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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 1996 Commission File Number 0-22962
HUMAN GENOME SCIENCES, INC.
(Exact name of registrant)
Delaware 22-3178468
(State of organization) (I.R.S. employer Identification number)
9410 Key West Avenue, Rockville, Md. 20850-3338
(address of principal executive offices and zip code )
(301) 309-8504
(Registrant's telephone Number)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The number of shares of the registrant's common stock outstanding on March 17,
1997 was 21,870,460
As of March 17, 1997, the aggregate market value of the common stock held by
non-affiliates of the registrant based on the closing price reported on the
National Association of Securities Dealers Automated Quotations System was
approximately $ 560,000,000.*
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Human Genome Sciences, Inc.'s Notice of Annual Stockholder's Meeting
and Proxy Statement, to be filed within 120 days after the end of the
registrant's fiscal year, are incorporated into Part III of this Annual Report.
* Excludes 6,628,616 shares of common stock deemed to be held by officers
and directors, and stockholders whose ownership exceeds five percent of the
shares outstanding at March 17, 1997. Exclusion of shares held by any
person should not be construed to indicate that such person possesses the
power, direct or indirect, to direct or cause the direction of the
management or policies of the registrant, or that such person is controlled
by or under common control with the registrant.
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains, in addition to historical
information, forward-looking statements that involve risks and uncertainty. The
Company's actual results could differ signficantly from the results discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" forward-looking statements, as
well as those discussed elsewhere in this Annual Report on Form 10-K.
GENERAL
Human Genome Sciences, Inc. (the "Company") is engaged in the
research and development of novel, proprietary pharmaceutical and diagnostic
products based on the discovery and understanding of the medical utility of
genes. Using automated, high throughput gene sequencing technology, the Company
has generated over 1,000,000 partial human gene sequences, which the Company
believes correspond to most of the expressed genes in the human body, and now
possesses one of the largest proprietary databases of human and microbial genes.
Based on this genomic database, the Company has created a broad base of product
opportunities. The Company's activities have progressed to focusing primarily on
research and development of therapeutic protein product candidates. In its
efforts to identify the most promising product candidates, the Company uses its
advanced proprietary bioinformatics system to analyze partial gene sequences and
identify the genes corresponding to such partial gene sequences and the proteins
encoded by such genes. As of February 15, 1997, the Company has isolated and
characterized several hundred full-length genes and expressed and purified more
than 100 potential therapeutic proteins. The Company is currently evaluating six
therapeutic protein product candidates in preclinical studies. In addition, the
Company is investigating for development with its collaborators proprietary
product opportunities in diagnostics and small molecule drugs based on human
genes, as well as vaccines, antibiotics, and diagnostics based on genes of
microorganisms.
The Company has a two-pronged commercialization strategy:
Product Development and Commercialization. The Company utilizes its
internal capabilities to research and develop recombinant therapeutic
proteins, which are proteins that can be produced on a large scale and used
as drugs to treat diseases. The Company generally intends to develop
potential products to a late preclinical or early clinical stage and then
to collaborate with pharmaceutical or biotechnology companies for further
development and commercialization. However, the Company may consider
developing certain potential products on its own.
Corporate Collaborations. The Company leverages its resources and
capabilities by establishing collaborations with pharmaceutical companies
for the development and commercialization of new products. The Company
believes that these arrangements will enable the Company to focus its
internal resources on a select number of promising product candidates while
still exploiting the broader product opportunities presented by its genomic
database.
The Company's initial collaboration was formed with SmithKline Beecham
Corporation ("SmithKline Beecham") in May 1993 (as amended, the "SB
Collaboration Agreements"). To date, the Company has received $125 million in
payments from SmithKline Beecham and is further entitled to product development
milestone payments and royalty payments. In June 1995, the Company and
SmithKline Beecham entered into a collaboration agreement with Takeda Chemical
Industries, Ltd. ("Takeda"), whereby Takeda was granted certain rights to
develop and commercialize products based on the Company's and SmithKline
Beecham's human gene technology ("Human Gene Technology") and an option to
develop and commercialize for Japan certain products developed by the Company.
In June 1996 the Company entered into a significant amendment (the "SB
Amendment") to the SB Collaboration Agreements which, among other things, allows
the Company to designate six therapeutic proteins at any one time for exclusive
development and commercialization (subject to certain restrictions and
co-development rights of its collaborators) and permits the Company and
SmithKline Beecham to enter into additional collaboration agreements in the
field covered by the SB Collaboration Agreements.
In June 1996 and July 1996, the Company and SmithKline Beecham entered into
collaboration agreements (the "New Collaboration Partner Agreements") with
Schering Corporation and Schering-Plough, Ltd. (collectively,
"Schering-Plough"), Synthelabo S.A. ("Synthelabo") and Merck KGaA ("Merck")
(collectively, the "New Collaboration Partners"). Under the terms of the New
Collaboration Partner Agreements, $87.5 million of license and research payments
is payable to the Company over five years, of which $17.5 million has been
received to date. In addition, the New Collaboration Partner Agreements provide
for milestone and royalty payments with respect to products developed under
these agreements. In exchange, the New Collaboration Partners received certain
rights to research, develop and commercialize therapeutic products based on the
Company's and SmithKline Beecham's Human Gene Technology. Schering-Plough and
SmithKline Beecham have been granted the right to develop jointly with the
Company certain of the therapeutic protein product candidates to which the
Company has retained the exclusive development rights.
The Company also has entered into other collaborative agreements in certain
areas where the Company has retained exclusive rights, including: the creation
of bacterial vaccines and immunotherapeutics and antimicrobial agents based on
genes of infectious agents; corn genomics; and gene therapy. Pursuant to the
terms of such collaboration agreements, an aggregate of $34.1 million of license
and research payments is payable to the Company over five years, of which $18.5
million has been received to date.
The Company also has formed a collaboration with The Institute of Genomic
Research ("TIGR"). Under the collaboration agreement, the Company has agreed to
provide TIGR with funding totaling $85 million over a ten-year period ending
September 2002, of which $44 million has been paid to date. In return, the
Company is entitled to exclusive intellectual property rights to TIGR's
research.
The Company vigorously pursues patents to protect its intellectual
property. As of February 15, 1997, the Company has five issued U.S. patents
covering full-length genes and has filed U.S. patent applications covering more
than 230 full-length genes and the proteins they encode. The Company makes
patent filings outside the United States as it deems appropriate. In addition,
the Company has filed patent applications with respect to more than 190,000
expressed sequence tags ("EST's") that represent over 1,000,000 partial gene
sequences, although there is substantial uncertainty as to the patentability of
partial gene sequences.
GENOME SCIENCE
Genome science refers to the characterization of the entire set of genetic
information of any organism, including humans. All cells contain DNA, a complex
material containing all of the genetic information necessary to govern a cell's
biological processes. In humans, approximately 3-5% of DNA consists of segments
called genes. The entire human genome is believed to contain at least 100,000
genes, of which only several thousand were known to have been identified at the
time the Company commenced its operations. Each gene consists of a linear
sequence of nucleotides, the basic structural units of DNA. Sequencing genes
involves determining the order of nucleotides in the gene, which permits
identification of the gene and the protein produced by the gene.
Genes act as the fundamental blueprint for all the physiological attributes
of an individual. Each gene contains the information required to produce
("express") a gene product, generally a protein. Proteins are expressed by a
gene according to a set of genetic instructions encoded in the DNA and are the
principal determinants of an organism's characteristics. A typical cell of
higher animals, such as humans, contains thousands of different proteins
essential to cellular structure, growth and function. The aberrant expression
within a cell by even a single gene can severely alter the cell's normal
function and result in a disease condition.
When a gene is expressed in a cell, the order of different nucleotides in
the gene is copied into RNA in a duplication process called transcription. A
splicing process within the cell then removes the introns, or non-coding gene
segments, from the transcript, thereby creating a messenger RNA ("mRNA"), which
contains only the exons, or coding regions, of the transcribed gene. The mRNA
then directs the production of a protein in a process called translation. The
order of nucleotides in the mRNA determines the protein that is made. By
isolating mRNA from cells, the Company's scientists can analyze primarily the
coding regions of a gene. However, mRNA is unstable and therefore is difficult
to analyze directly. To sequence the mRNA, it is preferable to copy or
transcribe the mRNA back into DNA. This process produces a DNA copy ("cDNA"),
which contains only the exons, or coding regions, of the expressed gene. This
process avoids examination of the majority of human DNA, as approximately 95-97%
of
the human genome consists of long stretches of nucleotides which do not code for
protein. By focusing on the mRNA, the Company examines the portion of the genome
which it believes to be the most important, because it is the portion which
makes protein.
Genes play an important role in the development of a variety of
therapeutics, diagnostics and other products and services. Proteins expressed by
genes are the targets of most drugs. As a result, the identification of proteins
can play an important role in the development of drugs and drug screens.
Proteins themselves can also be used as drugs. Two examples of protein drugs on
the market are erythropoietin, which stimulates the production of red blood
cells, and insulin, which regulates sugar metabolism. The identification of
genes that code for proteins that may be missing or defective can enable the
development of therapeutics for genetic diseases. In addition, identification of
genes that may predispose a person to a particular disease may enable the
development of diagnostic tests for the disease.
COMPANY TECHNOLOGY AND RESEARCH
The Human Gene Anatomy Project
The gene discovery activity of the Company has focused on its Human Gene
Anatomy Project. The goal of this project is to identify virtually all human
genes, to catalogue the relative abundance of expressed genes by organ, tissue
and cell of origin and to identify changes in gene expression associated with
the normal processes of development, differentiation and activation, as well as
abnormal changes in gene expression associated with the development of disease.
The Company believes its Human Gene Anatomy Project approach is substantially
different from most others engaged in genomic research, which seek either to
isolate a single copy of each gene, determine the sequence of large regions of
human chromosomes or determine the chromosome location of genes responsible for
inherited genetic diseases. While such approaches will provide information
valuable for the creation of some new gene-based pharmaceutical products, the
Company believes that its Human Gene Anatomy Project provides a much broader
opportunity to discover genes of potential medical use.
The first component of the Human Gene Anatomy Project is the isolation and
preparation of a set of cDNA libraries from most normal human tissues. A library
is comprised of cDNA derived from samples of mRNA expressed in a particular
tissue. The Company's libraries reflect the relative abundance of the various
mRNAs expressed in each tissue. As of February 15, 1997, the Company, SmithKline
Beecham and TIGR had prepared more than 600 such libraries, which include almost
all normal human tissues. The Company isolates and purifies individual cDNA
fragments from each library for sequence analysis to identify the structure and
possible function of genes. The Company sequences a portion of each cDNA, which
the Company believes is often sufficient to identify the expressed gene and
represent the best method for rapid gene discovery.
The Company's gene sequencing efforts now focus principally on comparing
genes expressed in normal and abnormal, developmental tissues. The Company uses
such information to analyze changes in gene expression associated with
development, differentiation and disease processes, such as tumors of the
prostate, breast, colon and ovary. Additional areas of planned research include
changes in gene expression that occur during the processes of atherosclerosis,
asthma, emphysema, restenosis, osteoporosis, psoriasis, arthritis and a number
of neurological diseases.
Development of Product Opportunities
The Company has created an advanced proprietary bioinformatics system to
facilitate the selection of genes with potential medical utility. Bioinformatics
refers to the use of computers to process, analyze, store and retrieve
biological information. The Company believes it has one of the largest sets of
human gene sequences, and its computer system enables it to access publicly
available gene sequences. The Company's high capacity computer system has been
designed for ease of use by research scientists, who readily access the system
through desktop computers. The Company's data is also available to scientists at
SmithKline Beecham, Takeda, and the New Collaboration Partners through
bioinformatics systems created by the Company and SmithKline Beecham. See " --
Collaborative Arrangements."
The Company believes that its proprietary bioinformatics system is an
important asset for the creation of gene-based product opportunities. The
Company's bioinformatics system has several capacities that facilitate
identification of genes with potential medical utility, including gene
similarity detection, sequence motif identification, sequence assembly and
differential gene expression analysis.
The Company's primary focus has progressed from identification of genes
having potential medical utility to the creation of proprietary product
opportunities. Specifically, the Company is now engaged in the identification
and development of product candidates, including the isolation and
characterization of full-length cDNAs, purification of proteins encoded by cDNAs
of interest, the creation of cell lines that express specific receptors of
interest, the mapping of genes of interest, the creation of polyclonal and
monoclonal antibodies, the testing of the effects of purified proteins in cell
and tissue-based in vitro assays and the study of the effects of purified
proteins in small laboratory animals.
Approximately 184 of the Company's 244 scientific staff at February 15,
1997 are devoted to these activities. As of February 15, 1997, the Company has
isolated and fully sequenced several hundred full-length cDNAs, purified more
than 100 potential therapeutic proteins and mapped more than 250 full-length
cDNAs to their chromosomal locations.
The Company's research and development efforts have been organized into the
following divisions:
Molecular Biology Division. The Company's Molecular Biology Division seeks to
identify and evaluate genes that may be useful for the creation of therapeutic
protein drugs, small molecule drugs, gene therapy, antisense treatments and
diagnostic products. The Molecular Biology Division contains the Protein
Therapeutics group and Exploratory Research group.
The Protein Therapeutics group identifies and evaluates genes which encode
proteins which may be useful as therapeutic protein drugs or for gene therapy or
antisense applications. The Protein Therapeutics group also identifies genes
that may be useful for diagnostic purposes. When comparative analysis indicates
that a gene encodes a potential therapeutic protein, this group isolates the
corresponding full-length cDNA, determines its pattern of tissue expression and
its entire coding sequence.
The Company has commenced a program to identify from its database what it
believes to be full-length cDNAs likely to encode potential therapeutic
proteins. To date, the Company has identified what it believes to be over 4,000
secreted proteins. The Company is expressing and evaluating these proteins and
assessing their activity using in vitro and in vivo models covering different
therapeutic areas.
In addition to efforts relating to the identification of potential
therapeutic proteins, the Protein Therapeutics group characterizes genes and
proteins that may serve as targets for small molecule drug discovery,
principally to support the work of the Company's collaborators. The group
isolates full-length cDNAs, performs experiments to determine the tissue and
cell type in which the genes are expressed and determines the complete sequence
of the cDNA corresponding to each candidate gene. The group has identified
several hundred genes which encode proteins that may be targets for small
molecule drug screening. Full-length cDNAs corresponding to many of these genes
have been isolated and fully sequenced, and tissue distribution and chromosomal
location of most of these full-length genes have been determined.
The efforts of the Exploratory Research group are focused on development
and implementation of new technologies useful in the identification of
medically-relevant gene candidates. Responsibilities of this group include new
methodologies for cDNA library construction, chromosome mapping, optimization of
full-length gene cloning and development of new methods for gene analysis. This
group is also currently responsible for efforts in microbiology, including
construction and analysis of microbial genome libraries and selection of
candidate genes which may be useful in vaccine and immunotherapeutic programs.
Protein Expression Division. The purpose of the Protein Expression Division
is to provide proteins in a form suitable for in vitro and in vivo testing. The
Protein Expression Division uses bacterial, insect and mammalian expression
systems that have been engineered to express abundant amounts of proteins. The
Company's therapeutic protein production facilities include 15 bioreactors
ranging in capacity from 2 to 100 liters. The Protein Expression Division also
purifies potential therapeutic proteins, enzymes that may be useful in the
discovery of small molecule drugs and bacterial proteins that may be useful as
vaccine components. This division will also oversee the contract
production of cGMP materials by third parties for preclinical qualification and
Phase I clinical studies and will also oversee the construction, and be
responsible for the operation, of the Company's proposed pilot scale production
and process development facility.
Through February 15, 1997 the Company has produced and purified more than
100 novel human proteins in amounts sufficient to test for activity. In some
cases, the Company also provides highly purified proteins to its collaborators
for further analysis.
Cell Biology Division. The Cell Biology Division determines the activities
of purified therapeutic protein candidates on cells in tissue culture. This
division is also developing high throughput screens to assess the activity of
the Company's therapeutic protein candidates. This division uses over 75 in
vitro assays to evaluate biological activities of therapeutic protein
candidates, many of which are used to determine whether such candidates have
biological activities relevant to serious unmet medical needs. Examples of such
in vitro tests include assays that detect proteins that have an anti-viral
effect, proteins that are capable of prolonging the life of neurons and of
promoting neural cell growth, proteins that have anti-cancer activity and
proteins that affect the growth and differentiation of hematopoietic cells.
Pharmacology Division. The Pharmacology Division tests for in vitro and in
vivo activity of therapeutic protein candidates and is also responsible for
safety studies. The division is responsible for preclinical animal testing of
the Company's therapeutic protein product candidates and employs a number of
standard assays for determining biological function. The division has also
developed several specialized assays to test biological function of specific
therapeutic proteins. The Company has recently expanded this division to
increase its efforts to develop therapeutic protein product candidates, and the
Company expects to continue to expand the division as necessary to support
preclinical and clinical development. The Company intends to establish a
clinical management team to manage and oversee clinical trials. The Company
intends to utilize contract research organizations to conduct toxicology,
pathology and clinical trials on the Company's lead therapeutic protein product
candidates.
AREAS OF PRODUCT DEVELOPMENT
The Company believes that the genes it identifies have the potential to be
valuable for the development of a wide range of healthcare products in some or
all of the following areas:
Therapeutic Proteins. Therapeutic proteins are recombinant human proteins
that in native or modified form exert medically useful physiologic or
pharmacologic activity. By discovering and isolating genes, the Company may be
able to cause the genes that code for therapeutic proteins to express those
proteins. Therapeutic proteins may be useful for the treatment of diseases,
including inflammatory and autoimmune diseases, neurodegenerative diseases,
cardio-pulmonary diseases and other diseases caused by insufficient or defective
proteins resulting from a missing or defective gene. Therapeutic proteins
currently in clinical use include interferon, insulin, human growth hormone,
DNAse, G-CSF, GM-CSF and erythropoietin.
Currently, the Company is conducting pre-clinical development studies on
the following proteins:
Myeloid Progenitor Inhibitory Factor-1 (MPIF-1) Myeloid Progenitor Inhibitory
Factor-2 (MPIF-2) Keratinocyte Growth Factor-2 (KGF-2) Monocyte Attractant
Protein (MAP) Monocyte Colony Inhibition Factor-1 (MCIF-1) Fibroblast Growth
Factor-10 (FGF-10)
MPIF-1 and MPIF-2. MPIF-1 and MPIF-2 are members of the chemokine family.
The Company has shown that MPIF-1 and MPIF-2 in in vitro and in vivo studies
inhibit the differentiation and growth of bone marrow cells (myeloid progenitor
cells) responsible for maintenance of red and white blood cells. Myeloid
progenitor cells are destroyed by many forms of cancer chemotherapy resulting in
severe leukopenia, thrombocytopenia and anemia. By preventing the growth of
myeloid progenitor cells during aggressive cancer chemotherapy, it may be
possible to reduce the destruction of these cells allowing the more rapid
repopulation of red and white blood cells in the circulation. This, in turn, may
reduce the incidence of serious infection, anemia and coagulation disorders
associated with cancer chemotherapy.
KGF-2 and MAP. KGF-2 is a member of the Fibroblast Growth Factor
superfamily and MAP is a member of the chemokine family of proteins. The Company
has shown in in vivo tests that KGF-2, and in vitro tests that MAP, stimulate
the growth of epithelial cells. Both proteins have potential for use in the
treatment of topical (skin) ulcers, surgical and other wounds and burns and
possibly other conditions affecting epithelial cells. In addition, KGF-2 may be
useful in the treatment of mucositis (frequently a toxicity of cancer
chemotherapy) and/or acute renal failure.
MCIF-1. MCIF-1 is also a member of the chemokine family. The Company has
shown in in vivo tests that MCIF-1 inhibits the differentiation and growth of
macrophages and monocytes, white blood cells involved in inflammation. In in
vivo animal studies, MCIF-1 has been shown to reduce the severity of cartilage
and bone destruction associated with a model of arthritis, and to reduce the
severity of septic shock in a model of that disease.
FGF-10. FGF-10 is a member of the Fibroblast Growth Factor superfamily. The
Company has shown in in vivo studies that FGF-10 protects motor neurons from
destruction caused by experimental trauma. These models have been used to
identify agents which may have use in preventing or treating neurodegenerative
diseases such as Amyotrophic Lateral Sclerosis (Lou Gehrig's Disease).
As a result of the SB Amendment, in June 1996, the Company obtained the
right to designate six therapeutic proteins at any one time for exclusive
development and commercialization by the Company. Schering-Plough and SmithKline
Beecham have certain co-development rights with respect to these product
candidates. Subject to certain limitations, the Company has the right to
substitute new therapeutic proteins for therapeutic proteins that have been
licensed to third parties under procedures set forth in the SB Amendment, are
the subject of clinical trials or the right to which have been surrendered by
the Company. See " -- Collaborative Arrangements."
All of the Company's therapeutic protein product candidates are in the
early stages of preclinical testing. Accordingly, the results of preclinical
testing to date may not be indicative of results that will be obtained in
clinical trials. As further results of preclinical tests are received, the
Company may abandon particular projects which it might otherwise have considered
promising. Additionally, there can be no assurance that clinical trials as to
any particular product candidate, if commenced, will be successful.
Small Molecule Drugs. The Company believes that knowledge of a more
complete set of genes and the proteins they express will enable pharmaceutical
companies to design and screen pharmaceutical products in a more efficient
fashion by providing logical specific targets for discovering drugs. The
discovery of new drugs often involves screening a large family of synthetic and
natural products to determine their impact on proteins expressed by genes.
Increasingly, automated biochemical assays that test the ability of proteins to
bind to and modify the activity of purified proteins are used to test the
efficacy and selectivity (i.e., the ability to affect only the desired protein
targets and not other proteins expressed in the human body) of new drugs. The
undesired binding of a drug to other proteins not detected by a screening assay
can result in toxicity or other undesirable side effects. The Company believes
that the genes it discovers may contribute to screening assays by permitting
more complete sets of target proteins to be assembled for an assay. SmithKline
Beecham is currently using proteins expressed by genes identified by the Company
in a number of screening assays used to identify new drugs.
Diagnostics. The Company also believes that the genetic data obtained by it
could lead to the development of diagnostic tests for diseases. Such diagnostics
would likely be focused on four different applications. First, the comparative
analysis of genes expressed during the progression of tissues from normal to
fully diseased states may permit more accurate staging of diseases, thereby
facilitating the diagnosis and treatment of the disease. Proteins expressed by
"marker" genes associated with a specific disease can be a starting point in the
synthesis of antibodies, the principal components in many diagnostic systems.
Second, the Company's genetic data may enable the development of methods to
determine individual predisposition to disease. Third, tests could be designed
to detect inherited diseases in fetal cells. Fourth, the Company believes that
the genetic data obtained from the sequencing of disease-causing microorganisms
may allow for the rapid determination of the presence and activity of a
particular microorganism in an infected person. The development of diagnostics
based on genes identified by the Company is part of SmithKline Beecham's field
under the SB Collaboration Agreements.
Antimicrobial Agents and Vaccines. The Company has retained exclusive
rights to utilize its information and technology to develop antimicrobial agents
and vaccines and, accordingly, is identifying and characterizing genes of
microorganisms, including bacteria, viruses, fungi and multicellular parasites.
The Company anticipates using its automated sequencing techniques to identify
genes expressed by microorganisms and parasites during resting, vegetative and
pathogenic states of infection. The Company believes that genes expressed during
the pathogenic phase of a microorganism may be found to be required for disease.
Each such gene (called a virulence gene) might be a candidate target for a new
antibiotic or vaccine. The Company also believes that knowledge of genes and
proteins expressed by pathogenic organisms may facilitate the development of
gene-based and antibody-based diagnostic assays for infectious diseases.
Analysis of the total genome of a microorganism should provide a complete
picture of all genes encoded by the microorganism. With this information, the
Company believes it may be possible to choose protein candidates that may be
useful as vaccine components or antigens required for the development of
immunotherapeutics. The Company also believes that a high throughput approach of
gene identification may identify new genes capable of producing antibiotics and
other useful secondary metabolites. Additionally, the Company has completed
sequencing pathogenicity islands of Escherichia coli, and, in collaboration with
TIGR, has sequenced the essentially complete genome of Streptococcus pneumonia.
Patent applications have been filed by the Company on these genomes.
In January 1996, the Company completed sequencing the majority of the DNA
comprising the genome of the bacterium Staphylococcus aureus. Staphylococcus
aureus is the most frequent cause of infections in hospitals. The bacterium is
also the major cause of toxic shock syndrome and wound infections. Many strains
are resistant to most antibiotics, and there is concern that the organism will
soon develop widespread resistance to one of the last remaining effective
antibiotics, vancomycin. The work on Staphylococcus aureus is the first
application of the Company's large scale sequencing technology to a non-human
organism. Staphylococcus aureus was selected for both its medical and commercial
importance.
The Company also owns certain intellectual property rights related to the
genome sequences of three other microorganisms, Haemophilus influenzae,
Mycoplasma genitalium and Methanococcus jannaschii, arising from its
collaboration with TIGR. In addition, the Company intends to file patent
applications related to genes of Helicobacter pylori, another microorganism
sequenced by TIGR. TIGR has recently been focusing its sequencing efforts on
infectious and other microorganisms, and the Company will own any intellectual
property arising from these efforts. In July 1995, the Company entered into a
collaboration with MedImmune to create vaccines and immunotherapeutic products
based on the genomes of infectious microorganisms. See "-- Collaborative
Arrangements."
Gene Therapy. The Company believes that its gene discovery technology may
identify new genes that can be introduced into the body through the use of gene
therapy techniques. Many diseases result when specific proteins are produced in
inappropriate quantities, in a defective manner or not at all. Gene therapy is a
novel approach to the treatment of disease in which genes are inserted into a
patient's cells for the purpose of inducing these cells to produce therapeutic
proteins or to replace defective or missing genes. In other applications, the
Company believes that gene therapy may induce cells to secrete proteins that
enhance the immune system's ability to recognize and attack a specific disease.
Gene therapy might also allow localized delivery of proteins that cannot reach
the appropriate site through conventional methods of administration. There are
currently no gene therapy products on the market, although a number are
undergoing clinical trials. In June 1996, the Company entered into a
collaboration with Schering-Plough with respect to use of the Company's
technologies for gene therapy. See "-- Collaborative Arrangements."
Antisense Drugs. The Company believes that the knowledge of the structure
of genes developed through the use of its sequencing technology may facilitate
the development of antisense drugs. Antisense technology involves the use of
short oligonucleotide sequences, complementary to the gene, that, after binding
to the mRNA encoded by the gene, inhibit the synthesis of the protein encoded by
the gene. If, for example, the target gene expressed a protein involved in rapid
cell growth leading to a particular cancer, then use of the antisense drug could
have the potential of inhibiting the synthesis of the target protein encoded by
the particular gene and lead to restoration of normal growth. Antisense drugs
could also be of potential benefit in diseases where production of excess
protein leads to the disease state. There are currently no antisense drugs
approved for treatment.
COLLABORATIVE ARRANGEMENTS
Agreements with SmithKline Beecham. In May 1993, the Company entered into
the SB Collaboration Agreements pursuant to which SmithKline Beecham was granted
certain exclusive rights to develop and commercialize therapeutic and diagnostic
products within the "SB Field" (as defined below) based on human genes
discovered by the Company. Pursuant to the SB Collaboration Agreements,
SmithKline Beecham has paid to the Company an aggregate of $125 million
including $55.1 million which was allocated to the purchase of an aggregate of
1,351,738 shares of Common Stock.
In June 1996, the SB Collaboration Agreements were substantially amended
(the "SB Amendment"). The SB Amendment allowed the Company and SmithKline
Beecham together to enter into collaboration agreements with additional
pharmaceutical companies ("New Collaboration Partners") in the SB Field (other
than diagnostics and animal healthcare in which SmithKline Beecham has generally
retained exclusive rights). The "SB Field" is the field of human and animal
healthcare, other than gene therapy (excluding gene therapy vaccines), antisense
products and the use of genes for synthesizing drugs that were known at the time
the SB Collaboration Agreements were executed. In addition, the SB Amendment
provides that each of the Company and SmithKline Beecham can independently
designate potential therapeutic proteins for its exclusive development and
commercialization (e.g. marketing or outlicensing) provided that it is the first
among the Company, SmithKline Beecham and the New Collaboration Partners to
select the protein and certain research requirements are met prior to such
designation. Under the SB Amendment, the Company can designate six therapeutic
proteins for its exclusive development and commercialization at any one time.
Subject to certain limitations, the Company may substitute additional
therapeutic proteins for any of the six therapeutic proteins designated by the
Company (i) which have been licensed by the Company to third parties in
accordance with the SB Amendment, (ii) which are the subject of clinical studies
by the Company and (iii) the rights to which have been surrendered by the
Company. SmithKline Beecham's right to select therapeutic proteins during the
initial research term of the SB Collaboration Agreements is not limited. In
addition, the SB Amendment provides that each of the Company and SmithKline
Beecham may independently (i) research, develop and commercialize antibody
products directed against antigens derived from the human genome database
created by the Company and (ii) identify and use novel molecular targets derived
from the human genome database created by the Company to discover and develop
small molecule pharmaceutical products, provided that the Company will not
initiate screening of such targets for three years from the effective date of
the SB Amendment and will not use certain targets subject to agreements with
third parties, subject to certain other restrictions. The SB Amendment restricts
the Company from entering into collaborations with third parties (other than New
Collaboration Partners and Takeda) in the SB Field (i) during the initial
research term except with respect to products for which the Company has
exclusive development rights and (ii) during the initial research term and for a
period thereafter with respect to certain products which are the subject of
research plans submitted by SmithKline Beecham or a New Collaboration Partner or
Takeda prior to the expiration of the initial research term.
The SB Amendment provides that SmithKline Beecham and the Company will
share equally in any license fees and product development milestone payments
paid under New Collaboration Partner Agreements, and that the Company will
receive all royalties and research support payments under such New Collaboration
Partner Agreements. The SB Collaboration Agreements provide for payments to the
Company of royalties on net sales of products based on the Company's patents or
technologies within the SB Field ("SB Products") sold by SmithKline Beecham (or
its licensees) and milestone payments in connection with the development of SB
Products. The Company has an option to co-promote SB Products sold by SmithKline
Beecham, on a country-by-country basis, in the United States, Canada, Mexico and
Europe (subject to certain limitations as to rights granted to Takeda and other
parties). If the Company develops and markets or outlicenses a product in the SB
Field pursuant to its rights under the agreements with SmithKline Beecham,
SmithKline Beecham will generally be entitled to royalties or to share in
milestone payments and license fees received by the Company from licensees with
respect to such products. The New Collaboration Partner Agreement with
Schering-Plough includes an option for Schering-Plough to co-develop and
co-commercialize up to two products in the SB Field to which the Company has
exclusive development and commercialization rights under the SB Collaboration
Agreements. The SB Collaboration Agreements include an
option for SmithKline Beecham to co-develop and co-commercialize products in the
SB Field to which the Company has exclusive development and commercialization
rights under the SB Collaboration Agreements and for which Schering-Plough has
not exercised its option to co-develop and co-commercialize. SmithKline Beecham
will also be entitled to royalties on, and an option to co-promote products
outside the SB Field sold by the Company which are based on or incorporate
patents or information developed by SmithKline Beecham based on the Human Gene
Technology of the Company.
The initial research term under the SB Collaboration Agreements continues
through June 2001. After expiration of the initial research term, the Company
will have all rights to the Company's Human Gene Technology, except that
SmithKline Beecham will retain rights to the Company's Human Gene Technology
pursuant to research plans meeting certain specified criteria submitted prior to
expiration of the initial term, Takeda will retain rights granted to it under a
license agreement prior to expiration of the initial research term and New
Collaboration Partners will retain rights granted to them under New
Collaboration Partner Agreements. See "-- Other Collaborations in the SB Field."
SmithKline Beecham has the right to extend the research term for up to five
additional years by making certain payments, which would extend the time for
submitting research plans as to therapeutic products other than antibody
products and therapeutic protein products.
The Company has agreed that it will make available 35 gene sequencers and
related personnel and reagents to sequence genes at the direction of a research
committee.
Other Collaboration Agreements in the SB Field. In June 1996 and July 1996,
the Company and SmithKline Beecham entered into the New Collaboration Partner
Agreements with Schering-Plough, Synthelabo, and Merck. Each of the New
Collaboration Partner Agreements provides the New Collaboration Partner the
rights and licenses to access and use the Company's Human Gene Technology, as
well as biological information developed by the Company and SmithKline Beecham
prior to, and in the case of the Company, after the effective date of such
Agreement, to discover, develop and commercialize products based upon or derived
from such Human Gene Technology in the SB Field (other than diagnostics and
animal healthcare). Each New Collaboration Partner may also designate, and
receive exclusive license rights under the Company and SmithKline Beecham
patents and technology to, potential therapeutic protein products for its
exclusive development and commercialization, subject, in certain cases, to
certain restrictions as to the number of therapeutic proteins that can be
claimed, and subject to achievement of certain research requirements prior to
such designation. Each of the New Collaboration Partners is obligated to pay
license fees, research payments, and milestone payments in connection with
development of products under the agreement and royalties. Each of the New
Collaboration Partner Agreements is for an initial research term expiring in
June 2001. Each New Collaboration Partner has the right to extend the term for
up to five additional years by making certain payments. The Company cannot enter
into additional agreements similar to the New Collaboration Partner Agreements
without the consent of SmithKline Beecham, Takeda and certain of the New
Collaboration Partners.
The Company will be entitled to one-half of all license fees and milestone
payments and to all royalties due from each New Collaboration Partner. In
addition, each New Collaboration Partner will make research payments directly to
the Company for the duration of the initial research term which continues
through June 2001. Aggregate license fees and research payments due under the
New Collaborative Partner Agreements are $140 million during the initial
research term, of which the Company will be entitled to $87.5 million, payable
in equal installments over a five-year period. $17.5 million have been received
by the Company to date.
The New Collaboration Partner Agreement with Schering-Plough includes an
option for Schering-Plough to co-develop and co-commercialize up to two of the
Company's products in the SB Field to which the Company has exclusive
development and commercialization rights under the SB Collaborative Agreements.
SmithKline Beecham and Takeda entered into a License Agreement (the "Takeda
License Agreement") relating to the development and sale of products in the SB
Field based upon rights licensed from the Company. The Company will be entitled
to all royalty payments and one-half of the milestone payments due from Takeda
to SmithKline Beecham under the Takeda License Agreement on sales of products
developed by Takeda under the agreement. In addition, at the same time that
SmithKline Beecham and Takeda entered into the Takeda License Agreement, Takeda
and the Company entered into an Option and License Agreement pursuant to which
Takeda was granted an exclusive option to license rights under the Company's
patents and technology in the field of human healthcare (other than gene
therapy, antisense and diagnostics) to make and sell a limited number (equal to
the
number of collaboration partners other than SmithKline Beecham and Takeda with
which the Company enters into collaboration agreements in the SB Field) of
products in Japan. In consideration of the grant of the option, Takeda paid the
Company $5 million and agreed to pay to the Company royalties based on the sale
of Takeda products covered by the Option and License Agreement and certain
milestone payments. The option period terminates three years following
expiration of the initial research term under the SB Collaboration Agreements.
Collaboration Agreements Outside of the SB Field. The Company has entered
into collaboration agreements with respect to the development of products based
on the Company's gene discovery research outside of the SB Field. These
collaboration agreements, which generally provide for milestone payments and
royalties and in most cases up front license fees and/or research payments,
include the following:
A Collaboration and License Agreement with MedImmune entered into in July
1995 with respect to the development of drugs based upon infectious agents
sequenced by the Company or TIGR or as to which the Company has licensed
the rights. Programs under the agreement with MedImmune include the
creation of vaccines and immunotherapeutics for non-encapsulated
Haemophilus influenzae, Streptococcus pneumoniae, Escherichia coli,
Staphylococcus aureus, Helicobacter pylori and Borellia bergdorferi;
A Research Collaboration Agreement with Pioneer entered into in January
1996 under which Pioneer was granted exclusive license rights in the field
of corn genomics;
A License Agreement with Roche entered into in March 1996, under which the
Company is responsible for sequencing and assembling the genome of
Streptococcus pneumoniae, a bacterial pathogen responsible for severe
respiratory and other infections and under which Roche received a
non-exclusive license to use this information to identify potential new
anti-infectives and antibiotics;
A Collaboration and License Agreement with Schering-Plough relating to the
field of human gene therapy (including gene therapy vaccines to the extent
the Company has the right to do so), under which Schering-Plough was
granted (i) a non-exclusive license to use the Company's Human Gene
Technology to conduct research and (ii) an option to obtain an exclusive
license to specific genes in the field of gene therapy;
An agreement entered into in October 1996 with Pharmacia, whereby the
Company granted to Pharmacia (i) a nonexclusive license to conduct research
and to make, use and sell products based on genes of Staphylococcus aureus
and the pathogenicity islands of Escherichia coli sequenced by the Company,
(ii) the right to obtain an exclusive license to certain products and (iii)
the right to negotiate to obtain an exclusive license as to certain
microbial genomes as to which the Company desires to grant an exclusive
license; and
An agreement entered into in November 1996 with OraVax with respect to an
exclusive license granted by MedImmune and the Company with respect to use
of the Company's and MedImmune's technology for a Helicobacter pylori
vaccine.
As of February 15, 1997, the Company had entered into approximately 200
material transfer agreements with 96 academic institutions covering
approximately 1,000 gene sequences, cDNAs and proteins. The Company is
continuing to negotiate additional material transfer and license agreements. The
purpose of these agreements is to expand research and development relating to
the Company's gene information by providing academic researchers with
proprietary gene sequence information and related materials which enable them to
explore the biological activity and potential medical utility of newly
discovered human genes. Most of these material transfer agreements grant to the
Company a license, with established royalty rates, to any invention resulting
from the use of gene sequence information or related materials provided by the
Company. A relatively small number of the material transfer agreements signed by
the Company provide for an option to license any invention resulting from the
use of the Company's gene sequencing information. The Company has not, in any
case, signed a material transfer agreement with an academic institution which
does not provide for a license or option to exclusive rights for inventions
resulting from use of the Company's information. In addition, TIGR, SmithKline
Beecham and Takeda have also entered into material transfer agreements with
academic institutions. The Company is also entitled to rights with respect to
inventions resulting from use of sequence information and related materials
under such arrangements.
Agreements with TIGR. In October 1992 the Company entered into a Research
Services Agreement and an Intellectual Property Agreement with TIGR, a
not-for-profit research institute. TIGR initially performed most of the
gene sequencing and made the sequences available to the Company and continues to
perform genomic research, including sequencing the genomes of microbial
organisms. The Company currently has a sequencing and analysis capacity greater
than that of TIGR. The Company believes that it benefits from, but is no longer
dependent upon, TIGR's assistance for achieving research and development goals.
Pursuant to the agreements with TIGR, the Company has exclusive rights to all
intellectual property resulting from TIGR's gene sequencing and other research.
Pursuant to these agreements, a Lease Funding Agreement entered into in
March 1993 and a subsequent agreement entered into in April 1993, the Company
has committed to provide an aggregate of approximately $85 million to TIGR over
a ten-year period, ending September 2002, of which $70 million consists of a
research grant and equipment funding for TIGR's scientific research relating to
determining human genes and their functions and uses. Through February 15, 1997,
the Company had paid approximately $44 million pursuant to these agreements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
TIGR operates independently from the Company, and the Company does not have
the right to control or direct TIGR's activities. TIGR receives funding from
government sources in addition to funding from the Company. Under the Research
Services Agreement and the Intellectual Property Agreement, for a ten-year
period ending 2002, TIGR is obligated to disclose to the Company all significant
developments relating to information or inventions discovered at TIGR, and the
Company will own (on a royalty-free basis) all of TIGR's interest in inventions
and patent rights arising out of TIGR's research during the term of the
agreement (including rights arising from research funded by third parties,
except for research funded by certain governmental and not-for-profit
organizations as to which the Company has been granted a royalty-bearing,
worldwide, perpetual, exclusive license, subject to a non-exclusive royalty-free
license retained by such organization).
TIGR has completed the sequencing of the genomes of several microbial
organisms, including nonencapsulated Haemophilus influenzae, Mycoplasma
genitalium, and Methanococcus jannaschii. The Company has exclusive rights in
the intellectual property resulting from this research. TIGR has advised the
Company that it plans to sequence complete genomes of other organisms that cause
diseases in humans or which may have other uses, such as industrial or
agricultural uses. TIGR has agreed with the Company that it will sequence the
genome of certain specified bacterial organisms.
Pursuant to the Human cDNA Database Agreement, TIGR has generally agreed
not to publish the sequences of any human cDNAs sequenced at TIGR and, instead,
will contribute those sequences to the Human cDNA Database (described below).
TIGR has retained the right to publish sequence data included in the Human cDNA
Database on the same basis as researchers who are provided access to proprietary
information in the Human cDNA Database. See "-- The Human cDNA Database
Agreement." As set forth below, the Human cDNA Database Agreement will terminate
in April 1997. TIGR has agreed not to publish any other information or
inventions (other than information with respect to non-animal genes), including
human cDNA's after the termination or expiration of the Human cDNA Database
Agreement, resulting from TIGR's research until six months after TIGR discloses
the information or invention to the Company, provided that this six-month period
can be extended to up to 18 months under certain circumstances if the
information or invention relates to a product that the Company and its
collaborators intend to develop. With respect to non-animal genes (which
includes microbial agents), TIGR has agreed not to publish information or
inventions until at least six months after substantially all information and
inventions resulting from studies being conducted by TIGR have been disclosed to
the Company.
The Human cDNA Database Agreement. In July 1994, the Company, TIGR and
SmithKline Beecham reached an agreement to contribute a number of partial cDNA
sequences to a database (the "Human cDNA Database") that is accessible to
academic scientists and researchers at non-profit institutions that sign access
agreements. To date, approximately 160,000 human cDNAs resulting from the
collaboration between the Company and TIGR have been contributed to the Human
cDNA Database, including 50,000 cDNAs sequenced by the Company. The Human cDNA
Database Agreement provides that the Human cDNA Database is not available to
persons or entities engaged in commercial activities. In October 1996, TIGR
notified SmithKline Beecham and the Company of its decision to terminate the
Human cDNA Database Agreement according to its terms, such termination to be
effective in April 1997. Upon termination, all Company sequences will be removed
from the database and the remaining TIGR sequences may be made publicly
available without restriction.
Potential Dispute with TIGR. The Company's agreements with TIGR include
non-disclosure obligations on the part of TIGR. The Company and TIGR have had
recent disagreements concerning the scope of these non-disclosure
obligations. It has come to the Company's attention that certain disclosures by
TIGR of sequence and other information which the Company believes may violate
such non-disclosure obligations may have taken place or may take place in the
future. Disclosure of information by TIGR in violation of its non-disclosure
obligations may negatively affect the Company's ability to obtain patent
protection on inventions described therein. The Company is investigating this
situation and will determine what action, if any, should be taken to prevent
such disclosures. See "-- Patents and Proprietary Rights." There can be no
assurance that these disagreements will not materially affect the Company's
relationship with TIGR. However, TIGR has been primarily sequencing microbial
genes and not human genes in recent years, and the Company does not believe that
it is or will be dependent on TIGR.
PATENTS AND PROPRIETARY RIGHTS
The Company's commercial success is dependent in part on its ability to
obtain patent protection on genes discovered by it. The Company applies for
patent protection for genes identified by partial sequencing and, subsequently,
for those genes which it fully sequences. However, there is substantial
uncertainty as to the patentability of genes based on partial sequences. Even if
patent protection is afforded for such sequences, it may not provide effective
marketing exclusivity. The Company's business might be enhanced by obtaining
patent protection based on partial gene sequences, but the Company does not
believe that its commercial success will be materially dependent on its ability
to do so. The Company has isolated and obtained full-length sequence information
for many of the genes that the Company or its collaborators intend to develop
further and has filed, and continues to file, for patent protection based on
such full-length sequences. However, the Company does not expect to isolate and
fully sequence a significant portion of the partial gene sequences it discovers.
See "-- Company Technology and Research."
The patent positions of biotechnology firms generally are highly uncertain
and involve complex legal and factual questions. There is a substantial backlog
of biotechnology patent applications at the PTO, and no clear policy has emerged
regarding the breadth of claims covered in biotechnology patents. There have
been, and continue to be, intensive discussions on the scope of patent
protection for both gene fragments and full-length genes. There have also been
proposals for review of the appropriateness of patents on genes and gene
fragments. There can be no assurance that these or other proposals will not
result in changes in, or interpretations of, the patent laws which will
adversely affect the Company's patent position. The biotechnology patent
situation outside the United States is even more uncertain and is currently
undergoing review and revision in many countries.
As of February 15, 1997, the Company had filed United States patent
applications with respect to more than 230 full-length human genes and their
corresponding proteins. The Company has also filed U.S. patent applications with
respect to all or portions of the genomes of five infectious microorganisms and
one non-infectious microorganism. As of February 15, 1997, the Company has five
issued U.S. patents covering full-length human genes, which expire between 2013
and 2014. There can be no assurance that the remaining applications covering
full-length genes and their corresponding proteins will result in the issuance
of any patents. While the Company identifies multiple uses for genes it has
fully sequenced, these uses may not be sufficient to meet the statutory
requirements for patentability in all cases. Additionally, in view of the
substantial number of genes that may be covered by the Company's patent
applications, the Company cannot predict what issues may arise in connection
with the Company's patent applications or the timing of the grant of patents
with respect to genes covered by such patent applications. Moreover, in certain
instances, the Company will be dependent upon its collaborators to file and
prosecute patent applications.
The Company also has filed United States patent applications claiming more
than 190,000 partial human gene sequences. These applications seek to protect
partial human and non-human gene sequences, the full-length gene sequences that
include the partial sequences, as well as products derived therefrom and uses
therefor. These applications identify possible biological functions for some of
the genes based in part on a comparison to genes included in public databases,
but do not contain any laboratory or clinical data with respect to such
biological functions. There are certain court decisions indicating that
disclosure of a partial sequence may not be sufficient to support the
patentability of a full length sequence. In view of these court decisions, as
well as the position of the PTO referred to below, the Company believes that
there is significant risk that patents will not issue based on patent
disclosures limited to partial gene sequences. Finally, even if patents issue on
the basis of partial gene sequences,
there is uncertainty as to the scope of the coverage, enforceability or
commercial protection provided by any such patents.
In June 1991, the National Institutes of Health (the "NIH") filed a patent
application seeking protection for a substantial number of genes based upon
partial gene sequences. The application generated substantial controversy in the
scientific community regarding the patentability of gene fragments and the
full-length gene based on only partial sequencing of genes, particularly in
cases where the biological function of the full-length gene is not identified.
An examiner in the PTO rejected the patent claims contained in the NIH
application and the rejection was not appealed by the NIH. The Company believes
that the patent applications that have been filed by the Company based on
partial gene sequences may be considered similar to the application filed by the
NIH. To date, the Company has not received notice from the PTO of a similar
rejection of its patent applications covering partial gene sequences.
Publication of information concerning genes prior to the time the Company
applies for patent protection based on the full-length gene could adversely
affect the Company's ability to obtain patent protection with respect to genes
identified by it. Washington University has identified genes through partial
sequencing pursuant to funding provided by Merck & Co. and has deposited the
partial sequences identified in a public database. In July 1994, the Company,
TIGR and SmithKline Beecham reached an agreement to contribute a number of
partial cDNA sequences to the Human cDNA Database. Pursuant to the Agreement,
the Human cDNA Database is accessible only to academic scientists and
researchers at non-profit institutions that sign access agreements. In October
1996, TIGR notified SmithKline Beecham and the Company of its decision to
terminate the Human cDNA Database Agreement effective in April 1997. TIGR and
researchers who are provided access to proprietary data in the Human cDNA
Database have certain rights to publish human cDNA sequences in which the
Company has rights. The termination of the Human cDNA Database Agreement in
April 1997 will eliminate limitations on publication of those sequences in the
Human cDNA Database as of that date. While the Company believes that the
limitations on publication of sequences in the Human cDNA Database have
generally been sufficient to permit the Company to apply for patent protection
on genes in which it is interested in pursuing further research, there can be no
assurance that such publication will not affect the Company's ability to obtain
patent protection for some genes in which it may have an interest, which, in the
case of genes of commercial significance, could have a material adverse effect
on the Company. See "-- Collaborative Agreements -- Agreements with TIGR -- The
Human cDNA Database Agreement" and " -- Potential Dispute with TIGR."
In January 1997, TIGR, in collaboration with the National Center for
Biological Information (NCBI), disclosed full-length DNA sequences (which are
reportedly in excess of 35,000 sequences) assembled from partial gene sequences
(EST's) available in publicly accessible databases or sequenced at TIGR. Such
disclosure might limit the scope of claims or make unpatentable subsequent
patent applications filed by the Company on full-length genes.
In addition, others have filed and are likely to file in the future patent
applications which have not yet been published covering genes or protein
sequences similar or identical to those of the Company. Moreover, the number of
patent applications covering genes and proteins expressed by genes has been
increasing, and is expected to continue to increase, as a result of the increase
in the number of entities conducting genomic research. See "-- Competition." The
Company has been notified that there may be patent applications filed by others
which cover genes for which the Company has filed patent applications. The
priority of competing patent claims would be decided in an interference
proceeding before the PTO. No assurance can be given that any such patent
application of third parties will not have priority over patent applications
filed by the Company or that any patent applications filed by the Company will
result in issued patents.
The Company is aware that patent applications have been filed by one or
more third parties with respect to three of the Company's therapeutic protein
product candidates. The Company has been granted a patent with respect to DNA
sequences encoding one of the three therapeutic proteins. However, proceedings
may be instituted in the PTO to determine which of the Company or a third party
is entitled to a United States patent covering such protein and/or DNA encoding
such protein. As to the remaining two therapeutic proteins, the Company has been
notified that the PTO is considering instituting proceedings to determine which
of the Company or a third party is entitled to a patent covering the DNA
encoding one of such therapeutic proteins, and it is possible that proceedings
may be instituted as to the third therapeutic protein.
Accordingly, there can be no assurance that patents issued and any
additional patents, if issued, will provide commercially meaningful protection
against competitors. There can also be no assurance that any patent issued to
the Company will provide it with competitive advantages, or will not be
challenged by others. Furthermore, there can be no assurance that others will
not independently develop similar products which could result in an interference
proceeding in the PTO. Others may be able to design around issued patents or
develop products providing similar effect to products being developed by the
Company based on genes or proteins expressed by genes which are not covered by
patents issued to the Company. In addition, others may discover uses for genes
or proteins other than those uses covered in the Company's patent applications,
and these other uses may be separately patentable. In such case, the holder of a
use patent covering an invention as to which the Company has a composition of
matter patent claim could exclude the Company from selling a product for a use
covered by such use patent.
The Company's potential products may conflict with patents that have been
or may be granted to competitors, universities or others. As the biotechnology
industry expands and more patents are issued and other companies engage in the
business of discovering genes through the use of high speed sequencers, the risk
increases that the Company's potential products may give rise to claims that
they infringe the patents of others. Such other persons could bring legal
actions against the Company claiming damages and seeking to enjoin clinical
testing, manufacturing and marketing of the affected products. If any such
actions are successful, in addition to any potential liability for damages, the
Company could be required to obtain a license in order to continue to
manufacture or market the affected products. There can be no assurance that the
Company would prevail in any such action or that any license required under any
such patent would be made available on acceptable terms. The Company believes
that there will continue to be significant litigation in the industry regarding
patent and other intellectual property rights. If the Company becomes involved
in such litigation, it could consume a substantial portion of the Company's
resources.
In addition, some of the genes (representing a small percentage of
sequences covered by the Company's patent filings) covered by two of the patent
applications in which the Company has rights that have been filed were
identified pursuant to research funded by grants from the United States
Department of Energy ("DOE"). TIGR is also receiving funding from the DOE with
respect to certain non-pathogenic bacterial genomes it is sequencing. The DOE
has a statutory right under certain circumstances (including inaction on the
part of the holder of the patent rights to achieve practical application of the
invention or a need to alleviate public health or safety concerns not reasonably
satisfied by the holder of the patent rights) to grant to other parties licenses
under the patents which may be granted based on research funded by the DOE.
The enactment of the legislation implementing the General Agreement on
Trade and Tariffs has resulted in certain changes to United States patent laws
that became effective on June 8, 1995. Most notably, the term of patent
protection for patent applications filed on or after June 8, 1995 is no longer a
period of seventeen years from the date of grant. The new term of United States
patents will commence on the date of issuance and terminate twenty years from
the earliest effective filing date of the application. Because the time from
filing to issuance of patent applications is often more than three years, a
twenty-year period from the effective date of filing may result in a
substantially shortened term of patent protection, which may adversely impact
the Company's patent position.
The Company also relies on trade secret protection for its confidential and
proprietary information. The Company believes it has developed proprietary
procedures for making cDNA libraries and sequencing and analyzing genes. The
Company has not sought patent protection for these procedures. Additionally, the
Company has developed a substantial database concerning genes identified by it.
The Company has taken security measures to protect its data and continues to
explore ways to further enhance the security for its data. However, trade
secrets are difficult to protect. While the Company has entered into
confidentiality agreements with employees and academic collaborators who are
provided data or materials under material transfer agreements, there can be no
assurance that such data or material will not be disclosed, that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology, or that the Company can meaningfully protect its trade secrets.
In addition, certain trade secrets important to the Company's business have been
developed by, or are in the possession of, TIGR, including information
concerning sequencing procedures and genes identified by TIGR. Although TIGR
also enters into confidentiality agreements with its employees, there is an
additional risk that such trade secrets cannot be meaningfully protected.
COMPETITION
There is a finite number of genes in the human genome, and the Company
believes that the great majority of such genes have been identified by the
Company or others conducting genomic research and that virtually all will be
identified within several years. While the Company's goal has been to identify,
establish the utility of and ultimately patent as many genes as rapidly as
possible, the Company continues to face substantial competition in these efforts
both from entities using high throughput gene sequencers to discover genes, as
well as from entities using more traditional methods to discover genes related
to particular diseases. Research to identify genes is also being conducted by
various institutes and United States and foreign government-financed entities,
including British, French, German and Japanese efforts, as well as numerous
smaller laboratories associated with universities or other not-for-profit
entities. In addition, a number of pharmaceutical and biotechnology companies
and government-financed programs are engaged or have announced the intention to
engage in areas of human genome research similar to or competitive with the
Company's focus on gene discovery, and other companies are likely to enter the
field.
The gene sequencing machines used by the Company are commercially available
and are currently being utilized by many other companies, in some cases for
business purposes competitive with those of the Company. In addition, a number
of other companies have announced plans to engage in gene discovery and could
acquire similar machines and develop procedures for automated sequencing of
genes. Although the Company believes that its large scale, automated processes
and lead time provide it with a competitive advantage, any one of these
companies or other entities may discover and establish a patent position in one
or more genes that the Company has identified and might have designated or
considered designating as a product candidate. Any potential products based on
genes identified by the Company will face competition both from companies
developing gene-based products and from companies developing other forms of
treatment for diseases that may be caused by, or related to, genes identified by
the Company.
The Company's potential competitors include pharmaceutical and
biotechnology firms and other companies, not-for-profit entities and United
States and foreign government-financed programs, many of which have
substantially greater research and product development capabilities and
financial, scientific, marketing and human resources than the Company. These
competitors may succeed in identifying genes or developing products earlier than
the Company or its collaborators, obtaining approvals from the United States
Food and Drug Administration (the "FDA") or other regulatory agencies for such
products more rapidly than the Company or its collaborators, or developing
products that are more effective than those proposed to be developed by the
Company or its collaborators. Certain of these competitors may be further
advanced than the Company in developing potential products that may compete with
potential products of the Company. There can be no assurance that research and
development by others will not render the products that the Company or its
collaborators may seek to develop obsolete or uneconomical or result in
treatments, cures or diagnostics superior to any therapy or diagnostic developed
by the Company or its collaborators, or that any therapy or diagnostic developed
by the Company or its collaborators will be preferred to any existing or newly
developed technologies. The Company expects that competition in this field will
intensify.
GOVERNMENT REGULATION
Regulation of Pharmaceutical Products. New drugs are subject to regulation
under the Federal Food, Drug, and Cosmetic Act, and biological products, in
addition to being subject to certain provisions of that Act, are regulated under
the Public Health Service Act. The Company believes that the pharmaceutical
products developed by it or its collaborators will be regulated either as
biological products or as new drugs. Both statutes and the regulations
promulgated thereunder govern, among other things, the testing, manufacturing,
distribution, safety, efficacy, labeling, storage, record keeping, advertising
and other promotional practices involving biologics or new drugs, as the case
may be. FDA approval or other clearances must be obtained before clinical
testing, and before manufacturing and marketing, of biologics and drugs. At the
FDA, the Center for Biological Evaluation and Research ("CBER") is responsible
for the regulation of biologics, and the Center for Drug Evaluation and Research
("CDER") is responsible for the regulation of new drugs.
In addition, any gene therapy products (which is one of the areas in which
the Company may develop products) developed by the Company will require
regulatory approvals prior to clinical trials and additional regulatory
approvals prior to commercialization. New human gene therapy products are
expected to be subject to extensive regulation by the FDA and comparable
agencies in other countries. The precise regulatory requirements with which the
Company will have to comply are uncertain at this time due to the novelty of the
human gene therapies currently under development. Currently, each protocol is
reviewed by the FDA and, in some instances, the NIH, on a case-by-case basis.
The FDA and the NIH have published a "Points to Consider" guidance document with
respect to the development of gene therapy protocols.
Obtaining FDA approval has historically been a costly and time consuming
process. Generally, in order to gain FDA pre-market approval, a developer first
must conduct preclinical studies in the laboratory and in animal model systems
to gain preliminary information on an agent's efficacy and to identify any
safety problems. The results of these studies are submitted as a part of an
investigational new drug ("IND") application, which the FDA must review before
human clinical trials of an investigational drug can start. The IND application
includes a detailed description of the initial clinical investigation to be
undertaken.
Preclinical studies can take several years to complete, and there is no
assurance that an IND based on such studies will ever become effective so as to
permit clinical testing to begin. A 30-day waiting period after the receipt of
each IND is required by the FDA prior to the commencement of initial clinical
testing, unless the FDA approves the IND before then. If the FDA has not
commented on or questioned the IND within this 30-day period, initial clinical
studies may begin, although companies often obtain affirmative FDA approval
before beginning such studies. If the FDA has comments or questions, it places
the studies on clinical hold and the questions must be answered to the
satisfaction of the FDA before the initial clinical testing may begin.
In order to commercialize pharmaceutical products, the Company or its
collaborator must sponsor and file an IND and will be responsible for initiating
and overseeing the clinical studies to demonstrate the safety and efficacy and,
for a biologic product, the potency that are necessary to obtain FDA approval of
any such products. For Company or collaborator-sponsored INDs, the Company or
its collaborator will be required to select qualified investigators (usually
physicians within medical institutions) to supervise the administration of the
products, and ensure that the investigations are conducted and monitored in
accordance with FDA regulations and the general investigational plan and
protocols contained in the IND. Clinical trials are normally done in three
phases, although the phases may overlap. Phase I trials are concerned primarily
with the safety and preliminary effectiveness of the drug, involve fewer than
100 subjects, and may take from six months to over a year. Phase II trials
normally involve a few hundred patients and are designed primarily to
demonstrate effectiveness in treating or diagnosing the disease or condition for
which the drug is intended, although short-term side effects and risks in people
whose health is impaired may also be examined. Phase III trials are expanded
clinical trials with larger numbers of patients which are intended to gather the
additional information for proper dosage and labeling of the drug and
demonstrate its safety and effectiveness. Clinical trials generally take two to
five years, but may take longer, to complete. Recent regulations promulgated by
the FDA may shorten the time periods and reduce the number of patients required
to be tested in the case of certain life-threatening diseases which lack
available alternative treatments.
The FDA receives reports on the progress of each phase of clinical testing,
and it may require the modification, suspension, or termination of clinical
trials if an unwarranted risk is presented to patients. If the FDA imposes a
clinical hold, clinical trials may not recommence without prior FDA
authorization and then only under terms authorized by the FDA. The IND process
can thus result in substantial delay and expense. Human gene therapy products
(which is one of the areas in which the Company may seek to develop products)
are a new category of therapeutics, and there can be no assurance as to the
length of the clinical trial period, the number of patients the FDA will require
to be enrolled in the clinical trials in order to establish the safety, efficacy
and, in the case of a biologic, potency of human gene therapy products, or that
the clinical data generated in these studies will be acceptable to the FDA to
support marketing approval.
After completion of clinical trials of a new drug or biologic product, FDA
marketing approval must be obtained. If the product is regulated as a biologic,
CBER will require the submission and approval, depending on the type of
biologic, of either a Biologic License Application or both a Product License
Application and an Establishment License Application before commercial marketing
of the biologic. If the product is classified as a new drug, the Company must
file a New Drug Application ("NDA") with CDER and receive approval before
commercial marketing of the drug (collectively these forms of application are
referred to below as the "BLA"). The NDA or BLA must include results of product
development, preclinical studies and clinical trials. The testing and approval
processes require substantial time and effort and there can be no assurance that
the FDA will accept the NDA or BLA for filing and, even if filed, that any
approval will be granted on a timely basis, if at all. NDAs and BLAs submitted
to the FDA can take, on average, two to five years to receive approval. If
questions arise during the FDA review process, approval can take more than five
years. Notwithstanding the submission of relevant data, the FDA may ultimately
decide that the NDA or BLA does not satisfy its regulatory criteria for approval
and require additional clinical studies. Even if FDA regulatory approvals are
obtained, a marketed product is subject to continual review, and later discovery
of previously unknown problems or failure to comply with the applicable
regulatory requirements may result in restrictions on the marketing of a product
or withdrawal of the product from the market as well as possible civil or
criminal sanctions. In addition, the FDA may condition marketing approval on the
conduct of specific post-marketing studies to further evaluate safety and
effectiveness.
If a developer obtains designation by the FDA of a biologic or drug as an
"orphan" drug for a particular use, the developer may request small grants from
the federal government to help defray the costs of qualified testing expenses in
connection with the development of such drug. Orphan drug designation may be
granted to drugs for rare diseases (generally, a disease or condition that
affects populations of fewer than 200,000 individuals in the United States),
including many genetic diseases. The first applicant who has obtained
designation of a drug for a particular use as an orphan drug and then obtains
approval of a marketing application for such drug for the particular use is
entitled to marketing exclusivity for a period of seven years, subject to
certain limitations. Essentially, this means that no other company can market
the same orphan drug for the use approved by the FDA for seven years after the
approval.
Orphan drug designation does not convey any advantage in, or shorten the
duration of, the regulatory approval process. Although obtaining FDA approval to
market a product with an orphan drug designation can be advantageous, there can
be no assurance that the scope of protection or the level of marketing
exclusivity that is currently afforded by orphan drug designation and marketing
approval will remain in effect in the future.
Rigorous and extensive FDA regulation of pharmaceutical products continues
after approval, particularly with respect to manufacturing, which must be done
in compliance with cGMP, reporting of adverse effects, and advertising,
promotion, and marketing.
Regulation of Diagnostics. Some of the diagnostic products developed by the
Company or its collaborators are likely to be regulated by the FDA as medical
devices rather than drugs. The nature of the FDA requirements applicable to such
diagnostic devices depends on their classification by the FDA. A diagnostic
device developed by the Company or its collaborators would be automatically
classified as a Class III device, requiring premarket approval, and would remain
in Class III and require premarket approval unless the device were reclassified
into Class II or Class I by the FDA or the sponsor could demonstrate to the FDA,
in the required pre-market notification procedure, that the device was
substantially equivalent to a legally marketed existing device that has been
classified in Class I or Class II or to a legally marketed Class III device for
which premarket approval is not required. Following submission of a premarket
notification, a company may not market the device for clinical use until an
order is issued by the FDA finding the device to be substantially equivalent.
The FDA has no specific time limit by which it must respond to a premarket
notification. If the Company or its collaborators were unable to demonstrate
such substantial equivalence to the FDA's satisfaction, it would be required to
undertake the costly and time-consuming process, comparable to that for new
drugs, of conducting preclinical studies and conducting clinical tests, filing a
pre-market approval ("PMA") application, and obtaining FDA approval.
If the Company or its collaborators can demonstrate substantial equivalence
to a Class I product, the "general controls" of the Food, Drug, and Cosmetic Act
- -- chiefly adulteration, misbranding, and "good manufacturing practice"
requirements -- will apply. If substantial equivalence to a Class II device can
be shown, the general controls plus "special controls" -- such as performance
standards, guidelines for safety and effective, and post-market surveillance --
will apply. If substantial equivalence to a Class III device (for which
premarket approval is not required) can be shown, the general controls plus any
applicable special controls will apply, and the product will require premarket
approval once the FDA requires such approval for the device to which substantial
equivalence was shown and other devices of the same generic type. While
demonstrating substantial equivalence to a Class I, Class II or Class III
product (for which premarket approval is not required) is not ordinarily as
costly or time-
consuming as the premarket approval process for Class III devices, it can in
some cases also involve conducting clinical tests to demonstrate that any
differences between the new device and devices already on the market do not
affect safety or effectiveness.
In January 1997, the NIH-Department of energy Task Force on Genetic Testing
issues proposed recommendations including increased monitoring of genetic
disorders, and tracking of people with positive and negative test results, by
CDC; establishment (under the Clinical Laboratory Improvement Amendments of
1988) of national program for the accreditation of laboratories performing
genetic testing, based on quality assurance, proficiency testing, and on-site
inspections; and additional regulation by the FDA. The Task Force's proposed
recommendations, if adopted and implemented, would significantly increase
federal regulation of genetic tests, whether provided as a product or service,
beginning with their manufacture and continuing through their marketing and use.
Marketed devices are subject to pervasive and continuing regulatory
oversight by the FDA, including record-keeping requirements and reporting of
adverse experiences with the use of the device. The Federal Food, Drug and
Cosmetic Act requires that medical devices be manufactured in accordance with
the FDA's cGMP regulation. This regulation requires, among other things, that
(i) the manufacturing process be regulated, controlled and documented by the use
of written procedures, and (ii) the ability to produce devices which meet the
manufacturer's specifications be validated by extensive and detailed testing of
every aspect of the process. The regulation also requires investigation of any
deficiencies in the manufacturing process or in the products produced and
detailed record keeping. Manufacturing facilities are subject to FDA inspection
on a periodic basis to monitor compliance with GMP requirements. If violations
of the applicable regulations are noted during FDA inspections of manufacturing
facilities, the FDA can prohibit further manufacturing, distribution and sale of
the devices until the violations are cured. On October 7, 1996, the FDA
published a revision of its GMP requirements, incorporating them into a new
regulation called the quality system ("QS") regulation. The QS regulation
requires, among other things, pre-production design controls, purchasing
controls, and maintenance of service records. The QS regulation is effective
June 1, 1997, except that the FDA has stated that as long as manufacturers are
taking reasonable steps to come into compliance with the design control
requirements, the FDA will not initiate action (including enforcement cases)
based on a failure to comply with these requirements before June 1, 1998. Once
in effect, the QS regulation is expected to increase the cost of complying with
the cGMP requirements and related requirements. Other applicable requirements
include the FDA's medical device (manufacturer) reporting regulation, which
requires that the device manufacturer provide information to the FDA on deaths
or serious injuries alleged to have been associated with the use of its marketed
devices, as well as product malfunctions that would likely cause or contribute
to a death or serious injury if the malfunction were to recur.
Labeling, advertising and promotional activities for investigational and
marketed devices are subject to scrutiny by the FDA and, in certain instances,
by the Federal Trade Commission. The FDA enforces statutory prohibitions against
promoting or marketing products for unapproved uses.
Other. In addition to the foregoing, the Company's business is and will be
subject to regulation under various state and federal environmental laws,
including the Occupational Safety and Health Act, the Resource Conservation and
Recovery Act and the Toxic Substances Control Act. These and other laws govern
the Company's use, handling and disposal of various biological, chemical and
radioactive substances used in and wastes generated by its operations. The
Company believes that it is in material compliance with applicable environmental
laws and that its continued compliance therewith will not have a material
adverse effect on its business. The Company cannot predict, however, whether new
regulatory restrictions on the production, handling and marketing of
biotechnology products will be imposed by state or federal regulators and
agencies.
SOURCES OF SUPPLY
The Company currently relies on a single supplier, Applied Biosystems, a
division of Perkin-Elmer Corporation, to provide all of its gene sequencing
machines and certain reagents required in connection with the gene sequencing
process. The Company has not experienced problems in obtaining either gene
sequencing machines or reagents in a timely manner. While other gene sequencing
machines are available, the Company does not believe that such other machines
are as efficient as the machines currently used by the Company. The Company
has entered into certain agreements with Perkin-Elmer Corporation that (i)
provide for an established pricing structure with respect to the Company's
purchases of selected reagents, although such pricing is subject to change if
the Company does not meet certain minimum purchase requirements, and (ii) in the
case of one enzyme, provide that the Company will purchase and Perkin-Elmer
Corporation will sell a stated quantity at a fixed price. The Company orders
these reagents by submitting purchase orders at the time of purchase. No
assurance can be given that either the gene sequencing machines or the reagents
will remain available in commercial quantities at costs that are not
economically prohibitive. Should the Company be unable to obtain additional
machines or an adequate supply of reagents or other ingredients at commercially
reasonable rates, its ability to continue to identify genes through gene
sequencing in accordance with its current business plan would be adversely
affected.
The Company has contracted for the manufacture of therapeutic proteins for
preclinical testing and clinical development from a single supplier. The
supplier is a recently organized entity which will manufacture the therapeutic
proteins in a new cGMP manufacturing facility. The Company will be dependent on
this company for its supply of therapeutic proteins. Any failure or delay in
supplying therapeutic proteins could affect the timing of preclinical tests and
clinical trials and could delay submission of products for regulatory approval.
MANUFACTURING AND MARKETING
The Company has developed in-house capabilities for the production and
purification of recombinant proteins for use in its research activities, but
does not currently have any manufacturing facilities capable of supplying
materials suitable for clinical trials or for commercial sale or any experiences
in manufacturing materials suitable for clinical trials or for commercial sale.
In the near term, the Company intends to rely on third parties for production of
certain of its therapeutic proteins for use in pre-clinical and early clinical
development and has entered into an agreement with a third party to supply such
materials. The Company will depend on such third party to comply with current
good manufacturing practices ("cGMPs") and other regulatory requirements and to
deliver materials on a timely basis, however there can be no assurance that such
party will perform. Any failures by third parties may delay clinical trial
development or the submission of products for regulatory approval, or otherwise
impair the Company's competitive position, which could have a materially adverse
effect on the Company's business.
The Company is planning the construction of a pilot scale production and
process development facility for the preparation of clinical trial quantities of
its therapeutic proteins in compliance with cGMP requirements. The Company has
completed the conceptual design and is beginning the preliminary engineering
design and site selection process. Construction is expected to begin by mid 1997
and be completed in mid to late 1998. The facility will be designed to allow for
the production and purification of multiple recombinant proteins. The Company
intends to use the facility for production of preclinical and clinical supplies
of its therapeutic proteins and for process development and scale-up. A delay in
completion of the facility could adversely affect the cost and timing of
clinical trials and could delay submission of products for regulatory approval.
The Company intends to seek financing with respect to all or a portion of the
estimated $40 million construction cost of this proposed facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity."
The Company's long range plan is to establish manufacturing capabilities to
allow it to meet its clinical trial and commercial manufacturing requirements.
However, the Company may contract with third party manufacturers or may develop
products with partners and take advantage of the partner's manufacturing
capabilities. There can be no assurance that the Company will be able to
successfully establish manufacturing capabilities and manufacture its products
economically or in compliance with cGMPs and other regulatory requirements.
The Company generally expects to rely on its collaborators or on third
parties with whom the Company may contract to market any products. In either
case, the Company will be dependent on such third parties for marketing.
However, in the future, the Company may co-promote or retain U.S. marketing
rights to certain of its products. Significant additional expenditures and
management resources will be required to develop an external sales force and
implement its marketing strategy if the Company decides to market products
directly. There can be no assurance that the Company's collaborators or other
third parties will be successful in marketing products, or that the Company will
be able to establish a successful marketing force.
EMPLOYEES
As of February 15, 1997, the Company had 284 full-time employees, of whom
244 were in research and development, including 61 scientists holding doctorate
degrees. The Company anticipates hiring approximately 25 additional employees
during the next twelve months. The additional staff are expected to include a
formulation and stability staff and a clinical development group in support of
product development research. None of the Company's employees is covered by
collective bargaining agreements and management considers its relations with its
employees to be good.
ITEM 2. PROPERTIES
The Company currently leases approximately 135,000 square feet of
laboratory and office space in five buildings in Rockville, Maryland. This
includes approximately 119,000 square feet of laboratory space and approximately
16,000 square feet of administrative office space.
The Company considers that its properties are generally in good condition,
are well maintained and are generally suitable and adequate to carry on the
Company's business.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER'S MATTERS
The Company's Common Stock is traded on the NASDAQ National Market System
under the symbol HGSI. The Company's Common Stock began trading on December 2,
1993. The following table presents the quarterly high and low sales price as
quoted by NASDAQ.
1996 HIGH LOW
First Quarter 49 3/4 31 1/2
Second Quarter 48 1/4 32 1/2
Third Quarter 39 1/2 24 3/4
Fourth Quarter 43 1/4 34 3/4
1995 HIGH LOW
First Quarter 15 1/2 12 1/4
Second Quarter 17 3/4 12 1/4
Third Quarter 29 16 5/8
Fourth Quarter 38 1/4 18 1/4
1994 HIGH LOW
First Quarter 20 3/4 14
Second Quarter 20 1/2 15 1/4
Third Quarter 19 3/4 14
Fourth Quarter 18 1/2 14 1/4
1993 HIGH LOW
12/2/93 - 12/31/93 27 3/4 14 1/2
As of March 17, 1997, there were approximately 525 holders of record of the
Company's Common Stock. No cash dividends have been paid on the Common Stock to
date.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company for the years ended
December 31, 1994, 1995 and 1996, and as of December 31, 1995 and 1996 have been
derived from the audited financial statements included elsewhere herein and
should be read in conjunction with such financial statements and the
accompanying notes. The following selected financial data of the Company for the
period from June 26, 1992 (inception) to December 31, 1992 and for the year
ended December 31, 1993, and as of December 31, 1992, 1993 and 1994 have been
derived from audited financial statements not included herein. The results of
operation of prior periods are not necessarily indicative of results that may be
expected for any other period. See "ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "ITEM 1. BUSINESS."
JUNE 26, 1992
(INCEPTION) YEARS ENDED DECEMBER 31,
TO DECEMBER 31, -------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS
DATA:
Revenue-research and development
collaborative contracts ... $ -- $ 22,000 $ 41,065 $ 5,000 $ 36,460
Costs and expenses:
Research and development:
Direct expenditures ... 805 7,611 17,636 22,904 30,409
Payments under research
services agreement .. 2,925 8,989 9,662 10,075 10,063
General and administrative 541 3,998 6,840 8,745 9,639
Net interest (income)
expense ................ 121 (390) (2,813) (4,005) (6,092)
-------- -------- ---------- -------- -- ----------
Income (loss) before taxes . (4,392) 1,792 9,740 (32,719) (7,559)
Provision (benefit) for
income taxes ............... -- (2) 2,436 (1,651)
208
Net income (loss) .......... $ (4,392) $ 1,794 $ 7,304 $(31,068) $ (7,767)
======== ======== ========== ========== ==========
Net income (loss) per share $ (0.41) $ 0.15 $ 0.47(1) $ (1.98)(1) $ (0.42)(1)
======== ======== ========== ========== ==========
Weighted average shares
outstanding ............... 10,783 12,197 15,543(1) 15,723(1) 18,631(1)
AS OF DECEMBER 31,
-----------------------------------------------------------
1992 1993 1994 1995 1996
-------- ------- ------- --------- ---------
(In thousands)
BALANCE SHEET DATA:
Cash, cash equivalents and
investments................... $ 2,898 $69,478 $76,002 $ 105,462 $ 116,116
Total assets................... 9,835 82,450 95,543 126,963 140,117
Total debt and capital
leases, less current portions. 64 1,338 5,346 4,332 2,954
Retained earnings (deficit).... (4,392) (2,598) 4,706 (26,362) (34,129)
Total stockholders' equity..... 68 75,929 83,785 115,606 128,521
- -------------------------------------------------------------------------------------------------------------------
(1) Computed on the basis described in Note B of Notes to Financial
Statements.
The Company has never paid dividends on its Common Stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company initially focused its efforts on establishing collaborative
arrangements, establishing and expanding its gene sequencing, bioinformatics,
molecular biology, cell biology, protein expression and pharmacology
capabilities, developing proprietary processes for automating the gene discovery
process and creating, together with its collaborators, approximately 600 cDNA
libraries representing most human organs, tissues and cell types. The Company's
activities are focused primarily on research and development of therapeutic
protein product candidates.
The Company has not received any product sales revenue or royalties from
product sales and does not anticipate revenues from product sales or from
royalties on product sales in the foreseeable future. Through December 31, 1996,
the Company had received (i) $69.9 million in revenue and $55.1 million in
equity payments pursuant to the SB Collaboration Agreements, (ii) payments from
the New Collaboration Partners of $17.5 million and (iii) an aggregate of $14.6
million from other collaborators, including $8.0 million from Pioneer Hi-Bred
International, Inc. ("Pioneer"), $2.0 million from F. Hoffmann-La Roche
("Roche"), $3.0 million from Pharmacia & Upjohn Company ("Pharmacia"), $0.6
million from OraVax Merieux Co. and Merieux OraVax S.N.C. (collectively,
"OraVax") and $1.0 million from Schering-Plough (in addition to certain payments
received from Schering-Plough pursuant to the New Collaboration Partner
Agreements). Pursuant to the terms of such collaboration agreements, the Company
expects to receive license fees and research payments of $17.5 million annually
over the next four years from the New Collaboration Partners and an aggregate of
$19.5 million over the next four years from other collaborators. See "Business
- -- Collaborative Arrangements."
The Company expects that its revenue sources for at least the next several
years may be limited to interest income, payments under the collaboration
agreements with the New Collaboration Partners, payments from the sale of rights
and other payments from other collaborators and licensees under existing or
future arrangements, to the extent that the Company enters into any such further
arrangements. The Company expects to continue to incur substantial expenses
relating to its research and development efforts, which are expected to increase
relative to historical levels as the Company focuses on preclinical and clinical
trials required for the development of therapeutic protein product candidates.
As a result, the Company expects to incur continued and increasing losses over
the next several years unless it is able to realize additional revenues under
existing or new collaboration agreements. The timing and amounts of such
revenues, if any, cannot be predicted with certainty and will likely fluctuate
sharply. Results of operations for any period may be unrelated to the results of
operations for any other period. In addition, historical results should not be
viewed as indicative of future operating results.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues. The Company had revenues of $36.5 million and $5.0 million for
the years ended December 31, 1996 and December 31, 1995, respectively. The 1996
revenue consisted of $6.9 million for the achievement of the third milestone
("Milestone III") under the SB Collaboration Agreements, $10.0 million in
license fees and research payments from collaborations with Pioneer and Roche
entered into in the first quarter of 1996, $12.0 million in annual license fees
and additional payments from collaborations with Schering-Plough and Synthelabo
entered into in the second quarter of 1996, $5.5 million in annual license fees
and additional payments pursuant to a collaboration agreement entered into with
Merck in July 1996, and $2.1 million in license fees from collaborations with
Pharmacia, MedImmune and OraVax entered into in the fourth quarter of 1996. The
1995 revenue consisted of $5.0 million from Takeda for an option and license
agreement to commercialize certain future products of the Company in Japan.
Expenses. Research and development expenses increased to $40.5 million for
the year ended December 31, 1996 from $33.0 million for the year ended December
31, 1995. The increase resulted primarily from significant expansions in the
Company's cell biology, protein expression and pharmacology departments and
reflect the
Company's increasing emphasis on determining the biological functions and
possible medical utilities of genes and proteins discovered as a result of the
Company's gene discovery efforts. Expenses will continue to increase in support
of research and development of potential products by the Company and in support
of the new collaborations.
General and administrative expenses increased to $9.6 million for the year
ended December 31, 1996 from $8.7 million for the year ended December 31, 1995.
The increase resulted primarily from significantly higher legal expenses
associated with filing and prosecuting a larger number of patent applications
relating to genes and proteins discovered by the Company. Patent expenses will
continue to increase significantly as additional applications are filed and
existing applications are prosecuted in the United States and internationally.
Interest income was significantly higher for the year ended December 31, 1996
compared to the year ended December 31, 1995 due to higher cash balances and
interest rates.
Net Income (Loss). The Company recorded a net loss of $7.8 million, or
$0.42 per share, for the year ended December 31, 1996 compared to a net loss of
$31.1 million, or $1.98 per share, for the year ended December 31, 1995. The
difference in results for the year ended December 31, 1996 and 1995 is primarily
due to the receipt of $36.5 million in license fees and research payments during
the year ended December 31, 1996, which was partially offset by higher expenses.
YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
Revenues. The Company generated $5.0 million in revenues for the year ended
December 31, 1995, compared with revenues of $41.1 million for the year ended
December 31, 1994. The 1995 revenues were received from Takeda for an Option and
License Agreement to commercialize certain future products of the Company in
Japan. Substantially all of the 1994 revenues were payments upon the achievement
of the first milestone ("Milestone I") (first quarter) and the second milestone
("Milestone II") (second quarter) under the SB Collaboration Agreements, and the
exercise by SB of an option for certain rights in Southeast Asia, pursuant to
the SB Collaboration Agreements.
Expenses. Research and development expenses were $33.0 million for the year
ended December 31, 1995, compared to $27.3 million for the year ended December
31, 1994. The Company's payments to TIGR increased from $9.7 million in 1994 to
$10.1 million in 1995 due primarily to higher scheduled research payments in
accordance with the long-term contractual agreement between TIGR and the
Company. Direct expenditures for research and development increased to $22.9
million for the year ended December 31, 1995 from $17.6 million for the year
ended December 31, 1994 due to planned expansions in the areas of molecular
biology, cell biology, protein expression and pharmacology.
General and administrative expenses increased to $8.7 million for the year
ended December 31, 1995 from $6.8 mil