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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NO. 000-30469
DECODE GENETICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3326704
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
LYNGHALS 1, REYKJAVIK, ICELAND
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
+ 354-570-1900
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the equity stock held by non-affiliates
of the Registrant: $296,036,957 at January 23, 2001 based on the last sales
price on that date.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of January 31, 2001.
CLASS NUMBER OF SHARES
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Common Stock, $.001 par value 45,066,969
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement to be filed with respect to the Annual Meeting of
Stockholders to be held on June 15, 2001 is incorporated by reference into Part
III.
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PART I
ITEM 1. BUSINESS
OVERVIEW
deCODE is a genomics and health informatics company which is developing
products and services for the healthcare industry. We develop and apply modern
informatics technology to discover new knowledge about health and disease
through data-mining.
Our approach to the discovery of healthcare knowledge brings together three
key types of anonymous population data derived from the Icelandic nation:
information from the healthcare system, information about relationships among
individuals covered by this system and associated molecular genetics data.
Our business model is based on four sets of information:
- genealogy records of almost all living Icelanders and most of their
ancestors for whom records exist, dating back in some cases to the
settlement of Iceland in the ninth century;
- genotype data from consenting Icelanders;
- the Icelandic Health Sector Database, which we plan to create and operate
from healthcare records of Icelanders pursuant to the Icelandic Health
Sector Database license; and
- other public and proprietary data to which we have access.
Our three avenues of commercialization are as follows:
Discovery Services. We believe that the development and application of
proprietary bioinformatics tools in the context of an appropriate population
will accelerate our ability to discover disease-related genes and associated
drug targets. We have adopted this strategy to derive value both from diagnostic
and therapeutic products and from pharmacogenomic services. We are currently
working on discovery in collaboration with F.Hoffmann-La Roche, or Roche, and in
our own research programs. We expect to seek additional partners for this
business unit from among pharmaceutical and biotechnology companies.
Database Services. We are developing the deCODE Combined Data Processing
system, a tool which, subject to ongoing compliance with regulatory
requirements, will cross-reference genealogical records, data from the Icelandic
Health Sector Database and genotypes of consenting participants. We plan to
develop the deCODE Combined Data Processing system to generate knowledge about
diseases and their genetic risk factors, disease management, the interplay
between environment and disease, and outcomes and resource use in delivering
healthcare.
Healthcare Informatics. The third unit of our business, healthcare
informatics, is derived from our discovery and database services. We expect the
products of this business unit to result from knowledge and experience acquired
in our two principal business units, discovery services and database services.
In the future, the integration of genetics and medicine will add a new level of
complexity to the decision making process in the delivery of healthcare. The
need for medical decision-support systems for healthcare providers is expected
to increase over the next several years. We are developing medical
decision-support systems, which will include insights from the deCODE Combined
Data Processing system, for healthcare providers and we will seek to
commercialize bioinformatics tools developed in our gene and drug target
discovery efforts. We also plan to provide privacy protection products based on
our expertise in encryption tools for complex and sensitive medical and genetic
data.
In this report, references to us refer to us and our wholly-owned
subsidiary, Islensk erf(LOGO)agreining ehf., and its subsidiaries deCODE cancer
ehf. and Encode ehf., each an Icelandic private limited company.
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SCIENTIFIC BACKGROUND
In February 2001, Celera Genomics and the Human Genome Project presented
the initial sequencing and analysis of the human genome. The next great
challenge is to transform these raw sequence data into specific knowledge about
disease and healthcare.
GENOMICS
The blueprint of all biological activity, which consists of
deoxyribonucleic acid, or DNA, is located within the nucleus of every cell and
is commonly referred to as the genome. The genome is the total DNA content of an
organism. DNA is composed of four bases. The sequence or order of these bases is
the code that ultimately determines structure and function in all organisms. The
human genome is broken up into 23 pairs of chromosomes and every individual
inherits a set of 23 chromosomes from each parent. Genes are segments of DNA
located throughout the genome. The human genome consists of approximately three
billion bases and has been estimated to contain 30,000 - 35,000 protein-coding
genes. Each cell uses or "expresses" only those genes (approximately 30% of the
30,000 - 35,000 genes) necessary for its specific role. Accordingly, different
types of cells express different sets of genes.
When a gene is turned on or expressed, it produces a derivative copy of its
DNA sequence called messenger RNA, which is used as a template to direct the
production of a protein. Proteins are large molecules composed of amino acids
and control all biological processes. The order of the bases in DNA determines
the order of amino acids in a protein. Proteins in turn make up molecular
pathways, which cells use to carry out their specific functions. Diseases can
occur when a mutated or a defective gene upsets or blocks a molecular pathway in
a normal biological function. The ability to detect a mutation and to understand
the process by which it contributes to disease is crucial to understanding the
fundamental mechanisms of a disease. In the simplest form, genetic diseases
result from a mutation in only one gene and the disease is usually passed from
generation to generation. Common diseases are thought to have a complex genetic
basis; they generally skip one or more generations and may result from
interactions between genes or from the interaction between genetic and
environmental factors.
The human genome sequence is now nearly completed and has been estimated to
contain 30,000 -- 35,000 protein-coding genes and more than two million markers
to help map disease-causing genes. We believe that by itself, this knowledge is
of limited value and that the importance of this discovery will only reach its
full potential if this sequence data is explored along with detailed knowledge
about health history, genetic profile and genealogy.
POPULATION GENOMICS
Population genomics is a field of genomics which applies modern genetic and
molecular biology techniques to an entire population to discover how genetic
factors contribute to the cause of diseases. Since almost all common diseases
have a genetic component, the discovery of the cause of disease can often be
reduced to finding the gene or genes mutated in patients who have the disease as
compared to those who do not. Since this approach does not require a
preconceived notion about which tissues or proteins or genes are important in
the disease, it represents a systematic strategy for creating specific knowledge
about disease. We believe that the challenge is to find a population which is
small enough to allow the necessary cooperation but large enough to deliver
meaningful results.
FUNCTIONAL GENOMICS
Functional genomics is a field of genomics that attempts to determine the
manner in which disease genes specifically impact the disease process. It is the
study of the function of genes, including how expression of a particular gene is
regulated and the function of the protein that the gene encodes. Researchers
employing functional genomics techniques may analyze large numbers of genes to
compare patterns of gene expression in diseased and healthy tissues or may
compare genes in humans to those in other species, in each case in an effort to
determine the molecular pathways that cause disease.
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GENOMICS AND HEALTHCARE PRODUCTS
Genomics and Diagnostics. Gene-based diagnostic tests for both disease
diagnoses and management represent an important tool that physicians can use to
identify and monitor patients with increased risk of a disease. These tests can
complement clinical tests and may lead to more cost-effective use of expensive
tests and to a greater level of accuracy. Knowledge of predisposition towards a
disease may allow patients to alter their lifestyles or to take medication that
prevents the disease.
Genomics and Therapeutics. The lack of precise knowledge about the causes
of diseases makes it difficult for the pharmaceutical industry to select targets
for new drugs. Identifying specific disease genes may result in very specific
and, therefore, potentially more valuable drug targets than are otherwise
available. The disease gene products themselves may be attractive drug targets.
In addition, they mark a key molecular pathway that is composed of several other
potential drug targets.
Genomics and Drug Response. The efficacy and safety of existing and new
drugs may be enhanced by pharmacogenomics. Pharmacogenomics is the application
of genomics technology to the analysis and identification of genes involved in
drug response. It is believed that genomics will permit the identification of
the genetic differences that cause people to respond differently to the same
drugs. This may lead to tailor-made treatments for individuals, maximizing
efficacy and minimizing side effects.
deCODE'S UNIQUE APPROACH
POPULATION GENOMICS AND THE VALUE OF THE ICELANDIC POPULATION
We believe that our unique approach, coupled with the application of
extensive bioinformatics to population genomics, has a number of distinct
advantages because of the following characteristics of the Icelandic nation:
Extensive Genealogy. Genealogy is a national pastime in Iceland. According
to Icelandic history books and old manuscripts from as early as the thirteenth
century, Iceland was settled in the ninth and tenth centuries. Since very early
stages of their history, Icelanders wrote detailed accounts of Icelandic facts
and events, including genealogy. The library of the University of Iceland and
other institutions contain manuscripts on genealogy dating from the middle ages,
which form a bridge between the time of settlement and official records kept in
the Icelandic National Archives from the time when church and government
officials began systematic registration of the population in the seventeenth
century. Numerous sources of genealogical information, including parish records,
census data and written manuscripts, such as the Icelandic sagas, are readily
available. Genealogical data can facilitate the identification of genes that
cause a specific disease by enabling researchers to compare the genes of family
members with and without the disease over the generations. The genealogical data
can go back as far as 35 generations and we believe it provides sufficient
genealogical information for our purposes. In addition, the fact that there has
been little immigration means that most Icelanders living today are descendants
of the original "founding" settlers and can, therefore, trace their ancestry to
the early middle ages.
Relative Genetic Homogeneity. Diseases which are prevalent in developed
countries, such as cancer and heart disease, have a large number of genetic
causes. In an isolated population that is genetically simpler, the number of
genetic causes is likely to be fewer than in more genetically diverse
populations. Thus, studying a more homogeneous population, like the Icelanders,
simplifies the problem of finding and subsequently understanding disease genes
and mutations causing common diseases. The Icelandic population was founded by
Norwegian and British settlers who arrived in Iceland in the ninth and tenth
centuries. Because Iceland has experienced little immigration over the last
eleven centuries, most of the 280,000 living Icelanders are descended from these
original "founding" settlers. Our ability to trace the Icelandic population back
approximately 1,100 years also facilitates gene discovery. Specific genes are
associated with the appearance and existence of specific diseases. For example,
the BRCA2 gene is known to carry mutations in some individuals that can cause
breast cancer. Because many present-day Icelanders may share a gene carrying a
mutation that causes a particular disease with one of the founding settlers,
they may also have such "disease gene" in common with other Icelanders. We can
make use of this "founder" effect to facilitate the
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identification of disease genes. It has been demonstrated that the disease genes
found in Iceland are, in general, also found in other populations. Even if the
disease genes in Iceland are different from those found in other populations,
the identification of any disease gene can lead to discovery of a key molecular
pathway likely to be involved in the disease and, consequently, to the discovery
of disease genes in other populations which cause anomalies in the particular
pathway. Therefore, we believe the discovery of a disease gene in Iceland may
enhance the identification of drug targets for any population.
Centralized Healthcare System. Iceland has had a centralized national
healthcare system since 1915. It presently consists of a base of 55 primary care
centers, a large University hospital in Reykjavik which has recently been formed
on the basis of a merger of the country's two largest hospitals, one central
hospital in Akureyri, and several smaller ones. Outside the primary care
centers, the healthcare system is highly specialized. Specialty clinics care for
most of the patients with major illnesses. Our clinical collaborators work at
these specialty clinics, as well as in the major hospitals. This centralization
of the healthcare system means that the data is centralized and easily
accessible for scientific research.
Well-educated Population. The level of public education is high in Iceland
and illiteracy is negligible. Historically, the Icelandic population has been
cooperative when approached by physicians and scientists working on biomedical
research in the Icelandic community.
We believe that the Icelandic population meets the criteria of being small
enough to allow necessary cooperation but large enough to deliver meaningful
results. While the Icelandic population is characterized by relative genetic
homogeneity, it is large enough to prevent an increased incidence of recessive
genetic conditions which can arise as a result of intermarriage. At the same
time, the population is small enough, and the amount of immigration is limited
enough, that the total genome of Icelanders is less variable than the genomes of
larger, less historically isolated nations.
Comparison to Other Approaches
Some companies are using an approach to locate disease genes that relies on
correlating DNA variations such as single nucleotide polymorphisms, known as
SNPs, throughout the genome or in candidate genes to patients. We believe that
this approach is analogous to searching for a single needle that is present in
one of a hundred haystacks. We believe that our population genomics approach
will allow us to find the haystack using our large families before we begin
searching for the needle using SNPs and other variations to narrow down or
fine-map genes.
Other companies are using functional genomics to help select potential drug
targets. Most of these approaches depend on expression analysis using DNA chips
that compare the genes turned on or off in diseased tissue with those in normal
tissue. We, on the other hand, apply functional genomics more selectively,
focusing on the disease genes identified through our population genomics
approach to more specifically define their molecular pathways.
There may be some limitations to our population genomics approach because
disease genes found in Iceland may not always be directly relevant in other
populations, although there is much overlap in disease genes that have been
found in Iceland over the last 15 years and the rest of the world. The Icelandic
population is probably too small to study diseases that are not common. However,
our aim is to continue to focus on the diseases in Iceland that have the
greatest public health prevalence worldwide.
DISCOVERY SERVICES
The extensive genealogy database and associated bioinformatics that we have
built in Iceland are the core of our novel genealogical approach to identifying
human disease genes and associated drug targets.
We believe that working with the Icelandic population puts us in a position
to accelerate the discovery and development of new proprietary diagnostic and
therapeutic products capable of addressing diseases at their root causes, rather
than simply identifying and treating their symptoms. These programs may permit
doctors to make earlier diagnoses, use healthcare resources more
cost-effectively and select safer and more effective drugs for patients on the
basis of their genetic make-up.
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The genealogical approach that we have developed depends on a genealogical
database and bioinformatics tools that we have built. In the study of any
particular disease, we first define the disease classification broadly but
rigorously. (For example, we first labeled stroke patients as "stroke" rather
than as a series of less common subtypes of stroke). After our clinical
collaborators compile a list of all patients who have been diagnosed with the
disease, the list is encrypted and run through our genealogy database which
yields very large extended families of patients, sometimes containing hundreds
of individuals. The genealogy naturally links together those patients who are
likely to share a gene or genes for the disease. The patients are genotyped to
determine which genes or pieces of chromosomes they have in common. The
genealogical approach compensates for the inadequacies of "consensus criteria"
for disease classification, which utilizes specific symptoms accepted by a
consensus committee of physicians to determine who is "affected" by the disease,
and increases the chance that the form of the disease studied is the one
actually inherited. We believe that no other organization uses genealogy in this
manner. Our unique approach to human genetics has allowed us to map genes in
diseases in which many others have previously failed. By using this approach, we
expect to be able to assign function to the raw data contained in the human
genome sequence.
The following describes our approach to gene discovery.
Genetic Mapping
We have developed an extensive computerized genealogy database that
currently includes approximately 620,000 individuals or almost all the
approximately 280,000 living Icelanders along with most of their ancestors for
whom records exist. This represents most of the Icelanders who are known through
records ever to have lived in Iceland. Research that our scientists conducted on
26 extended families containing hundreds of individuals, which the American
Journal of Human Genetics published in its May 2000 issue, showed that the
accuracy of maternal connections in the database is 99.3%.
Before we start a study looking for genes that cause or contribute to a
particular disease, we obtain approvals from both the Icelandic Bioethics
Committee and the Data Protection Authority. All patients who participate in our
research program by giving a blood sample sign an informed consent form approved
by the Bioethics Committee. We have developed a sophisticated encryption system
to protect the personal privacy of all participating volunteers.
In our present disease-based research projects the first step of our
genealogical approach is for our clinical collaborators to compile a list of
patients who have been diagnosed with a particular disease in Iceland. After the
patient list has been encrypted, it is sent to us and run through an encrypted
version of our genealogy database. The genealogy database and associated
data-mining tools that we have developed enable us to determine the
relationships among all members of a large patient list and demonstrate
information flow through the generations.
Using DNA from participating patients and their relatives, who grant us
informed consent, we are able to generate high-resolution genotypes with our
genotyping facility using 1,000 microsatellite markers. A microsatellite marker
is a segment of DNA containing variable short repeats that can be used to derive
a genotype. Our high-throughput genotyping facility and bioinformatics systems
substantially decrease the amount of labor involved in reading the genotypes.
We have developed a statistical informatics program that is used to
determine which portion of the genome is shared among most or all of the
patients within a family. This technique can systematically screen every segment
of the human genome for shared genotypes and can narrow the location of a
disease gene or genes to a small fraction (1/1000) of the human genome. That
segment marks the location of the disease gene that is mutated in the patients
with the disease. We use stringent criteria to determine that we have
successfully found a disease gene location before moving onto the next step of
gene discovery.
Physical Mapping, Fine-Mapping, and Sequencing
Once we have narrowed the chromosomal region containing the disease gene to
two to three million base pairs, we develop a higher resolution map. To
accomplish this, we construct a physical map using large
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overlapping pieces of human DNA. We have developed an automated high-throughput
physical mapping method which is based on sophisticated proprietary software we
have developed and uses robotics. By integrating a robust hybridization system
(i.e., matching of a small piece of DNA to large segments of DNA), automated
analysis of the hybridization data and data-mining techniques, we construct a
high-resolution map of the human genome.
We use low-resolution and high-resolution physical maps to find new
microsatellite markers and genetic variations known as single nucleotide
polymorphisms, or SNPs which allows us to create more precise sets of genotypes
of the patients. SNP markers differ from microsatellite markers in several ways.
SNPs represent a single base change in the genomic sequence and microsatellite
markers represent short repeats of sequence. Microsatellite markers contain more
information than SNPs (one microsatellite marker typically contains three to
five times more information than a SNP) and, therefore, are well-suited for our
genetic studies using large families. Currently, the cost of genotyping
microsatellite markers is much less than genotyping SNPs (especially given the
relative information content). However, the SNPs are more numerous than
microsatellite markers and therefore more useful for fine-mapping and
association studies.
Many patients may share several closely spaced genotypes which serve to
narrow the region containing a disease gene. We believe that the relative
genetic homogeneity and the age of the Icelandic population will enable us to
reduce the size of the chromosomal region containing the disease gene to as few
as 250,000 base pairs. We believe that this segment would generally contain
fewer than ten candidate genes, thus reducing the amount of time required to
screen the genes for mutations.
Once we have narrowed a region, we sequence this narrow region using
automated DNA sequencers and then use our bioinformatics tools to identify new
genes. The genes are screened in turn for mutations that occur in patients with
the disease and rarely in those without. Typically, only one gene in this
segment will be the disease gene, but we may find disease genes on other
chromosomes that can be discovered in the same manner. We believe that our
ability to go from gene mapping to disease gene identification will be further
enhanced as the sequencing of the human genome is completed.
Functional Genomics
After we have succeeded in identifying a disease gene using our population
genomics approach, we seek to define molecular pathways in which the disease
gene plays a role. This is essential information both for understanding the
biology of the disease and also for identifying additional specific drug targets
that interact with the disease genes.
We have established three complementary systems designed to isolate
specific drug targets from "upstream," "downstream" and "proximal" pathways that
may be involved in the disease process. We believe these three functional
approaches will expand the number of potential drug targets that are associated
with the specific disease genes identified using our population genomics
approach.
Our proximal analysis identifies proteins that physically interact with the
disease gene product. As very few proteins work alone in the body, these partner
proteins are likely to be involved in the normal biology of the disease gene. We
carry out the screening in yeast cells, using methods which involve increasing
stringency in order to eliminate false positive protein-protein interactions. We
are also able to crossmatch the genes identified as partners of the first
disease gene with additional population genomics data since they might be
mutated in the same disease.
Potential drug targets from upstream pathways include proteins that control
the expression level of the disease gene (i.e., those gene products that are
responsible for turning the disease gene on or off in particular tissues or
under particular conditions). We plan to link the control region of newly
identified disease genes to a "reporter" gene and establish precisely which
region governs expression. DNA from this region will be used to retrieve
specific binding proteins that are responsible for turning the disease on.
Finally, we plan to perform gene expression analysis using Affymetrix GeneChip
technology to validate our conclusions and to identify other genes which are
regulated in tandem with the disease gene.
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Our downstream analysis is designed to uncover genes that are influenced by
the overexpression, underexpression or misexpression of the disease gene. We
have established efficient systems to turn a gene on or off in cells, as well as
to express mutated versions revealed in the course of gene discovery. We employ
DNA chip technology in our efforts to find genes whose expression patterns are
altered by different scenarios of disease gene expression. Some of these genes
may play a role together with the disease gene product in disrupting the normal
biology and leading to disease.
DATABASE SERVICES
The main focus of our database services will be first on the development
and then on the operation of the deCODE Combined Data Processing system.
Description of the deCODE Combined Data Processing system
We believe that the deCODE Combined Data Processing system will represent
the first opportunity in the world to cross-reference genetic, phenotypic and
genealogic data on a large scale. We intend to design it to enable users to pose
specific queries to it through a software program, or query layer, which will
process the request. With these tools, we expect users to be able to query the
various data sets cross-referenced by the deCODE Combined Data Processing
system. The users' interactions will be confined to the query layer; users will
not have direct access to the data accessed by the deCODE Combined Data
Processing system.
We believe that the deCODE Combined Data Processing system will permit
users to build more complete models of the interplay of genes, environment and
disease than are currently available primarily as a result of the following:
- the healthcare data contained in the Icelandic Health Sector Database
will include not only basic disease diagnosis but also details of
laboratory results, treatments and outcomes;
- the Icelandic Health Sector Database will contain a population rather
than the handpicked patient lists used in existing approaches; and
- the Icelandic Health Sector Database will contain medical information
collected over time.
There are three sources of data for the deCODE Combined Data Processing
system, which are as follows:
Data from the Icelandic Healthcare System. Under the terms of the
Icelandic Health Sector Database license we will be able to process medical
information, environmental exposure information and resource use information
from the Icelandic healthcare system. The key data sources include:
- hospitals and ambulatory services;
- primary healthcare centers;
- private specialty clinics; and
- hospital and private laboratory results.
A computerized network of medical records will be organized in each
participating healthcare institution. Information processed in the Icelandic
Health Sector Database will take place in a manner designed to ensure that
personal data remains non-personally identifiable. The type of healthcare data
will include admission data, diagnostic work-up and results, diagnoses,
treatment and operations for each patient visit, medical and social history,
allergies, risk factor exposure, pharmaceutical treatment and outcomes.
Genealogy Data. The deCODE Combined Data Processing system will access the
same genealogy database that we use in our current discovery services.
Genotypic Data. We plan to derive genotypes of consenting Icelanders who
give us blood samples in accordance with applicable regulations and consent to
have their genotypic data stored and cross-referenced with the Icelandic Health
Sector Database.
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Our genealogy database is complete for our applications. We are in the
early stages of development of the other two sources of data for the deCODE
Combined Data Processing system.
The License
On December 17, 1998, the Icelandic parliament passed the Icelandic Health
Sector Database Act, or the Act, allowing the Ministry of Health and Social
Security, or the Ministry, to grant an operating license to create and operate
the Icelandic Health Sector Database. On January 22, 2000, the Ministry granted
the Icelandic Health Sector Database license (the "License") to Islensk
erf(LOGO)agreining ehf., our wholly-owned Icelandic subsidiary. The License,
which has a term of twelve years, allows us to collect data from medical records
of Icelandic healthcare institutions and self-employed health professionals, and
to transfer such data in encrypted form into a centralized database containing
non-personally identifiable information. It also permits us to cross-reference
the Icelandic Health Sector Database data with genealogical data and genotypic
data obtained through consent.
The Act provides that patients may request at any time, by giving notice to
the Icelandic Director General of Public Health, that information about them not
be entered into the Icelandic Health Sector Database. As required by the Act,
the Director General of Public Health has prepared forms for the giving of such
notice and has distributed these forms to healthcare institutions and to the
offices of self-employed health professionals.
Pursuant to the terms of the License and the Act, before we can begin
collecting information and transferring it into the Icelandic Health Sector
Database, we must fulfill numerous conditions, such as paying fees and costs
associated with the License and obtaining government approval of our privacy
protection measures, and must enter into agreements with healthcare institutions
and self-employed health professionals allowing us access to their medical
records. Some medical professionals, including the board of directors of the
Icelandic Medical Association, and the World Medical Association have opposed
some aspects of the Icelandic Health Sector Database on ethical and privacy
grounds. The Icelandic Medical Association presented its opposition to the Act
before the World Medical Association Council Session in April of 1999. The World
Medical Association publicly announced its support for the Icelandic Medical
Association's opposition shortly thereafter. At its October 1999 annual general
meeting, the Icelandic Medical Association adopted resolutions declaring its
opposition to the Act based on ethical issues, which include doctor-patient
confidentiality and privacy concerns. We do not believe that these views are
representative of the Icelandic medical profession as a whole or that they will
materially affect our ability to enter into such agreements. To date we have
entered into 9 such agreements with health institutions. Once we have entered
into the required agreements, an independent security expert must verify that
our information systems and operating procedures comply with the data security
requirements of the Icelandic Data Protection Authority, or the Authority,
before we can process the data we obtain from these healthcare providers.
In addition to the scrutiny of the Authority, we believe that our security
system for the Icelandic Health Sector Database will benefit from the advice and
monitoring of deCODE's Security Advisory Board of internationally renowned
experts in the fields of computer security, data and privacy protection and
security of healthcare informatics. We expect this board of experts to meet
periodically to review any security issues we may encounter in our operations
and in the development and operation of the Icelandic Health Sector Database and
the deCODE Combined Data Processing system and to provide us with technical
advice for solving such issues and maintaining or exceeding international best
industry-practice standards.
HEALTHCARE INFORMATICS
Physicians are routinely required to cross-reference specific details
regarding their individual patients with their general knowledge of best medical
practice in clinics and hospitals. We believe that one of the main challenges
facing physicians today is how to deal with the vast and growing amount of
medical knowledge. In addition, the number of medical tests ordered and drugs
that patients take are leading to more information stored per patient. Some
hospitals and clinics have begun to use information technology to help store
patient records. However, the actual analysis and decision-making about
diagnosis and treatment is still mostly carried
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out by the un-aided human mind of the physician combining general medical
knowledge with specific patient data.
While this approach has worked well in the past, we believe it is an
increasingly difficult task which sometimes leads to delays in diagnosis and
medical mistakes. The complexity of physicians' decision-making may increase in
the future if genetics is integrated with the delivery of healthcare in the form
of predictive testing and treatments tailor-made to individual patients.
We believe that the "information load" on physicians will continue to grow
as the genetic dimension of healthcare leads to risk prediction and a shift from
generalized treatment guidelines to personalized care. This trend toward
personalized healthcare presents the following three opportunities in healthcare
informatics:
- We will use the knowledge that we gain from our discovery programs and
the deCODE Combined Data Processing system to provide medical
decision-support systems necessary to deliver and interpret this
increased volume of data to a variety of end-users.
- We will use our experience in privacy protection in the deCODE Combined
Data Processing system to meet the increased need for privacy solutions
that will accompany the increased volume of personally sensitive
healthcare information.
- We will use our expertise in the gene and drug target discovery unit to
develop and market bioinformatics tools.
We also plan to pursue market opportunities for other software tools that
we intend to develop during the design and construction of the Icelandic Health
Sector Database and the deCODE Combined Data Processing system and that we have
developed in our disease gene discovery efforts, including GeneMiner, DecodeGT
and a comprehensive sample database.
OUR STRATEGY
Our strategy is to use its population-based approach to transform genomic
and healthcare data into products and services for the healthcare sector. The
key elements of our strategy are as follows:
Gene and Drug Target Discovery. We plan to pursue gene and drug target
discovery and the characterization of genes that contribute to the causes of
common diseases. In addition, we will use studies of gene expression and
protein-protein interaction systems to define molecular pathways, which may
contain drug targets. We will focus on diseases that have the potential to
result in the discovery of new proteins and drug candidates. We will also seek
to identify disease genes for the purpose of developing diagnostic products.
Database Subscription and Consulting Services. We expect to build and
operate the deCODE Combined Data Processing system, which is intended to process
and cross-reference non-personally identifiable healthcare information on the
Icelandic population (in the Icelandic Health Sector Database) with genealogy
data and genetic data obtained through consent. In addition, we are developing
new mathematical algorithms to extract further knowledge from the deCODE
Combined Data Processing system. Services we plan to offer to future subscribers
of the deCODE Combined Data Processing system will include principally gene
discovery and drug target prioritization, pharmacogenomics, disease management
and health management. We expect subscribers to include pharmaceutical
companies, healthcare organizations, national health services and government
agencies that will pay subscription fees and, in some cases, development
milestones and a share of product revenues they generate as a result of using
the database.
Pharmacogenomics Partnerships. In collaboration with pharmaceutical
companies, we intend to apply pharmacogenomics to understand differences in drug
response among individuals. We believe that genomics will permit the
identification of the genetic differences that cause people to respond
differently to the same drugs and that, as a result, it will be possible to
individualize the selection of drugs for patients. We believe that the
integration of medical treatment and outcome information with genetic
information will give us an advantage in the generation of pharmacogenomics
information.
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Sale and Marketing of Healthcare Informatics Products. We plan to exploit
market opportunities for software tools that we develop during the design and
construction of the Icelandic Health Sector Database and the deCODE Combined
Data Processing system and in our disease gene discovery efforts. Software tools
that we have developed to date include GeneMiner, DecodeGT, an encryption
system, and a comprehensive sample database. We expect to offer healthcare
informatics services, such as medical decision-support systems and privacy
solutions. The decision-support tools would, for example, be useful in areas
such as medical record keeping and its standardization and in medical
decision-making. We may provide specialized services to customers such as
governmental agencies and medical institutions which will enable them to collect
and process information in a standardized form. We intend to capitalize on our
experience in the protection of privacy of medical and genetic data to market
systems for the protection of privacy in healthcare. The customers for these
services could include industry, public institutions and governments.
Formation of Collaborations. We intend to seek corporate collaborations or
joint ventures with pharmaceutical and biotechnology companies to provide
research alliances, product development and commercialization for our gene and
drug target discovery programs. We also plan to seek collaborators for the
development and marketing of our database and healthcare informatics products
and services.
PRODUCTS AND SERVICES
Our current services and those under development can be classified into
three categories, all of which are based on analyzing data from the Icelandic
population using our proprietary bioinformatics tools: discovery services;
database services; and healthcare informatics.
DISCOVERY SERVICES
Current Discovery Programs
We have started gene discovery programs associated with over 40 common
diseases, 12 of which are funded by Roche. The inheritance patterns of many
common diseases are complex, indicating that the diseases are probably caused by
mutations in multiple genes and/or through interactions between genes and
environment. We believe that these diseases represent large market opportunities
for therapeutic and diagnostic products because:
- their causes are not fully understood;
- current treatments are of limited effectiveness;
- there are currently no approaches to tailor treatment to cause; and
- large numbers of individuals are affected by these diseases.
We expect the identification of disease genes to provide insights into the
causes of common diseases and to help the development of highly specific
diagnostic and therapeutic products, including small molecule products,
recombinant proteins, gene therapy and antisense therapy. A brief description of
several of our discovery programs follows.
Autoimmune Diseases. We are currently studying several autoimmune diseases
such as inflammatory bowel disease (Crohn's and ulcerative colitis), psoriasis,
atopy and rheumatoid arthritis. All four are in large genome-wide linkage scans,
and we have found the location of a novel psoriasis gene.
- Psoriasis. Psoriasis is a chronic inflammatory disease that leads to
disfiguring skin lesions and arthritis. We have completed a genome-wide
linkage scan of Icelandic familial material and have confirmed linkage
and association to a region of the genome that regulates immune response
known as the MHC. Our genome-wide scan also identified a novel region of
the genome that interacts with the MHC to cause psoriasis. Our second
location represents the second gene mapped outside the MHC that fulfills
the criteria for genome-wide significance. We are in the process of
fine-mapping both gene locations.
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Cardiopulmonary Diseases. We are studying a variety of common diseases
such as asthma, chronic obstructive pulmonary disease, myocardial infarction,
peripheral vascular disease and stroke.
- Peripheral arterial occlusive disease (PAOD). PAOD is a vascular
disorder characterized by narrowing of the arteries of the arms and legs,
and obstruction of the blood flow. PAOD strikes between 2% and 5% of
people over the age of 65 worldwide and results in pain, diminished
mobility, the need for invasive surgery, and, in extreme cases, gangrene
and loss of the affected limbs. By conducting a genome-wide analysis of
1300 Icelandic PAOD patients and family members, deCODE researchers were
able to identify a small section of a single chromosome that shows
significant genetic linkage to the disease. The patients who participated
in the study were carefully selected by collaborating surgeons from the
Icelandic Society of Vascular Surgery working at Iceland's National
University Hospital. All had undergone previous angiography that
documented the nature and extent of vascular lesions, and most had
undergone surgery to bypass blocked arteries. The study marks an
important advance in identifying the genetic mechanisms contributing to
PAOD. A target has also been identified through analysis of a gene which
we have linked to PAOD. This achievement represents a research milestone
with Roche.
- Cerebrovascular disease (Stroke). Stroke represents diseases that
directly or indirectly affect the blood vessels in the brain and cause
central nervous system damage from either blockage of cerebral blood flow
or rupture of an intracranial artery. It is the third leading cause of
death. We have formed a research alliance with local physicians who care
for a majority of the stroke patients diagnosed in Iceland. We have
collected almost 2,000 DNA samples from informative families and
genotyped most of them. Using our genealogical approach, we have mapped
the location of one stroke gene that meets the criteria for genome-wide
significance. This represents the first gene ever mapped for the common
forms of stroke and for this achievement deCODE received a research
milestone from Roche.
Central Nervous System Diseases. We are studying the genetic basis for
psychiatric and central nervous system diseases.
- Alzheimer's Disease. Alzheimer's disease is the most common cause of
dementia. We have carried out a genome-wide scan that included 1,200
Icelanders and mapped a gene that contributes to the occurrence of
late-onset Alzheimer's disease. As a result of this discovery, we have
achieved a research milestone in our collaboration with Roche.
- Schizophrenia. Schizophrenia is a debilitating psychiatric disorder. We
have carried out a genome-wide scan with the participation of 400
Icelandic schizophrenia patients and we have identified a gene linked to
schizophrenia and two candidate disease genes. This accomplishment
represents a research milestone in our collaboration with Roche.
Metabolic and Other Diseases. We are studying the genetic basis for
osteoarthritis, non-insulin-dependent diabetes, osteoporosis and endometriosis.
- Osteoarthritis. Osteoarthritis is a degenerative disease of the joints.
There are currently no known genes causing the common forms of
osteoarthritis. We have mapped three genes linked to osteoarthritis. This
accomplishment represents a research milestone in our collaboration with
Roche. We are currently fine-mapping and sequencing these regions to
search for the disease genes themselves.
- Osteoporosis. Osteoporosis is a disorder of the bones characterized by
the progressive thinning and weakening of bone tissue. It generally
strikes people over the age of 50, and is four times more common in women
than in men, making it one of the most challenging medical problems in
women's health worldwide. We have mapped an osteoporosis gene to a small
chromosomal region as a result of a genome-wide scan conducted with the
participation of 139 Icelandic families, including more than 430 patients
and 600 unaffected relatives. The discovery marks a major advance toward
identifying one of the genes that, if present in a variant form,
contribute to this important disease. For this we received a research
milestone from Roche.
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Collaborations
Our strategy for pursuing business opportunities is to establish alliances
with pharmaceutical companies, biotechnology firms and other healthcare
institutions to perform research into the genetic basis of a given disease or
group of diseases. Depending on the nature of each prospective business
opportunity, we may conduct the research in return for one or more of the
following: up-front equity investments; direct payments for research funding;
payments upon the achievement of scientific milestones; shared or exclusive
rights to diagnostics and therapeutics; and royalties on products that our
collaborators market. In some instances, we may negotiate for access to our
collaborators technologies, for example libraries of chemical compounds, to
enhance our operations.
F.Hoffmann-La Roche. In February 1998, we entered into a research
collaboration and cross-license agreement with Roche to collaborate on the
discovery of genetic variations which affect the cause of diseases for the
purpose of developing new methods to diagnose diseases and obtain drug targets
useful in drug discovery. The agreement provides for a steering committee, the
membership of which is equally divided between the parties, to oversee the
collaborative research programs. The agreement requires us to conduct research
activities assigned by the steering committee and requires Roche to fund the
collaborative gene discovery programs in twelve diseases, including four
cardiovascular diseases, four psychiatric/neurologic diseases and four metabolic
diseases, by making specified payments according to a payment schedule. Roche's
obligation under the agreement to fund these programs will continue until
February 1, 2003 provided that Roche elects to extend the research term of the
agreement for the one-year period commencing on the fourth anniversary of the
agreement. During the research term, neither party may terminate the agreement
unless the other is in default. In addition to research funding payments, Roche
is required to make payments to us upon the achievement of specified scientific
development and marketing milestones. Under this agreement, we may receive
approximately $70 million in research funding and more than $130 million in
milestone payments that are linked to our progress in research efforts and
commercialization. The milestone payments may include, with respect to each
disease being researched, the payment of up to an aggregate of approximately
$5.75 million for early discovery efforts and the confirmation of the first,
second and third genes. Additional milestone payments are required in the event
we confirm additional genes with respect to each of the diseases. For each
therapeutic product, Roche is also required to make milestone payments of up to
an aggregate of $7 million for regulatory filings and approvals. Milestone
payments of up to $3 million are also required in connection with the commercial
sale of diagnostic products. As of December 31, 2000, Roche has paid or owes us
a total of approximately $52,425,000 million in research funding and milestone
payments. The costs of the collaboration with Roche which we have incurred
consist mainly of salaries, materials, equipment depreciation and other
facilities costs. We estimate that these costs were $23.2 million in the year
ended December 31, 2000, $21.9 million in 1999 and $12.7 million in 1998.
The agreement gives Roche exclusive worldwide rights to develop and
commercialize therapeutic and diagnostic products based on gene discoveries.
Roche is required to pay us royalties on sales of any such products until the
later of ten years from the first commercial sale or the last date on which the
product is covered by a patent. We retained the exclusive, worldwide rights to
develop and commercialize gene therapy and antisense products based on our gene
discoveries and will be required to pay Roche royalties on sales of any such
products. Because no products have yet been developed, we are unable to estimate
the amount of royalties which we may receive or be required to pay under the
agreement.
In connection with the agreement, Roche Finance Ltd., or Roche Finance, an
affiliate of Roche, purchased shares of our preferred stock and received an
option to purchase additional shares at any time prior to the end of February
2001. Roche Finance also purchased warrants to buy shares of our preferred stock
and received the right to purchase additional warrants if it exercised its
option to acquire additional shares of preferred stock. These became warrants to
purchase an equivalent amount of common stock upon the completion of our initial
public offering. In April 2000, Roche Finance transferred these shares, warrants
and options to an affiliate, SAPAC Corporation Ltd., or SAPAC. In June 2000,
SAPAC exercised its option and purchased 555,556 shares of our preferred stock,
which subsequently converted into an equivalent number of shares of common stock
and a warrant to purchase 55,556 shares of our preferred stock, which currently
allows for the purchase of the same number of shares of common stock.
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Pursuant to an agreement, we license our GeneMiner bioinformatic software
product to Roche.
In addition to the research collaboration with Roche, we have entered into
the following collaborations:
Partners HealthCare System, Inc. In May 2000, we entered into a strategic
alliance agreement and crosswalk development agreement with Partners HealthCare
System, Inc., The General Hospital Corporation, d.b.a. Massachusetts General
Hospital and The Brigham and Women's Hospital, Inc. (collectively, "Partners")
pursuant to which (a) we will fund research by investigators of Partners
pursuant to sponsored research agreements and/or clinical trial agreements to be
entered into from time to time, (b) we will collaborate with Partners on, and
provide funding for, development of an information technology bridge, called the
crosswalk, to facilitate studies with the deCODE Combined Data Processing system
and Partners' Research Patient Data Registry and (c) we will develop and market,
in consultation with Partners, new information technology products and services
relating to the use of the crosswalk for future pharmaceutical and biotechnology
applications. We do not believe that the amount of funding we have agreed to
provide over the term of the agreements is material to us.
The strategic alliance agreement provides that a steering committee, the
membership of which is equally divided between the parties, will oversee the
alliance (including the development of the crosswalk) and select the research
projects and/or clinical trials that we will fund at Partners. We will have an
exclusive option to acquire an exclusive license to any patents or copyrights
developed under such sponsored research or clinical trial agreements on
financial terms to be negotiated by the parties based on pre-determined criteria
contained in the strategic alliance agreement. Each party has the right to use
the crosswalk to facilitate studies with the databases for non-commercial
internal research purposes. Each party also has the right to use the crosswalk
to facilitate studies with such party's own database to conduct commercially
sponsored research. Partners is required to pay us a royalty on revenue it
receives from such use. In addition, we have the exclusive right to use the
crosswalk to develop and market products and services, and we are obligated to
pay Partners a royalty on revenue we receive from the sale of such products and
services. Because we have not yet developed such products or services and
Partners has not yet entered into any commercially sponsored research
agreements, we cannot estimate the amount of royalties we may receive or be
required to pay under the agreements.
The agreements are for a three year term, which, in the case of the
strategic alliance agreement, may be extended for an additional two year term by
the mutual agreement of the parties and, in the case of the crosswalk
development agreement, may be extended for an additional term to be agreed upon
by the parties. The agreements may also be terminated by either party if the
other party is in default. In addition, we may terminate the agreements under
certain circumstances, including infeasibility of the alliance or if the
alliance jeopardizes the mission or objectives of either party.
Other Hospital and Physician Collaborations. We have entered into
collaboration agreements and arrangements with the Icelandic Heart Association
and several physician groups. The goal of these collaborations is the discovery
of genetic factors which contribute to the genesis of certain disorders on which
the various physician groups maintain patient information. These collaborators
contribute data and/or other clinical information to the project, while we
provide our expertise in molecular genetics and experimental design, as well as
necessary equipment and research supplies. We are responsible for the
reimbursement of all expenses related to the projects. In addition, if we sell
the results of the project to a third party, we will make specified payments and
pay a portion of any performance-based milestones and royalties we receive from
these third parties to the physician groups. We have already sold the results of
many of these projects to a third party, Roche. As a result, we have already
paid approximately $5 million and, in addition, are obligated to pay
approximately $4 million over the remaining terms of these agreements, in
specified payments and milestone payments. We share the ability to make
management decisions regarding the projects with these collaborators, and we
jointly form executive or steering committees to monitor the projects. Our
collaboration agreements with these collaborators normally continue for a term
of no more than five years.
To further facilitate our research projects and enable us to construct
lists of patients with specific diseases, we have also entered into
collaboration agreements and arrangements with two of the largest hospitals in
Iceland, one of which was recently founded by merging the two formerly largest
hospitals in Iceland. Under the terms of these agreements, the hospitals
contribute research data, and surveillance
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committees that we jointly appoint with the hospitals monitor our projects. We
are obligated to pay all the hospitals' out-of-pocket expenses incurred as a
result of the collaboration. Our agreements with the hospitals will continue
until terminated by the parties.
We have also entered into agreements with 9 Icelandic health institutions
as required by the Icelandic Health Sector Database Act and License in order to
get data from those institutions into the Health Sector Database.
Pharmacogenomics
In November 2000, we acquired Encode, a wholly owned subsidiary, which will
focus on pharmacogenomics studies -- measuring the drug response according to
individuals' genetic profiles -- and on conducting clinical trials for new and
existing therapeutics. We plan to offer pharmacogenomic services to
pharmaceutical and biotechnology companies. In this way, we believe that we will
be able to assist pharmaceutical companies in tailoring drugs to specific parts
of the patient population. Tailor-made drugs will better ensure both
effectiveness and safety. In addition, genetic information may lead to faster
and more successful clinical trials, which may result in cost savings.
Pharmacogenomics may also enable pharmaceutical companies to explore the use of
older chemical compounds which have been abandoned. Because the development cost
of these compounds has already been incurred, the additional cost to bring these
products to market may be reduced.
Cancer
In November 2000, we founded deCODE Cancer ehf., a wholly-owned subsidiary
that will incorporate and expand deCODE's cancer research. By creating a
subsidiary with an exclusive focus on cancer, we believe that we will reinforce
the ability of our researchers to continue to develop the particular skills and
methods necessary for studying the complex biology involved in the study of
cancer. deCODE Cancer will also enjoy the flexibility to develop special
alliances, while at the same time continuing to leverage deCODE's resources for
population genomics research.
Internal Programs
We also plan to work on some diseases without partnering with
pharmaceutical companies, and we are currently pursuing a number of disease
projects independent of research sponsorships. In the event we complete any
independent projects, we intend to pursue the commercial development of our gene
and drug target discovery through the development and marketing of therapeutics
and diagnostic products. We may do this by using our own resources to turn
discoveries from our internal projects into therapeutic or diagnostic products
and developing our own marketing capabilities, by licensing our discoveries to
others who would be required to pay us royalties on sales of any products they
develop using the results of our gene discovery programs or by entering into
collaborative arrangements for the development and marketing of products from
these programs.
DATABASE SERVICES
The deCODE Combined Data Processing system is intended to allow users to
ask questions about relationships between genetic and environmental data and
disease. We believe the deCODE Combined Data Processing system may increase the
utility of human genome sequence data by providing a medical and environmental
context, which may facilitate the development of new products and services for
healthcare.
Products
Gene Discovery and Drug Target Prioritization. We expect pharmaceutical
and biotechnology companies to use the deCODE Combined Data Processing system in
gene discovery programs and drug target prioritization as a way of confirming
their own provisional findings or providing an impetus for further research. We
expect users to implement the deCODE Combined Data Processing system to search
the human genome for gene mutations that are linked to the occurrence of a
particular disease.
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Pharmacogenomics. We expect the deCODE Combined Data Processing system to
improve understanding of how drug response can vary across a population due to
underlying genetic differences. For example, a customer might search for a
region of the genome that appears to be shared by patients with similar drug
responses. Pharmacogenomic analysis with the deCODE Combined Data Processing
system is therefore an opportunity for pharmaceutical companies to market
products which more closely meet the needs of a diverse market.
Disease Management. The deCODE Combined Data Processing system is
positioned to provide new insights and help design disease management programs.
By carefully analyzing clinical data and correlating such data with genetic
factors, healthcare providers may develop programs that cover the lifespan of
the disease, from preventive actions to determining the most appropriate
treatments for each individual. For a healthcare provider, which is constantly
making the cost/quality tradeoff, this is a unique way to design programs which
optimize both cost and quality.
Health Economics. We believe that a major trend in healthcare is the shift
from managing disease towards maintaining individual health. Providers are under
pressure to stop focusing on therapeutic areas in isolation and to begin
considering an individual's risk of disease in general. In order to do this,
providers will need to understand inter-relationships between different
therapeutic areas and health indicators so that they can analyze the costs and
benefits of various treatments or behavioral modifications. We believe that the
deCODE Combined Data Processing system will naturally lend itself to this kind
of analysis by processing data across the major therapeutic areas as well as
information on well-being and lifestyle. For example, a customer may use the
deCODE Combined Data Processing system to analyze a particular preventive
measure known to reduce the risk of a target disease to see if that measure may
increase the patient's risk of developing other diseases.
Customers
We believe that the potential customer base for the deCODE Combined Data
Processing system consists of members of the healthcare industry, including:
- Pharmaceutical and Biotechnology Companies. Pharmaceutical and
biotechnology companies may use the deCODE Combined Data Processing
system in their gene discovery and pharmacogenomics programs.
- Health Organizations. Healthcare providers, including health maintenance
organizations, or HMOs, managed care groups and hospital groups may use
the deCODE Combined Data Processing system to help them determine the
most appropriate method of care for patients.
- National Health Services and Government Agencies. National health
services and government agencies may use the database to save money by
determining the most effective allocation of resources.
We anticipate that our customers will pay for access to the database by
means of a fixed subscription plus, in the case of pharmaceutical and
biotechnology companies, a share of any product revenues they generate as a
result of using the database.
Collaborations
During our development of the deCODE Combined Data Processing system, we
intend to establish alliances with partners who can contribute to the creation
of the deCODE Combined Data Processing system and the Icelandic Health Sector
Database and complement our efforts. Potential areas of collaboration include
access to comparable data from populations outside Iceland, assistance from
potential users with the design of products and technical expertise from vendors
or consultants. We anticipate that any partner would contribute to funding of
the development of the deCODE Combined Data Processing system.
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HEALTHCARE INFORMATICS
We have identified three product opportunities in healthcare informatics to
leverage capabilities derived from our gene discovery and database operations.
Products
Bioinformatics. To aid in our gene and drug target discovery work, we have
developed numerous proprietary bioinformatics tools for genealogy analysis,
project management, gene mapping, physical mapping, and gene identification
which we hope to commercialize as independent products.
A description of these tools is illustrated below:
TYPE DESCRIPTION
- ---- -----------
Genealogy tools: - Clustering algorithms are used to compare lists of
patients with the genealogy database to determine relevant
patient relationships.
- Special datamining algorithms are used to determine the
genetic component of traits.
Project management tools: - Our sample manager is used to track blood and DNA samples
that have arrived in the laboratory, throughout the
discovery process.
- Our project manager is used to keep track of all patient
blood samples, DNA samples, pedigrees, and medical
information in research projects.
Genotyping tools: - Our genotype viewer automates the fractionation of data
according to quality, decreasing the amount of labor.
- The marker manager manages large genetic marker sets
collated in the laboratory and is used to view and define
maps for statistical analysis.
- Our genotype manager manages the imports and exports of
the genotypes for a given set of patients and markers.
- The Observer is a quality control tool for genotyping and
sequencing facilities.
Statistical tools: - The Allegro linkage analysis program has computational
power which is one to two orders of magnitude more efficient
than previously developed statistical analysis programs
known in the public domain.
Physical mapping tools: - Our software automates the process of reading physical
mapping hybridization data through image analysis and uses
data-mining tools that combine multiple data sources.
Gene discovery tools: - GeneMiner is used to discover new genes through the use of
sequence information alone; it analyzes up to a million base
pairs of sequence; its graphical interface allows user
annotation; and it permits integration of third party
information. Its main features are: exon prediction,
clustered Blast analysis, splice variant analysis, 2D
structure prediction, protein family analysis, species
homology and ontology analysis (human, mouse etc.), SNP
classification, polymorphism mutation detection and
patient/control analysis.
Privacy Protection. We have developed expertise in encryption mechanisms
and security management to fulfill the Icelandic Data Protection Authority's
requirements. For example, our encryption tools provide for privacy of blood
samples that enter our laboratory. We believe that the opportunity to
commercialize this expertise will grow as the healthcare industry seeks to take
advantage of the benefits that information technology offers to manage complex
healthcare data while maintaining patient confidentiality.
Medical Decision-Support Software. In deciding how to treat patients,
physicians are routinely required to make the appropriate link between the
specific details regarding patients and their general knowledge of best medical
practice. One of the main challenges facing physicians today is how to deal with
the vast and growing amount of information about best medical practice and the
specific circumstances of their patients. Medical decision-support software
provides computer-based assistance to physicians in assimilating and using
available information. We expect to offer products which will include ways of
combining medical knowledge with patient information such as symptoms and test
results to assist physicians in determining diagnosis and treatment while
addressing patients' concerns about the confidentiality of their personal
medical data.
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Customers
Bioinformatics. We believe that the customers for our bioinformatics tools
will mainly consist of pharmaceutical and biotechnology companies. However, we
also expect to attract customers in other areas of the healthcare industry.
These customers will use our tools to aid in their gene and drug target
discovery programs.
Privacy Products. We believe that privacy products can potentially be sold
to any company handling sensitive data about individual persons, whether or not
the data are healthcare-related. However, pharmaceutical companies, healthcare
providers and payors with substantial quantities of individual data protected by
privacy restrictions will serve as our primary target. One such opportunity is
to develop a secure Internet environment for government agencies collecting
nation-wide patient data from mobile field staff. Other opportunities relate to
developing and supporting medical decision-support services and enabling secure
remote access by patients, physicians and other users or to a distributed
network.
Medical Decision-Support Software. Products and services in the field of
decision support have a broad potential customer base in the healthcare
industry. Our initial focus will be on healthcare providers, government
agencies, physicians and HMOs, all of whom use support tools that capture and
analyze patient data to assist them in healthcare decision-making.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses were $45,742,081 in the year ended
December 31, 2000, $33,213,557 in 1999 and $19,282,364 in 1998. Of these
amounts, we estimate that $23.2 million in the year ended December 31, 2000,
$21.9 million in 1999 and $12.7 million in 1998 were customer sponsored research
activities.
PATENTS AND PROPRIETARY RIGHTS
We will be able to protect our proprietary rights from unauthorized use by
third parties only to the extent that our proprietary rights are covered by
valid and enforceable patents or are effectively maintained as trade secrets.
Accordingly, patents and other proprietary rights protections are an essential
element of our business. We currently rely on patents, trade secret law and
contractual non-disclosure and confidentiality arrangements to protect our
proprietary information. We intend to seek patent protection in the United
States and other jurisdictions to protect technology, inventions and
improvements to inventions that are commercially important to the development of
our business, including genes we discover, mutations of genes and related
processes and inventions, technologies which may be used to discover and
characterize genes, and therapeutic and diagnostic processes and other
inventions based on these genes. To date, we have two U.S. patents, one European
patent and have filed 18 patent applications for our inventions in the United
States. We also intend to seek patent protection or rely upon trade secret
rights to protect other technologies that may be used to develop databases and
healthcare informatics products and services.
We have obtained an exclusive license from The Beth Israel Deaconess
Medical Center, or Beth Israel, in Boston, Massachusetts to develop and
commercialize therapeutic and diagnostic products anywhere in the world based on
Beth Israel's interest in patents and know-how relating to the linkage between a
particular segment of DNA and multiple sclerosis. The license under the patents
will expire upon the expiration of the last patent to expire and thereafter the
license to the know-how will be perpetual. Under the terms of the agreement, we
are obligated to pay license fees and other payments upon the achievement of
specified milestones. We are also obligated to pay royalties to Beth Israel on
the sales of products that may result from the licensed technology. We do not
believe that payments under our agreement with Beth Israel will be material to
us.
COMPETITION
We face, and will continue to face, intense competition in our gene
discovery programs from organizations such as major pharmaceutical companies,
specialized biotechnology firms, pharmacogenomics compa-
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nies, universities and other research institutions, the Human Genome Project and
other government-sponsored entities. A number of entities are attempting to
rapidly identify and patent genes responsible for causing diseases or an
increased susceptibility to diseases and to develop products based on these
discoveries.
Competition is also intense in the healthcare informatics and database
areas. Many companies are focusing on medical record systems and cost-oriented
patient databases as well databases containing genomic information.
Many of our competitors, either alone or together with their collaborative
partners, have substantially greater financial resources and larger research and
development staffs than we do. These competitors may discover, characterize or
develop important genes, drug targets or drug leads before we or our
collaborators do or may obtain regulatory approvals of their drugs more rapidly
than we or our collaborators do. They may develop healthcare informatics and
database products before we do or which are technically superior to ours or
prove to be more useful to our potential customers.
Developments by others may render pharmaceutical product candidates or
technologies that we or our collaborators develop obsolete or non-competitive.
Any product candidate that we or our collaborators successfully develop may
compete with existing therapies that have long histories of safe and effective
use.
Our competitors may obtain patent protection or other intellectual property
rights that could limit our rights, or our customers' ability, to use our
technologies, healthcare informatics products or databases, or commercialize
therapeutic or diagnostics products. In addition, we face, and will continue to
face, intense competition from other companies for collaborative arrangements
with pharmaceutical and biotechnology companies, for establishing relationships
with academic and research institutions and for licenses to proprietary
technology.
Our ability to compete successfully will depend, in part, on our ability,
and that of our collaborators, to:
- develop proprietary products;
- develop and maintain products that reach the market first, and are
technologically superior to and more cost effective than other products
on the market;
- obtain patent or other proprietary protection for our products and
technologies;
- attract and retain scientific and product development personnel;
- obtain required regulatory approvals; and
- manufacture, market and sell products that we develop.
GOVERNMENT REGULATION
Regulation by governmental authorities will be a significant factor in our
ongoing research and development activities and in our proposed business
relating to the deCODE Combined Data Processing system. In addition, the
development, production and marketing of any pharmaceutical products which we or
a partner may develop is subject to regulation by governmental authorities.
THE ICELANDIC HEALTH SECTOR DATABASE LICENSE
The deCODE Combined Data Processing system and the Icelandic Health Sector
Database are subject to applicable Icelandic law. The Icelandic Health Sector
Database will be developed and operated pursuant to a License from the Ministry
and will be subject to the Act, the regulations promulgated under the Act, the
License and an agreement between the licensee and the Ministry, all of which
impose numerous requirements on our activities.
As required by the License, concurrently with the issuance of the License,
we, through our Icelandic subsidiary, entered into an agreement with the
Ministry. This agreement provides that we must pay the Icelandic government a
fixed annual fee for the license of 70 million Icelandic kronas (approximately
$815,000 as of March 2001) and an additional annual fee of 6% of its net profit,
up to a maximum of 70
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million Icelandic kronas per year. The agreement also provides that our rights
to the Icelandic Health Sector Database will be transferred to the Ministry on
the expiration or termination of the license.
The license and the agreement under which we received the license also
require us to:
- pay the costs that the health institutions incur (including the costs of
medical record software) in connection with the entering of data from
medical records before transfer to the Icelandic Health Sector Database;
- financially segregate the operation of the Icelandic Health Sector
Database from our other activities by maintaining a separate operating
unit and separate accounts for Icelandic Health Sector Database
operations;
- pay the costs of the governmental agencies which monitor our Icelandic
Health Sector Database activities;
- indemnify and agree not to sue the Icelandic government for any liability
resulting from the passage of the legislation on the Icelandic Health
Sector Database and its operation and/or the issuance of the Icelandic
Health Sector Database license; and
- observe international bioethics rules.
The License prohibits us from, among other things:
- abusing our position by charging unreasonable fees, refusing business to
our competitors or discriminating among customers by imposing
discriminatory or other onerous business terms on our customers; or
- assigning or pledging our rights in the license.
The Act places a number of duties on us, as the Icelandic Health Sector
Database licensee, and imposes a number of conditions on the License. The Act
prohibits us from allowing direct access to the Icelandic Health Sector Database
and requires us keep the Icelandic Health Sector Database and processing of the
database in Iceland. Our database employees and contractors must sign an
irrevocable confidentiality oath prior to commencing employment or performing
services on our behalf. At the expiration of the License, we are required to
ensure that the Ministry or a party entrusted by the Ministry will receive,
without payment of consideration, intellectual property rights necessary for the
creation and operation of the database for public health purposes and for
scientific research.
The License may be revoked if we or our employees violate the terms of the
Act, if we fail to fulfill the conditions of the License or if we become unable
to operate the Icelandic Health Sector Database. If we or our employees or any
person assigned to process data violate the provisions of the Act or applicable
regulations with regard to confidentiality, the license requires us to
compensate any persons to whom the data relate for financial loss which the
violation causes. If results obtained from cross-referencing data in the deCODE
Combined Data Processing system prove to be personally identifiable, the Data
Protection Authority may, among other actions, order the destruction of such
results in their entirety or in part or revoke its approval of the procedures
and work processes applied by us to ensure privacy of the Icelandic Health
Sector Database data.
The License will be reviewed by the Ministry no later than October 1, 2008.
During the course of the review, we and the Ministry will enter into discussions
for the renewal of the License after its expiration in 2012 provided that we
continue to meet the requirements of all applicable laws and regulations. The
Ministry may also review the License from time to time following our request, on
its own initiative or if the License contravenes any applicable laws or
regulations.
Our creation and operation of the Icelandic Health Sector Database and the
deCODE Combined Data Processing system will involve oversight by the Ministry,
with the assistance of an Icelandic Health Sector Database Monitoring Committee,
an Interdisciplinary Ethics Committee, the Bioethics Committee of Iceland and
the Data Protection Authority of Iceland. These bodies will help to ensure our
compliance with applicable laws and regulations.
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The Monitoring Committee consists of three members which the Minister of
Health and Social Security appoints. The Monitoring Committee will ensure that
the licensee complies with the Act and applicable regulations by monitoring
negotiations and agreements for the transfer of data and reporting any events of
noncompliance with the Act to the Ministry. The Monitoring Committee is charged
with protecting the interests of the public health authorities, health
institutions, self-employed health service workers and scientists in the process
of making agreements between us and those parties.
The Interdisciplinary Ethics Committee will review query types and monitor
research projects for compliance with internationally accepted ethical standards
for scientific research involving human beings. The Ministry appoints members of
the Interdisciplinary Ethics Committee which may halt any query or research
project deemed by the committee to violate such standards.
The Bioethics Committee of Iceland is a standing committee that oversees
scientific research relating to human beings in Iceland. It has no direct
supervisory function over our Icelandic Health Sector Database license but will
provide ethical advice to the Monitoring Committee based upon quarterly reports
containing lists of queries and patient data submitted to the Icelandic Health
Sector Database. The Ministry appoints the members of the committee.
Members of the Data Protection Authority (the "Authority") which is
responsible for overseeing rights of privacy and data protection in Iceland. The
Minister of Justice appoints the board members of the Authority. The Authority
establishes the technology, security and organizational terms with which we must
comply in the development of the Icelandic Health Sector Database pursuant to
the License. The Authority may periodically review such terms in light of new
technologies, experience or change of circumstances, and we will be required to
comply with the revised data protection terms within the deadline established by
the Authority. The Authority will monitor the security of the collection, use
and access to patients' information and may intervene to prevent breaches of
such security. The Authority will ensure that we comply with the privacy laws
applicable in Iceland and will administer the access limitations to data and
encryption methodology used for the Icelandic Health Sector Database.
PHARMACEUTICAL PRODUCTS
Our success will depend, in part, on the development and marketing of
products based on our research and development. Strict regulatory controls on
the clinical testing, manufacture, labelling, supply and marketing of the
products will influence our ability and our partners' ability to successfully
manufacture and market therapeutic or diagnostic products. Most countries
require a company to obtain and maintain regulatory approval for a product from
the relevant regulatory authority to enable the product to be marketed.
Obtaining regulatory approval and complying with appropriate statutes and
regulations is time-consuming and requires the expenditure of substantial
resources.
Most European countries and the United States have very high standards of
technical appraisal and consequently, in most cases, a lengthy approval process
for pharmaceutical products. The regulatory approval processes, which usually
include pre-clinical and clinical studies, as well as post-marketing
surveillance to establish a compound's safety and efficacy, can take many years
and require the expenditure of substantial resources. Data obtained from such
studies is susceptible to varying interpretations that could delay, limit or
prevent regulatory approval. Delays or rejections may also be encountered based
upon changes in drug approval policies in applicable jurisdictions. There can be
no assurance that we or our collaborative customers will obtain regulatory
approval for any drugs or diagnostic products developed as the result of our
gene discovery programs.
Because many of the products which may result from our research and
development programs are likely to involve the application of new technologies,
various governmental regulatory authorities may subject such products to a
greater degree of review. As a result, regulatory approvals for such products
may require more time than for products using more conventional technologies. In
addition, ethical concerns about the use of genetic predisposition testing, and
in particular about the risk that such testing could lead to discrimination by
insurance providers or employers, may lead to poor market acceptance or to
regulatory controls that would adversely affect the development of or demand for
diagnostic products based on our research.
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ENVIRONMENTAL
Our research facilities and laboratory are located in Reykjavik, Iceland.
We operate under applicable Icelandic and European Union laws and standards,
with which we believe that we comply, relating to environmental, hazardous
materials and other safety matters. Our research and manufacturing activities
involve the generation, use and disposal of hazardous materials and wastes,
including various chemicals and radioactive compounds. These activities are
subject to standards prescribed by Iceland and the EU. We do not believe that
compliance with these laws and standards will have any material effect upon our
capital expenditures, earnings or competitive position, nor that we will have
any material capital expenditures for environmental control facilities for the
remainder of this fiscal year or any succeeding fiscal year.
EMPLOYEES
As of December 31, 2000, we had approximately 445 employees, of whom
approximately 400 were employed full-time, 70 held Ph.D. or M.D. degrees and
approximately 220 held college degrees. 380 employees were engaged in, or
directly supported, research and development activities, of whom 260 worked
within the laboratory facilities and 120 held positions associated with the
development of informatics. 45 employees were engaged in finance, administrative
support and facilities management, and about 20 were engaged in other support
functions such as Business Development, Legal, Communications, Human Resources
and Clinical Collaboration. In addition, we utilized part-time employees and
outside contractors and consultants as needed and plan to continue to do so. We
anticipate continuing growth in recruitment in 2001.
We have entered into individual employment contracts with our employees in
accordance with standard Icelandic hiring practices. We believe that the
relationship with our employees is good. Furthermore, to help protect our
proprietary know-how and data, each employee must agree not to disclose any
trade secret or confidential information without our prior consent. Employees
also assign to us all patent rights and technical information which they develop
during employment.
FORWARD LOOKING STATEMENTS AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This report contains forward-looking statements. These statements relate to
future events or our future financial performance. In some cases,
forward-looking statements can be identified by terminology such as "may,"
"will," "should," "could," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "intend," "potential" or "continue" or the negative of
such terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially due to a number of
factors, including those set forth in this section and elsewhere in this Form
10-K. These factors include, but are not limited to, the risks set forth below.
WE MAY NOT SUCCESSFULLY DEVELOP OR DERIVE REVENUES FROM ANY PRODUCTS OR SERVICES
DISCOVERY SERVICES
Our gene discovery programs are still in the early stages of development
and may not result in marketable products. We direct our technology and
development focus primarily toward identifying genes or gene fragments which are
responsible for, or indicate the presence of, certain diseases. Our technologies
and approach to gene discovery may not enable us to identify successfully the
specific genes that cause or predispose individuals to the complex diseases that
are the targets of our gene discovery program, even where we have identified
candidate genes. In addition, the diseases we are targeting are generally
believed to be caused by a number of genetic and environmental factors. It may
not be possible to address such diseases through gene-based therapeutic or
diagnostic products. Accordingly, even if we are successful in identifying
specific genes, our discoveries may not lead to the development of commercial
products.
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Even if we, or our collaborators, are able to develop pharmaceutical
products, those products will fail to produce revenues unless they:
- are safe and effective;
- meet regulatory standards in a timely manner;
- successfully compete with other technologies and products;
- avoid infringing on the proprietary rights of others;
- can be manufactured in sufficient quantities at reasonable costs; and
- can be marketed successfully.
We are not certain that we will be able to achieve these conditions for
product revenues. We expect that it will be a number of years, if ever, before
we will recognize revenue from therapeutic or diagnostic product sales or
royalties on such sales.
Our initiatives in pharmacogenomics and the study of the function of genes,
a field known as functional genomics, are not certain to provide any revenues.
There may be no market for these services because of competition, lack of market
acceptance or our inability to develop these services successfully. We may not
be able to develop our functional genomics capabilities to a state that is
adequate for realizing revenues.
DATABASE SERVICES
We received the License to create and operate the Icelandic Health Sector
Database in January 2000, and accordingly, are at the early stages of its
development. The collection of genotypic data, which is another integral part of
the deCODE Combined Data Processing system, is also in the early stages of
development. We expect that it will take several years before we have fully
developed the deCODE Combined Data Processing system. We are presently devoting
substantial resources to the development of the deCODE Combined Data Processing
system and its components. We plan to continue to devote substantial resources
to this development for the foreseeable future. We cannot be sure that the
deCODE Combined Data Processing system will result in marketable products or
services. Our intended method for cross-referencing genealogical, genotypic and
healthcare data is central to the development of the deCODE Combined Data
Processing system and is unproven. The success of our database services is
contingent upon:
- the development of the Icelandic Health Sector Database and collection of
genotypic data;
- the creation of database and cross-reference software that is free from
design defects or errors;
- compliance with governmental requirements regarding the Icelandic Health
Sector Database;
- the security and reliability of encryption technology;
- the cooperation of the Icelandic healthcare system;
- the ability to obtain blood samples from consenting Icelanders and
consents to the use of their genotypic data by cross-referencing through
the deCODE Combined Data Processing system;
- the usefulness of information derived through the deCODE Combined Data
Processing system in disease management, analysis of drug response, gene
discovery and drug target validation; and
- the development of marketing and pricing methods that the intended users
of the deCODE Combined Data Processing system will accept.
If we fail to successfully commercialize our database services, we will not
realize revenues from this part of our business.
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HEALTHCARE INFORMATICS
Our bioinformatics and privacy protection products have, to date, been
tested only in connection with our own use of them and they may not meet the
needs of potential customers. We are at a very early stage of development of our
medical decision-support systems for healthcare providers, and we have generated
no revenues from sales or licenses of bioinformatics, decision-support, or
privacy protection products. To date we have not produced any decision-support
tools and there can be no assurance that we can successfully develop or
commercialize medical decision-support systems or that there will be a market
for our bioinformatics, decision-support or privacy protection products for
healthcare delivery.
IF OUR ASSUMPTION ABOUT THE ROLE OF GENES IN DISEASE IS WRONG, WE MAY NOT BE
ABLE TO DEVELOP USEFUL PRODUCTS
The products we hope to develop involve new and unproven approaches. They
are based on the assumption that information about genes may help scientists
better understand complex disease processes. Scientists generally have a limited
understanding of the role of genes in diseases, and few products based on gene
discoveries have been developed. Of the products that exist, all are diagnostic
products. To date, we know of no therapeutic products based on disease gene
discoveries. If our assumption about the role of genes in the disease process is
wrong, our gene discovery programs may not result in products, the genetic data
included in our database and informatics products may not be useful to our
customers and those products may lose any competitive advantage.
IF WE CONTINUE TO INCUR OPERATING LOSSES FOR A PERIOD LONGER THAN ANTICIPATED,
OR IN AN AMOUNT GREATER THAN ANTICIPATED, WE MAY BE UNABLE TO CONTINUE OUR
OPERATIONS
We incurred net losses of $31,118,503 for the year ended December 31, 2000,
and $23,788,447 for the year ended December 31, 1999. As of December 31, 2000,
we had an accumulated deficit of $110,753,700. To date, we have never generated
a profit and we have not generated any significant revenues except for payments
received in connection with our research collaboration with Roche and interest
revenues. The development of our technologies will require substantial increases
in expenditures over the next several years. In addition, we expect to spend
more in connection with our internal research programs and the preparation of
the Icelandic Health Sector Database, the deCODE Combined Data Processing system
and informatics. As a result, we expect to incur operating losses for several
years. If the time required to generate product revenues and achieve
profitability is longer than we currently anticipate or the level of operating
losses is greater than we currently anticipate, we may not be able to continue
our operations.
IF WE ARE NOT ABLE TO OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET OUR EXPANDING
CAPITAL REQUIREMENTS, WE MAY BE FORCED TO REDUCE OR TERMINATE OUR RESEARCH
PROGRAMS AND PRODUCT DEVELOPMENT
We have used substantial amounts of cash to fund our research and
development activities. We expect our capital and operating expenditures to
increase over the next several years as we expand our research and development
activities, construct the Icelandic Health Sector Database and the deCODE
Combined Data Processing system, collect the genotype data and develop
healthcare informatics products. Many factors will influence our future capital
needs, including:
- the progress of our discovery and research programs;
- the number and breadth of these programs;
- our ability to attract collaborators for, subscribers to or customers for
our products and services;
- our achievement of milestones under our research collaboration agreement
with Roche;
- our ability to establish and maintain additional collaborations;
- our collaborators' progress in commercializing our gene discoveries;
- the level of our activities relating to commercialization rights we
retain in our collaborations;
- competing technological and market developments;
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- the costs involved in enforcing patent claims and other intellectual
property rights; and
- the costs and timing of regulatory approvals.
We intend to rely on Roche and future collaborators for significant funding
in support of our research efforts. In addition, we may seek additional funding
through public or private equity offerings and debt financings. Additional
financing may not be available when needed. If available, such financing may not
be on terms favorable to us or our stockholders. Stockholders' ownership will be
diluted if we raise additional capital by issuing equity securities. If we raise
additional funds through collaborations and licensing arrangements, we may have
to relinquish rights to certain of our technologies or product candidates, or
grant licenses on unfavorable terms. If adequate funds are not available, we
would have to scale back or terminate our discovery and research programs and
product development. We believe that the net proceeds from our initial public
offering, other cash and investment securities and anticipated cash flow from
Roche will be sufficient to support our current operating plan for several
years. We have based this belief on assumptions that may prove wrong.
IF WE DO NOT MAINTAIN THE GOODWILL AND RECEIVE THE COOPERATION OF THE ICELANDIC
POPULATION, WE MAY BE UNABLE TO PURSUE OUR GENE IDENTIFICATION PROGRAMS,
PHARMACOGENOMICS OR FUNCTIONAL GENOMICS EFFORTS, COLLECT GENOTYPE DATA OR
DEVELOP THE ICELANDIC HEALTH SECTOR DATABASE AND THE DECODE COMBINED DATA
PROCESSING SYSTEM
Our approach to gene identification and the development and maintenance of
genotype data, the Icelandic Health Sector Database and the deCODE Combined Data
Processing system depend on the goodwill and cooperation of the Icelandic
population, including the Icelandic government and the healthcare system. Our
development of the Icelandic Health Sector Database will be impaired if
individual Icelanders refuse to allow information from their medical records to
be included in the Icelandic Health Sector Database or healthcare providers
attempt to prevent us from having access to medical records of their patients.
Individuals may opt-out of having their records included in the Icelandic Health
Sector Database. As of December 31, 2000 approximately 7% of the population has
exercised this right. Some doctors practicing in Iceland have expressed
opposition to the Icelandic Health Sector Database and may attempt to withhold
their patients' data from inclusion in such database or encourage their patients
to exercise their opt-out rights. Our development of genotype data and our
cross-referencing through the deCODE Combined Data Processing system of that
data with information about the manifestations of disease, which are known as
phenotypes, in the Icelandic Health Sector Database require that a substantial
portion of the Icelandic population provide us with blood samples for genotyping
and consent to the use of their DNA to cross-reference molecular genetics data
with the Icelandic Health Sector Database. To date, between eighty and ninety
percent of individuals that we have asked to participate in our research
projects have done so. Because only a small portion of the Icelandic population
may carry certain mutations, the unwillingness of even a small portion of the
population to participate in our programs could diminish our ability to develop
and market information based on the use of genotypic data.
OUR RELIANCE ON THE ICELANDIC POPULATION IN OUR GENE DISCOVERY PROGRAMS AND
DATABASE SERVICES MAY LIMIT THE APPLICABILITY OF OUR DISCOVERIES TO CERTAIN
POPULATIONS
In general, the genetic make-up and prevalence of disease vary across
populations around the world. Common complex diseases generally occur with a
similar frequency in Iceland as in other western countries. We are already
studying some of these diseases in our gene discovery programs. However, the
populations of other western nations may be genetically predisposed to certain
diseases because of mutations not present in the Icelandic population. As a
result, we and our partners may take more time or may be unable to develop
diagnostic products that are effective on all, or a portion, of those people
with such diseases. Similarly, any difference between the Icelandic population
and the populations of other countries may have an effect on the usefulness of
the Icelandic Health Sector Database and deCODE Combined Data Processing system
in studying disease in populations of countries other than Iceland. We do not
anticipate developing any products solely for the Icelandic market. For our
business to succeed, we must apply discoveries that we make on the basis of the
Icelandic population to other markets.
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OUR CREATION AND OPERATION OF THE ICELANDIC HEALTH SECTOR DATABASE IS BASED UPON
THE LICENSE FROM THE ICELANDIC MINISTRY OF HEALTH AND SOCIAL SECURITY AND IS
SUBJECT TO GOVERNMENT SUPERVISION AND REGULATION, WHICH MAY MAKE OUR DEVELOPMENT
OF DATABASE PRODUCTS MORE EXPENSIVE AND TIME-CONSUMING THAN WE ANTICIPATED
We may construct the Icelandic Health Sector Database and cross-reference
it with our genealogical and genetic data, through the deCODE Combined Data
Processing system, only in accordance with the stipulations of the License which
the Ministry granted us pursuant to the Act. The License permits the processing
of healthcare data from healthcare records and other relevant data into the
Icelandic Health Sector Database. The Monitoring Committee, the Data Protection
Authority of Iceland, or the Authority, and an Interdisciplinary Ethics
Committee will supervise our construction and operation of the Icelandic Health
Sector Database. These committees report to the Ministry. In addition, the
Icelandic Bioethics Committee will review our operation of the Icelandic Health
Sector Database. The Ministry may withdraw our License in the event that we
violate the terms and conditions of the License, the Act or its rules. In
addition, the Icelandic parliament could amend the Act in ways which would
adversely affect our ability to develop or market the Icelandic Health Sector
Database and, consequently, the deCODE Combined Data Processing system. Because
the Icelandic parliament and government recently adopted the Act and its rules,
there is no precedent interpreting the Act or the rules.
In preparing the Icelandic Health Sector Database, we must comply with the
Authority's technical requirements. These technical requirements cover areas
such as data encryption and privacy protection. The Authority may review these
requirements from time to time and may require greater technical capabilities
than we currently have. Compliance with these requirements can be expensive and
time-consuming and may delay the development of the Icelandic Health Sector
Database and the deCODE Combined Data Processing system or make such development
more expensive than we anticipated. In addition, the agencies imposing these
requirements will evaluate our compliance efforts. We cannot control the time
required for this evaluation, and accordingly, the evaluation process may lead
to delay in the development of the Icelandic Health Sector Database and the
deCODE Combined Data Processing system.
The Interdisciplinary Ethics Committee has the power to withdraw permission
for any type of research program in the Icelandic Health Sector Database not
conducted in accordance with international rules of bioethics.
At the expiration of the License, we are required to ensure that the
Ministry or its designee will receive, without payment of consideration,
intellectual property rights necessary for the creation and operation of the
database for public health purposes and for scientific research.
We are subject to a very extensive indemnity clause in our agreement with
the Ministry, pursuant to which:
- we have agreed not to make any claim against the government if the Act or
the License are amended as a result of the Act or rules relating to the
Icelandic Health Sector Database being found to be inconsistent with the
rules of the European Economic Area, or EEA, or other international rules
and agreements to which Iceland is or becomes a party;
- we have agreed that if the Icelandic State, by a final judgment, is found
to be liable or subject to payment to any third party as a result of the
passage of legislation on the Icelandic Health Sector Database and/or
issuance of the Icelandic Health Sector Database license, we will
indemnify it against all damages and costs in connection with the
litigation; and
- we have agreed to compensate any third parties with whom the Icelandic
government negotiates a settlement of liability claims arising from the
legislation on the Icelandic Health Sector Database and/or the issuance
of the License, provided that the Icelandic government demonstrates that
it was justified in agreeing to make payments pursuant to the settlement.
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IF WE ARE NOT ABLE TO ENTER INTO AGREEMENTS WITH MORE ICELANDIC HEALTH
INSTITUTIONS, AS THE ICELANDIC HEALTH SECTOR DATABASE LICENSE REQUIRES, IN ORDER
TO COLLECT DATA FROM THE INSTITUTIONS, WE WILL NOT BE ABLE TO CONSTRUCT AND
OPERATE THE ICELANDIC HEALTH SECTOR DATABASE
The License requires us to enter into agreements with Icelandic health
institutions and self-employed health service professionals regarding access to
and the processing of information from medical records. To date we have only
entered into such agreements with 9 Icelandic health institutions. We cannot be
certain that we will be able to enter into such agreements with a sufficient
number of health institutions as the operations of the Icelandic Health Sector
Database will require. Neither can we be certain that such agreements will be on
terms favorable to us. Some doctors practicing in Iceland have expressed
opposition to the Icelandic Health Sector Database and it is possible that those
who have private practices and as such have authority to enter into agreements
with us may refuse to do so or those who are employed by health institutions may
encourage the institutions to refuse to do so. We cannot be certain that
individuals within health institutions will adhere to the requirements of such
agreements. The Icelandic Medical Association is currently publicly opposing
some aspects of the way in which the Icelandic Health Sector Database will be
created. Our inability to enter into additional such agreements on favorable
terms or in a timely manner, or to obtain others' compliance with the terms of
such agreements, could have a material adverse effect on our ability to
construct and operate the Icelandic Health Sector Database.
IF WE CANNOT OBTAIN AN EXTENSION OF THE TERM OF THE ICELANDIC HEALTH SECTOR
DATABASE LICENSE BEYOND ITS EXPIRATION DATE IN JANUARY 2012, WE WILL NOT BE ABLE
TO OPERATE OR DERIVE RESOURCES FROM THE ICELANDIC HEALTH SECTOR DATABASE OR THE
DECODE COMBINED DATA PROCESSING SYSTEM AFTER THAT DATE
Even if we are successful in creating and marketing the Icelandic Health
Sector Database and the deCODE Combined Data Processing system, the License will
expire in January 2012 unless we are able to obtain an extension. There is no
assurance that we will obtain further access rights on favorable terms, if at
all. Our negotiations with healthcare institutions, the process of genotyping
and the development of database infrastructure, among other factors, will
determine when we can begin marketing the deCODE Combined Data Processing
system. We expect that the Icelandic Health Sector Database and the deCODE
Combined Data Processing system will not be fully operational for up to four
years. The License will be subject to a review in 2008, and at that time, in
accordance with an agreement we entered into with the Ministry simultaneously
with the granting of the License, we and the Ministry will enter into
discussions on renewal of the License at the end of the term. The Ministry might
not renew the License in 2012 and we cannot guarantee any renewal.
WE MAY NOT BE ABLE TO FORM AND MAINTAIN THE COLLABORATIVE RELATIONSHIPS THAT OUR
BUSINESS STRATEGY REQUIRES
Our strategy for deriving revenues from the discovery of genes and the
development of products based upon our discoveries depends upon the formation of
research collaborations and licensing arrangements with several partners at the
same time. We currently have only two substantial collaborative relationships.
To succeed, we will have to maintain these relationships and establish
additional collaborations. We cannot be sure that we will be able to establish
the additional research collaborations or licensing arrangements necessary to
develop and commercialize products using our technology, that any future
collaborations or licensing arrangements will be on terms favorable to us, or
that current or future collaborations or licensing arrangements ultimately will
be successful. If we are not able to manage multiple collaborations
successfully, our programs will suffer.
We also expect to rely on collaborations in other parts of our business
such as the construction of the deCODE Combined Data Processing system. During
the development of the deCODE Combined Data Processing system, we intend to
pursue collaborations to assist us in the development of certain of its
components. Such collaborations may involve the use of particular technologies
or collaborative development and marketing activities. If we are unable to enter
into such collaborations on favorable terms, our ability to commercialize the
deCODE Combined Data Processing system will be adversely affected.
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To develop our healthcare informatics products, we also plan to rely on
collaborative relationships. To date we have not established any such
collaborative relationships. If we are unable to form or maintain such
collaborative arrangements, our healthcare informatics operations will be
adversely affected.
OUR DEPENDENCE ON COLLABORATIVE RELATIONSHIPS MAY LEAD TO DELAYS IN PRODUCT
DEVELOPMENT AND DISPUTES OVER RIGHTS TO TECHNOLOGY
Currently we do not expect to develop or market pharmaceutical products on
our own. As a result, we will be dependent on collaborators for the pre-clinical
study and clinical development of therapeutic and diagnostic products and for
regulatory approval, manufacturing and marketing of any products that result
from our technology. Our agreements with pharmaceutical collaborators or
collaborators for gene research projects will typically allow them significant
discretion in electing whether to pursue such activities. We cannot control the
amount and timing of resources collaborators will devote to our programs or
potential products. Our collaborations may have the effect of limiting the areas
of research that we may pursue either alone or with others.
In addition, we expect to develop our database products, in part, with
various collaborators, and we may develop healthcare informatics tools which are
designed to work in conjunction with or to enhance the healthcare informatics
tools of other developers. These arrangements may place responsibility for key
aspects of product development and marketing on our collaborative partners.
Accordingly, the performance of these key aspects is uncertain and beyond our
direct control. If our collaborators fail to perform their obligations, our
database products could contain erroneous data, design defects, viruses or
software defects that are difficult to detect and correct and may adversely
affect our revenues and the market acceptance of our products.
If any pharmaceutical, healthcare informatics or database collaborator were
to breach or terminate its agreement with us, or otherwise fail to conduct
collaborative activities successfully and in a timely manner, the development or
commercialization of products, services, technologies or research programs may
be delayed or terminated.
Competing products that our collaborators develop or to which our
collaborators have rights may result in their withdrawal of support for our
products and services.
Disputes may arise in the future over the ownership of rights to any
technology developed with collaborators. These and other possible disagreements
between us and our collaborators could lead to delays in the collaborative
research, development or commercialization of products. Such disagreements could
also result in litigation or require arbitration to resolve.
ETHICAL AND PRIVACY CONCERNS MAY LIMIT OUR ABILITY TO DEVELOP AND USE THE
ICELANDIC HEALTH SECTOR DATABASE AND THE DECODE COMBINED DATA PROCESSING SYSTEM
AND MAY LEAD TO LITIGATION AGAINST US OR THE ICELANDIC GOVERNMENT
The Icelandic parliament's passage of the Act and the Ministry's granting
of the License have raised ethical and privacy concerns in Iceland and
internationally among healthcare professionals and others including the
Icelandic Medical Association and the World Medical Association. Ethical and
privacy concerns about the development and use of the Icelandic Health Sector
Database and the deCODE Combined Data Processing system may lead to litigation
in U.S., Icelandic or other national courts, or in international courts such as
the European Court of Human Rights in Strasbourg (e.g., on the basis of an
alleged breach of the patient-doctor confidential relationship, constitutional
privacy issues, international conventions dealing with protection of privacy
issues or human rights conventions). The results of such litigation could have a
material adverse affect on our ability to construct and operate the Icelandic
Health Sector Database and the deCODE Combined Data Processing system.
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CERTAIN PARTIES HAVE ANNOUNCED AN INTENTION TO INSTITUTE LITIGATION TESTING THE
CONSTITUTIONALITY OF THE ACT, WHICH COULD DELAY OR PREVENT US FROM DEVELOPING
AND OPERATING THE ICELANDIC HEALTH SECTOR DATABASE AND THE DECODE COMBINED DATA
PROCESSING SYSTEM
In February 2000, an organization known as The Association of Icelanders
for Ethics in Science and Medicine, or Mannvernd, and a group of physicians and
other citizens issued a press release announcing their intention to file
lawsuits against the State of Iceland and any other relevant parties, including
us, to test the constitutionality of the Act. According to the press release,
the intended lawsuit will allege that the Act and the License involve human
rights violations and will challenge the validity of provisions of the Act which
allow the use of presumed consent for the processing of health data into the
Icelandic Health Sector Database and the grant of a License to operate a single
database. To date no such suit has been brought against us or the State of
Iceland to that effect by Mannvernd or any other party. We believe that any such
litigation would be without merit and intend to defend vigorously any such
action in which we become a party. However, in the event that the Icelandic
State by a final judgment is found to be liable or subject to payment to any
third party as a result of the passage of legislation on the Icelandic Health
Sector Database and/or the issuance of the License, our agreement with the
Ministry requires us to indemnify the Icelandic State against all damages and
costs incurred in connection with such litigation. In addition, the pendency of
such litigation could lead to delay in the development of the Icelandic Health
Sector Database and the deCODE Combined Data Processing System, and an
unfavorable outcome would prevent us from developing and operating the Icelandic
Health Sector Database and the deCODE Combined Data Processing system.
IF WE FAIL TO PROTECT CONFIDENTIAL DATA ADEQUATELY, WE COULD INCUR LIABILITY OR
LOSE OUR LICENSE
The Act and the License require us to encrypt all patient data and to take
other actions to ensure confidentiality of data included in the Icelandic Health
Sector Database and restrict access to it. We are developing the Icelandic
Health Sector Database according to the Authority's technology, security and
organizational terms. The Authority may periodically review and amend such terms
in light of new technology or change of circumstances. We must comply with any
such revised data protection terms within a deadline which the Authority may
establish when it revises the terms. Although, to date, one expert in this field
has criticized the security terms, we believe that they are, and will continue
to be, in line with international best industry-practice standards. In addition,
the customers for other products we may develop may impose confidentiality
requirements. Accidental disclosures of confidential data may result from
technical failures in encryption technology or from human error by our employees
or those of our customers or collaborators. Any failure to comply fully with all
confidentiality requirements could lead to liability for damages incurred by
individuals whose privacy is violated, the loss of the License, the loss of our
customers and reputation and the loss of the goodwill and cooperation of the
Icelandic population including healthcare professionals.
ETHICAL AND PRIVACY CONCERNS MAY LIMIT THE USE OF GENETIC TESTING AND THEREFORE
THE COMMERCIAL LIABILITY OF ANY PRODUCTS WE DEVELOP
Other companies have developed genetic predisposition tests that have
raised ethical concerns. It is possible that employers or others could
discriminate against people who have a genetic predisposition to certain
diseases. Concern regarding possible discrimination may result in governmental
authorities enacting restrictions or bans on the use of all, or certain types
of, genetic testing. Similarly, such concerns may lead individuals to refuse to
use genetics tests even if permissible. These factors may limit the market for,
and therefore the commercial viability of, products that we and our
collaborators develop.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH BIOTECHNOLOGY COMPANIES AND
ESTABLISHED PHARMACEUTICAL COMPANIES IN THE DEVELOPMENT AND MARKETING OF
PRODUCTS BASED UPON THE IDENTIFICATION OF DISEASE-CAUSING GENES
A number of companies are attempting to rapidly identify and patent genes
that cause diseases or an increased susceptibility to diseases. Competition in
this field is intense and is expected to increase. We have numerous competitors,
including major pharmaceutical and diagnostic companies, specialized
biotechnology firms, universities and other research institutions, the United
States-funded Human Genome Project and
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other government-sponsored entities. Many of our competitors have considerably
greater capital resources, research and development staffs and facilities, and
technical and other resources than we do, which may allow them to discover
important genes before we do. We believe that a number of our competitors are
developing competing products and services that may be commercially successful
and that are further advanced in development than our potential products and
services. To succeed, we, together with our collaborators, must discover
disease-predisposing genes, characterize their functions, develop genetic tests
or therapeutic products and related information services based on such
discoveries, obtain regulatory and other approvals, and launch such services or
products before competitors. Even if our collaborators or we are successful in
developing effective products or services, our products and services may not
successfully compete with those of our competitors. Our competitors may succeed
in developing and marketing products and services that are more effective than
ours or that are marketed before ours.
Our collaboration with Roche does not prevent it from initiating its own
gene research or developing products based upon its, or any other party's, gene
research. Such products may compete with any products that we develop through
our gene discovery programs. We expect that future collaborations may allow our
future partners to undertake research and develop products on their own or with
third parties.
Competitors have established, and in the future may establish, patent
positions with respect to gene sequences related to our research projects. Such
patent positions or the public availability of gene sequences comprising
substantial portions of the human genome could decrease the potential value of
our research projects and make it more difficult for us to compete. We may also
face competition from other entities in gaining access to DNA samples used for
research and development purposes.
We expect competition to intensify as technical advances are made and
become more widely known. Our future success will depend in large part on
maintaining a competitive position in the genomics field. Others' or our rapid
technological development may result in products or technologies becoming
obsolete before we recover the expenses we incur in developing them. Less
expensive or more effective technologies could make future products obsolete. We
cannot be certain that we will be able to make the necessary enhancements to any
products we develop to compete successfully with newly emerging technologies.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH ESTABLISHED COMPANIES AND
GOVERNMENT AGENCIES IN THE FIELD OF DATABASE SERVICES
Others are currently developing or marketing a number of databases to
assist participants in the healthcare industry and academic researchers in the
management and analysis of their own genomic data and data available in the
public domain. Although we believe that our existing genealogy database and our
License provide us with a unique opportunity to cross-reference databases that
include genetic makeup, genealogy, medical history, disease symptoms, resource
use and treatment outcomes, we cannot be sure that any of the databases that we
create will achieve greater market acceptance than those of our competitors. We
plan to grant limited Internet access to our genealogy data to the Icelandic
public for non-business use. Although our genealogy data will be restricted both
by technical and legal means, it is possible that this Internet access will in
some way facilitate the construction of similar databases intended for
commercial purposes.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN THE FIELD OF
HEALTHCARE INFORMATICS
The healthcare informatics field is highly competitive. Many companies
compete with us to develop healthcare informatics similar to our expected
products, including products relating to medical record maintenance, medical
decision-support systems and systems design. We expect that competition will
continue to intensify. Many of our competitors have significantly greater
financial resources and market presence than we have. We cannot be sure that any
products that we develop in the field of healthcare informatics, including
medical decision-support systems, will compete effectively with those of our
competitors.
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REGULATORY AUTHORITIES MAY DETERMINE THAT OUR LICENSE TO DEVELOP THE ICELANDIC
HEALTH SECTOR DATABASE INFRINGES UPON COMPETITION RULES IN THE EUROPEAN ECONOMIC
AREA, OR EEA, WHICH COULD NEGATIVELY AFFECT OUR ABILITY TO DERIVE REVENUES FROM
THE ICELANDIC HEALTH SECTOR DATABASE AND THE DECODE COMBINED DATA PROCESSING
SYSTEM
Iceland is a member of the European Free Trade Association, or EFTA,
together with Norway, Switzerland and Liechtenstein. Through this membership,
Iceland has become a part of the EEA which was created by the EEA agreement
between EFTA and the European Union, or EU. The EEA agreement extends the EU
internal market and its regulations to EFTA countries that adopt certain EU
legislation. Accordingly, Iceland is subject to both EFTA and EU competition and
public procurement rules. A determination that the Act or our License is in
breach of such rules could result in a revocation or dilution of the License for
the Icelandic Health Sector Database and could have a negative impact on the
profitability and marketing potential of the deCODE Combined Data Processing
system.
OTHERS MAY CLAIM INTELLECTUAL PROPERTY RIGHTS TO OUR GENEALOGY DATABASE, WHICH
COULD PREVENT US FROM USING SOME OR ALL OF OUR DATABASE AND IMPAIR OUR ABILITY
TO DERIVE REVENUES FROM OUR DATABASE AND GENE DISCOVERY SERVICES
We are aware that there are other firms and individuals who have prepared,
or are currently preparing, genealogy databases similar to the one we have
developed. If any parties should successfully claim that the creation or use of
any of our databases infringes upon their intellectual property rights, it could
have a material adverse effect on our business. Two parties alleging to hold
copyrights to approximately 100 Icelandic genealogy books have filed a copyright
infringement suit against us in Iceland claiming that we have used data from
these books in the creation of our genealogy database, in violation of their
rights. The claimants seek a declaratory judgment to prevent our use of the
database and monetary damages in the amount of approximately 616,000,000
Icelandic kronas, or approximately $7,200,000 (as of March, 2001). We believe
that this suit is without merit and intend to defend it vigorously, but if it
were successful it could have a material adverse effect on our database and gene
discovery services.
WE MAY NOT BE ABLE TO PROTECT THE PROPRIETARY RIGHTS THAT ARE CRITICAL TO OUR
SUCCESS
Our success will depend on our ability to protect our genealogy database
and genotypic data and any other proprietary databases that we develop,
proprietary software and other proprietary methods and technologies. Despite our
efforts to protect our proprietary rights, unauthorized parties may be able to
obtain and use information that we regard as proprietary.
Our commercial success will depend in part on obtaining patent protection.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including ours, are generally uncertain and involve complex legal and
factual considerations. We cannot be sure that any of our pending patent
applications will result in issued patents, that we will develop additional
proprietary technologies that are patentable, that any patents issued to us or
our partners will provide a basis for commercially viable products, will provide
us with any competitive advantages or will not be challenged by third parties,
or that the patents of others will not have an adverse effect on our ability to
do business.
In addition, patent law relating to the scope of claims in the area of
genetics and gene discovery is still evolving. There is substantial uncertainty
regarding the patentability of genes or gene fragments without known functions.
The laws of some European countries provide that genes and gene fragments may
not be patented. The Commission of the EU has passed a directive which prevents
the patenting of genes in their natural state. The U.S. Patent and Trademark
Office initially rejected a patent application by the National Institutes of
Health on partial genes. Accordingly, the degree of future protection for our
proprietary rights is uncertain and, we cannot predict the breadth of claims
allowed in any patents issued to us or to others. We could also incur
substantial costs in litigation if we are required to defend ourselves in patent
suits brought by third parties or if we initiate such suits.
Others may have filed and in the future are likely to file patent
applications covering genes or gene products that are similar or identical to
our products. We cannot be certain that our patent applications will
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have priority over any patent applications of others. The mere issuance of a
patent does not guarantee that it is valid or enforceable; thus even if we are
granted patents we cannot be sure that they would be valid and enforceable
against third parties. Further, a patent does not provide the patent holder with
freedom to operate in a way that infringes the patent rights of others. Any
legal action against us or our partners claiming damages and seeking to enjoin
commercial activities relating to the affected products and processes could, in
addition to subjecting us to potential liability for damages, require us or our
partners to obtain a license in order to continue to manufacture or market the
affected products and processes. There can be no assurance that we or our
partners would prevail in any action or that any license required under any
patent would be made available on commercially acceptable terms, if at all. If
licenses are not available, we or our partners may be required to cease
marketing our products or practicing our methods.
If expressed sequence tags, single nucleotide polymorphisms, or SNPs, or
other sequence information become publicly available before we apply for patent
protection on a corresponding full-length or partial gene, our ability to obtain
patent protection for those genes or gene sequences could be adversely affected.
In addition, other parties are attempting to rapidly identify and characterize
genes through the use of gene expression analysis and other technologies. If any
patents are issued to other parties on these partial or full-length genes or
gene products or uses for such genes or gene products, the risk increases that
the sale of our or our collaborators' potential products or processes may give
rise to claims of patent infringement. The amount of supportive data required
for issuance of patents for human therapeutics is highly uncertain. If more data
than we have available is required, our ability to obtain patent protection
could be delayed or otherwise adversely affected. Even with supportive data, the
ability to obtain patents is uncertain in view of evolving examination
guidelines, such as the utility and written description guidelines that the U.S.
Patent and Trademark Office has adopted.
While we require employees, academic collaborators and consultants to enter
into confidentiality agreements, there can be no assurance that proprietary
information will not be disclosed, that others will not independently develop
substantially equivalent proprietary information and techniques, otherwise gain
access to our trade secrets or disclose such technology, or that we can
meaningfully protect our trade secrets.
If the information processed by the deCODE Combined Data Processing system
is disclosed without our authorization, demand for our products and services may
be adversely affected.
IF WE OR OUR COLLABORATORS ARE UNABLE TO OBTAIN REGULATORY APPROVALS FOR
PRODUCTS RESULTING FROM OUR GENE DISCOVERY PROGRAMS, WE WILL NOT BE ABLE TO
DERIVE REVENUES FROM THESE PRODUCTS
Government agencies must approve new drugs and diagnostic products in the
countries in which they are to be marketed. We cannot be certain that regulatory
approval for any drugs or diagnostic products resulting from our gene discovery
programs will be obtained. The regulatory process can take many years and
require substantial resources. Because some of the products likely to result
from our disease research programs involve the application of new technologies
and may be based upon a new therapeutic approach, various government regulatory
authorities may subject such products to substantial additional review. As a
result, these authorities may grant regulatory approvals for these products more
slowly than for products using more conventional technologies. Furthermore,
regulatory approval may impose limitations on the use of a drug or diagnostic
product.
After initial regulatory approval, a marketed product and its manufacturer
must undergo continuing review. Discovery of previously unknown problems with a
product may have adverse effects on our business, financial condition and
results of operations, including withdrawal of the product from the market.
OUR DEPENDENCE UPON A SINGLE THIRD PARTY FOR SEQUENCING MACHINES MAY IMPAIR OUR
RESEARCH PROGRAMS
We currently use a single manufacturer to supply the gene sequencing
machines that we use in our gene discovery programs. While other types of gene
sequencing machines are available from other manufacturers, we do not believe
that the other machines are as efficient as the machines we currently use. We
cannot be sure that the gene sequencing machines will remain available in
sufficient quantities at acceptable costs. If we cannot obtain additional gene
sequencing machines at commercially reasonable rates, or if we are required to
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change to a new supplier of gene sequencing machines, our gene discovery
programs would be adversely affected.
WE MAY NOT BE ABLE TO OBTAIN NECESSARY TECHNOLOGY
We have acquired or licensed certain components of our technologies from
third parties. Changes in or termination of these third party agreements could
materially adversely affect our discovery or research programs. We cannot be
certain that we will be able to acquire any new technologies which we need.
WE WILL HAVE TO RELY ON OTHERS FOR CLINICAL TRIALS, MANUFACTURING, MARKETING,
REGULATORY COMPLIANCE AND SALES CAPABILITIES, WHICH MAY IMPAIR OUR ABILITY TO
DELIVER PRODUCTS
In our research collaborations, we will seek to retain rights to develop
and market certain therapeutic and diagnostic products or services. If we are
able to retain these rights and successfully develop products, we expect to
contract with others for conducting clinical trials, manufacturing, marketing
and sales.
We are not certain that we will be able to enter into such arrangements on
favorable terms, if at all. Our dependence upon third parties for the conduct of
clinical trials, the obtaining of governmental approvals or the manufacture,
marketing or sales of products may adversely affect our ability to develop and
deliver products on a timely and competitive basis. Our current facilities and
staff are inadequate for commercial production and distribution of products. If
we choose in the future to engage directly in the development, manufacturing and
marketing of certain products, we will require substantial additional funds,
personnel and production facilities.
EFFORTS TO REDUCE HEALTHCARE COSTS MAY REDUCE MARKET ACCEPTANCE OF OUR PRODUCTS
Our success will depend in part on the extent to which government and
health administration authorities, private health insurers and other third party
payors will pay for our products. Reimbursement for newly approved healthcare
products is uncertain. Third party payors, including Medicare in the U.S., are
increasingly challenging the prices charged for medical products and services.
Government and other third party payors are increasingly attempting to contain
healthcare costs by limiting both coverage and the level of reimbursement for
new therapeutic products. We cannot be certain that any third party insurance
coverage will be available to patients for any products we discover or develop.
If government or other third party payors do not provide adequate coverage and
reimbursement levels for our products, the market acceptance of these products
may be materially reduced.
OUR OPERATIONS MAY BE IMPAIRED UNLESS WE CAN SUCCESSFULLY MANAGE OUR GROWTH
We have recently experienced significant growth in the number of our
employees and the scope of our operations. We intend to hire additional
personnel to construct the Icelandic Health Sector Database and the deCODE
Combined Data Processing system, and to develop our healthcare informatics
products. Our management and operations are, and may continue to be, under
significant strain due to this growth. To manage such growth, we must strengthen
our management team and attract and retain skilled employees. Our success will
also depend on our ability to improve our management information, research
information and operational control systems and to expand, train and manage our
workforce.
CHANGES IN OUTSOURCING TRENDS IN THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES
COULD ADVERSELY AFFECT OUR GROWTH
Economic factors and industry trends that affect our primary customers,
pharmaceutical and biotechnology companies, also affect our business. For
example, the practice of many companies in these industries has been to
outsource from organizations like ours to conduct genetic research, clinical
research and sales and marketing projects. Some industry commentators believe
that the rate of growth of outsourcing will trend downward. If these industries
reduce their present tendency to outsource those projects, our operations,
financial condition and growth rate could be materially and adversely affected.
Recently, we also believe we have been negatively impacted by pending mergers
and other factors in the pharmaceutical industry, which appear to have slowed
decision making by our customers and delayed certain trials. A continuation of
these
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trends would have an ongoing adverse effect on our business. In addition,
numerous governments have undertaken efforts to control growing healthcare costs
through legislation, regulation and voluntary agreements with medical care
providers and pharmaceutical companies. If further regulatory cost containment
efforts limit the profits which can be derived on new drugs, our customers may
reduce their research and development spending which could reduce the business
they outsource to us. We cannot predict the likelihood of any of these events or
the effects they would have on our business, results of operations or financial
condition.
SOME PARTS OF OUR PRODUCT DEVELOPMENT SERVICES CREATE A RISK OF LIABILITY FROM
CLINICAL TRIAL PARTICIPANTS AND THE PARTIES WITH WHOM WE CONTRACT
We, through Encode, contract with drug companies to perform a wide range of
services to assist them in bringing new drugs to market. Its services include
supervising clinical trials, data and laboratory analysis, patient recruitment
and other services. The process of bringing a new drug to market is
time-consuming and expensive. If we do not perform our services to contractual
or regulatory standards, the clinical trial process could be adversely affected.
Additionally, if clinical trial services such as monitoring clinical trials,
adherence to good clinical practice and laboratory analysis do not conform to
contractual or regulatory standards, trial participants could be affected. In
such case these events would create a risk of liability to us from the drug
companies with whom we contract or the study participants.
Encode also contracts with physicians to serve as investigators in
conducting clinical trials. Such testing creates risk of liability for personal
injury to or death of patients or volunteers, particularly to patients with
life-threatening illnesses, resulting from adverse reactions to the test drugs.
It is possible third parties could claim that we should be held liable for
losses arising from any deficiencies in professional conduct of the
investigators with whom we contract or in the event of personal injury to or
death of persons participating in clinical trials. We do not believe we are
legally accountable for the medical care rendered by third party investigators,
and we would vigorously defend any such claims. Nonetheless, it is possible we
could be found liable for such losses.
In addition to supervising tests or performing laboratory analysis, Encode
will also engage in Phase I clinical trials. We also could be liable for the
general risks associated with the conducting of such trials. These risks
include, but are not limited to, adverse events resulting from the
administration of drugs to clinical trial participants or the unprofessional
practice of Phase I medical care providers.
We also could be held liable for errors or omissions in connection with our
services. For example, we could be held liable for errors or omissions or breach
of contract if one of our laboratories inaccurately reports or fails to report
lab results or if our informatics products violate rights of third parties. We
maintain insurance to cover ordinary risks but any insurance might not be
adequate, and it would not cover the risk of a customer deciding not to do
business with us as a result of poor performance.
USE OF THERAPEUTIC OR DIAGNOSTIC PRODUCTS DEVELOPED AS A RESULT OF OUR PROGRAMS
MAY RESULT IN LIABILITY CLAIMS FOR WHICH WE HAVE INADEQUATE INSURANCE
The users of any therapeutic or diagnostic products developed as a result
of our discovery or research programs or the use of our database or medical
decision-support products may bring product liability claims against us. We
currently do not carry liability insurance to cover such claims. We are not
certain that we or our collaborators will be able to obtain such insurance or,
if obtained, that sufficient coverage can be acquired at a reasonable cost. If
we cannot protect against potential liability claims, we or our collaborators
may find it difficult or impossible to commercialize products.
WE MAY BE UNABLE TO HIRE AND RETAIN THE KEY PERSONNEL UPON WHOM OUR SUCCESS
DEPENDS
We depend on the principal members of our management and scientific staff,
including Dr. Kari Stefansson, Chairman, President and Chief Executive Officer,
Hannes Smarason, Executive Vice President and Senior Business and Finance
Officer, Dr. Jeffrey Gulcher, Vice President, Research and Development and Dr.
C. Augustine Kong, Vice President of Statistics. We have not entered into
agreements with any of these
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persons that bind them to a specific period of employment. If any of these
people leaves us, our ability to conduct our operations may be negatively
affected. Our future success also will depend in part on our ability to attract,
hire and retain additional personnel. There is intense competition for such
qualified personnel and we cannot be certain that we will be able to continue to
attract and retain such personnel. Failure to attract and retain key personnel
could have a material adverse effect on us.
OUR OPERATIONS INVOLVE A RISK OF INJURY FROM HAZARDOUS MATERIALS, WHICH COULD BE
VERY EXPENSIVE TO US
Our research and manufacturing activities involve the generation, use and
disposal of hazardous materials and wastes, including various chemicals and
radioactive compounds. We are subject to laws and regulations governing the use,
storage, handling and disposal of these materials, including standards
prescribed by Iceland and applicable EU standards. Although we believe that our
safety procedures comply with such laws and regulations, we cannot eliminate the
risk of environmental contamination or injury. In the event of such an
occurrence, we could be held liable for any damages that result, which could
exceed our resources. Although we believe that we comply in all material aspects
with applicable environmental laws and regulations and do not expect to make
additional material capital expenditures in this area, we cannot predict whether
new regulatory restrictions on the production, handling and marketing of
biotechnology products will be imposed. Any such new regulatory restrictions
could require us to incur significant costs to comply.
OUR COMMON STOCK PRICE HAS BEEN HIGHLY VOLATILE
The market price of our common stock has been highly volatile. In addition
to various risks described elsewhere in this report, the following factors could
also cause price volatility:
- announcements that we or our competitors make concerning the results of
research activities, technological innovations or new commercial
products;
- changes in or adoption of new government regulations;
- regulatory actions;
- changes in patent laws;
- developments concerning proprietary rights;
- variations in operating results; and
- actual, announced or threatened litigation.
Extreme price and volume fluctuations occur in the stock market from time
to time and can particularly affect the prices of technology and biotechnology
stocks. These extreme fluctuations are unrelated to the actual performance of
the affected issuers. These broad market fluctuations may adversely affect the
market price of our common stock.
CURRENCY FLUCTUATIONS MAY NEGATIVELY AFFECT OUR FINANCIAL CONDITION
Our revenues and cash reserves are mostly denominated in U.S. dollars, but
a portion of our operating costs are denominated in Icelandic kronas. A
strengthening of the Icelandic krona against the U.S. dollar may, therefore,
have a negative impact on our financial condition.
ITEM 2. PROPERTIES
Our headquarters and laboratories are located at Lynghals 1, Reykjavik,
Iceland in a three-story building, which we lease pursuant to a sale/leaseback
arrangement. This building has 3,300 square meters, or approximately 30,000
square feet, of floor space including our laboratory, support and administrative
space. Furthermore, we have purchased a total of 2,800 square meters and leased
an additional 300 square meters in a nearby building at Krokhals 5, Reykjavik to
house additional laboratory facilities, bio-informatics and software
development. The facility is now being renovated and furnished and we expect to
start operating there in the second quarter of 2001. In addition, we maintain a
facility for approximately 15 genealogists located in Thverholt 14, Reykjavik
and we lease 2,600 square meters, or approximately 23,000 square feet, of
additional
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office space to conduct database and informatics activities and provide
additional management and administrative space at Hlidarsmari 15, Kopavogur,
Iceland. We also lease an office in Boston, Massachusetts. On February 15, 2000,
we entered into an agreement with the City of Reykjavik and the University of
Iceland pursuant to which we are planning to construct a 15,000 square meter, or
approximately 140,000 square foot building, to serve as our new headquarters and
laboratories. The building has been designed and we have recruited a contractor
for the construction. We expect to start operating in the new building in the
first half of 2002.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings except as follows:
On January 13, 2000 Thorsteinn Jonsson and Genealogia Islandorum hf., the
alledged holders of copyrights to approximately 100 books of genealogical
information, commenced an action against us in the District Court of Reykjavik
in Iceland. They allege that our genealogy database infringes their copyrights
and seek damages in the amount of approximately 616,000,000 Icelandic kronas, or
approximately $7,200,000 (as of March, 2001).and a declaratory judgment to
prevent us from using the allegedly infringing data. We believe the suit is
without merit and intend to defend this action vigorously; however, the ultimate
resolution of this matter cannot yet be determined.
On April 10, 2000, Ernir Snorrason, one of our original stockholders, filed
a complaint in the Court of Chancery of the State of Delaware for New Castle
County alleging that we improperly exercised an option to repurchase 256,637
shares of common stock that we issued to him in 1996 pursuant to a Founders'
Stock Purchase Agreement. The complaint seeks an order requiring us to recognize
Mr. Snorrason as the owner of these shares. We believe that we have good
defenses to this action and intend to defend it vigorously. However, given the
uncertainties inherent in the litigation process, we cannot be certain of the
outcome of this proceeding.
Mannvernd issued a press release in February 2000, announcing its intention
to file lawsuits against the State of Iceland and any other relevant parties,
including us, to test the constitutionality of the Act. In its press release,
Mannvernd indicated that it hopes to halt the construction and/or operation of
the Icelandic Health Sector Database. Mannvernd has not commenced litigation
against us and we are not aware of any other litigation commenced by Mannvernd
with respect to the Act; however, the ultimate resolution of this matter cannot
yet be determined.
In January 2000, an individual advised us that he believes that he and
another individual are entitled to receive, collectively, 1,000,000 shares of
our common stock pursuant to an agreement with us. The other individual has not
asserted a claim to these shares. We believe that this assertion is without
merit and intend to defend vigorously any action that this party may commence.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been traded on the Nasdaq National Market
and the EASDAQ Market under the symbol "DCGN" since July 17, 2000. The following
table sets forth, for the calendar periods indicated, the range of high and low
sale prices for the Common Stock of the Company on the Nasdaq National Market:
2000 HIGH LOW
- ---- ------ ------
Third Quarter (commencing July 17, 2000) $31.50 $22.00
Fourth Quarter $26.63 $ 8.94
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As of March 9, 2001, there were 6,495 holders of record of the Common
Stock, with beneficial stockholders in excess of such amount. On March 8, 2001,
the last sale price reported on the Nasdaq National Market for the Common Stock
was $8.50 per share.
The Company commenced an initial public offering of its common stock, $.001
par value, on July 17, 2000 pursuant to registration statements on Form S-1
(Registration Nos. 333-31984 and 333-41598), which were declared effective by
the Securities and Exchange Commission on July 17, 2000. Net proceeds to the
Company after deduction of expenses were approximately $182,000,000. During the
quarter ended December 31, 2000, the Company used approximately $3.9 million
dollars of the proceeds in its Research and Development activities. The
remaining proceeds are primarily invested in U.S. dollar denominated money
market funds, and partly in Icelandic krona denominated financial securities,
pending use by the Company.
During the quarter ended December 31, 2000, the Company sold the following
securities that were not registered under the Securities Act:
(1) On October 11, 2000, the Company issued 8,000 shares of common
stock to an Icelandic collaborator in consideration of a collaboration
arrangement.
(2) On November 8, 2000, the Company issued an aggregate of 137,910
shares of common stock to two non-U.S. entities in consideration for all of
the outstanding capital stock of Cyclops ehf.
(3) On November 15, 2000, the Company issued 70,833 shares of common
stock to Arch Venture Fund II, L.P., upon its cashless exercise of a
warrant.
(4) On November 24, 2000, the Company granted stock options to
employees, directors and consultants to purchase a total of 506,500 shares
of common stock at an average exercise price of $11.86 per share. On
December 21, 2000, the Company sold an aggregate of 185,000 shares of
common stock to two employees at an aggregate purchase price of $1,755,000,
upon the exercise of stock options granted on November 24, 2000.
The sale and issuance of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2) and/or Regulation D as transactions not involving any public
offering or Regulation S as offers and sales that occurred outside the United
States. Where appropriate, the purchasers represented their intention to acquire
the securities for investment only and not with a view to the distribution
thereof or that they were non-U.S. persons. Appropriate legends are affixed to
the stock certificates issued in those transactions. All recipients either
received adequate information about the Company or had access, through
employment or other relationships, to adequate information.
The Company has neither paid nor declared dividends on its Common Stock
since its inception and does not plan to pay dividends in the foreseeable
future. Any earnings that the Company may realize will be returned to finance
the growth of the Company.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and the notes to those
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Annual Report. The
consolidated statement of operations data for the fiscal years ended December
31, 1998, 1999 and 2000 and the consolidated balance sheet data at December 31,
1999 and 2000 are derived from consolidated financial statements included
elsewhere in this Annual Report that have been audited by PricewaterhouseCoopers
ehf., independent auditors. The consolidated statement of operations data for
the period from inception (August 23, 1996) to December 31, 1996 and for the
fiscal year ended December 31, 1997, and the consolidated balance sheet data at
December 31, 1996, 1997 and 1998 are derived from consolidated financial
statements that have been audited by PricewaterhouseCoopers ehf. and are not
included in this Annual Report. Historical results are not necessarily
indicative of future results.
INCEPTION
(AUGUST 23, 1996) YEAR ENDED DECEMBER 31,
TO DECEMBER 31, --------------------------------------------------------
1996 1997 1998 1999 2000
----------------- ----------- ------------ ------------ ------------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue.................................... $ 0 $ 0 $ 12,705,000 $ 16,591,485 $ 21,545,656
Operating expenses
Research and development............... 737,764 6,080,096 19,282,364 33,213,557 45,742,081
General and administrative............. 454,873 1,967,684 4,893,202 8,220,758 15,373,223
----------- ----------- ------------ ------------ ------------
Total operating expenses................... 1,192,637 8,047,780 24,175,566 41,434,315 61,115,304
----------- ----------- ------------ ------------ ------------
Operating loss............................. (1,192,637) (8,047,780) (11,470,566) (24,842,830) (39,569,648)
Interest income............................ 82,531 163,076 922,230 2,187,695 8,866,604
Other non-operating income and (expense),
net...................................... (42,526) (171,537) (359,894) (1,133,312) (415,459)
Taxes...................................... 0 0 0 0 0
----------- ----------- ------------ ------------ ------------
Net loss................................... (1,152,632) (8,056,241) (10,908,230) (23,788,447) (31,118,503)
=========== =========== ============ ============ ============
Accrued dividends and amortized discount on
preferred stock(2)....................... (181,852) (620,385) (2,571,523) (7,542,787) (7,540,879)
Premium on repurchase of preferred stock... 0 0 0 (30,887,044) 0
----------- ----------- ------------ ------------ ------------
Net loss available to common
stockholders(2).......................... $(1,334,484) $(8,676,626) $(13,479,753) $(62,218,278) $(38,659,382)
=========== =========== ============ ============ ============
Basic and diluted net loss per share....... $ (1.10) $ (3.85) $ (3.06) $ (9.65) $ (1.63)
Shares used in computing basic and diluted
net loss per share (1)(2)................ 1,213,925 2,254,413 4,400,576 6,446,055 23,671,113
OTHER NON-GAAP FINANCIAL DATA:
Pro forma basic and diluted net loss per
share(3)................................. $ (0.86) $ (0.85)
Shares used in computing pro forma basic
and diluted net loss per share(3)........ 27,559,365 36,483,034
AS OF DECEMBER 31,
------------------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ----------- ----------- ------------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................ $3,975,311 $2,714,225 $25,075,844 $29,845,664 $194,144,688
Total assets..................................... 7,801,556 6,770,492 38,540,115 80,526,534 248,900,567
Total long-term liabilities...................... 1,440,673 1,331,156 6,946,330 5,471,054 3,519,114
Redeemable, convertible preferred stock(2)....... 6,881,851 12,603,990 43,158,079 121,589,367 0
Total stockholders' equity (deficit)(2).......... (1,328,469) (9,907,939) (18,222,123) (72,772,138) 216,269,166
- ---------------
(1) See notes to the consolidated financial statements for an explanation of the
determination of the shares used in computing basic and diluted net loss per
share.
(2) Effective upon the closing of our initial public offering in 2000, the
outstanding shares of preferred stock were converted into shares of common
stock and retired.
(3) Pro forma basic and diluted net loss per share is computed as if the
preferred shares had converted into common shares immediately upon their
issuance. Accordingly, in the calculation of pro forma net loss per share,
net loss has not been increased for the accumulated dividends or amortized
discounts on preferred stock.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read this section in conjunction with our consolidated financial
statements and related notes thereto appearing elsewhere in this document.
OVERVIEW
deCODE was incorporated in August 1996. We have incurred losses since our
inception, principally as a result of research and development and general and
administrative expenses in support of our operations. As of December 31, 2000,
we had an accumulated deficit of $110,753,700. We anticipate incurring
additional losses over at least the next several years as we expand our internal
and collaborative gene discovery efforts, continue our technology development
and construct the deCODE Combined Data Processing system and healthcare
informatics. We expect that our losses will fluctuate from quarter to quarter
and that such fluctuations may be substantial especially because progress in our
scientific work and milestone payments which are related to progress can
fluctuate between quarters.
In February 1998, we entered into a research collaboration and
cross-license agreement with Roche regarding research into the genetic causes of
twelve diseases. Under the terms of the agreement, Roche has made equity
investments and is funding our gene discovery programs in the twelve diseases.
Under the agreement, we may receive a total of more than $200 million in
research funding and milestone payments and will receive royalty payments on the
sale of diagnostic and therapeutic products resulting from the collaboration.
The term of the agreement will continue until February 1, 2003 provided that
Roche elects to extend the agreement for the one-year period commencing on the
fourth anniversary of the agreement. Revenues recognized by us have consisted
primarily of revenues generated under the research collaboration and
cross-license agreement with Roche. Roche constituted 96% of our total revenues
in the year ended December 31, 2000. See "Business."
In May 2000, we entered into a strategic alliance agreement and crosswalk
development agreement with Partners Healthcare System, Inc., The General
Hospital Corporation, d.b.a. Massachusetts General Hospital and The Brigham and
Women's Hospital, Inc., (collectively "Partners") pursuant to which (a) we will
fund research by investigators of Partners pursuant to sponsored research
agreements and/or clinical trial agreements to be entered into from time to
time, (b) we will collaborate with Partners on, and provide funding for,
development of an information technology bridge, called the crosswalk, to
facilitate studies with the deCODE Combined Data Processing system and Partners'
Research Patient Data Registry and (c) we will develop and market, in
consultation with Partners, new information technology products and services
relating to the use of the crosswalk for future pharmaceutical and biotechnology
applications.
We have a number of collaborative agreements with local medical
institutions and doctors regarding particular disease research. These agreements
generally extend for a period of five years. Under the agreements, these
institutions and/or physicians contribute data or other clinical information and
we contribute equipment, research supplies and our molecular genetics and
experimental design expertise. The agreements also require us to reimburse all
project-related expenses. If we sell project results, the agreements require us
to make specified payments and pay a portion of performance-based milestone
payments that we receive. In addition, we have a settlement agreement with a
non-Icelandic medical institution whereby we are committed to pay royalties and
milestone payments if we are successful in developing and commercializing
products which result from a particular technology jointly owned by us and the
medical institution.
We anticipate that collaborations will remain an important element of our
business strategy and future revenues. Our ability to generate revenue growth
and become profitable is dependent, in part, on our ability to enter into
additional collaborative arrangements, and on our ability and our collaborative
partners' ability to successfully commercialize products incorporating, or based
on, our work. There can be no assurance that we will be able to maintain or
expand our existing collaborations, enter into future collaborations to develop
applications based on existing or future research agreements or successfully
commercialize the deCODE Combined Data Processing system.
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We intend to invest in all of our three business units, discovery services,
database services and healthcare informatics, and expect to report net losses
for the next few years. If the costs of these investments are greater than
anticipated, or if they take longer to complete, or if losses are incurred from
strategic investments, we may incur losses for a longer period of time.
Our failure to successfully develop and market products over the next
several years, or to realize product revenues, would have a material adverse
effect on our business, financial condition and results of operations. We do not
expect to receive royalties or other revenues from commercial sales of products
developed using our technologies for at least several years, if at all.
We have made and intend to continue to make strategic equity investments
in, and acquisitions of, technologies and businesses that are complementary to
our business. As a result, we may record losses or expenses related to our
proportionate ownership interest in such long-term equity investments, record
charges for the acquisition of in-process technologies, or record charges for
the recognition of the impairment in the value of the securities underlying such
investments.
Our operating results through December 31, 2000 reflect the expenses
incurred in our gene discovery activities, partly offset by the revenues
received pursuant to our research collaboration agreement with Roche in
connection with these activities. We will continue these activities, but our
operating results will also reflect the substantial costs we expect to incur in
commencing the development of the Icelandic Health Sector Database and the
deCODE Combined Data Processing system. While we intend to enter into
collaborations to help fund and develop the deCODE Combined Data Processing
system, until we do so there will be no revenue from our database service
activities to offset against these costs.
Comparison of Years Ended December 31, 2000 and 1999
Revenues. Our revenues increased to $21,545,656 for the year ended
December 31, 2000 as compared to $16,591,485 for the year ended December 31,
1999, an increase of 30%. Revenues related to our agreement with Roche increased
to $20,693,333 for the year ended December 31, 2000 from $15,776,667 for the
year ended December 31, 1999, an increase of 31%. This increase primarily
resulted from new milestones having been achieved under the agreement with Roche
in 2000. However, revenue would have increased a further $1.5 million for the
full year ended December 31, 2000 had we not had a revision resulting from
Roche's extension of the term of our agreement with them through January 2002.
Revenue would thus have been, had it not been for this revision, a total of
$23.0 million. The cumulative effect at the time of this revision ($1.3 million)
was recorded as a reduction to revenue in the fourth quarter of 2000. We could
have further significant downward revisions to revenue under the retrospective
straight-line basis of recognizing milestone revenues in our collaboration with
Roche resulting from, among other things, further extension by Roche of the
contractual term of our collaboration with them.
At December 31, 2000, the total amount of deferred research revenue which
will be recognized in future periods aggregated $4,404,999.
In connection with our July 2000 initial public offering, we adopted the
provisions of Staff Accounting Bulletin No. 101 (SAB 101) on revenue
recognition. Under SAB 101, milestone revenue is recognized on a retrospective
basis over the contractual term of the agreement with Roche. Accordingly, upon
achievement of the milestone, a portion of the milestone payment equal to the
percentage of the collaboration completed through that date is recognized. The
remainder is recognized as services are performed (generally straight-line) over
the remaining term of the collaboration.
Research and Development. Our research and development expenses increased
to $45,742,081 for the year ended December 31, 2000 as compared to $33,213,557
for the year ended December 31, 1999, an increase of 38%. We have continued to
expand our research and development operations, including our hiring of
additional research personnel and the resulting salary and benefits costs, an
expansion of our laboratory facilities and equipment acquisitions and the
resulting depreciation, and our increased research efforts. License fee costs,
payable to the Icelandic government, as required by the Icelandic Health Sector
Database operating license, were also recorded in the year ended December 31,
2000; no such costs were recorded in the year
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ended December 31, 1999 because the license had not yet been issued. We expect
to continue to increase research and development spending as we pursue and
expand our research efforts and accelerate the development of the database
services. We also expect research and development to increase with the
establishment of our new subsidiaries, Encode and deCODE Cancer.
General and Administrative. Our general and administrative expenses
increased to $15,373,223 for the year ended December 31, 2000 as compared to
$8,220,758 for the year ended December 31, 1999, an increase of 87%. This
increase was partly attributable to $3.2 million in charitable contributions of
our stock and the resulting expense recorded in the year ended December 31,
2000. This increase is also due to continued expansion of operations, including
our hiring of additional general and administrative personnel and the resulting
salary and benefits costs. We expect that general and administrative expenses
will increase in 2001.
Stock-Based Compensation and Remuneration Expense. Stock-based
compensation and remuneration expense was $8,686,507 for the year ended December
31, 2000 as compared to $9,045,865 for the year ended December 31, 1999, a
decrease of 4%. Historical stock-based compensation and remuneration is not
necessarily representative of the effects on reported income or loss for future
years due to, among other things, the vesting period of the stock options and
the fair value of additional stock options that may be granted in future years.
Interest Income. Our interest income increased to $8,866,604 for the year
ended December 31, 2000 as compared to $2,187,695 for the year ended December
31, 1999, a 305% increase. This increase is primarily due to higher average cash
reserves as a result of our initial public offering.
Other non-operating income and (expense), net. Our other non-operating
income and expense, net decreased to a net expense of $415,459 for the year
ended December 31, 2000 as compared to $1,133,312 for the year ended December
31, 1999 primarily as a result of the impact of deconsolidating Prokaria. See
"Notes to Financial Statements -- Investments and Other."
Income Taxes. As of December 31, 2000, we had accumulated losses of
$110,753,700 and did not owe any Icelandic or U.S. federal income taxes nor did
we pay any in the years ended December 31, 2000 and 1999. Realization of
deferred tax assets is dependent on future earnings, if any. As of December 31,
2000, we had net operating losses able to be carried forward for federal income
tax purposes of approximately $458,000 to offset future federal taxable income
in the United States which begins to expire in 2018 and our subsidiary had net
operating loss carryforwards of approximately $20.2 million which expire in
varying amounts beginning in 2004.
Net Loss and Basic and Diluted Net Loss Per Share. Net loss and basic and
diluted net loss per share were $31,118,503 and $1.63 for the year ended
December 31, 2000, respectively, as compared to $23,788,447 and $9.65 for the
year ended December 31, 1999, respectively. This is an increase of 31% in net
loss and a decrease of 83% in basic and diluted net loss per share. Although net
loss has increased, basic and diluted net loss per share has decreased primarily
as a result of the greater number of average shares outstanding as a result of
our initial public offering in July 2000 and a decrease in the net loss
available to common stockholders to $38,659,382.
Pro Forma Basic and Diluted Net Loss Per Share. Pro forma basic and
diluted net loss per share is computed as if the preferred shares had converted
into common shares immediately upon their issuance. Accordingly, in the
calculation of pro forma net loss per share, net loss has not been increased for
the accumulated dividends or amortized discounts on preferred stock. Pro forma
basic and diluted net loss per share decreased to $0.85 for the year ended
December 31, 2000 as compared to $0.86 for the year ended December 31, 1999.
Comparison of Years Ended December 31, 1999 and 1998
Revenues. Our revenues increased to $16,591,485 for the year ended
December 31, 1999 as compared to $12,705,000 for the year ended December 31,
1998, an increase of 31%. The increase was primarily due to revenues related to
milestone payments received pursuant to our research collaboration agreement
with Roche. The increase also reflected the recognition of twelve months of
research funding provided by Roche in 1999 compared to eleven months in 1998 and
the receipt of laboratory equipment and consumables from Affymetrix in the first
fiscal quarter of 1999 as consideration for services provided by us on its
behalf.
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Research and Development. Our research and development expenses increased
to $33,213,557 for the year ended December 31, 1999 as compared to $19,282,364
for the year ended December 31, 1998, an increase of 72%. This increase was
primarily attributable to the continued expansion of operations including our
hiring of additional research personnel and the resulting salary and benefits
costs, an expansion of our laboratory facility and the resulting depreciation,
and our increased research efforts.
General and Administrative. Our general and administrative expenses
increased to $8,220,758 for the year ended December 31, 1999 as compared to
$4,893,202 for the year ended December 31, 1998, an increase of 68%. This
increase was principally attributable to the increase in personnel and related
salaries and benefits costs.
Stock-Based Compensation and Remuneration Expense. Stock-based
compensation and remuneration expense was $9,045,865 for the year ended December
31, 1999 as compared to $5,219,642 for the year ended December 31, 1998, an
increase of 73%. This increase was primarily attributable to compensation
expense being recorded on the 855,500 stock options granted in 1999 as well as a
full year of compensation expense being recorded on the stock options granted in
1998.
Interest Income. Our interest income increased to $2,187,695 for the year
ended December 31, 1999 as compared to $922,230 for the year ended December 31,
1998, a 137% increase. This increase primarily derived from interest on payments
received in connection with a stock issuance. The increase was also attributable
to increased cash reserves resulting from milestone payments pursuant to our
research collaboration agreement with Roche.
Other non-operating income and (expense), net. Our other non-operating
income and expense, net increased to a net expense of $1,133,312 for the year
ended December 31, 1999 as compared to $359,894 for the year ended December 31,
1998 primarily as a result of our equity in net loss of affiliate, Gagnalind
hf., during the year ended December 31, 1999.
Net Loss and Basic and Diluted Net Loss Per Share. Net loss and basic and
diluted net loss per share were $23,788,447 and $9.65 for the year ended
December 31, 1999, respectively, as compared to $10,908,230 and $3.06 for the
year ended December 31, 1998, respectively. This is an increase of 118% in net
loss and 215% in basic and diluted net loss per share. The increase in basic and
diluted net loss per share is greater than the increase in net loss primarily
due to a greater net loss available to common stockholders in the year ended
December 31, 1999 as a result of the premium on repurchase of preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, we had $194,144,688 in cash and cash equivalents.
Available cash is invested in accordance with our investment policy's primary
objectives of liquidity, safety of principal and diversity of investments.
Inflation has not had a material effect on our business.
Net cash used in operating activities was $16,124,995 for the year ended
December 31, 2000, as compared to $11,797,086 in the year ended December 31,
1999 and $2,067,278 in the year ended December 31, 1998. The increase was
primarily due to higher research and development and general and administrative
expenses, which were only partly offset by higher revenues in 2000.
Our investing activities have consisted of capital expenditures and
long-term strategic equity investments in, and acquisitions of, technologies and
businesses that are complementary to our business. Purchase of property and
equipment for the year ended December 31, 2000 was $15,469,623 compared to
$2,885,644 in the year ended December 31, 1999 and $5,084,441 in the year ended
December 31, 1998, primarily due to the expansion of our facilities and
operations. During the year ended December 31, 2000 we expended $3,539,184 in
respect of a new building to house our operations in the University District of
Reykjavik. In addition, while not impacting cash flows from investing activities
in 2000, we acquired fifty new ABI Prism 3700 DNA Analyzers in 2000 in exchange
for $13,150,000 and twenty-four of our used gene sequencing machines. The
laboratory equipment was placed into service in September and October and
payment was made in February 2001. Net cash used in investing activities may in
the future fluctuate significantly from quarter to quarter due to the timing of
capital expenditures and investments.
Net cash provided by financing activities was $196,865,248 for the year
ended December 31, 2000 as compared to $19,553,293 in the year ended December
31, 1999 and $29,513,338 in the year ended
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December 31, 1998. This increase was largely due to approximately $182 million
of net proceeds from our July 2000 initial public offering.
deCODE's cash is deposited only with financial institutions in Iceland,
United Kingdom and the United States having a high credit standing. Almost all
of this cash is invested in dollar denominated money market instruments but
partly invested in Icelandic krona denominated financial securities.
In January 2001 we engaged a contractor for the construction of a new
building to house our operations in the University District of Reykjavik. Total
project cost is estimated to be approximately $30 million and $3,539,184 has
been incurred through December 31, 2000. We expect that the new building will be
complete before the end of 2001. We are currently exploring various methods for
financing this project. We had no other material commitments for capital
expenditures at December 31, 2000.
We expect cash requirements to continue to increase significantly as we:
invest in genotyping, sequencing and bioinformatics capabilities; invest in
software and hardware to support the continuing development of the database
services; continue to seek access to technologies through investments, research
and development alliances, license agreements and/or acquisitions; and continue
to make improvements in existing facilities and invest in new facilities.
Based upon our current plans, and taking into consideration the proceeds of
the initial public offering, we believe that our existing resources will be
adequate to satisfy our capital needs for several years. Our cash requirements
depend on numerous factors, including our ability to obtain new research
collaboration agreements, to obtain subscription and collaboration agreements
for the database services; expenditures in connection with alliances, license
agreements and acquisitions of and investments in complementary technologies and
businesses; competing technological and market developments; the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights; the purchase of additional capital equipment, including capital
equipment necessary to ensure that our sequencing and genotyping operations
remain competitive; capital expenditures required to expand the company's
facilities. Changes in our research and development plans or other changes
affecting our operating expenses may result in changes in the timing and amount
of expenditures of our capital resources.
We will require significant additional capital in the future, which we may
seek to raise through public or private equity offerings, debt financing or
additional collaborations and licensing arrangements. No assurance can be given
that additional financing or collaborations and licensing arrangements will be
available when needed, or that if available, will be obtained on favorable
terms. If adequate funds are not available when needed, we may have to curtail
operations or attempt to raise funds on unattractive terms. See "Risk
Factors -- We may not be able to obtain sufficient additional funding to meet
our expanding capital requirements."
IMPACT OF CURRENCY FLUCTUATIONS
We publish our consolidated financial statements in U.S. dollars. Currency
fluctuations can affect our financial results as revenues and cash reserves are
mostly in U.S. dollars but a portion of operating costs are in Icelandic kronas.
A strengthening of the Icelandic krona against the dollar can thus adversely
affect the "buying power" of our cash reserves and revenues. On the other hand,
weakening of the Icelandic krona can strengthen our financial position. Most of
our long-term liabilities are U.S. dollar denominated. We have not previously
engaged in, and do not now contemplate entering into, currency hedging
transactions. However, we may enter into such transactions on a non-speculative
basis to the extent that we may in the future have substantial foreign currency
exposure, for example, in connection with payments from collaborative partners
or due to investments.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities" amended in June
2000 by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." These Statements establish a new model for accounting for
hedging activities and supersede and amend a number of existing standards. Upon
the standard's initial
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application, all derivatives are required to be recognized in the balance sheet
as either assets or liabilities and measured at fair value. In addition, all
hedging relationships must be designated, reassessed and documented. We are
required to implement the Statements in the first quarter of 2001. Considering
our current activities, there will be no significant impact on our financial
position or results of operations upon adoption of SFAS No. 133.
In September 2000, the FASB issued SFAS No. 140 (SFAS No. 140), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This Statement replaces FASB SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
revising the accounting for securitizations and other transfers of financial
assets and collateral as well as requiring certain additional disclosures. SFAS
No. 140 establishes standards that are based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished.
This Statement is effective prospectively, with certain exceptions, for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001, however, considering our current activities, it
is not anticipated that the adoption of SFAS No. 140 will have a significant
impact on our financial position or results of operations. This Statement was
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for our fiscal year ended
December 31, 2000, however had no impact on our financial position or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while maximizing income we receive from our investments without significantly
increasing risk. Some of the securities in our investment portfolio may be
subject to market risk. This means that a change in prevailing interest rates
may cause the market value of the investment to fluctuate. For example, if we
hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the market
value of our investment will probably decline. To minimize this risk in the
future, we intend to maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, money market
funds and government and non-government debt securities. In general, money
market funds are not subject to market risk because the interest paid on such
funds fluctuates with the prevailing interest rate. As of December 31, 2000, all
of our cash and cash equivalents were in money market and checking accounts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed pursuant to this Item 8 are
appended to this Annual Report on Form 10-K. A list of the financial statements
filed herewith is found at "Index to Financial Statements and Schedules" on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
For information concerning this item, see the information under "Election
of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement to be filed with respect
to the Annual Meeting of Stockholders to be held on June 15, 2001, which
information is incorporated herein by reference.
43
45
ITEM 11. EXECUTIVE COMPENSATION
For information concerning this item, see the information under "Executive
Compensation" in the Company's Proxy Statement to be filed with respect to the
Annual Meeting of Stockholders to be held on June 15, 2001, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning this item, see the information under "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement to be filed with respect to the Annual Meeting of Stockholders to be
held on June 15, 2001, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning this item, see the information under "Certain
Relationships and Related Transactions" in the Company's Proxy Statement to be
filed with respect to the Annual Meeting of Stockholders to be held on June 15,
2001, which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are included as part of this Annual Report on
Form 10-K:
1. Financial Statements:
PAGE
----
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Stockholders' Equity
(Deficit)................................................. F-5
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
2. All schedules are omitted as the information required is inapplicable or
the information is presented in the consolidated financial statements or the
related notes.
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation, as
further amended (Incorporated by reference to Exhibit 3.1
and Exhibit 3.3 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31984) which became effective
on July 17, 2000).
3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-31984) which became effective on July 17, 2000)
4.1 Specimen Common Stock Certificate (Incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31984) which became effective
on July 17, 2000)
4.2 Form of Warrant to Purchase Series A Preferred Stock
(Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
44
46
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.3 Form of Warrant to Purchase Series C Preferred Stock
(Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.1 Form of License from The Icelandic Data Protection
Commission (now, The Icelandic Data Protection Authority) to
Islensk erfoagreining ehf. and its Clinical Collaborators to
Use and Access Patient Records and Other Clinical Data
Relating to Individuals (Incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form
S-1 (Registration No. 333-31984) which became effective on
July 17, 2000)
10.2+ 1996 Equity Incentive Plan, as amended (Incorporated by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-8 (Registration No. 333-56996) filed on
March 14, 2001)
10.3+ Form of Non-Statutory Stock Option Agreement, as executed by
employees and officers of deCODE genetics, Inc. who received
non-statutory stock options
10.4+ Form of Employee Proprietary Information and Inventions
Agreement (Incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-31984) which became effective on July 17, 2000)
10.5 Agreement on the Collaboration of Friorik Skulason (FS) and
Islensk erfoagreining ehf. (IE) on the Creation of a
Database of Icelandic Genealogy, dated April 15, 1997
(Incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.6* Research Agreement between deCODE genetics, Inc., and
Islensk erfoagreining ehf. and Rannsokna- og
Fraeethslusjoethurinn ehf., dated October 24, 1997, as
extended (Incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-31984) which became effective on July 17, 2000)
10.7+ Consultancy Contract between deCODE genetics, Inc. and Vane
Associates, dated December 1, 1997, together with
Nondisclosure Agreement executed by Vane Associates as of
December 1, 1997, as amended (Incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on Form
S-1 (Registration No. 333-31984) which became effective on
July 17, 2000)
10.8+ Indemnity Agreement between deCODE genetics, Inc. and Sir
John Vane, dated December 1, 1997 (Incorporated by reference
to Exhibit 10.8 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31984) which became effective
on July 17, 2000)
10.9* Settlement Agreement between The Beth Israel Deaconess
Medical Center and deCODE genetics, Inc., dated as of
December 31, 1997 (Incorporated by reference to Exhibit 10.9
to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.10+ Amended and Restated Non-Recourse Promissory Note between
deCODE genetics, Inc. and Hannes Smarason, dated March 24,
1999 (Incorporated by reference to Exhibit 10.10 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-31984) which became effective on July 17, 2000)
10.11* Research Collaboration and Cross-license Agreement among F.
Hoffman-La Roche Ltd, Hoffman-La Roche Inc. and deCODE
genetics, Inc., dated February 1, 1998 (Incorporated by
reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
10.12 Amended and Restated Investor rights Agreement of deCODE
genetics, Inc., dated as of February 2, 1998, as further
amended and restated (Incorporated by reference to Exhibit
10.12 to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
45
47
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.13* Collaboration Agreement between The Icelandic Heart
Association (Hjartavernd) and Islensk erfoagreining ehf.,
dated February 13, 1998 (Incorporated by reference to
Exhibit 10.13 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31984) which became effective
on July 17, 2000)
10.14* Collaboration Agreement between Dr. Helgi Jonsson,
(th)orvaldur Ingvarsson and Islensk erfoagreining ehf.,
dated March 31, 1998 (Incorporated by reference to Exhibit
10.14 to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.15* Collaboration Agreement between The Research Group on
Arterial Hypertension and Islensk erf(LOGO)agreining ehf.,
dated June 3, 1998 (Incorporated by reference to Exhibit
10.15 to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.16 Contract on Sale and Leaseback between Islensk erfoagreining
ehf. and The Icelandic Investment Bank, dated June 8, 1998
(Incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.17 Contract on Financial Leasing between Islensk erfoagreining
ehf. and Lysing hf., dated June 19, 1998 (Incorporated by
reference to Exhibit 10.17 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
10.18+ Employment Agreement between Islensk erfoagreining ehf. and
Axel Nielsen, dated July 1, 1998 (Incorporated by reference
to Exhibit 10.18 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31984) which became effective
on July 17, 2000)
10.19* Collaboration Agreement between a Collaboration Group on
Alzheimer's Disease and Related Disorders and Islensk
erfoagreining ehf., dated July 19, 1998 (Incorporated by
reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
10.20* Collaboration Agreement between The Research Group on
Osteoporosis and Islensk erfoagreining ehf., dated July 19,
1998 (Incorporated by reference to Exhibit 10.20 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-31984) which became effective on July 17, 2000)
10.21+ Employment Agreement between Islensk erfoagreining ehf. and
Kristjan Erlendsson, dated September 4, 1998 (Incorporated
by reference to Exhibit 10.21 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
10.22 Co-operation Agreement between Reykjavik Hospital and
Islensk erfoagreining ehf., dated November 4, 1998
(Incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.23+ Amended and Restated Non-Recourse Promissory Note between
deCODE genetics, Inc. and Sigurour I. Bjornsson, dated March
24, 1999 (Incorporated by reference to Exhibit 10.23 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-31984) which became effective on July 17, 2000)
10.24 Co-operation Agreement between the Iceland State Hospital
and Islensk erfoagreining ehf., dated December 15, 1998
(Incorporated by reference to Exhibit 10.24 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.25+ Employment Contract between Islensk erfoagreining ehf. and
Sigurour I. Bjornsson, dated January 15, 1999 (Incorporated
by reference to Exhibit 10.25 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
46
48
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.26 Lease between Frioar sf. and Islensk erfoagreining ehf.,
dated February 18, 1999 (Incorporated by reference to
Exhibit 10.26 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31984) which became effective
on July 17, 2000)
10.27* Research Contract on the Co-operation of a Research Team for
Age-Related Macular Degeneration and Islensk erfoagreining
ehf., dated April 27, 1999 (Incorporated by reference to
Exhibit 10.27 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31984) which became effective
on July 17, 2000)
10.28* Research Contract on the Co-operation of a Research Team for
Peripheral Artery Occulsive Disease and Islensk
erfOagreining ehf., dated May 28, 1999 (Incorporated by
reference to Exhibit 10.28 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
10.29* Research Contract on the Co-operation of a Research Team for
Allergy and Asthma and Islensk erfoagreining ehf., dated
July 1, 1999 (Incorporated by reference to Exhibit 10.29 to
the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.30 Series A Preferred Stock Repurchase Agreement between deCODE
genetics, Inc. and certain holders of Series A preferred
Stock, dated as of July 12, 1999, with attached Addendum
(Incorporated by reference to Exhibit 10.30 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.31 Series C Preferred Stock Repurchase Agreement between deCODE
genetics, Inc. and Roche Finance Ltd., dated as of July 12,
1999, with attached Addendum (Incorporated by reference to
Exhibit 10.31 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31984) which became effective
on July 17, 2000)
10.32 Common Stock Repurchase Agreement between deCODE genetics,
Inc. and Kari Sefansson, dated as of July 12, 1999
(Incorporated by reference to Exhibit 10.32 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.33 Stock Purchase Agreement between deCODE genetics, Inc. and
Biotek Invest, S.A., dated as of June 30, 1999, with
attached Addendum (Incorporated by reference to Exhibit
10.33 to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.34 Co-operation Agreement between Akureyri Central Hospital and
Islensk erfoagreining ehf., dated October 26, 1999, with
attached Declaration (Incorporated by reference to Exhibit
10.34 to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.35+ Non-Recourse Promissory Note between deCODE genetics, Inc.
and Hannes Smarason, dated September 15, 1999 (Incorporated
by reference to Exhibit 10.35 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
10.36* Research Contract on the Co-Operation of a Research Team for
Cerebral Haemorrhage and Islensk erfoagreining ehf., dated
November 3, 1999 (Incorporated by reference to Exhibit 10.36
to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.37 Lease between the Computer Centre of the Icelandic Savings
Banks and Islensk erfoagreining ehf., dated November 24,
1999 (Incorporated by reference to Exhibit 10.37 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-31984) which became effective on July 17, 2000)
47
49
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.38 Research Collaboration Agreement by and between Islenskar
hveraorverur ehf. (now Prokaria, ehf.) and Islensk
erfoagreining ehf., dated December 28, 1999 (Incorporated by
reference to Exhibit 10.38 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
10.39 Agreement between The Minister for Health and Social
Security and Islensk erfoagreining ehf. relating to the
Issue of an Operating License for the Creation and Operation
of a Health Sector Database, dated January 21, 2000
(Incorporated by reference to Exhibit 10.39 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.40 Operating License issued to Islensk erfoagreining ehf., for
the Creation and Operation of a Health Sector Database,
dated January 22, 2000 (Incorporated by reference to Exhibit
10.40 to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.41 Series B Preferred Stock Agreement between deCODE genetics,
Inc. and Kari Stefansson, dated as of March 1, 2000
(Incorporated by reference to Exhibit 10.41 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.42 Agreement between The University of Iceland, Islensk
erfoagreining ehf., and the City of Reykjavik, dated
February 15, 2000 (Incorporated by reference to Exhibit
10.42 to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.43 Lease between Islensk erfoagreining ehf. and Faghus ehf.,
dated as of March 1, 2000 (Incorporated by reference to
Exhibit 10.43 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31984) which became effective
on July 17, 2000)
10.44+ Form of Employee Confidentiality, Invention Assignment and
Non-Compete Agreement executed by certain officers
(Incorporated by reference to Exhibit 10.44 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.45 Series C Preferred Stock and Warrant Purchase Agreement
between Roche Finance Ltd and deCODE genetics, Inc., dated
as of February 1, 1998 (Incorporated by reference to Exhibit
10.45 to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.46 Founder Stock Purchase Agreement between deCODE genetics,
Inc. and Jeffrey R. Gulcher, dated as of August 21, 1996
(Incorporated by reference to Exhibit 10.46 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.47* Research Contract on the Co-Operation of a Research Team for
Chronic Obstructive Pulmonary Disease and Islensk
erfoagreining ehf., dated as of July 1, 1999 (Incorporated
by reference to Exhibit 10.47 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
10.48* Strategic Alliance Agreement between Partners HealthCare
System, Inc., The General Hospital Corporation, d.b.a.
Massachusetts General Hospital, The Brigham and Women's
Hospital, Inc. and deCODE genetics Ltd. (Islensk
erfoagreining), dated May 11, 2000 (Incorporated by
reference to Exhibit 10.48 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
10.49* Crosswalk Development Agreement between Partners HealthCare
System, Inc., The General Hospital Corporation, d.b.a.
Massachusetts General Hospital, The Brigham and Women's
Hospital, Inc. and deCODE genetics Ltd. (Islensk
erfoagreining), dated May 11, 2000 (Incorporated by
reference to Exhibit 10.49 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
48
50
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.50 Property Leasing Contract on Premises at Hlioarsmari 15
between Veigur ehf. and Islensk erfoagreining ehf., dated
April 2000 (Incorporated by reference to Exhibit 10.50 to
the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.51* Research Contract on the Co-Operation between a Research
Team for The Epidemiology and Heredity Lung Cancer and
Islensk erfoagreining ehf., dated as of June 26, 2000
(Incorporated by reference to Exhibit 10.51 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.52+ Employment Agreement between Islensk erfoagreining ehf. and
Hakon Guobjartsson, dated May 5, 1999
10.53 Stock Purchase Agreement between Islensk erfoagreining ehf.
and KACE Traders Ltd., dated November 8, 2000
10.54+ Employment Agreement between Islensk erfoagreining ehf. and
Einar Stefansson, dated November 22, 2000
10.55+ Non-Recourse Promissory Note between deCODE genetics, Inc.
and Einar Stefansson, dated December 21, 2000
10.56+ Employment letter between deCODE genetics, Inc. and
Augustine Kong, dated December 30, 2000
10.57+ Employee Confidentiality, Invention Assignment and
Non-Compete Agreement between deCODE genetics, Inc. and C.
Augustine Kong, dated January 1, 2001
10.58 Form of Contract on the Processing of Clinical Data and
their Transfer to a Health Sector Database between several
Health Institutions and Islensk erfoagreining ehf.
21.1 Subsidiaries of deCODE genetics, Inc.
23.1 Consent of PricewaterhouseCoopers ehf., independent public
accountants
99.1 Government Regulation on a Health Sector Database, dated
January 22, 2000 (Incorporated by reference to Exhibit 99.1
to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
99.2 Act. No. 139/1998 on a Health Sector Database (Incorporated
by reference to Exhibit 99.2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
- ---------------
* Confidential treatment has been granted with respect to a portion of this
Exhibit.
+ Denotes a management contract or compensation plan or arrangement required to
be filed as an exhibit pursuant to Item 14(a) of this Form 10-K.
(b) REPORTS ON FORM 8-K
We did not file any reports on Form 8-K during the quarter ended December
31, 2000
49
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
deCODE genetics, Inc.
By: /s/
DR. KARI STEFANSSON MARCH 20,
2001
------------------------------------
Dr. Kari Stefansson, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DR. KARI STEFANSSON Chairman, President, Chief March 20, 2001
- --------------------------------------------------- Executive Officer (principal
Dr. Kari Stefansson executive officer) and
Director
/s/ AXEL NIELSEN Vice President, Finance and March 20, 2001
- --------------------------------------------------- Treasurer (principal
Axel Nielsen financial officer and
principal accounting officer)
/s/ JEAN-FRANCOIS FORMELA Director March 20, 2001
- ---------------------------------------------------
Jean-Francois Formela
/s/ ANDRE LAMOTTE Director March 20, 2001
- ---------------------------------------------------
Andre Lamotte
/s/ TERRANCE MCGUIRE Director March 20, 2001
- ---------------------------------------------------
Terrance McGuire
/s/ SIR JOHN VANE Director March 20, 2001
- ---------------------------------------------------
Sir John Vane
50
52
deCODE GENETICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Stockholders' Equity
(Deficit)................................................. F-5
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
F-1
53
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and stockholders of deCODE genetics, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows present fairly, in all material respects, the
consolidated financial position of deCODE genetics, Inc. ("deCODE") at December
31, 1999 and 2000 and the consolidated results of its operations and its
consolidated cash flows for each of the three years in the period ended December
31, 2000, in conformity with generally accepted accounting principles in the
United States. These financial statements are the responsibility of deCODE's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards in the United States,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers ehf.
Reykjavik, Iceland
March 9, 2001
F-2
54
deCODE GENETICS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
1999 2000
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 29,845,664 $ 194,144,688
Receivable from share issuance............................ 33,143,836 0
Receivables and other current assets...................... 3,695,351 14,482,336
------------ -------------
Total current assets.............................. 66,684,851 208,627,024
Property and equipment, net................................. 13,051,466 37,100,690
Other long-term assets...................................... 790,217 3,172,853
------------ -------------
Total assets...................................... $ 80,526,534 $ 248,900,567
============ =============
LIABILITIES, REDEEMABLE, CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses..................... $ 4,314,115 $ 22,957,481
Current portion of capital lease obligations.............. 2,218,726 1,749,807
Deferred research revenue................................. 2,238,333 4,404,999
Payable to preferred shareholders......................... 17,467,077 0
------------ -------------
Total current liabilities......................... 26,238,251 29,112,287
Capital lease obligations, net of current portion......... 4,549,809 2,801,853
Other long-term liabilities............................... 921,245 717,261
Redeemable, convertible preferred stock, $0.001 par value;
No shares authorized at December 31, 2000:
Series A; no shares issued or outstanding at December 31,
2000................................................... 12,405,887 0
Series B; no shares issued or outstanding at December 31,
2000................................................... 99,865,152 0
Series C; no shares issued or outstanding at December 31,
2000................................................... 9,318,328 0
------------ -------------
Total redeemable, convertible preferred stock..... 121,589,367 0
------------ -------------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; Authorized: 7,016,666
and 6,716,666 shares at December 31, 1999 and 2000,
respectively Issued and outstanding: none.............. 0 0
Common stock, $0.001 par value; Authorized: 48,000,000 and
60,000,000 shares at December 31, 1999 and 2000,
respectively Issued and outstanding: 9,604,012 and
45,041,969 shares at December 31, 1999 and 2000,
respectively........................................... 9,604 45,042
Additional paid-in capital................................ 35,072,575 350,398,909
Notes receivable.......................................... (9,597,830) (11,850,953)
Deferred compensation..................................... (12,549,757) (11,568,776)
Dividends accreted on redeemable, convertible preferred
stock.................................................. (8,384,951) 0
Accumulated deficit....................................... (77,324,190) (110,753,700)
Accumulated other comprehensive income.................... 2,411 (1,356)
------------ -------------
Total stockholders' equity (deficit).............. (72,772,138) 216,269,166
------------ -------------
Total liabilities, redeemable, convertible
preferred stock and stockholders' equity
(deficit)....................................... $ 80,526,534 $ 248,900,567
============ =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
55
deCODE GENETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1999 2000
------------ ------------ ------------
REVENUE
Research collaborative contract................ $ 12,705,000 $ 15,776,667 $ 20,693,333
Other revenue.................................. 0 814,818 852,323
------------ ------------ ------------
Total revenue.......................... 12,705,000 16,591,485 21,545,656
OPERATING EXPENSES
Research and development....................... 19,282,364 33,213,557 45,742,081
General and administrative..................... 4,893,202 8,220,758 15,373,223
------------ ------------ ------------
Total operating expenses............... 24,175,566 41,434,315 61,115,304
------------ ------------ ------------
Operating loss................................... (11,470,566) (24,842,830) (39,569,648)
Interest income.................................. 922,230 2,187,695 8,866,604
Other non-operating income and (expense), net.... (359,894) (1,133,312) (415,459)
Taxes............................................ 0 0 0
------------ ------------ ------------
Net loss......................................... (10,908,230) (23,788,447) (31,118,503)
Accrued dividends and amortized discount on
preferred stock................................ (2,571,523) (7,542,787) (7,540,879)
Premium on repurchase of preferred stock......... 0 (30,887,044) 0
------------ ------------ ------------
Net loss available to common stockholders........ $(13,479,753) $(62,218,278) $(38,659,382)
============ ============ ============
Basic and diluted net loss per share............. $ (3.06) $ (9.65) $ (1.63)
Shares used in computing basic and diluted net
loss per share................................. 4,400,576 6,446,055 23,671,113
The accompanying notes are an integral part of the Consolidated Financial
Statements.
F-4
56
deCODE GENETICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
DIVIDENDS
ACCRETED
ON
SHARES REDEEMABLE,
---------------------- ADDITIONAL CONVERTIBLE
PAR PAID-IN NOTES DEFERRED PREFERRED ACCUMULATED
COMMON STOCK VALUE CAPITAL RECEIVABLE COMPENSATION STOCK DEFICIT
------------ ------- ------------ ------------ ------------ ----------- -------------
BALANCE AT DECEMBER 31,
1997........................ 6,035,000 $ 6,035 $ 140,535 $ 0 $ (43,399) $ (787,026) $ (9,224,084)
Issuance of common stock..... 200,000 200 340,768 (80,000)
Issuance of common stock upon
exercise of stock options... 3,146,500 3,147 3,977,127 (3,953,347)
Deferred compensation arising
from stock options.......... 13,384,181 (13,384,181)
Amortization of deferred
compensation................ 4,877,674
Accretion of dividends and
amortization of discount on
preferred stock............. (2,428,602) (142,921)
Comprehensive income (loss):
Net loss for the period...... (10,908,230)
---------- ------- ------------ ------------ ------------ ----------- -------------
Total comprehensive income
(loss)......................
---------- ------- ------------ ------------ ------------ ----------- -------------
BALANCE AT DECEMBER 31,
1998........................ 9,381,500 9,382 17,842,611 (4,033,347) (8,549,906) (3,215,628) (20,275,235)
Issuance of common stock..... 68,000 68 1,449,012
Forfeiture of unvested
Founder stock and unvested
common stock issued upon
early exercise of stock
options..................... (359,655) 219,111 513,424
Exchange of Common Stock for
Series B preferred stock.... (333,333) 750,000
Issuance of common stock upon
exercise of stock options... 847,500 154 663,392 (5,895,594)
Deferred compensation arising
from stock options.......... 12,941,712 (12,941,712)
Cancellation of stock options
previously giving rise to
deferred compensation....... (115,072) 115,072
Amortization of deferred
compensation................ 8,313,365
Payments of notes
receivable.................. 112,000
Premium on repurchase of
preferred stock............. 582,514 (31,469,558)
Beneficial conversion feature
of issuance of Series C
preferred stock............. 1,540,920
Accretion of dividends and
amortization of discount on
preferred stock............. (5,751,837) (1,790,950)
Comprehensive income (loss):
Net loss for the period...... (23,788,447)
Other comprehensive income
(loss):
Foreign currency
translation.................
---------- ------- ------------ ------------ ------------ ----------- -------------
Total comprehensive income
(loss)......................
---------- ------- ------------ ------------ ------------ ----------- -------------
BALANCE AT DECEMBER 31,
1999........................ 9,604,012 $ 9,604 $ 35,072,575 $ (9,597,830) $(12,549,757) $(8,384,951) $ (77,324,190)
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
INCOME TREASURY STOCKHOLDERS'
(LOSS) STOCK EQUITY (DEFICIT)
------------- --------------- ----------------
BALANCE AT DECEMBER 31,
1997........................ $ 0 0 $ (9,907,939)
Issuance of common stock..... 260,968
Issuance of common stock upon
exercise of stock options... 26,927
Deferred compensation arising
from stock options.......... 0
Amortization of deferred
compensation................ 4,877,674
Accretion of dividends and
amortization of discount on
preferred stock............. (2,571,523)
Comprehensive income (loss):
Net loss for the period...... (10,908,230)
----------- --------------- ------------
Total comprehensive income
(loss)...................... (10,908,230)
----------- --------------- ------------
BALANCE AT DECEMBER 31,
1998........................ 0 0 (18,222,123)
Issuance of common stock..... 1,449,080
Forfeiture of unvested
Founder stock and unvested
common stock issued upon
early exercise of stock
options..................... (732,895) (360)
Exchange of Common Stock for
Series B preferred stock.... (4,500,000) (3,750,000)
Issuance of common stock upon
exercise of stock options... 5,232,895 847
Deferred compensation arising
from stock options.......... 0
Cancellation of stock options
previously giving rise to
deferred compensation....... 0
Amortization of deferred
compensation................ 8,313,365
Payments of notes
receivable.................. 112,000
Premium on repurchase of
preferred stock............. (30,887,044)
Beneficial conversion feature
of issuance of Series C
preferred stock............. 1,540,920
Accretion of dividends and
amortization of discount on
preferred stock............. (7,542,787)
Comprehensive income (loss):
Net loss for the period...... (23,788,447)
Other comprehensive income
(loss):
Foreign currency
translation................. 2,411 2,411
----------- --------------- ------------
Total comprehensive income
(loss)...................... (23,786,036)
----------- --------------- ------------
BALANCE AT DECEMBER 31,
1999........................ $ 2,411 0 $(72,772,138)
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
57
deCODE GENETICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIT)S -- (CONTINUED)
DIVIDENDS
ACCRETED
ON
SHARES REDEEMABLE,
---------------------- ADDITIONAL CONVERTIBLE
PAR PAID-IN NOTES DEFERRED PREFERRED ACCUMULATED
COMMON STOCK VALUE CAPITAL RECEIVABLE COMPENSATION STOCK DEFICIT
------------ ------- ------------ ------------ ------------ ----------- -------------
BALANCE AT DECEMBER 31,
1999........................ 9,604,012 $ 9,604 $ 35,072,575 $ (9,597,830) $(12,549,757) $(8,384,951) $ (77,324,190)
Common stock issued upon
initial public offering, net
of issuance cost............ 11,040,000 11,040 181,940,726
Issuance of common stock upon
exercise of warrants........ 306,943 307 (307)
Other issuances of common
stock....................... 165,910 166 3,670,002 (665,700)
Redeemable, convertible
preferred stock converted to
common stock................ 23,737,081 23,737 118,735,067 13,614,823
Beneficial conversion feature
of issuance of Series C
preferred stock............. 2,040,880
Accretion of dividends and
amortization of discount on
preferred stock............. (5,229,872) (2,311,007)
Forfeiture of unvested common
stock issued upon early
exercise of stock options... (26,977) 109,325 185,676
Issuance of common stock upon
exercise of stock options... 215,000 188 2,130,417 (2,362,448)
Deferred compensation arising
from stock options.......... 6,809,549 (6,809,549)
Amortization of deferred
compensation................ 8,270,554
Comprehensive income (loss):
Net loss for the period...... (31,118,503)
Other comprehensive income
(loss):
Foreign currency
translation.................
---------- ------- ------------ ------------ ------------ ----------- -------------
Total comprehensive income
(loss)......................
---------- ------- ------------ ------------ ------------ ----------- -------------
BALANCE AT DECEMBER 31,
2000........................ 45,041,969 $45,042 $350,398,909 $(11,850,953) $(11,568,776) $ 0 $(110,753,700)
========== ======= ============ ============ ============ =========== =============
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
INCOME TREASURY STOCKHOLDERS'
(LOSS) STOCK EQUITY (DEFICIT)
------------- --------------- ----------------
BALANCE AT DECEMBER 31,
1999........................ $ 2,411 0 $(72,772,138)
Common stock issued upon
initial public offering, net
of issuance cost............ 181,951,766
Issuance of common stock upon
exercise of warrants........ 0
Other issuances of common
stock....................... 3,004,468
Redeemable, convertible
preferred stock converted to
common stock................ 132,373,627
Beneficial conversion feature
of issuance of Series C
preferred stock............. 2,040,880
Accretion of dividends and
amortization of discount on
preferred stock............. (7,540,879)
Forfeiture of unvested common
stock issued upon early
exercise of stock options... (295,028) (27)
Issuance of common stock upon
exercise of stock options... 295,028 63,185
Deferred compensation arising
from stock options.......... 0
Amortization of deferred
compensation................ 8,270,554
Comprehensive income (loss):
Net loss for the period...... (31,118,503)
Other comprehensive income
(loss):
Foreign currency
translation................. (3,767) (3,767)
----------- --------------- ------------
Total comprehensive income
(loss)...................... (31,122,270)
----------- --------------- ------------
BALANCE AT DECEMBER 31,
2000........................ $ (1,356) 0 $216,269,166
=========== =============== ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
58
deCODE GENETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1999 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(10,908,230) $(23,788,447) $(31,118,503)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 1,470,959 3,374,039 5,203,715
Equity in net loss of affiliate........................... 0 486,366 738,359
Amortization of deferred stock compensation............... 4,877,674 8,313,365 8,270,554
Other stock-based remuneration and stock contributions.... 341,968 732,500 3,609,930
Accrued interest on receivable from share issuance........ 0 (893,836) 893,836
Equipment received for services provided.................. 0 (414,000) 0
Other..................................................... (45,389) 0 (794,420)
Changes in operating assets and liabilities:
Receivables and other current assets...................... (753,014) (1,748,007) (11,671,110)
Accounts payable and accrued expenses..................... 1,802,896 906,977 6,315,817
Deferred research revenue................................. 1,155,000 1,083,333 2,166,666
Other long-term liabilities............................... (9,142) 150,624 260,161
------------ ------------ ------------
Net cash used in operating activities................... (2,067,278) (11,797,086) (16,124,995)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (5,084,441) (2,885,644) (15,469,623)
Investment in affiliated company, net..................... 0 (104,324) (446,345)
Acquisitions and investments, net......................... 0 3,581 (350,471)
Other..................................................... 0 0 (174,790)
------------ ------------ ------------
Net cash used in investing activities................... (5,084,441) (2,986,387) (16,441,229)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from financing of facility....................... 2,437,254 0 0
Repurchase of preferred stock............................. 0 (20,310,555) (17,467,077)
Forfeiture of common stock................................ 0 (360) (27)
Issuance of preferred stock and warrants.................. 27,269,350 41,658,444 34,534,276
Issuance of common stock, net............................. 26,927 848 182,014,951
Repayment of notes receivable for common stock............ 0 112,000 0
Cash on deposit........................................... 1,595,769 0 0
Installment payments on capital lease obligations......... (1,475,565) (1,907,084) (2,216,875)
Repayment of bridge loans................................. (340,397) 0 0
------------ ------------ ------------
Net cash provided by financing activities............... 29,513,338 19,553,293 196,865,248
------------ ------------ ------------
Net increase in cash........................................ 22,361,619 4,769,820 164,299,024
Cash and cash equivalents at beginning of period............ 2,714,225 25,075,844 29,845,664
------------ ------------ ------------
Cash and cash equivalents at end of period.................. $ 25,075,844 $ 29,845,664 $194,144,688
============ ============ ============
Supplemental cash flow information:
Cash paid for interest.................................... $ 551,576 $ 574,226 $ 495,143
Supplemental schedule of non-cash transactions:
Equipment acquired under capital leases................... $ 8,420,123 $ 0 0
Series A preferred stock issued in settlement of current
liability............................................... 285,000 150,000 0
Series B preferred stock issued as a part of payment for
facility................................................ 347,216 0 0
Receivable from share issuance............................ 0 33,143,836 0
Payable to preferred shareholders......................... 0 17,467,077 0
Series B Preferred Stock issued in exchange for shares in
affiliate............................................... 0 779,064 0
Common stock issued in exchange for shares in
subsidiary.............................................. 0 1,449,080 2,394,523
Supplies received in exchange for services provided....... 0 239,600 0
Payable for laboratory equipment.......................... 0 0 13,150,000
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
59
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
References to deCODE refer to deCODE genetics, Inc., a Delaware company,
and deCODE genetics, Inc.'s wholly owned subsidiary, Islensk erfoagreining ehf.,
an Icelandic company registered in Reykjavik.
deCODE is a genomics and health informatics company which applies and
develops modern informatics to collect and analyze data about the Icelandic
population in order to develop products and services for the healthcare
industry. deCODE was founded in 1996 and its facilities are located in Iceland,
where all of deCODE's operations presently take place.
BASIS OF PRESENTATION
These financial statements are reported in United States dollars, deCODE's
functional currency, and prepared in accordance with generally accepted
accounting principles in the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and operations
of deCODE genetics, Inc. and its wholly owned subsidiary, Islensk erfoagreining
ehf. deCODE conducts all of its operations through this subsidiary. No dividends
have been paid by this subsidiary. All significant intercompany accounts and
transactions are eliminated upon consolidation. Investments in which deCODE has
significant influence, but does not control, are accounted for using the equity
method.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
UNCERTAINTIES
deCODE is subject to risks common to companies in the biotechnology
industry including, but not limited to, development by deCODE or its competitors
of new technological innovations, ability to market products or services,
dependence on key personnel, dependence on key suppliers, protection of
proprietary technology, ability to obtain additional financing, ability to
negotiate collaborative arrangements, reliance on the license to create and run
the Icelandic Health Sector Database, and compliance with governmental and other
regulations.
CONCENTRATION OF RISK
Financial instruments that potentially subject deCODE to concentrations of
credit risk consist principally of temporary cash investments. deCODE's cash is
deposited only with financial institutions in Iceland, United Kingdom and the
United States having a high credit standing.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of short-term financial instruments, including cash and cash
equivalents, receivables, certain other current assets, trade accounts payable,
certain accrued liabilities, and other current liabilities
F-8
60
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
approximates their carrying amount in the financial statements due mainly to the
short maturity of such instruments.
The fair value of capital lease obligations and other long-term liabilities
approximate their carrying amounts based on deCODE's estimated current
incremental borrowing rate for similar obligations with similar terms.
CASH EQUIVALENTS
deCODE considers all highly liquid investments with a maturity of 90 days
or less at the date of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets
of generally fifty years for buildings, three to five years for laboratory
equipment, five years for furniture and fixtures, and three to five years for
other equipment. Maintenance and repairs are expensed as incurred, while major
betterments are capitalized. When assets are retired or otherwise disposed of,
the assets and related accumulated depreciation or amortization are eliminated
from the accounts and any resulting gain or loss is reflected in the statement
of operations.
IMPAIRMENT OF LONG-LIVED ASSETS
deCODE reviews long-lived assets for potential impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets held for use is measured by
comparing the carrying amount of an asset to the undiscounted estimated future
cash flows expected to be generated by the asset. In estimating expected future
cash flows for determining whether an asset is impaired, assets are grouped at
the lowest level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets. If any such assets are
considered to be impaired, the impairment to be recognized is the amount by
which the carrying amount of the assets exceeds its fair value.
deCODE has made no adjustments to the carrying values of long-lived assets
during the years ended December 31, 1998, 1999 and 2000.
CAPITAL LEASES
Assets acquired under capital lease agreements are recorded at the present
value of the future minimum rental payments using interest rates appropriate at
the inception of the lease. Property and equipment subject to capital lease
agreements are amortized over the shorter of the life of the lease or the
estimated useful life of the asset, in accordance with deCODE's normal
depreciation policies, unless the lease transfers ownership or contains a
bargain purchase option, in which case the leased asset is amortized over the
estimated useful life of such asset.
REVENUE RECOGNITION AND DEFERRED REVENUE
deCODE's revenues are currently derived primarily from research funding
under the research and collaboration agreement with Roche. Research funding
revenue is recognized on an accrual basis as services are provided and are
recorded with reference to contracted rates. Research funding payments are not
refundable in the event that the research efforts are not successful. Milestone
payments are recorded when acknowledgement of having achieved applicable
performance requirements is received and are recognized as revenue on a
retrospective basis over the contractual term of the agreement with Roche.
deCODE believes that the milestone payments represent additional amounts of the
aggregate total revenue to be earned under
F-9
61
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the arrangement with Roche, and that such revenue is more appropriately
accounted for over the service period of the agreement. Accordingly, upon
achievement of the milestone, a portion of the milestone payment equal to the
percentage of the collaboration completed through that date is recognized. The
remainder is recognized as services are performed (generally straight-line) over
the remaining estimated term of the collaboration. Payments received in advance
of being earned are recorded as deferred revenue.
In October 2000, Roche elected to extend the term of the research and
collaboration agreement through January 2002. As a result, deCODE changed the
estimated contractual term over which milestone revenue is recognized from three
to four years. The cumulative effect of this revision ($1,333,000) has been
recorded as a reduction to revenue in the fourth quarter of 2000.
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
All research and development costs, including costs associated with the
development of computer software to be used in deCODE's research and development
activities, are expensed as incurred.
STOCK-BASED COMPENSATION
deCODE follows Statement of Financial Accounting Standards No. 123 (SFAS
No. 123), "Accounting for Stock-Based Compensation." The provisions of SFAS No.
123 allow companies to either expense the estimated fair value of stock options
granted to employees or to follow the intrinsic value method set forth in
Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock
Issued to Employees," and disclose the pro forma effects on net loss and net
loss per share had the estimated fair value of the options granted to employees
been expensed. SFAS No. 123 requires companies to expense the estimated fair
value of stock options granted to non-employees. deCODE has elected to follow
the intrinsic value method in accounting for its employee stock options and
follows the fair value method in accounting for its non-employee stock options.
FOREIGN CURRENCY TRANSLATION
deCODE's functional currency is the U.S. dollar. Islensk erf(LOGO)agreining
also consolidates its subsidiaries, all of which use the local currency, the
Icelandic krona, as the functional currency. For these entities, the assets and
liabilities are translated into U.S. dollars at exchange rates in effect at the
balance sheet date. Income and expense items are translated at the average
exchange rates prevailing during the period. Gains and losses from translation
are included in accumulated other comprehensive income (loss).
Foreign currency transaction gains and losses are reported according to the
exchange rates prevailing on the transaction date and are included in the
consolidated statements of operations. Net transaction gains (losses) were
$202,255, $(97,798) and $1,488,599 in 1998, 1999 and 2000, respectively.
INCOME TAXES
deCODE accounts for income taxes using the liability method, which requires
the recognition of deferred tax assets or liabilities for the temporary
differences between the financial reporting and tax bases of deCODE's assets and
liabilities and for tax loss carryforwards at enacted statutory tax rates in
effect for the years in which the differences are expected to reverse. In
addition, valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
SEGMENT INFORMATION
Management plans to organize deCODE's main business units along three
avenues of commercialization: discovery services, database services, and
healthcare informatics. Discovery services, or the development and applications
of proprietary bioinformatics tools to discover disease-related genes and
associated drug targets,
F-10
62
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
are currently carried-out in collaboration with Roche and in deCODE's own
research programs. This business unit will also ultimately encompass diagnostic
and therapeutic products and pharmacogenomic services. The database services
business unit will involve the construction and commercialization of the
Icelandic Health Sector Database containing non-personally identifiable data
from Icelandic healthcare records, and the deCODE Combined Data Processing
system to cross-reference data from the Icelandic Health Sector Database with
genealogical and genotypic data. deCODE expects to derive revenues from the
database business unit by providing services through the deCODE Combined Data
Processing system to pharmaceutical and biotechnology companies, healthcare
providers and other participants in the healthcare industry. The healthcare
informatics business unit will seek to commercialize bioinformatics tools
developed in deCODE's gene and drug target discovery and database efforts.
Products of the healthcare informatics business unit are expected to include
medical decision-support systems designed to assist the decision making process
in the delivery of healthcare and privacy protection products derived from
deCODE's expertise in encryption tools for complex and sensitive medical and
genetic data.
Through December 31, 2000, deCODE's efforts have been almost entirely
directed toward discovery services. Financial information available for
evaluation by management in deciding how to allocate resources and assess
performance is that of the business as a whole. For these reasons, deCODE has a
single reportable segment. All of deCODE's revenue from inception have been
generated in Iceland, and all of deCODE's long-lived assets are located in
Iceland. Roche accounted for 100%, 95% and 96% of consolidated revenue in the
years ended December 31, 1998, 1999 and 2000, respectively.
COMPUTATION OF NET LOSS PER COMMON SHARE
Basic net loss per share is computed using net loss available to common
stockholders and the weighted-average number of common shares outstanding. The
weighted-average number of common shares outstanding during the period is the
number of shares determined by relating the portion of time within a reporting
period that common shares have been outstanding to the total time in that
period. Net loss available to common stockholders consists of the following:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1999 2000
----------- ----------- -----------
Net loss............................................ $10,908,230 $23,788,447 $31,118,503
Accrued dividends on Series A, Series B and Series C
preferred stock................................... 2,428,602 5,751,837 5,229,872
Amortized discount on Series A and Series C
preferred stock................................... 142,921 1,790,950 2,311,007
----------- ----------- -----------
Accrued dividends and amortized discount on
preferred stock................................... 2,571,523 7,542,787 7,540,879
Premium on repurchase of preferred stock............ 0 30,887,044 0
----------- ----------- -----------
Net loss available to common stockholders........... $13,479,753 $62,218,278 $38,659,382
=========== =========== ===========
Diluted net loss per share is computed using the weighted-average number of
common shares outstanding during the period, plus the dilutive effect of
potential common shares. Diluted net loss per share does not differ from basic
net loss per share in all periods presented as potential common shares are
antidilutive for all such
F-11
63
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
periods and are, therefore, excluded from the calculation. Potential common
shares excluded from the calculation of diluted net loss per share as their
inclusion would have been antidilutive were:
DECEMBER 31,
--------------------------------------
1998 1999 2000
---------- ---------- ----------
(SHARES) (SHARES) (SHARES)
Preferred stock convertible into shares of common
stock................................................ 19,125,683 22,969,544 0
Warrants to purchase shares of common stock............ 1,998,926 2,110,037 1,167,500
Options to purchase shares of common stock............. 47,000 45,000 823,000
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities," amended in June
2000 by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." These Statements establish a new model for accounting for
derivatives and hedging activities and supersede and amend a number of existing
standards. Upon the standard's initial application, all derivatives are required
to be recognized in the balance sheet as either assets or liabilities and
measured at fair value. In addition, all hedging relationships must be
designated, reassessed and documented. deCODE is required to implement the
Statements in the first quarter of fiscal 2001. Considering deCODE's current
activities, there will be no significant impact on its financial position or
results of operations upon adoption of SFAS No. 133.
In September 2000, the FASB issued SFAS No. 140 (SFAS No. 140), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This Statement replaces FASB SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
revising the accounting for securitizations and other transfers of financial
assets and collateral as well as requiring certain additional disclosures. SFAS
No. 140 establishes standards that are based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished.
This Statement is effective prospectively, with certain exceptions, for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001, however, considering deCODE's current
activities, it is not anticipated that the adoption of SFAS No. 140 will have a
significant impact on its financial position or results of operations. This
Statement was effective for recognition and reclassification of collateral and
for disclosures relating to securitization transactions and collateral for
deCODE's fiscal year ended December 31, 2000. However, it had no impact on its
financial position or results of operations.
RECEIVABLES AND OTHER CURRENT ASSETS
Receivables and other current assets consist of the following:
DECEMBER 31,
-------------------------
1999 2000
---------- -----------
Receivables................................................. $2,143,226 $ 9,347,946
Value added taxes........................................... 1,209,269 3,662,206
Other current assets........................................ 342,856 1,472,184
---------- -----------
Total............................................. $3,695,351 $14,482,336
========== ===========
Receivables at December 31, 2000 include $1,347,946 of amounts due from
Prokaria, a related party.
F-12
64
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENTS AND OTHER
GAGNALIND HF. AND eMR HF.
In January and February 1999, deCODE acquired equity interests totalling
25.2% in Gagnalind hf. (Gagnalind) in exchange for $254,444 in cash and 70,824
shares of Series B preferred stock. On the date of issuance, these Series B
shares had an aggregate estimated value of $779,064, or $11.00 per share. In
November 1999, deCODE entered into an agreement in which it acquired common
shares of eMR hf. (eMR), an Icelandic software company, in an integrated series
of transactions as follows:
- On November 19, 1999, deCODE issued 68,000 shares of common stock to two
Icelandic companies in exchange for an additional 30.4% equity interest
in Gagnalind. On this date, these common shares had an aggregate
estimated value of $1,449,080, or $21.31 per share.
- In March and April 2000, deCODE acquired 29,925,000 common shares (35.0%)
in eMR in exchange for $341,436 in cash and 31,169,112 shares (55.6%) in
Gagnalind.
- On April 19, 2000, deCODE sold 12,825,000 common shares (15.0%) in eMR to
the Icelandic Investment Bank for $963,568.
deCODE's investment in Gagnalind was accounted for under the equity method
until November 19, 1999. On this date, deCODE acquired a majority interest and
Gagnalind was consolidated. deCODE's equity in net earnings (loss) of Gagnalind
for the period through November 19, 1999 included in other non-operating income
and expense is comprised of deCODE's share of the earnings (loss) of Gagnalind
and amortization of the difference between deCODE's cost and the underlying
equity in the net assets of Gagnalind at acquisition. Minority interest in the
earnings (loss) of Gagnalind (44.4%) from November 19, 1999 to year-end 1999 and
in the year ended December 31, 2000 was $2,842 and ($32,149), respectively, and
is included in other non-operating income and expense. eMR has not declared nor
paid any dividends to date.
In December 2000, the Icelandic Investment Bank and deCODE nullified the
previous sale of 12,825,000 common shares (15%) in eMR. deCODE's investment in
the common shares of eMR (35%) is accounted for under the equity method and is
included in other long-term assets, amounting to $920,274 at December 31, 2000.
Equity in net earnings (loss) of affiliate in the year ended December 31, 2000
included in other non-operating income and expense is comprised of deCODE's
share of the earnings (loss) of eMR from March 2000 and amortization of the
difference between deCODE's cost and the underlying equity in the net assets of
eMR at acquisition.
PROKARIA EHF.
Prokaria ehf. (Prokaria), a consolidated affiliate, underwent a
recapitalization during 2000 resulting in its deconsolidation from deCODE and
resulting in a gain of $786,794. Such gain is included in other non-operating
income and expense in the year ended December 31, 2000. The cash flows and
results of Prokaria are included in the consolidated financial statements
through September 2000, revenues and net loss for the period being $32,367 and
$699,418, respectively. Two of deCODE's executive officers own an aggregate
37.5% of the share capital and are board members of Prokaria.
Subsequent to Prokaria's recapitalization, deCODE and Prokaria entered into
a collaboration and research licensing agreement, the terms of which include:
- Prokaria settled non-interest bearing debts owed deCODE amounting to
$540,654.
- deCODE sold certain intellectual property rights to certain research,
including a patent application, to Prokaria in exchange for: $508,754
cash; royalties on revenue Prokaria may receive from the rights related
to the patent application; and, a license for the use of the patent
application rights in deCODE's
F-13
65
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
own operations for the duration of the patent. The payment of $508,754
has been recognized and is included in other revenue in the year ended
December 31, 2000.
- deCODE agreed to provide certain sequencing and advisory services in
exchange for appropriate fees. deCODE recognized $31,600 in other revenue
in respect of such sequencing services provided during the period October
to December 2000.
- Prokaria agreed to reimburse deCODE in respect of certain legal costs
incurred by deCODE on Prokaria's behalf.
PROPERTY AND EQUIPMENT
Property and equipment, all located in Iceland, consist of the following:
DECEMBER 31,
--------------------------
1999 2000
----------- -----------
Buildings................................................. $ 5,339,200 $11,662,353
Laboratory equipment...................................... 11,370,430 32,400,291
Furniture and fixtures.................................... 763,475 1,940,895
Other equipment........................................... 384,360 605,141
----------- -----------
17,857,465 46,608,680
Less: accumulated depreciation and amortization........... (4,805,999) (9,507,990)
----------- -----------
Total........................................... $13,051,466 $37,100,690
=========== ===========
The total depreciation and amortization of property and equipment for the
years ended December 31, 1998, 1999 and 2000 was, $1,470,959, $2,791,449 and
$4,723,967, respectively.
In January 1998, deCODE purchased the building then housing its research
operations and corporate headquarters for total consideration amounting to
$2,375,803, comprised of cash and 74,670 shares of Series B preferred stock. In
June 1998, deCODE sold the building for $2,403,846 of cash proceeds and leased
it back from the counterparty (an Icelandic bank). As ownership of the property
will be transferred to deCODE at the end of the lease without any further
payment, the transaction has been recorded as a financing and no immediate gain
was recognized.
In addition to deCODE's building, property and equipment includes amounts
for certain fixed assets financed under capital lease obligations. Total cost
and accumulated amortization relating to property and equipment subject to
capital lease obligations was $10,624,985 and $3,336,034, respectively, as of
December 31, 1999 and $10,590,668 and $4,975,162, respectively, as of December
31, 2000.
deCODE's capital lease obligations are collateralized by the assets to
which the obligations relate. deCODE has an option to purchase all of the leased
property and equipment for 3% of the original lease amount at lease end, with
the exception of the leased building, in which ownership transfers upon lease
expiration.
During 1999, laboratory equipment and consumables were received by deCODE
from a customer as consideration for equipment testing services provided.
Revenue was recorded, and fair value was determined with reference to list
prices for such laboratory equipment and consumables. Laboratory equipment
valued at $414,000 has been capitalized and is being depreciated according to
deCODE's normal depreciation policy and consumables valued at $239,600 were
expensed in 1999.
During 2000, deCODE paid $1,423,000 and was granted permission to construct
a building of approximately 15,000 square meters in the University District
which will house the operations of deCODE.
F-14
66
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
deCODE began excavation on the site during October 2000 and, in January 2001,
engaged a contractor for the construction of the building itself. Total building
costs through December 31, 2000 ($3,539,184) for the project in-process are
included in buildings. Total project cost is estimated to be approximately $30
million. Depreciation on this building will commence when it is placed into
service.
In September 2000, deCODE acquired fifty new gene sequencing machines in
exchange for $13,150,000 and twenty-four of its used gene sequencing machines.
This laboratory equipment was placed into service in September and October 2000
and depreciation on the equipment commenced at that time. Payment was made in
February 2001 and the amount is included in accounts payable and accrued
liabilities at December 31, 2000. No gain was recognized in the exchange of
deCODE's used equipment.
ACQUISITIONS
CYCLOPS EHF.
In November 2000, deCODE acquired the outstanding shares of Cyclops ehf.
(Cyclops), an Icelandic company performing research involving the solubility and
absorption of drugs, in exchange for 107,910 shares of deCODE's common stock. In
addition, deCODE issued 30,000 shares of its common stock to the selling
shareholders of Cyclops in connection with the continuing employment by the two
former owners of Cyclops and that are subject to repurchase by deCODE. deCODE
also agreed that the same two former owners of Cyclops would receive a portion
of any net royalties deCODE may earn from certain ongoing projects of Cyclops.
The consolidated financial statements include the cash flows and results of
Cyclops from the date of acquisition.
The acquisition was accounted for using the purchase method, whereby the
total purchase price ($2,394,523) has been allocated to Cyclops' assets and
liabilities based on their estimated fair values on the date of acquisition. The
excess of purchase price over the fair value of the net tangible assets acquired
has been allocated to patents that are being amortized using the straight-line
method over three years. At December 31, 2000, other long-term assets include
the recorded amount of patents less accumulated amortization on such amounting
to $2,367,154 and $114,575, respectively.
In addition, compensation in respect of the 30,000 shares of deCODE common
stock issued to the selling shareholder of Cyclops ($665,700) is not part of the
purchase price but has been recorded as deferred compensation, a component of
stockholders' equity, and is being recognized as expense over four years from
the date of the acquisition.
ENCODE EHF.
In November 2000, deCODE acquired the outstanding shares of Islenskar
lyfjarannsoknir ehf. (Encode), an Icelandic research company serving the
pharmaceutical industry. The acquisition was accounted for using the purchase
method, whereby the total purchase price has been allocated to Encode's assets
and liabilities based on their estimated fair values on the date of acquisition.
The consolidated financial statements include the cash flows and results of
Encode from the date of acquisition.
F-15
67
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
DECEMBER 31,
-------------------------
1999 2000
---------- -----------
Payable for laboratory equipment........................... $ 0 $13,150,000
Suppliers.................................................. 2,482,683 5,501,428
Salaries and other employee benefits....................... 1,570,150 2,583,131
Other...................................................... 261,282 1,722,922
---------- -----------
Total............................................ $4,314,115 $22,957,481
========== ===========
COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
deCODE leases certain property, laboratory equipment and other assets under
long-term capital leases which expire at varying dates through 2008. At December
31, 2000, future minimum lease payments for non-cancelable capital leases were
as follows:
DECEMBER 31,
2000
------------
2001........................................................ $ 2,000,808
2002........................................................ 1,189,722
2003........................................................ 383,608
2004........................................................ 383,608
2005-2008................................................... 1,355,709
-----------
Total minimum lease payments................................ 5,313,455
Less amount representing interest........................... (761,795)
-----------
Present value of future minimum lease payments.............. 4,551,660
Less current portion........................................ (1,749,807)
-----------
Long-term portion........................................... $ 2,801,853
===========
SETTLEMENT AGREEMENT
On December 31, 1997, deCODE entered into a settlement agreement (the
"Agreement") with The Beth Israel Deaconess Medical Center (Beth Israel) in
respect of deCODE's past use of the institution's research facilities. Among
other terms, the Agreement provides for the joint ownership of a specific
technology associated with the linkage of a segment of DNA to the multiple
sclerosis trait that was developed at the research facilities. deCODE has
obtained an exclusive license from Beth Israel to develop and commercialize
therapeutic and diagnostic products worldwide based on Beth Israel's interest in
patents and know-how relating to the linkage between this particular segment of
DNA and multiple sclerosis. The license under the patents will expire upon the
expiration of the last patent to expire and thereafter the license to the
know-how will be perpetual.
Pursuant to the Agreement, deCODE paid cash fees and issued Series A
preferred stock as follows: on January 1, 1998, deCODE issued 100,000 shares of
Series A preferred stock; and, on December 31, 1998 and 1999, deCODE issued
20,000 shares and 10,000 shares of Series A preferred stock, respectively. The
amounts paid and the value of the shares issued have been expensed in the
statement of operations. During the years
F-16
68
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31, 1998 and 1999, deCODE recognized stock-based remuneration
expenses of $81,000 and $217,500, respectively, which related to the share
issuances and resulted from the difference between the contractual share
issuance price and the estimated fair value of the shares on the dates of
issuance.
Under the terms of the Agreement, deCODE is obligated to pay license fees
and other payments upon the achievement of established milestones leading to the
discovery of defined products. deCODE is also required to pay royalties to Beth
Israel on certain royalty bearing products which may result from the licensed
technology. Such royalties are to be paid for a period up to and potentially
exceeding 15 years.
COLLABORATIVE PARTIES
F.Hoffman-La Roche. In February 1998, deCODE entered into a research
collaboration and cross-license agreement with Roche to collaborate on the
discovery of genetic variations which affect the cause of diseases for the
purpose of developing new methods to diagnose diseases and obtain drug targets
useful in drug discovery. The agreement provides for a steering committee, the
membership of which is equally divided between the parties, to oversee the
collaborative research programs. The agreement requires deCODE to conduct
research activities assigned by the steering committee and requires Roche to
fund the collaborative gene discovery programs in twelve diseases, including
four cardiovascular diseases, four psychiatric/neurologic diseases and four
metabolic diseases, by making specified payments according to a payment
schedule. Roche's obligation under the agreement to fund these programs will
continue until February 1, 2003 provided that Roche elects to extend the
research term of the agreement for the one-year period commencing on the fourth
anniversary of the agreement. In addition to research funding payments, Roche is
required to make payments to deCODE upon the achievement of specified scientific
development and marketing milestones. Under this agreement, deCODE may receive a
total of more than $200 million in research funding and milestone payments,
depending on its progress in the research efforts. The costs of the
collaboration with Roche which deCODE has incurred consist mainly of salaries,
materials, equipment depreciation and other facilities costs amounting to an
estimated $12.7 million, $21.9 million and $23.2 million in 1998, 1999 and 2000,
respectively. The agreement gives Roche exclusive worldwide rights to develop
and commercialize therapeutic and diagnostic products based on gene discoveries.
Roche is required to pay deCODE royalties on sales of any such products until
the later of ten years from the first commercial sale or the last date on which
the product is covered by a patent. deCODE retained the exclusive, worldwide
rights to develop and commercialize gene therapy and antisense products based on
its gene discoveries and will be required to pay Roche royalties on sales of any
such products.
Partners HealthCare System, Inc. In May 2000, deCODE entered into a
strategic alliance agreement and crosswalk development agreement with Partners
HealthCare System, Inc., The General Hospital Corporation, d.b.a. Massachusetts
General Hospital, and The Brigham and Women's Hospital, Inc. (collectively
"Partners") pursuant to which deCODE will (a) fund research by investigators of
Partners pursuant to sponsored research agreements and/or clinical trial
agreements to be entered into from time to time, (b) collaborate with Partners
on, and provide funding for, development of an information technology bridge,
called the crosswalk, to facilitate studies with the deCODE Combined Data
Processing system and Partners' Research Patient Data Registry and (c) develop
and market, in consultation with Partners, new information technology products
and services relating to the use of the crosswalk for future pharmaceutical and
biotechnology applications.
The strategic alliance agreement provides that a steering committee, the
membership of which is equally divided between the parties, will oversee the
alliance (including the development of the crosswalk) and select the research
projects and/or clinical trials that deCODE will fund at Partners. deCODE has an
exclusive option to acquire an exclusive license to any patents or copyrights
developed under such sponsored research or clinical trial agreements on
financial terms to be negotiated by the parties based on pre-determined criteria
contained in the strategic alliance agreement. Each party has the right to use
the crosswalk to facilitate studies
F-17
69
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
with the databases for non-commercial internal research purposes. Each party
also has the right to use the crosswalk to facilitate studies with such party's
own database to conduct commercially sponsored research. Partners is required to
pay deCODE a royalty on revenue it receives from such use. In addition, deCODE
has the exclusive right to use the crosswalk to develop and market products and
services but are obligated to pay Partners a royalty on revenue from the sale of
such products and services.
The agreements are for a three year term, which, in the case of the
strategic alliance agreement, may be extended for an additional two year term by
the mutual agreement of the parties and, in the case of the crosswalk
development agreement, may be extended for an additional term to be agreed upon
by the parties. The agreements may also be terminated by either party if the
other party is in default. In addition, deCODE may terminate the agreements
under certain circumstances, including infeasibility of the alliance or if the
alliance jeopardizes the mission or objectives of either party.
Hospital and Physician Collaborations. deCODE has entered into
collaboration agreements and arrangements with the Icelandic Heart Association
and several physician groups. The goal of these collaborations is the discovery
of genetic factors which contribute to the genesis of certain disorders on which
the various physician groups maintain patient information. Under the agreements,
these institutions and/or physicians contribute data or other clinical
information and deCODE contributes equipment, research supplies and our
molecular genetics and experimental design expertise. The agreements also
require deCODE to reimburse all project-related expenses. If deCODE sells
project results, the agreements require it to make specified payments and pay a
portion of any performance-based milestones and royalties that it receives.
deCODE has already sold the results of many of these projects to a third party,
Roche. deCODE shares the ability to make management decisions regarding the
projects with the physician groups, and jointly forms an executive or steering
committee to monitor the project. deCODE's collaboration agreements with the
physician groups normally continue for a term of no more than five years.
To further facilitate deCODE's research projects and enable it to construct
lists of patients with specific diseases, deCODE has also entered into
collaboration agreements and arrangements with two of the largest hospitals in
Iceland, one of which was recently founded by merger of the two formerly largest
hospitals. Under the terms of these agreements, the hospitals provide research
data. deCODE's projects are monitored by a surveillance committee that is
jointly appointed with the hospitals. deCODE is obligated to pay all of the
expenses (other than the hospitals' administrative expenses) incurred as a
result of the collaboration. The agreements with the hospitals will continue
until terminated by the parties.
The Icelandic Health Sector Database license requires deCODE to enter into
agreements with Icelandic health institutions and self-employed health service
workers regarding access to and the processing of information from medical
records. To date, deCODE has entered into such agreements with nine Icelandic
health institutions.
ICELANDIC HEALTH SECTOR DATABASE LICENSE
On January 22, 2000, the Ministry of Health and Social Security, or the
Ministry, granted deCODE an operating license to create and run the Icelandic
Health Sector Database, or the License. The License, which has a term of twelve
years, allows deCODE to collect data from medical records of Icelandic
healthcare institutions and self-employed healthcare professionals and to
transfer such data in encrypted form into a centralized database. As required by
the License and concurrently with the issuance of the License, deCODE entered
into an agreement with the Ministry whereby deCODE must pay the Icelandic
government a fixed annual fee of 70 million Icelandic kronas and an additional
annual fee of 6% of its net profit, up to a maximum of 70 million Icelandic
kronas per year. At December 31, 2000, $826,446 in respect of these annual fees
has been provided and is included in accounts payable and other accrued
expenses. The agreement also provides
F-18
70
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
that deCODE's rights to the Icelandic Health Sector Database will be transferred
to the Ministry on the expiration or termination of the license, January 2012.
deCODE's preparation of the Icelandic Health Sector Database is subject to
technical requirements imposed by the Icelandic Data Protection Authority, or
the Authority, in areas such as data encryption and privacy protection. These
requirements are subject to change from time to time and may require greater
technical capabilities than deCODE currently has. Compliance with these
requirements can be expensive and time-consuming and may delay the development
of the Icelandic Health Sector Database and the deCODE Combined Data Processing
system or make such development more expensive than anticipated. In addition,
deCODE's compliance is subject to evaluation by the agencies imposing these
requirements. deCODE cannot control the time required for this evaluation, and
accordingly, the evaluation process may lead to delay in the development of the
Icelandic Health Sector Database and the deCODE Combined Data Processing system.
deCODE is subject to a very extensive indemnity clause in the agreement
with the Ministry, pursuant to which it has:
- agreed not to make any claim against the government if the Act or the
License are amended as a result of the Act or rules relating to the
Icelandic Health Sector Database being found to be inconsistent with the
rules of the European Economic Area or other international rules and
agreements to which Iceland is or becomes a party;
- agreed that if the Icelandic state by a final judgment is found to be
liable or subject to payment to any third party as a result of the
passage of legislation on the Icelandic Health Sector Database and/or
issuance of the License, deCODE will indemnify it against all damages and
costs in connection with the litigation; and
- agreed to compensate any third parties with whom the Icelandic government
negotiates a settlement of liability claims arising from the legislation
on the Icelandic Health Sector Database and/or the issue of the License,
provided that the Icelandic government demonstrates that it was justified
in agreeing to make payments pursuant to the settlement.
The License and the agreement under which deCODE received the license also
require it to:
- pay the costs incurred by the health institutions (including the costs of
medical record software) in connection with the entering of data from
medical records before transfer to the Icelandic Health Sector Database;
- financially segregate the operation of the Icelandic Health Sector
Database from its other activities by maintaining a separate operating
unit, and separate accounts for the Icelandic Health Sector Database;
- pay the costs of the governmental agencies which monitor deCODE's
Icelandic Health Sector Database activities;
- indemnify and agree not to sue the Icelandic government for any liability
resulting from the passage of the legislation on the Icelandic Health
Sector Database and its operation and/or the issuance of the Icelandic
Health Sector Database; and
- observe international science ethics rules.
The License prohibits deCODE from, among other things, abusing its position
by charging unreasonable fees, refusing business to our competitors or
discriminating among customers by imposing discriminatory or other onerous
business terms on our customers; or assigning or pledging our rights in the
License.
The Icelandic Health Sector Database license will expire in January 2012,
unless an extension is granted.
F-19
71
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LITIGATION
In January 2000, (LOGO)orsteinn Jonsson and Genealogia Islandorum hf., the
alleged holders of copyrights to approximately 100 books of genealogical
information, commenced an action against deCODE in the District Court of
Reykjavik in Iceland. They allege that deCODE's genealogy database infringes
their copyrights and seek damages in the amount of approximately 616,000,000
Icelandic kronas, or approximately $7,300,000 (as of December 31, 2000) and a
declaratory judgment to prevent deCODE from using the allegedly infringing data.
deCODE believes the suit is without merit and intends to defend this action
vigorously; however, the ultimate resolution of this matter cannot yet be
determined.
In January 2000, an individual advised deCODE that he believes that he and
another individual are entitled to receive, collectively, 1,000,000 shares of
deCODE common stock pursuant to an agreement with deCODE. The other individual
has not asserted a claim to these shares. deCODE believes that this assertion is
without merit and intends to defend vigorously any action that this party may
commence.
In February 2000, Mannvernd, an organization known as the Association of
Icelanders for Ethics in Science and Medicine, issued a press release announcing
its intention to file lawsuits against the State of Iceland and any other
relevant parties, including deCODE, to test the constitutionality of the Act. In
its press release, Mannvernd indicated that it hopes to halt the construction
and/or operation of the Icelandic Health Sector Database. Mannvernd has not
commenced litigation against deCODE and deCODE is not aware of any other
litigation commenced by Mannvernd with respect to the Act. The ultimate
resolution of this matter cannot yet be determined.
On April 10, 2000, Ernir Snorrason, an original stockholder of deCODE,
filed a complaint in the Court of Chancery of the State of Delaware for New
Castle County alleging that deCODE improperly exercised an option to repurchase
256,637 shares of common stock that deCODE issued to Mr. Snorrason in 1996
pursuant to a Founders' Stock Purchase Agreement. The complaint seeks an order
requiring deCODE to recognize Mr. Snorrason as the owner of these shares. deCODE
believes that it has good defenses to this action and intends to defend it
vigorously; however, the ultimate resolution of this matter cannot yet be
determined.
PREFERRED STOCK
Prior to deCODE's initial public offering of common stock, deCODE was
authorized to issue a total of 32,641,926 shares of preferred stock. Of these
shares, 11,041,926 shares, 10,300,000 shares, and 4,583,334 shares had been
designated Series A, Series B and Series C, respectively, and 6,716,666 remain
undesignated.
In accordance with the terms of the then outstanding preferred stock,
shares of Series A, Series B, and Series C preferred stock were converted into
9,624,282, 10,046,132 and 4,066,667 shares of common stock, respectively,
effective upon the closing of deCODE's initial public offering in July 2000.
Effective concurrently with the initial public offering, all authorized shares
of Series A, Series B and Series C preferred stock were retired.
In respect of the remaining undesignated shares of preferred stock,
deCODE's Board of Directors is authorized, except as otherwise limited by
Delaware law, without further action by the stockholders to:
- issue shares of preferred stock in one or more series;
- fix or alter the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, and liquidation preferences of any wholly
unissued series of preferred stock;
- designate the number of shares constituting, and the designation of, any
series of preferred stock; and
- increase or decrease the number of shares of a series subsequent to the
issue of shares of that series, but not below the number of shares of
that series then outstanding.
F-20
72
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NUMBER OF SHARES AMOUNT
------------------------------------- -------------------------------------------
SERIES A SERIES B SERIES C SERIES A SERIES B SERIES C
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
STOCK STOCK STOCK STOCK STOCK STOCK TOTAL
---------- ----------- ---------- ------------ ------------- ------------ -------------
BALANCE AT DECEMBER 31,
1997.................... 11,790,375 0 0 $ 12,603,990 $ 0 $ 0 $ 12,603,990
Issuance of Series A
preferred stock......... 120,000 366,000 366,000
Issuance of Series B
preferred stock......... 4,712,990 22,616,316 22,616,316
Issuance of Series C
preferred stock,
warrants and options.... 2,500,000 5,000,250 5,000,250
Accretion of dividends and
amortization of discount
on preferred stock...... 1,042,473 1,113,560 415,490 2,571,523
---------- ----------- ---------- ------------ ------------- ------------ -------------
BALANCE AT DECEMBER 31,
1998.................... 11,910,375 4,712,990 2,500,000 $ 14,012,463 $ 23,729,876 $ 5,415,740 $ 43,158,079
Repurchase and retirement
of Series A preferred
stock................... (2,358,074) (2,916,259) (2,916,259)
Exchange of common stock
for Series B preferred
stock................... 250,000 3,750,000 3,750,000
Repurchase of Series B
preferred stock......... (250,000) (3,750,000) (3,750,000)
Repurchase of Series C
preferred stock and held
in treasury............. (100,000) (224,329) (224,329)
Issuance of Series A
preferred stock......... 10,000 367,500 367,500
Issuance of Series B
preferred stock......... 5,180,824 71,869,064 71,869,064
Issuance of Series C
preferred stock and
warrants................ 1,111,111 1,792,525 1,792,525
Accretion of dividends and
amortization of discount
on preferred stock...... 942,183 4,266,212 2,334,392 7,542,787
---------- ----------- ---------- ------------ ------------- ------------ -------------
BALANCE AT DECEMBER 31,
1999.................... 9,562,301 9,893,814 3,511,111 12,405,887 99,865,152 9,318,328 121,589,367
Issuance of Series A
preferred stock upon
exercise of warrants.... 61,981 61,981 61,981
Issuance of Series B
preferred stock......... 152,318 3,000,000 3,000,000
Issuance of Series C
preferred stock and
warrants upon exercise
of option............... 555,556 181,400 181,400
Accretion of dividends and
amortization of discount
on preferred stock...... 494,980 4,418,652 2,627,247 7,540,879
Redeemable, convertible
preferred stock
converted to common
stock................... (9,624,282) (10,046,132) (4,066,667) (12,962,848) (107,283,804) (12,126,975) (132,373,627)
---------- ----------- ---------- ------------ ------------- ------------ -------------
BALANCE AT DECEMBER 31,
2000.................... 0 0 0 $ 0 $ 0 $ 0 $ 0
========== =========== ========== ============ ============= ============ =============
SERIES A PREFERRED STOCK
In connection with the sale of 5,090,376 shares of Series A preferred stock
in October 1997, deCODE issued 1,137,814 warrants to purchase Series A preferred
stock for $1.00 per share. The total consideration received under the issuance
was allocated between the preferred shares and the warrants based upon their
relative fair values at the date of issuance. The consideration allocated to the
warrants was $650,240, and the resulting discount on the preferred shares was
being amortized over seven years, the earliest redemption date
F-21
73
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of the Series A preferred stock. One stockholder exercised 61,981 warrants in
March 2000 and, in connection with deCODE's initial public offering and in
accordance with the their terms, the remaining 1,075,833 warrants were converted
in July 2000 into warrants to purchase the same number of shares of common
stock.
SERIES B PREFERRED STOCK
In January 2000, deCODE and the Icelandic Ministry for Health and Social
Security agreed to jointly establish an independent foundation, the objective of
which is to tend to matters of interest for children in Iceland. In May 2000,
deCODE provided capital to the foundation in the amount of 150,000 shares of
deCODE's Series B preferred stock for $0.001 per share; such issuance resulting
in $3 million being recorded immediately as a contribution expense.
SERIES C PREFERRED STOCK
Pursuant to a stock and warrant purchase agreement signed in February 1998,
Roche purchased 2,500,000 shares of Series C preferred stock at $2.00 per share
in February 1998, 555,555 shares of Series C preferred stock at $3.00 per share
in February 1999, 555,556 shares of Series C preferred stock at $3.00 per share
in May 1999, and 555,556 shares of Series C preferred stock at $4.00 per share
in June 2000. There are no future performance obligations or any stated or
unstated rights or privileges associated with these purchases of Series C
preferred stock by Roche. In connection with these share purchases, Roche also
obtained warrants to purchase an additional 416,667 shares of Series C preferred
stock for a weighted-average exercise price of $2.53 per share. The total
consideration received under these issuances was allocated between the preferred
shares and the warrants based upon their relative fair values at the dates of
issuance.
Options and warrants to purchase 861,112 shares of Series C preferred stock
were issued to Roche in February 1998. The consideration allocated to these
options and warrants was $400,250, and the resulting discount on the preferred
shares was being amortized over seven years, the earliest redemption date of the
Series C preferred stock. An option to purchase 555,556 shares of Series C
preferred stock and an option to purchase warrants in respect of 55,556 shares
of Series C preferred stock were exercised in June 2000 (refer above and below).
The remaining 250,000 warrants expire in February 2007
The consideration allocated to the 55,555 warrants issued in February 1999
was $41,668, and the resulting discount on the preferred shares was being
amortized over seven years, the earliest redemption date of the Series C
preferred stock. These warrants expire in February 2008.
The consideration allocated to the 55,556 warrants issued in May 1999 was
$125,804 resulting in the preferred shares being issued at a discount. As the
preferred shares issued with these warrants were issued with beneficial
conversion features, the remaining consideration to be allocated was recorded as
additional paid-in capital resulting in no consideration being allocated to the
preferred shares. This resulting discount on the preferred shares was amortized
entirely on the date of issuance, as the preferred shares are convertible upon
issuance. These warrants expire in May 2009.
The consideration allocated to the 55,556 warrants issued in June 2000 was
$181,400 resulting in the preferred shares being issued at a discount. As the
preferred shares issued with these warrants were issued with beneficial
conversion features, the remaining consideration to be allocated was recorded as
additional paid-in capital resulting in no consideration being allocated to the
preferred shares. This resulting discount on the preferred shares was amortized
entirely on the date of issuance, as the preferred shares are convertible upon
issuance. These warrants expire in June 2009.
In connection with deCODE's initial public offering and in accordance with
the their terms, the remaining Series C preferred stock warrants outstanding
(416,667) were converted in July 2000 into warrants to purchase the same number
of shares of common stock.
F-22
74
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ISSUANCE OF SERIES B PREFERRED STOCK
On June 30, 1999, deCODE entered into a Stock Purchase Agreement (the
"Purchase Agreement") to sell five million shares of Series B preferred stock at
$7.50 per share (the "Purchase Price") to a Luxembourg-based financial buyer
(the "Buyer"). The sale closed on August 8, 1999.
Contemporaneously with the execution of the Purchase Agreement, deCODE and
the Buyer entered into an agreement pursuant to which the parties agreed upon
the following:
- Sales of Series B preferred stock in the Icelandic market shortly before
the date of the Purchase Agreement indicated that the market price was
approximately $15 per share;
- The Buyer would sell the Series B preferred stock to Icelandic investors
at the market price;
- The Purchase Price at which the Buyer would buy the Series B shares from
deCODE would be increased to $15.00 per share (the "Adjusted Purchase
Price") if (i) the Buyer was able to sell at least 50% of the Series B
shares at or above the Adjusted Purchase Price and (ii) the trading price
in the Icelandic market remained at or above the Adjusted Purchase Price
from the time of such resale through the end of 1999;
- In the event that deCODE received the incremental Adjusted Purchase Price
proceeds from the Buyer, deCODE would also receive interest on such
amount at a rate of 6% per annum from the closing date; and
- The Buyer would receive a commission of 7% of the proceeds from the sale
of the Series B preferred stock for the placement of deCODE's stock. This
commission would only become payable in the event that the Purchase Price
was subsequently increased to the Adjusted Purchase Price.
On August 8, 1999, the closing date, the Buyer advised deCODE that it had
arranged for the sale of at least 50% of the Series B shares at a price of
$15.00 per share.
EXCHANGE OF COMMON STOCK FOR SERIES B PREFERRED STOCK
On August 8, 1999, deCODE exchanged 333,333 shares of common stock held by
deCODE's chief executive officer, or CEO, for 250,000 shares of newly issued
Series B preferred stock. At that time, the common shares were estimated to have
a fair value equal to 90% of the fair value of the Series B preferred shares.
This exchange resulted in a deemed contribution by deCODE's CEO of $750,000
being recorded. The 333,333 shares of common stock were held in treasury and
subsequently re-issued during 1999.
REPURCHASE OF SERIES A, SERIES B AND SERIES C PREFERRED STOCK
On August 8, 1999, deCODE repurchased the 250,000 shares of Series B
preferred stock issued to its CEO pursuant to a Resolution adopted by the Board
of Directors. The 250,000 shares of Series B preferred stock were held in
treasury and subsequently re-issued during 1999.
On August 11, 1999, deCODE repurchased and retired 2,358,074 shares of
Series A preferred stock.
On August 24, 1999, deCODE repurchased and held in treasury 100,000 shares
of Series C preferred stock.
Pursuant to the Series A and Series C preferred stock repurchase agreements
and the Board Resolution, the initial repurchase price deCODE paid for such
shares of Series A, Series B and Series C preferred stock was $7.50 per share
(the "Repurchase Price"). deCODE paid the Repurchase Price to the selling
shareholders in August 1999. However, pursuant to agreements between the
respective stockholders and deCODE on July 12, 1999, it was agreed that the
repurchase price paid for the Series A, Series B and Series C
F-23
75
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
preferred stock would be equal to the Purchase Price per share, net of any
commission payable to the Buyer, at which deCODE sold shares of its Series B
preferred stock in the August 8, 1999 offering.
ADJUSTMENT TO ISSUANCE AND REPURCHASE PRICES
On December 28, 1999, the conditions requiring an increase of the Purchase
Price were met, and deCODE and the Buyer agreed on an Adjusted Purchase Price of
$15.00 per share for the five million shares of Series B preferred stock sold to
the Buyer on August 8, 1999. It was also agreed that the Buyer would receive the
commission in the amount of $5,250,000, representing 7% of the total aggregate
Adjusted Purchase Price for the Series B shares.
As of December 31, 1999, deCODE had recorded a receivable from the Buyer in
the amount of $33,143,836 representing the incremental amount due from the Buyer
with respect to the Adjusted Purchase Price of $37,500,000, less commissions and
plus accrued interest. The receivable from the Buyer was paid in February 2000.
The total amount received was $33,476,712.
As a result of the Purchase Price being adjusted, on December 28, 1999,
deCODE and the Series A stockholders, deCODE's CEO and the Series C stockholder
agreed upon an adjusted repurchase price for the Series A, Series B and Series C
preferred stock of $13.95 per share, that being the Adjusted Purchase Price of
$15.00 per share less a commission of 7% of the Adjusted Purchase Price. This
adjustment to the repurchase price resulted in the Series A and Series C shares
being repurchased for total premiums of $29,978,873 and $1,170,671,
respectively, and the Series B shares being repurchased for a net discount of
$262,500.
The incremental repurchase price per share of $6.45, or $17,467,077 in
aggregate, was paid to the respective sellers of Series A, Series B and Series C
preferred stock in February 2000, and accordingly, is reflected in the balance
sheet at December 31, 1999 as a current liability.
COMMON STOCK
The total authorized shares of common stock, par value $0.001, of deCODE is
60,000,000 shares. Holders of shares of common stock are entitled to one vote at
all meetings of stockholders for each share held by them. The common stock has
no preemptive rights or other rights to subscribe for additional shares, no
conversion right and no right of redemption. Subject to the rights and
preferences of the holders of any preferred stock, the holders of the common
stock are entitled to receive such dividends as, when and if declared by the
Board of Directors out of funds legally available for that purpose.
In July 2000, deCODE completed its initial public offering of common stock.
A total of 11,040,000 shares were sold by deCODE at a price of $18.00 per share.
The offering resulted in net proceeds to deCODE of approximately $182.0 million,
net of an underwriting discount of $13.9 million and offering expenses of $2.9
million.
Of the 6,015,000 shares of common stock that were issued and paid at the
inception of deCODE, 5,789,438 were issued to the founders of deCODE subject to
certain vesting provisions ("Founder Stock"). The unvested shares of Founder
Stock are subject to repurchase by deCODE at the original issue price in the
event that a founder does not continue in employment, according to individual
terms. At December 31, 2000, 160,982 shares of the Founder Stock remained
subject to repurchase.
Of the Founder Stock, 3,125,292 shares of common stock are entitled to
piggyback registration rights with respect to the registration of such shares
under the Securities Act. Should deCODE propose to register any further shares
of common stock under the Securities Act either for deCODE's own account or for
the account of other security holders, the holders of shares having piggyback
rights are entitled to receive notice of the registration and are entitled, with
some limitation, to include their shares in the registration.
F-24
76
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Forfeited unvested Founder Stock and unvested common stock issued upon
early exercise of stock options totalling 359,655 and 26,977 shares in 1999 and
2000, respectfully, were held in treasury and subsequently re-issued during
those same years. At December 31, 2000, 1,895,586 shares of common stock that
were issued upon early-exercise of stock options remained unvested.
Notes receivable provided in connection with the purchase of common stock
are collateralized only by the shares to which they relate, are payable after a
fixed period of generally four years and bear a fixed interest rate of generally
six percent per annum.
Upon the closing of deCODE's public offering in July 2000, warrants to
purchase 1,075,833 shares of Series A preferred stock and warrants and options
to purchase 416,667 shares of Series C preferred stock automatically converted
into warrants and options to purchase the same number of shares of common stock.
Of these warrants, 325,000 were exercised during the period from the public
offering and December 31, 2000. At December 31, 2000, 1,167,500 warrants to
purchase the same number of common stock are outstanding. Holders of such
warrants and options have the right to require deCODE to file a registration
statement under the Securities Act covering the registration of their shares at
any time after 180 days from the effective date of an initial registration
statement if the holders of 50% of such shares demand registration. Such
registration rights are subject to conditions and limitations, including the
right of the underwriters of an offering to limit the number of shares of common
stock which security holders may include in a registration. Further, deCODE may
defer a registration for a period of 90 days if deCODE furnishes to the holders
requesting registration a certificate signed by the chairman of the board
stating that in the good faith judgment of the Board of Directors it would be
seriously detrimental to deCODE and its stockholders for the requested
registration to be effected at that time. deCODE is generally required to bear
all of the expenses of such registrations, except underwriting discounts and
selling commissions. Registration of any of the shares of common stock held by
security holders with registration rights would result in such shares becoming
freely tradable without restriction under the Securities Act immediately upon
effectiveness of such registration.
STOCK OPTION PLAN
In August 1996, deCODE adopted the deCODE genetics, Inc. 1996 Equity
Incentive Plan (the "Plan"). A total of 6,000,000 options are reserved to be
granted under the terms of the Plan. The Plan provides for grants of stock
options to employees, members of the Board of Directors, consultants and other
advisors who are not employees. Options granted to date generally vest over a
period of four years, generally have a maximum term of 10 years, and may contain
early-exercise provisions allowing for company-provided financing of the
exercise price. As of December 31, 2000, 1,048,000 shares were available for
grant under the 1996 Plan.
F-25
77
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Options transactions pursuant to the Plan are summarized as follows:
EXERCISE PRICE EXERCISE PRICE EXERCISE PRICE
GREATER THAN GRANT EQUALS GRANT LESS THAN GRANT
DATE STOCK FAIR VALUE DATE STOCK FAIR VALUE DATE STOCK FAIR VALUE TOTAL
--------------------- --------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- --------- --------- --------- ---------- --------- ---------- ---------
Outstanding at December
31, 1997............... 0 $0.00 0 $ 0.00 1,180,000 $0.20 1,180,000 $ 0.20
Granted.................. 540,000 4.00 15,000 4.00 1,378,500 0.64 1,933,500 1.58
Exercised................ (523,000) 4.00 0 0.00 (2,543,500) 0.42 (3,066,500) 1.03
-------- ----- -------- ------ ---------- ----- ---------- ------
Outstanding at December
31, 1998............... 17,000 4.00 15,000 4.00 15,000 0.20 47,000 2.79
Granted.................. 0 0.00 0 0.00 855,500 5.85 855,500 5.85
Exercised................ (7,000) 4.00 0 0.00 (840,500) 5.62 (847,500) 5.61
Cancelled................ (10,000) 4.00 0 0.00 0 0.00 (10,000) 4.00
-------- ----- -------- ------ ---------- ----- ---------- ------
Outstanding at December
31, 1999............... 0 0.00 15,000 4.00 30,000 9.25 45,000 7.50
Granted.................. 0 0.00 779,000 15.31 305,000 5.53 1,084,000 12.56
Exercised................ 0 0.00 (140,000) 12.54 (75,000) 0.84 (215,000) 8.46
Cancelled................ 0 0.00 (91,000) 17.90 0 0.00 (91,000) 17.90
-------- ----- -------- ------ ---------- ----- ---------- ------
Outstanding at December
31, 2000............... 0 $0.00 563,000 $15.49 260,000 $6.86 823,000 $12.76
======== ===== ======== ====== ========== ===== ========== ======
The following table summarizes information about stock options outstanding
at December 31, 2000:
OUTSTANDING
-----------------------
WEIGHTED-
AVERAGE VESTED AND EXERCISABLE
REMAINING ----------------------------
CONTRACTUAL WEIGHTED-AVERAGE
NUMBER OF LIFE NUMBER OF EXERCISE
EXERCISE PRICE SHARES (IN YEARS) SHARES PRICE
- -------------- --------- ----------- --------- ----------------
$0.20 to $5.70................................... 125,000 7.27 80,854 $ 3.44
$10.00 to $13.56................................. 454,500 9.72 0 0.00
$18.00 to $18.29................................. 243,500 8.94 17,363 18.25
------- ---- ------ ------
$0.20-18.29...................................... 823,000 9.10 98,217 $ 6.06
======= ==== ====== ======
deCODE records deferred compensation for employee stock options based on
the difference between the exercise price and the common stock fair value on the
measurement date (i.e., the date on which both the number of shares to be issued
and the exercise price are fixed and determinable) and records interim estimates
of deferred compensation between the grant date and the measurement date. deCODE
records deferred compensation for non-employee stock options based on the grant
date fair value of options granted as estimated by the Black-Scholes option
pricing model. Deferred compensation is amortized and recorded as compensation
expense ratably over the vesting period of the options. Stock-based compensation
expense of $4,655,647, $5,815,010 and $8,246,419 was recognized in the
statements of operations during the years ended December 31, 1998, 1999 and 2000
for employee stock options, and stock-based compensation expense of $222,027,
$2,498,355 and $24,135 was recognized in the statements of operations during the
years ended December 31, 1998, 1999 and 2000 for non-employee stock options.
F-26
78
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Each employee option grant generally vests twenty-five percent on the first
anniversary date of an employee's commencement of employment and 1/48th of the
original grant each month thereafter for the following three years. Non-employee
option grants generally have not contained vesting provisions.
All options granted from inception through 1999 and two option grants in
2000 have contained a provision for early-exercise according to the terms of the
Plan with company-provided financing of the exercise price made available. In
almost all cases, employees took advantage of their right to early-exercise and
to fund such exercise with a company-provided loan. The company-provided loans
are due after a fixed term of generally four years and bear a fixed interest
rate of six percent per annum.
Employee stock options granted in 1997 and 1998 were amended in March 1999.
Such amendment eliminated prepayment terms with respect to principal and
interest pursuant to the company-provided note and fixed the interest rate at
6%. With this, these option grants, which were originally variable awards,
became fixed. Total compensation measured at March 1999 with respect to the
options granted in 1997 and 1998 aggregated $14,872,579. Of this amount,
$11,851, $4,655,647 and $1,265,947 was recognized as compensation in the
consolidated statements of operations in 1997, 1998 and in the period January
through March 1999, respectively. Compensation deferred as of and to be
recognized subsequent to March 1999 with respect to the options granted in 1997
and 1998, amounted to $8,939,134.
OTHER STOCK AND STOCK OPTION ARRANGEMENTS
In February 1998, deCODE granted a stock option to a collaborator which was
not granted under the provisions of the Plan. This option was for 80,000 shares
of common stock at an exercise price of $0.40 per share. The option had no
vesting provisions and was immediately exercised using company-provided
financing that was subsequently paid in 1999.
In 2000, deCODE issued 20,000 shares of common stock to collaborators
amounting to $415,953 in exchange for services provided. This remuneration
amount was charged to expense in the statement of operations in the year ended
December 31, 2000.
PRO FORMA NET LOSS PER COMMON SHARE
Had compensation cost for all stock options been determined based on the
fair value at the grant date for awards in 1998, 1999 and 2000, consistent with
the provisions of SFAS No. 123, deCODE's net loss and basic and diluted net loss
per share would have been changed to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1999 2000
----------- ----------- -----------
Net loss attributable to common stockholders -- as
reported.......................................... $13,479,753 $62,218,278 $38,659,382
Net loss attributable to common
stockholders -- proforma.......................... 9,471,753 58,348,278 35,862,382
Basic and diluted net loss per share -- as
reported.......................................... 3.06 9.65 1.63
Basic and diluted net loss per share -- pro forma... 2.15 9.05 1.52
Pro forma net loss and net loss per share for the years ended December 31,
1998, 1999 and 2000 is less than net loss and net loss per share as reported as
a result of deCODE's employee stock options initially being accounted for as
variable awards under APB No. 25. The variable award accounting combined with
the growth in the estimated fair value of deCODE's common stock during these
years resulted in significant stock-based compensation expense being recognized
in the statements of operations for 1998, 1999 and 2000 under APB No. 25.
The effects of applying the provisions of SFAS No. 123 on net loss and net
loss per share as stated above is not necessarily representative of the effects
on reported income or loss for future years due to, among other things, the
vesting period of the stock options and the fair value of additional stock
options that may be
F-27
79
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
granted in future years. The weighted-average grant date fair values using the
Black-Scholes option pricing model were:
YEAR ENDED DECEMBER 31,
-------------------------
1998 1999 2000
----- ------ ------
Exercise price greater than grant date stock fair value..... $2.31 $ -- $ --
Exercise price equals grant date stock fair value........... $1.88 $ -- $ 9.82
Exercise price less than grant date stock fair value........ $1.72 $11.89 $17.65
The fair values of the options granted during 1998, 1999 and 2000 are
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions: no dividends, expected volatility of
50%, 60% and 80%, respectively; expected terms of 3.8 years, 3.9 years and 5.0
years, respectively; and risk-free interest rates of 5.44%, 5.74% and 5.42%,
respectively.
STOCK-BASED COMPENSATION AND REMUNERATION
Stock-based compensation represents the expense charged in the statements
of operations relating to employee and non-employee stock options granted.
Stock-based remuneration represents the expense charged in the statements of
operations relating to shares of stock issued to non-employees in exchange for
services provided. Stock-based compensation and remuneration are included in the
statements of operations in the following captions:
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1999 2000
---------- ---------- ----------
General and administrative expense..................... $1,757,639 $3,478,968 $4,072,819
Research and development expense....................... 3,462,003 5,566,897 4,613,688
---------- ---------- ----------
Total........................................ $5,219,642 $9,045,865 $8,686,507
========== ========== ==========
In addition, general and administrative expenses in the year ended December
31, 2000 include charitable contributions of 150,000 shares of Series B
preferred stock amounting to $3.0 million and of 8,000 shares of common stock
amounting to $193,992.
DEFINED CONTRIBUTION BENEFITS
deCODE contributes to relevant pension organizations for personnel in
Iceland. Certain other discretionary contributions may be made. Contributions
are based on employee salaries paid and deCODE has no further liability in
connection with these plans. Total contributions were $381,138, $747,939 and
$979,306 for the years ended December 31, 1998, 1999 and 2000, respectively.
INCOME TAXES
Due to deCODE incurring net losses since inception, there is no provision
for income taxes for the years ended December 31, 1998, 1999 and 2000. deCODE
has not paid income taxes in the United States, Iceland or elsewhere since
inception.
F-28
80
deCODE GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities were as follows:
DECEMBER 31,
---------------------------
1999 2000
----------- ------------
DEFERRED TAX ASSETS (LIABILITIES):
Loss carryforwards.......................................... $ 5,662,000 $ 6,221,000
Capitalization of research and development costs............ 3,308,000 6,375,000
Deferred revenue............................................ 0 908,000
Other deferred tax assets................................... 121,000 268,000
Tax depreciation in excess of book depreciation............. (428,000) (616,000)
Patent...................................................... 0 (710,000)
----------- ------------
Net deferred tax asset...................................... 8,663,000 12,446,000
Valuation allowance......................................... (8,663,000) (12,446,000)
----------- ------------
$ 0 $ 0
=========== ============
At December 31, 2000, deCODE genetics, Inc. has available a net operating
loss carryforward for federal income tax purposes of approximately $458,000 to
offset future federal taxable income in the United States which begins to expire
in 2018. As of December 31, 2000, Islensk erf(LOGO)agreining ehf. had net
operating loss carryforwards of approximately $20,215,000 which expire in
varying amounts beginning in 2004. Management of deCODE has evaluated the
positive and negative evidence bearing upon the realizability of its deferred
tax assets and has established a full valuation allowance for such assets, which
result principally from net operating loss carryforwards and the capitalization
of research and development costs. Management re-evaluates such positive and
negative evidence periodically.
Ownership changes, as defined in the Internal Revenue Code, may have
limited the amount of net operating loss carryforwards that can be utilized
annually to offset future taxable income. Subsequent ownership changes could
further affect the limitation in future years.
SUBSEQUENT EVENTS
In January 2001, deCODE acquired the outstanding shares of Digitalis ehf.
in exchange for 20,000 shares of deCODE common stock. Also in January 2001,
deCODE made a charitable contribution of 5,000 shares of its common stock.
F-29
81
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation, as
further amended (Incorporated by reference to Exhibit 3.1
and Exhibit 3.3 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31984) which became effective
on July 17, 2000).
3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-31984) which became effective on July 17, 2000)
4.1 Specimen Common Stock Certificate (Incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31984) which became effective
on July 17, 2000)
4.2 Form of Warrant to Purchase Series A Preferred Stock
(Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
4.3 Form of Warrant to Purchase Series C Preferred Stock
(Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
82
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Form of License from The Icelandic Data Protection
Commission (now, The Icelandic Data Protection Authority) to
Islensk erfoagreining ehf. and its Clinical Collaborators to
Use and Access Patient Records and Other Clinical Data
Relating to Individuals (Incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form
S-1 (Registration No. 333-31984) which became effective on
July 17, 2000)
10.2+ 1996 Equity Incentive Plan, as amended (Incorporated by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-8 (Registration No. 333-56996) filed on
March 14, 2001.
10.3+ Form of Non-Statutory Stock Option Agreement, as executed by
employees and officers of deCODE genetics, Inc. who received
non-statutory stock options.
10.4+ Form of Employee Proprietary Information and Inventions
Agreement (Incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-31984) which became effective on July 17, 2000)
10.5 Agreement on the Collaboration of Friorik Skulason (FS) and
Islensk erfoagreining ehf. (IE) on the Creation of a
Database of Icelandic Genealogy, dated April 15, 1997
(Incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.6* Research Agreement between deCODE genetics, Inc., and
Islensk erfoagreining ehf. and Rannsokna- og
Fraeethslusjoethurinn ehf., dated October 24, 1997, as
extended (Incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-31984) which became effective on July 17, 2000)
10.7 Consultancy Contract between deCODE genetics, Inc. and Vane
Associates, dated December 1, 1997, together with
Nondisclosure Agreement executed by Vane Associates as of
December 1, 1997, as amended (Incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on Form
S-1 (Registration No. 333-31984) which became effective on
July 17, 2000)
10.8 Indemnity Agreement between deCODE genetics, Inc. and Sir
John Vane, dated December 1, 1997 (Incorporated by reference
to Exhibit 10.8 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31984) which became effective
on July 17, 2000)
10.9* Settlement Agreement between The Beth Israel Deaconess
Medical Center and deCODE genetics, Inc., dated as of
December 31, 1997 (Incorporated by reference to Exhibit 10.9
to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.10+ Amended and Restated Non-Recourse Promissory Note between
deCODE genetics, Inc. and Hannes Smarason, dated March 24,
1999 (Incorporated by reference to Exhibit 10.10 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-31984) which became effective on July 17, 2000)
10.11* Research Collaboration and Cross-license Agreement among F.
Hoffman-La Roche Ltd, Hoffman-La Roche Inc. and deCODE
genetics, Inc., dated February 1, 1998 (Incorporated by
reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
10.12 Amended and Restated Investor rights Agreement of deCODE
genetics, Inc., dated as of February 2, 1998, as further
amended and restated (Incorporated by reference to Exhibit
10.12 to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
83
EXHIBIT
NUMBER DESCRIPTION
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10.13* Collaboration Agreement between The Icelandic Heart
Association (Hjartavernd) and Islensk erfoagreining ehf.,
dated February 13, 1998 (Incorporated by reference to
Exhibit 10.13 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31984) which became effective
on July 17, 2000)
10.14* Collaboration Agreement between Dr. Helgi Jonsson,
(th)orvaldur Ingvarsson and Islensk erfoagreining ehf.,
dated March 31, 1998 (Incorporated by reference to Exhibit
10.14 to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.15* Collaboration Agreement between The Research Group on
Arterial Hypertension and Islensk erf(LOGO)agreining ehf.,
dated June 3, 1998 (Incorporated by reference to Exhibit
10.15 to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.16 Contract on Sale and Leaseback between Islensk erfoagreining
ehf. and The Icelandic Investment Bank, dated June 8, 1998
(Incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.17 Contract on Financial Leasing between Islensk erfoagreining
ehf. and Lysing hf., dated June 19, 1998 (Incorporated by
reference to Exhibit 10.17 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
10.18+ Employment Agreement between Islensk erfoagreining ehf. and
Axel Nielsen, dated July 1, 1998 (Incorporated by reference
to Exhibit 10.18 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31984) which became effective
on July 17, 2000)
10.19* Collaboration Agreement between a Collaboration Group on
Alzheimer's Disease and Related Disorders and Islensk
erfoagreining ehf., dated July 19, 1998 (Incorporated by
reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
10.20* Collaboration Agreement between The Research Group on
Osteoporosis and Islensk erfoagreining ehf., dated July 19,
1998 (Incorporated by reference to Exhibit 10.20 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-31984) which became effective on July 17, 2000)
10.21+ Employment Agreement between Islensk erfoagreining ehf. and
Kristjan Erlendsson, dated September 4, 1998 (Incorporated
by reference to Exhibit 10.21 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
10.22 Co-operation Agreement between Reykjavik Hospital and
Islensk erfoagreining ehf., dated November 4, 1998
(Incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.23+ Amended and Restated Non-Recourse Promissory Note between
deCODE genetics, Inc. and Sigurour I. Bjornsson, dated March
24, 1999 (Incorporated by reference to Exhibit 10.23 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-31984) which became effective on July 17, 2000)
10.24 Co-operation Agreement between the Iceland State Hospital
and Islensk erfoagreining ehf., dated December 15, 1998
(Incorporated by reference to Exhibit 10.24 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.25+ Employment Contract between Islensk erfoagreining ehf. and
Sigurour I. Bjornsson, dated January 15, 1999 (Incorporated
by reference to Exhibit 10.25 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
84
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.26 Lease between Frioar sf. and Islensk erfoagreining ehf.,
dated February 18, 1999 (Incorporated by reference to
Exhibit 10.26 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31984) which became effective
on July 17, 2000)
10.27* Research Contract on the Co-operation of a Research Team for
Age-Related Macular Degeneration and Islensk erfoagreining
ehf., dated April 27, 1999 (Incorporated by reference to
Exhibit 10.27 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31984) which became effective
on July 17, 2000)
10.28* Research Contract on the Co-operation of a Research Team for
Peripheral Artery Occulsive Disease and Islensk
erfOagreining ehf., dated May 28, 1999 (Incorporated by
reference to Exhibit 10.28 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
10.29* Research Contract on the Co-operation of a Research Team for
Allergy and Asthma and Islensk erfoagreining ehf., dated
July 1, 1999 (Incorporated by reference to Exhibit 10.29 to
the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.30 Series A Preferred Stock Repurchase Agreement between deCODE
genetics, Inc. and certain holders of Series A preferred
Stock, dated as of July 12, 1999, with attached Addendum
(Incorporated by reference to Exhibit 10.30 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.31 Series C Preferred Stock Repurchase Agreement between deCODE
genetics, Inc. and Roche Finance Ltd., dated as of July 12,
1999, with attached Addendum (Incorporated by reference to
Exhibit 10.31 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31984) which became effective
on July 17, 2000)
10.32 Common Stock Repurchase Agreement between deCODE genetics,
Inc. and Kari Sefansson, dated as of July 12, 1999
(Incorporated by reference to Exhibit 10.32 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.33 Stock Purchase Agreement between deCODE genetics, Inc. and
Biotek Invest, S.A., dated as of June 30, 1999, with
attached Addendum (Incorporated by reference to Exhibit
10.33 to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.34 Co-operation Agreement between Akureyri Central Hospital and
Islensk erfoagreining ehf., dated October 26, 1999, with
attached Declaration (Incorporated by reference to Exhibit
10.34 to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.35 Non-Recourse Promissory Note between deCODE genetics, Inc.
and Hannes Smarason, dated September 15, 1999 (Incorporated
by reference to Exhibit 10.35 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
10.36* Research Contract on the Co-Operation of a Research Team for
Cerebral Haemorrhage and Islensk erfoagreining ehf., dated
November 3, 1999 (Incorporated by reference to Exhibit 10.36
to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.37 Lease between the Computer Centre of the Icelandic Savings
Banks and Islensk erfoagreining ehf., dated November 24,
1999 (Incorporated by reference to Exhibit 10.37 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-31984) which became effective on July 17, 2000)
85
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.38 Research Collaboration Agreement by and between Islenskar
hveraorverur ehf. (now Prokaria, ehf.) and Islensk
erfoagreining ehf., dated December 28, 1999 (Incorporated by
reference to Exhibit 10.38 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
10.39 Agreement between The Minister for Health and Social
Security and Islensk erfoagreining ehf. relating to the
Issue of an Operating License for the Creation and Operation
of a Health Sector Database, dated January 21, 2000
(Incorporated by reference to Exhibit 10.39 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.40 Operating License issued to Islensk erfoagreining ehf., for
the Creation and Operation of a Health Sector Database,
dated January 22, 2000 (Incorporated by reference to Exhibit
10.40 to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.41 Series B Preferred Stock Agreement between deCODE genetics,
Inc. and Kari Stefansson, dated as of March 1, 2000
(Incorporated by reference to Exhibit 10.41 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.42 Agreement between The University of Iceland, Islensk
erfoagreining ehf., and the City of Reykjavik, dated
February 15, 2000 (Incorporated by reference to Exhibit
10.42 to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.43 Lease between Islensk erfoagreining ehf. and Faghus ehf.,
dated as of March 1, 2000 (Incorporated by reference to
Exhibit 10.43 to the Company's Registration Statement on
Form S-1 (Registration No. 333-31984) which became effective
on July 17, 2000)
10.44+ Form of Employee Confidentiality, Invention Assignment and
Non-Compete Agreement executed by certain officers
(Incorporated by reference to Exhibit 10.44 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.45 Series C Preferred Stock and Warrant Purchase Agreement
between Roche Finance Ltd and deCODE genetics, Inc., dated
as of February 1, 1998 (Incorporated by reference to Exhibit
10.45 to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
10.46 Founder Stock Purchase Agreement between deCODE genetics,
Inc. and Jeffrey R. Gulcher, dated as of August 21, 1996
(Incorporated by reference to Exhibit 10.46 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.47* Research Contract on the Co-Operation of a Research Team for
Chronic Obstructive Pulmonary Disease and Islensk
erfoagreining ehf., dated as of July 1, 1999 (Incorporated
by reference to Exhibit 10.47 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
10.48* Strategic Alliance Agreement between Partners HealthCare
System, Inc., The General Hospital Corporation, d.b.a.
Massachusetts General Hospital, The Brigham and Women's
Hospital, Inc. and deCODE genetics Ltd. (Islensk
erfoagreining), dated May 11, 2000 (Incorporated by
reference to Exhibit 10.48 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
10.49* Crosswalk Development Agreement between Partners HealthCare
System, Inc., The General Hospital Corporation, d.b.a.
Massachusetts General Hospital, The Brigham and Women's
Hospital, Inc. and deCODE genetics Ltd. (Islensk
erfoagreining), dated May 11, 2000 (Incorporated by
reference to Exhibit 10.49 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
86
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.50 Property Leasing Contract on Premises at Hlidarsmar 15 between
Veigur ehf. and Islensk erfoagreining ehf., dated April 2000
(Incorporated by reference to Exhibit 10.50 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.51* Research Contract on the Co-Operation between a Research
Team for The Epidemiology and Heredity Lung Cancer and
Islensk erfoagreining ehf., dated as of June 26, 2000
(Incorporated by reference to Exhibit 10.51 to the Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000)
10.52+ Employment Agreement between Islensk erfoagreining ehf. and
Hakon Guobjartsson, dated May 5, 1999
10.53 Stock Purchase Agreement between Islensk erfoagreining ehf.
and KACE Traders Ltd., dated November 8, 2000
10.54+ Employment Agreement between Islensk erfoagreining ehf. and
Einar Stefansson, dated November 22, 2000
10.55+ Non-Recourse Promissory Note between deCODE genetics, Inc.
and Einar Stefansson, dated December 21, 2000
10.56+ Employment letter between deCODE genetics, Inc. and
Augustine Kong, dated December 30, 2000
10.57+ Employee Confidentiality, Invention Assignment and
Non-Compete Agreement between deCODE genetics, Inc. and C.
Augustine Kong, dated January 1, 2001
10.58 Form of Contract on the Processing of Clinical Data and
their Transfer to a Health Sector Database between several
Health Institutions and Islensk erfoagreining ehf.
21.1 Subsidiaries of deCODE genetics, Inc.
23.1 Consent of PricewaterhouseCoopers ehf., independent public
accountants
99.1 Government Regulation on a Health Sector Database, dated
January 22, 2000 (Incorporated by reference to Exhibit 99.1
to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000)
99.2 Act. No. 139/1998 on a Health Sector Database (Incorporated
by reference to Exhibit 99.2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000)
- ---------------
* Confidential treatment has been granted with respect to a portion of this
Exhibit.
+ Denotes a management contract or compensation plan or arrangement required to
be filed as an exhibit pursuant to Item 14(a) of this Form 10-K.