Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2001.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from to
Commission File Number:
0-30365
-----------------
Paradigm Genetics, Inc.
(Exact name of registrant as specified in its charter)
Delaware 56-2047837
(State or other (I.R.S. Employer
jurisdiction of (Identification No.)
incorporation or
organization)
108 Alexander Drive, Research Triangle Park, North Carolina 27709
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (919) 425-3000
Former name, former address, and former year, if changed since last report: Not
applicable
SECURITIES REGISTERED TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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 registrant's voting stock, held by
non-affiliates of the registrant (based upon the closing sale price on the
Nasdaq National Market on February 28, 2002) was approximately $24,773,429.
Exclusion of shares held by any person should not be construed to indicate that
such person is an affiliate of the registrant.
As of February 28, 2002, there were 31,963,532 shares of common stock, $.01
per share par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in Part III of this Form 10-K is incorporated
by reference from the registrant's proxy statement, to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the registrant's Annual Meeting of Stockholders to be held on May
17, 2002.
================================================================================
PARADIGM GENETICS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001
-----------------
Table of Contents
Page
----
PART I
Item 1. Business............................................................................. 3
Item 2. Properties........................................................................... 19
Item 3. Legal Proceedings.................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders.................................. 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 20
Item 6. Selected Financial Data.............................................................. 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 23
Item 8. Financial Statements and Supplementary Data.......................................... 36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 36
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 37
Item 11. Executive Compensation............................................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 37
Item 13. Certain Relationships and Related Transactions....................................... 37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................... 38
Index to Financial Statements........................................................ F-1
2
PART 1
ITEM 1. BUSINESS
BUSINESS
Overview
In September 1997, we founded Paradigm Genetics as an integrated life
sciences company developing novel technologies to speed the discovery of new
products for the advancement of human health and agriculture. We developed
technology to rapidly determine the function of genes in plants and fungi and
we are using this information to develop products and services in our target
markets either in collaboration with commercial partners or on our own. To
industrialize this process we developed a high throughput platform, known as
the GeneFunction Factory(TM). We completed this platform in early 2000 and
today we have analyzed thousands of genes in our model systems. Our rate of
discovery of plant and fungal gene function far exceeds that of other
approaches and we believe that this will not only place us in a strong
intellectual property position but will also enable us and our commercial
partners to accelerate the development of novel products.
As part of our integrated discovery approach, we have developed a
proprietary biochemical profiling platform designed to allow us to characterize
essentially all of the small molecules, or metabolites, in cells, tissues and
fluids of any organism. The technology surrounding this process is known as
metabolomics. This technology has been an important part of our GeneFunction
Factory(TM) since 1999. More recently, we began adapting this technology for
use with human cells, tissues and fluids, and we believe that this platform,
which we call MetaVantage(TM), will enable us to improve drug discovery and
development by significantly improving the validation process of new targets
and the selection of new lead compounds. Human metabolomics is the global
analysis of all classes of biochemicals, also known as the metabolome, in a
human being. MetaVantage(TM) elucidates the biochemical profile of a cell,
tissue, or fluid, and integrates this information with data from other genomics
analyses using a proprietary comprehensive informatics system. We believe that,
by globally investigating biochemistry in this way, we can learn much more than
by studying just genes or proteins and that we will be able to move beyond
traditional genomic technologies to reveal the next level of cellular
information. This is an important technology because biochemistry forms the
basis of all physiology. We believe that we are a pioneer and a leader in the
field of metabolomics.
Our GeneFunction Factory(TM) and MetaVantage(TM) systems generate many
terabytes of data. In order to integrate these data and elucidate information
that we and our commercial partners can use to develop new products, we have
developed a sophisticated data integration and analysis system called
FunctionFinder(TM) and are in the process of creating a data integration and
visualization system for our MetaVantage(TM) platform called MetaTrace(TM). We
use FunctionFinder(TM) to infer the function of genes in our plant and fungal
model systems and we use MetaVantage(TM) to understand the relationship between
biochemical profiles, biochemical pathways and target genes in human beings.
Based on the information we are generating through our proprietary systems, we
established major commercial partnerships in the areas of agriculture and
nutrition in 1998 and 1999. Additionally, in 2001, we announced plans to build
a pharmaceutical drug discovery and development platform, based around our
expertise in metabolomics.
Human Health
We are developing a proprietary metabolomics platform called
MetaVantage(TM), which will generate important knowledge about human
metabolism. We believe that we will be able to use MetaVantage(TM) to
accelerate drug discovery and development for partners and ourselves by
improving the study of drug targets, lead compounds, and predictive medicines.
We believe that metabolites are a more proximal determinant of cellular
behavior than genes or proteins and, therefore, can provide both complementary
and better information than simply analyzing genes and proteins. Furthermore,
because there are far fewer metabolites than there are genes or proteins, we
believe that metabolites are more efficient to study.
3
The process of discovering and developing new pharmaceutical drugs has
become increasingly expensive and challenging. According to the Tufts Center
for the Study of Drug Development, the cost of developing a new drug and
bringing it to market, including failures, now exceeds $800 million in the
United States, and the length of time from candidate discovery to approval has
increased from an average of eight years in the 1960s to over 14 years today.
The toxic adverse side-effects from drugs result in more than two million
hospitalizations each year and there are more then 100,000 deaths annually from
unintended drug complications making this the fifth leading cause of death in
the United States. Currently, on average, more than 10,000 lead compounds must
be tested in pre-clinical development for each marketed drug that is developed
in order to overcome attrition due to inadequate safety or efficacy.
Existing pharmaceutical drugs interact with less than 500 biological targets
out of an estimated 10,000 potential targets. This means that the majority of
potential drug targets currently remain undiscovered. While genomic
technologies have vastly increased the pace of discovery for new potential drug
targets, the pharmaceutical industry has limited capacity to study and exploit
them. A key component of applying genomics tools to drug discovery and
development is the collection of functional information on how genes and gene
products impact cells, tissues, organs and their associated disease states.
Technologies that profile gene and protein expression patterns have seen
widespread use for adding value to current biological information. However,
correlation of results from these two technologies can be difficult and this
has limited researchers' ability to impact the challenges faced in drug
discovery.
We believe that MetaVantage(TM), our proprietary human metabolomics
platform, will have the potential to lower the cost of drug discovery, decrease
the time to market for new drugs, lower the incidence of adverse toxic side
effects and complement other genomics tools to help researchers better
understand the link between cellular or biochemical function and pharmaceutical
drugs and disease response.
Metabolomics is a powerful new science in drug research and development.
While the genome-wide analysis of cells and tissues at the DNA and protein
level yields important clues about disease states, biochemicals, which are a
key component of cellular function, largely have been overlooked by researchers
as part of their drug discovery efforts. Genes code for proteins, which in turn
function to alter biochemicals, and biochemicals determine all cellular
physiology. Therefore understanding what changes take place in biochemicals
gives researchers valuable information about the function of genes and proteins
in disease and drug response. These biochemicals, or metabolites, comprise the
human metabolome, and the human metabolome provides the next level of analysis
in functional biology, following the genome, transcriptome and proteome. Thus,
metabolomics, which is the science of determining the biochemical profile of a
cell, tissue, or fluid, provides researchers with a more complete understanding
of whole systems biology.
4
[GRAPHIC]
The metabolome is the next level of information after the proteome.
Metabolomics is the study of the human metabolome.
Metabolomics is the systematic analysis of all non-peptide small molecules,
such as vitamins, sugars, hormones, fatty acids, and other metabolites, and is
distinct from traditional analyses which target only individual metabolites or
pathways. We believe that, once determined, an organism's biochemical profile
will prove to be a more proximal indicator of cellular physiology than a
profile of its proteome or genome and will, therefore, provide valuable data in
drug discovery and development research.
While humans are thought to have between 30,000 and 40,000 genes, as many as
100,000 gene transcripts, and potentially more than 1,000,000 proteins, we
believe that all human cells are comprised of less than 3,000 metabolites.
Accordingly, we believe that the study of these metabolites through
metabolomics, will provide a more targeted approach to understanding functional
biology than either gene expression analysis or proteomics and also promises to
be highly complementary to these other technologies.
We have shown biochemical profiling data to be a reliable indicator and
predictor of the physiological state of a cell or organism, ultimately
consistent with associated gene expression data. Furthermore, biochemical
profiling of different physiological states may in fact be more predictive than
transcriptomics and proteomics approaches because changes in metabolite
concentrations reflect not only alterations at the gene expression and protein
levels, but also reflect the complex control mechanisms involved in processing
gene transcripts and polypeptides that ultimately dictate physiological
activity. By taking a snapshot of the small molecules present in a cell or
tissue, we believe that metabolomics will provide pharmaceutical researchers
with data sets complementary and additive to existing studies of transcripts,
proteins and phenotypes. In addition, metabolomics has the advantage of being a
relatively straightforward and highly quantitative technology, compared to gene
expression analysis or proteomics. Furthermore, it is currently technically
feasible to identify a significant percentage of the small molecules present in
a sample, while it is difficult to identify a similar percentage of proteins
present in a sample.
With our suite of bioinformatics tools and scientific expertise, we are
using metabolomics to understand the physiological state of a cell, tissue, or
fluid, based on the small molecules in that cell, tissue, or fluid, and their
5
relationship to biochemical pathways and global gene expression. We believe
that this will allow us to better understand the bases of health and disease,
the mechanisms of action, potential toxicity, nutritional states, and the
genetic, environmental and chemical effects of pharmaceutical drugs.
MetaVantage(TM)--Our proprietary human metabolomics technology
We believe we are one of the first companies to have developed an
industrialized approach for capturing the value of metabolomics in functional
genomics and pharmaceutical research. We are developing a proprietary
metabolomics platform called MetaVantage(TM) for the study of human cells,
tissues, and fluids, which we believe will provide a set of profiling
technologies to enable researchers to quickly understand changes in a
physiological state of a cell or tissue in response to internal or external
stimuli. We use sophisticated parallel mass spectrometry to quantify
essentially all of the small molecules, less than 1,000 daltons, in a sample.
We also globally analyze lipids, proteins and carbohydrates. Using this
platform, we identify spectra of biologically relevant molecules, including
polar and non-polar metabolites such as fats, alcohols, nucleotides, simple
sugars, fatty acids, organic acids, amino acids and metal ions.
We began developing our agricultural metabolomics platform in 1999 and we
have validated it both by delivering plant metabolomic data to our commercial
partners and by using plant and fungal data in our internal development
programs. We are leveraging the expertise and experience gained from the
development of our agricultural metabolomics platform to help us develop our
MetaVantage(TM) platform. We have formed key technology partnerships to create
essential software tools and integrate metabolomic data with genome, pathway
and gene expression databases, as well as to maintain a leading position in the
implementation of the most advanced mass spectrometry equipment. Additionally,
we have partnered with leading academic institutions to provide access to
MetaVantage(TM) in basic research, garner cutting-edge knowledge on further
applications and obtain rights to potential drug targets and diagnostics.
We are developing MetaVantage(TM) as a turn-key platform that will include
the instrumentation, computational tools and industrial processes necessary to
generate high throughput metabolomics data. The platform will be composed of
the following four processes, across which we believe we have extensive
intellectual property and proprietary positions:
1. Sample Preparation. Sample preparation encompasses proprietary
procedures covering the preparation, storage, extraction, derivitization,
quality control and tracking of cells and fluids. We subject all sample
preparations to rigorous chemical stability analysis involving multiple
standards and randomized controls.
2. Analytics. Our platform is high-throughput and scalable, capable of
analyzing thousands of samples per week. Our platform employs separation
techniques including positive- and negative-ion separation by liquid
chromatography/time-of-flight mass spectrometry (LC/MS), non-polar compound
analysis with gas chromatography/time-of-flight mass spectrometry (GC/MS),
and elemental analysis with inductively coupled plasma/mass spectrometry
(ICP/MS). We have automated much of the process based in part on a
proprietary laboratory information management system (LIMS) and robotics to
enhance throughput and reduce variability. In 2001, we formed a strategic
alliance with Thermo Finnigan, a business unit of Thermo Electron
Corporation, to design and develop the next generation of
chromatography/mass spectrometry systems, and we will have exclusive
pre-commercial access to the new instruments and systems in the field of
metabolomics.
3. Informatics. Our MetaVantage(TM) platform generates several gigabytes
of raw data every day. We use proprietary software systems that will enable
us to reduce, refine, store and integrate these data with gene expression
data, proteomics data and clinical data. Our systems will allow us to
integrate large data streams from disparate sources into coherent data sets
that will represent the underlying biological relationships in a cell or
tissue. MetaVantage(TM) also catalogues all data that we are able to
capture, regardless of whether the identification of a peak can be
determined, and we retain this information for use as a part of the
signature profile for that sample.
6
4. Pathway Linkage. In 2000, we formed a strategic alliance with LION
Biosciences AG to develop a metabolomics analysis software system and
database so that we could visualize and analyze the data from our
MetaVantage(TM) platform. Once completed, we believe this system, called
MetaTrace(TM), will include computational tools to annotate and visualize
biochemical and gene expression profiling data and allow us to directly
compare control and experimental samples so that we can rapidly identify
'signature' metabolites. We believe these signature metabolites will link
differences in biochemical profiles to biochemical pathways, which will
enable us to identify target genes or gene products such as enzymes.
Market Opportunities in drug discovery and drug development
We believe that our MetaVantage(TM) metabolomics technology is one of the
first of its kind and we will seek to leverage this platform to accelerate drug
discovery and development for ourselves and our partners, and improve the study
of drug targets, lead compounds and predictive medicines. We are seeking to use
MetaVantage(TM) to identify, validate, and prioritize targets for drug
discovery. We plan to do this by comparing the biochemical profiles of diseased
and normal tissues and identifying the biochemical pathways that are perturbed
during disease. We believe that the identification of perturbed pathways can
greatly facilitate the identification of novel proteins as potential drug
targets, validate suspected drug targets, and permit prioritization of targets
based on their role in the mechanism of disease. In February 2002, we entered
into a master collaborative research agreement with Duke University Medical
Center to use our MetaVantage(TM) platform to help identify and validate novel
drug targets for drug discovery as well as attempt to discover new biomarkers
for use in predictive medicines. Our first area of focus under this
collaborative research agreement is in cardio vascular disease.
Also, we are seeking to use MetaVantage(TM) to enhance lead compound
selection, optimization and design. We plan to do this by comparing diseased or
normal tissues to the same tissue following treatment with a chemical compound.
We will then analyze this data with MetaTrace(TM) to see whether the chemical
compound acts specifically in the pathways involved in disease, and also to see
whether the chemical compound perturbs other pathways, indicating a toxicity
risk. We believe this will allow us to prioritize lead compounds, optimize lead
compound design and provide guidance in toxicity screening to optimize lead
safety. In addition, if the mechanism of action of an effective chemical
compound is unknown, we believe we can use MetaVantage(TM) data to support
reverse pharmacology approaches and the determination of how that compound
affects the physiology of a cell. This is also known as chemical genetics. We
believe that this can lead to new insights into drug design, as well as new
target identification. In February 2002, we entered into a research and
development agreement with VDDI Pharmaceuticals to use our MetaVantage(TM)
platform to help prioritize lead compounds targeting the bacterial enzyme
nicotinamide adenine dinucleotide synthetase. This enzyme is essential in many
biological processes in gram-positive bacteria, such as anthrax.
We believe that we will be able to use MetaVantage(TM) to impact efficacy
and safety in drug development, drug rescue and clinical diagnostics. We will
seek to do this by correlating patient-specific biochemical profiling
signatures to response patterns in clinical trials. We believe that this will
assist in the stratification and streamlining of clinical trials. We also
believe we can use MetaVantage(TM) to identify toxicity biomarkers to create
assays with which we may be able to screen patients for safety. This could be
of value in keeping profitable drugs on the market or rescuing previously
withdrawn chemical compounds. We believe that these biomarkers may be used as
diagnostics to yield insights into disease management in individual patients.
Agriculture
In Agriculture, our goal is to comprehensively understand the function of
genes in plants and fungi and then develop new and improved agricultural
products, either on our own or in conjunction with our commercial partners,
around those genes that have commercially relevant characteristics.
Historically this process has been slow, labor intensive and expensive and
today scientists still do not fully understand the function of the vast
majority of these genes. To solve this problem, we have developed an
industrialized approach to determining the function of genes in plants and
fungi. Our industrial scale GeneFunction Factory(TM) is an integrated, rapid
laboratory through which we discover and modify genes in plants and microbes,
understand the consequences of the modifications and reliably determine the
function of those genes. We process the data produced by this
7
platform in our FunctionFinder(TM) bioinformatics analysis system and then use
this information in the development of new products.
We have established commercial partnerships with Bayer and Monsanto and have
strategic alliances with Celera Genomics, Agilent Technologies and Lion
Bioscience. The Bayer partnership is focused on the development of new
herbicides while the Monsanto partnership is focused on the development of new
crop traits for more efficient farming and better foods. In 2001, we acquired
Celera's AgGen plant genomics and genotyping business. Also in 2001, we signed
a multi-year strategic alliance with Agilent Technologies to develop and market
the first whole Arabidopsis genome microarray for use in gene expression
studies. In 2000, we entered into a strategic alliance with Lion Bioscience to
develop and market a database and analysis system containing plant and
microbial biochemical profile data. In 2001, this alliance was amended to
incorporate human biochemical profile data.
Industrialized Discovery Platform
Our assembly-line approach to gene function discovery automates the
measurement of thousands of physical and chemical characteristics of a selected
organism at different times in the organism's life cycle. We begin the process
by altering DNA fragments to produce a gene variant. In plants, we produce two
types of variants: knock-out variants, in which we have modified the selected
gene to under-produce its encoded protein, and over-expression variants, in
which we have modified the selected gene to over-produce its protein. In fungi,
we use proprietary technology to activate or inactivate genes using specialized
DNA fragments that we can insert into genes to modify the gene. We then
introduce the modified gene into the fungal nucleus where it efficiently and
precisely replaces the normal gene. Using these proprietary technologies, we
have modified thousands of plant and fungal genes. We then collect three types
of data for each variant using gene expression profiling, biochemical profiling
and phenotype profiling.
Gene Expression Profiling. Gene expression profiling provides a snapshot of
the genes expressed in an organism at a given time. By comparing gene
expression profiles of a variant organism to a normal organism, we gather
information about the function of the modified gene as well as the effect of
that gene on the expression of other normal genes. By determining how a
modified gene affects normal genes, we gain insight into biochemical pathways
of an organism.
Biochemical Profiling. We use our metabolomics platform to provide a
snapshot of the chemicals, including vitamins, minerals and other biochemicals,
in cells, tissues, and organisms, at a given time. In agriculture, our
metabolomics platform uses mass spectroscopy, which separates molecules by
electrical charge and size, and chromatography, which separates molecules by
size and chemical properties. We analyze these biochemical data using our
proprietary platform.
Phenotype Profiling. Phenotype profiling is the measurement of physical and
chemical characteristics of an organism at one or more times during its life
cycle. We currently measure approximately 140 different characteristics of our
target and model organisms. These include flowering time, plant height, plant
weight, seed set, seed size, leaf size, root density, nutrient utilization and
appearance. We take measurements under standard conditions as well as under
various stress conditions. These different measurements, when taken at
specified times, produce a phenotype profile for a variant that we can compare
to a phenotype profile for a normal organism to help understand the function of
the modified gene. We have developed a series of proprietary methods for
obtaining phenotype profiles for organisms.
Our FunctionFinder(TM) Bioinformatics System
These processes, which are managed by our proprietary Laboratory Information
Management System, or LIMS, generate several terabytes of diverse data. The
LIMS uses barcodes and other automated data collection devices to track samples
and store data which are then fed into our proprietary FunctionFinder(TM)
bioinformatics system for analysis and interrogation. The challenge with
managing the vast amounts of data that we collect and store for so many genes
is being able to retrieve and make sense of relevant information to determine
the function of genes. FunctionFinder(TM) deals with this issue by
intelligently storing, retrieving, analyzing and mining data to create valuable
knowledge about gene function.
8
Our Model and Target Organisms
We have carefully selected the organisms we study in our GeneFunction
Factory(TM). Some researchers use yeast and the bacterium Escherichia coli as
general model organisms, and others use the mouse as a model for humans. Yeast
and bacteria are efficient model organisms, but are such simple organisms that
extrapolating information about gene function to more complex target organisms
is often not meaningful. Mice are more useful for annotating genes of higher
organisms, but are expensive to maintain and study and are not conducive to
high throughput analysis. We have prioritized organisms for our Gene Function
Factory(TM) that are economical and efficient to study, have short life cycles
and have direct applicability to our target markets. The organisms on which we
have initially focused are a plant known as Arabidopsis and three fungi known
as Magnaporthe grisea, Mycosphaerella graminicola and Botrytis cinecea.
Arabidopsis is a useful model organism because it is a dicot and, as such,
it is similar to soybeans, cotton, vegetables and oil seed crops. It is an
efficient model organism because it has a short life cycle of seven weeks and a
small genome. Of the approximately 289 known human disease genes, nearly 50%
are found in Arabidopsis making it an important model organism for human
healthcare as well as agricultural applications. Although the Arabidopsis
genome has been sequenced and catalogued, we estimate that excluding the genes
that we have analyzed using our GeneFunction Factory(TM) less than 10% of the
Arabidopsis genome, which we believe has approximately 14,000 unique genes, has
been experimentally investigated for function by others. To date, we have
analyzed over 6,500 of these genes for potential herbicide targets and have
analyzed over 1,700 genes for agricultural output traits.
Magnaporthe grisea, Mycosphaerella graminicola and Botrytis cinerea are
three fungi that cause diseases in cereals, rice and broadleaf plants. Each of
these organisms has a genome with a total of between 8,000 and 10,000 genes. To
date we have analyzed the vast majority of these genes for function and have
identified over 30 targets for potential agricultural fungicides or human
anti-fungal drugs. In 2001, we developed assays for these targets, screened
those assays against a library of chemical compounds and developed a list of
hit pre-lead chemicals.
Our Commercial Partnerships
We have established important commercial partnerships with Bayer, in the
area of chemical herbicides, and Monsanto, in the area of crop output traits
and nutrition.
In September 1998, we entered into a commercial partnership with Bayer for
the development of new chemical herbicides. Under the terms of the commercial
partnership, we have agreed to use our GeneFunction Factory(TM) to identify
Arabidopsis genes that may be targets for herbicide discovery. We are providing
exclusively to Bayer assays based on these targets for use in high throughput
screening for herbicides, as well as access to customized Arabidopsis-based
releases of FunctionFinder(TM) for use in herbicide discovery. The commercial
partnership had an initial term of three years, ending in September 2001. In
June 2001, Bayer extended the term of this agreement for an additional three
years, ending in September 2004. Bayer also has the option to extend the
agreement for two additional years, through September 2006. The commercial
partnership provides that we are entitled to committed research funds,
additional fees based on the number of assays we deliver and our success in
delivering customized releases of FunctionFinder(TM), and milestone and royalty
payments for any products that might emerge from the commercial partnership.
Under the terms of the commercial partnership, Bayer is obligated to pay us a
total of approximately $24.3 million in committed funding and as much as an
additional $21.4 million in performance fees, milestone payments and payments
made in connection with the exercise of options to extend the commercial
partnership. As of December 31, 2001, we had received approximately $16.7
million of this funding from Bayer pursuant to the commercial partnership. Of
this, approximately $12.7 million relates to committed funding and
approximately $4.0 million relates to performance fees and milestone payments.
We will also earn sales royalties and product milestones in the event that our
commercial partnership with Bayer yields commercial products. We have achieved
sixteen milestones in our
9
commercial partnership with Bayer. These milestones include the delivery of
fourteen assays for high throughput screening and the delivery of the first and
second releases of a customized FunctionFinder(TM) bioinformatics system for
discovery of novel herbicide targets. To date we have completed the full
analysis of approximately 6,500, out of a total of approximately 14,000, unique
Arabidopsis genes as part of our commercial partnership with Bayer.
In November 1999, we entered into a commercial partnership with Monsanto to
provide certain Arabidopsis-based gene function data for the development of
crop inputs and outputs and nutrition. Under the terms of this commercial
partnership, Monsanto is providing us with thousands of genes from Arabidopsis
and other organisms. We are performing a functional analysis of such genes for
Monsanto using our GeneFunction Factory(TM). Monsanto will either own or have
exclusive licenses to certain patents that result from this project. The
commercial partnership has an initial term of six years from the commencement
of work in February 2000 and ending in January 2006, unless Monsanto terminates
it at an earlier date because we do not achieve specific milestones. Monsanto
also has the option to extend the commercial partnership for up to two years
and nine months. Monsanto may expand the commercial partnership by increasing
the number of genes that we are to analyze in Arabidopsis for additional
research and possible milestone payments. The commercial partnership provides
that we are entitled to committed research funds, additional fees based on the
number of genes analyzed and royalty payments for any products that might
emerge from the commercial partnership. Under the terms of the commercial
partnership, Monsanto is obligated to pay us approximately $41.5 million in
committed funding and as much as an additional $88.5 million in performance
fees, milestone payments and payments made in connection with the exercise of
options to extend the commercial partnership. As of December 31, 2001, we had
received approximately $24.9 million of this funding from Monsanto pursuant to
the commercial partnership. Of this, approximately $20.2 million relates to
committed funding and approximately $4.7 million relates to performance fees
and milestone payments. We will also earn sales royalties and product
milestones in the event that our commercial partnership with Monsanto yields
commercial products. To date, we have completed the full analysis of
approximately 1,700, out of a total of approximately 14,000, unique arabidopsis
genes as part of our commercial partnership with Monsanto.
In November 2000, we entered into a strategic collaboration with LION
bioscience for the development and marketing of a plant and fungal based
biochemical profiling database and bioinformatics software products for
analyzing that database. In 2001, this alliance was expanded to incorporate
human biochemical profile data. We intend to use the database for target
identification and target validation.
In October 2001, we entered into a multi-year collaboration with Agilent
Technologies to commercialize the first whole Arabidopsis genome microarray for
use in gene expression studies. Under the terms of the collaboration, we will
receive royalties from the sale of these arrays as well as royalties from other
co-developed products.
In December 2001, we acquired Celera's AgGen plant genomics and genotyping
business for 422,459 shares of our common stock. We have renamed the AgGen
business ParaGen. We believe that the acquisition of ParaGen will enable us to
obtain increased access to agricultural companies. We also believe that the
acquisition of ParaGen will enable us to market our full suite of functional
genomics services to ParaGen's customer base. These genomic services include
molecular, biochemical and computational tools to drive the discovery, product
development, and commercialization of products.
Market Opportunities
Crop Production
The crop production sector consists of crop inputs and crop outputs.
Herbicides, fungicides, fertilizers and seeds are examples of crop inputs.
Harvested grain, vegetables and fiber are examples of crop outputs. We intend
to use the information derived from our GeneFunction Factory(TM) to develop
commercial products, independently or with commercial partners, in the
following areas:
10
Crop Inputs
Herbicides. Herbicides are chemicals that kill weeds that cause substantial
crop loss. The herbicide market is a mature market in which innovative products
have historically been introduced only about once per decade. In 2001, global
sales of herbicides were approximately $15 billion, with Roundup(R) being the
leading product. While there are many herbicides on the market today, there is
still a need for new types of products. For example, there is a need for a
herbicide that can be applied at the same time seeds are planted, remains
active in the field for several weeks, is environmentally friendly and kills a
broad spectrum of weeds quickly.
Conventionally, researchers have discovered new herbicide products by
spraying various chemicals on weeds in the hope of finding a chemical that
kills weeds without killing crops. Once a promising chemical is discovered,
researchers use labor-intensive genetics, physiology and biochemistry
techniques to determine the protein in the weed that the chemical affects. This
conventional approach is expensive and slow and has a low success rate.
Typically, researchers must screen an average of 80,000 chemicals to find a
commercial product.
To date, using our GeneFunction Factory(TM) we have discovered over 350
herbicide targets out of what we estimate will be a total of between 500 and
600 targets in Arabidopsis. This is a rate of discovery far higher than
conventional methods and may significantly increase what we believe are only 23
known chemical herbicide mechanisms of action. As part of our collaboration
with Bayer, we have delivered 14 assays to Bayer for chemical screening for new
herbicides. By narrowly focusing our discovery efforts on finding chemicals
that disable specific genes within weeds, we believe that, together with our
commercial partners, we may be able to discover environmentally friendly
herbicides more efficiently than our competition.
Fungicides. Fungal plant diseases impose greater costs upon food growers
than any other plant disease. Chemicals used to control these diseases are
called fungicides. The global market for fungicides, such as Tilt(R) and
Ridomil PC(R), was approximately $6 billion in 2001. There is a need for better
and safer fungicides, particularly those that treat currently untreatable
fungal diseases or fungal strains that become resistant to existing fungicides.
As with herbicides, researchers conventionally have discovered fungicides by
spraying various chemicals on crops in the hope of finding a chemical that
inhibits fungal infections on crops without killing the crops themselves. Until
recently, researchers had not used an approach based upon the determination of
gene function for fungicide discovery. To date, using our GeneFunction
Factory(TM) we have discovered over 30 new fungicide targets, have developed
assays for those targets, have screened those assays against a library of
chemical compounds and have developed a list of hit pre-lead chemicals.
Fertilizers. Fertilizers are products that are typically applied to the
soil to provide crops with the nutrients needed to produce high yields. The
primary ingredients of most fertilizers are nitrogen, potassium and phosphorus.
The global market for fertilizers in 2001 was about $50 billion. In general,
current product discovery efforts for fertilizers are focused on blending or
reformulating known fertilizer compounds and reducing production costs. Plants
are limited in their ability to utilize fertilizers. Excess fertilizer enters
the environment either as run-off or ground water seepage, both of which are
major environmental concerns. We believe that products that enhance fertilizer
utilization will dramatically improve the economics and lessen environmental
concerns of crop production because growers will be able to use less fertilizer
to produce the same yields. We believe that our GeneFunction Factory(TM) may
allow us to identify genes in crops that improve their ability to utilize
fertilizer.
Seeds. Typical commercial seeds include hybrid corn seeds, registered wheat
seeds and vegetable seeds. The global market for commercial seeds in 2001 was
over $15 billion. Currently, there is a need for new commercial seeds that can
increase crop yields and improve the quality of foods and fibers. One
commercial seed that has successfully increased crop yield while reducing the
use of pesticides is the Bollgard(TM) cottonseed. Its developers inserted a
microbial gene into cottonseed that encodes a protein that kills the cotton
budworm, a significant pest of cotton. The resulting seed produces a high yield
of cotton while avoiding both the cost and negative environmental impact of
budworm pesticide.
11
Historically, time-consuming plant breeding techniques have dominated
research in the seed industry. Recently, the seed industry has invested heavily
in the genetic modification of crops, which has resulted in a number of
commercialized products and products in development. The seed industry now has
the technology to efficiently insert genes into seeds, and products such as the
Bollgard cottonseed have demonstrated the commercial viability of this
technology. We believe that there is a market need for a technology that can
rapidly generate information about the function of a large number of genes and
identify those genes that code for commercially valuable crop traits that the
seed industry could then breed or insert into crops. Examples of valuable crop
traits are disease resistance, vitamin content and resistance to herbicides and
fungicides.
Crop Outputs
The output side of crop production consists of harvested crops. The global
value of harvested crops in 2001 was approximately $700 billion with additional
value created through crop processing. While there are more than 170 crops
grown worldwide, only a few key crops, such as corn, soybean, rice, wheat,
potatoes and tomatoes, account for most of the value. Two major market
opportunities involve improving processing and product attributes. An example
of a processing improvement is a reduction in the soluble fiber present in
wheat. Pasta made from this type of wheat would be faster drying than ordinary
pasta and therefore companies could produce and package pasta at a reduced
cost. An example of an improved product attribute is an increased amount of oil
in each ton of processed canola. By using our GeneFunction Factory(TM) we have
been able to quickly and efficiently identify novel genes that control
processing and product attributes. To date, we have analyzed over 1,700
Arabidopsis genes as part of our commercial partnership with Monsanto and our
internally funded programs.
Our Strategy
Our goal is to build long term stockholder value by speeding the discovery
of new products either on our own or with our commercial partners in human
health and agriculture. The key elements of our strategy in our largest markets
are as follows:
Human Health
We believe that metabolomics can improve the speed, efficiency, and quality
of drug discovery and development. We hope to use MetaVantage(TM) to attract
commercial partners and increase the probability of developing successful
therapeutic products in healthcare for partners and for ourselves. Our business
strategy in healthcare includes the following key elements:
Expand and strengthen our metabolomics platform. We believe that our
MetaVantage(TM) technology will be a key competitive advantage in our drug
discovery and development efforts. We are working aggressively to enhance and
strengthen our technology platform. We plan to continue to develop our core
MetaVantage(TM) technology and our internal capabilities in biochemical
profiling by investing in research and development in this area. In addition,
we intend to aggressively seek to acquire and license technologies from third
parties that complement, or add, to our metabolomics capabilities. We also plan
to protect and build on our existing patent portfolio and use trade secrets to
protect our proprietary technologies. We intend to recruit and collaborate with
academic as well as commercial leaders in the field of metabolomics and in
other complementary areas.
Develop and leverage near term revenue opportunities. We intend to seek out
opportunities to generate near-term revenues and longer-term product milestones
and royalties by entering into collaborations with pharmaceutical and
biotechnology companies. We plan to do this by using our MetaVantage(TM)
platform to increase the probability of developing successful therapeutic
products. We may also pursue new grants from U.S. government agencies in areas
of commercial interest.
We may also seek to generate short-term revenues by commercializing
metabolomics-based information and tools for drug discovery and development. We
plan to attempt to generate revenues by licensing access to data
12
management and visualization software, developed through our collaboration with
Lion Biosciences and by continuing to develop and license access to our
reference database of the human metabolome.
Establish commercial partnerships to develop products. We intend to seek
long-term commercial partnerships to use our MetaVantage(TM) platform and our
genomic expertise to develop therapeutic products. We intend to seek to use our
technology and our informatics capabilities to partner with biotechnology and
pharmaceutical companies to validate and prioritize targets and lead compounds,
participate in drug discovery and development efforts, and potentially develop
our own drug products.
Build an internal capability and pipeline in drug discovery. By utilizing
our MetaVantage(TM) technology, we intend to continue building our
infrastructure and capabilities for internal drug discovery, and we intend to
seek to ultimately develop our own products. We have started, and will
continue, to invest our own funds in specific product opportunities with the
aim of capturing greater shareholder value. We plan to continue this element of
our business strategy by seeking to gain access to complementary technologies,
capabilities and expertise through in-licensing agreements, corporate and
academic partnerships and technology and corporate acquisitions.
Agriculture
Continue to determine the function of genes in our target and model
organisms using our GeneFunction Factory(TM), so that we can increase the
number of potential products developed in collaboration with our commercial
partners. Using our GeneFunction Factory(TM), we intend to continue the
process of analyzing the function of essentially every gene in each of our
target and model organisms and incorporate this data into our
FunctionFinder(TM) bioinformatics system. We intend to establish our
FunctionFinder(TM) bioinformatics system as the definitive source of gene
function information for these target and model organisms, as well as other
target organisms related to our model organisms.
Increase the number of commercial partnerships and joint ventures. We
intend to establish additional commercial partnerships and joint ventures with
leading companies in fields outside those of our partnerships with Bayer and
Monsanto. By leveraging our FunctionFinder(TM) data we will endeavor to build
stockholder value through a combination of research payments, milestone
payments, royalties, and product revenues.
Intellectual Property
Pursue Intellectual Property Protection for our MetaVantage(TM) and
GeneFunction Factory(TM) platforms. We intend to continue to aggressively
pursue patents for our discovery methods, our research platforms and aspects of
our bioinformatics system. Additionally, we intend to aggressively pursue
patents on discoveries of novel genes and gene functions. As of February 28,
2002, we have rights to 150 U.S. patent applications and 24 international
patent applications relating to our technologies and genes. We own three U.S.
patents and no international patents. We intend to protect and build on our
existing patent portfolio and also rely on trade secrets to protect our
proprietary technologies. Where necessary, we will seek licenses to implement
aspects of our research platform subject to ownership rights of others.
Research and Development
Our research and development efforts are directed towards the development of
our MetaVantage(TM) metabolomics platform, populating our MetaTrace(TM)
database and analysis system, processing genes through our GeneFunction
Factory(TM), and analyzing the function of those genes through our
FunctionFinder(TM) bioinformatics system. We spent approximately $28.2 million
in 2001, approximately $18.9 million in 2000, and approximately $7.6 million in
1999 on our research and development efforts.
13
Competition
Human Health
We face intense competition in the healthcare market. Our competitors in the
United States and abroad are numerous and include, among others, major
pharmaceutical and diagnostic companies, specialized biotechnology companies,
and research and academic institutions.
There are many companies that may have, or are, developing biochemical
profiling information, informatics tools or technologies for drug discovery and
development. Many of our potential competitors have significantly greater
financial, technical and other resources than we do. In addition,
pharmaceutical, biotechnology, and genomics companies and academic institutions
may be conducting work in the field of human metabolomics. In the near future,
we expect the field to become intensely competitive as technical advances occur
and metabolomics becomes more widely known.
In addition, we expect to face intense competition from major pharmaceutical
companies, diagnostic companies, biotechnology companies, genomics companies,
proteomics companies, and academic institutions and universities with respect
to our technologies and any products that may be developed using our
technologies. Many of our potential competitors have significantly greater
financial, technical and other resources than we do, that may allow them to
have a competitive advantage. In addition, many of our competitors have
significantly greater experience and larger research and development staffs
than we do.
There is no assurance that potential competitors will not succeed in
developing technologies and products that may render our technologies and any
products developed by us or our collaborators obsolete or noncompetitive. In
addition, our competitors may obtain patent protection or other intellectual
property rights that could limit our rights or our collaborator's ability to
use our technologies or to commercialize potential products.
Agriculture
We face competition from functional genomics companies, including Exelixis,
Inc., Ceres, Inc., Mendel Biotechnology Inc., and Large Scale Biology
Corporation. We expect competition to intensify in genomics research as
technology advances are made and become widely known. Genomic technologies have
undergone and are expected to continue to undergo rapid and significant change.
Our future success will depend in large part on maintaining a competitive
position in the genomics field, and particularly in the functional genomics
field. We, or others, may make rapid technological developments, which may
result in products or technologies becoming obsolete or noncompetitive before
we recover the expenses we incur in connection with our development. Products
that we or our commercial partners offer could be made obsolete by less
expensive or more effective crop production, nutrition enhancement, human
health and industrial application product development technologies, including
technologies that may be unrelated to genomics. We may not be able to make the
enhancements to our technology necessary to compete successfully with newly
emerging technologies.
Any products that we may develop alone or in collaboration with others will
compete in highly competitive markets. In the specific markets in which we
apply or intend to apply our FunctionFinder(TM) bioinformatics system, we face
competition from plant genomics, pharmaceutical, agri-chemical and
biotechnology companies. Many of our existing and potential competitors have
substantially greater financial resources, research and development staffs,
facilities, manufacturing and marketing experience, distribution channels and
human resources than we do. Many of these competitors have achieved substantial
market penetration in our chosen markets. We have entered into commercial
partnerships with Bayer and Monsanto in the crop production and nutrition
sectors, but have not yet entered into any commercial partnerships in other
markets. Moreover, our competitors may obtain patent protection or other
intellectual property rights that could limit our rights or our commercial
partners' ability to use our technologies or commercialize products in our
chosen markets.
14
Government Regulation
Regulation of Development and Commercialization of Agricultural Products
Federal, state, local and foreign government regulations and regulatory
agencies will govern our efforts, alone or together with our commercial
partners, to develop and commercialize genetically enhanced nutrition and crop
products. These regulations and agencies may prevent us and our commercial
partners from developing and marketing nutrition and crop product candidates in
a timely manner or under technically or commercially feasible conditions, and
may impose expenses, delays and other impediments to our efforts to develop
such product candidates.
The FDA's current policy is to apply the same regulatory standards to
genetically modified foods that it applies to foods developed through
traditional plant breeding. This means that a food or food ingredient developed
by genetic modification must meet the same rigorous safety standards under the
Federal Food, Drug, and Cosmetic Act as other food products. Under this policy,
the FDA ordinarily will require premarket review of genetically modified foods
only if they raise significant safety concerns, such as elevated levels of
toxicants or the presence of allergens, or if the FDA deems them to contain a
food additive. The FDA requires premarket approval of food additives as
products from introduced genes only if the product differs substantially in
structure and function from similar naturally occurring substances. Also, the
FDA does not currently require that genetically modified products be labeled as
such, as long as they are as safe and have the same nutritional characteristics
as conventional products.
In January 2001, the FDA issued a proposed rule and a draft guidance
document concerning food developed through biotechnology. The proposed rule, if
finalized, would require food developers to notify the FDA at least 120 days in
advance of their intent to market a food or animal food developed through
biotechnology and to provide information to demonstrate that the product is as
safe as its conventional counterpart. The proposed regulation also recommends
that the food developer participate in a presubmission consultation with the
FDA. At the end of the 120-day period, the FDA may request additional time to
evaluate the submission, disagree with the sponsor's assessment of equivalent
safety or pose no further questions, in which case the bioengineered food may
be marketed. The draft guidance document, if finalized, would provide direction
to manufacturers who wish to voluntarily label their food products as being
made with or without ingredients developed through biotechnology. If and when
the regulation is finalized, our commercial partners and we will have to
provide notice to the FDA before we may commercialize any genetically modified
food product and depending on the FDA's assessment, we may be delayed or
prevented from commercializing any such product.
The USDA prohibits genetically modified plants from being grown and
transported except pursuant to an exemption or under special controls. In
general, companies apply for an exemption to facilitate product development
because the special controls are burdensome. However, we can not guarantee that
the products we develop will qualify for such an exemption.
Regulatory policies for genetically modified nutrition and crop products
vary widely, are currently the subject of intense political controversy, and
may change substantially in the near future. Accordingly, labeling, premarket
notification or other restrictions in foreign countries where we and our
commercial partners may want to develop and/or market genetically modified
product candidates may impose additional expenses and delays on such product
candidates or may make commercialization in such countries impracticable.
Our future nutrition and crop product candidates may also be subject to
other regulations and regulatory agencies, such as the Occupational Safety and
Health Act, the Toxic Substances Control Act, the National Environmental Policy
Act, other federal water, air and environmental quality statutes, import/export
control legislation and other laws. Any product candidates relating to
pesticides will be subject to the jurisdiction of the Environmental Production
Agency.
15
Regulation of Drug Development and Commercialization
Prior to the marketing of any new drug developed by us or our commercial
partners, that new drug must undergo an extensive and expensive regulatory
review process by the U.S. Food and Drug Administration, or FDA, or similar
regulatory agencies in other countries. The process required by the FDA before
new drugs may be marketed in the United States generally involves the following:
. Preclinical laboratory and animal testing;
. Submission of an investigational new drug application, or IND, which must
become effective before clinical trials may begin;
. Adequate and well-controlled human clincial trials to establish the
safety and efficacy of the proposed drug for its intended use; and
. FDA approval of a new drug application, or NDA, or a new biologics
license application, or BLA, if the drug is a biologic.
The testing and approval process requires substantial time, effort and
financial resources, and we cannot be certain that we or any of our commercial
partners will receive approvals for any new drug on a timely basis, if at all.
Prior to commencing a clinical trial, we or our commercial partners must
submit an IND to the FDA. The IND automatically becomes effective 30 days after
receipt by the FDA unless the FDA, within the 30-day time period, raises
concerns or questions about the conduct of the clinical trial. In such a case,
the IND sponsor and the FDA must resolve any outstanding concerns before the
clinical trial can begin. The submission of an IND may not result in FDA
authorization to commence a clinical trial. Further, an independent
institutional review board for each medical center at which the clinical trial
will be performed must review and approve the plan for any clinical trial
before it commences.
For purposes of an NDA or BLA approval, human clinical trials are typically
conducted in three sequential phases that may overlap.
. Phase I: The drug is initially introduced into healthy human subjects and
tested for safety, dosage tolerance, absorption, metabolism, distribution
and excretion. In the case of products for severe or life-threatening
diseases, the initial human testing is often conducted in patients rather
than in healthy volunteers.
. Phase II: Studies are conducted in a limited patient population to
identify possible adverse effects and safety risks, to determine the
efficacy of the product for specific targeted diseases and to determine
dosage tolerance and optimal dosage.
. Phase III: When Phase II evaluations demonstrate that a dosage range of
the product is effective and has an acceptable safety profile, Phase III
trials are undertaken to further evaluate dosage, to provide
statistically significant evidence of clinical efficacy and to further
test for safety in an expanded patient population at multiple clinical
study sites.
On occasion, the FDA may require, or companies may pursue, additional
clinical trials after a product is approved. These so-called Phase IV studies
may be made a condition to be satisfied after a drug receives approval.
The results of product development, preclinical studies and clinical trials
are submitted to the FDA as part of a NDA or BLA. The FDA may deny approval of
a NDA or BLA if the applicable regulatory criteria are not satisfied, or it may
require additional clinical data and/or a second Phase III pivotal clinical
trial. Even if such data are submitted, the FDA may ultimately decide that the
NDA or BLA does not satisfy the criteria for approval. Once
16
issued, the FDA may withdraw product approval if compliance with regulatory
standards is not maintained or if problems occur after the product reaches the
market. In addition, the FDA may require testing and surveillance programs to
monitor the effect of approved products which have been commercialized, and the
FDA has the power to prevent or limit further marketing of a product based on
the results of these post-marketing programs.
Any products manufactured or distributed pursuant to FDA approvals are
subject to continuing regulation by the FDA, including advertising,
record-keeping and reporting requirements, compliance with FDA's current good
manufacturing practices, and periodic unannounced inspections.
No agency has approved any product resulting from the use of our technology
platforms for commercialization in the United States or elsewhere. In addition,
we and our commercial partners have not submitted any investigational new drug
applications for any such product candidate. We cannot be certain if or when we
or our commercial partners will submit an application for regulatory review, or
whether we or our commercial partners will be able to obtain marketing approval
for any products on a timely basis, if at all. If we and our commercial
partners fail to obtain required governmental approvals, it will prevent us
from marketing drugs or diagnostic products. The occurrence of any of these
events may cause our business, financial condition and results of operations to
suffer.
Environmental Regulation
Our research and development activities involve the controlled use of
hazardous materials and chemicals. We are subject to federal, state and local
laws and regulations governing the use, storage, handling and disposal of such
materials and certain waste products. The risk of accidental contamination or
injury from these materials cannot be eliminated. In the event of an accident,
we could be held liable for any damages that result, and any liability could
exceed our resources.
Intellectual Property
We seek U.S. and foreign patent protection for major components of our
MetaVantage(TM) and GeneFunction Factory(TM) platforms. We also rely on trade
secret protection for certain of our confidential and proprietary information,
and we use license agreements both to access external technologies and assets
and to convey certain intellectual property rights to others. Our commercial
success will be dependent in part on our ability to obtain commercially
valuable patent claims and to protect our intellectual property portfolio. As
of February 28, 2002, we had filed 150 U.S. patent applications and 24
international patent applications, which are subject to rights that we have
granted to various collaborators and development partners. We have filed 23
trademark applications in the United States and have received allowances on 19
of them. We have five registered trademarks. We own three issued U.S. patents
and no issued patents in any other country.
The patent positions of life science companies are generally uncertain and
involve complex legal and factual questions. Our business could be hurt by any
of the following:
. our pending patent applications may not result in issued patents;
. the claims of any issued patents may not provide meaningful protection;
. we may be unsuccessful in developing additional proprietary technologies
that are patentable;
. our patents may not provide a basis for commercially viable products or
provide us with any competitive advantages and may be challenged by third
parties; and
. others may have patents that relate to our technology or business.
In addition, patent law relating to the scope of claims in the technology
field in which we operate is still evolving. The extent of future patent
protection is uncertain. In particular, we are aware of several groups that are
attempting to identify and patent gene fragments and full-length genes, both
characterized and uncharacterized.
17
There is substantial uncertainty regarding the possible patent protection for
gene fragments or genes without known function or correlation with specific
functions. Furthermore, others may independently develop similar or alternative
technologies, duplicate any of our technologies, and if patents are licensed or
issued to us, design around the patented technologies licensed to or developed
by us. In addition, we could incur substantial costs in litigation if we are
required to defend ourselves in patent suits brought by third parties or if we
initiate such suits.
We are aware of a number of U.S. patents and patent applications and related
foreign patents and patent applications owned by third parties relating to gene
sequences and the analysis of gene function. These other technologies may
provide third parties with competitive advantages over us and may hurt our
business. In addition, some third party patent applications contain broad
claims, and it is not possible to determine whether or not applicants will
narrow such claims during prosecution or whether patent offices will allow and
issue patents on such claims, even if such claims appear to cover prior art or
have other defects. An owner or licensee of a patent in the field may threaten
or file an infringement action and we may or may not prevail in any such
action. The cost of defending an infringement action may be substantial, which
could significantly increase our expenses and increase our losses. Furthermore,
other patent holders may not grant us required licenses on commercially viable
terms, if at all. Failure to obtain any required license could prevent us from
utilizing or commercializing one or more of our technologies or gene-related
products.
We have applied, and intend to make additional applications, for patent
protection for:
. key elements, processes and supporting technologies in our MetaVantage(TM)
and biochemical profiling platforms;
. methods relating to gene sequencing, phenotype analysis, gene expression
profiling, metabolic profiling and other methods for determination of gene
function;
. bioinformatic technologies;
. function specific patterns of gene expression we identify; and
. individual genes and targets we discover.
Such patents may include claims relating to novel genes and gene fragments
and to novel uses for known genes or gene fragments identified through our
discovery programs. We may not be able to obtain meaningful patent protection
for our discoveries; even if patents are issued, the scope of the coverage or
protection they would afford is uncertain. Failure to secure such meaningful
patent protection would endanger our competitive position.
With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, we rely on trade secret
protection and confidentiality agreements to protect our interests, including
several elements of our FunctionFinder(TM) bioinformatics system, our
MetaVantage(TM) human metabolomics platform and our GeneFunction Factory(TM).
In addition, we are developing a proprietary index of plant and fungal gene and
gene fragment sequences which we update on an ongoing basis. We will apply for
patents on some of this data, whereas we will maintain other data as
proprietary trade secret information. We have taken security measures to
protect our proprietary know-how and technologies and confidential data and
continue to explore further methods of protection. While we require all
employees, consultants and commercial partners to enter into confidentiality
agreements, we cannot be certain that others will not disclose proprietary
information, or will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to our trade
secrets, or that we can meaningfully protect our trade secrets. In the case of
arrangements with our commercial partners that require the sharing of data, our
policy is to make available to our commercial partners only such data as is
relevant to our agreements with such commercial partners, under controlled
circumstances, and only during the contractual term of those agreements, and
subject to a duty of confidentiality on the part of our customer. However, such
measures may not adequately protect our data. Any material leak of confidential
data into the public domain or to third parties may harm our business.
18
We are a party to various license agreements that give us rights to use
technologies and biological materials in our research and development
processes. We may not be able to maintain such rights on commercially
reasonable terms, if at all. Failure by us to maintain such rights could harm
our business.
Employees
As of February 28, 2002, we had 253 full-time employees, of whom 42 hold
Ph.D. degrees. Of our total workforce, 210 are engaged in research and
development activities, and 43 are engaged in business development, finance and
administration. None of our employees is represented by a collective bargaining
agreement. We believe that our relations with our employees are good.
ITEM 2. PROPERTIES.
We currently lease an aggregate of approximately 125,000 square feet of
single-story and multi-story office and laboratory facilities in Research
Triangle Park and Durham, North Carolina. The first building lease, for
approximately 19,000 square feet on Alexander Drive in Research Triangle Park,
is on a month-to-month basis. The second building lease, for approximately
20,000 square feet on S. Miami Boulevard in Durham, North Carolina expires
August 31, 2005. The third building lease, for approximately 86,000 square feet
on Alexander Drive in Research Triangle Park expires on November 18, 2010. We
have the option to renew all leases. We also have an option to require a real
estate investment trust to develop and finance an additional two-story
laboratory and office facility covering approximately 50,000 square feet on our
current site on Alexander Drive in Research Triangle Park, North Carolina.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Market Information
The Company's common stock, par value $.01 ("common stock") per share, is
traded on the Nasdaq National Market ("Nasdaq") under the symbol "PDGM." The
following table sets forth for the periods indicated the range of high and low
sales prices for the common stock as reported by Nasdaq.
High Low
----------- -----------
2001
First Quarter............................... $ 12.375 $ 3.516
Second Quarter.............................. $ 9.100 $ 4.125
Third Quarter............................... $ 8.050 $ 3.620
Fourth Quarter.............................. $ 7.090 $ 4.440
2000
First Quarter............................... Not traded Not traded
Second Quarter.............................. $ 15.250 $ 7.000
Third Quarter............................... $ 28.563 $ 12.125
Fourth Quarter.............................. $ 28.563 $ 7.375
Stockholders
As of February 28, 2002, there were approximately 267 holders of record of
the Company's common stock and, according to the Company's estimates,
approximately 4,628 beneficial owners of the Company's common stock.
Dividends
The Company has never declared or paid dividends on its capital stock and
does not anticipate paying any dividends in the foreseeable future.
Use of Proceeds
In connection with our initial public offering, we sold 6,000,000 shares of
common stock at $7.00 per share for net proceeds of approximately $37.6
million, net of underwriting discounts, commissions and other offering costs.
On May 31, 2000, the underwriters exercised an over-allotment option to
purchase an additional 750,000 shares resulting in net proceeds of
approximately $4.9 million. On May 5, 2000, the Securities and Exchange
Commission declared our Registration Statement on Form S-1 (File No. 333-30758)
effective. The following table sets forth our cumulative use of the net
offering proceeds as of December 31, 2001:
Construction and acquisition of plant
buildings, facilities, and equipment...... $12,287,000
Repayment of indebtedness................... 5,023,000
General corporate purposes.................. 1,919,000
Research and development expenses........... 22,381,000
Restricted Cash............................. 919,000
The foregoing use of net proceeds does not represent a material change in
the use of net proceeds described in the Registration Statement.
20
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data for December 31, 1999, 2000 and 2001 and
the balance sheet data as of December 31, 2000 and 2001 have been derived from
our audited financial statements beginning on page F-1 of this report. The
statement of operations data for the period from inception (September 9, 1997)
through December 31, 1997 and the year ended December 31 1998 and the balance
sheet data as of December 31, 1997, 1998 and 1999 have been derived from
audited financial statements that are not included in this report. The
historical results are not necessarily indicative of the operating results to
be expected in the future. The selected financial data shown below should be
read in conjunction with our financial statements and the notes to those
financial statements beginning on page F-1 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 23
of this report.
Period from
Inception
(September
Years Ended December 31, 1997) to
------------------------------------------------- December 31,
2001 2000 1999 1998 1997
----------- ----------- ---------- ---------- ------------
(in thousands, except per share amounts and shares outstanding)
Statement of Operations Data:
Revenues:
Commercial partnerships................... $ 24,337 $ 9,837 $ 2,052 $ 820 $ --
Grant revenue............................. 130 500 145 51 --
----------- ----------- ---------- ---------- ----------
Total revenues.......................... 24,467 10,337 2,197 871 --
Operating expenses:
Research and development (includes
$561, $449, $88, $0 and $0
respectively, of stock-based
compensation)........................... 28,183 18,945 7,615 3,641 71
Selling, general and administrative
(includes $510, $959, $112, $6 and $0
respectively, of stock-based
compensation)........................... 12,397 10,131 4,826 1,530 149
----------- ----------- ---------- ---------- ----------
Total operating expenses................ 40,580 29,076 12,441 5,171 220
----------- ----------- ---------- ---------- ----------
Loss from operations....................... (16,113) (18,739) (10,244) (4,300) (220)
----------- ----------- ---------- ---------- ----------
Other income (expense), net................ 65 1,015 (376) 10 --
----------- ----------- ---------- ---------- ----------
Net loss................................... (16,048) (17,724) (10,620) (4,290) (220)
----------- ----------- ---------- ---------- ----------
Beneficial conversion of Series C Preferred
Stock.................................... -- (12,000) -- -- --
----------- ----------- ---------- ---------- ----------
Net loss attributable to common
stockholders............................. $ (16,048) $ (29,724) $ (10,620) $ (4,290) $ (220)
----------- ----------- ---------- ---------- ----------
Net loss per share attributable to common
stockholders--basic and diluted.......... $ (0.59) $ (1.61) $ (2.51) $ (1.14) $ (0.19)
=========== =========== ========== ========== ==========
Weighted average common shares
outstanding--basic and diluted........... 27,264,022 18,434,804 4,236,409 3,750,036 1,160,958
=========== =========== ========== ========== ==========
December 31,
--------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ---------- ---------- ------------
(in thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term
investments.............................. $ 10,736 $ 36,000 $ 3,956 $ 3,455 $ 18
Working capital............................ (4,932) 16,003 (3,635) 1,148 (224)
Total assets............................... 85,087 75,465 14,225 7,435 63
Long-term debt, net of current portion..... 7,678 10,753 8,047 3,539 --
Preferred stock............................ -- -- 11,919 5,951 --
Accumulated deficit........................ (48,934) (32,887) (15,163) (4,543) (253)
Total stockholders' equity (deficit)....... 53,244 39,614 (2,827) 1,452 (216)
21
Selected Quarterly Financial Data
(unaudited)
2001
---------------------------------------------
First Second Third Fourth Total
-------- ------- ------- ------- --------
(in thousands, except per share amounts)
Net revenues.......................................... $ 5,451 $ 6,058 $ 6,251 $ 6,707 $ 24,467
Loss from operations.................................. (4,164) (4,431) (3,926) (3,592) (16,113)
Net loss.............................................. (4,010) (4,298) (4,057) (3,683) (16,048)
Net loss attributable to common stockholders.......... (4,010) (4,298) (4,057) (3,683) (16,048)
Net loss per share attributable to
common stockholders--basic and diluted.............. $ (0.15) $ (0.16) $ (0.15) $ (0.12) $ (0.59)
2000
---------------------------------------------
First Second Third Fourth Total
-------- ------- ------- ------- --------
(in thousands, except per share amounts)
Net revenues.......................................... $ 593 $ 1,696 $ 3,536 $ 4,512 $ 10,337
Loss from operations.................................. (4,793) (5,136) (4,254) (4,556) (18,739)
Net loss.............................................. (4,776) (4,774) (3,992) (4,182) (17,724)
Beneficial conversion of Series C Preferred Stock..... (12,000) -- -- -- (12,000)
Net loss attributable to common stockholders.......... (16,776) (4,774) (3,992) (4,182) (29,724)
Net loss per share attributable to common
stockholders--basic and diluted..................... $ (3.11) $ (0.29) $ (0.16) $ (0.16) $ (1.61)
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that are based
upon current expectations. Our actual results and the timing of events could
differ materially from those anticipated in our forward-looking statements as a
result of many factors, including those set forth under "Risk Factors",
"Forward-Looking Statements" and elsewhere in this report.
You should read the following discussion and analysis in conjunction with
"Selected Financial Data" and the financial statements and related notes
included elsewhere in this report.
Overview
We are an integrated life sciences company developing novel technologies
designed to speed the discovery of new products for the advancement of human
health and agriculture. In human health, we are developing a proprietary human
metabolomics platform called MetaVantage(TM) which we believe will
significantly enhance the development of drug targets, lead compounds and
predictive medicines. Human metabolomics is the global analysis of all classes
of biochemicals, also known as the metabolome, in a human being. We are
currently in the process of developing a reference library of stable
metabolites identified in human cells, tissues and fluids and we plan to use
this database in conjunction with our MetaVantage(TM) discovery platform to
build an integrated drug discovery platform. In agriculture, we have developed
an industrialized platform for determining the definitive function of plant and
microbial genes that we believe will enable us and our commercial partners to
develop novel products in the areas of crop production and nutrition. This
industrialized, high-throughput platform is known as the GeneFunction
Factory(TM).To date, we have analyzed thousands of genes in our model systems
using this platform. This is a rate of discovery that far exceeds that of other
approaches.
Our GeneFunction Factory(TM) and MetaVantage(TM) systems generate many
terabytes of data. In order to analyze these data we have developed a
sophisticated data integration and analysis system called FunctionFinder(TM),
and we are developing a data integration and visualization system called
MetaTrace(TM). We use FunctionFinder(TM) to infer the function of plant and
microbial genes and we intend to use MetaTrace(TM), when it is completed, to
understand the relationship between biochemical profiles, biochemical pathways
and target genes in human beings.
We currently have commercial partnerships with Bayer AG in the area of crop
production and with The Monsanto Company in the areas of crop production and
nutrition. The commercial partnership with Bayer was signed in September 1998.
The commercial partnership with Monsanto was signed in November 1999. For the
fiscal year 2001 the Bayer and Monsanto contracts each contributed
approximately equally to our revenues. For fiscal years 2000 and 1999 the
commercial partnership with Bayer generated the majority of our revenues. We
also generated revenues in fiscal years 2001, 2000 and 1999 from a grant from
the U.S. Department of Energy.
We have invested heavily in developing our MetaVantage(TM), GeneFunction
Factory(TM), MetaTrace(TM) and FunctionFinder(TM) systems. During the first
quarter of 2001, we expanded our facilities by moving into a newly developed
office and laboratory complex, housing our new generation GeneFunction
Factory(TM), totaling approximately 86,000 square feet. We now occupy office
and laboratory space totaling approximately 125,000 square feet. Our total
number of full time employees increased to 277 employees at December 31, 2001
from 193 employees at December 31, 2000 and from 92 employees at December 31,
1999. Of our total number of employees on December 31, 2001, 83% were engaged
in research and development activities. Our research and development efforts
consisted of work performed under our commercial partnerships, our federal
government grant and work advancing our own core technologies and programs.
We have incurred significant losses since our inception. As of December 31,
2001, our accumulated deficit was approximately $48.9 million and total
stockholders' equity was approximately $53.2 million. Our net loss
23
decreased to approximately $16.0 million during the year ended December 31,
2001 compared to approximately $17.7 million during the year ended December 31,
2000, and approximately $10.6 million during the year ended December 31, 1999.
The reason for the decrease in our net loss was primarily due to higher
revenues generated by increased throughput and utilization rates in our
GeneFunction Factory(TM), which more than offset our increased spending on
generating these revenues and investing in our human metabolomics and
informatics platforms. Operating expenses including non-cash compensation
charges increased to approximately $40.6 million during the year ended December
31, 2001, from approximately $29.1 million during the year ended December 31,
2000 and approximately $12.4 million during the year ended December 31, 1999.
The reason for the increase in operating expenses was higher throughput in our
GeneFunction Factory(TM) and increased investment in our human metabolomics and
informatics platforms. We expect to incur additional operating losses for the
foreseeable future as we continue to develop our MetaVantage(TM) platform,
advance our internal research and development programs, establish the
infrastructure necessary to support our business and increase our marketing
activities.
Critical Accounting Policies
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenues are derived from commercial partnerships and from a government
grant. Revenues related to fixed nonrefundable payments are recognized under
commercial partnerships based on progress to completion in accordance with the
applicable performance requirements of each commercial partnership. Refundable
fees received under commercial partnerships are initially deferred and
recognized as revenues based on progress-to-completion over the term of the
commercial partnerships beginning at the date that the refund right expires,
which is the date on which the related performance requirements have been met.
Our effort level under these partnerships is not ratable. Progress-to-completion
under commercial partnerships is measured based on a comparison of the cost of
the number of genes analyzed to the cost of the total number of genes to be
analyzed, on a contract-by-contract basis. Each quarter, we review the status of
each project to determine if the assumptions are still correct and adjustments
are made accordingly. As the work progresses, original estimates might be seen
to have been incorrect due to revisions in the scope of work or a contract
modification negotiated with the customer. We bear the risk of cost overruns.
Should our estimated costs on fixed contracts prove to be low, future margins
could be reduced, absent our ability to negotiate a contract modification.
Historically, the majority of our estimates and assumptions have been
materially correct, but these estimates might not continue to be accurate.
Milestone payments under commercial partnerships are recognized as revenue when
the applicable milestone has been achieved, on a progress-to-completion basis,
and such achievement has been acknowledged by the other partner. Future
potential milestone payments under the contract may never be received if the
milestones are not achieved. Revenues from the government grant are recognized
as expenses are incurred over the period of the grant. Cash received in excess
of revenues recognized under commercial partnerships and the government grant
is recorded as deferred revenue. Payments received under our commercial
partnerships and government grant are generally non-refundable regardless of
the outcome of the future research and development activities to be performed
by us under these arrangements. As of December 31, 2001, we had deferred
revenue of approximately $13.3 million.
Results of Operations
Years Ended December 31, 2001 and 2000.
Revenues. Revenues are comprised of amounts recognized under our commercial
partnerships and a grant from the U.S. Department of Energy. Total revenues
increased 137% to approximately $24.5 million in 2001
24
compared to approximately $10.3 million in 2000. This increase was primarily
the result of higher throughput in our GeneFunction Factory(TM) and the
delivery to Bayer of a number of herbicide assays during the year.
Revenues earned under commercial partnerships increased 147% to
approximately $24.3 million in 2001 compared to approximately $9.8 million in
2000. This increase was primarily the result of higher throughput in our
GeneFunction Factory(TM) for Bayer and Monsanto. Revenues relating to our Bayer
partnership increased to approximately $13.1 million in 2001 from approximately
$8.6 million in 2000 and revenues relating to our Monsanto partnership
increased to approximately $11.2 million in 2001 from approximately $1.2
million in 2000. In 2002, we expect more of our revenue to come from our
partnership with Monsanto than from our partnership with Bayer, as we slow down
our gene discovery work for Bayer. At the end of 2001, we were substantially
ahead of schedule for the gene discovery component of our work for Bayer. Under
the terms of our agreement, payments from Bayer for this gene discovery work
are fixed and are paid quarterly regardless of whether or not we are ahead of
schedule. In order to help preserve our working capital, in 2002, we plan to
slow down our gene discovery work to more closely match the work schedule in
our commercial partnership agreement. Although this will not affect our
anticipated cash receipts from Bayer in 2002, we do anticipate that it will
lower our 2002 revenues from Bayer. Therefore, without additional commercial
partnerships, our total revenue may decline in 2002 when compared to 2001, as
we lower the throughput in our GeneFunction Factory(TM) for Bayer and
concentrate our resources on the development of our metabolomics platform.
Grant revenues decreased 74% to approximately $130,000 in 2001 from
approximately $500,000 in 2000. In June 2001, this grant ended and no longer
contributes to our revenue.
Research and Development Expenses. Research and development expenses
consist primarily of personnel costs, costs of supplies, facility costs,
license fees, consulting fees, the recognition of deferred compensation and
depreciation of laboratory equipment. Research and development expenses
increased 49% to approximately $28.2 million in 2001 compared to approximately
$18.9 million in 2000. Of this increase, approximately $3.6 million was due to
an increased number of research and development staff, approximately $400,000
was due to higher supplies costs, approximately $1.9 million was due to higher
facilities costs, approximately $300,000 was due to additional license fees,
$1.2 million was due to additional consulting fees, approximately $100,000 was
due to the amortization of deferred compensation, and approximately $1.9
million was due to depreciation of additional laboratory equipment to support
our commercial partnership agreements and develop our core technology. We
expect to continue to devote substantial resources to research and development.
Without additional commercial partnerships we expect that our research and
development expenses will remain approximately at 2001 levels. These cost
increases were the result of increased throughput in our GeneFunction
Factory(TM) relating to our commercial partnerships, the expansion of our human
metabolomics platform and further investment in informatics.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of personnel costs, professional
expenses, such as legal and accounting fees, facilities costs, business
development costs, depreciation, a one time charge related to an acquisition
that we are no longer pursuing the recognition of deferred compensation.
Selling, general and administrative expenses increased 22% to approximately
$12.4 million in 2001 compared to approximately $10.1 million in 2000. Of this
increase, approximately $1.1 million was due to increased staffing necessary to
manage and support our growth, approximately $400,000 was due to an increase in
professional expenses, and approximately $900,000 was due to a one time charge
related to an acquisition that we are no longer pursuing. Without additional
commercial partnerships we expect that our selling, general and administrative
expenses will decrease from 2001 levels, and that net losses will continue.
Stock-Based Compensation Expense. Stock-based compensation expense
represents the amortization of deferred compensation related to stock options
granted to employees with an exercise price below the estimated fair value of
our common stock at the date of grant, as determined by our board of directors.
Deferred compensation is amortized over the vesting period of the related stock
options, which is generally four years. We
25
recognized approximately $1.1 million in non-cash compensation expense related
to amortization of deferred compensation in 2001 as compared to approximately
$1.4 million in 2000.
Deferred compensation for options granted to employees has been determined
as the difference between the estimated fair value for financial reporting
purposes of our common stock on the date the options were granted and the
exercise price. Deferred compensation for options granted to consultants has
been determined in accordance with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" as the fair value of equity
instruments issued. In connection with the grant of stock options to employees,
we recorded deferred compensation of $0 in 2001 compared to approximately $1.3
million in 2000.The decrease in deferred compensation is because we did not
issue stock options at below fair market value in 2001.
Other Income (Expense), Net. Other income (expense), net represents
interest earned on our cash and cash equivalents and short-term investments and
long-term investments offset by interest expense on long-term debt and capital
leases and the recognition of gains and losses on disposal of assets. Other
income, net was approximately $65,000 in 2001, compared to approximately $1.0
million in 2000. This change was attributable to a decrease in interest we
earned on our cash and investments, an increase in interest paid on notes
payable secured by capital equipment purchases, and a gain on the disposal of
assets. We expect an increase in other expense, net for 2002, as our short-term
and long-term investments decrease and we earn lower interest income. Our
interest earnings on cash and investments may decrease as we continue to fund
operations and service our debt.
Years Ended December 31, 2000 and 1999.
Revenues. Revenues are comprised of amounts recognized under our commercial
partnerships and a grant from the U.S. Department of Energy. Total revenues
increased 371% to approximately $10.3 million in 2000 compared to approximately
$2.2 million in 1999. This increase was primarily the result of higher
throughput in our GeneFunction Factory(TM), the successful delivery of version
2.0 of our proprietary FunctionFinder(TM) bioinformatics system and the
delivery to Bayer of a number of herbicide assays during the year.
Revenues earned under commercial partnerships increased 379% to
approximately $9.8 million in 2000 compared to approximately $2.1 million in
1999. This increase was primarily the result of higher throughput in our
GeneFunction Factory(TM) for Bayer and to a lesser extent the result of
commencement of work for Monsanto. Revenues relating to our Bayer partnership
increased to approximately $8.6 million in 2000 from approximately $2.1 million
in 1999 and revenues relating to our Monsanto partnership increased from zero
in 1999 to approximately $1.2 million in 2000. In 2002, we expect more of our
revenue to come from our partnership with Monsanto than from our partnership
with Bayer, as we decrease the amount of gene discovery work in our
GeneFunction Factory(TM) for Bayer.
Grant revenues increased 245% to approximately $500,000 in 2000 from
approximately $145,000 in 1999. This increase was the result of our U.S.
Department of Energy grant being extended in 1999. In June 2001, this grant
ended and no longer contributes to our revenue.
Research and Development Expenses. Research and development expenses
consist primarily of personnel costs, costs of supplies, facility costs,
license fees, the recognition of deferred compensation and depreciation of
laboratory equipment. Research and development expenses increased 149% to
approximately $18.9 million in 2000 compared to approximately $7.6 million in
1999. Of this increase, approximately $5.3 million was due to an increased
number of research and development staff, approximately $1.3 million was due to
higher supplies, approximately $478,000 was due to higher facilities costs,
approximately $445,000 was due to additional license fees, approximately
$362,000 was due to the amortization of deferred compensation, and
approximately $1.9 million was due to depreciation of additional laboratory
equipment to support our commercial partnership agreements and develop our core
technology.
26
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of personnel costs, professional
expenses, such as legal and accounting fees, facilities costs, business
development costs, depreciation and the recognition of deferred compensation.
Selling, general and administrative expenses increased 110% to approximately
$10.1 million in 2000 compared to approximately $4.8 million in 1999. Of this
increase, approximately $1.7 million was due to increased staffing necessary to
manage and support our growth, approximately $825,000 was due to an increase in
professional expenses, approximately $229,000 was due to higher facilities
costs, and approximately $847,000 was due to the recognition of deferred
compensation.
Stock-Based Compensation Expense. Stock-based compensation expense
represents the amortization of deferred compensation related to stock options
granted to employees with an exercise price below the estimated fair value of
our common stock at the date of grant, as determined by our board of directors.
Deferred compensation is amortized over the vesting period of the related stock
options, which is generally four years. We recognized approximately $1.4
million in non-cash compensation expense related to amortization of deferred
compensation in 2000 as compared to approximately $200,000 in 1999.
Deferred compensation for options granted to employees has been determined
as the difference between the estimated fair value for financial reporting
purposes of our common stock on the date the options were granted and the
exercise price. Deferred compensation for options granted to consultants has
been determined in accordance with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" as the fair value of equity
instruments issued. In connection with the grant of stock options to employees,
we recorded deferred compensation of approximately $1.3 million in 2000,
compared to approximately $3.4 million in 1999.
Other Income (Expense), Net. Other income (expense), net represents
interest earned on our cash, cash equivalents and short-term investments and
long-term investments, offset by interest expense on long-term debt and capital
leases and the recognition of a loss on disposal of assets. Other income, net
was approximately $1.0 million in 2000, as compared to other expense, net of
approximately $375,000 in 1999. This change was attributable to the interest we
earned on our cash and investments offset partially by increases in interest
paid from higher senior long-term debt and notes payable secured by capital
equipment purchases, and the recognition of a loss on the disposal of assets.
Our interest earnings on cash and investments may decrease as we continue to
fund operations and service our debt.
Liquidity and Capital Resources
We have historically financed our operations through the sale of common and
preferred stock, debt and capital lease financing, payments received from
commercial partnerships and a government grant. From our inception through
December 31, 2001, we have raised approximately $26.9 million in net cash
proceeds from the sale of preferred stock. On May 10, 2000, we completed an
initial public offering in which we sold 6,000,000 shares of common stock at
$7.00 per share for net proceeds of approximately $37.6 million, net of
underwriting discounts, commissions and other offering costs. On May 31, 2000,
the underwriters exercised an over-allotment option to purchase an additional
750,000 shares resulting in net proceeds of approximately $4.9 million. On
October 23, 2001, we closed a direct offering in which we sold 5,097,727 shares
of common stock at $5.50 per share for proceeds of approximately $26.1 million,
net of underwriting discounts, commissions and other offering costs. During the
years ended December 31, 2001, 2000 and 1999 we raised approximately $3.9
million, $6.9 million and $5.8 million, respectively, in secured debt financing.
Annual maturities of long-term debt subsequent to 2001 are approximately
$6.8 million in 2002, approximately $4.1 million in 2003, approximately $2.8
million in 2004 and approximately $404,000 in 2005. We have two capital
equipment leases. Our lease payments, under these leases, are approximately
$358,000 in 2002, approximately $240,000 in 2003 and approximately $180,000 in
2004. In addition, we have several noncancellable operating leases pertaining
to office lease space and other equipment. Our minimum lease
27
payments, under these leases, are approximately $1.7 million in 2002,
approximately $1.7 million in 2003, approximately $1.8 million in 2004,
approximately $1.9 million in 2005, approximately $1.9 million in 2006, and
approximately $7.9 million thereafter.
We had cash, cash equivalents and short-term investments of approximately
$10.7 million at December 31, 2001, $36.0 million at December 31, 2000 and
approximately $4.0 million at December 31, 1999. Our cash, cash equivalents,
short-term investments and long-term investments totaled approximately $43.0
million at December 31, 2001 and $44.5 million at December 31, 2000. We believe
that this balance coupled with cash from our commercial partners will be
sufficient to cover our cash flow needs at least through 2003. We are exposed
to interest rate fluctuations on cash equivalents and short-term and long-term
investments. Our cash and cash equivalents, short-term, and long-term
investments are invested in financial instruments with interest rates based on
financial market conditions.
We had a working capital deficit of approximately $4.9 million at December
31, 2001, working capital of approximately $16.0 million at December 31, 2000,
and a working capital deficit of approximately $3.6 million at December 31,
1999. The decrease in working capital between 2001 and 2000 was primarily due
to the investment of some of our cash and short-term investments in long-term
investments. If we include long-term investments in our working capital, we
would have had working capital of approximately $27.3 million at December 31,
2001 compared to approximately $24.5 million at December 31, 2000. Our cash
position was strengthened during the year primarily as a result of the closing
of our direct offering in October 2001, cash received from our commercial
partners during the year and cash received from secured debt financing. The
increase in working capital between 2000 and 1999 was primarily due to proceeds
from the completion of our initial public offering in May 2000, the issuance of
convertible preferred stock in January 2000, an increase in secured debt
financing and cash received from our commercial partners during the year.
Operating activities used cash of approximately $19.9 million in 2001,
approximately $4.4 million in 2000 and approximately $4.4 million in 1999. Cash
used in operating activities was primarily related to net operating losses.
Investing activities used cash of approximately $2.2 million in 2001,
approximately $57.2 million in 2000 and approximately $7.6 million in 1999. The
reason that investing activities used more cash in 2000 than in either 1999 or
2001 was because we invested the majority of the proceeds from our initial
public offering in 2000 in long-term investments. Investing activities consist
primarily of net purchases of long-term investments and additions to property
and equipment. Capital expenditures totaled approximately $7.8 million in 2001,
approximately $18.3 million in 2000 and approximately $6.6 million in 1999.
During 2001 we continued our investment in our GeneFunction Factory(TM), but at
a decreased rate from 2000, and we increased our investment in our
MetaVantage(TM) platform. The capital investments include laboratory and data
processing equipment and leasehold improvements. We expect to continue to make
investments in the purchase of property and equipment to support our
operations. A portion of our cash may be used to acquire or invest in
complementary businesses, products or technologies, or to obtain the right to
use such complementary technologies.
Financing activities provided cash of approximately $26.2 million in 2001,
approximately $63.3 million in 2000 and approximately $11.5 million in 1999.
Cash provided by financing activities resulted from the receipt of
approximately $26.1 million in net proceeds from our direct offering in October
2001. In 2000 we received approximately $42.5 million in net proceeds from our
initial public offering in May 2000 and approximately $15.0 million in net
proceeds from the sale of Series C Preferred Stock in January 2000. In 1999 we
received approximately $6.0 million in net proceeds from the sale of Series B
Preferred Stock. In addition, we had net repayments under our notes payable for
equipment financing of approximately $175,000 in 2001, net borrowing of
approximately $5.0 million in 2000 and net borrowing of approximately $5.5
million in 1999 which includes $2.0 million under our senior note payable.
28
We expect to continue expanding our operations through internal growth and,
possibly, through strategic acquisitions. We expect these activities will be
funded from existing cash, issuances of our stock, and borrowings under credit
facilities. We believe that these sources of liquidity will be sufficient to
fund our operations at least through 2003. From time to time, we evaluate
potential acquisitions and other growth opportunities, which might require
additional external financing, and we might seek funds from public or private
issuances of equity or debt securities.
Acquisition
In December 2001, we acquired Celera's AgGen plant genomics and genotyping
business for 422,459 shares of our common stock. We have renamed the AgGen
business ParaGen. We believe that the acquisition of ParaGen will enable us to
market our full suite of functional genomics services to ParaGen's customer
base. These genomic services include molecular, biochemical and computational
tools to drive the discovery, product development, and commercialization of
products.
Recently Issued Accounting Standards
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations", ("SFAS No. 141"), and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets", ("SFAS
No. 142"). We have adopted SFAS No. 141 as of July 1, 2001, which requires that
all business combinations be accounted for under the purchase method and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. We intend to adopt SFAS No. 142 as of January 1,
2002, as required. In addition, we have also adopted the required provisions of
SFAS No. 142 for goodwill and intangible assets acquired after June 30, 2001.
We will no longer record the amortization of goodwill in the financial
statements effective January 1, 2002 as required by SFAS No. 142. Rather, we
will analyze goodwill for impairment at the reporting unit level during the
first quarter of 2002 and, at a minimum, on an annual basis going forward.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
("SFAS No. 144"), which supersedes SFAS No. 121 and portions of APB Opinion No.
30. SFAS No. 144 provides guidance on the recognition and impairment of
long-lived assets to be held and used and for long-lived assets to be disposed.
We intend to adopt SFAS No. 144 as of January 1, 2002, as required, and do not
believe the adoption will have a material impact on our financial statements.
Potential Volatility of Quarterly Operating Results and Stock Price
Our quarterly and annual operating results have fluctuated, and we expect
that they will continue to fluctuate in the future. Factors that could cause
these fluctuations include:
. the timing of the initiation, progress or cancellation of commercial
partnerships
. the mix of work performed for our commercial partners in a particular period
. the timing of internal expansion costs, and
. the timing and amount of costs associated with evaluating and integrating
acquisitions, if any.
Fluctuations in quarterly results or other factors beyond our control could
affect the market price of our common stock. Such factors include changes in
earnings estimates by analysts, market conditions in our industry, changes in
pharmaceutical, agri-chemical, and biotechnology industries, and general
economic conditions. Any effect on our common stock could be unrelated to our
longer-term operating performance.
29
FORWARD-LOOKING STATEMENTS
Our forecast of the period of time through which our financial resources
will be adequate to support our operations and other statements contained in
this report are forward-looking and involve risks and uncertainties. Actual
results could vary as a result of a number of factors. We believe that our
existing cash and investment securities and anticipated cash flow from existing
partnerships together with the net proceeds from our initial public offering
and our October 2001 direct offering will be sufficient to support our current
operating plan at least through 2003. We have based this estimate on
assumptions that may prove to be wrong. It is possible that we may seek
additional funding within this time frame. We may raise additional funds
through public or private financing, collaborative relationships or other
arrangements. We cannot assure you that additional funding, if sought, will be
available or, even if available, will be available on terms favorable to us.
Further, any additional equity financing may be dilutive to stockholders, and
debt financing, if available, may involve restrictive covenants. Our failure to
raise capital when needed may harm our business and operating results. Our
future capital requirements will depend on many factors, including:
. the number, breadth and progress of our research programs
. the achievement of the milestones under certain of our existing commercial
partnerships
. our ability to establish additional and maintain current and additional
commercial partnerships
. our commercial partners' success in commercializing products developed under
our commercial partnership agreements
. our success in commercializing products to which we have retained the rights
under our commercial partnerships
. the costs incurred in enforcing and defending our patent claims and other
intellectual property rights, and
. the costs and timing of obtainin