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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL PERIOD ENDED DECEMBER 31, 2000
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.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0489621
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10398 PACIFIC CENTER COURT, SAN DIEGO, CA 92121
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(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 March 23,
2001, as reported on the Nasdaq National Market was approximately $112,465,223.
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 20,981,900
as of March 23, 2001.
NANOGEN, INC.
FORM 10-K
INDEX
PAGE
PART I
Item 1. Business.......................................................................... 1
Item 2. Properties........................................................................27
Item 3. Legal Proceedings.................................................................27
Item 4. Submission of Matters to a Vote of Security Holders...............................28
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............29
Item 6. Selected Financial Data...........................................................30
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................30
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.....................................................................34
Item 8. Financial Statements and Supplementary Data.......................................34
Item 9. Change in and Disagreements with Accountants on Accounting and
and Financial Disclosures.......................................................34
PART III
Item 10. Directors and Executive Officers of the Registrant................................35
Item 11. Executive Compensation............................................................35
Item 12. Security Ownership of Certain Beneficial Owners and Management....................35
Item 13. Certain Relationships and Related Transactions....................................35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................36
SIGNATURES..........................................................................................40
-i-
PART I
ITEM 1. BUSINESS
OVERVIEW
We launched our first commercial product during the second quarter of the
year 2000, beginning our transformation from a research and development company
to a customer-oriented company. The NanoChip(TM) Molecular Biology Workstation
has been targeted toward clinical researchers performing genetic-based analyses,
particularly those involving single nucleotide polymorphisms ("SNPs"), short
tandem repeats ("STRs"), single point mutations ("PMs") and other genetic
variations. Our first product launch marks a point of entry from which we hope
to expand our product line and served markets.
Our primary differentiation stems from our ability to integrate advanced
microelectronics and molecular biology into a core technology platform with
potential 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(TM) Molecular Biology Workstation, comprised of two
automated instruments and a consumable cartridge. The NanoChip(TM) Cartridge
incorporates a proprietary microchip, providing 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 potential
future applications for our system include 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 may shift bioassay
analysis from manual and mechanical methods to microelectronic systems, thereby
significantly improving the quality and reducing the overall cost of research
and healthcare.
During the year 2000, we accomplished the following:
- - finalized the beta test results for our NanoChip(TM) System, reporting
extremely high accuracy and flexibility in hard to score mutations;
- - raised over $76.5 million in a secondary offering;
- - commercially launched the NanoChip(TM) System as our first product and
shipped a total of 23 NanoChip(TM) Systems to the research laboratories of
hospitals, universities, government organizations and pharmaceutical
companies;
- - significantly expanded our sales, marketing and field support staff and
expanded our international sales and marketing efforts by opening our
European office in The Netherlands;
- - signed a long-term collaboration agreement with Hitachi expanding our
earlier agreement and providing for the joint development of future
technology;
- - realigned our joint venture with Becton Dickinson to expand our licensing
rights to the joint venture's proprietary amplification technique;
- - received two additional government grants that provide for a total of $2.7
million of continued funding for the development of our core technologies;
and
- - expanded our intellectual property portfolio by adding ten U.S. patents and
seven foreign patents.
1
YEAR 2000 ACCOMPLISHMENTS
SUCCESSFUL BETA SITE TESTS
In February 2000, we announced the completion of our third and final beta
site testing results for the NanoChip(TM) 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(TM) 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.
$76.5 MILLION SECONDARY OFFERING
In March 2000, we completed a secondary public offering of common stock
that generated net proceeds of approximately $76.5 million. As of December 31,
2000, our cash, cash equivalents and short-term investment balance was in excess
of $95 million.
COMMERCIAL LAUNCH OF THE NANOCHIP(TM) SYSTEM AND SHIPMENT OF 23 SYSTEMS
We began commercialization of our NanoChip(TM) Molecular Biology
Workstation during the second quarter of 2000 in the genomics and biomedical
research fields. The initial application for the technology is the analysis of
SNPs including those that are hard to score, insertions and deletions, STRs, PMs
and other genetic variations. We anticipate adding the analysis of gene
expression as an additional application during 2001. Because of the importance
of the genomics and biomedical research markets for the development and sales of
future applications for the NanoChip(TM) System and for other products related
to our technology, we chose to build a commercial infrastructure that would
allow us to be directly involved in marketing and selling our first product.
Additionally, we set up a distribution capability for our products in Japan
through the distribution arm of Hitachi, Ltd., our manufacturing partner.
As of December 31, 2000, we shipped a total of 23 NanoChip(TM) Systems to
customers in three countries, including the research laboratories of hospitals,
universities, government organizations and pharmaceutical companies. Such
customers include the National Cancer Institute, the Mayo Clinic, the Children's
Research Hospital of Tokyo, Aventis, Stanford University and Beth Israel
Deaconess Medical Center at Harvard. Our NanoChip(TM) System is designed to
assist research in the fields of genetics, cancer and infectious and
cardiovascular disease.
These 23 shipments include two sales recorded as sponsored research revenue
and funded by corporate alliances, seven title transfer transactions
representing sales and recorded as product revenue, and 14 non-title transfer
transactions. Of the non-title transfers, one was a shipment made to a corporate
collaborator pursuant to an expanded relationship. The other 13 were strategic
placements made pursuant to our development site agreements. Non-title
transferring transactions may include development site agreements, leases and
reagent rentals. Title transferring transactions normally result in recording of
full instrument revenue at the time of the transaction, while non-title
transferring transactions may spread instrument revenue associated with the
transaction, if any, over the life of the instrument or the agreement. We
believe that the non-title transferring transactions help us establish awareness
and credibility in our target markets.
EXPANDED SALES, MARKETING AND FIELD SUPPORT EFFORTS
We increased the number of employees in our sales and marketing group from
three at December 31, 1999 to twenty-six at December 31, 2000. In addition, in
August 2000, we incorporated a subsidiary, Nanogen Europe B.V. in The
Netherlands as our European sales office. At December 31, 2000, this office
employed four European-based sales executives in the United Kingdom, Germany,
The Netherlands and Denmark.
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EXPANDED HITACHI COLLABORATION
In July 2000, we executed a ten-year agreement with Hitachi, Ltd., Nissei
Sangyo Co. Ltd. and Hitachi Instruments Service Co. Ltd. of Japan (collectively,
"Hitachi") to develop, manufacture and distribute products based on the parties'
proprietary technologies, potentially including, among other things,
reduced-size instruments for genetic testing, integrated amplification and
point-of-care detection. The agreement expands on the agreement executed by the
Company and Hitachi in January 2000. The agreement provides that the parties
will jointly determine which projects to prioritize over the term of the
agreement. The agreement may be terminated before its expiration by either
party, subject to certain restrictions. Pursuant to the terms of the agreement,
we and Hitachi each may contribute up to $28.5 million in cash over the ten-year
period. In addition, Hitachi made an equity investment in us by purchasing
74,590 shares of our common stock worth approximately $2.0 million pursuant to a
private sale by us based on a per share price of $26.813 (the fair market value
as of the signing date of the Hitachi agreement). Hitachi has the right to be
the exclusive distributor of collaboration products in Japan and, based upon the
attainment of minimum sales targets to be mutually agreed upon, in other Asian
countries. We retain the exclusive right to distribute collaboration products
outside of these countries. The agreement is non-exclusive and excludes some
clinical markets.
REALIGNED JOINT VENTURE WITH BECTON DICKINSON
In September 2000, we and Becton Dickinson modified our joint venture to
permit each of us the opportunity to commercialize certain of the joint
venture's technology and allow collaborations with third parties to develop and
commercialize certain products in the field of infectious diseases. Pursuant to
amendments to the Master Agreement, the General Partnership Agreement and the
Collaborative Research and Development and License Agreement, the Partnership
exclusively licensed Partnership technology developed up to that date to Becton
Dickinson and Becton Dickinson exclusively sublicensed the Partnership
technology to us to commercialize products in the field of infectious diseases.
Becton Dickinson also agreed to non-exclusively license SDA technology to us for
use and for sublicensing purposes in the field of infectious diseases. Becton
Dickinson also expanded the field of use for our SDA license outside of the
Partnership to not only include IN VITRO human genetic testing and IN VITRO
cancer diagnostics, but also IN VITRO testing of environmental, agricultural and
veterinary samples. Pursuant to the amendments, Becton Dickinson paid us
$300,000.
RECEIVED ADDITIONAL GOVERNMENT GRANTS
In August 2000, we were awarded a contract by the Space and Naval Warfare
Systems Center San Diego for the Defense Advanced Research Projects Agency in an
amount totaling approximately $1.6 million over a two year period. The goal of
the contract is to develop and refine electronically driven sample preparation
protocols on specifically designed microelectronic chips. In October 2000, we
entered into a cooperative agreement with the U.S. Army Medical Research
Acquisition Activity ("USAMRAA") in an amount totaling approximately $1.1
million over a two year period. The objective of the USAMRAA agreement is to
develop an arrayable electronic system for the identification of biological
warfare or infectious disease agents.
EXPANDED OUR INTELLECTUAL PROPERTY PORTFOLIO
During 2000, we expanded our intellectual property portfolio adding ten
additional U.S. patents and seven additional foreign patents. As of December 31,
2000, we had a total of 20 U.S. patents and 13 foreign patents.
OUR TECHNOLOGY AND RELEVANT MARKETS
LIMITATIONS OF CURRENT ASSAY TECHNOLOGIES
Many bioassay techniques have been developed from a wide variety of
different scientific disciplines for molecular biology and clinical diagnostic
laboratories. Many of these techniques are technically demanding, difficult to
perform, expensive or inflexible and may lack acceptable clinical accuracy. In
addition, technologies well suited or targeted to one market, such as the
biomedical research or drug discovery markets, often are unable to bridge the
gap to serve downstream markets such as clinical diagnostics.
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Despite recent advances in technology, many bioassays are too specialized
or inflexible to be used throughout the various departments of 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. While these technologies each
have certain advantages, they also have significant drawbacks that inhibit their
broad applicability across the life sciences market.
THE NANOGEN SOLUTION
We believe that our initial product, the NanoChip(TM) Molecular Biology
Workstation, or the NanoChip(TM) System, provides the accuracy, flexibility,
versatility and ease-of-use features required to serve a wide range of genomic
and biomedical as well as many other applications. We are promoting the
NanoChip(TM) System as the research laboratory standard for molecular
biologists, and eventually the industry standard for accurate, targeted genomics
in both laboratory and non-laboratory settings. The NanoChip(TM) System provides
the following advantages:
ACCURACY
Accuracy is critical in laboratory analysis. The NanoChip(TM) 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. Nanogen's technology may have the ability to expand
a customer's range of testing to include important, difficult to score mutations
such as genetic deletions.
FLEXIBILITY
Nanogen's technology is highly flexible. The NanoChip(TM) System is
centered around an electronics microarray containing 100 individually
controllable and programmable electronic test sites. Each of the major bioassay
formats, the "dot blot" and the "reverse dot blot" are conveniently handled by
the NanoChip(TM) System and customers can design arrays in several different
formats to meet their specific needs. Customers can combine several types of
assays on one chip and multiple Loaders can be controlled by one Reader.
VERSATILITY
The NanoChip(TM) System is designed to analyze SNP's, including those that
are hard to score, insertions, deletions, STRs, single point mutations and other
genetic variations. Our electronic-based technology is potentially applicable to
biological analyses beyond genomics and biomedical research including
immunoassays, enzyme assays, cell separation and cell receptor studies.
FAST ARRAY DESIGN
Experimental design of arrays on the NanoChip(TM) Cartridge is
straightforward. Customers can program NanoChip(TM) arrays in their own
laboratories, allowing for faster turnaround times and higher levels of
confidentiality.
EASE OF USE
Nanogen assays are easy to perform. Our fully automated Loader allows the
simultaneous programming of up to four NanoChip(TM) arrays. A loaded cartridge
is inserted and then analyzed on the Nanogen Reader. The NanoChip(TM) System
includes proprietary software to automate assay operation and provide results in
"real time." Data interpretation is clear-cut and presented in a user-friendly
format.
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THROUGHPUT
Our system's ability to program as many as 100 test sites at a time allows
for higher throughput than is achievable with some competitive technologies.
This throughput capacity permits highly efficient workflow for many biomedical
applications in a variety of laboratory settings.
COST EFFECTIVENESS
We have designed the NanoChip(TM) System to be a cost-effective solution
for most molecular biology assays. Moreover, the custom features of the system
allow users to employ their own reagents in designing arrays for specific
purposes. Since the NanoChip(TM) System consumes small quantities of reagents,
generally at low concentration, bioassay reagent costs (such as DNA) per result
are relatively 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.
COMMERCIALIZATION STRATEGY
Our primary commercialization strategy is 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(TM) System is designed eventually to bridge the
gap between scientific research and 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 is a bench-top system for use in biomedical research and
genomic applications. The capabilities that are incorporated into this system
are the core technology platform that will serve as the basis for expanding into
other biological and non-biological areas. In addition, we believe we have the
core technology that will enable us to design and deliver products incorporating
molecular biology and electronics in additional formats, beyond the microchip
format. These new product forms may broaden the markets we serve.
CONTINUE TO PURSUE GENOMICS AND BIOMEDICAL RESEARCH APPLICATIONS
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. Nanogen seeks to position
the NanoChip(TM) System as such a technology. 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.
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, we expect that additional
features, such as genetic content-based kits, sample-to-answer capabilities and
portability at reduced cost, may broaden the market potential from the research
market to larger markets 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 are selling bench-top instruments that we anticipate 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.
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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 or other electronics device.
In the NanoChip(TM) Cartridge, 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 have initially focused on DNA-based sample analysis in
developing applications utilizing our platform.
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 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 charged sites, where they concentrate and are chemically
bound to those sites. 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(TM) System allows end users to build custom arrays
through the placement of specific capture probes on a microchip. Alternatively,
the target samples themselves can be electronically addressed to the test sites.
All tests are performed using replicate probes or samples for control purposes.
These microchip arrays 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. In addition, because we use
buffers with low ionic strength, we improve the system's accuracy by reducing
the occurrence of undesirable, non-specific hybridization. Again, the
alternative method of attaching the target molecules to the test sites and then
adding probes to interrogate the targets electronically is also available. All
tests are performed using replicate probes or samples for control purposes.
STRINGENCY CONTROL
In addition to utilizing conventional thermal and chemical stringency
techniques, the NanoChip(TM) System 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
permits the detection of single point mutations, single base pair mismatches or
other genetic mutations which have significant implications
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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 or
samples and related test sites on the microchip. Other currently marketed DNA
arrays either are more difficult to control and/or require more uniformity in
the preparation of the sample.
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 for
thermal regulation is not required. The Nanogen/Becton Dickinson Partnership was
granted rights to Becton Dickinson's patents relating to SDA in infectious
disease diagnostics. During 2000, Becton Dickinson and we revised our
relationship. 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.
THE NANOCHIP(TM) SYSTEM'S COMPONENTS
The NanoChip(TM) System 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.
CONSUMABLE CARTRIDGE
The consumable NanoChip(TM) Cartridge consists of a proprietary
semiconductor microchip with electrical and fluidic connections to the
instrument. We expect that over time the consumable cartridge and microchip may
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 mounted within the consumable cartridge and is
coated with a proprietary permeation layer to which either capture probes or
target samples can be attached. We have developed arrays of various sizes
utilizing both passive and active CMOS microchips, as well as flip chip assembly
technologies. Our initial production of consumable cartridges employs 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
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biological materials from the harsh electrochemical environment near the
electrode surface and provides the chemistry necessary for attachment of capture
probes or target samples.
CAPTURE PROBES OR TARGET SAMPLES
Capture probes or target samples are electronically addressed to the
desired microlocations and attached to the permeation layer. Because independent
control can be applied at any test site on our microchip, different capture
probes or target samples can be addressed on the same microchip, allowing
multiple tests to be processed simultaneously. Our cartridges 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. In the future, we may also offer cartridges preloaded with sets of
probes or samples.
OUR INSTRUMENTS
Our fully integrated NanoChip(TM) 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, (2) and (3) are, collectively, the
Reader, 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 users to electronically address their
own target samples or probes to test sites on up to four chips simultaneously.
In addition, hybridization can be performed on the Loader or on the Reader.
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 five 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.
NANOCHIP(TM) ANALYSIS PROCESS
CARTRIDGE
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.
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ELECTRONIC ADDRESSING
Users design and create their own genetic arrays on
the microelectronic chip with Nanogen's automated
system. A 96 well or 384 well microtiter plate
containing 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 samples or probes 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.
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.
PRODUCTS AND APPLICATIONS UNDER DEVELOPMENT
GENOMICS AND BIOMEDICAL RESEARCH APPLICATIONS
We began commercialization of the NanoChip(TM) System during the second
quarter of 2000. Unlike the high-density arrays and sequencing technologies now
in the marketplace, our focus is on the targeted analysis of data from the
genomics revolution and post genomics era--helping clinical 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, our 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 microarrays
is anticipated to grow rapidly from $200 million in 2000 to almost $800 million
by 2003.
Our initial strategy for entering this market is to focus on sophisticated
commercial and academic users such as the research laboratories of large
hospitals, academic and government institutions and genomics and pharmaceutical
companies. We provide technical support and applications specialists to assist
these customers in applying the technology. Our initial product offering
includes features such as the ability to perform assays on SNPs, PMs and STRs 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
may allow for the development of relevant genetic-based tests that may
9
evolve from biomedical research, and for the awareness and confidence in
electronic-based technology to extend to medical practitioners. Finally, we
anticipate the need for regulatory approval of certain diagnostic tests.
- 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(TM) System 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 ultimately to 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(TM) 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 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 help 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.
10
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 microchip format may
provide a valuable tool for the high throughput screening of compounds. One such
application is the high throughput screening of drug candidates acting on
protein kinases. Protein kinases are particularly important in signal
transduction pathways and are thought to be key elements in many forms of
cancer. Nanogen's electronic, fluorescent assays are free of antibodies and have
the potential of improving the cost and quality of the screening process.
To advance our efforts in this area of drug discovery and optimization, we
entered into a research and development collaboration with Aventis in 1998. This
collaboration was focused on the development of novel electronic combinatorial
approaches toward drug screening and discovery and was concluded at the end of
2000. We are negotiating a potential new relationship with Aventis relating to
the research conducted and technology developed under this 1998 agreement. In
1999, we entered into an additional collaboration agreement with Aventis for two
additional projects. Nanogen and Aventis have met all of the objectives to date
for these two projects.
FORENSIC APPLICATIONS
STRs are the genetic sequences chosen by the U.S. government and various
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(TM) System 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. Our integrated "host substrate" or
"motherboard" array capability could serve to provide researchers with useful
new tools that permit them 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 have evaluated the use of this platform
technology to facilitate integration of different size components for the
development of new photonic or electronic devices.
COLLABORATIVE ALLIANCES
We have established collaborative alliances in the areas of drug discovery
and genomics as part of our strategy to expand the applications and accelerate
the commercialization of products derived from our technology. During 1999, we
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, Ltd.
In July 2000, we entered into an additional agreement with Hitachi, Ltd., Nissei
Sangyo Co. Ltd. and Hitachi Instruments Service Co. Ltd. of Japan (collectively,
"Hitachi") to develop, manufacture and distribute additional potential products
based on the parties' proprietary technologies, potentially including, among
other things, reduced-size instruments for genetic testing, integrated
amplification and point-of-care detection. We anticipate being directly involved
with marketing our first product line to the biomedical research and genomics
market. Additionally, we may distribute products in Japan and selected Asian
markets through the distribution arm of Hitachi, Nissei Sangyo Co., Ltd.
11
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. The term of this collaboration
agreement expired at the end of 2000. We are negotiating a potential new
relationship with Aventis relating to the research conducted and technology
developed under this 1998 agreement. In addition, in September 1999 we entered
into an additional collaboration agreement with Aventis that involves 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 any products resulting from these new projects,
while Aventis retains the right to use the technology for internal research and
development.
As part of our 1998 collaboration, the Company issued to Aventis a warrant
to purchase 120,238 shares of common stock exercisable through December 2003,
which was exercised by Aventis in October 2000 at an agreed-upon exercise price
of $6.17 per share. The Company has 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 at a 50 percent premium to the market
price on the date the milestone is achieved. These warrants will have five-year
maximum terms.
HITACHI
In January 2000, we executed an agreement with Hitachi, Ltd., effective as
of December 15, 1999, for the full-scale commercial manufacturing and
distribution of the NanoChip(TM) Molecular Biology Workstation in specified
research markets. Hitachi, Ltd.'s Instrument Group provides technology and
technical support to aid in the manufacturing scale-up of the NanoChip(TM)
Molecular Biology Workstation's components.
Under this agreement, Hitachi, Ltd. has the right to be the sole
distributor of Hitachi, Ltd. produced NanoChip(TM) Molecular Biology
Workstations in Japan. Hitachi, Ltd. also has the non-exclusive right to
distribute NanoChip(TM) Cartridges in Japan. We retained the right to
distribute, directly or through others, Hitachi, Ltd. produced NanoChip(TM)
Molecular Biology Workstations outside of Japan. In addition, we currently
develop and manufacture the NanoChip(TM) Cartridges for distribution worldwide.
Except for Hitachi, Ltd.'s exclusive distribution rights of Hitachi, Ltd.
produced Workstations in Japan, the agreement is non-exclusive and excludes
certain clinical markets. We also retain the right to form other manufacturing
and distribution agreements.
In July 2000, we executed a ten-year agreement with Hitachi, Ltd., Nissei
Sangyo Co. Ltd. and Hitachi Instruments Service Co. Ltd. of Japan (collectively,
"Hitachi") to develop, manufacture and distribute products based on the parties'
proprietary technologies, potentially including, among other things,
reduced-size instruments for genetic testing, integrated amplification and
point-of-care detection. The agreement provides that the parties will jointly
determine which projects to prioritize over the term of the agreement. The
agreement may be terminated before its expiration by either party, subject to
certain restrictions. Pursuant to the terms of the agreement, Hitachi and
Nanogen each may contribute up to $28.5 million in cash over the ten-year
period. In addition, Hitachi made an equity investment in Nanogen by purchasing
74,590 shares of Nanogen's common stock worth approximately $2.0 million
pursuant to a private sale by Nanogen based on a per share price of $26.813 (the
fair market value as of the signing date of the Hitachi agreement). The
agreement expands on the agreement executed by us and Hitachi in January 2000.
Hitachi has the right to be the exclusive distributor of collaboration products
in Japan and, based upon the attainment of minimum sales targets to be mutually
agreed upon, in other Asian countries. We retain the exclusive right to
distribute collaboration products outside of these countries. The agreement is
non-exclusive and excludes some clinical markets.
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.
12
In September 2000, we and Becton Dickinson modified the joint venture to
permit the partners the opportunity to commercialize certain of the
Partnership's technology and allow them to collaborate with third parties to
develop and commercialize certain products in the field of infectious diseases.
Pursuant to amendments to the Master Agreement, the General Partnership
Agreement and the Collaborative Research and Development and License Agreement,
the Partnership exclusively licensed other Partnership technology developed up
to that date to Becton Dickinson and Becton Dickinson exclusively sublicensed
the Partnership technology to Nanogen to commercialize products in the field of
infectious diseases. Becton Dickinson also agreed to non-exclusively license SDA
technology to Nanogen for its use and for sublicensing purposes in the field of
infectious diseases. Becton Dickinson also expanded the field of use for our SDA
license outside of the Partnership to not only include IN VITRO human genetic
testing and IN VITRO cancer diagnostics, but also IN VITRO testing of
environmental, agricultural and veterinary samples. Pursuant to the amendments,
Becton Dickinson paid us $300,000. We do not expect to receive any additional
funding from Becton Dickinson.
ELAN
In December 1997, we entered into an agreement with Elan Corporation, plc
("Elan") for a non-exclusive research and development agreement for the
development of genomics and gene expression research tools. We and Elan have not
agreed upon specific program objectives with respect to the nonexclusive
research and development program. In 1999 and 1998, revenues earned by us
pursuant to this agreement were approximately $568,000 and $929,000,
respectively. No revenue was recognized under the agreement during 2000. We do
not expect to receive any additional funding from Elan.
RESEARCH AND PRODUCT DEVELOPMENT
In the near term, Nanogen is working to develop its NanoChip(TM) System to
provide gene expression analysis capabilities, a key component in realizing the
potential of the post genomics era. Nanogen seeks to further develop the
NanoChip(TM) System, integrating new features and broadening the applications of
the currently marketed system, including enhancing chip design and capabilities
to simplify instrument design. Nanogen's scientists will investigate new
opportunities, while customers may create new assays by taking advantage of the
flexible format of the system.
We also intend to pursue new opportunities utilizing electronics beyond the
current microchip concept. Future technologies may include integration of sample
processing and DNA amplification. The NanoChip(TM) System may be designed to
provide analysis of other charged molecules and anitigen-antibody, enzyme
substrate, cell-receptor, and cell-separation techniques. The NanoChip(TM)
System eventually may also become a portable lab on a chip for use in the field,
away from the laboratory bench.
Nanogen may also continue to develop leading edge technologies such as
micro electro-mechanical systems ("MEMS"), micro-fluidics, miniaturized
capillary electrophoresis and the application of electronics to high throughput
screening.
One mechanism to fund and implement new technologies or applications is
through the government grant system. In 2000, Nanogen's scientists received
grants from the Space and Naval Warfare Systems Center San Diego to develop an
integrated electronics-based sample to answer technology and from the U.S. Army
to develop technology to identify biological warfare compounds if used in combat
against U.S. troops. The development of these new technologies represent
important elements in Nanogen's long-term platform development strategy.
PROPRIETARY TECHNOLOGY AND PATENTS
As of December 31, 2000, we have twenty issued U.S. patents, thirteen
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.
13
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.
We seek to protect our inventions through filing U.S. patents and foreign
counterpart applications in selected other countries. Because patent
applications in the U.S. are maintained in secrecy for at least eighteen months
after the applications are filed and since publication of discoveries in the
scientific or patent literature often lags 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 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.
In addition to the patent litigation with Motorola and MIT, and with
CombiMatrix and Dr. Montgomery described in Item 3 herein, other 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 U.S. Patent and Trademark
Office 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. We are currently in litigation concerning
trade secret issues against CombiMatrix and Dr. Montgomery as described in Item
3.
14
MANUFACTURING
In January 2000 we formed a collaboration with Hitachi for the manufacture
of our NanoChip(TM) Molecular Biology Workstation instruments. In July 2000, we
executed a ten-year agreement with Hitachi, Ltd., Nissei Sangyo Co. Ltd. and
Hitachi Instruments Service Co. Ltd. of Japan to develop, manufacture and
distribute products based on the parties' proprietary technologies. For the
manufacture of the NanoChip(TM) Cartridge, we perform many of the proprietary
assembly steps in-house. We believe our technology allows for large-scale
microchip production at a relatively low cost. We believe that the
implementation of 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.
SALES AND MARKETING
We began commercializing the NanoChip(TM) Molecular Biology Workstation
during the second quarter of 2000. We have built a commercial structure which
allows us to sell directly in certain markets, while selling through
distributors and partners in other markets. Our commercial organization includes
direct sales representatives and sales management, field support personnel and
marketing. We began selling our product directly to customers in the United
States, Canada and selected European countries such as Germany and the United
Kingdom. Hitachi's distribution company, Nissei Sangyo Co. Ltd. began
distributing our product in Japan during the second half of 2000. We expect to
augment our commercial selling process by adding distributor partners in other
countries. To support the commercial efforts in Europe, in August 2000 we
established Nanogen Europe B.V., a company with limited liability, in The
Netherlands. This wholly-owned subsidiary operates as our primary European sales
and marketing office. In San Diego, we are supporting 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 we. Moreover, competitors may
offer broader product lines and have greater name recognition than we, 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, that 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.
15
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 marketing or commercial sales in the U.S. of new
medical devices 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 Quality System Regulation, or 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 at least nine 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 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.
16
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 may become 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 potential future 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 Investigational Device Exemption, 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, should we develop food pathogen products, they 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.
EMPLOYEES
As of December 31, 2000, we had 175 full-time employees, of whom 39 hold
Ph.D. degrees and 25 hold other advanced degrees. Approximately 89 are involved
in research and development, 31 in operations, manufacturing and quality
assurance, 30 in sales and marketing, and 25 in finance, legal 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. We currently have only two
products for sale, our NanoChip(TM) Molecular Biology Workstation and our
NanoChip(TM) Cartridge. All of our other products are under development.
17
Our NanoChip(TM) System or our other 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 will require significant
enhancements to our basic technology platform. There can be no assurance that we
can successfully develop such enhancements.
LACK OF MARKET ACCEPTANCE OF OUR TECHNOLOGY WOULD HARM US.
We may not be able to develop commercially viable products. Neither the
products we have developed nor those we develop in the future may 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
- - sell, 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, internal
obstacles to customer approvals of purchases of our products and market
conditions in general.
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 future 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 a health care company, pharmaceutical
companies and a developer and manufactuer of instrumentation products. 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 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, Becton Dickinson, Elan and
Hitachi, Ltd. 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. During the year ended, December 31, 2000,
Becton Dickinson agreed to pay $300,000 related to amendments of existing
Partnership agreements. We do not expect to receive any additional funds from
Becton Dickinson. We have not agreed upon specific program objectives with
respect to our research and development agreement with Elan. We do not expect to
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.
18
We began selling our first two products in the second quarter of 2000, but
we did not sell significant quantities of our first products during fiscal 2000.
From our inception to December 31, 2000, we have incurred cumulative net losses
totaling approximately $90.9 million. Moreover, our negative cash flow and
losses from operations will continue to 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. The amount and timing of product revenue
recognition may depend on whether potential customers for the NanoChip(TM)
System choose to enter into title transfer or non-title transfer transactions.
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;
- - meeting regulatory requirements, including obtaining necessary regulatory
clearances or approvals;
- - filing, prosecuting, defending and enforcing patent claims and litigation;
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.
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 and other 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.
19
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 we. Moreover, these
competitors may offer broader product lines and have greater name recognition
than we 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 for
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 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.
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.
OUR PRODUCTS COULD INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
MAY SUBJECT US TO FUTURE LITIGATION AND CAUSE US TO BE UNABLE TO LICENSE
TECHNOLOGY FROM THIRD PARTIES.
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. Besides the patent
involved in litigation with Motorola, MIT and Genometrix described below, we are
aware of other 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.
There are many U.S. and foreign patents and patent applications held by
third parties in our areas of interest, and we believe that, besides our
litigation with Motorola, MIT and Genometrix described below, there may be
significant other litigation in the industry regarding patent and other
intellectual property rights. Additional 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
20
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), 400 different oligonucleotides
per cm(2) on a substrate, and for gene expression, more than 100 different
oligonucleotides at a density greater than about 60 different
oligonucleotides per 1 cm(2). In the event that we proceed with the
development of arrays with more than 400 groups of oligonucleotides, or for
gene expression, with more than 100 different oligonucleotides, we expect to
design our devices through, among other things, the selection of the physical
dimensions, methods of binding, selection of support materials and intended
uses of the device 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. or Isis Innovations (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 INVOLVED IN INTELLECTUAL PROPERTY LITIGATION THAT IS AND MAY CONTINUE TO
BE COSTLY, TIME-CONSUMING AND MAY IMPACT OUR COMPETITIVE POSITION.
In April 2000, we filed a complaint for declaratory judgment against
Motorola, Inc. ("Motorola"), Beckman Coulter, Inc. ("Beckman") and Massachusetts
Institute of Technology ("MIT") in the United States District Court for the
Southern District of California. Prior to the filing of the complaint, the
parties had been involved in licensing discussions concerning U.S. Patent No.
5,693,939 entitled "Optical and Electrical Methods and Apparatus For Molecule
Detection" (the "'939 patent") which was licensed by MIT to Beckman in 1993 and
to Genometrix, Inc. ("Genometrix") in 1994. Genometrix in turn granted its
sublicensing rights to Motorola in 1999. The inventions claimed in the `939
patent were made with United States government funding through a grant from the
Department of the Air Force. The complaint seeks, among other things, a
declaration that we are entitled to a license to the government funded `939
patent and that we are not required to obtain a license from both Motorola and
Beckman. Alternatively, the complaint seeks a declaratory judgment that the
claims of the `939 patent are invalid and not infringed by us.
In May 2000, we reached a settlement with Beckman and dismissed Beckman
from the lawsuit without prejudice. In connection with the settlement, we
secured a license to the `939 patent from Beckman.
The action continues against Motorola and MIT. Motorola filed a
counterclaim against us in May 2000, claiming infringement of the `939 patent
and seeking monetary damages and injunctive relief. Motorola's counterclaim
asserts that it has exclusive rights to certain claims in the `939 patent. In
October 2000, our motion for leave to amend the complaint to add Genometrix as a
defendant was granted. Fact discovery was substantially completed in early March
2001. The pretrial conference is currently scheduled for October 2001. No
assurance can be given that a license to the `939 patent will be available from
Motorola on commercially acceptable terms, or at all, or that we will prevail in
the lawsuit. We have expended, and will continue to expend considerable
financial resources and managerial efforts prosecuting the lawsuit and defending
against Motorola's counterclaim, and against Motorola's, MIT's and Genometrix's
affirmative defenses. We may not prevail in the action, which could have a
material adverse effect on us.
In November 2000, we filed a complaint against CombiMatrix Corp.
("CombiMatrix") and Dr. Donald Montgomery in the United States District Court
for the Southern District of California. Dr. Montgomery is a former Nanogen
employee now affiliated with CombiMatrix.
21
The Nanogen complaint alleges that the naming of Dr. Montgomery as the sole
inventor on U.S. Patent No. 6,093,302, entitled "Electrochemical Solid Phase
Synthesis" (the "'302 patent"), and assignment of the `302 patent to CombiMatrix
were incorrect and that the invention was made by Nanogen employees. The
Complaint also alleges that inventions disclosed in the patent were Nanogen
trade secrets and that CombiMatrix and Dr. Montgomery misappropriated these
trade secrets by their actions, including publishing those trade secrets in
patent applications. Nanogen's complaint, containing fourteen claims, seeks
correction of inventorship, assignment of rights in the patent to Nanogen, an
injunction preventing disclosure of trade secrets and damages for trade secret
misappropriation.
On December 15, 2000, CombiMatrix and Dr. Montgomery filed a motion to
dismiss Nanogen's complaint. On January 29, 2001, the motion was denied as to
all claims except a claim for conversion, as to which the motion was granted
without prejudice. We elected not to amend our complaint as to the conversion
claim. On March 9, 2001, CombiMatrix and Dr. Montgomery answered Nanogen's
complaint, asserted various affirmative defenses and filed a counterclaim for
breach of contract against Nanogen for unspecified damages allegedly arising
from the filing of the complaint at a time when CombiMatrix had announced its
intent to make an initial public offering of its shares. The counterclaim
asserts that Nanogen, by filing its complaint, breached a settlement agreement
entered into between Nanogen and Dr. Montgomery in 1995. No assurances can be
given that we will prevail in the lawsuit or that we can successfully defend
ourselves against the counterclaim. We may have to expend considerable financial
resources and managerial efforts prosecuting the lawsuit and defending against
Dr. Montgomery's and CombiMatrix's counterclaim. We may not prevail in the
action, which could have a material adverse effect on us.
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 potential future 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 test systems, kits, and IN VITRO reagents that are marketed for
human diagnostic use. Pursuant to the Federal Food, Drug, and Cosmetic Act, the
FDA regulates the preclinical and clinical testing, design, safety,
effectiveness, 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 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:
- - criminal prosecution, civil penalties, other administrative sanctions, or
judicially imposed sanctions such as injunctions;
- - recall or seizure of products;
- - total or partial suspension of production;
22
- - failure of the government to grant premarket clearance or premarket
approval for devices or withdrawal of marketing clearances or approvals
once granted.
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, including the California Department of Health Services.
WE DEPEND ON SUPPLIERS FOR MATERIALS WHICH COULD IMPAIR OUR ABILITY TO
MANUFACTURE OUR PRODUCTS.
Outside vendors provide key components and raw materials used by us and
Hitachi in the manufacture of our products. Although we believe that alternative
sources for these components and raw materials are available, any supply
interruption in a limited or sole source component or raw material would harm
our and Hitachi's ability to manufacture our products until a new source of
supply is identified and qualified. In addition, an uncorrected defect or
supplier's variation in a component or raw material, either unknown to us or
Hitachi or incompatible with our or Hitachi's manufacturing processes, could
harm our or Hitachi's ability to manufacture products. We or Hitachi may not be
able to find a sufficient alternative supplier in a reasonable time period, or
on commercially reasonable terms, if at all. If we or Hitachi fail to obtain a
supplier for the manufacture of components of our potential products, we may be
forced to curtail or cease operations.
WE MAY NOT BE ABLE TO MANUFACTURE PRODUCTS ON A COMMERCIAL SCALE.
We and Hitachi rely on subcontractors to manufacture the limited quantities
of microchips and other components we require for use by and sale to our
customers, as well as for internal and collaborative purposes.
Manufacturing, supply and quality control problems may arise as we or
Hitachi either alone, together or with subcontractors, attempt to scale up
manufacturing procedures. We or Hitachi may not be able to scale-up in a timely
manner or at a commercially reasonable cost. Problems could lead to delays or
pose a threat to the ultimate commercialization of our products and cause us to
fail.
We or Hitachi or any of our contract manufacturers could encounter
manufacturing difficulties, including:
- - the ability to scale up manufacturing capacity;
- - production yields;
- - quality control and assurance; or
- - shortages of components or qualified personnel.
Our manufacturing facilities and those of Hitachi and any other of our
contract manufacturers are or will be subject to periodic regulatory inspections
by the FDA and other federal, state and international regulatory agencies and
these facilities are or may become subject to QSR requirements of the FDA. If
we, Hitachi or our third-party manufacturers, fail to maintain facilities in
accordance with QSR regulations, other international quality standards or other
regulatory requirements then the manufacture process could be suspended or
terminated which would harm us.
ENERGY SHORTAGES MAY ADVERSELY IMPACT OUR OPERATIONS.
California is currently experiencing shortages of electrical power and
other energy sources. This condition has periodically resulted in rolling
brownouts, or the temporary and generally unannounced loss of the primary
electrical power source. Our laboratory facility in San Diego is powered by
electricity. Currently, we do not have secondary electrical power sources to
mitigate the impacts of temporary or longer-term electrical outages. It is not
anticipated that the power shortages will abate soon, and therefore, our
operating facilities may experience brown-outs, black-outs, or other
consequences of the shortage, and may be subject to usage restrictions or other
energy consumption regulations that could adversely impact or disrupt our
research and development, manufacturing and other activities.
23
THE INCREASE IN THE NUMBER OF OUR SALES AND MARKETING EMPLOYEES MAY NOT RESULT
IN INCREASES IN SALES OR PLACEMENTS OF THE NANOCHIP(TM) SYSTEM.
We increased the number of employees in our sales and marketing group from
three at December 31, 1999 to twenty-six at December 31, 2000. In addition, in
July 2000, we incorporated a subsidiary, Nanogen Europe B.V. in The Netherlands
as our European sales office. At December 31, 2000, this office employed four
European-based sales executives in the United Kingdom, Germany, The Netherlands
and Denmark.
Developing, training and monitoring this sales and marketing force has
required and will further require capital and time expenditures by Nanogen and
certain of its employees. The size of our sales and marketing force may not
result in increased sales or placements of the NanoChip(TM) System nor increased
product revenues associated with such sales or placements. Nanogen may be
required to increase or decrease the size of this sales and marketing force as
deemed necessary and such increases or decreases in staff will require
additional capital and time expenditures by Nanogen and its employees.
FAILURE TO EXPAND OUR INTERNATIONAL SALES AS WE INTEND WOULD REDUCE OUR ABILITY
TO BECOME PROFITABLE.
We expect that a portion of our sales will be made outside the United
States. A successful international effort will require us to develop
relationships with international customers and partners. We may not be able to
identify, attract or retain suitable international customers and partners. As a
result, we may be unsuccessful in our international expansion efforts.
Furthermore, expansion into international markets will require us to continue to
establish and expand foreign sales and marketing efforts, hire additional sales
and marketing personnel and maintain good relations with our foreign customers
and partners.
International operations involve a number of risks not typically present in
domestic operations, including:
- - currency fluctuation risks;
- - changes in regulatory requirements;
- - costs and risks of deploying the NanoChip(TM)System in foreign countries;
- - licenses, tariffs and other trade barriers;
- - political and economic instability;
- - difficulties in staffing and managing foreign offices;
- - potentially adverse tax consequences; and
- - the burden and significant expense of complying with a wide variety of
complex foreign laws and treaties.
Our international sales and marketing efforts will also be subject to the
risks associated with the imposition of legislation and regulations relating to
the import or export of high technology products. We cannot predict whether
tariffs or restrictions upon the importation or exportation of our products will
be implemented by the United States or other countries.
We may lose money when we exchange foreign currency received from
international sales into U.S. dollars. A portion of our business is expected to
be conducted in currencies other than the U.S. dollar. We recognize foreign
currency gains or losses arising from our operations in the period incurred. As
a result, currency fluctuations between the U.S. dollar and the currencies in
which we do business will cause foreign currency translation gains and losses.
We cannot predict the effects of exchange rate fluctuations upon our future
operating results because of the number of currencies involved, the variability
of currency exposure and the potential volatility of currency exchange rates. We
do not currently engage in foreign exchange hedging transactions to manage our
foreign currency exposure.
24
IF WE FAIL TO MANAGE OUR GROWTH, OUR BUSINESS COULD BE IMPAIRED.
We expect to continue to experience growth in the number of our employees
and the scope of our operating and financial systems. This growth has resulted
in an increase in responsibilities for both existing and new management
personnel. Our ability to manage growth effectively will require us to continue
to implement and improve our operational, financial and management information
systems and to recruit, train, motivate and manage our employees. We may not be
able to manage our growth and expansion, which would impair our business.
WE MAY HAVE SIGNIFICANT PRODUCT LIABILITY EXPOSURE.
We face an inherent business risk of exposure to product liability and
other claims in the event that our technologies or products are alleged to have
caused harm. These risks are inherent in the testing, manufacturing and
marketing of our products. We may not be able to obtain insurance for such
potential liability on acceptable terms with adequate coverage, or at reasonable
costs. Any potential product liability claims could exceed the amount of our
insurance coverage or may be excluded from coverage under the terms of the
policy. Our insurance, once obtained, may not be renewed at a cost and level of
coverage comparable to that then in effect.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, WE MAY NOT BE ABLE TO PURSUE COLLABORATIONS OR DEVELOP OUR OWN
PRODUCTS.
We are highly dependent on the principal members of our scientific,
manufacturing, marketing and management personnel, the loss of whose services
might significantly delay or prevent the achievement of our objectives. We face
competition from other companies, academic institutions, government entities and
other organizations in attracting and retaining personnel.
HEALTH CARE REFORM AND RESTRICTIONS ON REIMBURSEMENT MAY LIMIT OUR RETURNS ON
POTENTIAL PRODUCTS.
Our ability to earn sufficient returns on our products will depend in part
on the extent to which reimbursement for our products and related treatments
will be available from:
- - government health administration authorities;
- - private health coverage insurers;
- - managed care organizations; and
- - other organizations.
If appropriate reimbursement cannot be obtained, we could be prevented from
successfully commercializing our potential products.
There are efforts by governmental and third party payors to contain or
reduce the costs of health care through various means. We expect that there will
continue to be a number of legislative proposals to implement government
controls. The announcement of proposals or reforms could impair our ability to
raise capital. The adoption of proposals or reforms could impair our business.
Additionally, third party payors are increasingly challenging the price of
medical products and services. If purchasers or users of our products are not
able to obtain adequate reimbursement for the cost of using our products, they
may forego or reduce their use. Significant uncertainty exists as to the
reimbursement status of newly approved health care products, and whether
adequate third party coverage will be available.
IF ETHICAL AND OTHER CONCERNS SURROUNDING THE USE OF GENETIC INFORMATION BECOME
WIDESPREAD, WE MAY HAVE LESS DEMAND FOR OUR PRODUCTS.
25
Genetic testing has raised ethical issues regarding confidentiality and the
appropriate uses of the resulting information. For these reasons, governmental
authorities may call for limits on or regulation of the use of genetic testing
or prohibit testing for genetic predisposition to certain conditions,
particularly for those that have no known cure. Any of these scenarios could
reduce the potential markets for our products, which could seriously harm our
business, financial condition and results of operations.
WE USE HAZARDOUS MATERIALS IN OUR BUSINESS. ANY CLAIMS RELATING TO IMPROPER
HANDLING, STORAGE OR DISPOSAL OF THESE MATERIALS COULD BE TIME CONSUMING AND
COSTLY.
Our research and development processes involve the controlled storage, use
and disposal of hazardous materials including biological hazardous materials and
radioactive compounds. We are subject to federal, state and local regulations
governing the use, manufacture, storage, handling and disposal of materials and
waste products. Although we believe that our safety procedures for handling and
disposing of these hazardous materials comply with the standards prescribed by
law and regulation, the risk of accidental contamination or injury from
hazardous materials cannot be completely eliminated. In the event of an
accident, we could be held liable for any damages that result, and any liability
could exceed the limits or fall outside the coverage of our insurance. We may
not be able to maintain insurance on acceptable terms, or at all. We could be
required to incur significant costs to comply with current or future
environmental laws and regulations.
OUR STOCK PRICE COULD CONTINUE TO BE HIGHLY VOLATILE AND OUR STOCKHOLDERS MAY
NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THE PRICE THEY PAID FOR THEM.
The market price of our common stock, like that of many other life sciences
companies, has been highly volatile and is likely to continue to be highly
volatile. The following factors, among others, could have a significant impact
on the market price of our common stock:
- - the results of our premarket studies and clinical trials or those of our
collaborators or competitors or for DNA testing in general;
- - evidence of the safety or efficacy of our potential products or the
products of our competitors;
- - the announcement by us or our competitors of technological innovations or
new products;
- - the announcement by us of acquisitions by customers of our
NanoChip(TM)System or our other products;
- - announcements or developments relating to our litigation against Motorola,
MIT and Genometrix and to our litigation against Combimatrix and Dr.
Montgomery;
- - developments concerning our patents or other proprietary rights or those of
our competitors, including other litigation or patent office proceedings;
- - loss of key personnel or the increase or decrease in size of our sales and
marketing staff;
- - governmental regulatory actions or the failure to gain necessary clearances
or approvals;
- - changes or announcements in reimbursement policies;
- - developments with our collaborators;
- - changes in or announcements relating to acquisition programs for our
products, including the expiration or continuation of our development site
agreements;
- - period-to-period fluctuations in sales and our operating results;
- - market conditions for life science stocks in general; and
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- - changes in estimates of our performance by securities analysts.
OUR ANTI-TAKEOVER PROVISIONS COULD DISCOURAGE POTENTIAL TAKEOVER ATTEMPTS AND
MAKE ATTEMPTS BY STOCKHOLDERS TO CHANGE MANAGEMENT MORE DIFFICULT.
The approval of two-thirds of our voting stock is required to approve some
transactions and to take some stockholder actions, including the calling of a
special meeting of stockholders and the amendment of any of the anti-takeover
provisions contained in our certificate of incorporation. Further, pursuant to
the terms of our stockholder rights plan adopted in November 1998, as amended,
we have distributed a dividend of one right for each outstanding share of common
stock. These rights will cause substantial dilution to the ownership of a person
or group that attempts to acquire us on terms not approved by our board of
directors and may have the effect of deterring hostile takeover attempts.
IF WE MAKE ANY ACQUISITIONS, WE WILL INCUR A VARIETY OF COSTS AND MAY NEVER
REALIZE THE ANTICIPATED BENEFITS.
If appropriate opportunities become available, we may attempt to acquire
businesses, technologies, services or products that we believe are a strategic
fit with our business. We currently have no commitments or agreements with
respect to any material acquisitions. If we do undertake any transaction of this
sort, the process of integrating an acquired business, technology, service or
product may result in operating difficulties and expenditures and may absorb
significant management attention that would otherwise be available for ongoing
development of our business. Moreover, we may never realize the anticipated
benefits of any acquisition. Future acquisitions could result in potentially
dilutive issuances of equity securities, the incurrence of debt, contingent
liabilities and/or amortization expenses related to goodwill and other
intangible assets, which could adversely affect our results of operations and
financial condition.
ITEM 2. PROPERTIES
We currently lease an approximately 45,000 square foot facility 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
laborator