ORCHID BIOSCIENCES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 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		22-3392819
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4390 US Route One Princeton, NJ		08540
(Address of principal executive offices)		(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Exchange Act:

None

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Stock, $.001 Par Value Per Share
(Title of Class)

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 checked box

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S 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. checked box

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). checked box

Yes

The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) computed by reference to the price at which the Common Stock was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter was $69,813,441.

As of March 1, 2003, the registrant had 55,738,781 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K: Certain information required in Part III of this Annual Report on Form 10-K is incorporated from the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on June 12, 2003.

ORCHID BIOSCIENCES, INC.

FORM 10-K

INDEX

		Page
PART I

ITEM 1.	BUSINESS	2
ITEM 2.	PROPERTIES	24
ITEM 3.	LEGAL PROCEEDINGS	24
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	25

PART II

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	26
ITEM 6.	SELECTED FINANCIAL DATA	26
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	29
ITEM 7a.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	42
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	43
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES	74

PART III

ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	74
ITEM 11.	EXECUTIVE COMPENSATION	74
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	74
ITEM 13.	CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS	75
ITEM 14.	CONTROLS AND PROCEDURES	75

PART IV

ITEM 15.	EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K	75

SIGNATURES		78

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PART I

Item 1.

BUSINESS

We have a portfolio of business units that are engaged in the development and commercialization of products and services that measure and analyze information related to genetic uniqueness, or the genetic variability that distinguishes one organism from another, also known as genoprofiling.

Genoprofiling data is used in the field of identity genomics for paternity and forensics identification testing, and by health care providers in organ transplantation compatibility testing. Genoprofiling data also has public health applications, such as prion susceptibility testing to breed sheep resistant to scrapie disease. Additionally, genoprofiling data is also being used for genetic disease susceptibility testing and to help physicians manage treatment regimens. Pharmaceutical companies are now using genoprofiling data to facilitate the development of more specific and efficacious drugs and to enable the adoption of personalized medicine which involves prescribing the right drug for the right person at the optimal dose based on the individual’s genetic profile. Our products and services are already being used in each of these applications and we expect their uses to increase.

Our principal executive offices are located at 4390 US Route One, Princeton, New Jersey, 08540. Our telephone number is (609) 750-2200 and our web site address is www.orchid.com. We make available free of charge through the Investors section of our web site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). We include our web site address in this Annual Report on Form 10-K as an inactive textual reference only.

History

We began operations in 1995, and in the first three years of business we were primarily focused on developing our microfluidics technologies for applications in high throughput synthesis of small molecules under collaborative research programs with SmithKline Beecham and Sarnoff Corporation. In 1998, we made a fundamental shift in our focus to apply our technology to the fields of genetic diversity applications, including single nucleotide polymorphism, or SNP, genotyping and pharmacogenetics. Subsequently, we acquired substantially all of the assets of Molecular Tool, Inc. (“Molecular Tool”), a wholly owned subsidiary of GeneScreen, Inc. (“GeneScreen”). Molecular Tool’s proprietary primer extension technology for genotyping SNPs matched with our existing microfluidics technologies. In December 1999, we acquired GeneScreen, Inc., a recognized leader in identity genomics services. In 2001, we acquired two new businesses: Cellmark Diagnostics (“Cellmark”), a business division of AstraZeneca, a provider of DNA laboratory testing in the UK and a supplier of genotyping products for human inherited disease diagnosis; and Lifecodes Corporation (“Lifecodes”), one of the largest providers of identity genomics testing for forensics and paternity in the US, and a major provider of human leukocyte antigens, or HLA, genotyping products and services for transplantation compatibility testing. In early 2002, we began the process of realigning our business into strategic units for marketing purposes. These business units consisted of Orchid Identity Genomics, Orchid GeneShield, Orchid Diagnostics and Orchid LifeSciences.

	•	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, as well as prion susceptibility testing to the UK government through Orchid Europe with the goal of breeding sheep genetically resistant to the disease scrapie;
	•	Orchid GeneShield is developing programs designed to accelerate the adoption and use of personalized medicine by patients and physicians;
	•	Orchid Diagnostics provides products and services for genetic testing, including HLA genotyping, inherited disease diagnosis and immunogenetics, or the study of the relationship between an individual’s immune response and their genetic makeup; and
	•	Orchid Life Sciences develops and markets products, services and technologies for SNP genotyping, or scoring, and genetic diversity analyses to life sciences and biomedical researchers as well as pharmaceutical,

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agricultural, diagnostic and biotechnology companies. The instrumentation portion of this business unit was divested in 2002.

In 2002, we sharpened our strategic focus by concentrating our efforts on our high growth genoprofiling service businesses where we have a market leadership position in forensics, paternity and prion susceptibility testing. We have also continued the pioneering work of our Orchid GeneShield unit in accelerating adoption of personalized medicine. These segments are represented by Orchid Identity Genomics which currently accounts for nearly all of our revenues, and Orchid GeneShield. With the refocusing of our business, we decided to divest the instrumentation portion of our Orchid Life Sciences business and our Orchid Diagnostics business unit, as we believe these segments do not offer the profitable growth prospects of our other business units. In addition, we believe these segments face the risk of significant competition and short product cycles in the product business and require higher levels of research and development expenses to maintain a leading position. These refocusing actions are consistent with our efforts during 2002 to increase efficiencies, reduce operating costs and improve our financial position.

In December 2002, we sold the Orchid Life Sciences product related assets to Beckman Coulter, Inc. for a combination of cash payments and Beckman Coulter’s assumption of certain debt obligations. In connection with this transaction, Beckman Coulter acquired rights to the SNP genotyping products, reagents, and software formerly marketed by Orchid Life Sciences and certain patent and trademark rights. Beckman Coulter received an exclusive license to use our proprietary primer extension SNP analysis technology in products sold to the research and specialty testing markets, and a non-exclusive license to use our primer extension technology in the field of diagnostics. We retained rights to use the primer extension technology in the diagnostics market, as well as in all of our genoprofiling service businesses, including identity testing for forensics and paternity, and pharmacogenetic testing for personalized medicine. We will continue to use our primer extension technology to provide advanced clinical-quality genotyping services to pharmaceutical and agricultural customers. We retained rights to our portfolio of primer extension technology patents, as well as to our existing primer extension technology license agreements.

We are currently pursuing the sale of our Orchid Diagnostics business unit. Currently we do not have a definitive agreement to sell the Orchid Diagnostics business unit. As we committed to the disposition of our Orchid Diagnostics business unit during 2002, the results of operations of that business have been reflected as discontinued operations for all periods presented herein and the related assets and liabilities are reflected as held for sale as of each period end.

Background

Genetic information provides a basis for identification as well as understanding biological and medical functions in organisms. In recent years, scientists have analyzed large portions of deoxyribonucleic acid, or DNA, to determine the sequence of nucleotide bases in the DNA within the human genome and within the genomes of plant and animal species, with the objective of understanding and using this molecular level knowledge to transform traditional approaches to medicine, agriculture and other fields. With the first phase of the human genome sequence completed in 2000, attention has turned from mapping the sequence to identifying genetic differences between individuals and to applying this knowledge in healthcare and other related fields where genetic variability is of use. The increasing availability of genomic data derived from species other than humans is driving use of genetic variability information in such fields as agriculture and public health, to produce improved characteristics in livestock or crops, and to protect against animal-borne diseases. Newer genetic analysis techniques are now being applied to long-established DNA testing applications, such as, identity determination for forensics and paternity. The most common form of genetic variation, single nucleotide polymorphisms, or SNPs, have become a primary focus of genetic variability studies, and we expect them to become more important as their impact is better understood. We are developing services to enable the performance of SNP and related genetic variability analyses in various segments of our business.

SNPs: A Key Element of Genetic Variation

DNA sequences contain a variety of known polymorphisms, or differences, in the genetic code. The most common form of polymorphism involves a change in a single nucleotide base and is called a single nucleotide polymorphism, or SNP. SNPs can impact an individual’s disease susceptibility and treatment response. The importance of SNPs was highlighted in 1999, when a group of leading pharmaceutical companies and others formed The SNP Consortium for the primary purpose of discovering human SNPs and making them publicly available. The SNP Consortium successfully mapped more than 1.8 million SNPs, which are now publicly available and are being used in genetic diversity research. As one of the few

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commercial firms chosen to collaborate with The SNP Consortium, we conducted work that has provided us with early access to potentially valuable SNPs, and has enabled us to begin to incorporate these SNPs into a variety of panels for use in pharmacogenetic research and for pilot programs that use SNPs in paternity and forensic testing.

Our SNP Analysis Technology

At the center of our products and services for SNP scoring, or genotyping, is our proprietary primer extension technology. Our primer extension technology is a method of isolating the precise location of the site of a suspected SNP and utilizing the inherent accuracy of DNA polymerase to determine the presence or absence of the SNP. With more than a decade of use, our SNP technology is among the most validated genotyping methods used today. We believe our SNP technology offers an exceptional combination of attributes, including:

	•	accuracy,
	•	flexibility,
	•	cost-effectiveness,
	•	robustness, and
	•	scalability

The capabilities of our primer extension technology have been developed into a “next generation” tag array technology, which is a significant improvement in our core SNP technology. This tag array technology is based on multiplexing, or the ability to perform multiple SNP analyses in a single test. Multiplexing is important in SNP genotyping because as researchers undertake increasingly complex and large-scale genetic analyses, the need for technologies with improved cost and time efficiencies and design and performance flexibility increases. This is especially true for the whole genome and chromosome mapping studies that are used to analyze entire portions of the genome. It is similarly essential for genotyping specific SNPs in a very large number of samples, as occurs in our animal testing services. We expect that rapid and cost-effective analysis of SNP panels for high volumes of samples will become increasingly important as SNP genotyping becomes more established in routine applications such as healthcare and identity genomics. Through multiplexing, our tag array technology enables a dramatic increase in the amount of information per analysis while simultaneously improving the overall quality of that information and reducing the time and cost requirements. Since multiplexing allows many reactions to be performed on a single sample, it can also generate very large savings in consumables. During 2002, we used our tag array technology in three products offered by Orchid Life Sciences: the microarray-based SNPcode, the medium throughput SNPstream MT (formerly referred to as our SNPstream 5K), and the ultra high throughput SNPstream UHT. Although we have sold our Orchid Life Sciences product business, we intend to continue to leverage our SNP technology in our paternity, forensics, public health and pharmacogenetic service businesses, where it provides improved operating efficiencies and the potential for new service offerings.

Microfluidics

Microfluidics is a set of technologies designed to control the flow, reactions and measurements of minute amounts of chemicals and biochemicals in miniaturized systems. Our microfluidics chips are multi-layered devices consisting of arrayed networks of liquid reagent flow paths in channels or conduits. These chips allow the processing of sequential and/or parallel reactions. The reagents conveyed in the conduits and delivered to the location of the reactions can range in volume from nanoliters to milliliters with a typical reactor volume being from 100 to 800 nanoliters. Proprietary rights and patents cover our pumping and valving techniques that control the timing, location and amount of desired reagent delivery. Although we continue to maintain and prosecute existing intellectual property rights, we currently do not have any plans to further commercialize this technology.

Products and Services to Serve Multiple Genoprofiling Diversity Markets

During 2002, we provided products and services to a variety of genoprofiling markets, including genetic variability analyses for identity genomics, agricultural applications and DNA diagnostics as well as pharmaceutical, biotechnology, academic and the emerging market of pharmacogenetics and personalized medicine. We analyzed a number of sources of genetic variability in addition to SNPs for our varied client base, including short tandem repeats for identity genomics, mitochondrial DNA for forensics, HLA genotypes for transplantation compatibility matching and haplotypes for pharmacogenetic studies. As a result of our growth following several acquisitions beginning in 1998 and continuing through

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2001, we marketed these products and services to our customers in 2002 through the organization of four strategic business units as described above.

Services

We have established an identity genomics testing business as a result of our acquisitions of GeneScreen, Cellmark and Lifecodes, leaders in the provision of paternity and forensics testing. Additionally, we are a leader in prion susceptibility testing, which enables sheep to be bred with reduced susceptibility to the disease scrapie. These services, offered by our Identity Genomics business unit, are conducted in accredited facilities that also provide us with the infrastructure to conduct clinical SNP genotyping and pharmacogenetic testing. In total, we have a network of seven accredited laboratories located in the US and the UK. We expect that our testing services will generate increasing revenues as these markets expand and as SNP genotyping moves from the development laboratory to commercial practice. We also offer organ transplant compatibility testing services through our Orchid Diagnostics business unit. During 2002, our Orchid Life Sciences business unit provided a variety of SNP genotyping services to the research market.

Paternity Testing Services

Through Orchid GeneScreen, our Identity Genomics business unit offers paternity testing services for both governmental agency and private customers to determine the parentage of a child in three accredited laboratories. The public paternity testing market, for which we conduct the majority of testing services, involves tests ordered by state or county governmental agencies commonly referred to as Child Support Enforcement Agencies (CSEAs). CSEAs are required by law to identify the biological father of a child in circumstances where a mother applies for public monetary assistance, in order to compel the father to make child support payments or to recoup any disbursements made for the benefit of the child. In the US, 90% of the costs of paternity testing incurred by CSEAs are reimbursed by the Federal government, provided the CSEAs abide by certain Federal regulations. These regulations provide incentives to the CSEAs to increase effectiveness and efficiency in their paternity establishment measures. This has resulted in continued expansion of this market. Services are provided to these agencies under contracts awarded in a competitive bid process and typically are of one to three years in duration.

We continue to build on our genetic diversity expertise to develop SNP panels capable of establishing paternity with a higher degree of accuracy and lower cost than currently used methods, and create forensic panels that enable us to successfully perform identity determinations that were not possible just a few years ago. The cutting edge SNP genotyping methods that we have developed for pharmaceutical and agricultural uses have the potential to substantially reduce production costs and further improve quality and service in identity genomics. We believe this combination will help create a new market dynamic with the potential for growth and profitability. In addition, we plan to utilize our existing clinical genotyping technology and facilities for our Orchid GeneShield business, which is designed to accelerate the adoption of personalized medicine.

Due to changing demographics related to out-of-wedlock births, reduced stigmas associated with paternity testing, and increased public understanding of paternity testing, private customers have increased their demand for paternity testing in recent years and the private sector has grown rapidly. During 2002, we began marketing paternity testing services on a much broader base, and we expect to capture a larger share of the private paternity market. In addition to offering services directly to individuals, in 2002 we began establishing relationships with firms or individuals acting as our marketing agents. We supply products and materials to such agents and in return, the agent agrees to exclusively utilize our services for their customers seeking private paternity services. We are further increasing our marketing efforts to the private sector to increase awareness of our services, increase the number of referral sources and improve our service offerings.

Forensic Testing Services

Our Identity Genomics business unit offers forensics testing through Orchid Cellmark, which is among the most respected forensic DNA testing services in the world and is known for its high quality and expert staff. We test a variety of forensic evidence samples collected at crime scenes and provide DNA identification profiles on individual felons for inclusion in national and state DNA databases. Testing services on criminal casework may be provided to implicate or exclude a known suspect, or may be provided in the absence of a suspect to generate a DNA profile of a perpetrator for searching DNA databases. Although the majority of testing is done for criminal justice agencies, we also provide testing services for defense attorneys as well. Case work testing for government agencies may be provided on an individual case basis or under long-term contract. Contract services are usually awarded in a competitive bid process and typically last from one to three years. In addition to casework, we also provide felon database testing under contract. DNA specimens are collected from

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incarcerated individuals according to state laws, and tested by our laboratory to provide a DNA identification profile for inclusion in a national database known as the Combined DNA Index System, or CODIS. Biological evidence from criminal cases with no known suspects may then be screened against this database to identify a possible suspect. Databasing contracts are also usually awarded in a competitive bid process and typically last from one to three years.

All three of our forensic testing facilities in the US have received the prestigious American Society of Crime Lab Directors-LAB accreditation, a designation that only a very small number of non-government DNA laboratories have been awarded. The value of genotyping in solving crimes is increasingly being recognized and we anticipate Federal and state governments to allocate greater resources to support wider use of DNA. This is evidenced by legislation under consideration by the Senate and House of Representatives known as “The Debbie Smith Act”, and the recent announcement by the US Government to allocate $900 million over the next five years towards clearing up the backlog of forensic testing that currently exists in the criminal justice system.

In 2002, we were awarded a contract by the Office of the Chief Medical Examiner of New York City to apply our SNP technology to analyze unidentified DNA samples collected from the World Trade Center disaster site. In a pilot program conducted with New York City officials in 2002, we demonstrated that panels of SNPs can enable the identification of additional victims from DNA specimens that have failed previous attempts with traditional forensic analysis methods. Orchid Cellmark is also exploring the use of SNPs in other difficult cases involving degraded DNA samples.

SNP Genotyping Services

Through Orchid Europe, we conduct the major portion of the UK Government’s project to help British farmers breed sheep with reduced susceptibility to the disease scrapie. Following a competitive bid process, we were awarded a multi-year contract in 2001 to generate several million scrapie SNP genotypes per year for the project. The project is part of the innovative National Scrapie Plan (NSP) for Great Britain developed by the Department for Environment, Food and Rural Affairs (DEFRA) in conjunction with the Agriculture and Rural Affairs Departments in Scotland and Wales. Scrapie, one of the transmissible spongiform encephalopathies, is an untreatable, fatal disease that affects sheep worldwide. With an estimated UK sheep population of 40 million, scrapie has the potential to cause significant economic losses to farmers. Prevention of the disease agent’s ability to maintain itself is viewed as the most effective way to limit the spread of the disease. As SNPs affect an individual sheep’s susceptibility to scrapie, sheep with SNPs associated with a genetic resistance to scrapie are selected as breeding stock. Over time, farmers expect to produce flocks with greatly reduced vulnerability to the condition and, in turn, decrease the risk of prion diseases disseminating into the food supply. In 2002 Orchid Europe was also awarded a year extendable contract as the sole genotyping supplier to the Northern Ireland Scrapie Plan. During 2002, we offered low, medium and high throughput SNP scoring services on multiple platforms, including the SNPstream 25K, the SNPstream MT, SNPcode and SNPstream UHT platforms. Our multiple offerings to pharmaceutical, biotechnology, academic and agricultural customers helped Orchid Life Sciences match its customers’ needs to the platform best suited to conduct their work. In December 2002, we sold our Orchid Life Sciences product business assets to Beckman Coulter. With the sale of the Life Sciences business, we do not intend to continue to commercialize SNP genotyping services to the research market.

Transplant Testing Services

We provide testing services for screening and confirmation of HLA genotyping for prospective bone marrow transplant donors participating in public and private programs, using both DNA and serological testing. Our customers include agencies and individuals in the US and Europe. HLA testing, also known as tissue typing, determines the compatibility between donors and recipients for the transplantation of solid organs (i.e. heart, liver, kidney and lung) and bone marrow. Compatibility within the HLA minimizes immune rejection. Historically, tissue typing has been performed by serological methods, but the introduction of DNA molecular technology offers greater versatility and resolution, while requiring a smaller sample. Our HLA genotyping laboratory is accredited by the American Society for Histocompatibility and Immunogentics (ASHI) and New York HLA Histocompatibility. We offer a full array of services and supplies for phlebotomy, coordination, shipment and reporting. In addition to working with the American Registry and various National Marrow Donor Program donor centers, we offer coordination of unrelated bone marrow registry and patient family drives in the US and internationally.

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Products-Systems

LifeMatch System

Our LifeMatch™ platform is a system developed by our researchers for automated HLA genotyping and antibody detection. The LifeMatch system runs on the Luminex xMap platform using proprietary reagents. It includes products, reagents and software developed for optimal integrated performance, providing laboratories with all of the necessary components to test more than 350 samples in an eight-hour shift. During 2002, we launched the LifeMatch platform in the US and Europe. This system is commercialized and supported by our Orchid Diagnostics business.

SNPstream Systems

During 2002, we commercialized the SNPstream 25K, the SNPstream MT and the SNPstream UHT Systems, each of which are based upon different platforms and provided various throughput capabilities. Beckman Coulter acquired these systems and the rights to commercialize them in December 2002 when it purchased the products portion of our Orchid Life Sciences business.

Products-Consumables

During 2002, we commercialized the following SNPware consumables for use with SNPstream Systems we sold and systems of other companies: SNPware Kits, SNPware 96 Kits, SNPware 384 Kits and SNPcode Kits. Beckman Coulter acquired the rights to commercialize these consumables in December 2002 when it acquired the products portion of our Orchid Life Sciences business.

Products-Diagnostic

ELUCIGENE Kits and Tests

The ELUCIGENE line of kits and tests are for cystic fibrosis, or CF, genetic testing. ELUCIGENE kits are sold throughout Europe and in the US. The ELUCIGENE CF20 kit uses patented ARMS™ detection technology to simultaneously detect 25 common mutations of the CFTR gene that are associated with cystic fibrosis. The ELUCIGENE CF29 panel of Analyte Specific Reagents, or ASRs, detects all 25 mutations recommended by the American College of Medical Genetics for cystic fibrosis screening.

LifeMatch Consumables

We sell assays to measure the A and B antigens for transplantation typing that impact the ability of a transplant recipient to accept a transplant organ.

Other Consumables

Orchid’s Overall Business Plan

Our goal is to be the leading provider of services to profile genetic uniqueness through our core Identity Genomics businesses that offer paternity, forensics and prion susceptibility testing, as well as our GeneShield personalized medicine initiative.

Orchid’s Identity Genomics Testing Business

We have become the market leader in identity genomics in the US, which represents one of the largest existing markets for genetic analysis today. Our Identity Genomics business is comprised of: (i) Orchid GeneScreen, which conducts paternity genotyping determinations for government agencies and private individuals; (ii) Orchid Cellmark, which is a leading provider of forensic DNA testing; and (iii) Orchid Europe, which provides paternity, forensics and prion susceptibility testing.

We have seven accredited laboratories in the US and UK providing high quality identity genomics testing services. Our laboratories have accreditations from the Clinical Laboratory Improvement Act (CLIA) for clinical genotyping, from the

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American Association of Blood Banks (AABB) for paternity testing, and from the American Society of Crime Lab Directors (ASCLD) for forensics testing, and from the State of New York for paternity testing and forensic testing. In 2002, two Orchid Cellmark laboratories received the prestigious ASCLD-LAB accreditation, bringing our total number of ASCLD-LAB accredited laboratories to three. In the US, there are only five other private laboratories accredited by ASCLD-LAB. A large portion of paternity and forensic testing is government sponsored and involves contracts that are generally awarded by respective state agencies for terms from one to three years. The contract bidding process is highly competitive and the criteria used to determine the awards varies. In some cases contracts are awarded solely on the basis of price, while others use a scoring matrix to achieve the desired mix of price, quality and service. In addition to continually seeking more attractively priced contracts based on our ability to provide high quality services, we intend to implement innovative technologies that provide us a competitive advantage or premium pricing.

We expect that the strength of our position in identity genomics will enable us to realize efficiencies, and, in the case of paternity testing, to apply our advanced SNP technologies to significantly reduce the cost structure of what has traditionally been a labor-intensive process. We intend to accomplish this by applying the same high throughput SNP scoring systems that we have developed for advanced life sciences applications to paternity testing, thereby taking advantage of our investments in new genotyping technologies across a broad range of both existing and new businesses. We have recently developed SNP panels to replace the short tandem repeat, or STR, technology currently used for paternity testing, and expect to begin implementing these panels during 2003 following AABB approval.

In addition to providing paternity and forensics testing, Orchid Europe conducts the major portion of the UK Government’s project to help British farmers breed sheep with reduced susceptibility to the disease scrapie. Following a competitive bid process, we were awarded a multi-year contract in 2001 to generate several million scrapie genotypes per year for the project. The project is part of the innovative National Scrapie Plan (NSP) for Great Britain developed by the Department for Environment, Food and Rural Affairs (DEFRA) in conjunction with the Agriculture and Rural Affairs Departments in Scotland and Wales. Scrapie, one of the transmissible spongiform encephalopathies, is an untreatable, fatal disease that affects sheep worldwide. With an estimated UK sheep population of 40 million, scrapie has the potential to cause significant economic losses to farmers and prevention of the disease agent’s ability to maintain itself is viewed as the most effective way to limit the spread of the disease. As SNPs affect an individual sheep’s susceptibility to scrapie, sheep with SNPs associated with a reduced genetic susceptibility to scrapie are selected as breeding stock, over time farmers expect to produce flocks with greatly reduced vulnerability to the condition and, in turn, decrease the risk of prion diseases disseminating into the food supply.

Orchid GeneShield: Creating Value Through Personalized Medicine

Orchid GeneShield, our majority owned subsidiary, is developing services designed to accelerate the adoption of personalized medicine into routine medical care. Our GeneShield team is developing programs that would, among other things, incorporate pharmacogenetics data in a form familiar to physicians and be readily acceptable to patients, provide tangible value to health care providers and payers, and be capable of producing recurring revenues for us.

We plan to utilize our existing clinical genotyping technology and facilities that are necessary for the resulting high-sample throughput demands for genotyping panels of SNPs to help physicians and patients improve the selection of medicine through GeneShield. We are currently conducting a limited pilot program of our first service in collaboration with a number of leading managed care organizations and expect to launch this service later this year.

Orchid’s Diagnostic Testing Business

Our Diagnostic business unit focuses on clinical genotyping for the diagnostics market. We offer our ELUCIGENE product line for for the diagnosis of mutations associated with inherited diseases including cystic fibrosis and we offer our HLA services business for transplant compatibility matching with the HLA products and services. In 2002, we established manufacturing and marketing channels in the US and Europe and introduced the LifeMatch system, which offers HLA genotyping customers significant time and cost advantages over current products and technologies. The LifeMatch instrument system is based on the Luminex xMap platform and uses our proprietary consumables. It is targeted at the large number of hospital and independent laboratories who perform their own HLA genotyping. In order to focus primarily on our Orchid identify Genomics testing business and Orchid GeneShield, we are currently pursuing the sale of the Orchid Diagnostics business unit. However, we currently do not have a definitive agreement to sell this business unit.

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Orchid’s Life Sciences SNP Genotyping Business

During 2002, we provided SNP genotyping products and services to pharmaceutical, biotechnology, academic and agricultural customers through our Orchid Life Sciences business unit. In December 2002, we sold our Orchid Life Sciences product business assets to Beckman Coulter. With the sale of the Orchid Life Sciences product related assets, we do not intend to continue to commercialize SNP instrumentation or consumables.

Sustained Competitive Advantage

In order to build and sustain our competitive advantage in the field of genetic diversity, we plan to continue to form strategic alliances and scientific collaborations and make strategic acquisitions as appropriate. Our seven accredited genotyping facilities provide us with the foundation for providing clinical quality genotyping testing to a variety of customers and for our own use. Through collaborations and selective acquisitions, we plan to seek access to distribution channels and opportunities to improve operational efficiencies.

We intend to continue selected investment in our proprietary technologies through internal development and by licensing third-party technologies whenever necessary. We seek to improve the cost-effectiveness and utility of our existing products and services through improved performance and development of improved information technologies, including improvements to our ultra high throughput SNP genotyping system.

Collaborations and Licenses

We continue to enter into collaborative research programs and licenses relating to our core primer extension technology with pharmaceutical and biotechnology companies, including Asper Biotech, AstraZeneca, Beckman Coulter, Affymetrix, Ellipsis Biotherapeutics, DNA Link, Hitachi MiraiBio and Luminex. However, a significant element of our business strategy is the governmental relationships we establish in providing large-scale paternity and forensic testing services as well as diagnostic services. We currently provide such services under contracts awarded to us by the Department for Environment, Food and Rural Affairs (DEFRA), Department of Agriculture and Rural Development (Northern Ireland), Forensic Alliance, Ltd., the UK Foreign and Commonwealth office, Deutsche Knochenmarkspenderdatei Gemeinnutzige GmbH, Ohio Department of Job and Family Services, Georgia Department of Human Resources, Florida Department of Revenue, Illinois State Police, New York City Police Department, Los Angeles Police Department and California Department of Justice. Also, in order to grow our personalized medicine business, we engaged in several important collaboration and license agreements with Laboratory of the Government Chemists (LGC), Quest Diagnostics, First Genetic Trust and Merck-Medco.

Perkin Elmer

In December 2000, we granted an exclusive license to the Life Sciences business of PerkinElmer to use our patented primer extension technology for SNP scoring applications using fluorescence polarization and energy transfer read-out methods. Under the terms of the agreement, PerkinElmer Life Sciences has agreed to produce and sell reagent kits, software and instruments incorporating our single base primer extension technology to enable its customers to perform fluorescence-based SNP analyses. This license grants PerkinElmer exclusive rights to use our primer extension technology with fluorescence polarization, a laboratory read-out methodology that is expected to achieve rapid growth as a result of such attributes as simplicity, accuracy and cost effectiveness. In addition to licensing fees, we are entitled to receive royalties (including yearly minimum payments) from product sales, if any, under the license agreement. This agreement, under which we have also granted PerkinElmer an option to expand the field of use to include diagnostic assays based on fluorescence methodologies and time resolved energy transfer, terminates on the date upon which the last of the patents we license to PerkinElmer expires. In the event of a breach of this agreement, the non-breaching party may terminate the agreement upon 14 days’ written notice for uncured breaches relating to non-payment, except for non-payment of license fees, and upon 60 days’ written notice for all other uncured breaches.

In December 2000, we further granted a non-exclusive license to the Life Sciences business of PerkinElmer to use our primer extension technology for scoring applications on DNA sequencers. Under the agreement, PerkinElmer will produce and sell reagent kits, software and instruments incorporating our technology for performing SNP analyses on capillary and slab gel DNA sequencers. In addition to licensing fees, we are entitled to receive royalties from product sales, if any, under the license agreement. This will enable PerkinElmer to develop and sell reagent kits so that researchers can perform high

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quality SNP analyses using the DNA sequencers they already own. This agreement terminates on the date upon which the last of the patents we license to PerkinElmer expires. In the event of a breach of this agreement, the non-breaching party may terminate the agreement upon 14 days’ written notice for uncured breaches relating to non-payment, except for non-payment of license fees, and upon 60 days’ written notice for all other uncured breaches.

Amersham Biosciences

In June 2000, we entered into a license agreement with Amersham Pharmacia Biotech (now known as Amersham Biosciences), the life sciences division of Nycomed Amersham Plc, pursuant to which we granted a royalty bearing, non-exclusive license to Amersham Biosciences to use our single base primer extension technology. Under the terms of the agreement, Amersham Biosciences will produce and sell reagent kits and software incorporating our technology to allow researchers to perform SNP analyses on Amersham Biosciences capillary and slab gel DNA sequencers. In addition to licensing fees, we are entitled to receive royalties for the duration of the license agreement. Our agreement with Amersham does not provide for minimum annual sales requirements, and therefore, we cannot determine at this time the materiality or the value of this agreement to our business or us. This agreement terminates on the date upon which the last of the patents we license to Amersham expires. In the event of a breach of this agreement, the non-breaching party may terminate the agreement upon 14 days’ written notice for uncured breaches relating to non-payment, except for non-payment of license fees, and upon 60 days’ written notice for all other uncured breaches.

Applied Biosystems, Inc.

In July 2000, we entered into a license agreement with PE Biosystems, now known as Applied Biosystems, a division of PE Corporation, under which we granted a royalty bearing, non-exclusive license to Applied Biosystems to use our single base primer extension technology. Under the terms of the agreement, Applied Biosystems will produce and sell reagent kits and software incorporating our technology to allow researchers to perform SNP analyses on Applied Biosystems’ ABI PRISM® DNA sequencers. In addition to licensing fees, we are entitled to receive royalties for the duration of the license agreement. Our agreement with Applied Biosystems does not provide for minimum annual sales requirements, and therefore, we cannot determine at this time the materiality or the value of this agreement to our business or us. This agreement terminates on the last day upon which the last of the patents we licensed to Applied Biosystems expires. In the event of a breach of this agreement, the non-breaching party may terminate the agreement upon 14 days’ written notice for uncured breaches relating to non-payment, except non-payment of license fees, and upon 60 days’ written notice for all other uncured breaches.

The SNP Consortium Ltd.

In July 2000, we expanded our collaboration with The SNP Consortium Ltd. under which we performed certain SNP scoring services for determining the allelic frequency of 60,000 SNP genomic markers in diverse populations. We bore a substantial portion of the costs to perform these services. To fulfill our commitment under this collaboration, we accelerated the hiring of personnel for, and use of SNPware consumables in our MegaSNPatron facility. In exchange, we obtained the right to commercialize certain technology developed as a result of performing these services and also received milestone payments. Work under this collaboration was completed during 2002.

Other Agreements

In addition, we have entered into various, license, service and collaboration agreements with respect to our technology, product and services with third parties that are not material to our business. We will continue to seek to enter into similar agreements to enable us to develop or license technologies and earn revenues from our products and services in the future.

Manufacturing and Suppliers

During 2002, we manufactured SNPware consumables at our Princeton, New Jersey facility, products and consumables for HLA testing at our Stamford, Connecticut facility, and reagents for inherited disease diagnosis testing at our facility in Abingdon, UK. If we are unable to meet commercial demand for our products, we may need to enter into supply arrangements with third parties to produce commercial quantities of our products. However, we believe we currently have sufficient manufacturing capacity to meet commercial demand for our products through 2003. Our manufacturing facilities are designed to optimize material flow and personnel movement with centrally located manufacturing and quality control operations. We produce critical components in environmentally controlled clean rooms that are isolated from the rest of the facility. Our Stamford, Connecticut facility has ISO9001 accreditation and we plan to comply with quality system

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requirements, or QSRs, and US Food and Drug Administration (FDA) guidelines for analyte-specific reagents, or ASRs, over the next two years. Access and safety features are designed to meet Federal, state and local health ordinances. Our Abingdon, UK facility is ISO 13485, EN 46001 and ISO 17025 accredited and complies with QSR for the FDA, is a registered manufacturer with the FDA, and has ASRS registered with the FDA.

During 2002, we relied on outside vendors to manufacture a number of central components of our SNPstream system and reagents that were provided in our SNPware kits. We previously established agreements with Tecan and Beckman Coulter for the components of our SNPstream systems and PerkinElmer for some of the key reagents in our SNPware kits. However, since the disposition of the product portion of our Orchid Life Sciences business to Beckman Coulter in December 2002, we no longer need to rely on these suppliers. We also have agreements with Luminex, Applera UK, Cambiex Bioscience Workingham, Ltd, Cambridge Bioscience, Qiagen Ltd, and Sigma Aldrich Company, Ltd for the supply of components key to our provision of services and sale of products. In 2002, we established a company-wide enterprise resource planning system to manage and control our material and product inventories. This system encompasses product costing, materials procurement, production planning and scheduling, inventory tracking and control and batch records, with links to document control for all quality control, quality assurance and regulatory compliance procedures.

All of our Identity Genomics laboratories have the CLIA accreditations necessary to be in compliance with the required regulations, and all three US Orchid Cellmark laboratories have American Society for Criminal Laboratory Directors (ASCLD) certification. Our Orchid Europe laboratory has AABB, New York State Department of Health and ISO 17025 accreditation. Our Orchid Diagnostics laboratory has both CLIA and American Society of Histocompatibility and Immunology (ASHI) accreditation necessary to perform HLA typing services.

Distribution

We have expanded our business internationally, using the facilities acquired in early 2001 as a headquarters for the operations of our European subsidiary, Orchid BioSciences Europe, Ltd., in Abingdon, UK. We use our international operations to expand our identity genomics testing services and to serve as the base for the eventual introduction of our personalized medicine products and services into Europe.

Intellectual Property

We have implemented a patent strategy designed to provide us with a unique proprietary position in the fields of genotyping technologies, pharmacogenetics, microfluidics and focused areas of genetic diversity. Our strategy will continue to concentrate on protecting and commercializing our current and future products. Our patent portfolio reflects our international scope and includes pursuing patent protection in many of the industrialized nations of the world. We currently own, or have exclusive licenses to, 63 US patents and 71 foreign patents, and have received notices of allowance for 2 additional Australian patent applications. Additionally, we have 88 pending patent applications of which 22 are US applications and 66 are foreign patent applications.

Our commercial success will also depend, in part, on our ability to obtain patent protection on the SNPs for which we discover utility and on the products, methods and services for which we base such discoveries. We have sought and intend to continue to seek patent protection for novel uses of SNPs. In such cases where novel uses of SNPs has already been patented by a third party, we may need to obtain a license for the use of these SNPs to make use of or sell products using these SNPs.

We own or exclusively license key patents covering these fundamental areas of our business: primer extension technologies and surface biochemistry and arrays. We also own or exclusively license patents covering other areas of our business including pharmacogenomics, paternity and forensic genetic markers. As of December 31, 2002, these subject patents have approximately 10 or more years before they expire.

We also rely on both patent and trade secret protection of our intellectual property. Complex legal and factual determinations and evolving laws make patent protection uncertain. As a result, we cannot be certain that patents will be issued from any of our patent applications or from applications licensed to us or that any issued patents will have sufficient breadth to offer meaningful protection. In addition, our issued patents or patents licensed to us may be successfully challenged, invalidated, circumvented or unenforceable so that our patent rights would not create an effective competitive barrier. Moreover, the laws of some foreign countries may not protect our proprietary rights to the same extent as US law.

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We attempt to protect our trade secrets by entering into confidentiality agreements with third parties, employees and consultants. Most of our employees and consultants also sign agreements requiring that they assign to us their interests in discoveries, inventions, patents and copyrights arising from their work for us, maintain the confidentiality of our intellectual property, and refrain from unfair competition with us during their employment and for a period of time after their employment with us, which includes solicitation of our employees and customers. We cannot assure you that these agreements will not be breached or invalidated. In addition, we cannot assure you that third parties will not independently discover or invent competing technologies or reverse engineer our trade secrets or other technologies.

In the future, third parties may file claims asserting that our technologies or products infringe on their intellectual property. We cannot predict whether third parties will assert such claims against us or against the licensors of technologies licensed to us, or whether those claims will harm our business. If we are forced to defend against such claims, whether they are with or without any merit or whether they are resolved in favor of or against us or our licensors, we may face costly litigation and diversion of management’s attention and resources. As a result of such disputes, we may have to develop costly non-infringing technologies, or enter into licensing agreements. These agreements, if necessary, may be unavailable on terms acceptable to us, or at all, which could seriously harm our business and financial condition.

We have 50 trademarks for which we have received registrations or notices of allowance in the US and elsewhere. We also have 53 pending trademark applications pending. Some of the key trademarks for which we have either received registrations or notices of allowance include: GeneScreen® and the Orchid logo. A majority of our “SNP” family trademarks were included in the sale of certain assets to Beckman Coulter in December 2002.

This Annual Report on Form 10-K contains references to our trademarks GeneScreen®, GeneShield, Cellmark, ELUCIGENE, LifeMatch, Platform Propagation and the Orchid logo. These are our trademarks for which we have filed registration applications with the US Patent and Trademark Office. All other trademarks or trade names referred to in this annual report are the property of their respective owners.

Government Regulation

While most of our initial research products will not be subject to government regulation, we anticipate the manufacturing, labeling, distribution and marketing of some or all of our future diagnostic products and services developed or performed using our SNP-related technologies or microfluidics will be subject to government regulation in the US and in certain other countries.

In the US, the FDA regulates, as medical devices, most diagnostic tests and in vitro reagents that companies market as finished test kits or equipment. Some clinical laboratories, however, purchase individual reagents intended for specific analyses, and, using those reagents, develop and prepare their own finished diagnostic tests. We intend to market some diagnostic products as finished test kits or equipment and others as individual reagents. Consequently, some or all of these products will be regulated as medical devices. The AABB has accredited our CLIA laboratories in Dallas, Texas, Dayton, Ohio, East Lansing, Michigan, Germantown, Maryland, Nashville, Tennessee, and Abingdon, UK. Our Abingdon, UK facility is also accredited by New York State Department of Health for genetic testing. The American Society of Histocompatibility and Immunology, or ASHI, has accredited our Dayton, Ohio and Stamford, Connecticut laboratories for transplantation typing of prospective bone marrow donors. The National Forensic Science Testing Center and the ASCLD have accredited our Germantown, Maryland, Nashville, Tennessee and Dallas, Texas laboratories for DNA typing for criminal forensic purposes. Only eight private forensics labs in the US have earned the respected ASCLD accreditation of which three are owned by Orchid. The Dayton, Ohio facility has been accredited by the Standards Council of Canada (SCC) for paternity testing.

The FDA has also adopted a set of regulations that govern laboratories that use Analyte Specific Reagents, or ASRs, which cover the production of assays and their components consistent with Good Manufacturing Practices for use by clinical laboratories producing their own assays. We satisfy these ASR guidelines in connection with our manufacture of diagnostic products that are affected by these guidelines.

The Food, Drug, and Cosmetic Act requires that medical devices introduced to the US market, unless exempted by regulation, be the subject of either a pre-market notification clearance, also known as a 510(k) or an approved pre-market approval application, or PMA. Some of our products may require a PMA and others may require a 510(k). With respect to devices reviewed through the 510(k) process, we may not market a device until the FDA agrees that the product is substantially equivalent to a legally marketed device known as a ‘‘predicate device.’’ A 510(k) submission may involve the presentation of a substantial volume of data, including clinical data, and may require a substantial FDA review. The FDA

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may agree that the product is substantially equivalent to a predicate device and allow the product to be marketed in the US. The FDA, however, may (i) determine that the device is not substantially equivalent and require a PMA, or (ii) require further information, such as additional test data, including data from clinical studies, before it is able to make a determination regarding substantial equivalence. By requesting additional information, the FDA can further delay market introduction of our products. If the FDA indicates that a PMA is required for any of our products, the application may require extensive clinical studies, manufacturing information and likely review by a panel of experts outside the FDA. The FDA could also require us to conduct clinical studies to support either a 510(k) submission or a PMA application in accordance with FDA requirements. Failure to comply with FDA requirements could result in the FDA’s refusal to accept the data or the imposition of regulatory sanctions. FDA approval of a PMA application could take significantly longer than a 510(k) approval.

Medical device laws and regulations are also in effect in many countries in which we may do business outside the US. These range from comprehensive device approval requirements for some or all of our medical device products to requests for product data or certifications. The number and scope of these requirements are increasing. We cannot assure you that we will obtain regulatory approvals in such countries or that we will not be required to incur significant costs to obtain or maintain any such foreign regulatory approvals. In addition, the export by us of certain of our products which have not yet been cleared for domestic commercial distribution may be subject to FDA export restrictions. Medical laws and regulations are also in effect in some states in which we do business. The failure to obtain product approvals in a timely fashion or to comply with state or foreign medical device laws and regulations may have a material adverse impact on our business and results of operations.

Our current DNA testing laboratories in the US and our services that Orchid Europe in the UK provides to US citizens are regulated under CLIA. The intent of CLIA is to ensure the quality and reliability of clinical laboratories by mandating specific standards in the areas of personnel qualifications, administration, participation in proficiency testing, patient test management, quality control, quality assurance and inspections. The regulations promulgated under CLIA establish three levels of diagnostic tests; waived, moderately complex and highly complex, and the standards applicable to a clinical laboratory depend on the level of the tests it performs. Therefore, we cannot assure you that the CLIA regulations and future administrative interpretations of CLIA will not have a material adverse impact on us by limiting the potential market for our DNA testing services.

Our gene diagnostic kits sold by us in Europe are classified as IVD medical devices and are covered by the European Directive, 98/79/EC, or the IVDD Directive. The IVDD Directive was implemented into UK legislation through the In Vitro Diagnostic Medical Devices Regulations, SI 2000/1315, or the IVD Regulations, which came into force on June 7, 2000. There is a transition period until December 7, 2003 during which manufacturers must either comply with the existing national laws or comply with the IVD Regulations and “CE” (the mark of conformity) mark their devices. After the transition period, it will be mandatory for us to comply with the IVD Regulations. IVDs are classified into three categories so that the level of regulatory control applied to an IVD will be proportionate to the degree of perceived risk based on whom the device user may be or the effect if it fails to perform as intended. These categories are in order of increasing perceived risk, and our products fall into the lowest risk category, or general IVDs. In order to “CE” mark our IVD products, we will need to demonstrate compliance with the essential requirements and use the appropriate conformity assessment route that are both detailed in the IVD Regulations and the relevant Annexes of the Directive. In connection with this demonstration of compliance, we must compile a technical dossier for each IVD we market. The requirement to comply with the IVD Regulations will increase the cost of regulatory compliance for our Diagnostics business.

Prior to the Directive becoming mandatory, manufacturers are subject to other legislation and obligations relating to quality control and safety, such as the General Product Safety Regulations 1994 (SI 1994/2328). Manufacturers must also comply with the Products of Animal Origin (Import and Export) Regulations 1996 (SI 1996/3124) if it is applicable to their devices. Under these regulations we are required to (and have) obtained registration from the Ministry of Agriculture, Fisheries & Food of our manufacturing units in relation to the export of genetic testing kits containing Purified Bovine Serum and Purified Gelatin.

We currently sell a number of IVD products in the UK and have accreditation certificates for our quality systems from a Notified Body (SGS Yarsley ICS), thereby meeting the requirements of ISO9001, EN46001 and ISO13485. We have also received an accreditation certificate meeting the requirements of ISO17025 from the United Kingdom Accreditation Service, or UKAS, in relation to our testing laboratory. UKAS is the national body for the accreditation of testing and calibration laboratories, certification and inspection bodies.

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As a result of obtaining the above-mentioned accreditations, we expect that we will be able to demonstrate compliance of our IVD products with some of the essential requirements provided for in Annex I of the Directive. However, we must also prepare technical dossiers in accordance with Annex III of the Directive before affixing a CE marking on each IVD. Products have already been registered with the UK Competent Authority and we aim to demonstrate compliance of all of our IVD products with the relevant Annexes of the Directive.

In the US and UK, we are also subject to numerous environmental and safety laws and regulations, including those governing the use and disposal of hazardous materials. Any violation of, and the cost of compliance with, these regulations could have a material adverse effect on our business and results of operations.

Employees

As of December 31, 2002, we had 492 full time employees. The employee group includes chemists, engineers, computer scientists, and biologists with experience in the medical diagnostic, genoprofiling, pharmacogenomic, prionic, computer, and electronic industries. None of our employees are represented by a collective bargaining agreement, nor have we experienced work stoppages. We believe that we maintain good relationships with our employees. Our success will depend in large part on our ability to attract and retain skilled and experienced employees. There can be no assurance that we will be successful in hiring or retaining qualified personnel, and our failure to do so could have a material adverse impact on our business, financial condition and results of operations.

Competition

The markets for our products are competitive and the intensity of competition may increase. Currently, we compete primarily with other companies that are pursuing technologies, products and services that are similar to those that we offer. Some of our competitors have greater financial, operational, sales and marketing resources, and more experience in research and development and commercialization than we have. Moreover, some competitors may have greater name recognition than we do, and may offer discounts as a competitive tactic. These competitors and other companies may have developed or could in the future develop new technologies that compete with our products or which could render our products obsolete. We cannot assure you that we will be able to make the enhancements to our technologies necessary to compete successfully with newly emerging techniques.

Our competitors in the field of identity genomics testing include: Bode Labs, DNA Diagnostics, Identigene, Laboratory Corporation of America, Myriad Genetics, and Reliagene in the US, along with Forensic Science Service and Laboratory of the Government Chemist in the UK.

Competitors in the DNA diagnostics field include: Applied Biosystems, Celera Diagnostics, diaDexus, Immunogenetics Laboratory Corporation of America, Myriad Genetics, Nanogen, Quest Diagnostics, Roche, Specialty Labs and Third Wave Technologies. Competitors in the field of HLA testing include: Biotest, One Lambda and Pel-Freeze.

Our principal competitors in the field of pharmacogenetics research and development for personalized medicine include: Celera Genomics, CuraGen, DNA Sciences, Genaissance Pharmaceuticals and Millenium Predictive Medicine. Our principal competitors in the field of pharmacogenetics patient testing include: Genelex, Great Smokies Laboratory, Laboratory Corporation of America, Myriad Genetics and Quest Diagnostics.

During 2002, we competed with several companies in the SNP genotyping field offering alternative technology concepts. These companies include: Affymetrix, Applied Biosystems, Illumina, Nanogen, Pyrosequencing, Qiagen Genomics, Sequenom and Third Wave Technologies.

Risks Related to Our Business

If we fail to acquire additional capital to fund our current and future operating plans or obtain it on unfavorable terms, then we may have to end further development to some of our programs and operations.

We have expended significant resources developing our facilities, and funding commercialization activities. We anticipate that our existing cash on hand, including the 2003 financing and the availability of funds under the line of credit, are sufficient to fund our current and future operating plans at least through 2003. After this, we may be unable to

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fund our business operations and may be required to seek other strategic alternatives. The amount of additional capital which we will need to raise will depend on many factors, including those listed under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Liquidity and Capital Resources.”

As a result of the March 2003 financing and, in addition, if we raise additional funds through the sale of equity or convertible debt or equity-linked securities, your percentage ownership in the company will be reduced. In addition, these transactions may dilute the value of our outstanding common stock. We may issue securities that have rights, preferences and privileges senior to our common stock. If we raise additional funds through collaborations or licensing arrangements, we may be forced to relinquish rights to certain of our technologies or products, or grant licenses to third parties on terms that are unfavorable to us. We may be unable to raise additional funds on terms acceptable to us. If future financing is not available to us on acceptable terms, we may not be able to fund our future needs and we may have to curtail one or more commercial activities.

We may be delisted from Nasdaq resulting in a limited public or private market for our common stock and volatility in our stock price.

Our common stock is currently listed on the Nasdaq National Market. On January 10, 2003, we received a notice from Nasdaq stating that we were not in compliance with their continued listing requirements because our common stock bid price had fallen below Nasdaq’s $1.00 minimum bid price requirement for 90 consecutive trading days. On February 20, 2003, Orchid attended a hearing before the Nasdaq Qualifications Panel (the Panel) to appeal the staff’s determination. On March 26, 2003, the Panel determined to continue listing of our common stock on the Nasdaq National Market through June 24, 2003. If we are unable to regain compliance with the $1.00 minimum bid requirement by June 24, 2003, and any appeal to Nasdaq for relief from this requirement is unsuccessful, our common stock will be delisted from trading on the Nasdaq National Market. If this were to happen, trading in our common stock would decrease substantially, or may cease altogether, the market price of the common stock may decline further, potentially to zero, and stockholders may lose some or all of their investment. Furthermore, delisting of our common stock from the Nasdaq National Market would inhibit, if not preclude, our ability to raise additional working capital on acceptable terms, if at all.

If our common stock is delisted from Nasdaq, the founders of GeneShield may terminate their agreements with GeneShield.

Pursuant to the terms of our May 2001 contribution and license agreement with the founders of GeneShield, if our common stock is delisted from the Nasdaq National Market for a period of 90 days, subject to certain cure periods, the founders may terminate the contribution and license agreement which would preclude GeneShield from operating as currently structured, which could have an adverse effect on our results of operations and financial condition.

We are at an early stage of development and may never become profitable.

We organized our company as a Delaware corporation on March 8, 1995 and have a short operating history. The market for the products and services that we develop, manufacture and market, all of which are derived from genomics and microfluidics technologies, is uncertain. We face risks related to our ability to:

	•	develop, market and maintain competitive technologies, products and services;

	•	anticipate and adapt to changes in our rapidly evolving markets;

	•	retain current collaborators and customers and attract new collaborators and customers for our genoprofiling products and services in paternity, forensics,disease susceptibility, diagnostic and pharmacogenetic testing;

	•	attract, retain and motivate qualified management, technical and scientific personnel;

	•	obtain additional capital to support the expenses of developing our technologies and commercializing our products and services; and

	•	transition successfully from a company with a research focus to a company capable of supporting commercial activities.

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If we fail to adequately manage these risks, we may never become profitable and our financial condition would suffer.

We had an accumulated deficit of $263.4 million as of December 31, 2002 and expect to continue to incur operating losses through at least the third quarter of 2003 or possibly beyond.

We have had substantial operating losses since our inception, and we expect our operating losses to continue at least through the third quarter of 2003 and possibly beyond. For example, we experienced net losses of $80.1 million for the year ended December 31, 2002, $84.7 million in 2001, and $47.9 million in 2000. In order to further develop and commercialize our paternity, forensic and animal testing services, as well as our pharmacogenomic services provided by GeneShield, we will need to incur expenses in connection with our internal development and commercialization programs. As a result, we expect to incur operating losses at least through the third quarter of 2003.

Fluctuations in our quarterly revenues and operating results may negatively impact our stock price.

Revenues and results of operations have fluctuated significantly in the past and significant fluctuations are likely to continue in the future due to a variety of factors, many of which are outside of our control. These factors include:

	•	the volume and timing of orders for our products and services;

	•	changes in the mix of our products and services offered;

	•	the number, timing and significance of new products and services introduced by our competitors;

	•	our ability to develop, market and introduce new and enhanced products and services on a timely basis;

	•	changes in the cost, quality and availability of intellectual property and components required to manufacture or use our products and services;