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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, 2001
[_] 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: 000-30267
ORCHID BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3392819
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4390 US Route One 08540
Princeton, NJ (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (609) 750-2200
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 Par Value Per Share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant (without admitting that any person whose shares
are not included in such calculation is an affiliate) on March 1, 2002, was
$125,031,443, based on the last sale price as reported by The Nasdaq Stock
Market.
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As of March 1, 2002, the registrant had 54,200,537 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10-K: Certain information required in Part
III of this Annual Report on Form 10-K is incorporated from the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on June 14,
2002.
2
ORCHID BIOSCIENCES, INC.
FORM 10-K
INDEX
Page
PART I
ITEM 1. BUSINESS......................................................... 4
ITEM 2. PROPERTIES....................................................... 31
ITEM 3. LEGAL PROCEEDINGS................................................ 31
ITEM 4. SUBMISSION OF MATTERS TO HAVE A VOTE OF SECURITY HOLDERS......... 32
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................. 33
ITEM 6. SELECTED FINANCIAL DATA.......................................... 34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION...... 36
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES............................. 80
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 80
ITEM 11. EXECUTIVE COMPENSATION........................................... 80
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................... 80
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.................... 80
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON.......... 80
FORM 8-K
SIGNATURES
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PART I
Item 1. BUSINESS
We are engaged in the development and commercialization of technologies,
products and services designed to measure and analyze information related to
genetic diversity, or the genetic variability that distinguishes one organism
from another. We have established a portfolio of business units that provide
products and services focusing on the analysis of genetic variability through
genotyping, the measurement of genetic variability in a person, plant or animal
individual.
Genetic diversity data is used in the field of identity genomics for
paternity and forensics identification testing. Health care providers also use
genetic diversity information in organ transplantation compatibility testing.
Additionally, genetic diversity data is also being used for genetic disease
susceptibility testing and to help physicians manage treatment regimens.
Pharmaceutical companies are now using genetic diversity data to facilitate the
development of more specific and efficacious drugs and to enable the adoption of
personalized medicine which involves prescribing the right drug for the right
person at the optimal dose based on the individual's genetic profile.
Furthermore, genetic diversity data has other commercial applications, such as
the improvement of crop development and for livestock breeding programs. Our
products, services and technologies are already being used in each of these
applications and we expect their uses to increase.
History
For the first three years of our existence after beginning operations in
1995, we were primarily focused on developing our microfluidics technologies for
applications in high throughput synthesis of small molecules under collaborative
research programs with SmithKline Beecham and Sarnoff Corporation. In the first
half of 1998, we made a fundamental shift in our focus to apply our technology
to the fields of genetic diversity applications, including single nucleotide
polymorphism, or SNP, genotyping and pharmacogenetics, and subsequently acquired
substantially all of the assets of Molecular Tool, Inc. ("Molecular Tool"), a
wholly owned subsidiary of GeneScreen, Inc. ("GeneScreen"), in September 1998.
Molecular Tool's proprietary SNP-IT primer extension technology for genotyping
SNPs matched very well with our existing microfluidics technologies, which are
being selectively incorporated into our SNP genotyping products and services in
the US. In December 1999, we acquired GeneScreen, Inc., a recognized leader in
identity genomics services. In 2001, we acquired two new businesses: Cellmark
Diagnostics ("Cellmark"), a business division of AstraZeneca, a provider of DNA
laboratory testing in the UK; and Lifecodes Corporation ("Lifecodes"), one of
the largest providers of identity genomics testing for forensics and paternity
in the US, and a major provider of human leukocyte antigens, or HLA, genotyping
products and services for transplantation compatibility testing. During 2002, we
began the process of re-aligning our business into four business units for
marketing purposes. These business units will consist of Orchid Life Sciences,
Orchid Identity Genomics, Orchid Diagnostics and Orchid GeneShield. These
business units may or may not constitute reportable segments in 2002.
. Orchid Life Sciences develops and markets products, services and
technologies for SNP genotyping, or scoring, and genetic diversity
analyses to life sciences and biomedical researchers as well as
pharmaceutical, agricultural, diagnostic and biotechnology companies;
. Orchid Identity Genomics provides DNA testing for paternity and
forensics determinations to state and local governmental authorities
as well as to individuals and organizations, through Orchid GeneScreen
and Orchid Cellmark;
. Orchid Diagnostics provides products and services for genetic testing,
including HLA genotyping, disease susceptibility testing and
immunogenetics, or the study of the relationship between an
individuals immune response and their genetic makeup, to individuals;
and
. Orchid GeneShield is developing programs designed to accelerate the
adoption and use of personalized medicine by patients and physicians.
Background
Genetic information provides a basis for understanding biological and
medical functions in organisms. In recent years, scientists have analyzed large
portions of deoxyribonucleic acid, or DNA, to determine the sequence of
nucleotide bases in the DNA within the human genome and within the genomes of
plant and animal species, with the objective of understanding and using this
molecular level knowledge to transform traditional approaches to medicine,
agriculture and
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other fields. With the first phase of the human genome sequence completed in
2000, attention has turned from mapping the sequence to identifying genetic
differences between individuals and to applying this knowledge in healthcare and
other related fields where genetic variability is of use. The increasing
availability of genomic data derived from species other than humans is driving
the use of genetic variability information in such fields as agriculture and
public health, to produce improved characteristics in livestock or crops, and to
protect against animal-borne diseases. Newer genetic analysis techniques are now
being applied to long-established DNA testing applications like identity
determination for forensics and paternity. The most common form of genetic
variation, single nucleotide polymorphisms, or SNPs, have become a primary focus
of genetic variability studies, and we expect them to become more important as
their impact is better understood. We have designed our products and services to
enable the performance of SNP and related genetic variability analyses by a wide
variety of researchers. We are also using these technologies ourselves to build
value from commercial uses of SNPs and other genetic markers.
SNPs: A Key Element of Genetic Variation
DNA sequences contain a variety of known polymorphisms, or differences, in
the genetic code. The most common form of polymorphism involves a change in a
single nucleotide base and is called a single nucleotide polymorphism, or SNP.
SNPs are the most common type of genetic variation and can impact an
individual's disease susceptibility and treatment response. The importance of
SNPs was highlighted in 1999, when a group of leading pharmaceutical companies
and others formed The SNP Consortium for the primary purpose of discovering
human SNPs and making them publicly available. The SNP Consortium successfully
mapped more than 1.2 million SNPs, which are now publicly available and are
being used in genetic diversity research. As one of the few commercial firms
chosen to collaborate with The SNP Consortium, we conducted work that has
provided us with early access to potentially valuable SNPs, and has enabled us
to begin to incorporate these SNPs into a variety of panels for use in
pharmacogenetic research and for pilot programs that use SNPs in paternity and
forensic testing.
Researchers now estimate that each human has between three and 10 million
SNPs. Only some of these will be of medical relevance, and the effort to
identify these valuable SNPs is already underway. As the SNP discovery phase
winds down over the next few years, we expect the attention and activity will
continue to shift to identifying those informative SNPs that will be of
continuing utility and value. As a result, we expect that the demand for SNP
genotyping, determining the presence or absence of a specific SNP in a sample,
will continue to rapidly increase as more SNPs are known and their importance
and utility are sought. Researchers require highly accurate, high throughput SNP
genotyping technologies that can be implemented at a competitive cost to
characterize these potentially valuable SNPs. With our highly flexible and
accurate SNP genotyping technology, we believe that we are positioned to be a
leader in providing SNP scoring to the thousands of researchers who are already
performing or are interested in performing SNP analyses, as well as to the
growing number of industries and service providers using SNPs in their ongoing
operations. In addition, we have research and development programs in place to
help us identify and obtain intellectual property related to medical and other
valuable uses of SNPs.
The characteristics of the emerging SNP genotyping market are illustrated
by examining differing customer needs over the course of "the lifecycle of a
SNP", as described below.
Stage 1: SNP Discovery. Discovery of a SNP, typically through high
----------------------
throughput DNA sequencing.
Stage 2: SNP Confirmation. Confirmation that the suspected SNP is indeed a
-------------------------
SNP rather than a sequencing mistake or rare mutation. This is accomplished by
scoring the SNP on hundreds of samples to determine its frequency of occurrence
(allele frequency) in the population of interest.
Stage 3: Association. Initial determination of the potential role of the
--------------------
SNP in affecting disease susceptibility, variations in drug response, or an
attribute of interest in a crop or livestock species. Relatively small-scale
studies (as few as 200 subjects) are conducted to assess whether the specific
SNP is statistically associated with the characteristic under investigation. If
the association is demonstrated, larger scale clinical studies may then be
conducted to confirm and extend the findings.
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Stage 4: Clinical Trials. Successful association studies may be followed by
------------------------
larger scale clinical trials to extend the initial findings and as a basis for
filings with the regulatory authorities like the Food and Drug Administration,
or FDA, to support use of the SNP as a diagnostic or in conjunction with a
therapeutic.
Stage 5: Diagnostic Testing and Industrial Application. Once association
------------------------------------------------------
and larger scale clinical studies are successfully completed, the SNP may be
routinely used in healthcare as a diagnostic tool or for use in optimizing
treatment regimens for personalized medicine, as well as in agricultural
applications for selective breeding programs.
We believe that each of these stages of the SNP lifecycle represents a
separate business opportunity with its own market dynamics and product or
service requirements. As a SNP progresses through this lifecycle, the throughput
requirements at any given laboratory for scoring a SNP may decrease, as those
relatively few informative SNPs with utility are identified and assembled into
panels for ongoing use. We expect research laboratories will run an increasing
number of samples as SNPs move from research applications into routine use. Our
portfolio of products and services enables customers to select the right
price-performance combination to serve their needs, at whatever point in the
lifecycle their SNP of interest may be. Thus, as the field of genetic diversity
matures over the coming years, we expect that a growing number of researchers
and practitioners will score an increasing total number of SNPs in an increasing
number of laboratories, using high, medium and low throughput SNP scoring
platforms as appropriate. We believe that the robust performance qualities and
flexibility of our SNP-IT technology will enable us to develop and market
products and services with the potential to be product leaders in these evolving
markets.
SNP-IT, Our SNP Identification Technology
At the center of our products and services for SNP scoring, or genotyping,
is our core proprietary SNP-IT primer extension technology. SNP-IT primer
extension is a method of isolating the precise location of the site of a
suspected SNP and utilizing the inherent accuracy of DNA polymerase to determine
the presence or absence of the SNP. In order to conduct SNP-IT primer extension,
a specially synthesized DNA primer is first bound to the sample DNA to expose
the DNA site of interest where a SNP may be present. DNA polymerase, a naturally
occurring molecule that accurately and reliably inserts the appropriate
complementary base to a chain of DNA, is then added to extend the DNA chain by
one base at the suspected SNP location. One of several conventional methods,
including fluorescence, optical density, electrophoresis and mass spectroscopy,
is then used to detect this single base extension. The result is a direct
read-out method of detecting SNPs that creates a simple binary "bit" of genetic
information representing the presence of a SNP in a DNA sample. With more than a
decade of use, our SNP-IT technology is among the most validated genotyping
methods available today. We believe our SNP-IT technology offers an exceptional
combination of attributes, including:
. Accuracy
. Flexibility
. Cost-effectiveness
. Robustness
. Scalability
The capabilities of our SNP-IT technology have been greatly enhanced by the
commercial introduction in 2001 of our SNP-IT tag array "next generation"
technology. SNP-IT tag array is a significant "next-generation" improvement in
our core SNP-IT technology. SNP-IT tag array is based on multiplexing, or the
ability to perform multiple SNP analyses in a single test. Multiplexing is
important in SNP genotyping because as researchers undertake increasingly
complex and large-scale genetic analyses, the need for technologies with
improved cost and time efficiencies and design and performance flexibility
increases. This is especially true for the whole genome and chromosome mapping
studies that are used to analyze entire portions of the genome. It is similarly
essential for genotyping specific SNPs in a very large number of samples, as
occurs in pharmaceutical research. We expect that rapid and cost-effective
analysis of SNP panels for high volumes of samples will become increasingly
important as SNP genotyping becomes more established in routine applications
such as healthcare and identity genomics. Through multiplexing, our SNP-IT tag
array technology enables a dramatic increase in the amount of information per
analysis while simultaneously improving the overall quality of that information
and reducing the time and cost requirements. SNP-IT tag array can be easily
customized for any set of SNPs that a researcher wants to analyze. Since
multiplexing allows many reactions to be performed on a single sample, it can
also generate very large savings in consumables. We currently use SNP-IT tag
array in three of our products: the microarray-based SNPcode, the medium
throughput SNPstream MT (formerly referred to as our SNPstream 5K), and the
ultra high throughput SNPstream UHT.
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We have started to commercialize three significant new products based SNP
genotyping products based on the SNP-IT tag array, namely: (i) the SNPstream MT
for medium throughput genotyping based on a Luminex platform; (ii) SNPcode
consumables for use in high density, high throughput whole genome mapping
studies on Affymetrix GeneChip(R) systems; and (iii) the beta test version of
the SNPstream UHT (formerly referred to as our SNPstream 100K), our ultra high
throughput system which is capable of performing more than 140,000 SNP genotypes
from multiple samples in a single shift. We have achieved industry-leading
levels of multiplexing on our SNPcode platform and our SNPstream UHT system.
Microfluidics
Microfluidics is a set of technologies designed to control the flow,
reactions and measurements of minute amounts of chemicals and biochemicals in
miniaturized systems. Our microfluidics chips are multi-layered devices
consisting of arrayed networks of liquid reagent flow paths in channels or
conduits. These chips allow the processing of sequential and/or parallel
reactions. The reagents conveyed in the conduits and delivered to the location
of the reactions can range in volume from nanoliters to milliliters with a
typical reactor volume being from 100 to 800 nanoliters.
Proprietary rights and patents cover our pumping and valving techniques
that control the timing, location and amount of desired reagent delivery. In
late 2001, we were awarded a three-year grant from the US Department of Defense
agency, DARPA, to apply our microfluidics technologies to the synthesis of long
oligonucleotides. The total amount expected over the three-year term, from
September 2001 through September 2004, is $4.8 million. However, no obligation
exists for the agency to provide any of the funding amounts after the first year
of the contract unless certain options, as defined in the agreement, are
exercised.
Platform Propagation: A Core Concept
Through our Platform Propagation strategy, we develop and license our
SNP-IT technology for use on the installed instruments of other manufacturers.
To date, we have completed 19 licensing or marketing agreements with customers
such as Affymetrix, Amersham Biosciences, Applied Biosystems, Beckman Coulter,
Hitachi MiraiBio, Invitrogen, Luminex, PerkinElmer, Quest Diagnostics, Thermo
Biostar, and Asper Biotech. Five of these agreements involve the use of SNP-IT
technology for diagnostic applications. We expect that diagnostic applications
will become increasingly important as genetic assays progress from research
laboratories to routine clinical use. These agreements are helping to establish
our SNP-IT technology as a leading technology available to thousands of
laboratories worldwide, which we believe will provide us with a significant
competitive advantage as an ever-increasing number of researchers and
practitioners begin to use genotyping routinely in their work.
Products and Services to Serve Multiple Genetic Diversity Markets
We continue to provide products and services to a variety of genetic
diversity markets, including genetic variability analyses for pharmaceutical,
biotechnology, academic and agricultural applications, as well as identity
genomics, DNA diagnostics, and the emerging market of pharmacogenetics and
personalized medicine. We analyze a number of sources of genetic variability in
addition to SNPs for our varied client base, including short tandem repeats for
identity genomics, mitochondrial DNA for forensics, HLA genotypes for
transplantation compatibility matching and haplotypes for pharmacogenetic
studies. As a result of the growth of the company following several acquisitions
beginning in 1998 and continuing through 2001, we now market these products and
services to our customers through the organization of four strategic business
units as described above.
For the year 2001, we attributed 17.1% of our total revenues to the
products segment of our business and 82.9% of our total revenues to the services
segment of our business.
7
Products-Systems
SNPstream 25K System
We introduced our SNPstream 25K system in September 1999. This high
throughput system is based on an OEM robotic system optimized for use with our
proprietary SNP-IT primer extension SNP scoring assays. Each assay is formatted
in 384-well plates and uses our dedicated consumables and software to provide
the user with turnkey SNP scoring capabilities of more than 20,000 SNPs per day.
The equipment manufacturer, Beckman Coulter, installs and services this system,
and we support the SNP scoring applications.
SNPstream MT System
Our medium throughput SNPstream MT SNP genotyping system was launched in
September 2001. Our SNPstream MT system includes instrumentation, reagents and
software developed for optimal integrated performance, providing researchers
with all of the necessary components to generate up to 4,000 SNP genotypes per
day. Our SNPstream MT system, which runs on the Luminex xMap platform, was
developed under a May 2000 agreement with Luminex. Current owners of Luminex
xMap systems can also purchase from us SNPware 96B reagents kits and an
Accessory Kit from us containing our SNP scoring software that enables users to
conduct genotyping studies.
SNPstream UHT System
Our ultra high throughput SNPstream UHT genotyping platform is capable of
performing more than 140,000 SNP genotypes from multiple samples during an
eight-hour shift. Some of our customers are currently beta testing our SNPstream
UHT system, and we expect to formally launch the system as part of our service
facility in early 2002 and as a product in the first half of 2002.
LifeMatch System
Our LifeMatch(TM) platform is a system developed by our researchers for
automated HLA genotyping and antibody detection. The LifeMatch system runs on
the Luminex xMap platform using our proprietary reagents. It includes
instrumentation, reagents and software developed for optimal integrated
performance, providing laboratories with all of the necessary components to test
more than 350 samples in an eight-hour shift. We recently launched the LifeMatch
platform in Europe and intend to formally launch the system in the US in the
first half of 2002.
Products-Consumables
SNPware Kits
Each of our SNPware genotyping biochemistry kits includes a set of
optimized and validated reagents. These reagents can be pre-dispensed in the
necessary amounts to run a specific number of SNP scores. We assemble each set
of reagents along with the labware and instructions in a kit for the convenience
of our customers. We sell these kits under our SNPware brand name for use on our
own SNPstream systems, as well as on the systems of other companies. We also
intend to market SNPware using the Internet where customers can order custom
panels of SNPs to fit their needs. Our SNPware consumable product line is
assembled and marketed by our Life Sciences business unit and includes the
following:
SNPware 96 Kit
Launched in 2001, SNPware 96 kits are low-volume SNP genotyping consumables
for use with 96-well plates and simple readers. SNPware 96 kits enable
researchers to perform up to 1,000 SNP genotypes per day using standard 96-well
plate reader systems. We sell SNPware 96 kits to both our high throughput
customers and collaborators. Invitrogen markets our 96-well kit, a product based
on our SNP-IT technology, to the research market pursuant to an exclusive
worldwide marketing agreement that we signed in November 2001. Also, as part of
the agreement, Invitrogen will refer customers to us who express an interest in
the use of our SNP scoring technology in applications requiring high throughput
genotyping systems.
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SNPware 384 Kit
SNPware 384 kits are designed for use with the SNPstream 25K, and
contain optimized reagents and software for performing accurate, robust SNP
genotyping. They are offered in custom and generic formats. The custom kits are
formatted for scoring of specific sets of SNPs at the request of our customers.
SNPware 384 generic kits allow customers of the SNPstream 25K system to format
their own plates for their SNP analyses, and provide greater flexibility to
customers. We expect to launch the generic kits in early 2002. We plan to sell
these kits to researchers who want to conduct high volume genotyping studies
with their existing 384-well plate readers and fluid-handling robotic systems.
SNPcode Kit
We designed our SNPcode kit for use with the Affymetrix GeneChip(R)
system, which enables users to genotype SNPs using the Affymetrix GenFlex(TM)
Tag Array. SNPcode enables the multiplexing of 2,000 SNPs, making it ideal for
high density, high throughput whole genome mapping studies. We also currently
use SNPcode in the services we provide at our MegaSNPatron service facility, and
we expect to launch SNPcode as a stand-alone product in 2002.
Products-Other Kits
Orchid sells reagents and kits for diagnostic uses. Our ELUCIGENE and
LifeMatch consumable kits are marketed by our Diagnostics business unit.
ELUCIGENE Kits and Tests
The ELUCIGENE line of kits and tests are for cystic fibrosis, or CF,
genetic testing. ELUCIGENE kits are sold throughout Europe and in the US. In
2001, we registered the ELUCIGENE CF20 kit with the regulatory authorities in
France for human in-vitro diagnostic use. The ELUCIGENE CF20 kit uses patented
ARMS(TM) detection technology to simultaneously detect 20 common mutations of
the CFTR gene that are associated with cystic fibrosis. In 2001, we also
launched the ELUCIGENE CF29 panel of Analyte Specific Reagents, or ASRs, that
detects all 25 mutations recommended by the American College of Medical Genetics
for cystic fibrosis screening. We are developing specific panels for cystic
fibrosis screening of targeted populations in various other countries, and
expect to expand the distribution of our ELUCIGENE CF kits in 2002.
LifeMatch Consumables
We sell assays to measure the A and B antigens for transplantation
typing that impact the ability of a transplant recipient to accept a transplant
organ, and intend to expand the number of assays we offer in 2002.
Services
We have established an identity genomics testing business as a result
of our acquisitions of GeneScreen, Cellmark and Lifecodes, leaders in the
provision of paternity and forensics testing. These services, offered by our
Identity Genomics business unit, are conducted in accredited facilities that
also provide us with the infrastructure to conduct clinical SNP genotyping and
pharmacogenetic testing. We expect that our testing services will generate
increasing revenues as SNP genotyping moves from the laboratory to the clinic.
Currently, our Life Sciences business unit provides a variety of SNP genotyping
services through our MegaSNPatron facility, which offers one of the highest
throughput and most cost-effective SNP scoring services available in the
industry. We introduced the first phase of our MegaSNPatron facility in March
1999. We began offering SNP scoring services to clients in 2000, and expect to
increase the number of pharmaceutical, biotechnology, agricultural and academic
clients we currently serve. We also offer organ transplant compatibility testing
services through our Diagnostics business unit.
Paternity Testing Services
We offer a variety of paternity tests for publicly mandated and private
testing. Customers include state child welfare agencies and individuals.
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Forensic Testing Services
We test a variety of forensic samples found at crime scenes and conduct
large-scale screening and matching studies for criminal justice agencies.
Transplant Testing Services
We provide testing services for screening and confirmation of HLA
genotyping for prospective bone marrow transplant donors participating in public
and private programs, using both DNA and serological testing. Our customers
include agencies and individuals in the US and Europe.
MegaSNPatron SNP Genotyping Services
We currently offer low, medium and high volume SNP scoring services on
multiple platforms, including the SNPstream 25K, the SNPstream MT, and SNPcode
platforms, and expect to add the SNPstream UHT in early 2002. Our multiple
offerings enable us to match our customers' needs to the platform best suited to
conduct their work.
Orchid Overall Business Plan
We aim to be the leading provider of SNP scoring and genetic diversity
products and services.
Providing Genotyping Services Through Our Mega SNPatron Services Facility
We believe that the market for genetic variability analysis among
pharmaceutical, biotechnology, academic and agricultural customers is increasing
as data from the efforts of The SNP Consortium and others are met in the
marketplace with growing access to faster, more cost-effective and more accurate
genotyping technologies. We believe an important driver of this growth includes
the ongoing efforts to identify the role of SNPs in health and disease,
including pharmacogenetics, or pharmacogenomics, the study of the impact of
genetic variation on the efficacy, pharmacology and toxicity of a drug.
Researchers have long known that genetic differences can affect individual drug
response, causing adverse reactions in some patients that are not seen in the
majority of users, or resulting in reduced efficacy in a subset of users. For
example, a drug is likely only to be effective in individuals who carry the
specific protein or receptor for which the drug was designed. Individuals who,
because of genetic variation, have a slightly modified version of these proteins
or receptors or those involved in the metabolism of the drug, may not respond to
the drug or may experience adverse side effects.
Currently, the pharmaceutical industry is attempting to find ways to
develop safer and more effective new drugs and to improve existing drugs by
using genetic variation information to select the best drug for a particular
patient. Researchers have begun to use genetic variability information in the
drug discovery process by identifying SNPs and their products as the targets for
new drugs. Genetic variation information is also being used in agriculture
programs, where researchers are seeking alternatives to genetic modification to
develop improved crops and livestock breeding. We believe SNP analysis can
enable acceleration of traditional breeding methods to obtain the desired
attributes thereby avoiding the need to insert foreign genetic material.
The pharmaceutical markets for SNP scoring are in an early stage of
development, but we expect them to develop rapidly over the next few years. We
have sold our products into these emerging markets through our commercial
agreements in 2000 and 2001 and we intend to continue to seek to enter into
additional agreements with pharmaceutical firms. We also plan to seek new
biotechnology, academic research and agricultural customers.
We believe that we now have one of the broadest product lines of SNP
genotyping products and services. In 2001, our affordable, medium throughput
SNPstream MT product and the new low volume 96-well genotyping kit were added to
our system product line. In 2002, we plan to launch our ultra high throughput
tag array-based SNPstream UHT platform and our SNPcode product for direct
customer use. Our SNPstream UHT and SNPcode platforms are among the few in the
industry capable of performing high-density genotyping for whole genome and
whole chromosome mapping studies. Our MegaSNPatron genotyping service facility
provides high quality, cost effective SNP
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genotyping services using our multiple platforms. Our mix of leading SNP scoring
products and services and the availability of our technology on the platforms of
our strategic partners has a number of advantages, including the following:
. Enables us to uniquely provide varied, optimized SNP scoring
solutions to a diverse customer base.
. Enables our customers to seamlessly migrate their studies and
specific assays from platform to platform, a feature that we
believe to be a significant advantage as SNP analyses become more
common and varied.
. Enables us and our collaborators to develop higher value content
in the form of assays, panels and mapping analyses that can
easily be transferred to other genotyping systems, thereby
significantly increasing their utility.
We believe that whole genome and chromosome mapping studies will be
especially important for deriving valuable content, and our SNP-IT tag array
technology is particularly well suited for these types of studies.
Orchid's Identity Genomics Testing Business
With the acquisition of Lifecodes, we have become the market leader in
identity genomics in the US, which represents one of the largest existing
markets for genetic analysis today. We operate our identity genomics business
through: (i) Orchid GeneScreen, which conducts paternity genotyping
determinations for government agencies and private individuals; and (ii) Orchid
Cellmark, which is a leading provider of forensic testing. We expect that the
strength of our position in identity genomics will enable us to realize
efficiencies, and, in the case of paternity testing, to apply our advanced SNP
technologies to significantly reduce cost structure of what has traditionally
been a labor-intensive process. We intend to accomplish this by applying the
same ultra high throughput SNP scoring systems that we have developed for
advanced pharmaceutical, biotech and agricultural applications to paternity
testing, thereby taking advantage of our substantial investments in new
genotyping technologies across a broad range of both existing and new
businesses. We are developing SNP panels to replace older technologies currently
used for paternity testing, which we expect to begin implementing during 2002.
We also expect SNPs to have utility in forensics applications, especially in
analyzing degraded DNA that is not amenable to other methods of analysis.
During 2001, we had four accredited laboratories for paternity and
forensic testing in the US and UK. Subsequent to the acquisition of Lifecodes,
we now have eight accredited laboratories in the US, UK, and Canada providing
high quality genotyping services whose lab accreditations include those from
Clinical Laboratory Improvement Act (CLIA) for clinical genotyping, from the
American Association of Blood Banks (AABB) for paternity testing, and from the
American Society of Crime Lab Directors (ASCLD) for forensics testing. A large
portion of paternity and forensic testing is government sponsored and involves
contracts that are generally bid upon by respective state agencies every one to
three years. The contract bidding process is highly competitive and the criteria
used to determine the awards varies. In some cases contracts are awarded solely
on the basis of price, while others use a scoring matrix to achieve the desired
mix of price, quality and service. As we integrate our SNP scoring technologies
into our identity genomics business, we intend to continue to seek more
attractively priced contracts based on our ability to provide high quality
services that we expect will provide advantages in terms of accuracy and
turn-around time compared to most other competitors.
Orchid's Diagnostic Testing Business
Upon the acquisition of Lifecodes, we also established our diagnostic
business unit focusing on clinical genotyping for diagnostics. Orchid's
Diagnostics unit now offers our existing ELUCIGENE product line for disease
susceptibility testing for cystic fibrosis and our HLA services business for
transplant compatibility matching with the HLA products and services of
Lifecodes.
We believe we have now established the necessary manufacturing and
marketing channels in the US and Europe and have introduced an important new
product, the LifeMatch system, that offers HLA genotyping customers significant
time and cost advantages over current products and technologies. The LifeMatch
instrument system is based on the Luminex xMap platform and uses our proprietary
consumables. It is targeted at the large number of hospital and independent
laboratories who perform their own HLA genotyping. We expect to have dozens of
these systems sold by the end of 2002. Through Orchid Diagnostics, we are
currently developing additional consumables and marker sets to expand the menu
of HLA genotyping alternatives available on LifeMatch and to increase our
consumables revenues from sales of the growing base of installed instruments
that use our consumables.
11
We expect our Diagnostics business to serve as the foundation for a
significantly expanded product line of molecular diagnostic genotyping assays
over the next few years, by accessing new markers from a variety of academic and
commercial sources, and by focusing on the potentially high growth area of
immunogenetics.
Creating Value Through Personalized Medicine
GeneShield, our wholly owned subsidiary and fourth business unit, is
developing services designed to accelerate the adoption of personalized medicine
into routine medical care. In 2001, we hired a highly experienced team to
develop programs at GeneShield that would, among other things, incorporate
pharmacogenetics data in a form familiar to physicians and that would be readily
acceptable to patients, tangible in value to health care providers and payers,
and capable of producing recurring revenues for us.
We plan to utilize our existing clinical genotyping technology and
facilities necessary for the resulting high-sample throughput demands for
genotyping panels of SNPs to help physicians and patients improve the selection
of medicine through GeneShield. We plan to conduct alpha tests of our first
service in collaboration with a number of leading managed care organizations
over the remainder of the year and expect to announce our first beta test
program in the last quarter of 2002.
Sustained Competitive Advantage
In order to build and sustain our competitive advantage in the field of
genetic diversity, we plan to continue to form strategic alliances and
scientific collaborations and make strategic acquisitions as appropriate. Our
eight accredited genotyping facilities provide us with the foundation for
providing clinical quality SNP scoring and pharmacogenetic testing to a variety
of customers and for our own use. Through collaborations and selective
acquisitions, we plan to seek access to distribution channels and opportunities
to improve operational efficiencies. Our Platform Propagation strategy is
enabling us to accelerate adoption of our SNP-IT technology by a wide variety of
researchers. We expect the potential breadth of our early market penetration to
be an important competitive advantage in the future.
We intend to continue selected investment in our proprietary
technologies through internal development and by licensing third-party
technologies. We are pursuing research projects aimed at identifying and
developing new technologies to improve and expand our genetic diversity products
and services. These projects involve research conducted by us, collaborations
with other researchers and the acquisition of technologies developed by
universities and other academic institutions. We will also seek to improve the
cost-effectiveness and utility of our existing products and services through
improved performance and development of improved information technologies,
including improvements to our systems such as the SNPstream UHT, our
bioinformatics efforts and our new website that allows customers to design their
own primers for use with our SNP genotyping products.
Collaborations and Licenses
A significant element of our business strategy is to enter into
collaborative research programs and licenses with major pharmaceutical,
biotechnology and agricultural companies that have proven capabilities in
gene-based product discovery and commercialization. We believe this strategy
will allow us to apply our technologies to a broader range of product
development efforts, thereby generating a growing base of intellectual property
rights and revenues.
We currently have collaboration and license agreements with, Asper
Biotech, AstraZeneca, Beckman Coulter, DNALink, Hitachi MiraiBio, Luminex, Quest
Diagnostics, Invitrogen and Affymetrix. In the first quarter of 2002, we
announced a collaboration agreement with First Genetic Trust.
We concluded our 1999 collaboration agreement with Affymetrix in 2001
and simultaneously entered into a series of agreements with respect to
multiplexed primer extension technology.
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PerkinElmer
In February 2000, we entered into an agreement with PerkinElmer
(formerly known as NEN Life Sciences, Inc.), under which PerkinElmer has agreed
to supply us with all of our required terminators for use in our SNPware kits.
Terminators are nucleotides that stop the extension of a DNA chain. In
consideration of PerkinElmer's agreement to supply us with terminators at
preferential prices, we sold to PerkinElmer 125,000 shares of our common stock
for a purchase price of $750,000 and paid PerkinElmer an up-front fee of
$750,000. Under the supply agreement we will pay PerkinElmer a royalty fee based
on our revenues for SNPware kits we sell above a specified sales price. We are
required to purchase quantities of terminators with an approximate minimum value
during each annual period from the effective date of the agreement as follows:
$333,000 in the first year, $700,000 in the second year, $990,000 in the third
year, and $1,320,000 in the fourth year. Since the products being supplied are
used in our current product and may be used in future products, we will defer
and amortize the $750,000 up front fee plus the difference between the fair
value of the stock issued to PerkinElmer (approximately $1.5 million) over the
purchase price for the stock, or a total of $1.5 million over the estimated four
year term of the agreement on a straight-line basis. We measured the fair value
of the common stock on the date of the agreement as these shares were fully paid
and nonforfeitable on that date. Either party can terminate the agreement any
time after four years from the commencement date, without cause, upon 90 days'
prior written notice. Either party can also terminate the agreement for cause,
such as a failure to make payments or for any breach that remains uncured 60
days from the receipt of notice of the breach.
In December 2000, we also granted an exclusive license to the Life
Sciences business of PerkinElmer to use our patented SNP-IT technology for SNP
scoring applications using fluorescence polarization and energy transfer
read-out methods. Under the terms of the agreement, PerkinElmer Life Sciences
has agreed to produce and sell reagent kits, software and instruments
incorporating our SNP-IT single base primer extension technology to enable its
customers to perform fluorescence-based SNP analyses. This license grants
PerkinElmer exclusive rights to use our SNP-IT technology with fluorescence
polarization, a laboratory read-out methodology that is expected to achieve
rapid growth as a result of such attributes as simplicity, accuracy and cost
effectiveness. In addition to licensing fees, we are entitled to receive
royalties (including yearly minimum payments) from product sales, if any, under
the license agreement. This agreement, under which we have also granted
PerkinElmer an option to expand the field of use to include diagnostic assays
based on fluorescence methodologies and time resolved energy transfer,
terminates on the date upon which the last of the patents we license to
PerkinElmer expires. In the event of a breach of this agreement, the
non-breaching party may terminate the agreement upon 14 days' written notice for
uncured breaches relating to non-payment, except for non-payment of license
fees, and upon 60 days' written notice for all other uncured breaches.
In December 2000, we further granted a non-exclusive license to the
Life Sciences business of PerkinElmer to use our SNP-IT technology for scoring
applications on DNA sequencers. Under the agreement, PerkinElmer will produce
and sell reagent kits, software and instruments incorporating our technology for
performing SNP analyses on capillary and slab gel DNA sequencers. In addition to
licensing fees, we are entitled to receive royalties from product sales, if any,
under the license agreement. This will enable PerkinElmer to develop and sell
reagent kits so that researchers can perform high quality SNP analyses using the
DNA sequencers they already own. This agreement terminates on the date upon
which the last of the patents we license to PerkinElmer expires. In the event of
a breach of this agreement, the non-breaching party may terminate the agreement
upon 14 days' written notice for uncured breaches relating to non-payment,
except for non-payment of license fees, and upon 60 days' written notice for all
other uncured breaches.
Amersham Biosciences
In June 2000, we entered into a license agreement with Amersham
Pharmacia Biotech (now known as Amersham Biosciences), the life sciences
division of Nycomed Amersham Plc, pursuant to which we granted a royalty
bearing, non-exclusive license to Amersham Biosciences to use our SNP-IT single
base primer extension technology. Under the terms of the agreement, Amersham
Biosciences will produce and sell reagent kits and software incorporating our
technology to allow researchers to perform SNP analyses on Amersham Biosciences
capillary and slab gel DNA sequencers. In addition to licensing fees, we are
entitled to receive royalties for the duration of the license agreement. Our
agreement with Amersham Biosciences does not provide for minimum annual sales
requirements, and therefore we cannot determine at this time the materiality or
the value of this agreement to our business or us. This agreement terminates on
the date upon which the last of the patents we license to Amersham Biosciences
expires. In the event of a breach of this agreement, the non-breaching party may
terminate the agreement upon 14 days' written notice for uncured breaches
relating to non-payment, except for non-payment of license fees, and upon 60
days' written notice for all other uncured breaches.
Applied Biosystems, Inc.
In July 2000, we entered into a license agreement with PE Biosystems,
now known as Applied Biosystems, a division of PE Corporation, under which we
granted a royalty bearing, non-exclusive license to Applied Biosystems to use
our SNP-IT single base primer extension technology. Under the terms of the
agreement, Applied Biosystems will produce and sell reagent kits and software
incorporating our technology to allow researchers to perform SNP analyses on
Applied Biosystems' ABI PRISM(R) DNA sequencers. In addition to licensing fees,
we are entitled to receive royalties for the duration of the license agreement.
Our agreement with Applied Biosystems does not provide for minimum annual sales
requirements, and therefore we cannot determine at this time the materiality or
the value of this agreement to our business or us. This agreement terminates on
the last day upon which the last of the patents we licensed to Applied
Biosystems expires. In the event of a breach of this agreement, the
non-breaching party may terminate the agreement upon 14 days' written notice for
uncured breaches relating to non-payment, except non-payment of license fees,
and upon 60 days' written notice for all other uncured breaches.
The SNP Consortium Ltd.
In July 2000, we expanded our collaboration with The SNP Consortium
Ltd. under which we performed certain SNP scoring services for determining the
allelic frequency of 60,000 SNP genomic markers in diverse populations. We bore
a substantial portion of the costs to perform these services. To fulfill our
commitment under this collaboration, we accelerated the hiring of personnel for,
and use of SNPware consumables in our MegaSNPatron facility, resulting in
additional research and development expenses in 2001 of approximately $3.0
million. In exchange, we obtained the right to commercialize certain technology
developed as a result of performing these services and also received milestone
payments. Work under this collaboration was completed during 2002.
Other Agreements
In addition, we have entered into various, license, service and
collaboration agreements with respect to our technology, product and services
with various third parties that are not material to our business. We will
continue to seek to enter into similar agreements to enable us to develop
technologies and earn revenues from our products and services in the future.
Customers
We have entered into licensing arrangements with certain Platform
Propagation strategy collaborators with respect to our SNP-IT primer extension
technology. We typically structure these arrangements so that we receive
licensing fees and royalty payments for the use of our SNP-IT primer extension
technology in our customers' products. We intend to continue to enter into
similar arrangements in the future. We have also offered our SNPstream system
hardware in two basic transactions, either a purchase and sale transaction or an
arrangement in which the customer takes possession of the system and pays an
access fee for its use. SNPware consumables are sold to these customers for use
with the systems. We have also targeted biotechnology and pharmaceutical
companies that perform SNP scoring and have established marketing and
distribution channels for our SNPware consumables. We also perform SNP scoring
services on a fee-for-service basis. Our customers include Eli Lilly, The SNP
Consortium, GlaxoSmithKline, Ellipsis, Pig Improvement Corporation, the UK
Department of Environment, Food, and Rural Affairs, Ellipsis Biotherapeutics and
AstraZeneca. Our current SNPstream customers include DNA Link, Bristol-Myers
Squibb, DNAPrint genomics and Tepnel Life Sciences. Our SNPstream MT system was
launched in late 2001. Some of our customers are currently beta testing our
SNPstream UHT system, and we expect to formally launch the system for use by our
customers as a product and as part of our service facility in early 2002.
Customers for our identity genomics business include a large number of state and
local government agencies in New York, Ohio, Mississippi and California, as well
as individual customers for our private paternity services. Customers for our
diagnostic products and services include hospital and clinical laboratories and
individuals and groups organizing transplantation testing drives. We also
provide HLA testing services to a major customer in Germany, Deutsche
Knochenmarkspenderdatei Gemeinnutzige GmbH.
Manufacturing and Suppliers
We manufacture SNPware consumables at our Princeton, New Jersey
facility, products and consumables for HLA testing at our Stamford, Connecticut
facility, and reagents for disease susceptibility testing at our facility in
Abingdon, UK. If we are unable to meet commercial demand for our products, we
may need to enter into supply arrangements with third parties to produce
commercial quantities of our products. However, we believe we currently have
sufficient manufacturing capacity to meet commercial demand for our products
through 2003. Subsequent to our acquisition of Lifecodes in December 2001, we
are working to maximize efficiencies through the possible combination of
manufacturing facilities.
Our manufacturing facilities are designed to optimize material flow and
personnel movement with centrally located manufacturing and quality control
operations. We produce critical components in environmentally controlled clean
rooms that are isolated from the rest of the facility.
The Stamford, CT and Abingdon, UK facilities have ISO9001 accreditation
and we plan to comply with quality system requirements, or QSRs, and FDA
guidelines for analyte-specific reagents, or ASRs, over the next two years.
Access and safety features are designed to meet federal, state and local health
ordinances.
We rely on outside vendors to manufacture a number of central
components of our SNPstream system and reagents that we provide in our SNPware
kits. We have agreements with Tecan and Beckman Coulter for the components of
our SNPstream systems and PerkinElmer, Inc. for some of the key reagents in our
SNPware kits.
We are establishing a company-wide enterprise resource planning system
to manage and control our material and product inventories. This system will
encompass product costing, materials procurement, production planning and
scheduling, inventory tracking and control and batch records, with links to
document control for all manufacturing, quality control, quality assurance and
regulatory compliance procedures.
15
We also perform service testing at all of our facilities. All of our
Identity Genomics facilities have the CLIA accreditations necessary to be in
compliance with the required regulations, and two of our Cellmark laboratories
have American Society for Criminal Laboratory Directors (ASCLD) certification.
Distribution
We are expanding our business internationally, using the facilities
acquired in early 2001 as a headquarters for the operations of our European
subsidiary, Orchid BioSciences Europe, Ltd., in Abingdon, UK. We intend to use
our international operations to expand our identity genomics and clinical
genetic testing services, to provide service locations and redistribution
centers for our SNPstream systems and SNPware consumables, to expand the
marketing and distribution of our DNA diagnostic products, and to serve as the
base for the eventual introduction of our personalized medicine products and
services into Europe. In 2001, we strengthened our distribution capabilities
through our agreements with leading marketing partners, including Hitachi
MiraiBio for the SNPstream MT and Invitrogen for the 96-well genotyping kit that
we expect to be made available to thousands of laboratories.
Intellectual Property
We have implemented and continue to implement an aggressive patent
strategy designed to provide us with a unique proprietary position in the fields
of genotyping technologies, pharmacogenetics, microfluidics and other areas of
genetic diversity. This strategy will continue to focus on protecting and
commercializing our current and future products. Our patent portfolio reflects
our international scope and includes pursuing patent protection in many of the
industrialized nations of the world. We currently own, or have exclusive
licenses to, 70 US patents and 78 foreign patents, and have received notices of
allowance for 2 additional Australian patent applications. Additionally, we have
195 pending patent applications of which 50 are US applications and 145 are
foreign patent applications.
Our commercial success will also depend, in part, on our ability to
obtain patent protection on the SNPs for which we discover utility and on the
products, methods and services for which we base such discoveries. We have
sought and intend to continue to seek patent protection for novel uses of SNPs,
which may have initially been patented by third parties. In such cases, we may
need to license these SNPs from the patent holders to make use of or sell
products using these SNPs.
We own or exclusively license key patents covering these fundamental
areas of our business: primer extension technologies (patent numbers 5,888,819,
6,004,744, 6,013,431, 5,856,092, and 5,302,509) and surface biochemistry and
arrays (patent numbers 6,322,968, 6,337,188, 5,919,626, 6,294,336 and
6,225,109). We also own or exclusively license patents covering other areas of
our business including pharmacogenomics, paternity and forensic genetic markers.
As of December 31, 2001, these subject patents have approximately ten or more
years before they expire.
We also rely on both patent and trade secret protection of our
intellectual property. Complex legal and factual determinations and evolving
laws make patent protection uncertain. As a result, we cannot be certain that
patents will be issued from any of our patent applications or from applications
licensed to us or that any issued patents will have sufficient breadth to offer
meaningful protection. In addition, our issued patents or patents licensed to us
may be successfully challenged, invalidated, circumvented or unenforceable so
that our patent rights would not create an effective competitive barrier.
Moreover, the laws of some foreign countries may not protect our proprietary
rights to the same extent as US law does.
We attempt to protect our trade secrets by entering into
confidentiality agreements with third parties, employees and consultants. Most
of our employees and consultants also sign agreements requiring that they assign
to us their interests in discoveries, inventions, patents and copyrights arising
from their work for us, maintain the confidentiality of our intellectual
property, and refrain from unfair competition with us during their employment
and for a period of time after their employment with us, which includes
solicitation of our employees and customers. We cannot assure you that these
agreements will not be breached or invalidated. In addition, we cannot assure
you that third parties will not independently discover or invent competing
technologies or reverse engineer our trade secrets or other technologies.
In the future, third parties may file claims asserting that our
technologies or products infringe on their intellectual property. We cannot
predict whether third parties will assert such claims against us or against the
licensors of technologies licensed to us, or whether those claims will harm our
business. If we are forced to defend against such claims, whether they are with
or without any merit or whether they are resolved in favor of or against us or
our licensors, we may face costly
16
litigation and diversion of management's attention and resources. As a result of
such disputes, we may have to develop costly non-infringing technologies, or
enter into licensing agreements. These agreements, if necessary, may be
unavailable on terms acceptable to us, or at all, which could seriously harm our
business and financial condition.
We have 94 pending trademark applications in the US and elsewhere. We
have received registrations or notices of allowance for the following
trademarks: GeneScreen(R), GenoPak(R), SNPstream(R), SNPware, and the Orchid
logo. We have also received registration for SNP-IT(R) in Australia.
Government Regulation
While most of our initial research products will not be subject to
government regulation, we anticipate the manufacturing, labeling, distribution
and marketing of some or all of our future diagnostic products and services
developed or performed using our SNP-related technologies or microfluidics will
be subject to government regulation in the US and in certain other countries.
In the US, the FDA regulates, as medical devices, most diagnostic tests
and in vitro reagents that companies market as finished test kits or equipment.
Some clinical laboratories, however, purchase individual reagents intended for
specific analyses, and, using those reagents, develop and prepare their own
finished diagnostic tests. The FDA has not generally exercised regulatory
authority over these individual reagents or the finished tests prepared from
them by the clinical laboratories. The FDA has recently proposed a rule that, if
adopted, would regulate reagents sold to clinical laboratories as medical
devices. The proposed rule would also restrict sales of these reagents to
clinical laboratories certified under CLIA as high complexity laboratories. We
intend to market some diagnostic products as finished test kits or equipment and
others as individual reagents. Consequently, some or all of these products will
be regulated as medical devices. The AABB has accredited our CLIA laboratories
in Dallas, Texas, Dayton, Ohio, East Lansing, Michigan, Nashville, Tennessee and
Sacramento, California. The American Society of Histocompatibility and
Immunology, or ASHI, has accredited our Dayton, Ohio and Stamford, Connecticut
laboratories for transplantation typing of prospective bone marrow donors. The
National Forensic Science Testing Center and the ASCLD have accredited our
Germantown, Maryland and Dallas, Texas laboratories for DNA typing for criminal
forensic purposes. Only eight private forensics labs in the US have earned the
respected ASCLD accreditation.
The FDA has also adopted a set of regulations that govern laboratories
that use Analyte Specific Reagents, or ASRs, which cover the production of
assays and their components consistent with Good Manufacturing Practices for use
in clinical research and by clinical reference laboratories producing their own
assays. We are planning to satisfy these ASR guidelines within two years in
connection with our manufacture of any research or diagnostic product that these
guidelines may affect.
The Food, Drug, and Cosmetic Act requires that medical devices
introduced to the US market, unless exempted by regulation, be the subject of
either a pre-market notification clearance, also known as a 510(k) or an
approved pre-market approval application, or PMA. Some of our products may
require a PMA and others may require a 510(k). With respect to devices reviewed
through the 510(k) process, we may not market a device until the FDA agrees that
the product is substantially equivalent to a legally marketed device known as a
"predicate device." A 510(k) submission may involve the presentation of a
substantial volume of data, including clinical data, and may require a
substantial FDA review. The FDA may agree that the product is substantially
equivalent to a predicate device and allow the product to be marketed in the US.
The FDA, however, may (i) determine that the device is not substantially
equivalent and require a PMA, or (ii) require further information, such as
additional test data, including data from clinical studies, before it is able to
make a determination regarding substantial equivalence. By requesting additional
information, the FDA can further delay market introduction of our products. If
the FDA indicates that a PMA is required for any of our products, the
application may require extensive clinical studies, manufacturing information
and likely review by a panel of experts outside the FDA. The FDA could also
require us to conduct clinical studies to support either a 510(k) submission or
a PMA application in accordance with FDA requirements. Failure to comply with
FDA requirements could result in the FDA's refusal to accept the data or the
imposition of regulatory sanctions. FDA approval of a PMA application could take
significantly longer than a 510(k) approval.
Medical device laws and regulations are also in effect in many
countries in which we may do business outside the US. These range from
comprehensive device approval requirements for some or all of our medical device
products to requests for product data or certifications. The number and scope of
these requirements are increasing. We cannot assure
17
you that we will obtain regulatory approvals in such countries or that we will
not be required to incur significant costs to obtain or maintain any such
foreign regulatory approvals. In addition, the export by us of certain of our
products which have not yet been cleared for domestic commercial distribution
may be subject to FDA export restrictions. Medical laws and regulations are also
in effect in some states in which we do business. The failure to obtain product
approvals in a timely fashion or to comply with state or foreign medical device
laws and regulations may have a material adverse impact on our business and
results of operations.
Our current DNA testing laboratories in the US and our services that
Orchid Cellmark in the UK provides to US citizens are regulated under CLIA. The
intent of CLIA is to ensure the quality and reliability of clinical laboratories
by mandating specific standards in the areas of personnel qualifications,
administration, participation in proficiency testing, patient test management,
quality control, quality assurance and inspections. The regulations promulgated
under CLIA establish three levels of diagnostic tests, waived, moderately
complex and highly complex, and the standards applicable to a clinical
laboratory depend on the level of the tests it performs. Therefore we cannot
assure you that the CLIA regulations and future administrative interpretations
of CLIA will not have a material adverse impact on us by limiting the potential
market for our DNA testing services.
Our gene diagnostic kits sold by our Orchid Cellmark unit in Europe are
classified as IVD medical devices and are covered by the European Directive,
98/79/EC, or the Directive. The Directive was implemented into UK legislation
through the In Vitro Diagnostic Medical Devices Regulations, SI 2000/1315, or
the IVD Regulations, which came into force on June 7, 2000. There is a
transition period until December 7, 2003 during which manufacturers must either
comply with the existing national laws or comply with the IVD Regulations and
"CE" (the mark of conformity) mark their devices. After the transition period,
it will be mandatory for us to comply with the IVD Regulations. IVDs are
classified into four categories so that the level of regulatory control applied
to an IVD will be proportionate to the degree of perceived risk based on whom
the device user may be or the effect if it fails to perform as intended. These
categories are in order of increasing perceived risk, and our products fall into
the lowest risk category, or general IVDs. In order to "CE" mark our IVD
products, we will need to demonstrate compliance with the essential requirements
and use the appropriate conformity assessment route that are both detailed in
the IVD Regulations and the relevant Annexes of the Directive. In connection
with this demonstration of compliance, we must compile a technical dossier for
each IVD we market. The requirement to comply with the IVD Regulations will
increase the cost of regulatory compliance for our Cellmark division.
Prior to the Directive becoming mandatory, manufacturers are subject to
other legislation and obligations relating to quality control and safety, such
as the General Product Safety Regulations 1994 (SI 1994/2328). Manufacturers
must also comply with the Products of Animal Origin (Import and Export)
Regulations 1996 (SI 1996/3124) if it is applicable to their devices. Under
these regulations we are required to (and have) obtained registration from the
Ministry of Agriculture, Fisheries & Food of our manufacturing units in relation
to the export of genetic testing kits containing Purified Bovine Serum and
Purified Gelatin.
We currently sell a number of IVD products in the UK and have
accreditation certificates for our quality systems from a Notified Body (SGS
Yarsley ICS), thereby meeting the requirements of ISO9001, EN46001 and ISO13485.
We have also received an accreditation certificate from the United Kingdom
Accreditation Service, or UKAS, in relation to our testing laboratory. UKAS is
the national body for the accreditation of testing and calibration laboratories,
certification and inspection bodies.
As a result of obtaining the above-mentioned accreditations, we expect
that we will be able to demonstrate compliance of our IVD products with some of
the essential requirements provided for in Annex I of the Directive. However, we
must also prepare technical dossiers in accordance with Annex III of the
Directive before affixing a CE marking on each IVD. We cannot assure you that we
will be able to demonstrate compliance of our IVD products with the relevant
Annexes of the Directive.
In the US and UK, we are also subject to numerous environmental and
safety laws and regulations, including those governing the use and disposal of
hazardous materials. Any violation of, and the cost of compliance with, these
regulations could have a material adverse effect on our business and results of
operations.
Employees
As of February 15, 2002, we employed 595 persons, of whom 62 hold Ph.D.
or M.D. degrees and 81 hold other advanced degrees. Approximately 78 employees
are engaged in research and development, 46 employees are engaged in business
development, sales and marketing, 362 employees are engaged in manufacturing and
genotyping testing services,
18
and 109 employees are engaged in intellectual property, finance and other
administrative functions. None of our employees are represented by a collective
bargaining agreement, nor have we experienced any work stoppage. We believe we
maintain good relations with our employees.
Competition
The markets for our products are competitive, and we expect the
intensity of competition may increase. Currently, we compete primarily with
other companies that are pursuing technologies and products that are similar to
our technologies and products. Some of our competitors have greater financial,
operational, sales and marketing resources, and more experience in research and
development and commercialization than we have. Moreover, some competitors may
have greater name recognition than we do, and may offer discounts as a
competitive tactic. These competitors and other companies may have developed or
could in the future develop new technologies that compete with our products or
which could render our products obsolete. We cannot assure you that we will be
able to make the enhancements to our technologies necessary to compete
successfully with newly emerging techniques.
In the SNP genotyping field, we compete with several companies offering
alternative technology concepts. These companies include: Affymetrix, Sequenom,
Applied Biosystems, Illumina, Nanogen, Qiagen Genomics, Pyrosequencing and Third
Wave Technologies.
Our principal competitors in the field of pharmacogenetics research and
development for personalized medicine include: Celera Genomics, CuraGen,
Genaissance Pharmaceuticals, Millenium Predictive Medicine, DNA Sciences and
Variagenics.
Competitors in the DNA diagnostics field include: Myriad Genetics,
diaDexus, Celera Diagnostics, Third Wave Technologies, Nanogen, Specialty Labs,
Quest Diagnostics and Laboratory Corporation of America. Competitors in the
field of HLA testing include: One Lambda, Biotest, and PelFreeze.
Our Competitors in the field of identity genomics testing include: DNA
Diagnostics, Identigene, Laboratory Corporation of America and Bode Labs in the
US, along with Forensic Science Service and Laboratory of the Government Chemist
in the UK.
This report contains references to our trademarks SNP-IT and
GeneScreen(R), SNPstream(R), SNPware, GeneShield, Cellmark, MegaSNPatron,
SNPcode, ELUCIGENE, LifeMatch, Platform Propagation and the Orchid logo. These
are our trademarks for which we have filed registration applications with the
United States Patent and Trademark Office. All other trademarks or trade names
referred to in this annual report are the property of their respective owners.
19
Risks Related to Our Business
We are at an early stage of development and may never become profitable.
We organized our company as a Delaware corporation on March 8, 1995 and
have a short operating history. The market for the products and services that we
develop, manufacture and market, all of which are derived from genomics and
microfluidics technologies, is uncertain. We face risks related to our ability
to:
. develop, market and maintain competitive technologies, products
and services;
. anticipate and adapt to changes in our rapidly evolving markets;
. retain current collaborators and customers and attract new
collaborators and customers for our genotyping products and
services as well as our diagnostic kits and services in paternity
and forensics;
. implement and successfully execute our business strategy and
sales and marketing initiatives in order to increase our brand
recognition for our SNPware consumables and SNPstream
instruments;
. attract, retain and motivate qualified management, technical and
scientific personnel;
. obtain additional capital to support the expenses of developing
our technologies and commercializing our products and services;
and
. transition successfully from a company with a research focus to a
company capable of supporting commercial activities.
If we fail to adequately manage these risks, we may never become profitable
and our financial condition would suffer.
We had an accumulated deficit of $183.3 million as of December 31, 2001 and
expect to continue to incur substantial operating losses for the foreseeable
future.
We have had substantial operating losses since our inception, and we expect
our operating losses to continue for the foreseeable future. For example, we
experienced net losses of $84.7 million in 2001, $47.9 million in 2000, and
$28.2 million in 1999. In order to further develop our SNP scoring, identity
genomics and microfluidics technologies as well as our genetic diversity
services, including services provided by GeneShield, Inc., our wholly-owned
subsidiary, we will need to incur significant expenses in connection with our
internal research and development and commercialization programs. As a result,
we expect to incur operating losses for the foreseeable future.
Fluctuations in our quarterly revenues and operating results may negatively
impact our stock price.
Revenues and results of operations have fluctuated significantly in the
past and significant fluctuations are likely to continue in the future due to a
variety of factors, many of which are outside of our control. These factors
include:
. the volume and timing of orders for our SNPware consumables,
SNPstream instruments and other products and services;
. changes in the mix of our products and services offered;
. the number, timing and significance of new products and services
introduced by our competitors;
. our ability to develop, market and introduce new and enhanced
products and services on a timely basis;
. changes in the cost, quality and availability of reagents and
components required to manufacture or use our products; and
20
. availability of commercial and government funding to researchers
who use our products and services.
Research and development costs associated with our technologies,
products and services, as well as personnel costs, marketing programs and
overhead account for a substantial portion of our operating expenses. We cannot
adjust these expenses quickly in the short term. If our revenues decline or do
not grow as anticipated, we may not be able to reduce our operating expenses
accordingly. Our failure to achieve anticipated levels of revenues could
therefore harm our operating results for a particular fiscal period. In
addition, market and other conditions may require certain non-cash charges such
as stock based compensation charges and impairment charges related to long-lived
assets to be recorded by us in future periods. If our operating results in some
quarters fail to meet the expectations of public market analysts or investors,
the market price of our common stock is likely to fall.
We have limited manufacturing experience as it relates to manufacturing our
products on a commercial scale.
We have limited manufacturing experience and currently possess eight
accredited facilities capable of manufacturing limited quantities of our
products for both sale to our customers and internal use. We have completed a
significant portion of building out our manufacturing facility to meet current
market needs. If commercial sales were to increase dramatically in the short
term, we may need to scale-up our manufacturing facilities. If we are unable to
successfully scale-up our existing manufacturing capability quickly to meet such
a demand, we may not be able to provide our customers with the quantity of
products and services they require, which would result in reduced revenues. If
any natural disaster were to significantly damage our manufacturing facility or
if other events were to cause our operations to fail, these events could prevent
us from developing and manufacturing our products. Furthermore, we may not have
adequate insurance to cover the damage, which would adversely affect our results
of operations.
We have limited sales and marketing experience, and as a result, may be unable
to compete successfully with our competitors in commercializing our potential
products and services.
We have limited experience in sales and marketing. We have only
recently established a small direct sales force and will continue to rely
principally upon a small number of employees. We also intend to market our
products and services through collaborations and distribution agreements with
pharmaceutical, biotechnology, and agricultural companies and DNA testing
services to governmental entities and individual consumers. We cannot assure you
that we will be able to successfully establish or maintain either a direct sales
force or distribution arrangements to market our products and services, which
could have a material adverse effect on our financial condition and business
strategy.
Our technologies and commercial products and services may not be commercially
viable or successful, which would adversely affect our revenues.
We have not yet fully completed the development of our SNP scoring
technologies or the build-out of our ultra high-throughput MegaSNPatron facility
for SNP scoring, although the facility meets current market needs. These are
both important elements of our business strategy. We may not be able to
successfully develop these technologies. Even if we develop these technologies
or complete the build-out of this facility, we cannot be certain that our
prospective customers will value them. We are currently developing and
commercializing only a limited number of products based on our SNP scoring
technologies. We cannot assure you that we or our customers will be able to use
these technologies to successfully identify and score SNPs. In addition, any
SNPs which we or our customers score may not be useful in assisting
pharmaceutical or diagnostic product development. Our SNP scoring technologies
are in part directed toward the role of genes and polymorphisms in complex
diseases. A limited number of companies have developed or commercialized
products based on gene discoveries and/or polymorphisms to date. Accordingly,
even if we or our customers are successful in scoring SNPs and associating these
SNPs with specific drug responses or diseases, we cannot assure you that these
discoveries will lead to the development of therapeutic or diagnostic products.
If we fail to successfully develop our SNP scoring technologies or any
commercially successful diagnostic products and services based on such
technologies, we may not achieve a competitive position in the market.
Our SNP scoring technologies involve novel uses of instrumentation,
software and technologies that require validation in commercial applications.
Previously unrecognized defects or limitations of our SNP scoring technologies
may become apparent in these commercial applications. As a result, we may be
unable to validate or achieve the improvements in the components of our SNP
scoring technologies necessary for their successful commercialization.
21
If our customers do not purchase significant volumes of SNPware consumables, our
commercialization strategy could fail.
Our customers may not generate sufficient data in a cost-effective manner
using our SNPstream line of products and services. This may limit their
purchases of our SNPware consumables. Other factors which may limit the use of
our kits and consumables include the acceptance of our technologies by our
customers and the training of our customers' personnel. If our customers are
slow to, or never, achieve sufficient results using our SNPstream system, or
fail to purchase sufficient quantities of our SNPware consumables, we may never
achieve profitability. Further, our customers may not adopt SNPware consumables
for use with their own instrument systems. Even if they do, our products may not
work on their systems. Either circumstance would materially and adversely affect
our revenues and our rapid commercialization strategy.
If we fail to maintain the identity genomics contracts we have with various
state and governmental agencies or fail to enter into additional contracts, we
would lose a significant source of revenues.
We currently derive a substantial portion of our revenues from the identity
genomics services we provide in the paternity and forensic fields. These
services are heavily dependent upon contracts we have with various governmental
agencies, which are typically open to bid and awarded every one to three years.
The process and criteria for these awards are typically complex and highly
competitive. We may not be able to maintain any of our existing governmental
contracts or be the successful bidder on any additional governmental contracts
which may become available in the future, or negotiate terms acceptable to us in
connection with any governmental contract awarded to us, which would adversely
affect our results of operations and financial condition.
If we fail to improve our genetic analyses process, we could fail to achieve
cost improvements and lose our competitive position in the market.
Due to rapid product development and technological advancement in the
medical diagnostics and DNA testing industry, our growth and future operating
results will depend, in significant part, upon our ability to apply new
technologies to automate and improve our genetic analysis services and modify
our existing products to take advantage of new technologies. There can be no
assurance that our development efforts will result in any additional
commercially viable or successful improvements to our testing processes or
products. Any potential improvements to the testing process or new product will
require substantial additional investment, laboratory development and clinical
testing, and possibly regulatory approvals, prior to commercialization. Our
inability to successfully develop improvements to our testing processes or new
products or to achieve market acceptance of such improvements or new products
could have a material adverse effect on our business, financial condition and
results of operations. In addition, the rapid product development and
technological advancement in the genetic analysis and DNA testing industry could
result in our current or future DNA testing services or products becoming
obsolete. We believe that our future operating results will depend substantially
upon our ability to overcome significant technological challenges, successfully
introduce new technologies into our laboratories and to our customers and to
gain access to and successfully integrate such technologies if developed by
others.
We will require additional capital to fund our future operating plans which may
not be available on acceptable terms, if at all.
We anticipate that our existing capital resources may not be sufficient to
fund our future operating plans and we may therefore need to raise significant
additional capital. We expect our capital and operating expenses to be
significant for the foreseeable future. We have expended significant resources
to date in developing our MegaSNPatron facility and expect to continue to expend
resources to maintain this and our other facilities, as well as fund
commercialization activities. The amount of additional capital which we will
need to raise will depend on many factors, including:
. our progress with research and development;
. the number and breadth of our research programs;
. our internal use of and our level of success in commercialization
activities;
. our ability to establish and maintain successful collaborations; and
22
. the costs incurred by us in enforcing and defending patent
claims and other intellectual property rights.
We believe our cash on hand will be sufficient to fund our operating
costs for at least the next 12 months. However, we may need additional financing
sooner if we:
. decide to expand faster than planned;
. develop new or enhanced services or products ahead of
schedule;
. need to respond to competitive pressures; or
. decide to acquire complementary products, businesses or
technologies.
If we raise additional funds through the sale of equity or convertible
debt or equity-linked securities, your percentage ownership in the company will
be reduced. In addition, these transactions may dilute the value of our
outstanding common stock. We may issue securities that have rights, preferences
and privileges senior to our common stock. If we raise additional funds through
collaborations or licensing arrangements, we may be forced to relinquish rights
to certain of our technologies or products, or grant licenses to third parties
on terms that are unfavorable to us. We may be unable to raise additional funds
on terms acceptable to us. If future financing is not available to us on
acceptable terms, we may not be able to fund our future needs which would have a
material adverse effect on our results of operations and financial condition.
If we cannot enter into new collaborations or licensing agreements, we may be
unable to develop or commercialize our technologies, products and services.
Our strategy for developing and commercializing technologies, products
and services based on our discoveries depends upon our ability to form research
collaborations and licensing arrangements. As a result, we may be dependent on
our collaborators and licensees for marketing of SNP scoring systems, regulatory
approval and manufacturing and marketing of diagnostic products and personalized
medicine resulting from the application of our technologies. If we are unable to
enter into such research collaborations and licensing arrangements or implement
our strategy to develop and commercialize diagnostic products based upon our
discoveries it would have a material adverse effect on our results of operation
and financial condition.
The early termination of any of our collaborations or licenses could harm
our business and financial condition.
The collaboration agreements we have with third parties may be
terminated early under certain circumstances, including in the event of a
material breach by us. In addition, we intend to enter into additional
collaborations and licenses with third parties, who may require that their
agreements with us permit termination by them prior to the expiration of the
negotiated term under certain circumstances. If any third party were to
terminate its agreement with us or otherwise fail to perform its obligations or
to complete them in a timely manner, we could lose significant revenues.
We may not be able to attract and retain consultants and scientific
advisors.
We have historically maintained relationships with consultants and
scientific advisors at academic and other institutions who have conducted
research on our behalf critical to the development of our technologies, products
and services. The majority of these individuals have commitments to other
entities and have limited time available for us. Some of these entities may also
compete with us. We will need to establish new relationships with consultants
and scientific advisors in its genetic diversity fields. We will have little, if
any, control over the activities of any new collaborators and can expect only
limited amounts of their time to be dedicated to our activities. Our ability to
discover and score SNPs and commercialize products based on these discoveries
will depend in part on continued collaborations with researchers at academic and
other institutions. We cannot assure you that any of our existing collaborations
will be successful. Further, we may not be able to negotiate acceptable
collaborations in the future with additional consultants or scientific advisors
at academic and other institutions.
23
If we do not successfully distinguish and commercialize our technologies,
products and services, we may be unable to compete successfully with our
competitors or to generate significant revenues.
We are subject to significant competition from companies that are
pursuing products and services that are substantially similar to our existing
and proposed products and services. Many of the organizations competing with us
have greater financial, manufacturing, marketing, sales, distribution and
technical resources than we do. In the SNP scoring field, we compete with
several companies offering alternative technologies. We may also compete against
certain of our customers, which could adversely affect our relationships with
them.
We also face significant competition in our strategy designed to
identify and patent medically important uses of SNPs (our GeneShield
strategies). Some of the organizations competing with us have greater financial
and technical resources. We also have limited experience working in the managed
care and health care delivery industries and may not be able to successfully
commercialize our inventions, either on our own or in partnership with others.
It may also take longer than currently anticipated for SNPs and pharmacogenetics
to become widely used in clinical practice, which could adversely impact our
ability to realize significant revenues from our GeneShield business division in
the foreseeable future.
We believe our future success will depend, in large part, on our
ability to maintain a competitive position in instrument and kit-based SNP
scoring, SNP scoring services, and pharmacogenetics product fields. Others may
make rapid technological developments which may result in our technologies,
products or services becoming obsolete before we recover the expenses incurred
to develop them. Our inability to also make the enhancements to our technologies
necessary to compete successfully with newly emerging technologies would have a
material adverse effect on our competitive position.
If we are unable to protect our proprietary methods and technologies, we may not
be able to commercialize our products and services.
If our patent applications do not result in issued patents, our competitors
may obtain rights to commercialize ours discoveries, which would harm our
competitive position.
Our commercial success will depend, in part, on our ability to obtain
patent protection on many aspects of our business, technologies, products and
services, including the discovery and the association of particular SNPs with
disease predisposition and adverse drug metabolism, and on the products, methods
and services we develop. We may not be able to obtain new patents for our
SNPware consumables and SNPstream systems. We will pursue patent protection on
novel uses of SNPs discovered by us of known genes, as well as novel uses for
previously identified SNPs discovered by third parties. We may need to obtain a
license from such third parties with respect to any patent covering such SNPs in
order to make, use or sell any related products. In addition, we may need to
obtain a separate license from the gene patent holder. We may not be able to
acquire such licenses on terms acceptable to us, if at all.
Certain parties are attempting to rapidly identify and characterize
genes and SNPs through the use of gene expression analysis and other
technologies. To the extent any patents issue to other parties on such partial
or full-length genes or SNPs or on uses for such genes or SNPs, the risk that
the sale of products,or processes developed by us or our collaborators may give
rise to claims of patent infringement against us may increase. Others may have
filed and, in the future, are likely to file, patent applications covering SNP
uses. Any such patent application could have priority over our patent
applications and could further require us to obtain rights to previously issued
patents covering SNP uses. We cannot assure you that any license that we may
require under any such patents will be made available to us on commercially
acceptable terms, if at all.
The scope of our issued patents may not provide us with adequate protection
of our intellectual property, which would harm our competitive position.
Any issued patents that cover our proprietary technologies may not
provide us with substantial protection or be commercially beneficial to us. The
issuance of a patent is not conclusive as to its validity or its enforceability.
The United States Patent and Trademark Office may invalidate one or more of our
patents. In addition, third parties may have patents of their own which could,
if asserted, prevent us from practicing our proprietary technologies, including
the methods we use to conduct SNP scoring. If we are otherwise unable to
practice our patented technologies, we may not be able to commercialize our
technologies, products or services and our competitors could commercialize our
technologies.
24
Our success will depend partly on our ability to operate without
misappropriating the intellectual property rights of others.
We may be sued for infringing, or may initiate litigation to determine
that we are not infringing, on the intellectual property rights of others. For
example, we have commenced an action against St. Louis University seeking
declaratory judgment of non-infringement, invalidity and non-enforcement with
respect to a patent controlled by St. Louis University. Intellectual property
litigation is costly, and could adversely affect our results of operations. If
we do not prevail in any intellectual property litigation, in addition to any
damages we might have to pay, we could be required to stop the infringing
activity, or obtain a license to or design around the intellectual property in
question. If we are unable to obtain a required license on acceptable terms, or
is unable to design around any third party patent, we may be unable to sell some
of our products and services, which would result in reduced revenues.
We may need to initiate lawsuits to protect or enforce our patents and other
intellectual property rights, which could result in the forfeiture of these
rights.
In order to protect or enforce our patent rights, we may need to
initiate patent litigation against third parties. These lawsuits could be
expensive, take significant time, and could divert management's attention from
other business concerns. These lawsuits could result in the invalidation or a
limitation in the scope of our patents or forfeiture of the rights associated
with its patents. We cannot assure you that we will prevail in the St. Louis
University action or in any future litigation or that a court will not find
damages or award other remedies in favor of the opposing party in any of these
suits. During the course of these suits, there may be public announcements of
the results of hearings, motions and other interim proceedings or developments
in the litigation. Securities analysts or investors may perceive these
announcements to be negative, which would likely cause the market price of our
stock to decline.
Other rights and measures that werely upon to protect our intellectual
property may not be adequate to protect our products and services and could
reduce ours ability to compete in the market.
In addition to patents, we rely on a combination of trade secrets,
copyright and trademark laws, non-disclosure agreements and other contractual
provisions and technical measures to protect our intellectual property rights.
While we require employees, collaborators, consultants and other third parties
to enter into confidentiality and/or non-disclosure agreements where
appropriate, any of the following could still occur:
. the agreements may be breached;
. we may have inadequate remedies for any breach;
. proprietary information could be disclosed to our competitors;
or
. others may independently develop substantially equivalent
proprietary information and techniques or otherwise gain
access to our trade secrets or disclose such technologies.
If for any of the above reasons our intellectual property is disclosed
or misappropriated, it would harm both our ability to protect our rights and our
competitive position.
25
Future acquisitions or investments could disrupt our ongoing operations,
increase our expenses and adversely affect our revenues.
Since September 1998, we acquired Molecular Tool, a developer of SNP
technologies, as well as GeneScreen, Cellmark and Lifecodes, providers of
genetic diversity testing services. Although we have no commitments or
agreements with respect to any additional acquisitions at present, we anticipate
that a portion of our future growth may be accomplished by acquiring existing
businesses. Factors that will affect the success of any potential acquisition to
be made by us include our ability to integrate acquired personnel, operations,
products and technologies into our organization effectively, to motivate key
personnel and to retain customers of acquired businesses. We may not be able to
identify suitable acquisition opportunities, obtain any necessary financing for
such acquisitions on acceptable terms or successfully integrate acquired
personnel and operations. These difficulties could disrupt our ongoing business,
distract our management and employees, increase our expenses and materially and
adversely affect our revenues.
Our failure to comply with applicable government and industry regulations may
affect our ability to develop, produce, or market our potential products and
services and may adversely affect our results of operations.
Our research and development, manufacturing and service activities
involve the controlled use of hazardous materials and chemicals and patient
samples. We are subject to federal, state, local, UK and European laws and
regulations governing the use, storage, handling and disposal of such materials
and certain waste products, as well as the conveyance, processing, and storage
of data on patient samples. Further, we are subject to CLIA as a result of our
acquisition of GeneScreen, Cellmark, and Lifecodes. CLIA imposes certain
certification requirements on all clinical laboratories performing tests on
human specimens for the purpose of providing information for the diagnosis,
prevention or testing of any diseases. In addition, we are subject to the
European Directive 98/79/EC as a result of our acquisition of the Cellmark
Laboratory. European Directive 98/79/EC imposes certain requirements in
connection with Cellmark's sale of gene diagnostic kits. Although we believe we
comply in all material respects with the standards prescribed by federal, state,
local, UK and European laws and regulations, if we fail to comply with
applicable laws or regulations, including CLIA and European Directive 98/79/EC,
or if an accident occurs, we could be required to pay penalties or be held
liable for any damages that result and this liability could exceed our financial
resources.
All eight of our clinical genotyping laboratories must comply with
various industry regulations and accreditation standards in order to continue to
provide our paternity testing, forensic testing and bone marrow typing services.
For example, our GeneScreen laboratories have obtained accreditation from the
American Association of Blood Banks in order to provide paternity testing, from
the National Forensic Science Testing Center in order to provide criminal
forensic testing services and from the American Society of Histocompatibility
and Immunology in order to provide bone marrow donor typing services. In
addition, our Cellmark laboratory must comply with various industry regulations
and accreditation standards in order to provide paternity and forensic testing
services. For example, our Cellmark laboratory has obtained accreditation from a
Notified Body (SGC Yarsley ICS) and the United Kingdom Accreditation Service and
a registration from the Ministry of Agriculture, Fisheries and Food in order to
provide paternity and forensic testing services. In addition, Cellmark must
comply with regulations applicable to the marketing of its products. We cannot
assure you that we will be able to maintain our accreditations with any of these
authorities or comply with the regulations applicable to the marketing of
Cellmark products. If we fail to comply with the applicable regulations
promulgated by any of these agencies or if we were to lose our accreditation by
any of them, which could eliminate or significantly reduce the revenues
supporting our GeneScreen or Cellmark division.
26
The sale of our SNPware consumables, MegaSNPatron and SNPstream instruments
involves a lengthy and expensive sales cycle that may not result in sales.
Our ability to obtain customers for our SNPware consumables and
SNPstream instruments will depend in significant part upon the perception that
our products and services can help accelerate or improve drug discovery and
development efforts or have beneficial effects on human health. Our average
sales cycle is lengthy due to the education effort that is required to
effectively sell the benefits of our products and services to a variety of
constituencies within our prospective customer base, including research and
development personnel and key management. As a result, in some instances we may
expend significant human and capital resources to market our products without
any resulting sales.
The international sale of our products and services are subject to increased
costs and other risks which could affect our revenues.
Our Cellmark laboratory as well as our diagnostic business unit rely
upon international sales which are subject to certain inherent risks, including
difficulties in collecting accounts receivable, potentially longer payment
cycles, increased costs associated with maintaining international marketing
efforts, currency fluctuations, changes in regulatory requirements, and
difficulties in enforcement of contractual obligations and intellectual property
rights.
If our customers fail to accurately prepare DNA samples for use with our SNPware
and SNPstream product line or for analysis at our MegaSNPatron facility, our
products and services may fail to produce accurate results.
Before using our SNPstream product line and MegaSNPatron SNP scoring
service facility, customers must prepare samples by following several steps that
are prone to human error, including DNA isolation and DNA segment amplification.
If they do not prepare DNA samples appropriately, our SNPstream products and
MegaSNPatron SNP scoring service will not generate an accurate reading.
Alternatively, they may achieve lower levels of throughput than the levels for
which our system was designed. If our customers generate inaccurate readings or
are unable to achieve expected levels of throughput, they may not continue to
purchase our consumables, instruments or services, which could materially and
adversely affect our revenues.
We may be held liable for any inaccuracies associated with our research and
identity genomics services, which may require us to defend ourselves in costly
litigation.
Our clinical laboratory testing centers provide pharmacogenetic,
forensic and paternity testing services. Claims may be brought against us for
false identification of paternity or other inaccuracies. Litigation of these
claims can be costly. We could expend significant funds during any litigation
proceeding brought against us. Further, if a court were to require us to pay
damages to a plaintiff, the amount of such damages could significantly harm our
financial condition.
If our vendors fail to supply us with components for which availability is
limited, we may experience delays in our product development and
commercialization.
Certain key components of our SNP scoring and associated system
technologies are currently available only from a single source or a limited
number of sources. We currently rely on outside vendors to manufacture certain
components of our SNPstream system and certain reagents we provide in our
SNPware kits. Some or all of these key components may not continue to be
available in commercial quantities at acceptable costs. For example, we have an
agreement with NEN Life Sciences (now known as PerkinElmer) under which they
supply us with some of the key reagents contained in our SNPware kits. We rely
on third parties to provide DNA samples to us and to perform DNA synthesis. It
could be time consuming and expensive for us to seek alternative sources of
supply. Consequently, if any events cause delays or interruptions in the supply
of our components, we may not be able to supply our customers with our products
and services on a timely basis which would adversely affect our results of
operations. We also currently rely on DNA and oligonucleotides provided to us by
suppliers and rely on other third parties to perform DNA synthesis for us. A
steady supply of oligonucleotides is essential for both our internal and
external scoring needs. The market for custom oligonucleotide synthesis is
dominated by only six producers of oligonucleotides. To the extent that our
suppliers fail to meet our requirements completely or consistently, we may need
to enter a new agreement with other suppliers, the terms of which may not be as
favorable toward us as our existing supply agreements.
27
If we fail to retain our key personnel and hire, train and retain qualified
employees, we may not be able to compete effectively, which could result in
reduced revenues.
Our future success will depend on the continued services and on the
performance of our senior management, in particular the services of:
. Dale R. Pfost, Ph.D., Orchid's Chairman of the Board, President and
Chief Executive Officer; and
. Donald R. Marvin, Orchid's Chief Operating Officer, Chief Financial
Officer, and Senior Vice President of Corporate Development.
If either of Dr. Pfost or Mr. Marvin were hired away from us by a
competitor, or if for any reason they could not continue to work for us, we
would have difficulty hiring officers with equivalent skills in general and
financial management. We do not currently carry "key man" life insurance, so the
loss of the services of either of these individuals could seriously impair our
ability to operate or to compete in our industry.
In addition, our researchers, scientists and technicians have significant
experience in research and development related to genetic diversity. If we were
to lose these employees to our competitors, we could spend a significant amount
of time and resources to replace them, which could impair our research and
development efforts. Further, in order to scale-up our manufacturing capability
and to further our research and development efforts, we will need to hire,
train, and retain additional research, scientific, and technical personnel. If
we are unable to do so, we may experience delays in the research, development
and commercialization of our technologies, products and services.
Risks Related to the Biotechnology Industry
Public opinion regarding ethical issues surrounding the use of genetic
information may adversely affect demand for our products.
Public opinion regarding ethical issues related to the confidentiality and
appropriate use of genetic testing results may influence governmental
authorities to call for limits on, or regulation of the use of, genetic testing.
In addition, such authorities could prohibit testing for genetic predisposition
for certain conditions, particularly for those that have no known cure. Any of
these scenarios could reduce the potential markets for our products, which could
materially and adversely affect our revenues.
Commercializing medical products has associated risks, including compliance with
clinical testing and manufacturing regulations.
If we were to undertake the development of medical, testing or diagnostic
products without the collaboration of others, we would have to expend
significant funds. Any of our potential medical, testing or diagnostic products
will be subject to the risks of failure inherent in the development of
diagnostic products based on new technologies. These risks include the following
possibilities:
. that the products, if efficacious, will be difficult to manufacture on
a large scale or uneconomical to market;
. that proprietary rights of third parties will preclude us or our
collaborative partners from marketing such products; or
. that third parties will market superior or equivalent products.
If we have difficulty managing these risks, we may not be able to develop
any commercially viable products. In addition, clinical trials or marketing of
any such potential medical, testing or diagnostic products may expose us to
liability claims from the use of such products. We may not be able to obtain
product liability insurance and, even if we do, any coverage we obtain could be
insufficient or costly. In addition, should we choose to manufacture or to
develop our own products independently, we will have to make significant
investments in product development, marketing, sales and regulatory compliance
resources, and we will have to establish or contract for the manufacture of
products under the
28
regulations of the FDA regarding good manufacturing practices. We cannot assure
you that it will be able to develop or commercialize successfully any potential
medical, testing or diagnostic products.
Risks Associated With Our Common Stock
Future issuance of our preferred stock may dilute the rights of our common
stockholders.
Our board of directors has the authority to issue up to 5,000,000
shares of preferred stock and to determine the price, privileges and other terms
of these shares. Our board of directors may exercise this authority without any
further approval of our stockholders. The rights of the holders of our common
stock may be adversely affected by the rights of the holders of our preferred
stock that may be issued in the future.
We have various mechanisms in place that you as a stockholder may not consider
favorable, which may discourage takeover attempts.
Certain provisions of our certificate of incorporation and by-laws, as
well as Section 203 of the Delaware General Corporation Law and our adoption of
a shareholder's rights plan, may discourage, delay or prevent a change in
control of the Company, even if the change in control would be beneficial to
stockholders. These provisions include:
. authorizing the issuance of "blank check" preferred stock that could be
designated and issued by our board of directors to increase the number
of outstanding shares and thwart a takeover attempt;
. creating a classified board of directors with staggered, three-year
terms, which may lengthen the time required to gain control of our
board of directors;
. prohibiting cumulative voting in the election of directors, which will
allow a majority of stockholders to control the election of all
directors;
. requiring super-majority voting to effect certain amendments to our
certificate of incorporation and by-laws;
. limiting who may call special meetings of stockholders;
. prohibiting stockholder action by written consent, which requires all
actions to be taken at a meeting of stockholders; and
. establishing advance notice requirements for nominations of candidates
for election to our board of directors or for proposing matters that
can be acted upon by stockholders at stockholder meetings.
Pursuant to our stockholder rights plan, each share of our common stock
has an associated preferred share purchase right. The rights will not trade
separately from the common stock until, and are exercisable only upon, the
acquisition or the potential acquisition through tender offer by a person or
group of 15% or more of the outstanding our common stock.
In addition, our stock incentive plans may discourage, delay or prevent
a change in control of the Company.
Our stock price has been, and likely will continue to be, volatile and your
investment may suffer a decline in value.
The market prices for securities of companies quoted on The Nasdaq
Stock Market, including our market price, have in the past been, and are likely
to continue in the future to be, very volatile. The Nasdaq Composite Index has
significantly declined since our initial public offering in May 2000 and remains
very volatile. The market price of our common sto