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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
For the fiscal year ended December 28, 1997 Commission File No. 0-21794
GENZYME TRANSGENICS CORPORATION
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 04-3186494
(State or other jurisdiction of (I.R.S. Employer identification No.)
incorporation or organization)
FIVE MOUNTAIN ROAD 01701
FRAMINGHAM, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
(508) 872-8400
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01
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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 twelve months and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 16, 1998: $122,872,600
Number of shares of the Registrant's Common Stock outstanding as of March
16, 1998: 17,406,912
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 27, 1998 are incorporated by reference into Part III
of this Form 10-K.
ITEM 1.
BUSINESS
General
Genzyme Transgenics Corporation ("GTC" or the "Company") has established a
leadership position in the application of transgenic technology to the
development and production of genetically engineered proteins for therapeutic,
diagnostic and other biomedical uses, both in collaboration with pharmaceutical
and biotechnology companies and independently. To date, GTC has produced more
than 27 such proteins. For its lead compound, Antithrombin III ("AT-III"), the
Company has completed a Phase I and Phase II human clinical trial, and has
initiated a Phase III clinical study. GTC is also a leading Contract Research
Organization ("CRO"), providing services such as preclinical efficacy and safety
testing, in vitro testing and formulation development to pharmaceutical,
biotechnology, medical device and other companies. In February 1998, GTC
reorganized its CRO business to form Primedica Corporation ("Primedica").
Revenues for the Company's testing and production services were $43.4 million in
1997, an increase of 13% from 1996. Revenues from research and development
totaled $19.5 million, an increase of 134% from 1996.
GTC produces recombinant proteins transgenically by inserting, into the genetic
material of an animal embryo, a gene that directs the production of a desired
protein in the milk of female offspring. The Company believes that transgenic
production offers significant economic and technological advantages relative to
traditional protein production systems, including reduced capital expenditures
and lower direct production cost per unit for complex proteins. For proteins
currently derived from pooled human plasma, transgenic production provides an
alternative source, free from the risks of transmission of human viruses and
other adventitious agents. In the case of certain complex proteins, transgenic
production may represent the only technologically and economically feasible
method of commercial production. To date, GTC has expressed 14 proteins at
levels of one gram per liter or higher, more than 10 times the level typically
achieved for comparable proteins in conventional cell culture systems.
GTC's most advanced product candidate is transgenic AT-III, an anticoagulant
normally present in human serum. Plasma-derived AT-III is an approved therapy
for inherited AT-III deficiency and for certain acquired deficiencies. Worldwide
sales of plasma-derived AT-III were approximately $200 million in 1994. The
Company believes transgenic AT-III may represent a more attractive product in
light of safety considerations, the limited volume of AT-III available from
plasma and the impracticality of producing sufficient quantities of recombinant
AT-III by cell culture methods. GTC has expressed transgenic AT-III in goats,
demonstrating stable expression across multiple generations and successive
lactations. Further, GTC has purified transgenic AT-III to clinical grade with
attractive yields. Preclinical safety and efficacy studies, Phase I and Phase II
human safety studies, have been successfully completed. GTC filed an
Investigational New Drug application (an "IND") with the U.S. Food and Drug
Administration ("FDA") to initiate a Phase III clinical trial for this product,
which began in the first quarter of 1998.
Other significant plasma proteins under development by GTC include Alpha-1
Proteinase Inhibitor ("API") and Human Serum Albumin ("HSA"), which is now being
developed in conjunction with Fresenius AG. Additionally, GTC is working with
other corporate partners such as Bristol-Meyers Squibb and BASF on a number of
monoclonal antibodies and other recombinant proteins. The Company is also
developing transgenic production processes for other proteins, including
prolactin, insulin and the msp-1 protein for use in a malaria vaccine, and is in
commercial discussions with prospective partners for other products.
The Company's Primedica CRO operations are focused on enabling its clients to
meet regulatory testing and other product development needs quickly and
effectively by offering a fully integrated line of services. Primedica's
laboratories focus on providing high value, scientifically differentiated
services to clients, including preclinical efficacy testing, experimental
surgery, photobiology and reproductive toxicology testing as well as formulation
development. Primedica uses its technological capabilities to introduce new
services that improve the ability of its customers to develop their products
successfully. The Company's comprehensive programs link its preclinical and
manufacturing support services in order to reduce the time and expense of
bringing new therapeutics or other products to market.
As an outgrowth of production services performed for the National Cancer
Institute (the "NCI"), the Company has developed technology for the production
of idiotypic vaccines, in which a cancer patient's own tumor cells are used to
enhance the immune system's ability to prevent the regrowth of tumors. Idiotypic
vaccines produced by GTC have shown
promising results, including the absence of disease for over six years in four
of nine lymphoma patients treated. Results from this program have been reported
in the October 1992 issue of The New England Journal of Medicine and the May
1995 issue of The Lancet. During 1997, 4 of 5 multiple myeloma patients and 7 of
8 lymphoma patients were shown to mount T-cell immune responses specific to
their tumors in response to vaccination with the idiotype vaccine. These results
were reported at the IVth International Workshop on Multiple Myeloma in Boston
in June 1997 and at the American Society of Hematology Meeting in San Diego in
December 1997. GTC and the NCI signed a Collaborative Research and Development
Agreement ("CRADA") in 1996. The Company has expanded its clinical trials in
myeloma in 1997 under an agreement with the University of Arkansas for Medical
Sciences.
Transgenic Production
Overview and Strategy
A growing number of recombinant proteins are being developed by pharmaceutical,
biotechnology and other companies for therapeutic, diagnostic and nutriceutical
applications. Many of these proteins have proven difficult or expensive to
produce in the quantities required using conventional methods, such as bacteria,
yeast or mammalian cell sources. Moreover, bacteria or yeast systems cannot
produce many complex proteins. While mammalian cells can produce certain complex
proteins, they are generally more difficult and expensive to grow and often
produce lower volumes of protein. Proteins produced by the Company
transgenically have been expressed at concentrations significantly greater than
those typically achieved using conventional methods.
Transgenic technology uses in vitro microinjection or other techniques to
introduce a genetically engineered segment of exogenous DNA (an "expression
vector") into the genetic material of a fertilized egg or early stage animal
embryo. Two types of genetic instructions are incorporated into the expression
vector: the coding sequence and the promoter sequence. Coding sequences instruct
the cells of the animal to express a specified protein. Promoter sequences
direct the expression of proteins at appropriate times and by specific tissues
or cell types. The modified embryo is then transferred to a recipient female.
Transgenes are successfully integrated into the genetic makeup of only a small
percentage of the embryos that are microinjected; therefore multiple
microinjection candidates are required. If successful, the resulting animal,
when mature and lactating, will express the desired protein. Once established in
the first generation of transgenic animals, the transgene is transmitted like
other genetic traits to future generations through traditional breeding with
either non-transgenic or other transgenic animals.
The Company believes transgenic production offers significant economic and
technological advantages over traditional methods of protein production,
including reduction in the total amount of required capital expenditures, lower
direct production cost per unit and reduced risk of transmission of human
viruses and other adventitious agents. For certain complex proteins, transgenic
production may represent the only technologically and economically feasible
method of commercial production. To date, the Company has produced such proteins
principally using goats, which offer an attractive combination of large milk
volumes, relatively short generational time periods and ease of handling and
milking.
GTC also believes that for certain proteins required in extremely large amounts,
the cloning of large dairy animals such as cows expressing the desired transgene
in their milk will speed transgenic biopharmaceutical development. In September
1997, GTC signed an exclusive, worldwide licensing agreement with Advanced Cell
Technologies, Inc. ("ACT") of Worcester, MA allowing GTC to utilize ACT
technology for the development of biopharmaceuticals and nutraceuticals in the
milk of cloned, transgenic dairy cows. In January 1998, two transgenic calves
expressing a marker gene were born using this technology. ACT has developed
proprietary technology, which, when coupled with GTC's transgenic technology,
will provide patentable approaches to efficiently create cloned transgenic cows.
GTC's strategy is to commercially produce proteins by use of transgenic
technology both by (i) entering into contracts with biotechnology and
pharmaceutical companies to utilize the Company's transgenic services in
exchange for revenue, royalties and, possibly, marketing rights to the resulting
product and (ii) independently identifying proteins in the public domain,
proteins covered by lapsing patents and proprietary proteins available for
license which represent attractive candidates for transgenic production and
funding development of such proteins itself or seeking corporate partner
funding.
GTC has entered into funding contracts for the development of AT-III, other
plasma proteins, certain monoclonal antibodies and other products.
Achievements to Date:
Over the past few years, GTC has shown the feasibility of transgenic protein
production by the achievement of the following specific milestones:
o To date, GTC has produced 27 different transgenic proteins in animals,
14 at concentrations of one gram per liter or greater and one protein
in excess of 35 grams per liter, levels often many times higher than
those achievable in other production systems.
o The Company has produced a significant number of transgenic goats. GTC
maintains a herd of over 500 goats at its facility in Massachusetts as
well as an additional 150 goats at Tufts University School of
Veterinary Medicine ("Tufts"). Over 40 of these goats are transgenic,
each expressing one of five different proteins.
o Stability of expression has been demonstrated across lactations, and,
for two proteins, across two generations expressing the same
transgene.
o Together with Genzyme Corporation ("Genzyme"), GTC has been able to
achieve clinical grade purity for a transgenically produced protein at
high recovery levels. This transgenic protein has been extensively
characterized and its pharmacodynamic properties in animal models have
been shown to be comparable to those of the same protein from other
sources.
o GTC completed a Phase I human safety clinical trial, filed an IND with
the FDA, and completed a Phase II clinical trial in patients
undergoing coronary artery bypass grafting ("CABG"). GTC began a Phase
III clinical trial in patients on cardiopulmonary bypass during
surgery in March 1998.
Transgenic Products Under Development
Antithrombin III. AT-III is an anticoagulant normally present in human serum.
Decreased levels of AT-III are found in individuals who have either a hereditary
or an acquired deficiency of AT-III. The hereditary deficiency has an incidence
rate of 1 in 2,000 to 1 in 20,000. Individuals with hereditary AT-III deficiency
have an increased tendency towards blood clots (thromboses) and are treated with
AT-III protein replacement therapy during periods when they are at high risk for
clots, such as during surgery. Acquired AT-III deficiency occurs in many disease
states as a result of several possible causes, including a decrease in the
amount of AT-III produced, an increase in the rate of AT-III consumption or an
abnormal loss of AT-III from the circulation. Examples of such conditions
include acute liver failure, disseminated intravascular coagulation, sepsis and
septic shock, burns, multiple organ failure, bone marrow and other organ
transplantation and hemodialysis.
Plasma-derived AT-III is approved for use in Europe and Japan for treatment of
both acquired and hereditary AT-III deficiency. In the United States,
plasma-derived AT-III is currently approved for use only for hereditary AT-III
deficiency. The worldwide market for plasma-derived AT-III was approximately
$200 million in 1994.
GTC believes transgenic AT-III may represent a more attractive product in light
of the risks of viral transmission from pooled plasma products in general, the
limited volume of AT-III currently available from plasma and the impracticality
of producing sufficient quantities of recombinant AT-III in cell culture
systems. The Company also believes that a lower cost, higher volume alternative
to plasma-derived AT-III will further expand the use of AT-III in clinical
settings.
GTC has produced multiple transgenic goats carrying the AT-III gene and has
selected a founder goat from which a production herd is being generated. This
genetic line expresses AT-III at levels of approximately two grams per liter.
The processes for production and purification have been implemented and result
in a product that is purified to clinical grade at attractive yields.
Preclinical safety and efficacy studies for AT-III have been successfully
completed. The Company filed an IND with the FDA for the use of transgenic
AT-III as a potential treatment for AT-III deficiency that occurs during certain
vascular surgeries, including cardiopulmonary artery bypass grafting, and a
Phase II clinical study for this indication was completed. The study confirmed
the safety of AT-III at all doses administered and supported its ability to
enhance anticoagulation in CABG patients. A Phase III clinical trial was begun
in March 1998 to test the efficacy of AT-III in restoring heparin sensitivity
among patients on cardiopulmonary bypass. A concurrent trial is comparing the
physiological activity of transgenic AT-III with that of plasma-derived AT-III.
GTC is developing recombinant human AT-III under a license from Behringwerke AG,
subject to a royalty obligation. In March 1996, the Company entered into a
Convertible Debt and Development Funding Agreement (the "Agreement") with
Genzyme under which Genzyme agreed to provide a revolving line of credit
("Genzyme Credit Line") in the amount of $10 million and agreed to fund
development costs of the AT-III program. During 1996, Genzyme converted
$1,673,000 of debt to equity under this agreement, leaving the availability
under the Genzyme Credit Line at $8.3 million.
In March 1997, the Company amended the Agreement with Genzyme to provide for
continued funding by Genzyme of the development costs of the AT-III program
through June 30, 1997. In June 1997, the Company agreed to extend the AT-III
Agreement until December 31, 1997. Under the agreements in effect in 1997,
Genzyme provided $7 million in development funding. In July 1997, the Company
and Genzyme announced an agreement to establish a joint venture (the "ATIII
LLC") for the development, marketing and distribution of AT-III, subject to the
execution of a definitive agreement. A definitive collaboration agreement for
ATIII LLC ("Genzyme Joint Venture") was executed on January 1, 1998. Under the
terms of the agreement, Genzyme will provide 70% of the next $33 million of
development costs and the Company will fund the remaining 30%. Development costs
in excess of $33 million will be funded equally by the partners. In addition to
the funding, both partners will contribute manufacturing, marketing and other
resources to the joint venture at cost and will share profits from product sales
equally. The agreement covers all territories other than Asia and may include
milestone payments from Genzyme to the Company after the product has been
approved by the FDA.
Alpha-1 Proteinase Inhibitor ("API"). API is a serine protease inhibitor which
is normally present in human plasma. In certain pulmonary diseases, including
congenital alpha1-antitrypsin ("AAT") deficiency and cystic fibrosis, patients
develop chronic emphysema. Although the precise mechanism is uncertain,
researchers believe that the development of emphysema results from a chronic
imbalance between elastase and API, which is deficient in patients with
hereditary AAT deficiency. Plasma-derived API is approved in the United States
for parenteral use in the treatment of patients with congenital AAT deficiency.
Treatment of AAT deficiency focuses on chronic augmentation therapy with API to
restore the elastase/elastase inhibitor balance. Dosing requirements are high,
averaging four grams per week for a 150-pound patient.
An imbalance between elastase and elastase inhibitors also occurs in cystic
fibrosis, which is the most common fatal genetic disease among Caucasians,
occurring in one in every 2,500 infants born in the United States. Based on
preliminary data, the Company believes that aerosol administration of API to
cystic fibrosis patients may be effective in reducing the level of neutrophil
elastase in the lung, thereby reducing elastase-induced pulmonary tissue
degradation and fibrosis.
GTC believes that transgenic API may represent a more attractive product than
plasma-derived API in light of potential risks of viral transmission from donor
plasma products, and that it will be more economical to produce and more widely
available than the plasma-derived products. The ability to produce large
quantities of transgenic API may enable the Company to pursue other indications
for this product, such as atopic dermatitis, in which an imbalance of proteases
is also implicated.
GTC has expressed API at levels equivalent to 35 grams per liter in a mouse
model. Several transgenic founder goats have been generated, including at least
one line which expresses API in excess of 20 grams per liter. To date, GTC has
funded the development of API internally.
Human Serum Albumin ("HSA"). HSA is the protein principally responsible for
maintaining oncotic pressure, plasma volume and the balance of fluids in blood.
It is critical to the transport of amino acids, fatty acids, enzymes and
hormones in the blood stream. The therapeutic use of HSA is indicated in
situations of blood loss and decreased blood albumin levels which can occur
during shock, serious burns, pre- and post-operative conditions and gastric and
intestinal malfunctions. HSA is currently produced by human plasma
fractionation, with 1994 worldwide sales in excess of $1.3 billion.
For HSA and all human blood sourced products, the theoretical risk of virus
transmission, including HIV and hepatitis, remains a concern despite efforts to
improve screening and purification techniques.
Prices for HSA are expected to rise due to a number of factors, including
increasing costs of testing and purifying protein fractions sourced from human
plasma, the replacement of high margin plasma fractions with safer recombinant
versions,
and decreasing blood donations in the face of increasing demand. Transgenic
production of HSA would eliminate the risk of human viral transmission and help
ensure the delivery of safe therapeutics at competitive prices.
GTC has expressed transgenic HSA in mice at levels equivalent to or greater than
35 grams per liter. Because the Company has demonstrated that the mouse system
is highly predictive to that of dairy animals, the Company believes it will be
able to produce transgenic HSA in cows at commercial scale. An individual dairy
cow will produce approximately 8,000 liters of milk per year, or an estimated 80
kilograms of albumin per year. This level of productivity will provide GTC with
the ability to produce HSA at costs competitive with albumin sourced from human
blood. The Company believes that HSA is not the subject of any composition of
matter patent, and has entered into an agreement with Fresenius AG of Bad
Homburg, Germany, to further develop and commercialize transgenic HSA. During
1997, GTC made substantial progress toward meeting key milestones for the
commercialization of HSA. By the end of 1997, GTC has demonstrated, at the
technical laboratory scale and through its sophisticated analysis, that the
production of HSA at the scale, purity and cost requirements is feasible. In
February 1998, GTC's partner, Fresenius, agreed that this milestone had been
achieved. By this achievement GTC now believes it has demonstrated that it has
the ability to produce recombinant proteins at the lowest-to-date cost ever
achieved in the biotechnology industry.
The founding of transgenic cows for HSA also progressed well. GTC and its
collaborators were on target for the year in activities toward the founding of
transgenic cows. Both traditional microinjection and cloning techniques are
being utilized, and the first cows are expected to be born by Spring 1998. The
other elements of the project, such as planning for production facilities, are
on track or ahead of planned schedules. GTC has entered into an agreement with
Advanced Cell Technologies of Worcester, MA to develop cloned, transgenic cows
for the production of HSA.
Monoclonal Antibodies. Monoclonal antibodies are immune system proteins that can
find and attach to specific biological targets in the body. Recent advances in
developing humanized and human antibodies, single chain antibodies and
conjugated antibodies have added to the potential value of these therapeutic
agents. More than 50 monoclonal antibodies are now in clinical trials sponsored
by pharmaceutical and biotechnology companies with many more in development as
therapeutics for cancer, cardiovascular disease, immune system disorders and for
use against a wide variety of infectious agents, such as viruses and bacterial
infections. GTC is now collaborating with pharmaceutical and biotechnology
companies for the transgenic production of a number of therapeutic monoclonal
antibodies.
Bristol-Myers Squibb ("BMS"), a leading pharmaceutical company specializing in
cancer treatment, has entered into an agreement with GTC for transgenic
production in goats of its BR-96 monoclonal antibody, a potential therapy for
breast and lung cancer. In February 1997, GTC announced that it had successfully
demonstrated an expression level of 14 grams per liter in the milk of transgenic
goats, and that the antigen binding levels were equivalent to material produced
using conventional cell culture technology. During 1997, BMS decided to
terminate its antibody targeting program, of which BR-96 was a part. GTC did
receive its milestone payment of achievement of expression levels prior to this
termination. BMS is currently spinning off this technology to a group of former
BMS employees, and GTC expects that any further BR-96 development would be done
in conjunction with this new entity.
Discussions are underway to determine next steps.
GTC executed a second agreement with BMS for the development of transgenic goats
expressing a humanized monoclonal antibody in their milk. This antibody,
CTLA4Ig, is currently in clinical trials for the treatment of psoriasis, and may
have applications in other disorders including rheumatoid arthritis and organ
transplant rejection.
GTC currently has nine other funded development programs underway. One, an
anti-colon cancer antibody, produced on behalf of a Japanese pharmaceutical
company, has been expressed in the milk of goats at four grams per liter. Other
programs are being conducted in collaboration with B. Braun Melsungen,
Progenics, BASF AG, Zeneca, HMR, Monsanto/Searle, Novopharm and NeoRx. The
Company is in active discussions with a number of other pharmaceutical and
biotechnology companies for the transgenic development of therapeutic
antibodies.
Progenics. In 1997, GTC and Progenics Pharmaceuticals, Inc. signed a
collaborative agreement for the development of a transgenic manufacturing
process for PRO 542, Progenics' fusion protein for the treatment of HIV. The
initial samples of product have been produced by Progenics in cell culture and
have entered Phase I human clinical trials. This exclusive arrangement between
GTC and Progenics is targeted to the large scale, low cost manufacture of this
product which is hoped to be beneficial for HIV/AIDS patients.
Insulin. Current worldwide sales of insulin products are more than $3 billion
annually. Recombinant DNA insulin now accounts for approximately 50% of the
market.
GTC has expressed insulin precursors at the equivalent of more than eight grams
per liter in the milk of mice, which provides for the potential to manufacture
insulin on a highly cost effective basis. GTC has taken initial steps to develop
appropriate insulin processing and purification procedures, and the Company
believes that there are several approaches to the manufacture of a transgenic
insulin that may offer cost benefits compared to current products. Insulin is
not the subject of any known patents that could foreclose the Company's
development program.
Prolactin. In collaboration with Genzyme, GTC has developed multiple transgenic
mouse lines which express prolactin at levels in excess of the equivalent of one
gram per liter. Prolactin is a human hormone which has numerous biological
activities, including stimulation of the immune system. Genzyme has licensed
patents covering recombinant prolactin and the parties are jointly exploring the
development of transgenic prolactin for multiple clinical indications, and for
the infant and specialty nutritional product markets. GTC announced in November
1997 that it had achieved expression levels of 3 milligrams per milliliter of
human prolactin in the milk of transgenic mice, a level 30-50 times greater than
that achieved in conventional cell culture production systems.
Malaria Vaccine. GTC's transgenic expression system has the potential to express
the correct, immunogenic protein for use as a malaria vaccine both economically
and on a large scale. Malaria is a disease that has an annual incidence of more
than 300 million people worldwide and results in several million deaths
annually. GTC is working with the U.S. National Institutes of Health (the "NIH")
and the Federal Malaria Vaccine Coordinating Committee to transgenically express
a malaria vaccine and to examine the options for commercializing the vaccine.
The Company has signed a letter of intent to enter into a CRADA with the NIH and
has achieved high level expression on a malaria-based peptide, MSP-1, in the
milk of transgenic mice.
TransGenerics. GTC has a program to identify and develop transgenic production
systems for the first generation of approved recombinant drugs as they come off
patent. These drugs, many of which have established significant markets, may
become vulnerable to competition from second-generation transgeneric versions
which are more cost effective. GTC is in discussions with both generic and
proprietary pharmaceutical and biotechnology companies with strategic and
product-specific interests in the TransGenerics program.
GTC completed its first commercial agreement for an undisclosed
second-generation transgeneric with B. Braun of Melsungen, Germany. GTC will
develop the product, a currently-approved biological, through product launch. B.
Braun will make up to $11 million in development and milestone payments to GTC
in exchange for bringing the product to Phase II human clinical trials. Both
companies will share pivotal clinical trial costs, and GTC will retain
co-marketing rights in the US.
Other Products. GTC is actively developing, at various technical stages, a
number of proprietary products on its own or in conjunction with partners. These
products include decorin, for the treatment of scar formation in a wide variety
of surgical indications and other conditions such as renal disease, and
gluatamic acid decarboxylase (GAD) for the putative treatment of Type 1 juvenile
diabetes. GTC is also involved in several collaborations on products where
identity is confidential.
Primedica Corporation (CRO Services)
Overview
Contract research organizations provide testing and development services to
pharmaceutical, biotechnology, medical device and other companies, as well as to
certain government agencies. The industry is divided generally into companies
which conduct human clinical trials and those providing non-clinical services,
including preclinical testing, clinical trial support and other development
services. The worldwide revenues for non-clinical CRO services were in excess of
$1 billion in 1997.
The growth of the CRO market has been influenced by several factors. First, cost
control pressures on large pharmaceutical firms are leading them to focus on
core competencies, often resulting in a reduction in the size and capacity of
in-house, non-clinical testing departments. Second, emerging biotechnology and
medical device companies often have and can afford little infrastructure
dedicated to such functions. Third, new scientific developments continue
to lead to new fields of safety testing. Fourth, regulatory changes have
mandated additional testing requirements. Fifth, the need for services, such as
efficacy models and formulation development, increases as pharmaceutical
companies venture further from their traditional bases in search of breakthrough
products.
GTC believes that it has built one of the premier non-clinical CROs in the
industry. The Company believes that it has a broader set of value-added services
than any of its competitors and is differentiated by its ability to offer
comprehensive development programs. The Company has the ability to perform
virtually all of the safety, efficacy and quality control testing, as well as to
provide the regulatory affairs expertise necessary to bring a client's early
research-stage product to the start of Phase I clinical trials.
Operations and Technical Capabilities
GTC acquired its CRO capabilities through the acquisitions of TSI Corporation
("TSI") in October 1994 and BioDevelopment Laboratories, Inc. ("BDL") in June
1995. GTC conducts its CRO services through five laboratories: Mason
Laboratories (Worcester, Massachusetts); Argus Research Laboratories (Horsham,
Pennsylvania); Redfield Laboratories (Redfield, Arkansas); Washington
Laboratories (Rockville, Maryland) and BDL (Cambridge, Massachusetts). In
February 1998, GTC reorganized its CRO businesses under its wholly owned
subsidiary, Primedica Corporation ("Primedica"), to provide a unified identity
and a dedicated structure for further growth of its CRO business. GTC expects to
use Primedica as a vehicle to pursue acquisitions and facilitate other
transactions driving growth and profitability. This business currently employs
over 400 people.
Primedica's laboratories focus on providing high value, scientifically
differentiated services to its clients. Fields in which Primedica provides
contract services include:
o Preclinical Efficacy Testing measures the effectiveness of a drug
candidate prior to human clinical trials. Primedica believes that its
Mason Laboratories facility has the only comprehensive preclinical
efficacy services in the CRO marketplace utilizing a wide variety of
disease models and expertise intended to assist clients in designing
optimal clinical trials.
o ExperimentalSurgery to support toxicology programs enables Primedica
scientists to test novel routes of administration for biotechnology
products which cannot be delivered through standard routes. Primedica
believes that its Mason Laboratories facility has the leading surgical
capabilities in the preclinical CRO marketplace and has the ability to
perform studies which are unavailable from other CROs.
o PhotobiologyTesting measures a drug candidate's potential interactions
with sunlight. Primedica believes that the FDA will require an
increasing number of products to be tested for these effects.
Primedica has the only CRO facilities capable of performing a full
range of phototoxicology and photocarcinogenesis testing.
o Developmental and Reproductive Toxicology Testing measures a drug
candidate's potential impact on a fetus. Primedica believes that its
Argus Research Laboratories facility has performed more teratology
studies than any other laboratory in the industry and is widely
recognized as the leader in the field.
Primedica has also made significant investments in bioanalytical chemistry
services to support clinical trials, drug formulation development and lot
release testing for biopharmaceuticals. The Company believes that its experience
in related areas, its client base and its sales force enables it to compete
effectively in these fields. Clients have recently contracted with Primedica for
testing services for major programs in each of these areas, and Primedica is
pursuing opportunities which may, if successfully concluded, lead to growth in
each field. Primedica believes that its ability to provide high value,
scientifically differentiated services, combined with its traditional strengths
in toxicology, pharmacokinetics, cell line testing and production and regulatory
affairs, offers clients one of the broadest sets of preclinical services
available in the CRO industry.
Primedica believes the key to sustaining superior performance in this field will
be in providing services in a close, collaborative relationship in which
customers are able to receive scientific services from Primedica at levels equal
to or greater than that which they could receive from an in-house department.
Toward this end, GTC has also made significant investment in people, technology
and programs since its acquisition of TSI, increasing the numbers of doctoral
level employees by 42% since the acquisition. GTC believes that its testing
services strategy has been validated by the growth in its business since the
acquisition of TSI in October 1994. Revenues for the Company's testing and
production services in 1997 were $43.4 million representing a 13% increase
compared to 1996.
Idiotypic Cancer Vaccines
GTC's Washington Laboratories (now part of Primedica) has been producing
experimental cancer vaccines for the NCI under contract since 1993. These
vaccines have shown preliminary efficacy in early clinical trials. In 1996, the
Company signed a letter of intent to enter into a CRADA with the NCI to expand
these clinical trials and to gain development rights to the program.
Idiotypic cancer vaccines are autologous therapeutics, requiring that
immunoglobulin harvested from individual patients be expanded in separate cell
cultures. Vaccines are produced at the NCI and Primedica and are given to
patients upon the completion of chemotherapy. The vaccine activates the
patient's immune system to destroy cancer cells which remain after traditional
chemotherapy regimens.
The principal clinical focus of the work today is on B-cell lymphoma, with
secondary efforts on multiple myeloma and other related malignancies. There
are over 40,000 newly diagnosed cases of B-cell lymphoma in the United States
each year. Most patients initially respond favorably to chemotherapy, but the
cancer has a 70% to 90% mortality rate, with patients typically relapsing
within two to three and one half years.
Idiotypic vaccines produced by Primedica have shown promising results, including
the absence of disease for over six years in four of nine lymphoma patients. The
first myeloma patient treated experienced a remission of three and one half
years. GTC signed a CRADA with the NCI in May 1997 to expand clinical trials for
lymphoma and myeloma. The production costs for these vaccines will be shared by
the NCI and GTC. In June 1997, GTC's NCI collaborator, Dr. Larry Kwak, reported
that 4 of 5 multiple myeloma patients who had received the idiotypic vaccine
have mounted a cellular immune response against their own tumors. He further
reported at the American Society of Hematology meeting in December 1997, that 7
of 8 lymphoma patients had responded similarly to the vaccine. In 1997, GTC
entered into a collaboration with the University of Arkansas to expand myeloma
Phase I/II clinical trials at that institution, and expects to be manufacturing
6 vaccines per month by March 1998 for these trials, as well as two vaccines
monthly for the lymphoma clinical trial.
Relationship With Genzyme
Equity Position. Genzyme is the largest single stockholder of the Company,
currently holding 7,428,365 shares of Common Stock, representing approximately
43% of the outstanding GTC Common Stock. Genzyme also holds a Common Stock
Purchase Warrant (the "Genzyme Warrant") exercisable for 145,000 shares of
Common Stock at a price of approximately $2.84 per share, the market price of
the Common Stock at the time the warrant was issued.
Four million of Genzyme's shares in GTC were acquired in 1993 at the time of the
Company's organization in exchange for the transfer of certain assets to the
Company. In February 1995, 500,000 shares were sold to Genzyme at $8.00 per
share, upon exercise by GTC of a put agreement entered into at the time of the
Company's initial public offering. Genzyme received 1,333,333 shares in 1995 and
219,565 shares in 1996 in exchange for conversion of debt at the then current
market prices. In July 1995, 475,467 shares were issued to Genzyme in exchange
for shares of Genzyme common stock delivered as a portion of the consideration
for the acquisition of BDL. The remaining 900,000 shares were purchased by
Genzyme as part of the August 1996 Public Offering. The Genzyme Warrant, which
expires on July 3, 2005, was issued to Genzyme in consideration of Genzyme's
guaranty of the Company's indebtedness to a commercial bank discussed below. All
of the shares held by Genzyme are entitled to certain registration rights.
Arrangements Regarding Technology and Product Development. GTC and Genzyme have
entered into a number of agreements regarding technology and product development
discussed below:
Technology Transfer Agreement. Under the Technology Transfer Agreement
dated May 1, 1993, Genzyme transferred substantially all of its transgenic
assets and liabilities to GTC, including its ownership interest in SMI
Genzyme Ltd., a joint venture between Genzyme and Sumitomo Metal Industries
Ltd. (the "Joint Venture"), assigned its relevant contracts, and licensed
to the Company technology owned or controlled by it and relating to the
production of recombinant proteins in the milk of transgenic animals (the
"Field") and the purification of proteins produced in that matter. The
license is worldwide and royalty free as to Genzyme, although GTC is
obligated to Genzyme's licensors for any royalties due them. As long as
Genzyme owns less than 50% of GTC,
Genzyme may use the transferred technology, or any other technology it
subsequently acquires relating to the Field, without any royalty obligation
to the Company, provided Genzyme may not offer transgenic production
services to third parties.
R&D Agreement. Pursuant to the R&D Agreement, Genzyme and GTC agreed, until
May 1, 1998, to provide research and development services to the other
relating, in the case of GTC, to transgenic production of recombinant
proteins and, in the case of Genzyme, to the purification of such proteins.
Each company receives payments from the other equal to the performing
party's fully allocated cost of such services, which can be no less than
80% of the annual budgets established by the parties under the R&D
Agreement, plus, in most cases, a fee equal to 10% of such costs.
AT-III Development Funding. In March 1996, the Company entered into a
Convertible Debt and Development Funding Agreement (the "Agreement") with
Genzyme under which Genzyme agreed to provide a revolving line of credit
("Genzyme Credit Line") in the amount of $10 million and agreed to fund
development costs of the AT-III program. During 1996, Genzyme converted
$1,673,000 of debt to equity under this agreement, leaving the availability
under the Genzyme Credit Line at $8.3 million.
In March 1997, the Company amended the Agreement with Genzyme to provide
for continued funding by Genzyme of the development costs of the AT-III
program through June 30, 1997. In June 1997, the Company agreed to extend
the Agreement until December 31, 1997. Under the agreements in effect in
1997, Genzyme provided $7 million in development funding. In July 1997, the
Company and Genzyme announced an agreement to establish a joint venture for
the development, marketing and distribution of AT-III, subject to the
execution of a definitive agreement. A definitive collaboration agreement
for ATIII LLC was executed on January 1, 1998. Under the terms of the
agreement, Genzyme will provide 70% of the next $33 million of development
costs and the Company will fund the remaining 30%. Development costs in
excess of $33 million will be funded equally by the partners. In addition
to the funding, both partners will contribute manufacturing, marketing and
other resources to the joint venture at cost and will share profits from
product sales equally. The agreement covers all territories other than Asia
and may include milestone payments from Genzyme to the Company after the
product has been approved by the United States Food and Drug
Administration.
Other Arrangements. GTC and Genzyme have also entered into the following other
arrangements:
Services Agreement. Under a services agreement between GTC and Genzyme (the
"Services Agreement"), GTC pays Genzyme a fixed monthly fee for basic
laboratory and administrative support services provided by Genzyme. The
monthly fee is adjusted annually, based on the services to be provided and
changes in Genzyme's cost of providing the services. The Services Agreement
is self-renewing annually and may be terminated upon 90 days notice by
either party to the other party.
Lease. GTC leases a portion of Genzyme's facilities in Framingham,
Massachusetts (the "Lease"). GTC paid Genzyme $178,000 under the Lease in
1997.
Credit Line Guaranty, Term Loan Guaranty and Lien. The Company obtained a
credit line in July 1995 and a term loan in December 1995 with a commercial
bank, each secured by Genzyme's guaranty of the Company's obligations
thereunder (up to $9.8 million at December 28, 1997). The Company has
agreed to reimburse Genzyme for any liability Genzyme may incur under such
guaranty and has granted Genzyme a first lien on all of the Company's
assets to secure such obligation.
Genzyme Credit Line. In March 1996, the Company entered into the Genzyme
Credit Line Agreement with Genzyme under which Genzyme agreed to provide a
revolving line of credit in the amount of $10 million. During 1996,
$1,673,000 of debt was converted into 219,565 shares of common stock,
leaving $8,327,000 available on the revolving line of credit.
In September 1997, the Company and Genzyme amended the terms of the $8.3
million Genzyme Credit Line. The expiration date of the revolving credit
line was extended to March 31, 2000, with an option, at that date, for the
Company to convert the outstanding balance to a three-year term loan. The
interest rate remains at 7% through April 1, 1998, increasing annually
through the end of the term loan; starting at the lower of 8% or prime in
the first year increasing to the lower of 10% or prime lending rate +2% in
the final year of the term loan. Financial
covenants require positive quarterly earnings before interest, taxes,
depreciation, amortization and unfunded research and development expense
starting April 1, 1998. As of December 28, 1997, there was $6,000,000
outstanding on the Genzyme Credit Line.
Other Strategic Collaborations
Tufts University School of Veterinary Medicine. Pursuant to a cooperation and
licensing agreement, Tufts has agreed to work exclusively with GTC until
September 1998 in developing commercial applications of transgenic protein
production in milk. Tufts has also granted GTC a perpetual, non-exclusive
license to use certain proprietary microinjection technology and animal
husbandry techniques. Sales of products derived from transgenic goats produced
by Tufts, or from their offspring, are subject to royalties payable to Tufts.
The Company maintains a herd of approximately 150 goats at Tufts' facility in
Grafton, Massachusetts.
The Joint Venture. GTC holds an interest in the Joint Venture which, in March
1994, increased to 22% after an additional $1.2 million cash investment by the
Company. In October 1995, GTC contributed approximately $807,000 to maintain its
22% interest. The Joint Venture and GTC are parties to a research and
development agreement under which the Joint Venture funded GTC's research into
transgenic production of AT-III through October 1995 and certain research on
other proteins (the "Funded Proteins") through October 1996. GTC has granted to
the Joint Venture an exclusive license in Asia to use GTC's transgenic
technology to market and sell transgenic animals and to sell Funded Proteins
until the later of 2008 or the expiration of any applicable Japanese patent,
subject to various reciprocal royalty obligations. In February 1997, the Company
reached agreement with the Joint Venture under which GTC received milestone
payments of $4.4 million (see Note 12 to the consolidated financial statements
appearing in this report).
Patents and Proprietary Rights
GTC has filed a number of patent applications which cover relevant portions of
its transgenic technology, several of which are covered by cross-licensing
agreements. GTC holds an exclusive license from Genzyme to rights under a number
of patent applications on file in the United States and corresponding foreign
patent applications relating to certain aspects of its technology. GTC has a
broad patent issued by the European Patent Office which grants the full range of
claims presented in GTC's application covering the basic method of protein
production in milk, as well as any promoter used to do so. Other GTC
applications as to specific proteins, classes of proteins, techniques to enhance
expression and purification technologies remain pending.
GTC has exclusive and nonexclusive licenses to technologies owned by other
parties, including DNX, Inc. as to microinjection, Stanford University as to
gene transfer, and Behringwerke AG as to AT-III, as well as promoter
cross-licenses in place with PPL Therapeutics PLC and Pharming B.V. Certain of
the licenses require GTC to pay royalties on sales of products which may be
derived from or produced using the licensed technology. The licenses generally
extend for the life of any applicable patent. In April 1997, GTC entered into a
Settlement Agreement that ended the arbitration proceeding with Pharming B.V.
with respect to one such cross-license agreement. See "Item 3--Legal
Proceedings."
The Company also relies upon trade secrets, know how and continuing
technological advances to develop and maintain its competitive position. In an
effort to maintain the confidentiality and ownership of trade secrets and
proprietary information, the Company requires employees, consultants and certain
collaborators to execute confidentiality and invention assignment agreements
upon commencement of a relationship with the Company.
Competition
Transgenics
Many companies, including biotechnology and pharmaceutical companies, are
actively engaged in seeking efficient methods of producing proteins for
therapeutic or diagnostic applications. Two other companies known to GTC are
extensively engaged in the application of transgenic technology for the
production of proteins: Pharming B.V. and PPL Therapeutics PLC. Pharming B.V.,
based in the Netherlands, is primarily engaged in the development of recombinant
proteins in the milk of transgenic cows, which are most suitable for extremely
high volume protein production. See "Item 3--Legal Proceedings." PPL
Therapeutics PLC, which is based in Scotland, utilizes primarily sheep for
transgenic protein production.
Primedica
The worldwide markets for testing services, manufacturing support services and
related development services are highly fragmented, involving several hundred
companies, as well as universities and governmental bodies. Competition in these
markets is based primarily on technological capabilities and reputation for
quality of products and services offered and perceived financial stability. In
certain market segments, price is also a significant competitive factor.
Government Regulation
Transgenics
The manufacturing and marketing of GTC's potential products, and certain areas
of research related to them, are subject to regulation by governmental
authorities in the United States, including the FDA, the U.S. Department of
Agriculture (the "USDA") and the Environmental Protection Agency (the "EPA").
Comparable authorities are involved in other countries.
To GTC's knowledge, no protein produced in the milk of a transgenic animal has
been submitted for final regulatory approval. However, the FDA issued its Points
to Consider in August 1995. Earlier in 1995, comparable guidelines were issued
by European regulatory authorities. GTC believes that its programs
satisfactorily address the issues raised by these documents and generally views
them as a very positive milestone in the acceptance of the transgenic form of
production. Based on discussions with the FDA and others, GTC expects that the
basic U.S. regulatory framework for the transgenic production of recombinant
proteins in animals will be similar to that described in the Points to Consider.
The anticipated approval process will be a two-part process, governing, first,
the approval of an individual pharmaceutical product as safe and effective and,
second, the approval of the manufacturing process as complying with applicable
FDA current Good Manufacturing Processes ("GMPs"). There can be no assurance,
however, that there will not be any delays in product development or FDA
approval due to issues arising from the breeding of transgenic animals and the
use of proteins derived from such animals.
With respect to therapeutic products, generally the standard FDA approval
process includes preclinical laboratory and animal testing, submission of an IND
to the FDA, appropriate human clinical trails to establish safety and
effectiveness and submission of a New Drug Application prior to market
introduction. The Company generally expects the same process to apply to
transgenically produced products and has already submitted a U.S. IND for AT-III
and has initiated clinical trials in the U.S. GTC expects the approval process
for various proteins to be undertaken either by the Company, by a collaborator
for which the Company is producing proteins, or jointly, depending upon the
nature of the relationship involved.
Approval for the production facilities to be used in producing a therapeutic
product will be subject to both the requirements for Biologics License
Applications and the Points to Consider.
Primedica
GTC and its customers are subject to a variety of regulatory requirements
intended to ensure the quality and integrity of their products and services. The
industry standard for conducting non-clinical testing is embodied in regulations
called Good Laboratory Practices ("GLPs"). GLPs have been adopted by the EPA and
the FDA and a number of foreign regulatory bodies. To help ensure compliance,
the Company maintains a strict quality assurance program at each site to audit
test data and conduct regular inspections of testing procedures and facilities.
GTC also complies with FDA-established current GMPs at its Washington
Laboratories and at BDL.
GTC also maintains certain licenses and permits issued by federal, state and
local authorities relating to the operation of its current laboratory and
testing facilities, including those required for hazardous waste disposal, the
purchase, use and disposal of radioactive isotopes and the use of animals in
testing and research. These licenses and permits include licenses from the U.S.
Nuclear Regulatory Commission for the purchase, use and disposal of small
amounts of short-lived radioactive isotopes for research purposes. GTC also has
registered with the Massachusetts Department of Environmental Protection and the
EPA as a Very Small Quantity Hazardous Waste Generator in connection with its
disposal of certain organic hazardous wastes used in connection with its
molecular biology and biomedical research. These wastes are disposed of through
a licensed hazardous waste transporter. The use and disposal of chemicals is
regulated under the Toxic Substances Control Act and other state and federal
legislation.
Each of GTC's laboratories is licensed by the USDA and state and local
authorities to house and use laboratory animals for biomedical research
purposes. The ability to continue using animals in testing and research is
dependent on continued compliance with the requirements of such licenses. GTC's
Argus, Mason and Washington Laboratories are also registered with the U.S.
Public Health Service to conduct biomedical research on laboratory animals
funded by the NIH and other federal agencies. GTC's Argus, Mason and Redfield
laboratories are also licensed by federal and state drug enforcement agencies to
procure and use controlled substances in research programs involving laboratory
animals.
The Company's operations are also subject to federal, state and local laws,
rules, regulations and policies governing the use, generation, manufacture,
storage, air emission, effluent discharge, handling and disposal of certain
materials and waste, including, but not limited to, animal waste and waste
water.
RESEARCH AND DEVELOPMENT COSTS
During its fiscal years ended December 28, 1997, December 29, 1996, and December
31, 1995, GTC spent $17,840,000, $8,684,000, and $6,394,000, respectively, on
research and development (both sponsored and proprietary). These costs include
labor, materials and supplies, and overhead, including the cost of operating the
transgenics production facility as well as certain subcontracted research
projects.
EMPLOYEES
As of December 28, 1997, GTC employed 582 people. Of these, 368 were engaged in
operations, 54 were engaged in research and development, and 160 were engaged in
marketing and general administration. Of GTC's employees, approximately 43 have
Ph.D. degrees, 1 has a M.D. degree and 14 have D.V.M. degrees. None of GTC's
employees are covered by collective bargaining agreements. GTC believes its
employee relations are satisfactory.
ITEM 1A.
EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
James A. Geraghty.............. 43 Chairman of the Board, President and Chief Executive
Officer
John B. Green.................. 44 Vice President, Chief Financial Officer and Treasurer
Harry M. Meade................. 51 Vice President, Transgenics Research
Peter H. Glick................. 34 President, Primedica Corporation
Executive officers of the Company are elected by the Board of Directors on an
annual basis and serve at the discretion of the Board of Directors.
Mr. Geraghty has been the President, Chief Executive Officer and a director of
GTC since its incorporation in February 1993 and Chairman of the Board since
January 1998. Mr. Geraghty announced in November 1997 that upon the engagement
of his successor as Chief Executive Officer of the Company, he would resign from
such position. A search is currently underway for such position. Mr. Geraghty
joined Genzyme in September 1992, where he was a Vice President for Corporate
Development and the General Manager of the transgenics business unit until the
incorporation of the Company.
Mr. Green has been the Vice President and Chief Financial Officer of GTC since
December 1994 and Treasurer since August 1997. He has also served as Vice
President and Treasurer of TSI since March 1993 and as its Chief Financial
Officer since December 1994. Prior to that, he was Vice President and Assistant
Treasurer of TSI from December 1989.
Dr. Meade has been Vice President, Transgenics Research for GTC since August
1994 and has served as Research Director of GTC since May 1993. Prior to joining
GTC, Dr. Meade was a Scientific Fellow at Genzyme, where he was responsible for
directing the transgenic molecular biology program. From 1981 to March 1990,
when he joined Genzyme, Dr. Meade was a Senior Scientist at Biogen, Inc., a
biotechnology company, where he worked on the technology relating to the
production of proteins in milk and was an inventor on the first issued patent
covering this process.
Mr. Glick has been President, Primedica Corporation, a wholly-owned subsidiary
of GTC, since February 1998 and has served as Vice President, Marketing and
Corporate Development of GTC since June 1995. Prior to that he was Vice
President, Corporate Development of GTC from October 1994, and of TSI from June
1993. From January 1994 to January 1996, he also served as President of
Primedica's Washington Laboratories subsidiary. From November 1991 to May 1993,
he was Director, Corporate Development of TSI. Prior to joining TSI, he was a
strategy consultant at Bain & Company.
ITEM 2. PROPERTIES
GTC's headquarters and research facilities are located in approximately 9,100
square feet of laboratory and office space leased from Genzyme in Framingham,
Massachusetts. This lease extends through May 1998, at which time the lease
automatically renews on a year-to-year basis unless terminated by either party
on 90 days' notice. See "Item 1 - Business--Relationship with Genzyme."
GTC owns a 168-acre commercial production facility in central Massachusetts.
This facility contains 63,180
square feet of production, laboratory and administrative space. The facility
also currently houses more than 500 goats. GTC believes its and Genzyme's
current facilities are adequate for significant further development of
commercial transgenic products. GTC also currently utilizes animal housing, care
and treatment facilities operated by Tufts in Massachusetts.
GTC also owns or leases sites for each of its testing laboratories. The
Company's Mason Laboratories occupy two facilities in Worcester, Massachusetts,
the largest of which is an approximately 107,600 square foot preclinical testing
facility, leased through March 2005. In addition, GTC owns an adjacent building
that consists of 46,800 square feet, of which 28,100 square feet of space has
been renovated for preclinical testing. The remaining 18,700 square feet, of
which 16,000 square feet is unrenovated shell space, is available for future
expansion.
In addition, GTC owns and occupies a 68,000 square-foot preclinical testing
facility in Redfield, Arkansas; leases a 55,000 square-foot facility in Horsham,
Pennsylvania consisting of a 38,000 square foot preclinical testing facility and
16,000 square feet of unrenovated expansion space, under a lease which expires
in June 2002; operates its formulation business in a 10,500 square-foot
laboratory facility in Cambridge, Massachusetts under a lease that expires in
October 2002; and occupies a 27,000 square-foot laboratory and office facility
in Rockville, Maryland, under a lease expiring in December 2000 and leases 5,000
square feet of office space located in Milford, Massachusetts under a lease
expiring in October 1998.
The operations of the Company's now inactive subsidiary, Health and Sciences
Research Incorporated ("HSRI") were located in a 20,700 square foot facility in
Englewood, New Jersey under a lease expiring in August 1998. The Company has
sublet approximately 6,000 square feet of this space.
ITEM 3. LEGAL PROCEEDINGS
On April 23, 1997, the Company and Pharming, B.V., a Netherlands corporation,
("Pharming"), entered into a Settlement Agreement, thereby ending arbitration
proceedings which were initiated by Pharming on December 21, 1995. The
arbitration was filed under a license agreement between the companies dated
September 21, 1994 (the "License Agreement"), under which the Company and
Pharming cross-licenses various intellectual property rights under certain
patents relating to the transgenic production of proteins. Pharming claimed
breach of the License Agreement by the Company on various grounds, and the
Company denied Pharming's allegations and filed a counterclaim alleging that
Pharming's request for arbitration was filed for improper purposes.
Under the Settlement Agreement, a stipulation dismissing all claims was
submitted to the tribunal and the Company paid Pharming $200,000, which payment
was made in May 1997. Also, in connection with the settlement, the companies
amended the License Agreement to clarify the terms under which (i) the Company
and its affiliates may work in transgenic cattle under the existing license to
Pharming's promoter patent and (ii) Pharming and its affiliates may work in
transgenic goats under the existing license to the Company's promoter patent.
The amended License Agreement further specifies that the Company and Pharming
each have a right of first refusal to perform the work in goats and cattle,
respectively, which the other party would seek to contract to a third party.
Finally, the amended License Agreement clarifies that the agreement's conditions
and restrictions apply only to the cross-licensed patents, and that no rights
other than the cross-licensed patents are conferred on the parties. All other
material terms of the original License Agreement remain in force.
On June 17, 1994, a lawsuit was filed in the Court of Chancery of the State of
Delaware for New Castle County, Civil Action No 13569, on behalf of the
stockholders of TSI naming the Company, TSI and each of the directors of TSI as
defendants. The complaint alleged, among other things, that (i) the terms of the
merger between TSI and a subsidiary of GTC pursuant to the Agreement and Plan of
Merger dated June 14, 1994 among TSI, GTC and such subsidiary of GTC (the
"Merger Agreement") are unfair to the TSI stockholders, (ii) TSI's directors
breached their fiduciary duties to the TSI stockholders in authorizing TSI to
enter into the Merger Agreement and failing to conduct an auction for TSI, and
(iii) GTC aided and abetted the TSI directors in the breach of their fiduciary
duty. The lawsuit sought an unspecified amount of damages and a court order to
unwind the Merger. In September 1994, GTC filed a motion to dismiss all claims
asserted against it in the litigation. On April 14, 1996, the case was dismissed
by stipulation of the parties and under an approving order of the court.
Except as described above, GTC is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal year 1997, no matter was submitted to a vote
of the security holders of the Company.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of GTC commenced trading on July 9, 1993 in the Nasdaq National
Market System under the symbol GZTC. Quarterly high and low sales prices for the
stock as reported by the Nasdaq National Market System are shown below.
HIGH LOW
---- ---
1995:
1st Quarter 3 1/8 1 1/2
2nd Quarter 3 5/8 1 7/8
3rd Quarter 6 1/8 2 7/16
4th Quarter 5 7/8 4
1996:
1st Quarter 7 1/8 4 3/8
2nd Quarter 10 5/8 5
3rd Quarter 8 1/8 3 3/4
4th Quarter 7 1/4 5 1/8
1997:
1st Quarter 10 1/4 6
2nd Quarter 9 1/4 6 3/8
3rd Quarter 12 3/16 8
4th Quarter 14 8 1/4
On March 16, 1998, there were approximately 734 shareholders of GTC of record.
The Company has never paid a cash dividend on its Common Stock and currently
expects that future earnings will be retained for use in its business.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 28, 1997 and December
29, 1996 and for each of the three fiscal years in the period ended December 28,
1997 are derived from the Company's consolidated financial statements included
elsewhere in this Report, which have been audited by Coopers & Lybrand L.L.P.,
independent public accountants. The selected financial data set forth below as
of December 31, 1995, 1994 and 1993, and for the years ended December 31, 1994
and 1993 are derived from audited consolidated financial statements not included
in this Report. This data should be read in conjunction with the Company's
consolidated financial statements and related notes thereto under Item 8 of this
Report and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under Item 7 of this Report.
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands except per share data)
For the Fiscal Years Ended
-----------------------------------------------------------------------
December 28, December 29, December 31, December 31, December 31,
1997 1996 1995 1994 1993
---------- ----------- ----------- ----------- -----------
Statement of Operations Data:
Revenues:
Services $ 43,417 $ 38,496 $ 26,399 $ 4,465 $ -
Sponsored research and development 19,521 8,338 6,022 4,097 3,222
Products - - - 909 -
---------- ----------- ---------- ---------- ----------
62,938 46,834 32,421 9,471 3,222
Costs and expenses:
Services 36,989 33,356 24,250 5,157 -
Research and development 17,840 8,684 6,394 4,671 3,143
Products - - - 841 -
Selling, general and administrative 15,650 11,691 8,919 3,596 1,088
Equity in loss of Joint Venture 811 356 713 582 -
Impairment of investment in
Joint Venture - - - 58 318
---------- ----------- ---------- ---------- ----------
71,290 54,087 40,276 14,905 4,549
---------- ----------- ---------- ---------- ----------
Loss from continuing operations (8,352) (7,253) (7,855) (5,434) (1,327)
Other income and (expenses):
Interest income 136 85 32 238 156
Interest expense (1,129) (1,138) (1,007) (263) -
Other income 50 587 780 - -
---------- ----------- ---------- ---------- ----------
Loss from continuing operations before
income taxes (9,295) (7,719) (8,050) (5,459) (1,171)
Provision (benefit) for income taxes 48 27 (2,346) 7 -
---------- ----------- ---------- ---------- ----------
Loss from continuing operations $ (9,343) $ (7,746) $ (5,704) $ (5,466) $ (1,171)
Discontinued operations
Income from discontinued clinical
operations
(less applicable taxes of $239
and $21) - - 412 182 -
Gain on disposal of clinical
operations
(less applicable income taxes
of $3,401) - - 1,159 - -
---------- ----------- ---------- ---------- ----------
Net loss $ (9,343) $ (7,746) $ (4,133) $ (5,284) $ (1,171)
========== ============ =========== =========== ==========
Results per weighted average number
of common shares (basic and diluted)
From continuing operations $ (0.54) $ (0.52) $ (0.48) $ (0.83) $ (0.44)
========== ============ =========== =========== ==========
Net loss $ (0.54) $ (0.52) $ (0.35) $ (0.80) $ (0.44)
========== ============ =========== =========== ==========
Weighted average number of
shares outstanding (basic and
diluted) 17,253,292 14,801,725 11,788,542 6,598,545 2,632,070
December 28, December 29, December 31, December 31, December 31,
1997 1996 1995 1994 1993
---------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Cash and cash equivalents $ 6,383 $ 8,894 $ 5,825 $ 816 $ 8,417
Short-term investments - - - 2,231 1,944
Working capital (deficit) (8,423) (116) (7,011) (7,858) 9,882
Total assets 70,980 66,704 58,042 47,993 10,527
Long-term liabilities 10,779 6,742 7,179 9,082 -
Stockholders' equity 27,378 35,204 27,288 19,424 10,014
There were no cash dividends paid for any period presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Year Ended December 28, 1997 as Compared to Year Ended December 29, 1996
Total revenues for 1997 were $62.9 million, compared with $46.8 million in 1996,
an increase of $16.1 million or 34%. Service revenues increased to $43.4 million
in 1997 from $38.5 million in 1996, an increase of $4.9 million or 13%.
Sponsored research and development revenues increased to $19.5 million in 1997
from $8.3 million in 1996, an increase of $11.2 million or 135%, due primarily
to an increase in activity and revenues related to the funding received from
Genzyme Corporation ("Genzyme") in the development of the lead compound,
transgenic Antithrombin III ("AT-III"), the achievement of $4.4 million in
milestones from the joint venture formed by the Company and Sumitomo Metals
Industries, LTD. (the "Joint Venture"), the achievement of a $1.5 million
milestone, from Bristol-Meyers Squibb related to the BR96 collaboration and
increased commercial activity.
Cost of services in 1997 was $37 million compared to $33.4 million in 1996, an
increase of $3.6 million or 11%, due, primarily, to the increased service
volumes. Sponsored research and development expenses increased to $12.6 million
in 1997 from $7.9 million in 1996, an increase of $4.7 million or 59%. The
increase is due to the operating costs of a manufacturing facility coming
on-line for the production of AT-III clinical trial material and increased
activity in commercial programs. Proprietary research and development increased
to $5.3 million in 1997 from $828,000 in 1996, an increase of 540%. The increase
is due to the cancer vaccine program being initiated in 1997 and increased
internal research.
Gross profit in 1997 amounted to $8.1 million versus $4.8 million in 1996. Gross
profit on services in 1997 was $6.4 million, a gross margin of 15%, versus $5.1
million, a gross margin of 13%, in 1996. The improvement in the services margins
was primarily due to increased services revenues.
Selling, general and administrative ("SG&A") expenses increased to $15.7 million
in 1997 from $11.7 million in 1996, an increase of $4 million or 34%. The
increase is due to an increase in the sales and marketing effort and to the
addition of administrative personnel required to support the growth in
transgenic research and development programs, $434,000 of transaction costs on
uncompleted merger and acquisition activities as well as $326,000 in one-time
personnel-related charges.
Interest income increased to $136,000 in 1997, from $85,000 in 1996, due to the
investment of funds from the Company's secondary public offering and receipt of
interest on funds that were held in escrow last year. Interest expense was
essentially unchanged year to year at $1.1 million. Of the 1997 total, $962,000
represents interest incurred by the testing service operations, $161,000
represents interest for the financing of the transgenic production facility and
$6,000 represents interest incurred under the Convertible Debt and Development
Funding Agreement with Genzyme (the "Genzyme Credit Line") (see Item 8 and Note
5 to the consolidated financial statements appearing in this report).
The Company recognized $50,000 of non-operating income in 1997 compared to
$587,000 in 1996, a decrease of $537,000 or 91%. Of the 1996 total, $538,000
represents the collection of the final payments of the promissory note received
in connection with the 1995 sale of the TSI Center for Diagnostic Products Inc.
("CDP").
The Company recognized $811,000 of Joint Venture losses in 1997 compared to
$356,000 in 1996. The increase was due to additional research by the Joint
Venture including increased research funding to the Company (see Note 12 to the
consolidated financial statements appearing in this report).
Year Ended December 29, 1996 as Compared to Year Ended December 31, 1995
Total revenues for 1996 were $46.8 million compared with $32.4 million in 1995,
an increase of $14.4 million or 44%. Service revenues for 1996 were $38.5
million compared with $26.4 million in 1995, an increase of $12.1 million or
46%. Sponsored research and development revenues increased to $8.3 million in
1996 compared with $6 million in 1995, an increase of $2.3 million or 38%, due
primarily to an increase in activity and revenues related to the development of
AT-III.
Cost of services for 1996 were $33.4 million compared with $24.3 million in
1995, an increase of $9.1 million or 37%, due to increased service volumes.
Sponsored research and development expenses increased to $7.9 million in 1996
compared with $5.7 million in 1995, an increase of $2.2 million or 39%. The
increase was due to increased activity relating to the development of AT-III,
which, in the second half of 1996, had an Investigational New Drug Filing
("IND") approved by the Food and Drug Administration ("FDA") and entered into
Phase I/II clinical trials. Proprietary research and development increased to
$828,000 in 1997 from $727,000 in 1996, an increase of 14%.
Gross profit amounted to $4.8 million in 1996 compared with $1.8 million in
1995. Gross profit on services in 1996 was $5.1 million, a gross margin of 13%,
versus $2.1 million, a gross margin of 8% in 1995. The majority of the
improvement in service margins was due to increased service revenues as a result
of continued marketing efforts with an emphasis on developing significant client
relationships and a shift to higher margin services.
SG&A expenses increased to $11.7 million in 1996 from $8.9 million in 1995, an
increase of $2.8 million or 31%. The increase was due primarily to increased
investment in sales and marketing and to the growth in the testing services
operations.
Interest income increased to $85,000 in 1996 from $32,000 in 1995, an increase
of $53,000 or 166%, primarily due to the investment of funds received from the
Company's 1996 public offering. Interest expense was $1.1 million in 1996
compared with $1 million in 1995, an increase of $131,000 or 13%. Of the 1996
total, $902,000 represents interest incurred by the testing service operations,
$167,000 represents interest for the financing of the transgenic production
facility and $61,000 represents interest incurred under the Genzyme Credit Line.
The Company recognized $356,000 of Joint Venture losses in 1996 compared to
$713,000 in 1995, a decrease of $357,000 or 50%. The decrease is due to reduced
funding received from the Joint Venture during 1996.
The Company recognized $587,000 of non-operating income in 1996 compared to
$780,000 in 1995, a decrease of $193,000 or 25%. Of the 1996 total, $538,000
represents the collection of the final payments of the promissory note received
in connection with the 1995 sale of CDP.
The Company had income from its discontinued clinical operations of $412,000 in
1995. The 1995 income represents the results of operations (net of tax) for the
first three quarters of 1995 for GDRU Limited ("GDRU") and Health and Sciences
Research Incorporated ("HSRI"). These operations were acquired by the Company as
part of the TSI Corporation ("TSI") acquisition in October 1994. GDRU was sold
effective as of September 1, 1995 and the HSRI operation was shutdown in August
1995.
The Company realized a $1,159,000 gain on the disposal of clinical operations in
1995 from the sale of GDRU.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting
Comprehensive Income requires that all components of comprehensive income and
total comprehensive income be reported on one of the following: (1) the
statement of operations, or (2) a separate statement of comprehensive income.
Comprehensive income is comprised of net income and all changes to stockholders'
equity, except those due to investments by owners (changes in paid-in capital)
and distribution to owners (dividends). This statement is effective for fiscal
years beginning after December 15, 1997. The implementation of SFAS 130 is not
expected to have a significant impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), Disclosure
About Segments of an Enterprise and Related Information requires public
companies to report certain information about their operating segments in their
annual financial statements and quarterly reports issued to stockholders. It
also requires public companies to report certain information about their
products and services, the geographic areas in which they operate, and their
major customers. This statement is effective for fiscal years beginning after
December 15, 1997. Implementation of SFAS 131 will have no effect on the
Company's financial position or results of operations. The Company is assessing
the financial statement disclosure impact of SFAS 131.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $6.4 million at December 28, 1997.
During 1997 the Company had
a $2.5 million net decrease in cash; $6.2 million was invested in equipment,
further expansion of the transgenic production facility and the expansion of
laboratory facilities, $3.6 million was used to pay down long-term debt and $4.4
million was used in operations. Sources of funds during 1997 included $5.3
million of proceeds from issuance of long-term debt, $1.1 million of proceeds
from the issuance of common stock, and $6 million in borrowings under the
Genzyme Credit Line.
In June 1997, the Company completed a $3 million expansion of its Mason
Laboratories facility. The Company obtained $5 million in long-term financing
for this project from a consortium consisting of state and local government
agencies in conjunction with a commercial bank. In June 1997, the Company
received approximately $3.8 million in funds under this facility, of which
approximately $800,000 was used to pay down existing debt. In connection with
the financing, the Company issued 20,000 warrants at the closing market value on
June 26, 1997 of $8.75. The remaining $1.2 million of financing is available
through December 31, 1998 to fund future renovations of this facility, if any
(see Note 5 to the consolidated financial statements appearing in this report).
In September 1997, the Company and Genzyme amended the terms of the $8.3 million
Genzyme Credit Line dated March 29, 1996. Under the terms of the amended Genzyme
Credit Line, the expiration date of the revolving credit line was extended to
March 31, 2000 with an option, at that date, for the Company to convert the
outstanding balance to a three-year term loan. As of December 28, 1997, $6
million was outstanding under the Genzyme Credit Line (see Note 5 to the
consolidated financial statements appearing in this report).
In September 1997, the Company entered into an agreement with Advanced Cell
Technology ("ACT") to utilize ACT's cloning technology to produce transgenic
proteins. In return for exclusive access to this technology and subject to
successful achievement of technical milestones, the Company agreed to place a
minimum of $2 million in contract services with ACT annually from 1998 through
2002.
In March 1998, the Company completed a $20 million private placement of Series A
Convertible Preferred Stock (the "Preferred Stock") to three institutional
investors. The Preferred Stock matures in three years and is convertible into
common stock at various conversion prices (see Note 13 to the consolidated
financial statements appearing in this report). As a result of this financing,
the amount of the Genzyme Credit Line was reduced to approximately $6.4 million.
The Company had a working capital deficit of $8.4 million at December 28, 1997
compared to a deficit of $116,000 at December 29, 1996. As of December 28, 1997,
the Company had approximately $2.3 million available under the Genzyme Credit
Line (subsequently reduced to approximately $400,000 as a result of the
Preferred Stock offering), $1.2 million available under the Mason facility
financing and commitments for an additional $3 million of capital lease
financing. The Company expects that the funds available from these sources as
well as the Preferred Stock offering completed in March 1998 will be sufficient
to fund operations and capital investment for the next year.
Management's current expectations regarding the sufficiency of the Company's
cash resources are forward-looking statements, and the Company's cash
requirements may vary materially from such expectations. Such forward-looking
statements are dependent on several factors, including the results of the
Company's testing services business, the ability of the Company to enter into
any transgenic research and development collaborations in the future and the
terms of such collaborations, the results of research and development and
preclinical and clinical testing, competitive and technological advances and
regulatory requirements. If the Company experiences increased losses, the
Company may have to seek additional financing through collaborative
arrangements or from public or private sales of its securities, including
equity securities. There can be no assurance that additional funding will be
available on terms acceptable to the Company, if at all. If additional
financing cannot be obtained on acceptable terms, to continue its operations
the Company could be forced to delay, scale back or eliminate certain of its
research and development programs or to enter into license agreements with
third parties for the commercialization of technologies or products that the
Company would otherwise undertake itself.
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
implementing its plan to resolve the issue. The Year 2000 problem is a result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations. The
Company presently believes that, with upgrades to existing financial software,
the Year 2000 problem will not pose significant operational
problems or additional cost for the Company's computer systems as so modified
and converted.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
Financial Statements
Response to this item is submitted as a separate section of this report
immediately following Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information is set forth in part under the captions "ELECTION OF DIRECTORS"
and "SECTION 16 (a) BENEFICIAL REPORTING COMPLIANCE" in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders to be held on May 27, 1998
(the "Proxy Statement") which are incorporated herein by reference, and the
remainder of such information is set forth under the caption "EXECUTIVE OFFICERS
OF THE REGISTRANT" in Part I, Item 1A hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "EXECUTIVE COMPENSATION" in the
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information set forth under the caption "SHARE OWNERSHIP" in the Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the captions "EXECUTIVE EMPLOYMENT AGREEMENTS"
and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" in the Proxy
Statement is incorporated herein by reference. See also, Notes 2, 6 and 10 to
the Consolidated Financial Statements included herewith.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) The Company's Financial Statements appear as a separate section of this
report immediately following Item 14.
All schedules have been omitted because the required information is not
applicable or not present in amounts sufficient to required submission of the
schedule, or because the information required is in the consolidated financial
statements or the notes thereto.
The Exhibits to this report are listed below under Part IV, Item 14(c) hereof.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 28, 1997.
(c) Exhibits
The exhibits filed as part of this Form 10-K are listed on the Exhibit Index
immediately preceding such Exhibits, which Exhibit Index is incorporated herein
by reference.
FORM 10-K-ITEM 8, 14 (a) (1) and (2), and (d)
GENZYME TRANSGENICS CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Genzyme Transgenics
Corporation and subsidiaries are included in Item 8:
Report of Coopers & Lybrand L.L.P. - Independent Accountants
Consolidated Balance Sheets--December 28, 1997 and December 29, 1996
Consolidated Statements of Operations--For the fiscal years ended December
28, 1997, December 29, 1996 and December 31, 1995
Consolidated Statements of Stockholders Equity--For the fiscal years ended
December 28, 1997, December 29, 1996 and December 31, 1995
Consolidated Statements of Cash Flows--For the fiscal years ended December
28, 1997, December 29, 1996 and December 31, 1995
Notes to Consolidated Financial Statements
All schedules for which provision is made in the applicable regulation of the
Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Genzyme Transgenics Corporation:
We have audited the consolidated balance sheets of Genzyme Transgenics
Corporation as of December 28, 1997 and December 29, 1996 and the related
consolidated statements of operations, cash flows and stockholders' equity for
each of the three fiscal years in the period ended December 28, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Genzyme
Transgenics Corporation as of December 28, 1997 and December 29, 1996, and the
consolidated results of its operations and its cash flows for each of the three
fiscal years in the period ended December 28, 1997 in conformity with generally
accepted accounting principles.
Boston, Massachusetts /s/ Coopers & Lybrand L.L.P.
February 25, 1998, except as to
the information presented in Note 13,
for which the date is March 20, 1998
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share amounts)
December 28, December 29,
1997 1996
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,383 $ 8,894
Accounts receivable, net of allowance of $390
and $422 at December 28, 1997 and
December 29, 1996, respectively 10,517 7,499
Unbilled contract revenue (including
$891 and $664 from Genzyme Corporation at
December 28, 1997 and December 29, 1996,
respectively) 6,069 6,740
Other current assets 1,431 1,509
------------- -------------
Total current assets 24,400 24,642
Net property, plant, and equipment 26,297 20,566
Costs in excess of net assets acquired, net 19,532 20,695
Investment in Joint Venture - 283
Other assets 751 518
============= =============
$ 70,980 $ 66,704
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,091 $ 2,992
Accounts payable - Genzyme Corporation 3,364 1,339
Revolving line of credit 6,000 6,000
Revolving line of credit - Genzyme 6,000 -
Corporation
Accrued expenses 7,900 5,911
Advance payments 5,568 6,649
Current portion of long-term debt and
capital leases 1,900 1,867
------------- -------------
Total current liabilities 32,823 24,758
Long-term debt and capital leases, net of current portion 9,862 5,708
Deferred lease obligation 613 508
Other liabilities 304 526
------------- -------------
Total liabilities 43,602 31,500
Commitments and Contingencies (Note 4)
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares, none outstanding - -
Common stock, $.01 par value; 40,000,000
shares authorized; 17,403,406 and 17,130,901 shares
issued and outstanding at December 28, 1997
and December 29, 1996, respectively 174 171
Capital in excess of par value 54,478 52,974
Accumulated deficit (27,274) (17,931)
Accumulated translation adjustment - (10)
------------- -------------
Total stockholders' equity 27,378 35,204
============= =============
$ 70,980 $ 66,704
============= =============
The accompanying notes are an integral part of the consolidated financial statements.
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except share and per share amounts)
For the Fiscal Years Ended
----------------------------------
December 28, December 29, December 31,
1997 1996 1995
---------------- ------------- ---------------
Revenues:
Services $ 43,417 $ 38,496 $ 26,399
Sponsored research and development 19,521 8,338 6,022
---------------- ------------- ---------------
62,938 46,834 32,421
Costs and operating expenses:
Services 36,989 33,356 24,250
Research and development:
Sponsored 12,558 7,856 5,667
Proprietary 5,282 828 727
Selling, general and administrative 15,650 11,691 8,919
Equity in loss of Joint Venture 811 356 713
---------------- ------------- ---------------
71,290 54,087 40,276
---------------- ------------- ---------------
Loss from continuing operations (8,352) (7,253) (7,855)
Other income (expense):
Interest income 136 85 32
Interest expense (1,129) (1,138) (1,007)
Other income 50 587 780
---------------- ------------- ---------------
Loss from continuing operations before income taxes (9,295) (7,719) (8,050)
Provision (benefit) for income taxes 48 27 (2,346)
---------------- ------------- ---------------
Loss from continuing operations $ (9,343) $ (7,746) $ (5,704)
Discontinued operations
Income from discontinued clinical operations
(less applicable income taxes of $240) - - 412
Gain on disposal of clinical operations
(less applicable income taxes of $3,401) - - 1,159
---------------- ------------- ---------------
Net loss $ (9,343) $ (7,746) $ (4,133)
=============== ============= ===============
Net loss per common share (basic and diluted):
From continuing operations $ (0.54) $ (0.52) $ (0.48)
=============== ============= ===============
Net loss per share $ (0.54) $ (0.52) $ (0.35)
=============== ============= ===============
Weighted average number of common
shares outstanding (basic and diluted) 17,253,292 14,801,725 11,788,542
=============== ============= ===============
The accompanying notes are an integral part of the consolidated financial
statements.
waiting for consolidated statements of stockholders' equity
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Series A Convertible Capital in Parent Unrealized Accumulated Total
Preferred Stock Common Stock Excess of Company Loss on Accumulated Translation Stockholders'
Shares Amount Shares Amount Par Value Investment Investments Deficit Adjustment Equity
Balance, December 31, 1994...... -- -- 9,890 $99 $25,476 -- $(94) $ (6,052) $(5) $19,424
Net loss (4,133) (4,133)
Common stock issuance under the
Genzyme Common Stock Put
Agreement..................... 500 5 3,995 4,000
Issuance of common stock in
connection with the Common
Stock Purchase
Agreement with Genzyme........ 1,334 13 3,987 4,000
Issuance of common stock in
connection with the purchase
of a subsidiary............... 866 10 2,469 2,479
Issuance of common stock for
payment of consulting and non-
competition agreement......... 341 3 973 976
Common stock issuance under
Employee Stock Purchase Plan.. 87 1 170 171
Common stock issuance in
connection with the TSI
Savings and Retirement Plan... 130 1 273 274
Proceeds from the exercise of
stock options................. 3 8 8
Realized loss on investments.... 94 94
Translation adjustment.......... (5) (5)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995...... -- -- 13,151 132 37,351 -- -- (10,185) (10) 27,288
Net loss........................ (7,746) (7,746)
Sale of common stock to public,
net of expenses............... 3,450 34 12,666 12,700
Issuance of common stock in
connection with the
Convertible Debt and
Development Funding Agreement. 220 2 1,671 1,673
Common stock issuance under
Employee Stock Purchase Plan.. 165 1 511 512
Common stock issuance in
connection with the GTC
Savings and Retirement Plan... 58 1 265 266
Issuance of warrants in
settlement of liability....... 128 128
Proceeds from the exercise of
stock options................. 87 1 382 383
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 29, 1996...... -- -- 17,131 171 52,974 -- -- (17,931) (10) 35,204
Net loss........................ (9,343) (9,343)
Common stock issuance under
Employee Stock Purchase Plan.. 115 1 572 573
Common stock issuance in
connection with the GTC
Savings and Retirement Plan... 37 1 257 258
Issuance of warrants in
connection with a debt
financing..................... 130 130
Translation adjustment.......... 10 10
Proceeds from the exercise of
stock options................. 120 1 545 546
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 28, 1997...... -- -- 17,403 $174 $54,478 -- -- $(27,274) $ -- $27,378
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated
financial statements.
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
FOR THE FISCAL YEARS ENDED
--------------------------------------
December 28, December 29, December 31,
1997 1996 1995
--------- --------- ---------
Cash flows for operating activities:
Net loss $ (9,343) $ (7,746) $ (4,133)
Adjustments to reconcile net loss to net
cash used by operating a