UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Fiscal Year Ended December 31, 2002 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission File Number: 0-27188
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PHARMACOPEIA, INC. |
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(Exact name of Registrant as specified in its Charter) |
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Delaware |
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33-0557266 |
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(State or other
jurisdiction of |
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(I.R.S. employer identification number) |
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PO BOX 5350, Princeton, NJ |
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08543-5350 |
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(Address of principal executive offices) |
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(zip code) |
Registrant’s telephone number, including area code 609-452-3600
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of
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Common stock, par value $0.0001 per share |
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Nasdaq National Market |
Securities registered pursuant to Section 12(g) of the Act: NONE
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 periods as 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. o
Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES ý NO o
The aggregate market value of voting stock held by non-affiliates of the Company as of January 31, 2003 was $110,186,518.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
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Class |
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Outstanding at January 31, 2003 |
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Common stock, par value $0.0001 per share |
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23,612,423 |
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the 2003 Proxy Statement are Incorporated by Reference in Part III of this Report.
The Exhibit Index (Item No. 15) located on pages 66 to 70 incorporates several documents by reference as indicated therein.
PHARMACOPEIA, INC.
2002 Form 10-K
Table of Contents
Pharmacopeia, Inc. (“Pharmacopeia” or the “Company”) is a leader in enabling science and technology that accelerates and improves the drug discovery and chemical development processes. Our software segment, Accelrys Inc. (“Accelrys”), develops and commercializes molecular modeling, simulation, informatics, and decision support software for the life sciences and materials research markets. Our Drug Discovery segment, Pharmacopeia Drug Discovery, Inc. (“PDD”), integrates proprietary small molecule combinatorial and medicinal chemistry, high-throughput screening, in-vitro pharmacology, computational methods and informatics to discover and optimize lead compounds. Pharmacopeia is headquartered in Princeton, New Jersey and was incorporated in Delaware in 1993. Our internet address is www.pharmacopeia.com. Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available without charge on our website.
When used anywhere in this document, the words “expects”, “believes”, “anticipates”, “estimates” and similar expressions are intended to identify forward-looking statements. Forward-looking statements herein may include statements addressing our future financial and operating results. We have based these forward-looking statements on our current expectations about future events. Such statements are subject to risks and uncertainties including, but not limited to, the successful implementation of our strategic plans, the acceptance of new products, the obsolescence of existing products, the resolution of existing and potential future patent issues, additional competition, changes in economic conditions, and other risks described in documents we have filed with the Securities and Exchange Commission, including this report on Form 10-K in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” “Certain Risks Related to the Company as a Whole,” “Certain Risks Related to Intellectual Property,” “Certain Risks Related to Accelrys” and “Certain Risks Related to Pharmacopeia Drug Discovery,” and subsequent reports on Form 10-Q. All forward-looking statements in this document are qualified entirely by the cautionary statements included in this document and such filings. These risks and uncertainties could cause actual results to differ materially from results expressed or implied by forward-looking statements contained in this document. These forward-looking statements speak only as of the date of this document. We disclaim any undertaking to publicly update or revise any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Following are more detailed descriptions of each of our two business segments. Certain financial information for these segments is described in the Notes to the Financial Statements included in this report.
OUR SOFTWARE SEGMENT – ACCELRYS INC.
We operate our software business through Accelrys, a subsidiary established by bringing together five leading specialist software companies: Molecular Simulations Inc. (MSI) - simulation and modeling for life science and materials research; Synopsys Scientific Systems - chemical information management and data content; Oxford Molecular - cheminformatics, high throughput screening, and decision support solutions; Genetics Computer Group (GCG) - bioinformatics and gene sequence analysis software; and Synomics - middleware technology and consulting services for life sciences research. A wholly owned subsidiary of Pharmacopeia, Inc., Accelrys has over 500 employees and active license agreements with most leading chemical, biotechnology and pharmaceutical organizations. Our software covers disciplines including gene sequence analysis, proteomics, inorganic chemistry, and formulation design, to meet the needs of most research organizations. Customers are supported by our worldwide organization headquartered in San Diego, CA.
ACCELRYS OVERVIEW
For companies in the pharmaceutical, biotechnology, chemical, petrochemical and materials industries, innovation in the discovery and development of new products and the rapid, cost-effective commercialization of these products is crucial to success. Companies in these industries invest considerable resources in technologies that suggest productive new pathways for research projects, increase the efficiency of discovery and development processes, or enable them to maximize the use of corporate data, information and knowledge. One such technology is software-based computation, analysis, informatics and knowledge management tools. These tools allow users to simulate processes, predict the outcome of product designs, manage data and turn it into useful information, support decisions, and manage workflows.
Accelrys designs, develops, markets, and supports software and provides related services that facilitate the discovery and development of new products and processes in the pharmaceutical, biotechnology, chemical, petrochemical and materials industries. Using our software products, researchers may increase the speed and efficiency of the research and development cycle, thereby reducing product development costs and shortening the time to market for new product introductions and process improvements. Our software customers include leading commercial, governmental and academic organizations. Many of the largest pharmaceutical, biotechnology, chemical, petroleum and semiconductor companies worldwide use our software. We market our products and services worldwide, principally through our global direct sales force.
Following are brief descriptions of our Accelrys software product lines.
Modeling and Simulation Software. Many factors that affect a molecule, including activity, bioavailability, toxicity, shelf life and environmental impact, are governed by fundamental, properties such as shape, structure and reactivity, that are determined at the sub-atomic, molecular, or near-molecular levels. A spectrum of simulation technologies – quantum mechanical simulation, molecular simulation, and mesoscale simulation – predict these properties and help researchers discover new products, sharpen the focus of experimental activities and improve ultimate product performance. We are a leading provider of such modeling and simulation software.
We have a broad product suite consisting of over 100 application modules based on proprietary technologies that employ fundamental scientific principles, advanced computer visualization, molecular modeling techniques and computational chemistry. These products allow scientists to perform computations of chemical, biological and materials properties, to simulate, visualize and analyze chemical and biological systems, and to communicate the results to other scientists. Our products are based upon advanced software architectures that facilitate the development, integration and deployment of new software products. We also offer open access to our core software development environment, within which customers and third-party licensees can develop, integrate and distribute their own software applications for computational chemistry, biology and materials research.
We plan to continue enhancing our software product and service offerings for specialist computational chemists and biologists, who are the principal users of modeling and simulation products. In addition, we are broadening our user base by enabling straightforward access to these methods from personal computers to a much larger population of experimentalists, laboratory scientists and engineers.
Informatics Software. We are a leading provider of tools to capture, store, manage, and mine scientific data and information. Informatics is a well-established technology in the life sciences, where bioinformatics tools are integral to genetic and biological research, and cheminformatics applications are widely used to manage chemical information. We are pioneering the application of similar tools in the materials research arena – so-called materials informatics has found early applications in formulation design and combinatorial materials science. Our bioinformatics solutions include a suite of programs enabling molecular biologists to search, edit, compare, map and align sequence data. Researchers use these to enable the analysis of DNA and protein sequences and structure, predict RNA secondary structure and annotate protein sequences. Such capabilities help them to use the genomic data that is being made available by projects such as the Human Genome Project. In addition, we provide
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enterprise-wide data management and analysis tools that assist in the management of this data. These are based on the Oracle® architecture. Data visualization and analysis capabilities allow this data to be viewed and understood on standard desktop computers. Our cheminformatics software is based on standard database architectures such as Oracle and Microsoft® Access®. We provide data visualization and analysis software to search, retrieve, and use chemical structures, biological and chemical data, experimental data, and registration information. Many of these tools use industry standard software components and are compliant with applications such as Microsoft Excel®, allowing chemists to interact with chemical data within familiar productivity tools. We also use this component technology and our database architectures to build customized enterprise-wide systems for client companies.
ACCELRYS BUSINESS STRATEGY
Our objective is to strengthen Accelrys’ position as a leading provider of software-based computation, analysis, informatics and knowledge management products and services worldwide by providing a comprehensive set of integrated productivity tools that are integral to the enterprise-wide research and development activities of our customers, and by connecting these tools within an IT framework that makes it easier for research organizations to manage data, information, knowledge, and collaborative processes. The key elements of our strategy to achieve this objective include:
Expand User Base. We plan to increase sales to our key software accounts and pursue new software customers within existing markets. In addition, software will be targeted not only at a growing number of molecular modeling and simulation and gene sequence analyses specialists, but also at the much larger group of experimentalists (scientists and engineers). We believe we can leverage our strong relationships with modeling, simulation and analysis specialists to help promote the use of modeling, simulation and analyses methods by other scientists working in the same organization as the specialists.
Leverage Core Computational Technology and Maintain Technology Leadership. We believe that our core modeling and simulation and gene sequence analysis technologies have helped position us at the forefront of computational methods technology providers. We intend to continue to make significant investments in research and development in order to improve the efficiency and predictive accuracy of this core technology and to maintain our technology leadership.
Enhance Technology Position. We will strengthen our scientific and technical expertise through acquisitions and consortia, and through joint development projects with leading academic, governmental and industrial researchers. We may continue to pursue acquisitions and strategic relationships with third parties in order to provide us with early access to new technologies, facilitate market acceptance of new products and reduce internal research and development investment.
Expand Informatics Market Share. Our customers will need more sophisticated data and knowledge management tools as the use of modeling and simulation, gene sequence analysis and other computational methods expand, especially to the experimentalists, and as the amount of data about drug discovery and chemical development activities also continues to grow. We will continue to improve and integrate our bioinformatics and cheminformatics offerings, and to leverage our relationships with customers, in order to achieve this growth.
Create Collaborative Systems and Environments. We believe that the desire among our customer base to increase process efficiency across diverse workgroups and disciplines while managing and using enormous quantities of data and information has created a need for enterprise workflow and project management tools that help researchers to better collaborate and manage projects. We will continue to improve our offerings to include workflow and project management capabilities. As these product offerings expand, we also expect increased opportunities to tailor and customize work group and enterprise-wide solutions for customers. The integration of informatics capabilities and provision of collaborative enterprise environment is being pursued through the development of an integrated software platform for discovery research delivered via the Discovery Studio™ product line to the life science market, and through the Materials Studio® product line to the materials and chemicals
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process industries. We will develop our key modeling and informatics capabilities such that they are compatible with this platform.
ACCELRYS SCIENCE AND TECHNOLOGY
Following are more detailed descriptions of the science and technology supporting each of our various software product lines.
Modeling and Simulation. Our modeling and simulation technology delivers predictive models of chemical, biological and materials phenomena within an open environment. This technology simulates subatomic, interatomic and intermolecular interactions, and a wide range of corresponding properties, including molecular structure, activity, diversity, stability, morphology, solubility, adhesion, adsorption, diffusion, color, analytical spectra, and optical, electrical and mechanical properties. There are five primary classes of molecular and materials simulation methods, all of which are found in our products:
• Quantum Methods. Quantum methods, the most fundamental of our simulation methods, compute interactions at the level of electrons and nuclei. These methods are capable of simulating which chemical entities are stable, how chemical reactions occur, and properties such as reactivity, color and magnetism. These methods are computationally demanding. Historically, they have been applied to small, carefully selected models. Technological advances, many driven by us and our partners, are now allowing quantum mechanical methodology to be applied more generally and to larger materials and systems.
• Molecular Methods. Molecular methods probe molecular conformations and the interactions between molecules based on simplified analytical expressions. These methods include automated procedures for probing how a drug molecule binds to an active site, what conformations a polymer chain may adopt, and what similarities exist between a new amino acid sequence and protein sequences for which tertiary structures are known. They also include tools used to determine structure based on x-ray diffraction or nuclear magnetic resonance data. Such methods contain more approximations than quantum methods but can be applied to much larger and more complex systems, supporting insight into many chemical processes.
• Mesoscale Methods. Mesoscale methods study processes above the molecular scale that are critical to materials and chemical engineering properties. These methods are particularly suited to predicting the properties and mixing behaviors of polymer mixtures, complex fluids, detergents and soft materials.
• Correlative Methods. Correlative methods identify interrelationships between structure and properties that can be used predictively. In many cases, it is known that macroscopic properties determine by molecular-level behavior, but the analytical details of these relationships are not known. The quantitative structure activity relationship (“QSAR”) methods provide a framework in which to correlate molecular attributes and macroscopic properties. The framework can predict, to a reasonable degree of confidence, the properties of molecules that are comparable with a control set for which properties have been measured.
Platform Technologies. The computational methods outlined above are offered within an information technology framework designed to support the needs of today’s leading research organizations:
• Open Architecture. We pioneered an open scientific software architecture through our Cerius2® software, which includes an efficient data model; libraries of mathematical, chemical and graphical utilities; and a client/server data and communications management layer. The Cerius2 software, a modular, object-oriented system, is written principally in C++ and uses industry-standard protocols such as MOTIF and TCP/IP. This modular architecture is designed to provide streamlined access to the various methods described above, allowing their use in discrete, combined and packaged ways. Our internal developers use the Cerius2 application programming interfaces (“APIs”) to create products. The same APIs are made available through the Cerius2 Software Developer’s Kit (“SDK”) to customers and third-party licensees.
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• Desktop and Enterprise-Wide Access. The Discovery Studio software delivers new platform technology that will provide a common data architecture and project management system for pharmaceutical-focused products. The Discovery Studio software combines new technology, components from our architecture, and technology and expertise acquired along with Synomics in June 2001. It is also the medium by which we can deliver molecular modeling and simulation desktop products for life sciences experimentalists, through client-server computing. The server will be a workstation accessed through a corporate Intranet. The client application is created using industry-standard languages and protocols on a personal computer (“PC”), and incorporates powerful new technology that enables the display and manipulation of molecular structures and other data on the PC.
The Materials Studio software delivers similar benefits via desktop PC’s to users in the materials sciences. The client software provides a PC-based modeling and visualization environment from which users can set up, run and analyze computations on more powerful computer servers on their Intranet. The servers can be UNIX®workstations, Linux® servers or Windows® NT/2000® servers or workstations. The client software runs on Windows 95, 98, 2000, NT®, XP®, and Me®.
Our Cerius2 architecture, graphics and interface subsystems continue to be supported on Silicon Graphics® and IBM® UNIX workstations. Certain of the methods are also supported on vector supercomputers and on shared and distributed memory parallel architectures. Existing and planned Discovery Studio server software products will run on IBM and Silicon Graphics UNIX workstations. Existing and planned Materials Studio server software codes run on Silicon Graphics and HP UNIX workstations and Windows platforms.
Bioinformatics Software. Our bioinformatics solutions enable the management and analysis of biological data and provide a wide range of gene sequence analysis capabilities.
• Gene Sequence Analysis. The core technology serving the bioinformatics and gene sequence analysis market is contained within a suite of programs marketed under the name GCG® Wisconsin Package®. This contains over 130 programs covering the research needs of molecular biologists. Based on published algorithms from the fields of mathematical and computational biology, the GCG Wisconsin Package software includes sequence comparison, database searching and retrieval, DNA/RNA secondary structure prediction, editing and publication, evolutionary analysis, fragment assembly, gene finding and pattern recognition, importing and exporting, mapping, primer selection, protein analysis, and translation.
The computational and analysis capabilities of the GCG Wisconsin Package software run on UNIX workstations. They can be accessed through a variety of client user interfaces, enabling broad access to this technology. These include DS Gene sequence analysis software, a PC-based client running within the Discovery Studio product line; SeqWeb® software, a web browser-based interface that allows researchers to access the technology across corporate Intranets; SeqLab® software, enabling X-Windows-based access; and OMIGA™ software, which provides access to users of Windows operating systems. MacVector® sequence analysis software provides gene sequence analysis capabilities to users of Macintosh computers.
• Relational Databases. SeqStore® software, our Oracle database technology, allows researchers to collect, organize and maintain genomic data and the results of analyses in in-house corporate databases. The SeqStore data warehouse makes data from separate groups available across the corporate structure. Dynamic update technology allows new data to be continually and automatically added to the database.
In-house developers can access the Oracle data from popular development tools across multiple platforms and multiple networks, including Microsoft’s VisualTools™, Open Database Connectivity (ODBC), Java®, Java Database Connectivity (JDBC), and Oracle Objects for OLE.
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GCG Wisconsin Package software analyses can be applied to SeqStore databases – a process that can be automated as the data is updated, creating an automated sequence analysis pipeline that alerts the researcher to potentially valuable information as it is created.
• Data Content. We provide our users with a wide range of public databases in convenient formats that can be updated at regular intervals through our data update services. These include GenBank® and EMBL for nucleic acid sequences, SP-TREMBL protein translations of coding sequences, PIR protein sequences, NRL_3D sequence and three-dimensional structure, GenPept unannotated translations of GenBank sequences, REBASE restriction enzyme data, including specific restriction enzymes, SWISS-PROT well-annotated protein sequences, and PROSITE protein sequence motifs.
Cheminformatics Software. We provide software to manage chemical information, such as 2D chemical structure diagrams and associated property data. This software ranges from chemical data management and analysis technology integrated with standard desktop productivity tools to enterprise-wide informatics systems. We also provide a number of software packages focused on particular applications of interest to the chemist, and a range of useful data content.
• Desktop tools. The Accord for Excel, and Accord for Access software packages allow chemical objects to be stored and manipulated within standard Microsoft desktop productivity tools. This means that the researcher can view and analyze chemical data without the need to learn new software systems, and that the wide range of calculation and data management features available in these applications can be easily applied to chemical data without the need for us to develop and maintain specialist tools. The DIVA® and the Tsar® software technologies provide desktop decision support capabilities, allowing users to work with chemical structures, assay results and other chemical and biological data.
• Data content. We deliver a range of chemical databases. These include the Failed Reactions Database™ product, offering data on reactions that afford unexpected results, Solid-Phase Synthesis designed for chemists engaged in the design of combinatorial libraries, Metabolism and Biotransformations providing data on the metabolic fate of organic molecules, Methods in Organic Synthesis (MOS) containing over 3,000 new reactions each year, BioCatalysis covering biomolecule-mediated organic synthesis, Protecting Groups providing chemists with ready access to selected information on the full range of protecting group chemistry, and BIOSTER that provides a critical compilation of thousands of bio-analogous molecule pairs.
• Tools and Components. We enable IT professionals and scientific application developers to construct custom cheminformatics solutions through the Accord Chemistry Control™, Accord Grid Control™, Accord Developer Studio™, and Accord SDK products.
ACCELRYS PRODUCTS AND SERVICES
We offer a broad suite of software products and services designed to enable our customers to shorten product lead times, reduce research and development costs, improve product and process performance, manage and analyze chemical and biological data and information, and communicate more effectively both inside and outside an organization. These products and services incorporate the following attributes:
Validated Core Modeling Technology. The core technology underlying our modeling and simulation products consists of a number of fundamental, scientifically proven methods for conducting predictive computer modeling and analyses of chemical, biological and materials phenomena at the atomic and molecular level. This core technology is validated by over a decade of industrial use and by the publication of hundreds of presentations, papers and articles citing applications of this technology.
Broad Applicability. The validated core technology underlying our products enables us to offer products and services to a wide variety of industries, including the pharmaceutical, biotechnology, chemical, petrochemical,
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electronics, food, paper, agrochemical, aerospace, plastics, paint and natural gas industries. Our products simulate and analyze both small molecules that may be candidates for new drugs and more complex molecular structures such as proteins or the polymers found in advanced materials. These products are used in research applications as diverse as drug discovery, protein design and structure determination, crystallization and formulation, polymer property prediction, catalysis and development of electronic materials.
Data Management Compliant with Industry Standards. Our data management and analysis solutions are based on industry-standard technologies such as Oracle. This means that they are compliant with other corporate systems and retain the maximum openness and flexibility. Our technology ensures that these standards are enabled for chemical and biological data.
Open Architecture. Many of our products are based upon open architectures that allow customers, collaborators and third parties to develop software applications in the same development environment we use internally. Core molecular modeling functions are included in this open environment, which permits developers to focus on their particular scientific interests and increase the power and utility of their programs by integrating them with our products.
Ease of Use. Our software products are integrated, modular, focused on specific research areas or techniques, and accessible by intuitive graphical user interfaces (“GUI”). These enable experimentalists to use molecular simulation in a manner consistent with established analytical and laboratory techniques, in a user-friendly computational environment.
Increased Access. We have developed desktop product lines that target a broader group of users, including laboratory scientists and engineers. Scientific researchers increasingly use software products running in the Microsoft Windows environment on desktop computers to search for, analyze and communicate scientific data, particularly within corporate Intranets. Our desktop products use familiar technology and are built upon our open architecture and validated core technology.
Based upon the science, technology and attributes described above, we provide a broad suite of software products used throughout the research and development cycle. We believe that offering a “single-shop,” integrated drug discovery and chemical development solution will be a significant benefit to our customers. In addition to these software modules, we also offer the following:
Integration Products and Services. With most software modules, we offer customers and third-party licensees a standard environment in which to develop and integrate their own applications. These integration products provide an external developer with access to APIs used by our own internal development staff. As a result, a developer can employ most of the functions, subsystems or methods embodied in or accessible through our products to integrate an external program or to create additional application functionality, with a corresponding GUI.
Databases. Databases are a close adjunct to our software products. We create, maintain and sell a database of chemical reactions in connection with our cheminformatics product line. We also resell a number of scientific databases created by third parties.
ACCELRYS PRODUCT USES
Our software products are used in a variety of research areas within a number of industries. The principal research and development areas in which our software products are used include the following:
Sequence to Structure. Our bioinformatics, proteomics, and structural biology software provides tools that enable researchers to tackle the range of problems inherent in moving from gene sequence data to fully characterized targets for drug discovery projects. This range of activities represents the early stages of the drug discovery process and is an essential pre-requisite for the structure-based route to drug discovery. Relevant
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problems include finding interesting sequences within the huge quantities of available genetic data, characterizing those sequences and relating them to particular functions, determining the secondary structure of DNA and RNA, determining the three dimensional molecular structure of proteins (often using data from analytical techniques such as NMR and X-ray diffraction), and understanding the relationship between this structure and function. The key product for gene sequence analysis is the GCG Wisconsin Package software, now augmented and accessible via DS Gene software. Products used in macromolecular structure determination and subsequent protein modeling include the DS Modeling™, the X-PLOR®, the Insight II® application modules, the QUANTA™, the Discover®, the CHARMm®, and the Felix™ software.
Lead Identification and Optimization. The next step in drug discovery is the development and optimization of potential small molecule drugs based on these targets. Our rational drug design products allow the design of small organic therapeutics, based on a protein active site model or on activity data for a set of compounds. Related techniques are used to design and assess combinatorial molecular libraries that are screened for desired activity using high throughput experimentation. We thus bring together the worlds of computation and experimentation. The large quantities of data generated by such activities can be managed and analyzed using our informatics tools – the results inform more focused testing and design. Rational drug design and combinatorial chemistry products include the Catalyst®, the Cerius2 and the Insight II application modules, and the QSAR™, the Discover, and the DS MedChem Explorer™ software. Cheminformatics tools applied to manage relevant data are based on the Accord Enterprise Informatics product.
Development and Formulation. Following the discovery process, a drug must be delivered successfully – administered as a crystalline solid in a pill, or through some other mechanism such as a patch or spray. Our crystallization software solves a range of problems that are important to the development and formulation of pharmaceuticals – for example, establishing possible crystalline structures for the solid material of a pill. Such problems are critical across the chemicals industries, affecting products such as paints, pigments, and petrochemicals. Our crystallization products are delivered as the Cerius2 and the Materials Studio application modules. Development of new and improved products is also achieved through formulation – varying the process and proportions in which known components are combined. Our software can optimize this process for products including drugs, foods, cosmetics, personal care products, detergents, plastics, and specialty chemicals. We serve formulators through the MS FAST™ informatics software.
Improving Materials and Processes in the Chemicals Industry. Many of our other solutions support the design of improved products and processes across the chemicals industry. Two key technology areas in this respect are polymer science and catalysis. Polymer modeling products are used by researchers in the chemical, plastics, rubber, adhesives, petrochemical, aerospace and automotive industrial sectors to analyze and predict polymer properties and establish the link between these properties and the molecular-level structure of the material. Our polymer software products allow these researchers to construct and characterize models of polymers and predict key properties, such as blend compatibility, mechanical behavior, cohesion and adhesion to surfaces. Our polymer products include the Cerius2 and the Insight II application modules – the full range of polymer technology is now extended and available within the Materials Studio product line through the Discover, the Equilibria™, and the MesoDyn™ modules. Our catalysis products are used by companies in the chemical, petrochemical, natural gas and plastics industries and by catalyst manufacturers to characterize catalysts and sorbent materials, to simulate thermodynamic and reactivity data, and to understand and control chemical reactions. Our products are used to characterize and design metallocene catalysts, zeolites and other molecular sieves, and metal oxides. Legacy products include the Cerius2 and the Insight II application modules. This range is now available and extended within the Materials Studio product line through the Discover, the DMol3™, and the CASTEP™ modules. Through the MS CombiMat™ product, informatics methods are now applied to assist combinatorial materials science – a rapidly emerging technology in the search for new catalysts, polymers, and other materials.
Other Materials-based industries. Our products find a broad range of applications across industries including electronics, aerospace, structural materials, automotive and energy. In electronics, for example, the trend toward microminiaturization of electronic devices has created a need for improved processes and materials. Semiconductor
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and electronics companies use our software products to understand surface chemistry, defects, thin oxide layers, magnetic properties, and the performance of new packaging materials. Legacy products include the Cerius2 and the Insight II application modules. This range is now available and extended within the Materials Studio product line through the Discover, the Dmol3, and the CASTEP modules.
ACCELRYS SOFTWARE CUSTOMERS
Our software customer base consists of leading commercial, governmental and academic organizations. No single customer accounted for more than 10% of our software revenues during the fiscal year ended December 31, 2002.
Industrial Customers. Our industrial customers include many of the largest pharmaceutical, biotechnology, chemical, petroleum and semiconductor companies worldwide. In each of the past three fiscal years, a significant portion of our total software revenue has been derived from pharmaceutical, biotechnology and chemical companies.
Governmental Customers. Many governmental institutions in the United States, Canada, Europe and the Asia/Pacific region use our software products.
Academic Customers. Many universities in the United States, Europe and the Asia/Pacific region use our products. This use historically has been for purposes of academic research, but we believe our products increasingly may be used as a part of formal university teaching curricula.
ACCELRYS STRATEGIC AND ACADEMIC ALLIANCES
We have entered into a number of strategic alliances relating to product development, product distribution and joint marketing. We plan to continue to cultivate relationships with academic, governmental and commercial research organizations for purposes of identifying and licensing new technology to use in product development. In addition, we plan to maintain and expand our alliances focusing on the compatibility of our products with databases and database management systems, other computational chemistry and molecular simulation products, and products in related markets such as laboratory instrumentation. We also intend to continue to enter into porting and joint marketing arrangements with hardware vendors on whose systems our products operate.
SOFTWARE CONSORTIA
Since 1986, we have formed a number of consortia with outside parties, commonly for purposes of market expansion and product development. We believe the formation and management of these consortia helps us focus on topical industrial needs, and establishes the consortia members as an initial customer base for our products. We believe our consortia also help us establish valuable working relationships with leaders in our target markets.
ACCELRYS SALES AND MARKETING
We market our software products and services worldwide. In the United States, Europe and Asia, we have direct sales forces, consisting of field sales, certain distributor arrangements, and telesales representatives. Certain of the telesales representatives focus exclusively on sales to academic researchers. The direct sales representatives and remaining telesales representatives work in teams selling to commercial and governmental accounts in assigned geographic territories. The direct sales representatives typically focus on larger accounts and transactions and work closely with our pre-sales support scientists in order to demonstrate our products and their applicability to various research and development efforts. Our remaining distributor relationships are focused in the Asian market, and complement the direct sales approach recently implemented.
In support of our sales activities, we participate in industry trade shows, publish our own newsletters, place advertisements in other industry publications, publish articles in industrial and scientific publications, conduct direct
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mail campaigns, sponsor industry conferences and seminars, and maintain a World Wide Web home page that contains information about us and our product and service offerings.
Our software customers’ buying habits have historically resulted in a higher concentration of sales in the last quarter of the calendar year.
ACCELRYS PRODUCT DEVELOPMENT
Development of our software is focused on expanding software product lines, designing enhancements to our core technology and integrating existing and new products into our principal software architectures. We intend to offer regular updates to our products and to expand our existing product suite. A key component of our product development activities is the extension of our core UNIX-based software architecture to accommodate access to our products from desktop computers.
We license software products or otherwise have acquired software products from corporate, governmental and academic institutions. These arrangements sometimes involve joint development efforts and frequently require the payment of royalties by us. The development and royalty obligations, scope of distribution rights, duration and other terms of these arrangements vary depending on the product, the market, resource requirements, the other parties with which we contract and other factors. We intend to continue to license or otherwise acquire technology or products from third parties.
We have also developed products with funding and direction from customers through our consortia activities, see “Business - Software Consortia,” and we may continue to develop products as part of our consortia arrangements with customers.
ACCELRYS CUSTOMER SERVICE AND SUPPORT
We are committed to providing customers with superior support including telephone, electronic mail, fax and Internet-based technical support services; training; user group conferences; and targeted contract services involving application of our technology and scientific expertise to particular research needs of customers. We believe that customer service, support and training are key to the adoption and successful utilization of our products.
Purchases of multi-year licenses to use our software products include one year of maintenance services, consisting of technical support and software upgrades. Thereafter, we offer renewals of maintenance services on an annual basis for an annual fee. Annual licenses to use our software products generally include all maintenance services. Most of our customers contract for maintenance and support services. These give customers access to new releases, technical notes, documentation addenda and other support which enables customers to utilize our products more effectively, including access to our technical and scientific support personnel during extended business hours. Through our distribution channels, we offer training conducted by staff knowledgeable in both the theory and application of our products. Technical newsletters and bulletins and advance notification about future software releases are sent to customers to keep them informed and to help them with resource allocation and scheduling. To maintain an ongoing understanding of customer requirements, we sponsor scientific symposia and user group meetings throughout the year.
ACCELRYS COMPETITORS
The market for our software products is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. Our competitors offer a variety of products and services to address this market. We believe that the principal competitive factors in this market are product quality, flexibility, ease-of-use, scientific validation and performance, functionality and features, open architecture, quality of support and service, reputation and price. Competition currently comes from the following principal sources: other software packages for analysis of chemical and biological data; desktop software
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applications, including chemical drawing, molecular modeling and analytical data simulation applications; consulting and outsourcing services; other types of simulation software provided to engineers; and firms supplying databases, such as chemical or genomic information databases, database management systems and information technology. In addition, certain of our licenses grant the right to sublicense our software. As a result, our customers and third-party licensees could develop specific simulation applications using our technology and compete with us by distributing such programs to potential customers. Customers or licensees could also develop their own modeling, simulation, analyses, bioinformatics or cheminformatics technology and cease using our products and services. Further, they may choose to sublicense such technology.
Certain of our software competitors and potential competitors have longer operating histories than us and have greater financial, technical, marketing and other resources. Further, many of our competitors offer products and services directed at more specific markets than those targeted by us, enabling these competitors to focus a greater proportion of their efforts on such markets. Certain offerings that are competitive with our products and services are developed and made available by governmental organizations and academic institutions, and these entities may be able to devote substantial resources to product development and also offer their products to users for little or no charge. There can be no assurance that our current or potential competitors will not develop products, services or technologies that are comparable to, superior to, or render obsolete, the products, services and technologies we offer. There can be no assurance that our competitors will not adapt more quickly than us to technological advances and customer demands, thereby increasing such competitors’ market share relative to ours. Any material decrease in demand for our technologies or services may have a material adverse effect on our business, financial condition and results of operations.
ACCELRYS INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We rely primarily on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our proprietary rights. We also have eleven United States patents. We believe that factors such as the technological and creative skills of our personnel, new product development, frequent product enhancements, name recognition and reliable product maintenance are essential to establishing and maintaining a technological leadership position. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. Further, there can be no assurance that our patents will offer any protection or that they will not be challenged, invalidated or circumvented. Furthermore, there can be no assurance that others will not develop technologies that are similar or superior to our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In limited instances, we have licensed source codes of certain products to customers or collaborators. For these reasons, policing unauthorized use of our products may be difficult. In addition, the laws of some foreign countries do not protect proprietary rights as fully as do the laws of the United States.
There can be no assurance that our means of protecting our proprietary rights in the United States or abroad will be adequate. There can be no assurance that third parties will not claim infringement by us of their intellectual property rights. From time to time, we receive letters from third parties claiming or suggesting that our products may infringe patents or other intellectual property rights. We have investigated these matters and believe that they are immaterial to our software operations. There can be no assurance, however, that our products do not infringe upon the patent or other intellectual property rights of third parties, that we will not be required to seek licenses for or otherwise acquire rights to technology as a result of claims of infringement or that other companies will not bring infringement suits against us. We expect in general that software product developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segments grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management’s attention and resources, cause product shipment delays or require us to enter into royalty or licensing agreements.
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Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. In the event of a successful claim of product infringement against us, our failure or inability to license or design around the infringed technology would have a material adverse effect on our business, its financial condition and its results of operations.
From time to time, when we deem it advisable, we challenge potentially conflicting patent rights asserted by third parties. For example, in November 2002, we and six other companies filed Notices of Opposition in the European Patent Office (the “EPO”), seeking to prevent the issuance of Symyx Technologies, Inc. European Patent Application EP1080435, entitled “Design of Combinatorial Material Libraries.” This EPO matter is at an early stage, and no decision by the EPO is expected until at least 2004.
OUR DRUG DISCOVERY SEGMENT – PHARMACOPEIA DRUG DISCOVERY, INC.
In May 2002, we transferred substantially all of the assets, operations and business of our Drug Discovery segment (which had been operated as a division since its inception in 1993) into a new, wholly owned subsidiary of the Company, Pharmacopeia Drug Discovery, Inc. (“PDD”). As a result of this transaction, we operate both our Software and Drug Discovery businesses through wholly owned subsidiaries of the Company (Accelrys and PDD, respectively). In determining to reorganize our business in this manner, our Board of Directors concluded that such an organization would benefit the Company and our stockholders by, among other things, enabling our management to better focus on designing and implementing strategies intended to enhance the operating performance of each discrete business segment, thereby enhancing our ability to optimize our consolidated financial results and equity value; creating a stronger marketplace identity for our business segments through utilization of a corporat