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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934
For Fiscal Year Ended March 31, 2001
Commission File Number 0-23252
IGEN INTERNATIONAL, INC.
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(Exact name of Company as specified in its charter)
DELAWARE 94-2852543
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
16020 INDUSTRIAL DRIVE, GAITHERSBURG, MD 20877
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(Address of principal executive offices) (Zip Code)
301/869-9800
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(Company's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK $0.001 PAR VALUE
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(Title of Class)
Indicate by check mark whether the Company (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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
_______________
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Company as of June 8, 2001, computed by reference to the
closing sale price of such stock quoted on the Nasdaq National Market, was
approximately $315,502,500.
The number of shares outstanding of the Company's Common Stock as of June 8,
2001 was 17,984,400.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference into
the following parts of this Form 10-K. Certain information required in Part III
of this Annual Report on Form 10-K is incorporated from the Company's definitive
Proxy Statement relating to its Annual Meeting of Shareholders to be held on
September 13, 2001.
PART I
IN ADDITION TO HISTORICAL INFORMATION, THIS DOCUMENT CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE "SAFE HARBOR" PROVISION OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. REFERENCE IS MADE IN PARTICULAR TO
STATEMENTS REGARDING THE POTENTIAL MARKET, AND MARKET GROWTH, FOR DIAGNOSTIC
PRODUCTS, POTENTIAL IMPACT OF COMPETITIVE PRODUCTS, THE COMPANY'S EXPECTATIONS
REGARDING THE LEVEL OF ANTICIPATED ROYALTY AND REVENUE GROWTH IN THE FUTURE, THE
POTENTIAL MARKET FOR PRODUCTS IN DEVELOPMENT, FINANCING PLANS, THE OUTCOME OF
LITIGATION, THE DESCRIPTION OF THE COMPANY'S PLANS AND OBJECTIVES FOR FUTURE
OPERATIONS, ASSUMPTIONS UNDERLYING SUCH PLANS AND OBJECTIVES, THE NEED FOR AND
AVAILABILITY OF ADDITIONAL CAPITAL AND OTHER FORWARD-LOOKING STATEMENTS INCLUDED
IN ITEM 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" ("MD&A"). THE WORDS "MAY," "SHOULD," "WILL," "EXPECT,"
"COULD," "ANTICIPATE," "BELIEVE," "ESTIMATE," "PLAN," "INTEND" AND SIMILAR
EXPRESSIONS HAVE BEEN USED IN THIS DOCUMENT TO IDENTIFY FORWARD-LOOKING
STATEMENTS. WE HAVE BASED THESE FORWARD-LOOKING STATEMENTS ON OUR CURRENT VIEWS
WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. SUCH STATEMENTS ARE
BASED ON MANAGEMENT'S CURRENT EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS
AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS. IN PARTICULAR, CAREFUL
CONSIDERATION SHOULD BE GIVEN TO CAUTIONARY STATEMENTS MADE IN ITEM 7 -
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND IN ITEM 1 - "BUSINESS" UNDER THE HEADING "RISK FACTORS." IGEN
DISCLAIMS ANY INTENT OR OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
ITEM 1. BUSINESS
SUMMARY
We develop and market products that incorporate our proprietary ORIGEN(R)
technology, which permits the detection and measurement of biological
substances. We believe that ORIGEN offers significant advantages over competing
detection methods by providing a unique combination of speed, sensitivity,
flexibility and throughput in a single technology platform. ORIGEN is
incorporated into instrument systems and related consumable reagents, and we
also offer assay development and other services used to perform analytical
testing. Products based on our ORIGEN technology currently address the following
markets:
o LIFE SCIENCE - drug discovery and development, including applications
in high throughput screening and genomics, performed by pharmaceutical
and biotechnology companies, universities and other research
organizations. We estimate that this market currently exceeds $2
billion annually, with expected growth of approximately 15% annually
over the next several years;
o CLINICAL TESTING - IN VITRO diagnostic testing of patient samples to
measure the presence of disease and monitor medical conditions. This
testing is performed at facilities, such as central hospital and
clinical reference laboratories, and at other locations, including
sites closer to where patient care is delivered. These sites include
clinics, emergency rooms, intensive care units and physician offices.
We estimate the market segments that may be served by ORIGEN-based
products currently exceed $7 billion annually; and
o INDUSTRIAL TESTING - the testing of food and environmental samples for
safety and quality assurance purposes, as well as agricultural and
animal health testing. We estimate that this market currently
approximates $2 billion annually.
1
We and our corporate collaborators have commercialized multiple product lines
to serve these markets. We estimate that approximately 7,000 ORIGEN-based
systems have been sold or placed with customers. These sales and placements
have been made predominantly through our license arrangement with Roche
Diagnostics GmbH (Roche), the world's leading provider of clinical diagnostic
products. Roche has adopted ORIGEN as the integral technology for its Elecsys
immunodiagnostic product line. Roche has a license to commercialize the
ORIGEN technology solely for central hospital and clinical reference
laboratories and blood banks. As of March 31, 2001, Roche has paid us a total
of approximately $92 million in license fees, royalties and assay development
fees. For a discussion of litigation we are involved in with Roche, see ITEM
3, "Legal Proceedings".
The M-SERIES(TM) System, our new product line for use by pharmaceutical and
biotechnology companies in drug discovery and development, may be used in all
phases of drug discovery, including (1) validating targets identified through
genomics, (2) screening of large numbers of compounds generated through
combinatorial chemistry, (3) re-testing and optimization of lead compounds,
and (4) clinical trial testing of drug candidates. We believe the M-SERIES
System provides a number of advantages relative to other drug discovery
technologies, including enhanced sensitivity and greater ease and speed of
assay formatting. These features are designed to enable our customers to test
new biological targets against potential drug compounds with higher levels of
accuracy and specificity and may perform highly sensitive tests more quickly
and with less cost. This should permit a drug candidate to move more rapidly
into the later stages of drug development and ultimately into the market.
The M-SERIES System is the first product that features our
electrochemiluminescence module, which we have trademarked as TRICORDER(R).
The TRICORDER, which resulted from our extensive research and development
efforts, is a self-contained, analytical operating system. By combining all
of the features necessary to perform ORIGEN-based testing in a single compact
module, the TRICORDER provides a relatively simple-to-use, highly accurate
and cost-effective system, which can be configured for a high throughput
format. The TRICORDER's modular nature is expected to reduce the development
time and cost required to incorporate ORIGEN technology into future
diagnostic and analytical instruments. We believe that the TRICORDER, through
its flexibility as a detection tool and its modular nature, will be the core
component for additional products that we plan to develop for other target
markets.
We offer our customers the option of buying M-SERIES Systems or renting them
under reagent purchase plans. Under either option, our customers typically make
commitments for purchases of proprietary reagents. We also provide custom assay
development services based on our existing library of more than 300 assays. We
market the M-SERIES System through our sales, marketing and applications team
dedicated to the life science market. Our M-SERIES customers include:
o Agouron o GlaxoSmithKline
o Amgen o Human Genome Sciences
o AstraZeneca o Merck
o Aventis o Novo Nordisk
o Baxter o Pfizer
o Bayer o Pharmacia & Upjohn
o Boehringer Ingelheim o Schering Plough
o Bristol-Myers Squibb o Zymogenetics
2
We have also applied our ORIGEN technology to the rapidly growing market for
testing food and water for disease causing pathogens. We have begun
commercializing our first products for this market, the PATHIGEN panel of tests
for Salmonella, Campylobactor and E. Coli 0157, which are sold primarily to food
processors. A test for Listeria is presently completing field studies and is
expected to be added to this panel of tests. The E. coli test is up to 100 times
more sensitive than any other test on the market and we believe it offers
unprecedented precision and rapid results in detecting this dangerous strain of
the food-borne pathogen. We are also developing a test for Bovine Spongiform
Encephalopathy (BSE), commonly known as "Mad Cow" disease. We believe our test
for BSE will have the potential to overcome the limitations of current BSE
tests.
IGEN's executive offices are located at 16020 Industrial Drive, Gaithersburg,
Maryland 20877.
ORIGEN TECHNOLOGY
ORIGEN is a proprietary technology based on electrochemiluminescence. ORIGEN
permits the detection and measurement of a biological substance within a given
sample. It works by labeling the targeted substance within a sample using a
compound and binding the newly labeled substance to magnetizable beads. The
beads can then be separated from the rest of the sample using a magnet. When
this newly labeled substance is stimulated, the label emits light at a
particular wavelength. The light emission can be measured with a high degree of
accuracy. The level of intensity of the light emitted depends on how much of the
label is present, which in turn is determined by how much of the targeted
substance is present for the label to attach itself to. Thus, the light
emissions permit the accurate detection and measurement of the targeted
substance. ORIGEN technology provides a single basic format that can be used to
conduct a multitude of tests, including immunodiagnostic tests, nucleic acid
probe tests and clinical chemistry tests. The ORIGEN technology is protected by
numerous patents in the United States and internationally.
We and our licensees are using the ORIGEN technology to develop and
commercialize analytical systems that offer many advantages over current
detection technologies. We believe that ORIGEN technology offers a unique
combination of improved speed, sensitivity, flexibility and output relative to
existing technologies. ORIGEN technology also generallY lowers the cost of
diagnostic procedures by reducing the number of steps required in preparing a
sample for testing. Because the ORIGEN system directly measures
electrochemiluminescence, and does not require the use of enzymes in the
detection process as is common in competing systems, the ORIGEN system provides
a simplified and more stable format that can be used to test a broad range of
substances. The ORIGEN-based systems can be automated to provide in a uniform
format a large number of immunoassay, nucleic acid probe and clinical chemistry
tests. The essential component of an ORIGEN-based system is the flow cell, which
contains a magnet to separate the labeled substance from the sample being
tested, and a light detector to measure the electrochemiluminescence. The ORIGEN
flow cell has been designed so that it can be incorporated into a variety of
instruments, ranging from large central laboratory random-access systems to
small batch systems.
3
The major features and benefits of proprietary ORIGEN-based systems are:
o SIMPLE TESTING FORMAT: reduces time and labor in performing a test or
series of tests. Complete automation of testing process possible.
o FLEXIBILITY: enables a single instrument to perform immunodiagnostic
tests on large and small molecules and to perform DNA and RNA tests.
o COST: reduces costs per test by minimizing the amount of expensive
reagents needed.
o SPEED: reduced time from assay set-up to detection produces rapid
results. Enables high sample throughput.
o SENSITIVITY: allows detection of targeted specimens at very low
concentrations.
o PRECISION: provides highly-reproducible measurements.
o LABEL STABILITY: extends the shelf-life of the reagent that contains
the label used in testing. Improves measurement accuracy.
ORIGEN-BASED PRODUCTS AND MARKETS
We believe that our ORIGEN technology is well suited for the development of
families of instruments that can be used in all of our markets. The
technology should permit virtually all immunodiagnostic and nucleic acid
tests to be performed on similar instrumentation using the same detection
method.
The following table summarizes ORIGEN-based products and development programs.
CUSTOMER COMMERCIAL
MARKET PRODUCT APPLICATION STATUS RIGHTS
- ------ ------- ----------- ------ ------
LIFE SCIENCE MARKET M-SERIES Drug Discovery/Development Product Sales IGEN
(M-8 Analyzer and
Reagents)
ORIGEN Detection System Drug Discovery/Development Product Sales IGEN
Cell Culture Reagents Research Biologicals Product Sales IGEN
NucliSens/NASBA QR Nucleic Acid Probe Tests Product Sales Organon Teknika
M-SERIES (M-1
Research Analyzer) Drug Discovery/ Development IGEN
Development
4
CLINICAL TESTING MARKET
CENTRAL HOSPITAL/CLINICAL Elecsys 2010 Immunodiagnostic Tests Product Sales Roche
REFERENCE LABORATORY
SYSTEMS
Elecsys 1010 Immunodiagnostic Tests Product Sales Roche
NucliSens/NASBA QR Nucleic Acid Probe Tests Product Sales Organon Teknika
Picolumi Immunodiagnostic Tests Product Sales Eisai (Japan)
(Japan)
MODULAR/E170 Immunodiagnostic Tests Product Launch Roche
PATIENT CARE CENTER SYSTEMS Elecsys 2010/1010 Physicians' Office Lab Product Sales IGEN (1)
Immunodiagnostic Tests
M-SERIES (M-1 Portable Physicians' Office Development IGEN
Clinical Analyzer) Lab/Hospital
Immunodiagnostic Tests
Home Self-Testing Health Screening and Research IGEN
Monitoring
INDUSTRIAL MARKETS PATHIGEN Panel of Tests Detection of Contaminants in Product Sales IGEN
(ORIGEN Detection System) Food and Beverage Samples
Animal Health Testing Test for BSE Development IGEN
(1) IGEN is currently servicing customers pursuant to preliminary injunction
issued in the litigation described in ITEM 3 - "Legal Proceedings".
LIFE SCIENCE PRODUCTS AND MARKET
The life science market focuses on the discovery and development of new drugs.
We estimate the potential worldwide opportunity for products based on our ORIGEN
technology in the life science market to exceed $2 billion annually. Our
commercialization efforts in this market center on the M-SERIES System and the
ORIGEN DETECTION SYSTEM.
Advances in the field of combinatorial chemistry, which is based on the effects
of combining different compounds to make new drugs, and in the field of
biotechnology have revolutionized drug discovery. With the advent of
combinatorial chemistry, pharmaceutical and biotechnology companies have
dramatically expanded their libraries of potential drug candidates. Researchers
have completed sequencing of the human genome, which has greatly increased
scientists' understanding of how diseases work and the causes of disease, which
in turn should provide novel targets for fighting disease.
5
In order to exploit these advances, pharmaceutical and biotechnology companies
are re-engineering their drug development processes. An example of this is the
use of automation and the latest advances in technology to accelerate the
screening of existing drug compounds against the disease targets of interest.
Researchers are challenged to develop new drug screening procedures that are
faster and more efficient while reducing costs and processing larger numbers of
samples.
After identifying disease targets and synthesizing chemical compounds,
researchers attempt to find compounds that are drug candidates. This drug
discovery process involves developing the test, or assay, to determine whether a
particular compound has the desired effect on a target and then screening
compounds using that assay. Compounds of interest from the screening process
become drug candidates, which undergo further testing as part of "lead
optimization". These drug candidates are then subjected to pre-clinical and
clinical trials before becoming a drug.
M-SERIES SYSTEM. We believe that the need of pharmaceutical and biotechnology
companies to rapidly screen thousands of compounds per day in an effort to
find new drugs and advances in drug discovery technologies has created new
opportunities for the ORIGEN technology system in the pharmaceutical and
biotechnology industry. The M-SERIES System, based on the TRICORDER, builds
on the applications of the ORIGEN DETECTION SYSTEM. The first M-SERIES System
in the product family is called the M-8, which is compatible with multi-well
microtiter plates that are commonly used in drug discovery and development
laboratories. It can be fully integrated with many existing automation and
robotic systems and is designed to enable researchers to test new biological
targets against potential drug compounds with higher levels of accuracy and
specificity. It may also perform highly sensitive tests more quickly and with
less cost. This permits a drug candidate to move more rapidly into the later
stages of drug development, clinical trials and ultimately into the market.
We believe that the sensitivity and accuracy of the M-SERIES System create
advantages over many competitive screening technologies. The M-SERIES System
allows the user (1) to quickly adapt the ORIGEN technology to develop and then
perform the specific, desired assays, compared to the longer periods required by
other existing competing technologies, (2) to reduce the use of rare components,
such as proprietary compounds, antibodies or clinical trial samples, that must
be used to run assays and (3) to be more confident in the positive and negative
results the tests produce. Our expertise in developing assays allows us to
assist customers in determining whether a proposed assay is feasible and to
assist with the development and performance of assays that comply fully with the
FDA's Good Manufacturing Practices (GMP).
In addition to the M-8 Systems we sell or place, we typically receive
commitments from our customers for purchases of proprietary reagents. We also
offer M-8 System users custom assay development services based on our existing
library of more than 300 assays. We market the M-8 System directly through our
sales, marketing and applications team dedicated to the life science market. Our
M-SERIES customers include:
o Agouron o GlaxoSmithKline
o Amgen o Human Genome Sciences
o AstraZeneca o Merck
o Aventis o Novo Nordisk
o Baxter o Pfizer
o Bayer o Pharmacia & Upjohn
o Boehringer Ingelheim o Schering Plough
o Bristol-Myers Squibb o Zymogenetics
6
The second product in the M-SERIES family is the M-1, which is in development.
The M-1 is being designed for use in drug discovery and development, as well as
for basic biology research such as the study of general biological processes,
proteomics and the understanding of the molecular basis of disease. In addition
to pharmaceutical and biotechnology researchers, the M-1 may be used by
scientists at academic and government research institutions.
ORIGEN DETECTION SYSTEM. Our strategic links with pharmaceutical and
biotechnology companies and with customers in government and academic research
centers were initially forged with the launch of the ORIGEN DETECTION System.
Some of these customers are performing research in areas that are key to our
strategic growth. The ORIGEN DETECTION SYSTEM is the precursor to the M-SERIES
System and established ORIGEN as a powerful detection technology for
applications in life science research.
FUTURE DEVELOPMENTS. In addition to immunodiagnostic applications, we have
invested in a number of research programs directed at the development of
molecular biology assays using ORIGEN technology. As an initial result of this
effort, we plan to launch a series of nucleic acid-based assays directed toward
the screening and identification of genes involved in cancer. We believe that
the sensitivity of ORIGEN technology will allow for the direct detection of
specific sequences of DNA without requiring the costly steps associated with
purification and amplification of these sequences in a sample. We believe that
direct detection will be highly beneficial in the life science, clinical
diagnostic and industrial testing markets.
CLINICAL DIAGNOSTIC PRODUCTS AND MARKET
One of the markets that we have and will continue to target by developing and
marketing products and services based on our ORIGEN technology is the clinical
diagnostic market. The clinical diagnostic market utilizes IN VITRO diagnostic
testing, which is the process of analyzing blood, urine and other samples to
screen for, monitor and diagnose diseases and other medical conditions or to
determine the chemical and microbiological constituents of the samples. This
market is composed of various areas of clinical diagnostic testing, including
testing by central hospital laboratories and clinical reference laboratories, as
well as testing at satellite hospital laboratories and at or near patient care
centers. Taken as a whole, we estimate that the market segments served by
current ORIGEN-based products are currently $7 billion.
HOSPITAL/REFERENCE LABORATORY SYSTEMS. One of the significant applications of
our ORIGEN technology is in large, highly automated clinical immunodiagnostic
systems used in central hospital laboratories, clinical reference laboratories
and blood banks. These laboratories constitute the vast majority of the clinical
diagnostic market today. To serve these laboratories, systems must be able to
perform a wide variety of immunodiagnostic tests on a large number of samples
reliably, cost-effectively and quickly. We and our licensees believe that
systems based on the ORIGEN technology are well-lawsuited to serve this market
and may surpass other systems currently available in central hospital
laboratories, clinical reference laboratories and blood banks in terms of speed,
cost effectiveness and ease of use.
Roche, one of the companies that license's our technology, introduced its
first ORIGEN-based immunoassay system, the Elecsys 2010, for the central
hospital and clinical reference laboratory markets in 1996. The Elecsys 2010
is designed to perform multiple screenings in a random-access mode, while
simultaneously handling tests performed on clinical samples for which
immediate results are needed, without interfering with the system workflow.
The Elecsys 2010 is designed so that it can be integrated with Roche's
clinical chemistry systems. Roche also introduced the Elecsys 1010 system,
which is a system designed for central hospital and clinical reference
laboratory customers that have a lower output requirement.
7
Roche presently offers a panel of approximately 50 screening tests, or assays,
with the Elecsys systems, including assays for infectious diseases, anemia,
cancer, heart attacks, thyroid disease and fertility/pregnancy. Roche continues
to develop additional assays that are expected to be introduced to the market in
subsequent months and years. We are working with Roche to develop assays, for
which Roche reimburses us a portion of our development costs.
Roche has also developed a third instrument system, the MODULAR / E170, which
incorporates ORIGEN technology and is in the process of being introduced to the
market. The E170 is part of Roche's new MODULAR system that allows laboratories
to create customized workstations and has the features of the existing Elecsys
line together with expanded throughput capabilities. See ITEM 3 - "Legal
Proceedings" for a description of our litigation with Roche.
PATIENT CARE CENTER SYSTEMS. We are independently developing ORIGEN-based
products that can be used to perform immunodiagnostic tests and chemistry tests
outside of central hospital laboratories and clinical reference laboratories.
This market includes patient care centers such as physicians' offices,
ambulatory clinics, hospital emergency rooms, surgical and intensive care units,
hospital satellite laboratories, nurses' stations and the hospital patient's
bedside. Physicians, patients and third-party payors have created a demand for
bringing laboratory testing closer to the patient in order to provide the
medical practitioner with faster results and, in turn, prompt feed-back to the
patient. Most immunodiagnostic systems for individual physicians and group
practices have had limited market penetration because of the lengthy turnaround
time for test results, the need for skilled labor in performing the tests and
the high cost of tests. We believe that the emergence of simple and more
accurate and cost-effective diagnostic products is shifting the site of IN VITRO
diagnostic testing from clinical reference and central hospital laboratories to
alternative sites.
We believe that significant demand exists for clinical diagnostic products that
reduce turnaround time and cost. Our patient care center system is being
designed to create tests that can provide accurate results to a physician
rapidly, thereby permitting the physician to make a more timely decision
regarding the patient's course of treatment. The ORIGEN technology permits
development of a system that is compact and simple to operate at a very low cost
per test and the initial ORIGEN-based system being developed by the Company is
utilizing the TRICORDER product platform currently used in the life science
market. The broad menu of immunoassays that we, and companies working with us,
developed for the first generation of ORIGEN-based products can be performed on,
and is available for use with, TRICORDER-based systems. We are currently
exploring collaborative business arrangements to accelerate the
commercialization of TRICORDER-based products for multiple point-of-care
applications.
The Company presently distributes clinical assays to approximately 60
physicians' office laboratories in the United States that utilize Roche's
Elecsys systems. In connection with our litigation with Roche, the Court issued
a preliminary injunction enjoining Roche from marketing, selling, or
distributing its Elecsys products to physicians' offices and physicians' office
laboratories (POL's), which are outside of Roche's licensed field of use. The
Court also ordered Roche to refer all POL customers to us for future reagent
supply needs. In May 2000, the Company and Roche signed an agreement under which
Roche transferred to us all of its POL customers in the United States pending
the outcome of the ongoing litigation. In addition to these systems, we continue
to believe that an estimated 225 systems outside the United States fall within
the scope of the preliminary injunction and currently intends to pursue the
disposition of those additional systems during the course of litigation with
Roche.
8
INDUSTRIAL PRODUCTS
In the industrial market, we are seeking to develop further, either
independently or with others, ORIGEN-based products for use in food and water
quality assurance programs and agricultural and animal health testing. We
estimate the potential worldwide opportunity for products based on ORIGEN
technology in the industrial market to be approximately $2 billion annually. The
emergence of simple, accurate and cost effective immunodiagnostic testing
products is shifting focus from traditional labor intensive testing methods,
such as gas chromatography, which tests for the presence of substances based on
their affinities for various gas and liquid mediums. We believe that our ORIGEN
Detection System and the reagents its employs to run tests, together with
simpler, low-cost, TRICORDER-based instruments under development, should be
well-lawsuited for these market applications.
We have recently commenced sales of our PATHIGEN panel of food pathogen tests.
This panel includes tests for E. coli 0157, Salmonella and Campylobactor and
will also include a test for Listeria. These tests are used in testing food and
beverage products, such as the meat used in hamburger, for the bacteria that
have caused numerous outbreaks of gastrointestinal and kidney-related disease
worldwide. The test is semi-automated and creates a permanent record of test
results. According to published studies by the USDA and an independent
analytical laboratory in the United Kingdom, the PATHIGEN E. coli 0157 test is
up to 100 times more sensitive than conventional tests commonly used to screen
food.
Major food and beverage producers could become primary users of the PATHIGEN
test panel in order to ensure continued safety of their food and beverage
products. The major advantage of the PATHIGEN tests are the ability to
perform in complex samples, like hamburger meat, in less time, with up to a
100-fold increase in sensitivity over other available methods. We believe our
PATHIGEN tests offers food producers the ability to efficiently test many
more food samples than with other currently available methods.
In addition to the PATHIGEN panel of food safety tests, we are developing a test
for bovine spongiform encephalopathy (BSE), or "mad cow" disease. Caused by
infectious protein particles called prions, BSE was originally identified in the
United Kingdom and has recently spread to continental Europe. The same strain of
prions that causes BSE in cattle also causes a fatal human brain disorder called
variant Creutzfeldt-Jakob disease (vCJD). Scientists believe that vCJD may
result from consumption of certain beef products contaminated with BSE prions.
To prevent the spread of vCJD, many cattle in Europe are tested for BSE before
their meat is permitted to enter the human food supply. Independent sources have
estimated that the demand for BSE testing products in Europe is expected to
approach $200 million in 2001.
We believe current BSE tests have several disadvantages. Most notably, they
do not detect pre-clinical infections reliably, a significant shortcoming as
the disease has a long undetected incubation period. Current tests are also
difficult to perform making them ill-suited for both decentralized use in
slaughterhouses and for high-throughput applications in reference
laboratories. We believe that an ORIGEN-based BSE test would have the
potential to overcome these limitations. The ORIGEN-based test is being
developed to detect pre-clinical infections and to be more sensitive than
competing tests.
9
COLLABORATIONS
We have entered into collaborations with established diagnostic and
pharmaceutical companies. These collaborations have provided us with $84 million
in license fees over an eight-year period and product development and marketing
resources. In addition, we receive ongoing royalties from collaborators' product
sales.
For the three fiscal years ended March 31, 1999, 2000 and 2001, revenue from
corporate collaborators, which is represented as product-based royalty income
and contract revenue, totaled $9.9 million (67%), $12.9 million (63%) and $20.4
million (65%), respectively.
ROCHE DIAGNOSTICS GmbH. In 1992, we entered into a contract with Roche
Diagnostics GmbH (then known as Boehringer Mannheim GmbH), the largest worldwide
manufacturer of diagnostic equipment and supplies, to commercialize ORIGEN-based
clinical immunodiagnostic and nucleic acid probe systems. As of March 31, 2000,
we had received a total of approximately $92 million in license fees, royalties
and assay development fees from Roche. Roche currently markets three
ORIGEN-based systems together with a test menu of approximately 50 different
assays, including tests for infectious diseases, anemia, cancer, heart attacks,
thyroid disease and fertility/pregnancy. Since the initial European launch of
the first Elecsys system in mid-1996, Roche has placed or sold over 6,000
Elecsys systems worldwide.
In 1997, we filed a lawsuit in Maryland federal court against Roche Diagnostics.
The lawsuit claims multiple breaches of our license agreement with Roche and its
failure to perform its material obligations under the agreement. See ITEM 3 -
"Legal Proceedings".
We recorded royalty income from the Roche agreement of $8.6 million, $11.1
million and $15.3 million for the three fiscal years ended March 31, 1999, 2000
and 2001, respectively.
ORGANON TEKNIKA B.V. We have an agreement with Organon Teknika B.V. to develop
and commercialize ORIGEN-based nucleic acid probe systems that will be marketed
worldwide to clinical diagnostic and life science markets. Organon Teknika
specializes in hospital and blood bank products. It is a business unit of Akzo
Nobel N.V., a multinational corporation with annual revenues of approximately
$12 billion, which recently announced that the Organon Teknika business unit was
in the process of being sold to BioMerieux. Organon Teknika has combined its
proprietary nucleic acid sequence based amplification technology with ORIGEN
technology and markets the NucliSens line of diagnostic virology products
together with test kits for the detection of HIV-1 RNA and CMV (cytomegalo
virus). We have received $20 million under our agreement with Organon Teknika
and currently receive royalties on product sales.
EISAI CO., LTD. We have a collaboration with Eisai Co., Ltd., a leading Japanese
pharmaceutical company, to market an ORIGEN-based diagnostic system for the
clinical diagnostic market in Japan. Eisai introduced its first ORIGEN-based
product under the trade name Picolumi during 1997, and we receive royalties on
product sales. Eisai is currently marketing the Picolumi product with assays
focused primarily in the area of cancer diagnosis. See "Risk Factors -- If we
are not successful in our litigation against Hitachi, our royalty income could
suffer."
10
MESO SCALE DIAGNOSTICS, LLC. During 1995, we established Meso Scale Diagnostics,
LLC ("MSD"), a joint venture company formed for the development and
commercialization of products utilizing a proprietary combination of multi-array
technology together with ORIGEN and other technologies owned by us. Since
inception, MSD has been engaged in a research and development program based on
multi-array diagnostic techniques and the ability to control and adapt surface
chemistry reactions on a microscopic level. The process may generate thousands
of reactions on a single surface with results presented on an array and read
using electrochemiluminescence. Products based on these technologies would be
used for multiparameter analysis for novel life science and clinical diagnostic
applications. The multiple results would represent an advance in testing,
enabling researchers and clinicians to analyze biological information rapidly
and cost-effectively.
The MSD joint venture was formed by the Company and Meso Scale Technologies,
LLC ("MST"), a technology-based company established by Jacob Wohlstadter, the
son of Samuel J. Wohlstadter, IGEN's Chief Executive Officer. The joint
venture was initially scheduled to expire in November 2000 with extensions
through April 2001 at which time MST extended the term of the joint venture
for up to 180 days under an automatic extension provision in the joint
venture agreement. The Company, through an independent committee of its Board
of Directors, is currently negotiating with MST the terms under which the MSD
joint venture may be continued.
For the years ended March 31, 2001, 2000 and 1999, we made total
contributions to MSD of $8.3 million, $4.5 million and $3.6 million,
respectively. See ITEM 7 " Management's Discussions and Analysis of Financial
Condition and Results of Operations", and ITEM 13 " Certain Relationships and
Related Transactions".
PATENTS AND OTHER PROPRIETARY RIGHTS
We pursue a policy of seeking patent protection to preserve our proprietary
technology and our right to capitalize on the results of our research and
development activities and, to the extent it may be necessary or advisable, to
exclude others from appropriating our proprietary technology. We also rely on
trade secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain our competitive position. We prosecute and
defend our intellectual property, including our patents, trade secrets and
know-how. We regularly search for third-party patents in our fields of endeavor,
both to shape our own patent strategy as effectively as possible and to identify
licensing opportunities.
As of March 31, 2001, we owned 59 issued U.S. patents and had 19 pending U.S.
patent applications in the diagnostics field. As of that date, we owned 106
additional issued patents outside of the United States in North America, Europe
and Japan, and we had more than 76 pending patent applications covering the same
technology. These patents and patent applications are important to our business
and cover various aspects of our ORIGEN technology and products, as well as the
methods for their production and use. We cannot assure you that the pending
patent applications will be granted or that our existing patents will not be
challenged. Our business could be harmed if we lose the patent protection we
currently enjoy or if our pending patents are not issued. Our patents will not
begin to expire until 2005; core ORIGEN patents will extend through 2015. We
continue to protect our technology with new patent filings, which could further
extend our patent coverage.
11
GOVERNMENT REGULATION
Our research and development activities and our manufacturing and marketing of
existing and future products are subject to regulation by numerous governmental
authorities in the United States and other countries. In the United States,
clinical diagnostic devices are subject to rigorous U.S. Food and Drug
Administration ("FDA") regulation. The Federal Food, Drug and Cosmetic Act and
the Public Health Service Act govern the testing, manufacture, safety, efficacy,
labeling, storage, record keeping, approval, advertising and promotion of our
clinical products. In addition to FDA regulations, we are subject to other
federal and state regulations such as the Occupational Safety and Health Act and
the Environmental Protection Act. Product development and approval within this
regulatory framework may take a number of years and involves the expenditure of
substantial resources. In addition, there can be no assurance that this
regulatory framework will not change or that additional regulation will not
arise at any stage of our product development, which may affect approval of or
delay an application or require additional expenditures by us.
Our regulatory strategy is to pursue development and marketing approval of
products worldwide, either independently or through corporate collaborators. We
intend to seek input from the regulatory authorities at each stage of the
clinical process to facilitate appropriate and timely clinical development. The
clinical development of certain products may be the responsibility of our
collaborators.
CLINICAL DIAGNOSTIC SYSTEMS
The manufacture, distribution and sale in the United States of our products for
clinical diagnostic purposes will require prior authorization by the FDA. The
FDA and similar agencies in foreign countries have promulgated substantial
regulations that apply to the testing, marketing, export and manufacturing of
diagnostic products. To obtain FDA approval of a new product for diagnostic
purposes, we or our collaborators will in most cases be required to submit proof
of the safety and efficacy of the product, or its "substantial equivalence" to
previously marketed products. Such proof typically entails clinical and
laboratory tests. The testing, preparation of necessary applications and
processing of those applications by the FDA is expensive and time consuming.
Significant difficulties or costs may be encountered in order to obtain FDA
approvals and that could delay or preclude us from marketing products for
diagnostic purposes. Furthermore, there can be no assurance that the FDA will
not request the development of additional data following the original
submission. With respect to patented products or technologies, delays imposed by
the governmental approval process may materially reduce the period during which
we, or our collaborators will have the exclusive right to exploit those products
or technologies.
Our clinical diagnostic products are regulated as medical devices. The Roche
Elecsys clinical diagnostic products have received FDA approval. Prior to
entering commercial distribution, all medical devices must undergo FDA review
under one of two basic review procedures depending on the type of assay: a
Section 510(k) pre-market notification ("510(k)") or a pre-market approval
application ("PMA"). 510(k) notification is generally a relatively simple
filing submitted to demonstrate that the device in question is "substantially
equivalent" to another legally marketed device and includes tests for
therapeutic drugs and hormones. Approval under this procedure may be granted
within 90 days if the product qualifies, but generally takes longer, and may
require clinical testing. When the product does not qualify for approval
under the 510(k) procedure, the manufacturer must file a PMA to show that the
product is safe and efficacious, based on extensive clinical testing among
several diverse testing sites and population groups, and shows acceptable
sensitivity and specificity. This procedure requires much more extensive
pre-filing testing than does the 510(k) procedure and involves a
significantly longer FDA review after the date of filing. In responding to a
PMA, the FDA may grant marketing approval, may request additional
information, may set restrictive limits on claims for use or may deny the
application altogether.
12
After product approvals have been received, they may still be withdrawn if
compliance with regulatory standards is not maintained or if problems occur
after the product reaches the market. The FDA may require surveillance programs
to monitor the effect of products that have been commercialized, and has the
power to prevent or limit further marketing of the products based on the results
of these post-marketing programs. In addition to obtaining FDA approval for each
product, under the PMA guidelines, the Company must seek FDA approval of the
manufacturing facilities and procedures. The FDA will also inspect diagnostic
companies on a routine basis for regulatory compliance with its Good
Manufacturing Practices (GMP).
Our products for the physician's office market will be affected by the Clinical
Laboratory Improvement Amendments of 1988 ("CLIA"), which is intended to insure
the quality and reliability of medical testing and may have the effect of
discouraging, or increasing the cost of, testing in physicians' offices. The
regulations establish requirements for laboratories in the area of
administration, participation in proficiency testing, patient test management,
quality control, personnel, quality assurance and inspection. Under these
regulations, the specific requirements that a laboratory must meet depend upon
the complexity of the tests performed by the laboratory. Laboratory tests are
categorized as either waived tests, tests of moderate complexity or tests of
high complexity. Laboratories that perform either moderate or high complexity
tests must meet standards in all areas, with the major difference in
requirements between moderate and high complexity testing concerning quality
control and personnel standards. Quality control standards for moderate
complexity testing are being implemented in stages. Personnel standards for high
complexity testing are more rigorous then those for moderate complexity testing.
In general, personnel conducting high complexity testing will need more
education and experience than those doing moderate complexity testing. Under the
CLIA regulations, all laboratories performing moderately complex or highly
complex tests will be required to obtain either a registration certificate or
certificate of accreditation from the Healthcare Financing Administration
("HCFA").
Because the regulations' interpretation is uncertain, it is possible that
certain of our products may be categorized as tests of high complexity, in which
case penetration of the point-of-care market would be reduced since not all
laboratories would meet the standards required to conduct such tests. We
understand that laboratories, including physician office laboratories, will be
evaluating the requirements of CLIA in determining whether to perform certain
types of moderate and high complexity diagnostic tests. We believe that the sale
of products will not be adversely affected by CLIA. However, no assurance can be
given that the statute and its implementing regulations will not have a material
adverse impact on our ability to market and sell any products that we develop.
Although we believe that we will be able to comply with all applicable
regulations regarding the manufacture and sale of diagnostic devices, such
regulations are always subject to change and depend heavily on administrative
interpretations. There can be no assurance that future changes in regulations
or interpretations made by the HHS, FDA, HCFA or other regulatory bodies,
with possible retroactive effect, will not adversely affect us. In addition
to the foregoing, we are subject to numerous federal, state and local laws
and regulations relating to such matters as safe working conditions,
laboratory and manufacturing practices, environmental, fire hazard control,
and disposal of hazardous or potentially hazardous substances. To date,
compliance with these laws and regulations has not had a material effect on
our financial results, capital requirements or competitive position, and we
have no plans for material capital expenditures relating to such matters.
However, there can be no assurance that we will not be required to incur
significant costs to comply with such laws and regulations in the future, or
that such laws or regulations will not have a material adverse effect upon
our ability to do business. Sales of the Company's products outside the
United States are also subject to extensive regulatory requirements, which
vary widely from country to country. The time required to obtain such
approval may be longer or shorter than that required for FDA approval.
13
RESEARCH PRODUCTS
Our products that are being sold for research use only, including the M-SERIES
System, must be properly labeled as such, as required by the FDA, but do not
generally require FDA approval prior to marketing. The FDA has begun to impose
new distribution requirements and procedures on companies selling research-only
products, such as the requirement that the seller receive specified
certifications from its customers as to the customers' intended use of the
product. We expect that the FDA will develop additional restrictions of this
nature. We are unable at this time to predict the form these restrictions may
take, their likely magnitude or their ultimate impact on us.
ENVIRONMENTAL REGULATION
Due to the nature of our current and proposed research, development and
manufacturing processes, we are subject to stringent federal, state and local
laws, rules, regulations and policies governing the use, generation,
manufacture, storage, air emission, effluent discharge, handling and disposal of
certain materials and wastes. Although we believe that we have complied with
these laws and regulations in all material respects and have not been required
to take any action to correct any noncompliance, there can be no assurance that
we will not be required to incur significant costs to comply with environmental
and health and safety regulations in the future.
REIMBURSEMENT
Third-party payors, such as governmental programs and private insurance plans,
can indirectly affect the pricing or the relative attractiveness of our products
by regulating the maximum amount of reimbursement they will provide for
diagnostic testing services. In recent years, healthcare costs have risen
substantially, and third-party payors have come under increasing pressure to
reduce such costs. In this regard, the Federal government, in an effort to
reduce healthcare costs, may take actions that may involve reductions in
reimbursement rates. If the reimbursement amounts for diagnostic testing
services are decreased in the future, it may decrease the amount which
physicians, clinical laboratories and hospitals are able to charge patients for
such services and consequently the price we and our collaborators can charge for
our products.
COMPETITION
Competition varies in the three markets in which we operate. In the life science
market, competition is fragmented. To be competitive, a company must be able to
address the needs of pharmaceutical and biotechnology companies, which are
facing pressure to increase productivity while decreasing drug discovery costs
and timelines. These drug discovery companies favor detection systems that
combine automation and enhanced sensitivity with integrated equipment and
consumables. Because our ORIGEN system encompasses all of these elements, we
believe it offers significant advantages over competing systems. In addition,
we, unlike some of our competitors, offer our customers assay development
services, which we believe enhance the speed and robustness of their screening
operations.
The clinical testing market is dominated by a few large multi-national
companies, including Abbott Laboratories, Roche, Bayer and Johnson & Johnson. We
participate in this market through our license arrangements with Roche, the
world's largest provider of diagnostics products, Organon Teknika and Eisai.
14
The industrial testing market is highly fragmented. While existing testing
methods are relatively inexpensive, these technologies are time consuming and
produce non-specific test results that are often unreliable. As in the life
science market, we are developing a portfolio of tests that would offer
enhanced speed, reliability and specificity in detecting pathogens and other
microbial contaminants in food, water and other industrial samples being
tested. We believe this will allow us to position ORIGEN competitively as the
detection method of choice for the industrial testing market.
Our competition will be determined in part by the potential applications for
which our products are developed and ultimately approved by regulatory
authorities. For certain of our future products, an important factor in
competition may be the timing of market introduction of our own or competing
products. Accordingly, the relative speed with which we or our corporate
collaborators can develop products, complete the clinical trials and approval
processes and supply commercial quantities of the products to the market are
expected to be important competitive factors. We expect that competition with
products approved for sale will be based, among other things, on product
efficacy, safety, reliability, availability, price and patent protection.
Many of our existing or potential competitors have substantially greater
financial, technical and human resources than we do and may be better equipped
to develop, manufacture and market products. These companies may develop and
introduce products and processes competitive with or superior to ours.
Our competitive position also depends upon the ability to attract and retain
qualified personnel, obtain patent protection or otherwise develop proprietary
products or processes and secure sufficient capital resources for the often,
substantial period between technological conception and commercial sales.
MANUFACTURING
Our current commercial manufacturing operations consist of the manufacture of
the M-SERIES System and related reagents, PATHIGEN products and cell culture
research biologicals, as well as quality assurance processes. We operate a
qualified GMP and ISO 9001 facility. We use a variety of suppliers and believe
that we do not depend on any supplier that cannot be replaced in the ordinary
course of business. Any changes in source of supply may require additional
engineering or technical development, with costs and delays that could be
significant, in order to ensure consistent and acceptable performance of the
products.
We have not yet introduced clinical diagnostic products that are manufactured by
us. Initial clinical diagnostic products, based on our ORIGEN technology, are
being manufactured by corporate collaborators. Although we may manufacture
future products, we have not yet developed plans for establishing manufacturing
operations for these products.
SALES AND MARKETING
We market the M-SERIES System and the ORIGEN Detection System, together with
related reagents and services, directly to the life science research market. In
conjunction with the U.S. and European launch of the M-SERIES System, we have
expanded our direct sales force, including the addition of application
specialists and in-house technical service personnel. We utilize two
distributors in Japan, Sumitomo Corp. and Sanko JunyakuCo. Ltd. The ORIGEN cell
culture products are sold directly and through distributors. Substantial sales
and marketing of products based on our ORIGEN technology is conducted by
corporate collaborators. See "Collaborations."
15
HUMAN RESOURCES
As of May 31, 2001, IGEN employed 336 individuals full-time, of whom 248 were
engaged in research, product development, manufacturing and operations support,
58 in marketing, sales and applications support and 30 in general
administration. Of our employees, 51 have Ph.D. degrees. A significant number of
our management and professional employees have had prior experience with
pharmaceutical, biotechnology, diagnostic or medical products, computer software
or electronics companies. None of our employees is covered by collective
bargaining agreements, and management considers relations with its employees to
be good.
The ability to maintain our competitive position will depend, in part, upon
continued ability to attract and retain qualified scientific, technical and
managerial personnel. Competition for such personnel is intense.
GEOGRAPHIC SEGMENTS
Information on domestic and foreign product sales is incorporated herein by
reference to ITEM 8 - Consolidated Financial Statements - Notes to Consolidated
Financial Statements - Note 11.
EXECUTIVE OFFICERS OF THE COMPANY
The names and ages of all executive officers at May 31, 2001 and their
respective positions and offices with us are set forth below. Each officer
serves without a set term.
NAME AGE POSITION
- ---- --- --------
Samuel J. Wohlstadter 59 Chairman, Chief Executive Officer and Director
Richard J. Massey, Ph.D. 54 President, Chief Operating Officer and Director
George V. Migausky 46 Vice President, Chief Financial Officer and Secretary
SAMUEL J. WOHLSTADTER is a founder of IGEN and has been our Chairman of the
Board and Chief Executive Officer since 1982. Mr. Wohlstadter has been a venture
capitalist for more than 25 years and has experience in founding, supporting and
managing high technology companies, including Amgen Inc., a biotechnology
company, and Applied Biosystems, Inc., a medical and biological research
products company. Mr. Wohlstadter is also Chief Executive Officer of Hyperion
Catalysis International, an advanced materials company, which he founded in
1981; of Pro-Neuron, Inc., a drug discovery company, which he founded in 1985;
of Proteinix Corporation, a development stage company organized to conduct
research in intracellular metabolic processes, which he founded in 1988; and of
Pro-Virus, Inc., a drug discovery company, which commenced operations in 1984.
RICHARD J. MASSEY, Ph.D. is one of our founders and has been President and Chief
Operating Officer since February 1992 and a director since 1990. He served as
Senior Vice President from 1985 to 1992. From 1981 until he joined us in 1983,
Dr. Massey was a faculty member in the Microbiology and Immunology Department at
Rush Medical Center in Chicago. Prior to that, he was Senior Research Scientist
at the Frederick Cancer Center/National Cancer Institute.
16
GEORGE V. MIGAUSKY has been our Chief Financial Officer since 1985, assuming
that position on a full-time basis in 1992. Between 1985 and 1992, in addition
to serving as our Chief Financial Officer on a part-time basis, Mr. Migausky
also served as financial advisor to several other privately held companies.
Prior to joining us in 1985, he spent nine years in financial management and
public accounting positions, most recently as a Manager with the High Technology
Group of Deloitte & Touche.
OTHER KEY MANAGEMENT
In addition to our executive officers and directors, we have the following
managers directing key functions:
NAME AGE POSITION
---- --- --------
Daniel Abdun-Nabi......................... 46 General Counsel
Gerald Andros............................. 39 Director of Sales
David Boudreau............................ 44 Director of Operations
R. Don Elsey.............................. 47 Director of Finance and Administration
Robert Proulx............................. 44 General Manager - Life Science Business
DANIEL ABDUN-NABI joined us in September 1999 as General Counsel. He is
responsible for all areas of corporate law, including advising us about our
domestic and international legal matters, and he provides guidance in developing
legal and business strategies and negotiating financial transactions. From 1990
to September 1999, Mr. Abdun-Nabi was Senior Vice President - Legal Affairs &
General Counsel for North American Vaccine, Inc., where he oversaw domestic and
international legal issues for that pharmaceutical company and its operating
subsidiaries. Prior to that, Mr. Abdun-Nabi spent several years in private
practice in Washington, D.C. and served for three years as an attorney with the
Division of Corporation Finance at the SEC.
GERALD ANDROS has been our Director of Sales for Life Science since 1994. He is
responsible for sales of ORIGEN products both in the United States and
internationally. Prior to joining us, Mr. Andros spent six years working in
sales management, marketing and sales training for Abbott Laboratories, where he
focused on sales of immunoassay, chemistry and hematology product lines.
DAVID BOUDREAU joined us in August 1999 as Director of Operations. He is
responsible for manufacturing, logistics and inventory management. From 1995 to
August 1999, Mr. Boudreau served as Director of Manufacturing Operations at
i-Stat, a medical diagnostics company, where he handled operational planning and
supply chain management for the United States and Canada. Prior to that he held
the position of Manufacturing Manager at Analog Devices Inc. and worked as a
process engineer at Chevron USA.
R. DON ELSEY joined us in May 2000 as Director of Finance and Administration. He
is responsible for the accounting, treasury, risk management, and human
resources functions for IGEN. Mr. Elsey joined IGEN from PE Biosystems where he
was Director of Finance. Prior to that he held a variety of financial management
positions with International Business Machines, Inc.
ROBERT PROULX joined us in March 2000 as General Manager of the Life Sciences
Business. Mr. Proulx has primary responsibility for managing sales, marketing
and product development efforts for the Company's life science research
business. Mr. Proulx joined IGEN from Packard Instrument Company, Inc. which
specializes in instrumentation and reagents for the life science research
market. Mr. Proulx held various positions at Packard since 1989, most
recently as Vice President, Marketing.
17
RISK FACTORS
IF THE COMPANIES THAT LICENSE TECHNOLOGY FROM US DO NOT EFFECTIVELY DEVELOP AND
MARKET PRODUCTS BASED ON THAT TECHNOLOGY, OUR REVENUE WOULD BE ADVERSELY
AFFECTED.
The success of our business depends, in large part, on how effectively the
companies to which we have licensed our technology develop and market that
technology. If these companies do not effectively develop and market products
based on this technology, our revenues would decrease.
We have licensed our technology to Organon Teknika B.V., Eisai Co., Ltd., and
Roche Diagnostics GmbH for selected markets and uses. Our license agreements
with each of these companies allow each company to develop products using our
technology and to manufacture and sell those products in selected markets. In
return for the right to use our technology, each of these companies must pay
royalties to us based on revenues they receive from sales of products based on
our technology. These royalties are a significant part of our overall revenue.
For example, they accounted for 52% of our revenue in fiscal year 2001.
We believe that the companies licensing our technology have economic incentives
to continue marketing products using our technology. However, we cannot be sure
that these companies will diligently and effectively market products that
incorporate the technology we have licensed to them. In addition, we have
brought a lawsuit against Roche, one of our licensees, in part because we
believe Roche has not properly calculated and paid royalties to us and because
we believe Roche has not commercialized our technology as diligently as our
license agreement with Roche requires. See the risk factor immediately below for
a more detailed description of this litigation and the risks it poses to us. We
cannot predict whether similar or other problems will arise with other companies
to whom we license our technology.
WE ARE SUING THE LARGEST LICENSEE OF OUR TECHNOLOGY, AND THE OUTCOME OF THAT
LITIGATION COULD MATERIALLY ADVERSELY AFFECT OUR REVENUES AND FINANCIAL
CONDITION.
We have filed a lawsuit in Maryland federal court against Roche. Roche is the
largest licensee of our technology in terms of royalty income, accounting for
over 90% of our royalty income in fiscal 2001. The lawsuit centers on disputes
over our license agreement with Roche. We cannot predict whether we will succeed
in this litigation. If we do not succeed, our business and revenues could be
materially adversely affected. See ITEM 3 - "Legal Proceedings".
Our license agreement with Roche gives Roche the exclusive right to manufacture,
market and sell immunodiagnostic products using our patented ORIGEN technology
to a designated field. The license restricts Roche's rights in the Japanese
clinical diagnostic market.
In its lawsuit, we allege that Roche has failed to perform several of its
material obligations under the license agreement, including failure to
diligently commercialize the licensed technology and to properly compute and pay
royalties owed to us. We also claim that Roche engaged in unfair competition. We
are seeking both monetary damages as well as a court order declaring that we are
entitled to terminate the license agreement. We have voluntarily agreed not to
terminate the license agreement until the court determines that we are entitled
to do so.
18
Roche has filed a counterclaim against us in the lawsuit, alleging, among other
things, that we breached the Roche license by permitting Eisai Co., Ltd.,
another of our licensees, to market some ORIGEN-based products in Japan.
We are vigorously pursuing our action against Roche. We cannot be certain,
however, that we will win the lawsuit. The risks involved in the litigation
include:
- - If the court determines that Roche has not miscalculated or underpaid
royalties, or that its underpayments were less than we believe, our
future royalty revenue from Roche could be materially less than we
believe we are entitled to. Also, we would not, or may not, receive
money damages for past underpayments that we believe Roche has made.
- - If the court determines that Roche can continue to market and sell
other Roche products that compete with its ORIGEN-based products, we
will not be able to collect from Roche royalty revenues that we would
have otherwise received if Roche had sold more ORIGEN-based products
instead of its other competing products.
- - If the court determines that Roche may market products using our
technology to customers that we believe are not within the scope of the
license, such as to physicians' offices, our ability to market our
products to those customers would be weakened.
- - If the court determines that Roche's counterclaim regarding our license
to Eisai is valid, then Eisai's right to market ORIGEN-based products
in Japan could be adversely affected. As a result, our royalty income
from Eisai could be reduced.
- - Regardless of whether we win the lawsuit, Roche may divert its
attention from selling the licensed products and focus its energies
instead on finding alternative products to develop and market,
especially if Roche believes we may be successful in obtaining the
right to terminate the license agreement.
- - If the court were to decide that we may terminate the license agreement
with Roche and we did so, royalty revenues would suffer unless and
until we found one or more comparable replacements for Roche. In
addition, our overall income may significantly decrease. Moreover, at
this time we cannot be sure that we would be able to find a suitable
replacement.
- - Regardless of whether we are successful in the litigation, we have
expended, and will continue to expend, a significant amount of money
and management time to pursue the lawsuit and to defend against Roche's
counterclaim. This time and money have been, and will continue to be,
unavailable for use in the development of our business.
IF WE ARE NOT SUCCESSFUL IN OUR LITIGATION AGAINST HITACHI, OUR ROYALTY INCOME
COULD SUFFER.
We are suing Hitachi Ltd. in Japan. Hitachi develops and manufactures diagnostic
equipment based on ORIGEN technology for Roche, to whom we license our
technology. We believe that Hitachi's actions in Japan violate rights that we
originally granted to Eisai Co., Ltd. to develop, manufacture and sell products
using ORIGEN technology to the Japanese clinical diagnostic market. We have
asked the Japanese court to prohibit Hitachi from manufacturing, using or
selling in Japan the Elecsys 2010 Instrument, which Hitachi developed for Roche
based on our technology.
19
If we lose our lawsuit against Hitachi and Hitachi continues Japanese
manufacturing of products covered by our license with Eisai, Eisai's ability to
sell products based on our technology in Japan could suffer, and the royalty
income we receive from Eisai could decrease as a result. If, on the other hand,
we win the lawsuit against Hitachi, Roche will either have to find a new
manufacturer to make equipment based on ORIGEN technology or make arrangements
for Hitachi to manufacture the equipment outside of Japan. Our royalty income
could suffer if Roche cannot effectively make alternate arrangements.
FAILURE TO MEET OUR DEBT OBLIGATIONS COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION; IN ADDITION, OUR DEBT SERVICE OBLIGATIONS
COULD IMPAIR OUR OPERATING FLEXIBILITY.
We have a substantial amount of indebtedness, and there is a possibility that we
may be unable to generate cash or arrange financing sufficient to pay the
principal of, interest on and other amounts due in respect of our indebtedness
when due, or in the event any of our indebtedness is accelerated. In addition,
our substantial leverage may require that we dedicate a substantial portion of
our expected cash flow from operations to service our indebtedness, which would
reduce the amount of our expected cash flow available for other purposes,
including working capital and capital expenditures.
In March 1999, we entered into a debt financing with John Hancock Mutual Life
Insurance Company under a note purchase agreement in which we received $30
million, and we issued 8.5% senior secured notes due 2006. Principal and
interest installments of $1.7 million are due quarterly through March 2006. The
notes are secured by, among other things, royalty payments and our right to
receive monies due under our license agreement with Roche and a restricted cash
balance account. If we are unable to meet our obligations under the notes, the
note holders could require us to repay the principal amount of, and accrued
interest on, the subordinated convertible debentures, and we may not have
sufficient financial resources or be able to arrange sufficient financing to
make those payments when required.
In addition, covenants in the note purchase agreement for our 8.5% senior
secured notes require us to comply with annual and quarterly royalty payment
coverage ratios that are tied to royalty payments and debt service. The note
purchase agreement also contains covenants that limit our ability to take
specified actions, including incurring additional secured debt and amending our
license agreement with Roche, which could affect our ability to resolve issues
that are being litigated through an amendment to the existing license agreement
with Roche. These restrictions may limit our operating flexibility, as well as
our ability to raise additional capital.
In January 2000, we sold $35 million in aggregate principal amount of 5%
subordinated convertible debentures due 2005. Unless and until holders of the
debentures convert their debentures into common stock, we are required to make
semi-annual interest payments of $875,000 through 2005. If we are unable to meet
our obligations under the subordinated convertible debentures, the debenture
holders could require us to repay the principal amount of, and accrued interest
on, the subordinated convertible debentures, and we may not have sufficient
financial resources or be able to arrange sufficient financing to make those
payments when required.
WE HAVE A HISTORY OF OPERATING LOSSES, EXPECT TO INCUR FUTURE LOSSES AND CANNOT
BE CERTAIN THAT WE WILL BECOME A PROFITABLE COMPANY.
We have experienced significant operating losses each year since our inception,
and we expect those losses to continue. We also have an accumulated deficit and
negative net worth. Our losses have resulted principally from costs incurred in
research and development and from litigation costs, selling costs and other
general and administrative costs.
20
We expect to incur additional operating losses as a result of increases in
expenses for manufacturing, marketing and sales capabilities, litigation costs
and expenses, research and product development and general and administrative
costs. We cannot assure you that we will ever achieve profitability in the
future. Our ability to become profitable in the future will depend on, among
other things, our ability to:
- - expand the commercialization of our existing products;
- - upgrade and enhance the M SERIES product capabilities;
- - introduce new products into the market;
- - develop our marketing capabilities cost-effectively;
- - develop sales and distribution capabilities cost-effectively; and
- - establish successful collaborations with corporate partners to develop
and commercialize products that incorporate our technologies.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND THESE
FLUCTUATIONS MAY CAUSE OUR STOCK PRICE TO FALL.
Our quarterly operating results depend upon:
- - the volume and timing of orders for M-SERIES or other products;
- the timing of instrument deliveries and installations;
- - the success of M-SERIES upgrades and enhancements;
- - variations in revenue recognized from royalties and other contract
revenues;
- - our mix of products sold;
- - whether our instruments are sold to or placed with customers;
- - the timing of our introduction of new products;
- - our competitors' introduction of new products;
- - variations in expenses we incur in connection with the operation of our
business, including legal fees, research and development costs, and
sales and marketing costs, including costs for upgrading the M SERIES
products;
- - our manufacturing capabilities; and
- - the volume and timing of product returns and warranty claims.
These factors may cause our quarterly operating results to fluctuate
significantly, which in turn, may cause our stock price to fall. In addition,
because our revenues and operating results are volatile and difficult to
predict, we believe that period-to-period comparisons of our results of
operations are not a good indication of our future performance.
21
WE MAY NOT BE ABLE TO RAISE SUFFICIENT ADDITIONAL CAPITAL TO SUCCESSFULLY
DEVELOP OUR BUSINESS.
We need substantial amounts of money to fund our operations. We currently
anticipate that our existing capital resources, together with revenue from
product sales, will be adequate to fund our operations through fiscal year 2002.
Our access to funds could be negatively impacted by many factors, including the
results of pending litigation, the volatility of the price of our common stock,
continued losses from operations and other factors.
We may need to raise substantial amounts of money to fund a variety of future
activities integral to the development of our business, including the following:
- - for research and development in order to successfully develop our
technology;
- - to obtain regulatory approval for some of our products;
- - to file and prosecute patent applications in order to protect our
technology;
- - to respond to innovations that our competitors develop;
- - to continue to aggressively pursue our ongoing litigations against
Roche and Hitachi;
- - to retain qualified employees, particularly in light of intense
competition for qualified scientists and engineers;
- - to make new arrangements to market our technology, especially if we
terminate our license agreement with Roche;
- - to manufacture products ourselves or through a third party; and
- - to market different products to different markets, either through
building our own sales and distribution capabilities or relying on a
third party.
We cannot be certain that we will have access to enough funds to successfully
develop our business.
We may try to raise necessary additional capital by issuing additional debt or
equity securities. Holders of debt securities would have priority over our
equity holders with respect to the proceeds from the sale of our assets in the
event of liquidation of our business, and any debt financings we obtain may
contain restrictive terms that limit our operating flexibility. If, on the other
hand, we raise additional capital by selling more common or preferred stock, the
holdings of existing stockholders would be diluted. We have entered into an
agreement pursuant to which we can sell up to $60 million of our common stock
between now and June 2003 (of which $12.5 million had been sold as of March 31,
2001) at prices that have a 4.75 - 6% discount to market at the time of sale.
There are no commissions, warrants or other direct costs associated with these
sales. Subsequent to March 31, 2001 the Company sold an additional 1,461,546
shares for $28.5 million.
22
If we are unable to raise additional capital, we may have to scale back, or
even eliminate, some programs. Alternatively, we may have to consider
pursuing arrangements with other companies, such as granting licenses or
entering into joint ventures. These arrangements could require that we give
up substantial rights to technology or products.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST MORE ESTABLISHED COMPANIES AND
INSTITUTIONS, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
We are a relatively young company in a highly competitive industry. We compete
against established companies and research and academic institutions, and we
expect this competition to intensify. Many of these companies and institutions
have one or more competitive advantages over us, including:
- - more money to invest;
- - greater expertise and resources in developing, manufacturing, marketing
and selling products;
- - a larger, more experienced workforce; and
- - more experience in obtaining regulatory approval for clinical
diagnostic products.
As a result, we may not be able to compete successfully against our current or
future competitors. This could have a material adverse effect on our business,
financial condition and revenue.
WE DEPEND ON CONTINUING PRODUCT DEVELOPMENT.
The market for our products is characterized by rapidly changing technology,
evolving industry standards, the need for updated and effective technology and
new product introduction. Our future success will depend in part upon our
ability to enhance existing products and to develop and introduce new or
enhanced products. There can be no assurance that we will be able to avoid the
obsolescence of our products due to rapid technological change and evolving
industry standards. In general, the development of new or enhanced products is a
complex and uncertain process requiring the accurate anticipation of
technological and market trends as well as precise technological execution. We
have and may continue to experience design, development, implementation and
other difficulties that could delay or prevent our introduction of new or
enhanced products or affect the performance of existing products. These
difficulties and delays have caused, and may continue to cause, our expenses to
increase and our product sales to fluctuate.
WE DEPEND ON HIGHLY TRAINED AND SKILLED EMPLOYEES AND MANAGEMENT, AND WE CANNOT
BE SURE THAT WE WILL BE ABLE TO ATTRACT AND RETAIN SUFFICIENT PERSONNEL.
We need to hire additional staff and to retain existing staff, both of which are
difficult in today's competitive marketplace. Because we are a technology
company, we depend heavily on scientists and engineers to develop products and
to build a successful business. Research and development efforts could suffer if
we are not able to hire and retain enough qualified scientists and engineers.
We cannot be sure that we will succeed in our hiring and retention efforts. We
compete with other technology companies and research and academic institutions
for experienced scientists. Many of these companies and institutions have
greater resources than we do and thus may be in a better position to attract
desirable candidates.
23
In addition to scientists, we will also need to hire managers as the business
grows. We will need managers who are able to address the need for regulatory,
manufacturing and marketing capabilities. If we are not able to hire managers
with these skills, or develop expertise in these areas, our business prospects
could suffer.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS FOR MATERIALS USED IN MANUFACTURING
OUR PRODUCTS, AND ANY INTERRUPTION IN THE SUPPLY OF THOSE MATERIALS COULD HAMPER
OUR ABILITY TO MANUFACTURE PRODUCTS AND MEET CUSTOMER ORDERS.
We depend on vendors to supply key materials that we use in our products. Some
of these materials are available only from limited sources. In the event of a
reduction in, interruption of, or degradation in the quality of the supply of
any of our required materials, or an increase in the cost of obtaining those
materials, we would be forced to locate an alternative source of supply. If no
alternative source were available or if an alternative source were not available
on a timely basis or at a reasonable cost or otherwise on acceptable terms, our
ability to manufacture one or more of our products would be delayed or halted.
Any changes in sources of supply may require additional engineering or technical
development in order to ensure consistent and acceptable performance of the
products. If any of these events occur, product costs may increase, we might be
unable to deliver products timely, we could lose sales as well as customers, and
our business would be significantly harmed as a result.
WE MUST OBTAIN FDA APPROVAL TO MARKET OUR CLINICAL DIAGNOSTIC PRODUCTS, WHICH IS
OFTEN COSTLY AND TIME CONSUMING, AND IF WE DO NOT OBTAIN THE NECESSARY APPROVAL
OUR BUSINESS PROSPECTS WOULD SUFFER.
The FDA regulates many areas in which we conduct research and in which we
develop, produce and market products. In particular, we must obtain FDA approval
before we can market clinical diagnostic products such as those we are currently
developing for the patient care market. The approval process is often costly and
time consuming. In addition, we cannot assure you that we will be successful in
obtaining FDA approval for any of our clinical diagnostic products, which would
materially adversely affect our future prospects.
In order to obtain FDA approval in the United States, we, or the companies with
whom we work, will need to either obtain pre-market application approval or
pre-market notification clearance from the FDA. In order to obtain pre-market
notification clearance, we must submit data from clinical trials demonstrating
that new clinical diagnostic systems are substantially equivalent to diagnostic
systems that the FDA has already approved. If a product is subject to the
substantial equivalence requirement, neither we, nor any of our licensees can
sell that system for clinical use in the United States until the FDA determines
that a new ORIGEN-based system is substantially equivalent to a previously
approved system.
Typically, the FDA review process takes 90 days, but the FDA's review could take
longer. In addition, we cannot be sure that we will be able to demonstrate
substantial equivalence for future diagnostic systems.
If we do not successfully demonstrate substantial equivalence, or if we are
required to obtain pre-market application approval as an initial matter, we will
have to conduct extensive clinical testing of these products, which could take
years to complete. Extensive testing could involve substantial additional costs
and might delay bringing clinical diagnostic products to market, weakening our
competitive position. If we fail to obtain FDA approval for new products
altogether, we will be unable to market our ORIGEN-based systems at all for
clinical use in the United States.
24
WE ARE SUBJECT TO EXTENSIVE, ONGOING GOVERNMENT REGULATION, WHICH MAY INVOLVE
SIGNIFICANT COSTS AND MAY RESTRICT OUR ABILITY TO CONDUCT BUSINESS.
We expect that we may need to spend a substantial amount of money to comply on
an ongoing basis with the regulations of the FDA and other government agencies.
Government agencies, such as the FDA and the Environmental Protection Agency,
regulate manufacturers of diagnostic products and the manufacturing process
itself. The costs of complying with governmental regulations and any
restrictions that government agencies might impose could have a significant
impact on our business. As we increase our manufacturing, these costs will
increase.
Whether we manufacture products ourselves or contract with another company to
manufacture products based on our technology, the FDA will continually review
and periodically inspect the manufacturing process. If the FDA were to discover
a problem with our products, the manufacturing process or the manufacturing
facility, the FDA could place restrictions on these products and on the
manufacturer. For example, the FDA could require us to recall, or even totally
withdraw, a product from the market or close a manufacturing facility. In
addition to FDA regulations, the process of manufacturing products is subject to
a variety of environmental and safety laws and regulations, including laws and
regulations governing the use and disposal of hazardous materials. If we fail to
comply with these laws or regulations, our business and financial condition
could be materially adversely affected.
WE HAVE LIMITED MANUFACTURING AND MARKETING EXPERIENCE, WHICH PUTS US AT A
COMPETITIVE DISADVANTAGE.
We lack experience in large-scale manufacturing, which could hamper our ability
to manufacture existing products or new products that we develop. We have two
options to address this issue. First, we could expand our internal ability to
manufacture products. Second, we could contract with a third party to
manufacture for us products based on our technology. If, however, we are unable
to expand our own manufacturing capability or find a suitable manufacturer on
acceptable terms in a timely manner, we may be unable to meet demand for
existing products and could be delayed in introducing new products to the
market. Failure to meet demand for existing products or delays in introducing
new products could put us at a competitive disadvantage and could harm our
financial condition or our business prospects.
We will also need to develop greater selling, marketing and distribution
capabilities. To market clinical diagnostic products directly to customers, and
not through a licensee, we need to develop a substantial sales force with
technical expertise. We also need to establish a distribution system to support
the sales force. Alternatively, we could license or contract with another
company to provide sales and distribution services for products, in much the
same way as we have done with Roche, Eisai and Organon Teknika. We cannot be
sure, however, that we will be able to develop a sufficient sales and
distribution force or that we will be able to find asuitable company to fill
that role for us.
THE SUCCESS OF OUR BUSINESS DEPENDS ON PATENTS THAT WILL EXPIRE AND THAT MUST BE
ACTIVELY PURSUED AND PROTECTED.
Our business depends heavily on patents that will expire over time and may be
challenged or circumvented by competitors. Patents allow us to prevent others,
for a time, from using our inventions to compete against us. Our business
success or failure will depend, in part, on our ability to obtain and maintain
adequate patent protection for the ORIGEN technology. We cannot be certain that
current patents or future patents will adequately protect our technology from
being used by our competitors.
25
Because there is no consistent policy governing the scope of claims in medical
patents, patent protection is uncertain. Companies may, for example, challenge
and invalidate patents or circumvent valid claims in patents, all of which could
make it necessary for us to defend our patents in litigation. Litigation over
patents poses the following risks to our business:
- - Litigation costs can be extremely high, which could drain our financial
resources.
- - Litigation over our patents could discourage other companies from
working with us to develop and market new products based on technology
covered by these disputed patents.
- - If we lose some patent protection as a result of litigation, our
competitive advantage could be eroded.
OUR BUSINESS WOULD BE HARMED IF WE VIOLATE THE PATENT RIGHTS OF OTHERS.
Our business success or failure will also depend, in part, on the patent rights
of others. We license technology from other companies and academic institutions.
Because access to this technology is necessary to our business, we must be
certain that we comply with these license agreements. Our business could be
harmed if we breached any of these license agreements and lost the rights to use
this patented technology or if we were unable to renew existing licenses on
acceptable terms or get additional licenses that we may need on acceptable
terms.
We must also make sure that we do not infringe the patent rights of others. If
we were to infringe others' patent rights we could be exposed to the following
risks:
- - We could be required to alter, or abandon, our products or processes.
- - We could be required to obtain a license from the patent holder.
- - We could lose customers that are reluctant to continue using our
products or doing business with us.
- - We could be forced to abandon development work that we had begun with
respect to these products.
- - We could be required to pay damages that could be substantial.
We cannot be sure that we would be able to alter products or processes or that
we could obtain a license at a reasonable cost, if at all. Our business could be
damaged if we were unable to make necessary alterations or obtain a necessary
license on acceptable terms.
26
In addition, we may need to litigate the scope and validity of patents held
by others. Litigation could be a substantial cost for us. We are currently
defending a patent infringement claim that Laboratories Serono, S.A. filed
against us, Roche and Organon Teknika. This action claims that we and the
other defendants are infringing a patent for "A Method Assay Employing a
Magnetic Electrode." We, along with the other defendants, have denied any
infringement and have asserted that the patent is invalid and unenforceable.
Subsequently, F. Hoffman-La Roche Ltd., a member of the Roche family of
companies, acquired the patent from Serono and continued in Serono's place to
assert the infringement claim against Organon Teknika and us. This case was
tried before the U.S. District Court in February 2001. A decision has not
been rendered by the Court. We cannot assure you that we will be successful
in defending against this claim. If we are not successful, our business and
financial condition could be adversely affected. See ITEM 3 - "Legal
Proceedings".
WE RELY ON TRADE SECRETS AND OTHER INFORMATION THAT CANNOT BE PROTECTED BY
PATENTS, AND WE FACE RISKS THAT THIS INFORMATION WILL BE DISCLOSED TO OTHERS.
In addition to patents, we also rely in our business on trade secrets, know-how
and other proprietary information. If this information were disclosed to
competitors, our business would suffer. We seek to protect this information, in
part, by entering into confidentiality agreements with licensees, employees and
consultants, which prohibit these parties from disclosing our confidential
information. Despite our entering into these agreements, we cannot be sure that
the agreements will provide adequate protection for our trade secrets, know-how
and other proprietary information or that the information we share with others
during the course of our business will remain confidential. We also cannot be
certain that we would have sufficient legal remedies to correct or compensate
for unauthorized disclosures or sufficient resources to seek redress.
RESTRICTIONS ON HEALTH CARE COSTS AND HEALTH CARE AND INSURANCE FINANCING
PRACTICES COULD LIMIT DEMAND FOR OUR PRODUCTS.
In the United States and elsewhere, demand for clinical diagnostic testing is
dependent, in part, on consumers' ability to be reimbursed for the cost of the
tests by third-party payors, such as government agencies, health maintenance
organizations and private insurers. Medicaid and other third-party payors are
increasingly challenging the prices charged for medical services, including
clinical diagnostic tests. They are also attempting to contain costs by limiting
their coverage of, and the amount they will reimburse for, clinical diagnostic
tests and other health care products. We cannot be certain that insurers will
provide coverage for clinical diagnostic tests in the future. Without adequate
coverage and reimbursement, consumer demand for clinical diagnostic tests may
decrease. Decreased demand would likely cause sales of our clinical diagnostic
products, and sales by our licensees, to fall since fewer tests would be
performed or prices would be lowered, or both. Reduced sales or royalty income
would hurt our business and our business prospects.
In many foreign markets, governments directly set the prices that clinical
diagnostic companies may charge for their products and services. In the United
States, a number of legislative and regulatory proposals aimed at changing the
health care system have been proposed in recent years. We cannot predict whether
these proposals will be adopted or the effect that these proposals or managed
care efforts may have.
WE ARE EXPOSED TO PRODUCT LIABILITY RISKS.
We may not be able to adequately insure against risk of product liability. As we
begin marketing products, we may face product liability for claims and lawsuits
brought by customers. Damages awarded in product liability cases can be very
large. While we have product liability insurance, this coverage is limited. We
cannot assure you that our current product liability insurance would be adequate
to cover us against our potential liabilities or that we will be able to
maintain current levels of product liability insurance on acceptable terms, if
at all. Claims or losses in excess of our current or future product liability
insurance coverage could have a material adverse effect on our financial
condition.
MANAGEMENT EXERCISES SIGNIFICANT CONTROL OVER IGEN.
Our management has significant control over IGEN through its stock ownership.
Our officers and directors own, or have the right to purchase, about 32% of our
common stock and our Chief Executive Officer owns approximately 25% of our
common stock at March 31, 2001. Our officers and directors have significant
influence over the election of directors and other stockholders actions.
27
FAILURE TO MANAGE OUR GROWTH COULD ADVERSELY AFFECT OUR BUSINESS.
We have grown rapidly and expect to continue to grow by hiring new employees in
all areas of our operations, increasing our presence in existing markets and
introducing new products we develop into new potential high-growth markets. Our
growth has placed, and continues to place, a strain on our management and our
operating and financial systems.
As we grow, our personnel, systems, manufacturing capabilities and resources,
procedures and controls may be inadequate to support future operations. In order
to accommodate the increased operations for sales and marketing, research and
development, facilities and administration, we will need to hire, train and
retain the appropriate personnel. We may also need to improve our financial and
management controls, reporting systems and operating systems. We may encounter
difficulties in developing and implementing other new systems.
In response to our growth, we have recently implemented a new enterprise
resource planning system in order to automate all of our accounting,
manufacturing, sales and purchasing. If the enterprise resource planning system
fails to operate as we expect or experiences delays or interruptions, our
operations, as well as our ability to manage our increased growth, could be
materially adversely affected.
PROVISIONS OF OUR GOVERNING DOCUMENTS MAY DETER OTHERS FROM ATTEMPTING TO
ACQUIRE US.
Our governing documents contain provisions designed to prevent hostile
takeovers, which may limit the ability of stockholders to sell their stock at a
premium in a takeover. According to our governing documents, stockholders can
only act at annual meetings or at special meetings of stockholders. Stockholders
are not allowed to act by written consent. In addition, stockholders are not
allowed to call for a special meeting. Only our board of directors, the chairman
of the board or the president may call a special meeting. These provisions may
make it difficult for stockholders to force us to hold special meetings. These
provisions may also limit the ability of stockholders to consider transactions
that they may want to approve, such as a hostile takeover of us.
Our governing documents also contain other provisions that could make it more
difficult for a change in control to be effected. Our board of directors can
issue preferred stock and can determine the rights of those preferred
stockholders without the approval of our common stockholders. For example, our
board of directors could give preferred stockholders one or more votes on issues
on which common stockholders vote. This could have the effect of diluting the
voting rights of common stockholders, which might further discourage other
companies from trying to acquire us.
In addition, our certificate of incorporation contains provisions dividing our
board of directors into three classes. Each class serves until the third
succeeding annual meeting, and one class is elected at each annual meeting of
stockholders. As a result, even if our stockholders might prefer to effect a
change sooner, it could take at least two annual meetings of stockholders to
change a majority of the members of the board of directors.
Furthermore, our certificate of incorporation authorizes, and we have
adopted, a preferred share purchase rights plan, commonly referred to as a
"poison pill." Under the rights plan, we made a dividend distribution to the
stockholders of record on November 6, 1996 of one right to purchase from us
one one-hundredth of a share of our preferred stock for each outstanding
share of our common stock. The terms of the rights and the circumstances
under which they may be exercised are contained in a rights agreement, which
has been filed with the SEC.
28
These terms have been designed to deter hostile takeovers of us, even though
our stockholders might favor a takeover, especially if it were to afford them
an opportunity to sell their stock at a price above the prevailing market
rate.
OUR STOCK PRICE IS VOLATILE AND COULD DROP PRECIPITOUSLY AND UNEXPECTEDLY.
Our common stock currently trades on The Nasdaq National Market. The prices of
publicly traded stock often fluctuate. The price of our stock may rise or fall
dramatically, even though our business performance has not changed. In the past,
the stock price of technology companies has been especially volatile. We expect
that this will continue to be the case.
In addition to these fluctuations, an investment in our stock could be affected
by a wide variety of factors that relate to our business and industry, many of
which are outside of our control. For example, the value of our common stock
could be affected by:
- - new product introductions;
- - innovations by competitors;
- - our competitors' announcements of their financial results;
- - the failure of our operating results to meet or exceed the expectations
of investors and analysts;
- - changes in financial estimates and recommendations by security
analysts;
- - general economic conditions;
- - disputes over patents or other proprietary rights;
- - new or existing litigation, including our litigation with Roche;
- - publicity;
- - regulations;
- - market conditions; and
- - fluctuations in our performance and the performances of our licensees.
WE DO NOT PLAN TO PAY ANY CASH DIVIDENDS ON OUR COMMON STOCK.
We have never paid cash dividends on our common stock. We have no plans to pay
cash dividends in the foreseeable future.
29
THE VALUE OF THE COMMON STOCK MAY BE DILUTED IN THE FUTURE.
Our officers, directors, employees and consultants have options to purchase a
significant aggregate amount of our common stock. If they exercise their options
and purchase common stock, our common stock will be diluted. In addition, we
currently have preferred stockholders and convertible debenture holders who have
the right to convert their preferred shares and debentures, as the case may be,
to common stock. Our common stock would be diluted if these preferred
stockholders or convertible debenture holders decide to convert their securities
in the future. Moreover, our common stock could be further diluted if we issue
additional common stock or securities convertible into common stock in the
future, which we may need to do to raise funds for our business. Sales of
additional shares of our common stock or the conversion of securities into our
common stock could cause the market price of our common stock to decrease.
ITEM 2. PROPERTIES
Our principal administrative, marketing, manufacturing and research and
development facilities consist of 104,000 square feet located in three buildings
in Gaithersburg, Maryland. Our leases expire on a co-terminus basis in 2005. We
have an additional 11,000 square feet of leased research and development and
sales facilities in Vienna, Virginia, South San Francisco, California and
Oxford, England. We believe that current facilities should be adequate for
anticipated expansion needs.
ITEM 3. LEGAL PROCEEDINGS
ROCHE DIAGNOSTICS (ROCHE)
In 1997, the Company filed a lawsuit against Roche Diagnostics GmBH (formerly
Boehringer Mannheim GmbH) in the Southern Division of the United States District
Court for the District of Maryland. The lawsuit arises out of a 1992 License and
Technology Development Agreement (the "Agreement"), under which the Company
licensed to Roche certain rights to develop and commercialize diagnostic
products based on the Company's ORIGEN technology. In its lawsuit, the Company
alleges that Roche has failed to perform certain material obligations under the
Agreement, including development and commercialization of ORIGEN technology
according to the contractual timetable; exploitation of the license to the
extent contemplated by the parties; phase out of certain non-royalty-bearing
product lines; exploitation of ORIGEN technology only within Roche's licensed
fields; proper treatment of intellectual property rights regarding ORIGEN
technology; maintenance of records essential to the computation of royalties;
and proper computation and payment of royalties. On August 18, 2000, the Company
filed an Amended Complaint in the lawsuit asserting additional breach of
contract claims and a claim for unfair competition.
In its lawsuit, the Company seeks compensatory and punitive damages as well as
injunctive and declaratory relief, including a judicial determination of its
entitlement to terminate the Agreement. The Company voluntarily has agreed not
to terminate the Agreement unless and until the Court determines its entitlement
to do so.
30
In April 2001, the court granted judgment in the Company's favor on one count of
the Company's Amended Complaint, ruling that Roche breached the Agreement by
taking unsubstantiated "rental surcharge" deductions against reported sales of
royalty-bearing products. On June 1, 2001 the Company filed motions for summary
judgment on four additional counts in the complaint. Those counts allege,
respectively, that Roche breached the Agreement by selling products based on the
Company's technology outside of Roche's licensed field, by failing to ensure
that Roche affiliates who market products based on the Company's technology
comply fully with the terms of the Agreement, by continuing to improve and
develop a competing product line after the launch of the products based on the
Company's technology, and by settling out of a third-party infringement action
(brought by Laboratories Serono, S.A.) without the Company's knowledge or
consent. These pending motions ask the court to decide these four counts without
trial.
During 1998, the Court issued a preliminary injunction enjoining Roche from
marketing, selling, or distributing its Elecsys products to physicians' offices
and physicians' office laboratories, which are outside of Roche's licensed field
of use. The Court also ordered Roche to refer all physicians' offices and
physicians' office laboratory customers to the Company for future reagent supply
needs and to place all revenues derived from these unauthorized sales in escrow
pending the outcome of the litigation. In May 2000, the Company and Roche signed
an agreement under which Roche transferred to the Company all of its physician
office laboratory customers in the United States. This transfer involves
approximately 60 diagnostic systems in U.S. physicians' offices. In addition to
these systems, we continue to believe that an estimated 225 systems outside the
United States fall within the scope of the preliminary injunction and currently
intends to pursue the disposition of those additional systems during the course
of litigation with Roche. The Company has moved the court to rule on summary
judgment that Roche has violated its license by selling to physicians' offices
and physicians' office laboratories.
Roche had filed counterclaims against the Company, of which most were dismissed
by the Court. The remaining counterclaim for breach of contract allegations
relate primarily to the relationship between the Company and its Japanese
licensee, Eisai, Co., Ltd. Roche alleges that the Company breached the Agreement
by permitting Eisai to market certain ORIGEN based products in Japan and by
granting to other parties rights that were licensed to Roche.
During fiscal 2000, the Company received notice from Roche that Roche was
reducing royalty payments due to the Company through a "rental surcharge"
deduction that Roche contends it is entitled to take from royalty-bearing sales
revenues. Additionally, Roche issued a "debit note" claiming that the Company
owed Roche $2.6 million in royalties previously paid to the Company as a result
of a retroactive application of the rental surcharge deduction back to 1997. The
court granted the Company's motion for summary judgment that Roche's
implementation of the rental surcharge deduction breached the Agreement. In May
2001, Roche notified the Company that it was canceling the debit note pursuant
to the court ruling. Roche also had modified its calculation of royalties based
on the court ruling.
This litigation against Roche may have a material adverse effect upon the
Company regardless of whether the outcome is favorable or not.
In June 1998, a subsidiary of Ares-Serono ("Serono") filed a patent infringement
claim against the Company, Roche and Organon Teknika in the U.S. District Court,
District of Delaware. The action claims that Serono's patent "A Method of Assay
Employing a Magnetic Electrode" is being infringed by the Company. Subsequently,
F. Hoffman LaRoche, Ltd., a member of the Roche family of companies, acquired
the patent from Serono and continued in Serono's place to assert the
infringement claim against the Company and Organon Teknika. A trial was held in
Delaware on this matter during February 2001. No decision has been rendered by
the court. The Company does not believe it infringes the patent and intends to
continue to vigorously defend against the claim.
31
HITACHI
In December 1997, IGEN International K.K., a Japanese subsidiary of the Company,
filed a lawsuit in Tokyo District Court against Hitachi Ltd. ("Hitachi"). The
lawsuit seeks to enjoin Hitachi from infringing IGEN K.K.'s license registration
(known in Japan as a "senyo-jisshi-ken") to prevent Hitachi from manufacturing,
using or selling the Elecsys 2010 Instrument, which incorporates the Company's
patented ORIGEN technology, in Japan.
Hitachi is the sole manufacturer for Roche of the Elecsys 2010 immunoassay
instrument. Roche is licensed to market the Elecsys 2010 worldwide, except in
Japan, to central hospital laboratories and clinical reference laboratories. The
Company's ORIGEN technology is also licensed in Japan to Eisai Company, Ltd. The
lawsuit requests injunctive relief against Hitachi.
OTHER
On February 6, 2001, the Company received notice that Brown Simpson Strategic
Growth Fund L.P. ("Brown Simpson") initiated a shareholder derivative lawsuit
for and on behalf of the shareholders of the Company in the Circuit Court of
Montgomery County, Maryland against four of the Company's current directors,
two former directors, three executive officers and the Company as a nominal
defendant. In the complaint, Brown Simpson, stating that it holds 100 shares
of the Company's common stock, alleges breach of fiduciary duties by the
named individual defendants in connection with transactions between the
Company and other entities in which certain directors and officers are
alleged to have an interest, including its Meso Scale Diagnostics, LLC joint
venture.
On March 13, 2001, a second shareholder derivative lawsuit was filed by
Laurence Paskowitz in Circuit Court for Montgomery County, Maryland, for and
on behalf of the shareholders of the Company. In the lawsuit Mr. Paskowitz,
purporting to own 600 shares of the Company's common stock, names as
defendants all of the company's existing directors, all of the current
officers, two former directors, and the Company as a nominal defendant. The
allegations and the relief sought in this complaint are substantially the
same as those set forth in the complaint filed by Brown Simpson.
The Company and the individual defendants have filed a motion to dismiss and a
motion of summary judgment in both of the shareholders derivative lawsuits. The
Circuit Court recently decided to stay both proceedings, including all
discovery, until August 2001, at which time the court will consider all pending
motions.
In 2000, the Board of Directors established an independent committee to evaluate
substantially similar issues as those raised in both shareholder complaints.
Both lawsuits seek principally the following: that the defendants hold in trust
and be required to account for and restore to the Company alleged damages that
IGEN has allegedly sustained by reason of the allegations; and relief relating
to board and management composition. The complaints do not include any claims
against the Company.
The Company believes that the claims are wholly without merit, that
meritorious defenses are available and that there is every intention to
vigorously contest and defend against these claims. Further, the Company
intends to assert all of its legal rights in this matter, including all
counterclaims.
The Company is involved, from time to time, in various other than legal
proceedings arising in the ordinary course of business. In the opinion of
management, based on review with legal counsel, the Company does not believe
that any such legal proceedings will have a material adverse impact on its
financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company during the
fourth quarter of the fiscal year covered by this report.
32
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is quoted on The Nasdaq National Market under the
symbol IGEN. As of June 5, 2001, there were approximately 4,500 holders of
record of the Company's Common Stock. No cash dividends have been paid on the
Common Stock to date, and the Company currently intends to retain any earnings
for development of the Company's business.
The following table sets forth, for periods indicated, the range of high and low
closing sales prices of the Common Stock as quoted on The Nasdaq National
Market.
FISCAL 2001 HIGH LOW
----------- ---- ---
First Quarter $ 23.50 $ 12.875
Second Quarter $ 21.875 $ 15.75
Third Quarter $ 24.875 $ 10.25
Fourth Quarter $ 18.9375 $ 11.0625
FISCAL 2000
-----------
First Quarter $ 33.875 $ 23.75
Second Quarter $ 30.00 $ 21.00
Third Quarter $ 29.9375 $ 23.125
Fourth Quarter $ 39.6875 $ 24.125
33
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below with respect to the Company's
consolidated statements of operations for each of the years in the three-year
period ended March 31, 2001 and with respect to the consolidated balance sheets
at March 31, 2001 and 2000 are derived from, and are qualified by reference to,
the consolidated financial statements that have been audited by Deloitte &
Touche LLP, independent auditors, and are included elsewhere in this Form 10-K.
The statement of operations data for each of the years in the two-year period
ended March 31, 1998, and the balance sheet data at March 31, 1999, 1998 and
1997 are derived from audited financial statements not included in this Form
10-K. The following selected financial data should be read in conjunction with
the consolidated financial statements and notes thereto included elsewhere in
this Form 10-K.
FISCAL YEAR ENDED MARCH 31
-----------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ----------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statements of Operations Data:
Revenues:
Product sales $ 10,913 $ 7,743 $ 4,949 $ 5,614 $ 6,360
Royalty income 16,157 12,218 9,439 5,024 843
License and contract fees 4,292 700 510 2,795 8,802
---------- ----------- ----------- ---------- ----------
Total 31,362 20,661 14,898 13,433 16,005
---------- ----------- ----------- ---------- ----------
Operating Costs and Expenses:
Product costs 3,625 2,262 1,340 1,716 2,448
Research and development 28,497 18,665 14,271 11,615 13,114
Selling, general and administrative 16,849 13,989 10,676 10,897 10,910
Litigation costs 13,782 6,295 2,571 864 --
---------- ----------- ----------- ---------- ----------
Total operating expenses 62,753 41,211 28,858 25,092 26,472
---------- ----------- ----------- ---------- ----------
Loss from operations (31,391) (20,550) (13,960) (11,659) (10,467)
Interest and other income (expense)-net (4,867) (11,855) 651 (171) 586
---------- ----------- ----------- ---------- ----------
Loss before cumulative effect of
accounting change (36,258) (32,405) (13,309) (11,830) (9,881)
Cumulative effect of accounting change (6,995) -- -- -- --
---------- ----------- ----------- ---------- ----------
Net loss (43,253) (32,405) (13,309) (11,830) (9,881)
Preferred dividends (2,052) (2,137) (1,980) (541) --
---------- ----------- ----------- ---------- ----------
Net loss attributed to common shareholders $ (45,305) $ (34,542) $ (15,289) $ (12,371) $ (9,881)
========== =========== =========== ========== ==========
Basic and diluted net loss per share $ (2.84) $ (2.24) $ (1.00) $ (0.82) $ (0.66)
========== =========== =========== ========== ==========
Shares used in computing net loss per share 15,929 15,415 15,318 15,116 14,959
========== =========== =========== ========== ==========
MARCH 31
-----------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ----------- ----------- ---------- ----------
(IN THOUSANDS)
Balance Sheet Data:
Cash, cash equivalents and short term
investments $ 15,089 $ 38,486 $ 34,374 $ 23,122 $ 9,044
Working capital 9,096 38,537 32,327 17,590 4,431
Total assets 39,133 57,798 45,823 30,391 17,794
Long term obligations 56,821 59,605 32,704 146 158
Accumulated deficit (157,497) (114,244) (81,839) (68,530) (56,700)
Shareholders' (deficit) equity (36,373) (11,808) 5,590 20,862 7,882
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
We have devoted substantial resources to the research and development of our
proprietary technologies, primarily the ORIGEN(R) technology for the clinical
diagnostic, life science and industrial markets. We currently derive a majority
of our revenue from royalties received from licensees that develop and market
certain ORIGEN-based systems. We also generate sales of our own products,
particularly the M-SERIES(TM) System and related consumable reagents. We may
selectively pursue additional strategic alliances, which could result in
additional license fees or contract revenues. Since inception, we have incurred
significant losses and, as of March 31, 2001, we had an accumulated deficit of
$157 million. We expect to continue to incur substantial research and
development, manufacturing scale-up and general and administrative costs
associated with our operations. As a result, we will need to generate higher
revenue to achieve profitability.
RESULTS OF OPERATIONS
YEARS ENDED MARCH 31, 2001 AND 2000.
REVENUES. Total revenues for the fiscal year ended March 31, 2001 increased by
approximately $10.7 million or 52% to $31.4 million from $20.7 million in fiscal
2000. The revenue growth for fiscal 2001 was due to increases in all revenue
categories - product sales, royalty income and contract fees. Product sales were
$10.9 million in fiscal 2001, an increase of 41% over the prior year's product
sales of $7.7 million. This growth in product sales was led by the M-SERIES line
of instrumentation and consumable products, as well as, the revenue generated
from the sale of clinical diagnostic assays to physician office laboratory (POL)
customers in the United States. We began serving these POL customers in June
2000 when Roche transferred the customers in order to comply with a court
ordered preliminary injunction. Also contributing to the growth in product sales
were shipments under distribution agreements that we signed during the fiscal
year with Sanko Junyaku Co., Ltd. and Sumitomo Corporation.
Royalty income was $16.2 million in fiscal 2001, an increase of 32% over the
prior year's royalty income of $12.2 million. Royalties from Roche represent
approximately $15.3 million (94%) of the total royalty income for fiscal 2001 as
compared to approximately $11.1 million (91%) for fiscal 2000. Roche launched
its Elecsys product line in 1996, which is based on our ORIGEN technology that
was licensed to Roche under a 1992 license agreement. We are involved in
litigation with Roche arising out of this agreement. One of the disputes in the
litigation relates to the computation of royalties to which we believe we are
entitled to under the Agreement. See Item 3, "Legal Proceedings".
Contract revenue in the current fiscal year increased to $4.3 million from
$700,000 last year. This increase is attributable to our alliance with Bayer
Diagnostics ("Bayer") under which the two companies are exploring new products
for the hospital point-of-care testing market.
OPERATING COSTS AND EXPENSES. Product costs were $3.6 million (33% of product
sales) for fiscal 2001 compared to $2.3 million (29% of product sales) for
fiscal 2000. The change in product cost margins is attributable to a change in
product sales mix between lower margin M-Series instruments and the higher
margin M-series consumable reagents, as well as M-Series retrofit costs and POL
sales.
35
Research and development costs increased $9.8 million (53%) in fiscal 2001 to
$28.5 million from $18.7 million in fiscal 2000. This increase was due to
ongoing development expenses primarily associated with enhancements to the
M-SERIES System and related assays; development of additional instrumentation,
including new assays, for the M-SERIES line of products to meet the expanding
needs of the drug discovery and development market; development associated with
designing hospital point-of-care products; and research and development expenses
associated with the Meso Scale Diagnostics (MSD) joint venture.
Selling, general and administrative expenses were $16.9 million in fiscal 2001,
an increase of $2.9 million (20%) over the prior year's total of $14 million.
This increase was due primarily to higher sales and marketing costs related to
expanding the launch of the M-SERIES System throughout the United States, Europe
and Japan.
Costs related to our litigation with Roche increased to $13.8 million in fiscal
2001 from $6.3 million in fiscal 2000. This increase was attributable to
expanded activities in several areas, such as work related to a court-appointed
Special Master's examination of Roche's books and records; preparation and
presentation of several motions, including motions for summary judgment;
preparation for and participation in a trial in Delaware in February 2001; and
preparation for a trial in Maryland scheduled for October 2001. The increased
litigation costs also include financial and legal advisors' fees associated with
settlement discussions.
INTEREST AND OTHER EXPENSE. Interest expense, net of other income, excluding a
non-recurring charge in 2000, increased $2.6 million in fiscal 2001 due to
interest on higher debt balances during the year and a full year's amortization
of the detachable warrant value associated with the convertible debentures
issued in January 2000. In fiscal 2000, we also recorded a non-cash charge of
$9.6 million related to the beneficial conversion element of the convertible
debentures and related warrants. The convertible debentures have a one-time
beneficial conversion feature measured as the difference between the conversion
price and the fair value of our common stock at the time of the issuance of
debentures.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. During fiscal 2001, we adopted the
provisions of Emerging Issues Task Force (EITF) Release No. 00-27, "Application
of EITF Issue No. 98-5, Accounting for Convertible Securities and Beneficial
Conversion Features". This standard established new guidelines for convertible
securities and beneficial conversion features. The change in methods resulted in
a one-time, non-cash charge that was recorded during the year as a cumulative
effect of a change in accounting. Prior year financial statements have not been
restated to reflect the change in accounting. The effect of the change on our
Statement of Operations for the year ended March 31, 2001 was to increase the
net loss by $7 million ($0.44 per share).
NET LOSS. Excluding the non-recurring, non-cash charge of $7 million ($0.44 per
share) taken for the cumulative effect of accounting change, the net loss was
$36.3 million ($2.40 per share, after consideration of the effect of preferred
dividends) in fiscal 2001. Including this charge, the net loss was $43.3 million
($2.84 per share, after consideration of the effect of preferred dividends). In
fiscal 2000, including the non-cash charge, the net loss was $32.4 million
($2.24 per share, after consideration of the effect of preferred dividends).
Excluding the non-cash charge of $9.9 million ($0.64 per share) taken to account
for the beneficial conversion element of the convertible debentures and related
warrants issued January 2000, the net loss was $22.5 million ($1.60 per share,
after consideration of the effect of preferred dividends).
36
Results of operations in the future are likely to fluctuate substantially from
quarter to quarter as a result of various factors, which include the volume and
timing of orders for M-SERIES or other products; the timing of instrument
deliveries and installations; variations in revenue recognized from royalties
and other contract revenues; the mix of products sold; whether instruments are
sold to or placed with customers; the timing of the introduction of new
products; competitors' introduction of new products; variations in expenses
incurred in connection with the operation of the business, including legal fees,
research and development costs and sales and marketing costs; manufacturing
capabilities; and the volume and timing of product returns and warranty claims.
We have experienced significant operating losses each year since inception and
expect those losses to continue. Losses have resulted from a combination of
lower royalty revenue than we believe we are entitled to under license agreement
with Roche, costs incurred in research and development, Roche litigation costs,
selling costs and other general and administrative costs. We expect to incur
additional operating losses as a result of increases in expenses for
manufacturing, marketing and sales capabilities, research and product
development and general and administrative costs. Our ability to become
profitable in the future will depend, among other things, on our ability to
expand the commercialization of existing products; introduce new products into
the market; develop marketing capabilities cost-effectively, and develop sales
and distribution capabilities cost-effectively; complete new business
arrangements; and resolve the litigation with Roche.
As of March 31, 2001, we had net operating loss and general business credit tax
carryforwards of approximately $132 million and $3.9 million, respectively. Our
ability to utilize net operating loss and general business credit tax
carryforwards may be subject to an annual limitation in future periods pursuant
to the "change in ownership rules" under Section 382 of the Internal Revenue
Service Code of 1986, as amended.
YEARS ENDED MARCH 31, 2000 AND 1999.
REVENUES. Total revenues for the fiscal year ended March 31, 2000 increased by
approximately $5.8 million or 39% to $20.7 million from $14.9 million in fiscal
1999. The revenue growth for fiscal 2000 was due to increases in product sales
and royalty income. Product sales were $7.7 million in fiscal 2000, an increase
of 56% over the prior year's product sales of $4.9 million. This growth was led
by the M-SERIES line of instrumentation and consumable products, which commenced
sales in the second quarter of fiscal 2000. Royalty income was $12.2 million in
fiscal 2000, an increase of 29% over the prior year's royalty income of $9.4
million. Royalties from Roche represent approximately $11.1 million (91%) of the
total royalty income for fiscal 2000 as compared to approximately $8.6 million
(91%) for fiscal 1999.
OPERATING COSTS AND EXPENSES. Product costs were $2.3 million (29% of product
sales) for fiscal 2000 compared to $1.3 million (27% of product sales) for
fiscal 1999. The change in product cost margins is attributable to a change in
product sales mix between instruments, services and reagents related to the
M-SERIES product launch.
Research and development costs increased $4.4 million (31%) in fiscal 2000 to
$18.7 million from $14.3 million in fiscal 1999. This increase was due to higher
personnel and development expenses primarily associated with development of the
M-SERIES System and related assays; development of additional instrumentation
for the M-SERIES line of products; and research and development expenses
associated with the Meso Scale Diagnostics (MSD) joint venture.
37
Selling, general and administrative expenses were $14 million in fiscal 2000, an
increase of $3.3 million (31%) over the prior year's total of $10.7 million.
This increase was due primarily to higher sales and marketing costs related to
the launch of the M-SERIES System. Costs associated with our litigation with
Roche increased to $6.3 million in fiscal 2000 from $2.6 million in fiscal 1999.
This increase was due to extensive discovery and depositions in the litigation.
INTEREST AND OTHER EXPENSE. Interest expense, net of other income, increased
$2.6 million in fiscal 2000 due to interest on higher debt balances during the
year. We completed a $30 million debt financing in March 1999 and issued $35
million of convertible debentures in January 2000. We also recorded as interest,
non-cash charges of $9.9 million in fiscal 2000 related to the beneficial
conversion element of the convertible debentures and related warrants, of which
$9.6 million was non-recurring.
NET LOSS. Excluding the non-cash charge of $9.9 million ($0.64 per share) taken
to account for the beneficial conversion element of the convertible debentures
and related warrants issued in January 2000, the net loss was $22.5 million
($1.60 per share, after consideration of the effect of preferred dividends) in
fiscal 2000. Including the non-cash charge, the net loss was $32.4 million
($2.24 per share, after consideration on the effect of preferred dividends).
This compares with a net loss of $13.3 million ($1.00 per share, after
consideration on the effect of preferred dividends) for fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Through March 31, 2001, we have financed operations through the sale of
Preferred and Common Stock, aggregating approximately $99 million; the placement
of a $30 million debt financing with John Hancock Life Insurance Company in
March 1999; and the placement of $35 million principal amount of convertible
debentures in January 2000. Under the Hancock financing, we are obligated to
make quarterly principal and interest payments of $1.7 million through March
2006. Under the subordinated convertible debentures, unless and until the
holders of the debentures convert their debentures into common stock, we will be
required to make semi-annual interest payments of $875,000 through January 2005.
Interest payments may be made in cash or on equivalent value of common stock. In
addition, we have received funds from collaborative research and licensing
agreements, sales of our ORIGEN line of products and royalties from product
sales by licensees.
During February 2001, we entered into an agreement with Aqua Wellington North
American Equities Fund LLC ("Acqua") for an equity financing facility covering
the sale of up to $60 million of our common stock over the subsequent 28 months.
Under this facility, we have sold 1,000,975 shares to Acqua for $12.5 million
through March 31, 2001. All shares of common stock sold and to be sold to Acqua
will be issued under our shelf-registration statement covering up to 3 million
shares of common stock. We will control the amount and timing of additional
stock sales that may be made under the terms of this agreement. Each sale will
be made under the shelf-registration statement at a 4.75-6% discount to the
market at the time of the sale. There are no commissions, warrants or other
direct costs associated with these sales. Subsequent to March 31, 2001, the
Company sold an additional 1,461,546 shares to Acqua for $28.5 million.
As of March 31, 2001, we had $15.1 million in cash, cash equivalents and
short-term investments, with working capital of $9.1 million.
Cash used in operations was $27 million, $23.8 million and $15.5 million during
the years ended March 31, 2001, 2000 and 1999, respectively. These increases in
cash used were due primarily to higher operating losses incurred during each
period.
38
We used approximately $4.9 million, $4.6 million, and $1.7 million of cash
for the acquisition of equipment and leasehold improvements during the years
ended March 31, 2001, 2000 and 1999, respectively. Additionally, during
fiscal year 1999, we incurred capital lease obligations of approximately
$180,000 related to acquisition of equipment. We believe material commitments
for capital expenditures may be required in a variety of areas, such as
product development programs. We have not, at this time, made commitments for
any such capital expenditure or secured additional sources to fund such
commitments.
For fiscal 2002, future minimum lease payments for which we are obligated under
capital lease agreements approximate $66,000 (including interest) while facility
and equipment operating lease commitments approximate $2.3 million.
During 1995, the Company established Meso Scale Diagnostics, LLC ("MSD"), a
joint venture company formed for the development and commercialization of
products utilizing a proprietary combination of multi-array technology
together with ORIGEN and other technologies owned by the Company. The joint
venture was initially scheduled to expire in November 2000 with extensions
through April 2001 at which time MST extended the term of the joint venture
for up to 180 days under an automatic extension provision in the joint
venture agreement. The Company, through an independent committee of its Board
of Directors, is currently negotiating with MST the terms under which the MSD
joint venture may be continued. Although we have not committed to any
specific level or term for further funding of the joint venture, we are
presently funding MSD's ongoing research, development and capital equipment
costs, as well as certain patent costs of MST, while the independent
committee is negotiating with MST the terms under which the joint venture may
be continued. A new agreement may require us to make future capital
contributions, which could be substantial. Due to the complexities of the
issues, negotiations and agreements involved there can be no assurance that a
definitive agreement to continue the joint venture will be reached.
We have a substantial amount of indebtedness, and there is a possibility that we
may be unable to generate cash or arrange financing sufficient to pay the
principal of, interest on and other amounts due with respect to indebtedness
when due, or in the event any of it is accelerated. In addition, our
indebtedness may require that we dedicate a substantial portion of our expected
cash flow from operations to service indebtedness, which would reduce the amount
of expected cash flow available for other purposes, including working capital
and capital expenditures.
We need substantial amounts of money to fund operations. In this regard, we have
ongoing discussions with third parties, including multinational corporations,
regarding various business arrangements including distribution, marketing,
research and development, joint venture and other business agreements, which
could provide for substantial up-front fees or payments. Further, we are
considering and evaluating the advisability and feasibility of a variety of
financing alternatives, including issuance of additional debt or equity
securities. There can be no assurance that we will successfully complete any of
the foregoing arrangements and access to funds could be adversely impacted by
many factors, including the results of pending litigation, the volatility of the
price of our common stock, continuing losses from operations and other factors.
The Company believes that existing capital resources, together with revenue from
product sales, royalties and contract fees will be adequate to fund operations
through fiscal year 2002. If we are unable to raise additional capital, we may
have to scale back, or even eliminate, some programs. Alternatively, we may have
to consider pursing arrangements with other companies, such as granting licenses
or entering into joint ventures, on terms and conditions that may not be
favorable to us.
We are actively engaged with Roche in settlement discussions with respect to a
resolution of the litigations between the parties on mutually agreeable terms.
There can be no assurance as to when, or if, the parties will reach resolution
of these matters, or that such resolutions will be on favorable terms and
conditions. We have no reason to believe that the existence of the Roche
litigation is having a material adverse effect on Roche's sales pursuant to the
Agreement or that a negative result for us in the Roche litigation would have a
material adverse effect on Roche's sales, although there can be no assurance
that the litigation or its outcome would not have such an effect.
39
As it now stands, Roche has the right to continue to market its Elecsys products
to central hospital laboratories and clinical reference laboratories during the
term of the Agreement unless and until we are determined to have the right to
terminate the Agreement and then determine to terminate the Agreement. If we
elect to terminate the Agreement, it would have a material adverse effect on our
royalty revenue from license sales unless and until we entered into a strategic
partnership with another company that is able to develop and commercialize
diagnostic instruments for central hospital laboratories and clinical reference
laboratories. There can be no assurance, if we decided to terminate the
Agreement that we would be able to enter into such a strategic partnership on
terms favorable to us, if at all.
We do not expect that failure to prevail in the Hitachi litigation (See Item
3-Legal Proceedings) by itself would have a material adverse effect on our
revenue or sales, because Hitachi would continue to manufacture Roche
instruments and we would continue to earn royalties in connection with Roche
sales. There can be no assurance that the Hitachi litigation would not have a
material adverse effect on our intellectual property, regardless of whether the
outcome of the litigation is favorable or not. Success by us in the Hitachi
litigation could have a material adverse effect on our royalty revenues from
sales of Elecsys products to the extent that Roche's sales of Elecsys
instruments are hindered because it needs to find a new manufacturer for its
instruments or make arrangements to have Hitachi manufacture the instruments
outside of Japan.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in interest rates do not affect interest expense incurred on the
Company's long-term borrowings because they bear interest at a fixed rate. The
principal terms of this debt are as follows:
Note payable with John Hancock Life Insurance Company: $30 million
principal, seven year, 8.5% Senior Secured Notes secured by future
royalty revenue from Roche, maturing in 2006 with quarterly interest
only payments through September 2000 and quarterly principal and
interest payments through March 2006.
Subordinated convertible debentures: $35 million principal, 5% interest
maturing January 2005 with semi-annual interest payments in cash or
equivalent value of common stock.
However, the Company runs a risk that market rates will decline and that the
interest rate will exceed those based on the then-current market rate. The
Company is currently not using interest rate derivative instruments to manage
its exposure to interest rate changes.
Interest income earned on the Company's investment portfolio is affected by
changes in the general level of interest rates. The Company has invested its
excess cash generally in securities of the U.S. Treasury, money market funds,
certificates of deposit and corporate bonds. The Company invests its excess cash
in accordance with a policy objective that seeks to ensure both liquidity and
safety of principal. The policy limits investments to certain types of
instruments issued by institutions with strong investment grade credit ratings
and places restrictions on their terms and concentrations by type and issuer.
40
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
Independent Auditors' Report 42
Consolidated Statements of Operations for the Years 43
Ended March 31, 2001, 2000 and 1999
Consolidated Balance Sheets at March 31, 2001 and 2000 44
Consolidated Statements of Cash Flows for the Years 45
Ended March 31, 2001, 2000 and 1999
Consolidated Statements of Stockholders' (Deficit) Equity for the Years 46
Ended March 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements 47
41
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF IGEN INTERNATIONAL, INC.:
We have audited the accompanying consolidated balance sheets of IGEN
International, Inc. (the "Company") as of March 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' (deficit) equity,
and cash flows for each of the three years in the period ended March 31, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
March 31, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
McLean, Virginia
May 15, 2001 (June 20, 2001 As
to Note 4 of Notes
to Consolidated
Financial Statements)
42
IGEN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31
-----------------------------------------------
2001 2000 1999
------------ ----------- -----------
REVENUES:
Product sales $ 10,913 $ 7,743 $ 4,949
Royalty income 16,157 12,218 9,439
Contract fees 4,292 700 510
------------ ---------- ----------
Total 31,362 20,661 14,898
------------ ---------- ----------
OPERATING COSTS AND EXPENSES:
Product costs 3,625 2,262 1,340
Research and development 28,497 18,665 14,271
Selling, general, and administrative 16,849 13,989 10,676
Litigation costs 13,782 6,295 2,571
------------ ---------- ----------
Total 62,753 41,211 28,858
------------ ---------- ----------
LOSS FROM OPERATIONS (31,391) (20,550) (13,960)
------------ ---------- ----------
OTHER (EXPENSE) INCOME:
Beneficial conversion feature of
debentures - (9,597) -
Interest (expense) income net (4,867) (2,258) 651
------------ ---------- ----------
Total (4,867) (11,855) 651
------------ ---------- ----------
LOSS BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE (36,258) (32,405) (13,309)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (6,995) -- --
------------ ---------- ----------
NET LOSS (43,253) (32,405) (13,309)
PREFERRED DIVIDENDS (2,052) (2,137) (1,980)
----------- --------- ---------
NET LOSS ATTRIBUTED TO
COMMON SHAREHOLDERS $ (45,305) $ (34,542) $ (15,289)
------------ ---------- ----------
------------ ---------- ----------
BASIC AND DILUTED NET LOSS PER SHARE:
Loss before cumulative effect of accounting change $ (2.40) $ (2.24) $ (1.00)
Cumulative effect of accounting change (0.44) -- --
------------ ---------- ----------
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (2.84) $ (2.24) $ (1.00)
------------ ---------- ----------
------------ ---------- ----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 15,929 15,415 15,318
------------ ---------- ----------
------------ ---------- ----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
43
IGEN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31
-------------------------------
ASSETS 2001 2000
- ------- ------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,872 $ 3,172
Short-term investments 10,217 35,314
Accounts receivable, net 5,863 5,678
Inventory 4,995 3,063
Other current assets 1,834 1,311
------------ -----------
Total current assets 27,781 48,538
------------ -----------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS 18,106 13,181
Accumulated depreciation and amortization (10,021) (6,773)
------------ -----------
Equipment and leasehold improvements, net 8,085 6,408
------------ -----------
NONCURRENT ASSETS:
Restricted cash 2,120 1,400
Other 1,147 1,452
------------ -----------
Total noncurrent assets 3,267 2,852
------------ -----------
TOTAL $ 39,133 $ 57,798
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 13,170 $ 6,838
Note payable 4,668 2,168
Deferred revenue 794 921
Obligations under capital leases 53 74
------------ ------------
Total current liabilities 18,685 10,001
------------ -----------
NONCURRENT LIABILITIES:
Note payable 23,142 27,832
Subordinated convertible debentures 28,229 26,415
Convertible preferred stock dividend payable 5,121 4,380
Deferred revenue 273 871
Obligations under capital leases 56 107
------------ -----------
Total noncurrent liabilities 56,821 59,605
------------ -----------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' DEFICIT:
Convertible preferred stock, $ 0.001 par value, 10,000,000 shares
authorized, issuable in Series: Series A, 600,000 shares designated, none
issued; Series B, 25,000 shares designated, 18,220 and 23,465 shares
issued and outstanding - liquidation value of $18,220 and $23,465 plus
accrued and unpaid dividends 1 1
Common stock: $0.001 par value, 50,000,000 shares authorized: 17,261,400
and 15,577,600 shares issued and outstanding 17 15
Additional paid-in capital 124,816 102,420
Stock notes receivable (3,710) -
Accumulated deficit (157,497) (114,244)
------------ -----------
Total stockholders' deficit (36,373) (11,808)
------------ -----------
TOTAL $ 39,133 $ 57,798
============ ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
44
IGEN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
2001 2000 1999
---------- ---------- ---------
OPERATING ACTIVITIES:
Net loss $ (43,253) $ (32,405) $ (13,309)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,955 2,063 1,313
Beneficial conversion feature of convertible debenture 6,995 9,597 -
Common stock issued in payment of interest 875 - -
Amortization of detachable warrant value 1,412 300 -
Changes in assets and liabilities:
Increase in accounts receivable (185) (2,426) (1,700)
Increase in inventory (1,932) (1,608) (20)
(Increase) decrease in other current assets (523) (536) 89
Increase (decrease) in accounts payable and accrued expenses 6,332 1,914 (228)
Decrease in deferred revenue (725) (696) (1,651)
-------------- ------------- ------------
Net cash used for operating activities (27,049) (23,797) (15,506)
-------------- ------------- ------------
INVESTING ACTIVITIES:
Expenditures for equipment and leasehold improvements (4,925) (4,550) (1,721)
Sale and maturities of short-term investments 39,965 54,139 32,706
Purchase of short-term investments (14,868) (55,799) (44,740)
-------------- ------------- ------------
Net cash provided by (used for) investing activities 20,172 (6,210) (13,755)
-------------- ------------- ------------
FINANCING ACTIVITIES:
Issuance of common stock-net 12,870 553 558
Payments on note payable (2,190) - -
Preferred stock dividend paid (1,311) (279) -
Proceeds from subordinated convertible debentures - 35,000 -
Proceeds from note payable - - 30,000
Disbursements for debt issuance costs - (1,896) (1,361)
Restricted cash (720) (800) (600)
Payments under capital lease obligations (72) (119) (118)
-------------- ------------- ------------
Net cash provided by financing activities 8,577 32,459 28,479
-------------- ------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,700 2,452 (782)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,172 720 1,502
-------------- ------------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,872 $ 3,172 $ 720
-------------- ------------- ------------
-------------- ------------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 3,599 $ 2,583 $ 61
-------------- ------------- ------------
-------------- ------------- ------------
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligations incurred for equipment and
leasehold improvements $ - $ - $ 180
-------------- ------------- ------------
-------------- ------------- ------------
Common stock issued in exchange for notes receivable $ 3,710 $ - $ -
-------------- ------------- ------------
-------------- ------------- ------------
Accrued unpaid dividends $ 741 $ 1,858 $ 1,980
-------------- ------------- ------------
-------------- ------------- ------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
45
IGEN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS)
NOTES
RECEIVABLE
FROM
CONVERTIBLE ADDITIONAL SALE OF
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED SUBSCRIBED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
------ ------ ------ ------ ------- ------- ----- -----
BALANCE at April 1, 1998 25 $ 1 15,261 $ 15 $89,376 $(68,530) $ - $20,862
Issuance of shares of common stock - - 100 - 558 - - 558
Preferred stock, dividends payable - - - - (2,521) - - (2,521)
Net loss - - - - - (13,309) - (13,309)
------ ----- ------- ------ --------- ---------- --------- ----------
BALANCE at March 31, 1999 25 1 15,361 15 87,413 (81,839) - 5,590
Issuance of shares of common stock - - 107 - 553 - - 553
Preferred stock converted (2) - 110 - - - - -
Preferred stock, dividends payable - - - - (2,137) - - (2,137)
Detachable warrant value - - - - 6,995 - - 6,995
Beneficial conversion feature of
convertible debenture - - - - 9,596 - - 9,596
Net loss - - - - - (32,405) - (32,405)
------ ----- ------- ------ --------- ---------- --------- ----------
BALANCE at March 31, 2000 23 1 15,578 15 102,420 (114,244) - (11,808)
Issuance of shares of common stock - - 1,307 2 17,453 - (3,710) 13,745
Preferred stock converted (5) - 376 - - - - -
Preferred stock, dividends payable - - - - (2,052) - - (2,052)
Beneficial conversion feature of
convertible debentures - - - - 6,995 - - 6,995
Net loss - - - - - (43,253) - (43,253)
------ ----- ------- ------ --------- ---------- --------- ----------
BALANCE at March 31, 2001 18 $ 1 17,261 $ 17 $ 124,816 $(157,497) $ (3,710) $ (36,373)
------ ----- ------- ------ --------- ---------- --------- ----------
------ ----- ------- ------ --------- ---------- --------- ----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY - IGEN International, Inc. (the Company)
develops, manufactures, and markets products that permit the detection and
measurements of biological substances utilizing its patented ORIGEN(R)
technology, which is based on electrochemiluminescence. The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries, IGEN Europe, Inc. and IGEN International, K.K. All significant
inter-company transactions and balances have been eliminated.
ESTIMATES AND RECLASSIFICATIONS - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates. Certain amounts from the prior years
have been reclassified to conform to the current year presentation.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - Include cash in banks, money
market funds, securities of the U.S. Treasury, and certificates of deposit with
original maturities of three months or less. The Company has classified its
short-term investments consisting of U.S. Government Obligations and Corporate
Debt-Securities as "available for sale". These available for sale securities are
accounted for at their fair value and unrealized gains and losses on these
securities, if any, are reported as a separate component of stockholders equity.
The Company uses the specific identification on computing realized gains and
losses on sale of investments
CONCENTRATION OF CREDIT RISK - The Company has invested its excess cash
generally in securities of the U.S. Treasury, money market funds, certificates
of deposit and corporate bonds. The Company invests its excess cash in
accordance with a policy objective that seeks to ensure both liquidity and
safety of principal. The policy limits investments to certain types of
instruments issued by institutions with strong investment grade credit ratings
and places restrictions on their terms and concentrations by type and issuer.
The Company has not experienced any losses on its investments due to credit
risk.
RESTRICTED CASH -The Company has a debt service reserve of $1.7 million at March
31, 2001 that is restricted in use and held in trust as collateral (See Note 5).
During fiscal 2001, in conjunction with the Roche litigation the Company
escrowed $400,000 related to Physician's Office Laboratory sales (See Note 12)
INVENTORY is recorded at the lower of cost or market using the first-in,
first-out method and consists of the following:
(IN THOUSANDS) 2001 2000
----------------------------------------------------------------
Finished Goods $ 1,028 $ 1,041
Work in process 1,912 1,074
Raw materials 2,055 948
--------- ---------
Total $ 4,995 $ 3,063
======== =========
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
EQUIPMENT AND LEASEHOLD IMPROVEMENTS are carried at cost. Depreciation is
computed over the estimated useful lives of the assets, generally three to five
years, using accelerated methods, except for leasehold improvements, which are
amortized on a straight-line basis over the lesser of the life of the lease or
the assets useful life. Such property consists of the following:
(IN THOUSANDS) 2001 2000
----------------------------------------------------------------
Equipment and furniture $ 14,633 $ 10,657
Leasehold improvements 3,473 2,524
----------- -----------
Total $ 18,106 $ 13,181
=========== ===========
OTHER NONCURRENT ASSETS - Include purchased product technology rights of
$340,000 which are amortized on a straight-line basis over the estimated
economic lives of such assets, ranging from five to twenty-one years.
Accumulated amortization was $277,000 and $254,000 at March 31, 2001 and 2000,
respectively. Other noncurrent assets also include Deferred Debt Issuance Costs
of $1.4 million which are amortized using the effective interest method over the
terms of the debt agreement. Accumulated amortization was $545,000 and $265,000
at March 31, 2001 and 2000, respectively.
EVALUATION OF LONG-LIVED ASSETS - The Company evaluates the potential impairment
of long-lived assets based upon projections of undiscounted cash flows whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. Management believes no impairment of these assets
exists as of March 31, 2001 and 2000.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The following disclosures of estimated
fair value were determined by management using available market information and
appropriate valuation methodologies. The fair value of the Company's financial
instruments, including cash equivalents, accounts receivable, accounts payable,
accrued expenses, notes payable, and long-term debt approximate their carrying
values. Disclosure about fair values of financial instruments is based on
pertinent information available to management as of March 31, 2001. Although
management is not aware of any factors that would significantly affect the
reasonableness of the fair value amounts, current estimates of fair value may
differ significantly from the amounts presented to them.
COMPREHENSIVE INCOME - The Company has no significant elements of comprehensive
income other than net loss.
REVENUE RECOGNITION - Product sales revenue is recorded as products are shipped
and title is transferred. Royalty income is recorded based on information
provided by licensees. Service contract revenue is deferred at the time of sale
and recognized ratably over the period of performance. Contract fees, milestone
payments and service fees in connection with research and development contracts
or commercialization agreements are recognized when they are earned in
accordance with the applicable performance requirements and contractual terms.
Amounts received in advance of performance under contracts or commercialization
agreements are recorded as deferred revenue until earned.
DEFERRED INCOME TAXES - Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
LOSS PER SHARE - The Company uses Statement of Financial Accounting Standard
(SFAS) No. 128 "Earnings per Share" for the calculation of basic and diluted
earnings per share. The Company's loss has been adjusted by dividends
accumulated on the Company's Series B Convertible Preferred Stock.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE - During the year ended March 31, 2001,
the Company adopted the provisions of Emerging Issues Task Force (EITF) Release
No. 00-27, "Application of EITF Issue No. 98-5, Accounting for Convertible
Securities and Beneficial Conversion Features". This standard established new
guidelines for convertible securities with beneficial conversion features. The
EITF requires conversion options to be calculated using the effective conversion
price based on the proceeds allocated to the convertible instruments.
Previously, the Company had calculated the beneficial conversion feature of
Subordinated Convertible Debentures, issued in January 2000, using the stated
conversion price (See Note 6). The change in methods results in a one-time,
non-cash charge that was recorded during the year ended March 31, 2001 as a
cumulative effect of accounting change. Prior year financial statements have not
been restated to reflect the change in accounting. The effect of the change on
the Company's Statement of Operations for the year ended March 31, 2001 was to
increase the net loss by $7 million ($0.44 per share). There was no effect on
loss before the cumulative effect of the accounting change for the year ended
March 31, 2001.
NEW ACCOUNTING STANDARDS - In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES (SFAS 133). SFAS 133 is effective for years beginning after June 15,
2000 and requires the recognition of derivatives at fair value as either assets
or liabilities in the Company's financial statements. The Company has adopted
SFAS 133 and determined that it did not have a material effect on the Company's
financial position or results of operations for the year ended March 31, 2001.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS (SAB 101). SAB 101
is effective for the Company for the period ended March 31, 2001 and provides
the SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The adoption of SAB 101 did not have a
material effect on the Company's financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB Opinion No. 25" (FIN 44). FIN 44 applied prospectively to
new awards in a business combination, modifications to outstanding awards, and
changes to grantee status that occur on or after July 1, 2000, except for the
provisions related to repricings and the definition of an employee which apply
to awards after December 15, 1998. Additional provisions of FIN 44 related to
modification to fixed stock option awards to add a reload feature are effective
for awards modified after January 12, 2000. The adoption of FIN 44 did not have
a material impact on the Company's financial position, results of operations or
cash flows.
2. LICENSE AND RESEARCH AGREEMENTS
In 1992, the Company entered into an agreement with Roche Diagnostics (Roche),
under which that company was granted rights to develop and market certain
clinical diagnostic systems worldwide based on the Company's ORIGEN technology.
Under the terms of the agreement, the Company has received license payments of
$50 million. This agreement also provides the Company with additional payments
for certain product development work, as well as royalties on product sales. The
Company is currently in litigation with Roche (See Note 12).
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During 1993, the Company entered into a $20 million license and stock purchase
agreement with Organon Teknika, B.V. Under this agreement, the Company sold
346,135 shares of common stock, granted a license to develop and market certain
diagnostic systems worldwide utilizing the Company's ORIGEN technology and
agreed to invest $5 million in research and development under a joint
development program. Among other things, the agreement provides for royalty
payments to the Company on product sales and for product supply arrangements
between the parties. The Company recorded royalty income of $275,800, $495,400
and $438,500 for the fiscal years ended March 31, 2001, 2000 and 1999,
respectively.
During 1990, the Company granted a license to Eisai Co., Ltd., to market in
Japan a certain clinical diagnostic system based on the Company's ORIGEN
technology. The agreement provided license fees of $8 million tied to the
achievement of product development milestones. This agreement also provides for
royalty payments to the Company on product sales. In 1997, the Company received
$2.75 million as an advance royalty payment of which approximately $1.9 million
has been recognized as revenue through March 31, 2001.
During 1995, the Company established Meso Scale Diagnostics, LLC ("MSD"), a
joint venture company formed for the development and commercialization of
products utilizing a proprietary combination of multi-array technology
together with ORIGEN and other technologies owned by the Company. Since
inception, MSD has been engaged in a research and development program based
on multi-array diagnostic techniques and the ability to control and adapt
surface chemistry reactions on a microscopic level. The MSD joint venture was
formed together with Meso Scale Technologies, LLC ("MST"), a technology-based
company which is a non-controlled, non-owned affiliated company. The Company,
through an independent committee of its Board of Directors, is currently
negotiating with MST, the terms under which the MSD joint venture may be
continued. For the years ended March 31, 2001, 2000 and 1999, the Company
made total contributions to MSD of $8.3 million, $4.5 million and $3.6
million, respectively. The Company has accounted for its investments in MSD
as research and development funding arrangements and accordingly, has
recorded all payments as research and development expense.
3. STOCKHOLDERS' (DEFICIT) EQUITY
CONVERTIBLE PREFERRED STOCK - In December 1997, the Company received net
proceeds of $23.4 million from the issuance of 25,000 shares of Series B
Convertible Preferred Stock, stated value $1,000 per share. The Series B
Convertible Preferred Stock is convertible into shares of common stock of the
Company at a rate of $13.96 per share in accordance with the terms of the
Certificate of Designation, Powers, Preferences and Rights. The Series B
Convertible Preferred Stock entitles its holders to a dividend payment of 7.75%
compounded annually on the stated value of the stock. The Company may elect to
make the dividends payable in common shares at a rate of $13.96 per share,
rather than making the dividend payment in cash. If the Company elects to pay
such dividends in shares of common stock, the Company may issue up to 760,430
shares to the holders of Series B Convertible Preferred Stock. Through March 31,
2001, 6,780 shares of Series B Convertible Preferred Stock had been converted
into 485,672 shares of common stock. The remaining 18,220 unconverted Series B
shares may be converted into 1,305,159 shares of common stock. Upon conversion,
the Company paid dividends of $1.3 million and $279,000 during the years ended
March 31, 2001 and 2000, respectively.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SHAREHOLDER RIGHTS PLAN - In 1996, the Board of Directors adopted a shareholder
rights plan and declared a dividend of one preferred share purchase right for
each outstanding share of the Company's common stock (par value $.001 per
share). Each Right entitles the registered holder to purchase from the Company
one one-hundredth of a share of Series A Junior Participating Preferred Stock,
par value $.001 per share, at a price of $65.00 per one one-hundredth of a
Preferred Share, subject to adjustment. The Rights will be exercisable only if a
person or group (other than certain affiliates of the Company) acquires 15% or
more of the common stock or announces a tender offer that would result in that
person or group acquiring 15% or more of the common stock. Once exercisable, the
Plan allows stockholders (other than the acquirer) to purchase common stock or
securities of the acquirer having a then current market value of two times the
exercise price of the Right. The Rights are redeemable for $.01 per Right
(subject to adjustment) at the option of the Board of Directors. Until a right
is exercised, the holder of the Right has no rights as a stockholder of the
Company. The Rights will expire in 2006 unless redeemed by the Company prior to
that date.
STOCK OPTION PLAN - The Company adopted the 1994 Stock Option Plan under which
1,750,000 shares of Common Stock have been reserved for issuance upon exercise
of options granted to employees or consultants and the 1994 Non-Employee
Directors Stock Option Plan under which 150,000 shares of Common Stock have been
reserved for issuance upon exercise of options granted to Non-Employee
Directors. The 1994 Stock Option Plan replaced the 1985 Stock Option Plan which
expired in February 1995 and continues to have unexercised options.
The Option Plans provide for the granting of both incentive stock options
intended to qualify as such under Section 422 of the Internal Revenue Code of
1986, as amended, and supplemental stock options that do not so qualify.
A summary of the option activity is as follows:
(In thousands) WEIGHTED AVERAGE RANGE OF EXERCISE
NUMBER OF SHARES EXERCISE PRICE PRICE
Outstanding on April 1, 1998 1,935 $ 5.52 $ 0.29 - $ 20.00
Granted - - -
Exercised (100) $ 5.58 $ 0.29 - $ 14.00
Forfeited (30) $ 14.38 $ 4.87 - $ 20.625
---------
Outstanding on March 31, 1999 1,805 $ 7.77 $ 0.29 - $ 20.625
Granted - - -
Exercised (81) $ 6.81 $ 0.29 - $ 20.625
Forfeited (72) $ 8.62 $ 4.875 - $ 20.625
---------
Outstanding on March 31, 2000 1,652 $ 7.78 $ 0.57 - $ 20.625
Granted 867 $ 14.98 $ 11.06 - $ 18.75
Exercised (241) $ 17.06 $ 0.57 - $ 20.625
Forfeited (34) $ 9.32 $ 4.87 - $ 20.00
---------
Outstanding on March 31, 2001 2,244 $ 9.40 $ 4.57 - $ 20.625
=======
(Weighted Average Remaining Contractual Life is 5.27 Years)
At March 31, 2001, there were options for 1.4 million shares exercisable under
the Plans with a Weighted Average Exercise Price of $6.12.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As permitted by Statement of Financial Accounting Standard No. 123 (SFAS 123),
ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company continues to measure
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed by Accounting Principals Board Statement No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Pro forma disclosures of the
effect on net loss and loss per share as if the fair value-based method
prescribed by SFAS 123 had been applied is provided in the table below.
2001 2000 1999
----------- ---------- -----------
Net loss (in thousands)
As reported $ (43,253) $ (32,405) $ (13,309)
Pro forma $ (46,142) $ (34,455) $ (15,359)
Basic loss per share
As reported $ (2.84) $ (2.24) $ (1.00)
Pro forma $ (3.03) $ (2.37) $ (1.13)
The fair value of the option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
2001 2000 1999
---- ---- ----
Expected dividend yield 0% 0% 0%
Expected stock price volatility 70.6-71.8% 67.7% 82.5%
Risk-free interest rate 4.9-6.1% 6.3% 5.6%
Expected option term 5 Years 5 Years 5 Years
STOCK NOTES RECEIVABLE - In connection with the exercise of stock options by
officers in July 2000, the Company granted loans in the principal amounts of
$3.7 million, maturing in July 2008. The loans are 6.62% simple interest (paid
annually), full recourse loans against all assets of the borrowers,
collateralized by the pledge of 180,000 shares of the Company's common stock
owned by the borrowers.
4. EQUITY FINANCING AGREEMENT
During February 2001, the Company entered into an agreement with Acqua
Wellington North American Equities Fund LLC (Acqua) for an equity financing
facility covering the sale of up to $60 million of common stock over the
subsequent 28 months. All shares of common stock sold and to be sold to Acqua
will be issued under a shelf-registration statement covering up to 3 million
shares of common stock. The Company will control the amount and timing of
additional stock sales that may be made under the terms of this agreement.
Each sale will be made under the shelf-registration statement at a 4.75-6.%
discount to the market at the time of the sale. There are no commissions,
warrants or other direct costs associated with these sales. Under this
facility, the Company sold 1,000, 975 shares to Acqua for $12.5 million
through March 31, 2001. From April 1, 2001 through June 20, 2001, the Company
sold an additional 1,461,546 shares to Acqua for $28.5 million.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. NOTE PAYABLE
In March 1999, the Company entered into a debt financing with John Hancock
Mutual Life Insurance Company under a Note Purchase Agreement (Note) from which
the Company received $30 million. The seven year, 8.5% Senior Secured Notes
mature in 2006 with principal and interest installments of $1.7 million due
quarterly through March 2006. The Company is required to make note principal and
interest payments of $6.9 million in each fiscal year through 2006.
Collateral for the debt is represented by royalty payments and rights of the
Company to receive monies due pursuant to the Company's license agreement with
Roche. Additional collateral is represented by a Restricted Cash account, which
had a balance of $1.7 million at March 31, 2001. Covenants within the Note
include compliance with annual and quarterly Royalty Payment Coverage Ratios,
which are tied to royalty payments and debt service.
6. SUBORDINATED CONVERTIBLE DEBENTURES
In January 2000, the Company completed a placement of $35 million principal
amount of Subordinated Convertible Debentures. The 5% debentures, if not
converted, mature January 2005 with semi-annual interest payments to be made in
cash or an equivalent value of common stock. The debentures are immediately
convertible into 1,129,032 shares of the Company's common stock, which
represents a $31 per share conversion price.
The debentures have a one-time beneficial conversion feature totaling $9.6
million measured as the difference between the conversion price of $31 per share
and the fair value of the common stock at the time of the issuance of the
debentures. This beneficial conversion feature was recorded as a one-time,
non-cash charge to interest expense in fiscal 2000. See Note 1, "Cumulative
Effect of Accounting Change" for a description of the effect of a change in
accounting in fiscal 2001 related to the convertible debentures.
As part of this financing, the Company also issued detachable warrants to
purchase 282,258 shares of common stock with an exercise price of $31 per share.
Using the Black-Scholes model and the relative fair value of the warrants and
the debentures at the time of issuance, these warrants were valued at
approximately $7 million. The detachable warrant value has been recorded as a
reduction of the face value of the convertible debentures. Costs associated with
placing the debentures totaling $1.9 million, were deferred and have been netted
against the recorded convertible debenture balance. The convertible debenture
discount consisting of the warrant value and debt issuance costs is being
amortized over the five year life of the debentures.
7. INCOME TAXES
For the years ended March 31, 2001, 2000 and 1999, the Company recorded no
federal or state income tax expense and did not owe or pay federal or state tax,
as calculated by applying statutory rates to pretax income.
As of March 31, 2001, the Company has available for income tax reporting
purposes net operating loss and general business credit carryforwards
approximating $132 million and $3.9 million, respectively. These carryforwards
expire in varying amounts through March 31, 2016. The use of the Company's net
operating loss carryforward may be significantly reduced if substantial changes
in stock ownership take place. A valuation allowance equal to the total net
deferred tax assets has been provided for 2001, 2000 and 1999, respectively.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The approximate tax effects of temporary differences that gave rise to the
Company's deferred tax assets are as follows:
(in thousands)
2001 2000
------------- -------------
Deferred tax assets:
Deferred revenue $ 412 $ 692
Net operating loss and tax credit carryfowards 54,833 39,950
Other 624 280
-------------- --------------
Total deferred tax asset 55,869 40,922
Less valuation allowance (55,869) (40,922)
-------------- --------------
Net deferred tax assets $ - $ -
-------------- --------------
-------------- --------------
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate as follows:
2001 2000 1999
---- ---- ----
Statutory federal rate (34.00%) (34.00%) (34.00%)
State income taxes, net of valuation allowance 0.00% 0.00% 0.00%
Beneficial conversion 5.51% 10.09% 0.00%
Valuation allowance 28.35% 23.75% 33.85%
Other 0.14% 0.16% 0.15%
-------- ------- -------
Effective tax rates 0.00% 0.00% 0.00%
======== ======= =======
8. EMPLOYEE SAVINGS PLAN
The Company has an Employee Savings Plan qualifying under Section 401(k) of the
Internal Revenue Code and subject to the Employee Retirement Income Security Act
of 1974, as amended. The Company made discretionary contributions of $298,900,
$240,000 and $181,000 for the years ended March 31, 2001, 2000 and 1999,
respectively.
The Company is not obligated under any other postretirement benefit plan.
9. RELATED PARTIES
Certain shareholders of the Company are also shareholders of several other
companies, which are considered affiliates of the Company for the purpose of
this disclosure. The Company has a shared services arrangement with affiliated
companies. These shared services include accounting, human resources and other
administrative services, as well as facility related costs and services. The
Company incurred total shared services costs of approximately $10.6 million,
$8.5 million and $6.8 million for the years ended March 31, 2001, 2000 and 1999,
respectively. Of these shared services costs, $1.9 million, $1.8 million, and
$1.2 million were allocated to the affiliated companies for these respective
years. Amounts due from affiliated companies under the shared services
arrangement were approximately $20,200 and $340,000 at March 31, 2001 and 2000,
respectively, which were all paid subsequent to each respective year end.
One of the Company directors is an executive officer of Organon Teknika. (See
Note 2.)
The Company has licensed certain diagnostic technologies from affiliated
companies and has licensed certain pharmaceutical technologies to affiliated
companies. No royalties have ever been earned or accrued under these license
agreements.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. COMMITMENTS
CAPITAL LEASES - The Company is obligated under capital lease agreements, for
certain equipment, furniture and building improvements. The aggregate discounted
lease payments are recorded as a liability, and the fair market value of the
related leased assets are capitalized and amortized over the assets estimated
useful lives. Total assets capitalized pursuant to such agreements were
approximately $350,000 at March 31, 2001 with accumulated depreciation totaling
approximately $285,000.
The future minimum payments (in thousands) under these lease agreements at
March 31, 2001 are as follows:
2002 $ 66
2003 60
-----------------------------------------------------------------------
Total minimum payments 126
Amount representing interest (17)
-----------
Obligations under capital leases 109
Current portion (53)
-----------
Obligations under capital leases - noncurrent $ 56
===========
OPERATING LEASES - The Company leased office, laboratory and manufacturing
facilities pursuant to operating leases expiring in 2006. Rent expense for
facility and equipment operating leases totaled approximately $1.9 million for
the year ended March 31, 2001 and $1.5 million for each of the years ended March
31, 2000 and 1999.
At March 31, 2001, the future minimum operating lease payments under these
agreements are as follows (in thousands):
2002 $ 2,299
2003 2,157
2004 2,176
2005 1,914
2006 200
Thereafter 6
------------
Total $ 8,752
============
11. SEGMENT INFORMATION
The Company operates in one business segment. It is engaged in the development
and commercialization of ORIGEN-based products for the detection and measurement
of biological substances. Domestic and foreign product sales are as follows (in
thousands):
2001 2000 1999
------------ ------------ ------------
Domestic product sales $ 6,349 $ 6,186 $ 4,523
Foreign product sales 4,564 1,557 426
------------ ------------ -------------
Total $ 10,913 $ 7,743 $ 4,949
============ ============ =============
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Except for royalty and contract revenue from Roche and Bayer Diagnostics, no
single customer accounted for more than 10% of total revenue. Revenue from Roche
totaled 50%, 54% and 61% of total revenues for the years ended March 31, 2001,
2000 and 1999, respectively, while revenue from Bayer aggregated 13% of total
revenue for the year ended March 31, 2001. Roche is the only customer with an
account receivable balance that exceeds 10% of total outstanding receivables.
The amount receivable from Roche totaled 68% of total accounts receivable at
March 31, 2001.
12. LITIGATION
ROCHE
In 1997, the Company filed a lawsuit against Roche Diagnostics GmBH (formerly
Boehringer Mannheim GmbH) in the Southern Division of the United States District
Court for the District of Maryland. The lawsuit arises out of a 1992 License and
Technology Development Agreement (the "Agreement"), under which the Company
licensed to Roche certain rights to develop and commercialize diagnostic
products based on the Company's ORIGEN technology. In its lawsuit, the Company
alleges that Roche has failed to perform certain material obligations under the
Agreement, including development and commercialization of ORIGEN technology
according to the contractual timetable; exploitation of the license to the
extent contemplated by the parties; phase out of certain non-royalty-bearing
product lines; exploitation of ORIGEN technology only within Roche's licensed
fields; proper treatment of intellectual property rights regarding ORIGEN
technology; maintenance of records essential to the computation of royalties;
and proper computation and payment of royalties. On August 18, 2000, the Company
filed an Amended Complaint in the lawsuit asserting additional breach of
contract claims and a claim for unfair competition.
In its lawsuit, the Company seeks compensatory and punitive damages as well as
injunctive and declaratory relief, including a judicial determination of its
entitlement to terminate the Agreement. The Company voluntarily has agreed not
to terminate the Agreement unless and until the Court determines its entitlement
to do so.
In April 2001, the court granted judgment in the Company's favor on one count of
the Company's Amended Complaint, ruling that Roche breached the Agreement by
taking unsubstantiated "rental surcharge" deductions against reported sales of
royalty-bearing products. On June 1, 2001 the Company filed four additional
motions for summary judgment. Those counts allege, respectively, that Roche
breached the Agreement by selling products based on the Company's technology
outside of Roche's licensed field, by failing to ensure that Roche affiliates
who market products based on the Company's technology comply fully with the
terms of the Agreement, by continuing to improve and develop a competing product
line after the launch of the products based on the Company's technology, and by
settling out of a third-party infringement action (brought by Laboratories
Serono S.A) without the Company's knowledge or consent. These pending motions
ask the court to decide these four counts without trial.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During 1998, the Court issued a preliminary injunction enjoining Roche from
marketing, selling, or distributing its Elecsys products to physicians' offices
and physicians' office laboratories, which are outside of Roche's licensed field
of use. The Court also ordered Roche to refer all physicians' offices and
physicians' office laboratory customers to the Company for future reagent supply
needs and to place all revenues derived from these unauthorized sales in escrow
pending the outcome of the litigation. In May 2000, the Company and Roche signed
an agreement under which Roche transferred to the Company all of its physician
office laboratory customers in the United States. This transfer involves
approximately 60 diagnostic systems in U.S. physicians' offices. In addition to
these systems, we continue to believe that an estimated 225 systems outside the
United States fall within the scope of the preliminary injunction and intends to
pursue the disposition of those additional systems during the course of
litigation with Roche. The Company has moved the court to rule on summary
judgment that Roche has violated its license by selling to physicians' officers
and physicians' office laboratories.
Roche had filed a counterclaim against the Company. Most of Roche's
counterclaims were dismissed by the Court. The remaining counterclaim for breach
of contract allegations relate to the relationship between the Company and its
Japanese licensee, Eisai, Co., Ltd. Roche alleges that the Company breached the
Agreement by permitting Eisai to market certain ORIGEN based products in Japan.
During fiscal 2000, the Company had received notice from Roche that Roche was
reducing royalty payments due to the Company through a "rental surcharge"
deduction that Roche contends it is entitled to take from royalty-bearing sales
revenues. Additionally, Roche has issued a "debit note" claiming that the
Company owed Roche $2.6 million in royalties previously paid to the Company as a
result of a retroactive application of the rental surcharge deduction back to
1997. The count granted the Company's motion for a judgment that Roche's
implementation of the rental surcharge deduction breached the Agreement. In May
2001, Roche notified the Company that it was canceling the debit note pursuant
to the court ruling. Roche also had modified its calculation of royalties based
on the court ruling.
This litigation against Roche may have a material adverse effect upon the
Company regardless of whether the outcome is favorable or not.
In June 1998, a subsidiary of Ares-Serono ("Serono") filed a patent infringement
claim against the Company, Roche and Organon Teknika in the U.S. District Court
in Delaware. The action claims that Serono's patent "A Method of Assay Employing
a Magnetic Electrode" is being infringed by the Company. Subsequently, F.
Hoffman LaRoche, Ltd., a member of the Roche family of companies, acquired the
patent from Serono and continued in Serono's place to assert the infringement
claim against the Company and Organon Teknika. A trial was held in Delaware on
this matter during February 2001. There has been no decision rendered by the
court. The Company does not believe it infringes the patent and intends to
continue to vigorously defend against the claim.
HITACHI
In December 1997, IGEN International K.K., a Japanese subsidiary of the
Company, filed a lawsuit in Tokyo District Court against Hitachi Ltd.
("Hitachi"). The lawsuit seeks to enjoin Hitachi from infringing IGEN K.K.'s
license registration (known in Japan as a "senyo-jisshi-ken") to prevent
Hitachi from manufacturing, using or selling the Elecsys 2010 Instrument,
which incorporates the Company's patented ORIGEN technology, in Japan.
Hitachi is the sole manufacturer for Roche of the Elecsys 2010 immunoassay
instrument. Roche is licensed to market the Elecsys 2010 worldwide, except in
Japan, to central hospital laboratories and clinical reference laboratories.
The Company's ORIGEN technology is also licensed in Japan to Eisai Company,
Ltd. The lawsuit requests injunctive relief against Hitachi.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
OTHER MATTERS
On February 6, 2001, the Company received notice that Brown Simpson Strategic
Growth Fund L.P. ("Brown Simpson") initiated a shareholder derivative lawsuit
("Complaint") for and on behalf of the shareholders of the Company in the
Circuit Court of Montgomery County, Maryland against four of the Company's
current directors, two former directors, three executive officers and the
Company as a nominal defendant. In the Complaint, Brown Simpson, stating that it
holds 100 shares of the Company's common stock, alleges breach of fiduciary
duties by the named individual defendants in connection with transactions
between the Company and other entities in which certain directors and officers
are alleged to have an interest, including its Meso Scale Diagnostics, LLC joint
venture.
On March 13, 2001, a second shareholder derivative lawsuit was filed by Laurence
Paksowitz in Circuit Court for Montgomery County, Maryland, for and on behalf of
the shareholders of the Company. The lawsuit names as defendants as all of the
company exists directors, and the Company as a nominal defendant. The
allegations and the relief sought in this complaint are substantially the same
as those set forth in the complaint filed by Brown Simpson.
The Company and the individual defendants have filed a motion to dismiss and a
motion of summary judgment in both of the shareholders derivative lawsuits. The
Circuit Court recently decided to stay both proceedings, including all
discovery, until August 2001, at which time the court will consider all pending
motions.
In 2000, the Board of Directors established an independent committee to evaluate
substantially similar issues as those raised in both shareholder complaints.
Both lawsuits seek principally the following: that the defendants hold in trust
and be required to account for and restore to the Company alleged damages that
IGEN has allegedly sustained by reason of the allegations; and relief relating
to board and management composition. The complaints do not include any claims
against the Company.
The Company believes that the claims are wholly without merit, that
meritorious defenses are available and that there is every intention to
vigorously contest and defend against these claims. Further, the Company
intends to assert all of its legal rights in this matter, including all
counterclaims. This lawsuit is not expected to have a material, adverse
effect on the Company's financial position, results of operations or cash
flows.
The Company is involved, from time to time, in various other than legal
proceedings arising in the ordinary course of business. In the opinion of
management, based on review with legal counsel, the Company does not believe
that any such legal proceedings will have a material adverse impact on its
financial position results of operations or cash flows.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
13. QUARTERLY OPERATING RESULTS (UNAUDITED)
For the years ended March 31, FIRST SECOND THIRD FOURTH
------------------------------------------------------------
(in thousands, except per share data)
2001
- ----
Revenue $ 7,574 $ 6,570 $ 8,500 $ 8,718
Loss from operations $ (4,013) $ (7,642) $ (7,807) $ (11,929)
Loss before cumulative effect of accounting change $ - $ - $ (9,047) $ -
Cumulative effect of accounting change $ - $ - $ (6,995) $ -
Net loss $ (5,131) $ (8,763) $ (16,042) $ (13,317)
Loss before cumulative effect of accounting change $ - $ - $ (0.44) $ -
Cumulative effect of accounting change $ - $ - $ (0.60) $ -
Basic and diluted loss per share $ (0.36) $ (0.59) $ (1.04) $ (0.85)
2000
- ----
Revenue $ 3,922 $ 4,822 $ 5,717 $ 6,200
Loss from operations $ (4,626) $ (5,091) $ (5,313) $ (5,520)
Net loss $ (5,073) $ (5,489) $ (5,782) $ (16,061)
Basic and diluted loss per share $ (0.36) $ (0.39) $ (0.41) $ (1.08)
59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART II
Certain information required by Part III is omitted from this Report in that the
Company will file a definitive proxy statement pursuant to Regulation 14A (the
"Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference. Only those sections of the Proxy Statement which
specifically address the items set forth herein are incorporated by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
(a) DIRECTORS. The information with respect to directors required
under this item is incorporated herein by reference to the
section captioned "Election of Directors" in the Company's
Proxy Statement with respect to the Annual Meeting of
Shareholders to be held on September 13, 2001.
(b) EXECUTIVE OFFICERS. The information with respect to executive
officers required under this item is incorporated herein by
reference to Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required under this item is incorporated herein by reference to
the sections entitled "Election of Directors -- Compensation for Directors",
"--Compensation of Executive Officers", "--Compensation Arrangements and
Employment Agreements", in the Company's Proxy Statement with respect to the
Annual Meeting of Shareholders to be held on September 13, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required under this item is incorporated herein by reference to
the section entitled "Principal Shareholders" in the Company's Proxy Statement
with respect to the Annual Meeting of Shareholders to be held on September 13,
2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required under this item is incorporated herein by reference to
the section entitled "Certain Transactions" in the Company's Proxy Statement
with respect to the Annual Meeting of Shareholders to be held on September 13,
2001.
60
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) INDEX TO FINANCIAL STATEMENTS.
The financial statements listed in the Index to Financial Statements are filed
as part of this Annual Report on Form 10-K. See ITEM 8 - Consolidated Financial
Statements and Supplementary Data.
(a) (2) INDEX TO FINANCIAL STATEMENT SCHEDULES.
All schedules are omitted because they are not applicable, or not required, or
because the required information is included in the financial statements or
notes thereto.
(a) (3) INDEX TO EXHIBITS.
The Exhibits filed as part of this Form 10-K are listed on and incorporated by
reference to the Exhibit Index immediately following the Signature page to this
Form 10K.
(b) REPORTS ON FORM 8-K:
The Company filed reports on Form 8-K under Item 5, Other
Events on January 2, 2001 February 9, 2001, February 12, 2001,
April 26, 2001, and June 20, 2001.
(c) EXHIBITS The Exhibits filed as part of this Form 10-K are listed on
and incorporated by reference to the Exhibit Index immediately
following the Signature page to this Form 10K.
(d) FINANCIAL STATEMENT SCHEDULES. All schedules are omitted because
they are not applicable, or not required, or because the required
information is included in the financial statements or notes
thereto.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
IGEN International, Inc.
June 28, 2001 By: /S/ SAMUEL J. WOHLSTADTER
-----------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ SAMUEL J. WOHLSTADTER Chief Executive Officer June 28, 2001
- ------------------------- (Principal Executive Officer); Director
Samuel J. Wohlstadter
/s/ GEORGE V. MIGAUSKY Vice President June 28, 2001
- ---------------------- and Chief Financial Officer
George V. Migausky (Principal Financial and Accounting
Officer)
/s/ RICHARD J. MASSEY President, Chief Operating Officer; June 28, 2001
- --------------------- Director
Richard J. Massey
/s/ RICHARD CASS Director June 28, 2001
- ----------------
Richard Cass
/s/ ANTHONY REES Director June 28, 2001
- ----------------
Anthony Rees
/s/ ROBERT SALSMANS Director June 28, 2001
- -------------------
Robert Salsmans
/s/ JOOP SISTERMANS Director June 28, 2001
- -------------------
Joop Sistermans
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
2.1(4) Agreement and Plan of Merger effective November 19, 1996 (by virtue of a reincorporation),
by and between IGEN, Inc., a California corporation and IGEN International, Inc. a Delaware
corporation
3.1(4) Certificate of Incorporation, as filed with the Secretary of State of the State of
Delaware on August 30, 1996.
3.2(4) Certificate of Designation of Series A Junior Participating Preferred Stock, as filed
with the Secretary of State of the State of Delaware on November 18, 1996.
3.3(8) Certificate of Designation of Series B Convertible Preferred Stock, as filed with the
Secretary of State of the State of Delaware on December 18, 1997.
3.4(4) Bylaws, as currently in effect.
4.1(7) Form of Specimen Right Certificate.
4.2(7) Rights Agreement, dated November 6, 1996, between the Company and The First National
Bank of Boston.
4.3(9) Note Purchase Agreement between the Company and the purchasers named therein dated as
of March 22, 1999.
4.4(10) Securities Purchase Agreement, dated as of January 11, 2000, among Company and the
Purchasers listed on Schedule I thereto
4.5(8) Purchase Agreement for the Series B Convertible Preferred Stock between the Company and
the purchasers named therein dated as of December 16, 1997.
10.1(11) Common Stock Purchase Agreement between IGEN International, Inc. and Acqua Wellington
North American Equities Fund, Ltd. dated as of February 9, 2001 relating to the sale of
$60 million of Common Stock.
10.2(11) Common Stock Purchase Agreement between IGEN International, Inc. and Acqua Wellington
North American Equities Fund, Ltd. dated February 9, 2001 relating to the sale of $3
million Common Stock.
10.4(3) Agreement between the Company and Eisai Co., Ltd. dated May 25, 1990 (with certain
confidential information deleted).
10.4.1(1) Supplemental Agreement between Eisai Co., Ltd. and the Company
10.5(3) License and Development Technology Agreement between the Company and Boehringer
Mannheim GmbH dated September 23, 1992 (with certain confidential information deleted).
10.5.1(2) Advanced Royalty Agreement between the Company and Boehringer Mannheim GmbH dated
January 9, 1997.
10.6(3) License Agreement between the Company and Hyperion Catalysis International ("Hyperion")
dated October 10, 1993 as amended March 15, 1990.
10.7(3) Common Stock Purchase Agreement between the Company and Organon Teknika B.V.
("Organon") dated May 19, 1993.
10.8(3) License and Technology Development agreement between the Company and Organon dated
May 19, 1993 (with certain confidential information deleted).
10.10(3) Term Sheet for Consolidation of Research Projects between the Company and Proteinix
Corporation dated December 14, 1993 (with certain confidential information deleted).
INDEX TO EXHIBITS (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.11(3) Term Sheet for consolidation of Cancer Research Projects between the Company and
Pro-Neuron, Inc. dated December 14, 1993 (with certain confidential information
deleted).
10.12(3) Form of Indemnity Agreement entered into between the Company and its directors and
officers.
10.13(3)+ 1985 Stock Option Plan, as amended, and related Form of Incentive Stock Option Grant
and Form of Nonqualified Stock Option Grant.
10.14(5)+ 1994 Stock Option Plan, as amended in 1998. Filed herewith.
10.15(5)+ 1994 Non-Employee Directors Stock Option Plan, and related Form of Incentive Stock
Option Grant.
10.16(5) Lease Agreement between the Company and W-M 16020 Limited Partnership dated October 5,
1994.
10.17(5) Agreement for Purchase and Sale of Joint Venture Interest between the Company and
Hyperion, dated December 28, 1994
10.18(6) Joint Venture Agreement, dated as of November 30, 1995, between Meso Scale Diagnostics,
LLC ("MSD"), Meso Scale Technologies, LLC ("MST") and the Company.
10.19(6) Limited Liability Company Agreement, dated as of November 30, 1995, between MSD, MST
and the Company.
10.20(6) IGEN/MSD License Agreement, dated as of November 30, 1995, between MSD and the Company.
10.21(6) Indemnification Agreement, dated as of November 30, 1995, between the Company and Jacob
Wohlstadter.
10.22(12) Letter Agreement dated November 29, 2000 between Meso Scale Technologies, LLC, Meso
Scale Diagnostics, LLC and IGEN International, Inc.
10.23+ Amended and Restated Promissory Note effective as of July 22, 2000 between Samuel J.
Wohlstadter and the Company. Filed herewith.
10.24+ Stock Pledge Agreement effective as of July 22, 2000 between Samuel J. Wohlstadter and
the Company. Filed herewith.
10.25+ Amended and Restated Promissory Note effective as of July 22, 2000 between Richard J.
Massey and the Company. Filed herewith.
10.26+ Stock Pledge Agreement effective as of July 22, 2000 between Richard J. Massey and the
Company. Filed herewith.
23.1 Consent of Deloitte & Touche LLP. Filed herewith.
+ Denotes management contract or compensatory plan or arrangement
(1) Previously filed as an exhibit to the Company's Form 10-Q for the
quarter ended September 30, 1997.
(2) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K, as amended, for the fiscal year ended March 31, 1997.
(3) Previously filed as an exhibit to the Registration Statement on
Form S-1, as amended (Registration No. 33-72992) and incorporated
by reference herein.
(4) Previously filed as an exhibit to the Company's Form 10-Q for the
quarter ended November 14, 2000.
(5) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1995.
(6) Previously filed as an exhibit to the Company's Form 10-Q for the
quarter ended December 31, 1995.
(7) Incorporated by reference to Exhibit 1.1 of the Company's Form
8-A filed December 10, 1996.
(8) Previously filed as an exhibit to the Company's Registration
Statement on Form S-3, as amended (Registration No. 333-45355).
(9) Previously filed as an exhibit to the Company's Form 10-K or the
fiscal year ended March 31, 1999.
(10) Previously filed as an exhibit to the Company's Form 8-K on
January 12, 2000.
(11) Previously filed as an exhibit to the Company's Form 8-K on
February 12, 2001
(12) Previously filed as an exhibit to the Company's Form 8-K on
December 12, 2000