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UNITED STATES
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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NUMBER: 000-30111
LEXICON GENETICS INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 76-0474169
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
4000 RESEARCH FOREST DRIVE
THE WOODLANDS, TEXAS 77381
(Address of Principal Executive
Offices and Zip Code)
(281) 364-0100
(Registrant's Telephone Number,
Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.001 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 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 voting stock held by non-affiliates of
the registrant was approximately $333.0 million as of March 7, 2001, based on
the closing price of the common stock on the Nasdaq National Market on such date
of $10.0625 per share. For purposes of the preceding sentence only, all
directors, executive officers and beneficial owners of ten percent or more of
the registrant's common stock are assumed to be affiliates. As of March 7, 2001,
48,469,173 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's definitive proxy statement
relating to the registrant's 2001 annual meeting of stockholders, which proxy
statement will be filed under the Securities Exchange Act of 1934 within 120
days of the end of the registrant's fiscal year ended December 31, 2000, are
incorporated by reference into Part III of this annual report on Form 10-K.
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LEXICON GENETICS INCORPORATED
TABLE OF CONTENTS
ITEM
PART I
1. Business...................................................................................... 1
2. Properties.................................................................................... 19
3. Legal Proceedings............................................................................. 19
4. Submissions of Matters to a Vote of Security Holders.......................................... 19
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 20
6. Selected Financial Data....................................................................... 21
7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 22
7A. Quantitative and Qualitative Disclosure About Market Risk..................................... 25
8. Financial Statements and Supplementary Data................................................... 25
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 25
PART III
10. Directors and Executive Officers of the Registrant............................................ 26
11. Executive Compensation........................................................................ 26
12. Security Ownership of Certain Beneficial Owners and Management................................ 26
13. Certain Relationships and Related Transactions................................................ 26
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 27
Signatures............................................................................................... 29
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The Lexicon name and logo and OmniBank(R) are registered trademarks and
LexVision(TM), Lexgen.com(TM), Internet Universal(TM) and e-Biology(TM) are
trademarks of Lexicon Genetics Incorporated.
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In this annual report on Form 10-K, "Lexicon," "we," "us" and "our"
refer to Lexicon Genetics Incorporated.
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FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements.
These statements relate to future events or our future financial performance. We
have attempted to identify forward-looking statements by terminology including
"anticipate," "believe," "can," "continue," "could," "estimate," "expect,"
"intend," "may," "plan," "potential," "predict," "should" or "will" or the
negative of these terms or other comparable terminology. These statements are
only predictions and involve known and unknown risks, uncertainties and other
factors, including the risks outlined under "Item 1. Business - Risk Factors,"
that may cause our or our industry's actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels or activity, performance or achievements expressed or implied by these
forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. We are not under any duty to
update any of the forward-looking statements after the date of this annual
report on Form 10-K to conform these statements to actual results, unless
required by law.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Lexicon Genetics is a drug discovery company of the post-genome era,
using gene knockout technology to define the functions of genes for the
discovery of pharmaceutical products. We are using this technology to expand our
LexVision program and fuel drug discovery programs in cancer, cardiovascular
disease, immune disorders, neurological disease, diabetes and obesity. We have
established drug discovery alliances and functional genomics collaborations with
leading pharmaceutical and biotechnology companies, research institutions and
academic institutions throughout the world to commercialize our technology and
further develop our discoveries.
We generate our gene function discoveries using knockout mice - mice
whose DNA has been altered to disrupt, or "knock out," the function of the
altered gene. Our patented gene trapping and gene targeting technologies enable
us to rapidly generate these knockout mice by altering the DNA of genes in a
special variety of mouse cells, called embryonic stem (ES) cells, which can be
cloned and used to generate mice with the altered gene. We employ an integrated
platform of advanced medical technologies to systematically discover the
functions and potential pharmaceutical uses of the genes we have knocked out. We
believe that our LexVision database, which captures and catalogues the
information resulting from this analysis, and our OmniBank library of more than
100,000 knockout mouse clones provide us and our collaborators significant
opportunities to discover and develop pharmaceutical products based on genomics
- - the study of genes and their function.
We made substantial business and technical progress in the year 2000:
o We commenced our LexVision program and, in September 2000,
established our first LexVision collaboration with
Bristol-Myers Squibb Company, under which we could receive
between $15 million and $25 million in access and delivery
fees, in addition to milestone payments and royalties on
products Bristol-Myers Squibb develops using our technology;
o We established drug discovery alliances with Abgenix, Inc. for
the discovery of human monoclonal antibody drugs and with
Arena Pharmaceuticals, Inc. for the discovery of small
molecule drugs that target an important class of genes called
G protein-coupled receptors, or GPCRs;
o We entered into functional genomics collaborations with
American Home Products, Boehringer Ingelheim Pharmaceuticals,
Inc., Pharmacia Corp. and Tularik, Inc.;
o We expanded our functional genomics collaboration with
Millennium Pharmaceuticals, Inc. and completed the first year
of our collaborations with Johnson & Johnson and N.V. Organon,
both of which were signed in December 1999;
o We nearly doubled the size of our OmniBank library, which we
estimate now contains gene knockout clones for more than 40%
of all genes in the mammalian genome;
o We obtained key patents covering our gene trapping technology
and gene function discoveries; and
o We completed a $220 million initial public offering, one of
the largest in the history of the biotechnology industry.
Lexicon Genetics was incorporated in Delaware in July 1995, and
commenced operations in September 1995. Our corporate headquarters are located
at 4000 Research Forest Drive, The Woodlands, Texas 77381, and our telephone
number is (281) 364-0100. Our corporate website is located at
www.lexicon-genetics.com. Information found on our website should not be
considered part of this annual report on Form 10-K.
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GENOMICS AND DRUG DISCOVERY
The Human Genome
The human genome is comprised of complementary strands of
deoxyribonucleic acid, or DNA, molecules organized into 23 pairs of chromosomes.
Genes, which carry the specific information, or code, necessary to construct, or
express, the proteins that regulate human physiology and disease, make up
approximately three to five percent of the genome. The remaining 95% to 97% of
DNA in chromosomes does not code for protein. It is now estimated that the
entire human genome contains approximately 30,000 to 50,000 genes within a total
of approximately 3.5 billion nucleotide base pairs of "genomic" or "chromosomal"
DNA.
The information contained in genes is used to express proteins via a
two-step process. The first step in protein expression is called transcription,
in which the DNA sequence of a gene is copied into a molecule known as
ribonucleic acid, or RNA. A splicing process within the cell then removes the
introns, or non-coding segments, from the transcript, thereby creating a
messenger RNA, or mRNA. In the second step, the mRNA directs the assembly of the
protein product of the gene in a process called translation.
The Human Genome Project and other publicly and privately-funded DNA
sequencing efforts have invested considerable resources to sequence the genes in
the human genome, culminating in the completion of a "working draft" of sequence
from the human genome in the year 2000 and its publication in February 2001. The
sequence of a gene alone, however, does not permit reliable predictions of its
function in physiology and disease. As a result, the databases of gene sequences
generated by these efforts can be compared by analogy to a dictionary that
contains thousands of words, but only a handful of definitions.
Functional Genomics
The efforts to discover these definitions - to define the functions of
the genes in the human genome and, in doing so, discover which genes encode
pharmaceutically-relevant drug targets and therapeutic proteins - are commonly
referred to as functional genomics. Researchers use a variety of methods to
obtain clues about gene function, such as gathering information about where a
gene's transcript is found and where the corresponding protein is expressed in
the cell. Experiments are also conducted using cell culture, biochemical studies
and non-mammalian organisms. While these methods may provide useful information
about gene function at the biochemical and cellular levels, their ability to
provide information about how genes control mammalian physiology, and thus their
usefulness for drug discovery and development, is significantly limited.
We believe that the method for determining a gene's function that has
the greatest relevance and highest value for drug discovery is to disrupt, or
knock out, the gene in a mouse and assess the physiological, pathological and
behavioral consequences of the disruption of the gene's function. The results of
such an analysis can determine the function and disease relevance of a
particular gene and the potential of the gene or the protein it encodes as a
drug target or therapeutic protein.
This method of defining gene function possesses a number of advantages
in discovering the most promising human drug targets and therapeutic proteins:
o Humans and mice are very similar genetically - large regions
of the two genomes contain similar genes in similar order;
o Humans and mice share very similar physiology - as a result,
the mouse is one of the most widely-used animal model systems
in the pharmaceutical industry; and
o The mouse is the only mammal for which ES cell cloning
technology has been well-established, and it is also the only
mammal that can be genetically engineered on a large scale.
The use of knockout mice has led to substantial successes in
identifying gene function. The methods traditionally used to generate knockout
mice, however, are labor-intensive, slow and often unpredictable, requiring
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highly-skilled scientific personnel and often a year or more of work. These
impediments have limited the rate at which knockout mice may be produced and,
therefore, the rate at which the genes in the mammalian genome may be analyzed.
We estimate that, to date, knockout mice have been made and analyzed for only a
small fraction of all genes.
OUR TECHNOLOGY PLATFORM
We have developed and refined gene-specific gene targeting and
genome-wide gene trapping technologies that enable us to overcome many of the
limitations of traditional methodologies for generating gene knockouts. We are
using these technologies to rapidly generate knockout mice for the analysis of
the functions of hundreds of genes each year. We employ an integrated platform
of advanced medical technologies to systematically analyze the functions and
pharmaceutical relevance of these genes.
Gene Targeting
We use gene targeting technology to rapidly generate knockout mice with
alterations in selected genes. Our gene targeting technology, which is covered
by several key patents, enables us to generate highly-specific alterations in
targeted genes, including alterations that selectively disrupt, or conditionally
regulate, the function of the targeted gene. We believe that our experience and
scale of production using gene targeting technology provide us with substantial
advantages in efficiency and speed relative to others using traditional methods
to generate knockout mice.
We use our gene targeting technology with a second technology known as
Cre/lox recombinase technology to generate alterations that selectively disrupt,
or conditionally regulate, the function of the targeted gene. We use several
other technologies that enable the regulation of the function of targeted genes
by different methods. The regulation of gene activity using these technologies
may closely model the pharmacological action of drugs that interact with
specific targets.
Gene Trapping
We are using our patented gene trapping technology, a high-throughput
method of generating knockout mouse clones that we invented, to expand our
OmniBank library. Our gene trapping technology uses a type of virus called a
retrovirus that has been genetically engineered. These retroviruses infect cells
in vitro, integrate into the chromosome of the cell and deliver molecular traps
for genes. The gene trap disrupts the function of the gene into which it
integrates, permitting the generation of knockout mice. In addition, the gene
trap stimulates transcription and use the cell's own splicing machinery to
extract a transcript of the trapped gene from the chromosome for automated DNA
sequencing. Because our gene trapping vectors are designed to trap genes in a
manner largely independent of their levels of expression, our OmniBank database
and library includes even those genes that are very rarely expressed. Apply our
gene trapping technology to human cell lines has also allowed us to capture DNA
sequence from thousands of human genes.
We use our gene trapping retroviruses in an automated process to
rapidly and cost-effectively create knockout mouse clones. Our OmniBank library
currently contains more than 100,000 frozen ES cell clones identified by DNA
sequence in a relational database. We are currently generating approximately
1,500 genetically engineered knockout ES cell clones per week using our gene
trapping technology. We estimate that our OmniBank library currently contains
gene knockout clones for more than 40% of all genes in the mammalian genome.
LexVision Technology Platform
We employ an integrated platform of advanced medical technologies to
rapidly and systematically discover and catalogue the functions of the genes we
have knocked out using our gene trapping and gene targeting technologies. This
state-of-the-art technology platform enables us to assess the phenotypic
consequences, or function in a living mammal, of the knocked-out gene across a
variety of parameters relevant to human disease, including cancer,
cardiovascular disease, immune disorders, neurological disease, diabetes and
obesity. Most of the technologies we employ are non-invasive, permitting
longitudinal studies of gene function over time that are not feasible using
conventional techniques for the analysis of knockout mice. The information
resulting from this
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analysis is captured in the LexVision relational database for our use, and use
by our collaborators, to discover genomics-based pharmaceutical products.
Drug Discovery Programs
We are using the discoveries made in our LexVision program to fuel drug
discovery programs in cancer, cardiovascular disease, immune disorders,
neurological disease, diabetes and obesity. We are conducting drug discovery
efforts in these areas on our own and in collaboration with the companies with
which we have established drug discovery alliances.
Research and Development Expenses
In 2000, we incurred $31.6 million on company-sponsored research and
development activities, including $10.9 million of stock-based compensation
expense.
OUR STRATEGY
We believe that genomics represents an opportunity for the development
of drugs that address medical needs for which there are presently no effective
treatments, as well as drugs that are more effective or have fewer side effects
than the treatments that are currently available. Drugs on the market today
interact with a total of about 500 specific protein targets, each of which is
encoded by a gene. While estimates of the total number of potential drug targets
encoded within the human genome vary, many experts believe that genomics
research could discover as many as 5,000 new targets for pharmaceutical
development. Very little is known about the functions of most genes, however,
presenting a major challenge to traditional drug discovery research.
We believe that the solution to this challenge requires redefining the
way drug discovery is conducted by systematically determining the functions of
large numbers of genes in mice, which, as mammals, share significant genetic and
physiological similarities with humans. We believe that the resulting
information will enable us and our collaborators to discover the most promising
drug targets and therapeutic proteins from the human genome.
Our principal objective is to establish a leadership position in drug
target and therapeutic protein discovery. The key elements of our strategy
include the following:
o expand and complete our OmniBank library using our gene
trapping technology to generate gene knockouts throughout the
mouse genome;
o expand our LexVision database using our integrated platform of
advanced medical technologies to systematically discover and
catalogue the functions of large numbers of genes that encode
potential drug targets and therapeutic proteins;
o establish additional drug discovery alliances and functional
genomics collaborations with researchers at pharmaceutical
companies, biotechnology companies and academic institutions;
and
o develop promising drug candidates through collaborations or
with our own resources.
COMMERCIALIZATION
We believe that the genes we identify and the gene functions we define
have the potential to be valuable in the discovery and development of
therapeutic proteins, antibody, small molecule and gene therapy drugs,
diagnostics, and pharmacology and toxicology applications. Our commercialization
strategy is to:
o establish additional subscription agreements for access to our
LexVision database and OmniBank database and library;
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o enter into additional functional genomics collaborations for
the development and analysis of knockout mice;
o expand our e-Biology collaborations;
o continue progress on our existing drug discovery alliances and
establish additional drug discovery and development alliances
with leading pharmaceutical and biotechnology companies; and
o develop a select group of pharmaceutical products on our own.
In implementing our commercialization strategy, we have entered into
the following collaboration and alliance agreements:
LexVision Collaboration
Bristol-Myers Squibb Company. We established a LexVision collaboration
with Bristol-Myers Squibb in September 2000, under which Bristol-Myers Squibb
has non-exclusive access to our LexVision database and OmniBank library for the
discovery of small molecule drugs. We could receive between $15 million and $25
million in access and delivery fees under this agreement, in addition to
milestone payments and royalties on products Bristol-Myers Squibb develops using
our technology. The agreement has a term of five years, although either party
may terminate the agreement after three years.
Drug Discovery Alliances
Abgenix, Inc. We established a drug discovery alliance with Abgenix in
July 2000 to discover novel antibody drugs using our functional genomics
technologies and Abgenix's technology for generating fully human monoclonal
antibodies. We and Abgenix will each have the right to obtain exclusive
commercialization rights, including sublicensing rights, for an equal number of
qualifying antibodies, and will each receive milestone payments and royalties on
sales of antibody drugs from the collaboration that are commercialized by the
other party or a third party sublicensee. Each party will bear its own expenses
under the collaboration. The agreement has a term of three years, subject to the
right of the parties to extend the term for up to three additional one-year
periods.
Arena Pharmaceuticals, Inc. We established a joint research
collaboration with Arena in June 2000 to discover novel drug candidates that
target an important class of receptors called G protein-coupled receptors, or
GPCRs, using our proprietary functional genomics technologies and Arena's
CART(TM) technology. Each company will fund its own efforts and share equally in
upfront fees, milestones and royalties generated from products developed from
alliance GPCRs. We expect most of these products to be licensed to third
parties, but we and Arena may elect to jointly fund further development of
select products discovered in the alliance.
Functional Genomics Collaborations
Millennium Pharmaceuticals, Inc. We established a multi-year functional
genomics agreement in July 1999 for the creation of gene-targeted knockout mice
for use by Millennium in the validation of potential drug targets identified and
selected by Millennium. We had a separate agreement with Millennium for access
to our human gene sequence database that expired in April 2000. We substantially
expanded our functional genomics agreement with Millennium in June 2000,
increasing the number of knockout mice that we will generate for Millennium over
the remaining term of the agreement. The term of the agreement extends until
June 2002.
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OmniBank Universal Agreements. The OmniBank Universal program allows
pharmaceutical and biotechnology companies to obtain non-exclusive access to our
OmniBank database and to obtain OmniBank and gene-targeted knockout mice under
predefined terms. Pharmaceutical and biotechnology companies that identify drug
targets of interest through either OmniBank or custom knockout mice also have
the option to engage us to analyze the phenotypes of those mice. We typically
receive annual subscription fees and fees for knockout mice with annual minimum
commitments and, under some of these agreements, may receive royalties on
products developed using novel genes discovered in OmniBank. We have entered
into agreements with the following companies under this program:
COMPANY DATE OF AGREEMENT END OF ACCESS PERIOD
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Abgenix, Inc. January 2001 January 2004
Tularik Inc. October 2000 October 2003
American Home Products March 2000 March 2003
Boehringer Ingelheim Pharmaceuticals, Inc. February 2000 February 2003
(a subsidiary of Boehringer Ingelheim GmBH, International)
Pharmacia Corp. January 2000 January 2003
The R.W. Johnson Pharmaceutical Research Institute December 1999 December 2001
(a subsidiary of Johnson & Johnson)
N.V. Organon December 1999 December 2002
(a subsidiary of Akzo Nobel)
DuPont Pharmaceuticals Company July 1998
(a subsidiary of E.I. du Pont de Nemours and Company)
We have entered into additional functional genomics collaboration
agreements with more than 30 companies and academic institutions throughout the
world under which we receive research fees for the generation of knockout mice
and, with participating institutions, certain rights to license inventions or
royalties on products discovered using such mice.
e-Biology Global Collaboration Program. Finding the best targets for
drug discovery among the estimated 30,000 to 50,000 genes contained in the human
genome is a task of such complexity and scale that it will require the combined
efforts of leading research scientists worldwide. The identification of drug
targets and therapeutic proteins using our technology will require the
application of in-depth scientific and medical knowledge to prioritize genes for
functional studies and to execute those studies. Therefore, we believe that the
magnitude of our OmniBank functional genomics resource uniquely enables
collaboration through the Internet to accelerate the discovery of gene function.
Researchers at pharmaceutical companies, biotechnology companies and
academic institutions worldwide subscribe to our OmniBank database through the
Internet. Our bioinformatics software allows subscribers to mine our OmniBank
database for interesting genes and knockout mice. Subscribers can acquire
OmniBank knockout mice on a non-exclusive basis and determine the function of
genes under our e-Biology collaboration program. In this program, we receive
fees for OmniBank knockout mice and, with participating institutions, certain
rights to license inventions or to receive royalties on pharmaceutical products
discovered using our mice. In cases where we do not obtain such rights, our
e-Biology collaborations leverage the value of OmniBank since we may also elect
to pursue any clone acquired through that program for gene function research
either on our own or with a commercial collaborator. We believe that Lexgen.com
and our e-Biology collaborations will allow us to harvest high-value functional
genomics information for application in drug discovery and facilitate
collaborations between us and pharmaceutical and biotechnology companies. We
have entered into more than 100 agreements under our e-Biology collaboration
program with researchers at leading institutions throughout the world.
Technology Sublicenses. We have granted non-exclusive, internal-use
sublicenses under certain of our gene targeting patent rights to a total of
fourteen leading pharmaceutical and biotechnology companies. These agreements
typically have a term of one to three years, in some cases with provisions for
subsequent renewals.
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PATENTS AND PROPRIETARY RIGHTS
We will be able to protect our proprietary rights from unauthorized use
by third parties only to the extent that those rights are covered by valid and
enforceable patents or are effectively maintained as trade secrets. Accordingly,
patents and other proprietary rights are an essential element of our business.
We seek patent protection for the genes, proteins and drug targets that we
discover. Specifically, we seek patent protection for:
o the sequences of genes that we believe to be novel, including
full-length genes and the partial gene sequences contained in
our human gene trap and OmniBank databases, the proteins they
encode and their predicted utility as a drug target or
therapeutic protein;
o the utility of genes and the drug targets or therapeutic
proteins they encode based on our discoveries of their
biological functions using knockout mice; and
o various enabling technologies in the fields of mutagenesis, ES
cell manipulation and transgenic or knockout mice.
We own or have exclusive rights to three issued U.S. patents that cover
our gene trapping technology and five issued U.S. patents that cover specific
knockout mice and discoveries of the functions of genes made using knockout
mice. We have licenses under 38 additional U.S. patents, and corresponding
foreign patents and patent applications, in the fields of gene targeting, gene
trapping and genetic manipulation of mouse ES cells. These include patents
covering the use of positive-negative selection, isogenic DNA and Cre/lox
technology to which we hold exclusive rights in certain fields. We have filed or
have exclusive rights to more than 300 pending patent applications in the United
States, the European Patent Office, the national patent offices of other foreign
countries or under the Patent Cooperation Treaty, covering our gene trapping
technology, the DNA sequences of genes and other products and processes.
Collectively, these patent applications cover, among other things, more than 200
full-length human gene sequences, more than 50,000 partial human gene sequences,
and more than 35,000 knockout mouse clones and corresponding mouse gene
sequence tags. Patents typically have a term of no longer than 20 years from the
date of filing.
All of our employees, consultants and advisors are required to execute
a confidentiality agreement upon the commencement of employment or consultation.
In general, the agreement provides that all inventions conceived by the employee
or consultant, and all confidential information developed or made known to the
individual during the term of the agreement, shall be our exclusive property and
shall be kept confidential, with disclosure to third parties allowed only in
specified circumstances. We cannot assure you, however, that these agreements
will provide useful protection of our proprietary information in the event of
unauthorized use or disclosure of such information.
COMPETITION
The biotechnology and pharmaceutical industries are highly competitive
and characterized by rapid technological change. We face significant competition
in each of the aspects of our business from for-profit companies such as Human
Genome Sciences, Inc., Incyte Pharmaceuticals, Inc., Millennium Pharmaceuticals,
Inc., Deltagen, Inc., DNX (a subsidiary of Xenogen Corporation) and Celera
Genomics, among others, many of which have substantially greater financial,
scientific and human resources than we do. In addition, the Human Genome Project
and a large number of universities and other not-for-profit institutions, many
of which are funded by the U.S. and foreign governments, are also conducting
research to discover genes and their functions.
While we are not aware of any other commercial entity that is
developing large-scale gene trap mutagenesis in ES cells, we face significant
competition from entities using traditional knockout mouse technology and other
technologies. Several companies and a large number of academic institutions
create knockout mice for third parties using these methods, and a number of
companies create knockout mice for use in their own research.
Many of our competitors in drug discovery and development have
substantially greater research and product development capabilities and
financial, scientific, marketing and human resources than we have. As a result,
our competitors may succeed in developing products earlier than we do, obtaining
approvals from the FDA or other regulatory agencies for those products more
rapidly than we do, or developing products that are more effective than
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those we propose to develop. Similarly, our collaborators face similar
competition from other competitors who may succeed in developing products more
quickly, or developing products that are more effective, than those developed by
our collaborators. We expect that competition in this field will intensify.
GOVERNMENT REGULATION
Regulation of Pharmaceutical Products
The development, production and marketing of any pharmaceutical
products developed by us or our collaborators will be subject to extensive
regulation by United States and foreign governmental authorities. In the United
States, new drugs are subject to regulation under the Federal Food, Drug and
Cosmetic Act and biological products are subject to regulation both under
certain provisions of that Act and under the Public Health Services Act. The FDA
regulates, among other things, the development, testing, manufacture, safety,
efficacy, record keeping, labeling, storage, approval, advertising, promotion,
sale and distribution of biologics and new drugs. The process of obtaining FDA
approval has historically been costly and time-consuming.
The standard process required by the FDA before a pharmaceutical agent
may be marketed in the United States includes:
o preclinical tests;
o submission to the FDA of an Investigational New Drug
application, or IND, which must become effective before human
clinical trials may commence;
o adequate and well-controlled human clinical trials to
establish the safety and efficacy of the drug or biologic in
our intended application;
o for drugs, submission of a New Drug Application, or NDA, or a
Biologic License Application, or BLA, with the FDA; and
o FDA approval of the NDA or BLA prior to any commercial sale or
shipment of the drug.
In addition to obtaining FDA approval for each product, each drug
manufacturing establishment must be inspected and approved by the FDA. All
manufacturing establishments are subject to inspections by the FDA and by other
federal, state and local agencies and must comply with current Good
Manufacturing Practices requirements.
The preclinical studies can take several years to complete, and there
is no guarantee that an IND based on those studies will become effective to even
permit clinical testing to begin. Once clinical trials are initiated, they
generally take two to five years, but may take longer, to complete. After
completion of clinical trials of a new drug or biologic product, FDA marketing
approval of the NDA or BLA must be obtained. This process requires substantial
time and effort and there is no assurance that the FDA will accept the NDA or
BLA for filing and, even if filed, that approval will be granted. In the past,
the FDA's approval of the NDA or BLA has taken, on average, two to five years;
if questions arise, approval can take more than five years.
In addition to regulatory approvals that must be obtained in the United
States, a drug product is also subject to regulatory approval in other countries
in which it is marketed, although the requirements governing the conduct of
clinical trials, product licensing, pricing, and reimbursement vary widely from
country to country. No action can be taken to market any drug product in a
country until an appropriate application has been approved by the regulatory
authorities in that country. FDA approval does not assure approval by other
regulatory authorities. The current approval process varies from country to
country, and the time spent in gaining approval varies from that required for
FDA approval. In some countries, the sale price of a drug product must also be
approved. The pricing review period often begins after market approval is
granted. Even if a foreign regulatory authority approves a drug product, it may
not approve satisfactory prices for the product.
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Other Regulations
In addition to the foregoing, our business is and will be subject to
regulation under various state and federal environmental laws, including the
Occupational Safety and Health Act, the Resource Conservation and Recovery Act
and the Toxic Substances Control Act. These and other laws govern our use,
handling and disposal of various biological, chemical and radioactive substances
used in and wastes generated by our operations. We believe that we are in
material compliance with applicable environmental laws and that our continued
compliance with these laws will not have a material adverse effect on our
business. We cannot predict, however, whether new regulatory restrictions on the
production, handling and marketing of biotechnology products will be imposed by
state or federal regulators and agencies or whether existing laws and
regulations will not adversely affect us in the future.
EMPLOYEES AND CONSULTANTS
We believe that our success will be based on, among other things,
achieving and retaining scientific and technological superiority and identifying
and retaining capable management. We have assembled a highly qualified team of
scientists as well as executives with extensive experience in the biotechnology
industry.
As of March 1, 2001, the Company employed 322 persons, of whom 64 hold
M.D., Ph.D. or D.V.M. degrees and 46 hold other advanced degrees. We believe
that our relationship with our employees is good.
SCIENTIFIC ADVISORY PANEL MEMBERS
We have consulting relationships with a number of scientific advisors,
organized into panels focused on specific human diseases or conditions. At our
request, these advisors review the feasibility of product development programs
under consideration, provide advice concerning advances in areas related to our
technology and aid in recruiting personnel. Most of these advisors receive cash
and stock-based compensation for their services, as well as access to our
OmniBank database and mice from our OmniBank library. All of the advisors are
employed by academic institutions or other entities and may have commitments to
or advisory agreements with other entities that may limit their availability to
us. Our advisors are required to disclose and assign to us any ideas,
discoveries and inventions they develop in the course of providing consulting
services to us. We also use consultants for various administrative needs. None
of our consultants or advisors is otherwise affiliated with us. Our scientific
advisors and consultants include the following persons:
NAME AND PANEL AFFILIATION TITLE
- -------------- ----------- -----
AGING AND CANCER
Carlo M. Croce, M.D. Thomas Jefferson University Director, Kimmel Cancer Center
Richard Fishel, Ph.D. Thomas Jefferson University Professor of Microbiology and Immunology
H. Earl Ruley, Ph.D. Vanderbilt University Professor, Department of Microbiology and
Immunology
ENDOCRINOLOGY AND OSTEOPOROSIS
John D. Brunzell, M.D. University of Washington Professor of Medicine, Division of
Metabolism, Endocrinology & Nutrition
Raif S. Geha, M.D. Harvard Medical School Professor of Pediatrics and Immunology
J. Wesley Pike, Ph.D. University of Cincinnati Professor, Department of Molecular and
Cellular Physiology
Clifford J. Rosen, M.D. Maine Center for Osteoporosis Medical Director for the Maine Center for
Research and Foundation Osteoporosis Research and Foundation
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CARDIOVASCULAR
Thomas M. Coffman, M.D. Duke University Medical Center Professor of Medicine, Chief Division of
Nephrology
Howard Rockman, M.D. Duke University Medical Center Associate Professor of Medicine
Oliver Smithies, Ph.D. University of North Carolina Excellence Professor, Department of
Pathology and Laboratory Medicine
METABOLISM, DIABETES AND OBESITY
Qais Al-Awqati, M.D. Columbia University Professor Physiology and Cell Biophysiology
Wolf-Georg Forsmann, M.D., Ph.D. Neidersachsisches Institut fur Direktor, Professor Neidersachsisches
Peptid-Forschung Institut fur Peptid-Forschung GmbH
Kenneth Heskel Gabbay, M.D. Baylor College of Medicine Head, Section of Molecular Diabetes and
Metabolism, Department of Pediatrics
Beverly Koller, Ph.D. University of North Carolina Assistant Professor, Department of Medicine
G. Stanley McKnight, Ph.D. University of Washington Professor, Department of Pharmacology
Richard D. Palmiter, Ph.D. University of Washington Professor of Biochemistry and Howard Hughes
Medical Institute Investigator
GENOMICS AND BIOINFORMATICS
Eric Douglas Green, M.D., Ph.D. National Human Genome Research Chief, Genome Technology
Institute
Steven R. Gullans, Ph.D. Harvard Institutes of Medicine Associate Professor of Medicine
Paul S. Meltzer, M.D., Ph.D. National Human Genome Research Head, Section of Molecular Genetics, Cancer
Institute Genetics Branch
William R. Pearson, Ph.D. University of Virginia Professor of Biochemistry
Gregory D. Schuler, Ph.D. National Center for Staff Scientist
Biotechnology Information
NEUROLOGY AND DEGENERATIVE DISEASES
Robert Edwards, M.D. University of California San Professor, Department of Neurology and
Francisco Physiology
Jeffrey L. Noebels, M.D., Ph.D. Baylor College of Medicine Professor of Neurology, Neuroscience and
Molecular Genetics
Rudolph E. Tanzi, Ph.D. Harvard Medical School Associate Professor of Neurology
(Neuroscience)
Laurence Tecott, M.D., Ph.D. University of California San Assistant Professor, Department of Psychiatry
Francisco
RISK FACTORS
Our business is subject to risks and uncertainties, including those
described below:
RISKS RELATED TO OUR BUSINESS
We have a history of net losses, and we expect to continue to incur net losses
and may not achieve or maintain profitability
We have incurred net losses since our inception, including net losses
of approximately $26.0 million for the year ended December 31, 2000. As of
December 31, 2000, we had an accumulated deficit of approximately $54.9 million.
We are unsure when we will become profitable, if ever. The size of our net
losses will depend, in part, on the rate of growth, if any, in our revenues and
on the level of our expenses.
We derive substantially all of our revenues from subscriptions to our
databases, functional genomics collaborations for the development and, in some
cases, analysis of knockout mice, and technology licenses, and will
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continue to do so for the foreseeable future. Revenues from database
subscriptions, collaborations and licenses are uncertain because our existing
agreements have fixed terms or relate to specific projects of limited duration.
Our ability to secure future agreements will depend upon our ability to address
the needs of our potential future subscribers and collaborators.
A large portion of our expenses are fixed, including expenses related
to facilities, equipment and personnel. In addition, we expect to spend
significant amounts to fund research and development and to enhance our core
technologies. As a result, we expect that our operating expenses will increase
significantly in the near term and, consequently, we will need to generate
significant additional revenues to achieve profitability. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis.
Our quarterly operating results have been and likely will continue to fluctuate,
and we believe that quarter-to-quarter comparisons of our operating results are
not a good indication of our future performance
Our quarterly operating results have fluctuated in the past and are
likely to do so in the future. In addition to the risks and uncertainties
described in this section, some of the factors that could cause our operating
results to fluctuate include:
o our ability to establish new database subscriptions or
research contracts with collaborators and new technology
licenses, and the timing of such arrangements;
o the expiration or other termination of database subscriptions
or research contracts with our collaborators or technology
licenses, which may not be renewed or replaced;
o the success rate of our discovery efforts leading to milestone
payments and royalties;
o the timing and willingness of our collaborators to
commercialize products which would result in milestone
payments and royalties; and
o general and industry-specific economic conditions, which may
affect our and our collaborators' research and development
expenditures.
Due to the likelihood of fluctuations in our revenues and expenses, we
believe that quarter-to-quarter comparisons of our operating results are not a
good indication of our future performance. Our operating results in some
quarters may not meet the expectations of stock market analysts and investors.
In that case, our stock price would probably decline.
We are an early-stage company with an unproven business strategy
Our business strategy of using our gene sequence databases and knockout
mice to select promising candidates for drug target development and
commercializing our discoveries through collaborations and alliances is
unproven. Our success will depend upon our ability to enter into additional
collaboration and alliance agreements on favorable terms, determine which genes
have potential value and select an appropriate commercialization strategy for
each potential product we or our collaborators choose to pursue.
Biotechnology and pharmaceutical companies have successfully developed
and commercialized only a limited number of gene-based products to date. We have
not proven our ability to identify gene-based drugs or drug targets with
commercial potential, or to develop or commercialize drugs or drug targets that
we do identify. It is difficult to successfully select those genes with the most
potential for commercial development, and we do not know that any products based
on genes that we discover can be successfully commercialized. In addition, we
may experience unforeseen technical complications in the processes we use to
generate our gene sequence database and functional genomics resources. These
complications could materially delay or limit the use of those databases and
resources, substantially increase the anticipated cost of generating them or
prevent us from implementing our processes at appropriate quality and throughput
levels.
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We face substantial competition in the discovery of the DNA sequences of genes
and their functions and in our drug discovery and product development efforts
There are a finite number of genes in the human genome, and we believe
that the majority of such genes have been identified by us or others conducting
genomic research and that virtually all will be identified within the next few
years. We face significant competition in our efforts to discover and patent the
sequence and other information derived from such genes from entities using
alternative, and in some cases higher volume and larger scale, approaches for
the same purpose.
We also face competition from entities using more traditional methods
to discover genes related to particular diseases. Many of these entities have
substantially greater financial, scientific and human resources than we do. A
large number of universities and other not-for-profit institutions, many of
which are funded by the U.S. and foreign governments, are also conducting
research to discover genes. A substantial portion of this research has been
conducted under the international Human Genome Project, a multi-billion dollar
program funded by the U.S. government and The Wellcome Trust. One or more of
these entities may discover and establish a patent position in one or more of
the genes that we wish to study or use in the development of a pharmaceutical
product.
We face significant competition in our drug discovery and product
development efforts from entities using traditional knockout mouse technology
and other functional genomics technologies, as well as from those using other
traditional drug discovery techniques. These competitors may develop products
earlier than we do, obtain regulatory approvals faster than we can and develop
products that are more effective than ours. Our ability to use our patent rights
to prevent competition in the creation and use of knockout mice is more limited
outside of the United States. Competitors could discover and establish patents
in genes or gene products that we or our collaborators identify as a drug target
or therapeutic protein. Numerous companies, academic institutions and government
consortia are engaged in efforts to determine the function of genes and gene
products. Furthermore, other methods for conducting functional genomics research
may ultimately prove superior, in some or all respects, to the use of knockout
mice. In addition, technologies more advanced than or superior to our gene
trapping technology may be developed, thereby rendering our gene trapping
technology obsolete.
We rely heavily on collaborators to develop and commercialize products based on
genes that we identify as promising candidates for development as drug targets
Since we do not currently possess the resources necessary to develop,
obtain approvals for or commercialize potential products based on genes
contained in our databases or genes that we identify as promising candidates for
development as drug targets or therapeutic proteins, we must enter into
collaborative arrangements to develop and commercialize these products. We will
have limited or no control over the resources that any collaborator may devote
to this effort. Any of our present or future collaborators may not perform their
obligations as expected. These collaborators may breach or terminate their
agreements with us or otherwise fail to conduct product discovery, development
or commercialization activities successfully or in a timely manner. Further, our
collaborators may elect not to develop products arising out of our collaborative
arrangements or may not devote sufficient resources to the development,
approval, manufacture, marketing or sale of these products. If any of these
events occurs, we may not be able to develop or commercialize potential
products.
Some of our agreements provide us with rights to participate in the
commercial development of compounds or therapeutic approaches derived from our
collaborations or access to our databases, technology or intellectual property.
We may not be able to obtain such rights in future collaborations or agreements.
Our ability to obtain such rights depends in part on the validity of our
intellectual property, the advantages and novelty of our technologies and
databases and our negotiating position relative to each potential collaborator
or customer. Previous attempts by others in the industry to obtain these rights
with respect to the development of knockout mice and related technologies have
generated considerable controversy, especially in the academic community.
Any cancellation by or conflicts with our collaborators could harm our business
Our collaboration agreements may not be renewed and may be terminated
in the event either party fails to fulfill its obligations under these
agreements. Any failure to renew or cancellation by a collaborator could mean a
significant loss of revenues and volatility in our earnings.
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In addition, we may pursue opportunities in fields that could conflict
with those of our collaborators. Moreover, disagreements could arise with our
collaborators over rights to our intellectual property or our rights to share in
any of the future revenues of compounds or therapeutic approaches developed by
our collaborators. These kinds of disagreements could result in costly and
time-consuming litigation. Any conflict with our collaborators could reduce our
ability to obtain future collaboration agreements and could have a negative
impact on our relationship with existing collaborators, adversely affecting our
business and revenues. Some of our collaborators could also become competitors
in the future. Our collaborators could develop competing products, preclude us
from entering into collaborations with their competitors or terminate their
agreements with us prematurely. Any of these developments could harm our product
development efforts.
We have no experience in developing and commercializing products on our own
Our ability to develop and commercialize products on our own will
depend on our ability to internally develop preclinical, clinical, regulatory
and sales and marketing capabilities, or enter into arrangements with third
parties to provide those functions. We may not be successful in developing these
capabilities or entering into agreements with third parties on favorable terms,
or at all. Further, our reliance upon third parties for these capabilities could
reduce our control over such activities and could make us dependent upon these
parties. Our inability to develop or contract for these capabilities would
significantly impair our ability to develop and commercialize products.
We may engage in future acquisitions, which may be expensive and time consuming
and from which we may not realize anticipated benefits
We may acquire additional businesses, technologies and products, if we
determine that these businesses, technologies and products complement our
existing technology or otherwise serve our strategic goals. We currently have no
commitments or agreements with respect to any acquisitions. If we do undertake
any transactions of this sort, the process of integrating an acquired business,
technology or product may result in operating difficulties and expenditures and
may absorb significant management attention that would otherwise be available
for ongoing development of our business. Moreover, we may never realize the
anticipated benefits of any acquisition. Future acquisitions could result in
potentially dilutive issuances of our equity securities, the incurrence of debt
and contingent liabilities and amortization expenses related to goodwill and
other intangible assets, which could adversely affect our results of operations
and financial condition.
If we lose our key personnel or are unable to attract and retain additional
personnel, we may be unable to pursue collaborations or develop our own products
We are highly dependent on Arthur T. Sands, M.D., Ph.D., our president
and chief executive officer, as well as other principal members of our
management and scientific staff. The loss of any of these personnel would have a
material adverse effect on our business, financial condition or results of
operations and could inhibit our product development and commercialization
efforts. Although we have entered into employment agreements with some of our
key personnel, including Dr. Sands, these employment agreements are for a
limited period of time and not all key personnel have employment agreements.
Recruiting and retaining qualified scientific personnel to perform
future research and development work will be critical to our success.
Competition for experienced scientists is high. Failure to recruit and retain
scientific personnel on acceptable terms could prevent us from achieving our
business objectives.
We may encounter difficulties in managing our growth, which could increase our
losses
We have experienced a period of rapid growth that has placed and, if
this growth continues, will continue to place a strain on our human and capital
resources. If we are unable to manage our growth effectively, our losses could
increase. The number of our employees increased from 57 at December 31, 1997 to
93 at December 31, 1998, 122 at December 31, 1999, 287 at December 31, 2000 and
322 at March 1, 2001. We intend to increase the number of our employees
significantly during the remainder of 2001. Our ability to manage our operations
and growth effectively requires us to continue to expend funds to improve our
operational, financial and management controls,
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reporting systems and procedures. If we are unable to successfully implement
improvements to our management information and control systems in an efficient
or timely manner, or if we encounter deficiencies in existing systems and
controls, our management may not have adequate information to manage our
day-to-day operations.
Because our entire OmniBank mouse clone library is located at a single facility,
the occurrence of a disaster could significantly disrupt our business
Our OmniBank mouse clone library and its back-up are stored in liquid
nitrogen freezers located at our facility in The Woodlands, Texas. If a disaster
such as a fire, flood, hurricane, tornado or similar event significantly damages
or destroys the facility in which our mouse clone library and back-up are
stored, our business could be disrupted until we could regenerate the library
and, as a result, our stock price could decline. Our business interruption
insurance may not be sufficient to compensate us in the event of a major
interruption due to such a disaster.
We may need additional capital in the future and, if it is not available, we
will have to curtail or cease operations
Our future capital requirements will be substantial and will depend on
many factors, including our ability to obtain database subscription and
collaboration agreements and government grants, the amount and timing of
payments under such agreements and grants, the level and timing of our research
and development expenditures, market acceptance of our products, the resources
we devote to developing and supporting our products and other factors. Our
capital requirements will also be affected by any expenditures we make in
connection with license agreements and acquisitions of and investments in
complementary technologies and businesses.
We anticipate that our existing capital resources will enable us to
maintain our currently planned operations for at least the next several years.
However, changes may occur that would consume available capital resources
significantly sooner than we expect. If our capital resources are insufficient
to meet future capital requirements, we will have to raise additional funds to
continue the development of our technologies and complete the commercialization
of products, if any, resulting from our technologies. We may be unable to raise
sufficient additional capital; if so, we will have to curtail or cease
operations.
RISKS RELATED TO OUR INDUSTRY
Our ability to patent our discoveries is uncertain because patent laws and their
interpretation are highly uncertain and subject to change
The patent positions of biotechnology firms generally are highly
uncertain and involve complex legal and factual questions that will determine
who has the right to develop a particular product. No clear policy has emerged
regarding the breadth of claims covered in biotechnology patents. The
biotechnology patent situation outside the United States is even more uncertain
and is currently undergoing review and revision in many countries. Changes in,
or different interpretations of, patent laws in the United States and other
countries might allow others to use our discoveries or to develop and
commercialize our products without any compensation to us. We anticipate that
these uncertainties will continue for a significant period of time.
Our patent applications may not result in enforceable patent rights
Our disclosures in our patent applications may not be sufficient to
meet the statutory requirements for patentability. Additionally, our current
patent applications cover many genes and we expect to file patent applications
in the future covering many more genes. As a result, we cannot predict which of
our patent applications will result in the granting of patents or the timing of
the granting of our patents. Our ability to obtain patent protection based on
genes or partial gene sequences will depend, in part, upon identification of a
function for the gene or gene sequences sufficient to meet the statutory
requirement that an invention have utility and that a patent application
describe the invention with sufficient specificity. While the U.S. Patent and
Trademark Office has issued guidelines for the examination of patent
applications claiming gene sequences, their therapeutic uses and novel proteins
coded by such genes, the impact of these guidelines is uncertain and may delay
or negatively impact our patent position. Biologic data in addition to that
obtained by our current technologies may be required for issuance of patents or
human therapeutics. If required, obtaining such biologic data could delay, add
substantial
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costs to, or affect our ability to obtain patent protection. There can be no
assurance that the disclosures in our current or future patent applications,
including those we may file with our collaborators, will be sufficient to meet
these requirements. Alternatively, if the level of biologic or other
experimental data required to obtain a patent is determined to be minimal, then
other companies who emphasize determining the gene sequence without significant
biologic function information will obtain a prior and superior patent position
to us and our collaborators. Even if patents are issued, there may be current or
future uncertainty as to the scope of the coverage or protection provided by any
such patents. In addition, the Human Genome Project, as well as many companies
and institutions, have identified genes and deposited partial gene sequences in
public databases and are continuing to do so. These public disclosures might
limit the scope of our claims or make unpatentable subsequent patent
applications on full-length genes.
Other companies or institutions have filed and will file patent
applications that attempt to patent genes or gene sequences that may be similar
to our patent applications. The U.S. Patent and Trademark Office could decide
competing patent claims in an interference proceeding. Any such proceeding would
be costly, and we may not prevail. In addition, patent applications filed by
third parties may have priority over patent applications we file. In this event,
the prevailing party may require us or our collaborators to stop pursuing a
potential product or to negotiate a license arrangement to pursue the potential
product. We may not be able to obtain a license from the prevailing party on
acceptable terms, or at all.
Some court decisions indicate that disclosure of a partial sequence may
not be sufficient to support the patentability of a full-length sequence. These
decisions have been confirmed by recent pronouncements of the U.S. Patent and
Trademark Office. We believe that these court decisions and the uncertain
position of the U.S. Patent and Trademark Office present a significant risk that
the U.S. Patent and Trademark Office will not issue patents based on patent
disclosures limited to partial gene sequences, like those represented in our
human gene trap database. In addition, we are uncertain about the scope of the
coverage, enforceability and commercial protection provided by any patents
issued on the basis of partial gene sequences.
If other companies and institutions obtain patents claiming the functional uses
of genes and gene products based upon gene sequence information and predictions
of gene function, we may be unable to obtain patents for our discoveries of
biological functions in knockout mice
We intend to pursue patent protection covering the novel uses and
functions of new and known genes and proteins in mammalian physiology and
disease states. While an actual description of the biological function of a gene
or protein should enhance a patent position, we cannot assure you that such
information will increase the probability of issuance of any patents. Further,
many other entities are currently filing patents on genes which are identical or
similar to our filings. Many such applications seek to protect partial human
gene sequences, full-length gene sequences and the deduced protein products
encoded by the sequences while others use biological or other laboratory data.
Some of these applications attempt to assign biologic function to the DNA
sequences based on computer predictions. There is the significant possibility
that patents claiming the functional uses of genes and gene products will be
issued to our competitors based on such information.
We are presently involved in patent litigation and may be involved in future
patent litigation and other disputes regarding intellectual property rights, and
can give no assurances that we will prevail in any such litigation or other
dispute
Our potential products and those of our collaborators may give rise to
claims that they infringe the patents of others. This risk will increase as the
biotechnology industry expands and as other companies obtain more patents and
attempt to discover genes through the use of high-speed sequencers. In addition,
many companies have well-established patent portfolios directed to common
techniques, methods and means of developing, producing and manufacturing
pharmaceutical products. Other companies or institutions could bring legal
actions against us or our collaborators for damages or to stop us or our
collaborators from manufacturing and marketing the affected products. If any of
these actions are successful, in addition to our potential liability for
damages, these entities may require us or our collaborators to obtain a license
in order to continue to manufacture or market the affected products or may force
us to terminate manufacturing or marketing efforts.
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We may need to pursue litigation against others to enforce our patents
and intellectual property rights. Patent litigation is expensive and requires
substantial amounts of management attention. In addition, the eventual outcome
of any such litigation is uncertain.
On May 24, 2000, we filed a complaint against Deltagen, Inc. in U.S.
District Court for the District of Delaware alleging that Deltagen is willfully
infringing the claims of United States Patent No. 5,789,215, under which we hold
an exclusive license from GenPharm International, Inc. This patent covers
methods of engineering the animal genome, including methods for the production
of knockout mice by homologous recombination, using isogenic DNA technology. In
the complaint, we are seeking unspecified damages from Deltagen, as well as
injunctive relief. Deltagen has counterclaimed for a declaratory judgment that
the patent is invalid and unenforceable and is not infringed by Deltagen. On
November 14, 2000, Deltagen filed an amended counterclaim alleging antitrust
claims against us and GenPharm, for which Deltagen is seeking unspecified
damages.
On October 13, 2000, we filed a second complaint against Deltagen, Inc.
in U.S. District Court for the Northern District of California alleging that
Deltagen is willfully infringing the claims of United States Patents Nos.
5,464,764, 5,487,992, 5,627,059, and 5,631,153, under which also we hold
exclusive licenses from GenPharm International. These patents cover methods and
vectors for using positive-negative selection for producing gene targeted, or
"knockout," cells and animals, including the production of knockout mice by
homologous recombination. In the complaint, we are seeking unspecified damages
from Deltagen, as well as injunctive relief. Deltagen has counterclaimed for a
declaratory judgment that the patents are invalid and unenforceable and are not
infringed by Deltagen.
While we believe that our complaints against Deltagen are meritorious
and that Deltagen's counterclaims against us are without merit, we can provide
no assurance that we will prevail in our litigation against Deltagen or that, if
we prevail, any damages or equitable remedies awarded will be commercially
valuable. If Deltagen prevails in declaring our patents invalid or on its
antitrust claim against us, our business and financial position could be
adversely affected. Furthermore, we are likely to incur substantial costs and
expend substantial personnel time in pursuing our litigation against Deltagen.
We believe that there will continue to be significant litigation in our
industry regarding patent and other intellectual property rights. We and many of
our competitors have and are continuing to expend significant amounts of time,
money and management resources on intellectual property litigation. If we become
involved in additional litigation, it could consume a substantial portion of our
resources and could negatively affect our results of operations.
Patent litigation involves substantial risks. Each time we sue for
patent infringement we face the risk that the patent will be held invalid or
unenforceable. Such a determination is binding on us for all future litigation
involving that patent. Furthermore, in light of recent U.S. Supreme Court
precedent, our ability to enforce our patents against state agencies, including
state sponsored universities and research labs is limited by the Eleventh
Amendment to the U.S. Constitution. Finally, opposition by academicians and the
government may hamper our ability to enforce our patent against academic or
government research laboratories. Enforcement of our patents may cause our
reputation in the academic community to be injured.
Issued patents may not fully protect our discoveries, and our competitors may be
able to commercialize products similar to those covered by our issued patents
Issued patents may not provide commercially-meaningful protection
against competitors. Other companies or institutions may challenge our or our
collaborators' patents or independently develop similar products that could
result in an interference proceeding in the Patent and Trademark Office or a
legal action. In the event any single researcher or institution infringes upon
our or our collaborators' patent rights, enforcing these rights may be difficult
and time consuming. Others may be able to design around these patents or develop
unique products providing effects similar to our products. We may be required to
choose between pursuing litigation against infringers and being unable to
recover damages or otherwise enforce our patent rights.
In addition, others may discover uses for genes or proteins other than
those uses covered in our patents, and these other uses may be separately
patentable. Even if we have a patent claim on a particular gene, the holder of a
patent covering the use of that gene could exclude us from selling a product
that is based on the same use of that
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gene. In addition, with respect to certain of our patentable inventions, we have
decided not to pursue patent protection outside the United States, both because
we do not believe it is cost effective and because of confidentiality concerns.
Accordingly, our international competitors could develop, and receive foreign
patent protection for gene sequences and functions for which we are seeking U.S.
patent protection.
Our rights to the use of technologies licensed by third parties are not within
our control
We rely, in part, on licenses to use certain technologies which are
material to our business. We do not own the patents which underly these
licenses. Our rights to use these technologies and practice the inventions
claimed in the licensed patents are subject to our licensors abiding by the
terms of those licenses and not terminating them. In many cases, we do not
control the prosecution or filing of the patents to which we hold licenses. We
rely upon our licensors to prevent infringement of those patents. The scope of
our rights under our licenses may be subject to dispute by our licensors or
third parties.
We may be unable to protect our trade secrets
While we have entered into confidentiality agreements with employees
and collaborators, we may not be able to prevent the disclosure of our trade
secrets. In addition, other companies or institutions may independently develop
substantially equivalent information and techniques.
We may become subject to regulation under the Animal Welfare Act, which could
subject us to additional costs and permit requirements
The Animal Welfare Act, or AWA, is the federal law that currently
covers animals in laboratories. It applies to institutions or facilities using
any regulated live animals for research, testing, teaching or experimentation,
including diagnostic laboratories and private companies in the pharmaceutical
and biotechnology industries. The AWA currently does not cover rats or mice.
However, the United States Department of Agriculture, which enforces the AWA,
has entered into a proposed settlement agreement under which it has agreed to
commence the process of adopting regulations under the AWA to include mice
within its coverage.
Currently, the AWA imposes a wide variety of specific regulations which
govern the humane handling, care, treatment and transportation of certain
animals by producers and users of research animals, most notably personnel,
facilities, sanitation, cage size, feeding, watering and shipping conditions. If
the USDA includes mice in its regulations, we will become subject to
registration, inspections and reporting requirements. Compliance with the AWA
could be expensive, and the regulations eventually adopted by the USDA could
impair our research and production efforts.
We and our collaborators are subject to extensive and uncertain government
regulatory requirements, which could increase our operating costs or adversely
affect our ability to obtain government approval of products based on genes that
we identify in a timely manner or at all
Since we develop animals containing changes in their genetic make-up,
we may become subject to a variety of laws, guidelines, regulations and treaties
specifically directed at genetically modified organisms, or GMOs. The area of
environmental releases of GMOs is rapidly evolving and is currently subject to
intense regulatory scrutiny, particularly internationally. If we become subject
to these laws we could incur substantial compliance costs. For example, the
Biosafety Protocol, or the BSP, a recently adopted treaty, is expected to cover
certain shipments from the United States to countries abroad that have signed
the BSP. The BSP is also expected to cover the importation of living modified
organisms, a category that could include our animals. If our animals are not
contained as described in the BSP, our animals could be subject to the
potentially extensive import requirements of countries that are signatories to
the BSP.
Drugs and diagnostic products are subject to an extensive and uncertain
regulatory approval process by the FDA and comparable agencies in other
countries. The regulation of new products is extensive, and the required process
of laboratory testing and human studies is lengthy and expensive. The burden of
these regulations will fall on us to the extent we develop proprietary products
on our own. If the products are the result of a collaboration effort, these
burdens may fall on our collaborating partner or may be shared with us. We may
not be able to obtain
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FDA approvals for those products in a timely manner, or at all. We may encounter
significant delays or excessive costs in our efforts to secure necessary
approvals or licenses. Even if we obtain FDA regulatory approvals, the FDA
extensively regulates manufacturing, labeling, distributing, marketing,
promotion and advertising after product approval. Moreover, several of our
product development areas may involve relatively new technology and have not
been the subject of extensive product testing in humans. The regulatory
requirements governing these products and related clinical procedures remain
uncertain and the products themselves may be subject to substantial review by
foreign governmental regulatory authorities that could prevent or delay approval
in those countries. Regulatory requirements ultimately imposed on our products
could limit our ability to test, manufacture and, ultimately, commercialize our
products.
Security risks in electronic commerce or unfavorable internet regulation may
deter future use of our products and services
We provide access to our databases and the opportunity to acquire our
knockout mice on the Internet. A fundamental requirement to conduct
Internet-based electronic commerce is the secure transmission of confidential
information over public networks. Advances in computer capabilities, new
discoveries in the field of cryptography or other developments may result in a
compromise or breach of the algorithms we use to protect content and
transactions on Lexgen.com or proprietary information in our OmniBank database.
Anyone who is able to circumvent our security measures could misappropriate our
proprietary information, confidential customer information or cause
interruptions in our operations. We may be required to incur significant costs
to protect against security breaches or to alleviate problems caused by
breaches. Further, a well-publicized compromise of security could deter people
from using the Internet to conduct transactions that involve transmitting
confidential information.
Because of the growth in electronic commerce, Congress has held
hearings on whether to regulate providers of services and transactions in the
electronic commerce market, and federal or state authorities could enact laws,
rules or regulations affecting our business or operations. If enacted and
applied to our business, these laws, rules or regulations could render our
business or operations more costly, burdensome, less efficient or impracticable.
We use hazardous chemicals and radioactive and biological materials in our
business; any disputes relating to improper handling, storage or disposal of
these materials could be time consuming and costly
Our research and development processes involve the use of hazardous
materials, including chemicals and radioactive and biological materials. Our
operations also produce hazardous waste products. We cannot eliminate the risk
of accidental contamination or discharge or any resultant injury from these
materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of these materials. We could be
subject to civil damages in the event of an improper or unauthorized release of,
or exposure of individuals to, these hazardous materials. In addition, claimants
may sue us for injury or contamination that results from our use or the use by
third parties of these materials, and our liability may exceed our total assets.
Compliance with environmental laws and regulations may be expensive, and current
or future environmental regulations may impair our research, development or
production efforts.
We may be sued for product liability
We or our collaborators may be held liable if any product we or our
collaborators develop, or any product which is made with the use or
incorporation of any of our technologies, causes injury or is found otherwise
unsuitable during product testing, manufacturing, marketing or sale. Although we
currently have and intend to maintain product liability insurance, this
insurance may become prohibitively expensive, or may not fully cover our
potential liabilities. Inability to obtain sufficient insurance coverage at an
acceptable cost or otherwise to protect against potential product liability
claims could prevent or inhibit the commercialization of products developed by
us or our collaborators. If we are sued for any injury caused by our or our
collaborators' products, our liability could exceed our total assets.
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Public perception of ethical and social issues may limit or discourage the use
of our technologies, which could reduce our revenues
Our success will depend in part upon our ability to develop products
discovered through our gene trapping and knockout mouse technologies.
Governmental authorities could, for ethical, social or other purposes, limit the
use of genetic processes or prohibit the practice of our gene trapping and
knockout mouse technologies. Claims that genetically engineered products are
unsafe for consumption or pose a danger to the environment may influence public
perceptions. The subject of genetically modified organisms, like knockout mice,
has received negative publicity and aroused public debate in some countries.
Ethical and other concerns about our technologies, particularly the use of genes
from nature for commercial purposes and the products resulting from this use,
could adversely affect the market acceptance of our technologies.
ITEM 2. PROPERTIES
We currently lease approximately 104,000 square feet of space for our
corporate offices and laboratories in buildings located in The Woodlands, Texas,
a suburb of Houston, Texas. Our facilities at this location include a 28,000
square foot state-of-the art animal facility completed in January 1999. We
believe this is one of the largest facilities in the world dedicated to the
generation and analysis of knockout mice.
In October 2000, we entered into a synthetic lease agreement under
which the lessor purchased our current laboratory and office space and animal
facility and agreed to fund the construction of an additional 128,000
square-foot laboratory and office space and a second 60,000 square-foot animal
facility. The construction of these new facilities is expected to be completed
in the fourth quarter of 2001.
ITEM 3. LEGAL PROCEEDINGS
On May 24, 2000, we filed a complaint against Deltagen, Inc. in U.S.
District Court for the District of Delaware alleging that Deltagen is willfully
infringing the claims of United States Patent No. 5,789,215, under which we hold
an exclusive license from GenPharm International, Inc. This patent covers
methods of engineering the animal genome, including methods for the production
of knockout mice by homologous recombination, using isogenic DNA technology. In
the complaint, we are seeking unspecified damages from Deltagen, as well as
injunctive relief. Deltagen has counterclaimed for a declaratory judgment that
the patent is invalid and unenforceable and is not infringed by Deltagen. On
November 14, 2000, Deltagen filed an amended counterclaim alleging antitrust
claims against us and GenPharm, for which Deltagen is seeking unspecified
damages.
On October 13, 2000, we filed a second complaint against Deltagen, Inc.
in U.S. District Court for the Northern District of California alleging that
Deltagen is willfully infringing the claims of United States Patents Nos.
5,464,764, 5,487,992, 5,627,059, and 5,631,153, under which also we hold
exclusive licenses from GenPharm International. These patents cover methods and
vectors for using positive-negative selection for producing gene targeted, or
"knockout," cells and animals, including the production of knockout mice by
homologous recombination. In the complaint, we are seeking unspecified damages
from Deltagen, as well as injunctive relief. Deltagen has counterclaimed for a
declaratory judgment that the patents are invalid and unenforceable and are not
infringed by Deltagen.
While we believe that our complaints against Deltagen are meritorious
and that Deltagen's counterclaims against us are without merit, we can provide
no assurance that we will prevail in our litigation against Deltagen or that, if
we prevail, any damages or equitable remedies awarded will be commercially
valuable. If Deltagen prevails in declaring our patents invalid or on its
antitrust claim against us, our business and financial position could be
adversely affected. Furthermore, we are likely to incur substantial costs and
expend substantial personnel time in pursuing our litigation against Deltagen.
We are not a party to any material legal proceedings other than the
Deltagen litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended
December 31, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been quoted on The Nasdaq National Market under
the symbol "LEXG" since April 7, 2000. Prior to that time, there was no public
market for our common stock. The following table sets forth, for the periods
indicated, the range of the high and low closing prices per share for our common
stock as reported on The Nasdaq National Market.
HIGH LOW
---- ---
2000
Second Quarter (April 1, 2000 through June 30, 2000)............................ $35.00 $ 9.12
Third Quarter................................................................... $47.12 $24.69
Fourth Quarter.................................................................. $29.56 $10.75
As of March 7, 2001, there were approximately 138 holders of record of
our common stock.
We have never paid cash dividends on our common stock. We anticipate
that we will retain all of our future earnings, if any, for use in the expansion
and operation of our business and do not anticipate paying cash dividends in the
foreseeable future.
The effective date of the Registration Statement on Form S-1
(Registration No. 333-96469) filed under the Securities Act of 1933, as amended,
relating to the initial public offering of our common stock was April 6, 2000.
On the same date, we signed an underwriting agreement with J.P. Morgan
Securities, Inc., Credit Suisse First Boston Corporation, CIBC World Markets
Corp. and Punk, Ziegel & Company, L.P., the managing underwriters for the
initial public offering and the representatives of the underwriters named in the
underwriting agreement, for the initial public offering of 10,000,000 shares of
our common stock at an initial public offering price of $22.00 per share. The
offering commenced on April 7, 2000 and was closed on April 12, 2000. The
initial public offering resulted in gross proceeds of $220.0 million. We
received net proceeds of $203.2 million after deducting underwriting discounts
of $15.4 million and estimated offering expenses of $1.4 million.
Concurrently with the closing of the initial public offering, the
4,244,664 outstanding shares of our Series A Preferred Stock were automatically
converted into 12,733,992 shares of common stock. As a result, we no longer have
any outstanding preferred stock.
From the time of receipt through December 31, 2000, the net proceeds of
our initial public offering were applied toward:
o purchases and installation of equipment and build-out of facilities: $ 7,259,000
o repayment of indebtedness: $ 1,620,000
o working capital: $ 36,378,000
o short-term investments in U.S. Government debt obligations
and investment grade commercial paper: $157,943,000
Except for the repayment of $917,000 of indebtedness to a director in
the second quarter of 2000, we have made no payments to our directors or
officers or their associates, holders of 10% or more of any class of our equity
securities or to our affiliates, other than payments to officers for salaries in
the ordinary course of business.
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ITEM 6. SELECTED FINANCIAL DATA
The statements of operations data for each of the years ended December
31, 1998, 1999 and 2000, and the balance sheet data as of December 31, 1999 and
2000, have been derived from our audited financial statements included elsewhere
in this annual report on Form 10-K that have been audited by Arthur Andersen
LLP, independent public accountants. The statements of operations data for the
years ended December 31, 1996 and 1997, and the balance sheet data as of
December 31, 1996, 1997 and 1998 have been derived from our audited financial
statements not included in this annual report on Form 10-K. Our historical
results are not necessarily indicative of results to be expected for any future
period. The data presented below have been derived from financial statements
that have been prepared in accordance with accounting principles generally
accepted in the United States and should be read with our financial statements,
including the notes, and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this annual report on
Form 10-K.
----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------
STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues ..................................... $ 306 $ 968 $ 2,242 $ 4,738 $ 14,459
Operating expenses:
Research and development, including
stock-based compensation of
$10,883 in 2000 ......................... 2,409 4,971 8,410 14,646 31,647
General and administrative,
including stock-based compensation of
$9,958 in 2000 .......................... 764 1,473 2,024 2,913 18,289
------------ ------------ ------------ ------------ ------------
Total operating expenses ..................... 3,173 6,444 10,434 17,559 49,936
------------ ------------ ------------ ------------ ------------
Loss from operations ......................... (2,867) (5,476) (8,192) (12,821) (35,477)
Interest income (expense), net ............... (12) 74 711 346 9,483
------------ ------------ ------------ ------------ ------------
Net loss ..................................... (2,879) (5,402) (7,481) (12,475) (25,994)
Accretion on redeemable
convertible preferred stock .............. -- -- (357) (535) (134)
------------ ------------ ------------ ------------ ------------
Net loss attributable to
common stockholders ...................... $ (2,879) $ (5,402) $ (7,838) $ (13,010) $ (26,128)
============ ============ ============ ============ ============
Net loss per common share,
basic and diluted ........................ $ (0.17) $ (0.23) $ (0.32) $ (0.53) $ (0.63)
============ ============ ============ ============ ============
Shares used in computing net
loss per common share, basic
and diluted ............................... 17,346,228 23,988,969 24,445,422 24,530,427 41,618,075
-------------------------------------------------------------
AS OF DECEMBER 31,
-------------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
BALANCE SHEET DATA: (IN THOUSANDS)
Cash, cash equivalents
and marketable securities ................ $ -- $ 1,980 $ 19,422 $ 9,156 $ 202,680
Working capital ............................ (303) 1,009 18,102 2,021 194,801
Total assets ............................... 1,090 4,917 28,516 22,295 220,693
Long-term debt, net of current portion ..... 81 5,268 5,024 3,577 1,834
Redeemable convertible preferred stock ..... -- -- 29,515 30,050 --
Accumulated deficit ........................ (3,551) (8,953) (16,434) (28,909) (54,903)
Stockholders' equity (deficit) ............. 521 (1,931) (9,034) (21,936) 207,628
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read with "Selected
Financial Data" and our financial statements and notes included elsewhere in
this annual report on Form 10-K.
OVERVIEW
We are defining the functions of genes for drug discovery using
knockout mice. Our proprietary gene trapping and gene targeting technologies
enable us to rapidly generate these knockout mice by altering the DNA of genes
in a special variety of mouse cells, called embryonic stem (ES) cells, which can
be cloned and used to generate mice with the altered gene. We employ an
integrated platform of advanced medical technologies to systematically analyze
the functions and pharmaceutical relevance of the genes we have knocked out. Our
LexVision program captures the information resulting from this analysis for our
use, and use by our collaborators, to discover pharmaceutical products based on
genomics - the study of genes and their function.
We derive substantially all of our revenues from subscriptions to our
databases, functional genomics collaborations for the development and, in some
cases, analysis of knockout mice, and technology licenses. To date, we have
generated a substantial portion of our revenues from a limited number of
sources.
Since our inception, we have incurred significant losses and, as of
December 31, 2000, we had an accumulated deficit of $54.9 million. Our losses
have resulted principally from costs incurred in research and development,
general and administrative costs associated with our operations, and non-cash
stock-based compensation expenses associated with stock options granted to
employees and consultants prior to our April 2000 initial public offering.
Research and development expenses consist primarily of salaries and related
personnel costs, material costs, legal expenses resulting from intellectual
property prosecution and other expenses related to our drug discovery and
LexVision programs, the expansion of our OmniBank library, the development and
analysis of knockout mice and our other functional genomics research efforts. We
expense our research and development costs as they are incurred. General and
administrative expenses consist primarily of salaries and related expenses for
executive, finance and other administrative personnel, professional fees and
other corporate expenses including business development and general legal
activities, as well as expenses related to our patent infringement litigation
against Deltagen, Inc. In connection with the expansion of our drug discovery
and LexVision programs, our OmniBank database and library and our functional
genomics research efforts, we expect to incur increasing research and
development and general and administrative costs. As a result, we will need to
generate significantly higher revenues to achieve profitability.
Deferred stock-based compensation and related amortization represents
the difference between the exercise price of stock options granted and the fair
value of our common stock at the applicable date of grant. Stock-based
compensation is amortized over the vesting period of the individual stock
options for which it was recorded, generally four years. If employees and
consultants continue to vest in accordance with their individual stock options,
we expect to record amortization expense for deferred stock-based compensation
as follows: $10.9 million during 2001, $10.9 million during 2002, $10.9 million
during 2003 and $900,000 during 2004. The amount of stock-based compensation
expense to be recorded in future periods may decrease if unvested options for
which deferred stock compensation expense has been recorded are subsequently
canceled or forfeited or may increase if additional options are granted to
individuals other than employees or directors.
Our quarterly operating results will depend upon many factors,
including our success in establishing new database subscription and research
contracts with collaborators, expirations of such contracts, the success rate of
our discovery efforts leading to milestones and royalties, the timing and
willingness of collaborators to commercialize products which may result in
royalties, and general and industry-specific economic conditions which may
affect research and development expenditures. As a consequence, our quarterly
operating results have fluctuated in the past and are likely to do so in the
future.
As of December 31, 2000, we had net operating loss carryforwards of
approximately $34.9 million. We also had research and development tax credit
carryforwards of approximately $1.7 million. The net operating loss and credit
carryforwards will expire at various dates beginning in 2011, if not utilized.
Utilization of the net operating losses and credits may be significantly limited
due to a change in ownership as defined by provisions of the Internal
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Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses and credits before utilization.
RESULTS OF OPERATIONS
Years Ended December 31, 1999 and 2000
Revenues. Total revenues increased 205% to $14.5 million in 2000 from
$4.7 million in 1999. Of the $9.8 million increase in total revenues, $2.4
million was derived from increased database subscription and technology license
fees and $7.4 million was derived from increased revenues from functional
genomics collaborations for the development and analysis of knockout mice.
In 2000, the Merck Genome Research Institute, or MGRI, and Millennium
Pharmaceuticals, Inc. represented 35% and 14% of revenues, respectively. In
1999, Millennium and ZymoGenetics, Inc. represented 28% and 23% of revenues,
respectively.
In September 2000, we concluded our 1997 agreement with MGRI. In
connection with the conclusion of the MGRI agreement, we recognized $3.1 million
of deferred revenues remaining from the $4.0 million cash payment made to us by
MGRI when the agreement was signed and an additional $1.0 million of revenue
related to a final, non-refundable cash payment that we received from MGRI. As a
result of these arrangements with MGRI, our revenues for the third quarter of
2000 were substantially greater than our revenues in prior quarters and in the
fourth quarter of 2000, and are likely to be significantly greater than our
quarterly revenues for at least the first quarter of 2001. As a result of these
and other factors, our quarterly operating results have fluctuated in the past
and are likely to do so in the future. We do not believe that quarter-to-quarter
comparisons of our operating results are a good indication of our future
performance.
Research and Development Expenses. Research and development expenses,
including stock-based compensation expense, increased 116% to $31.6 million in
2000 from $14.6 million in 1999. The largest part of the increase, $10.9
million, or 64% of the increase, represented stock-based compensation relating
to option grants made prior to our April 2000 initial public offering. The
remaining increase of $6.1 million was attributable to continued growth of
research and development activities, primarily related to increased personnel
costs to support the expansion of our drug discovery and LexVision programs, our
OmniBank database and library, the development and analysis of knockout mice and
our other functional genomics research efforts.
General and Administrative Expenses. General and administrative
expenses, including stock-based compensation expense, increased 528% to $18.3
million in 2000 from $2.9 million in 1999. The largest part of the increase,
$10.0 million, or 65% of the increase, represented stock-based compensation
relating to option grants made prior to our April 2000 initial public offering.
The remaining increase of $5.4 million was due primarily to additional personnel
costs for business development and finance and administration, as well as
expenses associated with our patent infringement litigation against Deltagen,
Inc.
Interest Income and Interest Expense. Interest income increased to $9.9
million in 2000 from $649,000 in 1999. This increase resulted from an increased
cash and investment balance as a result of proceeds received in our initial
public offering. Interest expense increased 39% to $422,000 in 2000 from
$303,000 in 1999.
Net Loss and Net Loss Per Common Share. Net loss attributable to common
stockholders increased to $26.1 million in 2000 from $13.0 million in 1999. Net
loss per common share increased to $0.63 in 2000 from $0.53 in 1999. Most of the
net loss for 2000 was attributable to stock-based compensation expense.
Excluding stock-based compensation expense and assuming the conversion of the
redeemable convertible preferred stock into common stock occurred on the date of
original issuance (May 1998), we would have had a net loss of $5.2 million and
$12.5 million in 2000 and 1999, respectively, and net loss per common share of
$0.11 and $0.33 in 2000 and 1999, respectively.
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Years Ended December 31, 1999 and 1998
Revenues. Total revenues increased 111% to $4.7 million in 1999 from
$2.2 million in 1998. Of the $2.5 million increase, $1.4 million was derived
from increased database subscription and license fees and $1.1 million was
derived from increased fees for the development of knockout mice.
In 1999, Millennium Pharmaceuticals, Inc. and ZymoGenetics, Inc.
represented 28% and 23% of revenues, respectively. In 1998, ZymoGenetics, Merck
& Co. Inc., and Genetics Institute represented 24%, 12% and 11% of revenues,
respectively.
Research and Development Expenses. Research and development expenses
increased 74% to $14.6 million in 1999 from $8.4 million for 1998. The increase
of $6.2 million was attributable to continued growth of research and development
activities, including $2.6 million related to increased personnel and laboratory
supply costs to support the generation of our human gene sequence databases,
OmniBank database and library and the development of knockout mice and $2.9
million related to higher operating expenses as a result of the completion of
our new animal facility in January 1999, with the remainder due to expansion in
operating activities. As of December 31, 1999, production costs incurred in the
development of knockout mice for commercial sale have not been significant.
General and Administrative Expenses. General and administrative
expenses increased 44% to $2.9 million during 1999 from $2.0 million for 1998.
The increase of $889,000 was due to $721,000 related to compensation for
business development, finance and administrative personnel, with the remainder
due to overall expansion in our operations.
Interest Income and Interest Expense. Interest income decreased 23% to
$649,000 in 1999 from $838,000 in 1998. This decrease resulted from a declining
cash and investment balance due to cash used in operating activities. Interest
expense increased 139% to $303,000 in 1999 from interest expense of $127,000 in
1998. This increase resulted from higher debt obligation balances in 1999.
Net Loss and Net Loss Per Common Share. Net loss increased to $12.5
million in 1999 from $7.5 million in 1998. Net loss per common share increased
to $0.53 in 1999 from $0.32 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations from inception primarily through sales
of common and preferred stock, contract and milestone payments to us under our
database subscription and collaboration agreements and equipment financing
arrangements. From our inception through December 31, 2000, we had received net
proceeds of $241.4 million from issuances of common and preferred stock,
including $203.2 million of net proceeds from the initial public offering of our
common stock in April 2000. In addition, from our inception through December 31,
2000, we received $24.6 million in cash payments from database subscription and
technology license fees, functional genomics collaborations for the development
and analysis of knockout mice, sales of reagents and government grants, of which
$22.7 million had been recognized as revenues through December 31, 2000.
As of December 31, 2000, we had $202.7 million in cash, cash
equivalents and marketable securities, as compared to $9.2 million as of
December 31, 1999. We used $1.5 million in operations in 2000. This consisted of
the net loss for the year of $26.0 million offset by non-cash charges of $20.8
million related to stock-based compensation expense and $2.6 million related to
depreciation expense offset partially by a net decrease in other working capital
accounts of $1.0 million. We used $165.4 million in investing activities in
2000, principally as a result of the purchase of marketable securities with the
net proceeds of our initial public offering in April 2000, and purchases of
property and equipment.
In June 1999, we entered into a $5.0 million financing arrangement for
the purchase of property and equipment which is secured by the equipment
financed. As of December 31, 2000, we had drawn down a total of approximately
$4.2 million and had $832,000 remaining available under this arrangement. As of
December 31, 2000, $2.8 million of the borrowings were outstanding under this
arrangement. This facility accrues interest at a weighted-average rate of
approximately 11.7% and principal and interest is due in monthly installments
through 2003. This debt may be retired through payment at the end of the second
quarter of 2001.
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In October 2000, we entered into a synthetic lease agreement under
which the lessor purchased our current laboratory and office space and animal
facility and agreed to fund the construction of additional laboratory and office
space and a second animal facility. Including the purchase price for our
existing facilities, the synthetic lease provides for funding of up to $45.0
million in property and improvements. The term of the agreement is six years,
which includes the construction period and a lease period. Lease payments for
our existing facilities are approximately $795,000 per year. Lease payments for
the new facilities will begin upon completion of construction, which is expected
in the fourth quarter of 2001. Future lease payments are subject to fluctuation
based on LIBOR rates. Based on a year-end LIBOR rate of 6.4%, our total lease
payments for our existing facilities and the new facilities would be
approximately $3.0 million per year. At the end of the lease term, the lease may
be extended for one-year terms, up to seven additional terms, or we may purchase
the properties for a price including the outstanding lease balance. If we elect
not to renew the lease or purchase the properties, we must arrange for the sale
of the properties to a third party. Under the sale option, we have guaranteed a
percentage of the total original cost as the residual fair value of the
properties.
Our capital requirements depend on numerous factors, including our
ability to obtain database subscription and collaboration agreements, the amount
and timing of payments under such agreements, the level and timing of our
research and development expenditures, market acceptance of our products, the
resources we devote to developing and supporting our products and other factors.
We expect to devote substantial capital resources to continue our research and
development efforts, to expand our support and product development activities,
and for other general corporate activities. We believe that our current cash
balances, which include the net proceeds of our April 2000 initial public
offering and revenues to be derived from subscriptions to our databases,
functional genomics collaborations for the research, development and analysis of
knockout mice, will be sufficient to fund our operations for at least the next
several years. During or after this period, if cash generated by operations is
insufficient to satisfy our liquidity requirements, we may need to sell
additional equity or debt securities or obtain additional credit arrangements.
Additional financing may not be available on terms acceptable to us or at all.
The sale of additional equity or convertible debt securities may result in
additional dilution to our stockholders.
IMPACT OF INFLATION
The effect of inflation and changing prices on our operations was not
significant during the periods presented.
DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk is confined to our cash and cash
equivalents which have maturities of less than three months. We maintain an
investment portfolio which consists of U.S. Government debt obligations and
investment grade commercial paper that mature one to twelve months after
December 31, 2000, which we believe are subject to limited credit risk. We
currently do not hedge interest rate exposure. Because of the short-term
maturities of our investments, we do not believe that an increase in market
rates would have any negative impact on the realized value of our investment
portfolio.
We have operated primarily in the