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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, 2001
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 JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
STURLUGATA 8, 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: $190,410,861 at March 22, 2002 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 March 22, 2002.
CLASS NUMBER OF SHARES
----- ----------------
Common Stock, $.001 par value 45,298,115
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement to be filed with respect to the 2002 Annual Meeting of
Stockholders 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 use our comprehensive
population data and proprietary datamining tools to identify and analyze the
genetic factors involved in common diseases. We use this information in the
development of new drugs, DNA-based diagnostics and bioinformatics systems and
tools. We also develop and apply modern informatics technology to discover new
knowledge about health and disease through data-mining.
Our approach to the discovery of knowledge about the nature of health and
disease brings together three key types of anonymized data on the Icelandic
population: public-domain genealogical data, and genotypic and clinical data
gathered from volunteer participants in our gene research programs.
Our research approach 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;
- clinical data from Icelandic patients and family members participating in
our disease-gene research; 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 datasets and informatics 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
development of diagnostic and therapeutic products and from pharmacogenomic
services. We are currently working on discovery and product development in these
areas on our own and in collaboration with a number of pharmaceutical and
biotechnology companies. Our partners include: F.Hoffmann-La Roche, or Roche;
Roche Diagnostics; Affymetrix; Genmab and Medarex; and Pharmacia. We expect to
seek additional partners for this part of our business.
Database Services. We have also developed and are marketing the Clinical
Genome Miner(TM), a computer based discovery system that allows users to perform
real-time analysis to study the association between variation in human genes and
human disease. The system is being offered under a multi-year license to
research organizations to enable the discovery and validation of novel
therapeutic and diagnostic targets, based on the pathology and genetics of human
disease. The Clinical Genome Miner(TM) combines bioinformatics software and
anonymized data on the medical condition, genotypes and genealogy of tens of
thousands of Icelandic individuals who have participated in deCODE disease
studies and contributed samples and information under informed consent.
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.
Informatics. The third area of focus, informatics, is derived from our
discovery and database services. Our informatics business has two principal
components: bioinformatics and healthcare informatics.
- Bioinformatics. Our population research into the genetic factors that
contribute to common diseases involves, in the first stage, the
gathering, management and genotyping of thousands of biological samples.
In order to carry out this work efficiently we have developed proprietary
software and systems specifically suited to these tasks. In order to
analyze this large amount of genotypic data, we have also developed what
we believe are some of the fastest and most powerful mathematical
algorithms and software systems for carrying out linkage analysis. These
products enable us to efficiently study the inheritance of genetic
markers across large families, an approach which indicates specific
regions of the
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genome containing genes involved in the pathogenesis of specific
diseases. We are now marketing these products in partnership with Applied
Biosystems Group, by integrating them for use with Applied Biosystems'
bioanalytical instruments and data-capture software.
- Healthcare Informatics. 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 Clinical Genome Miner(TM) and, when
it is operational, the Icelandic Health Sector Database.
In this report, references to we or us refer to deCODE genetics, Inc. and
our wholly-owned subsidiary, Islensk erfoagreining ehf., and its subsidiaries
deCODE cancer ehf. and Encode ehf., each an Icelandic private limited company.
After the closing of the acquisition of MediChem Life Sciences Inc. on March
18th 2002 we or us also refers to MediChem, a wholly owned subsidiary of deCODE
genetics, Inc., and to Medichem's wholly owned subsidiaries.
deCode was incorporated in Delaware in 1996.
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
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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.
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.
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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 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
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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.
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 to adulthood 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.
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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 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.
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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.
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
At present, our focus in database services is on the commercialization and
continued development of the deCODE Clinical Genome Miner(TM) and on the
development and launch of the Icelandic Health Sector Database and the deCODE
Combined Data Processing system.
Description of the deCODE Clinical Genome Miner(TM)
The deCODE Clinical Genome Miner(TM) (CGM) is the first bioinformatics
system in the world that enables the cross-referencing of genetic, phenotypic
and genealogical data on a large scale and in real time.
The CGM contains uniquely comprehensive and integrated proprietary data for
the analysis of the interplay between genetics and environmental factors
involved in the development of common diseases. These include our anonymized
genealogical data, as well as genoyptic and clinical medical data on over 50,000
volunteer participants in more than 30 of our disease research programs. The
datamining tools and two principal components of the CGM -- the Disease
Miner(TM) and Genome Miner(TM) -- enable users to find correlations between
genetic variation and disease, based on queries starting from either endpoint.
Users can define a phenotype, conduct a genome-wide, population linkage scan and
drill down to find the known genes in any chromosomal region of interest. They
can also identify a gene, place it within the most detailed genetic and physical
maps of the genome available -- developed by deCODE -- and view the population
linkage correlations between the chromosomal location of the gene and more than
30 diseases.
The CGM thereby enables subscribers to answer in a matter of minutes
questions that would likely take years to answer through experimentation, and to
ask the questions in a relatively hypothesis-free manner. We believe that the
CGM will be valuable to subscribers as a discovery platform, as a means of
verifying results, and, perhaps most importantly, as an efficient means for
pharmaceutical and biotechnology companies to characterize and prioritize large
numbers of drug and diagnostic targets whose links to disease may not be well
understood. We believe that this represents one of the most daunting challenges
in employing genomics to create new diagnostic tools and therapeutics to improve
healthcare.
CGM users' interactions with the system are confined to the query layer;
users will not have direct access to the data itself, which remains proprietary
to deCODE. We are marketing the CGM on the basis of non-exclusive, multi-year
subscriptions.
Description of the deCODE Combined Data Processing system
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. The healthcare data contained in the
Icelandic Health Sector Database will include, in addition to disease diagnosis
details of laboratory results, treatments and outcomes.
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
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system. 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
may 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.
INFORMATICS
BIOINFORMATICS
We believe that our population approach to genetics -- through which we use
population- and genome-wide genotypic analysis to identify key genetic
components in common, complex diseases -- has proven to be an efficient and
effective means of identifying drug targets and diagnostic markers rooted in the
biology of disease. With over 50 diseases now under research and one of the
largest high-throughput genotyping laboratories in the world, we believe that
deCODE is a world leader in the generation and analysis of genotypic data. We
have in the course of our research developed mathematical algorithms and
software systems for managing tens of thousands of samples and identifying
locations and levels of genetic sharing in large groups of patients because we
conduct linkage analysis on such a large scale.
HEALTHCARE INFORMATICS
We believe that the rapidly increasing volume of clinical information and
medical research data available to physicians and healthcare providers, combined
with the data processing capabilities of modern computer and software systems,
have created a need for effective healthcare informatics tools and the means to
meet this need. Key areas of healthcare informatics include personalized
medicine, privacy protection and disease management. We believe that our
experience in using advanced privacy protection systems and our broad range of
data, including anonymized population-based data on genetics and disease, will
enable us to develop innovative products in these fields.
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 are pursuing gene and drug target
discovery and the characterization of genes that contribute to the causes of
common diseases. In addition, we are using studies of gene expression and
protein-protein interaction systems to define molecular pathways, which may
contain drug targets. We are focusing on diseases that have the potential to
result in the discovery of new proteins and drug candidates. We intend to pursue
the development of these targets to create new therapeutics, both in-house and
in alliance with corporate partners. In addition knowledge about genes and
polymorphisms that contribute to the cause of disease can be used to develop
novel diagnostic markers and tests. Our acquisition in early 2002 of MediChem
Life Sciences, Inc., a U.S.-based drug discovery and development company,
provides us with medicinal chemistry and structural biology expertise to pursue
the downstream development of drug targets on a proprietary basis.
Pharmacogenomics Partnerships. In collaboration with pharmaceutical and
biotechnology companies, we are working to apply pharmacogenomics to understand
differences in drug response among individuals. Our approach enables the
identification of the genetic differences that cause people to respond
differently to the same drugs. As a result, we believe that it will be possible
to individualize the selection of drugs for patients. We believe that our
population approach and resources give us an advantage in identifying key genes
involved in responsiveness to drugs, and we are combining this approach with
large-scale gene expression studies to design accurate DNA-based tests to
indicate whether individual patients are likely to respond to a given drug.
Furthermore, we believe that the integration of medical treatment and outcome
information with genetic information will give us and our partners an advantage
in the generation and analysis of pharmacogenomics information, as well as in
the commercialization of pharmacogenomic tests.
Database Subscriptions. We have built the deCODE Clinical Genome Miner
database and discovery system, and will continue to extend and enhance this
system through the development of the Icelandic Health
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Sector Database and the deCODE Combined Data Processing system. Services we plan
to offer to future subscribers of our database and discovery systems 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.
Informatics Products and Services. We are pursuing market opportunities
for software tools that we have developed in the course of our gene discovery
efforts, in the development of the Clinical Genome Miner(TM). We also intend to
pursue market opportunities for products we develop in healthcare informatics.
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 informatics.
DISCOVERY SERVICES
Current Discovery Programs
We are conducting gene discovery programs associated with over 50 common
diseases. 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 and achievements follows.
Autoimmune Diseases. We are currently studying several autoimmune diseases
such as atopy, inflammatory bowel disease (Crohn's and ulcerative colitis),
insulin-dependent diabetes, psoriasis, rheumatoid arthritis and ankylosing
spondilytis. These, like all our disease-gene research programs, are being
researched using genome-wide linkage scans of patients and their relatives from
across the population. We have located genes in atopy, psoriasis and rheumatoid
arthritis.
- 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.
- Rheumatoid arthritis. We have mapped the first gene with genome-wide
significant linkage to rheumatoid arthritis outside the MHC region, and
are currently fine-mapping this locus.
Cardiopulmonary Diseases. We are studying a variety of common diseases
such as asthma, chronic obstructive pulmonary disease (COPD), hypertension,
myocardial infarction, peripheral arterial occlusive disease (PAOD),
cerebrovascular disease (stroke) and obstructive sleep apnea syndrome. We have
identified novel genes in PAOD and the common form of stroke, and located genes
in asthma, COPD, Hypertension and myocardial infarction.
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- 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. This study may expand slightly to emphasize that we have validated
a drug target which was linked to the disease. We have validated a drug
target identified through analysis of the gene which we have linked to
PAOD, and are now conducting ongoing drug discovery work on this target.
- 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 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 identified the first gene
ever linked to the common form of stroke and used this information to
identify a drug target. We are conducting drug discovery work using this
target.
Central nervous system diseases. We are studying the genetic basis for
several psychiatric and central nervous system diseases, including Alzheimer's
disease, anxiety, bipolar disease/depression, familial essential tremor,
multiple sclerosis, narcolepsy, Parkinson's disease, schizophrenia, autism,
attention deficit and hyperactivity disorder, and migraine.
- Alzheimer's disease. Alzheimer's disease is the most common cause of
dementia. We have carried out a genome-wide scan involving 1,200
Icelanders and mapped a gene that contributes to the occurrence of
late-onset Alzheimer's disease. We are fine-mapping this locus to
identify the gene in question.
- 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. Through functional and proteomics studies we identified a
protein coded for by this gene and another protein with which it
interacts in the central nervous system. We are using the latter protein
as a drug target. We have developed knock-out mice to gain additional
information on this target, and have conducted high-throughput screening
to identify potentially effective compounds for use against this target.
- Parkinson's disease. We have mapped a gene contributing to late-onset
Parkinson's disease, the first genetic factor ever mapped for the most
common form of the disease. The gene was mapped to a small region of
chromosome 1, through analysis of genotypic data from volunteer
late-onset Parkinson's patients and their unaffected relatives from 51
families from across Iceland.
- Familial essential tremor (FET). A genome-wide scan for FET genes was
performed at deCODE, in a study of 16 Icelandic families with 75 affected
individuals in whom FET was apparently inherited as a dominant trait. The
scan revealed one locus of genome-wide significance. This locus is
currently being fine-mapped.
- Anxiety disorder and depression. The most common form of mental illness
in industrialized countries, anxiety disorder and depression encompasses
a constellation of conditions, including panic disorder, phobic
disorders, obsessive-compulsive disorder, general anxiety disorder and
depression. We approached anxiety as a broadly defined disorder that
encompasses all of these complexities. Following a survey of more than
10,000 randomly-selected individuals conducted by collaborating
physicians, some 500 respondents who had reported symptoms of anxiety
agreed to be clinically examined and
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genotyped. By focusing on extended families with at least one individual
suffering from panic disorder, we mapped a gene strongly linked to all
forms of clinical anxiety. We are now expanding this program by surveying
20,000 randomly-selected individuals for depression and have already
identified 230 who have been further evaluated and are being genotyped
along with their closest family members.
Eye Disease. We are studying a range of eye diseases, including macular
degeneration, cataracts, glaucoma, myopia and retinitis pigmentosa. We have
mapped a gene linked to macular degeneration.
Women's Health. We are studying the genetic causes of women's health
problems including endometriosis and pre-eclampsia. We have located a
susceptibility gene for pre-eclampsia on chromosome 2p13. In February 2002, we
and a team from the National University Hospital in Reykjavik published a study
utilizing our genealogical database to demonstrate the contribution of genetic
factors in the development of endometriosis (Human Reproduction, 17:3,
pp555-559). We are using this data as the basis for a study to identify key
genes involved in the disease.
Cancer. We conducting research in many forms of cancer, including lung
cancer, melanoma, renal cancer, colon cancer, testicular cancer, thyroid cancer,
prostate cancer and also for benign prostatic hypertrophy.
Metabolic and Other Diseases and Conditions. We are studying the genetic
basis for osteoarthritis, osteoporosis, non-insulin-dependent diabetes (NIDDM),
obesity, familial combined hyperlipidemia, nocturnal enuresis, and longevity. We
have mapped genes for the first four conditions and for longevity.
- Osteoarthritis. We have mapped three genes linked to osteoarthritis. 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.
- Non-insulin dependent diabetes. We located a gene linked to NIDDM to a
small chromosomal region by utilizing the genotypes of 2700 volunteer
patients and relatives grouped into 200 families from across Iceland.
- Obesity. We located a gene whose variant forms contribute to obesity by
analyzing genotypic data from more than 11,000 adult volunteers in
Iceland -- representing a significant proportion of the population
suffering from severe obesity. Using the Clinical Genome Miner(TM), we
were able to correlate a wide range of clinical, behavioral, and
genotypic data, and gained important new insights into the heritability
of different aspects of obesity, as well as into the complex interplay
between obesity and diabetes, stroke, heart disease, and hyperlipidemia.
In this way we have also located a gene variant that appears to protect
obese individuals from type-2 diabetes, an otherwise common complication.
- Longevity. Using our genealogical database and datamining algorithms, we
have found that individuals above the 95th percentile in longevity in
Iceland are significantly more related than members of the population at
large. Through the analysis of genotype data from volunteer members of
families with significant numbers of individuals living beyond the 95th
percentile, we have located a gene that appears to correlate with extreme
longevity. We are fine-mapping this locus.
Collaborations
Our strategy for pursuing business opportunities is to attempt to turn our
discoveries and resources into to a broad range of products for the market. In
some instances we intend to pursue this research and product development on our
own, and in others through alliances with pharmaceutical companies,
biotechnology firms and other healthcare institutions. 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
11
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 term of this agreement expired on February 1,
2002.
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.
F.Hoffmann-La Roche. In January 2002, we formed with a new, three-year
alliance with Roche focused on turning the achievements of our 1998 gene
discovery collaboration into novel treatments for common diseases. Under our
1998 agreement, we used our population data to identify key genetic factors
contributing to ten major diseases: osteoarthritis, Alzheimer's disease,
schizophrenia, peripheral arterial occlusive disease (PAOD), stroke,
osteoporosis, obesity, anxiety, type 2 diabetes and rheumatoid arthritis. The
new alliance extends our partnership with Roche to leverage our expanding
capabilities in drug discovery and development. Under this new alliance, Roche
will provide us with research funding to increasingly focus over the next two
years on downstream research in a selection of four of the diseases covered by
the earlier agreement. The goal of the new alliance is to use the targets
identified under the 1998 alliance to discover and develop new therapeutic
compounds and to take these compounds into clinical trials. We will receive
milestone payments for the development of compounds as well as royalties on the
sales of drugs developed under the alliance. We retain therapeutic development
rights to those targets identified under the 1998 alliance and not carried over
into the new alliance. Pursuant to an agreement, we license our GeneMiner
bioinformatic software product to Roche.
Genmab and Medarex. In June 2001, we entered into two agreements with
Genmab A/S. Under the first, we are conducting research aimed at developing a
DNA-based test to predict individual clinical response to Genmab's antibody
treatment for rheumatoid arthritis (RA). We and our subsidiary Encode are
conducting studies using Icelandic patients and patients from broader
populations to identify key genetic factors predictive of clinical response to
treatments for moderate to severe RA. These studies will also specifically focus
on genetic factors predictive of responsiveness to HuMax-CD4, a fully human
monoclonal antibody developed by Genmab and now in Phase III clinical trials.
With the results of this research, we plan to develop an RNA- or DNA-based test
that can be employed by doctors to determine the best treatment regimes for
individual RA patients. Exclusive of potential sales royalties, Genmab is
providing deCODE with research funding and potential milestone payments for a
successfully marketed product.
We have also entered a broad-based collaboration with Genmab to develop new
antibody therapeutic products. The partnership aims to utilize novel targets
discovered in our research on the genetics of common diseases along with
Genmab's fully human antibody technology to create and develop new products.
This is a multi-target alliance covering a range of disease areas including
cardiovascular and inflammatory diseases as well as cancer. We and Genmab will
collaborate on the research, development, and commercialization of the new
antibody products, and will share equally development costs and revenues
generated from outlicensing or sales of these products. Given the scope of this
multi-target alliance, Medarex, Inc., a leading antibody company based in the
United States, will also contribute resources to the collaboration and will
share certain costs and commercial rights. Medarex originally developed the
UltiMAb(TM) platform, which Genmab has
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licensed, and also has an agreement in which it may participate with Genmab in
multi-target European genomics relationships, such as this one.
Roche Diagnostics. In June 2001, we signed with Roche a five-year alliance
to develop and market DNA-based diagnostics for major diseases. The alliance
represents an important element in our strategy of turning our research platform
and achievements into products on the market. The alliance aims to bring
together what we believe are important deCODE and Roche assets: our
comprehensive population genomics resources and bioinformatics expertise, and
Roche's prominence in the development and marketing of molecular diagnostics. In
addition to the development of novel DNA-based diagnostic and predisposition
screening products, we will be working under this alliance to use our Clinical
Genome Miner(TM) system to develop point-of-care informatics products that can
assist doctors in evaluating the results of DNA-based diagnostic tests. We
believe that our population data and informatics tools contained in the CGM give
us an advantage in the development of such products, and that such products will
be important in establishing the use of DNA-based diagnostic and pharmacogenomic
tests as a useful part of everyday healthcare.
Affymetrix. In July 2001, we formed a pharmacogenomics alliance with
Affymetrix, Inc., under which we are developing DNA-based tests to predict the
responsiveness of individual patients to treatments for common diseases. We are
bringing together our population-based approach to pharmacogenomics and
Affymetrix' GeneChip(R) technology, focusing initially on conducting gene
expression analysis to understand the response to drugs used in the treatment of
several common diseases. These include high-cholesterol, depression, asthma,
hypertension, breast cancer, schizophrenia and migraine. Clinical work under
this collaboration is being performed by Encode, our wholly-owned subsidiary.
Through Encode, we will share the revenues from the sale of tests developed
under the collaboration.
Pharmacia. In December 2001, we formed a pharmacogenomics alliance with
Pharmacia Corporation to identify the role of genetics in the development of
advanced forms of heart disease. Under the agreement, we will employ our
population resources and Clinical Genome Miner(TM) to find genetic markers that
can be used to identify patients who are highly predisposed to progressing from
an early to an advanced form of heart disease. The companies then hope to use
this information as the basis for clinical trials. These trials would aim to
establish the utility of these genetic markers in identifying patients likely to
benefit from cardiovascular drugs under development at Pharmacia. We believe
that this alliance underscores the potential of our pharmacogenomics approach
for extending the applicability of a developmental treatment in a targeted
manner, maximizing its potential benefits to patients. Through our
pharmacogenomics subsidiary and CRO Encode, we will receive contract fees as
part of the first phase of this agreement. If certain license options are
exercised by Pharmacia, deCODE, through Encode, will receive royalties on sales
of diagnostic tests as well as royalties on potential sales of cardiovascular
drugs. Pharmacia may terminate this arrangement for a full refund through April
18, 2002 for certain defined circumstances.
In addition, we have entered into the following collaborations:
Partners HealthCare System, Inc. In May 2000, we entered into a three-year
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.
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
13
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.
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. 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 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 19 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, to launch
pharmacogenomics studies in Iceland, based on deCODE's approach. Encode also
continues to conduct clinical trials for new and existing therapeutics for major
pharmaceutical companies as a Contract Research Organization. We are now working
with several pharmaceutical and biotechnology companies, including GenMab,
Pharmacia and Affymetrix to develop and market pharmacogenomic tests. 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. As the development cost of these compounds has already been incurred,
pharmacogenomics research may provide a cost-effective method to bring these
abandoned products to market.
Cancer
In November 2000, we founded deCODE Cancer ehf., a wholly-owned subsidiary
that has incorporated 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
also enjoy the flexibility to develop special alliances, while at the same time
continuing to leverage deCODE's resources for population genomics research.
Proprietary Discovery and Development Programs
We also plan to work on some diseases without partnering with
pharmaceutical companies, and we are currently pursuing approximately 45 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
14
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.
In March 2002, we acquired Medichem Life Sciences Inc. through a
stock-for-stock exchange and merger agreement. We did so in order to gain the
advanced drug discovery and development capabilities necessary to take our
targets into proprietary development. Founded in 1987, MediChem is a
full-service drug discovery technology and services company focused on using its
high-throughput integrated chemistry platform to streamline genomics-based drug
discovery and development. At the time of the acquisition, MediChem had 163
employees, including 107 chemists, 12 molecular biologists and 9 protein
crystallographers. The company has substantial expertise in structural
proteomics; lead discovery and optimization; combinatorial, computational and
medicinal chemistry; biocatalysis; analytical and separations chemistry;
chemical synthesis and scale-up; and clinical trials management and regulatory
approvals.
DATABASE SERVICES
The deCODE Clinical Genome Miner(TM) and the deCODE Combined Data
Processing system allow users to ask questions about relationships between
genetic, genealogical data and disease. We believe the deCODE database services
systems substantially enhances the value of human genome sequence data,
expression data or studies of animal models by providing a human, medical and
genetic context, which may facilitate the development of new human therapeutics.
Products
We expect pharmaceutical and biotechnology companies to use the deCODE
Clinical Genome Miner(TM) and the deCode Combined Data processing system in gene
discovery programs, gene validation and drug target prioritization as a way of
confirming their own findings or providing an impetus for further research.
Customers
We believe that the potential customer base for our database services
consists of members of the healthcare industry, including pharmaceutical and
biotechnology companies. Pharmaceutical and biotechnology companies may use our
database services in their gene discovery, gene validation and pharmacogenomics
programs.
We anticipate that our customers will pay for access to database products
by means of a fixed subscription fee, in addition to potential share of product
revenues they generate as a result of using the database.
INFORMATICS
We have identified two broad categories of product opportunities in
informatics to leverage capabilities derived from our gene discovery and
database operations: bioinformatics and healthcare informatics.
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 that
we hope to commercialize as independent products.
Healthcare Informatics. In the course of our research, and in order to
fulfill the Icelandic Data Protection Authority's requirements, we have
developed substantial expertise in the protection and encryption of potentially
sensitive personal data. All of the data used in our research, whether
genealogical, genetic or medical, is used only in non-personally identifiable
form, with the encryption of personal identifiers supervised by the Icelandic
Data Protection Authority. We have designed efficient systems for meeting
Iceland's data and privacy protection standards, which are at present among the
strictest in the world. We believe that the opportunity to commercialize this
expertise will grow as the healthcare industry seeks to take advantage of the
15
benefits that information technology offers to manage complex healthcare data
while maintaining patient confidentiality.
In addition to the increasing demand for privacy protection, 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 and the development of informed
strategies of preventive medicine. This trend toward personalized healthcare
presents a number of opportunities in healthcare informatics. We believe our
comprehensive data and software for mining this data for knowledge give us an
advantage as we pursue these opportunities in areas including:
- Personalized Medicine. We intend to use the knowledge that we gain from
our discovery programs and the Clinical Genome Miner(TM) system to
provide medical decision-support systems necessary to deliver and
interpret this increased volume of data to a variety of end-users. We are
working on integrating the CGM for use with DNA-based diagnostics under
our alliance with Roche Diagnostics. We believe this will be useful not
only in interpreting the results of such tests for assisting with
clinical diagnosis of disease, but also for correlating results
indicative of disease predisposition with other medical data in order to
design novel and informed strategies of preventive medicine.
- Disease Management. 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. We believe the Clinical Genome Miner lends itself to
this type of analysis, and its capabilities in this area will improve
with the ability of users to cross-reference CGM data with the healthcare
data to be included in the Icelandic Health Sector Database.
Collaborations
Applied Biosystems Group. In July 2001, we announced the formation of a
three-year alliance with Applied Biosystems Group. Under this alliance we are
adapting our genotyping software suite for integration with Applied Biosystems'
laboratory management software to provide a full range of highly customizable
solutions for the generation, management and analysis of genotyping data. We are
also collaborating with ABG to develop new bioinformatics software to meet the
evolving demands of life science customers. Applied Biosystems expects to
integrate the new software and customers' existing software tools with its
instruments to create fully integrated genotyping solutions. We will receive
royalties on sales of the alliance software.
Customers
Bioinformatics. We believe that the customers for our bioinformatics tools
will mainly consist of pharmaceutical and biotechnology companies.
Healthcare informatics. 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. We believe
that products and services in the fields of personalized medicine and disease
management have a broad potential customer base in the healthcare industry. Our
initial focus will be on healthcare providers, national health systems,
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 $71,796,515 in the year ended
December 31, 2001, $45,742,081 in 2000 and $33,213,557 in 1999. Of these
amounts, we estimate that $26 million, $23 million and $22 million were spent on
customer sponsored research and development activities in 2001, 2000 and 1999,
respectively.
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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. As of year-end 2001, we had four issued U.S.
patents, one European patent and had filed over 30 patent applications for our
inventions in the United States. We have also filed numerous international
patent applications under the Patent Cooperation Treaty, claiming priority from
those of our U.S. applications that we consider to be of significant commercial
value. 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 companies, 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.
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 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;
17
- 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
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
erfoagreining 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.
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. 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. In August 2001 deCODE and the Icelandic Medical
Association reached a certain mutual understanding about the dispute. To date we
have entered into 19 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.
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
$700,000 as of March 2002) and an additional annual fee of 6% of its net profit,
as defined, of the licensee, up to a maximum of 70 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.
18
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.
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
19
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 has appointed
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, labeling, 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.
ENVIRONMENTAL
deCODE's 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
20
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.
MediChem's activities involve the controlled use of hazardous materials. We
are subject to U.S. federal, state and local laws and regulations governing the
use, manufacture, storage, handling and disposal of such materials and certain
waste products. Although we believe that MediChem's activities currently comply
with the standards prescribed by such laws and regulations, the risk of
accidental contamination or injury from these materials cannot be eliminated. In
the event of such an accident, we could be held liable for any damages that
result and any such liability could exceed our resources. In addition, there can
be no assurance that we will not be required to incur significant costs to
comply with environmental laws and regulations in the future.
EMPLOYEES
As of December 31, 2001, we had approximately 592 employees, of whom
approximately 566 were employed full-time, 87 held Ph.D. or M.D. degrees and
approximately 295 held college degrees. 499 employees were engaged in, or
directly supported, research and development activities, of whom 308 worked
within the laboratory facilities and 149 held positions associated with the
development of informatics. 56 employees were engaged in finance, administrative
support and facilities management, and about 37 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 2002.
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.
DECODE MAY NOT ACHIEVE THE BENEFITS IT EXPECTED FROM THE ACQUISITION OF
MEDICHEM, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON DECODE'S BUSINESS,
FINANCIAL AND OPERATING RESULTS
deCODE acquired MediChem with the expectation that the acquisition would
result in benefits to it arising out of the combination of deCODE's unique
population genomics approach to identifying novel targets in major therapeutic
areas with MediChem's high-throughput integrated chemistry platform to
facilitate drug discovery and development. These benefits may include
operational efficiencies resulting from synergies between the companies and
greater sales levels due to increases in product offerings and consolidation of
sales and marketing expertise, among others. To realize any benefits from the
acquisition, deCODE will face the following post-acquisition challenges:
- integrating the complementary competencies of MediChem's chemistry
research platform and deCODE's gene discovery capabilities;
- retaining and assimilating the management and employees of each company;
- developing new products that utilize the assets and resources of both
companies;
- retaining existing customers, strategic partners and suppliers of each
company;
- realizing expected cost savings and synergies from the acquisition; and
- developing and maintaining uniform standards, controls, procedures,
policies and information systems.
21
If deCODE is not successful in addressing these and other challenges, then
the benefits of the acquisition will not be realized and, as a result, deCODE's
operating results and the market price of deCODE's common stock may be adversely
affected. These challenges, if not successfully met by deCODE, could result in
possible unanticipated liabilities, unanticipated costs, diversion of management
attention and loss of personnel. deCODE cannot assure you that it will
successfully integrate MediChem's business or profitably manage the combined
company. Further, deCODE cannot assure you its the growth rate after the
acquisition will equal the historical growth rates experienced by deCODE before
the acquisition.
IF THE COSTS ASSOCIATED WITH THE MEDICHEM ACQUISITION EXCEED THE BENEFITS,
DECODE MAY EXPERIENCE ADVERSE FINANCIAL RESULTS, INCLUDING INCREASED LOSSES
deCODE will incur consolidation and integration expenses which it cannot
accurately estimate at this time. Actual transaction costs may substantially
exceed deCODE's current estimates and may affect its financial condition and
operating results negatively. If the benefits of the acquisition do not exceed
the costs associated with the acquisition, including any dilution to deCODE's
stockholders resulting from the issuance of shares in connection with the
acquisition, deCODE's financial results could be adversely affected, including
increased losses.
THE MARKET PRICE OF DECODE'S COMMON STOCK MAY DECLINE AS A RESULT OF THE
MEDICHEM ACQUISITION
The market price of deCODE's common stock may decline as a result of the
acquisition for a number of reasons, including if:
- the integration of deCODE and MediChem is not completed in a timely and
efficient manner;
- deCODE does not achieve the perceived benefits of the acquisition as
rapidly or to the extent anticipated by financial or industry analysts;
or
- the effect of the acquisition on deCODE's financial results is not
consistent with the expectations of financial or industry analysts.
UNCERTAINLY REGARDING THE EFFECTS OF THE MEDICHEM ACQUISITION COULD CAUSE
DECODE'S CUSTOMERS OR STRATEGIC PARTNERS TO DELAY OR DEFER DECISIONS
deCODE's and/or MediChem's customers and strategic partners, in response to
the acquisition, may delay or defer decisions, which could have a material
adverse effect on deCODE's business.
DECODE MAY NOT SUCCESSFULLY DEVELOP OR DERIVE REVENUES FROM ANY PRODUCTS OR
SERVICES
Discovery Services
deCODE is still in the early stages of its gene discovery programs. deCODE
uses its technology and research capabilities primarily to identify genes or
gene fragments that are responsible for certain diseases, indicate the presence
of certain diseases or cause or predispose individuals to certain complex
diseases. Although deCODE has identified some genes that it believes are likely
to cause certain diseases, deCODE may not be correct and may not be successful
in identifying any other similar genes. Many experts believe that some of the
diseases deCODE is targeting are caused by both genetic and environmental
factors. Even if deCODE identifies specific genes that are partly responsible
for causing diseases, any gene-based therapeutic or diagnostic products may not
detect, prevent or cure a particular disease. Accordingly, even if deCODE is
successful in identifying specific genes, its discoveries may not lead to the
development of commercial products.
Any pharmaceutical products that deCODE or its collaborators are able to
develop will fail to produce revenues unless deCODE:
- establishes that they are safe and effective;
- successfully competes with other technologies and products;
- does not infringe on the proprietary rights of others;
- establishes that they can be manufactured in sufficient quantities at
reasonable costs;
- can market them successfully; and
22
- can maintain the goodwill and receive the cooperation of the Icelandic
population.
deCODE may not be able to meet these conditions. deCODE expects that it
will be years, if ever, before it will recognize revenue from the development of
therapeutic or diagnostic products.
Database Services
deCODE received a license to create and operate the Icelandic Health Sector
Database, or the Database License, in January 2000, and deCODE is still in the
early stages of developing this database and 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. deCODE expects
it will be several years before it fully develops the deCODE Combined Data
Processing system. deCODE will devote substantial resources to the development
of these systems and their components for the foreseeable future. Database
Services include the Clinical Genome Miner which contains tools to discover or
validate disease linked genes based on non-personally identifiable genotypic,
genealogical and phenotypic data. deCODE cannot be sure that marketing the
Clinical Genome Miner will lead to collaborations with potential clients nor
that the deCODE Combined Data Processing system will result in marketable
products or services. Although deCODE's intended method for cross-referencing
genealogical, genotypic and healthcare data is central to the development of the
deCODE Combined Data Processing system, it is unproven.
The success of deCODE's database services depends on its ability to:
- create database and cross reference software that is free from design
defects or errors;
- obtain the cooperation of the Icelandic healthcare system;
- obtain blood samples from Icelanders and their consent to use their
genotypic data;
- effectively use the information derived from the deCODE Combined Data
Processing system in disease management, analysis of drug response, gene
discovery and drug target validation; and
- develop marketing and pricing methods that the intended users of the
deCODE Combined Data Processing system will accept.
deCODE's 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. As of December
31, 2001, approximately 7% of the population has exercised their rights to
exclude their medical records from the database. 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 deCODE's programs could
diminish its ability to develop and market information based on the use of
genotypic data. If deCODE fails to successfully commercialize its database
services, it will not realize revenues from this part of its business.
Healthcare Informatics
Only deCODE has tested its bioinformatics and privacy protection products.
These products may not meet the needs of potential customers. deCODE is at a
very early stage of development of its medical decision-support systems for
healthcare providers. deCODE has generated little revenues from sales or
licenses of bioinformatics, decision-support or privacy protection products. To
date, deCODE has not produced any decision-support tools. deCODE cannot assure
you that it can successfully develop or commercialize medical decision-support
systems or that there will be a market for its bioinformatics, decision-support
or privacy protection products.
MediChem Services
Development and commercialization of potential drug candidates depend not
only on the achievement of research objectives by MediChem and its
collaborators, but also on each of MediChem's client's own financial,
competitive, marketing and strategic considerations and regulatory requirements
imposed by governmental and other regulatory entities in the U.S. and other
countries, all of which are beyond deCODE's control. Given the uncertainties
inherent in the drug discovery and development process, deCODE's ability to
realize revenues from the drug discovery and developmental business is highly
speculative.
23
IF DECODE CONTINUES TO INCUR OPERATING LOSSES LONGER THAN ANTICIPATED, OR IN
AMOUNTS GREATER THAN ANTICIPATED, IT MAY BE UNABLE TO CONTINUE ITS OPERATIONS
deCODE incurred a net loss of $47,838,471 for the year ended December 31,
2001 and has an accumulated deficit of $158,592,171 at December 31, 2001. deCODE
has never generated a profit and it has not generated revenues except for
payments received in connection with its research and development collaborations
with Roche, other recent collaborations and interest revenues. deCODE must
increase its expenditures substantially over the next several years to develop
its technologies and its internal research programs and to prepare the Clinical
Genome Miner Service, the Icelandic Health Sector Database, the deCODE Combined
Data Processing system and informatics. As a result, deCODE expects to incur
operating losses for several years. If the time required to generate product
revenues and achieve profitability is longer than deCODE currently anticipates
or the level of operating losses is greater than deCODE currently anticipates,
deCODE may not be able to continue its operations.
IF DECODE'S ASSUMPTION ABOUT THE ROLE OF GENES IN DISEASE IS WRONG, IT MAY NOT
BE ABLE TO DEVELOP USEFUL PRODUCTS
The products deCODE hopes to develop involve new and unproven approaches.
They are based on the assumption that information about genes may help
scientists to 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, deCODE knows of no therapeutic products based
on disease gene discoveries. If deCODE's assumption about the role of genes in
the disease process is wrong, its gene discovery programs may not result in
products, the genetic data included in its database and informatics products may
not be useful to its customers and those products may lose any competitive
advantage.
IF DECODE IS NOT ABLE TO OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET ITS
EXPANDING CAPITAL REQUIREMENTS, DECODE MAY BE FORCED TO REDUCE OR TERMINATE ITS
RESEARCH PROGRAMS AND PRODUCT DEVELOPMENT
deCODE has spent substantial amounts of cash to fund its research and
development activities and expects to spend substantially more over the next
several years for research and development activities. deCODE expects to use
cash to expand its research and development activities, develop the Clinical
Genome Miner, construct the Icelandic Health Sector Database and the deCODE
Combined Data Processing system, collect the genotype data, develop healthcare
informatics products and conduct drug discovery and developmental activities.
Many factors will influence its future capital needs, including:
- the number, breadth and progress of its discovery and research programs;
- its ability to attract customers;
- its ability to commercialize its discoveries and the resources it devotes
to commercialization;
- the amount it spends to enforce patent claims and other intellectual
property rights; and
- the costs and timing of regulatory approvals.
deCODE intends to rely on Roche and other existing and future collaborators for
significant funding of its research efforts. In addition, deCODE may seek
additional funding through public or private equity offerings and debt
financings. deCODE may not be able to obtain additional financing when it needs
it or the financing may not be on terms favorable to deCODE or its stockholders.
Stockholders' ownership will be diluted if deCODE raises additional capital by
issuing equity securities.
If deCODE raises additional funds through collaborations and licensing
arrangements, it may have to relinquish rights to some of its technologies or
product candidates, or grant licenses on unfavorable terms. If adequate funds
are not available, deCODE would have to scale back or terminate its discovery
and research programs and product development.
DECODE MAY NOT BE ABLE TO FORM AND MAINTAIN THE COLLABORATIVE RELATIONSHIPS THAT
ITS BUSINESS STRATEGY REQUIRES AND THE RELATIONSHIPS MAY LEAD TO DISPUTES OVER
TECHNOLOGY RIGHTS
deCODE must form research collaborations and licensing arrangements with
several partners at the same time to operate its business strategy. deCODE
currently has only six substantial collaborative relationships,
24
including two with Roche. To succeed, deCODE will have to maintain these
relationships and establish additional collaborations. deCODE cannot be sure
that it will be able to establish the additional research collaborations or
licensing arrangements necessary to develop and commercialize products using its
technology or that it can do so on terms favorable to deCODE. If deCODE's
collaborations are not successful or deCODE is not able to manage multiple
collaborations successfully, its programs will suffer. If deCODE increases the
number of collaborations, it will become more difficult to manage the various
collaborations successfully and the potential for conflicts among the
collaborators will increase.
DEPENDENCE ON COLLABORATIVE RELATIONSHIPS MAY LEAD TO DELAYS IN PRODUCT
DEVELOPMENT AND DISPUTES OVER RIGHTS TO TECHNOLOGY
deCODE is 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 its
technology. deCODE's agreements with collaborators typically allow them
significant discretion in electing whether to pursue such activities. deCODE
cannot control the amount and timing of resources collaborators will devote to
its programs or potential products.
AGREEMENTS WITH COLLABORATORS MAY HAVE THE EFFECT OF LIMITING THE AREAS OF
RESEARCH THAT IT MAY PURSUE EITHER ALONE OR WITH OTHERS
deCODE's arrangements may place responsibility for key aspects of
information technology product development and marketing on its collaborative
partners. If deCODE's collaborators fail to perform their obligations, deCODE's
information technology products could contain erroneous data, design defects,
viruses or software defects that are difficult to detect and correct and may
adversely affect its revenues and the market acceptance of its products.
deCODE's collaborators may stop supporting its products or providing services to
it if they develop or obtain rights to competing products. Disputes may arise in
the future over the ownership of rights to any technology developed with
collaborators. These and other possible disagreements between deCODE's
collaborators and deCODE could lead to delays in the collaborative research,
development or commercialization of products. Such disagreements could also
result in litigation or require arbitration to resolve.
DECODE'S CURRENT FACILITIES AND STAFF ARE INADEQUATE FOR COMMERCIAL PRODUCTION
AND DISTRIBUTION OF PRODUCTS
If deCODE chooses in the future to engage directly in the development,
manufacturing and marketing of certain products, it will require substantial
additional funds, personnel and production facilities.
BECAUSE REVENUES ARE CONCENTRATED, THE LOSS OF A SIGNIFICANT CUSTOMER WOULD HARM
ITS BUSINESS
Historically, a substantial portion of deCODE's and MediChem's revenue has
been derived from contracts with a limited number of significant customers.
deCODE's largest customer, Roche, accounted for approximately 80% of its
consolidated revenue in 2001. MediChem's ten largest customers accounted for
approximately 71% of its total contract revenues in 2001. The loss of any
significant customer would significantly lower deCODE's revenues and affect
deCODE's progression to profitability.
DECODE'S RELIANCE ON THE ICELANDIC POPULATION MAY LIMIT THE APPLICABILITY OF ITS
DISCOVERIES TO CERTAIN POPULATIONS
The genetic make-up and prevalence of disease generally varies across
populations around the world. Common complex diseases generally occur with a
similar frequency in Iceland and other western countries. 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, deCODE and its partners may be unable to develop diagnostic and
therapeutic products that are effective on all or a portion of the people with
such diseases. Any difference between the Icelandic population and other
populations may have an effect on the usefulness of the Icelandic Health Sector
Database and the Clinical Genome Miner in studying populations outside of
Iceland. For deCODE's business to succeed, it must be able to apply discoveries
that it makes on the basis of the Icelandic population to other markets.
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DECODE'S CREATION AND OPERATION OF THE ICELANDIC HEALTH SECTOR DATABASE DEPENDS
ON ITS DATABASE LICENSE FROM THE ICELANDIC GOVERNMENT AND IS SUBJECT TO
SUPERVISION AND REGULATION, WHICH MAY MAKE ITS DEVELOPMENT OF DATABASE PRODUCTS
MORE EXPENSIVE AND TIME-CONSUMING THAN DECODE ANTICIPATES
deCODE's construction and use of the Icelandic Health Sector Database is
subject to the stipulations of the Database License. The Database License was
granted to deCODE by the Ministry of Health and Social Security of Iceland, or
the Health Ministry, pursuant to the Act on the Health Sector Database, no.
139/1998, or the Database Act. The Database License permits the processing of
healthcare data from healthcare records and other relevant data into the
Icelandic Health Sector Database. deCODE's data collection and use activities
will be supervised by the Icelandic Health Sector Database Monitoring Committee,
the Data Protection Authority of Iceland and an Interdisciplinary Ethics
Committee. In addition, the Icelandic Bioethics Committee will review deCODE's
operation of the database. Due to this oversight, deCODE is subject to the
following additional risks:
- the Health Ministry may withdraw the Database License in the event that
deCODE violates the terms and conditions of the Database License, the
Database Act or its rules;
- the Icelandic parliament may amend the Database Act in ways which would
adversely affect deCODE's ability to