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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 23, 2001
(Date of earliest event reported)
INCYTE GENOMICS, 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.)
3160 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 risk factors affecting an investment in Incyte
Genomics, Inc. (the "Company"). In the descriptions of the risk factors below,
all references to "Incyte," "we," "us" or "our" mean Incyte Genomics, 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 as to our expected net losses, the percentage of
revenues generated by custom genomic products and services, our expected cash
flows, growth in our operations, our 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 our litigation,
our strategy with regard to protecting our proprietary technology, our ability
to compete and respond to rapid technological change, the performance and
utility of our products and services and expectations as to growth in the number
of our employees and scope of our operations. 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, our ability to retain and obtain
customers, the cost of accessing or acquiring technologies or intellectual
property, the effectiveness of our sequencing efforts, the impact of alternative
technological advances and competition, uncertainties associated with changes in
patent laws, developments in and expenses related to litigation and interference
proceedings, and the risks set forth below under the caption "Risk Factors."
Incyte and LifeSeq are our registered trademarks. GEM is our trademark. We
also refer to trademarks of other corporations and organizations in this current
report on Form 8-K.
RISK FACTORS
WE HAVE HAD ONLY LIMITED PERIODS OF PROFITABILITY, WE EXPECT TO INCUR LOSSES IN
THE FUTURE AND WE MAY NOT RETURN TO PROFITABILITY
We had net losses from inception in 1991 through 1996 and again incurred
net losses in 1999 and 2000. Because of those losses, we had an accumulated
deficit of $ 84.9 million as of December 31, 2000. We intend to continue to
spend significant amounts on new product and technology development, including
therapeutic drug discovery and development programs and making our products
available online, and to increase our investment in marketing, sales and
customer service. The amounts we intend to spend on new product and technology
development include spending for our efforts to determine the sequence of genes,
or genomic sequencing, determine gene functions, develop database and software
products such as our gene expression database, discover SNPs, expand research
and development alliances, and develop electronic commerce products. As a
result, we expect to incur losses in 2001. We may report net losses in future
periods as well. We will not return to profitability unless we increase our
revenues or reduce our expenses.
TO GENERATE SIGNIFICANT REVENUES, WE MUST OBTAIN ADDITIONAL DATABASE
COLLABORATORS AND RETAIN EXISTING COLLABORATORS
As of September 30, 2000, we had over 20 database agreements. If we are
unable to enter into additional agreements, or if our current database
collaborators choose not to renew their agreements upon expiration, we may not
generate additional revenues or maintain our current revenues. 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 the extent to
which existing collaborators reduce the number of products or services for which
they subscribe, the impact of which will vary based upon our pricing of those
products and services. Some of our database agreements require us to meet
performance obligations, some or all of which we may not be successful in
attaining. 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 LONGER-TERM STRATEGY FOR PROFITABILITY INCLUDES LICENSES UNDER OUR
GENE-RELATED INTELLECTUAL PROPERTY, BUT THESE LICENSES MAY NOT CONTRIBUTE TO
REVENUES FOR SEVERAL YEARS, AND MAY NEVER RESULT IN REVENUES
Part of our strategy is to license to database collaborators and to some of
our other customers our know-how and patent rights associated with the genetic
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. Therefore, milestone or royalty payments from these
collaborations may not contribute to revenues for several years, if at all.
IF WE ARE NOT ABLE TO GENERATE SIGNIFICANT REVENUES FROM OUR CUSTOM GENOMIC
PRODUCTS AND SERVICES, WE MAY NOT BE ABLE TO GENERATE SIGNIFICANT REVENUES
We expect that our custom genomic products and services will become a
greater percentage of our revenues. Whether this occurs, and whether these
products and services will generate significant revenues, depends on our ability
to increase our customer base, increase sales to existing customers, and
increase our production capacity in a timely manner and with consistent volumes
and quality to meet the increased demand.
OUR OPERATING RESULTS ARE UNPREDICTABLE, WHICH MAY CAUSE OUR STOCK PRICE TO
DECLINE AND RESULT IN LOSSES TO INVESTORS
Our operating results are unpredictable and may fluctuate significantly
from period to period, which may cause our stock price to decline and result in
losses to investors. Some of the factors that could cause our operating results
to fluctuate include:
- - changes in the demand for our products and services, including our
database business;
- - the introduction of competitive databases or services, including databases
of publicly available, or public domain, genetic information;
- - the nature, pricing and timing of products and services provided to our
collaborators;
- - acquisition, licensing and other costs related to the expansion of our
operations, including operating losses of acquired businesses;
- - losses and expenses related to our investments in joint ventures and
businesses;
- - 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;
- - changes in intellectual property laws that affect our rights in genetic
information that we sell;
- - 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 and counterclaims filed by Affymetrix.
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 harm 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.
OUR INDUSTRY IS INTENSELY COMPETITIVE, AND IF WE DO NOT COMPETE EFFECTIVELY, OUR
REVENUES MAY DECLINE
We compete in markets that are new, intensely competitive, rapidly
changing, and fragmented. Many of our current and potential competitors have
greater financial, human and other resources than we do. If we cannot respond
quickly to changing customer requirements, secure intellectual property
positions, or adapt quickly and obtain access to new and emerging technologies,
our revenues may decline. Our competitors include:
- - Affymetrix, Inc.,
- - Celera Genomics Group of Applera Corporation,
- - CuraGen Corporation,
- - Gene Logic Inc.,
- - Human Genome Sciences, Inc.,
- - major pharmaceutical companies, and
- - universities and other research institutions, including The SNP
Consortium, which is funded by a number of pharmaceutical companies, and those
receiving funding from the federally funded Human Genome Project.
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.
In addition, we face competition from companies who are developing and may
seek to develop new technologies for discovering the functions of genes, gene
expression information, including microarray technologies, discovery of
variations among genes and related technologies. Also, if we are unable to
obtain the technology we currently use or new advanced technology on acceptable
terms, but other companies are, we will be unable to compete.
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. If pharmaceutical companies
and researchers are able to manage their own genomic data, they may not
subscribe to our databases.
Extensive research efforts resulting in rapid technological progress
characterize the genomics industry. To remain competitive, we must continue to
expand our databases, improve our software, and invest in new technologies. New
developments will probably continue, and discoveries by others may render our
services and potential products noncompetitive.
OUR NEW INVESTMENTS IN VALIDATING DRUG TARGETS WILL LEAD TO INCREASED EXPENSES
AND MAY NOT RESULT IN COMMERCIAL PRODUCTS OR SERVICES
We have recently decided to invest in validating drug targets associated
with diseases that may be linked to several or many genes working in
combination. The process of discovering drugs based upon genomics is new and
evolving rapidly, and we have limited experience in discovering or developing
drugs. These efforts will result in increased expenses and may not result in
commercial products or services. There is limited scientific understanding
generally relating to the role of genes in diseases, and few, if any, products
based on gene discoveries have been developed and commercialized. Accordingly,
even if we are successful in identifying genes, biological pathways or drug
candidates associated with specific diseases, we or our collaborators may not be
able to develop or commercialize products to improve human health. Rapid
technological development by us or others may result in compounds, products or
processes becoming obsolete before we recover our development expenses.
OUR REVENUES COULD DECLINE DUE TO PATENT POSITIONS BECOMING PUBLICLY AVAILABLE,
OR DUE TO OUR COMPETITORS PUBLICLY DISCLOSING THEIR DISCOVERIES
Our competitors may discover and establish patent positions with respect to
the genes in our databases. Our competitors and other entities who engage in
discovering the location of genes within a DNA strand and may make the results
of their sequencing efforts publicly available. Currently, academic institutions
and other laboratories participating in the Human Genome Project make their gene
sequence information available through a number of publicly available databases,
including the GenBank database. Also, Celera Genomics Group has publicly stated
that it is committed to make available to the public basic human sequence data.
The public availability of these discoveries or resulting patent positions
covering substantial portions of the human genome 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.
WE ARE INVOLVED IN PATENT LITIGATION, WHICH IF NOT RESOLVED FAVORABLY COULD
REQUIRE US TO PAY DAMAGES AND STOP SELLING AND USING MICROARRAY PRODUCTS
We are currently involved in patent litigation. If we lose this litigation
we could be prevented from producing and using our microarray products,
including uses of those products for purposes of providing gene expression
database products and gene expression services. We could also be required to pay
damages. 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 Synteni and Incyte infringed the '934 patent by making,
using, selling, importing, distributing or offering to sell in the United States
high density arrays and that this infringement was willful. Affymetrix seeks a
permanent injunction enjoining Synteni and Incyte from further infringement of
the '934 patent and, in addition, seeks damages, costs, attorneys' fees and
interest. Affymetrix also requests triple damages based on its allegation of
willful infringement by Incyte and Synteni.
In September 1998, Affymetrix filed an additional lawsuit in Federal Court,
alleging Synteni and Incyte infringed U.S. patent number 5,800,992 and U.S.
patent number 5,744,305. The complaint alleges that Synteni and Incyte infringed
the '305 patent by making, using, selling, importing, distributing or offering
to sell in the United States high density arrays. It also alleges that Synteni
and Incyte infringed the '992 patent by using their GEM microarray technology
to conduct gene expression monitoring and other applications using two-color
labeling, and that this infringement was willful. Affymetrix seeks a permanent
injunction enjoining Synteni and Incyte from further infringement of the '305
and '992 patents. In addition, Affymetrix had sought a preliminary injunction
enjoining Incyte and Synteni from using Synteni's and Incyte's GEM microarray
technology to conduct gene expression monitoring using two-color labeling as
described in the '992 patent. Affymetrix's request for a preliminary injunction
was denied in May 1999. The court held a pretrial hearing in November 2000 to
determine how to construe the patent claims that will be litigated in trial. In
January 2001, the court issued a ruling describing how the claims in the '934,
'305 and '992 patents should be interpreted.
In April 1999, the Board of Patent Appeals and Interferences of the United
States Patent and Trademark Office declared interferences between pending patent
applications licensed exclusively to us and the Affymetrix '305 and '992
patents. The Board of Patent Appeals and Interferences invokes an interference
proceeding when more than one patent applicant claims the same invention. During
the proceeding, 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 we had not met our prima
facie case, and ruled that the patents licensed by Incyte and Synteni from
Stanford University were not entitled to priority over corresponding claims in
the two Affymetrix patents. We are seeking de novo review of the Board's
decisions in the United States District Court for the Northern District of
California.
In August 2000, we filed a lawsuit against Affymetrix in federal court
alleging infringement of U.S. patent numbers 5,716,785 and 5,891,636. The
patents relate to technologies used in the amplification of RNA and the
generation of gene expression information. Affymetrix has filed counterclaims
in this lawsuit that allege, among other things, that Incyte and Synteni
infringe U.S. patent number 6,040,193 and U.S. patent number 5,871,928. These
counterclaims allege that Incyte and Synteni infringe these patents by making,
using, offering to sell and/or selling within the United States the inventions
claimed in the patents, including, in the case of the '193 patent, methods for
forming microarrays and, in the case of the '928 patent, methods for analyzing
nucleic acids. The counterclaims also allege that Incyte and Synteni engaged in
acts of unfair competition under California statutory and common law. Affymetrix
seeks a permanent injunction enjoining Incyte and Synteni from further
infringement of the '193 patent and '928 patent and, in addition, seeks damages,
costs and attorneys' fees and interest. Affymetrix further requests triple
damages from the infringement claims based on its allegation of willful
infringement by Incyte and Synteni.
In December 1999 and August 2000, we filed lawsuits against Gene Logic Inc.
in federal court alleging patent infringement. Gene Logic filed counterclaims
alleging, among other things, that we committed acts of unfair competition under
California statutory and common law. Gene Logic sought, among other things,
damages, costs and attorneys' fees. In January 2001, we reached a litigation
settlement with Gene Logic pursuant to which the lawsuits were dismissed and
Gene Logic will have a non-exclusive license to practice the technology
described in the patents.
On July 24, 2000, Affymax Research Institute filed suit in state court
alleging breach of contract and intentional interference with contractual
relations by Michael C. Pirrung, Incyte and Does 1-10. The complaint alleges
that Dr. Pirrung, a former employee and paid consultant of Affymax, breached the
confidential information secrecy and invention agreement and consultant services
agreement he entered into with Affymax by working as our paid consultant on the
Affymetrix litigation. The complaint further alleges that we and/or our counsel
were aware of Dr. Pirrung's contractual obligations to keep confidential
Affymax's confidential, proprietary and privileged information and intended by
engaging Dr. Pirrung as an expert to interfere with his contracts with Affymax.
The complaint seeks compensatory and consequential damages, specific performance
of the contracts and a preliminary and permanent injunction enjoining Dr.
Pirrung from divulging any confidential information. Affymax also seeks to keep
us from retaining Dr. Pirrung as a consultant in the Affymetrix litigation,
recover costs of suit and attorneys' fees and such other relief as the court
deems just and proper. Affymax's request for a temporary restraining order and
for a preliminary injunction was denied. A case management conference is set
for February 27, 2001.
We believe we have meritorious defenses and intend to defend the suits and
counterclaims brought by Affymetrix and Affymax vigorously. However, our
defenses may be unsuccessful. At this time, we cannot reasonably estimate the
possible range of any loss resulting from these suits and counterclaims due to
uncertainty regarding the ultimate outcome. Regardless of the outcome, the
Affymetrix litigation has resulted and is expected to continue to result in
substantial expenses and diversion of the efforts of our management and
technical personnel. Further, there can be no assurance that any license that
may be required as a result of this litigation or the outcome thereof would be
made available on commercially acceptable terms, if at all. This litigation may
also affect our potential customers' willingness to use our microarray services
and gene expression databases, which could affect our revenue.
IF WE ARE SUBJECT TO ADDITIONAL LITIGATION AND INFRINGEMENT CLAIMS, THEY COULD
BE COSTLY AND DISRUPT OUR BUSINESS
The technology that we use to develop our products, and the technology 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 third parties. 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
and services. Further, we may not be able to obtain any necessary licenses on
acceptable terms, if at all.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY INFORMATION, WHICH MAY RESULT IN ITS
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. 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.
IF THE INVENTIONS DESCRIBED IN OUR PATENT APPLICATIONS ON FULL-LENGTH OR PARTIAL
GENES ARE FOUND TO BE UNPATENTABLE, OUR ISSUED PATENTS ARE NOT ENFORCED OR OUR
PATENT APPLICATIONS CONFLICT WITH PATENT APPLICATIONS FILED BY OTHERS, OUR
REVENUES MAY DECLINE
One of our strategies is to file patent applications on what we believe to
be novel full-length and partial genes and SNPs obtained through our efforts to
discover the order, or sequence, of the molecules, or bases, of genes. We have
filed U.S. patent applications in which we claimed partial sequences of some
genes. 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. While
the United States Patent and Trademark Office has issued patents covering
full-length genes, partial gene sequences and SNPs, the Patent and Trademark
Office may choose to interpret new guidelines for the issuance of patents in a
more restrictive manner in the future, which could impact the issuance of our
pending patent applications. We also do not know whether or how courts may
enforce our issued patents, if that becomes necessary. If a court finds these
types of inventions to be unpatentable, or interprets them narrowly, the value
of our patent portfolio and possibly our revenues could be diminished.
We believe that some of our patent applications claim genes and partial
sequences of 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, before a patent is issued. If a full-length or
partial length sequence for which we seek a patent is issued to one of our
competitors, we may be unable to include that full-length or partial length
sequence on a microarray or in a library of bioreagents. This could result in a
loss of revenues.
IF THE EFFECTIVE TERM OF OUR PATENTS IS DECREASED DUE TO CHANGES IN THE U.S.
PATENT LAWS OR IF WE NEED TO REFILE SOME OF OUR PATENT APPLICATIONS, THE VALUE
OF OUR PATENT PORTFOLIO AND THE REVENUES WE DERIVE FROM IT MAY BE DECREASED
The value of our patents depends in part on their duration. A shorter
period of patent protection could lessen the value of our rights under any
patents that we obtain and may decrease the revenues we derive from our patents.
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. Also, we may
need to refile some of our 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 and may decrease the revenues that we might obtain from the patents.
INTERNATIONAL PATENT PROTECTION IS PARTICULARLY UNCERTAIN, AND IF WE ARE
INVOLVED IN OPPOSITION PROCEEDINGS IN FOREIGN COUNTRIES, WE MAY HAVE TO EXPEND
SUBSTANTIAL SUMS AND 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 foreign patents or
our competitors foreign patents, which could result in substantial costs and
diversion of our efforts.
IF OUR PROGRAMS RELATING TO THE ROLE OF GENETIC VARIATION IN DISEASE AND DRUG
RESPONSE ARE NOT SUCCESSFUL, THEY MAY NOT GENERATE SIGNIFICANT REVENUES OR
RESULT IN PROFITABLE OPERATIONS
Part of our business is focused on developing information-based and other
products and services to assist pharmaceutical companies in a new and unproven
area: the identification and correlation of variation in genetic composition 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 aspect of our business focuses on single nucleotide polymorphisms or
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 because the variations we discovered may not occur
frequently enough to justify use by a pharmaceutical company.
Our success in this area will also depend upon our ability to develop, use
and enhance new and relatively unproven technologies. 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.
IF OUR STRATEGIC INVESTMENTS RESULT IN LOSSES, OUR EARNINGS MAY DECLINE
We make strategic investments in joint ventures or businesses that
complement our business. These investments 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, such as the losses we reported in 1997, 1998, 1999 and the first
quarter of 2000 related to our investment in diaDexus, LLC;
- - 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.
BECAUSE OUR SALES CYCLE IS LENGTHY, WE MAY SPEND A LOT OF TIME AND MONEY TRYING
TO OBTAIN NEW OR RENEWED SUBSCRIPTIONS TO OUR PRODUCTS AND SERVICES BUT MAY BE
UNSUCCESSFUL, WHICH COULD HURT OUR PROFITABILITY
Our ability to obtain new subscribers for our databases, software tools and
microarray and other services or to obtain renewals or additions to existing
subscriptions 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 new, renewed or expanded subscription or services agreement
will result. These expenditures, without increased revenues, will negatively
impact our profitability. 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.
IF WE ENCOUNTER PROBLEMS IN MEETING CUSTOMERS' SOFTWARE NEEDS, OUR REVENUES
COULD DECLINE AND WE COULD LOSE OUR CUSTOMERS' GOODWILL
Our databases 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, which could result in a
loss of revenues and customer goodwill.
WE HAVE ENCOUNTERED DIFFICULTIES INTEGRATING COMPANIES WE ACQUIRED, AND IF IN
THE FUTURE WE CANNOT SMOOTHLY INTEGRATE BUSINESSES WE ACQUIRE, OUR OPERATIONS
AND FINANCIAL RESULTS COULD BE HARMED
In December 2000, we acquired Proteome, Inc. As part of our business
strategy, we may acquire other assets, technologies and businesses. Our past
acquisitions have involved and our future acquisitions may 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.
IF WE ARE UNABLE TO MANAGE EFFECTIVELY OUR GROWTH, OUR OPERATIONS AND ABILITY TO
SUPPORT OUR CUSTOMERS COULD BE AFFECTED, WHICH COULD HARM OUR REVENUES
We may continue to experience 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 additional locations, 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 AFFECT OUR ABILITY TO
ACHIEVE OUR OBJECTIVES
We are highly dependent on the principal members of our management,
operations and scientific staff. Our product development, operations and
marketing efforts would be delayed or curtailed if we lose the services of any
of these people.
Our future success also will depend in part on the continued service of our
executive management team, key scientific, software, bioinformatics and
management personnel and our ability to identify, hire, train and retain
additional personnel, including customer service, marketing and sales staff. We
experience intense competition for qualified personnel. If we are unable to
continue to attract, train and retain these personnel, we may be unable to
expand our business.
WE RELY ON A SMALL NUMBER OF SUPPLIERS OF PRODUCTS WE NEED FOR OUR BUSINESS, AND
IF WE ARE UNABLE TO OBTAIN SUFFICIENT SUPPLIES, WE WILL BE UNABLE TO COMPETE
EFFECTIVELY
Currently, we use gene sequencing machines supplied by Molecular Dynamics,
a subsidiary of Amersham Pharmacia Biotech, Ltd., and chemicals used in the
sequencing process, called reagents, supplied by Sigma-Aldrich, Inc. in our gene
sequencing operations. If we are not able to obtain additional machines or an
adequate supply of reagents or other materials at commercially reasonable rates,
our ability to identify genes or genetic variations would be slower and more
expensive.
IF THE INFORMATION WE OBTAIN FROM THIRD-PARTY DATA SOURCES IS CORRUPT OR
VIOLATES THE LAW, OUR REVENUES AND OPERATING RESULTS COULD DECLINE
We rely on and include in our databases scientific and other data supplied
by others, including publicly available information from sources such as the
Human Genome Project. 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 this
data caused database corruption or violated legal requirements, we would be
unable to sell subscriptions to our databases. These lost sales would harm our
revenue and operating results.
SECURITY RISKS IN ELECTRONIC COMMERCE OR UNFAVORABLE INTERNET REGULATIONS MAY
DETER FUTURE USE OF OUR PRODUCTS AND SERVICES, WHICH COULD RESULT IN A LOSS OF
REVENUES
We offer several products through our website on the Internet and may offer
additional products in the future. Our ability to provide secure transmissions
of confidential information over the Internet may limit online use of our
products and services by our database collaborators as we may be limited by our
inability to provide secure transmissions of confidential information over the
Internet. Advances in computer capabilities and new discoveries in the field of
cryptography may comprise the security measures we use to protect our website,
access to our databases, and transmissions to and from our website. If our
security measures are breached, our proprietary information or confidential
information about our collaborators could be misappropriated. Also, a security
breach could result in interruptions in our operations. The security measures we
adopt may not be sufficient to prevent breaches, and we may be required to incur
significant costs to protect against security breaches or to alleviate problems
caused by breaches. Further, if the security of our website, or the website of
another company, is breached, our collaborators may no longer use the Internet
when the transmission of confidential information is involved. For example,
recent attacks by computer hackers on major e-commerce websites and other
Internet service providers have heightened concerns regarding the security and
reliability of the Internet.
Because of the growth in electronic commerce, the United States Congress
has held hearings on whether to further regulate providers of services and
transactions in the electronic commerce market. The federal government could
enact laws, rules and regulations that would affect our business and operations.
Individual states could also enact laws regulating the use of the Internet. If
enacted, these federal and state laws, rules and regulations could require us to
change our online business and operations, which could limit our growth and our
development of our online products.
OUR CUSTOMERS MAY NOT CONSIDER THE INTERNET AS AN ACCEPTABLE METHOD FOR
ACCESSING OUR PRODUCTS AND SERVICES
We have expended a significant amount of time and money to made our
products available through the internet. In 2000, we introduced our on-line
product LifeSeq Gene-by-Gene and make LifeSeq Gold and LifeExpress available
on-line. If only a few of our customers choose to use the internet as a method
for accessing our products and services, we may have to incur a charge against
earnings to write-off internet related assets.
BECAUSE OUR ACTIVITIES INVOLVE THE USE OF HAZARDOUS MATERIALS, WE MAY BE SUBJECT
TO COSTLY ENVIRONMENTAL LIABILITY THAT COULD EXCEED OUR RESOURCES
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 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.
BECAUSE OUR REVENUES ARE DERIVED PRIMARILY FROM THE PHARMACEUTICAL AND
BIOTECHNOLOGY INDUSTRIES, OUR REVENUES 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 as well as to the academic community. Accordingly, our
success will depend in large part 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 or by the academic
community. These reductions and delays may result from factors such as:
- - changes in economic conditions;
- - consolidation in the pharmaceutical industry;
- - changes in the regulatory environment, including governmental pricing
controls, 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.
IF A NATURAL DISASTER OCCURS, WE MAY HAVE TO CEASE OR LIMIT OUR BUSINESS
OPERATIONS
We conduct our database, 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.
WE MAY EXPERIENCE POWER BLACKOUTS AND HIGHER ELECTRICITY PRICES AS A RESULT OF
CALIFORNIA'S CURRENT ENERGY CRISIS, WHICH COULD DISRUPT OUR OPERATIONS AND
INCREASE OUR EXPENSES
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. We rely on the major Northern California
public utility, Pacific Gas & Electric Company, or PG&E, to supply electric
power to our facilities in Northern California. Due to problems associated with
the de-regulation of the power industry in California and shortages in wholesale
electricity supplies, customers of PG&E have been faced with increased
electricity prices, power shortages and, in some cases, rolling blackouts. If
blackouts interrupt our power supply, we may be temporarily unable to continue
operations at our facilities. Any such interruption in our ability to continue
operations at our facilities could delay our ability to develop or provide our
products and services, which could damage our reputation and result in lost
revenue, either of which could substantially harm our business and results of
operations.
WE HAVE A LARGE AMOUNT OF DEBT AND OUR DEBT SERVICE OBLIGATIONS MAY PREVENT US
FROM TAKING ACTIONS THAT WE WOULD OTHERWISE CONSIDER TO BE IN OUR BEST INTERESTS
As of December 31, 2000, we had
- - total consolidated debt of approximately $187.8 million,
- - stockholders' equity of approximately $622.7 million, and
- - a deficiency of earnings available to cover fixed charges of $28.5 million
for the nine months ended December 31, 2000.
A variety of uncertainties and contingencies will affect our future
performance, many of which are beyond our control. We may not generate
sufficient cash flow in the future to enable us to meet our anticipated fixed
charges, including our debt service requirements with respect to the our
convertible subordinated notes due 2007 that we sold in February 2000. $185
million of those notes were outstanding as of December 31, 2000. The following
table shows, as of December 31, 2000, the aggregate amount of our interest
Year Aggregate Principal Aggregate Interest
---- ------------------- ------------------
2001 -- 10,175,000
2002 -- 10,175,000
2003 -- 10,175,000
2004 -- 10,175,000
2005 -- 10,175,000
payments due in each of the next five years listed:
Our substantial leverage could have significant negative consequences for
our future operations, 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.
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 23, 2001
INCYTE GENOMICS, INC.
By /s/ John M. Vuko
-------------------
Name: John M. Vuko
Title: Executive Vice President and
Chief Financial Officer