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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22570
LYNX THERAPEUTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3161073
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
25861 INDUSTRIAL BLVD., HAYWARD, CA 94545
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(510) 670-9300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of shares of common stock of the Registrant outstanding as of
February 15, 2000, was 11,264,850. The aggregate market value of the common
stock of the Registrant held by non-affiliates as of February 15, 2000, was
$613,430,027.
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in this section, "-- Business Risks" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
OVERVIEW
We are a leader in the development and application of novel technologies
for the discovery of gene expression patterns and genomic variations important
to the pharmaceutical, biotechnology and agricultural industries. These
technologies are based on Megaclone, our unique and proprietary cloning
procedure, which transforms a sample containing millions of DNA molecules into
one made up of millions of micro-beads, each of which carries approximately
100,000 copies of one of the DNA molecules in the sample. In contrast to
conventional cloning, in which an individual DNA molecule is selected from a
sample and amplified into many copies for analysis or identification, we can
capture on one set of micro-beads clones of nearly all the DNA sequences that
characterize a sample. Once attached to the micro-beads, these clones can be
handled and subjected to experiments and analyses all at the same time.
Megaclone thereby enables many analyses or characterizations to be conducted
that would otherwise be too cumbersome or onerous to conduct using conventional
procedures where each clone must be addressed individually. Based on Megaclone,
we have developed a suite of applications that have the potential to enhance the
pace, scale and quality of genomics and genetics research programs. Currently,
our principal collaborators and customers are BASF AG, E.I. DuPont de Nemours
and Company, Aventis CropScience GmbH and Oxagen Limited.
Technologies we have developed that leverage the power of Megaclone are:
- Massively Parallel Signature Sequencing, or MPSS -- which generates
simultaneously, from a million or more Megaclone micro-beads, sequence
information that uniquely identifies a sample's DNA molecules without the
need for individual conventional sequencing reactions.
- Megasort -- which enables researchers to focus on potential target genes
by permitting, from a single experiment, the direct physical isolation of
nearly all the genes differentially expressed between samples.
We are also developing the following application based on Megaclone:
- Megatype -- which, when fully developed, should enable a single
experiment to yield directly, without individual genotyping, those
disease- or trait-associated single nucleotide polymorphisms, or SNPs,
that differentiate large populations of genomes.
We are developing additional applications of these technologies, as well as
new technologies aimed at addressing the needs of the pharmaceutical,
biotechnology and agricultural industries. For example, we are developing the
ability to assemble high-resolution genomic maps based on sequences obtained
from the application of our MPSS technology. We also are working on a new
separation technology in the area of proteomics to provide high-resolution
analysis of complex mixtures of proteins from cells or tissues of interest.
In addition to our work with collaborators and customers, we intend to
apply our suite of technologies in selected biological areas to develop products
internally to discover and then license or sell gene targets, validated gene
targets, genetic associations, genomic maps and other products. For example, we
are pursuing projects directed to gene discovery and target validation in
immunopathology and, through BASF-LYNX, our joint venture with BASF, central
nervous system disorders.
INDUSTRY BACKGROUND
The approaching publication of the first draft sequence of the human genome
is a milestone in the history of genetics and genomics. However, the ensuing
challenge for researchers in industry and academia alike will
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be to explore the multitude of genomic variations and to discover, from the
analysis of these differences, the functions of genes and their roles in health
and disease. It is this work a post genome-sequencing, that is expected to lead
to commercial opportunities and ultimately to the discovery of new therapies for
unmet medical needs and to provide the basis for the emerging fields of
pharmacogenetics and individualized patient therapy.
Many diseases result from a malfunction of the genetically programmed
protective response to insults, such as trauma, infection, stress or an
inherited mutant gene. That malfunction may result in inadequate, misguided or
exaggerated gene expression, unfolding a complex pathogenic process which may
resolve itself, linger chronically or evolve with increasingly destructive
effects in a manner quite removed from, and even independent of, the original
insult. Analyzing which genes are expressed in a cell or tissue and to what
level can determine which physiological pathways are active in the cell and to
what degree. By understanding when and where abnormal gene expression occurs and
the changes in expression that a drug can cause, the physiological pathways
implicated in disease and drug action can be pinpointed. This knowledge can be
used to help discover drug targets, screen drug leads, predict a compound's
toxic effects, anticipate pharmacological responses to drug leads and tailor
clinical trials to the specific needs of subgroups within a population. By
recognizing gene expression patterns, researchers, and ultimately physicians,
may also be able to determine which treatments are likely to be effective for a
specific condition and which may be ineffective or harmful.
Genomic approaches to therapeutics seek to identify genes connected to the
origin of a disease. Searches to identify such genes generally are laborious and
involve a very large amount of conventional DNA sequencing to identify genes or
gene fragments. This knowledge of genes is a first step only. While it may pave
the way for the development of better diagnostics, it may not necessarily lead
to a successful therapy. For example, while a particular gene, or absence of a
gene, may predispose to a cancer, an entirely different set of genes is likely
to govern the tumor and its metastases. Hence, in addition to understanding the
cause of disease, it is important to understand entire networks of genes and
their function in both healthy and diseased states in order to identify the
optimal targets for therapy.
One approach to genomics research is based on the study of gene expression
and regulation of gene expression in cells in differing states or conditions.
Gene expression in a cell consists of transcription, which converts the genetic
information encoded in the double-stranded DNA of a gene into mRNA, and
translation, which converts the genetic information encoded in mRNA into a
specific protein molecule. At any one time, any particular human cell expresses
tens of thousands of genes, out of the approximately 100,000 total human genes.
A different number of copies of each mRNA type will be present in each sample
depending upon the particular cell, its function and its environmental
conditions at the time. Thus, a cell will contain, at any one time, tens of
thousands of different mRNAs, in various quantities, for a total on the order of
one million or more mRNA molecules.
Elucidating gene function involves not only determining which genes are
expressed in a healthy or diseased tissue, but also requires determining which
of the altered gene expressions cause a disease rather than result from the
disease. In general, only the most abundantly expressed genes are currently
accessible using conventional methods. In addition, conventional methods are
dependent on separating and cloning double-stranded copies of each individual
mRNA, or cDNA, prior to analysis. Thus, by conventional methods, it is
impractical to obtain a comprehensive, high-resolution analysis of gene
expression across one million or more mRNA molecules in cells of interest to the
researcher.
Another approach to genomics research is based on the study of human
genetic variations. It is well known that the incidence of human diseases and
their severity differ in different groups and individuals. There are many common
diseases in which several genes play a role in the initiation and development of
the pathological process, as well as in the responses of the individual to a
therapy. This approach studies gene association with diseases by using a large
assembly of specific gene variants called polymorphisms. The most abundant of
these are single nucleotide polymorphisms, or SNPs, which are single-base
mutations in the genome. A SNP is found, on average, once in every 1,000 bases.
This means if any two individuals are compared, their genomes will be found to
differ at more than one million places. Genotyping refers to the process of
testing individual genomes for the presence or absence of a set of SNPs.
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If a SNP correlation to a disorder is proven, it would point to those
regions of the genome in which the sequences responsible for the disorder may be
located. However, to discover such regions, it is currently believed one would
have to test several hundred individual genomes for the presence or absence of
tens of thousands, if not more, SNPs. Thus, there is a real need to employ a
technology that can quickly and efficiently determine which of these thousands
of SNPs are significantly associated with diseases in large populations of
patients and thereby provide a relevant set of SNPs for downstream genotyping of
individuals.
OUR SOLUTION
We overcome many of the limitations of current technologies by capturing
essentially all of the different DNA molecules in a sample on micro-beads using
our Megaclone technology and applying our various analytical technologies to
conduct relevant comparisons and other analyses of the captured DNA molecules.
Thus, our patented Megaclone technology enables an automated, high-throughput
analysis of complex mixtures of DNA molecules.
Megaclone is a process that uses a proprietary library of approximately
16.7 million short synthetic DNA sequences, called tags, and their complementary
anti-tags, to uniquely mark and process each DNA molecule in a sample. Each
unique tag is a permanent identifier of the DNA molecule it is attached to, and
all of the tagged molecules in a sample are amplified together to create
multiple copies of the tagged molecules. Another proprietary process is used to
generate five micron diameter micro-beads, each of which carries multiple copies
of a short anti-tag DNA sequence complementary to one of the 16.7 million tags.
The amplified tagged DNA molecules are then collected onto the micro-beads
through hybridization of the tags to the complementary anti-tags. Each
micro-bead carries on its surface enough complementary anti-tags to collect
approximately 100,000 identical copies of the corresponding tagged DNA molecule.
By this process, each tagged DNA molecule in the original sample is
converted into a micro-bead carrying about 100,000 copies of the same sequence.
Therefore, in a few steps, our Megaclone technology can transform a complex
mixture of a million or more identified DNA molecules into a usable format that
provides the following benefits:
- substantially all the different DNA molecules present in a sample are
represented in the final micro-bead collection;
- these million or more DNA molecules can be analyzed simultaneously in
various applications; and
- the need for storing and handling millions of individual DNA clones is
eliminated.
Megaclone is the foundation for our analytical applications, including
MPSS, which provides gene sequence information, Megasort, which provides gene
expression information, and Megatype, which is expected to provide SNP disease-
or trait-association information.
OUR BUSINESS STRATEGY
We intend to apply our technologies to maximize the value of human, animal
and plant genomic information for our collaborators, customers and ourselves
through high-resolution gene expression analysis and in the discovery and
characterization of important genetic variations. We intend to enlarge our
presence in the pharmaceutical and biotechnology markets now that the majority
of our technologies have been reduced to practice. We believe many drug
discovery and development companies now recognize the need for significantly
greater resolution and scope in their genomics and genetics research.
The primary elements of our business strategy are:
- - Pursue selected internal programs to capture greater value
We intend to use our technologies to discover and develop gene targets,
validated gene targets, genetic associations, genomic maps or other products in
selected fields. Through these internal programs, we will endeavor to create
valuable drug discovery information and related intellectual property that we
could license to third parties. For example, we have initiated a program
directed to the discovery and validation of targets in
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the field of immunopathology. If successful, we could realize revenues from
licensing our discoveries through licensing fees, milestone payments and
royalties or profit sharing.
- - Collaborate with others with whom we can create value
We will seek to collaborate with companies and research institutions under
arrangements in which we provide access to our suite of technologies, and our
collaborators provide access to well-defined clinical samples and/or biological
expertise. For example, BASF-LYNX is using our technologies to discover and
validate novel gene targets for central nervous system, or CNS, disorders. BASF
and Lynx will share equally any intellectual property developed by BASF-LYNX. If
successful, we could realize revenues through a share in any licensing or
commercialization by us or our collaborators.
- - Continue to grow our genomic discovery services
We have generated revenues through agreements for genomic discovery
services. We will continue to provide such services to pharmaceutical,
biotechnology and agricultural companies for use in their discovery, development
and commercialization efforts. The revenue sources from this type of arrangement
typically include technology access and services fees.
- - Develop new technologies and additional applications of our technologies
We intend to continue to develop creative solutions to complex biological
problems. We are currently focused on reducing to commercial practice our
Megatype technology in order to extract from large populations those genomic
fragments exhibiting SNPs and associate these SNPs with traits or diseases. We
may further develop our technology to apply to individual genotyping services,
which would determine the relevant SNPs present in an individual. A further
application of Megaclone and MPSS technologies under development is a method for
constructing high-resolution genomic maps. We are also working in the area of
proteomics to provide a means of high-resolution analysis of complex mixtures of
proteins from cells or tissues.
OUR TECHNOLOGIES AND APPLICATIONS
We have developed or are developing several important analytical
applications of our Megaclone technology to better address the need for
increased pace, scale and quality of genomics and genetics research programs.
Current Applications
Massively Parallel Signature Sequencing Technology. Our MPSS technology
addresses the need to generate sequence information from millions of DNA
fragments. At this extremely large scale, our MPSS approach eliminates the need
for individual sequencing reactions and the physical separation of DNA fragments
required by conventional sequencing methods.
MPSS enables the simultaneous identification of nearly all the DNA
molecules in a sample, which are fixed in a single layer array of one million or
more Megaclone micro-beads in a flow cell, so solvents and reagents can be
washed over the micro-beads in each cycle of the process. Our proprietary
protocol elicits sequence-dependent fluorescent responses from the micro-beads,
which are recorded by a CCD camera after each cycle. Short 16- to 20-base-pair
signature, or identifying, sequences are constructed through this process
without requiring fragment separation and separate sequencing reactions as in
conventional DNA sequencing approaches. We have developed proprietary
instrumentation and software to automate the delivery of reagents and solutions
used in our sequencing process and to compile, from the images obtained at each
cycle, the signature sequences that result from each experiment.
We believe MPSS has the following advantages over conventional DNA
sequencing methods:
- it sequences DNA molecules on as many as one million or more Megaclone
beads simultaneously;
- it eliminates the need for individual sequencing reactions and gels;
- it identifies each of the DNA molecules by a unique 16- to 20-base
signature sequence;
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- it produces a comprehensive quantitative profile of gene expression in
cells or tissues of interest; and
- it identifies even the rarest expressed genes.
In 1999, we achieved several technology milestones set by our
collaborators, BASF and DuPont, primarily related to our MPSS technology. In
these experiments, we demonstrated that hundreds of thousands of gene copies
expressed by cells could be analyzed and identified simultaneously. In one
experiment, we identified over three million human cDNA clones from two states
of stimulation in a human cell, unstressed and stressed, in approximately six
weeks, running on four of our proprietary sequencing instruments. The experiment
identified more than 50,000 expressed human genes, a significant number of which
were not found in public database. In the other experiment, we identified more
than 500,000 cDNA clones expressed in a corn tissue and characterized over
50,000 corn genes, a substantial number of which were not in the public domain
or DuPont's own databases. This identification was achieved in less than a
month, running on two of our proprietary instruments. We believe these two
experiments demonstrate the pace and scale at which we can conduct DNA analysis.
We currently have over 20 operational proprietary MPSS instruments. We are
utilizing MPSS to generate high-resolution expression data in several biological
systems for our collaborators and customers and for ourselves. These data are
being derived from tissues and samples that have been prioritized by our
collaborators and customers, in addition to those identified by our research
teams for our internal programs. We will also generate data that can be
delivered directly to our customers to identify new genes and otherwise enhance
their databases. MPSS delivers gene sequence information and high-resolution
gene expression information and could enable the construction of high-resolution
physical maps of genomes.
Megasort Technology. Our Megasort technology provides a method to identify
and physically extract essentially all genes that differ in expression level
between two samples. The novelty of Megasort is that the identification and
extraction are performed in a single assay.
Megasort compares two DNA samples, each containing millions of molecules,
and extracts those DNA molecules that are present in different proportions in
the samples. These could be differentially expressed genes or DNA fragments that
are found in one sample but not the other. Because the comparison and sorting
require no prior knowledge of the sequences of the genes in either sample,
Megasort can be used with samples isolated from tissues or organisms that are
not well characterized. Megasort involves hybridizing two probes prepared
separately, one from each of the samples to be compared, with a population of
Megaclone micro-beads, each of which carries many copies of a single DNA
fragment or gene derived from either of the samples. Because each probe is
labeled with a different fluorescent marker, genes or fragments that are under-
or over-represented in either sample are readily separated by a fluorescence
activated cell sorter, also referred to as a FACS. Genes or fragments of
interest can then be recovered from the sorted micro-beads for further study.
Megasort technology uses Megaclone micro-beads as a "fluid" microarray. In
a single experiment, Megasort can isolate nearly all the potential target genes
that are differentially expressed, and remove those that do not differ between
the samples. We believe Megasort has the following advantages over conventional
gene microarrays:
- it interrogates all the expressed genes, including rarely expressed
genes, in the two samples being compared, whether known or not;
- it does not require advance knowledge about any of the genes in these
samples; and
- it extracts, at the end of the experiment, physical DNA clones of those
genes that are of interest attached to the micro-beads that were sorted.
Megasort delivers high-resolution gene expression information, focused sets of
differentially expressed genes and potential gene targets.
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Technologies, Applications and Products Under Development
Megatype Technology. We believe our Megatype technology will permit the
comparison of collected genomes of two populations. It is designed to enable the
detection and recovery of DNA fragments with the SNPs that distinguish these two
populations. In contrast to other SNP validation methods that require thousands
or millions of assays, only a single Megatype experiment should be required for
SNP association with disease or other traits.
Megatype is designed to identify SNPs that are differentially represented
in two populations of individuals. DNA fragments that exhibit a specific class
of SNPs in the combined populations are selected by a proprietary method and
loaded onto micro-beads with our Megaclone technology. Using fluorescently
labeled probes prepared through the same proprietary method from the two
separate populations, micro-beads bearing SNP-containing fragments that are
under- or over-represented in either of the two populations are easily separated
using the FACS. No prior knowledge of the SNP sequences or where they are
located in the genome is required to conduct this analysis.
We believe the advantages of Megatype will include:
- enabling simultaneous discovery of disease- or trait-associated SNPs
without prior knowledge of SNP sequences;
- identifying, in a single experiment, the genetic differences that
distinguish large populations;
- extracting fragments containing over- or under-represented SNPs in
different populations;
- eliminating the need for millions of individual genotyping assays to
determine SNP disease association; and
- bypassing the prior need for a comprehensive SNP map.
We believe our Megatype technology will deliver information on the disease- or
trait-association of SNPs and should provide a cost-effective approach to drug
discovery and pharmacogenetics.
Genotyping. As a natural extension of our Megatype technology, we may
further apply the technology to individual genotyping, which would determine the
relevant SNPs present in an individual. This application will attempt to derive
more of the downstream value from the scientifically relevant SNPs through the
additional enabling of trait selection in crops, and predictive or preventative
medicine in humans, thus moving closer to the notion of "personal genomics."
Furthermore, we may develop additional assays to help link associated SNPs
initially identified by Megatype technology to specific genes responsible for
the observed traits.
Genomic Mapping. Another application of Megaclone and MPSS technologies
under development is a method for constructing high-resolution genomic maps
based on the ordering of signature sequences. Our collaboration agreements with
DuPont and Aventis CropScience both include plans to construct high-resolution
maps of certain crop genomes. We believe these maps could be important tools for
associating genes with complex quantitative traits and set the stage for
sequencing these genomes in their entirety at some future date.
Proteomics. Proteomics is the study of the entire protein complement in
cells. Our proteomics technology aims to provide high-resolution analysis of
complex mixtures of proteins from cells or tissues. Based on solution-phase
electrophoresis in proprietary micro-channel plates, the approach combines the
speed of capillary electrophoresis with the resolving power of conventional
two-dimensional gel-based techniques. Using this technology, we expect to
complement high-resolution gene expression measurements using our MPSS platform
with similar high-resolution analysis of a cell's translated proteins. The
combined data from these measurements should provide a much more accurate and
comprehensive picture of cell and tissue physiology than is available using
current techniques. Our goal is to use our proteomics technology to discover
drug targets, validate candidate targets and correlate gene expression with
protein expression in cells.
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COLLABORATIONS AND CUSTOMERS
BASF and BASF-LYNX
In October 1996, we entered into an agreement with BASF to provide them
with nonexclusive access to certain of our genomics discovery services. In
connection with certain technology development accomplishments, BASF paid us a
technology access fee of $4.5 million in the fourth quarter of 1999. BASF's
access to our genomics discovery services is for a minimum of two years and
requires BASF to purchase services at a minimum rate of $4.0 million per year.
BASF paid us $4.0 million in the fourth quarter of 1999 for genomics discovery
services to be performed by us in the first year.
In 1996, we formed a joint venture company with BASF called BASF-LYNX
Bioscience AG. BASF-LYNX is located in Heidelberg, Germany. BASF-LYNX began
operations in 1997 and is employing our technologies to discover and validate
novel gene targets for CNS disorders. To date, BASF-LYNX has identified several
potential targets and has filed two related patents. We have contributed access
to our technologies to BASF-LYNX in exchange for an initial 49% equity
ownership. BASF, by committing to provide research funding to BASF-LYNX of DM50
million (or approximately $25 million based on a March 13, 2000 exchange rate)
over a five-year period beginning in 1997, received an initial 51% equity
ownership in BASF-LYNX. In 1998, BASF agreed to provide an additional $10
million in research funding to BASF-LYNX, of which $4.3 million was paid to us
for technology assets related to a CNS program. BASF-LYNX had 55 employees as of
December 31, 1999.
DuPont
In October 1998, we entered into a research collaboration agreement with
DuPont to apply our technologies on an exclusive basis to the study of certain
crops and their protection. Under the terms of the agreement, we could receive
payments over a five-year period for genomic discovery services, the achievement
of specific technology milestones and the delivery of genomic maps of specified
crops. An initial payment of $10 million for technology access was received at
the execution of the agreement, with additional minimum service fees of $12
million to be received by us over a three-year period commencing January 1999,
of which we have received $4 million to date. In the fourth quarter of 1999, we
achieved a technology milestone under the agreement that resulted in a $5
million payment from DuPont.
Aventis CropScience
In March 1999, Aventis Pharmaceuticals, formerly Hoechst Marion Roussel,
Inc., obtained nonexclusive access to certain of our genomics discovery services
for the benefit of its affiliate, Aventis CropScience. We received an initial
payment for genomics discovery services to be performed by us for Aventis
CropScience. The service period ends on March 31, 2000, subject to renewal for
up to three additional one-year periods.
In September 1999, we signed a three-year research collaboration agreement
with Aventis CropScience. Aventis CropScience will receive exclusive access to
certain of our genomics discovery services for the study of certain plants,
which is aimed at developing new crop varieties and other agricultural products.
Under the terms of the agreement, Aventis CropScience paid us a technology
access fee upon execution of the agreement. We can earn additional fees for the
performance of genomics discovery services and the delivery of genomic maps of
certain plants and milestone payments and licensing fees related to the
discovery of trait-associated SNPs for the subject plants.
Oxagen
In May 1999, we entered into an agreement with Oxagen to collaborate on a
program to discover and validate disease-associated SNPs using our Megatype
technology. The program will initially focus on inflammatory bowel disease, but
the companies may extend it to other common human disorders. Under the terms of
the agreement, we could receive licensing fees and royalties or other share in
the revenues from the licensing or sale and subsequent commercialization of
related products by Oxagen or third parties.
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COMPETITION
Competition among entities attempting to identify the genes associated with
specific diseases and to develop products based on such discoveries is intense.
We face, and will continue to face, competition from pharmaceutical,
biotechnology and agricultural companies, academic and research institutions and
government agencies, both in the United States and abroad. Several entities are
attempting to identify and patent randomly sequenced genes and gene fragments,
while others are pursuing a gene identification, characterization and product
development strategy based on positional cloning. We are aware certain entities
are using a variety of gene expression analysis methodologies, including
chip-based systems, to attempt to identify disease-related genes. In addition,
numerous pharmaceutical companies are developing genomic research programs,
either alone or in partnership with our competitors. Competition among such
entities is intense and is expected to increase. In order to successfully
compete against existing and future technologies, we will need to demonstrate to
potential customers that our technologies and capabilities are superior to those
of competitors.
Some of our competitors have substantially greater capital resources,
research and development staffs, facilities, manufacturing and marketing
experience, distribution channels and human resources than us. These competitors
may discover, characterize or develop important genes, drug targets or drug
leads, drug discovery technologies or drugs in advance of our customers or us or
which are more effective than those developed by our customers or us. They may
also obtain regulatory approvals for their drugs more rapidly than our
collaborators or customers will, any of which could have a material adverse
effect on our business. Moreover, our competitors may obtain patent protection
or other intellectual property rights that could limit our rights or our
customers' ability to use our technologies or commercialize therapeutic,
diagnostic or agricultural products. We also face competition from these and
other entities in gaining access to cells, tissues and nucleic acid samples for
use in our discovery programs.
INTELLECTUAL PROPERTY
We are pursuing a strategy designed to obtain United States and foreign
patent protection for our core technologies. Our long-term commercial success
will be dependent in part on our ability to obtain commercially valuable patent
claims and to protect our intellectual property portfolio. As of January 31,
2000, we owned 25 issued patents and 85 pending patent applications in the
United States and foreign countries relating to our genomics technologies.
In addition to acquiring patent protection for our core analysis
technologies, as part of our business strategy, we intend to file for patent
protection on sets of genes, both known and newly discovered, that have
diagnostic or prognostic applications, novel genes that may serve as drug
development targets, genetic maps and sets of genetic markers, such as SNPs,
that are associated with traits or conditions of medical or economic importance.
However, there is substantial uncertainty regarding the availability of such
patent protection.
Patent law relating to the scope of claims in the technology field in which
we operate is still evolving. The degree to which we will be able to protect our
technology with patents, therefore, is uncertain. Others may independently
develop similar or alternative technologies, duplicate any of our technologies,
and, if patents are licensed or issued to us, design around the patented
technologies licensed to or developed by us. In addition, we could incur
substantial costs in litigation if we are required to defend ourselves in patent
suits brought by third parties or if we initiate such suits.
With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, we rely on trade secret
protection and confidentiality agreements to protect our interests. We intend to
maintain several important aspects of our technology platform as trade secrets.
While we require all employees, consultants, collaborators and customers to
enter into confidentiality agreements, we cannot be certain that proprietary
information will not be disclosed or that others will not independently develop
substantially equivalent proprietary information.
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RESEARCH AND DEVELOPMENT EXPENDITURES
We have devoted our efforts primarily to research and development. Research
and development expenses were $15.5 million for the year ended December 31,
1999, $13.2 million for the year ended December 31, 1998 and $14.2 million for
the year ended December 31, 1997.
SCIENTIFIC ADVISORS
Our principal scientific advisor:
Sydney Brenner, M.B., D.Phil., Director and President of The Molecular
Sciences Institute, a non-profit research institute in Berkeley, California.
Until his retirement in 1996, Dr. Brenner was Honorary Professor of Genetic
Medicine, University of Cambridge School of Clinical Medicine, Cambridge,
England. Dr. Brenner is known for his work on the genetic code and the
information transfer from genes to proteins, and for his pioneering research on
the genetics and development of the nematode. Dr. Brenner is a Fellow of the
Royal Society (1955) and a Foreign Associate of the U.S. National Academy of
Sciences (1977) and has received numerous awards of recognition, including the
Albert Lasker Medical Research Award (1991), the Genetics Society of America
Medal (1987) and the Kyoto Prize (1990). Dr. Brenner is the principal inventor
of Lynx's bead-based technologies.
EMPLOYEES
As of December 31, 1999, we employed 107 full-time employees, of which 86
were engaged in research and development activities and 21 in finance and
administrative activities. We believe we have been successful in attracting
skilled and experienced scientific personnel; however, competition for such
personnel is intense. None of our employees are covered by collective bargaining
agreements, and management considers relations with our employees to be good.
9
11
BUSINESS RISKS
OUR TECHNOLOGIES ARE NEW AND UNPROVEN AND MAY NOT ALLOW US OR OUR COLLABORATORS
TO IDENTIFY GENES OR TARGETS FOR DRUG DISCOVERY.
Our technologies are new and unproven. The application of these
technologies is in too early a stage to determine whether it can be successfully
implemented. These technologies assume information about gene expression and
gene sequences may enable scientists to better understand complex biological
processes. Relatively few therapeutic products based on gene discoveries have
been successfully developed and commercialized. Our technologies may not enable
us or our collaborators to identify genes or targets for drug discovery. To
date, no targets for drug discovery have been identified based on our
technologies.
WE ARE DEPENDENT ON OUR COLLABORATIONS AND WILL NEED TO FIND ADDITIONAL
COLLABORATORS IN THE FUTURE TO DEVELOP AND COMMERCIALIZE DIAGNOSTIC OR
THERAPEUTIC PRODUCTS.
Our strategy for the development and commercialization of our technologies
and potential products includes entering into collaborations, subscription
arrangements or licensing arrangements with pharmaceutical, biotechnology and
agricultural companies. We do not have the resources to develop or commercialize
diagnostic or therapeutic products on our own. We cannot assure you that we will
be able to negotiate additional collaborative arrangements or contracts on
acceptable terms, or at all, or that such collaborations or relationships will
be successful.
Substantially all of our revenues have been derived from corporate
collaborations and agreements. Revenues from collaborations and related
agreements depend upon continuation of the collaborations, the achievement of
milestones and royalties derived from future products developed from our
research and technologies. If we are unable to successfully achieve milestones
or our collaborators fail to develop successful products, we will not earn the
revenues contemplated under such collaborative agreements. If existing
agreements are not renewed, or if we are unable to enter into new collaborative
agreements on commercially acceptable terms, our revenues may decrease, and our
activities may fail to lead to commercialized products.
Our dependence on collaborative arrangements with third parties subjects us
to a number of risks. We have limited or no control over the resources that our
collaborators may choose to devote to our joint efforts. Our collaborators may
breach or terminate their agreements with us or fail to perform their
obligations thereunder. Further, our collaborators may elect not to develop
products arising out of our collaborative arrangements or may fail to devote
sufficient resources to the development, manufacture, market or sale of such
products. Some of our collaborators could also become our competitors in the
future. Our business could be harmed if our collaborators:
- do not develop commercially successful products using our technologies;
- develop competing products;
- preclude us from entering into collaborations with their competitors;
- fail to obtain necessary regulatory approvals; or
- terminate their agreements with us.
WE ARE AN EARLY STAGE COMPANY, SO OUR PROFITABILITY IS UNCERTAIN AND THERE IS A
HIGH RISK OF FAILURE.
You must evaluate us in light of the uncertainties and complexities
affecting an early stage genomics company. Our products and services are still
in the early stages of commercialization. Our technologies depend on the
successful integration of independent technologies, each of which has its own
development risks. We cannot assure you that our technologies will continue to
be successfully developed, that our services will continue to be sought by
customers or that any products developed from our technologies will prove to be
commercially successful. Further, we cannot assure you that we will be
successful in expanding the scope of our research into new areas of
pharmaceutical, biotechnology or agricultural research. Significant research and
development, financial resources and personnel will be required to capitalize on
our technologies. Commer-
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cialization of our technologies, whether through the sales of services,
royalties or other arrangements, may not generate sufficient or sustainable
revenues to enable us to be profitable.
WE HAVE A HISTORY OF NET LOSSES. WE EXPECT TO CONTINUE TO INCUR NET LOSSES, AND
WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred net losses each year since our inception in 1992,
including net losses of approximately $10.8 million in 1997, $4.3 million in
1998 and $6.7 million in 1999. As of December 31, 1999, we had an accumulated
deficit of approximately $53.4 million. We expect these losses to continue for
at least the next several years. The size of these net losses will depend, in
part, on the rate of growth, if any, in our revenues and on the level of our
expenses. Our research and development expenditures and general and
administrative costs have exceeded our revenues to date, and we expect research
and development expenses to increase substantially due to planned spending for
ongoing technology development and implementation, as well as new applications.
As a result, we expect our operating expenses will increase significantly in the
near term, and consequently, we will need to generate significant additional
revenues to achieve profitability. Even if we do increase our revenues and
achieve profitability, we may not be able to sustain profitability.
Our ability to generate revenues and achieve profitability is dependent on
many factors, including:
- our ability to enter into additional corporate collaborations and
agreements;
- our ability to discover genes and targets for drug discovery;
- our collaborators' ability to develop diagnostic and therapeutic products
from our drug discovery targets; and
- the successful clinical testing, regulatory approval and
commercialization of such products.
The time required to reach profitability is highly uncertain, and we cannot
assure you that we will be able to achieve profitability on a sustained basis,
if at all.
WE MAY NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE, WHICH MAY NOT BE AVAILABLE
TO US.
We have invested significant capital in our infrastructure and in our
scientific and business development activities. We expect our capital and
operating expenditures to increase over the next several years as we expand our
operations. Our future capital requirements will depend on many factors,
including:
- the progress and scope of our collaborative and independent research and
development projects;
- payments received under collaborative agreements;
- our ability to establish and maintain collaborative arrangements;
- the progress of the development and commercialization efforts under our
collaborations and corporate agreements;
- the costs associated with obtaining access to samples and related
information; and
- the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other intellectual property rights.
Changes to our current operating plan may require us to consume available
capital resources significantly sooner than we expect. We may be unable to raise
sufficient additional capital when we need it, on favorable terms, or at all. If
our capital resources are insufficient to meet future capital requirements, we
will have to raise additional funds. The sale of equity or convertible debt
securities in the future would be dilutive to our stockholders. If we are unable
to obtain adequate funds on reasonable terms, we may be required to curtail
operations significantly or to obtain funds by entering into financing or
collaborative agreements on unattractive terms.
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OUR REVENUES DEPEND ON A SMALL NUMBER OF COLLABORATORS AND CUSTOMERS.
To date, we have received a significant portion of our revenues from a
small number of collaborators and customers. For the year ended December 31,
1999, revenues from three collaborators and customers accounted for 81%, 13% and
5% of our total revenues. For the year ended December 31, 1998, revenues from
three collaborators and customers accounted for 61%, 33% and 5% of our total
revenues. For the year ended December 31, 1997, revenues from three
collaborators and customers accounted for 60%, 25% and 11% of our total
revenues. Our operating results may be harmed, if we lose one of these
collaborators or customers and we are not able to attract new collaborators or
customers.
WE DEPEND ON A SOLE SUPPLIER TO MANUFACTURE FLOW CELLS USED IN OUR MPSS
TECHNOLOGY.
The flow cells used in our MPSS technology are obtained from a single
supplier. Our reliance on outside vendors generally, and this sole supplier in
particular, involves several risks, including:
- the inability to obtain an adequate supply of required components due to
manufacturing capacity constraints, a discontinuance of a product by a
third-party manufacturer or other supply constraints;
- reduced control over quality and pricing of components; and
- delays and long lead times in receiving materials from vendors.
THE GENOMICS INDUSTRY IS INTENSELY COMPETITIVE AND EVOLVING RAPIDLY, AND OUR
COMPETITORS MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAKE OURS OBSOLETE.
The biotechnology industry is highly fragmented and is characterized by
rapid technological change. In particular, the area of genomics research is a
rapidly evolving field. Competition among entities attempting to identify genes
associated with specific diseases and to develop products based on such
discoveries is intense. Many of our competitors have substantially greater
research and product development capabilities and financial, scientific, and
marketing resources than we do.
We face, and will continue to face, competition from pharmaceutical,
biotechnology and agricultural companies, as well as academic research
institutions, clinical reference laboratories and government agencies. Some of
our competitors:
- are attempting to identify and patent randomly sequenced genes and gene
fragments;
- are pursuing a gene identification, characterization and product
development strategy based on positional cloning; and
- are using a variety of different gene expression analysis methodologies,
including the use of chip-based systems, to attempt to identify
disease-related genes.
In addition, numerous pharmaceutical, biotechnology and agricultural
companies are developing genomic research programs, either alone or in
partnership with our competitors. Our future success will depend on our ability
to maintain a competitive position with respect to technological advances. Rapid
technological development by others may result in our technologies and future
products becoming obsolete.
Any products that are developed through our technologies will compete in
highly competitive markets. Our competitors may be more effective at using their
technologies to develop commercial products. Further, we cannot assure you that
our competitors will not obtain intellectual property rights that would limit
the use of our technologies or the ability to commercialize diagnostic or
therapeutic products using our technologies. As a result, our competitors may be
able to more easily develop technologies and products that would render our
technologies and products, and those of our collaborators, obsolete and
noncompetitive.
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IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGIES, THIRD
PARTIES MAY BE ABLE TO USE OUR TECHNOLOGY, WHICH COULD ADVERSELY AFFECT OUR
ABILITY TO COMPETE IN THE MARKET.
Our success depends in part on our ability to obtain patents and maintain
adequate protection of the intellectual property related to our technologies and
products. The patent positions of biotechnology companies, including our patent
position, are generally uncertain and involve complex legal and factual
questions. We will be able to protect our proprietary rights from unauthorized
use by third parties only to the extent that our proprietary technologies are
covered by valid and enforceable patents or are effectively maintained as trade
secrets. The laws of some foreign countries do not protect proprietary rights to
the same extent as the laws of the U.S., and many companies have encountered
significant problems in protecting and defending their proprietary rights in
foreign jurisdictions. We have applied and will continue to apply for patents
covering our technologies, processes and products as and when we deem
appropriate. However, these applications may be challenged or may fail to result
in issued patents. Our existing patents and any future patents we obtain may not
be sufficiently broad to prevent others from practicing our technologies or from
developing competing products. Furthermore, others may independently develop
similar or alternative technologies or design around our patents. In addition,
our patents may be challenged or invalidated or fail to provide us with any
competitive advantage.
We also rely on trade secret protection for our confidential and
proprietary information. We have taken security measures to protect our
proprietary information and trade secrets, but these measures may not provide
adequate protection. While we seek to protect our proprietary information by
entering into confidentiality agreements with employees, collaborators and
consultants, we cannot assure you that our proprietary information will not be
disclosed or that we can meaningfully protect our trade secrets. In addition,
our competitors may independently develop substantially equivalent proprietary
information or may otherwise gain access to our trade secrets, which could
adversely affect our ability to compete in the market.
LITIGATION OR THIRD-PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD
REQUIRE US TO SPEND SUBSTANTIAL TIME AND MONEY AND ADVERSELY AFFECT OUR ABILITY
TO DEVELOP AND COMMERCIALIZE OUR TECHNOLOGIES AND PRODUCTS.
Our commercial success depends in part on our ability to avoid infringing
patents and proprietary rights of third parties and not breaching any licenses
that we have entered into with regard to our technologies. Other parties have
filed, and in the future are likely to file, patent applications covering genes,
gene fragments, the analysis of gene expression and the manufacture and use of
DNA chips. We intend to continue to apply for patent protection for methods
relating to gene expression and for the individual disease genes and drug
discovery targets we discover. If patents covering technologies required by our
operations are issued to others, we may have to rely on licenses from third
parties. We cannot assure you that such licenses will be available on
commercially reasonable terms, or at all.
Third parties may accuse us of employing their proprietary technology
without authorization. In addition, third parties may obtain patents that relate
to our technologies and claim that use of such technologies infringes these
patents. Regardless of their merit, such claims could require us to incur
substantial costs, including the diversion of management and technical
personnel, in defending ourselves against any such claims or enforcing our
patents. In the event that a successful claim of infringement is brought against
us, we may be required to pay damages and obtain one or more licenses from third
parties. We may not be able to obtain these licenses at a reasonable cost, or at
all. Defense of any lawsuit or failure to obtain any of these licenses could
adversely affect our ability to develop and commercialize our technologies and
products.
WE HAVE LIMITED EXPERIENCE IN SALES AND MARKETING AND THUS MAY BE UNABLE TO
FURTHER COMMERCIALIZE OUR TECHNOLOGIES AND PRODUCTS.
Our ability to achieve profitability depends on attracting collaborators
and customers for our technologies and products. There are a limited number of
pharmaceutical, biotechnology and agricultural companies that are potential
collaborators and customers for our technologies and products. To market our
technologies and products, we must develop a sales and marketing group with the
appropriate technical expertise. We may not
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15
be able to build such a sales force. We cannot assure you that our sales and
marketing efforts will be successful or that our technologies and products will
gain market acceptance.
OUR SALES CYCLE IS LENGTHY, AND WE MAY SPEND CONSIDERABLE RESOURCES ON
UNSUCCESSFUL SALES EFFORTS OR MAY NOT BE ABLE TO ENTER INTO AGREEMENTS ON THE
SCHEDULE WE ANTICIPATE.
Our ability to obtain collaborators and customers for our technologies and
products depends in significant part upon the perception that our technologies
and products can help accelerate their drug discovery and genomics efforts. Our
sales cycle is typically lengthy because we need to educate our potential
collaborators and customers and sell the benefits of our products to a variety
of constituencies within such companies. In addition, we may be required to
negotiate agreements containing terms unique to each collaborator or customer.
We may expend substantial funds and management effort with no assurance that we
will successfully sell our technologies and products. Actual and proposed
consolidations of pharmaceutical companies have negatively affected, and may in
the future negatively affect, the timing and progress of our sales efforts.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
We expect to continue to experience significant growth in the number of our
employees and the scope of our operations. This growth may place a significant
strain on our management and operations. As our operations expand, we expect
that we will need to manage additional relationships with various collaborators
and customers, suppliers and other third parties. Our ability to manage our
operations and growth effectively requires us to continue to improve our
operational, financial and management controls, reporting systems and
procedures. If we are unable to manage this growth effectively, our business may
be harmed.
THE LOSS OF KEY PERSONNEL OR THE INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL COULD IMPAIR THE GROWTH OF OUR BUSINESS.
We are highly dependent on the principal members of our management and
scientific staff. The loss of any of these persons' services might adversely
impact the achievement of our objectives and the continuation of existing
collaborations. In addition, recruiting and retaining qualified scientific
personnel to perform future research and development work will be critical to
our success. There is currently a shortage of skilled executives and employees
with technical expertise, and this shortage is likely to continue. As a result,
competition for skilled personnel is intense and turnover rates are high.
Competition for experienced scientists from numerous companies, academic and
other research institutions may limit our ability to attract and retain such
personnel. We are dependent on our President and Chief Executive Officer, Norman
J.W. Russell, Ph.D., and Chairman, Sam Eletr, Ph.D., the loss of whose services
could have a material adverse effect on our business.
WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR
BUSINESS. ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE
MATERIALS COULD BE TIME CONSUMING AND COSTLY.
Our research and development processes involve the controlled use of
hazardous materials, including chemicals, radioactive and biological materials.
Our operations produce hazardous waste products. We cannot eliminate the risk of
accidental contamination or discharge and any resultant injury from these
materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of hazardous materials. We may be
sued for any injury or contamination that results from our use or the use by
third parties of these materials, and our liability may exceed our insurance
coverage and our total assets. Compliance with environmental laws and
regulations may be expensive, and current or future environmental regulations
may impair our research, development and production efforts.
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ETHICAL, LEGAL AND SOCIAL ISSUES MAY LIMIT THE PUBLIC ACCEPTANCE OF, AND DEMAND
FOR, OUR TECHNOLOGIES AND PRODUCTS.
Our collaborators and customers may seek to develop diagnostic products
based on genes we discover. The prospect of broadly available gene-based
diagnostic tests raises ethical, legal and social issues regarding the
appropriate use of gene-based diagnostic testing and the resulting confidential
information. It is possible that discrimination by third-party payors, based on
the results of such testing, could lead to the increase of premiums by such
payors to prohibitive levels, outright cancellation of insurance or
unwillingness to provide coverage to individuals showing unfavorable gene
expression profiles. Similarly, employers could discriminate against employees
with gene expression profiles indicative of the potential for high
disease-related costs and lost employment time. Finally, government authorities
could, for social or other purposes, limit or prohibit the use of such tests
under certain circumstances. We cannot assure you that ethical, legal and social
concerns about genetic testing and target identification will not adversely
affect market acceptance of our technologies and products.
Although our technology is not dependent on genetic engineering, genetic
engineering plays a prominent role in our approach to product development. The
subject of genetically modified food has received negative publicity, which has
aroused public debate. Adverse publicity has resulted in greater regulation
internationally and trade restrictions on imports of genetically altered
agricultural products. Public attitudes may be influenced by claims that
genetically engineered products are unsafe for consumption or pose a danger to
the environment. Such claims may prevent genetically engineered products from
gaining public acceptance. The commercial success of our future products may
depend, in part, on public acceptance of the use of genetically engineered
products, including drugs and plant and animal products.
IF WE DEVELOP PRODUCTS WITH OUR COLLABORATORS, AND IF PRODUCT LIABILITY LAWSUITS
ARE SUCCESSFULLY BROUGHT AGAINST US, WE COULD FACE SUBSTANTIAL LIABILITIES THAT
EXCEED OUR RESOURCES.
We may be held liable if any product we develop with our collaborators
causes injury or is otherwise found unsuitable during product testing,
manufacturing, marketing or sale. Although we have general liability and product
liability insurance, this insurance may become prohibitively expensive or may
not fully cover our potential liabilities. Inability to obtain sufficient
insurance coverage at an acceptable cost or to otherwise protect us against
potential product liability claims could prevent or inhibit the
commercialization of products developed with our collaborators.
HEALTHCARE REFORM AND RESTRICTIONS ON REIMBURSEMENTS MAY LIMIT OUR RETURNS ON
DIAGNOSTIC OR THERAPEUTIC PRODUCTS THAT WE MAY DEVELOP WITH OUR COLLABORATORS.
If we are successful in validating targets for drug discovery, products
that we develop with our collaborators based on those targets may include
diagnostic or therapeutic products. The ability of our collaborators to
commercialize such products may depend, in part, on the extent to which
reimbursement for the cost of these products will be available from government
health administration authorities, private health insurers and other
organizations. In the U.S., third-party payors are increasingly challenging the
price of medical products and services. The trend towards managed healthcare in
the U.S., legislative healthcare reforms and the growth of organizations such as
health maintenance organizations that may control or significantly influence the
purchase of healthcare products and services, may result in lower prices for any
products our collaborators may develop. Significant uncertainty exists as to the
reimbursement status of newly approved healthcare products, and we cannot assure
you that adequate third-party coverage will be available to enable our
collaborators to maintain price levels sufficient to realize an appropriate
return on their investment in research and product development.
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OUR FACILITIES ARE LOCATED NEAR KNOWN EARTHQUAKE FAULT ZONES, AND THE OCCURRENCE
OF AN EARTHQUAKE OR OTHER CATASTROPHIC DISASTER COULD CAUSE DAMAGE TO OUR
FACILITIES AND EQUIPMENT, WHICH COULD REQUIRE US TO CEASE OR CURTAIL OPERATION.
Our facilities are located near known earthquake fault zones and are
vulnerable to damage from earthquakes. We are also vulnerable to damage from
other types of disasters, including fire, floods, power loss, communications
failures and similar events. If any disaster were to occur, our ability to
operate our business at our facilities would be seriously, or potentially
completely, impaired. In addition, the unique nature of our research activities
could cause significant delays in our programs and make it difficult for us to
recover from a disaster. The insurance we maintain may not be adequate to cover
our losses resulting from disasters or other business interruptions.
Accordingly, an earthquake or other disaster could materially and adversely harm
our ability to conduct business.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE.
The trading price of our common stock is subject to significant
fluctuations. The market prices of the common stock of many publicly held, early
stage biotechnology companies have in the past been, and can in the future be
expected to be, especially volatile. In addition, the securities markets have
from time to time experienced significant price and volume fluctuations that may
be unrelated to the operating performance of particular companies. The following
factors and events may have a significant and adverse impact on the market price
of our common stock:
- fluctuations in our operating results;
- announcements of technological innovations or new commercial products by
us or our competitors;
- release of reports by securities analysts;
- developments or disputes concerning patent or proprietary rights;
- developments in our relationships with current or future collaborators or
customers; and
- general market conditions.
Many of these factors are beyond our control. These factors may cause a decrease
in the market price of our common stock, regardless of our operating
performance.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY, EITHER OF WHICH COULD
ADVERSELY AFFECT OUR STOCK PRICE.
Under our certificate of incorporation, our board of directors has the
authority, without further action by the holders of our common stock, to issue
2,000,000 additional shares of preferred stock from time to time in series and
with preferences and rights as it may designate. These preferences and rights
may be superior to those of the holders of our common stock. For example, the
holders of preferred stock may be given a preference in payment upon our
liquidation or for the payment or accumulation of dividends before any
distributions are made to the holders of common stock.
Although we have no present intention to authorize or issue any additional
series of preferred stock, any authorization or issuance, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could also have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock. The preferred
stock may have other rights, including economic rights senior to those of our
common stock, and, as a result, an issuance of additional preferred stock could
adversely affect the market value of our common stock. Provisions of Delaware
law may also discourage, delay or prevent someone from acquiring or merging with
us.
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ITEM 2. PROPERTIES
In February 1998, we entered into a noncancelable operating lease for
facilities space of approximately 111,000 square-feet in two buildings in
Hayward, California. Currently, our corporate headquarters, principal research
and development facilities and production facilities are located in one of the
two buildings. The remaining space will be developed and occupied in phases,
depending on our growth. The lease runs through December 2008. We have an option
to extend the lease for an additional five-year period, subject to certain
conditions. We plan to lease approximately 37,000 square feet of additional
space in one of the buildings for further expansion.
In June 1998, Lynx GmbH entered into a noncancelable operating lease for
facilities space of approximately 6,300-square-feet in Heidelberg, Germany, to
house its operations. The space will be developed and occupied in phases,
depending on the growth of the organization. The lease terminates in June 2005.
A portion of this space is currently being subleased by BASF-LYNX.
In August 1993, we entered into a noncancelable operating lease for another
facility which expires on July 31, 2003. In 1998, we entered into an agreement
to sublease a portion of this space, and in 1999, through a subsequent
agreement, subleased the remaining portion of the facility. The term of the
sublease runs through July 2003. Rent from the sublease is sufficient to cover
the rent and other operating expenses incurred by Lynx under the terms of the
1993 lease.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the quarter
ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On December 30, 1997, Lynx listed its common stock on the Nasdaq National
Market. Prior to December 30, 1997, there was no established public trading
market for our voting stock. On March 31, 1998, pursuant to the Amended and
Restated Certificate of Designation dated September 30, 1997, all shares of
Series B, Series C, and Series D preferred stock were converted into common
stock on a ten-for-one basis. Lynx's common stock trades on the Nasdaq National
Market under the symbol LYNX. The following table sets forth, for the periods
indicated, the high and low closing sale prices for our common stock as reported
by the Nasdaq National Market:
COMMON STOCK PRICE
------------------
HIGH LOW
------- -------
YEAR ENDED DECEMBER 31, 1998
First Quarter............................................. $19.25 $10.00
Second Quarter............................................ 11.13 7.75
Third Quarter............................................. 13.25 7.75
Fourth Quarter............................................ 13.00 7.13
YEAR ENDED DECEMBER 31, 1999
First Quarter............................................. $15.00 $ 8.88
Second Quarter............................................ 12.69 9.44
Third Quarter............................................. 15.75 10.63
Fourth Quarter............................................ 37.00 9.13
As of February 15, 2000, there were approximately 2,600 stockholders of
record of our common stock. On February 15, 2000, the last reported sale price
of our common stock was $60.63.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain earnings to support the development of our business
and do not anticipate paying cash dividends for the foreseeable future. Any
future determination to pay dividends will be at the discretion of our board of
directors.
ITEM 6. SELECTED FINANCIAL DATA
This section presents our selected consolidated historical financial data.
You should read carefully the consolidated financial statements and the notes
thereto included in this report and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Consolidated Statement of Operations Data for the years ended December
31, 1997, 1998 and 1999 and the Consolidated Balance Sheet Data as of December
31, 1998 and 1999 have been derived from our audited consolidated financial
statements included elsewhere in this report. The Consolidated Statement of
Operations Data for the years ended December 31, 1995 and 1996 and the
Consolidated Balance Sheet Data as of December 31, 1995, 1996 and 1997 have been
derived from our audited financial statements that are not included in this
report. Historical results are not necessarily indicative of future results. See
the Notes to
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Consolidated Financial Statements for an explanation of the method used to
determine the number of shares used in computing basic and diluted net loss per
share.
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997 1998 1999
-------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Technology access and services fees....... $ 375 $ 1,958 $ 3,875 $ 2,625 $ 7,833
Collaborative research and other.......... 305 7,791 707 4,380 5,042
-------- ------- -------- ------- -------
Total revenues.................... 680 9,749 4,582 7,005 12,875
Operating costs and expenses:
Cost of services fees..................... -- -- -- -- 828
Research and development.................. 11,301 12,545 14,226 13,166 15,510
General and administrative................ 1,591 3,170 1,930 2,141 4,175
-------- ------- -------- ------- -------
Total operating costs and
expenses........................ 12,892 15,715 16,156 15,307 20,513
-------- ------- -------- ------- -------
Loss from operations........................ (12,212) (5,966) (11,574) (8,302) (7,638)
Interest and other income, net.............. 744 585 753 4,106 1,232
-------- ------- -------- ------- -------
Loss before provision for income taxes...... (11,468) (5,381) (10,821) (4,196) (6,406)
Provision for income taxes.................. -- 10 -- 151 258
-------- ------- -------- ------- -------
Net loss.................................... $(11,468) $(5,391) $(10,821) $(4,347) $(6,664)
======== ======= ======== ======= =======
Basic and diluted net loss per share........ $ (5.66) $ (2.45) $ (3.09) $ (0.45) $ (0.60)
Shares used in per share computation........ 2,026 2,197 3,501 9,642 11,128
DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.................................... $13,779 $14,082 $24,930 $23,862 $30,786
Working capital.................................. 12,730 9,118 21,875 20,834 25,042
Total assets..................................... 17,685 18,412 29,267 40,334 51,638
Notes payable -- noncurrent portion.............. -- -- -- -- 3,471
Stockholders' equity............................. 13,742 10,732 25,590 23,457 19,646
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. When used herein, the words "believe," "anticipate," "expect,"
"estimate" and similar expressions are intended to identify such forward-looking
statements. There can be no assurance that these statements will prove to be
correct. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section as well as in
the section entitled "Item 1. Business -- Business Risks." Lynx undertakes no
obligation to update any of the forward-looking statements contained herein to
reflect any future events or developments.
OVERVIEW
We are a leader in the development and application of novel technologies
for the discovery of gene expression patterns and genomic variations important
to the pharmaceutical, biotechnology and agricultural industries. These
technologies are based on Megaclone, our unique and proprietary cloning
procedure, which transforms a sample containing millions of DNA molecules into
one made up of millions of micro-beads, each of which carries approximately
100,000 copies of one of the DNA molecules in the sample. Based on Megaclone, we
have developed a suite of applications that have the potential to enhance the
pace, scale and
19
21
quality of genomics and genetics research programs. Currently, our principal
collaborators and customers are BASF, DuPont, Aventis CropScience and Oxagen.
We have incurred net losses each year since our inception in 1992. As of
December 31, 1999, we had an accumulated deficit of approximately $53.4 million.
We expect these losses to continue for at least the next several years. The size
of these losses will depend, in part, on the rate of growth, if any, in our
revenues and on the level of our expenses.
Revenues from technology access fees are from upfront payments from our
collaborators and customers who are provided access to our technologies for
specified periods. We receive service fees from our collaborators and customers
for genomic discovery services performed by us on the biological samples they
send to us. Collaborative research revenues are payments received under various
agreements and include such items as milestone payments. Other revenues include
the proceeds from the sale of our technology assets to BASF-LYNX and product
sales under one of our former programs.
Technology access fees are deferred and recognized as revenue on a
straight-line basis over the noncancelable term of the agreement to which they
relate. Payments for services and/or materials provided by us are recognized as
revenues when earned over the period in which the services are performed and/or
materials are delivered, provided no other obligations, refunds, or credits to
be applied to future work exist. Milestone payments are recognized as revenues
upon the achievement of the related milestone and the satisfaction of any
related obligations. Revenues from the sales of products, which have been
immaterial to date, are recognized upon shipment to the customer.
To date, we have received, and expect to continue to receive in the future,
a significant portion of our revenues from a small number of collaborators and
customers. During 1999, revenues from three collaborators and customers
accounted for 81%, 13% and 5% of total revenues. During 1998, revenues from
three collaborators and customers accounted for 61%, 33% and 5% of total
revenues. During 1997, revenues from three collaborators and customers accounted
for 60%, 25%, and 11% of total revenues.
Revenues in each quarterly and annual period have in the past, and could in
the future, fluctuate due to: the timing and amount of any technology access fee
and the period over which the revenue is recognized; the level of service fees,
which is tied to the number and timing of biological samples received from our
collaborators and customers, as well as our performance of the related genomic
discovery services on the samples; the timing of achievement of milestones and
the amount of related payments to us; and the initiation of new, and the
termination of existing, agreements with collaborators and customers.
Cost of services fees include the costs of direct labor, materials and
supplies, outside expenses, equipment and overhead incurred by us in performing
our genomic discovery services for our collaborators and customers. Research and
development expenses include the costs of personnel, materials and supplies,
outside expenses, equipment and overhead incurred by us in our technology and
application development efforts. We expect research and development expenses to
increase substantially due to planned spending for ongoing technology
development and implementation, as well as new applications. General and
administrative expenses include the costs of personnel, materials and supplies,
outside expenses, equipment and overhead incurred by us primarily in our
administrative, business development, legal and investor relations activities.
We expect general and administrative expenses to increase in support of our
research and development, commercial and business development efforts.
We account for our investment in BASF-LYNX on the equity method, however
such investment has a carrying value of zero in the financial statements. As we
have no obligation to fund the operations of BASF-LYNX, we have not recognized
our share of BASF-LYNX's losses in the accompanying statements of operations.
20
22
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues
We had total revenues of $12.9 million for the year ended December 31,
1999, and $7.0 million for the year ended December 31, 1998. Revenues for 1999
included technology access fees and service fees of $7.8 million from DuPont,
Aventis CropScience and BASF and collaborative research revenue from a $5.0
million milestone fee earned under the DuPont agreement. Revenues for 1998
included technology access fees of $2.6 million from BASF and DuPont and $4.3
million from the acquisition by BASF-LYNX of our technology assets for certain
central nervous system, or CNS, disorders.
Operating Costs and Expenses
Our total operating costs and expenses were $20.5 million for the year
ended December 31, 1999, and $15.3 million for the year ended December 31, 1998.
Cost of services fees were $0.8 million in 1999 and reflect the costs of
providing our genomic discovery services, which commenced in 1999. Research and
development expenses were $15.5 million in 1999 and $13.2 million in 1998. The
increase in research and development expenses in 1999, as compared to 1998, is
due primarily to a higher number of personnel, facilities expansion and for
activities incurred as we prepared to launch our commercial operations. Our
efforts in 1999 focused on initiating production for the commercial application
of our genomics technologies and completing the scientific experimentation that
led to the successful achievement of certain technology milestones and
achievements under our agreements. We expect research and development expenses
to increase substantially due to planned spending for ongoing technology
development and implementation, as well as new applications.
General and administrative expenses were $4.2 million for the year ended
December 31, 1999, compared to $2.1 million for the year ended December 31,
1998. The increase was primarily due to higher personnel related expenses,
outside legal and administrative costs associated with our business development
efforts and facilities expansion. We expect general and administrative expenses
to increase in support of our research and development, commercial and business
development efforts.
Interest and Other Income
Net interest income decreased to $1.1 million in the year ended December
31, 1999, from $1.2 million in the year ended December 31, 1998, primarily due
to lower average cash, cash equivalents and investment balances during 1999, as
compared to 1998, and interest expense incurred on debt outstanding in 1999.
Other income was $0.1 million in the year ended December 31, 1999, and $2.9
million in the year ended December 31, 1998. In 1999, other income was
attributable to a gain on the sale of certain fixed assets no longer used in our
operations. In 1998, other income was due primarily to the gain from the sale of
the assets associated with our antisense program to Inex Pharmaceuticals
Corporation.
Income Taxes
The provision for income taxes of approximately $258,000 for 1999 and
$151,000 for 1998 consisted entirely of alternative minimum tax.
As of December 31, 1999, we had a federal net operating loss carryforward
of approximately $19.8 million, which will expire at various dates from 2008
through 2018, if not utilized. As of December 31, 1999, we also had federal and
California research and development tax credit carryforwards of approximately
$1.6 million and $297,000, respectively, which will expire at various dates from
2008 through 2019, if not utilized.
Utilization of net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in expiration of net
operating loss and tax credit carryforwards before full utilization. Utilization
of federal and California net operating losses and
21
23
credit carryforwards incurred prior to February 1994 is limited on an annual
basis under the Internal Revenue Code of 1986, as amended, as a result of an
ownership change in 1994.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues
We had total revenues of $7.0 million for the year ended December 31, 1998,
and $4.6 million for the year ended December 31, 1997. Revenues for 1998
included technology access fees of $2.6 million from BASF and DuPont and
revenues of $4.3 million from the acquisition by BASF-LYNX of our technology
assets for certain CNS disorders. Revenues for 1997 included $3.9 million in
technology access fees earned under agreements with BASF and Aventis
Pharmaceuticals Inc. In 1997, revenues also included approximately $0.5 million
in sales of an antisense compound for use in clinical trials under one of our
former programs.
Operating Costs and Expenses
Total operating costs and expenses were $15.3 million for the year ended
December 31, 1998, and $16.2 million for the year ended December 31, 1997.
Research and development expenses were $13.2 million in 1998 and $14.2 million
in 1997. The decrease in expenses was due primarily to lower spending subsequent
to the sale of assets associated with our antisense program in March 1998 and
the phase-out of scientific efforts related to CNS disorders.
General and administrative expenses were $2.1 million for the year ended
December 31, 1998, compared to $1.9 million for the year ended December 31,
1997. The increase was primarily due to outside legal and administrative costs
associated with our business development efforts and facilities expansion.
Interest and Other Income
Interest income increased to $1.2 million in the year ended December 31,
1998, from $0.8 million in the year ended December 31, 1997, due primarily to
higher average cash, cash equivalents and investment balances during 1998 as
compared to 1997. Other income was $2.9 million in 1998. The 1998 amount was due
primarily to the gain from the sale of assets associated with our antisense
program. There was no other income earned in 1997.
Income Taxes
The provision for income taxes of approximately $151,000 for 1998 consisted
entirely of alternative minimum tax. Due to operating losses and the inability
to recognize an income tax benefit, there was no provision for income taxes for
1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities of $7.8 million for the year
ended December 31, 1999, increased from $5.7 million for the same period in
1998. This increase was primarily due to the increase in deferred revenues from
payments received from collaborators in 1999, which was partially offset by the
recognition in 1999 of a portion of previously deferred revenue and a decrease
in accounts payable and accrued liabilities balances. Net cash used in operating
activities of $13.1 million for the year ended December 31, 1997, was primarily
due to a net loss of $10.8 million, and a reduction in deferred revenues, offset
in part by depreciation and amortization of fixed assets and leasehold
improvements. Net cash used in investing activities of $10.7 million for the
year ended December 31, 1999, and $15.3 million for the year ended December 31,
1997, was primarily due to purchases of short-term investments and equipment,
while net cash provided by investing activities of $1.0 million for the year
ended December 31, 1998, was primarily due to maturities of short-term
investments, offset in part by expenditures for leasehold improvements and
purchases of equipment. Net cash provided by financing activities in 1999 of
$4.8 million resulted primarily from borrowings under an equipment loan
arrangement. Net cash provided by financing activities of $0.6 million in the
year ended December 31, 1998, and $25.1 million in the year ended December 31,
1997, resulted from the issuance of common stock. Cash and cash equivalents and
short-term investments were $30.8 million at December 31, 1999.
22
24
In late 1998, we entered into a $5 million financing agreement with a
financial institution under which we drew down $4.8 million during 1999 for the
purchase of equipment and certain other capital expenditures. We granted the
lender a security interest in all items financed by it under this agreement.
Each draw down under the loan has a term of forty-eight months from the date of
the draw down. As of December 31, 1999, the principal balance under loans
outstanding under this agreement was approximately $4.4 million. The amount
available for future draw downs at December 31, 1999, was approximately $0.2
million. The draw down period under the agreement expires on March 31, 2000.
We plan to use available funds for ongoing commercial and research and
development activities, working capital and other general corporate purposes and
capital expenditures. We expect capital investments during 2000 will be
comprised primarily of equipment purchases required in the normal course of
business and expenditures for leasehold improvements. We intend to invest our
excess cash in investment-grade, interest-bearing securities.
We have obtained funding for our operations primarily through sales of
preferred and common stock to venture capital investors, institutional investors
and collaborators, revenues from contractual arrangements and interest income.
The cost, timing and amount of funds required for specific uses by us cannot be
precisely determined at this time and will be based upon the progress and the
scope of our collaborative and independent research and development projects;
payments received under collaborative agreements; our ability to establish and
maintain collaborative agreements; costs included in protecting intellectual
property rights; legal and administrative costs; additional facilities capacity
needs and the availability of alternate methods of financing.
We expect to incur substantial and increasing research and development
expenses and intend to seek additional financing, as needed, through
arrangements with collaborators and equity or debt offerings. We cannot assure
you that any additional financing we require will be available on favorable
terms, or at all. We believe, at current spending levels, our existing capital
resources and interest income thereon, will enable us to maintain our current
and planned operations through at least the next 12 months.
IMPACT OF YEAR 2000
In prior years, we have discussed the nature and progress of our plans to
become Year 2000 ready. In late 1999, we completed our remediation and testing
of systems. We have experienced no significant disruptions in information
technology and non-information technology systems and believe those systems
successfully responded to the Year 2000 date change. Costs associated with
remediating our systems were immaterial. We are not aware of any material
problems resulting from Year 2000 issues, either with our products, our internal
systems or the products and services of third parties. We will continue to
monitor our computer applications and those of our suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters which may
arise are addressed promptly.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, or SFAS 133. SFAS 133 requires us to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through net income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings or recognized in the other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of the derivative's change in fair value will be immediately
recognized in earnings. SFAS 133 is effective for our fiscal year ending
December 31, 2001. We do not currently hold any derivatives and do not expect
this pronouncement to materially impact the results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, or SAB 101. SAB 101 summarizes certain
areas of the Staff's views in applying generally accepted accounting principles
to revenue in financial statements and specifically addresses revenue recogni-
23
25
tion for non-refundable technology access fees. We believe that our current
revenue recognition principles comply with SAB 101, and thus the adoption had no
effect on results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DISCLOSURES
Short-Term Investments
The primary objective of our investment activities is to preserve principal
while, at the same time, maximizing yields without significantly increasing
risk. To achieve this objective, we invest in highly liquid and high-quality
debt securities. Our investments in debt securities are subject to interest rate
risk. To minimize the exposure due to adverse shifts in interest rates, we
invest in short-term securities and maintain an average maturity of less than
one year. As a result, we do not believe we are subject to significant interest
rate risk.
Foreign Currency Rate Fluctuations
The functional currency for our German subsidiary is the deutsche mark. Our
German subsidiary's accounts are translated from the German deutsche mark to the
U.S. dollar using the current exchange rate in effect at the balance sheet date,
for balance sheet accounts, and using the average exchange rate during the
period, for revenues and expense accounts. The effects of translation are
recorded as a separate component of stockholders' equity, and to date, have not
been material. Our German subsidiary conducts its business in local European
currencies. Exchange gains and losses arising from these transactions are
recorded using the actual exchange differences on the date of the transaction.
We have not taken any action to reduce our exposure to changes in foreign
currency exchange rates, such as options or futures contracts, with respect to
transactions with our German subsidiary or transactions with our European
collaborators and customers.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... 26
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 27
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... 28
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997.............. 29
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... 30
Notes to Consolidated Financial Statements.................. 31
25
27
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Lynx Therapeutics
We have audited the accompanying consolidated balance sheets of Lynx
Therapeutics, Inc. as of December 31, 1999 and 1998, and the related statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lynx Therapeutics, Inc. at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 4, 2000
26
28
LYNX THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
--------------------
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 18,050 $ 16,170
Short-term investments.................................... 12,736 7,692
Accounts receivable....................................... 4,045 5,316
Other current assets...................................... 1,379 678
-------- --------
Total current assets.............................. 36,210 29,856
Property and equipment:
Leasehold improvements.................................... 10,347 9,510
Laboratory and other equipment............................ 8,025 3,657
-------- --------
18,372 13,167
Less accumulated depreciation and amortization............ (5,494) (3,530)
-------- --------
Net property and equipment.................................. 12,878 9,637
Other non-current assets.................................... 2,550 841
-------- --------
$ 51,638 $ 40,334
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 640 $ 1,770
Accrued compensation...................................... 356 295
Deferred revenues -- current portion...................... 8,438 3,000
Note payable -- current portion........................... 944 --
Other accrued liabilities................................. 790 3,957
-------- --------
Total current liabilities......................... 11,168 9,022
Deferred revenues........................................... 16,896 7,667
Note payable................................................ 3,471 --
Other non-current liabilities............................... 457 188
Commitments................................................. -- --
Stockholders' equity:
Preferred stock, $0.01 par value; 2,000,000 shares
authorized; no shares issued and outstanding........... -- --
Common stock, $0.01 par value; 20,000,000 shares
authorized, 11,219,188 and 11,132,815 shares issued and
outstanding at December 31, 1999 and 1998,
respectively........................................... 74,606 74,329
Notes receivable from stockholders........................ (293) (436)
Deferred compensation..................................... (2,444) (3,742)
Accumulated other comprehensive income (loss)............. 1,128 (7)
Accumulated deficit....................................... (53,351) (46,687)
-------- --------
Total stockholders' equity........................ 19,646 23,457
-------- --------
$ 51,638 $ 40,334
======== ========
See accompanying notes.
27
29
LYNX THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------- ------- --------
Revenues:
Technology access and services fees....................... $ 7,833 $ 2,625 $ 3,875
Collaborative research and other.......................... 5,042 4,380 707
------- ------- --------
Total revenues.................................... 12,875 7,005 4,582
Operating costs and expenses:
Cost of services fees..................................... 828 -- --
Research and development.................................. 15,510 13,166 14,226
General and administrative................................ 4,175 2,141 1,930
------- ------- --------
Total operating costs and expenses................ 20,513 15,307 16,156
------- ------- --------
Loss from operations........................................ (7,638) (8,302) (11,574)
Interest income, net........................................ 1,125 1,241 753
Other income................................................ 107 2,865 --
------- ------- --------
Loss before provision for income taxes...................... (6,406) (4,196) (10,821)
Provision for income taxes.................................. 258 151 --
------- ------- --------
Net loss.................................................... $(6,664) $(4,347) $(10,821)
======= ======= ========
Basic and diluted net loss per share........................ $ (0.60) $ (0.45) $ (3.09)
------- ------- --------
Shares used in per share computation........................ 11,128 9,642 3,501
======= ======= ========
See accompanying notes.
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30
LYNX THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PREFERRED STOCK COMMON STOCK ACCUMULATED OTHER
------------------- -------------------- NOTES DEFERRED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT RECEIVABLE COMPENSATION INCOME (LOSS)
-------- -------- ---------- ------- ---------- ------------ -----------------
Balance at December 31, 1996....... 495,587 $ 27,189 3,152,148 $17,361 $(210) $(2,092) $ 3
Comprehensive loss:
Net loss........................ -- -- -- -- -- -- --
Other comprehensive income
(loss)........................
Net unrealized loss on
securities.................. -- -- -- -- -- -- (48)
Comprehensive loss................ -- -- -- -- -- -- --
Exercise of employee stock options
for cash and note receivable.... -- -- 76,181 287 (250) -- --
Repurchase of common stock........ -- -- (11,476) (198) -- 197 --
Issuance of common stock for cash,
net of issuance costs of
$1,685.......................... -- -- 2,675,500 25,070 -- -- --
Amortization of deferred
compensation.................... -- -- -- -- -- 621 --
Recognition of deferred
compensation on employee stock
options......................... -- -- -- 4,120 -- (4,120) --
-------- -------- ---------- ------- ----- ------- ------
Balance at December 31, 1997....... 495,587 27,189 5,892,353 46,640 (460) (5,394) (45)
Comprehensive loss:
Net loss........................ -- -- -- -- -- -- --
Other comprehensive income
(loss)........................
Net unrealized gain on
securities.................. -- -- -- -- -- -- 38
Comprehensive loss................ -- -- -- -- -- -- --
Exercise of stock options for cash
and note receivable............. -- -- 334,309 744 (81) -- --
Repurchase of common stock........ -- -- (49,717) (108) 105 -- --
Conversion of series B, C and D
preferred stock to common
stock........................... (495,587) (27,189) 4,955,870 27,189 -- -- --
Amortization of deferred
compensation, including
forfeitures..................... -- -- -- (416) -- 1,652 --
Consulting and service expense
related to stock option
grants.......................... -- -- -- 280 -- -- --
-------- -------- ---------- ------- ----- ------- ------
Balance at December 31, 1998....... -- -- 11,132,815 74,329 (436) (3,742) (7)
Comprehensive loss:
Net loss........................ -- -- -- -- -- -- --
Other comprehensive income
(loss)........................
Net unrealized gain on
securities.................... -- -- -- -- -- -- 1,135
Comprehensive loss................ -- -- -- -- -- -- --
Employee stock purchase plan
issuance........................ -- -- 17,379 182 -- -- --
Exercise of stock options for cash
and repayment of note
receivable...................... -- -- 68,994 196 143 -- --
Amortization of deferred
compensation, including
forfeitures..................... -- -- -- (188) -- 1,298 --
Consulting and service expense
related to stock option
grants.......................... -- -- -- 87 -- -- --
-------- -------- ---------- ------- ----- ------- ------
Balance at December 31, 1999....... -- -- 11,219,188 $74,606 $(293) $(2,444) $1,128
======== ======== ========== ======= ===== ======= ======
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------- -------------
Balance at December 31, 1996....... $(31,519) $ 10,732
Comprehensive loss:
Net loss........................ (10,821) (10,821)
Other comprehensive income
(loss)........................ --
Net unrealized loss on
securities.................. (48)
--------
Comprehensive loss................ -- (10,869)
Exercise of employee stock options
for cash and note receivable.... -- 37
Repurchase of common stock........ -- (1)
Issuance of common stock for cash,
net of issuance costs of
$1,685.......................... -- 25,070
Amortization of deferred
compensation.................... -- 621
Recognition of deferred
compensation on employee stock
options......................... -- --
-------- --------
Balance at December 31, 1997....... (42,340) 25,590
Comprehensive loss:
Net loss........................ (4,347) (4,347)
Other comprehensive income
(loss)........................ --
Net unrealized gain on
securities.................. 38
--------
Comprehensive loss................ -- (4,309)
Exercise of stock options for cash
and note receivable............. -- 663
Repurchase of common stock........ -- (3)
Conversion of series B, C and D
preferred stock to common
stock........................... -- --
Amortization of deferred
compensation, including
forfeitures..................... -- 1,236
Consulting and service expense
related to stock option
grants.......................... -- 280
-------- --------
Balance at December 31, 1998....... (46,687) 23,457
Comprehensive loss:
Net loss........................ (6,664) (6,664)
Other comprehensive income
(loss)........................
Net unrealized gain on
securities.................... -- 1,135
--------
Comprehensive loss................ -- (5,529)
Employee stock purchase plan
issuance........................ -- 182
Exercise of stock options for cash
and repayment of note
receivable...................... -- 339
Amortization of deferred
compensation, including
forfeitures..................... -- 1,110
Consulting and service expense
related to stock option
grants.......................... -- 87
-------- --------
Balance at December 31, 1999....... $(53,351) $ 19,646
======== ========
See accompanying notes.
29
31
LYNX THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $ (6,664) $ (4,347) $(10,821)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization of fixed assets and
leasehold improvements................................. 1,964 1,176 1,298
Issuance of stock options to non-employees in exchange for
services............................................... 87 111 --
Amortization of deferred compensation..................... 1,110 1,236 621
Other..................................................... -- (138) --
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable....................................... 1,271 (5,072) (126)
Other current assets...................................... (701) (479) (41)
Accounts payable.......................................... (1,130) 1,579 (219)
Accrued liabilities....................................... (3,106) 3,237 60
Deferred revenues......................................... 14,667 8,375 (3,875)
Other noncurrent liabilities.............................. 269 9 31
-------- -------- --------
Net cash provided by (used in) operating activities......... 7,767 5,687 (13,072)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments......................... (22,121) (21,767) (16,180)
Maturities of short-term investments........................ 17,016 30,245 1,973
Leasehold improvements and equipment purchases, net of
retirements............................................... (5,205) (7,254) (1,188)
Notes receivable from officers and employees................ (248) (175) 50
Other assets................................................ (122) -- --
-------- -------- --------
Net cash provided by (used in) investing activities......... (10,680) 1,049 (15,345)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, net of repurchases................ 378 636 25,106
Proceeds of equipment loan.................................. 4,838 -- --
Repayment of equipment loan................................. (423) --