Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL PERIOD ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 000-23541
NANOGEN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0489621
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10398 PACIFIC CENTER COURT, SAN DIEGO, CA 92121
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 410-4600
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
Preferred Stock Purchase Rights
(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 (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant based upon the closing sale price of the Common Stock on February
17, 2000, as reported on the Nasdaq National Market was approximately
$959,608,552. Shares of Common Stock held by each executive officer and
director and by each person who owns 10 percent or more of the outstanding
Common Stock have been excluded in such calculation as such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of the registrant's common stock was
19,032,980 as of February 17, 2000.
NANOGEN, INC.
FORM 10-K
INDEX
PAGE
PART I
Item 1. Business.......................................................................... 1
Item 2. Properties........................................................................
Item 3. Legal Proceedings.................................................................
Item 4. Submission of Matters to a Vote of Security Holders...............................
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............
Item 6. Selected Financial Data...........................................................
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.....................................................................
Item 8. Financial Statements and Supplementary Data.......................................
Item 9. Change in and Disagreements with Accountants on Accounting and
and Financial Disclosures.......................................................
PART III
Item 10. Directors and Executive Officers of the Registrant................................
Item 11. Executive Compensation............................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management....................
Item 13. Certain Relationships and Related Transactions....................................
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................
SIGNATURES..........................................................................................
-i-
- --------------------------------------------------------------------------------
Business
OVERVIEW
We integrate advanced microelectronics and molecular biology into a core
technology platform with broad and diverse commercial applications in the fields
of genomics and biomedical research, medical diagnostics, drug discovery,
forensics, agriculture, environmental testing and potentially the electronics
and telecommunications industries. The first application we have developed is an
integrated bioassay system, the NanoChip molecular biology workstation,
comprised of two automated instruments and a consumable cartridge. The NanoChip
cartridge incorporating a proprietary microchip provides a flexible tool for the
rapid identification and precision analysis of biological test samples
containing charged molecules.
Through the use of microelectronics, our technology enables the active movement
and concentration of charged molecules, such as DNA, to and from designated
microlocations, or test sites, on our microchips. This electronic concentration
of molecules greatly accelerates molecular binding at each microlocation. In
addition, our technology allows the simultaneous analysis of multiple test
results, or "multiplexing," from a single sample. The open architecture design
of our system enables us to offer microchips with preloaded arrays designed for
specific applications or with arrays that can be customized by the end user. We
believe that our technology platform provides an accurate, versatile and highly
efficient integrated system that will shift bioassay analysis from current
manual and mechanical methods to microelectronic systems, thereby significantly
improving the quality and reducing the overall cost of research and healthcare.
In April of 1998 we completed our initial public offering. Since that time we
have:
- - designed and built production-ready automated instruments for cartridge
loading, processing and analysis;
- - simplified the consumable cartridge design by reducing total parts by 75%;
- - strengthened our development, manufacturing and commercialization
infrastructure;
- - added an additional eight U.S. patents and six foreign patents to our
intellectual property portfolio;
- - validated our technology through the successful completion of three beta
site tests; and
- - expanded collaborations with Aventis and Hitachi for technology development
and manufacturing.
COMMERCIALIZATION PLAN
Successful beta site tests
In February 2000, we announced the completion of our third and final beta site
testing results for the NanoChip molecular biology workstation. These tests were
conducted at three commercial and academic centers: the Mayo Clinic, the
University of Texas Southwestern Medical Center and the Bode Technology Group.
In each case, the results indicated very high levels of accuracy for the
NanoChip system. The SNP studies performed at the Mayo Clinic and the University
of Texas Southwestern Medical Center both reported 100% accuracy, exceeding the
performance of their current "gold standard" techniques. The STR analysis
results from the Bode Technology Group showed greater than 99.5% concordance
with current techniques, results which have been further improved by subsequent
software upgrades.
Commercial launch
We plan to begin commercialization of our NanoChip molecular biology workstation
during the second half of 2000 to a select group of customers in the genomics
and biomedical research fields. The initial applications for the technology will
be for the analysis of DNA including SNPs, PMs and STRs. It is
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
anticipated that the analysis of gene expression will be added as an additional
application. Because of the importance of the genomics and biomedical research
markets, we anticipate being directly involved with marketing our first product
line to this non-regulated market segment. Additionally, we expect to distribute
products in Japan through the distribution arm of Hitachi.
COLLABORATIONS
We have established corporate alliances in the areas of drug discovery, high
throughput screening, infectious disease diagnostics and instrument
manufacturing and distribution. In 1998 we entered into a collaboration with
Aventis to develop drug discovery tools. In 1999 we extended our relationship
with Aventis by adding two additional programs focused on developing high
throughput screening and gene expression analysis tools. In early 2000 we formed
a collaboration with Hitachi for the manufacture and further development of the
NanoChip instruments. Hitachi has the right to distribute our instrument system
and related NanoChip consumable cartridges in Japan. Our collaborations permit
integration of our technology with the resources and technology of our partners,
while allowing us to independently pursue diagnostics, drug discovery and
genomics opportunities outside the scope of these collaborations.
MARKET OPPORTUNITY
Background
Bioassays are used extensively throughout the life sciences industry to detect
the presence of certain biochemicals, proteins or genes in a sample. They are
broadly used in genomics and biomedical research applications, genetic analysis,
clinical diagnostics, pharmacogenomics, drug discovery, and law enforcement. For
example, bioassays can be used to:
- - validate genetic sequences generated as part of the Human Genome Project and
related commercial efforts;
- - detect genetic variations such as SNPs;
- - measure the affinity between a chemical compound and a disease target for
drug discovery and development;
- - assist physicians in prescribing the appropriate drug therapy to match the
patient's unique genetic makeup, a process known as pharmacogenomics;
- - measure the presence and quantity of biochemicals in blood to assist
physicians in diagnosing, treating and monitoring pathological conditions
such as heart attack or diabetes; and
- - identify criminals from DNA-bearing forensic evidence.
Bioassays are either developed internally to meet the specific needs of the
laboratory or purchased in the form of an off-the-shelf test kit or customized
service. According to industry reports, the global market for tools used to
develop and perform bioassays is estimated to have been approximately $27.5
billion in 1998.
Market Descriptions
Genomics and biomedical research
Genomics and biomedical research is focused on understanding biological
processes at the molecular level. Through an understanding of such processes,
scientists can better characterize disease, a critical first step in designing
drug therapies. Worldwide genomics efforts, including the Human Genome Project
and other public and private genetic sequencing efforts are actively identifying
and sequencing genes of many
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
organisms. As these genes and their nucleotide sequences are identified,
additional research will focus on how the genome, the genetic content of the
cell, controls and influences biological function. Gene expression studies are
often used to identify which of the genes contained within the genome are
regulated during disease or in response to a variety of stimuli. Such studies
also determine how specific mutations in a gene affect the normal expression and
operation of that gene. This basic understanding is leading to the development
of new diagnostic and therapeutic approaches to disease, according to its
genetic profile.
The National Institutes of Health provides over $12 billion annually in funding
to more than 50,000 scientists involved in genomics and biomedical research.
These scientists work in the laboratories of universities and other
not-for-profit research institutions. Pharmaceutical and biotechnology
industries also fund significant amounts of research. According to industry
reports, the global market for bioassays in genomics and biomedical research is
estimated to have been approximately $2.3 billion in 1998 and growing at an
annual rate of 13%. We believe there are a number of industry trends that will
drive this growth, including:
- - Increased demand for SNP studies. Academic and not-for-profit institutions
have played a major role in studying SNPs in the population. The SNP
consortium, a collaboration of academic, not-for-profit research
institutions and pharmaceutical companies, has announced an effort to
identify over 300,000 SNPs, some of which may be correlated with disease. As
a result, we anticipate that demand for SNP detection bioassays will
increase.
- - Increased research and development spending by pharmaceutical companies.
Pharmaceutical companies have a long history of collaborating with academic
institutions to study biological processes at the molecular and cellular
level. As these collaborations increase and diversify in focus, we believe
the number of bioassays performed will rise.
Clinical diagnostics
Bioassays are broadly used in the clinical diagnostics market. These bioassays
are commonly referred to as IN VITRO diagnostics, or IVD, and are used to detect
the presence and quantity of certain substances in body fluids, such as whole
blood, plasma, serum, urine and saliva, as well as cells and tissues.
Applications range from routine blood glucose determinations to the screening
and diagnosis of genetic diseases, infectious diseases and cancer. These
applications are performed in a number of different clinical settings, including
hospital laboratories, commercial laboratories and physicians' offices. There
are more than 150,000 hospital, clinical and physician office laboratories
registered with the Health Care Financing Administration (HCFA) in the United
States.
According to an industry report, the global market for IVD products is estimated
to have been approximately $18 billion in 1998. We believe a number of industry
trends exist that will drive this growth, including:
- - Evolution of pharmacogenomics. There are many studies investigating genetic
variation among individuals, including SNPs, and their linkage to disease.
SNPs represent the smallest possible genetic change, and occur where the DNA
molecules of different persons vary at a single location. The principle
behind pharmacogenomics is that patients react differently to a given drug
because of their unique genetic profile. The ability to test simultaneously
for many specific mutations can be used for detecting patients predisposed
to certain diseases and for early detection of the disease itself, thereby
permitting early preventive and therapeutic intervention. The long-term goal
of pharmacogenomics is to enable physicians to prescribe the appropriate
medicine for a particular patient that would maximize efficacy and minimize
side effects based on that patient's specific genetic profile. These studies
are principally funded by a consortium of pharmaceutical companies seeking
to correlate the results of an individual's SNP profile with drug response.
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
- - An increase in disease targets from the success of drug discovery efforts.
We believe the rise in research and development spending by pharmaceutical
and biotechnology companies will lead to the identification of a greater
number of disease targets. These targets may be assayed during drug
discovery and later developed as IVD products for disease diagnosis and
monitoring. For example, a newly discovered gene may be an integral part of
the disease process itself, and may later serve as a diagnostic marker for
that disease.
- - Evolution of disease specific test panels. Diagnosis and treatment of
diseases have traditionally focused on the discovery of a single causative
agent and a therapy to eradicate that agent. Clinical microbiology
laboratories can take up to several weeks to perform this function using a
variety of techniques from manual cell culturing to various automated and
semi-automated systems. The problem with traditional techniques is that
disease is rarely the result of a single agent and not all patients react to
therapy in the same fashion. In addition, during the time required to
receive results from the clinical lab, the patient is treated using
incomplete and sometimes inaccurate information. Genetically-based disease
specific panels can greatly improve the management of cases of complex
diseases such as childhood leukemia. The patient can be monitored for innate
resistance to infection (by checking for SNPs in the mannose binding protein
gene) while at the same time determining the child's likelihood of having a
serious, even life-threatening, adverse reaction to the powerful drugs used
to treat leukemia. Other markers indicative of inflammation, infection,
treatment success or failure, and residual disease can be added to the panel
as needed. We believe clinical laboratories will demand a system that can
perform all of these tests simultaneously from a single sample in a simple,
cost effective format.
- - Consolidation among the clinical diagnostic companies. As a result of
industry consolidation, clinical diagnostic companies have been
re-engineering the laboratory in order to streamline processes, improve
productivity and lower costs. Attempts to integrate the many instruments
employed by these laboratories have been part of this process. We believe,
however, that clinical laboratories will ultimately prefer a single
instrument that is both flexible and programmable and can perform the
required bioassays.
Drug discovery and development
The bioassays employed by the pharmaceutical industry vary in design and
complexity throughout the drug discovery and development process. Simple
bioassays are used to screen a pharmaceutical company's library of chemical
compounds against disease targets. More complex bioassays are then used in
confirmatory testing as well as in lead optimization. Finally, predictive
toxicity bioassays are used to test the safety of the potential drug. It is
estimated that the preclinical drug discovery process takes an average of six
and one-half years. Consequently, we believe there is a significant demand for
improved tools which accelerate the drug discovery process.
According to industry reports, the global market for tools to develop and
perform bioassays for the drug discovery and development industry is estimated
to have been approximately $7.2 billion in 1998 and is expected to continue to
grow at an annual rate of 14%. There are a number of factors driving this
growth, including:
- - A shift in research and development focus from gene sequencing to functional
genomics and proteomics. Recently, pharmaceutical companies have focused on
the sequence of the human genome, driven by the objectives of the Human
Genome Project as well as various public and private institutions.
Pharmaceutical and biotechnology companies are now focusing a major part of
their research and development efforts on identifying the role those genes
serve in biological processes and how variations in gene sequences may
result in a predisposition for a disease or an adverse reaction to a drug.
These activities are referred to as functional genomics.
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
- - Increased research and development spending. According to industry reports,
pharmaceutical and biotechnology companies spent in excess of $48 billion
worldwide in 1998 on drug discovery and development, including bioassay
tools, and are expected to increase spending at an annual rate of 15%. This
is the result of increasing pressure to expand the product pipeline, find
new applications for existing or failed drugs, and shorten the drug
discovery process in order to maximize the benefits of the patent protection
period. As a result, we believe the number of identified disease targets for
drug discovery will rise. According to industry reports, each pharmaceutical
and biotechnology company expects to screen, on average, 27 targets in 2001,
up from 17 in 1999.
DNA forensic analysis
Bioassays are also used to identify individuals by their genetic coding. STRs
are the genetic sequences chosen by the U.S. government as well as foreign
governments to populate their national criminal identification databases. These
databases are intended to provide nationwide tools for identifying repeat
criminals by comparing a given piece of evidence or sample from a suspect with
the sequences stored in the database. This method of identifying criminals from
forensics samples containing DNA is becoming increasingly accepted by law
enforcement in countries such as the United States, the United Kingdom, and
Canada. These tests are currently performed in specialized laboratories by
individuals trained in forensic science. While sales of tools used for forensic
analysis were less than $50 million in 1998, it is anticipated that several
factors could lead to significantly increased levels of growth:
- - The development and population of national and state databases containing
the genetic identities of all convicted criminals. The National Institute of
Justice and other U.S. government agencies have issued contracts for the
development of DNA forensics technology and for forensics sequencing
services to both construct and populate the national CODIS database. Private
and public laboratories currently have large backlogs of criminal DNA
samples to be analyzed and stored. Several states now are pursuing
legislation to require DNA tests on all individuals arrested. The National
Institute of Justice Bureau of Statistics estimates that in the U.S. alone
there are approximately 17 million arrests per year.
- - The use of DNA sequence databases to identify criminals from DNA bearing
forensics samples. Currently, DNA is used primarily as a confirmatory
tool--the law enforcement officer has both a sample and a suspect. The
opportunity in this area is to use the DNA bearing evidence to identify
potential suspects before their identity is known. This is accomplished by
comparing the DNA sequences from a sample of evidence with the known
sequences in the national and state databases. Determining a suspect in this
manner is known as a "cold hit". Even with the limited databases currently
available, law enforcement officials are already beginning to realize the
benefits associated from positive "cold hits."
- - The development of technology allowing DNA forensic testing to occur in
police precincts, particularly by genotyping arrested individuals. Once the
technology is developed to allow for DNA forensic testing to occur in police
precincts, the potential market in the United States for DNA forensic
analysis tools could significantly expand from forensic laboratories to law
enforcement agencies. The U.S. Department of Justice, Bureau of Justice
Statistics estimated that there were 18,769 state and local law enforcement
agencies in the U.S. in 1996 in addition to the 362 public and private
forensic laboratories reported by the Federal Bureau of Investigation.
Current assay development technologies and their limitations
Many bioassay techniques have been developed from a wide variety of different
scientific disciplines for molecular biology and clinical diagnostic
laboratories. The differing needs of the various life sciences laboratories have
led to the development of highly specialized techniques and instrumentation. Due
to this fact, many of these techniques are technically demanding, difficult to
perform, expensive, inflexible and often lack acceptable clinical accuracy. In
addition, technologies well suited or targeted to one market, such
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
as the biomedical research or drug discovery markets, often are unable to bridge
the required gap to serve downstream markets such as clinical diagnostics. This
has created inefficiencies in laboratories since they must now purchase multiple
instruments, often from different vendors, to meet their testing needs.
While advances in bioassay technologies have delivered new capabilities, most
remain highly specialized and still lack sufficient flexibility and accuracy to
be used by multiple departments within a life sciences laboratory. Current
bioassay tools were designed for large scale data generation, the automation of
repetitious tasks such as very high throughput discovery and the narrowing of
genetic targets from thousands of genes to a small set of perhaps 1 to 20 genes
that function in a selected biological process. In addition, many of these
systems are not useful in molecular, protein, enzyme, cell biology, and
forensics laboratories. These tools fall primarily into three categories:
high-density arrays; high throughput sequencing and SNP discovery tools; and gel
based methods.
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
The table below briefly describes the alternative bioassay technologies
addressing the molecular biology and clinical diagnostic industries and what we
consider to be their comparative advantages and disadvantages.
Key Technologies Description Markets Served Advantages Disadvantages
Higher density High density arrays Genomics and biomedical - High throughput screening. - Limited accuracy ~ 80-90%
passive microarrays of molecules research and drug Parallel analysis of - Inflexible design--fixed
attached to a discovery thousands of molecules in a configuration
glass, silicon or single experiment - Single sample per analysis
nylon membrane - High cost per test
surface - Limited chip-to-chip
reproducibility
- Single type of assay per
chip
- Large image data file and
data interpretation task
Lower density passive Low-density arrays Genomics and biomedical - Parallel analysis of - Lack of accuracy
microarrays of molecules research and drug hundreds of molecules in a - Lack of reproducibility
attached to a discovery single experiment - Single sample per analysis
glass, silicon or - Can be inexpensive - Single type of assay per
nylon membrane chip
surface - Large image data file and
data interpretation task
Microfluidics Chips Miniaturized lab Genomics and biomedical - Low required sample volume - Inflexible design--fixed
techniques on a research and drug - Low required reagent volume configuration
chip discovery - Limited ability to perform - High cost per test
Miniature liquid multiple bioassays - Sizing technique which must
handling, simultaneously be validated by other
electrophoretic - Reproducible methods
separations and - Fast time to result
detection
Microtiter, bead, and Plastic trays with Genomics and biomedical - Pervasive hardware - Levels of accuracy ~ 95%
amplification based wells in which research, drug - Low cost chemistries - High sample volumes
assays. assays are discovery, clinical - Varied chemistries - High reagent volumes
Primer extension performed diagnostics and available - Single test per well
assays clinical trials - Ability to perform multiple - DNA methods can be complex
bioassays simultaneously and tedious, requiring
- High batch throughput and highly trained users
parallel processing for
screening
Mass Spectrometry Uses molecular Genomics and biomedical - Very high throughput - Accuracy is limited to the
Assays weight as a research, clinical - Reproducible and accurate preanalytical molecular
detector for trials and drug identifiers
biological discovery - Large sample batches
molecules or tags required to justify setup
time/expense
- Hardware can be expensive
DNA sequencing and Fragments are Genomics and biomedical - Very high throughput - Accuracy ~ 90-95% for SNPs,
analysis by capillary separated by gel research, drug - Reproducible ~ 99% for sequencing
electrophoresis electrophoresis in discovery and forensics - Calls, especially
capillary columns heterozygote calls, can be
and detected as subjective
they elute - Resequencing with
confirmation by alternative
techniques is common
Gels and Blots Separation and Genomics and biomedical - Low equipment costs--many - Labor intensive
identification of research, drug techniques and trained - Low throughput
molecules by discovery, clinical technicians for most - Technique-sensitive, lacks
physical and diagnostics, clinical molecules reproducibility and
chemical trials and forensics - Multiple assays are accuracy
characteristics possible - Wet and sometimes hazardous
chemicals
- Possibly subjective image
analysis
- Sizing techniques which
must be validated by other
technologies
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
THE NANOGEN SOLUTION
We believe that our initial product, the NanoChip molecular biology workstation,
provides the accuracy, flexibility and ease-of-use features required to serve a
wide range of genomic and biomedical as well as many other applications. We
intend to promote the Nanogen system as the laboratory standard for molecular
biologists, and the industry standard for accurate, targeted genomics in both
laboratory and non-laboratory settings. The Nanogen system provides the
following key features critical to its function as a universal molecular biology
assay platform:
Accuracy
Accuracy is critical in laboratory analysis. The Nanochip molecular biology
workstation, with its precision electronic addressing and high degree of
stringency, exceeded the accuracy of the current "gold standard" techniques in
the SNP studies conducted at the Mayo Clinic and the University of Texas
Southwestern Medical Center.
Multiple formats
Nanogen's technology is designed to perform from one to 100 distinct assays on a
single sample, or, unlike existing technologies, several user-defined assays on
as many as 100 different samples. Each of the major bioassay formats, the "dot
blot" and the "reverse dot blot," are conveniently handled by the NanoChip
system. For example, the system could perform 100 SNP assays on one sample, or
several SNP assays on 100 samples, each in a fully automated, user-defined
manner. In addition, STR assays are conveniently performed in a hybridization
format on the Nanogen system, with a similar degree of accuracy that the Nanogen
system has demonstrated in other assay formats.
Flexibility/scalability
Nanogen's technology allows great flexibility in customizing test panels.
Specific panels can be modified to include new assays or targets simply by the
use of additional user-defined probe sets. Since as many as eight loaders can be
controlled by one reader, the user can prepare as many as 32 programmed arrays
in several hours. Due to this fact, labor is minimized, and the system can be
efficiently utilized in laboratories of various sizes. Several different assay
types may be combined on the same chip, for example a SNP assay and an STR
assay, and potentially assayed at the same time. The NanoChip system should
handle the flexibility requirements of the most advanced research laboratory,
while maintaining the ease of use and accuracy requirements of the clinical
laboratory. Nanogen's technology is a "bridging technology" that should simplify
the adoption of what were once previously complex genetic tests by the routine
clinical laboratory.
Speed
Nanogen's electronic concentration and hybridization technology greatly
accelerates the analysis process from hours to minutes. This may enable
point-of-care DNA diagnostics in the future, by allowing clinicians to perform
tests and choose appropriate therapy while a patient is still in the physician's
office.
Throughput
Nanogen's technology performs up to 100 tests on a single sample permitting
highly efficient workflow for many biomedical applications in a variety of
laboratory settings. Importantly, the ability to assay as many as 100 samples at
a time allows for much higher throughput than is achievable with competitive
technologies.
Diverse applications
The flexibility of Nanogen's electronic-based technology is applicable to
biological analyses beyond genomics and biomedical research, including
immunoassays, enzyme assays, cell separation and cell receptor studies.
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
Ease of use
Nanogen assays are simple to perform. Our fully automated probe loader allows
the simultaneous programming of up to four NanoChip arrays. A loaded cartridge
is inserted and then analyzed on the Nanogen reader. The NanoChip system
includes proprietary software to automate all aspects of assay operation, as
well as provide "real time" data acquisition and analysis. Results are provided
without the need for extensive data interpretation and can be directly
downloaded into a user's laboratory information system.
Cost effectiveness
We have designed the NanoChip system to be the cost-effective solution for most
molecular biology assays. The system is easy to use and may not require highly
skilled operators. Moreover, the custom features of the system allow users to
employ their own reagents in designing arrays for specific purposes. Since the
NanoChip system consumes very small quantities of reagents, generally at very
low concentration, bioassay reagent costs per result, such as DNA, are very low.
Walk-away automation conserves direct labor, while improving the overall
effectiveness of the laboratory operation. In addition, user definability allows
important experiments to be done quickly, both accelerating the discovery
process and simplifying the validation of important targets.
STRATEGY
We intend to research, develop, manufacture and market instruments and
components, independently and in conjunction with highly regarded corporate and
government partners, to facilitate breakthrough genetic analyses. Our NanoChip
molecular biology workstation uniquely bridges the gap between the earliest
scientific research and much later stage clinical practice. Our strategy is to
make our proprietary bioassay technology platform a standard for molecular
identification and analysis across a broad range of applications. Our initial
commercial product will be a bench-top system for use in biomedical research and
genomic applications. The capabilities that are incorporated into this system,
such as electronics-based tools that we believe can provide improved accuracy,
speed and flexibility over current laboratory techniques, will form the core
technology platform that will serve as the basis for expanding into other
biological and non-biological areas.
Continue to pursue genomics and biomedical research applications
Recent market research indicates that while researchers want to use high
throughput devices to discover genes and genetic mutations, they will want to
explore the function and impact of these genes and mutations with a more
targeted technology such as the NanoChip molecular biology workstation. We
intend to pursue the genomics and biomedical research markets by taking
advantage of the open architecture design of our technology that allows end
users to customize microchips to meet their individual research needs and help
drive development of novel applications. We believe that the speed and
flexibility of the "build-your-own-chip" feature will be very attractive to
researchers and will fulfill an unmet need for a powerful, versatile,
programmable, and cost effective analytical tool and help drive further
application development.
Pursue multiple applications
We intend to use substantially the same core hardware and consumable cartridge
platform across a spectrum of applications. By doing this, we believe we can
establish our platform as an industry standard and also reduce development costs
for follow-on applications. This approach should also allow us to achieve
manufacturing economies of scale that may help reduce our per unit cost of goods
sold over time. For our initial commercial market, the biomedical research
market, we do not anticipate the need for Food and Drug Administration or FDA or
other regulatory approval. Over time, it is expected that additional
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
features, such as sample-to-answer capabilities and portability at reduced cost,
may broaden the market potential from the research market to markets many times
larger that include drug discovery, diagnostics, forensics, agriculture and
environmental applications. Some of these applications would require FDA or
other regulatory approval.
Develop recurring revenue stream through bench-top and consumable product sales
We intend to sell bench-top instruments which we believe will lead to a
recurring stream of revenue from consumable cartridge sales. We believe that
widespread market penetration of our instruments and the open architecture of
the system will promote sustained demand for our cartridges.
Continue to establish strategic collaborations
We intend to continue to enter into collaborations to expand applications of our
technology platform and to accelerate the commercialization of our products. By
partnering with multinational healthcare and technology companies, we believe
that we can gain broader access to global markets without shifting our resources
from the development of our core technology platform. In addition, as part of
these arrangements, we believe we can better focus our efforts on tailoring our
technology to expanding markets while our collaborative partners contribute
their technology and expertise in areas such as sales, marketing and regulatory
approvals.
OUR PLATFORM TECHNOLOGY
Our proprietary platform technology takes advantage of the fact that most
biological molecules are either positively or negatively charged. Through the
use of microelectronics, this technology enables the active movement and
concentration of electronically charged molecules such as DNA to and from
designated test sites on a semiconductor microchip. These test sites are
arranged in an array on our proprietary microchips. In addition, the technology
allows for the simultaneous analysis of multiple test results, or
"multiplexing," from a single sample. We believe these attributes make our
technology well suited to unraveling complex genetic information. We believe our
proprietary technology has applications for the analysis of unknown charged
biological molecules which are capable of binding specifically to known capture
molecules on a microchip. We have initially focused on DNA-based sample analysis
in developing applications utilizing our platform.
Our technology allows small sequences of DNA capture probes to be electronically
placed at, or "addressed" to, specific sites on the microchip. A test sample can
then be analyzed for the presence of target DNA molecules by determining which
of the DNA capture probes on the array bind, or hybridize, with complementary
DNA in the test sample. In contrast to nonelectronic or passive hybridization
with conventional arrays on paper or glass "chips," the use of electronically
mediated active hybridization to move and concentrate target DNA molecules
accelerates hybridization. Electronically mediated hybridization occurs in
minutes rather than the hours required for passive hybridization techniques.
We believe our technology may be applicable to a number of other analyses, in
addition to DNA applications, including antigen-antibody, enzyme-substrate,
cell-receptor, and cell separation techniques.
Our system can integrate in a single platform the following electronic
operational features:
Electronic addressing
Electronic addressing is the process by which we place charged molecules at
specific test sites. Since DNA has a strong negative charge, it can be
electronically moved to an area of positive charge. A test site or a group of
test sites on the microchip is electronically activated with a positive charge.
A solution of DNA probes is introduced onto the microchip. The negatively
charged probes rapidly move to the positively
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
charged sites, where they concentrate and are chemically bound to that site. The
microchip is then washed and another solution of distinct DNA probes can be
added. Site by site, row by row, an array of specifically bound DNA probes can
be addressed on the microchip. Multiplexed sites can be addressed
simultaneously, allowing for speed and flexibility of array assembly. With the
ability to electronically address capture probes to specific sites, the NanoChip
molecular biology workstation allows end users to build custom arrays through
the placement of specific capture probes on a microchip. These microchip arrays
may provide research professionals with a powerful and versatile tool to process
and analyze molecular information.
Electronic concentration and hybridization
Following electronic addressing, we use electronics to move and concentrate
target molecules to one or more test sites on the microchip. In contrast to the
passive hybridization process, the electronic concentration process has the
advantage of significantly accelerating the rate of hybridization of a given
target molecule with complementary capture probes.
Stringency control
In addition to utilizing conventional thermal and chemical stringency
techniques, the NanoChip molecular biology workstation is capable of utilizing
electronic stringency control when appropriate. Electronic stringency control
can provide a means to quickly and easily remove non-complementary DNA as part
of the hybridization process. Electronic stringency can provide quality control
for the hybridization process and ensures that any bound pairs of DNA are truly
complementary. The precision, control, and accuracy of our platform technology
may permit the detection of single point mutations, single base pair mismatches
or other genetic mutations which have significant implications in a number of
disease states. Electronic control allows rapid and selective stringency
conditions to be applied to individual test sites, which cannot be achieved with
conventional methods. In contrast to conventional approaches, our technology can
also accommodate both short and long single-stranded fragments of DNA on the
same chip. This flexibility reduces the required number of probes and related
test sites on the microchip. Currently marketed DNA arrays are difficult to
control, require more uniformity in the preparation of the sample, and require
greater redundancy to improve accuracy.
Electronic multiplexing
Our electronic multiplexing feature allows the simultaneous analysis of multiple
tests from a single sample or multiple samples to be queried during the
hybridization process. Electronic multiplexing is facilitated by the ability to
control individual test sites (for addressing of capture probes and
concentration of test sample molecules) which allows for the simultaneous use of
biochemically unrelated molecules on the same microchip. Sites on a conventional
DNA array cannot be individually controlled, and therefore the same process
steps must be performed on the entire array. The use of electronics in our
technology provides increased versatility and flexibility over these
conventional methods.
Strand Displacement Amplification
Strand Displacement Amplification, or SDA, is a proprietary target amplification
process whereby very low numbers of diagnostic targets in a test sample are
enzymatically amplified to exponentially higher levels, greatly simplifying
accurate detection of these targets. Because this process does not require
thermal cycling, it is extremely fast, and complex instrumentation is not
required. The Nanogen/Becton Dickinson Partnership was granted rights to Becton
Dickinson's patents relating to SDA in infectious disease diagnostics. In
addition, we were granted rights to use SDA in the fields of IN VITRO human
genetic testing and cancer diagnostics for use outside The Nanogen/Becton
Dickinson Partnership. We believe that SDA may be an important element in the
development of sample-to-answer applications for our technology platform.
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
THE NANOCHIP MOLECULAR BIOLOGY WORKSTATION COMPONENTS
The NanoChip molecular biology workstation consists of both a consumable
cartridge containing a proprietary semiconductor microchip and a fully automated
instrument that controls all aspects of microchip operations, processing,
detection and reporting. The system has been designed so that after insertion of
a consumable cartridge containing a test sample into the instrument, all
subsequent steps are handled automatically under computer control. We have also
developed a bench-top microchip loader for those researchers wishing to
electronically address microchips with their own capture probes.
Consumable cartridge
The consumable NanoChip cartridge consists of a proprietary semiconductor
microchip with electrical and fluidic connections to the instrument. We are
finalizing designs for commercially manufacturing our cartridges based on
successful tests with a number of prototype cartridges. We expect that the
consumable cartridge and microchip will be manufactured in high volumes at a low
cost relative to many current technologies.
SEMICONDUCTOR MICROCHIP
Our proprietary microchip utilizes advances in the semiconductor industry and is
designed and constructed using microlithography and fabrication techniques. Our
microchip is coated with a proprietary permeation layer to which capture probes
are attached and is mounted within the consumable cartridge. We have developed
arrays of various sizes utilizing both passive and active CMOS microchips, as
well as flip chip assembly technologies. We expect our initial production of
consumable cartridges to employ 100 different test sites on the microchip.
PERMEATION LAYER
Our proprietary permeation layer, which is critical to the proper functioning of
our system, is the interface between the surface of the microchip and the
biological test environment. The permeation layer isolates the biological
materials from the harsh electrochemical environment near the electrode surface
and provides the chemistry necessary for attachment of capture probes.
CAPTURE PROBES
Capture probes or other capture molecules are electronically addressed to the
desired microlocations and chemically attached to the permeation layer. Because
independent control can be applied at any test site on our microchip, different
capture probes can be addressed on the same microchip, allowing multiple tests
to be processed simultaneously. Our cartridges can be sold with preloaded sets
of capture probes or can be customized by the end user in "build-your-own-chip"
applications which will allow the customer to assemble specific probes onto a
microchip to perform individualized analyses.
Our instruments
Our fully integrated NanoChip instrument system consists of four major
subsystems: (1) a freestanding microchip loader to perform electronic addressing
of blank microchips, (2) a highly sensitive, laser-based fluorescence scanner
that detects molecular binding, (3) a fluid handling subsystem that controls
test sample application and washing steps and (4) computer hardware and software
that allow the operator to select assays from a graphical user menu which
controls all microchip operations, tabulates test results and prints test
reports.
MICROCHIP LOADER
For biomedical research applications, our system includes a cartridge/microchip
loader that will allow the user to electronically address their own probes to
test sites on up to four chips simultaneously. For the
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
diagnostics market and most other applications, a loader will not be required
because we intend to provide pre-addressed microchips for a specific panel of
tests. Multiple loaders can operate concurrently under the control of one
system.
FLUORESCENT ARRAY SCANNER
The fluorescent scanner component of the system uses pattern recognition
techniques and optoelectronic technology to reduce instrument cost and size and
eliminate the need for complicated array positioning mechanics. In its present
configuration, the scanner is able to perform high sensitivity scans of arrays
of 100 test sites in less than two minutes.
FLUIDICS STATION
Within the fluorescent array scanner component of the system, the fluidics
station automates the movement of the reagents and test sample onto the
consumable cartridge. The fluidic subassembly of the instrument includes a panel
of precision syringe pumps, a cartridge-mounted sample assembly and fluidic
connections between the instrument and the consumable cartridge.
COMPUTER HARDWARE AND SOFTWARE SYSTEM
A multi-tasking operating system and microprocessor control all aspects of the
systems operations, including bar-coded assay selection, assay operation,
fluorescent signal detection and signal processing, calculation of assay results
and report generation. Each of the individual array locations is separately
controlled by the microprocessor. Fluorescent signals emanating from positive
test sites are scanned, monitored and quantitated.
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
NanoChip Analysis Process
Cartridge
[LOGO] An active microelectronic chip is mounted within
a plastic molded cartridge. The bar-coded
cartridge is delivered in a ready-to-address
format with no genetic sequences pre-attached.
Electronic addressing
Users design and create their own genetic arrays
on the microelectronic chip with Nanogen's
automated system. A microtiter plate containing
up to 96 different genetic sequences is placed
in the loader instrument. The system then
automatically electronically addresses the
microchip to the user-defined arrays.
Electronic hybridization and stringency
Users add the test sample to the cartridge and
insert the cartridge into the reader. The
instrument then automatically performs
electronic hybridization and the appropriate
stringency control. The electronically enhanced
process speeds and improves the genetic
analysis, allowing single-base accuracy.
[LOGO]
Simple-to-read output
Within minutes of inserting the bar-coded
cartridge for analysis, easy-to-read and
interpret output is available. Data can be
automatically downloaded to network systems and
to standard software spreadsheet packages. The
entire electronic addressing and data output
process can be completed rapidly, allowing users
to accelerate their research process by creating
new genetic arrays based on previous
experimental results.
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
PRODUCTS AND APPLICATIONS UNDER DEVELOPMENT
Genomics and biomedical research applications
We expect to begin commercialization of the NanoChip molecular biology
workstation, a bench-top molecular analysis system, for use in the genomics and
biomedical research market during the second half of 2000. Unlike the
high-density arrays and sequencing technologies now in the marketplace, our
focus will be on the targeted analysis of data from the genomics
revolution--helping researchers define the function of genes rather than
discover new genes. We believe our technology is well suited for this research,
given the speed, user programmability, multiplexing capability and sensitivity
of our unique platform.
Given that researchers are just beginning to move beyond gene discovery into
this targeted analysis area referred to as functional genomics, the timing of
our anticipated product introduction may be well suited to meet this evolving
market need. An independent market research study by Strategic Directions
International published in December 1999 indicated that the market potential for
DNA microarrays is anticipated to grow rapidly from $200 million in 2000 to
almost $800 million by 2003.
Our initial strategy for entering this market will be to focus on sophisticated
commercial and academic users such as large pharmaceutical companies,
biotechnology companies and research and academic institutions. We intend to
provide technical support and applications specialists to assist these customers
in applying the technology. Our initial product offering is expected to include
features such as the ability to perform assays on SNPs, point mutations and
genetic repeats in a multiplexed format using a variety of different methods. We
plan to further define and develop additional capabilities, such as gene
expression, on-chip amplification and sample processing. As these capabilities
are added, we expect to start expanding our customer base to a wider group that
may ultimately encompass a significant percentage of the biomedical research
labs in the U.S. and other parts of the world.
Diagnostics applications
We anticipate the introduction of array-based diagnostic testing will grow as
effective technologies are introduced and validated. This multi-step process
will allow for both the development of relevant genetic-based tests that may
evolve from biomedical research, and for the awareness and confidence in
array-based technology to extend to medical practitioners. Finally, we
anticipate the need for regulatory approval of certain diagnostic tests. It is
our intention to begin serving the diagnostic market in advance of a regulatory
approved product by providing a flexible tool to be used for clinical research
and for an industry practice referred to as "home brew" or "in-house" testing.
PHARMACOGENOMICS
We believe that the ability of our technology to screen simultaneously for
various DNA sequences and the ability to differentiate between SNPs has
potentially wide applicability to the field of genetic testing in general and
pharmacogenomics in particular.
Our NanoChip molecular biology workstation may provide pharmaceutical and
biotechnology companies with the ability to identify important genetic
variations early in the drug development process. We believe our system may help
stratify patients during clinical trials and identify those receiving the
maximum benefit from treatment. We intend to ultimately develop a small
sample-to-answer, FDA-approved diagnostic test that can be used in a doctor's
office potentially while a patient is waiting. We have a development program
underway to develop a more compact version of our NanoChip instrument system.
INFECTIOUS DISEASES
We believe we have the potential to apply our technology in the field of
infectious disease diagnostics to develop automated tests to replace the manual
and time-intensive procedures used in hospitals and reference
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
laboratories. The role of the clinical microbiology laboratory is to detect,
identify and determine antibiotic sensitivity of disease causing microorganisms.
To accomplish this task, colonies of microorganisms from patient specimens are
grown, or cultured, in various growth media. Following colony growth, various
direct and indirect techniques are utilized to determine the identity and, as
required, the sensitivity of the microorganism to specific antibiotics. Using
currently available technologies, the entire process may take days or weeks to
complete while the patient, requiring immediate therapy, must be treated by the
clinician based upon the best clinical facts available at that time. Upon
receipt of the diagnostic analysis from the laboratory, the initial patient
treatment protocol may need to be modified in order to treat the patient more
effectively.
Current culture-based methods detect a single microorganism at one time. Because
a particular infectious episode may be caused by one of many microorganisms or
several microorganisms together, multiple tests may be required to determine the
correct diagnosis. "Single tube" (one at a time) DNA probe diagnostics, which
were first introduced to the marketplace in the mid-1980's, have been
unsuccessful in displacing culture based diagnostic tests in part due to their
inability to identify several organisms simultaneously. Our technology addresses
these shortcomings by allowing the simultaneous analysis of multiple
microorganisms from a single patient sample. We believe our technology and
integrated system may speed the time-to-result for diagnostic tests and patient
treatment and offer our customers the opportunity to lower their costs and
improve productivity by automating all or a significant portion of their
labor-intensive testing.
OTHER GENETIC TESTING APPLICATIONS
As the Human Genome Project opportunity and other public and private genetic
sequencing efforts yield increasing amounts of genetic information, the demand
for genetic predisposition testing will continue to grow. Because many important
genetic diseases are ideally suited to diagnosis in multiplexed arrays, we
believe that our technology platform could contribute significantly to the
expansion of testing in this area. For example, in cancer diagnostics, certain
mutations are indicative of a predisposition to certain types of cancer.
Although many diseases involve multiple mutations, the ability to analyze all
possible mutations has previously been expensive and impracticable. Our
stringency control feature potentially permits rapid and accurate testing for
these single point mutations. While our development efforts in this area with
respect to specific genetic tests are still at an early stage, our core
technology platform for other diagnostic applications may be well suited for
these opportunities.
Drug discovery applications
We believe we have a powerful tool which will clarify appropriate pathways for
therapeutic intervention, identify and evaluate lead compounds and
simultaneously assess the efficacy and toxicology of these compounds in model
systems. It is estimated that the preclinical drug discovery process takes an
average of six and one-half years. Consequently, we believe there is a
significant demand for improved tools which accelerate the drug discovery
process.
We believe the microelectronic array format and independent test site control of
our system are well suited for applications in drug discovery. In addition, we
believe the use of electronics beyond the array format may provide a valuable
tool for the high throughput screening of compounds. Our electronic technology
is expected to enable the rapid manipulation of potential drug molecules against
targets such as bacteria, virus, tumor or immune response cells addressed to the
microchip to determine drug efficacy, thus simplifying the drug discovery
process. The combination of electronic addressing and the electronic protection
of specific areas of the microchip allows the targeting of chemical building
blocks to unique locations on the array. We believe our system may provide an
efficient automated method for drug lead optimization.
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
To further advance our efforts in this area, we entered into a research and
development collaboration with Aventis in 1998. This collaboration is focused on
the development of novel electronic combinatorial approaches toward drug
screening and discovery. We expanded our relationship with Aventis in 1999 by
adding two additional projects. Nanogen and Aventis met all of the objectives
for the initial collaboration in 1998 and 1999 and agreed to extend the research
program through 2001.
Forensic applications
STRs are the genetic sequences chosen by the U.S. government and other foreign
governments to populate their national criminal identification databases. These
databases are intended to provide nationwide tools for identifying repeat
criminals by comparing a given piece of evidence or sample from a suspect with
the sequences stored in the database. We believe our NanoChip molecular biology
workstation may be useful in human identity testing.
Non-biological applications
We are applying our core microelectronics biochip technology to potential
applications in non-biological areas which include nanotechnology, data storage
and semiconductor manufacturing. Based on the intrinsic self-assembly and
programmable qualities of DNA, our technology uses electrical current to direct
the heterogeneous integration of a number of molecular and nonmolecular
components onto a microelectronic chip. Presently, there are a number of
academic groups, government research labs, and electronics companies involved in
the development of molecular electronic components, but no one has successfully
developed a way to integrate them into useful devices. Our integrated "host
substrate" or "motherboard" array capability could serve to provide useful new
tools with the ability to take advantage of these valuable components.
Our electronic "pick and place" technology may have several advantages compared
to the more difficult conventional processes. Our technology could facilitate
the movement and assembly of microelectronic components ranging in size from
molecular scale to micron scale, something traditional assembly methods cannot
achieve. Also, using electric field specificity control, we may have the ability
to form novel integrated devices in a more timely and cost-effective fashion.
For example, we are evaluating the use of this platform technology to facilitate
integration of different size components for the development of new photonic or
electronic devices.
COMMERCIALIZATION PLAN
Successful beta site tests
Beta site testing is the process of placing pre-commercial products into
potential customer laboratories, and allowing them to use the system and provide
feedback to the manufacturer regarding product performance and potential
opportunities for improvement. We beta tested our NanoChip molecular biology
workstation during 1999 at three highly visible commercial and academic centers:
the Mayo Clinic, the University of Texas Southwestern Medical Center and the
Bode Technology Group. The Mayo Clinic is a world-renowned clinical research
facility and clinical practice, the University of Texas Southwestern Medical
Center is a university-based genomics center and the Bode Technology Group is a
private forensics laboratory. The Mayo Clinic and the University of Texas
Southwestern Medical Center performed SNP analyses, while the Bode Technology
Group performed an STR analysis. In each case, the researchers at the beta sites
released results of their studies which all indicated a very high level of
accuracy. The Mayo Clinic and the University of Texas Southwestern Medical
School both reported 100% accuracy for the SNP studies performed using the
NanoChip molecular biology workstation, which exceeded the performance of their
current "gold standard" techniques. The STR analysis beta test results at the
Bode Technology Group
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
showed greater than 99.5% accuracy for the NanoChip molecular biology
workstation. Additionally, all three sites provided input throughout the beta
testing process that helped us design improvements into the NanoChip molecular
biology workstation.
Commercial launch
We plan to begin commercialization of our NanoChip molecular biology workstation
during the second half of 2000 to a select group of customers in the genomics
and biomedical research field. The initial applications for the technology will
be for the analysis of DNA including SNPs, PMs and STRs. It is anticipated that
the analysis of gene expression will be added as an additional application.
COLLABORATIVE ALLIANCES
We have established collaborative alliances in the areas of infectious disease
diagnostics, drug discovery and genomics as part of our strategy to expand the
applications and accelerate the commercialization of products derived from our
technology. We have expanded our relationship with Aventis by increasing the
number of collaborative research and development projects from one to three. In
January 2000 we entered into a manufacturing, development and distribution
agreement with Hitachi. Because of the importance of the biomedical research and
genomics market as a beachhead, we anticipate being directly involved with
marketing our first product line to this non-regulated market segment.
Additionally, we expect to distribute products in Japan through the distribution
arm of Hitachi.
Aventis
In December 1997, we entered into a Letter Agreement with Aventis for an
exclusive research and development collaboration relating to new drug discovery
tools and immunodiagnostics research. In connection with the Letter Agreement,
we entered into a definitive Collaborative Research and Development Agreement
with an effective date of January 1, 1998. The arrangements for the
commercialization of products, if any, developed as a result of the
collaboration will be negotiated by the parties prior to completion of the
research and development phase. In addition, in September 1999 we expanded our
relationship with Aventis by adding two new research and development programs
focused on gene expression arrays and on an electronics-based high throughput
screening system. We retain full commercialization rights for the products
resulting from these new projects, while Aventis retains the right to use the
technology for internal research and development.
As part of our collaboration, we have agreed to issue a warrant for 120,238
shares of common stock to Aventis at an exercise price of $8.75 per share. We
have also agreed to issue to Aventis, upon the achievement of certain
milestones, warrants to purchase up to approximately 360,000 additional shares
of common stock as follows: upon announcement by the parties of entry into the
product development phase of the research and development collaboration, a
warrant for the purchase of approximately 180,000 shares of common stock at a
50 percent premium to the market price on the date of such entry, and upon the
first commercial sale by the joint venture or other joint relationship, a
warrant to purchase an additional 180,000 shares of common stock at a
50 percent premium to the market price on the date of such sale. The warrants
will have five-year maximum terms, provided that with respect to each such
warrant issuance, if at any time subsequent to the issuance of the warrant the
price of our common stock exceeds the exercise price by 50 percent or more,
Aventis must exercise such warrant no later than the end of its next fiscal
year.
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
Hitachi
In January 2000, we executed an agreement with Hitachi for the full-scale
commercial manufacturing and distribution of our Nanogen molecular biology
workstation in specified research markets. Hitachi's Instrument Group will
provide technology and technical support to aid in the manufacturing scale up of
the Nanogen molecular biology workstation's components.
Hitachi will have the right to be the sole distributor of Hitachi-produced
Nanogen molecular biology workstations instruments in Japan. Hitachi will also
have the non-exclusive right to distribute NanoChip cartridges in Japan. We
retain the right to distribute, directly or through others, Hitachi produced
NanoChip molecular biology workstations outside of Japan. In addition, we will
develop and manufacture the NanoChip cartridges for distribution worldwide. The
agreement is non-exclusive and excludes certain clinical markets, and we
continue to have the right to form other manufacturing and distribution
agreements for all markets and for all non-Hitachi produced products.
Becton Dickinson
In connection with Nanogen's joint venture with Becton Dickinson in October
1997, The Nanogen/Becton Dickinson Partnership, or the Partnership, a Delaware
general partnership was established. The Partnership was formed to develop and
commercialize products in the field of IN VITRO nucleic acid-based diagnostic
and monitoring technologies in infectious diseases.
In 1999, Becton Dickinson and Nanogen agreed to discuss a change in the
Partnership's scope and field. Both parties are currently in discussions with
the intention of redefining the Partnership's scope and field to better align it
with the strategic goals of each party. We have received no research funding
from Becton Dickinson since the third quarter of 1999, and are uncertain whether
we will receive any additional research funding from Becton Dickinson.
Concurrently with the execution of the joint venture agreement, we entered into
a worldwide, royalty-bearing, nonexclusive license agreement with Becton
Dickinson, relating to Becton Dickinson's proprietary SDA technology for use by
us outside the Partnership in the fields of IN VITRO human genetic testing and
IN VITRO cancer diagnostics.
Elan
In December 1997, we entered into a nonexclusive research and development
agreement with Elan Pharmaceuticals, plc for the development of genomics and
gene expression research tools. The agreement contemplates that we will develop
products for discrimination of sequence variations such as single nucleotide
polymorphisms, allelic variations, genotyping, and mutation detection. We may
also develop products for use in expression monitoring of RNA levels for use in
gene discovery, drug discovery, target validation, animal studies, and toxicity
studies. In 1999 and 1998, revenues earned by us pursuant to this agreement were
approximately $568,000 and $929,000 respectively. We are uncertain if we will
receive any additional funds from Elan.
RESEARCH GRANTS
We have a number of active research grants and contracts administered by various
governmental agencies. In September 1998, we were awarded (1) a contract by the
Space and Naval Warfare Systems Center San Diego or SSC San Diego for the
Defense Advance Research Projects Agency of $7 million over a five year term and
(2) a grant from the National Institute of Justice or NIJ of approximately
$1 million over a five year term. The contract award which was made by SSC San
Diego for the Defense Advance Research Projects Agency, includes over
$2 million to be paid during the first two years, and options to extend the
program for up to an additional three years that would pay us up to an
additional $4.8 million. The goal of the program is to create an advanced
miniaturized lab for biological warfare defense applications. Under the
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
grant awarded by the U.S. Department of Justice, Office of Justice Programs we
are continuing our work in the development of a portable microchip array-based
genetic detector for rapid forensic DNA testing and identification at the crime
scene.
RESEARCH AND PRODUCT DEVELOPMENT
Our research and product development is dedicated to:
- - developing our DNA analysis platform;
- - using this basic technology in a number of different product areas;
- - planning system modifications for specific applications using a common
platform; and
- - enhancing chip design and capabilities to simplify instrument design.
We have project teams focused on technology applications for the research market
and for drug discovery applications for the Aventis collaboration. In addition,
we have various groups supporting activities related to government contracts and
grants for both biologic and non-biologic applications.
PROPRIETARY TECHNOLOGY AND PATENTS
We have twelve issued U.S. patents, seven foreign issued patents and a number of
pending patent applications filed in the U.S. and abroad. In addition to
pursuing patents and patent applications relating to our platform technology, we
may enter into other license arrangements to obtain rights to third-party
intellectual property where appropriate.
Our or our licensors' patent applications may not be issued. Issued patents may
not be found valid if challenged. In addition, intellectual property rights
licensed by us may not be successfully integrated into commercial products.
Others may independently develop similar technologies or duplicate any
technology developed by us. Because of the extensive time required for
development, testing, and regulatory review of a potential product, it is
possible that, before any of our products can be commercialized, any related
patent may expire or remain in existence for only a short period following
commercialization, thus reducing any advantage of the patent, which could
adversely affect our ability to protect future product development and,
consequently, our business, financial condition and results of operations.
All of our inventions have originated in the U.S. and all patent applications
were originally filed in the U.S. We also seek to protect these inventions
through foreign counterpart applications filed in selected other countries.
Because patent applications in the U.S. are maintained in secrecy until the
patents are issued and since publication of discoveries in the scientific or
patent literature often lag behind actual discoveries, we cannot be certain that
we were the first to make the inventions covered by each of our issued or
pending patent applications or that we were the first to file for protection of
inventions set forth in such patent applications. Our planned or potential
products may be covered by third-party patents or other intellectual property
rights, in which case continued development and marketing of the products would
require a license. Required licenses may not be available to us on acceptable
terms, if at all. If we do not obtain these licenses, we could encounter delays
in product introductions while we attempt to design around the patents, or could
find that the development, manufacture or sale of products requiring these
licenses is foreclosed.
We are aware of U.S. and corresponding foreign patents and applications which
are assigned to Affymax Technologies, N.V., and Affymetrix which relate to
certain devices having 1,000 or more groups of oligonucleotides occupying a
total area of less than 1 cm(2) and 400 different oligonucleotides per cm(2) on
a substrate. In the event that we proceed with the development of arrays with
more than 400 groups of oligonucleotides, we expect to design our devices
through, among other things, the selection of the physical
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
dimensions, methods of binding and selection of support materials to avoid
infringing these patents. We may not be able to design around these patents. We
are aware of U.S. and European patents and patent applications owned by Isis
Innovations Ltd. (E. M. Southern). We have opposed one allowed European patent
which had broad claims to array technology for analyzing a predetermined
polynucleotide sequence. Isis Innovations' position with respect to the opposed
patent is that the claims relate to what it terms the "diagnostic mode." Those
claims have now all been narrowed to the point that if the claims are accepted
by the European Patent Office, they would not be infringed by our technology. On
May 5, 1998, The Opposition Division of the European Patent Office issued a
provisional nonbinding opinion that the claims should be revoked. If the claims
of the original European patent survive the opposition or if an application
relating to arrays issues in another country with claims as broad as the
original European patent, we would be subject to infringement claims that could
delay or preclude sales of some or all of our anticipated diagnostic products.
We are also aware of a U.S. patent and corresponding foreign applications which
are assigned on their face to Massachusetts Institute of Technology, Houston
Advanced Research Center and Baylor College of Medicine. We believe that we have
meritorious positions regarding non-infringement and invalidity. Parties
claiming to have rights under the patent and applications have offered us a
license. No assurance can be made that a license will be available on
commercially acceptable terms, or that we would prevail in any ultimate action.
Litigation may be necessary to defend against or assert claims of infringement,
to enforce patents issued to us, to protect trade secrets or know-how owned by
us or to determine the scope and validity of the proprietary rights of others.
In addition, interference proceedings declared by the USPTO may be necessary to
determine the priority of inventions with respect to our patent applications.
Litigation or interference proceedings could result in substantial costs to and
diversion of our effort, and could have a material adverse effect on our
business, financial condition, and results of operations. Any such efforts may
not be successful.
We may rely on trade secrets to protect our technology. Trade secrets are
difficult to protect. We seek to protect our proprietary technology and
processes by confidentiality agreements with our employees and certain
consultants and contractors. These agreements may be breached, we may not have
adequate remedies for any breach and our trade secrets may otherwise become
known or be independently discovered by competitors. To the extent that our
employees or our consultants or contractors use intellectual property owned by
others in their work for us, disputes may also arise as to the rights in related
or resulting know-how and inventions.
MANUFACTURING
In January 2000 we formed a collaboration with Hitachi for the manufacture of
our NanoChip molecular biology workstation instruments. For the manufacture of
the NanoChip cartridge, we perform many of the proprietary assembly steps
in-house, including deposition of the permeation layer and final electronic
assembly and testing. We believe our technology allows for large-scale microchip
production at a relatively low cost. We believe this scalability and low cost
will help promote the rapid acceptance of our proprietary semiconductor-based
platform technology as an industry standard. However, achieving these
efficiencies will require substantial commercial volumes and there can be no
assurance we will be successful in generating sufficient demand to scale up
manufacturing capacity to levels that will allow our products to be priced
competitively.
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
SALES AND MARKETING
We plan to field a focused, direct sales force in the United States and Europe
to coordinate the sale and marketing of our first product, the NanoChip
molecular biology workstation. The sales team will target sites for multi-unit
placements, strategic development of diagnostic content, and value-added
distribution partners for selected market segments.
Hardware service for our Hitachi-made NanoChip molecular biology workstations is
expected to be provided by Hitachi's technical service organization. Hitachi's
wholly-owned distribution partner, Nissei-Sangyo, will sell and service NanoChip
systems and cartridges in Japan.
In San Diego, we will support world-wide field activities with a customer
applications laboratory. This laboratory will be used to assist in early
customer demonstrations, protocol development and training.
COMPETITION
As we develop applications of our technology, we expect to encounter intense
competition from a number of companies that offer products competing in our
targeted applications. We anticipate that our competitors in these areas will
include health care companies that manufacture laboratory-based tests and
analyzers, diagnostic and pharmaceutical companies, as well as companies
developing drug discovery technologies. To the extent we are successful in
developing products in these areas, we will face competition from established
and development-stage companies.
In many instances, our competitors have substantially greater financial,
technical, research, and other resources and larger, more established marketing,
sales, distribution and service organizations than us. Moreover, competitors may
offer broader product lines and have greater name recognition than us, and may
offer discounts as a competitive tactic. In addition, several development stage
companies are making or developing products that compete with our potential
products. There can be no assurance that our competitors will not succeed in
developing or marketing technologies or products that are more effective or
commercially attractive than our potential products, or that would render our
technologies and products obsolete. Also, we may not have the financial
resources, technical expertise or marketing, distribution or support
capabilities to compete successfully in the future. Our success will depend in
large part on our ability to maintain a competitive position with respect to our
technologies. Rapid technological development by others may also result in
competing products or technologies.
GOVERNMENT REGULATION
For our initial commercial market, the biomedical research market, we do not
anticipate the need for FDA or other regulatory approval. We have not applied
for FDA or other regulatory approvals with respect to any of our products under
development. We anticipate, however, the manufacturing, labeling, distribution
and marketing of some or all of the diagnostic products we may develop and
commercialize in the future will be subject to regulation in the U.S. and in
other countries. In addition to clinical diagnostic markets, we also may pursue
forensic, agricultural, environmental, laboratory and industrial applications
for our products which may be subject to different government regulation.
Aspects of our manufacturing and marketing activities may also be subject to
federal, state and local regulation by various governmental authorities.
In the U.S., the FDA regulates, as medical devices, most diagnostic tests and IN
VITRO reagents that are marketed as finished test kits and equipment. Pursuant
to the Federal Food, Drug, and Cosmetic Act, and the regulations promulgated
thereunder, the FDA regulates the preclinical and clinical testing, design,
manufacture, labeling, distribution and promotion of medical devices. We will
not be able to commence
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
marketing or commercial sales in the U.S. of new medical devices under
development that fall within the FDA's jurisdiction until we receive clearance
or approval from the FDA, which can be a lengthy, expensive, and uncertain
process. Noncompliance with applicable requirements can result in, among other
things, administrative or judicially imposed sanctions such as injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing clearances or approvals, or
criminal prosecution.
In the U.S., medical devices are generally classified into one of three classes
(I.E., Class I, II or III) on the basis of the controls deemed necessary by the
FDA to reasonably ensure their safety and effectiveness. Class I devices are
subject to general controls (E.G., labeling, premarket notification, and
adherence to QSR). Class II devices are subject to general and special controls
(E.G., performance standards, postmarket surveillance, patient registries and
FDA guidelines). Generally, Class III devices are those which must receive
premarket approval by the FDA to ensure their safety and effectiveness (E.G.,
life-sustaining, life-supporting, and implantable devices or new devices which
have been found not to be substantially equivalent to a legally marketed
devices). Before a new device can be introduced in the market, the manufacturer
must generally obtain FDA clearance of a 510(k) notification or approval of a
PMA application. Our products will vary significantly in the degree of
regulatory approvals required. We believe that certain of our products for
research, genomics, drug discovery and industrial applications will not require
regulatory approvals or clearance. Some diagnostic products will require 510(k)
approvals while other diagnostic and genetic testing products will require PMA
approvals.
A 510(k) clearance will generally only be granted if the information submitted
to the FDA establishes that the device is "substantially equivalent" to a
legally marketed predicate device. For any devices that are cleared through the
510(k) process, significant modifications or enhancements in the design or
intended use that could significantly affect safety or effectiveness will
require new 510(k) submissions. It generally takes from four to twelve months
from submission to obtain 510(k) premarket clearance but the process may take
longer.
The PMA approval process is more expensive, uncertain, and lengthy than the
510(k) clearance process. A PMA must prove the safety and effectiveness of the
device to the FDA's satisfaction, which typically requires extensive data,
including but not limited to, technical, preclinical, clinical trials,
manufacturing and labeling to demonstrate the safety and effectiveness of the
device. Although clinical investigations of most devices are subject to the
investigational device exemption requirements, clinical investigations of IN
VITRO diagnostic tests, such as our products and products under development, are
exempt from the investigational device exemption requirements, including the
need to obtain the FDA's prior approval, provided the testing is noninvasive,
does not require an invasive sampling procedure that presents a significant
risk, does not introduce energy into the subject, and is not used as a
diagnostic procedure without confirmation by another medically established test
or procedure. In addition, the IN VITRO diagnostic tests must be labeled for
research use only or investigational use only, and distribution controls must be
established to assure that IVDs distributed for research or clinical
investigation are used only for those purposes.
The FDA may determine that we must adhere to the more costly, lengthy, and
uncertain PMA approval process for our potential products. Significant
modifications to the design, labeling or manufacturing process of an approved
device may require approval by the FDA of a PMA supplement or a new PMA
application.
After a PMA is accepted for filing, the FDA begins its review of the submitted
information, which generally takes between one and two years, but may take
significantly longer. During this review period, the FDA may request additional
information or clarification of information already provided. Also during the
review period, an advisory panel of experts from outside the FDA will be
convened to review and evaluate the
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
application and provide recommendations to the FDA as to the approvability of
the device. We may not be able to obtain necessary approvals on a timely basis,
if at all, and delays in obtaining or failure to obtain such approvals, the loss
of previously obtained approvals, or failure to comply with existing or future
regulatory requirements could have a material adverse effect on our business,
financial condition and results of operations.
Manufacturers of medical devices for marketing in the U.S. are required to
adhere to the QSR requirements (formerly Good Manufacturing Practices), which
include testing, control and documentation requirements. Manufacturers must also
comply with Medical Device Reporting requirements that a manufacturer report to
the FDA any incident in which its product may have caused or contributed to a
death or serious injury, or in which its product malfunctioned and would be
likely to cause or contribute to a death or serious injury upon recurrence.
Labeling and promotional activities are subject to scrutiny by the FDA and, in
certain circumstances, by the Federal Trade Commission. FDA enforcement policy
prohibits the marketing of approved medical devices for unapproved uses.
We are subject to routine inspection by the FDA and certain state agencies for
compliance with QSR requirements, medical device reporting requirements and
other applicable regulations. The recently finalized QSR requirements include
design controls that will likely increase the cost of compliance. We may incur
significant costs to comply with laws and regulations in the future and these
laws and regulations may have a material adverse effect upon our business,
financial condition and results of operation.
Any of our customers using our diagnostic devices for clinical use in the U.S.
may be regulated under the Clinical Laboratory Improvement Amendments of 1988 or
CLIA. CLIA is intended to ensure the quality and reliability of clinical
laboratories in the U.S. by mandating specific standards in the areas of
personnel qualification, administration, participation in proficiency testing,
patient test management, quality control, quality assurance and inspections. The
regulations promulgated under CLIA establish three levels of diagnostic tests
("waived," "moderately complex" and "highly complex"), and the standards
applicable to a clinical laboratory depend on the level of the tests it
performs. CLIA requirements may prevent some clinical laboratories from using
our diagnostic products. Therefore, CLIA regulations and future administrative
interpretations of CLIA may have a material adverse impact on us by limiting the
potential market for our products.
The Food and Drug Administration Modernization Act of 1997 makes changes to the
device provisions of the FD&C Act or the Act and other provisions in the Act
affecting the regulation of devices. Among other things, the changes will affect
the IDE, 510(k) and PMA processes, and also will affect device standards and
data requirements, procedures relating to humanitarian and breakthrough devices,
tracking and postmarket surveillance, accredited third-party review, and the
dissemination of off-label information. We cannot predict how or when these
changes will be implemented or what effect the changes will have on the
regulation of our products. There can be no assurance that the new legislation
will not impose additional costs or lengthen review times for our products.
Additionally, our food pathogen products will be subject to the regulations of
various domestic and foreign government agencies which regulate food safety and
food adulteration, including the U.S. Department of Agriculture.
FACILITIES
We currently lease approximately 45,000 square feet of commercial real estate in
San Diego, California, under a lease expiring in 2005. We have an option to
renew the lease on this facility for two additional five-year terms. The
facility currently houses our administrative offices and research and
development
- --------------------------------------------------------------------------------
Business
- --------------------------------------------------------------------------------
laboratories, and is expected to be sufficient to meet our currently anticipated
facilities needs at least through 2000. If required, we believe we will be able
to obtain additional facilities space on commercially reasonable terms.
EMPLOYEES
As of December 31, 1999, we had 142 full-time employees, of whom 50 hold
Ph.D. degrees and 19 hold other advanced degrees. Approximately 90 are
involved in research and development, 26 in operations, manufacturing and
quality assurance, and 26 in finance, legal, marketing and other
administrative functions. Our success will depend in large part upon our
ability to attract and retain employees. We face competition in this regard
from other companies, research and academic institutions, government entities
and other organizations. None of our employees is covered by a collective
bargaining agreement, and we believe that we maintain good relations with our
employees.
FACTORS THAT MAY AFFECT RESULTS
Our products may not be successfully developed, which would harm us and force
us to curtail or cease operations.
We are at an early stage of development. All of our products are under
development. We have not sold any products and do not expect to sell any
products until at the earliest the last half of 2000. Our products may not be
successfully developed or commercialized on a timely basis, or at all. If we
are unable, for technological or other reasons, to complete the development,
introduction or scale-up of manufacturing of our new products, or if our
products do not achieve a significant level of market acceptance, we would be
forced to curtail or cease operations.
Our success will depend upon our ability to overcome significant
technological challenges and successfully introduce our products into the
marketplace. A number of applications envisioned by us need significant
enhancements to our basic technology platform.
Lack of market acceptance of our technology would harm us.
We may not be able to develop commercially viable products. Even if we develop a
product it may not be accepted in the marketplace. If we are unable to achieve
market acceptance, we will not be able to generate sufficient product revenue to
become profitable. Market acceptance will depend on many factors, including our
ability to:
- - convince prospective strategic partners and customers that our technology is
an attractive alternative to other technologies;
- - manufacture products in sufficient quantities with acceptable quality and at
an acceptable cost; and
- - place and service sufficient quantities of our products.
In addition, our technology platform could be harmed by limited funding
available for product and technology acquisitions by our customers, as well as
internal obstacles to customer approvals of purchases of our products.
Commercialization of some of our potential products depends on collaborations
with others. If our collaborators are not successful or if we are unable to
find collaborators in the future, we may not be able to develop these
products.
Our strategy for the research, development and commercialization of some of our
products requires us to enter into contractual arrangements with corporate
collaborators, licensors, licensees and others. Our success depends in part upon
the performance by these collaborators of their responsibilities under these
arrangements. Some collaborators may not perform their obligations as we expect
or we may not derive any revenue from these arrangements.
We have collaborative agreements with several health care companies. We do not
know whether these companies will successfully develop and market any products
under our respective agreements. Moreover, some of our collaborators are also
researching competing technologies targeted by our collaborative
- --------------------------------------------------------------------------------
Risk factors
- --------------------------------------------------------------------------------
programs. We may be unsuccessful in entering into other collaborative
arrangements to develop and commercialize our products. In addition, disputes
may arise over ownership rights to intellectual property know-how or
technologies developed with our collaborators.
We currently have agreements with Aventis Research & Technologies, or Aventis,
Becton, Dickinson and Company, or Becton Dickinson, and Elan Corporation plc, or
Elan, that contemplate the commercialization of products resulting from research
and development collaboration agreements between the parties. In addition, we
have a manufacturing and distribution agreement with Hitachi. These
collaborations may not be successful. We have received no funding under our
collaboration with Becton Dickinson since the third quarter 1999 and we may
never receive any additional funds from Becton Dickinson. We have not yet agreed
upon specific program objectives with respect to our research and development
agreement with Elan, and we may never receive any additional funds from Elan.
We have a history of net losses. We expect to continue to incur net losses and
we may not achieve or maintain profitability.
We have not sold any products and do not expect to sell any products until at
the earliest the last half of 2000. From our inception to December 31, 1999, we
have incurred cumulative net losses totaling approximately $72.6 million.
Moreover, our negative cash flow and losses from operations will continue and
increase for the foreseeable future. We may never generate sufficient product
revenue to become profitable. We also expect to have quarter-to-quarter
fluctuations in revenues, expenses and losses, some of which could be
significant.
To develop and sell our products successfully, we will need to increase our
spending levels in research and development, as well as in selling, marketing,
and administration. We will have to incur these increased spending levels before
knowing whether our products can be sold successfully.
We may need additional capital in the future. If additional capital is not
available, we may have to curtail or cease operations.
We may need to raise more money to continue the research and development
necessary to bring our products to market and to establish manufacturing and
marketing capabilities. We may seek additional funds through public and private
stock offerings, arrangements with corporate partners, borrowings under lease
lines of credit or other sources. If we cannot raise more money we will have to
reduce our capital expenditures, scale back our development of new products,
reduce our workforce and license to others products or technologies that we
otherwise would seek to commercialize ourselves. The amount of money we will
need will depend on many factors, including among others:
- - the progress of our research and development programs;
- - the commercial arrangements we may establish;
- - the time and costs involved in:
- scaling up our manufacturing capabilities;
- obtaining necessary regulatory approvals; and
- filing, prosecuting, defending and enforcing patent claims; and
- - the scope and results of our future preclinical studies and clinical trials,
if any.
Additional capital may not be available on terms acceptable to us, or at all.
Any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may include restrictive covenants.
- --------------------------------------------------------------------------------
Risk factors
- --------------------------------------------------------------------------------
Competing technologies may adversely affect us.
We expect to encounter intense competition from a number of companies that offer
products in our targeted application areas. We anticipate that our competitors
in these areas will include:
- - health care companies that manufacture laboratory-based tests and analyzers;
- - diagnostic and pharmaceutical companies; and
- - companies developing drug discovery technologies.
If we are successful in developing products in these areas, we will face
competition from established companies and numerous development-stage companies
that continually enter these markets.
In many instances, our competitors have substantially greater financial,
technical, research and other resources and larger, more established marketing,
sales, distribution and service organizations than us. Moreover, these
competitors may offer broader product lines and have greater name recognition
than us and may offer discounts as a competitive tactic.
In addition, several development-stage companies are currently making or
developing products that compete with or will compete with our potential
products. Our competitors may succeed in developing, obtaining FDA approval or
marketing technologies or products that are more effective or commercially
attractive than our potential products, or that render our technologies and
potential products obsolete. As these companies develop their technologies, they
may develop proprietary positions which may prevent us from successfully
commercializing products.
Also, we may not have the financial resources, technical expertise or marketing,
distribution or support capabilities to compete successfully in the future.
The uncertainty of patent and proprietary technology protection and our
potential inability to license technology from third parties may adversely
affect us.
Our success will depend in part on obtaining and maintaining meaningful patent
protection on our inventions, technologies and discoveries. Our ability to
compete effectively will depend on our ability to develop and maintain
proprietary aspects of our technology, and to operate without infringing the
proprietary rights of others, or to obtain rights to third-party proprietary
rights, if necessary. Our pending patent applications may not result in the
issuance of patents. Our patent applications may not have priority over others'
applications, and even if issued, our patents may not offer protection against
competitors with similar technologies. Any patents issued to us may be
challenged, invalidated or circumvented and the rights created thereunder may
not afford us a competitive advantage.
Our commercial success also depends in part on us neither infringing valid,
enforceable patents or proprietary rights of third parties, nor breaching any
licenses that may relate to our technologies and products. We are aware of
third-party patents that may relate to our technology. It is possible that we
may unintentionally infringe these patents or other patents or proprietary
rights of third parties. We may in the future receive notices claiming
infringement from third parties as well as invitations to take licenses under
third-party patents. Any legal action against us or our collaborative partners
claiming damages and seeking to enjoin commercial activities relating to our
products and processes affected by third-party rights may require us or our
collaborative partners to obtain licenses in order to continue to manufacture or
market the affected products and processes. In addition, these actions may
subject us to potential liability for damages. We or our collaborative partners
may not prevail in an action and any license required under a patent may not be
made available on commercially acceptable terms, or at all.
- --------------------------------------------------------------------------------
Risk factors
- --------------------------------------------------------------------------------
There are many U.S. and foreign patents and patent applications held by third
parties in our areas of interest, and we believe that there may be significant
litigation in the industry regarding patent and other intellectual property
rights. Litigation could result in substantial costs and the diversion of
management's efforts regardless of the result of the litigation. Additionally,
the defense and prosecution of interference proceedings before the U.S. Patent
and Trademark Office, or USPTO, and related administrative proceedings would
result in substantial expense to us and significant diversion of effort by our
technical and management personnel. We may in the future become subject to USPTO
interference proceedings to determine the priority of inventions. In addition,
laws of some foreign countries do not protect intellectual property to the same
extent as do laws in the U.S., which may subject us to additional difficulties
in protecting our intellectual property in those countries.
We are aware of U.S. and corresponding foreign patents and applications which
are assigned to Affymax Technologies, N.V., and Affymetrix, Inc. which relate to
certain devices having 1,000 or more groups of oligonucleotides occupying a
total area of less than 1 cm(2) and 400 different oligonucleotides per cm(2) on
a substrate. In the event that we proceed with the development of arrays with
more than 400 groups of oligonucleotides, we expect to design our devices
through, among other things, the selection of the physical dimensions, methods
of binding and selection of support materials to avoid infringing these patents.
We may not be able to design around these patents. We are aware of U.S. and
European patents and patent applications owned by Isis Innovations Ltd. (E. M.
Southern). We have opposed one allowed European patent which had broad claims to
array technology for analyzing a predetermined polynucleotide sequence. Isis
Innovations' position with respect to the opposed patent is that the claims
relate to what it terms the "diagnostic mode." Those claims have now all been
narrowed to the point that if the claims are accepted by the European Patent
Office, they would not be infringed by our technology. On May 5, 1998, the
Opposition Division of the European Patent Office issued a provisional
nonbinding opinion that the claims should be revoked. If the claims of the
original European patent survive the opposition or if an application relating to
arrays issues in another country with claims as broad as the original European
patent, we would be subject to infringement claims that could delay or preclude
sales of some or all of our anticipated diagnostic products. We are also aware
of a U.S. patent and corresponding foreign applications which are assigned on
their face to Massachusetts Institute of Technology, Houston Advanced Research
Center and Baylor College of Medicine. We believe that we have meritorious
positions regarding non-infringement and invalidity. Parties claiming to have
rights under the patent and applications have offered us a license. No assurance
can be made that a license will be available on commercially acceptable terms,
or that we would prevail in any ultimate action.
We also rely upon trade secrets, technical know-how and continuing inventions to
develop and maintain our competitive position. Others may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets or disclose our technology and we may not be
able to meaningfully protect our trade secrets, or be capable of protecting our
rights to our trade secrets. We seek to protect our technology and patents, in
part, by confidentiality agreements with our employees and contractors. Our
employees may breach their existing Proprietary Information, Inventions, and
Dispute Resolution Agreements and these agreements may not protect our
intellectual property. This could have a material adverse effect on us.
- --------------------------------------------------------------------------------
Risk factors
- --------------------------------------------------------------------------------
The regulatory approval process is expensive, time consuming, uncertain and
may prevent us from obtaining required approvals for the commercialization of
our products.
We anticipate that the manufacturing, labeling, distribution and marketing of a
number of any diagnostic products will be subject to regulation in the U.S. and
other countries. These regulations could subject us to several problems such as:
- - failure to obtain necessary regulatory approvals or clearances for our
products on a timely basis, or at all;
- - delays in receipt of or failure to receive approvals or clearances;
- - the loss of previously received approvals or clearances;
- - limitations on intended uses imposed as a condition of approvals or
clearances; or
- - failure to comply with existing or future regulatory requirements.
In the U.S., the Food and Drug Administration, or FDA, regulates as medical
devices most diagnostic tests and IN VITRO reagents that are marketed as
finished test kits and equipment. Pursuant to the Federal Food, Drug, and
Cosmetic Act, the FDA regulates the preclinical and clinical testing, design,
efficacy, safety, manufacture, labeling, distribution and promotion of medical
devices. We will not be able to commence marketing or commercial sales in the
U.S. of these products until we receive clearance or approval from the FDA,
which can be a lengthy, expensive and uncertain process. We have not applied for
FDA or other regulatory approvals with respect to any of our products under
development. We may experience difficulties that could delay or prevent the
successful development, introduction and marketing of proposed products.
Regulatory clearance or approval or clearance of any proposed products may not
be granted by the FDA or foreign regulatory authorities on a timely basis, if at
all.
Noncompliance with applicable FDA requirements can result in:
- - administrative sanctions or judicially imposed sanctions such as
injunctions;
- - civil penalties, recall or seizure of products;
- - total or partial suspension of production, failure of the government to
grant premarket clearance or premarket approval for devices;
- - withdrawal of marketing clearances or approvals; and
- - criminal prosecution.
The FDA also has the authority to request the recall, repair, replacement or
refund of the cost of any regulated device manufactured or distributed by us.
Any devices manufactured or distributed by us pursuant to FDA clearance or
approvals are subject to thorough and continuing regulation by the FDA and
certain state agencies.
We depend on suppliers for materials which could impair our ability to
manufacture
our products.
Outside vendors provide key components and raw materials used in the manufacture
of our products. Although we believe that alternative sources for the