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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER 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 Identification No.)
Incorporation or Organization)
STURLUGATA 8, IS-101 REYKJAVIK, ICELAND
(Address of Principal Executive Offices)
+354-570-1900
(Registrant's Telephone Number, Including Area Code)
Indicate by check 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 whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes X No __
The aggregate number of shares of the registrant's common stock outstanding on
April 1, 2003 was 53,505,724 shares of common stock $.001 par value.
deCODE genetics, Inc.
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION ........................................ 2
Item 1. Financial Statements (unaudited).............................. 2
Condensed Consolidated Statements of Operations for the
three-months ended March 31, 2003 and 2002 ................. 2
Condensed Consolidated Balance Sheets as of March 31, 2003
and December 31, 2002 ...................................... 3
Condensed Consolidated Statements of Cash Flows for the
three-months ended March 31, 2003 and 2002 ................. 4
Notes to Condensed Consolidated Financial Statements ......... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk ... 16
Item 4. Controls and Procedures....................................... 17
PART II. OTHER INFORMATION ........................................... 17
Item 1. Legal proceedings ............................................ 17
Item 5. Other Information ............................................ 17
Risk factors ................................................. 17
Item 6. Exhibits and Reports on Form 8-K ............................. 26
(a) Exhibits ................................................. 26
(b) Reports on Form 8-K ...................................... 26
Signatures ........................................................... 27
Certifications ....................................................... 28
Index to Exhibits .................................................... 30
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
deCODE genetics, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
unaudited
FOR THE THREE-MONTHS ENDED MARCH 31,
------------------------------------
2003 2002
---- ----
REVENUE ............................................. $ 11,842 $ 5,258
OPERATING EXPENSES
Research and development, including cost of revenue 19,832 18,842
Selling, general and administrative ............... 4,096 3,302
Employee termination benefits ..................... 485 0
------------ ------------
Total operating expense ................... 24,413 22,144
------------ ------------
Operating loss ...................................... (12,571) (16,886)
Interest income ..................................... 355 862
Interest expense .................................... (916) (274)
Other non-operating income and (expense), net ....... 90 98
------------ ------------
Net loss before cumulative effect of change
in accounting principle ........................... (13,042) (16,200)
Cumulative effect of change in
milestone revenue recognition method .............. 0 333
------------ ------------
Net Loss ............................................ $ (13,042) $ (15,867)
============ ============
Basic and diluted net loss per share:
Net loss before cumulative effect of change
in accounting principle ......................... $ (0.25) $ (0.37)
Cumulative effect of change in
milestone revenue recognition method ............ -- 0.01
Net Loss .......................................... (0.25) (0.36)
Shares used in computing basic and diluted
net loss per share ............................... 51,156,718 43,471,256
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
deCODE genetics, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
unaudited
MARCH 31, DECEMBER 31,
2003 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 73,222 $ 87,244
Receivables .......................................................... 8,554 5,417
Other current assets ................................................. 6,914 9,437
--------- ---------
Total current assets ......................................... 88,690 102,098
Restricted cash ........................................................ 6,000 6,000
Property and equipment, net ............................................ 80,330 83,499
Goodwill ............................................................... 8,863 8,863
Other long-term assets and deferred charges ............................ 14,272 12,957
--------- ---------
Total assets ................................................. $ 198,155 $ 213,417
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 4,737 $ 4,865
Accrued expenses ..................................................... 9,136 10,613
Current portion of capital lease obligations ......................... 4,352 4,311
Current portion of long-term debt .................................... 4,567 4,243
Deferred research revenue ............................................ 7,259 7,606
--------- ---------
Total current liabilities .................................... 30,051 31,638
Capital lease obligations, net of current portion ...................... 3,900 5,008
Long-term debt, net of current portion ................................. 45,827 44,961
Deferred research revenue .............................................. 5,500 6,557
Other long-term liabilities ............................................ 7 7
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value;
Authorized: 6,716,666 shares
Issued and outstanding: none ...................................... 0 0
Common stock, $0.001 par value;
Authorized: 100,000,000 shares;
Issued: 53,720,461 and 53,695,869 shares
at March 31, 2003 and December 31, 2002,
respectively;
Outstanding: 53,509,369 and 53,545,234 shares
at March 31, 2003 and December 31, 2002,
respectively ...................................................... 54 54
Additional paid-in capital ........................................... 431,540 431,494
Notes receivable ..................................................... (7,252) (7,607)
Deferred compensation ................................................ (2,025) (2,642)
Accumulated deficit .................................................. (308,129) (295,087)
Accumulated other comprehensive income (loss) ........................ 2 (1)
Treasury stock, 211,092 and 150,635 shares stated at cost at March 31,
2003 and December 31, 2002, respectively .......................... (1,320) (965)
--------- ---------
Total stockholders' equity ................................... 112,870 125,246
--------- ---------
Total liabilities, and
stockholders' equity ...................................... $ 198,155 $ 213,417
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
deCODE genetics, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
unaudited
FOR THE THREE-MONTHS ENDED MARCH 31,
------------------------------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................... $ (13,042) $ (15,867)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................. 3,941 2,854
Purchased in-process research and development . 0 480
Equity in net earnings of affiliate ........... 0 18
Amortization of deferred stock compensation ... 552 906
Charges for write-down of obsolete and excess
materials and supplies ..................... 797 950
Unrealized gain on derivative financial
instruments ................................ (202) (254)
Other ......................................... 48 316
Changes in operating assets and liabilities
net of effect of acquisition:
Receivables and other current assets ........... (1,392) 3,163
Accounts payable and accrued expenses .......... (1,558) (7,839)
Deferred research revenue ...................... (1,404) 467
Other long-term liabilities .................... 0 (672)
--------- ---------
Net cash used in operating activities ....... (12,260) (15,478)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............ (325) (5,202)
Cash acquired in purchase of MediChem, net
of transaction costs ........................ 0 2,115
--------- ---------
Net cash used in investing activities ....... (325) (3,087)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from financing of building ............ 0 14,160
Issuance of common stock ....................... 38 0
Repayment of notes receivable for common stock . 26 44
Installment payments on debt and capital lease
obligations .................................. (1,501) (1,555)
--------- ---------
Net cash (used in) provided by
financing activities ........................ (1,437) 12,649
--------- ---------
Net decrease in cash ............................. (14,022) (5,916)
Cash and cash equivalents at beginning of period . 87,244 153,061
--------- ---------
Cash and cash equivalents at end of period ....... $ 73,222 $ 147,145
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
deCODE genetics, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except share and per share amounts)
THE COMPANY
References in this report to deCODE and "we" and "us" refer to deCODE genetics,
Inc., a Delaware company, and deCODE genetics, Inc.'s wholly owned subsidiary,
Islensk erfdagreining ehf., an Icelandic company registered in Reykjavik, and
its subsidiaries Encode ehf., deCODE Cancer ehf. and Vetrargardurinn ehf. as
well as deCODE genetics, Inc.'s wholly owned subsidiary, MediChem Life Sciences,
Inc., a Delaware corporation, and its subsidiaries MediChem Research, Inc.,
ThermoGen, Inc., Emerald BioStructures, Inc., Advanced X-Ray Analytical
Services, Inc. and MediChem Management, Inc.
Based in Reykjavik, Iceland, deCODE is a population genetics company developing
drugs and DNA-based diagnostics based upon its discoveries in the inherited
causes of common diseases. deCODE's population approach and resources have
enabled it to isolate gene and targets directly involved in the development of
many diseases posing significant challenges to public health and deCODE is
focused on turning these findings into a pipeline of products. deCODE's
customers include major pharmaceutical companies, biotechnology firms,
pharmacogenomics companies, universities and other research institutions.
deCODE's business is global, with its principal markets in the United States and
in Europe.
deCODE's historical operations have been in a single business segment, been
primarily focused on developing products and services for the healthcare
industry from its population-based gene discovery work in Iceland. To date,
deCODE's revenues have been largely derived from services provided, including
product development service activities. Broadening that discovery work to
development of products, deCODE is organized according to product development
offerings and services. deCODE's product development activities encompass the
discovery and commercialization of novel therapeutics designed against targets
identified in deCODE's gene discovery work, as well as the creation of DNA-based
diagnostic and pharmacogenomic tests and the development of software systems for
making correlations between genetic variation and disease and drug response.
deCODE's service offerings include contract service businesses in drug discovery
and medicinal chemistry through its Chicago-based pharmaceuticals group,
three-dimensional protein crystallography products and contract services through
its Seattle-based biostructures group, pharmacogenomics and clinical trials
services through its wholly-owned subsidiary Encode, genotyping services carried
out in Reykjavik, Iceland and bioinformatics services and tools developed in the
course of deCODE's gene and drug target research.
In March 2002, deCODE completed the acquisition of MediChem Life Sciences, Inc.
(MediChem) in a stock-for-stock exchange accounted for as a purchase
transaction. The acquisition gives deCODE capabilities in chemistry and
structural proteomics that can be used in the implementation of its strategy of
turning its targets identified by applying population genomics to common
diseases into novel drugs for the market both through its own programs and in
alliances with collaborators. Founded in 1987, MediChem (now our pharmaceuticals
and biostructures groups) provides contract chemistry research services
specializing in chemical synthesis for new drug discovery and development for
the global pharmaceutical, biotechnology, agricultural, chemical and personal
care industries.
BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included herein have
been prepared by deCODE, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant
to such rules and regulations. The condensed consolidated balance sheet as of
December 31, 2002 has been derived from the audited financial statements as of
that date, but does not include all disclosures required by accounting
principles generally accepted in the United States. deCODE believes the
disclosures included in the condensed consolidated financial statements when
read in conjunction with the financial statements and the notes thereto included
in deCODE's Annual Report on Form 10-K are adequate to make the information
presented not misleading.
These financial statements are reported in United States dollars, deCODE's
functional currency. Tabular amounts are stated in thousands, except share and
per share amounts.
The condensed consolidated financial statements have been prepared on the same
basis as the annual financial statements and, in the opinion of management,
reflect all adjustments, which include only normal recurring adjustments,
necessary for a fair presentation of deCODE's financial position, results of
operations and cash flows for the periods presented. The results of operations
for the three month periods ended March 31, 2003 and 2002 are not necessarily
indicative of the results that may be expected for any other interim period or
for the full fiscal year.
PRINCIPLES OF CONSOLIDATION
The unaudited condensed consolidated financial statements include the accounts
and operations of deCODE genetics, Inc. and its wholly owned subsidiaries. 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 the unaudited condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States
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. On an ongoing basis we
evaluate our estimates, which include, among others, those related to
collaborative arrangements, property and equipment, income taxes, litigation and
other contingencies, materials and supplies, derivatives, intangible assets, and
bad debts. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the
results of which form our basis for making judgments about carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results could differ from those estimates.
REVENUE RECOGNITION AND DEFERRED REVENUE
Revenues from research and development collaboration agreements are recorded and
recognized in accordance with the applicable performance requirements and terms
of the respective contracts, generally either (i) as contract research costs are
incurred, usually ratably over the period of effort, (ii) according to the
percentage of completion method of contract accounting based on the ratio of
costs incurred to expected total costs, or (iii) upon the achievement of
substantive milestones, that is where the milestone event is substantive, there
is substantial effort involved in achieving the milestone, the milestone payment
amount is commensurate with the magnitude of the related achievement, and the
associated follow-on revenue streams bear a reasonable relationship to one
another. Milestone payments without these characteristics are recognized on a
retrospective basis over the contractual term of the underlying agreement.
Funding payments are not refundable in the event that the related efforts are
not successful. Non-refundable, up-front payments are deferred and recognized on
a straight-line basis over the contract term. Contracted chemistry services
revenue from negotiated rate contracts are recognized on a per diem basis as
services are rendered or on the percentage of completion method based on the
ratio of costs incurred to expected total costs for fixed fee contracts based
upon the terms of the underlying contract. Any losses on contracts are provided
for when they are determinable. Included in revenue are billings to customers
for the cost of materials purchased by deCODE.
In general, prerequisites for billings are established by contractual terms
including predetermined payment schedules, the achievement of contract
milestones, or submission of appropriate billing detail. Revenue recorded
represents amounts billed in accordance with contractual terms. Unbilled costs
and fees arise when revenue has been recognized but customers have not been
billed. Contractual payments due to deCODE are recorded as deferred revenue
until earned. The following is a summary of deferred revenue:
MARCH 31,
---------
2003 2002
---- ----
(in thousands)
Revenue recorded during the period ended . $ 10,438 $ 6,058
Revenue recognized during the period ended (11,842) (5,258)
Cumulative effect of change in
milestone revenue recognition policy ... 0 (333)
-------- --------
(1,404) 467
Deferred revenue at beginning of period .. 14,163 11,297
-------- --------
Deferred revenue at end of period ........ $ 12,759 $ 11,764
======== ========
Roche accounted for 45% and 82% of consolidated revenue in three-month periods
ended March 31, 2003 and 2002, respectively, and Merck accounted for 14% of
consolidated revenue in the three-month period ended March 31, 2003. Revenue for
the three-month periods ended March 31, 2003 and 2002 includes $7,000 and
$83,000, respectively, in services provided to Prokaria, a related party.
STOCK-BASED COMPENSATION AND REMUNERATION
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.
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
condensed consolidated statements of operations in the following captions:
FOR THE THREE-MONTHS ENDED MARCH 31,
------------------------------------
2003 2002
------------ ------------
(in thousands)
Research and development expense . $322 $582
General and administrative expense 230 324
---- ----
Total .................. $552 $906
==== ====
Had compensation cost for all stock options been determined based on the fair
value at the grant date for awards consistent with the provisions of SFAS No.
123, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation --
Transition and Disclosure -- an amendment of FASB Statement No. 123" ("SFAS
148"), deCODE's net loss and basic and diluted net loss per share would have
been changed to the pro forma amounts indicated below:
FOR THE THREE-MONTHS ENDED MARCH 31,
-----------------------------------
2003 2002
------------ -----------
(in thousands, except per share amounts)
Net loss attributable to common stockholders -- as
reported ......................................... $(13,042) $(15,867)
Add: Stock-based employee compensation expense
included in reported net loss .................... 552 906
Deduct: Total stock-based employee compensation
expense determined under fair value method for
all awards ....................................... (1,193) (1,697)
-------- --------
Net loss attributable to common
stockholders -- proforma ......................... $(13,683) $(16,658)
======== ========
Basic and diluted net loss per share -- as
reported ......................................... $ (0.25) $ (0.36)
Basic and diluted net loss per share -- proforma . (0.27) (0.38)
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 granted in future years.
In May 2003, deCODE granted options to purchase 633,400 shares of common stock
to employees under the 1996 Equity Incentive Plan.
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.
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 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:
MARCH 31,
---------
2003 2002
------------ ------------
(shares)
Warrants to purchase shares of common stock..... 1,851,300 2,001,300
Options to purchase shares of common stock...... 1,984,554 2,573,878
Restricted shares with an associated outstanding
non-recourse promissory note.................. 2,368,160 3,315,416
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) generally represents all changes in stockholders'
equity except those resulting from investments or contributions by stockholders.
Amounts reported in other comprehensive income (loss) include foreign currency
translation adjustments. The following table presents the calculation of
comprehensive income:
FOR THE THREE-MONTHS ENDED MARCH 31,
------------------------------------
2003 2002
---- ----
(in thousands)
Net loss ......................... $ (13,042) $ (15,867)
Other comprehensive income (loss):
Foreign currency translation 3 (96)
------------ ------------
Total comprehensive loss $ (13,039) $ (15,963)
============ ============
EMPLOYEE TERMINATION BENEFITS
In September of 2002, deCODE implemented a cost reduction program including
charges related to termination benefits for 132 employees. Of the $2,158,000
then provided, $1,284,000 was paid in 2002 and $874,000 remained accrued and
unpaid as of December 31, 2002. Charges for termination benefits for 27
additional employees were added ($485,000) and total termination benefits of
$1,155,000 were paid in the three-months ended March 31, 2003, leaving $204,000
accrued and unpaid as of March 31, 2003. Termination benefits remaining accrued
and unpaid as of March 31, 2003 (14 employees) are expected to be settled in
cash over the next 3 months.
RECENT COLLABORATIONS
Merck. In September 2002, deCODE and Merck & Co., Inc. (Merck) entered into an
alliance aimed at developing new treatments for obesity. Under the alliance,
deCODE and Merck will combine their research efforts in the genetics of obesity
to identify, validate and prioritize a series of drug targets to take into
development. Under the terms of the three-year agreement, deCODE will receive
research funding, technology access, license fees, milestone payments as
compounds developed under the alliance advance in the development process, and
royalties on successfully marketed alliance drugs.
IBM. In January 2003, deCODE announced a three-year strategic alliance with IBM
under which deCODE and IBM will jointly market and sell deCODE's Clinical Genome
Miner (CGM) Discovery(TM) system running on IBM hardware and software. CGM
Discovery(TM) is the same statistically-based application for isolating and
analyzing genes and gene variations associated with particular diseases that
deCODE has used its gene discovery programs. The alliance aims to take advantage
of deCODE's expertise in genetics and IBM's leadership in hardware and software
systems to create solutions for what deCODE and IBM believe is a growing market
for information-based medicine.
Wyeth. In November 2002, deCODE entered into a pharmagenomic alliance with
Wyeth. Under the agreement, deCODE will use its in vitro pharmacogenomics
expertise to generate gene expression data for a drug candidate targeted to
treatment of certain respiratory diseases.
Vertex Pharmaceuticals. In January 2003 deCODE announced an agreement with
Vertex Pharmaceuticals under which we will gather and analyze pharmacogenomic
data as part of clinical trials our subsidiary Encode conducts on Vertex
developmental compounds. The first project under the agreement is a phase IIa
clinical trial for Vertex's VX-148 treatment for psoriasis. Our pharmacogenomics
capabilities will enable Vertex to gain an understanding, in conjunction with
clinical trial results, of genetic factors affecting the responses of
individuals to treatment. This information may be useful in designing subsequent
clinical strategies and pharmacogenomic tests. Based upon the results of work
under this agreement, the parties may extend the collaboration to the
development and commercialization of pharmacogenomic tests.
Families of Spinal Muscular Atrophy. In February 2003, deCODE and Families of
Spinal Muscular Atrophy (FSMA), an organization founded to promote research
leading to the effective treatment of this debilitating and often fatal disease,
announced the signing of an agreement aimed at developing a new therapeutic
compound for spinal muscular atrophy. Using promising compounds identified
through previous FSMA-funded gene- and drug-discovery work, deCODE's
Chicago-based pharmaceuticals group will identify the most promising lead
compounds, optimize these compounds, and conduct the medicinal chemistry and
scale-up work to develop a potentially effective new drug ready for clinical
trials. The three-year agreement is potentially worth $5.2 million, including
milestones for the successful development of a compound approved for clinical
trials.
DERIVATIVE FINANCIAL INSTRUMENTS
During the normal course of business, deCODE is exposed to foreign currency risk
and interest rate risk. These risks can create volatility in earnings and cash
flows from period to period. deCODE's objective is to reduce volatility of
earnings and cash flows associated with market risks. Derivative instruments
held by the Company are used for hedging and non-speculative purposes. As of
March 31, 2002, deCODE had entered into two cross-currency swaps for purposes of
managing certain of these risks.
deCODE seeks to maintain a desired level of floating-rate debt with respect to
its overall debt portfolio denominated in U.S. Dollars. To this end, deCODE uses
interest rate and cross-currency swaps to manage interest rate and foreign
currency risk arising from long-term debt obligations denominated in Icelandic
krona. These interest rate and cross-currency swaps with a remaining combined
notional amount of 1,930 million Icelandic krona are designated as economic
hedges of fixed rate foreign currency debt (Tier A and Tier C bonds), but do not
qualify for hedge accounting under SFAS 133. The estimated fair value of these
instruments is included in other long-term assets is $8,188,000 and $750,000 as
of March 31, 2003 and 2002, respectively. The unrealized gain for the
three-month periods ended March 31, 2003 and 2002 resulting from the recording
of these instruments together with the translation of the Tier A and Tier C
bonds is $202,000 and $254,000, respectively, and is included in other
non-operating income and (expense), net in the Consolidated Statements of
Operations.
The fair value of derivative instruments is sensitive to movements in the
underlying market rates and variables. deCODE monitors the fair value of
derivative instruments on a periodic basis. Fair values are estimated for each
derivative using common market valuation methods with reference to available
market data as of the balance sheet date.
GUARANTEES
In November 2002, the FASB issued FIN No.45 "Guarantor's Accounting and
Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others - an interpretation of FASB Statements F-25 No.5, 57 and
107 and rescission of FIN 34." The disclosure provisions of FIN 45 are effective
for financial statements of interim or annual periods that end after December
15, 2002 and the provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a guarantors year-end. The adoption of
FIN 45 did not have a material impact on deCODE's financial statements. The
following is a summary of deCODE's agreements that it has determined are within
the scope of FIN 45.
Under its bylaws, deCODE has agreed to indemnify its officers and directors for
certain events or occurrences while the officer or director is, or was serving,
at its request in such capacity. The term of the indemnification period is for
the officer's or director's lifetime. deCODE has a separate indemnification
agreement with one of its directors that requires it, subject to certain
exceptions, to indemnify him to the fullest extent authorized or permitted by
its bylaws and the Delaware General Corporation Law. The maximum potential
amount of future payments deCODE could be required to make under these
indemnification agreements is unlimited; however, deCODE has a directors and
officer liability insurance policy that limits its exposure and enables it to
recover a portion of any future amounts paid. As a result of its insurance
policy coverage, deCODE believes the estimated fair value of these
indemnification agreements is minimal. deCODE has no liabilities recorded for
these agreements as of March 31,2003.
When as part of an acquisition deCODE acquires all of the stock or all of the
assets and liabilities of a company, it assumes the liability for certain events
or occurrences that took place prior to the date of acquisition. The maximum
potential amount of future payments it could be required to make for such
obligations is undeterminable at this time. deCODE has no liabilities recorded
for these liabilities as of March 31,2003.
deCODE enters into indemnification provisions under (i) its agreements with
other companies in its ordinary course of business, typically with business
partners, contractors, clinical sites and customers and (ii) its agreements with
investors. Under these provisions deCODE generally indemnifies and hold harmless
the indemnified party for losses suffered or incurred by the indemnified party
as a result of deCODE's activities or, in some cases, as a result of the
indemnified party's activities under the agreement. These indemnification
provisions generally survive termination of the underlying agreement. In
addition, in some cases, deCODE has agreed to reimburse employees for certain
expenses and to provide salary continuation during short-term disability. The
maximum potential amount of future payments deCODE could be required to make
under these indemnification provisions is unlimited. deCODE has not incurred
material costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, the estimated fair value of these
agreements is minimal. Accordingly, deCODE has no liabilities recorded for these
agreements as of March 31, 2003.
LITIGATION
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 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. In April 2001, a lawsuit was
filed against the Icelandic Directorate of Public Health but Mannvernd has not
commenced litigation against us. The ultimate resolution of this matter cannot
yet be determined.
On or about April 20, 2002, an amended class action complaint, captioned In re
deCODE genetics, Inc. Initial Public Offering Securities Litigation (01 Civ.
11219(SAS)), alleging violations of federal securities laws was filed in the
United States District Court for the Southern District of New York on behalf of
certain purchasers of deCODE common stock. The complaint names us, two of our
current executive officers (the "Individual Defendants"), and the two lead
underwriters (the "Underwriter Defendants") for our initial public offering in
July 2000 (the "IPO") as defendants.
In the amended pleading, the plaintiff alleges violations of Section 11 of the
Securities Act of 1933 and violations of Section 10(b) of the Securities
Exchange Act of 1934 (and Rule 10b-5 promulgated thereunder) against us, the
Individual Defendants and the Underwriter Defendants. In addition, the amended
complaint alleges violations of Section 15 of the Securities Act of 1933, and
Section 20(a) of the Securities Exchange Act of 1934 against the Individual
Defendants. Generally, the amended complaint alleges that the Underwriter
Defendants: (i) solicited and received excessive and undisclosed commissions
from certain investors in exchange for which the Underwriter Defendants
allocated to those investors material portions of the shares of our stock sold
in the IPO; (ii) entered into agreements with customers whereby the Underwriter
Defendants agreed to allocate shares of our stock sold in the IPO to those
customers in exchange for which the customers agreed to purchase additional
shares of our stock in the aftermarket at pre-determined prices; and (iii)
improperly used their analysts, who purportedly suffered from conflicts of
interest, to manipulate the market. The amended complaint further alleges that
the prospectus incorporated into the registration statement for the IPO was
materially false and misleading in that it failed to disclose these
arrangements. The amended complaint also alleges that we and the Individual
Defendants had numerous interactions and contacts with the Underwriters from
which we and the Individual Defendants either knew of, or recklessly
disregarded, the Underwriters' purported wrongful acts. The suit seeks
unspecified monetary and recissionary damages and certification of a plaintiff
class consisting of all persons who purchased shares of our common stock from
July 17, 2000 to December 6, 2000.
We are aware that similar allegations have been made in hundreds of other
lawsuits filed (many by some of the same plaintiff law firms) against numerous
underwriter defendants and issuer companies (and certain of their current and
former officers) in connection with various public offerings conducted in recent
years. All of the lawsuits that have been filed in the Southern District of New
York have been consolidated for pretrial purposes before Honorable Judge Shira
A. Scheindlin. Pursuant to the underwriting agreement executed in connection
with our IPO, we have demanded indemnification from the Underwriter Defendants.
The Underwriter Defendants have asserted that our request for indemnification is
premature.
Pursuant to an agreement the Individual Defendants have been dismissed from the
case without prejudice. Along with numerous other issuers, we moved to dismiss
the complaint for failure to state a claim. On February 19, 2003, Judge
Scheindlin granted our motion with respect to the Section 10(b) claims and
denied the motion with respect to the Section 11 claims.
We believe that the allegations against us and our officers are without merit
and we intend to contest them vigorously. Because the litigation is, however,
still in the preliminary stage, we cannot predict its outcome and the ultimate
effect, if any, on our financial condition. In addition, it is possible that
further lawsuits alleging substantially similar claims will be filed against us
and our officers. If we are required to pay significant monetary damages as a
result of such litigation, our business could be significantly harmed. Even if
such suit or suits conclude in our favor, we may be required to expend
significant funds to defend against the allegations. We are unable to estimate
the range of possible loss from the litigation and no amounts have been provided
for such matters in our financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. We are still evaluating the
potential impact of FIN 46 on our financial position and results of operations.
In November 2002, the Emerging Issues Task Force reached a consensus on Issue
No. 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple Deliverables."
EITF 00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF 00-21 will apply to revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. We are still evaluating
the potential impact of EITF 00-21 on our financial position and results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (TABULAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE
AMOUNTS)
This Management's Discussion and Analysis of Financial Condition and Results of
Operations as of March 31, 2003 and for the three month periods ended March 31,
2003 and 2002 should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto set forth in Item 1 of this
report.
OVERVIEW
We are a population genetics company developing drugs and DNA-based diagnostics
based upon our discoveries in the inherited causes of common diseases. Our
population approach and resources have enabled us to isolate genes and targets
directly involved in the development of many of the most common diseases. We are
focused on turning these findings into a growing pipeline of products and
services which we believe will be able to combat the causes of disease, not just
the signs and symptoms. Our approach to the discovery of healthcare knowledge
brings together three key types of non-personally identifiable data derived from
our population research in Iceland: genotypic data and disease data from more
than 90,000 volunteer participants in some 50 disease gene research programs,
and genealogical data linking together the entire present-day population of
Iceland and going back to the settlement of the country in the ninth century.
Our business strategy is to leverage our capabilities and assets to create
product-driven value streams from the near through to the longer term. Our
business is divided into two components: products and services. Our primary
product focus is on the discovery and commercialization of novel therapeutics
designed against targets identified in our population-based gene discovery work.
Through the acquisition in March 2002 of MediChem Life Sciences and its
subsidiary Emerald Biostructures, now our pharmaceuticals and biostructures
groups, we have integrated capabilities for applying genetic findings to the
development of drugs both through our own programs and in alliance with our
corporate partners. Our product development activities also encompass the
creation of new DNA-based diagnostics and pharmacogenomics tests, as we apply
the links we have identified between genetic variation and disease, and genetic
variation and drug response. We believe such tests will become a standard part
of healthcare, making it possible to gauge individual predisposition to a
particular disease and to design effective preventive strategies; to complement
traditional clinical diagnoses; and to identify patients who are likely to
respond or not respond to particular drugs. We are also marketing bioinformatics
software systems developed in the course of our gene and drug target research
for making correlations between genetic variation and disease and drug response.
Our services include pharmacogenetics and clinical trial services offered
through our wholly-owned subsidiary Encode; contract services in structural
biology, medicinal chemistry and scale up into the clinic conducted by our
pharmaceuticals group based in Chicago; database services, through subscriptions
to our Clinical Genome Miner system, integrating anonymized population data with
data on disease, genotypes and genealogy; and genotyping services through our
laboratory in Reykjavik.
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 March 31, 2003 we had an accumulated deficit of $308.1
million. On the basis of our current range of activities, and following the
implementation in September 2002 of a plan to reduce costs and maximize the use
of automation in our core genetics operations, we anticipate that we will be
able to achieve positive cash flow from operations by the end of 2003. At the
same time, we believe that the initiation of substantial new activities within
this timeframe would require additional expenditures that could delay for some
time our achievement of positive cash flow from operations. For example, in our
target discovery work on our findings in myocardial infarction and hypertension,
we believe we may be able to bypass much of the drug discovery process and enter
directly into phase II clinical trials in 2003. We anticipate incurring
additional net losses at least through the next two years, due to, among other
factors, depreciation and amortization, as well as stock-based compensation and
other non-cash charges. We expect that our revenues and losses will fluctuate
from quarter to quarter and that such fluctuations may be substantial,
especially because progress in our scientific work and milestone payments that
are related to progress can fluctuate between quarters. We do not believe that
comparisons of our quarter-to-quarter performance are a good indication of
future performance.
We believe that current conditions in the global financial markets and in the
pharmaceutical industry pose significant near-term challenges to biotechnology
companies such as ourselves, as well as important opportunities. The principal
challenge to us posed by the downturn in the market valuations of biotechnology
companies and of the equity markets more generally is that it restricts our
present ability to raise additional capital on favorable terms. In a very broad
sense, it appears that the equity markets are currently more risk-averse than
they have been in the recent past. The markets are therefore less willing to
ascribe value to companies such as ourselves which, although developing new
technologies that may have the potential for generating successful products, are
still considered early-stage and are not yet profitable. This is a general trend
affecting not only the biotechnology industry but all industries involved in
developing new technologies and products that are unproven in the marketplace.
Moreover, it is not certain how long this sentiment in the equity markets will
last.
In order to mitigate the risk to our product development programs posed by the
current conditions in the financial markets, we have implemented measures aimed
at preserving our cash resources. We have implemented a plan to reduce costs to
a level that the we anticipate will make it possible to achieve positive cash
flow from operations by the end of 2003. We believe that we have sufficient cash
resources to continue to fund our current research and operations for several
years, and we are also investigating the possibility of alternative avenues of
financing for our product development programs.
At the same time, the pharmaceutical industry, which is the principal customer
base for our gene-discovery and contract chemistry businesses, is experiencing
difficulties in maintaining historical rates of growth. This presents near-term
challenges and significant longer-term opportunities. One of the main challenges
facing the pharmaceutical industry is developing pipelines of effective new
drugs to treat major indications. As many leading brand-name drugs come off
patent and face generic competition, developing successful new medicines will
become critical for filling the gap. In the short term, the financial pressures
on pharmaceutical companies may be reflected in their research and development
spending, making it more difficult for us to sign corporate alliances with
significant upfront funding, or lengthening the time required to negotiate such
deals. This will likely also lead to pressure on budgets for the outsourcing of
chemistry services, which are an important source of revenue for us. We believe
that in the medium to longer term, however, companies such as ours may be well
positioned to play an important role in filling the gap in the pipeline of new
drugs, either on their own or as partners of pharmaceutical companies. Our gene
discovery programs are aimed at identifying novel drug targets that are involved
in the basic biology of common diseases and we are focused on discovering new
drugs against these targets, both on our own and with major pharmaceutical
partners. Our partnerships with Roche and Merck demonstrate that the industry is
already investing in the development of new therapeutics based on our approach.
Similarly, it is possible that the pharmaceutical industry, in the interest of
reducing internal overhead, may opt to increase its outsourcing of contract
chemistry services.
COLLABORATIONS AND ALLIANCES
Collaborations and further growth in our medicinal chemistry, pharmacogenomics
and informatics services 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. It is also dependent on our ability to maintain and grow our service lines
of business. 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, sign additional
subscribers to our database services, or successfully expand our medicinal
chemistry or pharamacogenetics businesses. Our failure to successfully develop
and market products over the next several years, or to realize product revenues,
would have a materially 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 in the near
term. It may be several years before product revenues materialize, if they do at
all.
We have entered into research, development and commercialization alliances and
collaborations with major pharmaceutical and biotechnology companies across our
business model. These alliances provide us with varied combinations of fixed
funding for research, technology access fees, royalties and milestones. Our
partners include Merck, Wyeth, Roche, Roche Diagnostics, Pharmacia (now Pfizer)
and Vertex. These agreements are generally established for a set term, usually
three to five years.
ACQUISITIONS
As part of our business strategy, we continue to consider joint development
programs and merger and acquisition opportunities that may provide us with
products in late-stage development, intellectual property or financial
resources, or with capabilities that will help accelerate our downstream drug
discovery efforts.
On March 18, 2002, we acquired MediChem Life Sciences, Inc. in a stock-for-stock
exchange accounted for as a purchase transaction. The acquisition gives us
capabilities in chemistry and structural proteomics that will be used in the
implementation of its strategy of turning its targets identified by applying
population genomics to common diseases into novel drugs for the market. Building
upon the acquisition of MediChem (now our pharmaceutical and biostructures
groups), we will be creating an integrated biopharmaceutical company capable of
bringing our own targets into proprietary drug discovery. Through the
acquisition we added approximately 160 new employees and facilities in Illinois
and Washington.
Our consolidated financial statements include the cash flows and results of
MediChem from March 18, 2002. MediChem's total revenue and net loss included in
deCODE's consolidated three-month period ended March 31, 2002 were $0.8 million
and $0.2 million, respectively. The following unaudited pro forma financial
information presents our consolidated results as if the acquisition of MediChem
occurred at the beginning of 2002. Nonrecurring charges, such as the acquired
in-process research and development charge of $480 are not reflected in the
following pro forma financial information. This pro forma information is not
intended to be indicative of future operating results.
FOR THE THREE-MONTHS
ENDED MARCH 31,
--------------------
2003 2002
-------- --------
(in thousands, except)
per share amounts
Total Revenues ........................................ $ 11,842 $ 9,346
Net loss .............................................. (13,042) (19,711)
Basic and diluted net loss per share .................. (0.25) (0.39)
With MediChem, our revenues have increased as have our operating expenses. We
expect to fund the working capital needs and operating activities of MediChem in
the near term. The extent to which MediChem will ultimately impact our results
of operations and financial condition in the longer term is largely dependant
upon what proportion MediChem's capacity is brought to bear on our in-house
programs and how much of their existing contract services business is maintained
and developed.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires us to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities, the 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. On an
ongoing basis we evaluate our estimates, which include, among others, those
related to collaborative arrangements, property and equipment, income taxes,
litigation and other contingencies, materials and supplies, derivatives,
intangible assets, and bad debts. We base our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form our basis for making judgments about
carrying values of assets and liabilities that are not readily apparent from
other sources. The impact and any associated risks related to these and our
other accounting policies on our business or operations is discussed throughout
Management's Discussion and Analysis of Financial Condition and Results of
Operations where such policies affect our reported and expected financial
results. For a detailed discussion on the application of these and other
accounting policies, please refer to our notes to the Consolidated Financial
Statements. There can be no assurance that actual results may not differ from
the estimates referred to above.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
Our results of operations have fluctuated from period to period and may continue
to fluctuate in the future based upon, among other things, the timing and
composition of funding under our various collaborative agreements, as well as
the progress of our own research and development efforts and in what proportion
MediChem's capacity is brought to bear on our in-house programs. Results of
operations for any period may be unrelated to results of operations for any
other period. In addition, historical results should not be viewed as indicative
of future operating results. We are subject to risks common to companies in our
industry and at our stage of development, including risks inherent in our
research and development efforts, reliance upon collaborative partners,
development by us or our 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. In order for a product to be
commercialized based on our research, we and our collaborators must conduct
preclinical tests and clinical trials, demonstrate the efficacy and safety of
our product candidates, obtain regulatory approvals or clearances and enter into
manufacturing, distribution and marketing arrangements, as well as obtain market
acceptance. We do not expect to receive revenues or royalties based on
therapeutic or diagnostic products for a period of years, if at all.
Revenues. Our revenues from research and development collaboration agreements
are recorded and recognized in accordance with the applicable performance
requirements and terms of the respective contracts, generally either (i) as
contract research costs are incurred, usually ratably over the period of effort,
(ii) according to the percentage of completion method of contract accounting
based on the ratio of costs incurred to expected total costs, or (iii) upon the
achievement of substantive milestones, that is where the milestone event is
substantive, there is substantial effort involved in achieving the milestone,
the milestone payment amount is commensurate with the magnitude of the related
achievement, and the associated follow-on revenue streams bear a reasonable
relationship to one another. Milestone payments without these characteristics
are recognized on a retrospective basis over the contractual term of the
underlying agreement. Funding payments are not refundable in the event that the
related efforts are not successful. Non-refundable, up-front payments are
deferred and recognized on a straight-line basis over the contract term.
Contracted chemistry services revenue from negotiated rate contracts are
recognized on a per diem basis as services are rendered or on the percentage of
completion method based on the ratio of costs incurred to expected total costs
for fixed fee contracts based upon the terms of the underlying contract. Any
losses on contracts are provided for when they are determinable. Included in
revenue are billings to customers for the cost of materials purchased by deCODE.
In general, prerequisites for billings are established by contractual terms
including predetermined payment schedules, the achievement of contract
milestones, or submission of appropriate billing detail. Revenue recorded
represents amounts billed in accordance with contractual terms. Unbilled costs
and fees arise when revenue has been recognized but customers have not been
billed. Contractual payments due to deCODE are recorded as deferred revenue
until earned. The following is a summary of deferred revenue:
MARCH 31,
---------
2003 2002
---- ----
(in thousands)
Revenue recorded during the period ended......... $ 10,438 $ 6,058
Revenue recognized during the period ended....... (11,842) (5,258)
Cumulative effect of change in
milestone revenue recognition policy........... 0 (333)
----------- -----------
(1,404) 467
Deferred revenue at beginning of period.......... 14,163 11,297
----------- -----------
Deferred revenue at end of period................ $ 12,759 $ 11,764
=========== ===========
Excluding fourth quarter 2002 revenue resulting from the termination of
agreements with Applied Biosystems Group, our revenue increased 7% from the
fourth quarter of 2002 to $11.8 million for the three-month period ended March
31, 2003 as compared to $5.3 million for the three-month period ended March 31,
2002, an increase of 125%. Revenue in the three-month period ended March 31,
2003 results largely from our diagnostics and therapeutics collaborations with
Roche, from funding in our alliance with Merck and from the contribution of our
pharmaceuticals and biostructures groups. Roche accounted for 45% and 82% of
consolidated revenue in three-month periods ended March 31, 2003 and 2002,
respectively, and Merck accounted for 14% of consolidated revenue in the
three-month period ended March 31, 2003. The increase in the three-month period
ended March 31, 2003 as compared to the same period in 2002 largely is
attributable the contribution of our pharmaceuticals and biostructures groups
and to the addition of funding in our alliance with Merck.
At March 31, 2003, the total amount of deferred research revenue that will be
recognized in future periods aggregated $12.8 million. Revenue recorded was
consistent with that recorded in the fourth quarter 2002 at $10.4 million for
the three-month period ended March 31, 2003 as compared to $6.1 million for the
three-month period ended March 31, 2002. The $4.4 or 72% increase in recorded
revenue from 2003 to 2002 is largely attributable to the contribution of our
pharmaceuticals and biostructures groups.
Research and Development Expenses, including Cost of Revenue. Our research and
development expenses were down 7% from the fourth quarter 2002 to $19.8 million
for the three-months ended March 31, 2003, which compares to $18.8 million for
the three-months ended March 31, 2002. Our research and development expenses for
the three-month period ended March 31, 2003 reflects spending related to the
range of our disease-gene research programs and the initiation of downstream
work on targets already identified as well as the addition of our newly-acquired
pharmaceutical and biostructures groups from March 18, 2002, which are now an
integral part of our operations. Our research and development expenses for the
three-month period ended March 31, 2003 also reflect the beginnings of the
impact of the cost reduction measures we implemented late in 2002.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses were down 33% from the fourth quarter 2002 to $4.1
million for the three-month period ended March 31, 2003, which compares to $3.3
million for the three-month period ended March 31, 2002. The increase in the
three-month period ended March 31, 2003 as compared to the same period in 2002
reflects expanded sales efforts across our businesses and the addition of
selling, general and administrative costs of our pharmaceutical and
biostructures groups from March 18, 2002, which are now an integral part of our
operations. Our selling, general and administrative expenses for the three-month
period ended March 31, 2003 also reflect the beginnings of the impact of the
cost reduction measures we implemented late in 2002.
Employee Termination Benefits. In September of 2002, we implemented a cost
reduction program including charges related to termination benefits for 132
employees. Of the $2.2 million then provided, $1.3 million was paid in 2002 and
$0.9 million remained accrued and unpaid as of December 31, 2002. Charges for
termination benefits for 27 additional employees were added ($0.5 million) and
total termination benefits of $1.2 million were paid in the three-months ended
March 31, 2003, leaving $0.2 million accrued and unpaid as of March 31, 2003.
Termination benefits remaining accrued and unpaid as of March 31, 2003 (14
employees) are expected to be settled in cash over the next 3 months.
Stock-Based Compensation and Remuneration. Stock-based compensation and
remuneration expense was $0.6 million for the three-month period ended March 31,
2003 as compared to $0.9 million for the three-month period ended March 31,
2002, a decrease of 39%. With little compensation being attributed to our more
recent stock option grants, stock-based compensation and remuneration expense
has been decreasing as grants made to employees in earlier years become fully
vested. 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, the value of
stock options that have been granted in recent times and the value of additional
options that may be granted in future years.
Interest Income. Our interest income decreased to $0.4 million for the
three-month period ended March 31, 2003 as compared to $0.9 million for the
three-month period ended March 31, 2002, a decrease of 59%. The decrease is
attributable to the decline of prevailing interest rates but also from an
overall decrease in our cash balance as we continue to use the proceeds of our
initial public offering for operations.
Interest Expense. Our interest expense increased to $0.9 million for the
three-month period ended March 31, 2003 as compared to $0.3 million for the
three-month period ended March 31, 2002, reflecting the cost of financings put
into place during the late part of 2001 and early part of 2002.
Other non-operating income and (expense), net. Our other non-operating income
and expense, net was a net income of $0.1 million for the three-month period
ended March 31, 2003 and a net income of $0.1 million for the three-month period
ended March 31, 2002. Our other non-operating income and expense, net for the
three-month period ended March 31, 2003 comprises unrealized swap gains and
foreign exchange movements.
Income Taxes. As of March 31, 2003, we had an accumulated deficit of $308.1
million and did not owe any Icelandic or U.S. federal income taxes nor did we
pay any in the three-month periods ended March 31, 2003 or 2002. As of December
31, 2002, we had net operating losses able to be carried forward for U.S.
federal income tax purposes of approximately $32.2 million to offset future
taxable income in the United States that expire at various dates through 2022.
Also, as of December 31, 2002 our foreign subsidiaries had net operating loss
carryforwards of approximately $107.4 million that expire in varying amounts
beginning in 2006.
Net Loss and Basic and Diluted Net Loss Per Share. Net loss and basic and
diluted net loss per share were $13.0 million and $0.25 per share, respectively,
for the three-month period ended March 31, 2003, as compared to $15.9 million
and $0.36 per share, respectively, for the three-month period ended March 31,
2002, a decrease of 18% in net loss and a decrease of 31% in basic and diluted
net loss per share.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through funding from collaborative
agreements and the issuance of equity securities and debt instruments. From the
beginning of 1999 to-date, we have received cash of approximately $108 million
from collaborative research agreements, $183 million from the issuance of common
stock, $79 million from the issuance of preferred stock and warrants, and $64
million from privately placed bonds, bank loans and equipment financing. To-date
we have received approximately $90 million in research and development funding
from Roche. As of March 31, 2003 future funding under terms of our existing
agreements is approximately $36 million excluding milestone payments and
royalties that we may earn under such collaborations.
Cash and Cash Equivalents. As of March 31, 2003, we had $79.2 million in cash
and cash equivalents, including $6 million of restricted cash. Available cash is
invested in accordance with our investment policy's primary objectives of
liquidity, safety of principal and diversity of investments. Our cash is
deposited only with financial institutions in Iceland, the United Kingdom and
the United States having a high credit standing. This cash is largely invested
in U.S. dollar denominated money market and checking accounts and also in
Icelandic krona denominated accounts.
Operating Activities. Working capital needs resulted in the net use of $4.4
million of funds in the three-month period ended March 31, 2003 and $4.9 million
in the three-month period ended March 31, 2002. Net cash used in operating
activities decreased $3.2 million in the three-month period ended March 31, 2003
as compared to the three-month period ended March 31, 2002, reflect the
beginnings of the impact of the cost reduction measures we implemented late in
2002. Also notable, in the three-month period ended March 31, 2002 we made
significant payments to our vendors and particularly to ABG for reagents and
other supplies.
Investing Activities. 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. Purchases of
property and equipment during the three-month period ended March 31, 2003 were
$0.3 million as compared to $5.2 million in the three-month period ended March
31, 2002. We principally made replacement capital expenditures during the
three-month period ended March 31, 2003. During the three-month period ended
March 31, 2002 we expended $3.1 million in respect of the new building and
acquired $3.3 million of cash in the purchase of MediChem. There were also $3.9
million of MediChem transaction costs, of which $1.2 million was paid as of
March 31, 2002. Net cash used in investing activities may in the future
fluctuate significantly from period to period due to the timing of our capital
expenditures and other investments.
Financing Activities. Net cash of $1.4 million was used in financing activities
in the three-month period ended March 31, 2003 as compared to $12.6 million
provided in the three-month period ended March 31, 2002. Financing activities
for the three-month period ended March 31, 2002 were chiefly installment
payments on our existing capital lease obligations. In December 2001, we
established a $27.5 million bridge loan with an Icelandic financial institution
to finance the construction of our new headquarters facility. We repaid the
borrowings under the bridge loan in January and March 2002 with the proceeds
from our Tier A $13.5 million bond offering, Tier C $7.3 million offering of
privately placed bonds and Tier D $6.7 million bank loan. In December 2001, we
also entered into a $4,000 bank loan (Tier B) for the construction of our new
headquarters facility. $14 million of cash that was restricted as of December
31, 2001 was provided in 2002 in the final financing (Tiers C and D) of our new
headquarters facility.
We seek to maintain a desired level of floating-rate debt with respect to our
overall debt portfolio denominated in U.S. Dollars. To this end, we have entered
into two interest rate and cross-currency swaps to manage interest rate and
foreign currency risk arising from long-term debt obligations denominated in
Icelandic krona. These interest rate and cross-currency swaps with a remaining
combined notional amount of 1,930 million Icelandic krona are designated as
economic hedges of fixed rate foreign currency debt (Tier A and Tier C bonds),
but do not qualify for hedge accounting under SFAS 133. The estimated fair value
of these instruments is included in other long-term assets is $8.2 million and
$0.8 million as of March 31, 2003 and 2002, respectively. The unrealized gain
for the three-month periods ended March 31, 2003 and 2002 resulting from the
recording of these instruments together with the translation of the Tier A and
Tier C bonds is $0.2 million and $0.3 million, respectively, and is included in
other non-operating income and (expense), net in the Consolidated Statements
of Operations.
General. Following the implementation in September 2002 of a plan to reduce
headcount and maximize the use of automation in our core genetics operations and
based upon current plans, 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; to obtain and maintain contract service agreements in
our chemistry services and clinical research trials groups; 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; and capital expenditures required to expand our facilities. Changes
in our research and development plans, the entry into clinical trials of a drug
based on our discoveries, 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 further public or private equity offerings, additional debt
financing or added 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. We are still evaluating the
potential impact of FIN 46 on our financial position and results of operations.
In November 2002, the Emerging Issues Task Force reached a consensus on Issue
No. 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple Deliverables."
EITF 00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF 00-21 will apply to revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. We are still evaluating
the potential impact of EITF 00-21 on our financial position and results of
operations.
ITEM 3. 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 March 31, 2003, all of
our cash and cash equivalents were in money market and checking accounts.
We are exposed to market risks from changes in foreign currency exchange rates,
interest rates and investment prices. These changes may adversely affect our
operating results and financial condition. We seek to manage these risks through
regular operating and financing activities and, when deemed appropriate, through
the use of derivative financial instruments. We control and manage foreign
exchange risk, interest rate risk, and investment price risk by continually
monitoring changes in key economic indicators and market information.
As a consequence of the nature our business and operations our reported
financial results and cash flows are exposed to the risks associated with
fluctuations in the exchange rates of the U.S. dollar, the Icelandic krona and
other world currencies. We continue to monitor our exposure to currency risk but
have not yet purchased instruments to hedge these general risks through the use
of derivative financial instruments.
We hold various interest rate sensitive assets and liabilities to manage the
liquidity and cash needs of our day-to-day operations. As a result, we are
exposed to risks due to changes in interest rates. In order to mitigate risks
associated with interest rate sensitive liabilities we use interest rate
derivative instruments, such as cross currency interest rate swaps, and may in
future use other instruments to achieve the desired interest rate maturities and
asset/liability structures.
We are exposed to credit (or repayment) risk, as well as market risk from the
use of derivative instruments. If the counterparty fails to fulfill its
performance obligations under a derivative contract, our credit risk will equal
the positive market value in a derivative. Consequently, when the fair market
value of a derivative contract is positive, this indicates that the counterparty
owes us, thus creating a repayment risk for us. When the fair market value of a
derivative contract is negative, we owe the counterparty and therefore, assume
no repayment risk.
In order to minimize the credit risk in derivative instruments, we enter into
transactions with high quality counterparties such as financial institutions
that satisfy our established credit approval criteria. We review the credit
ratings of such counterparties on a regular basis.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Within the 90 days prior
to the date of this Quarterly Report on Form 10-Q, our Chief Executive Officer
and our Chief Financial Officer evaluated the effectiveness of deCODE's
disclosure controls and procedures as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon
that evaluation, the Chief Executive Officer and the Chief Financial Officer
have concluded that, except as described below, deCODE's current disclosure
controls and procedures are adequate and effective to ensure that information
required to be disclosed in the reports deCODE files under the Exchange Act is
recorded, processed, summarized and reported on a timely basis.
We are in the process of implementing the changes to our disclosure controls and
procedures described in our Annual Report on Form 10-K for the year ended
December 31, 2002. These changes relate to (1) notice provisions in, and waivers
and amendments of, our contracts, (2) identification of, and communication by,
non-executive personnel of deCODE of any material information that they may
receive and (3) our financial closing procedures, including timely supervisory
review of our accounting for cross-currency swaps.
(b) Changes in internal controls. There have been no significant changes in
deCODE's internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation by the Chief
Executive Officer and the Chief Financial Officer.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There has been no change in the matters reported in our annual report on Form
10-K for the year ended December 31, 2002.
ITEM 5. OTHER INFORMATION
RISK FACTORS, 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. We cannot assure our investors that our expectations and
assumptions will prove to have been correct. We undertake no intention or
obligation to update or revise any forward-looking statements, whether as a
result of future events, new information or otherwise. 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-Q. These factors include, but are not
limited to, the risks set forth below.
RISKS RELATED TO OUR BUSINESS
DECODE MAY NOT SUCCESSFULLY DEVELOP OR DERIVE REVENUES FROM ANY PRODUCTS OR
SERVICES.
deCODE uses its technology and research capabilities primarily to identify genes
or gene fragments that are responsible for certain diseases, indicate the
presence of certain diseases or cause or predispose individuals to certain
complex diseases. Although deCODE has identified some genes that it believes are
likely to cause certain diseases, deCODE may not be correct and may not be
successful in identifying any other similar genes. Many experts believe that
some of the diseases deCODE is targeting are caused by both genetic and
environmental factors. Even if deCODE identifies specific genes that are partly
responsible for causing diseases, any gene-based therapeutic or diagnostic
products may not detect, prevent, treat or cure a particular disease.
Accordingly, even if deCODE is successful in identifying specific genes, its
discoveries may not lead to the development of commercial therapeutic or
diagnostic products.
Any pharmaceutical or diagnostic products that deCODE or its collaborators are
able to develop will fail to produce revenues unless deCODE:
- establishes that they are safe and effective;
- successfully competes with other technologies and products;
- ensures that they do not infringe on the proprietary rights of others;
- establishes that they can be manufactured in sufficient quantities at
reasonable costs; and
- can market them successfully.
deCODE may not be able to meet these conditions. deCODE expects that it will be
years, if ever, before it will recognize revenue from the development of
therapeutic or diagnostic products.
deCODE's Clinical Genome Miner contains tools to discover or validate disease
linked genes based on non-personally identifiable genotypic, genealogical and
phenotypic data. deCODE cannot be sure that marketing the Clinical Genome Miner
or the Clinical Genome Miner Discovery(TM) will lead to additional
collaborations with potential clients.
The success of deCODE's informatics services and tools depends on its ability
to:
- create database and cross reference software that is free from design
defects or errors;
- effectively use the information derived from the Clinical Genome
Miner(TM) and other bioinformatics services and tools in disease
management, analysis of drug response, gene discovery and drug target
validation; and
- develop marketing and pricing methods that the intended users of the
deCODE's determining and other informatic services will accept.
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 deCODE's programs could diminish its ability to develop and
market information based on the use of genotypic data. If deCODE fails to
successfully commercialize its database services, it will not realize revenues
from this part of its business.
These products may not meet the needs of potential customers. deCODE has
generated little revenues from sales or licenses of informatics products. DeCODE
cannot assure you that it can successfully develop or commercialize, or that
there will be a market for, its informatics products.
IF DECODE CONTINUES TO INCUR OPERATING LOSSES LONGER THAN ANTICIPATED, OR IN
AMOUNTS GREATER THAN ANTICIPATED, IT MAY BE UNABLE TO CONTINUE ITS OPERATIONS.
deCODE incurred a net loss of $13.0 million for the three-month period ended
March 31, 2003, and has an accumulated deficit of $308.1 million at March 31,
2003. deCODE has never generated a profit and it has not generated revenues
except for payments received in connection with its research and development
collaborations with Roche, Merck and other collaborations, and from contract
services and interest revenues. deCODE must continue to make substantial
expenditures over the next several years to develop its technologies and its
internal research programs and to prepare the Clinical Genome Miner(TM), the CGM
Discovery(TM), the Iceland Health Sector Database and other informatics. Also,
with MediChem, deCODE's revenues have increased but operating expenses and, at
least for the near term, likely net losses will also increase. In addition,
deCODE expects to continue to fund the working capital needs and operating
activities of MediChem in the near term. The extent to which MediChem will
ultimately impact deCODE's results of operations and financial condition is
largely dependent upon the extent to which MediChem's capacity is brought to
bear on deCODE's in-house programs and how much of their existing contract
services business is maintained and developed. As a result, deCODE expects to
incur net losses for several years. If the time required to generate product
revenues and achieve profitability is longer than deCODE currently anticipates
or the level of losses is greater than deCODE currently anticipates, deCODE may
not be able to continue its operations.
IF DECODE'S ASSUMPTION ABOUT THE ROLE OF GENES IN DISEASE IS WRONG, IT MAY NOT
BE ABLE TO DEVELOP USEFUL PRODUCTS.
The products deCODE hopes to develop involve new and unproven approaches. They
are based on the assumption that information about genes may help scientists to
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, deCODE knows of no therapeutic products based on disease-gene
discoveries. If deCODE's assumption about the role of genes in the disease
process is wrong, its gene discovery programs may not result in products, the
genetic data included in its database and informatics products may not be useful
to its customers and those products may lose any competitive advantage.
BECAUSE REVENUES ARE CONCENTRATED, THE LOSS OF A SIGNIFICANT CUSTOMER WOULD HARM
DECODE'S BUSINESS.
Historically, a substantial portion of deCODE's revenue has been derived from
contracts with a limited number of significant customers. deCODE's largest
customer, Roche, accounted for approximately 41% of its consolidated revenue in
2002 and 45% of consolidated revenue in the three-month period ended March 31,
2003. Revenue under deCODE's alliance with Merck accounted for approximately 4%
of consolidated revenue in 2002 and 14% of consolidated revenue in the
three-month period ended March 31, 2003. Revenues under the joint development
and commercialization agreement with ABG, which was terminated in the fourth
quarter of 2002, accounted for 15% of consolidated revenue in the year ended
December 31, 2002. The loss of any significant customer may significantly lower
deCODE's revenues and affect deCODE's progression to profitability.
IF DECODE IS NOT ABLE TO OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET ITS
CAPITAL REQUIREMENTS, DECODE MAY BE FORCED TO REDUCE OR TERMINATE ITS RESEARCH
PROGRAMS AND PRODUCT DEVELOPMENT.
deCODE has spent substantial amounts of cash to fund its research and
development activities and expects to continue to spend substantial amounts for
these activities over the next several years. deCODE expects to use cash to
collect, generate and analyze genotypic and disease data from volunteers in its
disease-gene research programs; to conduct drug discovery and development
activities; to continue to develop the Clinical Genome Miner and Clinical Genome
Miner Discovery; to develop healthcare informatics products; and to continue
other research and development activities. Many factors will influence its
future capital needs, including:
- the number, breadth and progress of its discovery and research
programs;
- its ability to attract customers;
- its ability to commercialize its discoveries and the resources it
devotes to commercialization;
- the amount it spends to enforce patent claims and other intellectual
property rights; and
- the costs and timing of regulatory approvals.
deCODE intends to rely on Roche, Merck and other existing and future
collaborators for significant funding of its research efforts. In addition,
deCODE may seek additional funding through public or private equity offerings
and debt financings. deCODE may not be able to obtain additional financing when
it needs it or the financing may not be on terms favorable to deCODE or its
stockholders. Stockholders' ownership will be diluted if deCODE raises
additional capital by issuing equity securities.
If deCODE raises additional funds through collaborations and licensing
arrangements, it may have to relinquish rights to some of its technologies or
product candidates, or grant licenses on unfavorable terms. If adequate funds
are not available, deCODE would have to scale back or terminate its discovery
and research programs and product development.
The Icelandic parliament has enacted legislation authorizing the Minister of
Finance to provide an Icelandic government guarantee of a convertible bond
offering of up to $200 million by deCODE for the purpose of financing new
activities of deCODE in the area of drug development. To become effective, this
legislation must be approved by the EFTA (i.e. the European Free Trade
Association) Surveillance Authority (ESA) for compatibility with the state aid
stipulations of the agreement on the European Economic Area (EEA), to which
Iceland is a signatory. The measure is still under review by ESA. deCODE cannot
be certain that ESA will approve the legislation, that the Icelandic government
will make use of the authorization and offer the guarantee to deCODE for any or
all of the permitted amount, that such offer to deCODE by the Icelandic
Government, if effectuated, will be on terms acceptable to deCODE, or that even
with such an authorization deCODE will be able to find a market for such an
offering of convertible bonds.
DECODE'S CURRENT FACILITIES AND STAFF ARE INADEQUATE FOR COMMERCIAL PRODUCTION
AND DISTRIBUTION OF PRODUCTS.
If in the future deCODE chooses to engage directly in the development,
manufacturing and marketing of certain products, it will require substantial
additional funds, personnel and production facilities.
DECODE'S RELIANCE ON THE ICELANDIC POPULATION MAY LIMIT THE APPLICABILITY OF ITS
DISCOVERIES TO CERTAIN POPULATIONS.
The genetic make-up and prevalence of disease generally varies across
populations around the world. Common complex diseases generally occur with a
similar frequency in Iceland and other European populations. However, the
populations of other nations may be genetically predisposed to certain diseases
because of mutations not present in the Icelandic population. As a result,
deCODE and its partners may be unable to develop diagnostic and therapeutic
products that are effective on all or a portion of people with such diseases.
Any difference between the Icelandic population and other populations may have
an effect on the usefulness of the Clinical Genome Miner and Icelandic Health
Sector Database in studying populations outside of Iceland. For deCODE's
business to succeed, it must be able to apply discoveries that it makes on the
basis of the Icelandic population to other markets.
IF DECODE FAILS TO PROTECT CONFIDENTIAL DATA ADEQUATELY, IT COULD INCUR A
LIABILITY OR LOSE ITS DATABASE LICENSE.
Under laws and regulations in force in Iceland, including applicable European
laws, directives and regulations, all information on individuals that is used in
deCODE's population research is anonymized under the protocols and supervision
of the Data Protection Authority of Iceland. To extent that any of this data
held or generated by the company were to become personally identifiable deCODE
would risk losing public support for participation in its research, and could be
liable to legal action. 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 its customers and reputation and the loss of
the goodwill and cooperation of the Icelandic population, including healthcare
professionals. These eventualities could materially adversely affect deCODE's
work in Iceland.
The same general privacy and data protection laws and regulations as well as
specific laws and regulations apply to deCODE's license to build and operate the
Icelandic Health Sector Database (IHD). Were any data sent to or contained in
the IHD to become personally identifiable, deCODE would incur the same risks
above and potentially lose its database license.
DECODE'S CREATION AND OPERATION OF THE ICELANDIC HEALTH SECTOR DATABASE MAY BE
MORE EXPENSIVE AND TIME CONSUMING THAN DECODE ANTICIPATES, AND MAY LEAD TO
LITIGATION.
deCODE's development of the Icelandic Health Sector Database (IHD) involves
substantial government regulation and oversight, compliance with which can be
expensive and time-consuming and may delay, prevent or increase the cost of
development of the IHD. Data collection and use activities will be supervised by
the Icelandic Health Sector Database Monitoring Committee, the Data Protection
Authority of Iceland, and an Interdisciplinary Ethics Committee. In addition,
the Icelandic Bioethics Committee will review deCODE's operation of the
database.
Iceland is subject to both European Free Trade Association and European Union
competition and public procurement rules. If it is determined that the Database
Act or the Database License breaches such rules, the Database License could be
revoked or diluted. In addition to the costs of developing the system, under the
terms of the license we pay the Icelandic government a fixed fee for operating
the IHD of 70 million Icelandic Krona per year (approximately $913 USD as of
March 2003), and will pay an additional 6% of any profits per annum from its
commercialization.
Even if deCODE is able to successfully create and market the Icelandic Health
Sector Database, the Database License will expire in January 2012. There is no
assurance that deCODE will obtain further access rights on favorable terms, if
at all.
The Icelandic parliament's passage of the Database Act and the Health Ministry's
granting of the Database License have encountered some opposition in Iceland and
internationally. Opponents of the IHD may initiate litigation in U.S., Icelandic
or other national or international courts (for example, on the basis of an
alleged breach of the patient-doctor confidentiality, constitutional privacy
issues, international conventions dealing with protection of privacy issues or
human rights conventions). In February 2000, certain Icelandic opponents of the
IHD issued a press release announcing their intention to file lawsuits against
the State of Iceland and any other relevant parties, including deCODE, to test
the constitutionality of the Database Act. According to the press release, the
lawsuit will allege human rights violations and challenge the validity of
provisions of the Database Act. To date no such suit has been brought against
deCODE. One lawsuit has been brought in Icelandic courts against the Directorate
of Public Health in Iceland challenging the constitutionality of the Database
Act. 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
Database License, deCODE's agreement with the Health Ministry requires deCODE 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 an unfavorable outcome could prevent deCODE from developing and operating
the Icelandic Health Sector Database.
SOME PARTS OF DECODE'S PRODUCT DEVELOPMENT SERVICES CREATE A RISK OF LIABILITY
FROM CLINICAL TRIAL PARTICIPANTS AND THE PARTIES WITH WHOM IT CONTRACTS.
deCODE, through its wholly-owned subsidiary Encode ehf., contracts with drug
companies to perform a wide range of services to assist them in bringing new
drugs to market. deCODE also contracts with physicians to serve as investigators
in conducting clinical trials. deCODE's services include:
- supervising clinical trials;
- data and laboratory analysis;
- patient recruitment;
- acting as investigators in conducting clinical trials; and
- engaging in Phase I clinical trials.
If, in the course of these trials or activities deCODE does not perform its
services to contractual or regulatory standards;
- patients or volunteers suffer personal injury caused by or death from
adverse reactions to the test drugs or otherwise;
- there are deficiencies in the professional conduct of the
investigators with whom deCODE contracts;
- one of deCODE's laboratories inaccurately reports or fails to report
lab results; or
- deCODE's informatics products violate rights of third parties,
deCODE could then be held be held liable for these eventualities by the drug
companies with whom it contracts or by study participants. deCODE maintains
insurance to cover ordinary risks, but such insurance may be inadequate and it
would not cover the risk of a customer deciding not to do business with deCODE
as a result of poor performance.
USE OF THERAPEUTIC OR DIAGNOSTIC PRODUCTS DEVELOPED AS A RESULT OF DECODE'S
PROGRAMS MAY RESULT IN PRODUCT LIABILITY CLAIMS FOR WHICH DECODE HAS INADEQUATE
INSURANCE.
The users of any therapeutic or diagnostic products developed as a result of
deCODE's discovery or research programs or the use of its database or medical
decision-support products may bring product liability claims against deCODE.
deCODE currently does not carry liability insurance to cover such claims. deCODE
is not certain that it or its collaborators will be able to obtain such
insurance or, if obtained, that sufficient coverage can be acquired at a
reasonable cost. If deCODE cannot protect against potential liability claims,
deCODE's collaborators or deCODE may find it difficult or impossible to
commercialize products.
DECODE MAY BE UNABLE TO HIRE AND RETAIN THE KEY PERSONNEL UPON WHOM ITS SUCCESS
DEPENDS.
deCODE depends on the principal members of its management and scientific staff,
including Dr. Kari Stefansson, Chairman, President and Chief Executive Officer,
Hannes Smarason, Executive Vice President and Senior Business Officer, and Dr.
Jeffrey Gulcher, Vice President, Research and Development. deCODE genetics, Inc.
has not entered into agreements with any of the named persons that bind them to
a specific period of employment. If any of these people leaves deCODE, deCODE's
ability to conduct its operations may be negatively affected. deCODE's future
success also will depend in part on its ability to attract, hire and retain
additional personnel. There is intense competition for such qualified personnel
and deCODE cannot be certain that it 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 deCODE.
CURRENCY FLUCTUATIONS MAY NEGATIVELY AFFECT DECODE'S FINANCIAL CONDITION.
deCODE publishes its consolidated financial statements in U.S. dollars. Currency
fluctuations can affect its financial results because a portion of its cash
reserves and its operating costs are in Icelandic kronas. A fluctuation of the
exchange rates of the Icelandic krona against the U.S. dollar can thus adversely
affect the "buying power" of deCODE's cash reserves and revenues. Most of
deCODE's long-term liabilities are U.S. dollar denominated. However, deCODE may
enter into hedging transactions if it has substantial foreign currency exposure
in the future. deCODE may have increased exposure as a result of investments or
payments from collaborative partners.
DECODE'S CONTRACTS MAY TERMINATE UPON SHORT NOTICE.
Many of deCODE's contracts are terminable on short notice. This means that
deCODE's contracts could be terminated for numerous reasons, any of which may be
beyond its control such as a reduction or reallocation of a customer's research
and development budget or a change in a customer's overall financial condition.
The loss of a large contract or multiple smaller contracts, or a significant
decrease in revenue derived from a contract, could significantly reduce deCODE's
profitability and require it to reallocate under-utilized physical and
professional resources.
RISKS RELATED TO OUR COLLABORATORS
DECODE MAY NOT BE ABLE TO FORM AND MAINTAIN THE COLLABORATIVE RELATIONSHIPS THAT
ITS BUSINESS STRATEGY REQUIRES AND THE RELATIONSHIPS MAY LEAD TO DISPUTES OVER
TECHNOLOGY RIGHTS.
Our ability to generate revenue growth and become profitable is dependent, in
part, upon our ability to enter into additional collaborative arrangements, and
upon our ability and that of our collaborative partners to successfully
commercialize products incorporating, or based upon, our work.
deCODE must form research collaborations and licensing arrangements with several
partners at the same time in order to execute its business strategy. deCODE
currently has only six substantial collaborative relationships, including two
with Roche. To succeed, deCODE will have to maintain or expand these
relationships and establish additional collaborations. 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, sign additional subscribers to our database services, or
successfully expand our medicinal chemistry or pharamacogenetics businesses. 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 in the near term. It may be several years before product
revenues materialize, if they do at all.
If deCODE's collaborations are not successful or deCODE is not able to manage
multiple collaborations successfully, its programs will suffer. If deCODE
increases the number of collaborations, it will become more difficult to manage
the various collaborations successfully and the potential for conflicts among
the collaborators as to rights and products generated under work conducted with
deCODE will increase.
DEPENDENCE ON COLLABORATIVE RELATIONSHIPS MAY LEAD TO DELAYS IN PRODUCT
DEVELOPMENT AND DISPUTES OVER RIGHTS TO TECHNOLOGY.
deCODE is 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 its technology.
deCODE's agreements with collaborators typically allow them significant
discretion in electing whether to pursue such activities. DeCODE cannot control
the amount and timing of resources collaborators will devote to its programs or
potential products.
AGREEMENTS WITH COLLABORATORS MAY HAVE THE EFFECT OF LIMITING THE AREAS OF
RESEARCH THAT DECODE MAY PURSUE EITHER ALONE OR WITH OTHERS.
deCODE's arrangements may place responsibility for key aspects of information
technology, product development and marketing on its collaborative partners. If
deCODE's collaborators fail to perform their obligations, deCODE's information
technology products could contain erroneous data, design defects, viruses or
software defects that are difficult to detect and correct and may adversely
affect its revenues and the market acceptance of its products. deCODE's
collaborators may stop supporting its products or providing services to it if
they develop or obtain rights to competing products. Disputes may arise in the
future over the ownership of rights to any technology developed with
collaborators. These and other possible disagreements between deCODE's
collaborators and deCODE 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.
RISKS RELATED TO OUR INDUSTRY
CONCERNS REGARDING THE USE OF GENETIC TESTING RESULTS MAY LIMIT THE COMMERCIAL
VIABILITY OF ANY PRODUCTS DECODE DEVELOPS.
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 genetic
tests even if permissible. These factors may limit the market for, and therefore
the commercial viability of, products that deCODE's collaborators and/or deCODE
may develop.
DECODE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES AND
GOVERNMENT AGENCIES IN THE DEVELOPMENT AND MARKETING OF PRODUCT SERVICES.
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 and deCODE's other areas of business, including drug discovery and
development as well as database services and healthcare informatics, is intense
and is expected to increase. deCODE has numerous competitors, including major
pharmaceutical and diagnostic companies, specialized biotechnology firms,
universities and other research institutions, the United States-funded Human
Genome Project and other government-sponsored entities and companies providing
healthcare information products. deCODE's collaborators, including Roche and
Merck, may also compete with deCODE. Many of deCODE's competitors, either alone
or with collaborators, have considerably greater capital resources, research and
development staffs and facilities, and technical and other resources than deCODE
does, which may allow them to discover important genes before deCODE does.
deCODE believes that a number of its competitors are developing competing
products and services that may be commercially successful and that are further
advanced in development than its potential products and services. To succeed,
deCODE, together with its 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 deCODE's collaborators or deCODE is successful in
developing effective products or services, deCODE's products and services may
not successfully compete with those of its competitors. deCODE's competitors may
succeed in developing and marketing products and services that are more
effective than deCODE's or that are marketed before deCODE's.
Competitors have established, and in the future may establish, patent positions
with respect to gene sequences related to deCODE's 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
deCODE's research projects and make it more difficult for deCODE to compete.
deCODE may also face competition from other entities in gaining access to DNA
samples used for research and development purposes. Our competitors may also
obtain patent protection or other intellectual property rights that could limit
our rights, or our customers' ability, to use our technologies 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.
deCODE expects competition to intensify as technical advances are made and
become more widely known. deCODE's future success will depend in large part on
maintaining a competitive position in the genomics field. Others' or deCODE's
rapid technological development may result in products or technologies becoming
obsolete before deCODE recovers the expenses it incurs in developing them.
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.
CHANGES IN OUTSOURCING TRENDS AND ECONOMIC CONDITIONS IN THE PHARMACEUTICAL AND
BIOTECHNOLOGY INDUSTRIES COULD ADVERSELY AFFECT DECODE'S GROWTH.
Economic factors and industry trends that affect deCODE's primary customers,
pharmaceutical and biotechnology companies, also affect deCODE's business. For
example, the practice of many companies in these industries has been to
outsource to organizations like deCODE to conduct genetic research, clinical
research, sales and marketing projects and chemistry research and development
projects. If these industries reduce their present tendency to outsource those
projects, deCODE's operations, financial condition and growth rate could be
materially and adversely affected. These alliances and arrangements are both
time consuming and complex and we face substantial competition in establishing
these relationships. In addition, our ability to generate new business could be
impaired by general economic downturns in our customers' industries.
REGULATORY APPROVALS FOR PRODUCTS RESULTING FROM DECODE'S GENE DISCOVERY
PROGRAMS MUST BE OBTAINED OR DECODE 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. deCODE cannot be certain that it can
obtain regulatory approval for any drugs or diagnostic products resulting from
its gene discovery programs. The regulatory process can take many years and
require substantial resources. Because some of the products likely to result
from deCODE's 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 deCODE's business, financial condition and
results of operations, including withdrawal of the product from the market.
Our success will depend, in part, on the development and marketing of products
based upon our research and development. Strict regulatory controls on the
clinical testing, manufacture, labeling, supply and marketing of the products
will influence our 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.
EFFORTS TO REDUCE HEALTHCARE COSTS MAY REDUCE MARKET ACCEPTANCE OF DECODE'S
PRODUCTS.
deCODE's success will depend in part on the price and extent to which it will be
paid for its products by government and health administration authorities,
private health insurers and other third party payors. Reimbursement for newly
approved healthcare products is uncertain. Third party payors, including
Medicare in the United States, are increasingly challenging the prices charged
for medical products and services. They are increasingly attempting to contain
healthcare costs by limiting both coverage and the level of reimbursement for
new therapeutic products. deCODE cannot be certain that any third party
insurance coverage will be available to patients for any products deCODE
discovers or develops. If third party payors do not provide adequate coverage
and reimbursement levels for deCODE's products, the market acceptance of these
products may be materially reduced.
Numerous governments have undertaken efforts to control growing healthcare costs
through legislation, regulation and voluntary agreements with medical care
providers and pharmaceutical companies. If cost containment efforts limit the
profits that can be derived from new drugs, deCODE's customers may reduce their
research and development spending which could reduce the business they outsource
to deCODE.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
DECODE MAY NOT BE ABLE TO PROTECT THE PROPRIETARY RIGHTS THAT ARE CRITICAL TO
ITS SUCCESS.
deCODE's success will depend in part on its ability to protect its genealogy
database and genotypic data and any other proprietary databases that it develops
and its proprietary software and other proprietary methods and technologies.
Despite deCODE's efforts to protect its proprietary rights, unauthorized parties
may be able to obtain and use information that deCODE regards as proprietary.
deCODE's commercial success will depend in part on obtaining patent protection.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including deCODE's, are generally uncertain and involve complex legal
and factual considerations. deCODE cannot be sure that any of its pending patent
applications will result in issued patents, that it will develop additional
proprietary technologies that are patentable, that any patents issued to deCODE
genetics, Inc. or deCODE's partners will provide a basis for commercially viable
products, will provide deCODE 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 deCODE's ability to do business. If deCODE is unable to obtain
patent protection for its technology or discoveries, the value of its
proprietary resources will be adversely affected.
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 that 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 deCODE's
proprietary rights is uncertain and, deCODE cannot predict the breadth of claims
allowed in any patents issued to it to others. deCODE could also incur
substantial costs in litigation if it is required to defend itself in patent
suits brought by third parties or if it initiates 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 deCODE's
products. deCODE cannot be certain that its patent applications will 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 deCODE is
holding or is granted patents it 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 deCODE or its partners claiming damages and
seeking to enjoin commercial activities relating to the affected products and
processes could, in addition to subjecting deCODE to potential liability for
damages, require deCODE or its partners to obtain a license in order to continue
to manufacture or market the affected products and processes. There can be no
assurance that its partners or deCODE 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, its partners or
deCODE may be required to cease marketing its products or practicing its
methods.
If expressed sequence tags, single nucleotide polymorphisms, or SNPs, or other
sequence information become publicly available before deCODE applies for patent
protection on a corresponding full-length or partial gene, deCODE's 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 deCODE's or its 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 deCODE has 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 deCODE requires 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 deCODE can
meaningfully protect its trade secrets.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following is a list of exhibits filed as part of this Quarterly Report on
Form 10-Q.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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 Certificate of Amendment to Amended and Restated Certificate
of Incorporation dated August 30, 2002 (Incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report on
Form 10-Q filed on November 14, 2002).
3.3 Bylaws, as amended (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).
4.4 Warrant Certificate, dated May 6, 2002 issued to
Islandsbanki-FBA hf. (Incorporated by reference to Exhibit 4.1
to the Company's Quarterly Report on Form 10-Q filed on May
15, 2002).
4.5 Form of Indexed Bond (Tier A) (Incorporated by reference to
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q
filed on May 15, 2002).
4.6 Form of Indexed Bond (Tier C) (Incorporated by reference to
Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q
filed on May 15, 2002).
99.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Note: Unless otherwise noted, the SEC File number of each of the above
referenced documents is 000-30469.
(b) REPORTS ON FORM 8-K
On March 27, 2003, the Company filed a current report on Form 8-K, dated March
25, 2003, which reported that the Company would be: (i) reporting its full-year
2002 financial results in a subsequent press release, (ii) hosting a webcast of
its conference call to discuss the Company's financial results and then recent
operating highlights, (iii) issuing restated financial statements for 2001 and
the first three quarters of 2002, and (iv) filing an amended annual report on
Form 10-K for 2001 and amended quarterly reports on Form 10-Q for the first
three quarters of 2002.
SIGNATURES
Pursuant to the requirements 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.
Dated: May 14, 2003
deCODE genetics, Inc.
/s/ Kari Stefansson
--------------------------------------
Kari Stefansson
Chairman, President,
and Chief Executive Officer
/s/ Lance Thibault
--------------------------------------
Lance Thibault
Chief Financial Officer and
Treasurer (principal financial
officer and principal accounting officer)
CERTIFICATIONS
I, Kari Stefansson, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of deCODE genetics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present, in all material
respects, the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: May 14, 2003 /s/ Kari Stefansson
-------------------
Kari Stefansson
Chief Executive Officer
I, Lance Thibault, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of deCODE genetics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present, in all material
respects, the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: May 14, 2003 /s/ Lance Thibault
----------------------
Lance Thibault
Chief Financial Officer
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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 Certificate of Amendment to Amended and Restated Certificate
of Incorporation dated August 30, 2002 (Incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report on
Form 10-Q filed on November 14, 2002).
3.3 Bylaws, as amended (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).
4.4 Warrant Certificate, dated May 6, 2002 issued to
Islandsbanki-FBA hf. (Incorporated by reference to Exhibit 4.1
to the Company's Quarterly Report on Form 10-Q filed on May
15, 2002).
4.5 Form of Indexed Bond (Tier A) (Incorporated by reference to
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q
filed on May 15, 2002).
4.6 Form of Indexed Bond (Tier C) (Incorporated by reference to
Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q
filed on May 15, 2002).
99.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Note: Unless otherwise noted, the SEC File number of each of the above
referenced documents is 000-30469.