LARGE SCALE BIOLOGY CORP - 10-K Annual Report

LARGE SCALE BIOLOGY CORPORATION
(Exact name of registrant as specified in its charter)

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 this Form 10-K. ý

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No ý

The aggregate market value of voting stock held by non-affiliates of the Registrant as of June 30, 2004 was approximately $33.8 million (based on the last reported sales price of $1.38 on June 30, 2004 on the NASDAQ National Market).

The number of shares outstanding of the Registrant's common stock as of April 8, 2005 was 31,486,299.

Portions of the Registrant's definitive proxy statement, which is expected to be filed not later than 120 days after the Registrant's year ended December 31, 2004, to be delivered in connection with the Registrant's 2005 Annual Meeting of Stockholders, are incorporated by reference into Part III of this Form 10-K.

Large Scale Biology Corporation
Form 10-K
For the Year Ended December 31, 2004

Table of Contents

		Page
PART I
Item 1	Business	1
Item 2	Properties	11
Item 3	Legal Proceedings	11
Item 4	Submission of Matters to a Vote of Security Holders	11
PART II
Item 5	Market for Registrant's Common Equity and Related Stockholder Matters	12
Item 6	Selected Financial Data	13
Item 7	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	30
Item 8	Financial Statements and Supplementary Data	30
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	30
Item 9A	Controls and Procedures	30
Item 9B	Other Information	30
PART III
Item 10	Directors and Executive Officers of the Registrant	31
Item 11	Executive Compensation	31
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	31
Item 13	Certain Relationships and Related Transactions	32
Item 14	Principal Accountant Fees and Services	32
PART IV
Item 15	Exhibits and Financial Statement Schedules	33
	Signatures	59

Some of the statements contained in this report constitute forward-looking statements that involve substantial risks and uncertainties. In some cases, you can identify these statements by forward-looking words such as "may," "will," "expect," "plan," "anticipate," "believe," "forecast," "project," or "continue" and variations of these words or comparable words. In addition, any statements, which refer to expectations, projections or other characterizations of future events or circumstances, are forward-looking statements. Our Business section and Management's Discussion and Analysis of Financial Condition and Results of Operations contain many such forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and situations that may cause our or our industry's actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. The risk factors contained in this report, under the heading Factors That May Affect Our Business, as well as any other cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ from the expectations described or implied in our forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. Except as required by law, we do not undertake to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Large Scale Biology Corporation, LSBC, our logo, GENEWARE®, BAMF™, GRAMMR™ and other product and trade names are trademarks of or registered trademarks of Large Scale Biology Corporation in the United States and/or other countries. Other product and trade names mentioned herein may be trademarks and/or registered trademarks of their respective companies. References in this report to "the Company," "our," "we" and "us" refer collectively to Large Scale Biology Corporation, a Delaware corporation, and its predecessors and subsidiaries.

Large Scale Biology Corporation is a product-focused biotechnology company using proprietary technologies to develop and manufacture recombinant biologics. Our biomanufacturing opportunities include vaccines, complex proteins and follow-on off-patent therapeutics. We are focusing our efforts on the following products:

The technology employed in our product development and biomanufacturing operations includes our proprietary GENEWARE transient gene expression system and GRAMMR system to shuffle and improve gene sequences. Our manufacturing processes can be used to produce follow-on therapeutic products. We believe that our combination of proprietary technologies and existing manufacturing infrastructure enables us to rapidly and economically develop partner-specified products and to participate in market opportunities in major disease categories.

Our wholly-owned subsidiary company, Predictive Diagnostics, Inc., or PDI, is a diagnostics company established for the commercial development of a proprietary approach to early diagnosis of life-threatening diseases. PDI's products are supported by our technology developed in the course of our past genomics and medical product development programs. PDI's initial product focus is in the field of oncology. Our Biomarker Amplification Filter, or BAMF Technology, potentially provides low-cost and rapid analysis of multiple biomarkers derived from profiling thousands of individual proteins, peptides and other metabolites found in clinical blood samples. Current typical diagnostic tests rely on measuring the variations from the normal amount of a single protein or biomarker. Our BAMF Technology finds multiple proteins or biomarkers in blood samples and creates a disease "fingerprint," potentially leading to an accurate and early detection of disease.

Our history of negative cash flows and our cash balance of $1,112,000 at December 31, 2004, raise substantial doubt about the Company's ability to continue as a going concern, absent any new sources of significant cash flows. In an effort to mitigate this near-term concern, we are seeking debt or equity financing, sale of stock of our subsidiary, PDI, and joint development and commercialization of products with other companies. However, we cannot assure you that we will successfully obtain equity or debt financing or product related revenues as such events are subject to factors beyond our control. The financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of recorded liabilities that might be necessary should the Company be unable to continue as a going concern.

We were incorporated in California in 1987 and reincorporated in Delaware in 2000. From our inception until the end of 2000, our main focus was to develop our GENEWARE, genomics, proteomics and bioinformatics platforms, and to provide research and development services to customers. In 2001, our focus shifted to developing products and bringing our manufacturing operations up to regulatory standards for current good manufacturing practices, or cGMP.

The Company is headquartered in Vacaville, California, and its mailing address is 3333 Vaca Valley Parkway, Vacaville, California, 95688, and our telephone number is (707) 446-5501. Our corporate web site address is www.lsbc.com. We have made all reports and amendments to reports available on our website. We make available free of charge through our web site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the Securities and Exchange Commission.

Closed and Subleased our Germantown, Maryland Facility—The Germantown, Maryland facility was closed and the machinery and equipment was re-deployed, sold or scrapped during 2004. Net proceeds of $0.2 million were received when assets with a net book value of $0.2 million and a gross book value of $2.9 million were sold or scrapped. We entered into a sublease of our entire Germantown, Maryland, facility to the end of the lease term in 2010.

Issued Common Stock—On March 8, 2004, we completed an $8.2 million private placement of 5.2 million shares of newly issued common stock and warrants to purchase an additional 1.5 million shares that resulted in net proceeds after expenses of approximately $7.5 million.

Issued Long-term Debt—We entered into a $2.9 million loan agreement with Kentucky Technology, Inc., a for-profit economic development company formed by the University of Kentucky. During 2004 we received $1.0 million under this arrangement.

Further Established Our Intellectual Property—We obtained 22 new patents worldwide, including 13 patents in the U.S. and 9 foreign counterpart patents, impacting each key component of our technology base, bringing our total patents issued worldwide to 131. These new patents cover anti-cancer molecules, plant and animal viral vectors, and biomanufacturing. We also filed 38 new patent applications, including 24 patents in the U.S. and 14 foreign counterpart patents covering various aspects of our technology base, which increases the total number of pending patents to 190 worldwide.

On January 14, 2005, we received an additional $1.9 million under the aforementioned $2.9 million loan agreement with Kentucky Technology, Inc.

On January 31, 2005, we extended our research collaboration agreement with Schering-Plough Animal Health Corporation, or Schering-Plough, that will fund additional product development of animal health vaccines. Vaccines for three animal health targets were successfully delivered by us to Schering-Plough for animal clinical evaluation. We developed and produced trial quantities of the vaccines using our patented GENEWARE biomanufacturing platform. Our GENEWARE biomanufacturing technology provides a method for producing animal health vaccines using non-transgenic, non-food/fodder plants as production hosts.

On March 3, 2005, we borrowed $0.6 million from Kevin J. Ryan, our President and Chief Executive Officer and a member of the our Board of Directors and issued him a convertible promissory note. The note is due on July 1, 2005, and is convertible into our common stock.

On April 15, 2005, we borrowed an additional $3.0 million from Kevin J. Ryan and issued him a promissory note due on April 17, 2006.

All living things are made up of one or more cells. Although science still has much to learn about how cells actually function, it is commonly accepted that all cells have several basic components. Inside each plant and animal cell is a nucleus containing deoxyribonucleic acid, or DNA, that makes up its genetic code. Different sections of the DNA are called genes. A gene or a combination of genes encodes the information needed for conducting the various essential life functions. Each gene is composed of a specific, unique sequence of DNA. When a gene is turned on, or "expressed," the genetically coded information is copied into a related molecule called messenger ribonucleic acid, or mRNA. This messenger travels to a location outside the nucleus where proteins are then made according to the genetic information contained in the mRNA.

Private industry and the federal government have each announced the completion of the sequencing of the human genome. Utilizing the genetic information of the human genome, numerous laboratories are rapidly identifying gene sequences that are involved in the causes of diseases. An increasing number of new biological drugs are being tested and are being used to treat diseases. The production of biological drugs requires complicated, and usually, very expensive cellular production systems.

Our plant-based GENEWARE system offers several advantages for the production of biological compounds. A gene sequence, or mRNA, of a target protein is inserted into a plant virus, or vector. Non-recombinant non-food/feed plants are then inoculated with the vector. The virus penetrates cells of the plant and uses the cell's mechanism to replicate and to express the mRNA carried by the virus to produce the target protein. The virus spreads from cell to cell within the plant but does not get incorporated within the DNA of the plant cells. Consequently, the mRNA is not passed on to the next generation of the plant. This system provides a large-scale manufacturing capability to produce commercially valuable proteins rapidly and cost effectively, without the environmental concerns that afflict the cultivation of transgenic food/feed crops used by other companies.

Our corporate strategy is to focus our platform technologies on developing and commercializing our products and those of our partners. While our GENEWARE platform is broadly applicable, our current emphasis is to primarily use it for biomanufacturing health care products. Our strategic business focus consists of developing the following business opportunities:

We have successfully achieved proof of principle with our own human and animal-health-care therapeutics. While biomanufacturing and some early stages of regulatory and clinical development have been internally financed, we plan to achieve advanced clinical trials, final regulatory approvals and commercialization in collaboration with pharmaceutical and biotechnology companies. Our cat parvovirus vaccine has successfully completed early-stage pre-clinical trials, demonstrating safety and initial efficacy and is moving forward into advanced development. We have completed manufacturing process development of Aprotinin and Alpha-galactosidase A. We have received Orphan Drug designation from the FDA for Alpha-galactosidase A. We are improving our manufacturing process for human lysosomal acid lipase and are conducting research on its potential use as a therapeutic to treat Wolman disease and cholesterol ester storage disorder and to reduce atherosclerotic plaque. We have been developing biomanufacturing capability for proteins and peptides to capitalize on the capacity constraints of the biotechnology industry. We have built a manufacturing facility in Owensboro,

Kentucky, that is ready for FDA-compliant manufacturing of human therapeutics and vaccines developed by our partners and us.

We have created a wholly owned subsidiary, Predictive Diagnostics, Inc., or PDI, to apply our proprietary BAMF technology for diagnostic tests of cancer and other diseases. Predictive Diagnostics expects to perform diagnostic tests for specific diseases as an operating laboratory and in collaboration with major clinical reference labs, hospitals, and managed care laboratories. The reference lab partners would analyze serum samples, or perform mass spectrometry analysis where needed, prior to Predictive's BAMF diagnostic analysis. Upon successful completion of our first phase of our business plan, we expect to implement a fully vertical BAMF test with all laboratory steps performed directly or through outsourcing by PDI. PDI may also license BAMF technology to other organizations to enable them to perform such tests.

We have developed a novel gene shuffling technology called GRAMMR, which can generate large libraries of extensively shuffled gene sequences, and which we believe is faster and more efficient than competing gene shuffling technologies. Our contract with the US Army Medical Research Institute of Infectious Diseases, or USAMRIID, applies our proprietary GRAMMR technology for DNA shuffling and molecular evolution to improve biodefense therapy candidate products. In parallel with our program with the federal government, we plan to market GRAMMR gene shuffling technology to companies seeking to improve their biological drugs.

Aprotinin—Aprotinin is a natural protein that acts to prevent protein breakdown, and is used in medical procedures to reduce the systemic inflammatory response, or SIR, associated with cardiopulmonary bypass surgery, or CPB. Once triggered, SIR can lead to a cascade of subsequent inflammatory events that can collectively retard patient recovery. When administered intravenously in CPB procedures, aprotinin helps decrease the need for blood transfusions, reduces post-operative bleeding, and thus reduces re-exploration for bleeding.

The only aprotinin product in the United States market for use in CPB is currently obtained by extraction from cow lungs. We have successfully produced pilot-scale quantities of Aprotinin that is identical to this product using our proprietary GENEWARE plant-based biomanufacturing system. Our Aprotinin active pharmaceutical ingredient, or API, has the same biological activity as the animal-derived counterpart. When scaled to commercial-level production, we believe that our Aprotinin can be produced cost effectively and in sufficient quantities to meet worldwide demand, without the safety concerns associated with animal derived products. We are in discussions with potential partners for supplying our Aprotinin to the medical markets.

We entered into a multi-year, non-exclusive agreement with Sigma-Aldrich Fine Chemicals to distribute non-pharmaceutical Aprotinin. Aprotinin sales were 1% of total revenues during 2004.

Alpha-Galactosidase A—Alpha-galactosidase A is an enzyme used for replacement therapy to treat Fabry disease. Fabry disease is a genetic disorder that results in the inability of tissues within organs, primarily the liver, kidney and spleen, to recycle various structural lipid components resulting in the accumulation of these lipids in those organs and the heart. Fabry is a gender-based genetic degenerative disease that shortens a patient's lifespan.

Our Alpha-galactosidase A is produced in plants at our biomanufacturing facility in Owensboro, Kentucky with our proprietary GENEWARE system. The enzyme is recovered and purified to clinical standards in a proprietary process that is validated and compliant with current good manufacturing practices, or cGMP. The preclinical testing was performed in a Fabry mouse model system with Dr. Roscoe Brady at the National Institute of Neurological Disease and Stroke under a collaborative research and development agreement. The preclinical data showed good efficacy and safety in the animals. We received an Orphan Drug designation from the FDA for Alpha-galactosidase A and plan to file an IND with the FDA and begin clinical trials to evaluate its safety and efficacy in humans.

Follow-on Off-patent Biologics—When patent protection for proprietary pharmaceuticals ends, the product becomes eligible for sale as a "generic" version. Often new competition arises, resulting in lower costs and wider availability for the generic product relative to the original patented drug. A number of biological protein and peptide biopharmaceutical products are, or soon will be, off-patent. However, while the composition of a pharmaceutical product may be off patent, the manufacturing method may be further protected by exclusive patents of the innovator company. Consequently, suppliers are blocked from producing the generic product. Our freedom to operate with our proprietary GENEWARE biomanufacturing technology could provide our alliance partners the ability to enter markets otherwise blocked by process patents.

Our GENEWARE technology can produce molecules that are, or will be, off-patent including recombinant versions of aprotinin and interferon alpha 2a and 2b. We are in partnering discussions with several companies for the co-development, marketing and distribution of these types of off-patent molecules for research, manufacturing and medical applications.

Vaccines—Vaccines can represent a cost-efficient form of healthcare. Vaccines recruit the immune system to recognize and combat a wide range of diseases, including viral and microbial infectious diseases and some cancers. We are developing several vaccines for the human and animal care markets. We have conducted early clinical research with our personalized vaccine against the lymphatic cancer non-Hodgkin's lymphoma with successful initial results. With financial support from several US Government agencies, we are in early stage development of vaccines to treat human pappilloma virus and HIV infections. We are also developing vaccines to treat a variety of infectious diseases for animal health and veterinary care. Our GENEWARE biomanufacturing system helps enable the efficient improvement and production of vaccines that are either difficult to produce by using conventional technologies or where high costs of production preclude market expansion.

Human Lysosomal Acid Lipase—Lysosomal acid lipase, or LAL, deficiencies cause lipid metabolism and storage conditions including Wolman disease and cholesterol ester storage disorder, or CESD. Wolman disease is a rare genetic disorder afflicting newborns and infants and has nearly complete mortality. CESD is less lethal but is characterized by progressive morbidity. We would introduce LAL for these two Orphan Drug indications. In addition, cardiovascular disease, especially atherosclerosis, is a major cause of mortality in the US and many other industrialized countries. Several drugs are currently marketed to slow progression of atherosclerotic disease or treat its symptoms. Excessive build-up of plaque, which is a leading cause of heart disease, is often treated surgically and involves invasive procedures and long periods of convalescence. We believe our research on LAL could some day lead to this product's use in the clinical management of atherosclerotic disease without surgery. Discovered by University of Cincinnati scientists, LAL could represent a new approach in the treatment of cardiovascular disease. We have obtained an exclusive, worldwide license for use of LAL in this field and are developing and evaluating the enzyme in collaboration with the discovery team at University of Cincinnati.

BAMF Diagnostics—We plan to commercialize through a wholly owned subsidiary, Predictive Diagnostics, Inc., a diagnostic test for cancer and other serious diseases using our proprietary platform called BAMF technology. BAMF technology is a proprietary pattern recognition discovery platform that identifies protein biomarkers in the blood that can be used to detect cancer and other diseases. We believe that development of commercial diagnostic tests based on our BAMF technology could improve patient outcome through earlier diagnosis of disease and reduce associated medical treatment costs.

GRAMMR Gene Shuffling—Our GRAMMR technology is a new shuffling, or genetic reassortment research tool used to more efficiently develop a wide variety of improved product attributes. Traditional shuffling methods are typically complex, slow, labor-intensive, and have not always yielded the desired results. GRAMMR technology provides a number of significant advantages over traditional gene shuffling procedures, including higher efficiency, more rapid turnaround, greater adaptability and higher cost-efficiency. Our GRAMMR technology can reduce the complications of gene shuffling and empowers the user with greater control over the molecular evolution process. We can offer our partners and clients a complete range of GRAMMR-associated services, from gene shuffling and gene expression to protein manufacturing.

GENEWARE—Our proprietary and patented GENEWARE system makes use of natural genetic systems for encoding genetic information in plants to rapidly produce biologically-active proteins. A gene sequence of a target protein is cloned into a modified plant virus, or vector that is not harmful to humans. Growing plants are inoculated with the vector to temporarily introduce the genetic information into the plants. The target proteins encoded by the gene sequences are produced in the host plant and after approximately two weeks the plants are harvested. Utilizing proprietary and patented processes we extract and purify the target protein from the plants. These GENEWARE vectors have been used to produce numerous therapeutic proteins and vaccine antigens in large quantities.

The GENEWARE production system is environmentally safe because the viral vector and the genes we insert cannot be incorporated into the plant genome and, thus, cannot be transmitted to the next generation of the plant in the seed or pollen; it has a limited host range; and the modified virus does not persist in the soil to the next planting season. Since 1991, we have conducted more than ten USDA-approved field trials, each demonstrating that GENEWARE is environmentally safe. In addition, we apply our GENEWARE system only to non-food crops and follow standard operating procedures during field and greenhouse production to further ensure environmental safety.

While our GENEWARE technology can be used to identify and alter gene-product functions, we are primarily using the GENEWARE system to manufacture therapeutic proteins, peptides and other molecules in plants. GENEWARE technology can achieve significant time and cost advantages over traditional, transgenic genetic-engineering systems and alternative manufacturing technologies. The GENEWARE protein production system can be efficient and competitive as a result of its potential for high expression, speed of production, safety and minimal capital requirements compared to alternate expression systems. We have used our Owensboro, Kentucky, production facility to extract proteins from hundreds of tons of field-produced plants and have validated this facility for cGMP manufacturing of our Aprotinin and Alpha-galactosidase A.

BAMF Diagnostics—Our proprietary BAMF technology combines our bioinformatics and proteomics technologies. Our proteomics technology allows for the rapid determination of the protein composition, or proteome, of cells, tissues and body fluids that are associated with disease or abnormal conditions. Protein composition is a listing of the specific proteins present in a given sample and their amounts. By assembling and monitoring changes in this data, we are able to identify the presence of proteins that are caused by diseases.

Bioinformatics is the gathering and analysis of the data generated when working with genes and proteins. We use proprietary technologies to integrate and manage biological information, which increases our ability to assess the importance of biological data in the discovery of disease.

Our proprietary BAMF technology was derived from our bioinformatics capability. It utilizes multiple proteins called biomarkers that are derived from profiling thousands of proteins to diagnose disease. We are using our BAMF technology to identify protein biomarkers in the blood as a diagnostic to detect cancer and other diseases. Our ongoing research collaboration on BAMF technology is with Lance Liotta, M.D., Ph.D. and Emanuel Petricoin, Ph.D., who were formerly co-directors of the Clinical Proteomics Program at the National Cancer Institute and Food and Drug Administration.

GRAMMR Gene Shuffling—We invented a gene shuffling and molecular evolution technology that is easier to use, more efficient, and more cost-effective than other gene shuffling methods. Directed molecular evolution is an approach to enhancing the functionality of candidate genes and accelerating the development of improved products. We believe that gene shuffling, or reassortment, is the key to unlocking the potential of genetic diversity and developing biological molecules with novel or improved traits. Various gene-shuffling methods have been applied to improve a variety of commercially important products such as pharmaceutical proteins, vaccines, antibodies, viral vectors, and industrial enzymes. GRAMMR technology enables researchers to improve genes and the protein products derived from those genes which we believe have a number of inherent advantages over other gene shuffling methods, including: yield of a greater variety of chimeric products from fewer rounds of shuffling; rapid generation of thousands of shuffled gene sequences in a single day; adaptability to large genes, divergent genes, and complete gene clones; reliable conservation of the integrity of genes, resulting in improved screening efficiencies; and cost effectiveness.

We continually seek patent protection for our proteomics, genomics, biomanufacturing, and plant and animal viral gene expression technologies and for diagnostics. As of December 31, 2004, we had 80 issued and 94 pending U.S. patents. Our issued U.S. patents expire between 2008 and 2022. Foreign patents corresponding to many of the U.S. patents and patent applications have been filed and/or issued in one or more other countries, resulting in a total of 51 issued and 96 pending foreign patents as of December 31, 2004. In the plant and animal viral systems field, we have 22 issued U.S. patents and 38 issued foreign patents with durations ranging from 2011 to 2021. In the bioprocessing field, we have 9 issued U.S. patents and 4 issued foreign patents with durations ranging from 2019 to 2022. In the proteomics field we have 45 issued U.S. patents and 1 issued foreign patent with durations ranging from 2006 to 2020. In the vaccine field we have 1 issued U.S. patent and 6 issued foreign patents with durations ranging from 2020 to 2021. In the genomics field, we have 3 issued U.S. patents and 2 issued foreign patents with durations to 2019. In the diagnostic field, we have 8 pending U.S. patents. While we believe that our patents in various technological areas are valuable to our business, our business as a whole is not materially dependent on any one patent.

We and other companies in the biotechnology field typically apply for and receive, in the aggregate, thousands of patents annually in the U.S. and other countries. These patents give us the right to exclude others from practicing or selling products, technologies or services covered by the methods claimed, and from making, using or selling the products which are the subject of the claims of these patents.

A registered trademark gives the owner the right to exclude others from using identical or confusingly similar marks within the same channels of commerce. We own the GENEWARE registered trademark and the Large Scale Biology Corporation, LSBC, BAMF, GRAMMR and other trademarks in the U.S. and many other countries.

We also rely upon copyright protection, trade secrets, continuing technological innovation and licensing from others to protect our intellectual property. Our success will depend, in part, on our ability to obtain patent protection for our products and processes, to preserve our copyrights and trade secrets, to operate without infringing the proprietary rights of third parties and to acquire licenses, if needed, to support or enhance our intellectual property portfolio.

Our revenues have been derived principally from collaborations with others. The business structure varies depending on the specific product or research objectives of the collaborations. Research agreements may include payments for technology access, costs of research, certain rights to intellectual property developed and participation in sales of products resulting from the agreements. We may also seek to share in the long-term value of the products that we assist our collaborators in developing through the retention of certain product rights. Current agreements include those with Schering-Plough for animal healthcare vaccine products and Sigma-Aldrich Fine Chemicals for the non-exclusive distribution of our research-grade Aprotinin, and Growers Research Group, LLC, for development of a biological pest control product. Other collaborations may take the form of alliances to jointly commercialize product applications evolved from combining specific technologies of each company.

We actively seek revenue from government funding sources that promote the development of products having strategic importance to us. For instance, we have performed research activities under multi-year grants from the National Institute of Standards and Technology and National Institute of Allergy and Infectious Diseases to develop vaccines and new vaccine production technology. In addition, we have performed research activities for the United States Army Medical Research Institute of Infectious Disease to develop more effective candidate products for prevention and treatment of biowarfare related illnesses.

We enter into joint research collaborations to develop products for commercialization. Such collaborations are often accompanied by licenses for exclusive or non-exclusive rights for specific processes, technology or molecules. For example, we acquired an exclusive license for use of human lysosomal acid lipase, or LAL, with the Cincinnati Children's Hospital Medical Center, Cincinnati, Ohio and entered into a research collaboration with them to develop LAL for treating Wolman's disease, a rare genetic disorder afflicting newborns and infants and atherosclerosis, a leading cause of death in the United States and other developed countries. Also, we entered into a collaboration with the University of Louisville to advance our vaccine immunotherapeutics program applicable to the Human Papilloma Virus.

As of March 31, 2005, we have 78 full-time employees, of which 53 are engaged in research and development and biomanufacturing activities. Seven employees work in our Predictive Diagnostics, Inc. subsidiary. The remainder work in general and administrative areas. Sixteen employees hold Ph.D. degrees.

Our internally funded research and development expenses were $9.3 million, $11.5 million, and $21.2 million in 2004, 2003, and 2002, respectively. Our customer-sponsored research and development expenditures were $2.3 million, $4.7 million, and $1.2 million in 2004, 2003, and 2002, respectively.

The markets for protein development and production, including human vaccines and therapeutics such as the ones we are developing, are highly competitive. Competitors with substantially greater resources are actively developing products similar to, or competitive with, our products. Several pharmaceutical, biotechnology, chemical and other life sciences companies engage in research and development in the use of novel gene expression systems to produce therapeutic proteins. Two other companies are marketing products that would be competitive with our Alpha-galactosidase A product.

Our recombinant Aprotinin product and follow-on off-patent therapeutics such as interferons are, or will be, off patent protection by the time they are ready for marketing. While we expect to enter pre-existing markets with the same or similar products, our efficient GENEWARE manufacturing and the anticipated favorable cost of production through use of our GENEWARE system, should give us a competitive edge. One of our potential products, Lysosomal acid lipase, has no functional equivalent and thus, no direct competing product.

Technologies competitive with our BAMF technology are under development and being marketed by other companies and academic institutions. The field of bioinformatic analysis of blood serum to diagnose diseases such as cancer is in an early stage. We are not aware of commercially available competitive technology that has been demonstrated to be superior to ours.

The Company operates in one reportable segment. Revenues from various federal government agencies and the Grower's Research Group were 50% and 19% of our total revenues in 2004, respectively. All revenues are attributed to customers residing within the United States and all long-lived assets are located within the United States. Additional information regarding revenues, loss from operations and total assets may be found in our audited consolidated financial statements and related notes included in Part IV of this Report.

Our principal research and development facility and corporate headquarters are located in Vacaville, California, at a facility of approximately 45,000 square feet that includes administrative offices, a genetic engineering laboratory, a plant discovery and function laboratory and a bioinformatics software laboratory, under a lease that expires on February 28, 2009. We are currently marketing approximately 3,400 square feet of underutilized space for sublease. We own a manufacturing facility of approximately 30,000 square feet, a greenhouse complex of approximately 22,000 square feet containing 13,000 square feet of growing space and land of approximately 23 acres in Owensboro, Kentucky, for pilot and large-scale protein extraction and downstream biomanufacturing of products. This land, facility, equipment contained within and certain related intellectual property and know-how are security for a first priority lien under a $2.9 million loan agreement. This facility is adequate for our current production requirements and the land is sufficient in size for additional buildings or greenhouses if needed for increased manufacturing capacity. We have a facility in Germantown, Maryland, of approximately 53,000 square feet under a lease that expires on December 31, 2010. This facility is currently under sublease and was previously occupied by our proteomics operations, which was wound down on December 31, 2003.

From time to time we become a party to legal proceedings that are incident to our normal business operations such as employment litigation or have been initiated by us to protect our intellectual property. In the opinion of management, these lawsuits will not result in any material adverse effects on the Company's financial condition.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Market Information. Our common stock is traded on the NASDAQ National Market under the symbol "LSBC." Public trading of our common stock commenced on August 10, 2000. The following table sets forth the high and low sale price per share of the Company's common stock during each quarter of 2004 and 2003.

		High		Low
Year Ended December 31, 2004:
	Fourth Quarter	$	1.44	$	0.90
	Third Quarter		1.58		0.72
	Second Quarter		2.76		1.12
	First Quarter		2.50		1.54
Year Ended December 31, 2003:
	Fourth Quarter		2.90		1.15
	Third Quarter		1.51		0.71
	Second Quarter		1.60		0.39
	First Quarter		0.83		0.34

Holders. Based upon data provided by our transfer agent, we have approximately 5,340 beneficial holders of our common stock as of March 23, 2005. This total includes persons whose stock is in nominee or "street name" accounts through brokers.

Dividends. We have never declared or paid any cash dividends on our common stock and we do not anticipate declaring any dividends in the foreseeable future. We currently intend to reinvest future earnings, if any, for use in research and development or other business needs.

Recent Sales of Unregistered Securities. On March 8, 2004, we sold 5,169,682 shares of common stock at $1.58 a share in a private placement with gross proceeds of approximately $8.2 million and after expenses, net proceeds of approximately $7.5 million. In addition, warrants were granted in connection with this sale of stock. The warrants are currently exercisable to purchase 1,492,044 shares of common stock at an exercise price of $2.18 per share. Information with respect to persons whom the securities were sold may be found in the section captioned "Selling Stockholders" appearing in the Prospectus filed pursuant to Rule 424(b)(3) on May 5, 2004. Such information is incorporated herein by reference.

Repurchase of Securities. We have not repurchased any of the Company's securities during 2004.

You should read the following selected financial data in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and related notes included in Part IV of this Report. We derived the consolidated statement of operations data for the years ended December 31, 2004, 2003, and 2002 and the consolidated balance sheet data as of December 31, 2004 and 2003 from our audited consolidated financial statements included in this Report. We derived the consolidated statement of operations data for the year ended December 31, 2001 and 2000 and the consolidated balance sheet data as of December 31, 2002, 2001 and 2000 from our audited consolidated financial statements not included in this Report.

Certain 2002 and 2001 amounts have been reclassified to conform to the 2004 presentation.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with Item 6, "Selected Financial Data" and our audited consolidated financial statements and related notes included in Part IV of this Report. This discussion includes forward-looking statements, such as our projections about future results of operations that are inherently uncertain. Our actual results could differ materially from those anticipated in our forward-looking statements as a result of many factors including, but not limited to, those discussed in "Factors That May Affect Our Business" in this item.

Our current efforts are focused on improving cash flows, developing and manufacturing products and entering into relationships to market and sell our products. Management's objective is to manufacture and sell products in order to generate sufficient cash flows to sustain our operations.

Our cash balance was $1,112,000 at December 31, 2004, and we have incurred negative operating cash flows of $14,566,000 during 2004. The current rate of cash usage raises substantial doubt about the Company's ability to continue as a going concern, absent any new sources of significant cash flows. In an effort to mitigate this near-term concern, we are seeking to obtain debt financing or equity financing through the private placement of our common or preferred stock. In addition, we are seeking to secure funds for our subsidiary, Predictive Diagnostics, Inc., or PDI, and the Company through a sale of PDI stock held by the Company. A successful PDI related financing may not only improve our balance sheet, but also reduce ongoing expenses, as PDI becomes a separate operation. We are also pursuing opportunities for revenue growth with other companies for the joint development and commercialization of recombinant Aprotinin, Interferon alpha 2a and 2b and Lysosomal acid lipase products. We are currently in discussions with pharmaceutical companies capable of marketing these products. Such arrangements may provide revenues to us through license fees, the reimbursement of research and development costs, milestone payments and product sales. The commercialization of these products for therapeutic applications will require approval by the FDA and product scale-up at our biomanufacturing facility under FDA regulations. However, we cannot assure you that we will successfully obtain equity or debt financing or product related revenues as such events are subject to factors beyond our control. The financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of recorded liabilities that might be necessary should the Company be unable to continue as a going concern.

Current significant financial and operating events and strategies are summarized as follows:

Revenues—The following table presents the changes in revenues from 2002 through 2004:

				(Decrease) from 2003				Increase from 2002
		2004		Amount		%		2003		Amount		%		2002
Revenues		$	1,767,000		$	(1,803,000	)	(51%	)	$	3,570,000		$	948,000		36%		$	2,622,000

Revenues, primarily attributed to research contracts and grants, have partially offset costs, but have not been sufficient to sustain our operations. The decrease in revenues from 2003 to 2004 is attributable to exiting the fee-for-service proteomics business and the associated winding down our contract with The National Institute of Environmental Health Services, or NIEHS, that was completed on December 31, 2003. The increase in revenues from 2002 to 2003 is attributable to the NIEHS contract. The NIEHS contract revenues were $2.1 million and $0.8 million in 2003 and 2002, respectively. No revenues from NIEHS were recorded in 2004. The loss of revenues from the termination of the NIEHS contract will have no effect on our loss from operations in 2005, since the costs associated with this contract have been eliminated with the closure and sublease of the Germantown, Maryland, facility. We expect revenues into 2005 to be substantially the same as 2004 unless we enter into new revenue generating agreements.

Cost and expenses—The cost reduction programs and reorganizations during 2003 and 2002 and the closure of the Germantown, Maryland, facility have significantly reduced costs and cash expenditures throughout the Company. From 2003 to 2004 expenses decreased $2.3 million for employee compensation and benefits, $0.5 million for rent and building services and $0.3 million for materials purchases. In addition, non-cash expenses decreased $1.2 million for depreciation, $0.6 million for amortization of intangible assets and $0.4 million for stock-based compensation. Also, costs decreased from 2003 because of certain charges only being incurred during 2003 including $3.6 million for impairment charges, $1.4 million for severance benefits related to headcount reductions and $0.2 million for a provision for doubtful accounts receivable. These decreases in expenses were partially offset by $0.8 million of increased legal costs related to the filing and prosecuting intellectual property patents.

From 2002 to 2003 expenses decreased $3.7 million for employee compensation and benefits, $1.0 million for outside consulting and research services, $1.0 million for patent application legal services and $0.6 million for materials purchases. In addition, non-cash expenses decreased $1.4 million for depreciation, $1.1 million for stock-based compensation and $0.6 million for amortization of purchased intangibles. These decreases in expenses were partially offset by $2.3 million of increased non-cash impairment charges.

Development agreements and research and development costs—The following table presents the changes in total research activities from 2002 through 2004:

Development agreements and research and development costs consist mainly of personnel expenses, outside research services, research materials and laboratory overhead costs. Costs of total research activities have decreased significantly because of our cost reduction efforts and the closure of the Germantown, Maryland, facility. Development agreement costs, as they related to activities performed under revenue generating research agreements and grants, have and are expected to fluctuate consistently with increases or decreases in revenues earned from research agreements and grants. The decrease in development agreement expense from 2003 to 2004 is attributed to a $3.0 million decrease in development agreement activities related to the wind down of the NIEHS contract that was completed on December 31, 2003, partially offset by increased efforts performed under other commercial contracts and grants. In 2003, the increased development agreement costs are attributed to increased research activities for the NIEHS contract and NIST grant. Development agreement costs include the costs of product sol

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the year ended December 31, 2004
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
TRANSITION PERIOD FROM TO .

Delaware (State or other jurisdiction of Incorporation or organization)		77-0154648 (I.R.S. employer identification number)
3333 Vaca Valley Parkway, Vacaville, CA 95688 (Address of principal executive offices and zip code)
(707) 446-5501 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value Preferred Stock Purchase Rights

			Year ended December 31,
			2004			2003			2002			2001			2000
			In thousands, except share and per share data
Consolidated Statement of Operations Data
Revenues			$	1,767		$	3,570		$	2,622		$	17,731		$	23,291

Costs and expenses:
	Development agreements			2,263			4,720			1,247			3,467			8,115
	Research and development			9,288			11,511			21,191			22,391			16,373
	General and administrative			7,690			9,159			12,162			14,373			8,119
	Impairment of property			—			3,598			433			—			—
	Impairment of goodwill			—			—			839			—			—
	Stock compensation bonus			—			—			—			—			7,268
	Amortization of goodwill and purchased intangibles			—			52			624			1,300			1,197

		Total costs and expenses		19,241			29,040			36,496			41,531			41,072

Loss from operations				(17,474	)		(25,470	)		(33,874	)		(23,800	)		(17,781	)
Total other income (expense)				49			177			690			3,111			1,481

Net loss			$	(17,425	)	$	(25,293	)	$	(33,184	)	$	(20,689	)	$	(16,300	)

Net loss per share—basic and diluted			$	(.58	)	$	(.99	)	$	(1.33	)	$	(0.84	)	$	(1.07	)

Weighted average shares outstanding—basic and diluted				30,276,718			25,619,363			24,991,201			24,599,126			15,251,575

	December 31,
	2004			2003			2002			2001			2000
	In thousands
Consolidated Balance Sheet Data
Cash and cash equivalents	$	1,112		$	7,737		$	8,238		$	24,055		$	40,030
Marketable securities		—			—			14,840			24,724			44,971
Working capital		636			6,964			22,786			46,690			70,853
Total assets		12,795			20,980			44,741			76,912			106,943
Long-term debt		1,000			209			261			310			423
Accrued stock compensation		898			708			—			—			—
Deferred rent		336			—			—			—			—
Accumulated deficit		(191,623	)		(174,198	)		(148,905	)		(115,721	)		(95,032	)
Total stockholders' equity		9,431			18,319			42,659			73,037			89,792

			(Decrease) from 2003							Increase (Decrease) from 2002
	2004		Amount			%		2003		Amount			%		2002
Development agreements	$	2,263,000	$	(2,457,000	)	(52%	)	$	4,720,000	$	3,473,000		279%		$	1,247,000
Research & development		9,288,000		(2,223,000	)	(19%	)		11,511,000		(9,680,000	)	(46%	)		21,191,000

Total research activities	$	11,551,000	$	(4,680,000	)	(29%	)	$	16,231,000	$	(6,207,000	)	(28%	)	$	22,438,000