation and also negotiating licenses for the European and Japanese rights to Prestar