ORCHID BIOSCIENCES INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-30267

ORCHID BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)		22-3392819 (I.R.S. Employer Identification No.)

4390 US ROUTE ONE, PRINCETON, NJ (Address of principal executive offices)		08540 (Zip Code)

Registrant’s telephone number, including area code: (609) 750-2200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

The number of shares outstanding of the registrant’s Common Stock, $.001 par value, as of November 1, 2002, was 55,738,781.

ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q

		PAGE

PART I FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of September 30, 2002 (unaudited) and December 31, 2001	3

	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 (unaudited)	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition And Results Of Operations	16

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27

Item 4.	Controls and Procedures	27

PART II OTHER INFORMATION		29

Item 1.	Legal Proceedings	29

Item 2.	Changes in Securities and Use of Proceeds	29

Item 3.	Defaults upon Senior Securities	29

Item 4.	Submission of Matters to a Vote of Security Holders	29

Item 5.	Other Information	29

Item 6.	Exhibits and Reports on Form 8-K	30

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PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

Assets	September 30, 2002			December 31, 2001

	(unaudited)
Current assets:
Cash and cash equivalents	$	8,465		$	10,746
Short-term investments		609			17,196
Restricted cash		1,084			—
Accounts receivable, net		12,761			12,330
Inventory		4,233			5,354
Other current assets		1,881			1,855

Total current assets		29,033			47,481
Equipment and leasehold improvements, net		21,077			29,615
Goodwill, net		4,029			3,265
Other intangibles, net		35,502			36,772
Restricted cash		2,301			—
Other assets		2,706			3,783

Total assets	$	94,648		$	120,916

Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	3,372		$	3,397
Accounts payable		4,071			6,161
Accrued expenses		8,854			9,180
Deferred revenue		1,756			1,221

Total current liabilities		18,053			19,959

Long-term debt, less current portion		3,720			6,327
Other liabilities		1,504			1,392

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $.001 par value. Authorized 5,000,000 shares, no shares issued or outstanding		—			—
Series A junior participating stock, $.001 par value, 1,000,000 shares designated; no shares issued or outstanding		—			—
Common stock, $.001 par value. Authorized 150,000,000 shares, issued and outstanding 55,738,781 and 46,180,450 at September 30, 2002 and December 31, 2001, respectively		56			46
Additional paid-in capital		304,406			283,857
Deferred compensation		(4,402	)		(7,543	)
Accumulated other comprehensive income/(loss)		(62	)		181
Surrender shares for guaranteed value		(308	)		—
Accumulated deficit		(228,319	)		(183,303	)

Total stockholders’ equity		71,371			93,238

Total liabilities and stockholders’ equity	$	94,648		$	120,916

See accompanying notes to condensed consolidated financial statements.

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ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
	2002			2001			2002			2001

Revenues:
Products revenue	$	3,021		$	1,801		$	8,352		$	4,020
Services revenue		13,307			5,027			38,423			13,348
Collaboration, license and other revenues		664			603			2,477			2,416

Total revenues		16,992			7,431			49,252			19,784

Operating expenses:
Cost of products revenue (includes write-down of discontinued product inventory of $811 during the three and nine months ended September 30, 2002)		2,290			1,106			4,778			2,791
Cost of services revenue		7,182			3,596			22,581			9,327
Research and development		7,312			9,731			18,440			25,306
Marketing and sales		2,402			1,427			7,687			4,548
General and administrative		10,608			5,352			28,249			17,058
Impairment of assets		6,061			27,256			6,266			27,256
Restructuring		2,279			—			4,004			—
Amortization of intangible assets		955			1,190			2,916			3,056

Total operating expenses		39,089			49,658			94,921			89,342

Operating loss		(22,097	)		(42,227	)		(45,669	)		(69,558	)


Other income (expense):
Interest income		32			549			504			2,449
Interest expense		(205	)		(205	)		(663	)		(572	)
Other expense		(9	)		33			(82	)		33

Total other income (expense)		(182	)		377			(241	)		1,910


Loss before income taxes		(22,279	)		(41,850	)		(45,910	)		(67,648	)
Income tax benefit		—			—			894			—

Net loss allocable to common stockholders	$	(22,279	)	$	(41,850	)	$	(45,016	)	$	(67,648	)

Basic and diluted net loss per share allocable to common stockholders	$	(0.40	)	$	(1.06	)	$	(0.84	)	$	(1.89	)

Shares used in computing basic and diluted net loss per share allocable to common stockholders		55,530,230			39,531,965			53,415,183			35,854,843

See accompanying notes to condensed consolidated financial statements.

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ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

	Nine months ended September 30,

	2002			2001

Cash flows from operating activities:
Net loss	$	(45,016	)	$	(67,648	)
Adjustments to reconcile net loss to net cash used in operating activities:
Noncash compensation expense		1,984			2,210
Depreciation and amortization		7,847			5,838
Impairment of assets		6,266			27,256
Bad debt expense		2,725			—
Changes in assets and liabilities:
Accounts receivable		(3,156	)		(775	)
Inventory		1,121			1,041
Other current assets		(26	)		295
Other assets		835			(589	)
Accounts payable		(2,090	)		(730	)
Accrued expenses		(1,342	)		751
Deferred revenue		535			(21	)
Other liabilities		(113	)		—

Net cash used in operating activities		(30,430	)		(32,372	)

Cash flows from investing activities:
Cash paid to acquire Cellmark, including acquisition costs		—			(2,909	)
Acquisition of Affymetrix patent and license		—			(3,005	)
Capital expenditures		(2,888	)		(7,343	)
Increase in restricted cash		(3,385	)		—
Cash paid for intangible assets		(417	)		—
Maturities of short-term investments		27,785			110,720
Purchase of short-term investments		(11,198	)		(93,047	)

Net cash provided by investing activities		9,897			4,416

Cash flows from financing activities:
Repayment of debt on lines of credit		(2,632	)		(1,731	)
Proceeds from issuance of debt from line of credit		—			862
Net proceeds from issuance of common stock		21,223			33,325
Payments on patent obligation		(475	)		—

Net cash provided by financing activities		18,116			32,456

Effect of foreign currency translation on cash and cash equivalents		136			(246	)

Net increase (decrease) in cash and cash equivalents		(2,281	)		4,254
Cash and cash equivalents at beginning of period		10,746			14,558

Cash and cash equivalents at end of period	$	8,465		$	18,812

Supplemental disclosure of noncash financing and investing activities:
Changes in deferred compensation from grant, forfeiture and
remeasurement of common stock options	$	1,297		$	2,605
Issuance of common stock in connection with the acquisition of Cellmark		—			2,019
Issuance of common stock for services		—			229
Issuance of note payable and common stock for patent		1,500			—
Issuance of common stock for patent		500
Incremental Lifecodes liability recorded as incremental goodwill		525			—
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		651			559

See accompanying notes to condensed consolidated financial statements.

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ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2002 and 2001
(Dollars in thousands, except per share data)
(Unaudited)

(1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Orchid BioSciences, Inc. and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“US”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the US for complete annual financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results that may be expected for a full year.

The accompanying unaudited condensed consolidated financial statements include the results of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission.

The Company has not yet achieved profitable operations or positive cash flow from operations. There is no assurance that profitable operations, if ever achieved, could be sustained on a continuing basis. In addition, development and commercialization activities will require significant additional financing. The Company has an aggregate accumulated deficit of $228,319 through September 30, 2002 and expects to incur additional losses over at least the next year. The Company also expects the need to raise additional cash to fund operations until it becomes profitable, which is anticipated in late 2003.

Certain reclassifications were made to prior year amounts to conform to the current year presentation.

(2) Acquisition of Cellmark Diagnostics

On February 12, 2001, the Company completed its acquisition of certain assets of AstraZeneca’s business division, Cellmark Diagnostics (“Cellmark”), a leading provider of genoprofiling testing services in the UK which also sells kits for and conducts tests for genetic diseases, including cystic fibrosis. The acquisition has been accounted for under the purchase method of accounting and accordingly, the assets and liabilities acquired have been recorded at their fair values. The results of operations of Cellmark have been included in the Company’s consolidated statement of operations since the date of acquisition by the Company on February 12, 2001. The pro forma results of operations of Cellmark have not been presented because they are immaterial to the Company’s results of operations for 2001.

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(3) Acquisition of Lifecodes Corporation

On December 5, 2001, the Company acquired all of the outstanding equity securities of Lifecodes Corporation (“Lifecodes”). The following unaudited pro forma financial information presents the combined results of operations of the Company and Lifecodes as if the acquisition had occurred as of January 1, 2001, after giving effect to certain pro forma adjustments, including amortization of other intangibles and elimination of transaction related costs incurred by Lifecodes prior to the acquisition. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and Lifecodes constituted a single entity during this period or the results of operations which may occur in the future.

Three months
ended
September 30,
2001 Nine months
ended
September 30,
2001

(unaudited) (unaudited)

Revenues
$ 15,390 $ 43,944

Net loss allocable to common stockholders
(42,809 ) (68,928 )

Basic and diluted net loss per share allocable to common stockholders
$ (0.93 ) $ (1.62 )

(4) Inventory

Inventory is comprised of the following at September 30, 2002 and December 31, 2001, respectively:

September 30,
2002 December 31,
2001

Raw materials
$ 957 $ 3,087

Work in progress
1,346 1,208

Finished goods
1,930 1,059

$ 4,233 $ 5,354

Raw materials consist mainly of reagents, enzymes, chemicals and plates used in SNP scoring, genotyping and to manufacture SNPware consumables. Work in progress consists mainly of case work not yet completed and kits that are in the production process. Finished goods consist mainly of kits and equipment that have been produced, but have not been shipped.

(5) Segment Information

The Company had historically operated in two segments, the Products segment and the Services segment, each of which represented activities of strategic businesses that were historically managed separately because each business provided distinct products and services. The Products segment marketed and sold equipment and consumables for SNP scoring and other genetic analyses, whereas the Services segment included genotyping, or genoprofiling, services including DNA laboratory analysis for paternity, forensic and transplantation testing and SNP scoring services. The Company continues to market and sell these products and provide these services to its customers; however, in early 2002, the Company completed an internal process of realigning its business into four business units. These business units consist of Orchid Identity Genomics, Orchid Diagnostics, Orchid GeneShield and Orchid Life Sciences. A brief description of all of the business units which have been determined to be reportable segments is as follows:

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	•	Orchid Identity Genomics provides DNA testing for paternity and forensics determinations to state and local governmental authorities as well as to individuals and organizations, through Orchid GeneScreen and Orchid Cellmark;

	•	Orchid Diagnostics provides products and services for genetic testing, including HLA genotyping, disease susceptibility testing and immunogenetics, or the study of the relationship between an individual’s immune response and their genetic makeup;

	•	Orchid GeneShield is developing pharmacogenetics-based programs designed to accelerate the adoption and use of personalized medicine by patients and physicians; and

	•	Orchid Life Sciences develops and markets products, services and technologies for SNP genotyping, or scoring, to life sciences and biomedical researchers as well as pharmaceutical, agricultural, diagnostic and biotechnology companies.

The chief operating decision maker of the Company measures segment profit/(loss) using operating income/(loss), which excludes other income (expense) and allocation of corporate expenditures. These costs which include treasury, human resources, finance, restructuring costs and certain other corporate functions, are included in corporate and all other. The accounting policies of the segments are the same as those described in the summary of significant accounting policies, as discussed in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K filed for the year ended December 31, 2001.

Goodwill has been allocated to each reportable segment as shown below.

Prior period information presented below has been restated to the current segment presentation.

	Identity Genomics		Diagnostics			Life Sciences			Corporate and all other			Total

Three months ended September 30, 2002:
Revenues	$	10,341	$	3,649		$	3,002			—		$	16,992
Impairment of assets		—		—			6,061			—			6,061
Segment operating Income/(loss)		1,439		(2,347	)		(10,391	)		(10,798	)		(22,097	)

As of and for the nine months ended September 30, 2002:
Revenues		29,584		11,824			7,844			—			49,252
Impairment of assets		—		—			6,266			—			6,266
Segment operating Income/(loss)		2,114		(920	)		(18,149	)		(28,714	)		(45,669	)
Goodwill		2,417		1,612			—			—			4,029
Total assets	$	39,523	$	17,880		$	14,330		$	22,915		$	94,648

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	Identity Genomics			Diagnostics		Life Sciences			Corporate and all other			Total

Three months ended September 30, 2001:

Revenues	$	5,381		$	—	$	2,050		$	—		$	7,431
Impairment of assets		27,256			—		—			—			27,256
Segment operating loss		(29,446	)		—		(8,403	)		(4,378	)		(42,227	)

As of and for the nine months ended September 30, 2001:

Revenues		14,096			—		5,688			—			19,784
Impairment of assets		27,256			—		—			—			27,256
Segment operating loss		(33,456	)		—		(22,591	)		(13,511	)		(69,558	)

Total assets	$	25,826		$	—	$	20,147		$	65,336		$	111,309

(6)	Issuance of Common Stock

	On March 5, 2002, the Company completed an offering through which an aggregate of 9.0 million shares were sold, including an overallotment, to a group of new and existing shareholders. The shares of common stock were offered through a prospectus supplement pursuant to the Company’s effective shelf registration statement. The Company generated net proceeds as a result of this offering of approximately $21,200.

(7)	Restructuring

	During the second and third quarters of 2002, the Company formalized and announced a plan to restructure certain operations of the Company in order to reduce costs. As a result, over 110 positions which cover certain areas of the Company’s operations were eliminated. Most of these terminations were from the Company’s Princeton, New Jersey facility. During the quarter ended September 30, 2002, the Company recorded a restructuring charge of approximately $2,279 which included additional employee related charges such as severance, benefits and outplacement services of approximately $910 and incremental facility costs for approximately $1,369. During the second quarter of 2002, the Company recorded approximately $1,725 as a restructuring charge, which consisted of employee related charges such as severance, benefits and outplacement services of approximately $1,030 and facility charges related to lease exit costs of approximately $695. During the second quarter of 2002, the Company recorded leasehold improvements impairment charges of approximately $205 which has been reflected as an impairment charge during the nine months ended September 30, 2002. During the nine months ended September 30, 2002 approximately $4,004 has been charged to restructuring of which approximately $2,094 remains as an accrual as of September 30, 2002. The Company expects to pay most of the existing liability as it relates to severance during the fourth quarter of 2002. Facility related accruals are expected to be paid out during the remainder of 2002 and throughout 2003.

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(8)	Impairment of assets

	During the nine months ended September 30, 2002, the Company recorded an impairment charge related to certain assets of approximately $6,266. As a result of continuing losses incurred by the Company’s Life Sciences business segment, which prompted the restructuring efforts discussed above, the Company prepared an internal evaluation of the Life Sciences segment’s long-lived assets. Based on this internal evaluation, approximately $2,742 of laboratory equipment was determined to be idle and not able to be utilized in the Company’s other facilities and therefore determined to be permanently impaired. In addition, the Company currently has estimated an impairment loss of approximately $3,524 for leasehold improvements related to a facility currently utilized by the Life Sciences business unit. The impairment charge was calculated as the amount by which the carrying value of these leasehold improvements exceeded its fair value as calculated using a present value of future cashflows approach.

(9)	Contingencies

	Effective January 2000, the Company entered into three-year employment agreements with two executives of the Company. In certain cases, the Company may be obligated to pay the executives’ salary and benefits for up to eighteen months after leaving the Company.

(1)	Basis of Presentation

	The accompanying unaudited condensed consolidated financial statements of Orchid BioSciences, Inc. and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“US”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the US for complete annual financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results that may be expected for a full year.

	Certain reclassifications were made to prior year amounts to conform to the current year presentation.

(2)	Acquisition of Cellmark Diagnostics

	On February 12, 2001, the Company completed its acquisition of certain assets of AstraZeneca’s business division, Cellmark Diagnostics (“Cellmark”), a leading provider of genoprofiling testing services in the UK which also sells kits for and conducts tests for genetic diseases, including cystic fibrosis. The acquisition has been accounted for under the purchase method of accounting and accordingly, the assets and liabilities acquired have been recorded at their fair values. The results of operations of Cellmark have been included in the Company’s consolidated statement of operations since the date of acquisition by the Company on February 12, 2001. The pro forma results of operations of Cellmark have not been presented because they are immaterial to the Company’s results of operations for 2001.

(3)	Acquisition of Lifecodes Corporation

	On December 5, 2001, the Company acquired all of the outstanding equity securities of Lifecodes Corporation (“Lifecodes”). The following unaudited pro forma financial information presents the combined results of operations of the Company and Lifecodes as if the acquisition had occurred as of January 1, 2001, after giving effect to certain pro forma adjustments, including amortization of other intangibles and elimination of transaction related costs incurred by Lifecodes prior to the acquisition. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and Lifecodes constituted a single entity during this period or the results of operations which may occur in the future.

	Three months ended September 30, 2001			Nine months ended September 30, 2001

	(unaudited)			(unaudited)
Revenues	$	15,390		$	43,944
Net loss allocable to common stockholders		(42,809	)		(68,928	)
Basic and diluted net loss per share allocable to common stockholders	$	(0.93	)	$	(1.62	)

(4)	Inventory

	Inventory is comprised of the following at September 30, 2002 and December 31, 2001, respectively:

	September 30, 2002		December 31, 2001

Raw materials	$	957	$	3,087
Work in progress		1,346		1,208
Finished goods		1,930		1,059

	$	4,233	$	5,354

	Raw materials consist mainly of reagents, enzymes, chemicals and plates used in SNP scoring, genotyping and to manufacture SNPware consumables. Work in progress consists mainly of case work not yet completed and kits that are in the production process. Finished goods consist mainly of kits and equipment that have been produced, but have not been shipped.

(5)	Segment Information

	The Company had historically operated in two segments, the Products segment and the Services segment, each of which represented activities of strategic businesses that were historically managed separately because each business provided distinct products and services. The Products segment marketed and sold equipment and consumables for SNP scoring and other genetic analyses, whereas the Services segment included genotyping, or genoprofiling, services including DNA laboratory analysis for paternity, forensic and transplantation testing and SNP scoring services. The Company continues to market and sell these products and provide these services to its customers; however, in early 2002, the Company completed an internal process of realigning its business into four business units. These business units consist of Orchid Identity Genomics, Orchid Diagnostics, Orchid GeneShield and Orchid Life Sciences. A brief description of all of the business units which have been determined to be reportable segments is as follows: