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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-27488
INCYTE PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3136539
(STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
3174 PORTER DRIVE, PALO ALTO, CALIFORNIA (650) 855-0555
94304
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING
AREA CODE)
SECURITIES REGISTERED TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
SERIES A PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities 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 (Section 229.405 of this chapter) 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 aggregate market value of Common Stock held by non-affiliates (based
upon the closing sale price on the Nasdaq National Market on February 29, 2000)
was approximately $8,742,060,000.
As of February 29, 2000, there were 31,724,420 shares of Common Stock,
$.001 per share par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors), 11, 12 and 13 of Part III incorporate by
reference information from the registrant's proxy statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the registrant's 2000 Annual Meeting of Stockholders to be held on
June 5, 2000.
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ITEM 1. BUSINESS
When used in this Report, the words "expects," "anticipates," "estimates,"
"plans," and similar expressions are intended to identify forward-looking
statements. These are statements that relate to future periods and include
statements as to the Company's and diaDexus' expected net losses, expected
expenditure levels and rate of growth of expenditures, expected cash flows, the
adequacy of capital resources, growth in operations, the ability to
commercialize products developed under collaborations and alliances, our ability
to complete the sequence of full-length genes in areas of therapeutic interest
and file patents on these potential drug targets, our ability to integrate
companies and operations that we have acquired or will acquire, our ability to
implement online delivery of our database and software products, the scheduling
and timing of current and future litigation, our strategy with regard to
protecting our proprietary technology, our ability to compete and respond to
rapid technological change and the performance and utility of our products and
services. Forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. These
risks and uncertainties include, but are not limited to, those risks discussed
below, as well as the extent to which the pharmaceuticals and biotechnology
industries use genomic information in research and development, risks relating
to development of new products and services and their use by our potential
customers and collaborators, our ability to work with our collaborators to meet
the goals of our collaborators and alliances, our ability to retain and obtain
customers, the cost of accessing or acquiring technologies or intellectual
property, the effectiveness of our sequencing efforts, the impact of alternative
technological advances and competition, uncertainties associated with changes in
patent laws and developments in and expenses related to litigation and
interference proceedings; and the risks set forth below under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Results." These forward-looking statements
speak only as of the date hereof. The Company expressly disclaims any obligation
or undertaking to release publicly any updates or revisions to any forward-
looking statements contained herein to reflect any change in the Company's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
In the sections of this report entitled "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Results," all references to "Incyte,"
"we," "us," "our" or the "Company" mean Incyte Pharmaceuticals, Inc. and its
subsidiaries, except where it is made clear that the term means only the parent
company.
Incyte, LifeSeq and PathoSeq are our registered trademarks. ZooSeq,
LifeTools, LifeArray, LifeProt, LifeExpress, GeneAlbum and GEM are our
trademarks. We also refer to trademarks of other corporations and organizations
in this document.
OVERVIEW
Incyte is a leading provider of genomic information-based products and
services. These products and services include database products, genomic data
management software tools, microarray-based gene expression services, genomic
reagents and related services. We focus on providing an integrated platform of
information technologies designed to assist pharmaceutical and biotechnology
companies and academic researchers in the understanding of disease and the
discovery and development of new drugs.
Our genomic databases integrate bioinformatics software with proprietary
and, when appropriate, publicly available genomic information. In building the
databases, we utilize high-throughput, computer-aided gene sequencing and
analysis technologies to identify and characterize the expressed genes of the
human genome, as well as certain animal, plant and microbial genomes. By
searching our proprietary genomic databases, customers can integrate and analyze
genomic information from multiple sources in order to discover genes that may
represent the basis for new biological targets, therapeutic proteins, or gene
therapy, antisense or diagnostic products. The pharmaceutical and biotechnology
industries use our genomic products and services to accelerate the discovery and
development of new diagnostic and therapeutic products. Our products and
services can be applied to gene and target discovery, functional genomics
studies, preclinical pharmacology and toxicology studies, and can aid in
understanding and analyzing the results of clinical development studies.
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We currently provide access to our genomic databases through collaborations
with pharmaceutical and biotechnology companies worldwide. As of December 31,
1999, more than twenty companies had entered into multi-year agreements to
obtain access to our databases on a non-exclusive basis. These companies include
the following:
Abbott Laboratories Johnson & Johnson
AstraZeneca PLC Millennium Pharmaceuticals, Inc.
Aventis S.A. Monsanto Company
Bristol-Myers Squibb Company Novartis AG
Eli Lilly and Company Pfizer Inc.
F. Hoffmann-La Roche Ltd. Pharmacia & Upjohn, Inc.
Genentech, Inc. Schering AG
Glaxo Wellcome plc Schering-Plough, Ltd.
Revenues from these companies have primarily consisted of database access
fees. Our LifeSeq Gold human gene sequence database agreements also provide for
future milestone payments and royalties from the sale of products derived from
proprietary information contained in one or more database modules.
Our portfolio of products and services includes:
- LifeSeq Gold human gene sequence and expression database;
- PathoSeq microbial genomic database;
- ZooSeq animal model gene sequence and expression database;
- LifeExpress gene expression and protein expression database;
- SNP database that identifies common DNA sequence variants between
individuals;
- LifeTools suite of bioinformatics software;
- LifeArray gene expression data management and analysis software;
- LifeProt protein expression data management and analysis software; and
- contract sequencing and other services.
The databases are available using the Oracle database architecture and
operate on Sun Microsystems, Compaq and SGI workstations. As part of our
strategy for expanding our customer base, we are developing the infrastructure
to enable the online delivery of our database and software products.
BACKGROUND
Genes, found in all living cells, are composed of DNA, which in turn is
composed of two strands of complementary nucleotides referred to as base pairs
or bases. Nucleotides may be one of four different molecules -- adenine,
guanine, cytosine, or thymine -- which are strung together in specific patterns
to create genes. Genes provide the necessary information to create proteins, the
molecules that carry out all functions within a cell. Many human diseases are
associated with the inadequate or inappropriate presence, production or
performance of proteins. As such, pharmaceutical and biotechnology companies
often seek to develop drugs that will bind to a targeted protein involved in
disease in order to regulate, inhibit or stimulate its biological activity.
Other proteins, known as therapeutic proteins, have direct biological activity
and may be capable of treating disease. Insulin and human growth hormone are
examples of therapeutic proteins. Understanding the role genes play in disease,
and the protein targets or therapeutic proteins that they encode, has thus
become a significant area of interest and research within the pharmaceutical and
biotechnology industries.
Sequencing
One frequently employed method for determining gene function involves the
grouping of genes into "related" families based on similarities, or homologies,
in DNA sequence. DNA sequencing is a process that
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identifies the order of the bases in a segment of DNA. Once a gene's sequence is
known, its function may be inferred by comparing its sequence with the sequences
of other human genes of known function, because genes with homologous sequences
may have related functions. Comparing gene sequences across species has also
become a useful tool for understanding gene function, as frequently it is easier
to first assess gene function in other organisms.
Gene Expression
Another method used to determine gene function focuses on the analysis of
gene activity, referred to as expression, within a cell. When a gene is active,
its DNA is copied into messenger RNA or "mRNA." The population of mRNA within a
cell can be isolated and converted into complementary DNA or "cDNA," thereby
creating a cDNA library that represents the population of mRNAs present in a
cell type at a particular time. In a process called "gene expression profiling,"
high-throughput cDNA sequencing, computer analysis and microarray technologies
can be used to identify which genes are active or inactive and, if active, at
what levels. Expression profiles provide a more detailed picture of cellular
genetics than conventional laboratory techniques by indicating which genes, both
known and novel, are specifically correlated to discrete biological events in
normal and disease-state cells.
Microarray Technology
Microarray technology can be used to analyze the expression patterns or
sequence variations in a large number of genes simultaneously. A microarray
consists of fragments of a single strand DNA's double strand attached to a
surface, usually a glass, plastic or silicon slide, in a grid-like formation.
When cDNA that has been prepared from mRNA samples from normal and diseased
cells is applied to the microarray, complementary strands attach to the DNA
fragments on the microarray. Microarray technology allows the fabrication of
very small grids containing probes for thousands of different genes. Microarrays
can be used in drug discovery and development, to evaluate the behavior of a
large number of related genes in a diseased tissue or in response to treatment
with a new drug or in diagnostic testing to quickly detect the presence of a
large number of disease markers.
Bioinformatics
Due to improvements in sequencing technology, genomic information from both
public and private sources is increasing at a dramatic rate. As a result,
bioinformatics, or the use of computers and sophisticated algorithms to store,
analyze and interpret large volumes of biological data, is essential in order to
capture value from this growing pool of data. To date, the main focus of
bioinformatic and genomic tools has been drug discovery. The Company believes
these tools, and those under development, will also assist researchers with the
preclinical and clinical development process. For example, with the help of new
technology and bioinformatic analyses scientists may be able to correlate
genetic and physiologic response in preclinical animal models, examine gene
expression profiles in drug-treated animals to assess the pharmacological
activity and toxicity of new drugs, and stratify clinical trial patients
according to their gene expression profiles.
Single Nucleotide Polymorphism ("SNP") Discovery
Due to genetic variation, individuals may respond differently to disease or
to treatment with the same drug. Few, if any, FDA-approved drugs are capable of
successfully treating every individual diagnosed with a targeted disease. The
differences in patients' responses to a drug are believed to result in part from
differences in the sequence of nucleotides within genes. The most common form of
sequence variation is known as a single nucleotide polymorphism or "SNP." A SNP
is defined as a single base difference within the same DNA region between two
individuals. Some SNPs are "silent" and not associated with a disease or a
patient's ability to respond to a particular therapy, and some SNPs occur at a
frequency that is too low to justify large-scale patient screening. Thus,
researchers need to do more than identify SNPs; they must identify the most
frequently occurring SNPs and identify those that correlate with a patient's
disease prognosis or ability to respond to a drug. Through our acquisition of
Hexagen in September 1998, we are developing fluorescent single-strand
confirmation polymorphism (fSSCP) technology, a high-throughput SNP discovery
technology.
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fSSCP is particularly useful for identifying SNPs in genes not expressed or more
rarely expressed. This gel-based system detects SNPs in multiple samples
simultaneously by observing changes in the tertiary structure of single stranded
DNA fragments due to base pair changes. Incyte is contributing technologies in
the areas of electrophoresis, fluorescence chemistries, sequencing and
bioinformatics in order to continue to develop and improve the accuracy and
efficiency of this technology.
Gene Mapping
Mapping refers to the determination of the physical location of a gene in
the genome and the relative position of that gene to other genes along a
chromosome. Physiological processes and associated diseases can be extremely
complex and involve many genes. A gene can activate one or more different genes
forming a cascade of genetically controlled events or a "pathway." When the
genes involved in such a pathway are located within neighboring regions of DNA,
mapping can allow the location of one member of the pathway to be used to
identify the other members. In addition, genetically inherited diseases that
have been passed from generation to generation may be associated with visible
chromosome alterations, such as deletions of large segments of the chromosome or
insertions within the chromosome. These physical chromosome abnormalities allow
researchers to identify the DNA regions and genes that have a critical role in
causing disease.
Proteomics
Proteomics is a relatively new field of study that involves the separation,
identification, and characterization of proteins present in a biological sample.
By comparing disease and control samples, it is possible to identify
disease-specific proteins. These may have potential as targets for drug
development or as molecular markers of disease. The power of proteomics lies in
the ability to directly measure a gene product, determine subcellular
localization and detect post-translational modifications.
PRODUCTS AND SERVICES
Our current products and services include an integrated platform of genomic
databases, data management software tools, microarray-based gene expression
databases and services, and related reagents and services.
Genomic Databases. We provide our database collaborators with non-exclusive
database access. Database collaborators receive periodic data updates as well as
software upgrades and additional search and analysis tools when they become
available. The fees and the period of access are negotiated independently with
each company. Fees generally consist of database access fees, option fees, and
non-exclusive or exclusive license fees corresponding to patent rights on
proprietary sequences. We may also receive future milestone and royalty payments
from database collaborators from the development and sale of their products
derived from our technology and database information. Researchers can browse not
only Incyte-generated data, but also public domain information. We currently
offer the following database modules:
- LifeSeq Gold Database. The LifeSeq Gold human sequence and expression
database integrates the information from our LifeSeq public-domain and
proprietary gene sequences and expression database; LifeSeq FL,
full-length gene sequence database; and the sequence information from our
GeneAlbum database and reagent set. LifeSeq Gold uses a novel method to
assemble cDNA sequence fragments (ESTs) into genes, providing increased
sensitivity for distinguishing between closely related sequences,
including splice variants. Researchers can easily move from one module to
another through the HTML-based graphical interface. The sequence database
contains our computer-edited gene sequence files and is used by
researchers to identify related or homologous genes. For example, a
scientist may wish to identify new genes homologous to a gene identified
through their own research and believed to be linked to a disease. The
database contains biological information about each sequence in our
sequence database, including tissue source, homologies, and annotations
regarding characteristics of the gene sequence. Also, the database
contains a gene expression profile for every tissue in the database
combined with proprietary bioinformatics software to allow collaborators
to browse data and compare differences in gene expression across cells,
tissues, and different disease states. Thus, the database can
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be used to assist researchers in correlating the presence of specific
genes to discrete biological events in normal and disease-state cells. We
continually add sequences and expression data from normal and diseased
tissues to the LifeSeq Gold database.
- PathoSeq Database. The PathoSeq database currently contains proprietary
and public domain genomic data for more than 40 medically relevant
bacterial and fungal microorganisms. With drug-resistant strains of
bacteria and other microorganisms posing an increasing threat to world
health, pharmaceutical and biotechnology companies are searching for
genes unique to these pathogens that will aid in the development of new
drugs to treat infectious disease. Our proprietary bioinformatics process
edits all sequence data to remove artifacts and contamination, assemble
sequences, display the relative position of the DNA coding regions, and
identify genes either common among multiple microorganisms or unique to
one microbial genome. We believe PathoSeq can help researchers understand
the biology of microorganisms, study the mechanisms of drug resistance,
identify genes that may make effective drug targets, and, ultimately,
develop new therapeutics to treat and prevent infectious disease.
- ZooSeq Database. The ZooSeq database was developed to aid pharmaceutical
and biotechnology companies in designing and evaluating preclinical drug
studies in animal models, a crucial step in the drug development process.
The database currently contains gene sequence and expression data for the
rat, mouse, and monkey -- animals commonly used in preclinical drug
toxicology and efficacy studies. By correlating a drug's effects on an
animal with the animal's genetic makeup, and then cross-referencing these
data with our human LifeSeq database, a researcher may better predict the
drug's efficacy and side effects before moving to human clinical trials.
- LifeExpress Database. The LifeExpress database is a comprehensive,
nonexclusive database of gene expression and protein expression on
samples focusing on major therapeutic areas and pharmacology/toxicology.
The protein expression modules of the LifeExpress database are developed
in cooperation with our collaborator Oxford GlycoSciences. The two
subcategories of LifeExpress are TargetExpress and LeadExpress. Aimed at
facilitating the discovery and validation of high value targets,
TargetExpress provides further annotation and detailed expression
information on known and unknown gene products. LeadExpress focuses on
using genomic and proteomic technologies to further annotate chemical
structures of common drug classes.
- IsSNPs. Our in silico SNP program identifies common SNPs by mining
LifeSeq Gold and genomic sequence data. We have identified approximately
46,000 isSNPs and expect to identify a total of 100,000 isSNPs from
LifeSeq Gold (over 60,000 from expressed regions) throughout the coming
year.
Contract Sequencing. Contract sequencing services generally include
generating sequence and bioinformatics data for customers using our core
strengths in library construction, high-throughput cDNA sequencing and
bioinformatics.
Software. We have developed an enterprise-wide genomic information
management system capable of updating, reprocessing and integrating genetic data
from multiple sources and from different organisms. This system allows the
integration of our proprietary, subscriber-specific and public domain data, and
is capable of comparing information from humans, animals, microbes, fungi and
plants. The system incorporates the architecture necessary to integrate our
software tools data visualization tools, data mining programs and project
management capabilities, and is capable of being integrated with additional
technologies developed to more efficiently manage and analyze genomic data.
- LifeTools, a suite of specialized bioinformatic software programs and
project management tools, consists of sequence analysis and data
management tools for handling complex genomic information from multiple
sources. LifeTools reads and edits raw sequence data, including data
imported from public databases, and annotates and clusters sequence
fragments based on sequence similarity. LifeTools includes a fast,
scalable database search engine with intranet-based graphical tools for
interactive queries and analyses. The LifeTools relational database
management system stores and distributes sequence assembly, homology,
tissue expression information and biological data. Our
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database management architecture is based on open system standards,
providing interconnectivity between disparate systems and applications,
and enterprise-wide access to data and functions.
- LifeArray software manages and analyzes data resulting from microarray
hybridization experiments. It includes a searchable database that
accommodates experiment results from a variety of microarray platforms.
LifeArray provides an integrated data warehouse and analysis environment,
which allows the customer to bring data from multiple microarray
platforms into one integrated environment. LifeArray enables the user to
visualize differential expression between biological samples and can
track all details of microarrays, genes, biological samples, donor
information, and experimental results in one integrated environment with
a Java-based interface. It is an enterprise-wide system that can support
as many simultaneous users as required, and grow to suit changing
microarray management needs.
- LifeProt software provides tools to query, display, and analyze the
protein expression data resulting from two-dimensional gel experiments.
Using the program's query capabilities, customers can quickly locate
relevant sample data sets from among many stored in a central database.
This database tracks experiment conditions, tissue, treatment, and donor
information, as well as the sample data. The LifeProt software is an
enterprise-wide system that uses a Java-based interface and is available
across a company to scientists using a variety of different computers and
operating systems.
Microarray-Based Services. We offer microarray-based gene expression
services to the pharmaceutical, biotechnology, and agricultural industries and
academic researchers. These services can be used to simultaneously evaluate the
gene expression profile of a large number of genes. Our GEM microarray
technology allows probes for up to 10,000 genes per microarray. Microarrays can
be used to identify the genes involved in a complex disease pathway, examine a
drug-treated tissue to understand how the drug affected the expression of
important genes, and study several new drug candidates to determine if one has a
more favorable effect on gene expression than the others. Experiments can use
either prefabricated arrays or custom arrays. Prefabricated arrays contain
either public domain genes or genes chosen from our databases. We currently
offer 18 prefabricated microarrays, including an array containing the genes
found in a microbial pathogen Staphlycoccus aureus, an array containing the
genes found in the rat liver and kidney, and a series of arrays that contain
Incyte proprietary genes. Custom arrays can contain genes provided by the
customer or chosen by the customer from our proprietary databases.
DNA Reagents and Other Services. We offer a variety of DNA reagents and
other services designed to assist its collaborators in using information from
its databases in the customer's internal lab-based experiments. The cloned DNA
fragments from which the information in our databases is derived represent
valuable resources for researchers, enabling them to perform bench-style
experiments to supplement the information obtained from searching our databases.
We retain copies of all isolated clones corresponding to the sequences in the
database. Our collaborators may request clones corresponding to a sequence of
interest on a one-by-one basis or through the LifeSeq GeneAlbum component of
LifeSeq Gold. GeneAlbum is a subscription-based service that provides database
collaborators with large numbers of sequence verified DNA clones. In addition,
we produce a broad line of genomic research products, such as DNA clones and
insert libraries, and offers technical support services, including
high-throughput DNA screening, custom robotic services, contract DNA
preparation, contract mapping and fluorescent in situ hybridization, to assist
researchers in the identification and isolation of novel genes.
DATABASE PRODUCTION
We engage in the high-throughput automated sequencing of genes derived from
tissue samples followed by the computer-aided analysis of each gene sequence to
identify homologies to genes of known function in order to predict the
biological function of newly identified sequences. The derivation of information
in our databases involves the following steps:
- Tissue Access. We obtain tissue samples representing most major organs in
the human body from various academic and commercial sources. Where
possible, we obtain information as to the medical history and pathology
of the tissue. The genetic material is isolated from the tissue and
prepared for
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analysis. The results of this analysis, as well as the corresponding
pathology and medical history information, are incorporated into the
databases.
- High-Throughput cDNA Sequencing. We utilize specialized teams in an
integrated approach to our high-throughput sequencing and analysis
effort. Gene sequencing is performed using multiple work shifts to
increase daily throughput. One team develops and prepares cDNA libraries
from biological sources of interest, a second team prepares the cDNAs
using robotic workstations to perform key steps that result in purified
cDNAs for sequencing, and a third team operates the automated DNA
sequencers.
- Bioinformatics. Sequence information generated from our high-throughput
sequencing operations is uploaded to a network of servers. Our
proprietary bioinformatic software then assembles and edits the sequence
information. The sequence of each cDNA is compared via automated,
computerized algorithms to the sequences of known genes in our databases
and public domain databases to identify whether the cDNA codes for a
known protein or is homologous to a known gene. Each sequence is
annotated as to its cell or tissue source, its relative abundance and
whether it is homologous to a known gene with known function. The
bioinformatics staff monitors this computerized analysis and may perform
additional analyses on sequence information. The finished data are then
added to our proprietary sequence databases.
COLLABORATORS
As of December 31, 1999, we had database collaboration agreements with more
than 20 companies. Each collaborator has agreed to pay annual fees to receive
non-exclusive access to one or more of our databases. One of these companies
contributed 12% of total revenues in 1998. No customer contributed 10% or more
of total revenues in 1999 or 1997. During 1999, our database collaborators
included the following companies:
Abbott Laboratories Johnson & Johnson
AstraZeneca PLC Millennium Pharmaceuticals, Inc.
Aventis S.A. Monsanto Company
Bristol-Myers Squibb Company Novartis AG
Eli Lilly and Company Pfizer Inc.
F. Hoffmann-La Roche Ltd. Pharmacia & Upjohn, Inc.
Genentech, Inc. Schering AG
Glaxo Wellcome plc Schering-Plough, Ltd.
Some of our database agreements contain minimum annual update requirements,
which if not met could result in our breach of the respective agreement. We
cannot assure you that any of our database collaboration agreements will not be
terminated early in accordance with their terms. Loss of revenues from any
individual database agreement, if terminated or not renewed, could have an
adverse impact on our results of operations, although is not anticipated to have
a material adverse impact on our business or financial condition.
DEVELOPMENT PROGRAMS
Since our inception, we have made substantial investments in research and
technology development. During the years ended December 31, 1999, 1998, and 1997
we spent approximately $146.8 million, $97.2 million, and $72.5 million,
respectively, on research and development activities. This investment in
research and development includes an active program to enter into relationships
with other technology-driven companies and, when appropriate, acquire licenses
to technologies for evaluation or use in the production and analysis process.
Not all of these technologies or relationships survive the evaluation process.
We have entered into a number of research and development relationships with
companies and research institutions.
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In January 1998, we announced a relationship with Oxford GlycoSciences plc
("OGS") to investigate the use of proteomics, the large-scale, high-throughput
analysis of protein expression, in the development of new information-based
products. As part of the relationship, we made an equity investment in OGS. We
and OGS entered into a collaborative agreement under which the two parties are
developing data, software and related services, focusing on protein expression
and sequence information from a variety of human tissues. As part of the
collaborative agreement, we reimbursed OGS $5.0 million in 1999 for services
rendered and agreed to reimburse OGS for up to an additional $5.0 million in
2000 if revenues are not sufficient to offset OGS' expenses for services to be
rendered.
In August 1998, we initiated a series of programs in human genome
sequencing, accelerated human genome mapping, bioinformatics and SNP discovery.
The information resulting from these efforts will be used to supplement existing
databases and to generate new databases and services. We are initiating SNP
programs focused on specific candidate genes, gene families, disease pathways,
therapeutic areas or drug targets that could be useful to individual
pharmaceutical partners. These programs may include the identification of genes
associated with a particular disease and an in depth study of the population
frequency and disease correlation of SNPs within a selected DNA region. The SNP
discovery efforts were assisted by our acquisition of Hexagen in September 1998.
We are developing various platforms that can be used for the high
throughput screening of patient samples in order to correlate SNPs with
patients' responses to drugs. These platforms may be used to offer genotyping
and patient profiling services to pharmaceutical companies to help identify
statistically significant and medically relevant associations between SNPs in
specific genes and drug response or disease susceptibility. We expect that this
service will be used to assist in the evaluation of new drugs in clinical trials
and to assess clinical trial design.
DIADEXUS JOINT VENTURE
In September 1997, we established a 50-50 joint venture company, diaDexus,
LLC, with SmithKline Beecham Corporation. diaDexus is applying genomic and
bioinformatic technologies to the discovery and commercialization of novel
molecular diagnostic products. We provide diaDexus with non-exclusive access to
our human and microbial databases (LifeSeq Gold and PathoSeq) for diagnostic
applications. diaDexus also has exclusive rights to develop diagnostic tests
based on novel molecular targets and genetic alterations identified as part of
SmithKline Beecham's drug discovery efforts. SmithKline Beecham and Incyte have
also each assigned various additional technologies and intellectual property
rights in the diagnostic field and initially contributed a combined total of $25
million in funding to diaDexus. In July 1999, we and SmithKline Beecham each
invested an additional $2.5 million in the form of convertible notes that mature
in April 2000. The notes will automatically convert into equity if certain
funding requirements are met.
diaDexus is focusing initially on the generation of unique diagnostic
markers for so-called "homebrew" tests -- scientifically validated tests which
are awaiting formal regulatory approval -- for reference laboratory testing and
for license to diagnostic kit manufacturers. Ultimately, diaDexus may develop
its own capacity to manufacture kits for sale to clinical testing laboratories.
The initial product range will focus on tests for disease detection. New tests
for improved diagnosis, staging and patient stratification in infectious disease
and oncology will be accorded particular emphasis.
PATENTS AND PROPRIETARY TECHNOLOGY
Our database business and competitive position are in part dependent upon
our ability to protect our proprietary database information and software
technology. We rely on patent, trade secret and copyright law, as well as
nondisclosure and other contractual arrangements to protect our proprietary
information.
Our ability to license proprietary genes and SNPs may be dependent upon our
ability to obtain patents, protect trade secrets and operate without infringing
upon the proprietary rights of others. Other pharmaceutical, biotechnology and
biopharmaceutical companies, as well as academic and other institutions, have
filed applications for, may have been issued patents or may obtain additional
patents and proprietary rights, relating to products or processes competitive to
our products or processes. Patent applications filed by competitors may
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claim some of the same gene sequences or partial gene sequences as those claimed
in patent applications that we file. We are aware that some entities have made
or have announced their intention to make gene sequences publicly available.
Publication of sequence information may adversely affect our ability to obtain
patent protection for sequences that have been made publicly available.
Our current policy is to file patent applications on what we believe to be
novel full-length and partial gene sequences obtained through our
high-throughput computer-aided gene sequencing efforts. We have filed U.S.
patent applications in which we have claimed certain partial gene sequences and
have filed patent applications in the U.S. and applications under the Patent
Cooperation Treaty ("PCT"), designating countries in Europe as well as Canada
and Japan, claiming full-length gene sequences associated with cells and tissues
that are the subject of our high-throughput gene sequencing program. To date, we
hold approximately 400 U.S. patents with respect to full-length gene sequences
and one issued U.S. patent claiming multiple partial gene sequences. Currently,
we have no registered copyrights for our database-related software.
In 1996, the United States Patent and Trademark Office issued guidelines
limiting the number of partial gene sequences that can be examined in a single
patent application. Many of our patent applications containing multiple partial
sequences contain more sequences than the maximum number allowed under the new
guidelines. We are reviewing our options, and due to the resources needed to
comply with the guidelines, we may decide to abandon patent applications for
some of our partial gene sequences.
We have begun to file patent applications for patentable SNPs identified
with our LifeSeq Gold database, through our human genome sequencing program, and
through the use of our fSSCP discovery technology. These patents will claim
rights to SNPs for diagnostic and genotyping purposes. As information relating
to particular SNPs is developed, we plan to seek additional rights in those SNPs
that are associated with specific diseases, functions or drug responses. The
scope of patent protection for gene sequences, including SNPs, is highly
uncertain, involves complex legal and factual questions and has recently been
the subject of much controversy. No clear policy has emerged with respect to the
breadth of claims allowable for SNPs. There is significant uncertainty as to
what, if any, claims will be allowed on SNPs discovered through high throughput
discovery programs.
As the biotechnology industry expands, more patents are issued and other
companies engage in the business of discovering genes and other genomic-related
businesses, the risk increases that our potential products, and the processes
used to develop these products, may be subject to claims that they infringe the
patents of others. Further, we are aware of several issued patents in the field
of microarray or gridding technology, which can be utilized in the generation of
gene expression information. Some of these patents are the subject of
litigation. Therefore, our operations may require us to obtain licenses under
any of these patents or proprietary rights, and these licenses may not be made
available on terms acceptable to us. Litigation may be necessary to defend
against or assert claims of infringement, to enforce patents issued to us, to
protect trade secrets or know-how owned by us, or to determine the scope and
validity of the proprietary rights of others. We believe that some of our patent
applications cover genes that may also be claimed in patent applications filed
by other parties. Interference proceedings may be necessary to establish which
party was the first to invent a particular sequence for the purpose of patent
protection. Several interferences involving our patent applications covering
full length genes have been declared. Litigation or interference proceedings,
regardless of the outcome, could result in substantial costs to us, and divert
our efforts, and may have a material adverse effect on our business, operating
results and financial condition. In addition, there can be no assurance that
such proceedings or litigation would be resolved in our favor.
In January and September 1998, Affymetrix, Inc. filed lawsuits in the
United States District Court for the District of Delaware alleging infringement
of three U.S. patents by Incyte and its Synteni, Inc. subsidiary. Incyte
believes that it and Synteni have meritorious defenses and intends to defend
these suits vigorously. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors That May Affect Results -- We Are
Involved in Patent Litigation, Which, If Not Resolved Favorably, Could Harm Our
Business."
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COMPETITION
There is a finite number of genes in the human genome, and competitors may
seek to identify, sequence and determine in the shortest time possible the
biological function of a large number of genes in order to obtain a proprietary
position with respect to the largest number of new genes discovered. A number of
companies, institutions, and government-financed entities are engaged in gene
sequencing, gene discovery, gene expression analysis, positional cloning and
other genomic service businesses. Many of these companies, institutions and
entities have greater financial and human resources than we do. In addition, we
are aware that other companies have developed databases containing gene
sequence, gene expression, genetic variation or other genomic information and
are marketing, or have announced their intention to market, their data to
pharmaceutical companies. We expect that additional competitors may attempt to
establish databases containing this information in the future.
In addition, competitors may discover and establish patent positions with
respect to the gene sequences and polymorphisms in our databases. Further, some
entities engaged in or with stated intentions to engage in gene sequencing have
made or have stated their intention to make the results of their sequencing
efforts publicly available. These patent positions, or the public availability
of gene sequences comprising substantial portions of the human genome or on
microbial or plant genes, could:
- decrease the potential value of our databases to our subscribers; and
- adversely affect our ability to realize royalties or other revenue from
commercialization of products based upon such genetic information.
The gene sequencing machines that are utilized in our high-throughput
computer-aided gene sequencing operations are commercially available and are
currently being utilized by several competitors. Also, some of our competitors
or potential competitors are in the process of developing, and may successfully
develop, proprietary sequencing technologies that may be more advanced than the
technology we use. In addition, we are aware that a number of companies are
pursuing alternative methods for generating gene expression information,
including some that have developed and are developing microarray technologies.
At least one other company currently offers microarray-based services that might
be competitive with those we offer. These advanced sequencing or gene expression
technologies, if developed, may not be commercially available for our purchase
or license on reasonable terms, if at all.
A number of companies have announced their intent to develop and market
software to assist pharmaceutical companies and academic researchers in the
management and analysis of their own genomic data, as well as the analysis of
sequence data available in the public domain. Some of these entities have access
to significantly greater resources than we do, and their products may achieve
greater market acceptance than our products.
Our SNP discovery platform represents a modification of a process that is
in the public domain. Other companies could make similar or superior
improvements in this process.
We believe that the following are important aspects of our competitive
position:
- the features and ease of use of our database software;
- our experience in high-throughput gene sequencing;
- the cumulative size of our databases;
- the quality of the data, including the annotations in our databases;
- our computing infrastructure; and
- and our experience with bioinformatics and database software.
The genomics industry is characterized by extensive research efforts and
rapid technological progress. New developments are expected to continue and
there can be no assurance that discoveries by others will not render our
services and potential products noncompetitive. In addition, significant levels
of research in
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biotechnology and medicine occur in universities and other non-profit research
institutions. These entities have become increasingly active in seeking patent
protection and licensing revenues for their research results. These entities
also compete with us in recruiting talented scientists. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Results -- We Experience Intense
Competition and Rapid Technological Change and If We Do Not Compete Effectively
Our Revenues May Decline."
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products that may be developed by us or our licensees. At the
present time, we do not intend to develop any pharmaceutical products ourselves.
Our agreements with our LifeSeq Gold database subscribers provide for the
payment to us of royalties on any pharmaceutical products developed by those
subscribers derived from proprietary information obtained from our genomic
databases. Thus, the receipt and timing of regulatory approvals for the
marketing of such products may have a significant effect on our future revenues.
Pharmaceutical products developed by licensees will require regulatory approval
by governmental agencies prior to commercialization. In particular, human
pharmaceutical therapeutic products are subject to rigorous preclinical and
clinical testing and other approval procedures by the United States Food and
Drug Administration in the United States and similar health authorities in
foreign countries. Various federal and, in some cases, state statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of such pharmaceutical products, including
the use, manufacture, storage, handling and disposal of hazardous materials and
certain waste products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations require the expenditure of substantial resources over a significant
period of time, and there can be no assurance that any approvals will be granted
on a timely basis, if at all. Any such delay in obtaining or failure to obtain
such approvals could adversely affect our ability to earn milestone payments,
royalties or other license-based fees. Additional governmental regulations that
might arise from future legislation or administrative action cannot be
predicted, and such regulations could delay or otherwise affect adversely
regulatory approval of potential pharmaceutical products. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Results -- Our Revenues Are Derived
Primarily from the Pharmaceutical and Biotechnology Industries and May Fluctuate
Substantially Due to Reductions and Delays in Research and Development
Expenditures."
HUMAN RESOURCES
As of December 31, 1999, we had 1,108 full-time equivalent employees (195
of whom were contract or part-time employees), including 399 in sequencing,
microarray, SNP and reagent production, 294 in bioinformatics, 239 in research
and technology development, and 176 in marketing, sales and administrative
positions. None of our employees is covered by collective bargaining agreements,
and management considers relations with our employees to be good. Our future
success will depend in part on the continued service of our key scientific,
software, bioinformatics and management personnel and its ability to identify,
hire and retain additional personnel, including personnel in the customer
service, marketing and sales areas. There is intense competition for qualified
personnel in the areas of our activities, especially with respect to experienced
bioinformatics and software personnel, and there can be no assurance that we
will be able to continue to attract and retain such personnel necessary for the
development of our business. Failure to attract and retain key personnel could
have a material adverse effect on our business, financial condition and
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors that May Affect Results -- We May
Have Difficulty Managing Our Growth, Which May Impact Our Ability to Optimize
Our Resources" and "-- We Depend on Key Employees in a Competitive Market for
Skilled Personnel and the Loss of the Services of Any of Our Key Employees Would
Materially Affect Our Business."
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ITEM 2. PROPERTIES
Incyte's headquarters are in Palo Alto, California, where its main research
laboratories, sequencing facility, bioinformatics and administrative facilities
are located. Incyte also operates facilities in Fremont, California; St. Louis,
Missouri; and Cambridge, England. As of December 31, 1999, Incyte had multiple
sublease and lease agreements covering approximately 442,000 square feet that
expire on various dates ranging from March 2000 to March 2011. The Company
believes that its current facilities are adequate to support its current and
anticipated near-term operations and believes that it can obtain additional
space it may need in the future on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
Affymetrix
In January 1998, Affymetrix, Inc. ("Affymetrix") filed a lawsuit in the
United States District Court for the District of Delaware, subsequently
transferred to the United States District Court for the Northern District of
California in November 1998, alleging infringement of U.S. patent number
5,445,934 (the " '934 Patent") by both Synteni and Incyte. The complaint alleges
that the '934 Patent has been infringed by the making, using, selling,
importing, distributing or offering to sell in the U.S. high density arrays by
Synteni and Incyte and that such infringement was willful. Affymetrix seeks a
permanent injunction enjoining Synteni and Incyte from further infringement of
the '934 Patent and, in addition, seeks damages, costs and attorney's fees and
interest. Affymetrix further requests that any such damages be trebled based on
its allegation of willful infringement by Incyte and Synteni.
In September 1998, Affymetrix filed an additional lawsuit in the United
States District Court for the District of Delaware, subsequently transferred to
the United States District Court for the Northern District of California in
November 1998, alleging infringement of the U.S. patent number 5,800,992 (the
" '992 Patent") and U.S. patent number 5,744,305 (the " '305 Patent") by both
Synteni and Incyte. The complaint alleges that the '305 Patent has been
infringed by the making, using, selling, importing, distributing or offering to
sell in the United States high density arrays by Synteni and Incyte, that the
'992 Patent has been infringed by the use of Synteni's and Incyte's GEM(TM)
microarray technology to conduct gene expression monitoring using two-color
labeling, and that such infringement was willful. Affymetrix seeks a permanent
injunction enjoining Synteni and Incyte from further infringement of the '305
and '992 Patents and, in addition, Affymetrix had sought a preliminary
injunction enjoining Incyte and Synteni from using Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling as described in the '992 Patent. Affymetrix's request for a preliminary
injunction was denied in May 1999. As a result of the assignment of the case to
a new judge, all scheduled trial and pretrial dates have been vacated. The court
is expected to set a new schedule in late April 2000.
In April 1999, the Board of Patent Appeals and Interferences of United
States Patent and Trademark Office (PTO) declared interferences between pending
patent applications licensed exclusively to Incyte and the Affymetrix '305 and
'992 Patents. An interference proceeding is invoked by the PTO when more than
one patent applicant claims the same invention. The Board of Patent Appeals and
Interferences evaluates all relevant facts, including those bearing on first to
invent, validity, enablement and scope of claims, and then makes a determination
as to who, if anyone, is entitled to the patent on the disputed invention. In
September 1999, the Board of Patent Appeals and Interferences determined that
Incyte had not met its prima facie case, and ruled that the patents licensed by
Incyte and Synteni from Stanford University were not entitled to priority over
corresponding claims in the two Affymetrix patents. The Company is seeking de
novo review of the Board decisions in the United States District Court for the
Northern District of California.
Incyte and Synteni believe they have meritorious defenses and intend to
defend the suits vigorously. However, there can be no assurance that Incyte and
Synteni will be successful in the defense of these suits. At this time, the
Company cannot reasonably estimate the possible range of any loss resulting from
these suits due to uncertainty regarding the ultimate outcome. Regardless of the
outcome, this litigation has resulted and is expected to continue to result in
substantial expenses and diversion of the efforts of management and
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technical personnel. Further, there can be no assurance that any license that
may be required as a result of this suit or the outcome thereof would be made
available on commercially acceptable terms, if at all.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $.001 ("Common Stock"), is traded on
the Nasdaq National Market ("Nasdaq") under the symbol "INCY." The following
table sets forth, for the periods indicated, the range of high and low sales
prices for the Common Stock on Nasdaq as reported in its consolidated
transaction reporting system.
HIGH LOW
---- ----
1998
First Quarter................................... $50 3/8 $36
Second Quarter.................................. 47 1/ 31 1/
Third Quarter................................... 42 18 1/
Fourth Quarter.................................. 39 1/ 20 15/1
1999
First Quarter................................... 37 3/ 20 1/1
Second Quarter.................................. 26 7/1 17 3/
Third Quarter................................... 41 3/ 21 5/3
Fourth Quarter.................................. 63 1/ 16 9/1
As of December 31, 1999, the Common Stock was held by 506 stockholders of
record. The Company has never declared or paid dividends on its capital stock
and does not anticipate paying any dividends in the foreseeable future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related Notes included in Item 8 of
this Report.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:(1)
Revenues................................ $156,962 $134,811 $ 89,996 $ 41,895 $ 12,299
Costs and expenses:
Research and development.............. 146,833 97,192 72,452 41,337 19,272
Selling, general and administrative... 37,235 25,438 13,928 6,957 3,952
Charge for purchase of in-process
research and development........... -- 10,978 -- 3,165 --
Acquisition-related charges........... -- 1,171 -- -- --
-------- -------- -------- -------- --------
Total costs and expenses...... 184,068 134,779 86,380 51,459 23,224
Income (loss) from operations........... (27,106) 32 3,616 (9,564) (10,925)
Interest and other income, net.......... 5,169 7,266 4,140 2,288 988
Losses from joint venture............... (5,631) (1,474) (300) -- --
-------- -------- -------- -------- --------
Income (loss) before income taxes....... (27,568) 5,824 7,456 (7,276) (9,937)
Provision (benefit) for income taxes.... (800) 2,352 548 -- --
-------- -------- -------- -------- --------
Net income (loss)....................... $(26,768) $ 3,472 $ 6,908 $ (7,276) $ (9,937)
======== ======== ======== ======== ========
Basic net income (loss) per share....... $ (0.95) $ 0.13 $ 0.28 $ (0.32) $ (0.53)
======== ======== ======== ======== ========
Number of shares used in computation of
basic net income (loss) per share..... 28,138 26,921 24,300 22,398 18,819
======== ======== ======== ======== ========
Diluted net income (loss) per share..... $ (0.95) $ 0.12 $ 0.26 $ (0.32) $ (0.53)
======== ======== ======== ======== ========
Number of shares used in computation of
diluted net income (loss) per share... 28,138 28,899 26,498 22,398 18,819
======== ======== ======== ======== ========
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:(1)
Cash, cash equivalents, and securities
available-for-sale.................... $ 66,937 $111,233 $113,095 $ 40,238 $ 41,218
Working capital......................... 58,043 81,437 90,700 21,351 39,015
Total assets............................ 221,934 230,290 199,089 69,173 58,892
Non-current portion of capital lease
obligations and notes payable......... 194 796 801 37 147
Accumulated deficit..................... (55,169) (28,401) (30,129) (37,037) (29,761)
Stockholders' equity.................... 170,282 179,567 145,702 44,834 47,606
- ---------------
(1) Financial data for the years ended December 31, 1995 and 1996, have been
restated to reflect the combined results and financial position of the
Company and Genome Systems, Inc. All periods through December 31, 1997 have
been restated to reflect combined results and financial position of the
Company and Synteni, Inc. See Note 9 of Notes to Consolidated Financial
Statements.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with "Selected
Consolidated Financial Data" and the Consolidated Financial Statements and
related Notes included elsewhere in this Report.
When used in this discussion, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. These statements, which include statements as to the Company's and
diaDexus' expected net losses, expected expenditure levels, expected cash flows,
the adequacy of capital resources, growth in operations and Year 2000 related
actions, are subject to risks and uncertainties that could cause actual results
to differ materially from those projected. These risks and uncertainties
include, but are not limited to, those risks discussed below, as well as the
extent of utilization of genomic information by the biotechnology and
pharmaceutical industries; risks relating to the development of new products and
their use by potential collaborators of the Company; the impact of technological
advances and competition; the ability of the Company to obtain and retain
customers; competition from other entities; early termination of a database
collaboration agreement or failure to renew an agreement upon expiration; the
cost of accessing or acquiring technologies developed by other companies;
uncertainty as to the scope of coverage, enforceability or commercial protection
from patents that issue on gene sequences and other genetic information;
developments in and expenses relating to litigation; the results and viability
of joint ventures and businesses in which the Company has purchased equity; and
the matters discussed in "Factors That May Affect Results." These
forward-looking statements speak only as of the date hereof. The Company
expressly disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
OVERVIEW
Incyte Pharmaceuticals, Inc. ("Incyte" and, together with its wholly owned
subsidiaries, the "Company") designs, develops and markets genomic
information-based products and services. These products and services include
database products, genomic data management software tools, microarray-based gene
expression services, genomic reagents, and related services. The Company's
genomic databases integrate bioinformatics software with proprietary and, when
appropriate, publicly available genetic information to create information-based
products and services used by pharmaceutical and biotechnology companies and
academic researchers in the understanding of disease and the discovery and
development of new drugs.
Revenues recognized by the Company consist primarily of non-exclusive
database access fees related to database agreements. Revenues also include the
sales of genomic screening products and services, fees for microarray-based gene
expression services, fees for contract sequencing services, and sales of genomic
data management software tools. The Company's database agreements provide for
future milestone payments and royalties from the sale of products derived from
proprietary information obtained through the databases. There can be no
assurance that any database subscriber will ever generate products from
information contained within the databases and thus that the Company will ever
receive additional milestone payments or royalties. The Company's ability to
maintain and increase revenues will be dependent upon its ability to obtain
additional database subscribers, retain existing subscribers, and to expand its
product and service offerings and expand its customer base for microarray
services. The loss of revenues from any individual database agreement, if
terminated or not renewed, could have an adverse impact on the Company's results
of operations, although it is not anticipated to have a material adverse impact
on the Company's business or financial conditions.
The Company intends to invest in its sequencing, bioinformatics, expression
database development and SNP discovery programs in 2000 and as a result expects
to report a net loss at least through 2000. If the costs of these programs are
greater than anticipated, or if these programs take longer to complete, or if
losses are incurred from strategic investments, the Company may incur losses in
future periods, as well.
The Company has made and intends to continue to make strategic equity
investments in, and acquisitions of, technologies and businesses that are
complementary to the businesses of the Company. As a result, the
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Company may record losses or expenses related to the Company's proportionate
ownership interest in such long-term equity investments, record charges for the
acquisition of in-process technologies, or record charges for the recognition of
the impairment in the value of the securities underlying such investments.
In September 1998, the Company completed the acquisition of Hexagen Limited
("Hexagen"), a privately held SNP discovery company based in Cambridge, England.
The Company issued 976,130 shares of its common stock and $5.0 million in cash
in exchange for all of Hexagen's outstanding capital stock. In addition, the
Company assumed Hexagen's stock options, which if fully vested and exercised,
would amount to 125,909 shares of its common stock. The intrinsic value of the
stock options was included in the purchase price of Hexagen. The transaction was
accounted for as a purchase with a portion of the purchase price, estimated to
be approximately $11.0 million, expensed in the third quarter of 1998 as a
charge for the purchase of in-process research and development. The remainder of
the purchase price, approximately $17.6 million, was allocated to goodwill
($16.3 million), developed technology ($0.7 million), and Hexagen's assembled
work force ($0.6 million), which are being amortized over 8, 5 and 3 years,
respectively. The Company evaluates its intangible assets for impairment on a
quarterly basis.
The Company allocated Hexagen's purchase price based on the relative fair
value of the net tangible and intangible assets acquired. In performing this
allocation, the Company considered, among other factors, the technology research
and development projects in process at the date of acquisition. Hexagen's
in-process research and development program consisted of the development of its
fSSCP technology for SNP discovery. In 1999, the Company completed the
development of the fSSCP technology. There have been no significant changes in
the assumptions used to value the assets of Hexagen.
In January 1998, the Company completed the acquisition of Synteni, Inc.
("Synteni"), a privately-held microarray-based gene expression company. The
transaction has been accounted for as a pooling of interests, and the
consolidated financial statements discussed herein and all historical financial
information have been restated to reflect the combined operations of both
companies.
In September 1997, the Company formed a joint venture, diaDexus, LLC
("diaDexus"), with SmithKline Beecham Corporation ("SB") which will utilize
genomic and bioinformatics technologies in the discovery and commercialization
of molecular diagnostics. The Company and SB each hold a 50 percent equity
interest in diaDexus. The investment is accounted for under the equity method,
and the Company records its share of diaDexus' earnings and losses in its
statement of operations.
In January 1998, the Company announced a relationship relating to the joint
development of proteomics data and related software with Oxford GlycoSciences
plc ("OGS"). As part of this relationship, the Company made a $5.0 million
initial equity investment and a follow-on investment in April 1998 of
approximately $0.8 million as part of the OGS initial public offering of its
ordinary shares. As part of the collaborative agreement, the Company reimbursed
OGS $5.0 million in 1999 for services rendered and will reimburse OGS up to $5.0
million in 2000 if revenues are not sufficient to offset OGS' expenses for
services rendered. The market prices of the securities of the companies in which
the Company invests are highly volatile and therefore subject to declines in
market value. The Company will continue to evaluate its long-term equity
investments for impairment on a quarterly basis.
In an effort to broaden its business, the Company is investing in a number
of new areas, including molecular diagnostics, genome sequencing, SNP discovery,
proteomics, and microarray services. Given that many of these address new
markets, or involve untested technologies, it is not known if any of them will
generate revenues or if the revenues will be sufficient to provide an adequate
return on the investment. Depending on the investment required and the timing of
such investments, expenses or losses related to these investments could
adversely affect operating results.
The Company has incurred and could continue to incur substantial expenses
in its defense of the lawsuits filed in January and September 1998 by
Affymetrix, Inc. ("Affymetrix") alleging patent infringement by Synteni and
Incyte. Affymetrix seeks a preliminary injunction enjoining Incyte and Synteni
from using certain microarray technology in a manner alleged to infringe an
Affymetrix patent and a permanent injunction enjoining Incyte and Synteni from
further infringement of certain Affymetrix patents. In addition, Affymetrix
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seeks damages, costs, attorneys' fees and interest. Affymetrix further requests
that any such damages be trebled on its allegation of willful infringement by
Incyte and Synteni. Incyte and Synteni believe they have meritorious defenses
and intend to defend these suits vigorously. However, there can be no assurance
that Incyte and Synteni will be successful in the defense of these suits. At
this time, the Company cannot reasonably estimate the possible range of any loss
related to these suits due to uncertainty regarding the ultimate outcome.
Regardless of the outcome, this litigation has resulted and is expected to
continue to result in substantial expenses and diversion of the efforts of
management and technical personnel. Any future litigation could result in
similar expenses and diversion of efforts. Further, there can be no assurance
that any license that may be required as a result of these suits or the outcome
thereof would be made available on commercially acceptable terms, if at all.
RESULTS OF OPERATIONS
The Company recorded a net loss for the year ended December 31, 1999 of
$26.8 million and net income for the years ended December 31, 1998 and 1997 of
$3.5 million and $6.9 million, respectively. On a per share basis, basic and
diluted net loss was $0.95 for the year ended December 31, 1999. Basic and
diluted net income per share was $0.13 and $0.12 for the year ended December 31,
1998, respectively and $0.28 and $0.26 for the year ended December 31, 1997,
respectively. Excluding acquisition related charges, the Company recorded net
income of $15.5 million, and basic and diluted net income per share of $0.58 and
$0.54, respectively, for the year ended December 31, 1998. The net income per
share in 1997 reflects the dilutive effect of approximately 2.7 million shares
issued in an August 1997 follow-on public offering. The net income per share for
1998 and 1997 reflects the issuance of approximately 2.3 million shares in
January 1998 in connection with the Company's business combination with Synteni.
All share and per share data have been adjusted retroactively for a two-for-one
stock split effected in the form of a stock dividend paid on November 7, 1997 to
holders of record on October 17, 1997.
Revenues. Revenues for the years ended December 31, 1999, 1998, and 1997
were $157.0 million, $134.8 million, and $90.0 million, respectively. Revenues
resulted primarily from database access fees and, to a much lesser extent, from
microarray-based gene expression services, genomic screening products and
services, fees for contract sequencing, and sales of genomic data management
software tools and maintenance. The increase in revenues from year to year was
predominantly driven by expanded database agreements with existing customers,
new database customers and increased revenues from microarray-related products
and services.
Expenses. Total costs and expenses for the years ended December 31, 1999,
1998, and 1997 were $184.1 million, $134.8 million, and $86.4 million,
respectively. Total costs and expenses for the year ended December 31, 1998
included a one-time charge of $11.0 million for the purchase of in-process
research and development relating to the acquisition of Hexagen, and acquisition
related expenses of $1.2 million related to the combination with Synteni. Total
costs and expenses are expected to increase in the foreseeable future due to the
continued investment in new products and services.
Research and development expenses for the years ended December 31, 1999,
1998, and 1997 were $146.8 million, $97.2 million, and $72.5 million,
respectively. The increase from 1999 over 1998 resulted primarily from the
Company's genomic sequencing, genetic mapping, and SNP discovery initiatives
that were initiated in the second half of 1998, the Company's collaboration with
OGS in proteomics, the increase in microarray production, and the costs related
to intellectual property protection. The increase in research and development
expenses in 1998 over 1997 resulted primarily from an increase in bioinformatics
and software development efforts and to a lesser extent microarray production
capacity, and from costs related to genomic sequencing, genetic mapping, SNP
discovery efforts, technology development initiatives, and intellectual property
protection. The Company expects research and development spending to increase as
the Company continues to pursue the development of new database products and
services, including expression databases, expansion of existing database
products, increases in sequencing, bioinformatics, expression database
development and SNP discovery operations, and investments in new technologies.
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Selling, general and administrative expenses for the years ended December
31, 1999, 1998, and 1997 were $37.2 million, $25.4 million, and $13.9 million,
respectively. The increase in selling, general and administrative expenses in
1999 over 1998 resulted primarily from the growth in sales and marketing
activities and the increased personnel to support the growing complexity of the
Company's operations. The increase in selling, general and administrative
expenses in 1998 over 1997 resulted primarily from the growth in sales and
marketing activities and to a lesser extent the expansion of the Company's
United Kingdom operations and increased personnel to support the growing
complexity of the Company's operations. The Company's 1999 and 1998 operations
were also impacted by legal expenses related to the patent infringement lawsuits
filed by Affymetrix of approximately $6.5 million and $2.9 million,
respectively. The Company expects that total selling, general and administrative
expenses will continue to increase, primarily due to continued growth in
marketing, sales and customer support and expenses to support the growing
complexity of the Company's operations.
Interest and Other Income, Net. Interest and other income, net, for the
years ended December 31, 1999, 1998, and 1997 were $5.2 million, $7.3 million,
and $4.1 million, respectively. The decrease in 1999 from 1998 was primarily due
to decreased interest income as a result of lower cash, cash equivalent and
marketable securities balances. The increase in 1998 over 1997 was primarily due
to increased interest income from higher average combined cash, cash equivalent
and marketable securities balances and an increase in realized gains on the sale
of marketable securities.
Losses from Joint Venture. Losses from joint venture were $5.6 million,
$1.5 million and $0.3 million for the years ended December 31, 1999, 1998 and
1997, respectively. The loss represents the Company's share of diaDexus' losses
from operations. The loss in 1998 was net of $2.5 million of amortization of the
excess of the Company's share of diaDexus' net assets over its basis.
Income Taxes. The Company had an effective income tax benefit rate of 3.0%
in 1999. The benefit was primarily due to the carryback of the current year net
operating loss. The effective tax rate for 1998 was 14.0%, excluding the charge
for the purchase of in-process research and development, and for 1997 was 7.3%,
which represents the provision of federal and state alternative minimum taxes
after utilization of net operating loss carryforwards. The increase from 1997 to
1998 in the effective tax rate resulted primarily from the Company's expectation
that it would fully utilize all federal net operating loss carryforwards
available to benefit the income tax provision.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had $66.9 million in cash, cash
equivalents and marketable securities, compared to $111.2 million as of December
31, 1998. The Company has classified all of its marketable securities as
short-term, as the Company may choose not to hold its marketable securities
until maturity in order to take advantage of favorable market conditions.
Available cash is invested in accordance with the Company's investment policy's
primary objectives of liquidity, safety of principal and diversity of
investments.
Net cash used in operating activities was $21.4 million for the year ended
December 31, 1999, compared to cash provided of $36.2 million and $18.0 million
for the years ended December 31, 1998 and 1997. The change in cash flows from
operations in 1999 compared to 1998 was primarily due to the Company's
investments in genomic sequencing, mapping, bioinformatics and SNP discovery
resulting in a net loss in 1999 as compared to net income in 1998, and the
increase in accounts receivable and prepaid expenses, partially offset by
increases in accrued liabilities. The increase in net cash provided by operating
activities in 1998 compared to 1997 was primarily due to the increase in net
income before non-cash charges and the decrease in accounts receivable,
partially offset by the increase in prepaid and other assets and the decrease in
deferred revenues.
The Company's investing activities, other than purchases, sales and
maturities of marketable securities, have consisted predominantly of capital
expenditures and net purchases of long-term investments. Capital expenditures
for the years ended December 31, 1999, 1998, and 1997 were $34.8 million, $30.7
million, and $27.2 million, respectively. Capital expenditures increased in 1999
and 1998 primarily due to investments in
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computer and laboratory equipment as well as leasehold improvements related to
the expansion of the Company's facilities. Long-term investments in companies
with which the Company has research and development agreements were $4.2 million
for the year ended December 31, 1999 compared to $7.1 million and $8.5 million
for the years ended December 31, 1998 and 1997, respectively. In 1999 the
Company liquidated its investment in two such companies, resulting in proceeds
of $4.3 million and a net realized gain of $0.2 million. In 1998, the Company
paid $4.0 million, net of cash received, in connection with the purchase of
Hexagen and in 1997 transferred $6.0 million to restricted cash for disbursement
to diaDexus in accordance with the diaDexus joint venture agreement. In the
future, net cash used by investing activities may fluctuate significantly from
period to period due to the timing of strategic equity investments, capital
expenditures and maturity/sales and purchases of marketable securities.
Net cash provided by financing activities was $12.5 million, $4.0 million,
and $94.8 million for the years ended December 31, 1999, 1998, and 1997,
respectively. Net cash provided by financing activities in 1997 was primarily
due to proceeds from follow-on public stock offerings in August 1997, while net
cash provided by financing activities in 1999 and 1998 was due to the issuance
of common stock under the Company's stock option and employee stock purchase
plans.
Subsequent to December 31, 1999, the Company raised additional funds in two
financing transactions. In February 2000, the Company issued $200.0 million
aggregate principal amount of 5.5% convertible subordinated notes due 2007 in a
private placement, resulting in net proceeds of approximately $196.8 million.
Beginning May 15, 2000, the notes are convertible at the option of the note
holders into the Company's common stock at an initial conversion price of
$134.839 per share, subject to adjustment. Also in February 2000, the Company
issued 2,000,000 shares of its common stock in a private placement, for an
aggregate purchase price of $422.0 million. Net proceeds from the sale of those
shares were $398.3 million.
The Company expects its cash requirements to increase in 2000 as it:
invests in its sequencing, bioinformatics, expression database development, and
SNP discovery programs; invests in data-processing-related computer hardware to
support its existing and new database products and to enable the on-line
delivery of those products; continues to seek access to technologies through
investments, research and development alliances, license agreements and/or
acquisitions; makes strategic investments; and continues to make improvements in
existing facilities.
Based upon its current plans, the Company believes that its existing
resources will be adequate to satisfy its capital needs for at least the next
twelve months. The Company's cash requirements depend on numerous factors,
including the ability of the Company to attract and retain collaborators for its
databases and other products and services; expenditures in connection with
alliances, license agreements and acquisitions of and investments in
complementary technologies and businesses; competing technological and market
developments; the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights; the purchase of additional
capital equipment, including capital equipment necessary to ensure the Company's
sequencing and microarray operations remain competitive; capital expenditures
required to expand the Company's facilities; and costs associated with the
integration of new operations assumed through mergers and acquisitions. Changes
in the Company's research and development plans or other changes affecting the
Company's operating expenses may result in changes in the timing and amount of
expenditures of the Company's capital resources.
EURO CONVERSION
A single currency called the euro was introduced in Europe on January 1,
1999. Eleven of the fifteen member countries of the European Union agreed to
adopt the euro as their common legal currency on that date. Fixed conversion
rates between these participating countries' existing currencies (the "legacy
currencies") and the euro were established as of that date. The legacy
currencies are scheduled to remain legal tender as denominations of the euro
until at least January 1, 2002, but not later than July 1, 2002. During this
transition period, parties may settle transactions using either the euro or a
participating country's legal currency. This conversion to the euro had no
material impact on the Company's results of operations, financial
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position or cash flows. The Company will continue to evaluate the potential
impact of the euro on its computer and financial systems, business processes,
market risk, and price competition.
FACTORS THAT MAY AFFECT RESULTS
WE HAVE HAD ONLY LIMITED PERIODS OF PROFITABILITY AND WE EXPECT TO INCUR LOSSES
IN THE FUTURE, WHICH MAY PREVENT US FROM RETURNING TO PROFITABILITY
We had net losses from inception in 1991 through 1996, reported net income
in 1997 and 1998, and again incurred a net loss in 1999. Because of those
losses, we had an accumulated deficit of $55.2 million as of December 31, 1999.
We intend to make significant investments in sequencing, bioinformatics,
expression database development and single nucleotide polymorphism, or SNP,
discovery over the next year. As a result,we expect to report a net loss for the
year ending December 31, 2000. We may report net losses in future periods as
well. We expect that our expenditures may continue to increase in 2000 due in
part to our continued investment in new product and technology development,
including the continuation of our genomic sequencing, bioinformatics, expression
database development, SNP-discovery programs, obligations under existing and
future research and development alliances, and our increasing investment in
marketing, sales and customer service. Our profitability depends on our ability
to increase our revenues:
TO GENERATE SIGNIFICANT REVENUES, WE MUST OBTAIN ADDITIONAL DATABASE
COLLABORATORS AND RETAIN EXISTING COLLABORATORS. While we had over 20 database
agreements as of December 31, 1999, we may be unable to enter into any
additional agreements. Also, our database collaborators may choose not to renew
their agreements upon expiration. In 1999, for the first time one of our LifeSeq
Gold database collaborators did not renew its subscription. Our database
revenues are also affected by the extent to which existing collaborators expand
their agreements with us to include our new database products and to the extent
that existing collaborators reduce the number of products or services for which
they subscribe. Some of our database agreements require us to meet performance
obligations. A database collaborator can terminate its agreement before the end
of its scheduled term if we breach the agreement and fail to cure the breach
within a specified period.
OUR REVENUES AND PROFITABILITY WILL ALSO DEPEND ON OUR ABILITY TO GENERATE
PROFITS FROM EXPRESSION DATABASES AND MICROARRAY SERVICES. We acquired Synteni,
Inc. in January 1998 to provide microarray services and to generate information
for expression databases. The contribution of our microarray operations to our
operating results will depend on whether we can continue to obtain high-volume
customers for microarray services and expression databases, whether we can
continue to increase our microarray production capacity in a timely manner and
with consistent volumes and quality, and the costs associated with increasing
our microarray production capacity.
WE DO NOT EXPECT MILESTONE OR ROYALTY PAYMENTS TO SUBSTANTIALLY CONTRIBUTE
TO REVENUES FOR SEVERAL YEARS. Part of our strategy is to license to database
collaborators our know how and patent rights associated with the gene sequences
and related information in our proprietary databases, for use in the discovery
and development of potential pharmaceutical, diagnostic or other products. Any
potential product that is the subject of such a license will require several
years of further development, clinical testing and regulatory approval before
commercialization.
OUR OPERATING RESULTS ARE UNPREDICTABLE AND MAY ADVERSELY IMPACT OUR STOCK PRICE
Our operating results are unpredictable and may fluctuate significantly
from period to period due to a variety of factors, including:
- changes in the demand for our products and services;
- the introduction of competitive databases or services, including public
domain databases;
- the pricing of access to our databases;
- the nature, pricing and timing of other products and services provided to
our collaborators;
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- changes in the research and development budgets of our collaborators and
potential collaborators;
- depreciation expense from capital expenditures;
- acquisition, licensing and other costs related to the expansion of our
operations, including operating losses of acquired businesses such as
Synteni and Hexagen;
- losses and expenses related to our investments in joint ventures and
businesses, including our proportionate share of operating losses of our
diaDexus, LLC, joint venture with SmithKline Beecham Corporation;
- payments of milestones, license fees or research payments under the terms
of our increasing number of external alliances; and
- expenses related to, and the results of, litigation and other proceedings
relating to intellectual property rights (including the lawsuits filed by
Affymetrix, Inc. described below).
In particular, revenues from our database business are unpredictable
because:
- the timing of our database installations is determined by our
collaborators;
- the sales cycle for our database products is lengthy; and
- the time required to complete custom orders can vary significantly.
We expect our expression databases to represent an increasing amount of our
revenues. Also, revenues may be affected by developments in the Affymetrix
litigation, which may cause potential customers to postpone or change their
decision to use our microarray services.
We are investing in a number of new areas to try to broaden our business.
These areas include sequencing, bioinformatics, gene expression databases, SNP
discovery, molecular diagnostics, proteomics, or the large scale,
high-throughput analysis of protein expression, and the online delivery of our
database and software products. Because many of these address new markets or
involve untested technologies, they may not generate any revenues or provide an
adequate return on our investment. In these cases, we may have to recognize
expenses or losses.
We have significant fixed expenses, due in part to our need to continue to
invest in product development and extensive support for our database
collaborators. We may be unable to adjust our expenditures if revenues in a
particular period fail to meet our expectations, which would adversely affect
our operating results for that period. Forecasting operating and integration
expenses for acquired businesses may be particularly difficult, especially where
the acquired business focuses on technologies that do not have an established
market.
We believe that period-to-period comparisons of our financial results will
not necessarily be meaningful. You should not rely on these comparisons as an
indication of our future performance. If our operating results in any future
period fall below the expectations of securities analysts and investors, our
stock price will likely fall, possibly by a significant amount.
WE EXPERIENCE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE AND IF WE
DO NOT COMPETE EFFECTIVELY OUR REVENUES MAY DECLINE
GENOMIC BUSINESSES ARE INTENSELY COMPETITIVE. The human genome contains a
finite number of genes. Our competitors may seek to identify, sequence and
determine the biological function of numerous genes in order to obtain a
proprietary position with respect to new genes. A number of companies, other
institutions and government-financed entities are engaged in gene sequencing,
gene discovery, gene expression analysis, positional cloning, the study of
genetic variation, and other genomic service businesses. Many of these
companies, institutions and entities have greater financial and human resources
than we do.
Some of our competitors have developed databases containing gene sequence,
gene expression, genetic variation or other genomic information and are
marketing or plan to market their data to pharmaceutical companies. Additional
competitors may attempt to establish databases containing this information in
the future. We expect that competition in our industry will continue to
intensify. Several large pharmaceutical
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companies have formed a consortium to create a SNPs database and to make all of
the information publicly available. The formation of this consortium could delay
or reduce the potential revenues related to our SNP-related business.
PATENT POSITIONS OR PUBLIC DISCLOSURES MAY REDUCE THE VALUE OF OUR
DATABASES. Competitors may discover and establish patent positions with respect
to gene sequences in our databases. Further, certain entities engaged in gene
sequencing have made the results of their sequencing efforts publicly available.
In January 2000, the Celera Genomics Group of PE Corporation announced that it
has DNA sequence in its database that covers 90% of the human genome and plans
to complete the sequencing of the human genome by the summer of 2000. Celera has
announced that it has filed a provisional patent application on newly discovered
partial genes and stated its intention to file full applications on medically
important discoveries. The Human Genome Project, which is coordinated by the
U.S. Department of Energy and the National Institutes of Health, has announced
that a consortium of laboratories associated with the Project predicts that they
will produce at least 90% of the human genome sequence in a "working draft form"
by the spring of 2000 and that they intend to make the information publicly
available. The public availability of gene sequences or resulting patent
positions covering substantial portions of the human genome or microbial or
plant genomes could reduce the potential value of our databases to our
collaborators. It could also impair our ability to realize royalties or other
revenue from any commercialized products based on this genetic information.
COMPETITORS MAY DEVELOP SUPERIOR TECHNOLOGY. The gene sequencing machines
used in our computer-aided sequencing operations are commercially available and
are being used by at least one competitor. In addition, some of our competitors
and potential competitors are developing proprietary sequencing technologies
that may be more advanced than ours. PE Corporation began commercial shipments
of a new gel-based sequencing machine, of which a large number have been
provided to Celera Genomics Group. We may be unable to obtain access to
sufficient quantities of these machines on acceptable terms.
In addition, a number of companies are pursuing alternative methods for
generating gene expression information, including microarray technologies. These
advanced sequencing or gene expression technologies may not be commercially
available for us to purchase or license on reasonable terms, if at all. At least
one other company currently offers microarray-based services that might be
competitive with ours.
Our SNP discovery platform represents a modification of a process that is
in the public domain. We are seeking patent protection for these improvements,
but have not yet received any patents. Other companies could make similar or
superior improvements to this process without infringing our rights, and we may
not have access to those improvements. The discovery of SNPs is a competitive
area. Other companies may develop or obtain access to different SNP discovery
platforms, to which we may not have access, that may make our technology
obsolete.
We also face competition from providers of software. A number of companies
have announced their intent to develop and market software to assist
pharmaceutical companies and academic researchers in managing and analyzing
their own genomic data and publicly available data.
WE MUST CONTINUE TO INVEST IN NEW TECHNOLOGIES. The genomics industry is
characterized by extensive research efforts, resulting in rapid technological
progress. To remain competitive, we must continue to expand our databases,
improve our software, and invest in new technologies. New developments are
expected to continue, and discoveries by others may render our services and
potential products noncompetitive.
WE ARE INVOLVED IN PATENT LITIGATION, WHICH IF NOT RESOLVED FAVORABLY COULD HARM
OUR BUSINESS
In January 1998, Affymetrix filed a lawsuit in federal court alleging
infringement of U.S. patent number 5,445,934 by both Synteni and Incyte. The
complaint alleges that the '934 patent has been infringed by Synteni's and
Incyte's making, using, selling, importing, distributing or offering to sell
high density arrays in the United States and that this infringement was willful.
Affymetrix seeks a permanent injunction enjoining Synteni and Incyte from
further infringement of the '934 patent and seeks damages, costs, attorneys'
fees and interest. Affymetrix also requests triple damages based on allegedly
willful infringement.
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In September 1998, Affymetrix filed an additional lawsuit alleging
infringement of U.S. patent numbers 5,744,305 and 5,800,992 by Synteni and
Incyte. The complaint alleges that the '305 patent has been infringed by
Synteni's and Incyte's making, using, selling, importing, distributing or
offering to sell high density arrays in the United States. It also alleges that
the '992 patent has been infringed by the use of Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling and that this infringement was willful. Affymetrix had sought a
preliminary injunction enjoining Synteni and Incyte from using GEM microarray
technology to conduct this kind of gene expression monitoring, and a permanent
injunction enjoining Synteni and Incyte from further infringing the '305 and
'992 patents.
The lawsuits were initially filed in the United States District Court for
the District of Delaware. In November 1998, the court granted Incyte's motion to
transfer the suits to the United States District Court for the Northern District
of California. Affymetrix's request for a preliminary injunction was denied in
April 1999. As a result of the assignment of the case to a new judge, all
scheduled trial and pretrial dates have been vacated. The court is expected to
set a new schedule in late April 2000.
In April 1999, the Board of Patent Appeals and Interferences of United
States Patent and Trademark Office declared interferences between pending patent
applications licensed exclusively to us and the Affymetrix '305 and '992
patents. An interference proceeding is invoked by the Patent and Trademark
Office when more than one patent applicant claims the same invention. The Board
of Patent Appeals and Interferences evaluates all relevant facts, including
those bearing on first to invent, validity, enablement and scope of claims, and
then makes a determination as to who, if anyone, is entitled to the patent on
the disputed invention. In September 1999, the Board of Patent Appeals and
Interferences determined that Incyte had not met its prima facie case, and ruled
that patents licensed by Incyte and Synteni from Stanford University were not
entitled to priority over corresponding claims in the two Affymetrix patents. We
are seeking de novo review of the board decisions in the United States district
court for the Northern District of California.
We believe we have meritorious defenses and intend to defend these suits
vigorously. However, our defense may be unsuccessful. At this time, we cannot
reasonably estimate the possible range of any loss resulting from these suits
due to uncertainty about the ultimate outcome. We have spent and expect to
continue to spend a significant amount of money and management time on this
litigation. Also, if we are required to license any technology as a result of
these suits, we do not know whether we will be able to do so on commercially
acceptable terms, if at all.
WE SPEND A SUBSTANTIAL AMOUNT OF MONEY ON NEW AND UNCERTAIN BUSINESSES AND
DEMAND FOR OUR PRODUCTS AND SERVICES MAY BE INSUFFICIENT TO COVER OUR COSTS,
WHICH COULD IMPACT OUR PROFITABILITY
There is no precedent for our microarray-based gene expression database or
service businesses or the use of SNP-based genetic variation information. The
usefulness of the information generated by these businesses is unproven. Our
collaborators and potential collaborators may determine that our databases,
software tools and microarray-related services are not useful or cost-effective.
Due to the nature and price of some of the products and services we offer, only
a limited number of companies are potential collaborators for those products and
services. If we do not develop these new products and services in time to meet
market demand or if there is insufficient demand for these products and
services, we may not be able to cover our costs of developing these products and
services or earn a sufficient return on our investment.
Additional factors that may affect demand for our products and services
include:
- the extent to which pharmaceutical and biotechnology companies conduct
these activities in-house or through industry consortia;
- the emergence of competitors offering similar services at competitive
prices;
- the extent to which the information in our databases is made public or is
covered by others' patents;
- our ability to establish and enforce proprietary rights to our products;
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- regulatory developments or changes in public perceptions relating to the
use of genetic information and the diagnosis and treatment of disease
based on genetic information; and
- technological innovations that are more advanced than the technologies
that we have developed or that are available to us.
Many of these factors are beyond our control.
OUR NEW PROGRAMS RELATING TO THE ROLE OF GENETIC VARIATION IN DISEASE AND DRUG
RESPONSE MAY NEVER GENERATE SIGNIFICANT REVENUES OR PROFITABLE OPERATIONS
We recently began to focus part of our business on developing databases and
other products and services to assist pharmaceutical companies in a new and
unproven area: the identification and correlation of genetic variation to
disease and drug response. We will incur significant costs over the next several
years in expanding our research and development in this area. These activities
may never generate significant revenues or profitable operations.
This new aspect of our business will focus on SNPs, one type of genetic
variation. The role of SNPs in disease and drug response is not fully
understood, and relatively few, if any, therapeutic or diagnostic products based
on SNPs have been developed and commercialized. Among other things, demand in
this area may be adversely affected by ethical and social concerns about the
confidentiality of patient-specific genetic information and about the use of
genetic testing for diagnostic purposes.
Except for a few anecdotal examples, there is no proof that SNPs have any
correlation to diseases or a patient's response to a particular drug or class of
drug. Identifying statistically significant correlations is time-consuming and
could involve the collection and screening of a large number of patient samples.
We do not know if the SNPs we have discovered to date are suitable for these
correlation studies. Nor do we currently have access to the patient samples
needed or technology allowing us to rapidly and cost-effectively identify
pre-determined SNPs in large numbers of patients.
Most SNPs may occur too infrequently to warrant their use in analyzing
patients' genetic variation. We may have trouble identifying SNPs that both
correlate with diseases or drug responses and occur frequently enough to justify
their use by pharmaceutical companies.
Our success will also depend upon our ability to develop, use and enhance
new and relatively unproven technologies. Our strategy of using high-throughput
mutation detection processes and sequencing to identify SNPs and genes rapidly
is unproven. Among other things, we will need to continue to improve the
throughput of our SNP-discovery technology. We may not be able to achieve these
necessary improvements, and other factors may impair our ability to develop our
SNP-related products and services in time to be competitively available.
OUR STRATEGIC INVESTMENTS MAY RESULT IN LOSSES AND OTHER ADVERSE EFFECTS
We make strategic investments in joint ventures or businesses that
complement our business. These investments, such as our investment in diaDexus,
may:
- often be made in securities lacking a public trading market or subject to
trading restrictions, either of which increases our risk and reduces the
liquidity of our investment;
- require us to record losses and expenses related to our ownership
interest;
- require us to record charges related to the acquisition of in-process
technologies or for the impairment in the value of the securities
underlying our investment; and
- require us to invest greater amounts than anticipated or to devote
substantial management time to the management of research and development
relationships and joint ventures.
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The market values of many of these investments fluctuate significantly. We
evaluate our long-term equity investments for impairment of their values on a
quarterly basis. Impairment could result in future charges to our earnings.
These losses and expenses may exceed the amounts that we anticipated.
OUR SALES CYCLE IS LENGTHY AND THERE IS NO GUARANTEE THAT A SUBSCRIPTION OR
SERVICES AGREEMENT WILL RESULT
Our ability to obtain new subscribers for our databases, software tools and
microarray and other services depends upon prospective subscribers' perceptions
that our products and services can help accelerate drug discovery efforts. Our
database sales cycle is typically lengthy because we need to educate our
potential subscribers and sell the benefits of our tools and services to a
variety of constituencies within potential subscriber companies. In addition,
each database subscription and microarray services agreement involves the
negotiation of unique terms. We may expend substantial funds and management
effort with no assurance that a subscription or services agreement will result.
Actual and proposed consolidations of pharmaceutical companies have affected the
timing and progress of our sales efforts. We expect that future proposed
consolidations will have similar effects.
PATENTS AND OTHER PROPRIETARY RIGHTS PROVIDE UNCERTAIN PROTECTION OF OUR
PROPRIETARY INFORMATION AND OUR INABILITY TO PROTECT A PATENT OR OTHER
PROPRIETARY RIGHT MAY IMPACT OUR BUSINESS AND OPERATING RESULTS
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY INFORMATION, WHICH MAY RESULT
IN UNAUTHORIZED USE AND A LOSS OF REVENUE. Our business and competitive position
depend upon our ability to protect our proprietary database information and
software technology, but our strategy of obtaining proprietary rights in as many
genes and SNPs as possible is unproven. Despite our efforts to protect this
information and technology, unauthorized parties may attempt to obtain and use
information that we regard as proprietary. Although our database subscription
agreements require our subscribers to control access to our databases, policing
unauthorized use of our databases and software may be difficult.
We pursue a policy of having our employees, consultants and advisors
execute proprietary information and invention agreements when they begin working
for us. However, these agreements may not provide meaningful protection for our
trade secrets or other proprietary information in the event of unauthorized use
or disclosure.
Our means of protecting our proprietary rights may not be adequate and our
competitors may:
- independently develop substantially equivalent proprietary information
and techniques;
- otherwise gain access to our proprietary information; or
- design around patents issued to us or our other intellectual property.
OUR PATENT APPLICATIONS MAY CONFLICT WITH OTHERS. Our current policy is to
file patent applications on what we believe to be novel full-length and partial
gene sequences obtained through our gene sequencing efforts. We have filed U.S.
patent applications in which we have claimed certain partial gene sequences. We
have also applied for patents in the U.S. and other countries claiming
full-length gene sequences associated with cells and tissues involved in our
gene sequencing program. We hold a number of issued U.S. patents on full-length
genes and one issued U.S. patent claiming multiple partial gene sequences. A
number of entities make certain gene sequences publicly available, which may
adversely affect our ability to obtain patents on those genes.
We believe that some of our patent applications claim genes that may also
be claimed in patent applications filed by others. In some or all of these
applications, a determination of priority of inventorship may need to be decided
in an interference before the United States Patent and Trademark Office.
ENFORCEMENT OF GENE PATENTS IS UNCERTAIN AND GENE PATENTS MAY BE FOUND
UNENFORCEABLE, RESULTING IN A LOSS OF COMPETITIVE BENEFIT. One of our strategies
is to obtain proprietary rights in as many genes (including partial gene
sequences) and SNPs as possible. While the USPTO has issued patents covering
full-length genes, partial gene sequences and SNPs, we do not know whether or
how courts may enforce those patents, if that
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becomes necessary. If a court finds these types of inventions to be
unpatentable, or interprets them narrowly, the benefits of our strategy may not
materialize.
WE MAY DECIDE TO ABANDON PATENT APPLICATIONS, WHICH COULD DIMINISH THE
VALUE OF OUR PATENT PORTFOLIO AND POSSIBLY OUR FUTURE REVENUES. The USPTO has
had a substantial backlog of biotechnology patent applications, particularly
those claiming gene sequences. In 1996, the USPTO issued guidelines limiting the
number of partial gene sequences that can be examined within a single patent
application. Many of our patent applications contain more partial sequences than
the maximum number allowed under these guidelines. Due to the resources needed
to comply with the guidelines, we may decide to abandon patent applications for
some of our partial gene sequences.
Because filing large numbers of patent applications and maintaining issued
patents can be very costly, we may choose not to pursue every application. If we
do not pursue patent protection for all of our full-length and partial gene
sequences, the value of our intellectual property portfolio could be diminished.
Because of the possible delay in obtaining allowance of some of our patent
applications, and the secrecy of patent applications, we do not know if other
applications having priority over ours have been filed.
WE MAY NEED TO REFILE SOME OF OUR PATENT APPLICATIONS AND THE PERIOD OF
PATENT PROTECTION HAS BEEN SHORTENED, WHICH MAY AFFECT OUR POTENTIAL REVENUES
AND PROFITS. The value of our patents depends in part on their duration. The
U.S. patent laws were amended in 1995 to change the term of patent protection
from 17 years from patent issuance to 20 years from the earliest effective
filing date of the application. Because the average time from filing to issuance
of biotechnology applications is at least one year and may be more than three
years depending on the subject matter, a 20-year patent term from the filing
date may result in substantially shorter patent protection, which may adversely
affect our rights under any patents that we obtain. We may need to refile
applications claiming large numbers of gene sequences and, in these situations,
the patent term will be measured from the date of the earliest priority
application. This would shorten our period of patent exclusivity.
INTERNATIONAL PATENT PROTECTION IS PARTICULARLY UNCERTAIN, AND OPPOSITION
PROCEEDINGS IN FOREIGN COUNTRIES MAY BE COSTLY AND DIVERT MANAGEMENT
RESOURCES. Biotechnology patent law outside the United States is even more
uncertain than in the United States and is currently undergoing review and
revision in many countries. Further, the laws of some foreign countries may not
protect our intellectual property rights to the same extent as U.S. laws. We may
participate in opposition proceedings to determine the validity of our or our
competitors' foreign patents, which could result in substantial costs and
diversion of our efforts.
WE MAY BE SUBJECT TO ADDITIONAL LITIGATION AND INFRINGEMENT CLAIMS THAT COULD BE
COSTLY AND DISRUPT OUR BUSINESS
The technology that we use to develop our products, and those that we
incorporate in our products, may be subject to claims that they infringe the
patents or proprietary rights of others. The risk of this occurring will tend to
increase as the genomics, biotechnology and software industries expand, more
patents are issued and other companies attempt to discover genes and SNPs and
engage in other genomic-related businesses.
As is typical in the genomics, biotechnology and software industries, we
have received, and we will probably receive in the future, notices from third
parties alleging patent infringement. We believe that we are not infringing the
patent rights of any such third party. Except for Affymetrix, no third party has
filed a patent lawsuit against us.
We may, however, be involved in future lawsuits alleging patent
infringement or other intellectual property rights violations. In addition,
litigation may be necessary to:
- assert claims of infringement;
- enforce our patents;
- protect our trade secrets or know-how; or
- determine the enforceability, scope and validity of the proprietary
rights of others.
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We may be unsuccessful in defending or pursuing these lawsuits. Regardless
of the outcome, litigation can be very costly and can divert management's
efforts. An adverse determination may subject us to significant liabilities or
require us to seek licenses to other parties' patents or proprietary rights. We
may also be restricted or prevented from manufacturing or selling our products.
Further, we may not be able to obtain the necessary licenses on acceptable
terms, if at all.
WE MAY ENCOUNTER PROBLEMS IN MEETING CUSTOMERS' SOFTWARE NEEDS, WHICH COULD
ADVERSELY IMPACT OUR REVENUES AND THE