SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: FEBRUARY 22, 2000
(Date of earliest event reported)
INCYTE PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-27488 94-3136539
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
3174 PORTER DRIVE, PALO ALTO, CALIFORNIA 94304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 855-0555
Item 5. Other Events.
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Set forth below are updated descriptions of the business of and risk
factors affecting an investment in Incyte Pharmaceuticals, Inc. (the "Company").
Also attached hereto as Exhibit 99.1 and incorporated by reference herein is the
press release dated February 1, 2000 announcing the placement of $150 million in
convertible subordinated notes by the Company. In the descriptions of the
business and risk factors below, all references to "Incyte," "we," "us," "our"
or the "Company" mean Incyte Pharmaceuticals, Inc. and its subsidiaries, except
where it is made clear that the term means only the parent company.
As used in this current report on Form 8-K, the words "expects,"
"anticipates," "estimates," "plans" and similar expressions are intended to
identify forward-looking statements. These are statements that relate to future
periods and include statements under the captions "Business" and "Risk Factors"
as to our expected losses, the adequacy of capital resources, growth in
operations, the ability to commercialize products developed under collaborations
and alliances, our ability to complete the sequence of full-length genes in
areas of therapeutic interest and file patents on these potential drug targets,
our ability to integrate companies and operations that we have acquired or will
acquire, our ability to implement online delivery of our database and software
products, the scheduling and timing of current and future litigation, our
strategy with regard to protecting our proprietary technology, our ability to
compete and respond to rapid technological change and the performance and
utility of our products and services. Forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected. These risks and uncertainties include, but are not limited
to, the extent to which the pharmaceuticals and biotechnology industries use
genomic information in research and development, risks relating to development
of new products and services and their use by our potential customers and
collaborators, our ability to work with our collaborators to meet the goals of
our collaborators and alliances, the effectiveness of our sequencing efforts,
the impact of alternative technological advances and competition, changes in
patent laws, and the risks set forth under "Risk Factors."
Incyte, LifeSeq and PathoSeq are our registered trademarks. ZooSeq, LifeTools,
LifeArray, LifeProt, LifeExpress, GeneAlbum and GEM are our trademarks. We also
refer to trademarks of other corporations and organizations in this current
report on Form 8-K.
BUSINESS
OVERVIEW
Incyte is a leading provider of genomic information-based products and
services. These products and services include database products, genomic data
management software tools, microarray-based gene expression services, genomic
reagents and related services. We focus on providing an integrated platform of
information technologies designed to assist pharmaceutical and biotechnology
companies and academic researchers in the understanding of disease and the
discovery and development of new drugs.
Our genomic databases integrate bioinformatics software with proprietary
and, when appropriate, publicly available genomic information. In building the
databases, we utilize high-throughput, computer-aided gene sequencing and
analysis technologies to identify and characterize the expressed genes of the
human genome, as well as certain animal, plant and microbial genomes. By
searching our proprietary genomic databases, customers can integrate and analyze
genomic information from multiple sources in order to discover genes that may
represent the basis for new biological targets, therapeutic proteins, or gene
therapy, antisense or diagnostic products. The pharmaceutical and biotechnology
industries use our genomic products and services to accelerate the discovery and
development of new diagnostic and therapeutic products. Our products and
services can be applied to gene and target discovery, functional genomics
studies, preclinical pharmacology and toxicology studies, and can aid in
understanding and analyzing the results of clinical development studies.
We currently provide access to our genomic databases through collaborations
with pharmaceutical and biotechnology companies worldwide. As of December 31,
1999, more than twenty companies had entered into multi-year agreements to
obtain access to our databases on a non-exclusive basis. These companies include
the following:
Abbott Laboratories Johnson & Johnson
AstraZeneca PLC Millennium Pharmaceuticals, Inc.
Aventis S.A. Monsanto Company
Bristol-Myers Squibb Company Novartis AG
Eli Lilly and Company Pfizer Inc.
F. Hoffmann-La Roche Ltd. Pharmacia & Upjohn, Inc.
Genentech, Inc. Schering AG
Glaxo Wellcome plc Schering-Plough, Ltd.
Revenues from these companies have primarily consisted of database access
fees. Our LifeSeq Gold human gene sequence database agreements also provide for
future milestone payments and royalties from the sale of products derived from
proprietary information contained in one or more database modules.
Our portfolio of products and services includes:
- - LifeSeq Gold human gene sequence and expression database;
- - PathoSeq microbial genomic database;
- - ZooSeq animal model gene sequence and expression database;
- - LifeExpress gene expression and protein expression database;
- - SNP database that identifies common DNA sequence variants between
individuals;
- - LifeTools suite of bioinformatics software;
- - LifeArray gene expression data management and analysis software;
- - LifeProt protein expression data management and analysis software; and
- - contract sequencing and other services.
The databases are available using the Oracle database architecture and operate
on Sun Microsystems, Compaq and SGI workstations. As part of our strategy for
expanding our customer base, we are developing the infrastructure to enable the
online delivery of our database and software products.
BACKGROUND
Genes, found in all living cells, are composed of DNA, which in turn is
composed of two strands of complementary nucleotides referred to as base pairs
or bases. Nucleotides may be one of four different molecules-adenine, guanine,
cytosine, or thymine-which are strung together in specific patterns to create
genes. Genes provide the necessary information to create proteins, the molecules
that carry out all functions within a cell. Many human diseases are associated
with the inadequate or inappropriate presence, production or performance of
proteins. As such, pharmaceutical and biotechnology companies often seek to
develop drugs that will bind to a targeted protein involved in disease in order
to regulate, inhibit or stimulate its biological activity. Other proteins, known
as therapeutic proteins, have direct biological activity and may be capable of
treating disease. Insulin and human growth hormone are examples of therapeutic
proteins. Understanding the role genes play in disease, and the protein targets
or therapeutic proteins that they encode, has thus become a significant area of
interest and research within the pharmaceutical and biotechnology industries.
Sequencing
One frequently employed method for determining gene function involves the
grouping of genes into "related" families based on similarities, or homologies,
in DNA sequence. DNA sequencing is a process that identifies the order of the
bases in a segment of DNA. Once a gene's sequence is known, its function may be
inferred by comparing its sequence with the sequences of other human genes of
known function, because genes with homologous sequences may have related
functions. Comparing gene sequences across species has also become a useful tool
for understanding gene function, as frequently it is easier to first assess gene
function in other organisms.
Gene Expression
Another method used to determine gene function focuses on the analysis of
gene activity, referred to as expression, within a cell. When a gene is active,
its DNA is copied into messenger RNA or "mRNA." The population of mRNA within a
cell can be isolated and converted into complementary DNA or "cDNA," thereby
creating a cDNA library that represents the population of mRNAs present in a
cell type at a particular time. In a process called "gene expression profiling,"
high-throughput cDNA sequencing, computer analysis and microarray technologies
can be used to identify which genes are active or inactive and, if active, at
what levels. Expression profiles provide a more detailed picture of cellular
genetics than conventional laboratory techniques by indicating which genes, both
known and novel, are specifically correlated to discrete biological events in
normal and disease-state cells.
Microarray Technology
Microarray technology can be used to analyze the expression patterns or
sequence variations in a large number of genes simultaneously. A microarray
consists of fragments of a single strand DNA's double strand attached to a
surface, usually a glass, plastic or silicon slide, in a grid-like formation.
When cDNA that has been prepared from mRNA samples from normal and diseased
cells is applied to the microarray, complementary strands attach to the DNA
fragments on the microarray. Microarray technology allows the fabrication of
very small grids containing probes for thousands of different genes. Microarrays
can be used in drug discovery and development, to evaluate the behavior of a
large number of related genes in a diseased tissue or in response to treatment
with a new drug or in diagnostic testing to quickly detect the presence of a
large number of disease markers.
Bioinformatics
Due to improvements in sequencing technology, genomic information from both
public and private sources is increasing at a dramatic rate. As a result,
bioinformatics, or the use of computers and sophisticated algorithms to store,
analyze and interpret large volumes of biological data, is essential in order to
capture value from this growing pool of data. To date, the main focus of
bioinformatic and genomic tools has been drug discovery. The Company believes
these tools, and those under development, will also assist researchers with the
preclinical and clinical development process. For example, with the help of new
technology and bioinformatic analyses scientists may be able to correlate
genetic and physiologic response in preclinical animal models, examine gene
expression profiles in drug-treated animals to assess the pharmacological
activity and toxicity of new drugs, and stratify clinical trial patients
according to their gene expression profiles.
Single Nucleotide Polymorphism ("SNP") Discovery
Due to genetic variation, individuals may respond differently to treatment
with the same drug. Few, if any, FDA-approved drugs are capable of successfully
treating every individual diagnosed with a targeted disease. The differences in
patients' responses to a drug are believed to result in part from differences in
the sequence of nucleotides within genes. The most common form of sequence
variation is known as a single nucleotide polymorphism or "SNP." A SNP is
defined as a single base difference within the same DNA region between two
individuals. Some SNPs are "silent" and not associated with a disease or a
patient's ability to respond to a particular therapy, and some SNPs occur at a
frequency that is too low to justify large-scale patient screening. Thus,
researchers need to do more than identify SNPs; they must identify the most
frequently occurring SNPs and identify those that correlate with a patient's
disease prognosis or ability to respond to a drug. Through our acquisition of
Hexagen in September 1998, we are developing fluorescent single-strand
confirmation polymorphism (fSSCP) technology, a high-throughput SNP discovery
technology. fSSCP is particularly useful for identifying SNPs in genes not
expressed or more rarely expressed. This gel-based system detects SNPs in
multiple samples simultaneously by observing changes in the tertiary structure
of single stranded DNA fragments due to base pair changes. Incyte is
contributing technologies in the areas of electrophoresis, fluorescence
chemistries, sequencing and bioinformatics in order to continue to develop and
improve the accuracy and efficiency of this technology.
Gene Mapping
Mapping refers to the determination of the physical location of a gene in
the genome and the relative position of that gene to other genes along a
chromosome. Physiological processes and associated diseases can be extremely
complex and involve many genes. A gene can activate one or more different genes
forming a cascade of genetically controlled events or a "pathway." When the
genes involved in such a pathway are located within neighboring regions of DNA,
mapping can allow the location of one member of the pathway to be used to
identify the other members. In addition, genetically inherited diseases that
have been passed from generation to generation may be associated with visible
chromosome alterations, such as deletions of large segments of the chromosome or
insertions within the chromosome. These physical chromosome abnormalities allow
researchers to identify the DNA regions and genes that have a critical role in
causing disease.
PROTEOMICS
Proteomics is a relatively new field of study that involves the separation,
identification, and characterization of proteins present in a biological sample.
By comparing disease and control samples, it is possible to identify
disease-specific proteins. These may have potential as targets for drug
development or as molecular markers of disease. The power of proteomics lies in
the ability to directly measure a gene product, determine subcellular
localization and detect post-translational modifications.
PRODUCTS AND SERVICES
Our current products and services include an integrated platform of genomic
databases, data management software tools, microarray-based gene expression
databases and services, and related reagents and services.
Genomic Databases. We provide our database collaborators with
non-exclusive database access. Database collaborators receive periodic data
updates as well as software upgrades and additional search and analysis tools
when they become available. The fees and the period of access are negotiated
independently with each company. Fees generally consist of database access fees,
option fees, and non-exclusive or exclusive license fees corresponding to patent
rights on proprietary sequences. We may also receive future milestone and
royalty payments from database collaborators from the development and sale of
their products derived from our technology and database information. Researchers
can browse not only Incyte-generated data, but also public domain information.
We currently offer the following database modules:
- - LifeSeq Gold Database. The LifeSeq Gold human sequence and expression
database integrates the information from our LifeSeq public-domain and
proprietary gene sequences and expression database; LifeSeq FL, full-length gene
sequence database; and the sequence information from our GeneAlbum database and
reagent set. LifeSeq Gold uses a novel method to assemble cDNA sequence
fragments (ESTs) into genes, providing increased sensitivity for distinguishing
between closely related sequences, including splice variants. Researchers can
easily move from one module to another through the HTML-based graphical
interface. The sequence database contains our computer-edited gene sequence
files and is used by researchers to identify related or homologous genes. For
example, a scientist may wish to identify new genes homologous to a gene
identified through their own research and believed to be linked to a disease.
The database contains biological information about each sequence in our sequence
database, including tissue source, homologies, and annotations regarding
characteristics of the gene sequence. Also, the database contains a gene
expression profile for every tissue in the database combined with proprietary
bioinformatics software to allow collaborators to browse data and compare
differences in gene expression across cells, tissues, and different disease
states. Thus, the database can be used to assist researchers in correlating the
presence of specific genes to discrete biological events in normal and
disease-state cells. We continually add sequences and expression data from
normal and diseased tissues to the LifeSeq Gold database.
- - PathoSeq Database. The PathoSeq database currently contains proprietary
and public domain genomic data for more than 40 medically relevant bacterial and
fungal microorganisms. With drug-resistant strains of bacteria and other
microorganisms posing an increasing threat to world health, pharmaceutical and
biotechnology companies are searching for genes unique to these pathogens that
will aid in the development of new drugs to treat infectious disease. Our
proprietary bioinformatics process edits all sequence data to remove artifacts
and contamination, assemble sequences, display the relative position of the DNA
coding regions, and identify genes either common among multiple microorganisms
or unique to one microbial genome. We believe PathoSeq can help researchers
understand the biology of microorganisms, study the mechanisms of drug
resistance, identify genes that may make effective drug targets, and,
ultimately, develop new therapeutics to treat and prevent infectious disease.
- - ZooSeq Database. The ZooSeq database was developed to aid pharmaceutical
and biotechnology companies in designing and evaluating preclinical drug studies
in animal models, a crucial step in the drug development process. The database
currently contains gene sequence and expression data for the rat, mouse, and
monkey-animals commonly used in preclinical drug toxicology and efficacy
studies. By correlating a drug's effects on an animal with the animal's genetic
makeup, and then cross-referencing these data with our human LifeSeq database, a
researcher may better predict the drug's efficacy and side effects before moving
to human clinical trials.
- - LifeExpress Database. The LifeExpress database is a comprehensive,
nonexclusive database of gene expression and protein expression on samples
focusing on major therapeutic areas and pharmacology/toxicology. The protein
expression modules of the LifeExpress database are developed in cooperation with
collaborator Oxford GlycoSciences. The two subcategories of LifeExpress are
TargetExpress and LeadExpress. Aimed at facilitating the discovery and
validation of high value targets, TargetExpress provides further annotation and
detailed expression information on known and unknown gene products. LeadExpress
focuses on using genomic and proteomic technologies to further annotate chemical
structures of common drug classes.
- - IsSNPs. Our in silico SNP program identifies common SNPs by mining
LifeSeq Gold and genomic sequence data. We have identified approximately 46,000
isSNPs and expect to identify a total of 100,000 isSNPs from LifeSeq Gold (over
60,000 from expressed regions) throughout the coming year.
Contract Sequencing. Contract sequencing services generally include
generating sequence and bioinformatics data for customers using our core
strengths in library construction, high-throughput cDNA sequencing and
bioinformatics.
Software. We have developed an enterprise-wide genomic information
management system capable of updating, reprocessing and integrating genetic data
from multiple sources and from different organisms. This system allows the
integration of our proprietary, subscriber-specific and public domain data, and
is capable of comparing information from humans, animals, microbes, fungi and
plants. The system incorporates the architecture necessary to integrate our
software tools data visualization tools, data mining programs and project
management capabilities, and is capable of being integrated with additional
technologies developed to more efficiently manage and analyze genomic data.
- - LifeTools, a suite of specialized bioinformatic software programs and
project management tools, consists sequence analysis and data management tools
for handling complex genomic information from multiple sources. LifeTools reads
and edits raw sequence data, including data imported from public databases, and
annotates and clusters sequence fragments based on sequence similarity.
LifeTools includes a fast, scalable database search engine with intranet-based
graphical tools for interactive queries and analyses. The LifeTools relational
database management system stores and distributes sequence assembly, homology,
tissue expression information and biological data. Our database management
architecture is based on open system standards, providing interconnectivity
between disparate systems and applications, and enterprise-wide access to data
and functions.
- - LifeArray software manages and analyzes data resulting from microarray
hybridization experiments. It includes a searchable database that accommodates
experiment results from a variety of microarray platforms. LifeArray provides an
integrated data warehouse and analysis environment, which allows the customer to
bring data from multiple microarray platforms into one integrated environment.
LifeArray enables the user to visualize differential expression between
biological samples and can track all details of microarrays, genes, biological
samples, donor information, and experimental results in one integrated
environment with a Java-based interface. It is an enterprise-wide system that
can support as many simultaneous users as required, and grow to suit changing
microarray management needs.
- - LifeProt software provides tools to query, display, and analyze the
protein expression data resulting from two-dimensional gel experiments. Using
the program's query capabilities, customers can quickly locate relevant sample
data sets from among many stored in a central database. This database tracks
experiment conditions, tissue, treatment, and donor information, as well as the
sample data. The LifeProt software is an enterprise-wide system that uses a
Java-based interface and is available across a company to scientists using a
variety of different computers and operating systems.
Microarray-Based Services. We offer microarray-based gene expression
services to the pharmaceutical, biotechnology, and agricultural industries and
academic researchers. These services can be used to simultaneously evaluate the
gene expression profile of a large number of genes. Our GEM microarray
technology allows probes for up to 10,000 genes per microarray. Microarrays can
be used to identify the genes involved in a complex disease pathway, examine a
drug-treated tissue to understand how the drug affected the expression of
important genes, and study several new drug candidates to determine if one has a
more favorable effect on gene expression than the others. Experiments can use
either prefabricated arrays or custom arrays. Prefabricated arrays contain
either public domain genes or genes chosen from our databases. We currently
offer 18 prefabricated microarrays, including an array containing the genes
found in a microbial pathogen Staphlycoccus aureus, an array containing the
genes found in the rat liver and kidney, and a series of arrays that contain
Incyte proprietary genes. Custom arrays can contain genes provided by the
customer or chosen by the customer from our proprietary databases.
DNA Reagents and Other Services. We offer a variety of DNA reagents and
other services designed to assist its collaborators in using information from
its databases in the customer's internal lab-based experiments. The cloned DNA
fragments from which the information in our databases is derived represent
valuable resources for researchers, enabling them to perform bench-style
experiments to supplement the information obtained from searching our databases.
We retain copies of all isolated clones corresponding to the sequences in the
database. Our collaborators may request clones corresponding to a sequence of
interest on a one-by-one basis or through the LifeSeq GeneAlbum component of
LifeSeq Gold. GeneAlbum is a subscription-based service that provides database
collaborators with large numbers of sequence verified DNA clones. In addition,
we produce a broad line of genomic research products, such as DNA clones and
insert libraries, and offers technical support services, including
high-throughput DNA screening, custom robotic services, contract DNA
preparation, contract mapping and fluorescent in situ hybridization, to assist
researchers in the identification and isolation of novel genes.
DATABASE PRODUCTION
We engage in the high-throughput automated sequencing of genes derived from
tissue samples followed by the computer-aided analysis of each gene sequence to
identify homologies to genes of known function in order to predict the
biological function of newly identified sequences. The derivation of information
in our databases involves the following steps:
- - Tissue Access. We obtain tissue samples representing most major organs
in the human body from various academic and commercial sources. Where possible,
we obtain information as to the medical history and pathology of the tissue. The
genetic material is isolated from the tissue and prepared for analysis. The
results of this analysis, as well as the corresponding pathology and medical
history information, are incorporated into the databases.
- - High-Throughput cDNA Sequencing. We utilize specialized teams in an
integrated approach to its high-throughput sequencing and analysis effort. Gene
sequencing is performed using multiple work shifts to increase daily throughput.
One team develops and prepares cDNA libraries from biological sources of
interest, a second team prepares the cDNAs using robotic workstations to perform
key steps that result in purified cDNAs for sequencing, and a third team
operates the automated DNA sequencers.
- - Bioinformatics. Sequence information generated from our high-throughput
sequencing operations is uploaded to a network of servers. Our proprietary
bioinformatic software then assembles and edits the sequence information. The
sequence of each cDNA is compared via automated, computerized algorithms to the
sequences of known genes in our databases and public domain databases to
identify whether the cDNA codes for a known protein or is homologous to a known
gene. Each sequence is annotated as to its cell or tissue source, its relative
abundance and whether it is homologous to a known gene with known function. The
bioinformatics staff monitors this computerized analysis and may perform
additional analyses on sequence information. The finished data are then added to
our proprietary sequence databases.
COLLABORATORS
As of December 31, 1999, we had database collaboration agreements with more
than 20 companies. Each collaborator has agreed to pay annual fees to receive
non-exclusive access to one or more of our databases. One of these companies
contributed 12% of total revenues in 1998. No customer contributed 10% or more
of total revenues in 1999 or 1997. During 1999, our database collaborators
included the following companies:
Abbott Laboratories Johnson & Johnson
AstraZeneca PLC Millennium Pharmaceuticals, Inc.
Aventis S.A. Monsanto Company
Bristol-Myers Squibb Company Novartis AG
Eli Lilly and Company Pfizer Inc.
F. Hoffmann-La Roche Ltd. Pharmacia & Upjohn, Inc.
Genentech, Inc. Schering AG
Glaxo Wellcome plc Schering-Plough, Ltd.
Some of our database agreements contain minimum annual update requirements,
which if not met could result in our breach of the respective agreement. We
cannot assure you that any of our database collaboration agreements will not be
terminated earlier in accordance with their terms. In 1999 one LifeSeq Gold
database collaborator did not renew their subscription. The impact of this did
not have a significant impact on our results of operations or a material adverse
impact on our business or financial condition. However, future loss of revenues
from any individual database agreement, if terminated or not renewed, could have
an adverse impact on our results of operations, although it is not anticipated
to have a material adverse impact on our business or financial condition.
DEVELOPMENT PROGRAMS
Since our inception, we have made substantial investments in research and
technology development. During the years ended December 31, 1999, 1998, and 1997
we spent approximately $146.8 million, $97.2 million, and $72.5 million,
respectively, on research and development activities. This investment in
research and development includes an active program to enter into relationships
with other technology-driven companies and, when appropriate, acquire licenses
to technologies for evaluation or use in the production and analysis process.
Not all of these technologies or relationships survive the evaluation process.
We have entered into a number of research and development relationships with
companies and research institutions.
In January 1998, we announced a relationship with Oxford GlycoSciences plc
("OGS") to investigate the use of proteomics, the large-scale, high-throughput
analysis of protein expression, in the development of new information-based
products. As part of the relationship, we made an equity investment in OGS. We
and OGS entered into a collaborative agreement under which the two parties are
developing data, software and related services, focusing on protein expression
and sequence information from a variety of human tissues. As part of the
collaborative agreement, we reimbursed OGS $5.0 million in 1999 for services
rendered and agreed to reimburse OGS for up to an additional $5.0 million in
2000 if revenues are not sufficient to offset OGS' expenses for services to be
rendered.
In August 1998, we initiated a series of programs in human genome
sequencing, accelerated human genome mapping, bioinformatics and SNP discovery.
The information resulting from these efforts will be used to supplement existing
databases and to generate new databases and services. We are initiating SNP
programs focused on specific candidate genes, gene families, disease pathways,
therapeutic areas or drug targets that could be useful to individual
pharmaceutical partners. These programs may include the identification of genes
associated with a particular disease and an in depth study of the population
frequency and disease correlation of SNPs within a selected DNA region. The SNP
discovery efforts were assisted by our acquisition of Hexagen in September 1998.
We are developing various platforms that can be used for the high
throughput screening of patient samples in order to correlate SNPs with
patients' responses to drugs. These platforms may be used to offer genotyping
and patient profiling services to pharmaceutical companies to help identify
statistically significant and medically relevant associations between SNPs in
specific genes and drug response or disease susceptibility. We expect that this
service will be used to assist in the evaluation of new drugs in clinical trials
and to assess clinical trial design.
DIADEXUS JOINT VENTURE
In September 1997, we established a 50-50 joint venture company, diaDexus,
LLC, with SmithKline Beecham Corporation. diaDexus is applying genomic and
bioinformatic technologies to the discovery and commercialization of novel
molecular diagnostic products. We provide diaDexus with non-exclusive access to
our human and microbial databases (LifeSeq Gold and PathoSeq) for diagnostic
applications. diaDexus also has exclusive rights to develop diagnostic tests
based on novel molecular targets and genetic alterations identified as part of
SmithKline Beecham's drug discovery efforts. SmithKline Beecham and Incyte have
also each assigned various additional technologies and intellectual property
rights in the diagnostic field and initially contributed a combined total of $25
million in funding to diaDexus. In July 1999, we and SmithKline Beecham each
invested an additional $2.5 million in the form of convertible notes that mature
in April 2000. The notes will automatically convert into equity if certain
funding requirements are met.
diaDexus is focusing initially on the generation of unique diagnostic
markers for so-called "homebrew" tests-scientifically validated tests which are
awaiting formal regulatory approval-for reference laboratory testing and for
license to diagnostic kit manufacturers. Ultimately, diaDexus may develop its
own capacity to manufacture kits for sale to clinical testing laboratories. The
initial product range will focus on tests for disease detection. New tests for
improved diagnosis, staging and patient stratification in infectious disease and
oncology will be accorded particular emphasis.
PATENTS AND PROPRIETARY TECHNOLOGY
Our database business and competitive position are in part dependent upon
our ability to protect our proprietary database information and software
technology. We rely on patent, trade secret and copyright law, as well as
nondisclosure and other contractual arrangements to protect our proprietary
information.
Our ability to license proprietary genes and SNPs may be dependent upon our
ability to obtain patents, protect trade secrets and operate without infringing
upon the proprietary rights of others. Other pharmaceutical, biotechnology and
biopharmaceutical companies, as well as academic and other institutions, have
filed applications for, may have been issued patents or may obtain additional
patents and proprietary rights, relating to products or processes competitive to
our products or processes. Patent applications filed by competitors may claim
some of the same gene sequences or partial gene sequences as those claimed in
patent applications that we file. We are aware that some entities have made or
have announced their intention to make gene sequences publicly available.
Publication of sequence information may adversely affect our ability to obtain
patent protection for sequences that have been made publicly available.
Our current policy is to file patent applications on what we believe to be
novel full-length and partial gene sequences obtained through our
high-throughput computer-aided gene sequencing efforts. We have filed U.S.
patent applications in which we have claimed certain partial gene sequences and
have filed patent applications in the U.S. and applications under the Patent
Cooperation Treaty ("PCT"), designating countries in Europe as well as Canada
and Japan, claiming full-length gene sequences associated with cells and tissues
that are the subject of our high-throughput gene sequencing program. To date, we
hold approximately 400 U.S. patents with respect to full-length gene sequences
and one issued U.S. patent claiming multiple partial gene sequences. Currently,
we have no registered copyrights for our database-related software.
In 1996, the United States Patent and Trademark Office issued guidelines
limiting the number of partial gene sequences that can be examined in a single
patent application. Many of our patent applications containing multiple partial
sequences contain more sequences than the maximum number allowed under the new
guidelines. We are reviewing our options, and due to the resources needed to
comply with the guidelines, we may decide to abandon patent applications for
some of our partial gene sequences.
We have begun to file patent applications for patentable SNPs identified
with our LifeSeq Gold database, through our human genome sequencing program, and
through the use of our fSSCP discovery technology. These patents will claim
rights to SNPs for diagnostic and genotyping purposes. As information relating
to particular SNPs is developed, we plan to seek additional rights in those SNPs
that are associated with specific diseases, functions or drug responses. The
scope of patent protection for gene sequences, including SNPs, is highly
uncertain, involves complex legal and factual questions and has recently been
the subject of much controversy. No clear policy has emerged with respect to the
breadth of claims allowable for SNPs. There is significant uncertainty as to
what, if any, claims will be allowed on SNPs discovered through high throughput
discovery programs.
As the biotechnology industry expands, more patents are issued and other
companies engage in the business of discovering genes and other genomic-related
businesses, the risk increases that our potential products, and the processes
used to develop these products, may be subject to claims that they infringe the
patents of others. Further, we are aware of several issued patents in the field
of microarray or gridding technology, which can be utilized in the generation of
gene expression information. Some of these patents are the subject of
litigation. Therefore, our operations may require us to obtain licenses under
any of these patents or proprietary rights, and these licenses may not be made
available on terms acceptable to us. Litigation may be necessary to defend
against or assert claims of infringement, to enforce patents issued to us, to
protect trade secrets or know-how owned by us, or to determine the scope and
validity of the proprietary rights of others. We believe that some of our patent
applications cover genes that may also be claimed in patent applications filed
by other parties. Interference proceedings may be necessary to establish which
party was the first to invent a particular sequence for the purpose of patent
protection. Several interferences involving our patent applications covering
full length genes have been declared. Litigation or interference proceedings,
regardless of the outcome, could result in substantial costs to us, and divert
our efforts, and may have a material adverse effect on our business, operating
results and financial condition. In addition, there can be no assurance that
such proceedings or litigation would be resolved in our favor.
In January and September 1998, Affymetrix, Inc. filed lawsuits in the
United States District Court for the District of Delaware alleging infringement
of three U.S. patents by both Synteni and Incyte. Incyte believes that it and
Synteni have meritorious defenses and intends to defend these suits vigorously.
See "Risk Factors-We Are Involved in Patent Litigation, Which If We Do Not
Resolve Favorably Could Negatively Impact Our Business."
COMPETITION
There is a finite number of genes in the human genome, and competitors may
seek to identify, sequence and determine in the shortest time possible the
biological function of a large number of genes in order to obtain a proprietary
position with respect to the largest number of new genes discovered. A number of
companies, institutions, and government-financed entities are engaged in gene
sequencing, gene discovery, gene expression analysis, positional cloning and
other genomic service businesses. Many of these companies, institutions and
entities have greater financial and human resources than we do. In addition, we
are aware that other companies have developed databases containing gene
sequence, gene expression, genetic variation or other genomic information and
are marketing, or have announced their intention to market, their data to
pharmaceutical companies. We expect that additional competitors may attempt to
establish databases containing this information in the future.
In addition, competitors may discover and establish patent positions with
respect to the gene sequences and polymorphisms in our databases. Further, some
entities engaged in or with stated intentions to engage in gene sequencing have
made or have stated their intention to make the results of their sequencing
efforts publicly available. These patent positions, or the public availability
of gene sequences comprising substantial portions of the human genome or on
microbial or plant genes, could:
- - decrease the potential value of our databases to our subscribers; and
- - adversely affect our ability to realize royalties or other revenue from
commercialization of products based upon such genetic information.
The gene sequencing machines that are utilized in our high-throughput
computer-aided gene sequencing operations are commercially available and are
currently being utilized by several competitors. Also, some of our competitors
or potential competitors are in the process of developing, and may successfully
develop, proprietary sequencing technologies that may be more advanced than the
technology we use. In addition, we are aware that a number of companies are
pursuing alternative methods for generating gene expression information,
including some that have developed and are developing microarray technologies.
At least one other company currently offers microarray-based services that might
be competitive with those we offer. These advanced sequencing or gene expression
technologies, if developed, may not be commercially available for our purchase
or license on reasonable terms, if at all.
A number of companies have announced their intent to develop and market
software to assist pharmaceutical companies and academic researchers in the
management and analysis of their own genomic data, as well as the analysis of
sequence data available in the public domain. Some of these entities have access
to significantly greater resources than we do, and their products may achieve
greater market acceptance than our products.
Our SNP discovery platform represents a modification of a process that is
in the public domain. Other companies could make similar or superior
improvements in this process.
We believe that the following are important aspects of our competitive
position:
- - the features and ease of use of our database software;
- - our experience in high-throughput gene sequencing;
- - the cumulative size of our databases;
- - the quality of the data, including the annotations in our databases;
- - our computing infrastructure; and
- - and our experience with bioinformatics and database software.
The genomics industry is characterized by extensive research efforts and
rapid technological progress. New developments are expected to continue and
there can be no assurance that discoveries by others will not render our
services and potential products noncompetitive. In addition, significant levels
of research in biotechnology and medicine occur in universities and other
non-profit research institutions. These entities have become increasingly active
in seeking patent protection and licensing revenues for their research results.
These entities also compete with us in recruiting talented scientists. See "Risk
Factors-We Experience Intense Competition and Rapid Technological Change and If
We Do Not Compete Effectively Our Revenues May Decline."
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products that may be developed by us or our licensees. At the
present time, we do not intend to develop any pharmaceutical products ourselves.
Our agreements with our LifeSeq Gold database subscribers provide for the
payment to us of royalties on any pharmaceutical products developed by those
subscribers derived from proprietary information obtained from our genomic
databases. Thus, the receipt and timing of regulatory approvals for the
marketing of such products may have a significant effect on our future revenues.
Pharmaceutical products developed by licensees will require regulatory approval
by governmental agencies prior to commercialization. In particular, human
pharmaceutical therapeutic products are subject to rigorous preclinical and
clinical testing and other approval procedures by the United States Food and
Drug Administration in the United States and similar health authorities in
foreign countries. Various federal and, in some cases, state statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of such pharmaceutical products, including
the use, manufacture, storage, handling and disposal of hazardous materials and
certain waste products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations require the expenditure of substantial resources over a significant
period of time, and there can be no assurance that any approvals will be granted
on a timely basis, if at all. Any such delay in obtaining or failure to obtain
such approvals could adversely affect our ability to earn milestone payments,
royalties or other license-based fees. Additional governmental regulations that
might arise from future legislation or administrative action cannot be
predicted, and such regulations could delay or otherwise affect adversely
regulatory approval of potential pharmaceutical products. See "Risk Factors-Our
Revenues Are Derived Primarily from the Pharmaceutical and Biotechnology
Industries and May Fluctuate Substantially Due to Reductions and Delays in
Research and Development Expenditures."
HUMAN RESOURCES
As of December 31, 1999, we had 1,108 full-time equivalent employees (195
of whom were contract or part-time employees), including 399 in sequencing,
microarray, SNP and reagent production, 294 in bioinformatics, 239 in research
and technology development, and 176 in marketing, sales and administrative
positions. None of our employees is covered by collective bargaining agreements,
and management considers relations with its employees to be good. Our future
success will depend in part on the continued service of our key scientific,
software, bioinformatics and management personnel and its ability to identify,
hire and retain additional personnel, including personnel in the customer
service, marketing and sales areas. There is intense competition for qualified
personnel in the areas of our activities, especially with respect to experienced
bioinformatics and software personnel, and there can be no assurance that we
will be able to continue to attract and retain such personnel necessary for the
development of our business. Failure to attract and retain key personnel could
have a material adverse effect on our business, financial condition and
operating results. See "Risk Factors-We May Have Difficulty Managing Our Growth,
Which May Impact Our Ability to Optimize Our Resources" and "-We Depend on Key
Employees in a Competitive Market for Skilled Personnel and the Loss of the
Services of Any of Our Key Employees Would Materially Affect Our Business."
RISK FACTORS
WE HAVE HAD ONLY LIMITED PERIODS OF PROFITABILITY AND WE EXPECT TO INCUR LOSSES
IN THE FUTURE, WHICH MAY PREVENT US FROM RETURNING TO PROFITABILITY
We had net losses from inception in 1991 through 1996, reported net income
in 1997 and 1998, and again incurred a net loss in 1999. Because of those
losses, we had an accumulated deficit of $55.2 million as of December 31, 1999.
We intend to make significant investments in sequencing, bioinformatics,
expression database development and single nucleotide polymorphism, or SNP,
discovery over the next six to nine months, so we expect to report net losses at
least through the first three quarters of 2000 and for the year ending December
31, 2000. We may report net losses in future periods as well. We expect that our
expenditures may continue to increase through the first three quarters of 2000
due in part to our continued investment in new product and technology
development, including the continuation of our genomic sequencing,
bioinformatics, expression database development, SNP-discovery programs,
obligations under existing and future research and development alliances, and
our increasing investment in marketing, sales and customer service. Our
profitability depends on our ability to increase our revenues:
To generate significant revenues, we must obtain additional database
collaborators and retain existing collaborators. While we had over 20 database
agreements as of December 31, 1999, we may be unable to enter into any
additional agreements. In 1999, one LifeSeq Gold database collaborator did not
renew their subscription. Our other database collaborators may choose not to
renew upon expiration of other existing agreements. Our database revenues are
also affected by the extent to which existing collaborators expand their
agreements with us to include our new database products and to the extent that
existing collaborators reduce the number of products or services for which they
subscribe. Some of our database agreements require us to meet performance
obligations. A database collaborator can terminate its agreement before the end
of its scheduled term if we breach the agreement and fail to cure the breach
within a specified period.
Our revenues and profitability will also depend on our ability to generate
profits from microarray services and expression databases. We acquired
Synteni, Inc. in January 1998 to provide microarray services and to generate
information for expression databases. The contribution of our microarray
operations to our operating results will depend on whether we can continue to
obtain high-volume customers for microarray services and expression databases,
whether we can continue to increase our microarray production capacity in a
timely manner and with consistent volumes and quality, and the costs associated
with increasing our microarray production capacity.
We do not expect milestone or royalty payments to contribute to revenues
for a substantial period of time. Part of our strategy is to license to
database collaborators our know how and patent rights associated with the gene
sequences and related information in our proprietary databases, for use in the
discovery and development of potential pharmaceutical, diagnostic or other
products. Any potential product that is the subject of such a license will
require several years of further development, clinical testing and regulatory
approval before commercialization. In 1999, one customer paid future license
fees, even though the customer has not developed a product using our database
information. We are not assured of any additional milestone or royalty payments.
OUR OPERATING RESULTS ARE UNPREDICTABLE AND MAY ADVERSELY IMPACT OUR STOCK PRICE
Our operating results are unpredictable and may fluctuate significantly
from period to period due to a variety of factors, including:
- - changes in the demand for our products and services;
- - the introduction of competitive databases or services, including public
domain databases;
- - the pricing of access to our databases;
- - the nature, pricing and timing of other products and services provided to
our collaborators;
- - changes in the research and development budgets of our collaborators and
potential collaborators;
- - depreciation expense from capital expenditures;
- - acquisition, licensing and other costs related to the expansion of our
operations, including operating losses of acquired businesses such as Synteni
and Hexagen;
- - losses and expenses related to our investments in joint ventures and
businesses, including our proportionate share of operating losses of our
diaDexus, LLC, joint venture with SmithKline Beecham Corporation;
- - payments of milestones, license fees or research payments under the terms
of our increasing number of external alliances; and
- - expenses related to, and the results of, litigation and other proceedings
relating to intellectual property rights (including the lawsuits filed by
Affymetrix, Inc. described below).
In particular, revenues from our database business are unpredictable
because:
- - the timing of our database installations is determined by our
collaborators;
- - the sales cycle for our database products is lengthy; and
- - the time required to complete custom orders can vary significantly.
We expect our expression databases to represent an increasing amount of our
revenues. Also, revenues may be affected by developments in the Affymetrix
litigation, which may cause potential customers to postpone or change their
decision to use our microarray services.
We are investing in a number of new areas to try to broaden our business.
These areas include sequencing, bioinformatics, gene expression databases, SNP
discovery, molecular diagnostics, proteomics, or the large scale,
high-throughput analysis of protein expression, and the online delivery of our
database and software products. Because many of these address new markets or
involve untested technologies, they may not generate any revenues or provide an
adequate return on our investment. In these cases, we may have to recognize
expenses or losses.
We have significant fixed expenses, due in part to our need to continue to
invest in product development and extensive support for our database
collaborators. We may be unable to adjust our expenditures if revenues in a
particular period fail to meet our expectations, which would adversely affect
our operating results for that period. Forecasting operating and integration
expenses for acquired businesses may be particularly difficult, especially where
the acquired business focuses on technologies that do not have an established
market.
We believe that period-to-period comparisons of our financial results will
not necessarily be meaningful. You should not rely on these comparisons as an
indication of our future performance. If our operating results in any future
period fall below the expectations of securities analysts and investors, our
stock price will likely fall, possibly by a significant amount.
WE EXPERIENCE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE AND IF WE DO
NOT COMPETE EFFECTIVELY OUR REVENUES MAY DECLINE
Genomic businesses are intensely competitive. The human genome contains a
finite number of genes. Our competitors may seek to identify, sequence and
determine the biological function of numerous genes in order to obtain a
proprietary position with respect to new genes. A number of companies, other
institutions and government-financed entities are engaged in gene sequencing,
gene discovery, gene expression analysis, positional cloning, the study of
genetic variation, and other genomic service businesses. Many of these
companies, institutions and entities have greater financial and human resources
than we do.
Some of our competitors have developed databases containing gene sequence,
gene expression, genetic variation or other genomic information and are
marketing or plan to market their data to pharmaceutical companies. Additional
competitors may attempt to establish databases containing this information in
the future. We expect that competition in our industry will continue to
intensify. Several large pharmaceutical companies have formed a consortium to
create a SNPs database and to make all of the information publicly available.
The formation of this consortium could delay or reduce the potential revenues
related to our SNP-related business.
Patent positions or public disclosures may reduce the value of our
databases. Competitors may discover and establish patent positions with
respect to gene sequences in our databases. Further, certain entities engaged in
gene sequencing have made the results of their sequencing efforts publicly
available. In January 2000, the Celera Genomics Group of PE Corporation
announced that it has DNA sequence in its database that covers 90% of the human
genome and plans to complete the sequencing of the human genome by the summer of
2000. Celera has announced that it has filed a provisional patent application on
newly discovered partial genes and stated its intention to file full
applications on medically important discoveries. The Human Genome Project, which
is coordinated by the U.S. Department of Energy and the National Institutes of
Health, has announced that a consortium of laboratories associated with the
Project predicts that they will produce at least 90% of the human genome
sequence in a "working draft form" by the spring of 2000 and that they intend to
make the information publicly available. The public availability of gene
sequences or resulting patent positions covering substantial portions of the
human genome or microbial or plant genomes could reduce the potential value of
our databases to our collaborators. It could also impair our ability to realize
royalties or other revenue from any commercialized products based on this
genetic information.
Competitors may develop superior technology. The gene sequencing machines
used in our computer-aided sequencing operations are commercially available and
are being used by at least one competitor. In addition, some of our competitors
and potential competitors are developing proprietary sequencing technologies
that may be more advanced than ours. PE Corporation began commercial shipments
of a new gel-based sequencing machine, of which a large number have been
provided to Celera Genomics Group. We may be unable to obtain access to
sufficient quantities of these machines on acceptable terms.
In addition, a number of companies are pursuing alternative methods for
generating gene expression information, including microarray technologies. These
advanced sequencing or gene expression technologies may not be commercially
available for us to purchase or license on reasonable terms, if at all. At least
one other company currently offers microarray-based services that might be
competitive with ours.
Our SNP discovery platform represents a modification of a process that is
in the public domain. We are seeking patent protection for these improvements,
but have not yet received any patents. Other companies could make similar or
superior improvements to this process without infringing our rights, and we may
not have access to those improvements. The discovery of SNPs is a competitive
area. Other companies may develop or obtain access to different SNP discovery
platforms, to which we may not have access, that may make our technology
obsolete.
We also face competition from providers of software. A number of companies
have announced their intent to develop and market software to assist
pharmaceutical companies and academic researchers in managing and analyzing
their own genomic data and publicly available data.
We must continue to invest in new technologies. The genomics industry is
characterized by extensive research efforts, resulting in rapid technological
progress. To remain competitive, we must continue to expand our databases,
improve our software, and invest in new technologies. New developments are
expected to continue, and discoveries by others may render our services and
potential products noncompetitive.
WE ARE INVOLVED IN PATENT LITIGATION, WHICH IF WE DO NOT RESOLVE FAVORABLY COULD
NEGATIVELY IMPACT OUR BUSINESS
In January 1998, Affymetrix filed a lawsuit in federal court alleging
infringement of U.S. patent number 5,445,934 by both Synteni and Incyte. The
complaint alleges that the '934 patent has been infringed by Synteni's and
Incyte's making, using, selling, importing, distributing or offering to sell
high density arrays in the United States and that this infringement was willful.
Affymetrix seeks a permanent injunction enjoining Synteni and Incyte from
further infringement of the '934 patent and seeks damages, costs, attorneys'
fees and interest. Affymetrix also requests triple damages based on allegedly
willful infringement.
In September 1998, Affymetrix filed an additional lawsuit alleging
infringement of U.S. patent numbers 5,744,305 and 5,800,992 by Synteni and
Incyte. The complaint alleges that the '305 patent has been infringed by
Synteni's and Incyte's making, using, selling, importing, distributing or
offering to sell high density arrays in the United States. It also alleges that
the '992 patent has been infringed by the use of Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling and that this infringement was willful. Affymetrix had sought a
preliminary injunction enjoining Synteni and Incyte from using GEM microarray
technology to conduct this kind of gene expression monitoring, and a permanent
injunction enjoining Synteni and Incyte from further infringing the '305 and
'992 patents.
The lawsuits were initially filed in the United States District Court for
the District of Delaware. In November 1998, the court granted Incyte's motion to
transfer the suits to the United States District Court for the Northern District
of California. Affymetrix's request for a preliminary injunction was denied in
April 1999. As a result of the assignment of the case to a new judge, all
scheduled trial and pretrial dates have been vacated. A new schedule is expected
to be set by the court in late April 2000.
In April 1999, the Board of Patent Appeals and Interferences of United
States Patent and Trademark Office declared interferences between pending patent
applications licensed exclusively to us and the Affymetrix '305 and '992
patents. An interference proceeding is invoked by the Patent and Trademark
Office when more than one patent applicant claims the same invention. The Board
of Patent Appeals and Interferences evaluates all relevant facts, including
those bearing on first to invent, validity, enablement and scope of claims, and
then makes a determination as to who, if anyone, is entitled to the patent on
the disputed invention. In September 1999, the Board of Patent Appeals and
Interferences determined that Incyte had not met its prima facie case, and ruled
that patents licensed by Incyte and Synteni from Stanford University were not
entitled to priority over corresponding claims in the two Affymetrix patents. We
have sought de novo review of the board decisions in the United States district
court for the Northern District of California.
We believe we have meritorious defenses and intend to defend these suits
vigorously. However, our defense may be unsuccessful. At this time, we cannot
reasonably estimate the possible range of any loss resulting from these suits
due to uncertainty about the ultimate outcome. We have spent and expect to
continue to spend a significant amount of money and management time on this
litigation. Also, if we are required to license any technology as a result of
these suits, we do not know whether we will be able to do so on commercially
acceptable terms, if at all.
WE SPEND A SUBSTANTIAL AMOUNT OF MONEY ON NEW AND UNCERTAIN BUSINESSES AND
DEMAND FOR OUR PRODUCTS AND SERVICES MAY BE INSUFFICIENT TO COVER OUR COSTS,
WHICH COULD IMPACT OUR PROFITABILITY
There is no precedent for our microarray-based gene expression database or
service businesses or the use of SNP-based genetic variation information. The
usefulness of the information generated by these businesses is unproven. Our
collaborators and potential collaborators may determine that our databases,
software tools and microarray-related services are not useful or cost-effective.
Due to the nature and price of some of the products and services we offer, only
a limited number of companies are potential collaborators for those products and
services. If we do not develop these new products and services in time to meet
market demand or if there is insufficient demand for these products and
services, we may not be able to cover our costs of developing these products and
services or earn a sufficient return on our investment.
Additional factors that may affect demand for our products and services
include:
- - the extent to which pharmaceutical and biotechnology companies conduct
these activities in-house or through industry consortia;
- - the emergence of competitors offering similar services at competitive
prices;
- - the extent to which the information in our databases is made public or is
covered by others' patents;
- - our ability to establish and enforce proprietary rights to our products;
- - regulatory developments or changes in public perceptions relating to the
use of genetic information and the diagnosis and treatment of disease based on
genetic information; and
- - technological innovations that are more advanced than the technologies
that we have developed or that are available to us.
Many of these factors are beyond our control.
OUR NEW PROGRAMS RELATING TO THE ROLE OF GENETIC VARIATION IN DISEASE AND DRUG
RESPONSE MAY NEVER GENERATE SIGNIFICANT REVENUES OR PROFITABLE OPERATIONS
We recently began to focus part of our business on developing databases and
other products and services to assist pharmaceutical companies in a new and
unproven area: the identification and correlation of genetic variation to
disease and drug response. We will incur significant costs over the next several
years in expanding our research and development in this area. These activities
may never generate significant revenues or profitable operations.
This new aspect of our business will focus on SNPs, one type of genetic
variation. The role of SNPs in disease and drug response is not fully
understood, and relatively few, if any, therapeutic or diagnostic products based
on SNPs have been developed and commercialized. Among other things, demand in
this area may be adversely affected by ethical and social concerns about the
confidentiality of patient-specific genetic information and about the use of
genetic testing for diagnostic purposes.
Except for a few anecdotal examples, there is no proof that SNPs have any
correlation to diseases or a patient's response to a particular drug or class of
drug. Identifying statistically significant correlations is time-consuming and
could involve the collection and screening of a large number of patient samples.
We do not know if the SNPs we have discovered to date are suitable for these
correlation studies. Nor do we currently have access to the patient samples
needed or technology allowing us to rapidly and cost-effectively identify
pre-determined SNPs in large numbers of patients.
Most SNPs may occur too infrequently to warrant their use in analyzing
patients' genetic variation. We may have trouble identifying SNPs that both
correlate with diseases or drug responses and occur frequently enough to justify
their use by pharmaceutical companies.
Our success will also depend upon our ability to develop, use and enhance
new and relatively unproven technologies. Our strategy of using high-throughput
mutation detection processes and sequencing to identify SNPs and genes rapidly
is unproven. Among other things, we will need to continue to improve the
throughput of our SNP-discovery technology. We may not be able to achieve these
necessary improvements, and other factors may impair our ability to develop our
SNP-related products and services in time to be competitively available.
OUR STRATEGIC INVESTMENTS MAY RESULT IN LOSSES AND OTHER ADVERSE EFFECTS
We make strategic investments in joint ventures or businesses that
complement our business. These investments, such as our investment in diaDexus,
may:
- - often be made in securities lacking a public trading market or subject to
trading restrictions, either of which increases our risk and reduces the
liquidity of our investment;
- - require us to record losses and expenses related to our ownership
interest;
- - require us to record charges related to the acquisition of in-process
technologies or for the impairment in the value of the securities underlying our
investment; and
- - require us to invest greater amounts than anticipated or to devote
substantial management time to the management of research and development
relationships and joint ventures.
The market values of many of these investments fluctuate significantly. We
evaluate our long-term equity investments for impairment of their values on a
quarterly basis. Impairment could result in future charges to our earnings.
These losses and expenses may exceed the amounts that we anticipated.
OUR SALES CYCLE IS LENGTHY AND THERE IS NO GUARANTEE THAT A SUBSCRIPTION OR
SERVICES AGREEMENT WILL RESULT
Our ability to obtain new subscribers for our databases, software tools and
microarray and other services depends upon prospective subscribers' perceptions
that our products and services can help accelerate drug discovery efforts. Our
database sales cycle is typically lengthy because we need to educate our
potential subscribers and sell the benefits of our tools and services to a
variety of constituencies within potential subscriber companies. In addition,
each database subscription and microarray services agreement involves the
negotiation of unique terms. We may expend substantial funds and management
effort with no assurance that a subscription or services agreement will result.
Actual and proposed consolidations of pharmaceutical companies have affected the
timing and progress of our sales efforts. We expect that future proposed
consolidations will have similar effects.
PATENTS AND OTHER PROPRIETARY RIGHTS PROVIDE UNCERTAIN PROTECTION OF OUR
PROPRIETARY INFORMATION AND OUR INABILITY TO PROTECT A PATENT OR OTHER
PROPRIETARY RIGHT MAY IMPACT OUR BUSINESS AND OPERATING RESULTS
We may be unable to protect our proprietary information, which may result
in unauthorized use and a loss of revenue. Our business and competitive
position depend upon our ability to protect our proprietary database information
and software technology, but our strategy of obtaining proprietary rights in as
many genes and SNPs as possible is unproven. Despite our efforts to protect this
information and technology, unauthorized parties may attempt to obtain and use
information that we regard as proprietary. Although our database subscription
agreements require our subscribers to control access to our databases, policing
unauthorized use of our databases and software may be difficult.
We pursue a policy of having our employees, consultants and advisors
execute proprietary information and invention agreements when they begin working
for us. However, these agreements may not provide meaningful protection for our
trade secrets or other proprietary information in the event of unauthorized use
or disclosure.
Our means of protecting our proprietary rights may not be adequate and our
competitors may:
- - independently develop substantially equivalent proprietary information and
techniques;
- - otherwise gain access to our proprietary information; or
- - design around patents issued to us or our other intellectual property.
Our patent applications may conflict with others. Our current policy is
to file patent applications on what we believe to be novel full-length and
partial gene sequences obtained through our gene sequencing efforts. We have
filed U.S. patent applications in which we have claimed certain partial gene
sequences. We have also applied for patents in the U.S. and other countries
claiming full-length gene sequences associated with cells and tissues involved
in our gene sequencing program. We hold a number of issued U.S. patents on
full-length genes and one issued U.S. patent claiming multiple partial gene
sequences. A number of entities make certain gene sequences publicly available,
which may adversely affect our ability to obtain patents on those genes.
We believe that some of our patent applications claim genes that may also
be claimed in patent applications filed by others. In some or all of these
applications, a determination of priority of inventorship may need to be decided
in an interference before the United States Patent and Trademark Office.
Enforcement of gene patents is uncertain and gene patents may be found
unenforceable, resulting in a loss of competitive benefit. One of our
strategies is to obtain proprietary rights in as many genes (including partial
gene sequences) and SNPs as possible. While the USPTO has issued patents
covering full-length genes, partial gene sequences and SNPs, we do not know
whether or how courts may enforce those patents, if that becomes necessary. If a
court finds these types of inventions to be unpatentable, or interprets them
narrowly, the benefits of our strategy may not materialize.
We may decide to abandon patent applications, which could diminish the
value of our patent portfolio and possibly our future revenues. The USPTO has
had a substantial backlog of biotechnology patent applications, particularly
those claiming gene sequences. In 1996, the USPTO issued guidelines limiting the
number of partial gene sequences that can be examined within a single patent
application. Many of our patent applications contain more partial sequences than
the maximum number allowed under these guidelines. Due to the resources needed
to comply with the guidelines, we may decide to abandon patent applications for
some of our partial gene sequences.
Because filing large numbers of patent applications and maintaining issued
patents can be very costly, we may choose not to pursue every application. If we
do not pursue patent protection for all of our full-length and partial gene
sequences, the value of our intellectual property portfolio could be diminished.
Because of the possible delay in obtaining allowance of some of our patent
applications, and the secrecy of patent applications, we do not know if other
applications having priority over ours have been filed.
We may need to refile some of our patent applications and the period of
patent protection has been shortened, which may affect our potential revenues
and profits. The value of our patents depends in part on their duration. The
U.S. patent laws were amended in 1995 to change the term of patent protection
from 17 years from patent issuance to 20 years from the earliest effective
filing date of the application. Because the average time from filing to issuance
of biotechnology applications is at least one year and may be more than three
years depending on the subject matter, a 20-year patent term from the filing
date may result in substantially shorter patent protection, which may adversely
affect our rights under any patents that we obtain. We may need to refile
applications claiming large numbers of gene sequences and, in these situations,
the patent term will be measured from the date of the earliest priority
application. This would shorten our period of patent exclusivity.
International patent protection is particularly uncertain, and opposition
proceedings in foreign countries may be costly and divert management resources.
Biotechnology patent law outside the United States is even more uncertain than
in the United States and is currently undergoing review and revision in many
countries. Further, the laws of some foreign countries may not protect our
intellectual property rights to the same extent as U.S. laws. We may participate
in opposition proceedings to determine the validity of our or our competitors'
foreign patents, which could result in substantial costs and diversion of our
efforts.
WE MAY BE SUBJECT TO ADDITIONAL LITIGATION AND INFRINGEMENT CLAIMS THAT COULD BE
COSTLY AND DISRUPT OUR BUSINESS
The technology that we use to develop our products, and those that we
incorporate in our products, may be subject to claims that they infringe the
patents or proprietary rights of others. The risk of this occurring will tend to
increase as the genomics, biotechnology and software industries expand, more
patents are issued and other companies attempt to discover genes and SNPs and
engage in other genomic-related businesses.
As is typical in the genomics, biotechnology and software industries, we
have received, and we will probably receive in the future, notices from third
parties alleging patent infringement. We believe that we are not infringing the
patent rights of any such third party. Except for Affymetrix, no third party has
filed a patent lawsuit against us.
We may, however, be involved in future lawsuits alleging patent
infringement or other intellectual property rights violations. In addition,
litigation may be necessary to:
- - assert claims of infringement;
- - enforce our patents;
- - protect our trade secrets or know-how; or
- - determine the enforceability, scope and validity of the proprietary rights
of others.
We may be unsuccessful in defending or pursuing these lawsuits. Regardless
of the outcome, litigation can be very costly and can divert management's
efforts. An adverse determination may subject us to significant liabilities or
require us to seek licenses to other parties' patents or proprietary rights. We
may also be restricted or prevented from manufacturing or selling our products.
Further, we may not be able to obtain the necessary licenses on acceptable
terms, if at all.
WE MAY ENCOUNTER PROBLEMS IN MEETING CUSTOMERS' SOFTWARE NEEDS, WHICH COULD
ADVERSELY IMPACT OUR REVENUES AND THE GOODWILL OF OUR CUSTOMERS
Our databases also require software support and will need to incorporate
features determined by database collaborators. If we experience delays or
difficulties in implementing our database software or collaborator-requested
features, we may be unable to service our collaborators.
PAST ACQUISITIONS HAVE AND ANY FUTURE ACQUISITIONS THAT WE MAY MAKE COULD
ADVERSELY AFFECT OUR OPERATIONS OR FINANCIAL RESULTS
As part of our business strategy, we may acquire other assets, technologies
and businesses. We acquired Synteni in January 1998 and Hexagen in September
1998.
These and any future acquisitions involve risks such as the following:
- - we may be exposed to unknown liabilities of acquired companies;
- - our acquisition and integration costs may be higher than we anticipated
and may cause our quarterly and annual operating results to fluctuate;
- - we may experience difficulty and expense in assimilating the operations
and personnel of the acquired businesses, disrupting our business and diverting
management's time and attention;
- - we may be unable to integrate or complete the development and application
of acquired technology;
- - we may experience difficulties in establishing and maintaining uniform
standards, controls, procedures and policies;
- - our relationships with key customers of acquired businesses may be
impaired, due to changes in management and ownership of the acquired businesses;
- - we may be unable to retain key employees of the acquired businesses;
- - we may incur amortization expenses if an acquisition results in
significant goodwill or other intangible assets; and
- - our stockholders may be diluted if we pay for the acquisition with equity
securities.
In addition, if we acquire additional businesses that are not located near
our Palo Alto, California headquarters, we may experience more difficulty
integrating and managing the acquired businesses' operations.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH, WHICH MAY IMPACT OUR ABILITY TO
OPTIMIZE OUR RESOURCES
We expect to continue to experience significant growth in the number of our
employees and the scope of our operations. This growth has placed, and may
continue to place, a significant strain on our management and operations. Our
ability to manage this growth will depend upon our ability to attract, hire and
retain skilled employees. Our success will also depend on the ability of our
officers and key employees to continue to implement and improve our operational
and other systems and to hire, train and manage our employees.
In addition, we must continue to invest in customer support resources as
the number of database collaborators and their requests for support increase.
Our database collaborators typically have worldwide operations and may require
support at multiple U.S. and foreign sites. To provide this support, we may need
to open offices in addition to our Palo Alto, California headquarters and our
offices in Fremont, California, St. Louis, Missouri and Cambridge, England,
which could result in additional burdens on our systems and resources.
WE DEPEND ON KEY EMPLOYEES IN A COMPETITIVE MARKET FOR SKILLED PERSONNEL AND THE
LOSS OF THE SERVICES OF ANY OF OUR KEY EMPLOYEES WOULD MATERIALLY AFFECT OUR
BUSINESS
We are highly dependent on the principal members of our management,
operations and scientific staff, including Roy A. Whitfield, our Chief Executive
Officer, and Randal W. Scott, our President and Chief Scientific Officer. The
loss of either of these persons' services may have a material adverse effect on
our business. We have not entered into any employment agreement with either of
these persons and do not maintain a key person life insurance policy on the life
of any employee.
Our future success also will depend in part on the continued service of our
key scientific, software, bioinformatics and management personnel and our
ability to identify, hire and retain additional personnel, including customer
service, marketing and sales staff. We experience intense competition for
qualified personnel. We may not be able to continue to attract and retain
personnel necessary for the development of our business.
OUR INABILITY TO OBTAIN NECESSARY EQUIPMENT, SUPPLIES AND DATA FROM THIRD
PARTIES MAY ADVERSELY IMPACT OUR RESULTS
We rely on a small number of suppliers of gene sequencing machines and
reagents required for gene sequencing. Although we are evaluating alternative
gene sequencing machines, they may not be available in sufficient quantities or
at acceptable costs. In addition, if a third party claims that our use of these
machines infringes their patent rights, our use of these machines could become
more costly or could be prevented. If we are unable to obtain additional
machines or an adequate supply of reagents or other materials at commercially
reasonable rates, our ability to identify genes and SNPs would be adversely
affected.
We rely on outside sources for tissue samples from which we isolate genetic
material used in our operations. Our business could be adversely affected if
we lose access to some of these sources, or if they charged us higher access
fees or imposed tighter restrictions on our use of the information generated
from the samples.
We cannot control the performance of collaborators. We may enter into
research and development relationships with corporate and academic collaborators
and others. The success of these relationships depends upon third parties'
performance of their responsibilities. Our ability to develop these
relationships is uncertain, and any established relationships may prove
unsuccessful. Our collaborators may also be pursuing alternative technologies or
developing alternative products on their own or in collaboration with others,
including our competitors.
We rely on third-party data sources. We rely on scientific and other data
supplied by others, including our academic collaborators and sources of tissue
samples. This data could contain errors or other defects, which could corrupt
our databases. In addition, we cannot guarantee that our data sources acquired
this information in compliance with legal requirements. If either of these
happen and become known, our business prospects could be adversely affected.
OUR ACTIVITIES INVOLVE HAZARDOUS MATERIALS AND MAY SUBJECT US TO COSTLY
ENVIRONMENTAL LIABILITY
Our research and development involves the controlled use of hazardous and
radioactive materials and biological waste. We are subject to federal, state and
local laws and regulations governing the use, manufacture, storage, handling and
disposal of these materials and certain waste products. Although we believe that
our safety procedures for handling and disposing of these materials comply with
legally prescribed standards, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. In the event of an
accident, we could be held liable for damages, and this liability could exceed
our resources.
We believe that we are in compliance in all material respects with
applicable environmental laws and regulations and currently do not expect to
make material additional capital expenditures for environmental control
facilities in the near term. However, we may have to incur significant costs to
comply with current or future environmental laws and regulations.
OUR REVENUES ARE DERIVED PRIMARILY FROM THE PHARMACEUTICAL AND BIOTECHNOLOGY
INDUSTRIES AND MAY FLUCTUATE SUBSTANTIALLY DUE TO REDUCTIONS AND DELAYS IN
RESEARCH AND DEVELOPMENT EXPENDITURES
We expect that our revenues in the foreseeable future will be derived
primarily from products and services provided to the pharmaceutical and
biotechnology industries. Accordingly, our success will depend directly upon the
success of the companies within these industries and their demand for our
products and services. Our operating results may fluctuate substantially due to
reductions and delays in research and development expenditures by companies in
these industries. These reductions and delays may result from factors such as:
- - changes in economic conditions;
- - consolidation in the pharmaceutical industry;
- - changes in the regulatory environment affecting health care and health
care providers;
- - pricing pressures;
- - market-driven pressures on companies to consolidate and reduce costs; and
- - other factors affecting research and development spending.
These factors are not within our control.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE WHEN NEEDED
Based upon our current plans, we believe that our existing resources and
our anticipated cash flow from operations will satisfy our capital needs for at
least the next twelve months. Our cash requirements depend on numerous factors,
including:
- - our ability to attract and retain collaborators for our databases and
other products and services;
- - expenditures in connection with alliances, license agreements and
acquisitions of and investments in complementary technologies and businesses;
- - the need to increase research and development spending as a result of
competing technological and market developments;
- - the cost of filing, prosecuting, defending and enforcing patent claims and
other intellectual property rights;
- - the purchase of additional capital equipment, including equipment
necessary to process data for our databases and to ensure that our sequencing
and microarray operations remain competitive;
- - capital expenditures required to expand our facilities; and
- - costs associated with the integration of acquired operations.
Changes in our research and development plans or other changes affecting
our operating expenses may alter the timing and amount of expenditures of our
capital resources. If we need additional funding, we may be unable to obtain it
on favorable terms, or at all. If adequate funds are not available, we may have
to curtail operations significantly or obtain funds by entering into
arrangements requiring us to relinquish rights to certain technologies, products
or markets. In addition, if we raise funds by selling stock or convertible
securities, our existing stockholders could suffer dilution.
OUR BUSINESS COULD BE AFFECTED BY THE YEAR 2000 ISSUE
As a result of computer programs being written using two digits, rather
than four, to represent year dates, the performance of our computer systems and
those of our suppliers and customers in the Year 2000 and beyond is uncertain.
Any computer programs that have time-sensitive software may recognize a date
using "00" as the Year 1900 rather than the Year 2000. In addition, some
computer programs that were date sensitive to the Year 2000 may not have been
programmed to process the Year 2000 as a leap year. These Year 2000 issues could
result in a system failure or miscalculations which disrupt our operations, such
as a temporary inability to process transactions, send invoices or engage in
other normal business activities.
We rely, both domestically and internationally, upon various vendors,
government agencies, utility companies, telecommunications service companies,
delivery service companies and other service providers. We have no control over
these third parties and, although to date they have not experienced a
significant adverse impact from the transition to the Year 2000, they may suffer
a Year 2000 business disruption at any time in the Year 2000 and beyond.
Year 2000 problems could disrupt our business and require us to incur
significant, unanticipated expenses to remedy them. They could also result in
claims and litigation against us, which could subject us to significant costs
and could require substantial attention from our management. Similarly, the
demand for our products could be affected by Year 2000 issues affecting our
customers, which would harm our operating results. To date, we are not aware of
any major Year 2000 problems, but there can be no assurance that there will be
no Year 2000 disruptions in the coming months.
OUR BUSINESS COULD BE INTERRUPTED BY NATURAL DISASTERS
We conduct our sequencing and a significant portion of our other activities
at our facilities in Palo Alto, California, and conduct our microarray-related
activities at our facilities in Fremont, California. Both locations are in a
seismically active area. Although we maintain business interruption insurance,
we do not have or plan to obtain earthquake insurance. A major catastrophe (such
as an earthquake or other natural disaster) could result in a prolonged
interruption of our business.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH
FLOW
As a result of our February 2000 sale of $200 million of our convertible
subordinated notes due 2007, we will have substantial amounts of outstanding
indebtedness. As a result of this indebtedness, our principal and interest
payment obligations have increased substantially. There is the possibility that
we may be unable to generate cash sufficient to pay the principal of, interest
on and other amounts due in respect of our indebtedness when due. We also expect
to add additional equipment loans and lease lines to finance capital
expenditures and may obtain additional long term debt, working capital lines of
credit and lease lines. There can be no assurance that any financing
arrangements will be available.
Our substantial leverage could have significant negative consequences,
including:
- - increasing our vulnerability to general adverse economic and industry
conditions;
- - limiting our ability to obtain additional financing;
- - requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness, thereby reducing the amount of
our expected cash flow available for other purposes, including working capital
and capital expenditures;
- - limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; or
- - placing us at a possible competitive disadvantage compared to less
leveraged competitors and competitors that have better access to capital
resources.
OUR STOCK PRICE HAS BEEN AND WILL LIKELY CONTINUE TO BE VOLATILE
Our stock price has been and is likely to be highly volatile, particularly
due to our relatively limited trading volume. Our stock price could fluctuate
significantly due to a number of factors, including:
- - variations in our anticipated or actual operating results;
- - sales of substantial amounts of our stock;
- - announcements about us or about our competitors, including technological
innovations or new products or services;
- - litigation and other developments relating to our patents or other
proprietary rights or those of our competitors;
- - conditions in the life sciences, pharmaceuticals or genomics industries;
- - governmental regulation and legislation; and
- - changes in securities analysts' estimates of our performance, or our
failure to meet analysts' expectations.
Many of these factors are beyond our control.
In addition, the stock markets in general, and the Nasdaq National Market
and the market for life sciences and technology companies in particular, have
experienced extreme price and volume fluctuations recently. These fluctuations
often have been unrelated or disproportionate to the operating performance of
these companies. These broad market and industry factors may adversely affect
the market price of our common stock, regardless of our actual operating
performance.
In the past, companies that have experienced volatility in the market
prices of their stock have been the object of securities class action
litigation. If we were the object of securities class action litigation, it
could result in substantial costs and a diversion of management's attention and
resources.
Item 7. Financial Statements and Exhibits.
------------------------------------
(c) Exhibits
99.1 Press release dated February 1, 2000 announcing the placement of $150
million in convertible subordinated notes by the Company.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: February 22, 2000
INCYTE PHARMACEUTICALS, INC.
By: /s/ John M. Vuko
--------------------------------
Name: John M. Vuko
Title: Executive Vice President and
Chief Financial Officer
EXHIBIT 99.1 FOR IMMEDIATE RELEASE - ----------------------- INCYTE John Vuko Chief Financial Officer (650) 845-4106 INCYTE ANNOUNCES PLACEMENT OF $150 MILLION IN CONVERTIBLE SUBORDINATED NOTES PALO ALTO, CA, FEBRUARY 1, 2000 -- Incyte Pharmaceuticals, Inc. (Nasdaq: INCY) announced today the private placement of $150 million of its 5.5% Convertible Subordinated Notes due 2007. The offering is expected to close on February 4, 2000. The Company has also granted to the initial purchasers an option to purchase up to an additional $50 million in principal amounts of Notes. The Notes are convertible into Incyte common stock at an initial conversion price of approximately $134.84 per share. The Company stated that it expects to use the net proceeds of the offering for working capital and general corporate purposes. Proceeds may also be used to make strategic investments, acquire or license technology or products, or acquire businesses that may complement its business. This press release does not constitute an offer to sell or the solicitation of an offer to buy any security. The Notes have not been registered under the Securities Act of 1933 or applicable state securities laws and may not be offered or sold in the United States absent registration under the Securities Act and applicable state securities laws or an applicable exemption from registration requirements. Except for the historical information contained herein, the matters set forth in this press release, such as statements as to the expected use of net proceeds, are forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially, including market and other conditions that may affect Incyte's ability to complete the offering, the expected closing date of the offering, the satisfaction of customary closing conditions, the impact of alternative technological advances and competition, changes in the focus of Incyte's research and development activities, developments in litigation, and other risks detailed from time to time in Incyte's SEC reports, including its Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. Incyte disclaims any intent or obligation to update these forward-looking statements.