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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2001

OR

Commission file number 0-22170

EPOCH BIOSCIENCES, INC.
(Exact name of Registrant as Specified in its charter)

(425) 482-5555
(Issuer’s telephone number, including area code)

     Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [X]     NO [   ]

     Check if disclosure of delinquent filers pursuant to Item 405 of Regulation K is not contained in this form, and no disclosure will 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 [   ]

     As of March 19, 2002, the aggregate market value of the voting stock held by non-affiliates, computed by reference to the price at which the stock was sold on such date, was approximately $47,462,694.

25,655,510 shares of Common Stock were outstanding at March 19, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

     Information required under Items 10, 11, 12, and 13 of Part III hereof are incorporated by reference to portions of the registrant’s definitive Proxy Statement to be filed in connection with the solicitation of proxies for its Annual Meeting of Stockholders to be held May 23, 2002.

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INTRODUCTORY NOTE

     This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and we intend that these forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements include, without limitation, the development and commercialization of the company’s technology.

     The forward-looking statements included in this document are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on assumptions that Epoch’s technology will continue to be developed, and will not be replaced by new technology, that we will retain key technical and management personnel, and that there will be no material adverse change in our operations or business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future technology, economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking statements will be realized. In addition, our business and operations are subject to substantial risks which increase the uncertainty inherent in these forward-looking statements. Epoch undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information included in this document, the inclusion of information should not be regarded as a representation by us or any other person that the objectives or plans of Epoch will be achieved. Readers should carefully review the risk factors described in this document as well as in other documents the company files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by the company in fiscal year 2002.

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PART I

ITEM 1. Business

The Company

     Epoch Biosciences, Inc. is a biotechnology company developing technologies and making products to help scientists around the world perform genetic research to improve our lives and our environment. Genetic analysis has become a pervasive activity in academic, biopharmaceutical, clinical, agricultural, veterinary and forensic laboratories. Our technologies facilitate rapid, accurate and cost-effective genetic analysis at the scale necessary to generate the massive amounts of genetic information being studied today.

     As the human genome and other animal and plant genomes are sequenced, the task of understanding the structure and function of genes lies before us (genomics). Researchers want to know when and why a gene switches on and begins producing its protein (gene expression) and what the gene’s protein does in the body (proteomics). Finally, researchers want to know what people’s genetic similarities and differences mean for their health and susceptibility to disease. For example, single nucleotide polymorphisms, or SNPs, are tiny differences in our DNA that make humans different from one another. SNPs have been linked to good and bad traits, including hereditary and acquired diseases, and to people’s response to medications.

     Because of the implications of understanding gene function on human health and disease, institutions have moved quickly to design and manufacture automated genetic analysis systems. We develop patented technologies that improve the output of these systems. Our technologies are compatible with many of the genetic analysis systems currently in use or in development. Just as microprocessors are found in essentially all electronic appliances, our chemistries and technologies have the potential to be incorporated in nearly all genetic analysis systems.

     We earn revenues through a variety of sources. We license our technology for incorporation into other companies’ products and earn license fees and royalties from those companies and generate product revenue from sales of our chemistries to them. We also sell our products to end-users; both through our direct sales force and through distributors that provide worldwide reach. We also earn revenues through contract research activities, whereby third party companies pay for specific research and development activities carried out by our scientists.

     The following table summarizes our revenues by major category, for the last three years ($ in thousands):

     We incorporated in Delaware on August 14, 1985, under the name MicroProbe Corporation. We changed our name to Epoch Pharmaceuticals, Inc. in December 1995, and to Epoch Biosciences, Inc. on

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August 22, 2000. Our principal office is located at 21720 23^rd Drive SE, #150, Bothell, Washington, and our telephone number is (425) 482-5555.

Background

     Nucleic acids are found in all living organisms and are the sole carriers of the genetic code that specifies an organism’s makeup. There are two types of closely related nucleic acids: deoxyribonucleic acid, or DNA, and ribonucleic acid, or RNA. DNA carries the permanent genetic information for construction of all proteins in higher living organisms, while RNA carries a temporary copy of this information to direct protein synthesis. Proteins perform most of the normal physiological functions of living organisms, and aberrant production or activity of proteins may cause numerous diseases.

     DNA is comprised of two linear strands that are formed in a double helix. Each strand is a sequential array of four nucleotide bases: adenine (A), guanine (G), thymine (T) and cytosine (C), which are linked together in DNA by a sugar and phosphate backbone. Every gene contains a unique sequence of these bases and it is these unique sequences that constitute the genetic code which guides all cellular processes. The two chains, or strands, normally comprising DNA are held together by chemical attractions between opposing paired bases according to the following rules: A always pairs with T, G always pairs with C. Figure 1 is a schematic diagram of double-stranded DNA showing this highly specific interaction between the bases in the two strands. This process of base pairing, called hybridization, can occur between DNA strands of any size, as long as the paired segments are matched correctly. RNA occurs in several forms in cells, and each of these forms has a different function. Messenger RNA, or mRNA, is copied from the gene and carries the genetic code which is translated into the proteins synthesized by the cell. This process is called gene expression.

     Synthetic DNA strands can be designed to bind selectively to unique sequences of bases in order to measure the activity of genes, to identify infectious organisms, or to identify genetic differences between species or individuals. Our expertise in the chemistry, design and synthesis of synthetic DNA forms the basis of our research and development activities on compounds and techniques for genetic analysis.

Overview

     Genetic analysis has become the most important laboratory technique in the life sciences. The massive effort to sequence the human genome is paralleled by projects to sequence the genomes of infectious organisms, research animals including fruit flies, worms and rats, and important food crops. It is estimated that over $3.5 billion was spent worldwide in 2001 on industrial and academic research to understand human gene function. This research effort is revolutionizing the pharmaceutical and diagnostic industries, as well as the fields of crop science, animal breeding and veterinary medicine. In the area of human health, genetic analysis promises to identify the mutations that cause hereditary diseases, to elucidate the genetic events that lead to cancer and determine the relative malignancy of tumors, and to identify our individual risk for developing chronic illnesses like heart disease and arthritis.

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     This future promise of genetic analysis and a rapid surge in research activity has created a demand for new technologies and systems to accelerate the pace and accuracy of genetic research. Techniques to study gene expression levels and detect differences in gene sequences are rapidly evolving. As the amount of data being generated grows, the demand for simple, accurate, high throughput formats is increasing. New technologies are generating great interest, such as MGB TaqMan® systems from Applied Biosystems, Primer Extension, a DNA analysis system being developed by Orchid BioSciences, Sequenom and others, the Invader™ assay being commercialized by Third Wave Technologies, microarray technologies being developed by Affymetrix and others, and microfluidic platforms under development at Caliper Technologies, Aclara Biosciences and others.

     We have developed chemical compounds that broadly facilitate genetic analysis. Our chemistries include minor groove binders, modified bases, novel fluorescent molecules and non-fluorescent quenchers, and a unique chemistry to attach synthetic DNA strands to solid surfaces. When these chemical compounds are attached to or incorporated into DNA probes, they enhance methods to measure gene expression and to detect a difference of a single base in the DNA of different individuals, called a single nucleotide polymorphism, or SNP. Our compounds are compatible with multiple technologies, including polymerase chain reaction, or PCR, and alternative nucleic acid amplification technologies. Our technologies are used in multiple formats, including high throughput systems and microtiter plate formats, and they can be used in solution or on solid surfaces, including microarrays.

     The commercialization of our technologies has led to our current proprietary products which include MGB Eclipse™ Probe Systems and DNAnchor™ Microarray Systems.

     We are collaborating with companies that are interested in improving the speed, accuracy, and simplicity of their tests and applications by using our proprietary chemistries. We have a strategic partnership with Applied Biosystems, where our technology is incorporated into all their TaqMan® real-time PCR systems. And we have licensed our technology to Third Wave Technologies for use in their Invader™ system. We anticipate forming business relationships with other companies to commercialize products for genetic analysis that incorporate our technologies.

Genetic analysis

     As of June 2000, the Human Genome Project and Celera announced that they had sequenced the entire human genome of over 3 billion base pairs. At the same time, Incyte Genomics and Human Genome Sciences have identified partial sequences for the majority of human genes.

     Sequencing the human genome has been likened to the discovery of the elements and their arrangement in the periodic table: it only reveals the underlying structure and order of the system. With the human genome completely sequenced, we know approximately how many genes our chromosomes contain and where the genes are located on the chromosomes. However, that information generates many more questions than it answers. Searching for the answers to those questions will result in a rapid growth in the field of genetic analysis, with a parallel growth in technologies and products that facilitate that effort.

     Among the most important issues that genetic research will address in the next few decades are:

•

How does our genetic diversity — the differences in the sequence of the four bases that make up our DNA — affect our response to drugs, and contribute to our susceptibility to chronic diseases, including cancer and cardiovascular disease?

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•

How do differences in the expression of genes in our various tissues affect development and contribute to health and illness?

SNP detection

     The sequence of the four nucleotides (A,G,T,C) in our DNA determines our genetic makeup. Differences in this sequence, in large part, determine the uniqueness of each individual. Sites in the sequence which differ due to inheritance are called polymorphisms. One type of polymorphism is due to a change in a single base in the genetic DNA sequence. These single base polymorphisms, or SNPs, occur frequently enough along our DNA so that they can be used as markers on a “map” of the genome. Such a map can be used to localize traits such as hypertension, diabetes or sensitivity to therapeutic drugs by identifying SNPs that occur at a higher frequency in individuals with the trait than those without the trait. Knowing where the SNPs associated with the trait occur, one can look for nearby genes responsible for the trait, thus leading to a genetic understanding of the trait and directing efforts for treatment. Some SNPs have been shown to cause disease, or to be associated with risk for disease or adverse drug response. Presumably, a high proportion of genetically controlled disease will be caused by or associated with SNPs. Research on SNPs has proceeded in two phases, (1) discovery by comparing DNA sequences of different individuals and (2) analysis by studying populations with or without a given trait. The second phase requires testing thousands of SNPs in hundreds of individuals and requires accurate, high throughput automated systems. The performance of these systems is enhanced by the compounds we have developed.

Gene Expression

     Scientists study how gene expression affects development and contributes to health and illness by comparing the level of expression of genes in different tissues, in healthy versus diseased tissues, and at different points in embryonic development. This approach has been accelerated by the development of DNA microarrays, or biochips, which contain hundreds or thousands of sites on their surface to which messenger RNAs expressed by different genes will bind, allowing their relative levels to be tested and measured.

     Today, genetic analysis is primarily a research activity carried out in thousands of academic, industrial, and government laboratories. Within a few years, these analyses will be used not only in research, but also in doctors’ offices and clinics, on farms and ranches, at food-processing plants, in factories, at crime scenes, and on the battlefield. Simple, inexpensive DNA tests have a future in almost every aspect of everyday life.

Hybridization Tests

     Essentially all of the technologies and products useful for genetic analysis rely on hybridization, a process in which a synthetic DNA strand, called a probe, binds to a DNA target that is being detected. If the sequences of the two strands are perfectly complementary, the probe remains bound to its target at an elevated temperature. If they are not, the probe separates, or dissociates from its target. A hybridization assay is designed to detect the presence of the bound, or hybridized, probe to its nucleic acid target.

     One of the greatest challenges facing scientists in developing hybridization tests is that the sequence of the target DNA can complicate the design of the probe. The process of choosing the optimum region on the target strand to which to attach the probe can be time-consuming and tedious. In

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multiplex formats, where multiple targets are being probed in the same test, designing probes that bind to their target at similar temperatures can further complicate the problem.

     Our technologies facilitate genetic analysis by making the process of hybridization more efficient, hybridization tests simpler to design, and detection of the hybridized product easier.

Oligonucleotide Probes

     A DNA probe is synthesized on an automated instrument and is designed to be complementary to a unique sequence of bases in the DNA or RNA of the target cell or organism. However, short DNA probes do not bind to their target very tightly, and longer DNA probes bind so tightly that they can hybridize to an incorrect sequence, or a mismatch. The ability to overcome these problems is the key to our technology.

     We believe that the ability of DNA probes to precisely bind to matching DNA sequences will have broad use in the developing fields of molecular diagnostics and the study of genes. Applications that could benefit from improved hybridization sensitivity include:

	•		Accurate detection of mutations;
	•		Identifying infectious organisms, including measuring the level of HIV viruses in an individual’s bloodstream, and genotyping the virus to determine its resistance to therapy; and
	•		Diagnosing and determining the prognosis of cancers and their optimum therapies.

Epoch Technologies

     We are an innovative biotechnology company that focuses on the development and manufacture of unique molecular tools for genetic analysis. Our expertise in nucleic acid chemistries has led to the development of patented compounds and methods that make the design, hybridization, and detection of DNA sequences easier and more accurate.

     More specifically, our technologies enhance the performance of synthetic DNA probes used extensively in genomic research and fall into the following categories:

	•		Minor Grove Binders (MGB™) — A crescent shaped molecule that is attached to the ends of synthetic DNA to make “MGB Probes”. After hybridization, the MGB molecule folds into the minor groove of DNA to stabilize the duplex structure and enable greater flexibility in experimental design. The tight-binding MGB probes are especially useful for DNA detection using real-time PCR assay formats and has been adopted by Applied Biosystems, the leading provider of this technology.
	•		Modified Bases — Nature’s four nucleotide bases — A, G, T, and C — and their sequence within DNA guide all cellular processes. Unfortunately the A-T and G-C base pairs can cause problems for genetic analysis. A/T rich sequences are inherently unstable, and to study A/T rich regions of the genome, researchers must use long primers and probes that are less sensitive to mismatches. G-rich sequences tend to clump together and are troublesome for scientists to work with. We’ve developed modified A, T, and G bases to solve these inherent problems for researchers.
	•		Fluorescent Dyes and Quenchers — To enable detection of DNA probes bound to their intended target, a variety of fluorescent dyes are used as probe labels. We’ve developed

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			a selection of dyes for researchers to choose as labels for their custom probes. In addition, to prevent fluorescence of labeled, but unbound probes, we’ve developed a proprietary quencher that’s widely used in the commercial marketplace.
	•		Attachment Chemistry — DNA microarrays are another powerful technology platform for genetic analysis. Arrays of thousands of DNA probes on glass or plastic slides can be used to measure gene expression on a large scale. Although potentially powerful, current technology is highly variable and methods for array-making need improvement. We’ve developed attachment chemistry that enhances the binding of probes on glass or plastic slides and enables higher signal intensities for gene expression or SNP applications on microarrays.
	•		Design Software — Each of the above technologies impact the performance characteristics of DNA probes and sophisticated algorithms are needed to drive the design and use of probes incorporating them. We’ve developed and are enhancing proprietary software to aid customers in the design, ordering, and use of certain of our products.

Epoch Products

     We manufacture and sell high quality, modified and purified custom synthetic oligonucleotides, or oligos. We offer most standard modifications including biotin, fluorescent dyes, amine-linkers and phosphates. In addition, we offer more specialized modifications such as AP, HRP, Molecular Beacons, dual-labeled probes, RNA and 2’-O-methyl RNA.

     In July 2001, we introduced the MGB Eclipse™ Probe System that incorporate the performance advantages of our unique Minor Groove Binder (MGB™) and Eclipse™ Dark Quencher technologies. Eclipse Probe assays are compatible with all currently manufactured real-time PCR systems, and provide highly effective and reproducible results for academic, biotech, diagnostic, and pharmaceutical researchers. This initial release of Eclipse Probe Systems consisted of the following four products:

	•		Eclipse Probe Gene Expression System, which allows the researcher to determine relative concentrations of expressed genes;
	•		Eclipse Probe Viral Load Detection, for determination of viral titer in a real-time PCR format;
	•		Eclipse Probe Allelic Discrimination System, which allows the use of short DNA probes to unambiguously discriminate single nucleotide polymorphisms (SNPs) or mutations with the ease of real-time PCR; and
	•		Eclipse Probe Custom System, which can be customized to meet unique requirements of customers who seek specific modifications other than those in the basic product line.

     In late 2001, we introduced DNAnchor™ Microarray systems for entry into the fast growing microarray market. DNAnchor systems, which incorporate our proprietary attachment chemistry and modified bases, provide enhanced hybridization with higher signal intensities on glass and plastic slides.

     We also distribute our fluorescent dyes and Eclipse Dark Quencher, modified nucleotides and other proprietary technologies through distributors.

     For our collaborative partners, we manufacture chemical intermediates in our Bothell facility for incorporation into their products.

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Sales and Marketing

     We market and sell our products through a combination of direct sales personnel, which are focused primarily on the research market, distributors, and through collaborative relationships. We market and sell our specialty oligonucleotides through our direct sales force that currently operates in the United States. We market these products through advertisements in trade journals, direct mail, participation at industry trade shows, through our website, and through cooperative marketing and supply programs with partners. As an example, in September 2001, we entered into an alliance with Incyte Genomics that, among other things, identifies us as Incyte’s preferred third party provider of unique, custom oligonucleotide probes and other proprietary hybridization probes to Incyte’s database users and provides for our supply of Epoch Eclipse™ Probe Systems to Incyte for Incyte’s internal development purposes.

     We sell our fluorescent dyes and quencher, modified nucleotides and other proprietary technologies through distributors that have worldwide reach.

     We currently have a small sales force and limited experience in marketing our products. Accordingly, we anticipate that we will enter into further distribution agreements with current and future product offerings to expand the geographical availability of our products.

     We sell our chemical intermediates to collaborative partners for incorporation in their products pursuant to contractual supply agreements. For instance, we have granted licenses to use some of our genetic analysis technology to the Applied Biosystems division of Applera Corporation and also to Third Wave Technologies.

     We are currently working with many companies and institutions to apply our products to their systems and projects. The companies include those engaged in developing automated research platforms for genetic analysis and those developing systems to be used in clinical diagnostic laboratories. Our corporate development personnel target leading pharmaceutical and biotech companies and research and academic institutions with the objective of entering into collaborative agreements. We also appear at industry trade shows and advertise in trade publications in connection with our marketing efforts. There can be no assurance that we will be able to enter into any additional collaborative arrangements on favorable terms or at all.

     Our two largest customers in 2001 were Applied Biosystems, which accounted for 56% of our revenues, and Third Wave Technologies, which accounted for 18% of revenues. See “Certain factors that may effect our business and future results” and the “Notes to Financial Statements” for more information. Our current business plan relies on the continuation of our relationship with these customers and our business would be adversely affected if these relationships did not continue.

     Currently, sales of our products are primarily to customers in the United States. International sales are immaterial at this time.

Manufacturing and Supply

     We manufacture specialty oligonucleotides at our facility in San Diego, California, and produce chemical reagent products and small quantities of oligonucleotide products in our facility in Bothell, Washington. Additionally, we use contract manufacturers to synthesize chemical reagents when appropriate.

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     We purchase raw materials essential to our business in the ordinary course of business from numerous suppliers. Substantially all the raw materials used for our commercial manufacturing of oligonucleotides, assay systems and other reagent products are available from multiple sources; however, other raw materials for supply contract and OEM manufacturing are proprietary products of other companies. Raw materials may be rejected if they do not meet manufacturing specifications, are contaminated and/or have other failures. A material shortage, contamination, or failure could adversely impact the commercial manufacturing of our products and related revenues.

     We have sufficient manufacturing capacity to meet current customer needs. Anticipated increases in customer demand over the next year may require us to expand our manufacturing capacity in San Diego or Bothell, or both, acquire additional manufacturing capacity, or utilize costly third-party manufacturing vendors, as necessary. We are currently evaluating opportunities to expand our manufacturing capacity in the San Diego area, however we cannot provide assurance that we will be able to find new facilities, that we’ll manage the relocation successfully, or that the relocation will not significantly disrupt our operations.

Research and Development

     We conduct the majority of our research and development activities through our own staff and facilities. Our goal is to improve DNA technology thereby making biotechnology, molecular biology and diagnostics more robust. We have assembled a scientific staff with a variety of complementary skills in a broad range of advanced research technologies, representing molecular biology, biochemistry, physical chemistry, and synthetic chemistry. As of December 31, 2001, we had 24 employees engaged in developing our technology and applying it to genetic analysis, including 14 with Ph.D.’s. Our in-house research and development efforts are focused primarily on the development of improvements in DNA synthetic chemistry, hybridization reproducibility and ease of use, and detection technologies. This research and development focus will lead to our efforts to commercialize DNA probes, DNA bases, probe labeling, detection techniques and reagent chemistries. In addition to our in-house research programs, we collaborate with academic and research institutions to support research in areas of interest to us.

     Our research and development expenses were $2,858,000 in 1999, $3,468,000 in 2000, and $4,834,000 in 2001.

Patents and Proprietary Technology

     As of March 11, 2002, our core technologies were covered by nine issued patents, and we have filed nineteen additional patent applications. To our knowledge, there are no competing patents on our technology. The expiration dates of these patents range from January 2010 to November 2019.

     The patent position of biomedical companies, including our own, is uncertain and may involve complex legal and factual issues. Consequently, we do not know whether any of our patent applications will result in the issuance of any further patents, or whether issued patents will provide significant proprietary protection or will not be circumvented or invalidated. We cannot be certain that we were the first creator of inventions covered by pending patent applications or that we were the first to file patent applications for such inventions, largely because patent applications in the U.S. are maintained in secrecy until the patents issue, and because publications of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months. Moreover, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine the priority of inventions, which could result in substantial costs. We cannot provide assurance that our patent applications will

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result in further issued patents or that our issued patents will offer protection against competitors with similar technology. Additionally, we cannot provide assurance that any manufacture, use or sale of our technology or products will not infringe on patents or proprietary rights of others, and we may be unable to obtain licenses or other rights to these other technologies that may be required for the commercialization of our proposed products.

     We require our employees, consultants and advisors to execute confidentiality agreements upon the commencement of an employment or consulting relationship with us. Each agreement provides that all confidential information developed or made known to the individual during the course of the relationship will be kept confidential and not disclosed to third parties except in specified circumstances. In the case of employees, the agreements provide that all inventions conceived by an individual shall be our exclusive property, other than inventions unrelated to our business and developed entirely on the employee’s own time. We cannot provide assurance, however, that these agreements will provide meaningful protection or adequate remedies for misappropriation of trade secrets in the event of unauthorized use or disclosure of this information.

Competition

     There are more than 20 competitors in the development, marketing and manufacturing of diagnostics and genomics, including the detection of infectious diseases using a variety of technologies and specialty oligonucleotides, all of which are larger than us. Competition is this field is intense. There are many pharmaceutical, diagnostic and biotechnology companies, public and private universities and research organizations engaged in the research and development of diagnostic products. Most of these organizations have financial, manufacturing, marketing and human resources greater than ours.

Regulation

     We currently sell our products to researchers or to partners where the end customers are researchers. As such, our current products are not subject to regulation by the United States Food and Drug Administration. However, Epoch is subject to the regulations of various other federal and state agencies. We believe we are in compliance in all material respects with the regulations promulgated by the agencies which govern us, and that such compliance has not had, and is not expected to have, a material adverse effect on our business.

     We also believe that our operations comply in all material respects with applicable environmental laws and regulations. Such compliance has not had, and is not expected to have, a material adverse effect on our capital expenditures, results of operations or competitive position.

Insurance

     We carry property and general liability insurance, product liability insurance, and director and officers liability insurance in amounts and on terms deemed adequate by management. Future claims could, however, exceed our applicable insurance coverage.

Employees

     As of December 31, 2001, we had 53 full-time employees, of which 16 were devoted to manufacturing, 24 were devoted to research and development activities, 3 to sales and marketing, and 10 were devoted to general and administrative activities. At December 31, 2001, 31 employees worked in our Bothell facility and 22 worked in our San Diego facility. We believe we have been successful in

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attracting skilled employees with experience in the biomedical industry, but we cannot provide assurance that we will continue to do so in the future. None of our employees are covered by a collective bargaining agreement, and management considers relations with its employees to be good.

Certain factors that may affect our business and future results

Forward Looking Statements

     Some of the information included herein contains forward-looking statements. These statements can be identified by the use of forward-looking terms such as “may,” “will,” “expect,” “anticipates,” “estimate,” “continue,” or other similar words. These statements discuss future expectations, projections or results of operations or of financial condition or state other “forward-looking” information. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements we make. These risk factors could cause our actual results to differ materially from those contained in any forward-looking statement. If any of the following risks actually occur, our business could be harmed and the trading price of our common stock could decline.

We have never been profitable and anticipate future losses, and we may require additional capital

     We have never been profitable. Since our formation in 1985, we have generated limited revenues. As of December 31, 2001, we had an accumulated deficit of approximately $71 million. We expect to incur additional losses as we expand our manufacturing capacity, and our research and development activities and related product commercialization efforts. There is no assurance that we will ever become profitable or that we will sustain profitability if we do become profitable. Should we experience continued or unforeseen operating losses, our capital requirements would increase and our stock price would likely decline.

     Additionally, as of December 31, 2002 we had $7,489,000 in cash and cash equivalents. We currently anticipate that current cash balances and cash from operations will be sufficient to meet our cash needs through at least 2002. However, we may need to seek additional equity and/or debt capital, and there can be no assurance that such capital will be available to us on favorable terms, or at all. If additional funds are not available, we would be required to delay, reduce, or eliminate expenditures for some of all of our programs or products.

There is a risk that our technology may not be effective or might not work

     The science and technology of synthetic DNA-based products is rapidly evolving. While we are beginning to produce and supply products to customers for commercial use, the majority of our products and proposed products are in the discovery or early development stage. The proposed products will require significant further research, development, and testing. We face the risk that any or all of our products and proposed products could prove to be ineffective or unsafe, or be an inferior product to products marketed by others because our products are based on new and unproven innovative technologies. Some of our current research and development activities may not result in any commercially viable products. If we do not have commercially viable products, we will not be able to sell our products, we will not be able to attract partners, and we will not be able to generate funds internally to support operations.

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We have limited manufacturing experience

     While we have experience in researching and developing unique, proprietary technologies to enhance the study of genes, and in manufacturing oligonucleotides, our experience in manufacturing other chemical reagent products is relatively limited. While we are producing and supplying products to customers for commercial use, we do not currently have the capacity for high-volume production of our reagents, nor do we currently have the capacity to meet our projected sales of specialty oligonucleotides. We will need to expand our reagent and oligonucleotide manufacturing capacity in connection with the continued development and commercialization of our products. Any delay or inability to expand our manufacturing capacity could materially adversely affect our manufacturing ability.

There is a risk that we do not own exclusive rights to our technology and our competition may have access to our technology, which may prevent us from selling our products

     We attempt to protect our proprietary technology by relying on several methods including United States patents. We also have international patent applications that correspond to many of the U.S. patents and patent applications. The issued patents and pending patent applications cover inventions relating to the components of our core technologies. The expiration dates of these patents range from January 2010 to November 2019. We make no guarantee that any issued patents will provide us with significant proprietary protection, that pending patents will be issued, or that products incorporating the technology from our issued patents or pending applications will be free from challenges by competitors. Further, third parties may hold proprietary rights, which precede our claims and, therefore, could prohibit us from marketing the proposed products.

Some of our technology might infringe on the rights of others, which may prevent us from selling our products

     There is a great deal of litigation regarding patents and other intellectual property rights in the biomedical industry. We were defendants in one action of this kind, which we settled prior to 1997. Although patent and intellectual property disputes in the biomedical area are sometimes settled through licensing or similar arrangements, this kind of solution can be expensive, if a license can be obtained at all. An adverse determination in a judicial or administrative proceeding or our failure to obtain necessary licenses could prevent us from manufacturing and selling our products. This would substantially hurt our business.

We face numerous competitors and changing technologies which could make our products obsolete

     Many companies do research and development and market products designed to diagnose conditions based on a number of technologies and are developing additional products using gene-based technologies. Many of these companies have substantially greater capital resources, larger research and development and marketing staffs and facilities and greater experience in developing products than we have. Furthermore, our specific field in which we operate is subject to significant and rapid technological change. Even if we successfully introduce our products or proposed products, our technologies could be replaced by new technologies or our products or proposed products might be obsolete or non-competitive.

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We will be dependent upon our Agreement with Applied Biosystems for a significant portion of our revenues for 2002, and a reduction of sales under or early termination of this Agreement would seriously harm our revenues and operating results and would likely cause our stock price to decline

     In January 1999, Epoch and Applied Biosystems entered into a License and Supply Agreement pursuant to which we licensed some of our technology to Applied Biosystems for use in its TaqMan® 5'-nuclease real-time PCR assays, or tests (TaqMan® is a registered trademark of Roche Molecular Systems, Inc.). In July 1999, we licensed our proprietary software, which speeds the design of chemical tools used in the study of genes, to Applied Biosystems. In August 2000, the agreement was amended to include Epoch manufacturing product for Applied Biosystems. In October 2001, we further amended our agreement with Applied Biosystems, Under the terms of this amendment, Applied Biosystems will either purchase a specified minimum number of probes from us each quarter at a specified price, or pay us a lesser amount per probe for any probes not ordered below the minimum. This agreement is effective from October 2001, through December 2002. We will depend upon product sales and royalties from Applied Biosystems’ sales of its TaqMan® assays under this agreement for a significant portion of our revenues for 2002 and future periods. In addition, we have incurred significant expenditures to date to equip our facilities for the development of the assays we are developing under this agreement.

     Either party may terminate the agreement upon 180 days written notice. In the event that this agreement is terminated, our revenues, financial condition and operating results would be adversely affected and our stock price would likely decline.

Credit

     Some of our customers may experience financial difficulties, which could adversely impact our collection of accounts receivable. Although historically we have not experienced credit losses from our trade receivables, our experience is limited. At December 31, 2001, our allowance for doubtful accounts was approximately $19,000. We regularly review the collectibility and credit worthiness of our customers and the receivables to determine an appropriate allowance for doubtful accounts, however future uncollectable accounts could exceed our current or future allowances.

The loss of key personnel could adversely affect operations by impairing our research and our efforts to commercialize and license our products

     Our performance is greatly dependent upon our key management including our Chief Executive Officer, Dr. William Gerber, and technical personnel and consultants. Our future success will depend in part upon our ability to retain these people and to recruit additional qualified personnel. We must compete with other companies, universities, research entities and other organizations in order to attract and retain highly qualified personnel. Although we have entered into agreements with our key executive officers, we make no guarantee that we will retain these highly qualified personnel or hire additional qualified personnel. We currently maintain no key man life insurance on any of our management or technical personnel.

The value of our common stock could change significantly in a very short time

     The market price of our common stock may fluctuate significantly. For example, in the year 2001, our stock traded as high as $6.31 and as low as $1.46. The rapid price changes Epoch has experienced recently, and throughout our history, place your investment in our common stock at risk of total loss over a short period of time. We are in the biotechnology industry and the market price of

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securities of biotechnology companies have fluctuated significantly and these fluctuations have often been unrelated to the companies’ operating performance. Announcements by us or our competitors concerning technological innovations, new products, proposed governmental regulations or actions, developments or disputes relating to patents or proprietary rights, and other factors that affect the market generally could significantly impact our business and the market price of our securities.

Public opinion regarding ethical issues surrounding the use of genetic information may adversely affect demand for our products

     Public opinion regarding ethical issues related to the confidentiality and appropriate use of genetic testing results may influence governmental authorities to call for limits on, or regulation of the use of, genetic testing. In addition, these authorities could prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Furthermore, adverse publicity of public opinion relating to genetic research and testing, even in the absence of any governmental regulation, could harm our business. Any of these scenarios could reduce the potential markets for our products and technologies, which could materially and adversely affect our revenues.

Government regulation of genetic research or testing may adversely affect the demand for our products and impair our business and operations

     Federal, state and local governments may adopt regulations relating to the conduct of genetic research and genetic testing. These regulations could limit or restrict genetic research activities as well as genetic testing for research or clinical purposes. In addition, if state and local regulations are adopted, these regulations may be inconsistent with, or in conflict with, regulations adopted by other state or local governments. Regulations relating to genetic research activities could adversely affect our ability to conduct our research and development activities. Regulations restricting genetic testing could adversely affect our ability to market and sell our products and our technologies. Accordingly, any regulations of this nature could harm our business.

Health care cost containment initiatives could limit the adoption of genetic testing as a clinical tool, which would harm our revenues and prospects

     In recent years, health care payers as well as federal and state governments have focused on containing or reducing health care costs. We cannot predict the effect that any of these initiatives may have on our business, and it is possible that they will adversely affect our business. In particular, gene-based therapeutics, if successfully developed and commercialized, are likely to be costly compared to currently available drug therapies. Health care cost containment initiatives focused either on gene-based therapeutics or on genetic testing could cause the growth in the clinical market for genetic testing to be curtailed or slowed. In addition, health care cost containment initiatives could also cause pharmaceutical companies to reduce research and development spending. In either case, our business and our operating results would be harmed.

ITEM 2. Properties

     Our principal administrative office and research laboratories are located in Bothell, Washington, where we lease and occupy approximately 25,000 square feet. The current lease was initiated in February 2000 when we entered into a 12-year non-cancelable lease for space within a multi-tenant property which we occupied in November 2000.

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     Our principal manufacturing facility is located in San Diego, California, where we lease and occupy approximately 7,200 square feet. The current lease term on this property expires in November 2002 after which we will be required to negotiate a lease extension or be forced to move to an alternate location. We are currently evaluating opportunities in the San Diego area with an intent to relocate to a larger facility. We cannot provide assurance that we will be able to relocate to new facilities in San Diego, to manage the relocation successfully or that the relocation will not significantly disrupt our operations.

ITEM 3. Legal Proceedings

     Mordecai Jofen, as Trustee of the Harbor Trust, f/k/a The Edward Blech Trust v. Epoch Biosciences, Inc., United States District Court for the Southern District of New York, Case No. 01 CV 4129

     The Harbor Trust (formerly the Edward Blech Trust) filed a complaint against us on May 16, 2001, alleging the breach of a March 29, 1996 letter agreement between us and David Blech. Pursuant to the letter agreement, upon payment of a pre-existing debt owed to us by Blech (the “Ribonetics Debt”), we were to release to Blech from escrow warrants to purchase 500,000 shares of our stock. Blech assigned all of his rights under the letter agreement to the Harbor Trust. The Harbor Trust’s claim is based on our alleged failure to timely register the common stock underlying the warrants, allegedly resulting in damages to Blech and/or the Trust of at least $10 million, based on the peak trading value of our stock.

     We filed a motion to dismiss the complaint based on, among other things, the positions that: (1) Blech and the Harbor Trust have never had rights to receive or exercise the warrants because Blech failed to perform a condition precedent, i.e., payment of the Ribonetics Debt; and (2) we had no obligation to register the stock unless and until Blech was entitled to the warrants. Further, the warrants expired pursuant to the letter agreement in June 2000. The Court granted our motion to dismiss in November 2001, but gave the Harbor Trust leave to file an amended complaint.

     The Harbor Trust filed an amended complaint in December 2001, again claiming breach of the letter agreement but adding theories of modification, waiver, estoppel, breach of the covenant of good faith and fair dealing, unjust enrichment and novation. We filed a motion to dismiss the amended complaint in January 2002, and are awaiting a hearing and decision on our motion.

     No trial has been scheduled in the case. While we believe we have a strong position, it is not possible at this time to state the likelihood of an unfavorable outcome because of the inherent uncertainties of litigation.

ITEM 4. Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of security holders during the fourth quarter of 2001.

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PART II

ITEM 5. Market for Common Equity and Related Stockholder Matters

     The table below presents information on the high and low sales and bid prices of our common stock. On May 10, 2000, our common stock began trading on The Nasdaq National Market under the symbol “EBIO.” The information for trades on The Nasdaq National Market are based on the high and low sales prices of our common stock. Prior to May 10, 2000, our common stock traded on the OTC Bulletin Board under the symbol “EPPH.” Information on the high and low bid prices on the OTC Bulletin Board, which reflects inter-dealer prices, without retail mark-up, mark down or commission, may not represent actual transactions.

     On March 19, 2002, the last reported sale price for our common stock on the Nasdaq National Market was $1.85 per share. As of March 19, 2002, there were approximately 3,700 stockholders of record of our common stock. We have not paid any dividends on our common stock since our inception and do not anticipate paying any dividends in the foreseeable future. Any earnings generated in the foreseeable future will be used for the further expansion of the business.

Recent Sales of Unregistered Securities

     There were no transactions involving sales of our securities during 2001.

     The following is a summary of our transactions during 2000 involving sales of our securities that were not registered under the Securities Act. Exemption from the registration requirements of the Securities Act for the sales of the securities described below was claimed under Section 4(2) of the Securities Act, among others, on the basis that such transactions did not involve any public offering and the purchasers were sophisticated with access to the kind of information registration would provide. No underwriting or broker’s commissions were paid in connection with the following transactions.

     In February 2000, we received $10 million of private equity financing from the sale of 1,428,577 shares of common stock at $7.00 per share.

     In February 2000, we exercised the redemption provision on outstanding warrants that were issued in a private placement in 1996 and a warrant exchange in 1997, representing 3,801,812 shares of our common stock. Warrants representing approximately 3,798,762 shares of our common stock were exercised generating $9,497,000 in cash.

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     In addition to the warrant call, the exercise of other warrants to purchase 218,249 shares of our common stock in 2000 generated $109,030 in cash.

     In May 2000 we issued three year fully vested warrants to purchase 25,000 shares of our common stock to our public relations firm. The warrants have strike prices of $8.00 for 5,000 shares, $10.00 for 5,000 shares, $12.00 for 5,000 shares, $14.00 for 5,000 shares, and $16.00 for 5,000 shares. We recognized $94,000 in expenses related to this warrant issuance.

     In September 2000 we issued five year fully vested warrants to purchase 25,000 shares of our common stock at $7.00 per share for investment banking services related to the private placement and warrant call described above. We recognized $293,000 in expenses for the issuance of this warrant.

     In November 2000, we issued fully vested five year warrants to purchase 40,000 shares of our common stock at $10.19 per share to a Bay City Capital entity managed by Bay City Capital, LLC in lieu of cash fees for investment banking and consulting services. Bay City Capital, a merchant banking partnership that was formed by The Craves Group and The Pritzker Family business interests, has an 11.4% equity interest in Epoch at December 31, 2001. The Chairman of Epoch’s Board of Directors, Fred Craves, Ph.D., is a founding partner of The Craves Group and is the Chairman and a Manager of Bay City Capital, LLC. Sanford S. Zweifach, a member of Epoch’s Board of Directors, is a Managing Director and Chief Financial Officer of Bay City Capital, LLC. We recognized $373,000 in expenses relative to the issuance of this warrant.

     In December 2000, we issued five-year warrants to purchase 10,000 shares of our common stock at $6.69 per share to a consultant to the company. The shares vest monthly over four years. We recognized $1,000 in expenses in 2000 and $9,000 in expenses in 2001 related to this warrant.

     The following is a summary of our transactions during 1999 involving sales of our securities that were not registered under the Securities Act. Exemption from the registration requirements of the Securities Act for the sales of the securities described above was claimed under Section 4(2) of the Securities Act, among others, on the basis that such transactions did not involve any public offering and the purchasers were sophisticated with access to the kind of information registration would provide. No underwriting or broker’s commissions were paid in connection with the following transactions.

     In November 1999, we concluded $7 million of private equity financing. The financing included:

	•		The sale of 1,200,000 shares of common stock for $3,000,000 in cash at $2.50 per share.
	•		The conversion by Bay City Capital of $1.2 million of its $3 million loan to Epoch into 480,000 shares of our common stock at $2.50 per share.
	•		The application by Bay City Capital of $1.8 million of its $3 million loan to Epoch to the purchase of 2 million shares of our common stock at $0.90 per share pursuant to a warrant issued to Bay City Capital in connection with the $3 million loan.
	•		The conversion of $1 million of prepayments under the license agreement with Applied Biosystems, to 400,000 shares of common stock at $2.50 per share.

     The $2.50 price per share of common stock received by us in the private equity financing represented a premium to the trading price of our common stock as of the close of the transaction. Investors who purchased the 1,200,000 shares included Applera Corporation the parent company of Applied Biosystems, Bay City Capital, Grace Brothers Ltd. and Hilspen Capital Management.

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ITEM 6. Selected Financial Data

     The information set forth below should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and notes thereto included elsewhere in this report.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion of the financial condition and results of our operations should be read in conjunction with the financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in the forward-looking statement as a result of factors including, but not limited to, those set forth in “Certain factors that may affect our business and future results” and elsewhere in this report.

Overview

     Epoch develops technology and products that enable and accelerate genomic analysis. The foundation of our business strategy is the continued funding of innovative research and development and commercialization of the resultant products through a number of channels.

     We earn revenues through a variety of sources. We license our technology for incorporation into other companies’ products and generate product revenue and earn license fees and royalties from those companies. We also sell our products to end-users; both through our direct sales force and through

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distributors that provide worldwide reach. We also earn revenues through contract research activities, whereby third party companies pay for specific research and development activities carried out by our scientists.

     In January 1999, Epoch and Applied Biosystems entered into a License and Supply Agreement pursuant to which we licensed some of our technology to Applied Biosystems for use in TaqMan® 5’-nuclease real-time PCR assays, or tests. Under the terms of the agreement, Applied Biosystems’ made payments to us of initial fees for licensed technology and proprietary know how, and will make ongoing payments for purchases of chemical compounds as well as royalties on sales of product which use the licensed technology.

     In July 1999, we licensed our proprietary software, which speeds the design of chemical tools used in the study of genes, to Applied Biosystems. This agreement increased the scope of the licensing agreement entered into in January 1999 with Applied Biosystems to include software that allows for the efficient custom design of Taqman® probes, which are chemical compounds which seek out, or “probe” for a specific location on a gene, by the end user. The software is incorporated into Applied Biosystems’ Primer Express™ software which is sold with its 7700 Sequence Detection System. In addition to license fees, we receive royalties on all products that Applied Biosystems sells which incorporate the software.

     In November 1999, Applied Biosystems converted $1,000,000 of prepayments made by it pursuant to the License and Supply Agreement into 400,000 shares of our common stock. In order to secure any unused portion of the purchased product prepayments (up to $450,000), we continued to grant to Applied Biosystems a security interest in the patents related to the technology under the terms of a security agreement. The security interest automatically terminates when any unused portion of the purchased product prepayments is $50,000 or less. Although no security interest was granted with respect to the royalty prepayments, if the royalty payments do not become due under the agreement, we will also be required to refund any unused prepayments to Applied Biosystems.

     In August 2000, the agreement was amended to include research and development funding of $1,000,000 per year, subject to adjustment under terms of the agreement. The amended agreement also calls for Epoch to receive royalty payments based on percentages of sales of defined products by Applied Biosystems, subject to annual minimums.

     Under the terms of the agreement, if Applied Biosystems terminates the agreement upon 180 days written notice to us, or if we terminate the agreement following a material breach by Applied Biosystems, Applied Biosystems will release its security interest in the patents and forfeit any unused portion of the prepayments. However, if we and Applied Biosystems mutually agree to terminate the agreement, or if Applied Biosystems terminates the agreement as a result of a material breach by us, then we must reimburse Applied Biosystems the difference between the unused portion of the purchased product prepayments and $50,000.

     In October 2000, we entered into a Development, License and Supply Agreement with Third Wave Technologies whereby we licensed our proprietary fluorescent dye and quencher technologies to Third Wave. Third Wave also has the option to license other proprietary chemistries we have, in which case additional license and royalty fees would be due to us. We received an initial license fee which is being amortized over the life of the contract and we will receive a royalty on future sales of Third Wave products which include the licensed technology. Included in the agreement with Third Wave was a two-year collaborative research effort which is funded by Third Wave at $1,000,000 per year.

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     In November 2000 we acquired the assets of Synthetic Genetics, a San Diego, California manufacturer of specialty oligonucleotides for approximately $3,788,000 including $3,425,000 in cash paid, the direct costs of the acquisition, and the assumption of liabilities. The acquisition provided us with manufacturing capacity to meet anticipated order volumes generated by the Applied Biosystems contract. The acquisition was accounted for as a purchase of a business and resulted in the recognition of goodwill of approximately $2,321,000 and other intangibles of approximately $1,119,000.

     In July 2001, we launched our Eclipse™ Probe Systems, that incorporate the performance advantages of our unique Minor Grove Binder (MGB) and Eclipse Dark Quencher technologies. Eclipse probe assays are compatible with all currently manufactured real-time PCR systems, and provide highly effective and reproducible results for academic, biotech, diagnostic and pharmaceutical researchers. The initial release consisted of MGB Eclipse probes for gene expression, viral detection, and allelic discrimination for single nucleotide polymorphisms (SNP’s).

     In October 2001, we entered into a license, development, and supply alliance with Incyte Genomics, Inc. The alliance consists of three elements. First, we will receive access to the gene sequence content from Incyte’s LifeSeq Gold® and ZooSeq® databases for use in the design, manufacture, and sale of Eclipse™ probe products. Second, under the alliance we will be identified as the preferred provider of custom oligonucleotides and other proprietary hybridization probes to Incyte’s users of LifeSeq Gold. Third, we will supply Incyte with Eclipse™ Probe Systems for their internal development purposes.

     In October 2001, we further amended our agreement with Applied Biosystems. Under the terms of this amendment, Applied Biosystems will either purchase a specified minimum number of probes from us at a specified price each quarter, or pay us a lesser amount per probe for any probes not ordered below the minimum. This agreement is effective from October 2001 through December 2002.

     We expect to incur operating losses for the next year as we continue research and development spending in applying our synthetic DNA-based technology to the expanding areas of the study of genes, or genomics, and molecular diagnostics and incur increased costs commercializing the resultant products through various channels.

Critical Accounting Policies

     Our accounting policies are more fully described in Note 1 to our financial statements. However, certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management. As a result they are subject to an inherent degree of uncertainty. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Our critical accounting policies are as follows:

	•		revenue recognition; and
	•		accounting for income taxes.

     Revenue recognition. We earn product revenues through sales of chemical products and reagents to manufacturers for incorporation into their products, from the sale of specialty oligonucleotides and value added reagents to end users in the research fields of genomics and molecular diagnostics, from

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license fees for the use of our proprietary technology and know-how, and by providing services to third parties for performing research and development on their behalf. We also have product royalty agreements that result in royalties to us upon ultimate sales of products by our partners.

     Revenues from product sales that require no ongoing obligations are recognized when shipped to the customer and title has passed.

     Up front license fees are recognized over the term of the agreement to which the license fees correspond, which may extend to the expiration of the underlying patents, and based on the terms and future performance obligations in the underlying agreements. Deferred revenue principally represents license fees received in advance and prepayments for product purchases.

     Contract research revenues are recognized as the research and development activities are performed under the terms of commercial collaboration and supply agreements and government grants. Direct costs related to these contracts and grants are reported as research and development expenses.

     Royalty revenues are recognized when earned under the terms of the related agreements, which is generally upon sale of products by our partner containing our component products.

     Accounting for income taxes. Deferred income taxes are provided based on the estimated future tax effects of carryforward and temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those carryforwards and temporary differences are expected to be recovered or settled. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is recorded for deferred tax assets when it is more likely than not that such deferred tax assets will not be realized.

     The gross deferred tax assets as of December 31, 2001 were approximately $26 million, and have been fully reserved based on our history of operating losses.

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Results of Operations

     The following discussion of results of operations reflects Epoch’s diagnostics division as discontinued operations.

2001 vs. 2000

     Product Sales. Product sales began in 2000 and represent the sale of chemical intermediates and probes, primarily to collaborative partners, and the sale of specialty oligonucleotides to the research market from our San Diego facility.

     Chemical intermediate revenues, primarily to Applied Biosystems and Third Wave Technologies, represent component chemistries that we supply on cost-plus terms for incorporation in our partners products. These revenues increased in 2001 as a result of growth in our shipments to Applied Biosystems, and the start of shipments to Third Wave.

     Revenue growth in our specialty oligonucleotide business grew significantly in 2001 for two primary reasons. First, revenues from the MGB TaqMan probes and other products manufactured for Applied Biosystems pursuant to our license and Supply Agreement, as amended, began in early 2001. Second, because of the acquisition of Synthetic Genetics in November 2000, calendar 2001 results include a complete twelve month year while 2000 results includes only six weeks of operations.

     License Fees and Royalty Income. License fees reflect the amortization of initial payments for technology and know how transfers. These amounts are amortized over the life of the contract. Royalty income represents the royalties received under license agreements. Royalties in 2001 increased significantly over the prior year as a result of increased sales of products incorporating our technologies by our licensees and receipt of contractual minimum payments during the year.

     Contract Research Revenue. Contract research revenue in 2000 reflects payments for contract research and development performed under the Applied Biosystems’ agreement for four months of the year. In 2001 research contract revenue primarily reflects contract research under our agreements with Applied Biosystems and Third Wave Technologies for the full year.

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     Cost of Product Sales. The cost of product sales represents the direct manufacturing costs of material, labor and overhead allocations associated with product sales. Also included is the cost of outside manufacturers which we use to produce some of our chemical intermediates. The increased costs in 2001 are attributable to the increase in product revenue and changes in the product mix due to the addition of our San Diego operations and increased volumes of chemical intermediates at contractual margins.

     Research and Development. Research and development costs increased $1,366,000, or 39% in 2001 over 2000. This increase was primarily driven by:

	•		An increase of $476,000 in facility costs as we occupied our new laboratory space in late 2000.
	•		An increase in payroll expenses of $584,000 which primarily resulted from increased staffing over 2000 levels.
	•		Expenses of $171,000 incurred for the recruitment and relocation of senior scientific personnel.
	•		We also incurred an increase of $153,000 in research and development expenses in our San Diego operation as it was functional for a full year in 2001 compared to six weeks of the prior year.
	•		Increased research and development costs of $680,000 in 2001 included in the cost of product sales for personnel and other costs related to product manufacturing. This amount will fluctuate depending on the time and availability of personnel to conduct research and development activities. This amount was offset by increased purchases of raw materials which were primarily attributable to chemical intermediate manufacturing.

     Selling, General and Administrative. Selling, general and administrative expenses increased $1,212,000, or 36%, in 2001 over the 2000. The increases in 2001 were primarily the result of:

	•		$439,000 in selling and marketing expenses associated with our entry into the specialty oligonculeotide field and the addition of sales and marketing personnel.
	•		The addition of a full year of operations in San Diego which added $600,000 to general and administrative expenses.
	•		Approximately $375,000 in compensation expenses related to additional executive personnel.

     Interest Income, net. Interest income in 2001 is lower than 2000 due to reduced cash balances available for investment coupled with lower interest rates in 2001. Interest expense in 2000 and 2001 are minimal and represent the interest payments under capital leases which were assumed as part of the Synthetic Genetics acquisition.

2000 vs. 1999

     Product Sales. Product sales began in 2000 and represent the sale of chemical intermediates to Applied Biosystems and probes as well as six weeks of sales of specialty oligonucleotides from our San Diego facility.

     License Fees and Royalty Income. Amounts in 1999 and 2000 primarily represent license fees earned from collaborative partners.

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     Contract Research Revenue. Contract research revenue in 1999 reflects revenue from U.S. government grants. In 2000, research contract revenue reflected payments for contract research and development performed under the Applied Biosystems’ agreement.

     Research and Development. Research and development expenses increased by $610,000 in 2000 over 1999. This increase was primarily the result of additional staffing in 2000 over 1999 levels, the move to new facilities in November 2000, which resulted in additional laboratory costs, and increased patent and intellectual property expenses of $145,000. Equity financing received in early 2000 allowed us to replace positions lost to attrition in 1999 as well as to increase our research and development effort overall. Patent expenses increased over 1999 levels as we continued to improve and strengthen our patent portfolio.

     Selling, General and Administrative. Selling, general and administrative expenses increased $2,288,000 in 2000 over 1999. The increase in 2000 was primarily the result of:

	•		$443,000 in expenses incurred in connection with consulting services related to a warrant call and private placement of common stock. $293,000 of this was a non-cash expense related to the issuance of a fully vested five-year warrant for 25,000 shares of Epoch’s common stock at a price of $7.00 per share.
	•		$373,000 in non-cash expenses related to the issuance to Bay City Capital of a fully vested five year warrant to purchase 40,000 shares of our common stock at a price of $10.19 per share. This warrant was issued in lieu of a cash retainer for investment banking services.
	•		$253,000 in compensation related to additional executive personnel.
	•		Additional investor relations services of $171,000, of which $94,000 was a non-cash expense related to the issuance of a fully vested three-year warrant to purchase 25,000 shares of our common stock.
	•		Fees of $164,000 paid for executive searches for the Vice President of Corporate Development and the Chief Financial Officer who were ultimately hired in 2001, as well as searches for other management personnel.
	•		Increased facility rent expenses of $147,000.
	•		A $112,000 increase in outside services, most of which was incurred as a result of our move to new office and laboratory facilities in Bothell, Washington.
	•		Filing and membership fees paid to The Nasdaq National Market in the amount of $109,000 in connection with our re-listing in May, 2000.

     Interest Income, Net. In 2000, as a result of the proceeds from the private equity financing and warrant redemption early in 2000, we were able to invest the proceeds and earn interest on the invested balances. Interest and financing expense in 1999 reflected the amortization of $818,000 of deferred financing expense, including the charge off of all remaining unamortized amounts when the underlying loan was converted to equity in November 1999. Interest and financing expense in 2000 was minimal and represented the interest payments under capital leases which were assumed as part of the Synthetic Genetics acquisition.

     Discontinued Operations. The gain on disposal of discontinued operations represents only that portion of the gain for which cash payments were received in 1999. No payments were received in 2000.

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Liquidity and Capital Resources

     At December 31, 2001 we had operating cash and cash equivalents of $7,489,000, compared to the $12,122,000 at December 31, 2000, a decrease of $4,633,000.

     In 2001, cash used in operations amounted to $2,019,000. Our net loss of $4,576,000 was offset by non-cash depreciation and amortization charges of $1,291,000, and by an increase in deferred revenue caused by receipt of new license fees and advance payments from customers of $1,268,000. Cash used in investing activities was $2,963,000 in 2001, consisting of the license rights of $1,000,000, $1,605,000 in facilities and equipment, including $1,013,000 of December 2000 purchases, and $358,000 of costs associated with the Synthetic Genetics acquisition. The increase in accounts receivable balances from 2000 to 2001 is the result of increased product sales in 2001. The reduction in accounts payable in 2001 is primarily the result of the payout of $1,013,000 in the equipment and leasehold improvements related to the Synthetic Genetics acquisition in late 2000. Accrued liabilities increased in 2001 over 2000 primarily as a result of payroll and employee benefit costs, the majority of which were paid in January and February 2002.

     In February 2000 we received $10 million of private equity financing from the sale of 1,428,577 shares of common stock at $7.00 per share. The $7.00 per share price was determined based upon the 20 day trailing average of the closing price of the stock.

     Also in February 2000, we exercised the redemption provision on outstanding warrants, which were issued in a private placement in 1996 and a warrant exchange in 1997, representing 3,801,812 shares of our common stock. Warrants to purchase 3,798,762 shares of our common stock were exercised generating $9,497,000 in cash.

     Cash increased by $10,350,000 during 2000 primarily as a result of the net proceeds of $10,000,000 received from the private placement described above, $9,606,000 from the exercise of warrants, including the February 2000 warrant call described above, and $1,370,000 received from new or amended collaboration and supply agreements with Applied Biosystems and Third Wave, offset by normal expenditures on operations, cash payments for the acquisition of Synthetic Genetics of $3,425,000, cash payments for the acquisition of equipment of $307,000 and net expenditures of $2,000,000 on leasehold improvements on new facilities.

     Variances in accounts receivables, accounts payable and accrued liabilities in 2000 versus 1999 are the result of the acquisition of Synthetic Genetics with its ongoing trade payables and receivables, accounts payable associated with the purchase of approximately $1,013,000 in equipment and leasehold improvements in December 2000 which was paid in 2001, and normal business fluctuations.

     At December 31, 2001, our largest cash commitments are non-cancelable operating leases for facilities in the amount of $8,005,000 that expire in 2012. In addition, we have commitments to supply products to customers in the amount of $1,266,000 which have been paid for in advance.

     Capital expenditures were significantly higher in 2001 than historical levels, and further investments in capital expenditures may be necessary to facilitate our anticipated growth in operations. We anticipate the need for additional space for our manufacturing operation in San Diego in 2002 and we are currently evaluating options. We may also require a larger inventory of raw materials and products to provide better service to our customers. Any such increases can be expected to reduce cash and cash equivalents.

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     We currently anticipate that existing cash balances and cash from operations will be sufficient to meet our anticipated working capital and capital expenditures through at least 2002. Our future capital requirements depend on numerous factors, including but not limited to:

	•		magnitude of our future losses;
	•		timing and terms of new technology licensing agreements or other strategic relationships that may provide up front license fees or other payments;
	•		resources that we devote to research and development and sales and marketing in support of our business strategy; and
	•		capital expenditures necessary to expand manufacturing capacity.

     In the event that we need to seek additional equity and/or debt capital in the public or private markets, there can be no assurance that such financing will be available to us on favorable terms, or at all.

Recent Accounting Pronouncements

     In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, which was amended by FAS 138 “Accounting for Certain Derivative Instruments and Certain Hedging Activity.” These statements require that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The company does not use derivative instruments, therefore the adoption of these statements did not have any effect on the Company’s results of operations or its financial position upon adoption January 1, 2001.

     In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies the criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

     Epoch was required to adopt the provisions of Statement 141 immediately and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 continued to be amortized until the adoption of Statement 142.

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     As of the date of adoption, Epoch had unamortized goodwill in the amount of $2,132,000 and unamortized identifiable intangible assets in the amount of $2,366,000 all of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $15,000 for the year ended December 31, 2000 and $155,000 for the year ended December 31, 2001.

     We currently do not expect to record an impairment charge upon completion of the initial impairment review. However, there can be no assurance that at the time the review is completed a material impairment charge will not be recorded.

     Long-lived assets including goodwill, other intangible assets, property and equipment, and investment balances are reviewed for possible impairment whenever significant events or changes in circumstances, including changes in our business strategy and plans, indicate a potential impairment may have occurred. An impairment is recorded when the sum of the expected future undiscounted net cash flows identifiable to that asset or group of assets is less than book value. Impairment losses are determined based on net realizable values or projections of net cash flows. Interest is not accrued on impaired loans unless the estimated recovery amounts justify such accruals.

     In October 2001, the FASB issues SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, to be effective for fiscal years beginning after December 15, 2001. SFAS No. 144 supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets to Be Disposed Of. Other than extending discontinued operations treatment, previously applied only to operating segments, SFAS No. 144 does not fundamentally alter the provisions of SFAS No. 121. As this statement will be implemented prospectively the Company cannot determine the effect to its financial statements as a result of adopting this standard.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

     Our financial instruments include cash and short-term investment grade debt securities. At December 31, 2000 and 2001 the carrying values of our financial instruments approximated their fair values based on current market prices and rates. It is our policy not to enter into derivative financial instruments. We do not currently have material foreign currency exposure as our international transactions are minimal and the majority of our international transactions are denominated in U.S. currency. Accordingly, we do not have a significant currency exposure at December 31, 2001.

ITEM 8. Financial Statements and Supplementary Data

     The financial statements required by this item begin on Page F-1 of this Report.

ITEM 9. Changes in And Disagreements with Accountants on Accounting and Financial Disclosure

     Not applicable.

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PART III

ITEM 10. Directors, and Executive Officers of Epoch.

     The information required hereunder is incorporated by reference from the information contained in the sections entitled “Directors,” “Other Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy Statement for its 2002 Annual Meeting of the Stockholders to be held on May 23, 2002 to be filed with the Securities and Exchange Commission.

ITEM 11. Executive Compensation

     The information required hereunder is incorporated by reference from the information contained in the sections entitled “Compensation of Executive Officers,” “Option Matters,” “Employment and Severance Agreements” and “Directors Fees” in the Company’s definitive Proxy Statement for its 2002 Annual Meeting of the Stockholders to be held on May 23, 2002 to be filed with the Securities and Exchange Commission.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Matters

     The information required hereunder is incorporated by reference from the information contained in the section entitled “Security Ownership of Certain Beneficial Owners and Management” in Epoch’s definitive Proxy Statement for its 2002 Annual Meeting of the Stockholders to be held on May 23, 2002 to be filed with the Securities and Exchange Commission.

ITEM 13. Certain Relationships and Related Transactions

     The information required hereunder is incorporated by reference from the information contained in the section entitled “Certain Relationships and Related Transactions” in Epoch’s definitive Proxy Statement for its 2002 Annual Meeting of the Stockholders to be held on May 23, 2002 to be filed with the Securities and Exchange Commission.

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PART IV

ITEM 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K

     The following documents are filed as part of this Form 10-K:

(a)

Documents filed as part of this report:

	(b)		Reports on Form 8-K:
			None

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Power Of Attorney

     Each person whose signature appears below hereby authorizes Bert W. Hogue and/or William G. Gerber, as attorney-in-fact, to sign in his behalf and in each capacity stated below, and to file, all amendments and/or supplements to this Annual Report on Form 10-KSB.

Signatures

     In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: March 28, 2002

EPOCH BIOSCIENCES, INC. (Registrant)

By:

/s/ Bert W. Hogue Bert W. Hogue Vice President, Secretary, and Chief Financial Officer

     In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons of the registrant in the capacities and on the dates indicated.

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Epoch Biosciences, Inc.
Index to Financial Statements and
Financial Statement Schedules
(Item 14(a)(1) and 14(a)(2)

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Independent Auditors’ Report

The Board of Directors and Stockholders
Epoch Biosciences, Inc.

We have audited the accompanying balance sheets of Epoch Biosciences, Inc. as of December 31, 2000 and 2001, and the related statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects the financial position of Epoch Biosciences, Inc. as of December 31, 2000 and 2001, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.

KPMG LLP

Seattle, Washington
January 18, 2002

F-1

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Epoch Biosciences, Inc.

Assets

See accompanying notes to financial statements.

F-2

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Epoch Biosciences, Inc.

See accompanying notes to financial statements.

F-3

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Epoch Biosciences, Inc.