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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-K
Annual report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended January 3, 1999
Commission File No. 0-21794
GENZYME TRANSGENICS CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-3186494
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(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) 620-9700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
__________________
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01
_________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or15(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_____
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, 1999: $50,232,766
Number of shares of the Registrant's Common Stock outstanding as of
March 16, 1999: 18,709,831 -----------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 25, 1999 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 40 such proteins. For its lead compound, Antithrombin III ("AT-III"), the
Company has completed Phase I and Phase II human clinical trials, and has
initiated Phase III clinical studies. GTC also operates a leading contract
research organization ("CRO"), Primedica Corporation ("Primedica"), a wholly
owned subsidiary of GTC which provides services such as preclinical efficacy and
safety testing, IN VITRO testing and formulation development to pharmaceutical,
biotechnology, medical device and other companies. Revenues for Primedica were
$50.8 million in 1998, an increase of 17% from 1997. GTC's revenues from its
transgenic research and development totaled $11.6 million compared with $19.5
million for 1997. The decrease reflects the impact on revenue recognition of the
establishment, in January 1998, of the rh AT-III joint venture with Genzyme
Corporation ("Genzyme"). Had the rh AT-III program been structured on the same
basis during the year 1998, transgenic research revenues would have increased
approximately $713,000 from 1997.
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, with reduced risk of transmission of human viruses and other
known 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 17 proteins at
levels of one gram per liter or higher, substantially greater levels than those
typically achieved for comparable proteins in conventional cell culture systems.
GTC's most advanced product candidate is transgenic rh AT-III, a protein
normally present in human serum that, when bound to heparin acts as an
anticoagulant. 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 are approximately $200 million. The Company believes
transgenic AT-III may represent a more attractive product than plasma sourced
AT-III 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, as well
as Phase I and Phase II human safety studies have been successfully completed.
GTC initiated Phase III clinical trials in the US and Europe for this product
beginning in the second quarter of 1998.
GTC is also currently working to develop transgenically produced therapeutic
antibodies with five corporate partners including Bristol-Myers Squibb,
Centocor, and BASF Knoll. Antibody production represents an area of particular
focus for the Company, since these therapeutics are likely to be required in
relatively large and repeated doses for chronic diseases such as rheumatoid
arthritis and cancer, and are, therefore, uniquely suited to transgenic
production. During 1998, the United States Patent and Trademark office issued a
patent to Genzyme Transgenics covering the production of monoclonal and
assembled antibodies at commercial levels in the milk of transgenic mammals.
Other plasma proteins under development by GTC include Human Serum Albumin
("HSA"), which is now being developed in conjunction with Fresenius AG. The
Company is also developing transgenic production processes for other proteins,
including the msp-1 protein for use in a malaria vaccine and insulin, and is in
commercial discussions with prospective partners for other products.
Primedica Corporation's 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
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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 proteins derived from a cancer patient's own
tumor cells, or blood plasma, are used to enhance the immune system's ability to
prevent the regrowth of tumors.
TRANSGENIC PRODUCTION
OVERVIEW AND STRATEGY
A growing number of recombinant proteins are being developed by pharmaceutical,
biotechnology and other companies for therapeutic, diagnostic and nutraceutical
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 most of these
complex proteins, they are generally more difficult and expensive to grow and
often produce lower volumes of protein, or the proteins may not be secreted by
the cells into the culture medium, thereby complicating recovery and
purification. Proteins produced by the Company transgenically have been
expressed at concentrations substantially 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. 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.
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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:
- -- To date, GTC has produced more than 40 different transgenic proteins in
animals, 17 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.
- -- GTC maintains a herd of over 1,500 goats at its facility in
Massachusetts as well as an additional 150 goats at Tufts University
School of Veterinary Medicine ("Tufts"). A significant number of the
goats in these herds are transgenic.
- -- Stability of expression has been demonstrated across lactations, and,
for two proteins, across two generations expressing the same transgene.
- -- Together with 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.
- -- GTC filed an IND with the US Food and Drug Administration (the "FDA")
for its lead product AT-III, completed a Phase I human safety clinical
trial, completed a Phase II dosing clinical trial and initiated a Phase
III program in patients undergoing cardiac surgery requiring
cardiopulmonary bypass ("CPB") in May 1998.
- -- During 1998, GTC entered into 10 new alliances with corporate partners.
- -- The US Patent and Trademark office issued three new patents to the
Company during 1998; one covering its purification technology, one on
the production of monoclonal and assembled antibodies in the milk of
transgenic mammals, and one covering the production of rh AT-III in the
milk of transgenic goats.
TRANSGENIC PRODUCTS UNDER DEVELOPMENT
ANTITHROMBIN III. AT-III is a protein normally found in human serum that when
bound to heparin acts as an anticoagulant. 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 annual worldwide market for plasma-derived AT-III is
approximately $200 million.
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 ("CABG"),
and a Phase II clinical study for
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this indication was completed. The study confirmed the safety profile of AT-III
at all doses administered and supported its ability to enhance anticoagulation
in CABG patients. Two placebo-controlled Phase III clinical trials were begun
during the second quarter of 1998 to access the activity of AT-III in restoring
heparin sensitivity among heparin-resistant patients undergoing cardiac surgery
requiring CPB. A third 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, reducing the availability to
$8.3 million. The availability under the Genzyme Credit Line was subsequently
reduced in March 1998 to $6.3 million in connection with a preferred stock
offering.
In March 1996, GTC and Genzyme signed an agreement pursuant to which Genzyme
funded the development of AT-III through the first quarter of 1997. Genzyme was
granted co-marketing rights to transgenic AT-III in Europe and the United
States, subject to its entering into a further agreement with GTC by March 31,
1997. SMI Genzyme Ltd., a joint venture between GTC and Sumitomo Metal
Industries Ltd. (the "SMIG JV"), which contributed development funding for
AT-III through December 1995, retains marketing rights to transgenic AT-III in
Asia. In January 1997, the Company reached agreement with the SMIG JV under
which GTC subsequently received milestone payments for the development of AT-III
which totaled $4.4 million. In January 1998, GTC and Genzyme established a joint
venture ("ATIII LLC") for the marketing and distribution of rh AT-III in all
territories other than Asia. Under the terms of the ATIII LLC, Genzyme agreed to
provide 70 percent of the first $33 million of rh AT-III development costs other
than facility costs. GTC agreed to fund the other 30 percent of those costs,
with both companies sharing equally in facility costs and any development costs
exceeding that level. Both companies agreed to contribute manufacturing,
marketing and other resources to the ATIII LLC at cost, and will split profits
from the product sales equally.
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.
Monoclonal antibodies and assembled antibodies are a major area of focus for
GTC. During 1998, the Company received a US patent granting it exclusive rights
to the production of monoclonal and assembled antibodies in commercial
quantities in the milk of transgenic mammals. To date, the company has produced
13 antibodies, and is currently actively working with five different partners,
including Centocor, Bristol-Myers Squibb, BASF/Knoll, Progenics, and an unnamed
West Coast biotechnology company to develop therapeutic antibodies for diseases
including rheumatoid arthritis, cancer, psoriasis and AIDS. GTC anticipates
entering the clinic with the first transgenically-produced version of a
therapeutic antibody during 1999.
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 current 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.
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 should 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. Also,
during 1998, GTC further refined its purification
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process for transgenic HSA and developed a detailed economic model for its
commercial production.
OTHER PROTEINS
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 express a malaria
protein, which is considered a promising vaccine candidate and to examine the
options for commercializing the vaccine. The Company has entered into a CRADA
with the NIH and during 1998 achieved high level expression of the candidate
vaccine malaria antigen, MSP-1, in the milk of transgenic mice.
SECOND GENERATION BIOPHARMACEUTICALS
GTC has a program to identify and develop unique transgenic constructs which may
represent line extensions for recombinant biotherapeutics. These drugs, many of
which have established significant markets, may become vulnerable to competition
from novel versions which may be more cost effective and/or demonstrate improved
efficacy, allow more convenient routes of administration, or have extended
clinical applications. GTC is in discussions with both generic and proprietary
pharmaceutical and biotechnology companies with strategic and product-specific
interests in the second generation biopharmaceuticals program. In 1998, GTC
signed an agreement with Eli Lilly to develop and potentially commercialize a
novel second generation biotherapeutic for which GTC provides the intellectual
property and know how.
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 1998.
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.
Primedica 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 through preclinical testing.
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. In February 1998, GTC reorganized its CRO businesses under its wholly
owned subsidiary, Primedica, to provide a unified identity and a dedicated
structure for further growth of its CRO business. Primedica conducts its CRO
services through five laboratories located in Worcester, Massachusetts; Horsham,
Pennsylvania; Redfield, Arkansas; Rockville, Maryland and Cambridge,
Massachusetts. GTC expects to use Primedica as a vehicle to pursue acquisitions
and facilitate other transactions driving growth and profitability. This
business currently employs approximately 500 people. Primedica's laboratories
focus on providing high value, scientifically differentiated services to its
clients. Fields in which Primedica provides contract services include:
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- -- PRODUCT SAFETY TESTING. Primedica conducts safety studies on multiple
animal species using toxicological, pathological and specialty
endpoints, such as physiologic, pharmacologic and mechanistic
evaluations, and is a recognized world leader in conducting and
evaluating reproductive and developmental toxicology studies.
- -- METABOLISM AND PHARMACOKINETICS. Primedica's metabolism group evaluates
the distribution and impact of a drug and its metabolites using
sophisticated sampling techniques, metabolite profiling and
identification, tissue distribution studies, and other techniques to
determine tissue half-life, clearance rates, and potential sites of
drug toxicity after systemic exposure.
- -- COMPREHENSIVE MANUFACTURING SERVICES. Primedica specializes in
biopharmaceutical process development and manufacturing for
small-to-moderate batch sizes. These services include early cell line
development and optimization, production, down stream processing and
fill and finish services.
- -- DELIVERY AND DEVELOPMENT TECHNOLOGY SERVICES. These services include
targeted and controlled drug delivery, feasibility and preformulation
support, as well as formulation development for various routes of
administration.
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, Primedica has also made significant investments in people,
technology and programs since its acquisition of TSI, including an increase in
the number of doctoral level employees by 42% since the acquisition. Primedica
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 1998 were $50.8, million
representing a 17% increase compared to 1997.
IDIOTYPIC CANCER VACCINES
Primedica's Rockville Laboratories have been producing experimental cancer
vaccines for B-cell lymphoma and Myeloma for the NCI under contract since 1993.
These vaccines have shown preliminary efficacy in early clinical trials. In
1997, 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 for
lymphoma immunoglobulin be harvested from individual patients and expanded in
separate cell cultures. For Myeloma, immunoglobulin is harvested directly from
patient serum. 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 GTC have shown promising results. In results
reported at the American Society of Hematology meeting in December 1998, 18 of
21 patients with lymphoma treated with the vaccine following an initial
chemotherapy regimen remain disease free to intervals ranging from 19 to 42
months post-chemotherapy. GTC actively continues to seek a corporate partner for
the continued development and commercialization of its cancer vaccines and
expects to enter pivotal trials, pending funding, in 1999.
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
40% of the outstanding GTC Common Stock. Genzyme also holds two Common Stock
Purchase Warrants (the "Genzyme Warrants") exercisable for 145,000 and 288,000
shares of Common Stock at prices of approximately $2.84 and $4.875 per share,
respectively, the market price of the Common Stock at the time the Genzyme
warrants were issued.
Four million of Genzyme's shares in GTC were acquired in 1993 at the time of the
Company's organization in exchange for
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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 GTC's 1996 public
offering. The Genzyme Warrants, which expire on July 3, 2005 and December 28,
2008, were issued to Genzyme in consideration of Genzyme's guarantees of the
Company's indebtedness to commercial banks as 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, as 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 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 a Research and Development Agreement dated May 1,
1993 (the "R&D Agreement"), Genzyme and GTC agreed, until December 31, 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. The parties are continuing under this agreement and are currently
negotiating an extension of the agreement.
ATIII LLC. On January 1, 1998, a definitive collaboration agreement for the
ATIII LLC joint venture between the Company and Genzyme was executed. Under the
terms of the agreement, Genzyme will provide 70% of the first $33 million of
development costs, excluding facility costs, under this program. The Company
will fund the other 30% of these costs. Development costs in excess of these
amounts will be funded equally by the partners. The Company and Genzyme will
also make capital contributions to ATIII LLC sufficient to pay 50% each of all
new facility costs to be incurred. In addition to the funding, both partners
will contribute manufacturing, marketing and other resources to ATIII LLC at
cost. Under the agreement to establish the joint venture, Genzyme and the
Company were the only members and owned 3.7% and 96.3% interest, respectively.
In accordance with the executed purchase agreement, the Company sold and
assigned a 46.3% ownership interest to Genzyme so that Genzyme and GTC each
owned 50% of the venture. The purchase price includes milestone payments of
$12,500,000 from Genzyme to the Company if and when the product has been
approved by the United States Food and Drug Administration and certain sales
levels have been reached. Profits and losses are shared according to ownership
percentages. These agreements cover all territories other than Asia (see Note 11
to the consolidated financial statements appearing in this report).
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 $411,000 under the Lease in 1998. This lease
expired in May 1998, at which time the lease automatically renewed for one year
and continues to do so annually until terminated by either party on 90 days
notice.
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). In December 1998, GTC
refinanced the credit line and term loan with another bank and Genzyme
increased the amount of its guaranty (up to $24.6 million at January 3,
1999). The Company has agreed to
9
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. In consideration of Genzyme's agreement to provide these guarantees,
the Company issued warrants to purchase 145,000 and 288,000 shares of the
Company's common stock at prices per share of $2.84 and $4.875, respectively
(the Company's common stock's market prices at the dates of the Credit Lines)
each with a ten-year term.
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 2000 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.
SMIG JV. GTC holds an interest in the SMIG JV 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
SMIG JV and GTC are parties to a research and development agreement under which
the SMIG JV 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 SMIG JV 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 January 1997, the Company reached agreement with the SMIG JV under which GTC
received milestone payments of $4.4 million (see Note 11 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. During 1998, the United
States Patent and Trademark Office awarded GTC three patents, one covering the
purification of proteins from the milk of transgenic animals, another relating
to the production of monoclonal and assembled antibodies at commercial levels in
the milk of transgenic mammals, and one covering the production of rh AT-III in
the milk of transgenic goats.
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 Centeon L.L.C., as the successor to Behringwerke AG as to
AT-III, as well as promoter cross-licenses in place with PPL Therapeutics PLC
("PPL") and Pharming B.V. ("Pharming"). 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.
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
10
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 and PPL. Pharming, 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. PPL, which is based in Scotland, utilizes primarily sheep for
transgenic protein production.
TESTING SERVICES
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 trials 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.
TESTING SERVICES
Primedica 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.
Primedica also complies with FDA-established current GMPs at its Rockville and
Cambridge laboratories.
Primedica 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
11
from the U.S. Nuclear Regulatory Commission for the purchase, use and disposal
of small amounts of short-lived radioactive isotopes for research purposes.
Primedica 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 Primedica'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 in
dependent on continued compliance with the requirements of such licenses.
Primedica's Argus, Worcester and Rockville laboratories are also registered with
the U.S. Public Health Service to conduct biomedical research on laboratory
animals funded by the National Institute for Health ("NIH") and other federal
agencies. Primedica's Argus, Worcester 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 January 3, 1999, December 29, 1997, and December
29, 1996, GTC spent $16,641,000, $17,840,000, and $8,684,000, respectively, on
research and development. These costs include labor, materials and supplies, and
overhead, the cost of operating the transgenics production facility, as well as
certain subcontracted research projects.
EMPLOYEES
As of January 3, 1999, GTC employed 621 people. Of these, 462 were engaged in
operations, 32 were engaged in research and development, and 127 were engaged in
marketing and general administration. Of GTC's employees, approximately 51 have
Ph.D. degrees, 3 have M.D. degrees and 16 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 ........................ 44 Chairman of the Board
Sandra Nusinoff Lehrman, M.D. ............ 51 President and Chief Executive Officer
John B. Green ............................ 45 Vice President, Chief Financial Officer and Treasurer
Harry M. Meade ........................... 52 Vice President, Transgenics Research
Peter H. Glick ........................... 35 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 was the President and Chief Executive Officer of GTC from the date
of its incorporation in February 1993 until July 1998. He has been a director of
GTC since February 1993 and has been Chairman of the Board since January 1998.
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.
12
Dr. Lehrman has been President and Chief Executive Officer since July 1998.
Prior to joining GTC, from 1983 to 1994 Dr. Lehrman held several positions at
Wellcome PLC, the last being International Director, Biotechnology and Vice
President, General Manager of Burroughs Wellcome Mfg., Inc., a biopharmaceutical
production subsidiary. She also served as Vice President, Drug Development for
Triangle Pharmaceuticals until July 1996 and President of CytoTherapeutics,
Inc., before joining GTC.
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 Rockville 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 for the transgenics segment are
located in approximately 9,100 square feet of laboratory and office space leased
from Genzyme in Framingham, Massachusetts. This lease expired in May 1998, at
which time the lease automatically renewed, and continues to renew annually, on
a year-to-year basis until terminated by either party on 90 days' notice. (See
"Item 1 - Business--Relationship with Genzyme.")
GTC owns a 383-acre commercial production facility in central Massachusetts.
This facility contains 106,793 square feet of production, laboratory and
administrative space dedicated to its transgenic segment. The facility also
currently houses more than 1,500 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.
Primedica also owns or leases sites for each of its testing laboratories. The
Company's Worcester 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, Primedica
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, Primedica 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 2001.
ITEM 3. LEGAL PROCEEDINGS
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 1998, no matter was submitted to a vote
of the security holders of the Company.
13
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
---- ---
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
1998:
1st Quarter 13 1/2 9
2nd Quarter 12 1/4 7 11/16
3rd Quarter 8 4
4th Quarter 7 1/4 2 1/16
On March 16, 1999, there were approximately 781 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 January 3, 1999 and December
28, 1997 and for each of the three fiscal years in the period ended January 3,
1999 are derived from the Company's consolidated financial statements included
elsewhere in this Report, which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The selected financial data set forth below as
of December 29, 1996 and December 31, 1995 and 1994, and for the years ended
December 31, 1995 and 1994 are derived from audited consolidated financial
statements not included in this Report.
14
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
----------------------------------------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29, DECEMBER 31, DECEMBER 31,
1999 1997 1996 1995 1994
---------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Revenues:
Services $ 50,816 $ 43,417 $ 38,496 $ 38,496 $ 4,465
Sponsored research and development 11,596 19,521 8,338 6,022 4,097
Products -- -- -- -- 909
----------- ----------- ----------- ----------- -----------
62,412 62,938 46,834 32,421 9,471
Costs and expenses:
Services 43,668 36,989 33,356 24,250 5,157
Research and development 16,641 17,840 8,684 6,394 4,671
Products -- -- -- -- 841
Selling, general and administrative 16,184 15,650 11,691 8,919 3,596
Equity in loss of Joint Venture 4,285 811 356 713 582
Impairment of investment in Joint
Venture -- -- -- -- 58
----------- ----------- ----------- ----------- -----------
80,778 71,290 54,087 40,276 14,905
----------- ----------- ----------- ----------- -----------
Loss from continuing operations (18,366) (8,352) (7,253) (7,855) (5,434)
Other income and (expenses):
Interest income 280 136 85 32 238
Interest expense (1,379) (1,129) (1,138) (1,007) (263)
Other income 100 50 587 780 --
----------- ----------- ----------- ----------- -----------
Loss from continuing operations before
income taxes (19,365) (9,295) (7,719) (8,050) (5,459)
Provision (benefit) for income taxes 225 48 27 (2,346) 7
----------- ----------- ----------- ----------- -----------
Loss from continuing operations $ (19,590) $ (9,343) $ (7,746) $ (5,704) $ (5,466)
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 $ (19,590) $ (9,343) $ (7,746) $ (4,133) $ (5,284)
Dividends to preferred shareholders (1,156) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss to common shareholders $ (20,746) $ (9,343) $ (7,746) $ (4,133) $ (5,284)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net loss to common shareholders per
weighted average number of common
shares (basic and diluted):
From continuing operations $ (1.15) $ (0.54) $ (0.52) $ (0.48) $ (0.83)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net loss $ (1.15) $ (0.54) $ (0.52) $ (0.35) $ (0.80)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted average number of shares
outstanding (basic and diluted) 17,978,677 17,253,292 14,801,725 11,788,542 6,598,545
JANUARY 3, DECEMBER 28, DECEMBER 29, DECEMBER 31, DECEMBER 31,
1999 1997 1996 1995 1994
---------- ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Cash and cash equivalents $11,740 $ 6,383 $ 8,894 $ 5,825 $ 816
Short-term investments -- -- -- -- 2,231
Working capital (deficit) (4,319) (8,423) (116) (7,011) (7,858)
Total assets 83,337 70,980 66,704 58,042 47,993
Long-term liabilities 10,397 10,779 6,742 7,179 9,082
Stockholders' equity 36,204 27,378 35,204 27,288 19,424
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 JANUARY 3, 1999 AS COMPARED TO YEAR ENDED DECEMBER 28, 1997
15
Total revenues for 1998 were $62.4 million, compared with $62.9 million in 1997,
a decrease of $500,000 or 1%. Service revenues increased to $50.8 million in
1998 from 43.4 million in 1997, an increase of $7.4 million or 17%. Research and
development revenues decreased to $11.6 million in 1998 from $19.5 million in
1997, a decrease of $7.9 million or 41%. The decrease reflects the impact on
revenue of the establishment, in January 1998, of the joint venture ("ATIII
LLC") for the development of recombinant human antithrombin III (AT-III") with
Genzyme Corporation ("Genzyme"). Had the AT-III program been structured on the
same basis during 1998 as during 1997, research and development revenues for
1998 would have increased by approximately $713,000 or 4%.
Cost of services in 1998 were $43.7 million compared to $37.0 million in 1997,
an increase of 18%, due, primarily, to increased service volumes. Sponsored
research and development expenses decreased to $10.5 million in 1998 from $12.6
million in 1997, a decrease of $2.1 million or 17%. The decrease is due to the
impact of the formation of ATIII LLC. In 1997, the full cost of the AT-III
development program, including subcontractor costs, was reflected by the Company
as sponsored research and development expense and, to the extent that the
program was funded, as sponsored research and development revenue. With the
formation of ATIII LLC in 1998, all funding and subcontractor costs are being
recorded directly by ATIII LLC. Costs incurred by the Company for the AT-III
development program are being funded by ATIII LLC and, therefore, only these
costs are being recorded equally as sponsored research and development revenue
and sponsored research and development expense. Had the AT-III development
program been structured on the same basis during 1998 as during 1997, the
sponsored research and development expenses would have increased by
approximately $6.6 million over the 1997 rate. Internal research and development
expenses increased to $6.2 million in 1998 from $5.3 million in 1997, an
increase of $900,000 or 17%. The increase is due to increased work on the cancer
vaccine program and increased activity on internal research programs.
Gross profit, defined as revenues less service costs and research and
development costs, in 1998 amounted to $2.1 million versus $8.1 million in 1997.
The decrease is primarily due to $4.4 million of transgenic milestones from the
joint venture with Sumitomo Metals Industries, LTD ("SMIG JV") recorded in 1997
in connection with the AT-III program, a $1.5 million milestone from
Bristol-Myers Squibb in 1997 relating to the BR96 collaboration. Additionally,
an increase of $900,000 in internal R&D was offset by an increase of $700,000 in
services gross profit. Gross profit on services for 1998 was $7.1 million, a
gross margin of 14%, versus $6.4 million, a gross margin of 15% in 1997. The
decrease in gross margin is due to increased revenue recognized on contracts not
signed until the first quarter of 1997 but for which costs had previously been
incurred and recognized, partially offset by improved utilization in 1998 due to
increased revenues.
Selling, general and administrative ("S,G &A") expenses increased to $16.2
million in 1998 from $15.7 million in 1997, an increase of $500,000 or 3%. The
increase is due to the increased marketing effort and additional costs
associated with the name change for Primedica as well as the addition of
administrative personnel required to support the growth in transgenic research
and development programs.
Interest income increased to $280,000 in 1998, from $136,000 in 1997, due to an
increase in funds available for investment as a result of proceeds received from
the preferred stock offering in the first quarter of 1998 and the sale of common
stock in a registered direct offering in the second quarter of 1998. Interest
expense increased to $1.4 million in 1998, from $1.1 million in 1997. Of the
1998 total, $1,144,000 represents interest incurred by the testing service
operations, $101,000 represents interest for the financing of the transgenic
production facility and $134,000 represents interest incurred under the
Convertible Debt and Development Funding Agreement with Genzyme ("Genzyme Credit
Line") (see Item 8 and Note 4 to the consolidated financial statements appearing
in this report).
The Company recognized $100,000 of non-operating income in 1998 compared to
$50,000 in 1997. The 1998 amount represents an earnout payment in connection
with the sale in 1995 of the TSI Center for Diagnostic Products Inc.
("CDP").
The Company recognized $4.3 million of joint venture losses incurred on ATIII
LLC during 1998. In 1997, the Company incurred $811,000 of losses on the SMIG JV
(see Item 8 and Note 11 to the consolidated financial statements appearing in
this report).
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
16
$11.2 million or 135%, due primarily to an increase in activity and revenues
related to the funding received from Genzyme in the development of the lead
compound, AT-III, the achievement of $4.4 million in milestones from the SMIG
JV, 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. Internal 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.
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 Genzyme Credit Line (see Item 8
and Note 4 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 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 SMIG JV
including increased research funding to the Company (see Item 8 and Note 11 to
the consolidated financial statements appearing in this report).
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $11.7 million at January 3, 1999.
During 1998, the Company had a $5.4 million net increase in cash. Sources of
funds during the period include net proceeds of $18.9 million from the issuance
of preferred stock, net proceeds of $6.4 million from the issuance of common
stock, $1.6 million of proceeds received from employee stock purchase and stock
option plans, $2.2 million of proceeds from issuance of long-term debt and $5.1
million in net borrowings under a commercial bank revolving line of credit. Cash
inflows were offset by $8.0 million of cash used in operations (due primarily to
the net loss of $19.6 million, of which $10.1 million represented non-cash
charges), $6.0 million invested in capital equipment for further expansion of
the transgenic production facility and the expansion of the laboratory
facilities, $6.0 million used to pay down the Genzyme revolving line of credit,
$4.4 million invested in ATIII LLC and $4.1 million used to pay down long-term
debt.
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, callable in cash or
common stock at the sole discretion of the Company, and commencing on December
21, 1998 became convertible into common stock at the lower of the average of any
5 day closing bid prices selected by the holder, in the 20 trading days
immediately preceding the conversion date or $14.55. Conversion is subject to
maximum share limitations, and if holders are unable to convert a portion of
preferred stock due to these limitations, a dividend equal to 10% per annum of
the face amount of the unconverted preferred stock, payable in cash or preferred
stock at the Company's sole option will accrue (see Item 8 and Note 5 to the
consolidated financial statements appearing in this report). As a result of this
financing, the amount of the
17
revolving line of credit from Genzyme Corporation established under a May 1996
agreement (the "Genzyme Credit Line") was reduced to approximately $6.3 million.
In May 1998, the Company completed a private placement of 603,300 shares of
common stock at $10.80 per share in a registered direct offering to a single
purchaser raising approximately $6.4 million in new equity.
In December 1998, GTC refinanced its bank line of credit and a term loan with a
new commercial bank. The credit line was increased to $17.5 million (the "New
Credit Line") for a three year term expiring in December 2001. Under the New
Credit Line, borrowing capacity was increased by $10 million to $17.5 million, a
portion of which may be utilized for letters of credit. Availability under the
term loan, which provides financing for facilities expansion (the "New Term
Loan"), was increased by $5 million to $7.1 million. As of January 3, 1999,
approximately $11.1 million was outstanding and $4.9 million was available under
the New Credit Line while approximately $1.8 million was outstanding and $5.3
million was available under the New Term Loan. A standby letter of credit with a
face amount of $1.5 million has been issued under the New Credit Line to support
a major facility lease. No amounts were due under the standby letter of credit
as of January 3, 1999. The Company has outstanding debt of $11.8 million payable
through 2012 and operating leases with future minimum payments of $9.2 million
through 2005. The Company has entered into a collaboration agreement for the
ATIII LLC joint venture under which it has committed to fund 30% of development
costs until Genzyme has contributed $33 million and 50% of development costs
thereafter, as well as 50% of all new facility costs (see Item 8 and Notes 2, 9
and 11 to the consolidated financial statements appearing in this report).
Also in December 1998, the Company obtained an additional $5 million lease
commitment pursuant to an equipment lease agreement from a commercial leasing
company which was fully available at January 3, 1999.
The Company had a working capital deficit of $4.3 million at January 3, 1999
compared to a deficit of $8.4 million at December 28, 1997. As of January 3,
1999, the Company had approximately $4.9 million available under the New Credit
Line, $6.3 million available under the Genzyme Credit Line, $5.3 million
available on the New Term Loan and $5 million available under various capital
lease lines. Under the Company's 1999 operating plan, existing cash balances,
along with funds available under bank and lease lines and the Genzyme Credit
Line, are expected to be sufficient to fund the Company into the year 2000. The
Company continues to consider various alternative future financing strategies,
such as collaborative arrangements, public or private sales of its securities,
including securities in certain subsidiaries, additional mortgage or lease
financing, asset sales and other sources.
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.
IMPACT OF YEAR 2000
Certain companies may face problems if the computer processors and software upon
which they directly or indirectly rely are unable to process date values
correctly upon the turn of the millennium ("Year 2000"). Such a system failure
and corruption of data of the Company or its customers or suppliers could
disrupt the Company's operations, including, among other things a temporary
inability to process transactions or engage in other business activities or to
receive information or services from suppliers.
The Company has appointed a Year 2000 task force to address the issues and
assess the potential impact of the Year 2000 problem. The task force is
evaluating the Company's financial systems, computers, software and other
equipment to ensure that the programs and systems will be Year 2000 compliant.
The Company presently believes that its computer systems, software and other
equipment will be Year 2000 compliant by the Summer of 1999. The Company has
spent approximately $100,000 and estimates that it will spend approximately
$300,000 to $400,000 in capital replacement of computers,
18
equipment and software upgrades. The Company will incur another $100,000 to
$200,000 for costs of implementation. The Company will initiate communications
with third party suppliers and is requesting that they represent that their
products and services are to be Year 2000 compliant and that they have a program
to test for compliance. Additionally, the Company is assessing those vendors
that are not Year 2000 compliant and is in the process of finding alternative
vendors that are compliant.
Because the Company currently anticipates that it will achieve Year 2000
compliance, it has not formulated a contingency plan. However, should the
Company determine there is significant risk that it may be unable to adhere to
its compliance timetable, it will assess reasonably likely scenarios resulting
from noncompliance and establish a contingency plan to address such scenarios.
The Company's ability to achieve Year 2000 compliance is subject to various
uncertainties including the Company's ability to successfully identify systems
and programs not Year 2000 compliant, the nature and amount of programming
required to correct or replace affected programs, the availability and magnitude
of labor and consulting costs and the success of the Company's business
partners, vendors and clients in addressing the Year 2000 issue. Therefore,
while the financial impact of implementing Year 2000 compliance remediation has
not been and is not anticipated to be material to the Company's business,
financial position or results of operations, the Company can make no assurances
with respect to the costs of remediation efforts not yet incurred. Additionally,
the Company cannot be certain that it will achieve adequate Year 2000 compliance
in a timely manner or that any impact of a failure to achieve such compliance
will not have a material adverse effect on the Company's business, financial
condition or results of operation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has certain financial instruments at January 3, 1999, including a
guaranty, two revolving lines of credit, a letter of credit and various loans
outstanding which are sensitive to changes in interest rates. The Company has a
guaranty by Genzyme Corporation, obtained in December 1998, of the Company's
credit facility with a commercial bank, whose carrying value of $969,000
approximates fair value. Also, the Company has revolving lines of credit with a
commercial bank and with Genzyme Corporation totaling $23.8 million, which
accrue interest at a variable rate. At January 3, 1999, $11.1 million is
outstanding under the lines and the weighted average interest rate is 2.03%. As
part of the revolving credit facility at a commercial bank, the Company has been
issued a $1.5 million standby letter of credit in support of a major facility
lease, of which none has been drawn down at January 3, 1999. Additionally, the
Company has various loans outstanding. These instruments are not leveraged and
are held for purposes other than trading.
For the various loans outstanding, the table below presents the principal cash
flows that exist by maturity date and the related average interest rate.
1999 2000 2001 2002 2003 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
Fixed rate debt ($ in 000's) 661 510 919 422 461 2,145 5,118
Average interest rate on fixed rate debt 9.2% 9.3% 9.0% 9.0% 9.0% 8.5%
Variable rate debt ($ in 000's) 184 183 1,469 -- -- -- 1,836
The interest rate of the variable debt was 7.75% at January 3, 1999. At January
3, 1999, the fair value of these loans approximates carrying value.
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
19
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 1999 Annual Meeting of Stockholders to be held on May 25, 1999
(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 and the ATIII LLC Financial
Statements appear as a separate section of this report immediately
following Item 14.
All other 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 January 3, 1999.
(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-ITEMS 8, 14(a) (1), (a)(2) AND (d)
GENZYME TRANSGENICS CORPORATION AND SUBSIDIARIES
List Of Financial Statements And Financial Statement Schedules
20
The following consolidated financial statements of Genzyme Transgenics
Corporation and subsidiaries are included in Item 8:
Report of PricewaterhouseCoopers LLP - Independent Accountants
Consolidated Balance Sheets--January 3, 1999 and December 28, 1997
Consolidated Statements of Operations--For the fiscal years ended
January 3, 1999, December 28, 1997 and December 29, 1996
Consolidated Statements of Stockholders* Equity--For the fiscal
years ended January 3, 1999, December 28, 1997 and December 29, 1996
Consolidated Statements of Cash Flows--For the fiscal years ended
January 3, 1999, December 28, 1997 and December 29, 1996
Notes to Consolidated Financial Statements
The following financial statements of ATIII LLC are included in Item 4(d):
Report of PricewaterhouseCoopers LLP - Independent Accountants
Balance Sheet - December 31, 1998
Statement of Operations for the period from January 1, 1998 (date of
inception) to December 31, 1998
Statement of Cash Flows for the period from January 1, 1998 (date of
inception) to December 31, 1998
Statement of Changes in Venturer's Capital for the period from
January 1, 1998 (date of inception) to December 31, 1998
Notes to Financial Statements
All other 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.
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Genzyme Transgenics Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Genzyme
Transgenics Corporation and its subsidiaries (the "Company") at January 3, 1999
and December 28, 1997, and the results of their operations and their cash flows
for each of the three fiscal years in the period ended January 3, 1999, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 25, 1999
22
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share amounts)
JANUARY 3, DECEMBER 28,
1999 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,740 $ 6,383
Accounts receivable, net of allowance of $487 and $390 at
January 3, 1999 and December 28,1997, respectively 12,334 10,517
Unbilled contract revenue (including $771 and
$891 from related parties at January 3, 1999
and December 28, 1997, respectively) 6,847 6,069
Other current assets 1,496 1,431
-------- --------
Total current assets 32,417 24,400
Net property, plant, and equipment 30,486 26,297
Costs in excess of net assets acquired, net 18,404 19,532
Other assets 2,030 751
-------- --------
$ 83,337 $ 70,980
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,811 $ 2,091
Accounts payable - Genzyme Corporation 1,487 3,364
Accounts payable - ATIII LLC 2,418 --
Revolving line of credit 11,096 6,000
Revolving line of credit - Genzyme Corporation -- 6,000
Accrued expenses 8,403 7,900
Advance payments 8,317 5,568
Current portion of long-term debt and capital leases 2,204 1,900
-------- --------
Total current liabilities 36,736 32,823
Long-term debt and capital leases, net of current portion 9,561 9,862
Deferred lease obligation 741 613
Other liabilities 95 304
-------- --------
Total liabilities 47,133 43,602
Commitments and Contingencies (Note 3)
Stockholders' equity:
Series A convertible preferred stock, $.01 par value; 5,000,000 shares
authorized; 4,000,000 have been designated as Series A Convertible of which
20,000 shares are issued and outstanding at January 3, 1999 (liquidation
preference $20,000)
Common stock, $.01 par value; 40,000,000 shares authorized; 18,384,024
and 17,403,406 shares issued and outstanding at January 3, 1999
and December 28, 1997, respectively 184 174
Dividend on preferred stock (1,156) --
Capital in excess of par value - preferred stock 18,777 --
Capital in excess of par value - common stock 65,716 54,478
Unearned compensation (437) --
Accumulated deficit (46,864) (27,274)
Accumulated other comprehensive loss (16) --
-------- --------
Total stockholders' equity 36,204 27,378
-------- --------
$ 83,337 $ 70,980
-------- --------
-------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
23
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except share and per share amounts)
FOR THE FISCAL YEARS ENDED
JANUARY 3, DECEMBER 28, DECEMBER 29,
1999 1997 1996
----------------- ---------------- -----------------
Revenues:
Services $ 50,816 $ 43,417 $ 38,496
Sponsored research and development 11,596 19,521 8,338
------------ ------------ ------------
62,412 62,938 46,834
Costs and operating expenses:
Services 43,668 36,989 33,356
Research and development:
Sponsored 10,486 12,558 7,856
Internal 6,155 5,282 828
Selling, general and administrative 16,184 15,650 11,691
Equity in loss of joint ventures 4,285 811 356
------------ ------------ ------------
------------ ------------ ------------
80,778 71,290 54,087
------------ ------------ ------------
Loss from operations (18,366) (8,352) (7,253)
Other income (expense):
Interest income 280 136 85
Interest expense (1,379) (1,129) (1,138)
Other income 100 50 587
------------ ------------ ------------
Loss from operations before income taxes (19,365) (9,295) (7,719)
Provision for income taxes 225 48 27
------------ ------------ ------------
Net loss $ (19,590) $ (9,343) $ (7,746)
Dividend to preferred shareholders (1,156) -- --
------------ ------------ ------------
Net loss to common shareholders $ (20,746) $ (9,343) $ (7,746)
------------ ------------ ------------
------------ ------------ ------------
Net loss per common share (basic and diluted) $ (1.15) $ (0.54) $ (0.52)
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of common shares
outstanding (basic and diluted) $ 17,978,677 $ 17,253,292 $ 14,801,725
------------ ------------ ------------
------------ ------------ ------------
Comprehensive loss:
Net loss (19,590) (9,343) (7,746)
Other comprehensive income / (loss):
Unrealized holding losses on available for
sale securities (16) -- --
Reclassification adjustment for foreign currency
translation losses included in net loss -- 10 --
------------ ------------ ------------
Total other comprehensive income / (loss) (16) 10 --
------------ ------------ ------------
Comprehensive loss $ (19,606) $ (9,333) $ (7,746)
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of the consolidated financial
statements.
24
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Series A Convertible Capital in
Preferred Stock Common Stock Excess of
----------------- --------------- Par Value
Shares Amount Shares Amount Dividend Common Stock
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 -- $ -- 13,151 $ 132 $ -- $37,351
Net loss
Share of common stock to public, net of expenses -- -- 3,450 34 12,666
Issuance of common stock in connection with the
Convertible Debt and Development Funding Agreement 220 2 1,671
Common stock issuance under Employee Stock Purchase Plan 165 1 511
Common stock issuance in connection with the GTC Savings
and Retirement Plan 58 1 265
Issuance of warrants in settlement of liability 128
Proceeds from the exercise of stock options 87 1 382
---- ----- ------ ------ ------- -------
Balance, December 29, 1996 -- -- 17,131 171 52,974
Net loss
Common stock issuance under Employee Stock Purchase Plan 115 1 572
Common stock issuance in connection with the GTC Savings
and Retirement Plan 37 1 257
Issuance of warrants in connection with a debt financing 130
Translation adjustment
Proceeds from the exercise of stock options 120 1 545
---- ----- ------ ------ ------- -------
Balance, December 28, 1997 -- -- 17,403 174 54,478
Net loss
Sale of preferred stock to institutional investors, net cash
proceeds 20
Issuance of warrants in connection with the preferred stock
offering (1,156) 1,301
Sale of common stock in a private placement, net of expenses 603 6 6,440
Common stock issuance under Employee Stock Purchase Plan 229 2 1,149
Common stock issuance in connection with the GTC Savings
and Retirement Plan 43 1 398
Issuance of warrants in connection with a debt financing 969
Issuance of stock options to non-employees 519
Unrealized loss on investment
Proceeds from the exercise of stock options 106 1 462
---- ----- ------ ------ ------- -------
Balance, January 3, 1999 20 $ -- 18,384 $ 184 $(1,156) $65,716
---- ----- ------ ------ ------- -------
---- ----- ------ ------ ------- -------
Capital in
Excess of Accumulated
Par Value Other Total
Preferred Unearned Accumulated Comprehensive Stockholders'
Stock Compensation Deficit Income(loss) Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ -- $(10,185) $(10) $ 27,288
Net loss (7,746) (7,746)
Share of common stock to public, net of expenses 12,700
Issuance of common stock in connection with the
Convertible Debt and Development Funding Agreement 1,673
Common stock issuance under Employee Stock Purchase Plan 512
Common stock issuance in connection with the GTC Savings
and Retirement Plan 266
Issuance of warrants in settlement of liability 128
Proceeds from the exercise of stock options 383
------- ----- -------- ---- --------
Balance, December 29, 1996 (17,931) (10) 35,204
Net loss (9,343) (9,343)
Common stock issuance under Employee Stock Purchase Plan 573
Common stock issuance in connection with the GTC Savings
and Retirement Plan 258
Issuance of warrants in connection with a debt financing 130
Translation adjustment 10 10
Proceeds from the exercise of stock options 546
------- ----- -------- ---- --------
Balance, December 28, 1997 (27,274) -- 27,378
Net loss (19,590) (19,590)
Sale of preferred stock to institutional investors, net cash
proceeds 18,922 18,922
Issuance of warrants in connection with the preferred stock
offering (145) --
Sale of common stock in a private placement, net of expenses 6,446
Common stock issuance under Employee Stock Purchase Plan 1,151
Common stock issuance in connection with the GTC Savings
and Retirement Plan 399
Issuance of warrants in connection with a debt financing 969
Issuance of stock options to non-employees (437) 82
Unrealized loss on investment (16) (16)
Proceeds from the exercise of stock options 463
------- ----- -------- ---- --------
Balance, January 3, 1999 $18,777 $(437) $(46,864) $(16) $ 36,204
------- ----- -------- ---- --------
------- ----- -------- ---- --------
The accompanying notes are an integral part of the consolidated financial
statements
25
GENZYME TRANSGENICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
FOR THE FISCAL YEAR ENDED
JANUARY 3, DECEMBER 28, DECEMBER 29,
1999 1997 1996
-----------------------------------------------
Cash flows for operating activities:
Net loss $(19,590) $ (9,343) $ (7,746)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 5,002 4,149 3,821
Provision (recovery) of accounts receivable allowances 166 124 (237)
Shares to be issued for 401-K employer match 515 464 368
Issuance of non-employee options 82 -- --
Loss on disposal of fixed assets -- 7 165
Equity in loss of Joint Ventures 4,285 811 356
Issuance of warrants in settlement of liability -- -- 128
Changes in assets and liabilities:
Accounts receivable and unbilled contract revenue (2,844) (2,471) (4,072)
Other current assets 502 78 (700)
Accounts payable 1,261 1,124 (38)
Other accrued expenses 387 1,783 (1,153)
Advance payments 2,249 (1,081) 1,959
-------- -------- --------
Net cash used by operating activities (7,985) (4,355) (7,149)
Cash flows for investing activities:
Purchase of property, plant and equipment (6,005) (6,175) (3,549)
Investment in Joint Ventures (4,358) (528) --
Restricted cash -- -- 1,425
Other assets (391) -- 632
-------- -------- --------
Net cash used in investing activities (10,754) (6,703) (1,492)
Cash flows from financing activities:
Net proceeds from the issuance of common stock 6,446 -- 12,700
Net proceeds from employee stock purchase plan 1,151 573 512
Net proceeds from the exercise of stock options 463 546 383
Net proceeds from the issuance of convertible preferred stock 18,922 -- --
Proceeds from long-term debt 2,162 5,302 --
Repayment of long-term debt (4,063) (3,597) (1,713)
Net borrowings under revolving line of credit 5,096 -- --
Investment and advances by Genzyme Corporation (6,000) 6,000 1,673
Deferred financing costs -- (170) --
Other long-term liabilities (81) (117) (420)
-------- -------- --------
Net cash provided by financing activities 24,096 8,537 13,135
-------- -------- --------