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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NO. 000-30981

GENAISSANCE PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (203) 773-1450

        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 ý    No o

        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 the Form 10-K. ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý    No o

        The aggregate market value of Common Stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in the calculation is an affiliate) was $120,064,182 based on the last reported sale price of the Common Stock on The NASDAQ National Market on June 30, 2004.

        Number of shares of the registrant's Common Stock outstanding as of March 9, 2005: 34,728,829.

Documents Incorporated By Reference:

        Items 10, 11, 12, 13 and 14 of Part III (except for information required with respect to our executive officers which is set forth under "Executive Officers" in Item 1A of Part I of this report) have been omitted from this report and are incorporated by reference to the definitive proxy statement to be filed with the Securities and Exchange Commission relating to the registrant's 2005 annual meeting of stockholders.

        This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). For this purpose, statements contained herein regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives of management, other than statements of historical fact may be forward-looking statements. The words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we will actually achieve the plans, intentions or expectations expressed or implied in our forward-looking statements. There are a number of important factors that could cause actual results, levels of activity, performance or events to differ materially from those expressed or implied. These important factors include our "critical accounting estimates" and the factors set forth under the heading "Factors Affecting Future Operating Results." Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and readers should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of this Annual Report.

        The Genaissance name and logo, the Lark name and logo, and DecoGen®, HAP®, HAP™ and FAMILION™ are either registered trademarks or trademarks of Genaissance Pharmaceuticals, Inc. in the United States and/or other countries. All other trademarks, servicemarks or trade names referred to in this Annual Report on Form 10-K are the property of their respective owners.

ITEM 1. BUSINESS

Genaissance

Company Overview

        We develop innovative products based on our proprietary pharmacogenomic technology and have a revenue-generating business in DNA and pharmacogenomic products and services. We also market our proprietary FAMILION Test, a genetic test for cardiac channelopathies that is compliant with the Clinical Laboratory Improvement Amendments (CLIA), which is designed to detect mutations responsible for causing Familial LQT and Brugada Syndromes, two causes of sudden cardiac death. Our product development strategy is focused on drug candidates with promising clinical profiles and finding genetic markers to identify a responsive patient population. This strategy is designed to enable us to leverage existing clinical data and, thus, reduce the costs and risks associated with traditional drug development and increase the probability of clinical success and commercialization. Our total net revenues were approximately $8.1 million in 2002, $12.5 million in 2003 and $20.9 million in 2004.

        We were incorporated in Delaware on February 22, 1992 and changed our name to Genaissance Pharmaceuticals, Inc. on March 18, 1997. Our principal executive offices are located at Five Science Park, New Haven, Connecticut 06511. Our telephone number is (203) 773-1450 and our website is located at http://www.genaissance.com. The information on our Internet website is not incorporated by reference into this filing.

        We are completing a strategic review of our operations, including reducing our operating costs. Further, we are also reviewing various alternatives to financing our ongoing operations and meeting our obligations, including a potential reorganization, disposing of some of our assets, exploring strategic alternatives, such as a potential sale of the Company, developing strategic alliances and/or joint development arrangements. There is no assurance that we will be able to obtain sufficient financing on acceptable terms, if at all, or cure or waive any future non-compliance with the terms of our borrowing arrangements. These circumstances raise substantial doubt about our ability to continue as a going concern and our ability to meet our obligations under certain of our material agreements, including the agreement that we entered into with Merck KGaA (Merck) to develop and commercialize a small molecule compound known as vilazodone.

Available Information

        Our current reports on Form 8-K, quarterly reports on Form 10-Q and annual reports on Form 10-K are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC), and all such reports and amendments to such reports filed have been and will be made available, free of charge, through our website (http://www.genaissance.com) as soon as reasonably practicable after such filing or furnishing. Such reports will remain available on our website for at least twelve months. The public may read and copy any materials filed by us with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, D.C.

        The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Industry Overview

Development and Marketing of Drugs

        The pharmaceutical, biotechnology and healthcare industries face intense pressure to become more productive and deliver more cost effective healthcare. Two of the pharmaceutical and biotechnology industry's most challenging issues are the high cost and low success rate of developing drugs and the

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need to differentiate approved drugs in highly competitive markets. At the same time, healthcare providers and payers are spending a growing proportion of their resources on prescription drugs.

        The drug development process is costly and subject to a high failure rate. Even with recent technological advances, including advances in areas such as genomics, which is the knowledge and use of all of the genetic information of an organism, the failure rate of clinical trials has increased significantly. According to a study by Bain & Company, the average cost for developing a new drug, including the cost of unsuccessful drug candidates, is now $1.7 billion, 55% higher than the average cost from 1995 to 2000, because of this growing failure rate.

        Approved drugs often face intense competition. The period of market exclusivity for the first drug in a new therapeutic class is typically much shorter today than it was a few years ago because of the introduction of similar compounds in that therapeutic class. Consequently, marketing expenditures have increased rapidly as companies attempt to maintain or increase market share. For example, in 2003, pharmaceutical companies spent over $3 billion in the U.S. to advertise their drugs to consumers, which is only a small proportion of their promotional budget, most of which is targeted at physicians. Marketing departments are also under pressure to maximize the revenue generated from approved products in order to meet corporate-wide revenue and earnings goals. In addition, pharmaceutical companies continue to face increasing competition from generic drugs, as patents on more than 200 brand-name drugs will expire over the next several years. In 2002, for the first time in the U.S., generic drugs accounted for more than half of all prescriptions dispensed. IMS Health predicts that worldwide sales of generic drugs will continue to grow at double digit rates through 2007. Thus, in order to maintain revenue growth rates and profitability, pharmaceutical companies must both improve the success rate of clinical trials and differentiate their drugs in a crowded market place.

        Retail sales of prescription drugs, which are still growing faster than overall healthcare spending, reached $179.2 billion, or 11% of healthcare spending, in the U.S. in 2003. In an attempt to contain the rising cost of drug expenditures, healthcare providers and payers face the difficult task of deciding which drugs should be prescribed to specific patients and are suitable for reimbursement. Healthcare providers make these decisions using medical outcome studies and economic benefit factors but they have little, if any, knowledge of which individual patients are most likely to benefit from a specific drug, if at all. Thus, healthcare providers and patients would benefit from using drugs that are targeted for a patient population that would have the best drug response and safety profile and, thus, allow for more appropriate and safer intervention.

Population Genomics

        Scientists have known for a long time that genomic differences influence how patients respond to drugs. Population genomics is the analysis of genomic variation within groups of people. The genomic blueprint each person inherits from his or her biological parents is contained within a person's DNA and determines differences, such as height, hair color and eye color. As scientists better understand variation at the molecular or genomic level, they are more certain that an individual's response to a drug is dependent upon that individual's unique DNA sequence and that more than one gene is probably involved in a drug response. Scientists know that every drug generally interacts, directly and indirectly, with a variety of proteins produced by different genes. Therefore, in order to predict a specific drug response, scientists must analyze genomic variation in multiple genes.

        The medical community generally acknowledges that most drugs work more effectively for some patients than for other patients. The pharmaceutical and biotechnology industry often poorly appreciates this variability in patient response. Consequently, pharmaceutical and biotechnology companies may unnecessarily discontinue further drug development, fail to obtain regulatory approval for promising drug candidates or, even if a drug obtains approval, be unable to market an approved drug effectively or to obtain approval for third party reimbursement.

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Single Nucleotide Polymorphisms and Haplotypes

        At the DNA level, genomic variation occurs mainly as a result of variation at a single position in the DNA sequence, commonly referred to as a single nucleotide polymorphism or SNP. Geneticists historically studied genetic variation by analyzing the inheritance of traits within an extended family. Classical population geneticists coined the term haplotype to describe the physical organization of genetic variation as it occurs in an individual. The haplotype is the standard for measuring genetic variation. At the molecular level, a haplotype consists of multiple, individual SNPs that are organized into one of the limited number of combinations that actually exist as units of inheritance in humans. Each haplotype contains significantly more information than individual, unorganized SNPs. As a result, clinicians need fewer patients to define a patient population with a different drug response if they use haplotypes rather than individual, unorganized SNPs.

        In October 2002, an international consortium, composed of non-profit biomedical research groups and private companies in Japan, the United Kingdom, Canada, China and the United States, initiated an effort to create a genome-wide haplotype map. This venture is aimed at speeding the discovery of genes that are related to common illnesses, such as asthma, cancer, diabetes and heart disease. In January 2005, the consortium announced that it expects to complete the project by the end of 2005 by having examined 270 individuals for the presence of 4,000,000 common SNPs.

        Pharmaceutical and biotechnology companies generally have not considered genomic differences between patients in developing and implementing clinical trials or in the marketing of approved drugs. However, if, in clinical trials, pharmaceutical and biotechnology companies were able to use gene haplotypes, together with sophisticated software programs to identify patient populations that would have different drug responses, they could improve the drug development and marketing process. For example, pharmaceutical and biotechnology companies could use gene haplotypes, which are identified in Phase I and Phase II clinical trials as being predictive of a clinical outcome, to determine the size of the patient population that would likely benefit from the drug under development. They would also know the size of the clinical group needed for a Phase III clinical trial to obtain statistically significant data to support the clinical development program. In addition, if pharmaceutical and biotechnology companies could identify the patients most likely to have a side effect, they could more closely monitor these patients or eliminate them from participating in clinical trials and receiving the drug and, hence, increase the safety profile of a drug.

        The pharmaceutical and biotechnology companies would, therefore, have a better understanding of the cost required to complete the development of a drug and the likely economic return on their investment before proceeding to a Phase III clinical trial. In addition, if pharmaceutical and biotechnology companies could use gene haplotypes to predict a drug response, they would be able to improve the marketing of their drugs by identifying those patient populations for which particular drugs are likely to be most effective with the least likelihood of having an adverse reaction and, perhaps, even prevent severe adverse reactions from occurring which would force a drug to be withdrawn from the market. Furthermore, healthcare providers and payers would likely benefit economically from predictive information that would enable a physician to prescribe the most appropriate and safest medication at the earliest possible time. In November 2003, the U.S. Food and Drug Administration (FDA) issued draft guidance that encourages pharmaceutical and biotechnology companies to use pharmacogenomics during the drug development process. The FDA has stated that it expects to issue its final guidance in 2005.

The Genaissance Solution

        We have developed a combination of technologies and expertise that we call our HAP Technology, which allows population genomics to be integrated into the development, marketing and prescribing of new and existing medicines.

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        The key components of our HAP Technology are:

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a proprietary informatics system, which we call DecoGen, including unique algorithms, for defining patient populations with different drug responses and a database, which we call the HAP Database, of highly informative, proprietary measures of genetic variation, or haplotypes, which we call HAP Markers, for pharmaceutically relevant genes;



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Good Laboratory Practices (GLP) compliant support experience for about 550 clinical trials;



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GLP compliant DNA banking experience;



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a process to determine the genetic variation in clinical samples;



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a method to deduce haplotypes from a patient's genetic variation, which we call HAP Builder;



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GLP compliant sequencing, genotyping and related molecular biology experience;



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clinical genetics development skills; and



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clinical DNA testing laboratories licensed by the states of Connecticut and North Carolina under CLIA.

        We designed our HAP Technology to permit pharmaceutical and biotechnology companies to use population genomics in a variety of ways for drug development and commercialization.

Drug Development

        We designed our HAP Technology to improve the success rate of drugs in clinical trials by:

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assessing efficiently the genomic variation among the patients involved in a clinical trial, thereby permitting pharmaceutical and biotechnology companies to incorporate genomic variation information in the decision making process required during the course of a clinical trial;



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creating better informed, or "smarter," clinical trials through the design of protocols, which result in the inclusion of those patients most likely to benefit from the proposed therapeutic product;



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facilitating earlier "go/no-go" decisions on whether to proceed to the next phase of clinical trial testing, which should result in a more efficient use of clinical resources; and



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reducing the size and, hence, the cost of late-stage clinical trials by enrolling a group of patients, who are most likely to respond to a drug and are least likely to suffer an adverse reaction.

Drug Marketing and Prescribing

        We also designed our HAP Technology to help maximize the value of an approved drug by:

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identifying which of our HAP Markers define the patient population with the best response and with less risk of an adverse reaction;



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integrating genomic variation information into marketing strategies to sustain and enhance a market leading position or to address problems such as poor market penetration, competitive pricing issues, safety, risk of therapeutic substitution and limited patent life; and



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targeting new markets and obtaining approval for new indications.

        Our HAP Technology should also be useful for improving the drug discovery process through the selection and validation of drug targets. In addition, pharmaceutical and biotechnology companies could incorporate data obtained during clinical trials into the drug discovery process to develop second-generation drugs. If widely adopted, our HAP Technology could enable the healthcare system to personalize treatment based upon an individual's unique genome.

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Our Strategy

        Our strategy and commercialization programs include the following:

        Generate revenues from offering DNA-based analysis services in various markets.    The specific revenue sources include fees from:

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granting access to our HAP Markers for individual pharmaceutically relevant genes or to our HAP Database;



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isolating and banking DNA;



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sequencing DNA samples and providing related molecular services;



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measuring the genetic variation present in DNA samples; and



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home-brew tests, which define populations with different drug response or different traits, such as our FAMILION Test for mutations that cause familial LQT and Brugada Syndromes, which can result in sudden cardiac death.

        The different markets, including those markets within Japan and Europe, that we target include:

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pharmaceutical companies;



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biotechnology companies;



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diagnostic companies;



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government and academic groups;



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agricultural markets; and



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consumer markets, such as those for nutraceuticals, which are fortified foods or dietary supplements that are thought to provide health or medical benefits in addition to their basic nutritional value.

        Our commercialization programs include the following:

        Commercialize our HAP Technology.    We offer pharmaceutical and biotechnology companies access to our HAP Technology and our clinical genetics development expertise for use throughout each phase of drug development and marketing. We are also pursuing opportunities to work with third parties that have drugs in clinical development, which have encountered problems that might be addressed by applying our HAP Technology and clinical genetics capabilities. Customers, with whom we work, can obtain access to:

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a feasibility assessment for using phamacogenomics in developing a particular compound;



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assistance in designing an informed consent, developing or modifying a protocol for incorporating the use of pharmacogenomics and banking DNA;



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guidance in selecting genes, choosing proprietary HAP Markers and determining the number of patients required for a pharmacogenomic study;



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design, development and validation of assays and genotyping of samples with these validated assays;



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analysis of data to detect an association between a clinical response and HAP Markers and validation of the results under GLP compliant conditions; and



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development of home-brew molecular tests and diagnostic assays.

        In return, we seek fees for our collaborative contributions to our customers' specific drug development or marketing projects and for pharmacogenomic support services. We currently have

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relationships and/or are providing pharmacogenomic support services to a number of major pharmaceutical and biotechnology companies. We are in discussions and negotiations with additional pharmaceutical and biotechnology companies to enter into programs that will utilize our HAP Technology, including pharmaceutical companies within such markets as Japan. We have a business development group to commercialize our HAP Technology and a sales force in the U.S. and Europe to sell our service offerings. We sell our products and services directly through a distributor in Japan and both directly and through distributors in Europe.

        In connection with the commercialization of our HAP Technology, we enter into third-party agreements from time to time in the ordinary course of business. For example, effective September 29, 2004, we entered into a cooperative agreement with the Agricultural Research Service (ARS), the in-house research arm of the United States Department of Agriculture (USDA). In cooperation with scientists at ARS, we are determining the distribution of known bovine SNPs in different types of beef and dairy cattle and will construct and validate assays for these SNPs. ARS will then make this new panel of assays publicly available to trace the origin and/or parentage of cattle. Under the agreement, ARS pays us a fee for each sample that we sequence and each test that we design. In addition, effective October 19, 2004, we entered into a multi-year agreement with Pyxis Genomics, Inc., under which we will provide our high throughput genotyping services to Pyxis for the commercialization of Pyxis' Profile-1 System. The Profile-1 System consists of Pyxis' proprietary panel of SNPs, a search engine and database, developed by IBM Life Sciences, which enables producers to track animals and their meat products from the point of origin throughout the production and distribution pipeline. We collaborated with Pyxis to develop and validate the genotyping assays for their SNP panel and received the first commercial samples for genotype analysis in the fourth quarter of 2004. Under the agreement, Pyxis pays us a fee for each sample that we analyze.

        Commercialize the intellectual property that we license from others or develop with our HAP Technology.    We currently have five programs from which we have or expect to have intellectual property to commercialize.

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Genetic test for cardiac ion channel mutations (cardiac channelopathies).  Cardiac channelopathies, including familial LQT and Brugada Syndromes, are conditions that affect the electrical system of the heart. These conditions are caused by genetic mutations that result in structural abnormalities in the potassium and sodium channels of the heart and predispose affected individuals to an abnormal heart rhythm (arrhythmia). Familial LQT and Brugada Syndromes are commonly seen in apparently healthy, active adolescent patients. If left undiagnosed and untreated, these conditions can be fatal. Treatment options include life-style modification, the prescription or avoidance of specific classes of drugs and the insertion of an implantable cardioverter/defibrillator. In May 2004, we launched the FAMILION Test, our genetic test for cardiac ion channel mutations, through our CLIA licensed laboratory in New Haven, to assist physicians in choosing the most appropriate course of treatment for each patient. We have intellectual property rights relating to the five genes that have been identified as explaining the majority of two cardiac channelopathies, familial LQT and Brugada Syndrome, with each of the genes having multiple causative mutations. LQT can also result from the administration of a medication or can occur in patients with other disorders, such as congestive heart failure. More than 50 approved prescription drugs, in various therapeutic classes, are known to prolong the QT-interval. Drug-induced LQT has led to the withdrawal from the market of such well-known drugs as the heartburn agent Propulsid® and the antihistamine Seldane®. In December 2004, we entered into a license agreement with Vanderbilt University, which grants us exclusive commercial rights to a patent that claims screening patients for susceptibility to drug-induced cardiac arrhythmias by testing for the presence of a common polymorphism in KCNE1, an important cardiac ion-channel gene. We are currently marketing to pharmaceutical companies the ability to include LQT genetics in drug development.

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In support of our efforts to develop and launch tests with respect to cardiac channelopathies, including familial LQT and Brugada Syndromes, we have entered into royalty bearing intellectual property and material transfer agreements with the University of Rochester and the Mayo Foundation for Medical Education and Research, respectively, under which we obtained access to clinical expertise, clinical research samples and associated data, from which identities have been removed, and intellectual property related to disease-associated mutations. In addition, we amended our license agreement with the University of Utah and Yale University, under which we have certain rights to a patent estate of more than 50 issued and pending patents in the United States and other countries relating to five cardiac ion channel genes associated with LQT, Brugada and related syndromes.

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Thiopurine S-methyltransferase (TPMT) genetic test.  The TPMT test provides a genetic assessment of a patient's ability to metabolize the thiopurine class of drugs, which are commonly used in a wide range of therapeutic areas, including such fields as oncology, rheumatology, organ transplantation and vasculitis therapy. The activity of the TPMT enzyme varies significantly among individuals who have different haplotypes of the TPMT gene. Pursuant to license agreements that we acquired from DNA Sciences in May 2003, we receive royalties based on net sales of the home-brew test.



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CARING Study (Clozapine and Agranulocytosis Relationships Investigated by Genetics (HAP Markers)).  In December 2004, we reported the discovery of genetic markers that we believe predict who is at risk of developing clozapine-induced agranulocytosis, a life-threatening decrease of white blood cells that requires frequent blood testing of patients. We believe that the findings may apply to other drugs that also affect white blood cell counts. Clozapine, which is no longer under patent protection, is a highly effective therapeutic for treating certain patients with schizophrenia. During the first six months of treatment with clozapine, a patient must undergo weekly blood monitoring, a requirement that results in poor patient compliance. We believe that clozapine's third-line therapy status and the requirement for repeated blood testing are the primary reasons that the market share for all clozapine products is only approximately $350 million in the United States. Sales of antipsychotic drugs in the United States reached an estimated $5.2 billion in 2000 and are expected to exceed $8 billion in 2005.



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Vilazodone.  In September 2004, we acquired an exclusive worldwide license from Merck to develop and commercialize a small molecule compound, vilazodone, which is a selective serotonin reuptake inhibitor (SSRI) and a 5HT1A partial agonist. In Phase II clinical trials for depression, vilazodone has shown signals of efficacy and a favorable side effects profile in the more than 1,000 patients, who were exposed to this compound. We had intended to commence enrollment in January 2005 for a Phase II clinical trial of vilazodone that would include pharmacogenomic characterization of patients but we did not because of liquidity issues. We would apply our HAP Technology and clinical genetics experience and leverage the existing knowledge of the genetics of depression and response to antidepressants, especially to SSRIs. The primary goal of this clinical trial would be to find genetic markers that can be used to identify a population of patients who will respond to vilazodone. We currently do not have sufficient resources to commence this clinical trial of vilazodone. We will need to secure additional sources of financing by July 2005 to meet our obligations under the Merck agreement and we are considering our options in this regard.



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STRENGTH trials (Statin Response Examined by Genetic HAP Markers)  We applied our HAP Technology and our clinical genetics development skills to the statin class of drugs, which doctors use to treat patients with high cholesterol and lipid levels and who are, therefore, at risk for cardiovascular disease. This market is highly competitive with multiple approved products seeking to gain increased market share. Currently, the market is approximately $18 billion worldwide and experts estimate that the market is growing at the rate of about 20% per year.

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We examined five statins in two prospective STRENGTH clinical trials. The goal of these two trials was to identify which of our HAP Markers define a patient population that has the best therapeutic response to one or more of these statins with a superior safety profile. In January 2003, we signed an agreement with Bayer AG and with Bayer HealthCare LLC to commercialize exclusively the diagnostic rights and non-exclusively the drug product development rights from our STRENGTH trials. As of December 31, 2004, we had not received any royalties under this agreement.

        Pursue strategic acquisitions.    We continually evaluate opportunities that may provide us with, among other things, intellectual property, key personnel, capabilities that could augment our recurring revenues or technologies that will enhance and complement our HAP Technology. From time to time, we intend to pursue acquisitions, which we believe will meet these goals.

        In May 2003, a United States bankruptcy judge approved our acquisition of substantially all of the assets and certain liabilities of DNA Sciences, Inc. for $1.35 million in cash. These assets included:

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DNA Sciences' Morrisville, North Carolina GLP compliant and CLIA licensed facility, which was a leader in providing clinical trial services to the pharmaceutical industry, including DNA banking and genotyping;



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a patent estate, including exclusive licenses in specific areas from The University of Utah and Yale University to patents relating to the five genes examined in our FAMILION Test; and



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the TPMT test, from which DNA Sciences was receiving royalties from its sub-licensees.

        In April 2004, we acquired Lark Technologies, Inc. following approval by the stockholders of each of the two companies. The terms of the agreement and plan of merger included the exchange of each outstanding share of Lark Technologies common stock for 1.81 shares of our common stock. Lark provides contract, GLP compliant and research sequencing and associated molecular services to the pharmaceutical, biotechnology and agricultural industries through its GLP compliant facility in Houston, Texas and its research facility in Takeley, UK.

Our HAP Technology

Overview

        Geneticists use the term haplotype to describe how SNPs are organized on a chromosome. Our process for discovering genetic associations, which are correlations between genetic variation and clinical outcomes such as drug response uses candidate-gene haplotypes, which we call HAP Markers. The use of these candidate gene-based haplotypes allows us to perform discovery studies using unrelated individuals, who typically comprise clinical trials cohorts. This approach is in contrast to typical family-based approaches, which require the use of large numbers of related individuals who are tested in linkage studies using widely spaced, genetic markers that have less informational content than do haplotypes. To identify what HAP Markers occur in a gene, we first discover individual SNPs by high-throughput sequencing of DNA samples of unrelated and related individuals that are representative of the individuals who constitute the major pharmaceutical markets of the world. Sequencing is the process of determining the order of the chemical units in a molecule of DNA, which in turn defines the chemical units that make up the proteins that are encoded in a DNA molecule. We use our proprietary algorithms to organize the SNPs into HAP Markers. Using these algorithms, we found significantly fewer actual HAP Markers per gene than the theoretically large number of ways in which SNPs could be organized.

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        Our DecoGen Informatics System contains a number of components. Our HAP Database contains our HAP Markers, including information about their sequence, frequency and distribution. Our DecoGen Informatics System also contains a proprietary collection of algorithms and a search engine that correlates a patient's HAP Markers with a particular response to a drug. To handle large amounts of information, we developed a proprietary tool that we call RuleFinder™ that allows us to identify rapidly potential associations between clinical endpoints and genetic variation. Then using standard analytical tools, we have been able to determine, with statistical accuracy, the correlation between HAP Markers and drug response in a small population of the size commonly seen in Phase I and Phase II clinical trials.

        Genotyping is the process for measuring which HAP Marker pairs are present in a patient's DNA sample. Our research genotyping process uses a proprietary laboratory information management system (LIMS), robotics and Sequenom's MassARRAY™ platform to determine, on a high-throughput basis, which two HAP Markers for a gene are present in a patient's DNA sample. We integrate the resulting data into our DecoGen Informatics System to search for a correlation with a patient's drug response. We have a customized facility in New Haven dedicated to high-throughput genotyping, which is licensed under CLIA regulations, and, hence, can do molecular testing, and also can perform genotyping for clinical trials. The facility in New Haven is licensed by the Animal and Plant Health Inspection Service (APHIS), a division of the USDA, to genotype sheep and, thus, determine their susceptibility to scrapie under the United States National Scrapie Eradication Program (NSEP). Scrapie is a fatal, degenerative disease affecting the central nervous system of sheep and goats.

        The human genomic DNA, which is needed from patients in clinical trials to do genetic association studies, can be isolated from blood samples obtained from patients participating in clinical trials and stored under GLP compliant conditions in our facility in Research Triangle Park (RTP) in Morrisville, North Carolina. We can develop GLP compliant genotyping assays for identifying and validating a genetic association in our RTP facility, through which we also offer a range of GLP compliant P450 cytochrome genotyping assays for genes whose protein products are involved in the metabolism of drugs by the human body. Our RTP facility is also licensed under CLIA regulations to do molecular testing.

        The following outlines the components of our HAP Technology and how we use our HAP Technology to define a patient population with a specific drug response.

Gene Selection

        Our goal is to discover HAP Markers for pharmaceutically relevant genes. We prioritize these genes for HAP Marker discovery based upon the needs of our customers. We obtain genomic information relevant for gene selection from publicly available sources. We have discovered HAP Markers for genes that are, or will likely become, drug targets; are associated with drug target pathways; are involved in how drugs modify cell communication or regulate other genes; and are involved in the metabolic process by which the body absorbs a drug and breaks it down.

Index Repository

        We constructed an Index Repository, a collection of diverse DNA samples, to discover the SNPs that are present in genes. We designed our Index Repository to contain genomic information that would be representative of the people who constitute the major pharmaceutical markets of the world; to aid in the quality control analysis of the SNPs we discover; and to facilitate the organization of SNPs into HAP Markers.

        To build our Index Repository, we recruited over 650 individuals whose parents and grandparents came from specified geographical regions. We obtained personal information from each individual, including sex, date of birth, and general medical information, as well as a detailed family history and

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drew blood samples so that we could create continually multiplying cells from the white cells present in the blood. The resulting cells, called permanent cell lines, provide us with a supply of DNA from which to discover SNPs. We store frozen samples of each cell line at multiple locations to ensure that all of these cell lines are available in the future. To supply sufficient DNA for the production process, we grow the cell lines in our cell culture facility. We employ quality control procedures that permit each DNA sample to be matched unambiguously to its corresponding cell line. We store all of the information about a cell line in our proprietary HAP Database that is a component of our DecoGen Informatics System.

Discovering SNPs

        We use a subset of our Index Repository to discover SNPs. We employed principles of population statistics to determine the minimum number of unrelated individuals that we needed to have a 99% probability of detecting a SNP or a HAP Marker that occurs in at least 5% of the general population or in at least 10% of a population from a specific geographical region.

        We sequence 93 individual, human DNA samples, or 186 individual genomes, from our Index Repository in the following genomic regions for each selected gene: the region responsible for controlling when a gene is active, the control region; the regions containing coding information that is found in the protein product of the gene, the coding regions; the boundaries between the genomic regions containing coding information and those interspersed regions that do not contain coding information, the non-coding regions; and the region at the end of a gene immediately after the last region containing coding information.

        Our sequencing process is highly automated, from picking the regions to be sequenced through loading the samples onto a sequencing machine. We have also developed a proprietary LIMS to track genes as they progress through the production pipeline. We use the LIMS to monitor the overall quality of data we produce to ensure that the sequencing process is operating according to our established standards. The sequence information undergoes two forms of quality control analysis. We use electronic procedures and established population genomic principles to identify and validate that a SNP exists at a given position.

HAP Markers and the HAP Database

        We have developed an entirely computerized process for discovering HAP Markers. Our proprietary method works because it analyzes a large number of individual samples and it has members of extended families in its sample set. We have validated the accuracy of our computerized process by conventional family studies and molecular techniques. We use our proprietary computational methods and algorithms to determine how the SNPs in a gene are organized on each of the two chromosomes in each sample we sequence from our Index Repository.

        Our computerized process assigns a confidence value to each HAP Marker we discover. If the HAP Markers we discover for a gene fall below a defined confidence level, we subdivide the gene into regions. We reexamine each region until we identify HAP Markers that meet our acceptance level. We then enter each HAP Marker into our proprietary HAP Database. We also enter other relevant population information, such as the distribution and frequency of each HAP Marker among people from different geographical regions. We also include, in our HAP Database, genomic markers that others have identified and are available in public databases.

        As of December 31, 2004, we had processed 7,743 pharmaceutically relevant genes through our production process and deposited their HAP Markers and associated information into our HAP Database.

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The DecoGen Informatics System

        We have constructed a proprietary informatics system, called DecoGen, which contains our proprietary HAP Database of HAP Markers. This system can accommodate information from a variety of populations, including individuals suffering from a specific disease and patients in clinical trials, as well as associated data, such as detailed medical histories, including responses to drugs. The portal to these databases is the DecoGen Informatics System's search engine, which we designed with an intuitive, graphical user interface so that drug development clinicians can easily manage their data to find a correlation between HAP Markers and a drug response.

        Our DecoGen Informatics System can use either qualitative or quantitative clinical measurements as a clinical endpoint to search for a correlation with our HAP Markers. The informatics system has the ability to exchange information with standard software packages used in the pharmaceutical industry. Additional tools are also available within the system to help in the design and operation of clinical trials. In December 2004, we received a Notice of Allowance from the U.S. Patent and Trademark Office for a patent claiming methods incorporated into the DecoGen technology; these patented methods are useful for identifying correlations between the safety and efficacy of drugs and patients' unique genetic signatures. Our DecoGen Informatics System also contains a proprietary computational tool that determines the minimal number and combination of variable sites, which we must analyze in order to identify, with high confidence, the two HAP Markers that are present for each gene in a clinical sample of DNA. This proprietary tool exploits an established genetic principle. That is, the presence of a given form of genomic variation at one position can be highly predictive of the form of genomic variation present at another site in a gene. This predictability reduces the complexity of the information needed to identify a HAP Marker in a DNA sample. We can determine this predictability, however, only if we already know the haplotype or the organization of SNPs in a gene. Our HAP Markers contain this needed information.

Our Molecular Biology Services

Custom DNA Sequencing Services

        Through the acquisition of Lark Technologies, we offer a wide range of DNA sequencing services and have multiple sequencing technologies in our laboratories to accommodate both high-throughput and highly complex projects. Depending upon the nature of a project, we will develop an optimal sequencing strategy to generate consistent, high quality sequence data for use in applications spanning basic research to be submitted to the FDA or other regulatory agency, including the following:

•

FDA submission quality sequencing—This sequencing work is designed for presentation in a report that can be incorporated into an application to be submitted to the FDA or other regulatory agencies.



•

Single pass quick turnaround (QT) sequencing—This service is designed to give customers a "quick look" at high accuracy double or single strand sequence data from one or multiple clones, in which the data is returned to the customer within a very short period of time after receiving the sample.



•

High volume sequencing services—This service involves sequencing many clones from a genomic or an expressed sequence tag library utilizing high-throughput automated systems.



•

Large scale genomic sequencing services—In this service, we construct libraries from a variety of genomic constructs and assemble them into full-length sequences, which can represent hundreds or thousands of genes.

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Genetic Stability Testing (GST) Services

        These services assist clients in meeting the regulatory guidelines established for the development and maintenance of genetically engineered bacteria or cell lines that produce biotechnology products. We analyze and provide a comprehensive report on the genetic integrity of cell banks used to produce recombinant proteins, monoclonal antibodies, gene therapy, and vaccine products, which is essential for creating a reliable process that produces a pure biologic product in high yield. We believe that the need for these services is increasing rapidly because there is a growing number of biotechnology products entering the clinical development pipeline. The FDA requires that this work be performed according to GLP guidelines, a key differentiating feature of our services. We believe that true GLP guidelines are not commonly followed in research and many service laboratories due to the rigorous demands of documentation and adhesion to the quality assurance regulations. Our facility in Houston, Texas has a quality system in place for studies designated for regulatory submission. Under this system, we conduct studies under the requirements of GLP and current Good Manufacturing Practices (GMP) as promulgated by the FDA. Our compliance with these regulations is defined in our quality policy manual and our standard operating procedures. Our quality assurance department reviews all project documentation and final reports to insure that they are compliant with applicable GLP/GMP regulations. Our GST services include:

•

DNA sequencing—We offer a number of alternative strategies to circumvent issues associated with having insufficient DNA and provide our clients with complete sequence data.



•

Copy number—Copy number is a service we provide that monitors the number of copies of a gene contained within a cell. Demonstrating that cells experience predictable changes in their copy number during production scale-up assures regulatory authorities that the process is well controlled.



•

Insertion number—Insertion number is a service that is similar to copy number but it is an additional analysis that is utilized to measure the stability of a cell bank.



•

Plasmid loss or rearrangement—A plasmid is an artificial stretch of DNA used to insert specified genes into a cell. For plasmid-based gene expression systems, the loss or rearrangement of the plasmid can be a major practical problem in high yielding strains, affecting the growth of cells. We have assays to detect the percentage of cells that are missing or have undergone a loss or rearrangement of their plasmid.



•

Phage detection—Phages are bacterial viruses, which can kill or alter the bacterium's growth cycle or expression levels. Our phage detection service is designed to detect contamination of a bacterial cell bank.

Genetically Modified Organism (GMO) Testing Services

        We provide services for identifying and characterizing genetically modified (GM) crops and plants. We have developed several effective services for genetic testing of food and agricultural products. We offer a broad range of genetics-based assays for qualitative and quantitative analysis of bio-engineered modifications in plants such as corn, soy and other grain products. Companies need GMO testing of their ingredients to meet labeling requirements and to ensure the presence or absence of genetically enhanced characteristics. The GMO services that we offer include:

•

Polymerase chain reaction (PCR) analysis—This method is recognized as the "gold standard" for GMO testing.



•

Southern blot analysis—We use standard Southern blot analysis for mapping of known insertion and gene expression analysis.

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•

Sequence verification of the expression cassette—Sequencing the GMO can ensure that the quality of the DNA is guaranteed to be 100% accurate with 100% double stranded coverage for that region.

        Gene Expression and Deletion Services

        The Human Genome initiative continues to provide an abundance of gene sequence information. However, there is little information regarding the function of the genes on their biochemical pathways. We continue to introduce services that assist clients in understanding the biological role of a gene by determining if, when, and at what level a gene is expressed in different samples of interest. These services can be important for identifying novel genes, confirming the validity of a gene as a drug target, and monitoring a target gene through the product development process. We currently offer:

•

Quantitative polymerase chain reaction (QPCR)—Our QPCR service provides highly accurate detection of a gene sequence. This method is a powerful tool for analyzing the distribution and expression of a target DNA sequence or a RNA molecule in a high-throughput format.

Custom Core Molecular Biology Services

        Many of the custom services that we perform require the application of molecular biology techniques either upstream or downstream from the main service provided. As a result, we have the ability to perform a number of molecular biology techniques, which can be offered as a complement to another service, or as a stand-alone service. Some of the more frequently requested services that we offer are described below.

•

Nucleic acid extraction services—All of our services involve the manipulation of nucleic acids, the starting material for molecular biology research and development. We offer a variety of extraction procedures to analyze DNA and/or RNA from blood, tissue, and other fluids, as well as from bacterial, plant and cell culture samples.



•

Subcloning—Subcloning is a procedure used to transfer a DNA region of interest into a vector that is more suitable for procedures such as DNA sequencing and gene expression. We can provide a strategy for subcloning a variety of different sequence fragments, including PCR products, into standard vector systems.



•

Library screening—During the gene discovery process, customers may find only a portion of a gene of interest. We can use such a gene fragment to screen a library of clones and isolate the full-length cDNA of interest.



•

Polymerase chain reaction—PCR can be used to amplify a specific sequence of interest from plasmid, viral, or genomic DNA. We also have the expertise to provide reverse transcription PCR for amplification of an RNA product.



•

DNA preparation—Many of our customers need large amounts of DNA for sequencing or probe generation. We have the ability to isolate DNA on a large-scale basis.

Intellectual Property

        We rely on patents, trade secrets, non-disclosure agreements, copyrights and trademarks to protect our proprietary technologies and information. In addition, our goal is to license to third parties certain components of our intellectual property that is peripheral to our core products and services.

        As of December 31, 2004, our patent portfolio included a total of 85 issued patents in the U.S. and other countries, 11 of which we own outright, one of which is co-owned with the University of Cincinnati, for which we have an exclusive commercial license, one of which is co-owned with Yale

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University and 72 of which we have an exclusive license in certain fields of use. Our issued patents and pending patent applications include those for:

•

vilazodone, our lead therapeutic product;



•

genes and mutations associated with familial LQT;



•

HAP Markers for pharmaceutically important genes;



•

correlations between specific HAP Markers and drug response, including albuterol and statins;



•

components of our DecoGen Informatics System, including the processes for assembling HAP Markers and for determining clinical associations; and



•

processes for integrating personalized medicines into the healthcare system.

        The U.S. patents owned and licensed by us are currently set to expire at various dates beginning in July 2013.

        We also rely upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain our competitive position. We generally protect this information with reasonable security measures, including confidentiality agreements that provide that all confidential information developed or made known to others during the course of the employment, consulting or business relationship shall be kept confidential except in specified circumstances. Agreements with employees provide that all inventions conceived by the individual while employed by us are our exclusive property.

Competition

        There is significant competition among entities attempting to use genomic variation data and informatics tools to develop and market new and existing medicines. We expect the intensity of the competition to increase. We face, and will continue to face, competition from numerous pharmaceutical, biotechnology and diagnostic companies, both in the United States and abroad. Entities such as Perlegen Sciences and the International HapMap Project have developed or plan to develop databases containing gene sequence, genomic variation or other genomic information and are marketing or plan to market their data to pharmaceutical and biotechnology companies or plan to make freely available their databases. In addition, numerous pharmaceutical and biotechnology companies, such as GlaxoSmithKline plc, either alone or in collaboration with our competitors, are developing genomic research programs that involve the use of information that can be found in these databases. Furthermore, companies, such as deCODE genetics, Inc., have technologies for using genetic variation in diagnostics and in the drug development process and have collaborations with companies employing these technologies. In order to compete successfully against existing and future entities, we must demonstrate the value of our HAP Technology and that our informatics technologies and capabilities are superior to those of our competitors. Many of our competitors have greater resources and informatics development capabilities than do we. Therefore, our competitors may succeed in identifying an association between a phenotype and gene variation and applying for patent protection more rapidly than we do. In addition, we face competition in our GLP compliant and/or research sequencing, genotyping and associated molecular services from individual researchers at laboratories within institutions such as the National Institutes of Health, who are capable of performing the work themselves, to core laboratories inside companies such as Amgen Inc., GlaxoSmithKline and Prizer, Inc. (Pfizer). Core laboratories can exist either in an academic or government setting or within a medium to large company, which can provide services at a much-reduced rate due to subsidizing of overhead expenses. We also face competition from several companies and new entrants in the genomics services market attempting to copy our footprint by offering DNA sequencing, genotyping and/or related molecular biology services.

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        We expect that our ability to compete will be based on a number of factors, including:

•

the ability of our customers to develop and commercialize therapeutic and diagnostic products based upon our HAP Technology;



•

our ability to secure sufficient resources to fund our HAP Technology commercialization programs;



•

our ability to attract and retain customers;



•

our ability to commercialize our intellectual property;



•

our ability to attract and retain qualified personnel;



•

our ability to protect against unauthorized use of our HAP Technology under various intellectual property laws and contractual obligations;



•

our ability to grow our business in agricultural genotyping; and



•

the wide breadth of custom molecular services we offer through our four facilities.

Government Regulation

        Regulation by governmental entities in the United States and other countries will be a significant factor in the development, manufacturing and marketing of any product that our customers or we develop. Various federal and, in some cases, state statutes and regulations govern or influence the manufacturing, safety, labeling, storage, record keeping, performance and marketing of human therapeutic and diagnostic products or services. The extent to which these regulations may apply to our customers or us will vary depending on the nature of the product or service.

        Currently, the FDA does not require companies seeking product approvals to provide data regarding the correlation between therapeutic response and genomic variation. On November 3, 2003, however, the FDA issued draft guidance that encourages pharmaceutical and biotechnology companies to use pharmacogenomics during the drug development process and clarifies how the FDA will evaluate the resulting data. The FDA has stated that it expects to release its final guidance in 2005.

        Virtually all of the pharmaceutical products developed by our customers will require regulatory approval by governmental agencies prior to commercialization. In particular, the FDA and similar health authorities in foreign countries will impose on these products an extensive regulatory review process before they can be marketed. This regulatory process typically involves, among other requirements, preclinical studies, clinical trials and often post-marketing surveillance of each compound. This process can take many years and requires the expenditure of substantial resources. Delays in obtaining marketing clearance could delay the commercialization of any therapeutic or diagnostic products developed by our customers, impose costly procedures on our customers' activities, diminish any competitive advantages that our customers may attain and lessen our potential royalties. Any products our customers develop may not receive regulatory approval in a timely fashion or at all.

        The FDA regulates human therapeutic and diagnostic products in one of three broad categories: drugs, biologics or medical devices. Products developed using our technologies could potentially fall into any of these three categories.

        The FDA generally requires the following steps for pre-market approval of a new drug or biologic product:

•

preclinical laboratory and animal tests;



•

submission to the FDA of an investigational new drug application, which must become effective before clinical trials may begin;

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•

adequate and well-controlled human clinical trials to establish the safety and efficacy of the product for its intended indication;



•

submission to the FDA of a new drug application, or NDA, if the FDA classifies the product as a new drug, or a biologic license application, or BLA, if the FDA classifies the product as a biologic; and



•

FDA review of the NDA or BLA in order to determine, among other things, whether the product is safe and effective for its intended uses.

        The FDA classifies medical devices, which include diagnostic products, as class I, class II or class III, depending on the nature of the medical device and the existence in the market of any similar devices. Class I medical devices are subject to general controls, including labeling, pre-market notification and good manufacturing practice requirements. Class II medical devices are subject to general and special controls, including performance standards, post-market surveillance, patient registries and FDA guidelines. Class III medical devices are those which must receive pre-market approval, or PMA, by the FDA to ensure their safety and effectiveness, typically including life-sustaining, life-supporting, or implantable devices or new devices, which have been found not to be substantially equivalent to currently marketed medical devices. It is impossible to say at this time which of these categories will apply to any diagnostic product incorporating our technologies.

        Before a new device can be introduced into the U.S. market, it must, in most cases, receive either pre-market notification clearance under section 510(k) of the Food, Drug, and Cosmetic Act or approval pursuant to the more costly and time-consuming PMA process. A PMA application must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the device, typically including the results of clinical trials, bench tests, laboratory and animal studies. A 510(k) clearance will be granted if the submitted information establishes that the proposed device is "substantially equivalent" to a legally marketed class I or class II medical device or a class III medical device for which the FDA has not called for PMAs. While less expensive and time-consuming than obtaining PMA clearance, securing 510(k) clearance may involve the submission of a substantial volume of data, including clinical data, and may require a lengthy substantive review.

        Even if regulatory clearance is obtained, a marketed product and its manufacturer are both subject to continuing review. Discovery of previously unknown problems with a product may result in withdrawal of the product from the market, which could reduce our revenue sources and hurt our financial results, in addition to exposing us to product liability claims. Violations of regulatory requirements at any stage during the process, including preclinical studies and clinical trials, the review process, post-marketing approval or in manufacturing practices or manufacturing requirements, may result in various adverse consequences to us, including:

•

the FDA's delay in granting marketing clearance or refusal to grant marketing clearance of a product;



•

withdrawal of a product from the market; or



•

the imposition of civil or criminal penalties against the manufacturer and holder of the marketing clearance.

        Generally, similar regulatory requirements apply to products intended for marketing outside the United States.

        We use DNA isolated from clinical samples of blood from individuals in developing our intellectual property consisting of HAP Markers and HAP Marker associations. In some cases, a clinical research organization, or CRO, with which we have a contract, collects these blood samples, plus personal and medical information about each individual. In other cases, we contract directly with clinical sites to collect the blood samples plus personal and medical information without the assistance

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of a CRO. Our CRO prepares, subject to our approval, the sample collection protocol and the patient informed consent form, as well as identifying the clinical sites, which collect the samples. The individual clinical sites recruit the patients for each clinical study and, following the study protocol, explain and obtain the signed and witnessed informed consent documents from each patient. The informed consent form includes the patient's authorization to use the patient's blood sample and data derived from it for developing commercial products. Our contract with the CRO and contracts with individual clinical sites require an independent institutional review board to approve the study protocol, the patient informed consent form and the transmission of the samples to us. Either we do not know the identity or we have in place procedures to maintain the confidentiality of any of the individuals from whom we receive clinical samples. We believe that these procedures comply with all applicable federal, state and institutional regulations.

        While the FDA does not currently regulate our genotyping facility, CLIA defines standards that constitute good clinical laboratory practice. Although this is a federal law, each state is responsible for administering the statute. The state of Connecticut issued a CLIA license for our facility in New Haven and the state of North Carolina issued a CLIA license for our facility in RTP. Both of these facilities can provide clinical genetic test results in support of therapeutic or medical interventions. A CLIA licensed clinical laboratory can be inspected by the state at any time to insure that we are in compliance with CLIA.

        In addition, in June 2004, APHIS, a division of the USDA, approved our high-throughput genotyping facility in New Haven, to genotype sheep to determine their susceptibility to scrapie under NSEP. We subsequently began processing samples under a contract that the USDA awarded to us as part of NSEP.

Research and Development

        For the years ended December 31, 2002, 2003 and 2004, we spent approximately $23.9 million, $20.1 million and $19.8 million, respectively, on research and development activities.

Significant Customers and Foreign-Based Revenue

        We market and sell our technology, services and clinical development expertise primarily to a limited number of biopharmaceutical and diagnostic development companies, including Pfizer, which accounted for 20% of our revenues in the year ended December 31, 2004. During 2004, we signed an amendment to our agreement with Pfizer, which extended Pfizer's access to selected data from our HAP Database through August 31, 2005. Our agreement with Johnson & Johnson Pharmaceutical Research & Development, which is a division of Janssen Pharmaceutica, N.V. (J&J PRD), which accounted for 23% and 46% of our revenues in 2003 and 2002, respectively, expired in January 2004. We do not expect the expiration of the J&J PRD agreement to have a significant impact on future revenue.

        For the years ended December 31, 2004, 2003 and 2002, approximately 25%, 0% and 4%, respectively, of our revenues resulted from foreign-based customers.

Sole Supplier

        We have an agreement with Sequenom, Inc., under which it is the sole provider of silicon chips for one time use on their MassARRAY™ System, which is our high-throughput genotyping platform. Under the terms of the agreement and subject to specific conditions, we have the authority to reuse these chips should Sequenom be unable to supply new chips to us. We believe that we could prepare for reuse, the requisite supply of chips that we would need without unreasonable cost or delay, if we were required to do so.

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Human Resources

        As of December 31, 2004, we had 164 full-time employees, 31 of whom hold Ph.D., M.D. or equivalent degrees. None of our employees is represented by a collective bargaining arrangement, and we believe our relationship with our employees is good. Furthermore, recruiting and retaining qualified scientific personnel will be critical to our success. We face the risk that we may not be able to attract and retain a sufficient number of qualified personnel on acceptable terms, given the competition among biotechnology, pharmaceutical and health care companies, universities and non-profit research institutions for experienced scientists. In addition, we rely on a number of consultants to assist us in formulating our research and development strategies.

ITEM 1A. EXECUTIVE OFFICERS

        Set forth below is certain information regarding our current executive officers, including their respective ages as of March 15, 2005 (1):

(1)

Does not include information with respect to Matthew W. Kalnik, Ph.D., who resigned as our Senior Vice President, Business Development effective as of March 23, 2005.

        Kevin Rakin.    Mr. Rakin was appointed as our Chief Executive Officer, in addition to President, in August 2002. He co-founded Genaissance and has served as a Director since 1995. Mr. Rakin has served as our President since October 2000. From January 1997 through August 2002, Mr. Rakin also served as our Chief Financial Officer and, from January 1997 to October 2000, as our Executive Vice President. Prior to 1998, Mr. Rakin was also a Principal at the Stevenson Group, a consulting firm, where he provided financial and strategic planning services to high-growth technology companies and venture capital firms. Prior to this, Mr. Rakin was a manager with Ernst & Young's entrepreneurial services group. Mr. Rakin holds a B.S. in business and a M.S. in finance from the University of Cape Town and a M.B.A. from Columbia University.

        Gerald F. Vovis, Ph.D.    Dr. Vovis was appointed as our Executive Vice President, in addition to our Chief Technology Officer, in April 2002. He has served as our Chief Technology Officer since October 2000. From October 2000 to April 2002, Dr. Vovis was our Senior Vice President and, from April 1999 to October 2000, was our Senior Vice President of Genomics. From 1980 to 1999, he was affiliated with Genome Therapeutics Corporation (now Oscient Pharmaceuticals Corporation), which was then a genomics company, most recently as Senior Vice President of Scientific Affairs. Dr. Vovis has twenty-three years of experience in the management of genetic research and in the development and management of collaborative research programs with pharmaceutical and biotechnology companies. Dr. Vovis holds a B.A. in chemistry from Knox College and a Ph.D. in biology from Case Western Reserve University.

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        Carl W. Balezentis, Ph.D.    Dr. Balezentis was appointed as our Senior Vice President and President of Lark Technologies, Inc. (Lark) in connection with our acquisition of Lark in April 2004. From June 2001 to April 2004, he served as Chief Executive Officer of Lark. From 1997 to 2001, Dr. Balezentis served in various positions with Sigma-Aldrich Corporation, a multi-national company that develops, manufactures and distributes a broad range of biochemicals, organic chemicals, chromatography products and diagnostic reagents. He was the Vice President of Sales and Marketing for the Sigma-Genosys subsidiary, for which he was responsible for developing strategic marketing programs that helped stimulate revenue growth, and before that Dr. Balezentis was the Director of Business Development for the Sigma-Aldrich Life Sciences Division. Prior to that time, he held key management positions at Perceptive Scientific Instruments, Applied Biosystems Division of PerkinElmer and Promega Corporation. Dr. Balezentis holds a B.S. in biology from the University of Arizona and a Ph.D. in genetics from the University of Arizona.

        Richard S. Judson, Ph.D.    Dr. Judson was appointed as our Senior Vice President and Chief Scientific Officer in September 2003. He had served as our Senior Vice President of Medical Affairs and Informatics since August 2002. From April 2000 to August 2002, Dr. Judson was our Senior Vice President of Informatics and, from November 1999 to April 2000, was our Vice President of Informatics. He joined Genaissance in February 1999 as our Associate Director, Bioinformatics. From January 1997 to February 1999, Dr. Judson served as Group Leader in the Bioinformatics Department of CuraGen Corporation, a genomics company, where he was responsible for developing software for protein-protein interactions and DNA sequence analysis. From January 1990 to December 1996, he served as Senior Member of the Technology Staff at Sandia National Laboratories, leading modeling projects in several areas including computational drug design, protein modeling and sequence analysis. He holds a B.A. in chemistry and physics from Rice University and a M.A. and a Ph.D. in chemistry from Princeton University.

        Ben D. Kaplan.    Mr. Kaplan has served as our Senior Vice President and Chief Financial Officer since May 2003. From January 2003 to May 2003, Mr. Kaplan was Senior Vice President Finance and Administration and Chief Financial Officer of Ikonisys, Inc., an emerging diagnostic company. From November 2002 to January 2003, he was a consultant to Ikonisys, Inc. From November 2001 to November 2002, following the sale of Packard Bioscience Company to PerkinElmer, Inc., Mr. Kaplan was a consultant to PerkinElmer. From February 1997 to November 2001, he was Vice President and Chief Financial Officer at Packard Bioscience Company. At Packard, Mr. Kaplan was involved in all aspects of corporate transactions, including the $750 million sale of the company to PerkinElmer as well as nine acquisitions over a four-year period. In addition, he led the company's $100 million initial public offering in April 2000 and $300 million corporate recapitalization. Mr. Kaplan also had responsibility for treasury, risk management, accounting, information technology and other administrative departments. A certified public accountant, he was previously an audit partner in the Hartford and New Haven, Connecticut offices of Arthur Andersen LLP. Mr. Kaplan received a B.S. in business administration and a M.S. in public accounting from the University of Hartford.

ITEM 2. PROPERTIES

        Our executive offices and laboratories are located at Five Science Park, New Haven, Connecticut where we lease approximately 75,000 square feet of space under a lease expiring on September 30, 2006, which we may extend for two five-year periods. We lease approximately 37,000 square feet of laboratory and office space at 100 Perimeter Drive, Morrisville, North Carolina under a lease expiring in February 2015. We lease approximately 15,000 square feet of laboratory and office space at 9441 West Sam Houston Parkway South, Houston, TX, under a lease expiring in December 2009. We also lease approximately 10,000 square feet of laboratory and office space at Hope End, Takeley, England under a lease expiring in May 2014. We believe that our current facilities are suitable to meet the needs of our operations for the foreseeable future. For information concerning our obligations under

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all operating leases see Note 13 to our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K.

ITEM 3. LEGAL PROCEEDINGS

        We, from time to time, are subject to legal claims arising in connection with our business. While the ultimate results of the legal claims cannot be predicted with certainty, at December 31, 2004, there were no asserted claims against us which, in the opinion of management, if adversely decided would have a material adverse effect on our financial position and cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to stockholders for a vote during the fourth quarter of 2004.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        Our common stock is currently quoted on The NASDAQ National Market under the symbol "GNSC."

        Our common stock began trading on August 1, 2000. The following table reflects the range of high and low bid information per share of our common stock, as reported on The NASDAQ National Market for the periods indicated. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

        As of March 2, 2005, there were approximately 291 holders of record of our common stock. As of March 2, 2005, the last reported sale price of our common stock on The NASDAQ National Market was $1.68 per share.

Dividend Policy

        We have never paid cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, for use in the development, operation and expansion of our business. Covenants in our term loan agreement with Comerica Bank, N.A. (Comerica) impose restrictions on our ability to pay cash dividends. In addition, we cannot pay dividends on our common stock without the prior consent of holders of 66²/3% of the outstanding shares of our series A preferred stock. The holders of shares of our outstanding series A preferred stock would share pro rata in any dividends we pay on our common stock.

Recent Sales of Unregistered Securities

        On November 19, 2004, we sold an aggregate of 3,550,294 shares of our common stock in a private placement for an aggregate price of $6.0 million and net proceeds of approximately $5.4 million, net of issuance costs of approximately $580,000, to the following investors: Bristol Investment Fund, Ltd.; Orion Biomedical Fund, L.P.; Orion Biomedical Offshore Fund, L.P.; Portside Growth and Opportunity Fund; Capital Ventures International; Prescott Group Aggressive Small Cap Master Fund; TCMP(3) Partners; Catalytix, LDC; Catalytix, LDC Life Science Hedge; Merifin Capital N.V.; Sunrise Equity Partners, L.P.; MPB Limited Partnership; Victor Marshall; Richard L.E. Morgan; Amphion Capital Partners LLC 401K dated 11/1/03 FBO: Jonathan Gold TTEE; Emerald Investment Partners, L.P.; Robert Mosberg; and Iroquois Capital L.P. In addition, we issued the investors warrants, exercisable through November 18, 2009, to purchase an aggregate of 3,550,294 additional shares of common stock at an exercise price of $1.69 per share.

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        We offered and sold these shares and warrants to these investors, who are "accredited investors," without registration under the Securities Act of 1933, as amended, or the securities laws of certain states, in reliance on the exemptions provided by Section 4(2) of the Securities Act and Regulation D thereunder and in reliance on similar exemptions under applicable state laws. We subsequently filed a registration statement with the Securities and Exchange Commission, or the SEC, to register the public resale of these shares, which the SEC declared effective on January 26, 2005.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

        The following selected financial data should be read in conjunction with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Annual Report on Form 10-K. We acquired Lark Technologies, Inc and certain assets of DNA Sciences, Inc., in April 2004 and May 2003, respectively; both acquisitions were accounted for under the purchase method of accounting. Accordingly, the financial data below includes the results of operations of Lark Technologies and DNA Sciences from the date of acquisition. The selected balance sheet data set forth below, as of December 31, 2004, 2003 and 2002 and the statements of operations data for the years ended December 31, 2004, 2003 and 2002, are derived from our financial statements, which have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, and are included elsewhere in this Annual Report on Form 10-K. Financial statements for fiscal years 2000 and 2001 were audited by Arthur Andersen LLP (Andersen). The historical results are not necessarily indicative of the results we expect for future periods. This data is in thousands, except per share data.