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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NO. 000-30469
DECODE GENETICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3326704
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
LYNGHALS 1, REYKJAVIK, ICELAND
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
+ 354-570-1900
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the equity stock held by non-affiliates
of the Registrant: $296,036,957 at January 23, 2001 based on the last sales
price on that date.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of January 31, 2001.
CLASS NUMBER OF SHARES
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Common Stock, $.001 par value 45,066,969
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement to be filed with respect to the Annual Meeting of
Stockholders to be held on June 15, 2001 is incorporated by reference into Part
III.
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PART I
ITEM 1. BUSINESS
OVERVIEW
deCODE is a genomics and health informatics company which is developing
products and services for the healthcare industry. We develop and apply modern
informatics technology to discover new knowledge about health and disease
through data-mining.
Our approach to the discovery of healthcare knowledge brings together three
key types of anonymous population data derived from the Icelandic nation:
information from the healthcare system, information about relationships among
individuals covered by this system and associated molecular genetics data.
Our business model is based on four sets of information:
- genealogy records of almost all living Icelanders and most of their
ancestors for whom records exist, dating back in some cases to the
settlement of Iceland in the ninth century;
- genotype data from consenting Icelanders;
- the Icelandic Health Sector Database, which we plan to create and operate
from healthcare records of Icelanders pursuant to the Icelandic Health
Sector Database license; and
- other public and proprietary data to which we have access.
Our three avenues of commercialization are as follows:
Discovery Services. We believe that the development and application of
proprietary bioinformatics tools in the context of an appropriate population
will accelerate our ability to discover disease-related genes and associated
drug targets. We have adopted this strategy to derive value both from diagnostic
and therapeutic products and from pharmacogenomic services. We are currently
working on discovery in collaboration with F.Hoffmann-La Roche, or Roche, and in
our own research programs. We expect to seek additional partners for this
business unit from among pharmaceutical and biotechnology companies.
Database Services. We are developing the deCODE Combined Data Processing
system, a tool which, subject to ongoing compliance with regulatory
requirements, will cross-reference genealogical records, data from the Icelandic
Health Sector Database and genotypes of consenting participants. We plan to
develop the deCODE Combined Data Processing system to generate knowledge about
diseases and their genetic risk factors, disease management, the interplay
between environment and disease, and outcomes and resource use in delivering
healthcare.
Healthcare Informatics. The third unit of our business, healthcare
informatics, is derived from our discovery and database services. We expect the
products of this business unit to result from knowledge and experience acquired
in our two principal business units, discovery services and database services.
In the future, the integration of genetics and medicine will add a new level of
complexity to the decision making process in the delivery of healthcare. The
need for medical decision-support systems for healthcare providers is expected
to increase over the next several years. We are developing medical
decision-support systems, which will include insights from the deCODE Combined
Data Processing system, for healthcare providers and we will seek to
commercialize bioinformatics tools developed in our gene and drug target
discovery efforts. We also plan to provide privacy protection products based on
our expertise in encryption tools for complex and sensitive medical and genetic
data.
In this report, references to us refer to us and our wholly-owned
subsidiary, Islensk erf(LOGO)agreining ehf., and its subsidiaries deCODE cancer
ehf. and Encode ehf., each an Icelandic private limited company.
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SCIENTIFIC BACKGROUND
In February 2001, Celera Genomics and the Human Genome Project presented
the initial sequencing and analysis of the human genome. The next great
challenge is to transform these raw sequence data into specific knowledge about
disease and healthcare.
GENOMICS
The blueprint of all biological activity, which consists of
deoxyribonucleic acid, or DNA, is located within the nucleus of every cell and
is commonly referred to as the genome. The genome is the total DNA content of an
organism. DNA is composed of four bases. The sequence or order of these bases is
the code that ultimately determines structure and function in all organisms. The
human genome is broken up into 23 pairs of chromosomes and every individual
inherits a set of 23 chromosomes from each parent. Genes are segments of DNA
located throughout the genome. The human genome consists of approximately three
billion bases and has been estimated to contain 30,000 - 35,000 protein-coding
genes. Each cell uses or "expresses" only those genes (approximately 30% of the
30,000 - 35,000 genes) necessary for its specific role. Accordingly, different
types of cells express different sets of genes.
When a gene is turned on or expressed, it produces a derivative copy of its
DNA sequence called messenger RNA, which is used as a template to direct the
production of a protein. Proteins are large molecules composed of amino acids
and control all biological processes. The order of the bases in DNA determines
the order of amino acids in a protein. Proteins in turn make up molecular
pathways, which cells use to carry out their specific functions. Diseases can
occur when a mutated or a defective gene upsets or blocks a molecular pathway in
a normal biological function. The ability to detect a mutation and to understand
the process by which it contributes to disease is crucial to understanding the
fundamental mechanisms of a disease. In the simplest form, genetic diseases
result from a mutation in only one gene and the disease is usually passed from
generation to generation. Common diseases are thought to have a complex genetic
basis; they generally skip one or more generations and may result from
interactions between genes or from the interaction between genetic and
environmental factors.
The human genome sequence is now nearly completed and has been estimated to
contain 30,000 -- 35,000 protein-coding genes and more than two million markers
to help map disease-causing genes. We believe that by itself, this knowledge is
of limited value and that the importance of this discovery will only reach its
full potential if this sequence data is explored along with detailed knowledge
about health history, genetic profile and genealogy.
POPULATION GENOMICS
Population genomics is a field of genomics which applies modern genetic and
molecular biology techniques to an entire population to discover how genetic
factors contribute to the cause of diseases. Since almost all common diseases
have a genetic component, the discovery of the cause of disease can often be
reduced to finding the gene or genes mutated in patients who have the disease as
compared to those who do not. Since this approach does not require a
preconceived notion about which tissues or proteins or genes are important in
the disease, it represents a systematic strategy for creating specific knowledge
about disease. We believe that the challenge is to find a population which is
small enough to allow the necessary cooperation but large enough to deliver
meaningful results.
FUNCTIONAL GENOMICS
Functional genomics is a field of genomics that attempts to determine the
manner in which disease genes specifically impact the disease process. It is the
study of the function of genes, including how expression of a particular gene is
regulated and the function of the protein that the gene encodes. Researchers
employing functional genomics techniques may analyze large numbers of genes to
compare patterns of gene expression in diseased and healthy tissues or may
compare genes in humans to those in other species, in each case in an effort to
determine the molecular pathways that cause disease.
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GENOMICS AND HEALTHCARE PRODUCTS
Genomics and Diagnostics. Gene-based diagnostic tests for both disease
diagnoses and management represent an important tool that physicians can use to
identify and monitor patients with increased risk of a disease. These tests can
complement clinical tests and may lead to more cost-effective use of expensive
tests and to a greater level of accuracy. Knowledge of predisposition towards a
disease may allow patients to alter their lifestyles or to take medication that
prevents the disease.
Genomics and Therapeutics. The lack of precise knowledge about the causes
of diseases makes it difficult for the pharmaceutical industry to select targets
for new drugs. Identifying specific disease genes may result in very specific
and, therefore, potentially more valuable drug targets than are otherwise
available. The disease gene products themselves may be attractive drug targets.
In addition, they mark a key molecular pathway that is composed of several other
potential drug targets.
Genomics and Drug Response. The efficacy and safety of existing and new
drugs may be enhanced by pharmacogenomics. Pharmacogenomics is the application
of genomics technology to the analysis and identification of genes involved in
drug response. It is believed that genomics will permit the identification of
the genetic differences that cause people to respond differently to the same
drugs. This may lead to tailor-made treatments for individuals, maximizing
efficacy and minimizing side effects.
deCODE'S UNIQUE APPROACH
POPULATION GENOMICS AND THE VALUE OF THE ICELANDIC POPULATION
We believe that our unique approach, coupled with the application of
extensive bioinformatics to population genomics, has a number of distinct
advantages because of the following characteristics of the Icelandic nation:
Extensive Genealogy. Genealogy is a national pastime in Iceland. According
to Icelandic history books and old manuscripts from as early as the thirteenth
century, Iceland was settled in the ninth and tenth centuries. Since very early
stages of their history, Icelanders wrote detailed accounts of Icelandic facts
and events, including genealogy. The library of the University of Iceland and
other institutions contain manuscripts on genealogy dating from the middle ages,
which form a bridge between the time of settlement and official records kept in
the Icelandic National Archives from the time when church and government
officials began systematic registration of the population in the seventeenth
century. Numerous sources of genealogical information, including parish records,
census data and written manuscripts, such as the Icelandic sagas, are readily
available. Genealogical data can facilitate the identification of genes that
cause a specific disease by enabling researchers to compare the genes of family
members with and without the disease over the generations. The genealogical data
can go back as far as 35 generations and we believe it provides sufficient
genealogical information for our purposes. In addition, the fact that there has
been little immigration means that most Icelanders living today are descendants
of the original "founding" settlers and can, therefore, trace their ancestry to
the early middle ages.
Relative Genetic Homogeneity. Diseases which are prevalent in developed
countries, such as cancer and heart disease, have a large number of genetic
causes. In an isolated population that is genetically simpler, the number of
genetic causes is likely to be fewer than in more genetically diverse
populations. Thus, studying a more homogeneous population, like the Icelanders,
simplifies the problem of finding and subsequently understanding disease genes
and mutations causing common diseases. The Icelandic population was founded by
Norwegian and British settlers who arrived in Iceland in the ninth and tenth
centuries. Because Iceland has experienced little immigration over the last
eleven centuries, most of the 280,000 living Icelanders are descended from these
original "founding" settlers. Our ability to trace the Icelandic population back
approximately 1,100 years also facilitates gene discovery. Specific genes are
associated with the appearance and existence of specific diseases. For example,
the BRCA2 gene is known to carry mutations in some individuals that can cause
breast cancer. Because many present-day Icelanders may share a gene carrying a
mutation that causes a particular disease with one of the founding settlers,
they may also have such "disease gene" in common with other Icelanders. We can
make use of this "founder" effect to facilitate the
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identification of disease genes. It has been demonstrated that the disease genes
found in Iceland are, in general, also found in other populations. Even if the
disease genes in Iceland are different from those found in other populations,
the identification of any disease gene can lead to discovery of a key molecular
pathway likely to be involved in the disease and, consequently, to the discovery
of disease genes in other populations which cause anomalies in the particular
pathway. Therefore, we believe the discovery of a disease gene in Iceland may
enhance the identification of drug targets for any population.
Centralized Healthcare System. Iceland has had a centralized national
healthcare system since 1915. It presently consists of a base of 55 primary care
centers, a large University hospital in Reykjavik which has recently been formed
on the basis of a merger of the country's two largest hospitals, one central
hospital in Akureyri, and several smaller ones. Outside the primary care
centers, the healthcare system is highly specialized. Specialty clinics care for
most of the patients with major illnesses. Our clinical collaborators work at
these specialty clinics, as well as in the major hospitals. This centralization
of the healthcare system means that the data is centralized and easily
accessible for scientific research.
Well-educated Population. The level of public education is high in Iceland
and illiteracy is negligible. Historically, the Icelandic population has been
cooperative when approached by physicians and scientists working on biomedical
research in the Icelandic community.
We believe that the Icelandic population meets the criteria of being small
enough to allow necessary cooperation but large enough to deliver meaningful
results. While the Icelandic population is characterized by relative genetic
homogeneity, it is large enough to prevent an increased incidence of recessive
genetic conditions which can arise as a result of intermarriage. At the same
time, the population is small enough, and the amount of immigration is limited
enough, that the total genome of Icelanders is less variable than the genomes of
larger, less historically isolated nations.
Comparison to Other Approaches
Some companies are using an approach to locate disease genes that relies on
correlating DNA variations such as single nucleotide polymorphisms, known as
SNPs, throughout the genome or in candidate genes to patients. We believe that
this approach is analogous to searching for a single needle that is present in
one of a hundred haystacks. We believe that our population genomics approach
will allow us to find the haystack using our large families before we begin
searching for the needle using SNPs and other variations to narrow down or
fine-map genes.
Other companies are using functional genomics to help select potential drug
targets. Most of these approaches depend on expression analysis using DNA chips
that compare the genes turned on or off in diseased tissue with those in normal
tissue. We, on the other hand, apply functional genomics more selectively,
focusing on the disease genes identified through our population genomics
approach to more specifically define their molecular pathways.
There may be some limitations to our population genomics approach because
disease genes found in Iceland may not always be directly relevant in other
populations, although there is much overlap in disease genes that have been
found in Iceland over the last 15 years and the rest of the world. The Icelandic
population is probably too small to study diseases that are not common. However,
our aim is to continue to focus on the diseases in Iceland that have the
greatest public health prevalence worldwide.
DISCOVERY SERVICES
The extensive genealogy database and associated bioinformatics that we have
built in Iceland are the core of our novel genealogical approach to identifying
human disease genes and associated drug targets.
We believe that working with the Icelandic population puts us in a position
to accelerate the discovery and development of new proprietary diagnostic and
therapeutic products capable of addressing diseases at their root causes, rather
than simply identifying and treating their symptoms. These programs may permit
doctors to make earlier diagnoses, use healthcare resources more
cost-effectively and select safer and more effective drugs for patients on the
basis of their genetic make-up.
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The genealogical approach that we have developed depends on a genealogical
database and bioinformatics tools that we have built. In the study of any
particular disease, we first define the disease classification broadly but
rigorously. (For example, we first labeled stroke patients as "stroke" rather
than as a series of less common subtypes of stroke). After our clinical
collaborators compile a list of all patients who have been diagnosed with the
disease, the list is encrypted and run through our genealogy database which
yields very large extended families of patients, sometimes containing hundreds
of individuals. The genealogy naturally links together those patients who are
likely to share a gene or genes for the disease. The patients are genotyped to
determine which genes or pieces of chromosomes they have in common. The
genealogical approach compensates for the inadequacies of "consensus criteria"
for disease classification, which utilizes specific symptoms accepted by a
consensus committee of physicians to determine who is "affected" by the disease,
and increases the chance that the form of the disease studied is the one
actually inherited. We believe that no other organization uses genealogy in this
manner. Our unique approach to human genetics has allowed us to map genes in
diseases in which many others have previously failed. By using this approach, we
expect to be able to assign function to the raw data contained in the human
genome sequence.
The following describes our approach to gene discovery.
Genetic Mapping
We have developed an extensive computerized genealogy database that
currently includes approximately 620,000 individuals or almost all the
approximately 280,000 living Icelanders along with most of their ancestors for
whom records exist. This represents most of the Icelanders who are known through
records ever to have lived in Iceland. Research that our scientists conducted on
26 extended families containing hundreds of individuals, which the American
Journal of Human Genetics published in its May 2000 issue, showed that the
accuracy of maternal connections in the database is 99.3%.
Before we start a study looking for genes that cause or contribute to a
particular disease, we obtain approvals from both the Icelandic Bioethics
Committee and the Data Protection Authority. All patients who participate in our
research program by giving a blood sample sign an informed consent form approved
by the Bioethics Committee. We have developed a sophisticated encryption system
to protect the personal privacy of all participating volunteers.
In our present disease-based research projects the first step of our
genealogical approach is for our clinical collaborators to compile a list of
patients who have been diagnosed with a particular disease in Iceland. After the
patient list has been encrypted, it is sent to us and run through an encrypted
version of our genealogy database. The genealogy database and associated
data-mining tools that we have developed enable us to determine the
relationships among all members of a large patient list and demonstrate
information flow through the generations.
Using DNA from participating patients and their relatives, who grant us
informed consent, we are able to generate high-resolution genotypes with our
genotyping facility using 1,000 microsatellite markers. A microsatellite marker
is a segment of DNA containing variable short repeats that can be used to derive
a genotype. Our high-throughput genotyping facility and bioinformatics systems
substantially decrease the amount of labor involved in reading the genotypes.
We have developed a statistical informatics program that is used to
determine which portion of the genome is shared among most or all of the
patients within a family. This technique can systematically screen every segment
of the human genome for shared genotypes and can narrow the location of a
disease gene or genes to a small fraction (1/1000) of the human genome. That
segment marks the location of the disease gene that is mutated in the patients
with the disease. We use stringent criteria to determine that we have
successfully found a disease gene location before moving onto the next step of
gene discovery.
Physical Mapping, Fine-Mapping, and Sequencing
Once we have narrowed the chromosomal region containing the disease gene to
two to three million base pairs, we develop a higher resolution map. To
accomplish this, we construct a physical map using large
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overlapping pieces of human DNA. We have developed an automated high-throughput
physical mapping method which is based on sophisticated proprietary software we
have developed and uses robotics. By integrating a robust hybridization system
(i.e., matching of a small piece of DNA to large segments of DNA), automated
analysis of the hybridization data and data-mining techniques, we construct a
high-resolution map of the human genome.
We use low-resolution and high-resolution physical maps to find new
microsatellite markers and genetic variations known as single nucleotide
polymorphisms, or SNPs which allows us to create more precise sets of genotypes
of the patients. SNP markers differ from microsatellite markers in several ways.
SNPs represent a single base change in the genomic sequence and microsatellite
markers represent short repeats of sequence. Microsatellite markers contain more
information than SNPs (one microsatellite marker typically contains three to
five times more information than a SNP) and, therefore, are well-suited for our
genetic studies using large families. Currently, the cost of genotyping
microsatellite markers is much less than genotyping SNPs (especially given the
relative information content). However, the SNPs are more numerous than
microsatellite markers and therefore more useful for fine-mapping and
association studies.
Many patients may share several closely spaced genotypes which serve to
narrow the region containing a disease gene. We believe that the relative
genetic homogeneity and the age of the Icelandic population will enable us to
reduce the size of the chromosomal region containing the disease gene to as few
as 250,000 base pairs. We believe that this segment would generally contain
fewer than ten candidate genes, thus reducing the amount of time required to
screen the genes for mutations.
Once we have narrowed a region, we sequence this narrow region using
automated DNA sequencers and then use our bioinformatics tools to identify new
genes. The genes are screened in turn for mutations that occur in patients with
the disease and rarely in those without. Typically, only one gene in this
segment will be the disease gene, but we may find disease genes on other
chromosomes that can be discovered in the same manner. We believe that our
ability to go from gene mapping to disease gene identification will be further
enhanced as the sequencing of the human genome is completed.
Functional Genomics
After we have succeeded in identifying a disease gene using our population
genomics approach, we seek to define molecular pathways in which the disease
gene plays a role. This is essential information both for understanding the
biology of the disease and also for identifying additional specific drug targets
that interact with the disease genes.
We have established three complementary systems designed to isolate
specific drug targets from "upstream," "downstream" and "proximal" pathways that
may be involved in the disease process. We believe these three functional
approaches will expand the number of potential drug targets that are associated
with the specific disease genes identified using our population genomics
approach.
Our proximal analysis identifies proteins that physically interact with the
disease gene product. As very few proteins work alone in the body, these partner
proteins are likely to be involved in the normal biology of the disease gene. We
carry out the screening in yeast cells, using methods which involve increasing
stringency in order to eliminate false positive protein-protein interactions. We
are also able to crossmatch the genes identified as partners of the first
disease gene with additional population genomics data since they might be
mutated in the same disease.
Potential drug targets from upstream pathways include proteins that control
the expression level of the disease gene (i.e., those gene products that are
responsible for turning the disease gene on or off in particular tissues or
under particular conditions). We plan to link the control region of newly
identified disease genes to a "reporter" gene and establish precisely which
region governs expression. DNA from this region will be used to retrieve
specific binding proteins that are responsible for turning the disease on.
Finally, we plan to perform gene expression analysis using Affymetrix GeneChip
technology to validate our conclusions and to identify other genes which are
regulated in tandem with the disease gene.
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Our downstream analysis is designed to uncover genes that are influenced by
the overexpression, underexpression or misexpression of the disease gene. We
have established efficient systems to turn a gene on or off in cells, as well as
to express mutated versions revealed in the course of gene discovery. We employ
DNA chip technology in our efforts to find genes whose expression patterns are
altered by different scenarios of disease gene expression. Some of these genes
may play a role together with the disease gene product in disrupting the normal
biology and leading to disease.
DATABASE SERVICES
The main focus of our database services will be first on the development
and then on the operation of the deCODE Combined Data Processing system.
Description of the deCODE Combined Data Processing system
We believe that the deCODE Combined Data Processing system will represent
the first opportunity in the world to cross-reference genetic, phenotypic and
genealogic data on a large scale. We intend to design it to enable users to pose
specific queries to it through a software program, or query layer, which will
process the request. With these tools, we expect users to be able to query the
various data sets cross-referenced by the deCODE Combined Data Processing
system. The users' interactions will be confined to the query layer; users will
not have direct access to the data accessed by the deCODE Combined Data
Processing system.
We believe that the deCODE Combined Data Processing system will permit
users to build more complete models of the interplay of genes, environment and
disease than are currently available primarily as a result of the following:
- the healthcare data contained in the Icelandic Health Sector Database
will include not only basic disease diagnosis but also details of
laboratory results, treatments and outcomes;
- the Icelandic Health Sector Database will contain a population rather
than the handpicked patient lists used in existing approaches; and
- the Icelandic Health Sector Database will contain medical information
collected over time.
There are three sources of data for the deCODE Combined Data Processing
system, which are as follows:
Data from the Icelandic Healthcare System. Under the terms of the
Icelandic Health Sector Database license we will be able to process medical
information, environmental exposure information and resource use information
from the Icelandic healthcare system. The key data sources include:
- hospitals and ambulatory services;
- primary healthcare centers;
- private specialty clinics; and
- hospital and private laboratory results.
A computerized network of medical records will be organized in each
participating healthcare institution. Information processed in the Icelandic
Health Sector Database will take place in a manner designed to ensure that
personal data remains non-personally identifiable. The type of healthcare data
will include admission data, diagnostic work-up and results, diagnoses,
treatment and operations for each patient visit, medical and social history,
allergies, risk factor exposure, pharmaceutical treatment and outcomes.
Genealogy Data. The deCODE Combined Data Processing system will access the
same genealogy database that we use in our current discovery services.
Genotypic Data. We plan to derive genotypes of consenting Icelanders who
give us blood samples in accordance with applicable regulations and consent to
have their genotypic data stored and cross-referenced with the Icelandic Health
Sector Database.
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Our genealogy database is complete for our applications. We are in the
early stages of development of the other two sources of data for the deCODE
Combined Data Processing system.
The License
On December 17, 1998, the Icelandic parliament passed the Icelandic Health
Sector Database Act, or the Act, allowing the Ministry of Health and Social
Security, or the Ministry, to grant an operating license to create and operate
the Icelandic Health Sector Database. On January 22, 2000, the Ministry granted
the Icelandic Health Sector Database license (the "License") to Islensk
erf(LOGO)agreining ehf., our wholly-owned Icelandic subsidiary. The License,
which has a term of twelve years, allows us to collect data from medical records
of Icelandic healthcare institutions and self-employed health professionals, and
to transfer such data in encrypted form into a centralized database containing
non-personally identifiable information. It also permits us to cross-reference
the Icelandic Health Sector Database data with genealogical data and genotypic
data obtained through consent.
The Act provides that patients may request at any time, by giving notice to
the Icelandic Director General of Public Health, that information about them not
be entered into the Icelandic Health Sector Database. As required by the Act,
the Director General of Public Health has prepared forms for the giving of such
notice and has distributed these forms to healthcare institutions and to the
offices of self-employed health professionals.
Pursuant to the terms of the License and the Act, before we can begin
collecting information and transferring it into the Icelandic Health Sector
Database, we must fulfill numerous conditions, such as paying fees and costs
associated with the License and obtaining government approval of our privacy
protection measures, and must enter into agreements with healthcare institutions
and self-employed health professionals allowing us access to their medical
records. Some medical professionals, including the board of directors of the
Icelandic Medical Association, and the World Medical Association have opposed
some aspects of the Icelandic Health Sector Database on ethical and privacy
grounds. The Icelandic Medical Association presented its opposition to the Act
before the World Medical Association Council Session in April of 1999. The World
Medical Association publicly announced its support for the Icelandic Medical
Association's opposition shortly thereafter. At its October 1999 annual general
meeting, the Icelandic Medical Association adopted resolutions declaring its
opposition to the Act based on ethical issues, which include doctor-patient
confidentiality and privacy concerns. We do not believe that these views are
representative of the Icelandic medical profession as a whole or that they will
materially affect our ability to enter into such agreements. To date we have
entered into 9 such agreements with health institutions. Once we have entered
into the required agreements, an independent security expert must verify that
our information systems and operating procedures comply with the data security
requirements of the Icelandic Data Protection Authority, or the Authority,
before we can process the data we obtain from these healthcare providers.
In addition to the scrutiny of the Authority, we believe that our security
system for the Icelandic Health Sector Database will benefit from the advice and
monitoring of deCODE's Security Advisory Board of internationally renowned
experts in the fields of computer security, data and privacy protection and
security of healthcare informatics. We expect this board of experts to meet
periodically to review any security issues we may encounter in our operations
and in the development and operation of the Icelandic Health Sector Database and
the deCODE Combined Data Processing system and to provide us with technical
advice for solving such issues and maintaining or exceeding international best
industry-practice standards.
HEALTHCARE INFORMATICS
Physicians are routinely required to cross-reference specific details
regarding their individual patients with their general knowledge of best medical
practice in clinics and hospitals. We believe that one of the main challenges
facing physicians today is how to deal with the vast and growing amount of
medical knowledge. In addition, the number of medical tests ordered and drugs
that patients take are leading to more information stored per patient. Some
hospitals and clinics have begun to use information technology to help store
patient records. However, the actual analysis and decision-making about
diagnosis and treatment is still mostly carried
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out by the un-aided human mind of the physician combining general medical
knowledge with specific patient data.
While this approach has worked well in the past, we believe it is an
increasingly difficult task which sometimes leads to delays in diagnosis and
medical mistakes. The complexity of physicians' decision-making may increase in
the future if genetics is integrated with the delivery of healthcare in the form
of predictive testing and treatments tailor-made to individual patients.
We believe that the "information load" on physicians will continue to grow
as the genetic dimension of healthcare leads to risk prediction and a shift from
generalized treatment guidelines to personalized care. This trend toward
personalized healthcare presents the following three opportunities in healthcare
informatics:
- We will use the knowledge that we gain from our discovery programs and
the deCODE Combined Data Processing system to provide medical
decision-support systems necessary to deliver and interpret this
increased volume of data to a variety of end-users.
- We will use our experience in privacy protection in the deCODE Combined
Data Processing system to meet the increased need for privacy solutions
that will accompany the increased volume of personally sensitive
healthcare information.
- We will use our expertise in the gene and drug target discovery unit to
develop and market bioinformatics tools.
We also plan to pursue market opportunities for other software tools that
we intend to develop during the design and construction of the Icelandic Health
Sector Database and the deCODE Combined Data Processing system and that we have
developed in our disease gene discovery efforts, including GeneMiner, DecodeGT
and a comprehensive sample database.
OUR STRATEGY
Our strategy is to use its population-based approach to transform genomic
and healthcare data into products and services for the healthcare sector. The
key elements of our strategy are as follows:
Gene and Drug Target Discovery. We plan to pursue gene and drug target
discovery and the characterization of genes that contribute to the causes of
common diseases. In addition, we will use studies of gene expression and
protein-protein interaction systems to define molecular pathways, which may
contain drug targets. We will focus on diseases that have the potential to
result in the discovery of new proteins and drug candidates. We will also seek
to identify disease genes for the purpose of developing diagnostic products.
Database Subscription and Consulting Services. We expect to build and
operate the deCODE Combined Data Processing system, which is intended to process
and cross-reference non-personally identifiable healthcare information on the
Icelandic population (in the Icelandic Health Sector Database) with genealogy
data and genetic data obtained through consent. In addition, we are developing
new mathematical algorithms to extract further knowledge from the deCODE
Combined Data Processing system. Services we plan to offer to future subscribers
of the deCODE Combined Data Processing system will include principally gene
discovery and drug target prioritization, pharmacogenomics, disease management
and health management. We expect subscribers to include pharmaceutical
companies, healthcare organizations, national health services and government
agencies that will pay subscription fees and, in some cases, development
milestones and a share of product revenues they generate as a result of using
the database.
Pharmacogenomics Partnerships. In collaboration with pharmaceutical
companies, we intend to apply pharmacogenomics to understand differences in drug
response among individuals. We believe that genomics will permit the
identification of the genetic differences that cause people to respond
differently to the same drugs and that, as a result, it will be possible to
individualize the selection of drugs for patients. We believe that the
integration of medical treatment and outcome information with genetic
information will give us an advantage in the generation of pharmacogenomics
information.
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Sale and Marketing of Healthcare Informatics Products. We plan to exploit
market opportunities for software tools that we develop during the design and
construction of the Icelandic Health Sector Database and the deCODE Combined
Data Processing system and in our disease gene discovery efforts. Software tools
that we have developed to date include GeneMiner, DecodeGT, an encryption
system, and a comprehensive sample database. We expect to offer healthcare
informatics services, such as medical decision-support systems and privacy
solutions. The decision-support tools would, for example, be useful in areas
such as medical record keeping and its standardization and in medical
decision-making. We may provide specialized services to customers such as
governmental agencies and medical institutions which will enable them to collect
and process information in a standardized form. We intend to capitalize on our
experience in the protection of privacy of medical and genetic data to market
systems for the protection of privacy in healthcare. The customers for these
services could include industry, public institutions and governments.
Formation of Collaborations. We intend to seek corporate collaborations or
joint ventures with pharmaceutical and biotechnology companies to provide
research alliances, product development and commercialization for our gene and
drug target discovery programs. We also plan to seek collaborators for the
development and marketing of our database and healthcare informatics products
and services.
PRODUCTS AND SERVICES
Our current services and those under development can be classified into
three categories, all of which are based on analyzing data from the Icelandic
population using our proprietary bioinformatics tools: discovery services;
database services; and healthcare informatics.
DISCOVERY SERVICES
Current Discovery Programs
We have started gene discovery programs associated with over 40 common
diseases, 12 of which are funded by Roche. The inheritance patterns of many
common diseases are complex, indicating that the diseases are probably caused by
mutations in multiple genes and/or through interactions between genes and
environment. We believe that these diseases represent large market opportunities
for therapeutic and diagnostic products because:
- their causes are not fully understood;
- current treatments are of limited effectiveness;
- there are currently no approaches to tailor treatment to cause; and
- large numbers of individuals are affected by these diseases.
We expect the identification of disease genes to provide insights into the
causes of common diseases and to help the development of highly specific
diagnostic and therapeutic products, including small molecule products,
recombinant proteins, gene therapy and antisense therapy. A brief description of
several of our discovery programs follows.
Autoimmune Diseases. We are currently studying several autoimmune diseases
such as inflammatory bowel disease (Crohn's and ulcerative colitis), psoriasis,
atopy and rheumatoid arthritis. All four are in large genome-wide linkage scans,
and we have found the location of a novel psoriasis gene.
- Psoriasis. Psoriasis is a chronic inflammatory disease that leads to
disfiguring skin lesions and arthritis. We have completed a genome-wide
linkage scan of Icelandic familial material and have confirmed linkage
and association to a region of the genome that regulates immune response
known as the MHC. Our genome-wide scan also identified a novel region of
the genome that interacts with the MHC to cause psoriasis. Our second
location represents the second gene mapped outside the MHC that fulfills
the criteria for genome-wide significance. We are in the process of
fine-mapping both gene locations.
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Cardiopulmonary Diseases. We are studying a variety of common diseases
such as asthma, chronic obstructive pulmonary disease, myocardial infarction,
peripheral vascular disease and stroke.
- Peripheral arterial occlusive disease (PAOD). PAOD is a vascular
disorder characterized by narrowing of the arteries of the arms and legs,
and obstruction of the blood flow. PAOD strikes between 2% and 5% of
people over the age of 65 worldwide and results in pain, diminished
mobility, the need for invasive surgery, and, in extreme cases, gangrene
and loss of the affected limbs. By conducting a genome-wide analysis of
1300 Icelandic PAOD patients and family members, deCODE researchers were
able to identify a small section of a single chromosome that shows
significant genetic linkage to the disease. The patients who participated
in the study were carefully selected by collaborating surgeons from the
Icelandic Society of Vascular Surgery working at Iceland's National
University Hospital. All had undergone previous angiography that
documented the nature and extent of vascular lesions, and most had
undergone surgery to bypass blocked arteries. The study marks an
important advance in identifying the genetic mechanisms contributing to
PAOD. A target has also been identified through analysis of a gene which
we have linked to PAOD. This achievement represents a research milestone
with Roche.
- Cerebrovascular disease (Stroke). Stroke represents diseases that
directly or indirectly affect the blood vessels in the brain and cause
central nervous system damage from either blockage of cerebral blood flow
or rupture of an intracranial artery. It is the third leading cause of
death. We have formed a research alliance with local physicians who care
for a majority of the stroke patients diagnosed in Iceland. We have
collected almost 2,000 DNA samples from informative families and
genotyped most of them. Using our genealogical approach, we have mapped
the location of one stroke gene that meets the criteria for genome-wide
significance. This represents the first gene ever mapped for the common
forms of stroke and for this achievement deCODE received a research
milestone from Roche.
Central Nervous System Diseases. We are studying the genetic basis for
psychiatric and central nervous system diseases.
- Alzheimer's Disease. Alzheimer's disease is the most common cause of
dementia. We have carried out a genome-wide scan that included 1,200
Icelanders and mapped a gene that contributes to the occurrence of
late-onset Alzheimer's disease. As a result of this discovery, we have
achieved a research milestone in our collaboration with Roche.
- Schizophrenia. Schizophrenia is a debilitating psychiatric disorder. We
have carried out a genome-wide scan with the participation of 400
Icelandic schizophrenia patients and we have identified a gene linked to
schizophrenia and two candidate disease genes. This accomplishment
represents a research milestone in our collaboration with Roche.
Metabolic and Other Diseases. We are studying the genetic basis for
osteoarthritis, non-insulin-dependent diabetes, osteoporosis and endometriosis.
- Osteoarthritis. Osteoarthritis is a degenerative disease of the joints.
There are currently no known genes causing the common forms of
osteoarthritis. We have mapped three genes linked to osteoarthritis. This
accomplishment represents a research milestone in our collaboration with
Roche. We are currently fine-mapping and sequencing these regions to
search for the disease genes themselves.
- Osteoporosis. Osteoporosis is a disorder of the bones characterized by
the progressive thinning and weakening of bone tissue. It generally
strikes people over the age of 50, and is four times more common in women
than in men, making it one of the most challenging medical problems in
women's health worldwide. We have mapped an osteoporosis gene to a small
chromosomal region as a result of a genome-wide scan conducted with the
participation of 139 Icelandic families, including more than 430 patients
and 600 unaffected relatives. The discovery marks a major advance toward
identifying one of the genes that, if present in a variant form,
contribute to this important disease. For this we received a research
milestone from Roche.
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Collaborations
Our strategy for pursuing business opportunities is to establish alliances
with pharmaceutical companies, biotechnology firms and other healthcare
institutions to perform research into the genetic basis of a given disease or
group of diseases. Depending on the nature of each prospective business
opportunity, we may conduct the research in return for one or more of the
following: up-front equity investments; direct payments for research funding;
payments upon the achievement of scientific milestones; shared or exclusive
rights to diagnostics and therapeutics; and royalties on products that our
collaborators market. In some instances, we may negotiate for access to our
collaborators technologies, for example libraries of chemical compounds, to
enhance our operations.
F.Hoffmann-La Roche. In February 1998, we entered into a research
collaboration and cross-license agreement with Roche to collaborate on the
discovery of genetic variations which affect the cause of diseases for the
purpose of developing new methods to diagnose diseases and obtain drug targets
useful in drug discovery. The agreement provides for a steering committee, the
membership of which is equally divided between the parties, to oversee the
collaborative research programs. The agreement requires us to conduct research
activities assigned by the steering committee and requires Roche to fund the
collaborative gene discovery programs in twelve diseases, including four
cardiovascular diseases, four psychiatric/neurologic diseases and four metabolic
diseases, by making specified payments according to a payment schedule. Roche's
obligation under the agreement to fund these programs will continue until
February 1, 2003 provided that Roche elects to extend the research term of the
agreement for the one-year period commencing on the fourth anniversary of the
agreement. During the research term, neither party may terminate the agreement
unless the other is in default. In addition to research funding payments, Roche
is required to make payments to us upon the achievement of specified scientific
development and marketing milestones. Under this agreement, we may receive
approximately $70 million in research funding and more than $130 million in
milestone payments that are linked to our progress in research efforts and
commercialization. The milestone payments may include, with respect to each
disease being researched, the payment of up to an aggregate of approximately
$5.75 million for early discovery efforts and the confirmation of the first,
second and third genes. Additional milestone payments are required in the event
we confirm additional genes with respect to each of the diseases. For each
therapeutic product, Roche is also required to make milestone payments of up to
an aggregate of $7 million for regulatory filings and approvals. Milestone
payments of up to $3 million are also required in connection with the commercial
sale of diagnostic products. As of December 31, 2000, Roche has paid or owes us
a total of approximately $52,425,000 million in research funding and milestone
payments. The costs of the collaboration with Roche which we have incurred
consist mainly of salaries, materials, equipment depreciation and other
facilities costs. We estimate that these costs were $23.2 million in the year
ended December 31, 2000, $21.9 million in 1999 and $12.7 million in 1998.
The agreement gives Roche exclusive worldwide rights to develop and
commercialize therapeutic and diagnostic products based on gene discoveries.
Roche is required to pay us royalties on sales of any such products until the
later of ten years from the first commercial sale or the last date on which the
product is covered by a patent. We retained the exclusive, worldwide rights to
develop and commercialize gene therapy and antisense products based on our gene
discoveries and will be required to pay Roche royalties on sales of any such
products. Because no products have yet been developed, we are unable to estimate
the amount of royalties which we may receive or be required to pay under the
agreement.
In connection with the agreement, Roche Finance Ltd., or Roche Finance, an
affiliate of Roche, purchased shares of our preferred stock and received an
option to purchase additional shares at any time prior to the end of February
2001. Roche Finance also purchased warrants to buy shares of our preferred stock
and received the right to purchase additional warrants if it exercised its
option to acquire additional shares of preferred stock. These became warrants to
purchase an equivalent amount of common stock upon the completion of our initial
public offering. In April 2000, Roche Finance transferred these shares, warrants
and options to an affiliate, SAPAC Corporation Ltd., or SAPAC. In June 2000,
SAPAC exercised its option and purchased 555,556 shares of our preferred stock,
which subsequently converted into an equivalent number of shares of common stock
and a warrant to purchase 55,556 shares of our preferred stock, which currently
allows for the purchase of the same number of shares of common stock.
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Pursuant to an agreement, we license our GeneMiner bioinformatic software
product to Roche.
In addition to the research collaboration with Roche, we have entered into
the following collaborations:
Partners HealthCare System, Inc. In May 2000, we entered into a strategic
alliance agreement and crosswalk development agreement with Partners HealthCare
System, Inc., The General Hospital Corporation, d.b.a. Massachusetts General
Hospital and The Brigham and Women's Hospital, Inc. (collectively, "Partners")
pursuant to which (a) we will fund research by investigators of Partners
pursuant to sponsored research agreements and/or clinical trial agreements to be
entered into from time to time, (b) we will collaborate with Partners on, and
provide funding for, development of an information technology bridge, called the
crosswalk, to facilitate studies with the deCODE Combined Data Processing system
and Partners' Research Patient Data Registry and (c) we will develop and market,
in consultation with Partners, new information technology products and services
relating to the use of the crosswalk for future pharmaceutical and biotechnology
applications. We do not believe that the amount of funding we have agreed to
provide over the term of the agreements is material to us.
The strategic alliance agreement provides that a steering committee, the
membership of which is equally divided between the parties, will oversee the
alliance (including the development of the crosswalk) and select the research
projects and/or clinical trials that we will fund at Partners. We will have an
exclusive option to acquire an exclusive license to any patents or copyrights
developed under such sponsored research or clinical trial agreements on
financial terms to be negotiated by the parties based on pre-determined criteria
contained in the strategic alliance agreement. Each party has the right to use
the crosswalk to facilitate studies with the databases for non-commercial
internal research purposes. Each party also has the right to use the crosswalk
to facilitate studies with such party's own database to conduct commercially
sponsored research. Partners is required to pay us a royalty on revenue it
receives from such use. In addition, we have the exclusive right to use the
crosswalk to develop and market products and services, and we are obligated to
pay Partners a royalty on revenue we receive from the sale of such products and
services. Because we have not yet developed such products or services and
Partners has not yet entered into any commercially sponsored research
agreements, we cannot estimate the amount of royalties we may receive or be
required to pay under the agreements.
The agreements are for a three year term, which, in the case of the
strategic alliance agreement, may be extended for an additional two year term by
the mutual agreement of the parties and, in the case of the crosswalk
development agreement, may be extended for an additional term to be agreed upon
by the parties. The agreements may also be terminated by either party if the
other party is in default. In addition, we may terminate the agreements under
certain circumstances, including infeasibility of the alliance or if the
alliance jeopardizes the mission or objectives of either party.
Other Hospital and Physician Collaborations. We have entered into
collaboration agreements and arrangements with the Icelandic Heart Association
and several physician groups. The goal of these collaborations is the discovery
of genetic factors which contribute to the genesis of certain disorders on which
the various physician groups maintain patient information. These collaborators
contribute data and/or other clinical information to the project, while we
provide our expertise in molecular genetics and experimental design, as well as
necessary equipment and research supplies. We are responsible for the
reimbursement of all expenses related to the projects. In addition, if we sell
the results of the project to a third party, we will make specified payments and
pay a portion of any performance-based milestones and royalties we receive from
these third parties to the physician groups. We have already sold the results of
many of these projects to a third party, Roche. As a result, we have already
paid approximately $5 million and, in addition, are obligated to pay
approximately $4 million over the remaining terms of these agreements, in
specified payments and milestone payments. We share the ability to make
management decisions regarding the projects with these collaborators, and we
jointly form executive or steering committees to monitor the projects. Our
collaboration agreements with these collaborators normally continue for a term
of no more than five years.
To further facilitate our research projects and enable us to construct
lists of patients with specific diseases, we have also entered into
collaboration agreements and arrangements with two of the largest hospitals in
Iceland, one of which was recently founded by merging the two formerly largest
hospitals in Iceland. Under the terms of these agreements, the hospitals
contribute research data, and surveillance
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committees that we jointly appoint with the hospitals monitor our projects. We
are obligated to pay all the hospitals' out-of-pocket expenses incurred as a
result of the collaboration. Our agreements with the hospitals will continue
until terminated by the parties.
We have also entered into agreements with 9 Icelandic health institutions
as required by the Icelandic Health Sector Database Act and License in order to
get data from those institutions into the Health Sector Database.
Pharmacogenomics
In November 2000, we acquired Encode, a wholly owned subsidiary, which will
focus on pharmacogenomics studies -- measuring the drug response according to
individuals' genetic profiles -- and on conducting clinical trials for new and
existing therapeutics. We plan to offer pharmacogenomic services to
pharmaceutical and biotechnology companies. In this way, we believe that we will
be able to assist pharmaceutical companies in tailoring drugs to specific parts
of the patient population. Tailor-made drugs will better ensure both
effectiveness and safety. In addition, genetic information may lead to faster
and more successful clinical trials, which may result in cost savings.
Pharmacogenomics may also enable pharmaceutical companies to explore the use of
older chemical compounds which have been abandoned. Because the development cost
of these compounds has already been incurred, the additional cost to bring these
products to market may be reduced.
Cancer
In November 2000, we founded deCODE Cancer ehf., a wholly-owned subsidiary
that will incorporate and expand deCODE's cancer research. By creating a
subsidiary with an exclusive focus on cancer, we believe that we will reinforce
the ability of our researchers to continue to develop the particular skills and
methods necessary for studying the complex biology involved in the study of
cancer. deCODE Cancer will also enjoy the flexibility to develop special
alliances, while at the same time continuing to leverage deCODE's resources for
population genomics research.
Internal Programs
We also plan to work on some diseases without partnering with
pharmaceutical companies, and we are currently pursuing a number of disease
projects independent of research sponsorships. In the event we complete any
independent projects, we intend to pursue the commercial development of our gene
and drug target discovery through the development and marketing of therapeutics
and diagnostic products. We may do this by using our own resources to turn
discoveries from our internal projects into therapeutic or diagnostic products
and developing our own marketing capabilities, by licensing our discoveries to
others who would be required to pay us royalties on sales of any products they
develop using the results of our gene discovery programs or by entering into
collaborative arrangements for the development and marketing of products from
these programs.
DATABASE SERVICES
The deCODE Combined Data Processing system is intended to allow users to
ask questions about relationships between genetic and environmental data and
disease. We believe the deCODE Combined Data Processing system may increase the
utility of human genome sequence data by providing a medical and environmental
context, which may facilitate the development of new products and services for
healthcare.
Products
Gene Discovery and Drug Target Prioritization. We expect pharmaceutical
and biotechnology companies to use the deCODE Combined Data Processing system in
gene discovery programs and drug target prioritization as a way of confirming
their own provisional findings or providing an impetus for further research. We
expect users to implement the deCODE Combined Data Processing system to search
the human genome for gene mutations that are linked to the occurrence of a
particular disease.
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Pharmacogenomics. We expect the deCODE Combined Data Processing system to
improve understanding of how drug response can vary across a population due to
underlying genetic differences. For example, a customer might search for a
region of the genome that appears to be shared by patients with similar drug
responses. Pharmacogenomic analysis with the deCODE Combined Data Processing
system is therefore an opportunity for pharmaceutical companies to market
products which more closely meet the needs of a diverse market.
Disease Management. The deCODE Combined Data Processing system is
positioned to provide new insights and help design disease management programs.
By carefully analyzing clinical data and correlating such data with genetic
factors, healthcare providers may develop programs that cover the lifespan of
the disease, from preventive actions to determining the most appropriate
treatments for each individual. For a healthcare provider, which is constantly
making the cost/quality tradeoff, this is a unique way to design programs which
optimize both cost and quality.
Health Economics. We believe that a major trend in healthcare is the shift
from managing disease towards maintaining individual health. Providers are under
pressure to stop focusing on therapeutic areas in isolation and to begin
considering an individual's risk of disease in general. In order to do this,
providers will need to understand inter-relationships between different
therapeutic areas and health indicators so that they can analyze the costs and
benefits of various treatments or behavioral modifications. We believe that the
deCODE Combined Data Processing system will naturally lend itself to this kind
of analysis by processing data across the major therapeutic areas as well as
information on well-being and lifestyle. For example, a customer may use the
deCODE Combined Data Processing system to analyze a particular preventive
measure known to reduce the risk of a target disease to see if that measure may
increase the patient's risk of developing other diseases.
Customers
We believe that the potential customer base for the deCODE Combined Data
Processing system consists of members of the healthcare industry, including:
- Pharmaceutical and Biotechnology Companies. Pharmaceutical and
biotechnology companies may use the deCODE Combined Data Processing
system in their gene discovery and pharmacogenomics programs.
- Health Organizations. Healthcare providers, including health maintenance
organizations, or HMOs, managed care groups and hospital groups may use
the deCODE Combined Data Processing system to help them determine the
most appropriate method of care for patients.
- National Health Services and Government Agencies. National health
services and government agencies may use the database to save money by
determining the most effective allocation of resources.
We anticipate that our customers will pay for access to the database by
means of a fixed subscription plus, in the case of pharmaceutical and
biotechnology companies, a share of any product revenues they generate as a
result of using the database.
Collaborations
During our development of the deCODE Combined Data Processing system, we
intend to establish alliances with partners who can contribute to the creation
of the deCODE Combined Data Processing system and the Icelandic Health Sector
Database and complement our efforts. Potential areas of collaboration include
access to comparable data from populations outside Iceland, assistance from
potential users with the design of products and technical expertise from vendors
or consultants. We anticipate that any partner would contribute to funding of
the development of the deCODE Combined Data Processing system.
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HEALTHCARE INFORMATICS
We have identified three product opportunities in healthcare informatics to
leverage capabilities derived from our gene discovery and database operations.
Products
Bioinformatics. To aid in our gene and drug target discovery work, we have
developed numerous proprietary bioinformatics tools for genealogy analysis,
project management, gene mapping, physical mapping, and gene identification
which we hope to commercialize as independent products.
A description of these tools is illustrated below:
TYPE DESCRIPTION
- ---- -----------
Genealogy tools: - Clustering algorithms are used to compare lists of
patients with the genealogy database to determine relevant
patient relationships.
- Special datamining algorithms are used to determine the
genetic component of traits.
Project management tools: - Our sample manager is used to track blood and DNA samples
that have arrived in the laboratory, throughout the
discovery process.
- Our project manager is used to keep track of all patient
blood samples, DNA samples, pedigrees, and medical
information in research projects.
Genotyping tools: - Our genotype viewer automates the fractionation of data
according to quality, decreasing the amount of labor.
- The marker manager manages large genetic marker sets
collated in the laboratory and is used to view and define
maps for statistical analysis.
- Our genotype manager manages the imports and exports of
the genotypes for a given set of patients and markers.
- The Observer is a quality control tool for genotyping and
sequencing facilities.
Statistical tools: - The Allegro linkage analysis program has computational
power which is one to two orders of magnitude more efficient
than previously developed statistical analysis programs
known in the public domain.
Physical mapping tools: - Our software automates the process of reading physical
mapping hybridization data through image analysis and uses
data-mining tools that combine multiple data sources.
Gene discovery tools: - GeneMiner is used to discover new genes through the use of
sequence information alone; it analyzes up to a million base
pairs of sequence; its graphical interface allows user
annotation; and it permits integration of third party
information. Its main features are: exon prediction,
clustered Blast analysis, splice variant analysis, 2D
structure prediction, protein family analysis, species
homology and ontology analysis (human, mouse etc.), SNP
classification, polymorphism mutation detection and
patient/control analysis.
Privacy Protection. We have developed expertise in encryption mechanisms
and security management to fulfill the Icelandic Data Protection Authority's
requirements. For example, our encryption tools provide for privacy of blood
samples that enter our laboratory. We believe that the opportunity to
commercialize this expertise will grow as the healthcare industry seeks to take
advantage of the benefits that information technology offers to manage complex
healthcare data while maintaining patient confidentiality.
Medical Decision-Support Software. In deciding how to treat patients,
physicians are routinely required to make the appropriate link between the
specific details regarding patients and their general knowledge of best medical
practice. One of the main challenges facing physicians today is how to deal with
the vast and growing amount of information about best medical practice and the
specific circumstances of their patients. Medical decision-support software
provides computer-based assistance to physicians in assimilating and using
available information. We expect to offer products which will include ways of
combining medical knowledge with patient information such as symptoms and test
results to assist physicians in determining diagnosis and treatment while
addressing patients' concerns about the confidentiality of their personal
medical data.
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Customers
Bioinformatics. We believe that the customers for our bioinformatics tools
will mainly consist of pharmaceutical and biotechnology companies. However, we
also expect to attract customers in other areas of the healthcare industry.
These customers will use our tools to aid in their gene and drug target
discovery programs.
Privacy Products. We believe that privacy products can potentially be sold
to any company handling sensitive data about individual persons, whether or not
the data are healthcare-related. However, pharmaceutical companies, healthcare
providers and payors with substantial quantities of individual data protected by
privacy restrictions will serve as our primary target. One such opportunity is
to develop a secure Internet environment for government agencies collecting
nation-wide patient data from mobile field staff. Other opportunities relate to
developing and supporting medical decision-support services and enabling secure
remote access by patients, physicians and other users or to a distributed
network.
Medical Decision-Support Software. Products and services in the field of
decision support have a broad potential customer base in the healthcare
industry. Our initial focus will be on healthcare providers, government
agencies, physicians and HMOs, all of whom use support tools that capture and
analyze patient data to assist them in healthcare decision-making.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses were $45,742,081 in the year ended
December 31, 2000, $33,213,557 in 1999 and $19,282,364 in 1998. Of these
amounts, we estimate that $23.2 million in the year ended December 31, 2000,
$21.9 million in 1999 and $12.7 million in 1998 were customer sponsored research
activities.
PATENTS AND PROPRIETARY RIGHTS
We will be able to protect our proprietary rights from unauthorized use by
third parties only to the extent that our proprietary rights are covered by
valid and enforceable patents or are effectively maintained as trade secrets.
Accordingly, patents and other proprietary rights protections are an essential
element of our business. We currently rely on patents, trade secret law and
contractual non-disclosure and confidentiality arrangements to protect our
proprietary information. We intend to seek patent protection in the United
States and other jurisdictions to protect technology, inventions and
improvements to inventions that are commercially important to the development of
our business, including genes we discover, mutations of genes and related
processes and inventions, technologies which may be used to discover and
characterize genes, and therapeutic and diagnostic processes and other
inventions based on these genes. To date, we have two U.S. patents, one European
patent and have filed 18 patent applications for our inventions in the United
States. We also intend to seek patent protection or rely upon trade secret
rights to protect other technologies that may be used to develop databases and
healthcare informatics products and services.
We have obtained an exclusive license from The Beth Israel Deaconess
Medical Center, or Beth Israel, in Boston, Massachusetts to develop and
commercialize therapeutic and diagnostic products anywhere in the world based on
Beth Israel's interest in patents and know-how relating to the linkage between a
particular segment of DNA and multiple sclerosis. The license under the patents
will expire upon the expiration of the last patent to expire and thereafter the
license to the know-how will be perpetual. Under the terms of the agreement, we
are obligated to pay license fees and other payments upon the achievement of
specified milestones. We are also obligated to pay royalties to Beth Israel on
the sales of products that may result from the licensed technology. We do not
believe that payments under our agreement with Beth Israel will be material to
us.
COMPETITION
We face, and will continue to face, intense competition in our gene
discovery programs from organizations such as major pharmaceutical companies,
specialized biotechnology firms, pharmacogenomics compa-
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nies, universities and other research institutions, the Human Genome Project and
other government-sponsored entities. A number of entities are attempting to
rapidly identify and patent genes responsible for causing diseases or an
increased susceptibility to diseases and to develop products based on these
discoveries.
Competition is also intense in the healthcare informatics and database
areas. Many companies are focusing on medical record systems and cost-oriented
patient databases as well databases containing genomic information.
Many of our competitors, either alone or together with their collaborative
partners, have substantially greater financial resources and larger research and
development staffs than we do. These competitors may discover, characterize or
develop important genes, drug targets or drug leads before we or our
collaborators do or may obtain regulatory approvals of their drugs more rapidly
than we or our collaborators do. They may develop healthcare informatics and
database products before we do or which are technically superior to ours or
prove to be more useful to our potential customers.
Developments by others may render pharmaceutical product candidates or
technologies that we or our collaborators develop obsolete or non-competitive.
Any product candidate that we or our collaborators successfully develop may
compete with existing therapies that have long histories of safe and effective
use.
Our competitors may obtain patent protection or other intellectual property
rights that could limit our rights, or our customers' ability, to use our
technologies, healthcare informatics products or databases, or commercialize
therapeutic or diagnostics products. In addition, we face, and will continue to
face, intense competition from other companies for collaborative arrangements
with pharmaceutical and biotechnology companies, for establishing relationships
with academic and research institutions and for licenses to proprietary
technology.
Our ability to compete successfully will depend, in part, on our ability,
and that of our collaborators, to:
- develop proprietary products;
- develop and maintain products that reach the market first, and are
technologically superior to and more cost effective than other products
on the market;
- obtain patent or other proprietary protection for our products and
technologies;
- attract and retain scientific and product development personnel;
- obtain required regulatory approvals; and
- manufacture, market and sell products that we develop.
GOVERNMENT REGULATION
Regulation by governmental authorities will be a significant factor in our
ongoing research and development activities and in our proposed business
relating to the deCODE Combined Data Processing system. In addition, the
development, production and marketing of any pharmaceutical products which we or
a partner may develop is subject to regulation by governmental authorities.
THE ICELANDIC HEALTH SECTOR DATABASE LICENSE
The deCODE Combined Data Processing system and the Icelandic Health Sector
Database are subject to applicable Icelandic law. The Icelandic Health Sector
Database will be developed and operated pursuant to a License from the Ministry
and will be subject to the Act, the regulations promulgated under the Act, the
License and an agreement between the licensee and the Ministry, all of which
impose numerous requirements on our activities.
As required by the License, concurrently with the issuance of the License,
we, through our Icelandic subsidiary, entered into an agreement with the
Ministry. This agreement provides that we must pay the Icelandic government a
fixed annual fee for the license of 70 million Icelandic kronas (approximately
$815,000 as of March 2001) and an additional annual fee of 6% of its net profit,
up to a maximum of 70
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million Icelandic kronas per year. The agreement also provides that our rights
to the Icelandic Health Sector Database will be transferred to the Ministry on
the expiration or termination of the license.
The license and the agreement under which we received the license also
require us to:
- pay the costs that the health institutions incur (including the costs of
medical record software) in connection with the entering of data from
medical records before transfer to the Icelandic Health Sector Database;
- financially segregate the operation of the Icelandic Health Sector
Database from our other activities by maintaining a separate operating
unit and separate accounts for Icelandic Health Sector Database
operations;
- pay the costs of the governmental agencies which monitor our Icelandic
Health Sector Database activities;
- indemnify and agree not to sue the Icelandic government for any liability
resulting from the passage of the legislation on the Icelandic Health
Sector Database and its operation and/or the issuance of the Icelandic
Health Sector Database license; and
- observe international bioethics rules.
The License prohibits us from, among other things:
- abusing our position by charging unreasonable fees, refusing business to
our competitors or discriminating among customers by imposing
discriminatory or other onerous business terms on our customers; or
- assigning or pledging our rights in the license.
The Act places a number of duties on us, as the Icelandic Health Sector
Database licensee, and imposes a number of conditions on the License. The Act
prohibits us from allowing direct access to the Icelandic Health Sector Database
and requires us keep the Icelandic Health Sector Database and processing of the
database in Iceland. Our database employees and contractors must sign an
irrevocable confidentiality oath prior to commencing employment or performing
services on our behalf. At the expiration of the License, we are required to
ensure that the Ministry or a party entrusted by the Ministry will receive,
without payment of consideration, intellectual property rights necessary for the
creation and operation of the database for public health purposes and for
scientific research.
The License may be revoked if we or our employees violate the terms of the
Act, if we fail to fulfill the conditions of the License or if we become unable
to operate the Icelandic Health Sector Database. If we or our employees or any
person assigned to process data violate the provisions of the Act or applicable
regulations with regard to confidentiality, the license requires us to
compensate any persons to whom the data relate for financial loss which the
violation causes. If results obtained from cross-referencing data in the deCODE
Combined Data Processing system prove to be personally identifiable, the Data
Protection Authority may, among other actions, order the destruction of such
results in their entirety or in part or revoke its approval of the procedures
and work processes applied by us to ensure privacy of the Icelandic Health
Sector Database data.
The License will be reviewed by the Ministry no later than October 1, 2008.
During the course of the review, we and the Ministry will enter into discussions
for the renewal of the License after its expiration in 2012 provided that we
continue to meet the requirements of all applicable laws and regulations. The
Ministry may also review the License from time to time following our request, on
its own initiative or if the License contravenes any applicable laws or
regulations.
Our creation and operation of the Icelandic Health Sector Database and the
deCODE Combined Data Processing system will involve oversight by the Ministry,
with the assistance of an Icelandic Health Sector Database Monitoring Committee,
an Interdisciplinary Ethics Committee, the Bioethics Committee of Iceland and
the Data Protection Authority of Iceland. These bodies will help to ensure our
compliance with applicable laws and regulations.
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The Monitoring Committee consists of three members which the Minister of
Health and Social Security appoints. The Monitoring Committee will ensure that
the licensee complies with the Act and applicable regulations by monitoring
negotiations and agreements for the transfer of data and reporting any events of
noncompliance with the Act to the Ministry. The Monitoring Committee is charged
with protecting the interests of the public health authorities, health
institutions, self-employed health service workers and scientists in the process
of making agreements between us and those parties.
The Interdisciplinary Ethics Committee will review query types and monitor
research projects for compliance with internationally accepted ethical standards
for scientific research involving human beings. The Ministry appoints members of
the Interdisciplinary Ethics Committee which may halt any query or research
project deemed by the committee to violate such standards.
The Bioethics Committee of Iceland is a standing committee that oversees
scientific research relating to human beings in Iceland. It has no direct
supervisory function over our Icelandic Health Sector Database license but will
provide ethical advice to the Monitoring Committee based upon quarterly reports
containing lists of queries and patient data submitted to the Icelandic Health
Sector Database. The Ministry appoints the members of the committee.
Members of the Data Protection Authority (the "Authority") which is
responsible for overseeing rights of privacy and data protection in Iceland. The
Minister of Justice appoints the board members of the Authority. The Authority
establishes the technology, security and organizational terms with which we must
comply in the development of the Icelandic Health Sector Database pursuant to
the License. The Authority may periodically review such terms in light of new
technologies, experience or change of circumstances, and we will be required to
comply with the revised data protection terms within the deadline established by
the Authority. The Authority will monitor the security of the collection, use
and access to patients' information and may intervene to prevent breaches of
such security. The Authority will ensure that we comply with the privacy laws
applicable in Iceland and will administer the access limitations to data and
encryption methodology used for the Icelandic Health Sector Database.
PHARMACEUTICAL PRODUCTS
Our success will depend, in part, on the development and marketing of
products based on our research and development. Strict regulatory controls on
the clinical testing, manufacture, labelling, supply and marketing of the
products will influence our ability and our partners' ability to successfully
manufacture and market therapeutic or diagnostic products. Most countries
require a company to obtain and maintain regulatory approval for a product from
the relevant regulatory authority to enable the product to be marketed.
Obtaining regulatory approval and complying with appropriate statutes and
regulations is time-consuming and requires the expenditure of substantial
resources.
Most European countries and the United States have very high standards of
technical appraisal and consequently, in most cases, a lengthy approval process
for pharmaceutical products. The regulatory approval processes, which usually
include pre-clinical and clinical studies, as well as post-marketing
surveillance to establish a compound's safety and efficacy, can take many years
and require the expenditure of substantial resources. Data obtained from such
studies is susceptible to varying interpretations that could delay, limit or
prevent regulatory approval. Delays or rejections may also be encountered based
upon changes in drug approval policies in applicable jurisdictions. There can be
no assurance that we or our collaborative customers will obtain regulatory
approval for any drugs or diagnostic products developed as the result of our
gene discovery programs.
Because many of the products which may result from our research and
development programs are likely to involve the application of new technologies,
various governmental regulatory authorities may subject such products to a
greater degree of review. As a result, regulatory approvals for such products
may require more time than for products using more conventional technologies. In
addition, ethical concerns about the use of genetic predisposition testing, and
in particular about the risk that such testing could lead to discrimination by
insurance providers or employers, may lead to poor market acceptance or to
regulatory controls that would adversely affect the development of or demand for
diagnostic products based on our research.
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ENVIRONMENTAL
Our research facilities and laboratory are located in Reykjavik, Iceland.
We operate under applicable Icelandic and European Union laws and standards,
with which we believe that we comply, relating to environmental, hazardous
materials and other safety matters. Our research and manufacturing activities
involve the generation, use and disposal of hazardous materials and wastes,
including various chemicals and radioactive compounds. These activities are
subject to standards prescribed by Iceland and the EU. We do not believe that
compliance with these laws and standards will have any material effect upon our
capital expenditures, earnings or competitive position, nor that we will have
any material capital expenditures for environmental control facilities for the
remainder of this fiscal year or any succeeding fiscal year.
EMPLOYEES
As of December 31, 2000, we had approximately 445 employees, of whom
approximately 400 were employed full-time, 70 held Ph.D. or M.D. degrees and
approximately 220 held college degrees. 380 employees were engaged in, or
directly supported, research and development activities, of whom 260 worked
within the laboratory facilities and 120 held positions associated with the
development of informatics. 45 employees were engaged in finance, administrative
support and facilities management, and about 20 were engaged in other support
functions such as Business Development, Legal, Communications, Human Resources
and Clinical Collaboration. In addition, we utilized part-time employees and
outside contractors and consultants as needed and plan to continue to do so. We
anticipate continuing growth in recruitment in 2001.
We have entered into individual employment contracts with our employees in
accordance with standard Icelandic hiring practices. We believe that the
relationship with our employees is good. Furthermore, to help protect our
proprietary know-how and data, each employee must agree not to disclose any
trade secret or confidential information without our prior consent. Employees
also assign to us all patent rights and technical information which they develop
during employment.
FORWARD LOOKING STATEMENTS AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This report contains forward-looking statements. These statements relate to
future events or our future financial performance. In some cases,
forward-looking statements can be identified by terminology such as "may,"
"will," "should," "could," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "intend," "potential" or "continue" or the negative of
such terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially due to a number of
factors, including those set forth in this section and elsewhere in this Form
10-K. These factors include, but are not limited to, the risks set forth below.
WE MAY NOT SUCCESSFULLY DEVELOP OR DERIVE REVENUES FROM ANY PRODUCTS OR SERVICES
DISCOVERY SERVICES
Our gene discovery programs are still in the early stages of development
and may not result in marketable products. We direct our technology and
development focus primarily toward identifying genes or gene fragments which are
responsible for, or indicate the presence of, certain diseases. Our technologies
and approach to gene discovery may not enable us to identify successfully the
specific genes that cause or predispose individuals to the complex diseases that
are the targets of our gene discovery program, even where we have identified
candidate genes. In addition, the diseases we are targeting are generally
believed to be caused by a number of genetic and environmental factors. It may
not be possible to address such diseases through gene-based therapeutic or
diagnostic products. Accordingly, even if we are successful in identifying
specific genes, our discoveries may not lead to the development of commercial
products.
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Even if we, or our collaborators, are able to develop pharmaceutical
products, those products will fail to produce revenues unless they:
- are safe and effective;
- meet regulatory standards in a timely manner;
- successfully compete with other technologies and products;
- avoid infringing on the proprietary rights of others;
- can be manufactured in sufficient quantities at reasonable costs; and
- can be marketed successfully.
We are not certain that we will be able to achieve these conditions for
product revenues. We expect that it will be a number of years, if ever, before
we will recognize revenue from therapeutic or diagnostic product sales or
royalties on such sales.
Our initiatives in pharmacogenomics and the study of the function of genes,
a field known as functional genomics, are not certain to provide any revenues.
There may be no market for these services because of competition, lack of market
acceptance or our inability to develop these services successfully. We may not
be able to develop our functional genomics capabilities to a state that is
adequate for realizing revenues.
DATABASE SERVICES
We received the License to create and operate the Icelandic Health Sector
Database in January 2000, and accordingly, are at the early stages of its
development. The collection of genotypic data, which is another integral part of
the deCODE Combined Data Processing system, is also in the early stages of
development. We expect that it will take several years before we have fully
developed the deCODE Combined Data Processing system. We are presently devoting
substantial resources to the development of the deCODE Combined Data Processing
system and its components. We plan to continue to devote substantial resources
to this development for the foreseeable future. We cannot be sure that the
deCODE Combined Data Processing system will result in marketable products or
services. Our intended method for cross-referencing genealogical, genotypic and
healthcare data is central to the development of the deCODE Combined Data
Processing system and is unproven. The success of our database services is
contingent upon:
- the development of the Icelandic Health Sector Database and collection of
genotypic data;
- the creation of database and cross-reference software that is free from
design defects or errors;
- compliance with governmental requirements regarding the Icelandic Health
Sector Database;
- the security and reliability of encryption technology;
- the cooperation of the Icelandic healthcare system;
- the ability to obtain blood samples from consenting Icelanders and
consents to the use of their genotypic data by cross-referencing through
the deCODE Combined Data Processing system;
- the usefulness of information derived through the deCODE Combined Data
Processing system in disease management, analysis of drug response, gene
discovery and drug target validation; and
- the development of marketing and pricing methods that the intended users
of the deCODE Combined Data Processing system will accept.
If we fail to successfully commercialize our database services, we will not
realize revenues from this part of our business.
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HEALTHCARE INFORMATICS
Our bioinformatics and privacy protection products have, to date, been
tested only in connection with our own use of them and they may not meet the
needs of potential customers. We are at a very early stage of development of our
medical decision-support systems for healthcare providers, and we have generated
no revenues from sales or licenses of bioinformatics, decision-support, or
privacy protection products. To date we have not produced any decision-support
tools and there can be no assurance that we can successfully develop or
commercialize medical decision-support systems or that there will be a market
for our bioinformatics, decision-support or privacy protection products for
healthcare delivery.
IF OUR ASSUMPTION ABOUT THE ROLE OF GENES IN DISEASE IS WRONG, WE MAY NOT BE
ABLE TO DEVELOP USEFUL PRODUCTS
The products we hope to develop involve new and unproven approaches. They
are based on the assumption that information about genes may help scientists
better understand complex disease processes. Scientists generally have a limited
understanding of the role of genes in diseases, and few products based on gene
discoveries have been developed. Of the products that exist, all are diagnostic
products. To date, we know of no therapeutic products based on disease gene
discoveries. If our assumption about the role of genes in the disease process is
wrong, our gene discovery programs may not result in products, the genetic data
included in our database and informatics products may not be useful to our
customers and those products may lose any competitive advantage.
IF WE CONTINUE TO INCUR OPERATING LOSSES FOR A PERIOD LONGER THAN ANTICIPATED,
OR IN AN AMOUNT GREATER THAN ANTICIPATED, WE MAY BE UNABLE TO CONTINUE OUR
OPERATIONS
We incurred net losses of $31,118,503 for the year ended December 31, 2000,
and $23,788,447 for the year ended December 31, 1999. As of December 31, 2000,
we had an accumulated deficit of $110,753,700. To date, we have never generated
a profit and we have not generated any significant revenues except for payments
received in connection with our research collaboration with Roche and interest
revenues. The development of our technologies will require substantial increases
in expenditures over the next several years. In addition, we expect to spend
more in connection with our internal research programs and the preparation of
the Icelandic Health Sector Database, the deCODE Combined Data Processing system
and informatics. As a result, we expect to incur operating losses for several
years. If the time required to generate product revenues and achieve
profitability is longer than we currently anticipate or the level of operating
losses is greater than we currently anticipate, we may not be able to continue
our operations.
IF WE ARE NOT ABLE TO OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET OUR EXPANDING
CAPITAL REQUIREMENTS, WE MAY BE FORCED TO REDUCE OR TERMINATE OUR RESEARCH
PROGRAMS AND PRODUCT DEVELOPMENT
We have used substantial amounts of cash to fund our research and
development activities. We expect our capital and operating expenditures to
increase over the next several years as we expand our research and development
activities, construct the Icelandic Health Sector Database and the deCODE
Combined Data Processing system, collect the genotype data and develop
healthcare informatics products. Many factors will influence our future capital
needs, including:
- the progress of our discovery and research programs;
- the number and breadth of these programs;
- our ability to attract collaborators for, subscribers to or customers for
our products and services;
- our achievement of milestones under our research collaboration agreement
with Roche;
- our ability to establish and maintain additional collaborations;
- our collaborators' progress in commercializing our gene discoveries;
- the level of our activities relating to commercialization rights we
retain in our collaborations;
- competing technological and market developments;
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- the costs involved in enforcing patent claims and other intellectual
property rights; and
- the costs and timing of regulatory approvals.
We intend to rely on Roche and future collaborators for significant funding
in support of our research efforts. In addition, we may seek additional funding
through public or private equity offerings and debt financings. Additional
financing may not be available when needed. If available, such financing may not
be on terms favorable to us or our stockholders. Stockholders' ownership will be
diluted if we raise additional capital by issuing equity securities. If we raise
additional funds through collaborations and licensing arrangements, we may have
to relinquish rights to certain of our technologies or product candidates, or
grant licenses on unfavorable terms. If adequate funds are not available, we
would have to scale back or terminate our discovery and research programs and
product development. We believe that the net proceeds from our initial public
offering, other cash and investment securities and anticipated cash flow from
Roche will be sufficient to support our current operating plan for several
years. We have based this belief on assumptions that may prove wrong.
IF WE DO NOT MAINTAIN THE GOODWILL AND RECEIVE THE COOPERATION OF THE ICELANDIC
POPULATION, WE MAY BE UNABLE TO PURSUE OUR GENE IDENTIFICATION PROGRAMS,
PHARMACOGENOMICS OR FUNCTIONAL GENOMICS EFFORTS, COLLECT GENOTYPE DATA OR
DEVELOP THE ICELANDIC HEALTH SECTOR DATABASE AND THE DECODE COMBINED DATA
PROCESSING SYSTEM
Our approach to gene identification and the development and maintenance of
genotype data, the Icelandic Health Sector Database and the deCODE Combined Data
Processing system depend on the goodwill and cooperation of the Icelandic
population, including the Icelandic government and the healthcare system. Our
development of the Icelandic Health Sector Database will be impaired if
individual Icelanders refuse to allow information from their medical records to
be included in the Icelandic Health Sector Database or healthcare providers
attempt to prevent us from having access to medical records of their patients.
Individuals may opt-out of having their records included in the Icelandic Health
Sector Database. As of December 31, 2000 approximately 7% of the population has
exercised this right. Some doctors practicing in Iceland have expressed
opposition to the Icelandic Health Sector Database and may attempt to withhold
their patients' data from inclusion in such database or encourage their patients
to exercise their opt-out rights. Our development of genotype data and our
cross-referencing through the deCODE Combined Data Processing system of that
data with information about the manifestations of disease, which are known as
phenotypes, in the Icelandic Health Sector Database require that a substantial
portion of the Icelandic population provide us with blood samples for genotyping
and consent to the use of their DNA to cross-reference molecular genetics data
with the Icelandic Health Sector Database. To date, between eighty and ninety
percent of individuals that we have asked to participate in our research
projects have done so. Because only a small portion of the Icelandic population
may carry certain mutations, the unwillingness of even a small portion of the
population to participate in our programs could diminish our ability to develop
and market information based on the use of genotypic data.
OUR RELIANCE ON THE ICELANDIC POPULATION IN OUR GENE DISCOVERY PROGRAMS AND
DATABASE SERVICES MAY LIMIT THE APPLICABILITY OF OUR DISCOVERIES TO CERTAIN
POPULATIONS
In general, the genetic make-up and prevalence of disease vary across
populations around the world. Common complex diseases generally occur with a
similar frequency in Iceland as in other western countries. We are already
studying some of these diseases in our gene discovery programs. However, the
populations of other western nations may be genetically predisposed to certain
diseases because of mutations not present in the Icelandic population. As a
result, we and our partners may take more time or may be unable to develop
diagnostic products that are effective on all, or a portion, of those people
with such diseases. Similarly, any difference between the Icelandic population
and the populations of other countries may have an effect on the usefulness of
the Icelandic Health Sector Database and deCODE Combined Data Processing system
in studying disease in populations of countries other than Iceland. We do not
anticipate developing any products solely for the Icelandic market. For our
business to succeed, we must apply discoveries that we make on the basis of the
Icelandic population to other markets.
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OUR CREATION AND OPERATION OF THE ICELANDIC HEALTH SECTOR DATABASE IS BASED UPON
THE LICENSE FROM THE ICELANDIC MINISTRY OF HEALTH AND SOCIAL SECURITY AND IS
SUBJECT TO GOVERNMENT SUPERVISION AND REGULATION, WHICH MAY MAKE OUR DEVELOPMENT
OF DATABASE PRODUCTS MORE EXPENSIVE AND TIME-CONSUMING THAN WE ANTICIPATED
We may construct the Icelandic Health Sector Database and cross-reference
it with our genealogical and genetic data, through the deCODE Combined Data
Processing system, only in accordance with the stipulations of the License which
the Ministry granted us pursuant to the Act. The License permits the processing
of healthcare data from healthcare records and other relevant data into the
Icelandic Health Sector Database. The Monitoring Committee, the Data Protection
Authority of Iceland, or the Authority, and an Interdisciplinary Ethics
Committee will supervise our construction and operation of the Icelandic Health
Sector Database. These committees report to the Ministry. In addition, the
Icelandic Bioethics Committee will review our operation of the Icelandic Health
Sector Database. The Ministry may withdraw our License in the event that we
violate the terms and conditions of the License, the Act or its rules. In
addition, the Icelandic parliament could amend the Act in ways which would
adversely affect our ability to develop or market the Icelandic Health Sector
Database and, consequently, the deCODE Combined Data Processing system. Because
the Icelandic parliament and government recently adopted the Act and its rules,
there is no precedent interpreting the Act or the rules.
In preparing the Icelandic Health Sector Database, we must comply with the
Authority's technical requirements. These technical requirements cover areas
such as data encryption and privacy protection. The Authority may review these
requirements from time to time and may require greater technical capabilities
than we currently have. Compliance with these requirements can be expensive and
time-consuming and may delay the development of the Icelandic Health Sector
Database and the deCODE Combined Data Processing system or make such development
more expensive than we anticipated. In addition, the agencies imposing these
requirements will evaluate our compliance efforts. We cannot control the time
required for this evaluation, and accordingly, the evaluation process may lead
to delay in the development of the Icelandic Health Sector Database and the
deCODE Combined Data Processing system.
The Interdisciplinary Ethics Committee has the power to withdraw permission
for any type of research program in the Icelandic Health Sector Database not
conducted in accordance with international rules of bioethics.
At the expiration of the License, we are required to ensure that the
Ministry or its designee will receive, without payment of consideration,
intellectual property rights necessary for the creation and operation of the
database for public health purposes and for scientific research.
We are subject to a very extensive indemnity clause in our agreement with
the Ministry, pursuant to which:
- we have agreed not to make any claim against the government if the Act or
the License are amended as a result of the Act or rules relating to the
Icelandic Health Sector Database being found to be inconsistent with the
rules of the European Economic Area, or EEA, or other international rules
and agreements to which Iceland is or becomes a party;
- we have agreed that if the Icelandic State, by a final judgment, is found
to be liable or subject to payment to any third party as a result of the
passage of legislation on the Icelandic Health Sector Database and/or
issuance of the Icelandic Health Sector Database license, we will
indemnify it against all damages and costs in connection with the
litigation; and
- we have agreed to compensate any third parties with whom the Icelandic
government negotiates a settlement of liability claims arising from the
legislation on the Icelandic Health Sector Database and/or the issuance
of the License, provided that the Icelandic government demonstrates that
it was justified in agreeing to make payments pursuant to the settlement.
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IF WE ARE NOT ABLE TO ENTER INTO AGREEMENTS WITH MORE ICELANDIC HEALTH
INSTITUTIONS, AS THE ICELANDIC HEALTH SECTOR DATABASE LICENSE REQUIRES, IN ORDER
TO COLLECT DATA FROM THE INSTITUTIONS, WE WILL NOT BE ABLE TO CONSTRUCT AND
OPERATE THE ICELANDIC HEALTH SECTOR DATABASE
The License requires us to enter into agreements with Icelandic health
institutions and self-employed health service professionals regarding access to
and the processing of information from medical records. To date we have only
entered into such agreements with 9 Icelandic health institutions. We cannot be
certain that we will be able to enter into such agreements with a sufficient
number of health institutions as the operations of the Icelandic Health Sector
Database will require. Neither can we be certain that such agreements will be on
terms favorable to us. Some doctors practicing in Iceland have expressed
opposition to the Icelandic Health Sector Database and it is possible that those
who have private practices and as such have authority to enter into agreements
with us may refuse to do so or those who are employed by health institutions may
encourage the institutions to refuse to do so. We cannot be certain that
individuals within health institutions will adhere to the requirements of such
agreements. The Icelandic Medical Association is currently publicly opposing
some aspects of the way in which the Icelandic Health Sector Database will be
created. Our inability to enter into additional such agreements on favorable
terms or in a timely manner, or to obtain others' compliance with the terms of
such agreements, could have a material adverse effect on our ability to
construct and operate the Icelandic Health Sector Database.
IF WE CANNOT OBTAIN AN EXTENSION OF THE TERM OF THE ICELANDIC HEALTH SECTOR
DATABASE LICENSE BEYOND ITS EXPIRATION DATE IN JANUARY 2012, WE WILL NOT BE ABLE
TO OPERATE OR DERIVE RESOURCES FROM THE ICELANDIC HEALTH SECTOR DATABASE OR THE
DECODE COMBINED DATA PROCESSING SYSTEM AFTER THAT DATE
Even if we are successful in creating and marketing the Icelandic Health
Sector Database and the deCODE Combined Data Processing system, the License will
expire in January 2012 unless we are able to obtain an extension. There is no
assurance that we will obtain further access rights on favorable terms, if at
all. Our negotiations with healthcare institutions, the process of genotyping
and the development of database infrastructure, among other factors, will
determine when we can begin marketing the deCODE Combined Data Processing
system. We expect that the Icelandic Health Sector Database and the deCODE
Combined Data Processing system will not be fully operational for up to four
years. The License will be subject to a review in 2008, and at that time, in
accordance with an agreement we entered into with the Ministry simultaneously
with the granting of the License, we and the Ministry will enter into
discussions on renewal of the License at the end of the term. The Ministry might
not renew the License in 2012 and we cannot guarantee any renewal.
WE MAY NOT BE ABLE TO FORM AND MAINTAIN THE COLLABORATIVE RELATIONSHIPS THAT OUR
BUSINESS STRATEGY REQUIRES
Our strategy for deriving revenues from the discovery of genes and the
development of products based upon our discoveries depends upon the formation of
research collaborations and licensing arrangements with several partners at the
same time. We currently have only two substantial collaborative relationships.
To succeed, we will have to maintain these relationships and establish
additional collaborations. We cannot be sure that we will be able to establish
the additional research collaborations or licensing arrangements necessary to
develop and commercialize products using our technology, that any future
collaborations or licensing arrangements will be on terms favorable to us, or
that current or future collaborations or licensing arrangements ultimately will
be successful. If we are not able to manage multiple collaborations
successfully, our programs will suffer.
We also expect to rely on collaborations in other parts of our business
such as the construction of the deCODE Combined Data Processing system. During
the development of the deCODE Combined Data Processing system, we intend to
pursue collaborations to assist us in the development of certain of its
components. Such collaborations may involve the use of particular technologies
or collaborative development and marketing activities. If we are unable to enter
into such collaborations on favorable terms, our ability to commercialize the
deCODE Combined Data Processing system will be adversely affected.
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To develop our healthcare informatics products, we also plan to rely on
collaborative relationships. To date we have not established any such
collaborative relationships. If we are unable to form or maintain such
collaborative arrangements, our healthcare informatics operations will be
adversely affected.
OUR DEPENDENCE ON COLLABORATIVE RELATIONSHIPS MAY LEAD TO DELAYS IN PRODUCT
DEVELOPMENT AND DISPUTES OVER RIGHTS TO TECHNOLOGY
Currently we do not expect to develop or market pharmaceutical products on
our own. As a result, we will be dependent on collaborators for the pre-clinical
study and clinical development of therapeutic and diagnostic products and for
regulatory approval, manufacturing and marketing of any products that result
from our technology. Our agreements with pharmaceutical collaborators or
collaborators for gene research projects will typically allow them significant
discretion in electing whether to pursue such activities. We cannot control the
amount and timing of resources collaborators will devote to our programs or
potential products. Our collaborations may have the effect of limiting the areas
of research that we may pursue either alone or with others.
In addition, we expect to develop our database products, in part, with
various collaborators, and we may develop healthcare informatics tools which are
designed to work in conjunction with or to enhance the healthcare informatics
tools of other developers. These arrangements may place responsibility for key
aspects of product development and marketing on our collaborative partners.
Accordingly, the performance of these key aspects is uncertain and beyond our
direct control. If our collaborators fail to perform their obligations, our
database products could contain erroneous data, design defects, viruses or
software defects that are difficult to detect and correct and may adversely
affect our revenues and the market acceptance of our product