UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

PHARMACOPEIA, INC.

(Exact name of Registrant as specified in its Charter)

 

 

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 June 30, 2003 was $138,689,193.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 

 

Class		Outstanding at January 31, 2004
Common stock, par value $0.0001 per share		23,990,353

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Selected portions of the 2004 Proxy Statement are Incorporated by Reference in Part III of this Report.

The Exhibit Index (Item No. 15) incorporates several documents by reference as indicated therein.

 

 

PHARMACOPEIA, INC.

 

2003 Form 10-K

 

Table of Contents

 

PART  I
ITEM 1.	BUSINESS
ITEM 2.	PROPERTIES
ITEM 3.	LEGAL PROCEEDINGS
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 4A.	EXECUTIVE OFFICERS OF THE REGISTRANT
PART II
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6.	SELECTED FINANCIAL DATA
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
ITEM 9A.	CONTROLS AND PROCEDURES
PART III
ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11.	EXECUTIVE COMPENSATION
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
SIGNATURES

 

 

PART I

 

ITEM 1.  BUSINESS

 

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 is operated through Accelrys Inc. (“Accelrys”), a wholly-owned subsidiary of the Company which develops and commercializes molecular modeling, simulation, informatics, and decision support software for the life sciences and materials research markets.  Our Drug Discovery segment is operated through Pharmacopeia Drug Discovery, Inc. (“PDD”), a wholly-owned subsidiary of the Company which 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 completion of the “spin-off” of PDD described in the next section and execution upon 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.

 

PROPOSED SPIN-OFF OF PHARMACOPEIA DRUG DISCOVERY

 

On December 18, 2003, we announced that our Board of Directors had approved in principle a plan to separate our Accelrys and PDD businesses through a pro rata distribution to our stockholders of 100% of the outstanding shares of common stock of PDD.  The distribution, commonly referred to as a “spin-off,” would result in PDD being an independent, publicly-traded company with its shares listed on The Nasdaq National Market. The spin-off, which is expected to take place on or about March 31, 2004, is intended to be tax-free for U.S. federal income tax purposes (except for cash received in lieu of fractional share interests). If completed, the distribution would result in PDD owning and operating our Drug Discovery business on a stand-alone basis, while the Company would continue to own and operate the Accelrys software business.  Immediately following the distribution, our stockholders will continue to own their shares of Pharmacopeia stock as well as the shares of PDD stock that will be distributed in the spin-off. Our shares will continue to trade on The Nasdaq National Market under the symbol “ACCL” after the distribution, and it is our intention to request approval of our stockholders at

 

 

our 2004 Annual Meeting of Stockholders to change the name of the Company to “Accelrys, Inc.”

 

Our Board of Directors has reserved the right, in its sole discretion and without liability, to provide final approval for the spin-off or to abandon the spin-off at any time prior to its completion, for any reason or no reason at all.  In addition, certain conditions must be satisfied or waived by us prior to the distribution being effected, including without limitation PDD’s Registration Statement on Form 10 being declared effective under the Securities Exchange Act of 1934, as amended; the mailing of the Information Statement contained therein to our stockholders; the receipt of all required permits, registrations and consents in connection with the distribution; the approval of the PDD common stock for listing on The Nasdaq National Market; all material government approvals being in full force and effect; the absence of any order, injunction or decree issued by any court or agency or other legal restraint or prohibition preventing consummation of all or a portion of the distribution.

 

We believe that separating PDD from Pharmacopeia will resolve difficulties we have encountered regarding the effective operation and development of our drug discovery and software businesses within a single publicly-traded corporation.  The significantly different operating and financial models employed by our software and drug discovery units pervade the conduct of their respective businesses, affecting both day-to-day decisions and longer-term strategic initiatives. Our attempts to reconcile these divergent operating models often has required our management team to compromise in a way that is unsatisfactory for each business on a stand-alone basis. We believe the spin-off will enhance the performance of both Pharmacopeia and PDD by providing both companies with greater managerial, operational and financial focus to better respond to market conditions and opportunities in their respective business environments. The distribution will provide each company with a publicly-traded equity security in a single line of business for use in its compensation programs and as a “currency” to facilitate potential acquisitions, investments and alliances. The separation also should enable investors to evaluate better the financial performance of each unit, thereby enhancing the likelihood of appropriate market valuation of the securities of each company.

 

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 Inc. A wholly owned subsidiary of Pharmacopeia, Inc., Accelrys has over 540 employees and active license agreements with most leading chemical, biotechnology and pharmaceutical organizations.  Our software covers disciplines including gene sequence analysis, proteomics, rational drug design, lead optimization, materials research, and formulation design.  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 can be crucial to success. Such organizations also strive to increase the efficiency or effectiveness of products and processes – marginal process improvements can often have dramatic returns on investment.  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

 

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maximize the use of corporate data, information and knowledge.  One such set of technologies is software-based computation, analysis, informatics and knowledge management tools.  These allow users to simulate key chemical and biological systems, understand and predict fundamental properties, and design new or improved products and processes.  They also manage and mine scientific data, turning it into useful information and supporting decision processes and R&D workflows.

 

Accelrys designs, develops, markets, and supports software and provides related services that facilitate the discovery and development of new and improved 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, government 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 many of our core software development environments, 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. This also helps expert modelers to connect and communicate more effectively to the wider research organization, and assists these organizations in capturing, managing, and sharing the critical knowledge developed in modeling.

 

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 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

 

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of similar tools in the materials research arena – so-called materials informatics or ‘matinformatics’ has found early applications in formulation design and materials screening.

 

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 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, and we sell our components, enabling customization and flexible implementation of our systems by chemical programmers.

 

ACCELRYS BUSINESS STRATEGY

 

Our objective is to strengthen Accelrys’ position as a leading provider of software-based scientific 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 intend 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, simulation, and gene sequence analysis specialists, but also at the much larger group of experimentalists (scientists and engineers). We believe we can leverage our strong relationships with molecular modeling, simulation, and gene sequence analysis specialists to help promote the use of modeling, simulation, and gene sequence analysis 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.  We will continue to ensure that this leading-edge technology is delivered to customers in an environment that best fits emerging market needs – for example, offering access to some of our leading legacy UNIX® workstation products via Linux® clients.

 

Enhance Technology Position.  We will strengthen our scientific and technical expertise through acquisitions and partnerships, 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

 

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technologies, facilitate market acceptance of new products and reduce internal research and development investment.

 

Expand Informatics Market Share.  Our customers will need more sophisticated and flexible data and knowledge management tools as the use of modeling and simulation, gene sequence analysis and other computational methods expands and as the amount of data about drug discovery and chemical development activities continues to grow.  We will continue to improve and integrate our bioinformatics and cheminformatics offerings, to develop our components strategy that enables a better fit to customers’ individual needs, 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 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 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 Mechanical Methods. Quantum mechanical (QM) 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.  The problems studied using QM methods are those that are typical in the emerging nanotechnology market.

 

•                  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

 

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resonance data.  Such methods contain more approximations than quantum methods but can be applied to much larger and more complex systems, providing 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.

•                  Structure Determination and Instrument Simulation.  A range of methods combine the technologies introduced above and introduce techniques to interpret and simulate data captured from analytical instruments in order to determine accurate models of molecular, sub-molecular, and mesoscale structure.  The analytical techniques used include powder diffraction, NMR, and infrared spectra.  Such methods are often a vital pre-requisite to effective modeling and simulation and also act as essential validation of computational work.

 

•                  Correlative Methods. Correlative methods identify interrelationships between structure and properties that can be used predictively. In many cases, it is known that macroscopic properties are determined 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:

 

•                  Desktop and Enterprise-Wide Access.  The Discovery Studio software delivers new platform technology that provides a common data architecture and project management system for pharmaceutical-focused products.  The Discovery Studio software combines updated infrastructure technology and market leading science acquired and developed by Accelrys.  This platform will allow Accelrys to deliver molecular modeling and simulation desktop products to new classes of users, through the advantages of client-server computing.  Application installations range from a single user working on a personal computer (“PC”) to a multi-departmental facility accessing a wide range of heterogeneous computer resources to tackle the biggest simulations problems facing the industry.  The client application is created using industry-standard languages and protocols on PC’s, and incorporates powerful new technology that enables the display and manipulation of molecular structures and other data on the PC.  Depending on the application, the servers can be UNIX workstations or Windows® NT/2000® servers, or customers can take advantage of the low cost/high performance offered by Linux servers.

 

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 results of computations on more powerful computer servers on their Intranet. The servers can be UNIX workstations, Linux servers, or Windows® 2000® servers or workstations. The client software runs on Windows 98, 2000, XP®, and Me®.

 

•                  Open Architecture. Accelrys has pioneered an open scientific software architecture through products such as our Cerius2® and Insight II® software.  Many customers have used our published programming interfaces to incorporate and customize new methods into these

 

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software packages.  The modular architecture is designed to provide streamlined access to the various computational methods, allowing their use in discrete, combined and packaged ways.

 

Within the area of Modeling and Simulations, our graphics and interface subsystems continue to be supported on Silicon Graphics® workstations, which are still the most common platform of choice for high-end graphical work according to a recent independent survey our customers.  Accelrys has met the demand for high-end computational capacity by making many of the most compute-intensive operations available to run on IBM AIX servers.  Accelrys has also kept pace with changes in computer buying behavior in our customer base by making selected applications (namely Catalyst® and leading segments of Insight II available for Linux).   Existing and planned Discovery Studio server software products are planned to run on IBM and Linux systems. 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 now include DS Gene sequence analysis software, a PC-based client running within the Discovery Studio product line.

 

•                  Relational Databases.  DS 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.

 

•                  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.

 

•                  Enterprise solutions.  The Accord Enterprise Informatics (AEI) suite unites technology previously available through the company’s Accord and RS^3TM product-lines to create a

 

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single, powerful environment for enterprise-wide management of chemical structures, biological assay data, and related information.  Based on Oracle databases, which are extended to understand chemistry via the DS Accord Chemistry Cartridge, AEI allows customers to manage and share this data and access it via a series of applications focused on specific tasks, including data analysis, management of high throughput screening workflow, and compound registration.

 

•                  Desktop solutions.  The DS Accord for Excel, Accord Chemistry Control, and Accord Grid Control software allows 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 provides 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, BIOSTER that provides a critical compilation of thousands of bio-analogous molecule pairs, and a series of two organic chemistry databases offered in association with J.W. Wiley & Sons, publishers.

 

•                  Tools and Components. We enable IT professionals and scientific application developers to construct custom cheminformatics solutions through a wide range of tools and components that includes the DS Accord Chemistry Cartridge, Accord Chemistry Control, Accord Grid Control, Accord SDK, and the Combichem Enumeration Components.  These are central to our strategy of enabling cheminformatics customers to create systems and solutions that precisely fit their needs.

 

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, electronics, food, paper, agrochemical, aerospace, plastics, paint and natural gas industries. Our products simulate and analyze both small molecules

 

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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 a high level of 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 services:

 

Customer Support and Training.  Expert telephone support, an Internet-based knowledge-base and request-tracking system, on-site training, and scheduled training workshops, are all designed to enhance customer success in application of our technologies.

 

Contract Research.  Accelrys scientists can be contracted to work on specific projects, typically applying our modeling and simulation solutions to problems such as database construction or structure determination.

 

Implementation and Integration Services.  Accelrys can assist customers with the implementation of products, where required.  In particular, this is often a requirement for enterprise informatics products.  We also offer an integration service that can customize solutions and integrate them into more complex IT environments or with specialist data.

 

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:

 

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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 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®, Cerius² and Insight II®, and 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 FAST matinformatics 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. In addition to the crystallization tools introduced above, 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, Equilibria, and MesoDyn modules. Our catalysis products are used by companies in the chemical, petrochemical, natural gas and plastics industries and by catalyst manufacturers to characterize

 

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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, DMol3, and CASTEP modules.  Through the CombiMat product, informatics methods are now applied to assist materials screening – 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 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, Dmol3, and 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, 2003.

 

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

 

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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 Asia 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 mail campaigns, sponsor industry conferences and seminars, and maintain a World Wide Web site that contains information about us and our product and service offerings.

 

Our software customers’ buying habits have his