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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-27488
INCYTE GENOMICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3136539
(State of other (IRS Employer
jurisdiction of Identification No.)
incorporation
or organization)
3160 Porter Drive, Palo (650) 855-0555
Alto, California 94304
(Address of principal (Registrant's telephone
executives offices) number, including area
code)
Securities registered to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Series A Participating Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of Common Stock held by non-affiliates (based
upon the closing sale price on the Nasdaq National Market on February 28, 2002)
was approximately $735.0 million.
As of February 28, 2002, there were 66,897,667 shares of Common Stock, $.001
per share par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors and Section 16(a) Beneficial Ownership Reporting
Compliance), 11, 12 and 13 of Part III incorporate by reference information
from the registrant's proxy statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the
registrant's 2002 Annual Meeting of Stockholders to be held on June 4, 2002.
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Item 1. Business
When used in this Report, the words "expects," "anticipates," "intends,"
"estimates," "plans," "believes," and similar expressions are intended to
identify forward-looking statements. These are statements that relate to future
periods and include statements as to the Company's expected net profits and
losses, expected expenditure levels and rate of growth of expenditures,
expected cash flows, the adequacy of capital resources, growth in operations,
expected revenues and sources of revenues, the ability to commercialize
products developed under collaborations and alliances, our ability to complete
the sequence of full-length genes in areas of therapeutic interest and obtain
patents on these potential drug targets, our ability to integrate companies,
operations and their products that we have acquired or will acquire, the
scheduling and timing of current and future litigation, the size of our
intellectual property portfolio and its competitive position, our investments
in our intellectual property portfolio, our strategy with regard to protecting
our proprietary technology, the success of our therapeutic discovery and
development efforts, our ability to compete and respond to rapid technological
change, our intention to develop pharmaceutical products and ability to compete
successfully, our competitive advantage as to the annotation of the human
proteome, whether we receive future royalty payments from database
collaborators, our ability to leverage our intellectual property and genomic
information to take a lead position in therapeutic small molecule, secreted
protein and antibody discoveries, the effect of government regulation, the
receipt and timing of regulatory approvals obtained on pharmaceutical products
developed by our customers utilizing our database information, our compliance
with applicable environmental laws and regulations, the adequacy of our current
facilities and our ability to locate additional facilities at reasonable rates
including a permanent facility for our East Coast operations, our exposure to
foreign currency rate fluctuations, products and services under development,
and the performance, content and utility of, and the potential cost savings
associated with the use of, our products and services. Forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, those risks discussed below, as
well as the extent to which the pharmaceutical and biotechnology industries use
genomic information in research and development, risks relating to development
of new products and services and their use by our potential customers and
collaborators, our ability to develop and commercialize drugs and other
products to improve human health, our ability to work with our collaborators to
meet the goals of our collaborations and alliances, the ability of all of our
information products whether developed alone or in collaboration with others to
aid the research endeavors of third party researchers and to conduct such
research in an early cost-effective manner, our ability to enter into new
collaborations in support of our own drug discovery and development efforts,
our ability to retain and obtain customers, the cost of accessing or acquiring
technologies or intellectual property, the effectiveness of our research and
development efforts, the impact of alternative technological advances and
competition, our ability to compete with pharmaceutical, biotechnology or other
researchers with greater financial, personnel or other resources, uncertainties
associated with changes in patent laws and developments in and expenses related
to litigation and interference proceedings; and the risks set forth below under
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors That May Affect Results." These forward-looking
statements speak only as of the date hereof. The Company expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
In the sections of this report entitled "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Factors That May Affect Results," all references to "Incyte," "we,"
"us," "our" or the "Company" mean Incyte Genomics, Inc. and its subsidiaries,
except where it is made clear that the term means only the parent company.
Incyte and LifeSeq are our registered trademarks. ZooSeq, GeneAlbum, and
BioKnowledge Library are our trademarks. We also refer to trademarks of other
corporations and organizations in this document.
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Overview
Incyte believes it has the largest commercial portfolio of issued United
States patents covering human, full-length genes, the proteins they encode and
the antibodies directed against them. We intend to leverage our leading
intellectual property and genomic information position to be a leader in
therapeutic small molecule, secreted protein and antibody discoveries. In
addition, Incyte has also developed a leading integrated platform of genomic
technologies designed to aid in the understanding of the molecular basis of
disease. These technologies primarily consist of genomic databases and
pharmaceutically relevant intellectual property licenses, which help
pharmaceutical and biotechnology researchers in their therapeutic discovery and
development efforts. These efforts include gene discovery, understanding
disease pathways, identifying new disease targets and the discovery and
correlation of gene sequence variation to disease.
During 2001, Incyte increased its focus on its therapeutic discovery and
development programs and its information products, which include licensing
certain of its intellectual property. As a result, we exited the following
activities: microarray-related products and services, genomic screening
products and services, public domain clone products and related services,
contract sequencing services, transgenics products and services and single
nucleotide polymorphism ("SNP") discovery services.
Our current products include information databases, intellectual property
licensing, and certain other products, such as full-length clones.
Our databases integrate bioinformatics software with proprietary and, when
appropriate, publicly available genomic information. In developing our
databases, we utilize high-throughput, computer-aided gene sequencing and
analysis technologies to identify and characterize the expressed genes of the
human genome, as well as certain plant and animal genomes. By searching our
proprietary genomic databases, customers can integrate and analyze genomic
information from multiple sources to discover genes that may represent the
basis for new drug targets, therapeutic proteins, antisense or diagnostic
products. Our products can be applied to gene and target discovery, functional
genomics studies, preclinical pharmacology and toxicology studies, and can aid
in understanding and analyzing the results of clinical development studies.
We provide access to our databases to pharmaceutical and biotechnology
companies and academic institutions worldwide. In addition, customers may
access select databases online via our website. As of December 31, 2001, more
than fifty companies had entered into agreements for one or more of the
products shown below to obtain access to our databases on a non-exclusive
basis. Revenues from these companies have primarily consisted of database
access fees. Our agreements also provide for future milestone payments and
royalties from the development and sale of products derived from proprietary
information contained in one or more database modules.
Our portfolio of database products and services includes:
. LifeSeq(R) Gold;
. LifeSeq(R) Foundation;
. ZooSeq(TM);
. Bioknowledge(TM) Library; and
. DrugMatrix(TM).
The databases are available using the Oracle database architecture and
operate on various workstations. Online delivery of certain database products
is available from the Company's website at www.incyte.com.
We are also generating revenue from licenses to a range of intellectual
property, owned by or exclusively licensed by Incyte, covering genomic
technologies and our gene portfolio. Revenues derived from genomic technology
licenses are primarily related to microarray fabrication and gene expression,
automation, software and sequencing technology.
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Revenues are also generated from the licensing of our extensive gene
intellectual property portfolio for use by genomic "tool" and service
providers, such as microarray product manufacturers. As part of this licensing
strategy, we anticipate we will receive milestones and/or royalties on sales of
commercial products developed by certain of our licensees.
Background
All living cells contain DNA comprised of two strands of complementary
molecules. These molecules, called poly-nucleotides, are strung together in
specific patterns to create genes. Genes provide the necessary information to
create proteins, the molecules that carry out all functions within a cell. Many
human diseases are associated with the inadequate or inappropriate presence,
production or performance of proteins. As such, pharmaceutical and
biotechnology companies often seek to develop drugs that will bind to a
targeted protein involved in disease in order to regulate, inhibit or stimulate
its biological activity. Other proteins, known as therapeutic proteins, have
direct biological activity and may be capable of treating disease. Insulin and
human growth hormone are examples of therapeutic proteins. Understanding the
role genes play in disease, and the protein targets or therapeutic proteins
that they encode, has thus become a significant area of interest and research
within the pharmaceutical and biotechnology industries.
Sequencing
DNA sequencing is a process that identifies the order in which nucleotides
are strung together in a segment of DNA. Once the sequence of a gene is known,
the function of the gene may be inferred by comparing its sequence with the
sequences of other human genes of known function, or it may be determined
through use of other technologies. Genes with similar, or homologous, sequences
are likely to have related functions. Comparing gene sequences across species
is also a useful tool for understanding gene function, as frequently it is
easier to first assess gene function in other organisms.
Single Nucleotide Polymorphism
The most common form of gene sequence variation is known as a single
nucleotide polymorphism, or SNP. A SNP is defined as a single nucleotide
difference within the same DNA region between two individuals. Genetic
variation may cause individuals to respond differently to disease or treatment
with the same drug. Few, if any, FDA-approved drugs can successfully treat
every individual diagnosed with a targeted disease. The differences in
patients' responses to a drug are believed to result in part from differences
in the sequence of nucleotides within genes.
Proteomics
Proteomics is a relatively new field of study that involves the separation,
identification, and characterization of proteins present in a biological
sample. By comparing disease and control samples, it is possible to identify
disease-specific proteins. These may have potential as targets for drug
development or as molecular markers of disease.
Chemogenomics
Chemogenomics is a field of study bridging genomics into chemistry for drug
discovery and development to understand and predict broad compound interaction
and influence biological pathways and physiology.
Gene Expression Technology
Microarray technology can be used to analyze the expression patterns in a
large number of genes simultaneously. A microarray consists of fragments of DNA
attached to a surface in a grid-like formation. When fragments of DNA from
normal and diseased cells are applied to the microarray, complementary strands
attach to each other. Microarray technology allows the fabrication of very
small grids containing probes for thousands of
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different genes. Microarrays can be used in drug discovery and development, to
evaluate the behavior of a large number of related genes in a diseased tissue
or in response to treatment with a new drug or in diagnostic testing to quickly
detect the presence of a large number of disease markers.
Products and Services
Information and Licensing Products
Sequence Databases. We provide our database collaborators with
non-exclusive database access. Database collaborators generally receive
periodic data updates as well as upgrades and additional search and analysis
tools when they become available. The fees and the period of access are
negotiated independently with each company. Fees payable by pharmaceutical and
biotechnology collaborators generally consist of access fees, option fees, and
non-exclusive or exclusive license fees corresponding to patent rights on
proprietary sequences. We also provide access to our database to third parties
who use the database to develop genomic tools, such as microarrays that require
genetic content, which they in turn sell to pharmaceutical and biotechnology
researchers. We may also receive future milestone and royalty payments from
database collaborators from the development and sale of their products derived
from our technology and database information. Using our databases, researchers
can browse not only Incyte-generated data, but also public domain information.
Customers may also access select Incyte-hosted databases online via our
website. We currently offer the following database modules:
. LifeSeq Gold Database. Incyte's flagship database, LifeSeq Gold,
currently contains more than 7.5 million sequences--5.5 million of which
are proprietary to Incyte--representing more than 90% of the human genes.
These sequences come from more than 1,500 different libraries from both
normal and diseased tissue, including many libraries biased toward rare
genes and alternate splice variants, which are variations of known genes
that can be similar to, but longer, shorter, or of the same length but of
a different sequence from the known gene. More than 1,100 of the
libraries in LifeSeq Gold are proprietary to Incyte. The database also
contains public domain genomic data that has been curated and aligned
with Incyte's gene transcript data using our proprietary informatics
processes and sequences corresponding to rare genes. LifeSeq Gold
partners also have access to more than 250,000 sequence-verified clone
reagents. LifeSeq Gold data can be accessed via a browser-based
customized analysis tool to identify genes based on function, disease
association, or sequence. LifeSeq Gold is accessible to customers in
several different configurations including installation behind the
customer's firewall or through the Internet to an Incyte-hosted secure
site.
. LifeSeq Foundation Database. Incyte's new flagship database, LifeSeq
Foundation, was built to serve the evolving needs of the
biopharmaceutical industry in the post-genomic era. It moves in silico
research down the drug discovery pipeline from target discovery toward
target validation, the current bottleneck in drug discovery. It provides
access to high quality, hand-edited, full-length genes from gene families
that historically have been the most likely drug targets. In addition,
LifeSeq Foundation allows the researcher to understand quickly the
function and biology of a gene using proprietary SNPs, RNA expression,
and a hand-curated summary of the published literature from our
acquisition of Proteome, Inc. in December 2000. In addition, proprietary
bioinformatics has allowed Incyte to identify thousands of putative
secreted genes that have the potential to be novel protein therapeutics,
which information is also included in LifeSeq Foundation. All of this
data is anchored to the human genome to give a comprehensive, stable
reference to the transcribed human genome. LifeSeq Foundation enables a
rapid transition from the database to lab experiments with access to
thousands of full-length clones. Moreover, integration with proprietary
rat and mouse homologs from the ZooSeq database allows detailed
functional experiments in disease models.
. ZooSeq Database. The ZooSeq multi-species gene sequence database
provides genetic data for animal model organisms used in drug discovery,
drug development and testing, and gene discovery. With rat, mouse,
monkey, and dog animal models currently available, ZooSeq enables
individual and cross-species comparison of genes. This information can
help uncover previously unknown homologs of human disease-relevant genes,
improve understanding of disease pathways, and provide a basis for
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optimizing drug selection before moving on to expensive human clinical
trials. ZooSeq data is accessed from a browser-based interface that
provides point-and-click control of analysis tools included with the
database.
. DrugMatrix Database. DrugMatrix is the result of a collaboration between
Incyte and Iconix, together with development partner MDS Pharma Services,
Inc. DrugMatrix is a comprehensive research tool in the emerging field of
chemogenomics that is designed to enable researchers to select quality
leads and drug candidates at an early stage of drug discovery and
development, which can lead to cost savings. DrugMatrix brings together
the previously isolated fields of chemistry, genomics, toxicology and
pharmacology in a single environment, providing a research tool that
enables pharmaceutical researchers to ask questions in new ways to help
predict the potential success, failure or positioning of therapeutic
programs. DrugMatrix integrates approved pharmaceuticals and failed drug
molecules by profiling them in tens of thousands of standardized gene
expression microarray and molecular pharmacology experiments. In
addition, it is supported with scientific literature annotation on known
drug pharmacology, toxicology, and pathway interactions. The chemogenomic
content of DrugMatrix utilizes a 3-tier database architecture, with a
web-based user interface and bio-and chemoinformatics tools, to
facilitate access and data mining, to aid medicinal chemists,
pharmacologists and toxicologists in accelerating drug discovery through
drug lead optimization and reduction of drug candidate failure in
clinical trials.
. BioKnowledge Library. The BioKnowledge Library is a collection of
databases focused on the compilation of available protein information.
Using proprietary processes, Incyte sifts relevant biological literature
for curation into our products. The data are then presented in a simple
format that offers flexibility and time savings over traditional library
research. Access to thousands of independent research results offers the
advantage of reduced library research time and potentially faster
progression through discovery pathways.
We intend to use the anticipated cash generated from our information product
line to help fund the cost of our therapeutic discovery and development
efforts. Additionally, we anticipate that our information product line assets,
in particular our intellectual property, will be used to help drive
co-development and collaborative opportunities within our therapeutic discovery
and development efforts.
As of March 1, 2002, we have hired 23 personnel in connection with our
therapeutic discovery and development operations in our East Coast facility,
and we anticipate that such number will grow throughout the remainder of 2002
as we continue to build these operations.
Therapeutic Discovery and Development
Since our inception, we have made substantial investments in research and
technology development. This investment in research and development includes an
active program to enter into relationships with other technology-driven
companies and, when appropriate, acquire licenses to technologies for
evaluation or use in the production and analysis process. Not all of these
technologies or relationships survive the evaluation process. We have entered
into a number of research and development relationships with companies and
research institutions.
We have increased our investments in identifying and validating drug
targets. We employ sophisticated data mining and functional biology tools along
with our sequence, gene expression and SNP data included in our databases to
identify therapeutic targets. Our target validation efforts are supported by
our use of technologies that include biological assays and readout, gene
manipulation by antisense, retroviral transfection, and in vivo gene knockouts.
Our in-house and collaborative efforts are focused on high-priority therapeutic
areas such as cancer, cardiovascular disease and related metabolic disorders,
inflammatory disease, neurodegenerative disease, and osteoporosis.
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Discontinued Custom Genomics Products and Services
We recognized revenue in 2001 from the following products and services that
we no longer offer:
Expression
. LifeExpress Database. The LifeExpress database provided RNA and protein
expression data. LifeExpress Target provided comprehensive
disease-focused expression data for a number of key therapeutic areas,
including cancer, cardiovascular, central nervous system, immunology and
inflammation, and metabolic diseases (obesity, osteoporosis, and type 2
diabetes). Researchers used LifeExpress Target to prioritize targets
earlier in the discovery cycle; discover genes and regulatory pathways
involved in disease; and more quickly identify disease-associated genes
by tissue type, cell line, or animal model. The protein expression module
was developed in cooperation with our collaborator, Oxford GlycoSciences
Plc. The data was accessed via our Java-based software interface that
provided a variety of analysis tools.
. GEM microarrays. Our GEM microarrays (also known as LifeArrays) provided
researchers with a cost-effective way to perform detailed analysis of
differential gene expression in normal and diseased or treated cells. We
offered a variety of GEM microarrays that contained DNA fragments, or
clones, from both human and animal genomes.
Genetics
. Custom SNP discovery service. We provided customers with high-throughput
SNP discovery services. Incyte used its proprietary fSSCP screening
method on the customer's genes of interest to detect 95 percent of the
polymorphisms that had a frequency greater than or equal to 3.1 percent.
. IsSNPs. Our In silico SNP data was mined from the LifeSeq Gold database.
Researchers used data derived from Incyte's genetics programs to identify
and characterize optimal therapeutic targets, gain a better understanding
of the relationship between disease phenotypes and genetic variation,
enable faster clinical proof of principle, and identify genetic markers
of disease progression.
. Custom Sequencing. Our custom sequencing services leveraged several of
our core strengths, including library screening, library construction,
high-throughput cDNA sequencing and bioinformatics.
. Bioreagents and Other Services. We offered a variety of DNA reagents and
other services, including clones from our extensive libraries, GEM
microarray services, gene screening, clone resources, and robotics.
Database Production
We engage in the high-throughput automated sequencing of genes derived from
tissue samples followed by the computer-aided analysis of each gene sequence to
identify homologies to genes of known function in order to predict the
biological function of newly identified sequences. The derivation of
information in our databases involves the following steps:
. Tissue Access. We obtain tissue samples representing most major organs
in the human body from various academic and commercial sources. Where
possible, we obtain information as to the medical history and pathology
of the tissue. The genetic material is isolated from the tissue and
prepared for analysis. The results of this analysis, as well as the
corresponding pathology and medical history information, are incorporated
into the databases.
. High-Throughput cDNA Sequencing. We utilize specialized teams in an
integrated approach to our high-throughput sequencing and analysis
effort. Gene sequencing is performed using multiple work shifts to
increase daily throughput. One team develops and prepares cDNA libraries
from biological sources of interest, a second team prepares the cDNAs
using robotic workstations to perform key steps that result in purified
cDNAs for sequencing, and a third team operates the automated DNA
sequencers.
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. Bioinformatics. Sequence information generated from our high-throughput
sequencing operations is uploaded to a network of servers. Our
proprietary bioinformatic software then assembles and edits the sequence
information. The sequence of each cDNA is compared via automated,
computerized algorithms to the sequences of known genes in our databases
and public domain databases to identify whether the cDNA codes for a
known protein or is homologous to a known gene. Each sequence is
annotated as to its cell or tissue source, its relative abundance and
whether it is homologous to a known gene with known function. The
bioinformatics staff monitors this computerized analysis and may perform
additional analyses on sequence information. The finished data are then
added to our proprietary sequence databases.
Patents and Proprietary Technology
Our ability to license proprietary genes may be dependent upon our ability
to obtain patents, protect trade secrets and operate without infringing upon
the proprietary rights of others. We rely on patent, trade secret and copyright
law, as well as nondisclosure and other contractual arrangements to protect our
intellectual property. Other pharmaceutical, biotechnology and
biopharmaceutical companies, as well as academic and other institutions, have
filed applications, may have been issued patents or may obtain additional
patents and proprietary rights, relating to products or processes competitive
to our products or processes. Patent applications filed by competitors may
claim some of the same gene sequences or partial gene sequences as those
claimed in patent applications that we file. We are aware that some entities
have made or have announced their intention to make gene sequences publicly
available. Publication of sequence information may adversely affect our ability
to obtain patent protection for sequences that have been made publicly
available.
Our current policy is to file patent applications on what we believe to be
novel full-length gene sequences obtained through our high-throughput
computer-aided gene sequencing and characterization efforts. We have filed U.S.
patent applications in which we have claimed certain partial gene sequences and
have filed patent applications in the U.S. and applications under the Patent
Cooperation Treaty ("PCT"), designating countries in Europe as well as Canada
and Japan, claiming full-length gene sequences associated with cells and
tissues that are the subject of our high-throughput gene sequencing program. To
date, we hold over 500 U.S. patents with respect to human full-length gene
sequences and one issued U.S. patent claiming multiple partial gene sequences.
Currently, we have no registered copyrights for our database-related software.
In 1996, the United States Patent and Trademark Office issued guidelines
limiting the number of gene sequences that can be examined in a single patent
application. Many of our patent applications containing multiple sequences or
partial sequences contain more sequences than the maximum number allowed under
the new guidelines. We are reviewing our options, and due to the resources
needed to comply with the guidelines, we may decide to abandon patent
applications for some of our partial gene sequences, or may not pursue all
sequences in every patent application.
In 2000, the U.S. Patent and Trademark Office issued new guidelines under
which its examiners are to determine whether gene patent applications comply
with the U.S. Patent Law's utility requirements. We believe that our gene
patent applications comply with these legal requirements, but uncertainty
remains regarding the application of these requirements to our gene patent
applications.
We have filed patent applications for patentable SNPs identified with our
LifeSeq Gold database, through our human genome sequencing program, and through
the use of our SNP discovery efforts. These patents will claim rights to SNPs
for diagnostic and genotyping purposes. As information relating to particular
SNPs is developed, we plan to seek additional rights in those SNPs that are
associated with specific diseases, functions or drug responses. The scope of
patent protection for gene sequences, including SNPs, is highly uncertain,
involves complex legal and factual questions and has recently been the subject
of much controversy. No clear policy has emerged with respect to the breadth of
claims allowable for SNPs. There is significant uncertainty as to what, if any,
claims will be allowed on SNPs discovered through high throughput discovery
programs.
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As the biotechnology industry expands, more patents are issued and other
companies engage in the business of discovering genes and other genomic-related
businesses, the risk increases that our potential products, and the processes
used to develop these products, may be subject to claims that they infringe the
patents of others. Therefore, our operations may require us to obtain licenses
under any of these patents or proprietary rights, and these licenses may not be
made available on terms acceptable to us. Litigation may be necessary to defend
against or assert claims of infringement, to enforce patents issued to us, to
protect trade secrets or know-how owned by us, or to determine the scope and
validity of the proprietary rights of others. We believe that some of our
patent applications cover genes that may also be claimed in patent applications
filed by other parties. Interference proceedings may be necessary to establish
which party was the first to invent a particular sequence for the purpose of
patent protection. Several interferences involving our patent applications
covering full length genes have been declared. Litigation or interference
proceedings, regardless of the outcome, could result in substantial costs to
us, and divert our efforts, and may have a material adverse effect on our
business, operating results and financial condition. In addition, there can be
no assurance that such proceedings or litigation would be resolved in our favor.
In January and September 1998, Affymetrix, Inc. filed lawsuits in the United
States District Court for the District of Delaware alleging infringement of
three U.S. patents by the Company. In December 2001, Affymetrix and the Company
agreed to settle the infringement claims. This settlement does not include
Incyte's appeal before the United States District Court for the Northern
District of California seeking de novo review of the Board of Patent Appeals
and Interferences' decision relating to patent applications licensed by Incyte
from Stanford University.
In October 2001, Invitrogen Corporation filed an action against the Company
in the United States District Court for the District of Delaware, alleging
infringement of three patents. The complaint seeks unspecified money damages
and injunctive relief. The Company believes that it has meritorious defenses
and intends to defend this suit vigorously. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors That May
Affect Results."
Collaborators
As of December 31, 2001, Incyte had entered into agreements for information
products, which include licensing a portion of its intellectual property, with
over fifty pharmaceutical, biotechnology and agricultural companies and
academic institutions. Over 79% and 75% of revenues in 2001 and 2000,
respectively, were derived from such agreements. In general, collaborators
agree to pay, during the term of the agreement, fees to receive non-exclusive
access to selected modules of our databases and/or licenses of certain of our
intellectual property. In addition, if a collaborator develops certain products
utilizing our technology and proprietary database information, royalty payments
could potentially be received by Incyte.
One collaborator contributed 11% of total revenues in 2000 but no
collaborator accounted for 10% or more of total revenues in 2001 or 1999.
For the year ended December 31, 2001, we recorded revenue from collaborators
throughout the United States and in Austria, Canada, France, Germany, India,
Israel, Japan, Scandinavia, Switzerland and the United Kingdom. Export revenue
for the years ended December 31, 2001, 2000 and 1999 was $49.7 million,
$48.2 million and $43.7 million, respectively.
Competition
There is a finite number of genes and gene transcripts in the human genome,
and competitors may seek to identify, sequence and determine in the shortest
time possible the biological function of a large number of genes in order to
obtain a proprietary position with respect to the largest number of new genes
discovered. A number of companies, institutions, and government-financed
entities are engaged in gene sequencing, gene discovery, gene
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expression analysis, positional cloning and other genomic service businesses.
Many of these companies, institutions and entities have greater financial and
human resources than we do. In addition, we are aware that other companies have
developed databases containing gene sequence, gene expression, genetic
variation or other genomic information and are marketing, or have announced
their intention to market, their data to pharmaceutical companies. We expect
that additional competitors may attempt to establish databases containing this
information in the future.
In addition, competitors may discover and establish patent positions with
respect to the gene sequences and polymorphisms in our databases. Further, some
entities engaged in or with stated intentions to engage in gene sequencing have
made or have stated their intention to make the results of their sequencing
efforts publicly available. These patent positions, or the public availability
of gene sequences comprising substantial portions of the human genome or on
microbial or plant genes, could:
. decrease the potential value of our databases to our subscribers; and
. adversely affect our ability to realize royalties or other revenue from
commercialization of products based upon such genetic information.
We are aware that a number of companies are pursuing alternative methods for
generating gene expression information, including some that have developed and
are developing microarray technologies. These advanced gene expression
technologies, if developed, may not be commercially available for our purchase
or license on reasonable terms, if at all.
We believe that the following are important aspects of the competitive
position of our database products:
. the features and ease-of-use of our database software;
. our experience in high-throughput gene sequencing;
. the cumulative size of our databases;
. the quality of the data, including the annotations in our databases;
. our computing infrastructure; and
. our employees and their experience with bioinformatics and database
software.
Our therapeutic discovery and development efforts compete with those of many
companies in both the biotechnology and pharmaceutical sectors that are trying
to develop new drugs. These competitors include many that have greater
financial resources than us. It is also possible that our therapeutic discovery
and development efforts will require access to intellectual property or
technologies that are not available to us, or are only available on terms that
we consider unreasonable.
We believe the following are important aspects of the competitive position
of our therapeutic discovery and development efforts:
. our leading intellectual property portfolio;
. the experience of our senior management in managing the discovery and
development of drugs; and
. our relationships with pharmaceuticals and biotechnology collaborators.
The genomics industry is characterized by extensive research efforts and
rapid technological progress. New developments are expected to continue and
there can be no assurance that discoveries by others will not render our
services and potential products noncompetitive. In addition, significant levels
of research in biotechnology and medicine occur in universities and other
non-profit research institutions. These entities have become increasingly
active in seeking patent protection and licensing revenues for their research
results. These entities
9
also compete with us in recruiting talented scientists. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Factors That May Affect Results--Our industry is intensely
competitive, and if we do not compete effectively, our revenues may decline and
losses may increase."
Government Regulation
Regulation by governmental authorities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products that may be developed by us, our collaborators or our
licensees. Our agreements with our LifeSeq Gold database subscribers provide
for the payment to us of royalties on any pharmaceutical products developed by
those subscribers derived from proprietary information obtained from our
genomic databases. Thus, the receipt and timing of regulatory approvals for the
marketing of such products may have a significant effect on our future revenues.
Any products that we or our collaborators develop will require regulatory
clearances prior to clinical trials and additional regulatory clearances prior
to commercialization. We believe that the potential products developed by us or
our collaborators will be regulated either as biological products or as new
drugs. New drugs and biologics are subject to rigorous preclinical and clinical
testing and other approval procedures by the United States Food and Drug
Administration under the Federal Food, Drug, and Cosmetic Act in the United
States. In addition to being subject to certain provisions of that Act,
biologics are also regulated under the Public Health Service Act. Both statutes
and their corresponding regulations govern, among other things, the testing,
manufacturing, distribution, safety, efficacy, labeling, storage, record
keeping, advertising and other promotional practices involving biologics or new
drugs.
FDA approval or other clearances must be obtained before clinical testing,
and before manufacturing and marketing, of biologics and drugs. FDA approval is
required prior to marketing a pharmaceutical product in the United States. To
obtain this approval the FDA requires clinical trials to demonstrate the
safety, efficacy, and potency of the product candidates. Clinical trials are
the means by which experimental drugs or treatments are tested in humans. New
therapies typically advance from laboratory, research, testing through animal,
preclinical, testing and finally through several phases of clinical, human
testing. Upon successful completion of clinical trials, approval to market the
therapy for a particular patient population may be requested from the FDA in
the United States and/or its counterparts in other countries.
Obtaining FDA approval has historically been a costly and time-consuming
process. We may not obtain FDA approvals in a timely manner, or at all. We and
our collaborators may encounter significant delays or excessive costs in our
efforts to secure necessary approvals or licenses. Generally, in order to gain
FDA pre-market approval, a developer first must conduct laboratory studies and
animal-model studies to gain preliminary information on an agent's efficacy and
to identify any safety problems. The results of these studies are submitted as
a part of an investigational new drug application, which the FDA must review
before human trials of an investigational drug can start. The investigational
new drug application includes a detailed description of the initial animal
studies and human investigation to be undertaken.
Laboratory studies can take several years to complete, and there is no
assurance that an investigational new drug application based on such studies
will ever become effective so as to permit human testing to begin. A 30-day
waiting period after the receipt of each investigational new drug application
is required by the FDA prior to the commencement of human testing. If the FDA
has not commented on or questioned the investigational new drug application
within this 30-day period, human studies may begin. If the FDA has comments or
questions, it places the studies on clinical hold and the questions must be
answered to the satisfaction of the FDA before human testing may begin.
In order to commercialize pharmaceutical products, we or one of our
collaborators must sponsor and file an investigational new drug application and
be responsible for initiating and overseeing the human studies to demonstrate
the safety and efficacy and, for a biologic product, the potency, which are
necessary to obtain FDA approval of any such products. For our or our
collaborator-sponsored investigational new drug applications,
10
we or our collaborator will be required to select qualified investigators
(usually physicians within medical institutions) to supervise the
administration of the products, and ensure that the investigations are
conducted and monitored in accordance with FDA regulations and the general
investigational plan and protocols contained in the investigational new drug
application. Human clinical trials are normally conducted in three phases,
although the phases may overlap. Phase I trials are concerned primarily with
the safety and preliminary activity of the drug, involve fewer than 100
subjects and may take from six months to over a year to complete. Phase II
trials normally involve a few hundred patients, but in some cases may involve
fewer. Phase II trials are designed primarily to demonstrate effectiveness in
treating or diagnosing the disease or condition for which the drug is intended,
although short-term side effects and risks in people whose health is impaired
may also be examined. Phase III trials are expanded trials with larger numbers
of patients which are intended to gather the additional information for proper
dosage and labeling of the drug and demonstrate its overall safety and
effectiveness. All three phases generally take three to five years, but may
take longer, to complete. Regulations promulgated by the FDA may shorten the
time periods and reduce the number of patients required to be tested in the
case of certain life-threatening diseases which lack available alternative
treatments.
The FDA receives reports on the progress of each phase of testing, and it
may require the modification, suspension, or termination of trials if an
unwarranted risk is presented to patients. If the FDA imposes a clinical hold,
trials may not recommence without FDA authorization and then only under terms
authorized by the FDA. The investigational new drug application process can
thus result in substantial delay and expense. Inadvertent regulatory
noncompliance by the investigator, or intentional investigator misconduct, can
jeopardize the usefulness of study results and, in some circumstances, require
the company to repeat a study.
After completion of trials of a new drug or biologic product, FDA marketing
approval must be obtained. If the product is regulated as a biologic, the
Center for Biological Evaluation and Research will require the submission and
approval, depending on the type of biologic, of either a biologic license
application or, in some cases, a product license application and an
establishment license application before commercial marketing of the biologic.
If the product is classified as a new drug, we must file a new drug application
with the Center for Drug Evaluation and Research and receive approval before
commercial marketing of the drug. The new drug application or biologic license
applications must include results of product development, laboratory, animal
and human studies, and manufacturing information. The testing and approval
processes require substantial time and effort and there can be no assurance
that the FDA will accept the new drug application or biologic license
applications for filing and, even if filed, that any approval will be granted
on a timely basis, if at all. In the past, new drug applications and biologic
license applications submitted to the FDA have taken, on average, one to two
years to receive approval after submission of all test data. If questions arise
during the FDA review process, approval can take more than two years.
Notwithstanding the submission of relevant data, the FDA may ultimately decide
that the new drug application or biologic license application does not satisfy
its regulatory criteria for approval and require additional studies. In
addition, the FDA may condition marketing approval on the conduct or specific
post-marketing studies to further evaluate safety and effectiveness. Rigorous
and extensive FDA regulation of pharmaceutical products continues after
approval, particularly with respect to compliance with current good
manufacturing practices, or cGMPs, reporting of adverse effects, advertising,
promotion and marketing. Discovery of previously unknown problems or failure to
comply with the applicable regulatory requirements may result in restrictions
on the marketing of a product or withdrawal of the product from the market as
well as possible civil or criminal sanctions.
We are also subject to various federal, state and local laws and regulations
relating to safe working conditions, laboratory and manufacturing practices,
the experimental use of animals, and the use and disposal of hazardous or
potentially hazardous substances, including radioactive compounds and
infectious disease agents, that may be used in connection with our research. If
our operations result in contamination of the environment or expose individuals
to hazardous substances, we could be liable for damages and governmental fines.
We believe that we are in material compliance with applicable environmental
laws and that our continued compliance therewith will not have a material
adverse effect on our business. We cannot predict, however, how changes in
these laws and regulations may affect our future operations.
11
The process of obtaining these approvals and the subsequent compliance with
appropriate federal and foreign statutes and regulations require the
expenditure of substantial resources over a significant period of time, and
there can be no assurance that any approvals will be granted on a timely basis,
if at all. Any such delay in obtaining or failure to obtain such approvals
could adversely affect our ability to earn milestone payments, royalties or
other license-based fees. Additional governmental regulations that might arise
from future legislation or administrative action cannot be predicted, and those
regulations could delay or otherwise affect adversely regulatory approval of
potential pharmaceutical products.
Corporate History
Incyte was incorporated in Delaware in April 1991 under the name Incyte
Pharmaceuticals, Inc. In June 2000, our stockholders approved an amendment to
the Company's Certificate of Incorporation to change the Company's name to
Incyte Genomics, Inc.
Human Resources
As of December 31, 2001, we had 585 employees, including 137 in sequencing
and reagent production, 71 in bioinformatics, 114 in research and development
(including patent legal), and 263 in marketing, sales, business development,
finance, operations support and administrative positions. None of our employees
are covered by collective bargaining agreements, and management considers
relations with our employees to be good. Our future success will depend in part
on the continued service of our key scientific, bioinformatics and management
personnel and our ability to identify, hire and retain qualified personnel,
including personnel in the marketing, sales and therapeutic discovery and
development areas. There is intense competition for qualified personnel in the
areas of our activities, especially with respect to experienced scientific and
bioinformatics personnel, and there can be no assurance that we will be able to
continue to attract and retain such personnel necessary for the development of
our business. Failure to attract and retain key personnel could have a material
adverse effect on our business, financial condition and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors that May Affect Results--If we are unable to manage
effectively our growth, our operations, and ability to support our customers
could be affected, which could harm our revenues" and "--We depend on key
employees in a competitive market for skilled personnel, and the loss of the
services of any of our key employees would affect our ability to achieve our
objectives" and "Competition for scientific and managerial personnel in our
industry is intense; we will not be able to sustain our operations if we are
not able to attract and retain key personnel."
Research and Development
Since our inception, we have made substantial investments in research and
technology development. During 2001, 2000 and 1999, we incurred research and
development expenditures of $213.3 million, $192.6 million and $146.8 million,
respectively.
Item 2. Properties
Incyte's headquarters are in Palo Alto, California, where its main research
laboratories, sequencing facility, bioinformatics and administrative facilities
are located. Incyte also has offices in Beverly, Massachusetts; Cambridge,
England; and Tokyo, Japan. We also had lease and sublease agreements at
December 31, 2001 that include facilities that were closed as a part of the
restructuring in Fremont, California; St. Louis, Missouri; and Cambridge,
England. As of December 31, 2001, Incyte had multiple sublease and lease
agreements covering approximately 409,000 square feet that expire on various
dates ranging from November 2002 to March 2011. In March 2002, we entered into
a lease agreement for our first East Coast therapeutic discovery and
development operation in Newark, Delaware. Incyte believes that its current
facilities, along with the East Coast lease signed in 2002, are adequate to
support its current and anticipated near-term operations and believes that it
can obtain additional space it may need in the future on commercially
reasonable terms.
12
Item 3. Legal Proceedings
Affymetrix
On December 21, 2001, Incyte agreed to settle the following existing patent
infringement litigation with Affymetrix, Inc.: Affymetrix, Inc. v. Synteni,
Inc. and Incyte Pharmaceuticals, Inc., Case Nos. C 99-21164 JF and C 99-21165
JF (N.D. Cal.); Incyte Genomics, Inc. v. Affymetrix, Inc., Case No. C 01-20065
JF (N.D. Cal.); and the Incyte Opposition to Affymetrix's European Patent No.
EP 0 619 321. The first lawsuit involved several of Affymetrix's
microarray-related patents (U.S. Patent Nos. 5,445,934, 5,744,305 and
5,800,992). The second lawsuit involved Incyte's RNA amplification patents
(U.S. Patent Nos. 5,716,785 and 5,891,636) and two additional
microarray-related patents held by Affymetrix (U.S. Patent Nos. 5,871,928 and
6,040,193). As a part of the settlement, the companies have agreed to certain
non-exclusive, royalty-bearing licenses and an internal use license under their
respective intellectual property portfolios. This settlement does not include
Incyte's appeal before the United States District Court for the Northern
District of California seeking de novo review of the Board of Patent Appeals
and Interferences' decision relating to patent applications licensed by Incyte
from Stanford University. There can be no assurances as to the outcome of that
appeal.
Invitrogen
On October 17, 2001, Invitrogen Corporation filed an action against the
Company in the United States District Court for the District of Delaware,
alleging infringement of three patents (U.S. patent number 5,244,797, U.S.
patent number 5,668,005, and U.S. patent number 6,063,608) that relate to the
use of reverse transcriptase with no RNase H activity in preparing
complimentary DNA from RNA. The complaint seeks unspecified money damages and
injunctive relief.
On November 21, 2001, the Company filed its answer to the complaint filed by
Invitrogen in the United States District Court for the District of Delaware. In
addition to its answers to Invitrogen's patent infringement claims, the Company
asserted seven counterclaims against Invitrogen seeking declaratory relief with
respect to the patents at issue, implied license, estoppel, laches, and patent
misuse. The Company also seeks its fees, costs, and expenses. Invitrogen filed
its answer to the Company's counterclaims on January 9, 2002.
Simultaneously with the filing of its answer, the Company filed a motion to
transfer the action from the United States District Court for the District of
Delaware to the United States District Court for the District of Maryland,
where Invitrogen Corporation is currently a party to three infringement actions
alleging infringement of the same patents-in-suit. The issue of transfer has
been fully briefed and submitted to the court for decision.
In addition, on November 21, 2001, the Company filed a complaint against
Invitrogen, as amended on December 21, 2001 and March 7, 2002, in the United
States District Court for the Southern District of California alleging
infringement of fourteen of the Company's patents. Nine of the asserted patents
(U.S. patent numbers 5,633,149, 5,637,462, 5,817,497, 5,840,535, 5,919,686,
5,925,542, 5,962,263, 5,789,198 and 6,001,598) are gene patents. Three of the
patents (U.S. patent numbers 5,716,785, 5,891,636, and 6,291,170) relate to
RNA amplification and gene expression. Two of the patents (U.S. patent numbers
5,807,522 and 6,110,426) relate to methods of fabricating microarrays of
biological samples. The complaint seeks a permanent injunction enjoining
Invitrogen from further infringement of the patents at issue, damages for
Invitrogen's conduct, as well as the Company's fees, costs, and interest. The
Company further seeks triple damages from the infringement claim based on
Invitrogen's willful infringement of the Company's patents. Invitrogen's
response to the Company's Second Amended Complaint is due in April 2002.
The Company believes that it has meritorious defenses and intends to defend
the suit and potential counterclaims brought by Invitrogen vigorously. However,
the Company's defenses may be unsuccessful. At this time, the Company cannot
reasonably estimate the possible range of any loss resulting from this suit due
to uncertainty regarding the ultimate outcome. Regardless of the outcome, the
Invitrogen litigation is expected to result in substantial costs to the
Company. Further, there can be no assurance that any license that may be
13
required as a result of this litigation on the outcome thereof would be made
available on commercially acceptable terms, if at all.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders during the
fourth quarter of 2001.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock, par value $.001 ("Common Stock"), is traded on
the Nasdaq National Market ("Nasdaq") under the symbol "INCY." The following
table sets forth, for the periods indicated, the range of high and low sales
prices for the Common Stock on Nasdaq as reported in its consolidated
transaction reporting system.
High Low
------- ------
2000
First Quarter....................... $144.53 $32.63
Second Quarter...................... 60.25 21.69
Third Quarter....................... 55.56 34.00
Fourth Quarter...................... 43.00 22.06
2001
First Quarter....................... 30.63 11.44
Second Quarter...................... 25.07 12.61
Third Quarter....................... 22.56 10.76
Fourth Quarter...................... 21.22 12.68
As of December 31, 2001, the Common Stock was held by 415 stockholders of
record. The Company has never declared or paid dividends on its capital stock
and does not anticipate paying any dividends in the foreseeable future. The
above high and low sales prices for the Common Stock have been adjusted to
reflect the two-for-one stock split effected in the form of a stock dividend in
August 2000.
14
Item 6. Selected Consolidated Financial Data
Selected Annual Consolidated Financial Data
(in thousands, except per share data)
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related Notes included in Item 8 of
this Report.
Year Ended December 31,
-------------------------------------------------
2001 2000 1999 1998 1997
--------- -------- -------- -------- --------
Consolidated Statement of Operations Data:
Revenues............................................................. $ 219,263 $194,167 $156,962 $134,811 $ 89,996
Costs and expenses:
Research and development......................................... 213,336 192,556 146,833 97,192 72,452
Selling, general and administrative.............................. 70,626 64,201 37,235 25,438 13,928
Charge for purchase of in-process research and development....... -- -- -- 10,978 --
Acquisition-related charges...................................... -- -- -- 1,171 --
Other expenses /(1)/............................................. 130,372 -- -- -- --
--------- -------- -------- -------- --------
Total costs and expenses...................................... 414,334 256,757 184,068 134,779 86,380
Income (loss) from operations........................................ (195,071) (62,590) (27,106) 32 3,616
Interest and other income/(expense), net............................. 23,453 41,735 5,485 7,416 4,326
Interest expense..................................................... (10,128) (10,529) (316) (150) (186)
Loss on sale of assets............................................... (5,777) -- -- -- --
Gain on certain derivative financial instruments..................... 553 -- -- -- --
Losses from joint venture............................................ -- (1,283) (5,631) (1,474) (300)
--------- -------- -------- -------- --------
Income (loss) before income taxes, extraordinary item and accounting
change.............................................................. (186,970) (32,667) (27,568) 5,824 7,456
Provision (benefit) for income taxes................................. 930 205 (800) 2,352 548
--------- -------- -------- -------- --------
Income (loss) before extraordinary item and accounting change........ (187,900) (32,872) (26,768) 3,472 6,908
Extraordinary item, net of taxes..................................... 2,386 3,137 -- -- --
Cumulative effect of accounting change, net of taxes /(2)/........... 2,279 -- -- -- --
--------- -------- -------- -------- --------
Net income (loss).................................................... $(183,235) $(29,735) $(26,768) $ 3,472 $ 6,908
========= ======== ======== ======== ========
Basic net income (loss) per share.................................... $ (2.77) $ (0.47) $ (0.48) $ 0.06 $ 0.14
========= ======== ======== ======== ========
Number of shares used in computation of basic net income (loss) per
share............................................................... 66,193 63,211 56,276 53,842 48,600
========= ======== ======== ======== ========
Diluted net income (loss) per share.................................. $ (2.77) $ (0.47) $ (0.48) $ 0.06 $ 0.13
========= ======== ======== ======== ========
Number of shares used in computation of diluted net income (loss) per
share............................................................... 66,193 63,211 56,276 57,798 52,996
========= ======== ======== ======== ========
December 31,
-------------------------------------------------
2001 2000 1999 1998 1997
--------- -------- -------- -------- --------
Consolidated Balance Sheet Data:
Cash, cash equivalents, and marketable securities available-for-sale. $ 507,903 $582,180 $ 66,937 $111,233 $113,095
Working capital...................................................... 505,113 571,583 58,043 81,437 90,700
Total assets......................................................... 705,559 886,820 221,934 230,290 199,089
Non-current portion of capital lease obligations and notes payable... -- -- 194 796 801
Convertible subordinated notes....................................... 179,248 187,814 -- -- --
Accumulated deficit.................................................. (268,139) (84,904) (55,169) (28,401) (30,129)
Stockholders' equity................................................. 440,203 622,694 170,282 179,567 145,702
- --------
(1) Includes the following charges recorded in 2001: $68,666--goodwill and
intangibles impairment; $55,602--non-recurring restructuring charges; and
$6,104--impairment of a long-lived asset. See Note 14 of Notes to
Consolidated Financial Statements.
(2) Reflects the adoption of SFAS 133 related to the recording of warrants held
in other companies at fair value at the date of adoption.
15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with "Selected Annual
Consolidated Financial Data" and the Consolidated Financial Statements and
related Notes included elsewhere in this Report.
When used in this discussion, the words "expects," "believes,"
"anticipates," "estimates," and similar expressions are intended to identify
forward-looking statements. These statements, which include statements as to
the Company's expected net losses, expected expenses and expenditure levels,
expected revenues, sources of revenues, expected uses of cash, expected cash
flows, expected expenditures including expenditures on intellectual property
and research and development, and expected investments, expected marketable
securities balances, the adequacy of capital resources, the effect of SFAS 142
and SFAS 144, and growth in operations, the size of our intellectual property
portfolio and its competitive position, our ability to leverage our
intellectual property and genomic information to take a lead position in our
market, effect of pharmaceuticals company consolidations, our ability to manage
growth of our operations, our ability to obtain and maintain product liability
insurance, our strategy with regard to protecting our intellectual property are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties include, but are
not limited to, those risks discussed below, as well as the extent of
utilization of genomic information by the biotechnology and pharmaceutical
industries; actual and future consolidations of pharmaceutical companies; risks
relating to the development of new products and their use by potential
collaborators of the Company; the impact of technological advances and
competition; the ability of the Company to obtain and retain customers;
competition from other entities; early termination of a database collaboration
agreement or failure to renew an agreement upon expiration; the cost of
accessing or acquiring technologies developed by other companies; uncertainty
as to the scope of coverage, enforceability or commercial protection from
patents that issue on gene and other discoveries; developments in and expenses
relating to litigation; the results of businesses in which the Company has
purchased equity; and the matters discussed in "Factors That May Affect
Results." These forward-looking statements speak only as of the date hereof.
The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any such
statement is based.
Overview
Incyte believes it has the largest commercial portfolio of issued United
States patents covering human, full-length genes, the proteins they encode and
the antibodies directed against them. We intend to leverage our leading
intellectual property and genomic information position to be a leader in
therapeutic small molecule, secreted protein and antibody discoveries. In
addition, Incyte has also developed a leading integrated platform of genomic
technologies designed to aid in the understanding of the molecular basis of
disease. These technologies primarily consist of genomic databases and
pharmaceutically relevant intellectual property licenses, which help
pharmaceutical and biotechnology researchers in their therapeutic discovery and
development efforts. These efforts include gene discovery, understanding
disease pathways, identifying new disease targets and the discovery and
correlation of gene sequence variation to disease.
In December 2001, Incyte agreed to settle existing patent infringement
litigation with Affymetrix, Inc. involving several of Affymetrix's
microarray-related patents and Incyte's RNA amplification patents and two
additional microarray-related patents held by Affymetrix. As a part of the
settlement, the companies have agreed to certain non-exclusive, royalty-bearing
licenses and an internal use license under their respective intellectual
property portfolios. This settlement does not include Incyte's appeal before
the United States District Court for the Northern District of California
seeking de novo review of the Board of Patent Appeals and Interferences'
decision relating to patent applications licensed by Incyte from Stanford
University. There can be no assurances as to the outcome of such an appeal.
16
During 2001, Incyte increased its focus on its therapeutic discovery and
development program and its information products, which include licensing a
portion of its intellectual property. As a result, we exited the following
activities: microarray products and related services, genomic screening
products and services, public domain clone products and related services,
contract sequencing services, transgenics products and services and SNP
discovery services. As a part of the exit of these activities, we have closed
certain of our facilities in Fremont, California; St. Louis, Missouri and
Cambridge, England. In addition to the product lines exited, we made
infrastructure and other personnel reductions at our other locations resulting
in an aggregate workforce reduction of approximately 400 employees. A
non-recurring charge for restructure charges and impairment of long-lived
assets of $130.4 million was recorded in the fourth quarter of 2001 as a result
of the change in focus. This charge was comprised of the following items: $68.7
million--goodwill and intangibles impairment; $55.6 million--nonrecurring
restructuring charges (including $32.6 million in equipment and other assets
impaired) and $6.1 million--impairment of a long-lived asset.
As a result of the Company's change in strategic direction and restructuring
in 2001, pursuant to SFAS 121, Incyte performed an assessment of the carrying
value of its long lived assets recorded in connection with its Hexagen and
Proteome acquisitions and used in the operations being exited.
Equipment and other assets that were disposed of or removed from operations
were written down to their estimated fair value of $0.7 million and that
resulted in a charge of $32.6 million. The write-down of equipment and other
assets primarily relates to leasehold improvements, computer equipment and
related software, lab equipment and office equipment associated with the
activities being exited and related infrastructure reduction. Additionally, the
write-off of equipment and other assets also includes certain software costs
related to products no longer being offered. We estimated the fair value of
equipment and other assets based on the current market conditions.
In December 2000, we completed the acquisition of Proteome, Inc., a
privately held proteomics database company. We issued 1,248,522 shares of our
common stock and $37.7 million in cash in exchange for all of Proteome's
outstanding capital stock. In addition, we assumed Proteome's stock options,
which if fully vested and exercised, would amount to 216,953 shares of its
common stock. The fair value of the stock options assumed were allocated
between additional purchase price and deferred compensation in accordance with
guidance provided by the Financial Accounting Standards Board's Interpretation
No. 44. The transaction was accounted for as a purchase. The amount of the
purchase price in excess of net tangible assets acquired of approximately $70.8
million, was allocated to goodwill ($50.3 million), database ($16.6 million),
developed technology ($0.6 million), tradename ($1.7 million), and assembled
workforce ($1.6 million), which are being amortized over 8, 8, 5, 3 and 3
years, respectively. At the time of acquisition, we believed the acquisition
would strengthen our database offering with a larger collection of protein
annotation information. In the fourth quarter of 2001, we found that
collaborators were unwilling to pay fees to access the Proteome databases that
were sufficient to support the continued investment required to build and
sustain the Proteome products. In addition, we eliminated the positions of
approximately 45% of Proteome employees. We consider these events to be
indicators of potential impairment and performed a forecast of future cash
flows evaluation of the affected long-lived assets, which indicated the
long-lived assets were impaired. As a result, we recorded an impairment charge
on the goodwill and intangible assets associated with the Proteome acquisition
in the amount of $58.5 million. The net remaining balance of intangible assets
at December 31, 2001 related to this acquisition is $2.9 million.
The activities acquired through the Hexagen acquisition related primarily to
a method of SNP discovery. Although SNP discovery will continue, the Hexagen
method is one of the activities that will not be continued after the change in
strategic direction and restructuring. As a result, the company determined that
the goodwill and intangible assets related to this acquisition have no future
cash flows to support their carrying value and a $10.2 million charge was
recorded to write these assets down to their estimated fair value.
In reviewing its existing long-lived assets, we determined, based on certain
impairment indicators, that an asset related to capitalized software should be
analyzed for impairment. As a result of this analysis, it was
17
determined that the net book value of the asset was in excess of future
revenues expected from sale of this software reduced by costs to sell.
Therefore, it was determined that this capitalized software was impaired and we
recognized a $6.1 million impairment charge.
Critical Accounting Policies and Estimates
Incyte believes the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
. Revenue recognition
. Valuation of long-lived assets
. Accounting for long-term investments
Revenue Recognition. Revenues are recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
price is fixed and determinable and collectibility is reasonably assured. The
Company enters into various types of agreements for access to our information
databases, use of our intellectual property and sales of our custom genomics
products and services. Revenue is deferred for fees received before earned.
Revenue from database agreements are recognized evenly over the access
period. Revenue from licenses to the Company's intellectual property are
recognized when earned under the terms of the related agreements. Royalty
revenues are recognized upon the sale of the products or services to third
parties by the licensee or other agreed upon terms.
Revenues from custom products, such as clones, are recognized upon
completion and delivery. Revenues from custom services are recognized upon
completion of contract deliverables. Revenue from gene expression microarray
services includes: technology access fees, which are recognized ratably over
the access term, and progress payments, which are recognized at the completion
of key stages in the performance of the service in proportion to the costs
incurred.
Revenues recognized from multiple element contracts are allocated to each
element of the arrangement based on the relative fair values of the elements.
The determination of fair value of each element is based on objective evidence
from historical sales of the individual element by us to other customers. If
such evidence of fair value for each element of the arrangement does not exist,
all revenue from the arrangement is deferred until such time that evidence of
fair value does exist or until all elements of the arrangement are delivered.
In accordance with SAB 101, when elements are specifically tied to a separate
earnings process, revenue is recognized when the specific performance
obligation associated with the element is completed. When revenues for an
element are not specifically tied to a separate earnings process they are
recognized ratably over the term of the agreement. When contracts include
non-monetary exchanges, the non-monetary transaction is determined using the
fair value of the products and services involved, as applicable.
Valuation of Long-Lived Assets. We assess the impairment of long-lived
assets, which includes property and equipment, acquisition-related intangibles
and goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider important that could
trigger an impairment review include the following:
. Significant changes in the strategy of our overall business;
. Significant underperformance relative to expected historical or projected
future operating results;
. Significant changes in the manner of use of the acquired assets;
. Significant negative industry or economic trends;
18
. Significant decline in our stock price for a sustained period; and
. Our market capitalization relative to net book value.
When we determine that the carrying value of long-lived assets may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, in accordance with SFAS 121, we perform an undiscounted cash flow
analysis to determine if impairment exists. If impairment exists, we measure
the impairment based on a projected discounted cash flow method using a
discount rate determined by our management to be commensurate with the risk
inherent in our current business model. Net intangible assets and long-lived
assets amounted to $50.8 million as of December 31, 2001. Included in that
amount are assets with a net book value of $0.7 million that are being marketed
for sale.
Accounting for Long-Term Investments. We hold equity and debt securities
and warrants in companies having operations or technology in areas primarily
within our strategic focus, some of which are publicly traded and can have
volatile share prices. Investments in publicly traded companies are classified
as available-for-sale and are adjusted to their fair value each month based on
the their traded market price with any adjustments being recorded in other
comprehensive income. Investments in privately held companies are carried at
cost, and we monitor the company's financial results and prospects on a regular
basis to determine whether an impairment exists. We record an investment
impairment charge when we believe that the investment has experienced a decline
in value that is other than temporary. Generally, declines that persist for six
months or more are considered other than temporary. Future adverse changes in
market conditions or poor operating results of underlying investments could
result in additional impairment charges.
Results of Operations
The Company recorded net losses for the years ended December 31, 2001, 2000
and 1999 of $183.2 million, $29.7 million and $26.8 million, respectively. On a
basic and diluted per share basis, net loss was $2.77, $0.47 and $0.48 for the
years ended December 31, 2001, 2000 and 1999, respectively. The net loss per
share in 2000 and thereafter reflects the dilutive effect of four million
shares issued in a February 2000 private equity offering.
Revenues. Revenues for the years ended December 31, 2001, 2000 and 1999
were $219.3 million, $194.2 million and $157.0 million, respectively.
For the year ended December 31, 2001, revenues from companies considered to
be related parties, as defined by SFAS 57 were $24.6 million. With respect to
Incyte, related parties consist of companies in which members of Incyte's Board
of Directors have invested, either directly or indirectly, or in which a member
of Incyte's Board of Directors is an officer or holds a seat on the board of
directors.
Revenues received from agreements in which collaborators paid with equity or
debt instruments in their company were $7.8 million and $6.6 million in 2001
and 2000, respectively. Additionally, revenues received from agreements in
which the Company concurrently invested funds in the collaborator's stock were
$14.1 million and $6.4 million in 2001 and 2000, respectively. We did not have
similar transactions in 1999.
We also entered into transactions in which we have recognized revenues of
$24.7 million and $6.7 million in 2001 and 2000, respectively, with certain
customers from whom we concurrently committed to purchase goods or services of
$47.4 million and $12.4 million in 2001 and 2000, respectively. Of such
amounts, we expensed $18.3 million and $1.3 million in 2001 and 2000,
respectively. We did not have similar transactions in 1999.
The above transactions were recorded at fair value in accordance with the
Company's revenue recognition policy.
Revenues are derived primarily from information products, which include
licensing of our intellectual property, and custom genomics. Information
products include database subscriptions, licensing, and partner
19
programs and represented 79%, 75% and 80% of total net revenues in 2001, 2000
and 1999, respectively. Custom genomics includes microarray-based gene
expression products and services, genomic screening products and services,
public domain clone products and related services, contract sequencing and SNP
discovery services and represented 21%, 25% and 20% of total net revenues in
2001, 2000 and 1999, respectively. The increase in information product revenues
in 2001 from 2000 is primarily due to an increase in licensing of our
intellectual property. The increase in revenues from 1999 to 2000 resulted
primarily from database agreements with new customers, revenues from the Pfizer
partner program, revenues from new products, as well as increased revenues from
custom genomics products and services. Revenues for 2002 are expected to be in
the range of $130.0 million to $150.0 million. This anticipated decrease
primarily reflects the impact expected from the exit of custom genomics
products and services and from utilizing our information products differently
to facilitate our therapeutic discovery and development collaboration and
co-development efforts.
Operating Expenses. Total costs and expenses for the years ended December
31, 2001, 2000 and 1999 were $414.3 million, $256.8 million and $184.1 million,
respectively. Total costs and expenses for 2002 are currently expected to be in
the range of $210 million to $220 million. This anticipated decrease reflects
the reduction in expenses derived from the activities and related
infrastructure that were exited in the restructuring and the non-recurring
restructuring charges and long-lived asset write-downs in 2001, offset by
expanded spending in connection with the therapeutic discovery and development
efforts.
Research and development expenses. Research and development expenses
for the years ended December 31, 2001, 2000 and 1999 were $213.3 million,
$192.6 million and $146.8 million, respectively. The increase from 2001 over
2000 resulted primarily due to 2001 having a full year of activity related to
the Proteome acquisition, which was completed in December 2000, and an increase
in the costs related to the Company's therapeutic discovery and development
efforts. The increase from 2000 over 1999 resulted primarily from an increase
in bioinformatics and software development efforts, SNP discovery efforts,
microarray production, partner program expenses, expression database
development, an increase in internal disease pathway and therapeutic discovery
and development programs, and the development of internet and e-commerce
products.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the years ended December 31, 2001, 2000 and 1999
were $70.6 million, $64.2 million and $37.2 million, respectively. The increase
in 2001 over 2000 resulted primarily from having a full year of activity
related to the Proteome acquisition, which was completed in December 2000, and
increased legal expenses related to the Company's patent infringement cases.
The increase in selling, general and administrative expenses in 2000 over 1999
resulted primarily from the growth in the Company's sales and marketing
function, including its branding efforts, and increased personnel to support
the growing complexity of the Company's operations. The Company's selling,
general and administrative expenses were also impacted by legal expenses
related to the Company's patent lawsuits with Affymetrix, GeneLogic and
Invitrogen of approximately $14.6 million in 2001, and the Company's patent
infringement lawsuits with Affymetrix and GeneLogic of $8.9 million and
$6.5 million, in 2000 and 1999, respectively.
Other expenses. Other expenses of $130.4 million for the year ended
December 31, 2001 represent the charges recorded in connection with the fourth
quarter restructuring and long-lived asset impairments. These expenses, of
which $109.4 million were non-cash charges, were comprised of the following
items: $68.7 million--goodwill and intangibles impairment and $55.6
million--non-recurring restructuring charges and $6.1 million--impairment of
long-lived asset.
Other Income/Expense. Other income/expense includes "Interest and Other
Income/Expense", "Interest Expense" and "Income Tax Expense". Total other
income/expense for the years ended December 31, 2001, 2000 and 1999 were income
of $12.4 million, $31.0 million and $6.0 million, respectively. Total other
income/expense for 2002 is expected to be approximately $3 million to $7
million of income.
Interest and other income/expense, net. Interest and other
income/expense, net, for the years ended December 31, 2001, 2000 and 1999, was
income of $23.4 million, $41.7 million and $5.5 million, respectively.
20
The decrease in 2001 from 2000 was primarily due to the impact of impairment
charges recorded in 2001 totaling $14.7 million on long-term investments due to
declines in values deemed to be other than temporary. To a lesser degree, the
decrease in the cash and marketable securities average balances for 2001 and
lower interest rates also contributed to the lower interest income. The
increase in 2000 from 1999 was primarily due to higher interest income, and a
gain of $5.4 million from the sale of one of the Company's long-term strategic
investments. The higher interest income was primarily due to the convertible
debt offering and private equity offering in February 2000 resulting in higher
cash, cash equivalent and marketable securities balances.
Interest expense. Interest expense for the years ended December 31,
2001, 2000 and 1999 was $10.1 million, $10.5 million and $0.3 million,
respectively. The small decrease in 2001 from 2000 is due to a lower average
outstanding balance of our convertible subordinated notes as a result of the
timing of issuance in 2000 and subsequent repurchases of $23.0 million in par
value, causing the interest thereon to decrease. The increase in 2000 from 1999
was primarily due to the interest on the convertible subordinated notes issued
by the Company in February 2000.
Income taxes. Due to the Company's net loss in 2001 and 2000, the
Company had a minimal effective annual income tax rate. The income taxes for
2001 and 2000 are attributable to foreign operations. In 1999, the Company had
an effective income tax benefit rate of 3.0%, primarily due to the carryback of
the 1999 net operating loss.
Loss on Sale of Assets. Loss on the sale of assets of $5.8 million in 2001
resulted from the divestiture of the transgenics product line and the sale of
certain of those assets. There were no significant sales of assets in 2000 or
1999.
Gain on Certain Derivative Financial Instruments. Gain on derivatives in
2001 of $0.6 million represents the change in fair value of certain long-term
investments, specifically warrants held in other companies, in accordance with
SFAS 133.
Losses from Joint Venture. Losses from joint venture were $0, $1.3 million
and $5.6 million for the years ended December 31, 2001, 2000 and 1999,
respectively. In September 1997, the Company formed a joint venture, diaDexus,
LLC ("diaDexus") with SmithKline Beecham Corporation. The loss represents the
Company's share of diaDexus' losses from operations. On April 4, 2000, diaDexus
converted from an LLC to a corporation and completed a private equity financing
at which time the Company no longer had significant influence over diaDexus.
Accordingly, the Company began accounting for its investment in diaDexus under
the cost method of accounting as of the date of the financing, and therefore
did not include diaDexus' results of operations in the Company's statement of
operations subsequent to that date.
Extraordinary Item, Net. In 2001 and 2000, the Company repurchased $8.0
million and $15.0 million face value of its 5.5% convertible subordinated notes
on the open market, respectively. The repurchase resulted in a gain of $2.4
million and $3.1 million, for the years ended December 31, 2001 and 2000,
respectively.
Cumulative Effect of Accounting Change, Net. The Company adopted FASB
Statement No. 133 ("SFAS 133") on January 1, 2001. SFAS 133 requires companies
to recognize all derivatives as either assets or liabilities on the balance
sheet and measure these instruments at fair value. The $2.3 million cumulative
effect reported in 2001 relates to the recording of warrants held in other
companies at fair value upon the adoption of SFAS 133.
Recent Accounting Pronouncements
In July 2001, the FASB issued Statement No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"). SFAS 142 requires, among other things, the
discontinuance of goodwill amortization and includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of
21
existing recognized intangibles, and reclassification of certain intangibles
out of previously reported goodwill. The adoption of this statement on January
1, 2002 is not expected to have a material impact on the Company's consolidated
financial statements.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment of Long-Lived Assets ("SFAS 144"). The FASB's new rules on asset
impairment supersede FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, and portions of
APB Opinion No. 30, Reporting the Results of Operations. SFAS 144 provides a
single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. SFAS 144 also requires expected future operating losses
from discontinued operations to be displayed in the period in which the losses
are incurred, rather than as of the measurement date as presently required. The
Company will adopt the provisions of SFAS 144 during the first quarter of
fiscal year 2002. The adoption of this statement on January 1, 2002 is not
expected to have a material impact on the Company's consolidated financial
statements.
Liquidity and Capital Resources
As of December 31, 2001, the Company had $507.9 million in cash, cash
equivalents and marketable securities, compared to $582.2 million as of
December 31, 2000. The Company has classified all of its marketable securities
as short-term, as the Company may choose not to hold its marketable securities
until maturity in order to take advantage of favorable market conditions.
Available cash is invested in accordance with the Company's investment policy's
primary objectives of liquidity, safety of principal and diversity of
investments.
Net cash used in operating activities was $47.0 million, $13.9 million and
$21.4 million for the years ended December 31, 2001, 2000 and 1999,
respectively. The change in net cash used in 2001 as compared to 2000 was
primarily due to the increase in net loss in 2001, less non-cash restructuring
charges and impairment of long-lived assets, as well as increases in cash usage
for accounts receivable and accounts payable. The change in net cash used in
2000 as compared to 1999 was primarily due to the increases in accounts payable
and accrued and other current liabilities and the slower increase of accounts
receivables in 2000 as compared to 1999. These were partially offset by the
increase in prepaid assets and the decrease in deferred revenue.
The Company's investing activities, other than purchases, sales and
maturities of marketable securities, have consisted predominantly of capital
expenditures and net purchases of long-term investments. Capital expenditures
for the years ended December 31, 2001, 2000 and 1999, were $12.9 million, $59.5
million and $34.8 million, respectively. Capital expenditures decreased in 2001
due to lower spending on computer equipment, laboratory equipment and minimal
spending on leasehold improvements in 2001 and increased in 2000 and 1999
primarily due to investments in computer equipment and software, laboratory
equipment, and leasehold improvements related to the expansion of the Company's
facilities. Long-term investments in companies having operations or technology
in areas within our strategic focus were $28.0 million, $3.5 million and $4.2
million for the years ended December 31, 2001, 2000 and 1999, respectively. In
2000 the Company sold stock in an investment, resulting in proceeds of $7.9
million and a gain of $5.4 million, and diaDexus repaid its $2.5 million note
to Incyte. In 1999 the Company liquidated its investment in two such companies,
resulting in proceeds of $4.3 million and a net realized gain of $0.2 million.
In 2000, the Company paid $36.9 million, net of cash received, in connection
with the acquisition of Proteome. In the future, net cash used by investing
activities may fluctuate significantly from period to period due to the timing
of strategic equity investments, acquisitions, capital expenditures and
maturities/sales and purchases of marketable securities.
Net cash provided by financing activities was $5.8 million, $619.1 million
and $12.5 million for the years ended December 31, 2001, 2000 and 1999,
respectively. Net cash provided by financing activities in 2001 was primarily
due to proceeds received from the issuance of common stock under the Company's
stock option and employee stock purchase plans, offset by amounts paid to
repurchase convertible subordinated notes. Net cash
22
provided by financing activities in 2000 was primarily due to the Company
raising additional funds in two financing transactions. In February 2000, the
Company issued $200.0 million aggregate principal amount of 5.5% convertible
subordinated notes due 2007 in a private placement, resulting in net proceeds
of $196.8 million. Also in February 2000, the Company issued 4,000,000 shares
of its common stock in a private placement, for an aggregate purchase price of
$422.0 million. Net proceeds from the sale of those shares were $403.3 million.
Net cash provided by financing activities in 1999 was due to the issuance of
common stock under the Company's stock option and employee stock purchase plans.
The following summarizes the Company's contractual obligations at December
31, 2001 and the effect those obligations are expected to have on its liquidity
and cash flow in future periods (in millions):
Less Than Years Years Over
Contractual Obligations: Total 1 Year 1-3 4-5 5 Years
- ------------------------ ------ --------- ----- ----- -------
Convertible subordinated debt.................... $179.2 $ -- $ -- $ -- $179.2
Non-cancelable operating lease obligations....... 89.9 15.8 23.7 17.4 33.0
------ ----- ----- ----- ------
Total contractual obligations.................... $269.1 $15.8 $23.7 $17.4 $212.2
====== ===== ===== ===== ======
The Company also has purchase commitments of $25.0 million at December 31,
2001, the timing of which is dependent upon provision by the vendor of products
or services. Additionally, the Company has committed to purchase equity in
certain companies when certain events occur. The total amount committed at
December 31, 2001 was $15.0 million. These commitments are considered
contingent commitments as a future event must occur in order to cause the
commitment to be enforceable.
The Company expects to use net cash in 2002 as it: invests in its
therapeutic discovery and development programs, intellectual property
portfolio, sequencing and bioinformatics; continues to seek access to
technologies through investments, research and development and new alliances,
license agreements and/or acquisitions; makes strategic investments; and
continues to make improvements in existing facilities. The Company expects,
based on its current operating plans, that the cash and marketable securities
balance at December 31, 2002 will be in the range of $400 million to $420
million, excluding any strategic investments.
The Company believes that its existing resources will be adequate to satisfy
its capital needs for at least the next twelve months. The Company's cash
requirements depend on numerous factors, including the ability of the Company
to attract and retain collaborators for its databases and other products and
services; expenditures in connection with alliances, license agreements and
acquisitions of and investments in complementary technologies and businesses;
expenditures in connection with its recent expansion of therapeutic discovery
and development programs; competing technological and market developments; the
cost of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights; capital expenditures required to expand and
modify the Company's facilities, including facilities for the Company's
expanding therapeutic discovery and development programs; and costs associated
with the integration of new operations assumed through mergers and
acquisitions. Changes in the Company's research and development plans or other
changes affecting the Company's operating expenses may result in changes in the
timing and amount of expenditures of the Company's capital resources.
23
FACTORS THAT MAY AFFECT RESULTS
RISKS RELATING TO OUR FINANCIAL RESULTS
We have had only limited periods of profitability, we expect to incur losses in
the future and we may not return to profitability
We had net losses from inception in 1991 through 1996 and in 1999 through
2001. Because of those losses, we had an accumulated deficit of $268.1 million
as of December 31, 2001. We intend to continue to spend significant amounts on
new product and technology development, including the expansion of our internal
research and development efforts for therapeutic discovery and development, the
determination of the sequence of genes and the filing of patent applications
regarding those gene sequences, the determination of gene functions, and the
expansion of our research and development alliances. As a result, we expect to
incur losses in 2002. We expect to report net losses in future periods as well.
We expect that any profits from our information products will be more than
offset by expenditures for our therapeutic discovery and development efforts.
We anticipate that these efforts will increase as we focus on the studies that
are required before we can sell, or license to a third party, a drug product.
The development of therapeutic products will require significant expenses for
research, development, testing and regulatory approvals. Unless we generate
significant revenues to pay these costs, we will not return to profitability.
We cannot be certain whether or when we will again become profitable because of
the significant uncertainties relating to our ability to generate commercially
successful drug products that will generate significant revenues.
Our operating results are difficult to predict, which may cause our stock price
to decline and result in losses to investors
Our operating results are difficult to predict and may fluctuate
significantly from period to period, which may cause our stock price to decline
and result in losses to investors. Some of the factors that could cause our
operating results to fluctuate include:
. changes in the demand for our products;
. the timing of intellectual property licenses that we may grant;
. the introduction of competitive databases or services, including
databases of publicly available, or public domain, genetic information;
. the nature, pricing and timing of products and services provided to our
collaborators;
. our ability to compete effectively in our therapeutic discovery and
development efforts against competitors that have greater financial or
other resources or drug candidates that are in further stages of
development;
. acquisition, licensing and other costs related to the expansion of our
operations, including operating losses of acquired businesses;
. losses and expenses related to our investments;
. our ability to attract and retain key personnel;
. regulatory developments or changes in public perceptions relating to the
use of genetic information and the diagnosis and treatment of disease
based on genetic information;
. regulatory actions and changes related to the development of drugs;
. changes in intellectual property laws that affect our rights in genetic
information that we sell;
. payments of milestones, license fees or research payments under the terms
of our external alliances and collaborations and our ability to monitor
and enforce such payments; and
. expenses related to, and the results of, litigation and other proceedings
relating to intellectual property rights, including the lawsuits filed by
Invitrogen and counterclaims filed by us.
24
We anticipate significant fixed expenses, due in part to our expansion of
our therapeutic discovery and development programs, and our continuing
investment in product development and extensive support for our database
collaborators. We may be unable to adjust our expenditures if revenues in a
particular period fail to meet our expectations, which would harm our operating
results for that period. Forecasting operating and integration expenses for
acquired businesses may be particularly difficult, especially where the
acquired business focuses on technologies that do not have an established
market. We believe that period-to-period comparisons of our financial results
will not necessarily be meaningful. You should not rely on these comparisons as
an indication of our future performance. If our operating results in any future
period fall below the expectations of securities analysts and investors, our
stock price will likely fall, possibly by a significant amount. In addition, if
market or other economic conditions impact the stock market generally, or
impact other companies in our industry, our stock price may also decline,
possibly significantly.
If our strategic investments incur losses or charges, our earnings may decline
or our losses may increase
We make strategic investments in entities that complement our business.
These investments may:
. often be made in securities lacking a public trading market or subject to
trading restrictions, either of which increases our risk and reduces the
liquidity of our investment;
. require us to record losses and expenses related to our ownership
interest;
. require us to record charges related to the impairment in the value of
the securities underlying our investment;
. require us to record acquisition-related charges, such as in-process
research and development;
. require us to record charges related to post-acquisition impairment in
the value of the acquired assets, such as goodwill or intangibles; and
. require us to invest greater amounts than anticipated or to devote
substantial management time to the management of research and development
or other relationships.
The market values of many of these investments can fluctuate significantly.
We evaluate our long-term equity investments for impairment of their values on
a quarterly basis. Impairment could result in future charges to our earnings.
These losses and expenses may exceed the amounts that we anticipated.
Our debt investments are impacted by the financial viability of the underlying
companies
We have a diversified portfolio of investments. Our fixed rate debt
investments comply with our policy of investing in only investment-grade debt
instruments. The ability for the debt to be repaid upon maturity or to have a
viable resale market is dependent, in part, on the financial success of the
underlying company. Should the underlying company suffer significant financial
difficulty, the debt instrument could either be downgraded or, in the worst
case, our investment could be worthless. This would result in our losing the
cash value of the investment and incurring a charge to our statement of
operations.
Because our sales cycle is lengthy, we may spend a lot of time and money trying
to obtain new or renewed subscriptions to our products but may be unsuccessful,
which could hurt our profitability
Our ability to obtain new customers for information products to enter into
license agreements for our intellectual property or to obtain renewals or
additions to existing database product subscriptions depends upon prospective
subscribers' perceptions that our products and services can help accelerate
their drug discovery efforts. Our database and licensing sales cycle is
typically lengthy because we need to educate our potential subscribers and sell
the benefits of our products to a variety of constituencies within potential
subscriber companies. In addition, each agreement involves the negotiation of
unique terms, and we may expend substantial funds and management effort with no
assurance that a new, renewed or expanded agreement will result. These
25
expenditures, without increased revenues, will negatively impact our
profitability. Consolidations of pharmaceutical companies involved in drug
discovery and development have affected the timing, progress and relative
success of our sales efforts. We expect that any future consolidations will
have similar effects.
We have a large amount of debt and our debt service obligations may prevent us
from taking actions that we would otherwise consider to be in our best interests
As of December 31, 2001, we had
. total consolidated debt of approximately $179.2 million,
. stockholders' equity of approximately $440.2 million, and
. a deficiency of earnings available to cover fixed charges of $182.3
million for the year ended December 31, 2001.
A variety of uncertainties and contingencies will affect our future
performance, many of which are beyond our control. We may not generate
sufficient cash flow in the future to enable us to meet our anticipated fixed
charges, including our debt service requirements with respect to our
convertible subordinated notes due 2007 that we sold in February 2000. At
December 31, 2001, $177 million of those notes were outstanding. The following
table shows, as of December 31, 2001, the aggregate amount of our interest
payments due in each of the next five years listed:
Aggregate
Year Interest
---- ----------
2002 $9,735,000
2003 9,735,000
2004 9,735,000
2005 9,735,000
2006 9,735,000
Our substantial leverage could have significant negative consequences for
our future operations, including:
. increasing our vulnerability to general adverse economic and industry
conditions;
. limiting our ability to obtain additional financing;
. requiring the dedication of a substantial portion of our expected cash
flow to service our indebtedness, thereby reducing the amount of our
expected cash flow available for other purposes, including working
capital and capital expenditures;
. limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; or
. placing us at a possible competitive disadvantage compared to less
leveraged competitors and competitors that have better access to capital
resources.
The capital markets may not permit us to raise additional capital at the time
that we require it
We believe that we have sufficient capital to satisfy our capital needs for
at least the next twelve months. However, our future funding requirements will
depend on many factors and we anticipate that, at some future point, we will
need to raise additional capital to fund our business plan and research and
development efforts on a going-forward basis. If we require additional capital
at a time when investment in biotechnology companies such as ours, or in the
marketplace generally, is limited due to the then prevailing market or other
conditions, we may not be able to raise such funds at the time that we desire
or any time thereafter.
26
RISKS RELATING TO OUR OPERATIONS AND INDUSTRY
Difficulties we may encounter managing the growth of our therapeutic discovery
and development efforts may divert resources and limit our ability to
successfully expand our operations
Our anticipated growth in the future of our therapeutic discovery and
development programs, and our establishment of significant operations on the
East Coast of the United States, place a strain on our administrative and
operational infrastructure. As our operations expand, we expect that we will
need to manage multiple locations and additional relationships with various
collaborative partners, suppliers and other third parties. Our ability to
manage our operations and growth effectively requires us to continue to improve
our operational, financial and management controls, reporting systems and
procedures. We may not be able to successfully implement improvements to our
management information and control systems in an efficient or timely manner and
may discover deficiencies in existing systems and controls.
Our industry is intensely competitive, and if we do not compete effectively,
our revenues may decline and our losses may increase
We compete in markets that are new, intensely competitive, rapidly changing,
and fragmented. Many of our current and potential competitors have greater
financial, human and other resources than we do. If we cannot respond quickly
to changing customer requirements, secure intellectual property positions, or
adapt quickly and obtain access to new and emerging technologies, our revenues
may decline and commercial opportunities for any of our drug products may be
reduced or eliminated. Our competitors include:
. Celera Genomics Group of Applera Corporation,
. CuraGen Corporation,
. Gene Logic Inc.,
. Human Genome Sciences, Inc.,
. pharmaceutical and biotechnology companies, and
. universities and other research institutions.
The human genome contains a finite number of genes. Our competitors may seek
to identify, sequence and determine the biological function of numerous genes
in order to obtain a proprietary position with respect to new genes.
In addition, we face competition from companies who are developing and may
seek to develop new technologies for discovering the functions of genes, gene
expression information, including microarray technologies, discovery of
variations among genes and related technologies. Also, if we are unable to
obtain the technology we currently use or new advanced technology on acceptable
terms, but other companies are, we will be unable to compete.
We also face competition from providers of software. A number of companies
have announced their intent to develop and market software to assist
pharmaceutical companies and academic researchers in managing and analyzing
their own genomic data and publicly available data. If pharmaceutical companies
and researchers are able to manage their own genomic data, they may not
subscribe to our databases.
Extensive research efforts resulting in rapid technological progress
characterize the genomics industry. To remain competitive, we must continue to
expand our databases, improve our software, and invest in new technologies. New
developments will probably continue, and discoveries by others may render our
services and potential products noncompetitive.
27
We face significant competition for our therapeutic discovery and development
efforts, and if we do not compete effectively, our commercial opportunity will
be reduced or eliminated
The biotechnology and pharmaceutical industries are intensely competitive
and subject to rapid and significant technological change. Our therapeutic
discovery and development efforts may target diseases and conditions that are
already subject to existing therapies or that are subject to the drug discovery
efforts of other entities. These competitors may develop products more rapidly
or successfully than we or our collaborators are able to do. Our competitors
might develop drugs that are more effective or less costly than any that are
being developed by us or that would render our products obsolete and
noncompetitive. In addition, our competitors may succeed in obtaining
regulatory approvals for drug candidates more rapidly. Also, our competitors
may obtain patent protection or other intellectual property rights that would
limit our rights. Any drugs resulting from our research and development
efforts, or from our joint efforts with any future collaborators, might not be
able to compete successfully with competitors' existing and future products or
obtain regulatory approval in the United States or elsewhere.
If we are unable to manage our growth effectively, our operations and ability
to support our customers could be affected, which could harm our revenues
We may continue to experience growth in the number of our employees and the
scope of our operations. This growth has placed, and may continue to place, a
significant strain on our management and operations.
In addition, we must continue to invest in customer support resources as the
number of database collaborators and their requests for support increase. Our
database collaborators typically have worldwide operations and may require
support at multiple U.S. and foreign sites. To provide this support, we may
need to open offices in additional locations, which could result in additional
burdens on our systems and resources.
We depend on key employees in a competitive market for skilled personnel, and
the loss of the services of any of our key employees would affect our ability
to achieve our objectives
We are highly dependent on the principal members of our management,
operations and scientific staff. Our product development, operations and
marketing efforts could be delayed or curtailed if we lose the services of any
of these people.
Our future success also will depend in part on the continued service of our
executive management team, key scientific, bioinformatics and management
personnel and our ability to identify, hire, train and retain additional
personnel, including customer service, marketing and sales staff. We experience
intense competition for qualified personnel. If we are unable to continue to
attract, train and retain these personnel, we may be unable to expand our
business.
We rely on a small number of suppliers of products we need for our business,
and if we are unable to obtain sufficient supplies, we will be unable to
compete effectively
Currently, we use gene sequencing machines supplied by Molecular Dynamics, a
subsidiary of Amersham Pharmacia Biotech, Ltd., and chemicals used in the
sequencing process, called reagents, supplied by Roche Bioscience and Amersham
Pharmacia Biotech, Ltd. in our gene sequencing operations. If we are not able
to obtain an adequate supply of reagents or other materials at commercially
reasonable rates, our ability to identify genes or genetic variations would be
slower and more expensive.
If the information we obtain from third-party data sources is corrupt or
violates the law, our revenues and operating results could decline
We rely on and include in our databases scientific and other data supplied
by others, including publicly available information from sources such as the
Human Genome Project. This data could contain errors or other
28
defects, which could corrupt our databases. In addition, we cannot guarantee
that our data sources acquired this information in compliance with legal
requirements. If this data caused database corruption or violated legal
requirements, we would be unable to sell subscriptions to our databases. These
lost sales would harm our revenue and operating results.
Security risks in electronic commerce or unfavorable internet regulations may
deter future use of our products, which could result in a loss of revenues
We offer several products through our website on the Internet and may offer
additional products in the future. Our ability to provide secure transmissions
of confidential information over the Internet may limit online use of our
products and services by our database collaborators as we may be limited by our
inability to provide secure transmissions of confidential information over the
Internet. Advances in computer capabilities and new discoveries in the field of
cryptography may comprise the security measures we use to protect our website,
access to our databases, and transmissions to and from our website. If our
security measures are breached, our proprietary information or confidential
information about our collaborators could be misappropriated. Also, a security
breach could result in interruptions in our operations. The security measures
we adopt may not be sufficient to prevent breaches, and we may be required to
incur significant costs to protect against security breaches or to alleviate
problems caused by breaches. Further, if the security of our website, or the
website of another company, is breached, our collaborators may no longer use
the Internet when the transmission of confidential information is involved. For
example, recent attacks by computer hackers on major e-commerce websites and
other Internet service providers have heightened concerns regarding the
security and reliability of the Internet.
Because of the growth in electronic commerce, the United States Congress has
held hearings on whether to further regulate providers of services and
transactions in the electronic commerce market. The federal government could
enact laws, rules and regulations that would affect our business and
operations. Individual states could also enact laws regulating the use of the
Internet. If enacted, these federal and state laws, rules and regulations could
require us to change our online business and operations, which could limit our
growth and our development of our online products.
We also rely on strategic collaborations with software providers to provide
important functionality for our products. If any of these collaborators suffer
business difficulties, we may have to spend time and money to replace the
functionality, and we may also be adversely affected or our customer
relationships and revenues may suffer.
Because our revenues are derived primarily from the pharmaceutical and
biotechnology industries, our revenues may fluctuate substantially due to
reductions and delays in research and development expenditures
We expect that our revenues in the foreseeable future will be derived
primarily from products and services provided to the pharmaceutical and
biotechnology industries as well as to the academic community. Accordingly, our
success will depend in large part upon the success of the companies within
these industries and their demand for our products and services. Our operating
results may fluctuate substantially due to reductions and delays in research
and development expenditures by companies in these industries or by the
academic community. These reductions and delays may result from factors such as:
. changes in economic conditions;
. consolidation in the pharmaceutical industry;
. changes in the regulatory environment, including governmental pricing
controls, affecting health care and health care providers;
. pricing pressures;
29
. market-driven pressures on companies to consolidate and reduce costs; and
. other factors affecting research and development spending.
These factors are not within our control.
We are at the early stage of our therapeutic discovery and development efforts
and, because we have limited experience in developing and commercializing
products, we may be unsuccessful in our efforts to do so
We are in the early stage of building our therapeutic discovery and
development operations. Our ability to develop and commercialize pharmaceutical
products based on proteins, antibodies and other compounds will depend on our
ability to:
. identify high quality therapeutic targets;
. identify potential therapeutic candidates;
. develop products internally;
. complete laboratory testing and human studies;
. obtain and maintain necessary intellectual property rights to our
products;
. obtain and maintain necessary regulatory approvals related to the
efficiency and safety of our products;
. enter into arrangements with third parties to manufacture our products on
our behalf or develop efficient production facilities meeting all
regulatory requirements;
. deploy sales and marketing resources effectively or enter into
arrangements with third parties to provide these functions; and
. enter into arrangements with third parties to license and commercialize
our products.
We have limited experience with these activities and may not be successful
in developing or commercializing drug products. If we choose to outsource some
of these activities, we may be unable to enter into outsourcing or licensing
agreements on commercially reasonable terms, or at all. In addition, if we, in
the future, elect to manufacture our products in our own manufacturing
facilities, those facilities will require substantial additional capital
resources, and we will need to attract and retain qualified personnel to build
or lease or operate any such facilities.
The success of our therapeutic discovery and development efforts may depend on
our ability to use collaborators or other service providers to leverage our
capabilities, and if we are unable to establish future collaborations or if
these future collaborations are unsuccessful, our research and development
efforts could be delayed
Our strategy may depend in part upon the formation and sustainability of
multiple collaborative arrangements and license agreements with third parties
in the future. We may rely on these arrangements for not only financial
resources, but also for expertise that we expect to need in the future relating
to clinical trials, manufacturing, sales and marketing, and for licenses to
technology rights. In order for any future collaboration efforts to be
successful, we must first identify potential collaborators whose capabilities
complement and integrate well with ours. Our collaborators may prove difficult
to work with or less skilled than we originally expected.
It is likely that we will not be able to control the amount and timing of
resources that our future corporate collaborators devote to our programs or
potential products. We do not know whether our future collaborators, if any,
might pursue alternative technologies or develop alternative products either on
their own or in collaboration with others, including our competitors, as a
means for developing treatments for the diseases targeted by
30
collaborative arrangements with us. Conflicts also might arise with future
collaborative partners concerning proprietary rights to particular compounds.
We might not be able to commercialize our therapeutic product candidates
successfully, and we may spend significant time and money attempting to do so
At the present time, we are in the early stages of organizing our
therapeutic discovery and development operations. We have yet to identify
potential therapeutic compounds and then put them into clinical testing. Of the
compounds we identify as potential therapeutic candidates, at most, only a few
are statistically likely to lead to successful therapeutic development efforts.
We expect that any drugs that result from our research will not be commercially
available for a number of years, if at all. Commercialization of any product
candidates that we identify and develop depends on successful completion of
preclinical studies and clinical trials. Preclinical testing and clinical
development are long, expensive and uncertain processes, and we do not know
whether we, or any of our future collaborators, will be permitted to undertake
clinical trials of any potential products. It may take us or any of our future
collaborators several years to complete any such testing, and failure can occur
at any stage of testing. Interim results of trial do not necessarily predict
final results, and acceptable results in early trials may not be repeated in
later trials. Data obtained from tests are susceptible to varying
interpretation, which may delay, limit or prevent regulatory approval.
Regulatory authorities may refuse or delay approval as a result of many other
factors, including changes in regulatory policy during the period of product
development. A number of companies in the pharmaceutical industry, including
biotechnology companies, have suffered significant setbacks in advanced
clinical trials, even after achieving promising results in earlier trials.
Moreover, if and when our products reach clinical trials, we, or our future
collaborators may decide to discontinue development of any or all of these
products at any time for commercial, scientific or other reasons. There is also
a risk that competitors and third parties may develop similar or superior
products or have proprietary rights that preclude us from ultimately marketing
our products, as well as the potential risk that our products may not be
accepted by the marketplace.
Completion of clinical trials may take many years. The length of time
required varies substantially according to the type, complexity, novelty and
intended use of the product candidate. Our rate of commencement and completion
of clinical trials may be delayed by many factors, including:
. our inability to manufacture sufficient quantities of materials for use
in clinical trials;
. variability in the number and types of patients available for each study;
. difficulty in maintaining contact with patients after treatment,
resulting in incomplete data;
. unforeseen safety issues or side effects;
. poor or unanticipated effectiveness of products during the clinical
trials; or
. government or regulatory delays.
An important element of our business strategy is entering into collaborative
arrangements with third parties under which we license our therapeutic product
candidates to those third parties for development and commercialization. We
face significant competition in seeking appropriate collaborators. Also, these
arrangements are complex to negotiate and time-consuming to document. We may
not be successful in our attempts to establish these arrangements. The terms of
any such arrangements that we establish may not be favorable to us. Further,
any such arrangements may be unsuccessful.
31
We may encounter difficulties in integrating companies we acquire, and our
operations and financial results could be harmed
In December 2000, we acquired Proteome, Inc. As part of our business
strategy, we may acquire other assets, technologies and businesses. Our past
acquisitions have involved and our future acquisitions may involve risks such
as the following:
. we may be exposed to unknown liabilities of acquired companies;
. our acquisition and integration costs may be higher than we anticipated
and may cause our quarterly and annual operating results to fluctuate;
. we may experience difficulty and expense in assimilating the operations
and personnel of the acquired businesses, disrupting our business and
diverting management's time and attention;
. we may be unable to integrate or complete the development and application
of acquired technology;
. we may experience difficulties in establishing and maintaining uniform
standards, controls, procedures and policies;
. our relationships with key customers of acquired businesses may be
impaired, due to changes in management and ownership of the acquired
businesses;
. we may be unable to retain key employees of the acquired businesses;
. we may incur amortization or impairment expenses if an acquisition
results in significant goodwill or other intangible assets; and
. our stockholders may be diluted if we pay for the acquisition with equity
securities.
In addition, if we acquire additional businesses that are not located near
our Palo Alto, California headquarters, we may experience more difficulty
integrating and managing the acquired businesses' operations.
If product liability lawsuits are successfully brought against us, we could
face substantial liabilities and may be required to limit commercialization of
our products.
The testing and marketing of medical products entails an inherent risk of
product liability. If we cannot successfully defend ourselves against product
liability claims, we may incur substantial liabilities or be required to limit
commercialization of our products. Although we intend to obtain product
liability insurance, this insurance may be prohibitively expensive, or may not
fully cover our potential liabilities. Our inability to obtain sufficient
product liability insurance at an acceptable cost to protect against potential
product liability claims could prevent or inhibit the commercialization of
pharmaceutical products we develop, alone or with our future collaborators. We,
or our future collaborators, might not be able to obtain insurance at a
reasonable cost, if at all.
If a natural disaster occurs, we may have to cease or limit our business
operations
We conduct our database and a significant portion of our other activities at
our facilities in Palo Alto, California, which is in a seismically active area.
Although we maintain business interruption insurance, we do not have or plan to
obtain earthquake insurance. A major catastrophe, such as an earthquake or
other natural disaster, could result in a prolonged interruption of our
business.
32
RISKS RELATING TO COLLABORATORS
To generate significant revenues, we must obtain additional database
collaborators and retain existing collaborators
As of December 31, 2001, we had over 50 database agreements. If we are
unable to enter into additional agreements, or if our current database
collaborators choose not to renew their agreements upon expiration, we may not
generate additional revenues or maintain our current revenues. Our database
revenues are also affected by the extent to which existing collaborators expand
their agreements with us to include our new database products and the extent to
which existing collaborators reduce the number of products for which they
subscribe, the impact of which will vary based upon our pricing of those
products. Some of our database agreements require us to meet performance
obligations, some or all of which we may not be successful in attaining. A
database collaborator can terminate its agreement before the end of its
scheduled term if we breach the agreement and fail to cure the breach within a
specified period. In addition, it is likely that database revenues will
decrease if we are successful in entering into co-development arrangements with
some of our current database subscribers to develop new therapeutic products.
Licensing our gene-related intellectual property may not contribute to revenues
for several years, and may never result in revenues
Part of our strategy is to license to database collaborators and to some of
our other customers our know-how and patent rights associated with the genetic
information in our proprietary databases, for use in the discovery and
development of potential pharmaceutical, diagnostic or other products. Any
potential product that is the subject of such a license will require several
years of further development, clinical testing and regulatory approval before
commercialization. Therefore, milestone or royalty payments from these
collaborations may not contribute to revenues for several years, if at all.
If conflicts arise between our future collaborators or advisors and us, they
may act in their self-interest, which may be adverse to our interests or to the
interests of our shareholders
If conflicts arise between us and our future corporate collaborators or
scientific advisors, if any, the other party may act in its self-interest and
not in the interest of our stockholders. It is likely that many of our future
collaborators will be conducting multiple product development efforts within
each disease area that is the subject of the collaboration with us. Our future
corporate collaborators, may develop, either alone or with others, products in
related fields that are competitive with the products or potential products
that are the subject of these collaborations. Competing products, either
developed by our future collaborators or to which our future collaborators have
rights, may result in their withdrawal of support for our product candidates.
If we fail to enter into future collaborative arrangements, our business and
operations would be negatively impacted
We do not know if we will be able to establish collaborative arrangements,
or whether any such future collaborative arrangements will ultimately be
successful. For example, there have been, and may continue to be, a significant
number of recent business combinations among large pharmaceutical companies
that have resulted, and may continue to result, in a reduced number of
potential future corporate collaborators. This consolidation may limit our
ability to find partners who will work with us in developing and
commercializing drugs. If business combinations involving our existing
corporate collaborators were to occur, the effect could be to diminish,
terminate or cause delays in one or more of our corporate collaborations or
agreements.
We believe that our existing capital resources, together with the proceeds
from future and current collaborations and agreements, will be sufficient to
support our current operations. Nonetheless, our future funding requirements
will depend on many factors, including, but not limited to:
. any changes in the breadth of our research and development programs;
33
. the results of research and development, preclinical studies and clinical
trials conducted by us or our future collaborative partners or licensees,
if any;
. the acquisition or licensing of technologies or compounds, if any;
. our ability to maintain and establish new corporate relationships and
research collaborations;
. our ability to manage growth;
. competing technological and market developments;
. the time and costs involved in filing, prosecuting, defending and
enforcing patent and intellectual property claims;
. the receipt of contingent licensing or milestone fees from our current or
future collaborative and license arrangements, if established; and
. the timing of regulatory approvals.
RISKS RELATING TO INTELLECTUAL PROPERTY
Our database revenues could decline due to sequences becoming publicly available
Our competitors may discover and establish patent positions with respect to
the genes in our databases. Our competitors and other entities who engage in
discovering may make the results of their sequencing efforts publicly
available. Currently, academic institutions and other laboratories
participating in the Human Genome Project make their gene sequence information
available through a number of publicly available databases, including the
GenBank database. The public availability of these discoveries or resulting
patent positions covering substantial portions of the human genome could reduce
the potential value of our databases to our collaborators. Public availability
of sequences could also impair our ability to realize royalties or other
revenue from any commercialized products based on genetic information made
public prior to our patent filings.
We are involved in patent litigation, which if not resolved favorably, could
require us to pay damages
We are currently involved in patent litigation.
In October 2001, Invitrogen Corporation filed an action against us in
federal court, alleging infringement of three patents that relate to the use of
reverse transcriptase with no RNase H activity in preparing complimentary DNA
from RNA. The complaint seeks unspecified money damages and injunctive relief.
In November 2001, we filed our answers to Invitrogen's patent infringement
claims, and asserted seven counterclaims against Invitrogen seeking declaratory
relief with respect to the patents at issue, implied license, estoppel, laches,
and patent misuse. We are also seeking our fees, costs and expenses.
In November 2001, we filed a complaint against Invitrogen in federal court
alleging infringement of 14 of our patents relating to genes, RNA amplification
and gene expression, and methods of fabricating microarrays of biological
samples. The complaint seeks a permanent injunction enjoining Invitrogen from
further infringement of the patents at issue, damages for Invitrogen's conduct,
as well as our fees, costs, and interest. We are further seeking triple damages
from the infringement claim based on Invitrogen's willful infringement of our
patents.
We believe we have meritorious defenses and intend to defend the suit and
potential counterclaims brought by Invitrogen vigorously. However, our defenses
may be unsuccessful. At this time, we cannot reasonably estimate the possible
range of any loss or damages resulting from these suits and counterclaims due
to uncertainty regarding the ultimate outcome. In addition, regardless of the
outcome, we expect that the Invitrogen litigation will result in substantial
costs to us. Further, there can be no assurance that any license that may be
34
required as a result of this litigation or the outcome thereof may not be made
available on commercially acceptable terms, if at all.
If we are subject to additional litigation and infringement claims, they could
be costly and disrupt our business
The technology that we use to develop our products, and the technology that
we incorporate in our products, may be subject to claims that they infringe the
patents or proprietary rights of others. The risk of this occurring will tend
to increase as the genomics, biotechnology and software industries expand, more
patents are issued and other companies attempt to discover genes and SNPs and
engage in other genomic-related businesses. The success of our therapeutic
discovery and development efforts will also depend, in part, on our ability to
operate without infringing or misappropriating the proprietary rights of others.
As is typical in the genomics, biotechnology and software industries, we
have received, and we will probably receive in the future, notices from third
parties alleging patent infringement. Except for Invitrogen, no third party has
a current filed patent lawsuit against us.
We may, however, be involved in future lawsuits alleging patent infringement
or other intellectual property rights violations. In addition, litigation may
be necessary to:
. assert claims of infringement;
. enforce our patents;
. protect our trade secrets or know-how; or
. determine the enforceability, scope and validity of the proprietary
rights of others.
We may be unsuccessful in defending or pursuing these lawsuits. Regardless
of the outcome, litigation can be very costly and can divert management's
efforts. An adverse determination may subject us to significant liabilities or
require us or our future collaborators to seek licenses to other parties'
patents or proprietary rights. We or our future collaborators may also be
restricted or prevented from manufacturing or selling our products and
services. Further, we, or our future collaborators may not be able to obtain
any necessary licenses on acceptable terms, if at all.
We may be unable to protect our proprietary information, which may result in
its unauthorized use and a loss of revenue
Our business and competitive position depend upon our ability to protect our
proprietary database information and software technology. Despite our efforts
to protect this information and technology, unauthorized parties may attempt to
obtain and use information that we regard as proprietary. Although our database
subscription agreements require our subscribers to control access to our
databases, policing unauthorized use of our databases and software may be
difficult.
We pursue a policy of having our employees, consultants and advisors execute
proprietary information and invention agreements when they begin working for
us. However, these agreements may not provide meaningful protection for our
trade secrets or other proprietary information in the event of unauthorized use
or disclosure.
Our means of protecting our proprietary rights may not be adequate, and our
competitors may:
. independently develop substantially equivalent proprietary information
and techniques;
. otherwise gain access to our proprietary information; or
. design around patents issued to us or our other intellectual property.
35
If the inventions described in our patent applications on full-length or
partial genes are found to be unpatentable, our issued patents are not enforced
or our patent applications conflict with patent applications filed by others,
our revenues may decline
One of our strategies is to file patent applications on what we believe to
be novel full-length and partial genes and SNPs obtained through our efforts to
discover the order, or sequence, of the molecules, or bases, of genes. We have
filed U.S. patent applications in which we claimed partial sequences of some
genes. We have also applied for patents in the U.S. and other countries
claiming full-length gene sequences associated with cells and tissues involved
in our gene sequencing program. We hold a number of issued U.S. patents on
full-length genes and one issued U.S. patent claiming multiple partial gene
sequences. While the United States Patent and Trademark Office has issued
patents covering full-length genes, partial gene sequences and SNPs, the Patent
and Trademark Office may choose to interpret new guidelines for the issuance of
patents in a more restrictive manner in the future, which could affect the
issuance of our pending patent applications. We also do not know whether or how
courts may enforce our issued patents, if that becomes necessary. If a court
finds these types of inventories to be unpatentable, or interprets them
narrowly, the value of our patent portfolio and possibly our revenues could be
diminished.
We believe that some of our patent applications claim genes and partial
sequences of genes that may also be claimed in patent applications filed by
others. In some or all of these applications, a determination of priority of
inventorship may need to be decided in an interference before the United States
Patent and Trademark Office, before a patent is issued. If a full-length or
partial length sequence for which we seek a patent is issued to one of our
competitors, we may be unable to include that full-length or partial length
sequence or in a library of bioreagents. This could result in a loss of
revenues.
If the effective term of our patents is decreased due to changes in the U.S.
patent laws or if we need to refile some of our patent applications, the value
of our patent portfolio and the revenues we derive from it may be decreased
The value of our patents depends in part on their duration. A shorter period
of patent protection could lessen the value of our rights under any patents
that we obtain and may decrease the revenues we derive from our patents. The
U.S. patent laws were amended in 1995 to change the term of patent protection
from 17 years from patent issuance to 20 years from the earliest effective
filing date of the application. Because the average time from filing to
issuance of biotechnology applications is at least one year and may be more
than three years depending on the subject matter, a 20-year patent term from
the filing date may result in substantially shorter patent protection. Also, we
may need to refile some of our applications claiming large numbers of gene
sequences and, in these situations, the patent term will be measured from the
date of the earliest priority application. This would shorten our period of
patent exclusivity and may decrease the revenues that we might obtain from the
patents.
International patent protection is particularly uncertain, and if we are
involved in opposition proceedings in foreign countries, we may have to expend
substantial sums and management resources
Biotechnology patent law outside the United States is even more uncertain
than in the United States and is currently undergoing review and revision in
many countries. Further, the laws of some foreign countries may not protect our
intellectual property rights to the same extent as U.S. laws. We may
participate in opposition proceedings to determine the validity of our foreign
patents or our competitors foreign patents, which could result in substantial
costs and diversion of our efforts.
36
REGULATORY RISKS
If we are unable to obtain regulatory approval to develop and market products
in the United States and foreign jurisdictions, we might not be permitted to
commercialize products from our research
Before commencing clinical trials in humans, we, or our future
collaborators, will need to submit and receive approval from the FDA of an
Investigational New Drug application, or IND. The regulatory process also
requires preclinical testing. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations, which could delay, limit
or prevent regulatory approval. In addition, delays or rejections may be
encountered based upon changes in regulatory policy for product approval during
the period of product development and regulatory agency review. Any failure to
obtain regulatory approval could delay or prevent us from commercializing
products.
Due, in part, to the early stage of our drug candidate research and
development process, we cannot predict whether regulatory approval will be
obtained for any product we, or our future collaborators, hope to develop.
Significant research and development efforts will be necessary before any
products can be commercialized. Satisfaction of regulatory requirements
typically takes many years, is dependent upon the type, complexity and novelty
of the product and requires the expenditure of substantial resources.
If regulatory approval of a product is granted, this approval will be
limited to those disease states and conditions for which the product is
demonstrated through clinical trials to be safe and efficacious. We cannot
ensure that any compound developed by us, alone or with others, will prove to
be safe and efficacious in clinical trials and will meet all of the applicable
regulatory requirements needed to receive marketing approval.
Outside the United States, our ability, or that of our future collaborative
partners, to market a product is contingent upon receiving a marketing
authorization from the appropriate regulatory authorities. This foreign
regulatory approval process typically includes all of the risks associated with
FDA approval described above and may also include additional risks.
Because our activities involve the use of hazardous materials, we may be
subject to claims relating to improper handling, storage or disposal of these
materials that could be time consuming and costly
Our research and development processes involve the controlled use of
hazardous and radioactive materials and biological waste. Our operations
produce hazardous waste products. We cannot eliminate the risk of accidental
contamination or discharge and any resultant injury from these materials. We
are subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of these materials and waste
products. We may be sued for any injury or contamination that results from our
use or the use by third parties of these materials, and our liability may
exceed our insurance coverage and our total assets. Compliance with
environmental laws and regulations may be expensive, and current or future
environmental regulations may impair our research, development and production
efforts.
Future changes to environmental, health and safety laws could cause us to
incur additional expense or restrict our operations. In addition, our future
collaborators may use hazardous materials in connection with our collaborative
efforts. To our knowledge, their work is performed in accordance with
applicable biosafety regulations. In the event of a lawsuit or investigation,
however, we could be held responsible for any injury caused to persons or
property by exposure to, or release of, these hazardous materials use by these
parties. Further, we may be required to indemnify our collaborators against all
damages and other liabilities arising out of our development activities or
products produced in connection with these collaborations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate risk primarily through its
investments in short-term marketable debt securities. The Company's investment
policy calls for investment in short term, low risk, investment-grade
37
instruments. As of December 31, 2001, investments in marketable debt securities
were $500.0 million. Due to the nature of these investments, if market interest
rates were to increase immediately and uniformly by 10% from levels as of
December 31, 2001, the decline in the fair value of the portfolio would not be
material.
The Company is exposed to equity price risks on the marketable portion of
equity securities included in its portfolio of investments and long-term
investments, entered into to further its business and strategic objectives.
These investments are in small capitalization stocks in the
pharmaceutical/biotechnology industry sector, in companies with which the
Company has research and development or licensing agreements. The Company
typically does not attempt to reduce or eliminate its market exposure on these
securities. As of December 31, 2001, long-term investments were $45.3 million.
The Company is exposed to foreign exchange rate fluctuations as the
financial results of its foreign operations are translated into U.S. dollars in
consolidation. As exchange rates vary, these results, when translated, may vary
from expectations and adversely impact the Company's financial position or
results of operations. All of the Company's revenues are denominated in U.S.
dollars. The Company does not enter into forward exchange contracts as a hedge
against foreign currency exchange risk on transactions denominated in foreign
currencies or for speculative or trading purposes. If currency exchange rates
were to fluctuate immediately and uniformly by 10% from levels as of December
31, 2001, the impact to the Company's financial position or results of
operations would not be material.
38
Item 8. Financial Statements and Supplementary Data
INDEX
Page
----
Consolidated Financial Statements of Incyte Genomics, Inc.
Report of Ernst & Young LLP, Independent Auditors.................................................. 40
Consolidated Balance Sheets at December 31, 2001 and 2000.......................................... 41
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999......... 42
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2001,
2000 and 1999.................................................................................... 43
Consolidated Statement of Stockholders' Equity for the years ended December 31, 2001, 2000 and
1999............................................................................................. 44
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999......... 45
Notes to the Consolidated Financial Statements..................................................... 46
Interim Consolidated Financial Information (unaudited)............................................. 66
Financial Statements of diaDexus, Inc., a Development Stage Company
Report of PricewaterhouseCoopers LLP, Independent Accountants...................................... 68
Balance Sheets at December 31, 2001 and 2000....................................................... 69
Statements of Operations for the years ended December 31, 2001, 2000, 1999 and for the period from
August 29, 1997 (inception) through December 31, 2001............................................ 70
Statements of Members' and Stockholders' Equity for the period from August 29, 1997 (inception)
through December 31, 2001........................................................................ 71
Statements of Cash Flows for the years ended December 31, 2001, 2000, 1999 and for the period
from August 29, 1997 (inception) through December 31, 2001....................................... 72
Notes to Financial Statements...................................................................... 73
Schedule II--Valuation and Qualifying Accounts..................................................... 67
39
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Incyte Genomics, Inc.
We have audited the accompanying consolidated balance sheets of Incyte
Genomics, Inc. as of December 31, 2001 and 2000, and the related consolidated
statements of operations, comprehensive income (loss), stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2001.
Our audits also included the financial statement schedule listed in the Index
at Item 14(a). These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits. We did not audit
the financial statements of diaDexus, Inc., a development stage company, which
statements reflect a net loss of $11,286,000 for the year ended December 31,
1999. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the 1999 losses from
joint venture recorded under the equity method and other data included for
diaDexus, Inc. is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Incyte Genomics, Inc. at
December 31, 2001 and 2000, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Palo Alto, California
January 25, 2002
40
INCYTE GENOMICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares and par value)
December 31,
-------------------
2001 2000
--------- --------
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 43,368 $110,155
Marketable securities--available-for-sale....................................... 464,535 472,025
Accounts receivable, net/(1)/................................................... 54,038 35,022
Prepaid expenses and other current assets....................................... 29,280 30,693
--------- --------
Total current assets........................................................ 591,221 647,895
Property and equipment, net........................................................ 47,927 98,948
Long-term investments.............................................................. 45,272 40,003
Goodwill and other intangible assets, net.......................................... 2,914 82,944
Deposits and other assets.......................................................... 18,225 17,030
--------- --------
Total assets.................................................................... $ 705,559 $886,820
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 7,347 $ 17,497
Accrued compensation............................................................ 18,812 13,023
Interest payable................................................................ 4,060 4,310
Royalties payable............................................................... 5,001 465
Accrued and other current liabilities........................................... 11,873 18,261
Deferred revenue................................................................ 24,045 22,756
Accrued restructuring charges................................................... 14,970 --
--------- --------
Total current liabilities................................................... 86,108 76,312
Convertible subordinated notes..................................................... 179,248 187,814
--------- --------
Total liabilities........................................................... 265,356 264,126
--------- --------
Commitments and contingencies
Stockholders' equity:..............................................................
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and
outstanding at December 31, 2001 and 2000..................................... -- --
Common stock, $0.001 par value; 200,000,000 shares authorized; 66,745,577 and
65,691,623 shares issued and outstanding at December 31, 2001 and 2000,
respectively.................................................................. 67 66
Additional paid-in capital...................................................... 707,412 689,392
Deferred compensation........................................................... (8,127) (2,773)
Accumulated other comprehensive income.......................................... 8,990 20,913
Accumulated deficit............................................................. (268,139) (84,904)
--------- --------
Total stockholders' equity.................................................. 440,203 622,694
--------- --------
Total liabilities and stockholders' equity.................................. $ 705,559 $886,820
========= ========
- --------
(1) Includes receivables from related parties of $10,936 and $0 in 2001 and
2000, respectively.
See accompanying notes
41
INCYTE GENOMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
-----------------------------
2001 2000 1999
--------- -------- --------
Revenues/(1)/..................................................... $ 219,263 $194,167 $156,962
Costs and expenses:
Research and development/(2)/.................................. 213,336 192,556 146,833
Selling, general and administrative/(3)/....................... 70,626 64,201 37,235
Other expenses/(4)/............................................ 130,372 -- --
--------- -------- --------
Total costs and expenses................................... 414,334 256,757 184,068
--------- -------- --------
Loss from operations.............................................. (195,071) (62,590) (27,106)
Interest and other income (expense), net.......................... 23,453 41,735 5,485
Interest expense.................................................. (10,128) (10,529) (316)
Loss on sale of assets............................................ (5,777) -- --
Gain on certain derivative financial instruments.................. 553 -- --
Losses from joint venture......................................... -- (1,283) (5,631)
--------- -------- --------
Loss before income taxes, extraordinary item and accounting change (186,970) (32,667) (27,568)
Provision (benefit) for income taxes.............................. 930 205 (800)
--------- -------- --------
Loss before extraordinary item and accounting change.............. (187,900) (32,872) (26,768)
Extraordinary gain................................................ 2,386 3,137 --
Cumulative effect of accounting change............................ 2,279 -- --
--------- -------- --------
Net loss................................................... $(183,235) $(29,735) $(26,768)
========= ======== ========
Per share data:
Loss before extraordinary item................................. $ (2.84) $ (0.52) $ (0.48)
Extraordinary gain............................................. 0.04 0.05 --
Cumulative effect of accounting change......................... 0.03 -- --
--------- -------- --------
Basic and diluted net loss per share........................... $ (2.77) $ (0.47) $ (0.48)
========= ======== ========
Shares used in computing basic and diluted net loss per share..... 66,193 63,211 56,276
========= ======== ========
- --------
(1) Includes revenues from transactions with related parties of $24,615, $0 and
$0 for the years ended December 31, 2001, 2000 and 1999, respectively.
(2) Includes stock based compensation charges of $1,268, $336 and $416 in 2001,
2000 and 1999, respectively.
(3) Includes stock-based compensation charges of $137, $0 and $0 in 2001, 2000
and 1999, respectively.
(4) Includes the following charges recorded in 2001: $68,666--goodwill and
intangibles impairment; $55,602--non-recurring restructuring charges and
$6,104--impairment of a long-lived asset.
See accompanying notes
42
INCYTE GENOMICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Year Ended December 31,
-----------------------------
2001 2000 1999
--------- -------- --------
Net loss................................................................... $(183,235) $(29,735) $(26,768)
Other comprehensive income (loss):
Unrealized gains (losses) on marketable securities...................... (13,919) 17,446 3,346
Reclassification adjustment for realized gains on marketable securities. 1,993 172 272
Foreign currency translation adjustment................................. 3 (148) (165)
--------- -------- --------
Other comprehensive income (loss).......................................... (11,923) 17,470 3,453
--------- -------- --------
Comprehensive loss......................................................... $(195,158) $(12,265) $(23,315)
========= ======== ========
See accompanying notes
43
INCYTE GENOMICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except number of shares)
Accumulated
Additional Receivable Other Total
Common Paid-in Deferred From Comprehensive Accumulated Stockholders'
Stock Capital Compensation Stockholder Income Deficit Equity
------ ---------- ------------ ----------- ------------- ----------- -------------
Balances at January 1, 1999......... $56 $209,164 $(1,209) $(33) $ (10) $ (28,401) $ 179,567
Issuance of 1,961,696 shares of
Common Stock upon exercise of
stock options and 158,754 shares of
Common Stock under the ESPP........ 2 13,612 -- -- -- -- 13,614
Amortization of deferred
compensation....................... -- -- 403 -- -- -- 403
Repayment of receivable from
stockholder........................ -- -- -- 13 -- -- 13
Other comprehensive income (loss)... 3,453 3,453
Net loss............................ -- -- -- -- -- (26,768) (26,768)
--- -------- ------- ---- -------- --------- ---------
Balances at December 31, 1999....... 58 222,776 (806) (20) 3,443 (55,169) 170,282
Issuance of 2,448,612 shares of
Common Stock upon exercise of
stock options and 214,617 shares of
Common Stock under the ESPP........ 3 28,625 -- -- -- -- 28,628
Issuance of 4,000,000 shares of
Common Stock in private equity
offering........................... 4 403,351 -- -- -- -- 403,355
Issuance of 1,248,522 shares of
Common Stock and deferred
compensation from stock options
assumed in the acquisition of
Proteome Inc....................... 1 34,640 (2,479) -- -- -- 32,162
Amortization of deferred
compensation....................... -- -- 512 -- -- -- 512
Repayment of receivable from
stockholder........................ -- -- -- 20 -- -- 20
Other comprehensive income (loss)... 17,470 17,470
Net loss............................ -- -- -- -- -- (29,735) (29,735)
--- -------- ------- ---- -------- --------- ---------
Balances at December 31, 2000....... 66 689,392 (2,773) -- 20,913 (84,904) 622,694
Issuance of 752,151 shares of
Common Stock upon exercise of
stock options and 301,763 shares of
Common Stock under the ESPP........ 1 11,645 -- -- -- -- 11,646
Other............................... -- (234) -- -- -- -- (234)
Deferred compensation on issuance of
restricted stock units............. -- 7,933 (7,933) -- -- -- --
Adjustment of deferred compensation
for terminated employees........... -- (1,324) 1,324 -- -- -- --
Amortization of deferred
compensation....................... -- -- 1,255 -- -- -- 1,255
Other comprehensive income (loss)... (11,923) (11,923)
Net loss............................ -- -- -- -- -- (183,235) (183,235)
--- -------- ------- ---- -------- --------- ---------
Balances at December 31, 2001....... $67 $707,412 $(8,127) $ -- $ 8,990 $(268,139) $ 440,203
=== ======== ======= ==== ======== ========= =========
See accompanying notes
44
INCYTE GENOMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
------------------------------
2001 2000 1999
--------- --------- --------
Cash flows from operating activities:
Net loss............................................................................ $(183,235) $ (29,735) $(26,768)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash restructuring charges and impairment of long-lived assets............... 109,423 -- --
Depreciation and amortization.................................................... 46,410 34,842 28,106
Amortization of deferred compensation............................................ 1,255
Gain on repurchase of convertible subordinated notes............................. (2,386) (3,137) --
Cumulative effect of accounting change........................................... (2,279) -- --
Gain on derivative financial instruments, net.................................... (553) -- --
Impairment of long-term investments.............................................. 14,665
Gain on sale of long-term investments, net....................................... (2,505) (4,384) (241)
Loss on sale of assets........................................................... 5,777 -- --
Debt instruments and equity received in exchange for goods or services provided.. (8,100) (6,600) --
Losses from joint venture........................................................ -- 1,283 5,631
Changes in operating assets and liabilities:
Accounts receivable........................................................... (21,406) (8,414) (12,290)
Prepaid expenses and other assets............................................. (14,916) (19,824) (17,973)
Accounts payable.............................................................. (10,150) 10,816 (1,743)
Accrued and other current liabilities......................................... 19,557 14,912 6,427
Deferred revenue.............................................................. 1,439 (3,703) (2,595)
--------- --------- --------
Net cash used in operating activities...................................... (47,004) (13,944) (21,446)
--------- --------- --------
Cash flows from investing activities:
Capital expenditures................................................................ (12,919) (59,510) (34,758)
Purchase of long-term investments................................................... (28,019) (3,494) (4,181)
Proceeds from the sale of long-term investments..................................... 4,337 7,917 4,321
Purchase of subsidiary (net of cash received)....................................... -- (36,866) --
Purchases of marketable securities.................................................. (888,366) (822,357) (22,998)
Sales of marketable securities...................................................... 601,884 274,267 38,932
Maturities of marketable securities................................................. 297,226 112,950 10,000
Other............................................................................... 300 -- --
--------- --------- --------
Net cash used in investing activities...................................... (25,557) (527,093) (8,684)
--------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock under stock plans............................ 11,268 31,297 13,614
Proceeds from private equity offering............................................... -- 403,355 --
Proceeds from the issuance of Convertible Subordinated Notes........................ -- 196,800 --
Repurchase of Convertible Subordinated Notes........................................ (5,643) (11,872) --
Principal payments on capital lease obligations and note payable.................... -- (480) (1,160)
Other............................................................................... 145 20 13
--------- --------- --------
Net cash provided by financing activities.................................. 5,770 619,120 12,467
--------- --------- --------
Effect of exchange rate on cash and cash equivalents................................ 4 (148) (165)
Net increase (decrease) in cash and cash equivalents................................ (66,787) 77,935 (17,828)
Cash and cash equivalents at beginning of period.................................... 110,155 32,220 50,048
--------- --------- --------
Cash and cash equivalents at end of period.......................................... $ 43,368 $ 110,155 $ 32,220
========= ========= ========
Supplemental Schedule of Cash Flow Information
Interest paid....................................................................... $ 9,526 $ 6,219 $ 316
========= ========= ========
Taxes paid.......................................................................... $ 780 $ 226 $ 224
========= ========= ========
Cash Flow for Acquisition of Subsidiaries
Tangible assets acquired (excluding $808 cash received in 2000)..................... -- $ 1,597 --
Purchased in-process research and development....................................... -- -- --
Goodwill and other intangible assets acquired....................................... -- 70,771 --
Acquisition costs incurred.......................................................... -- (2,300) --
Liabilities assumed................................................................. -- (1,039) --
Deferred compensation assumed....................................................... -- 2,479 --
Common stock issued................................................................. -- (34,642) --
---------
Cash paid for acquisition (net of $808 cash received in 2000)....................... -- $ 36,866 --
=========
Supplemental Disclosure of Non-Cash Activity
Deferred compensation on restricted stock units..................................... $ 7,933 -- --
=========
Reversal of deferred compensation on Proteome....................................... $ (1,324) -- --
=========
See accompanying notes
45
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies
Organization and Business. Incyte Genomics, Inc. (the "Company") was
incorporated in Delaware in April 1991 under the name Incyte Pharmaceuticals,
Inc. In June 2000, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation to change the Company's name to Incyte
Genomics, Inc. The Company believes it has the largest commercial portfolio of
issued United States patents covering human, full-length genes and the proteins
and antibodies they encode. The Company intends to leverage its leading
intellectual property and genomic information position to be a leader in
therapeutic small molecule, secreted protein and antibody discoveries. In
addition, the Company has also developed a leading integrated platform of
genomic technologies designed to aid in the understanding of the molecular
basis of disease. These technologies primarily consist of genomic databases and
pharmaceutically relevant intellectual property licenses, which help
pharmaceutical and biotechnology researchers in their therapeutic discovery and
development efforts. These efforts include gene discovery, understanding
disease pathways, identifying new disease targets and the discovery and
correlation of gene sequence variation to disease.
During 2001, the Company increased its focus on its therapeutic discovery
and development programs and its information products and services, which
includes licensing a portion of its intellectual property. As a result, the
Company exited the following activities: microarray-related products and
services, genomic screening products and services, public domain clone products
and related services, contract sequencing services, transgenics products and
services and SNP discovery services. As a part of the exit of these activities,
the Company closed certain of its facilities in Fremont, California; St. Louis,
Missouri and Cambridge, England. In addition to the product lines exited, it
made infrastructure and other personnel reductions at its other locations,
resulting in an aggregate workforce reduction of approximately 400 employees.
Principles of Consolidation. The consolidated financial statements include
the accounts of Incyte Genomics, Inc., and its wholly owned subsidiaries. All
material intercompany accounts, transactions, and profits have been eliminated
in consolidation.
Reclassifications. Certain amounts reported in previous years have been
reclassified to conform to 2001 financial statement presentation.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles 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.
Foreign Currency Translation. The financial statements of subsidiaries
outside the United States are measured using the local currency as the
functional currency. Assets and liabilities of these subsidiaries are
translated at the rates of exchange at the balance sheet date. The resultant
translation adjustments are included in the accumulated other comprehensive
income (loss), a separate component of stockholders' equity. Income and expense
items are translated at average monthly rates of exchange.
Concentrations of Credit Risk. Cash, cash equivalents, short-term
investments, trade receivables, and long-term strategic investments are
financial instruments which potentially subject the Company to concentrations
of credit risk. The estimated fair value of financial instruments approximates
the carrying value based on available market information. The Company primarily
invests its excess available funds in notes and bills issued by the U.S.
government and its agencies and corporate debt securities and, by policy,
limits the amount of credit exposure to any one issuer and to any one type of
investment, other than securities issued or guaranteed by the U.S. government.
The Company's customers are primarily pharmaceutical and biotechnology
companies which are typically located in the United States and Europe. The
Company has not experienced any
46
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
significant credit losses to date and does not require collateral on
receivables. The Company's long-term investments represent equity and debt
investments in a number of companies whose businesses may be complementary to
the Company's business. The Company evaluates the long-term investments
quarterly for impairment. (See Long-Term Investments)
Cash and Cash Equivalents. Cash and cash equivalents are held in U.S banks
or in custodial accounts with U.S. and U.K. banks. Cash equivalents are defined
as all liquid investments with maturity from date of purchase of 90 days or
less that are readily convertible into cash and have insignificant interest
rate risk.
Marketable Securities--Available-for-Sale. All marketable securities are
classified as available-for-sale. Available-for-sale securities are carried at
fair value, based on quoted market prices, with unrealized gains and losses
reported as a separate component of stockholders' equity. The amortized cost of
debt securities in this category is adjusted for amortization of premiums and
accretions of discounts to maturity. Such amortization is included in interest
income. Realized gains and losses and declines in value judged to be other than
temporary for available-for-sale securities are included in interest and other
income/expense. The cost of securities sold is based on the specific
identification method.
The following is a summary of the Company's marketable security portfolio
including cash equivalents of $35,415,000 and $69,330,000 as of December 31,
2001 and 2000, respectively.
Net
Amortized Unrealized Estimated
Cost Gains (Losses) Fair Value
--------- -------------- ----------
(in thousands)
December 31, 2001
U.S. Treasury notes and other U.S.
government and agency securities..... $131,086 $ 533 $131,619
Corporate debt securities.............. 363,764 4,567 368,331
Long term equity investments........... 4,947 4,602 9,549
-------- ------- --------
$499,797 $ 9,702 $509,499
======== ======= ========
December 31, 2000
U.S. Treasury notes and other U.S.
government and agency securities..... $173,614 $ 226 $173,840
Corporate debt securities.............. 365,896 1,619 367,515
Long term equity investments........... 5,761 19,783 25,544
-------- ------- --------
$545,271 $21,628 $566,899
======== ======= ========
At December 31, 2001 and 2000, all of the Company's debt investments are
classified as short-term, as the Company has classified its investments as
available for sale and may not hold its investments until maturity in order to
take advantage of market conditions. Unrealized losses were not material and
have therefore been netted against unrealized gains. At December 31, 2001, the
Company's debt marketable securities had the following maturities:
Amortized Estimated
Cost Fair Value
--------- ----------
(in thousands)
Less than one year..................................... $296,872 $299,009
Between one and two years.............................. 178,164 181,020
Between two and three years............................ 19,814 19,921
-------- --------
$494,850 $499,950
======== ========
47
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net realized gains of $1,993,000, $172,000 and $272,000 from sales of
marketable securities were included in "interest and other income/expense, net"
in 2001, 2000 and 1999, respectively.
Accounts Receivable. Accounts receivable at December 31, 2001 and 2000
included an allowance for doubtful accounts of $2,101,000 and $356,000,
respectively, with the allowance reflecting reserves for activities exited in
the restructure.
Property and Equipment. Property and equipment is stated at cost, less
accumulated depreciation and amortization. Depreciation is recorded using the
straight-line method over the estimated useful lives of the respective assets
(generally three to five years). Leasehold improvements are amortized over the
shorter of the estimated useful life of the assets or lease term. Property and
equipment consists of the following:
December 31,
------------------
2001 2000
-------- --------
(in thousands)
Office equipment................................... $ 4,944 $ 5,308
Laboratory equipment............................... 21,149 32,286
Computer equipment................................. 75,906 93,136
Leasehold improvements............................. 33,433 48,924
-------- --------
135,432 179,654
Less accumulated depreciation and amortization..... (87,505) (80,706)
-------- --------
$ 47,927 $ 98,948
======== ========
Depreciation expense, including amortization expense of assets under capital
leases and leasehold improvements, was $31,240,000, $28,922,000 and $21,849,000
for 2001, 2000 and 1999, respectively.
Certain laboratory and computer equipment used by the Company could be
subject to technological obsolescence in the event that significant advancement
is made in competing or developing equipment technologies. Management
continually reviews the estimated useful lives of technologically sensitive
equipment and believes that those estimates appropriately reflect the current
useful life of its assets. In the event that a currently unknown significantly
advanced technology became commercially available, the Company would
re-evaluate the value and estimated useful lives of its existing equipment,
possibly having a material impact on the financial statements.
Valuation of Long-Lived Assets. Long-lived assets, including certain
identifiable intangible assets and goodwill, to be held and used are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable such as a significant
industry downturn or a significant decline in the market value of the Company.
Determination of recoverability is based on an estimate of undiscounted cash
flows resulting from the use of the asset and its eventual disposition.
Measurement of impairment charges for long-lived assets and certain
identifiable intangible assets including goodwill relating to those assets that
management expects to hold and use are based on the fair value of such assets.
Long-lived assets and certain identifiable intangible assets to be disposed of
are reported at the lower of carrying amount or fair value less costs to sell.
Long-Term Investments. The Company has made equity investments in a number
of companies whose businesses may be complementary to the Company's business.
The Company accounts for its investments for which the shares are freely
tradable or become freely tradable within one year of the balance sheet date in
48
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accordance with Financial Accounting Standard Board ("FASB") Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"),
with unrealized gains and losses being reported in accumulated other
comprehensive income (loss) as a separate component of stockholders' equity. In
all other cases, the cost method of accounting is used. The Company owns less
than 20% of the outstanding voting stock of each long-term investment, and does
not have the ability to exert significant influence over these investments.
Derivative Financial Instruments. In June 1998, the FASB issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"), as amended by SFAS Nos. 137 and 138. SFAS 133 established standards for
accounting and reporting derivative instruments and hedging activities. It
requires companies to recognize all derivatives as either assets or liabilities
on the balance sheet and measure these instruments at fair value. Derivatives
that are not designated as hedges must be adjusted to fair value through the
Statement of Operations. The Company adopted SFAS 133 on January 1, 2001 and
recorded a $2.3 million cumulative gain, or $0.03 per share, relating to the
valuation of warrants held in other companies, which is recorded in the
consolidated statements of operations as a cumulative effect of accounting
change. The Company also recorded a gain of $0.6 million during the year ended
December 31, 2001 related to the increase in value of the same instruments
subject to SFAS 133. The asset balances are included in long-term investments.
Joint Venture. In September 1997, the Company formed a joint venture,
diaDexus, LLC, with SmithKline Beecham Corporation ("SB"), to utilize genomic
and bioinformatic technologies in the discovery and commercialization of
molecular diagnostics. The Company and SB each held a 50 percent equity
interest in diaDexus and the Company accounted for the investment under the
equity method. On April 4, 2000, diaDexus converted from an LLC to a
corporation and completed a private equity financing, at which time the Company
no longer had significant influence over diaDexus. Accordingly, the Company
began accounting for its investment in diaDexus under the cost method of
accounting as of the date of the financing. (See Note 11).
Goodwill and Other Intangible Assets. Intangible assets represent purchased
intangible assets and the excess acquisition cost over the fair value of
tangible and identified intangible assets of businesses acquired (goodwill).
Purchased intangible assets include developed technology, database, tradename
and assembled workforce. Intangible assets are being amortized using the
straight-line method over estimated useful lives ranging from 3 to 8 years. At
December 31, 2001 and 2000, accumulated amortization was $8,064,000 and
$5,380,000, respectively. See Note 14 for a discussion of impairment charges
recognized in 2001.
Software Costs. In accordance with the provisions of the FASB Statement No.
86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed ("SFAS 86"), the Company has capitalized software
development costs incurred in developing certain products once technological
feasibility of the products has been determined. At December 31, 2001 and 2000,
capitalized software was $5,988,000 and $8,166,000, respectively, net of
accumulated amortization of $748,000 and $9,785,000, respectively. Amortization
expense was $4,327,000; $4,799,000; and $3,418,000 for the years ended December
31, 2001, 2000 and 1999, respectively. See Note 14 for a discussion of
impairment charges recognized in 2001.
Patent Costs. In accordance with the provisions of the Accounting
Principles Board Opinion No. 17, Intangible Assets ("APB 17"), the Company has
capitalized direct costs incurred in preparing, filing and maintaining patent
applications. At December 31, 2001 and 2000, capitalized patents were
$6,926,000 and $1,340,000, respectively, net of accumulated amortization of
$478,000 and $78,000, respectively. Amortization expense was $400,000; $78,000;
and $0 for the years ended December 31, 2001, 2000 and 1999, respectively.
Internal Use Software. The Company accounts for software developed or
obtained for internal use in accordance with Statement of Position 98-1
Accounting for the Costs of Computer Software Developed or
49
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Obtained for Internal Use ("SOP 98-1"). The statement requires capitalization
of certain costs incurred in the development of internal-use software,
including external direct material and service costs, employee payroll and
payroll related costs. Capitalized software costs, which are included in
property and equipment are depreciated over three to five years.
Royalties Payable. Royalties payable arise from the sublicense of third
party patents. These costs are accrued and matched with revenue recognition in
the period of the recording of revenue. The amount accrued at December 31, 2001
reflects increased information products and services sales in 2001.
Accumulated Other Comprehensive Income. Accumulated Other Comprehensive
Income consists of the following:
December 31,
---------------
2001 2000
------ -------
(in thousands)
Unrealized gains on marketable securities........ $9,702 $21,628
Cumulative translation adjustment................ (712) (715)
------ -------
$8,990 $20,913
====== =======
Revenue Recognition. Revenues are recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
price is fixed and determinable and collectibility is reasonably assured. The
Company enters into various types of agreements for access to its databases of
information, use of its intellectual property and sales of its custom genomics
products and services. Revenue is deferred for fees received before earned or
until no further obligations exist.
Revenue from database agreements are recognized evenly over the access
period. Revenue from licenses to the Company's intellectual property are
recognized when earned under the terms of the related agreements. Royalty
revenues are recognized upon the sale of the products or services to third
parties by the licensee or other agreed upon terms.
Revenues from custom products, such as clones and datasets are recognized
upon completion and delivery. Revenues from custom services are recognized upon
completion of contract deliverables. Revenue from gene expression microarray
services includes: technology access fees, which are recognized ratably over
the access term, and progress payments, which are recognized at the completion
of key stages in the performance of the service in proportion to the costs
incurred.
Revenues recognized from multiple element contracts are allocated to each
element of the arrangement based on the relative fair values of the elements.
The determination of fair value of each element is based on objective evidence
from historical sales of the individual element by us to other customers. If
such evidence of fair value for each element of the arrangement does not exist,
all revenue from the arrangement is deferred until such time that evidence of
fair value does exist or until all elements of the arrangement are delivered.
In accordance with SAB 101, when elements are specifically tied to a separate
earnings process, revenue is recognized when the specific performance
obligation associated with the element is completed. When revenues for an
element are not specifically tied to a separate earnings process they are
recognized ratably over the term of the agreement. When contracts include
non-monetary exchanges, the non-monetary transaction is determined using the
fair value of the products and services involved, as applicable.
Revenues received from agreements in which collaborators paid with equity or
debt instruments in their company were $7.8 million and $6.6 million in 2001
and 2000, respectively. Additionally, revenues received
50
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
from agreements in which the Company concurrently invested funds in the
collaborator's stock were $14.1 million and $6.4 million in 2001 and 2000,
respectively. We did not have similar transactions in 1999.
We also entered into transactions in which we recognized revenues of
$24.7 million and $6.7 million in 2001 and 2000, respectively, with certain
customers from whom we concurrently committed to purchase goods or services of
$47.4 million and $12.4 million in 2001 and 2000, respectively. Of such
amounts, we expensed $18.3 million and $1.3 million in 2001 and 2000,
respectively. We did not have similar transactions in 1999.
The above transactions were recorded at fair value in accordance with the
Company's revenue recognition policy.
Research and Development. Research and development costs are charged to
operations as incurred.
Stock-Based Compensation. In accordance with APB Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"), as amended by FASB Interpretation No.
44, Accounting for Certain Transactions Involving Stock Compensation ("FIN
44"), the Company records, and amortizes over the related vesting periods,
deferred compensation representing the difference between the price per share
of stock issued or the exercise price of stock options granted and the fair
value of the Company's common stock at the time of issuance or grant.
Advertising Costs. All costs associated with advertising products are
expensed in the year incurred. Advertising expense for the years ended December
31, 2001, 2000 and 1999, was $1,423,000, $2,482,000 and $1,051,000,
respectively.
New Pronouncements. In July 2001, the FASB issued Statement No. 142,
Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 142 requires, among
other things, the discontinuance of goodwill amortization and includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, and reclassification of certain intangibles out of previously
reported goodwill. The adoption of this statement on January 1, 2002 will not
have a material impact on the Company's consolidated financial statements.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment of Long-Lived Assets ("SFAS 144"). The FASB's new rules on asset
impairment supersede FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, and portions of
APB Opinion No. 30, Reporting the Results of Operations. SFAS 144 provides a
single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. SFAS 144 also requires expected future operating losses
from discontinued operations to be displayed in the period in which the losses
are incurred, rather than as of the measurement date as presently required. The
adoption of this statement on January 1, 2002 will not have a material impact
on the Company's consolidated financial statements.
Note 2. Information Product and Service Agreements
As of December 31, 2001, the Company had entered into agreements for
information products and services, which includes licensing a portion of the
Company's intellectual property, with over fifty pharmaceutical, biotechnology
and agricultural companies and academic institutions. Over 79% and 75% of
revenues in 2001 and 2000, respectively, were derived from such agreements. In
general, collaborators agree to pay, during the term of the agreement, fees to
receive non-exclusive access to selected modules of the Company's databases
and/or
51
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
licenses of certain of its intellectual property. In addition, if a
collaborator develops certain products utilizing the Company's technology and
proprietary database information, royalty payments could potentially be
received by the Company.
One collaborator contributed 11% of total revenues in 2000. No customer
contributed 10% or more of total revenues in 2001 or 1999.
Note 3. Commitments
At December 31, 2001, the Company had noncancelable operating leases on
multiple facilities and equipment, including facilities in Palo Alto and
Fremont, California; St. Louis, Missouri; Beverly, Massachusetts; and
Cambridge, England. Effective January 30, 2002, the Company assigned its lease
obligation for the Fremont facility to another party. The leases expire on
various dates ranging from November 2002 to March 2011. Rent expense for the
years ended December 31, 2001, 2000 and 1999, was approximately $13,081,000,
$12,696,000 and $8,674,000.
At December 31, 2001, future noncancelable minimum payments under the
operating leases were as follows:
Operating
Leases
--------------
Year ended December 31,
----------------------- (in thousands)
2002................................. $15,799
2003................................. 13,884
2004................................. 9,827
2005................................. 9,118
2006................................. 8,310
Thereafter........................... 32,953
-------
Total minimum lease payments..... $89,891
=======
The Company also has purchase commitments of $25.0 million at December 31,
2001, the timing of which is dependent upon provision by the vendor of products
or services. Additionally, the Company has committed to purchase equity in
certain companies when certain events occur. The total amount committed is
$15.0 million. These commitments are considered contingent commitments as a
future event must occur in order to cause the commitment to be enforceable.
Note 4. Convertible Subordinated Notes
In February 2000, in a private placement, the Company issued $200.0 million
of convertible subordinated notes, which resulted in net proceeds of $196.8
million. The notes bear interest at 5.5%, payable semi-annually on February 1
and August 1, and are due February 1, 2007. The notes are subordinated to all
senior indebtedness, as defined. The notes can be converted at the option of
the holder at an initial conversion price of $67.42 per share, subject to
adjustment. The Company may, at its option, redeem the notes at any time before
February 7, 2003, but only if the Company's stock price exceeds 150% of the
conversion price for 20 trading days in a period of 30 consecutive trading
days. On or after February 7, 2003 the Company may, at its option, redeem the
notes at specific prices. Holders may require the Company to repurchase the
notes upon a change in control, as defined. As of December 31, 2001, the fair
value of the notes was approximately $135.0 million based upon trading prices
on the over-the-counter market.
52
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In November 2000, the Company repurchased on the open market, and retired,
$15.0 million in par value of the convertible subordinated notes. The Company
recognized a gain of $3.1 million on the transactions, which was reported as an
extraordinary item. In 2001, the Company repurchased on the open market, and
retired, $8.0 million in par value of the convertible subordinated notes. The
Company recognized a gain of $2.4 million on the transactions, which was
reported as an extraordinary item in fiscal 2001.
Note 5. Stockholders' Equity
Common Stock. At December 31, 2001, the Company had reserved a total of
17,058,921 shares of its common stock for issuance upon exercise of outstanding
and available for issuance stock options and purchases under the Employee Stock
Purchase Plan described below and the conversion of the convertible
subordinated notes described in Note 7. In July 2000, the Company's Board of
Directors authorized a two-for-one stock split effected in the form of a stock
dividend paid on August 31, 2000 to holders of record on August 7, 2000. All
share and per share data have been adjusted retroactively to reflect the split.
On June 6, 2000, the Company's stockholders approved an increase in the
number of shares authorized for issuance from 75,000,000 to 200,000,000.
Preferred Stock. The Company is authorized to issue 5,000,000 shares of
preferred stock, none of which was outstanding at December 31, 2001 or 2000.
The Board of Directors may determine the rights, preferences and privileges of
any preferred stock issued in the future. The Company has reserved 500,000
shares of preferred stock designated as Series A Participating Preferred Stock
for issuance in connection with the Stockholders Rights plan described below.
Sales of Stock. In February 2000, in a private offering, the Company issued
4,000,000 shares of common stock at $105.50 per share. Net proceeds from this
offering were approximately $403.4 million, net of offering expenses.
Stock Compensation Plans. The Company applies APB Opinion No. 25 and
related Interpretations in accounting for its stock compensation plans.
Accordingly, no compensation cost, excluding options issued by Synteni prior to
the 1997 merger, has been recognized for its fixed stock option plans. Had
compensation cost for the Company's three stock-based compensation plans been
determined consistent with SFAS 123, the Company's pro forma net loss in 2001,
2000 and 1999 would have been approximately $202.0 million, $50.5 million and
$40.0 million, respectively. The Company's pro forma basic and diluted net loss
per share in 2001, 2000 and 1999 would have been $3.05, $0.80 and $0.71 per
share, respectively. The weighted average fair value of the options granted
during 2001, 2000 and 1999 are estimated at $10.56, $28.30 and $6.71 per share,
respectively, on the date of grant, using the Black-Scholes multiple-option
pricing model with the following assumptions: dividend yield 0%, 0% and 0%,
volatility of 86%, 92% and 66%, risk-free interest rate of 4.25%, 6.26% and
5.43%, and an average expected life of 3.46, 3.04 and 3.32 years, for 2001,
2000 and 1999, respectively. The average fair value of the employees' purchase
rights under the Employee Stock Purchase Plan during 2001, 2000 and 1999 is
estimated at $8.34, $6.67 and $4.07, respectively, on the date of grant, using
the Black-Scholes multiple-option pricing model with the following assumptions:
dividend yield 0%, 0% and 0%, volatility of 98%, 76% and 66%, risk free
interest rate of 4.41%, 5.89% and 5.14%, and an expected life of 6 months,
respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility
and option life. Because the Company's employee stock options have
characteristics significantly different from those of traded options,
53
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
because changes in the subjective input assumptions can materially affect the
fair value estimate, and because the Company has a relatively limited history
with option behavior, in management's opinion the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
Summaries of stock option activity for the Company's stock option plans as
of December 31, 2001, 2000 and 1999, and related information for the years
ended December 31 are included in the plan descriptions below.
1991 Stock Plan. In November 1991, the Board of Directors adopted the 1991
Stock Plan (the "Stock Plan"), which was amended and restated in 1992, 1995,
1996, 1997, 1999, 2000 and 2001 for issuance of common stock to employees,
consultants, and scientific advisors. Options issued under the plan shall, at
the discretion of the compensation committee of the Board of Directors, be
either incentive stock options or nonstatutory stock options. The exercise
prices of incentive and non-statutory stock options granted under the plan are
not less than the fair market value on the date of the grant, as determined by
the Board of Directors. Options generally vest over four years, pursuant to a
formula determined by the Company's Board of Directors, and expire after ten
years. In June 2001, the Company's stockholders approved an increase in the
number of shares of common stock reserved for issuance under the plan from
17,400,000 to 19,900,000.
During 2001, the Company granted 490,000 restricted stock units under the
Stock Plan to certain management personnel. In connection with the grant of
these restricted stock units, the Company recorded deferred compensation of
$7,933,000 in 2001. These restricted stock units have cliff vesting terms over
one to four years and are being amortized to stock compensation expense over
those vesting terms.
1998 Proteome Stock Plan. In October 1998, Proteome's Board of Directors
approved and adopted the Proteome, Inc. 1998 Employee, Director and Consultant
Stock Option Plan, as amended through August 6, 1999 (the "Proteome Plan").
Under the Proteome Plan, Proteome could grant incentive stock options and
non-qualified options to purchase the equivalent of 216,953 shares of Incyte
common stock. Incentive stock options could be granted to employees at exercise
prices of no less than 100% of the fair value of the common stock on the grant
date, as determined by the board of directors or a committee of the board of
directors. Non-qualified options could be granted to employees, outside
directors and consultants who provided services to Proteome at exercise prices
no less than par value of the common stock, as determined by the board of
directors or a committee of the board of directors. Options could be granted
with different vesting terms from time to time and options issued under the
Proteome Plan expire no more than 10 years after the date of grant. All
outstanding options at the time of the merger with Incyte were converted to
options to purchase Incyte common stock, and the Proteome Plan was assumed by
the Company. No further options will be granted under the Proteome Plan.
Non-Employee Directors' Stock Option Plan. In August 1993, the Board of
Directors approved the 1993 Directors' Stock Option Plan (the "Directors'
Plan"), which was amended in 1995. The Directors' Plan provides for the
automatic grant of options to purchase shares of common stock to non-employee
directors of the Company. The maximum number of shares issuable under the
Directors' Plan is 800,000.
Through the inception of the plan through March 1998, the Directors' Plan
provided that each new non-employee director joining the Board would receive an
option to purchase 80,000 shares of common stock. In March 1998, the Directors
Plan was amended to eliminate this initial grant. In May 2001, the Directors'
Plan was amended to provide that each new non-employee director joining the
Board would receive an option to purchase 20,000 shares of common stock. In
December 2001, the Directors' Plan was amended to provide that this initial
option shall cover the purchase of 30,000 shares of common stock. Additionally,
members who continue to serve on the Board will receive annual option grants
for 5,000 shares exercisable in full on the first anniversary of the date of
the grant. All options are exercisable at the fair market value of the stock on
the date of grant. At December 31, 2001, the Company had options outstanding
under the Directors' Plan to purchase 668,000 shares
54
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of common stock at a weighted average exercise price of $10.756 (535,000 and
615,000 shares of common stock at a weighted average exercise price of $8.819
and $5.625 at December 31, 2000 and 1999, respectively); 536,000 shares are
vested and exercisable at December 31, 2001 (495,000 and 575,000 shares were
vested and exercisable at December 31, 2000 and 1999, respectively). In 2000,
120,000 shares of common stock were purchased under the Directors' Plan at a
weighted average exercise price of $1.36. No options were exercised prior to
2000.
Activity under the combined plans was as follows:
Shares Subject to
Outstanding Options
--------------------
Weighted
Shares Average
Available Exercise
for Grant Shares Price
---------- ---------- --------
Balance at January 1, 1999....................... 3,103,292 8,381,407 $ 9.57
Additional authorization...................... 2,200,000 -- --
Options granted............................... (5,256,830) 5,256,880 13.77
Options exercised............................. -- (1,959,628) 6.38
Options canceled.............................. 1,258,705 (1,258,705) 14.30
---------- ----------
Balance at December 31, 1999..................... 1,305,167 10,419,904 11.71
Additional authorization...................... 2,600,000 -- --
Options granted............................... (1,043,922) 1,043,922 39.59
Options exercised............................. -- (2,446,632) 10.85
Options canceled.............................. 754,593 (754,593) 17.50
---------- ----------
Balance at December 31, 2000..................... 3,615,838 8,262,601 14.96
Additional authorization...................... 2,500,000 -- --
Options granted............................... (4,543,832) 4,543,832 17.66
Options exercised............................. -- (752,191) 11.01
Options canceled.............................. 1,633,830 (1,673,468) 22.75
---------- ----------
Balance at December 31, 2001..................... 3,205,836 10,380,774 $15.18
========== ==========
Options to purchase a total of 4,139,069; 3,469,661 and 3,725,352 shares at
December 31, 2001, 2000 and 1999, respectively, were exercisable. Of the
options exercisable, 4,127,069; 3,469,661 and 3,427,292 shares were vested at
December 31, 2001, 2000 and 1999, respectively.
Options Assumed in Proteome Acquisition. As part of the Proteome
acquisition, Proteome stock option holders received options to purchase 216,953
shares of Incyte common stock with a weighted average exercise price of $7.60.
The Company recognized $2,479,000 of deferred compensation related to these
options, which is being amortized over the vesting period of the options. In
connection with the workforce reduction related to the restructuring in 2001,
the Company terminated certain Proteome stock option holders included in the
original calculation and reduced the deferred compensation by $1,324,000 at
December 31, 2001. Options to purchase a total of 41,181 and 40,651 shares were
vested and exercisable at December 31, 2001 and 2000, respectively.
55
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 2001, for the 1991 Stock Plan, the 1996 Synteni Stock Plan, the
1998 Proteome Stock Plan, and the 1993 Non-employee Directors' Stock Option
Plan:
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Contractual Life Price Exercisable Price
- ------------------------ ----------- ---------------- -------- ----------- --------
$ 0.01- 4.44..... 1,378,871 3.23 $ 2.79 1,371,425 $ 2.79
4.66- 11.19..... 1,193,293 6.50 9.71 869,742 9.67
11.31- 14.00..... 1,211,836 7.95 13.55 589,355 13.53
14.07- 14.48..... 1,077,643 9.60 14.44 64,035 14.20
14.49- 15.22..... 1,667,960 7.80 15.08 892,863 15.11
15.32- 16.19..... 1,286,558 9.63 16.14 87,720 15.90
16.38- 21.81..... 1,349,147 7.86 19.24 600,403 18.05
21.94- 41.38..... 1,085,458 8.59 27.08 264,373 31.24
42.88- 70.00..... 92,995 8.36 47.36 46,278 48.02
119.88-119.88..... 37,013 8.18 119.88 18,804 119.88
---------- ---------
10,380,774 7.57 15.18 4,804,998 12.40
========== =========
Employee Stock Purchase Plan. On May 21, 1997, the Company's stockholders
adopted the 1997 Employee Stock Purchase Plan ("ESPP"). The Company has
authorized 1,200,000 shares of common stock for issuance under the ESPP. In
June 2001, the Company's stockholders approved an increase in the number of
shares of common stock reserved for issuance under the plan to 1,600,000. Each
regular full-time and part-time employee working 20 hours or more per week is
eligible to participate after one month of employment. The Company issued
301,763, 214,617 and 158,754 shares under the ESPP in 2001, 2000 and 1999,
respectively. As of December 31, 2001, 846,978 shares remain available for
issuance under the ESPP.
Stockholders Rights Plan. On September 25, 1998, the Board of Directors
adopted a Stockholder Rights Plan (the "Rights Plan"), pursuant to which one
preferred stock purchase right (a "Right") was distributed for each outstanding
share of common stock held of record on October 13, 1998. One Right will also
attach to each share of common stock issued by the Company subsequent to such
date and prior to the distribution date defined below. Each Right represents a
right to purchase, under certain circumstances, a fractional share of the
Company's Series A Participating Preferred Stock at an exercise price of
$100.00, subject to adjustment. In general, the Rights will become exercisable
and trade independently from the common stock on a distribution date that will
occur on the earlier of (i) the public announcement of the acquisition by a
person or group of 15% or more of the common stock or (ii) ten days after
commencement of a tender or exchange offer for the common stock that would
result in the acquisition of 15% or more of the common stock. Upon the
occurrence of certain other events related to changes in ownership of the
common stock, each holder of a Right would be entitled to purchase shares of
common stock, or an acquiring corporation's common stock, having a market value
of twice the exercise price. Under certain conditions, the Rights may be
redeemed at $0.01 per Right by the Board of Directors. The Rights expire on
September 25, 2008.
56
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Income Taxes
The provision (benefit) for income taxes consists of the following (in
thousands):
Year Ended December 31,
----------------------
2001 2000 1999
---- ---- -----
Current........................................................
Federal..................................................... $ -- $ -- $(832)
Foreign..................................................... 830 125 (92)
State....................................................... 100 80 124
---- ---- -----
Total provision (benefit) for income taxes.............. $930 $205 $(800)
==== ==== =====
Income (loss) before provision for income taxes, extraordinary items and
cumulative effect of accounting change consisted of the following (in
thousands):
Year Ended December 31,
-----------------------------
2001 2000 1999
--------- -------- --------
U.S. taxable entities.................................. $(186,970) $(32,667) $(27,869)
Other.................................................. -- -- 301
--------- -------- --------
$(186,970) $(32,667) $(27,568)
========= ======== ========
The provision (benefit) for income taxes before extraordinary items and
cumulative effect of accounting change differs from the federal statutory rate
as follows (in thousands):
Year Ended December 31,
---------------------------
2001 2000 1999
-------- -------- -------
Provision (benefit) at U.S. federal statutory rate......... $(65,440) $(11,433) $(9,649)
Unbenefitted net operating losses.......................... 47,408 11,144 8,604
Restructuring charges and long-lived asset impairments..... 15,791 -- --
Other...................................................... 3,171 494 245
-------- -------- -------
Provision (benefit) for income taxes....................... $ 930 $ 205 $ (800)
======== ======== =======
57
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the Company's deferred tax assets are as follows
(in thousands):
December 31
-------------------
2001 2000
--------- --------
Deferred tax assets:
Net operating loss carryforwards................ $ 105,000 $ 69,800
Research credits................................ 16,000 12,900
Capitalized research and development............ 16,800 13,000
Accruals and reserves........................... 11,800 4,400
Other, net...................................... 1,000 400
--------- --------
Total gross deferred tax assets............. 150,600 100,500
Less valuation allowance for deferred tax assets... (149,400) (91,900)
--------- --------
Net deferred tax assets............................ 1,200 8,600
Deferred tax liabilities:
Purchased intangibles........................... 1,200 8,600
--------- --------
Net deferred tax assets and liabilities..... $ -- $ --
========= ========
The valuation allowance for deferred tax assets increased by approximately
$57,500,000, $48,500,000 and $20,400,000 during the years ended December 31,
2001, 2000 and 1999, respectively. Approximately $57,500,000 of the valuation
allowance for deferred tax assets relates to benefits from stock option
deductions which, when recognized, will be allocated directly to contributed
capital.
The Company's management believes the uncertainty regarding the timing of
the realization of net deferred tax assets requires a valuation allowance.
As of December 31, 2001, the Company had federal net operating loss
carryforwards of approximately $299,500,000. The Company also had federal
research and development tax credit carryforwards of approximately $10,500,000.
The net operating loss carryforwards will expire at various dates, beginning in
2009 through 2021, if not utilized.
Utilization of the net operating losses and credits may be subject to an
annual limitation, due to the "change in ownership" provisions of the Internal
Revenue Code of 1986 and similar state provisions.
58
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share amounts):
Year Ended December 31,
-----------------------------
2001 2000 1999
--------- -------- --------
Numerator:
Net income (loss)................................... $(183,235) $(29,735) $(26,768)
========= ======== ========
Denominator:
Denominator for basic net income (loss) per share--
weighted-average shares outstanding............... 66,193 63,211 56,276
Dilutive potential common shares--stock options..... -- -- --
--------- -------- --------
Denominator for diluted net income (loss) per
share............................................. 66,193 63,211 56,276
========= ======== ========
Basic net income (loss) per share...................... $ (2.77) $ (0.47) $ (0.48)
========= ======== ========
Diluted net income (loss) per share.................... $ (2.77) $ (0.47) $ (0.48)
========= ======== ========
Options to purchase 10,380,774, 8,307,396 and 10,364,156 shares of common
stock were outstanding at December 31, 2001, 2000 and 1999, respectively, which
were not included in the computation of diluted net income (loss) per share, as
their effect was anti-dilutive. The Company's Convertible Subordinated Notes,
convertible into 2,625,383 shares of common stock, were not included in the
computation of diluted net income (loss) per share, as the effect of their
assumed conversion would be anti-dilutive.
Note 8. Defined Contribution Plan
The Company has a defined contribution plan covering all domestic employees.
Employees may contribute a portion of their compensation, which is then matched
by the Company, subject to certain limitations. Defined contribution expense
for the Company was $1,951,000, $1,735,000 and $1,259,000 in 2001, 2000 and
1999, respectively.
Note 9. Segment Reporting
The Company's operations are treated as one operating segment, in accordance
with SFAS 131: drug discovery and development products and services. For the
year ended December 31, 2001, the Company recorded revenue from customers
throughout the United States and in Austria, Canada, France, Germany, India,
Israel, Japan, Scandinavia, Switzerland, and the United Kingdom. Export revenue
for the years ended December 31, 2001, 2000 and 1999, was $49,656,000,
$48,174,000 and $43,679,000, respectively.
Note 10. Business Combinations
Acquisitions accounted for under the purchase method of accounting
In December 2000, the Company completed the acquisition of Proteome, Inc., a
privately held proteomics information company based in Beverly, Massachusetts.
The Company issued 1,248,522 shares of its common stock and $37.7 million in
cash in exchange for all of Proteome's outstanding capital stock. In addition,
the Company assumed Proteome's stock options, which if fully vested and
exercised, would amount to
59
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
216,953 shares of its common stock. The transaction was accounted for as a
purchase. The amount of the purchase price in excess of the net tangible assets
acquired of $70.8 million, was allocated to goodwill ($50.3 million); database
($16.6 million); tradename ($1.7 million); Proteome's assembled work force
($1.6 million); and developed technology ($0.6 million), each of which is being
amortized over 8, 8, 3, 3 and 5 years, respectively.
The Company allocated Proteome's purchase price based on the relative fair
value of the net tangible and intangible assets acquired. In performing this
allocation, the Company considered, among other factors, the technology
research and development projects in process at the date of acquisition. The
results of operations of Proteome have been included in the consolidated
results of the Company from the date of acquisition on December 28, 2000.
The table below presents the pro forma results of operations and earnings
per share for Proteome and the Company. The transaction is assumed to be
completed on January 1, 2000 and 1999 for the periods ended December 31, 2000
and 1999, respectively (in thousands except per share data).
2000 1999
-------- --------
Revenues................................................. $197,881 $158,773
======== ========
Loss before extraordinary item........................... $ 50,443 $ 38,122
======== ========
Net loss................................................. $ 47,306 $ 38,122
======== ========
Pro forma basic and diluted net loss per share........... $ 0.73 $ 0.66
======== ========
Pro forma shares for basic and diluted net loss per share 64,460 57,525
======== ========
Note 11. Joint Venture
In September 1997, the Company formed a joint venture, diaDexus, LLC
("diaDexus"), with SmithKline Beecham Corporation ("SB"), to utilize genomic
and bioinformatic technologies in the discovery and commercialization of
molecular diagnostics. The Company held a 50 percent equity interest in
diaDexus and accounted for the investment under the equity method. In July
1999, the Company and SB each invested an additional $2.5 million in diaDexus
through convertible notes.
On April 4, 2000, diaDexus obtained additional financing through a private
equity offering. In connection with the offering, diaDexus converted from an
LLC to a corporation and repaid in full the $2.5 million principal amount of,
together with accrued interest on, the convertible note held by the company.
Under diaDexus' new capital structure, the Company no longer has the ability to
exert significant influence over diaDexus. Accordingly, the Company accounts
for its investment in diaDexus under the cost method of accounting as of the
date of the financing.
diaDexus purchased $0.1 million, $2.6 million and $1.9 million of contract
sequencing, microarray and software services from the Company in the year ended
December 31, 2001, 2000 and 1999, respectively. At December 31, 2001, the
Company had no receivables outstanding from diaDexus related to these services.
60
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of diaDexus' financial information as of December
31, 2001, 2000, and 1999, and for the years then ended (in thousands):
2001 2000 1999
------- ------- -------
Current assets................................... $68,919 $49,579 $ 8,786
Total assets..................................... 83,538 96,072 11,297
Current liabilities.............................. 3,720 2,384 5,957
Total liabilities................................ 3,720 2,431 6,044
Net loss...................................... 24,517 23,346 11,286
Note 12. Litigation
Affymetrix
On December 21, 2001, Incyte agreed to settle the following existing patent
infringement litigation with Affymetrix, Inc.: Affymetrix, Inc. v. Synteni,
Inc. and Incyte Pharmaceuticals, Inc., Case Nos. C 99-21164 JF and C 99-21165
JF (N.D. Cal.); Incyte Genomics, Inc. v. Affymetrix, Inc., Case No. C 01-20065
JF (N.D. Cal.); and the Incyte Opposition to Affymetrix's European Patent No.
EP 0 619 321. The first lawsuit involved several of Affymetrix's
microarray-related patents (U.S. Patent Nos. 5,445,934, 5,744,305 and
5,800,992). The second lawsuit involved Incyte's RNA amplification patents
(U.S. Patent Nos. 5,716,785 and 5,891,636) and two additional
microarray-related patents held by Affymetrix (U.S. Patent Nos. 5,871,928 and
6,040,193). As a part of the settlement, the companies have agreed to certain
non-exclusive, royalty-bearing licenses and an internal use license under their
respective intellectual property portfolios. Pursuant to the settlement, the
Company received a net cash settlement that was recorded as revenue in 2001.
This settlement does not include Incyte's appeal before the United States
District Court for the Northern District of California seeking de novo review
of the Board of Patent Appeals and Interferences' decision relating to patent
applications licensed by Incyte from Stanford University. There can be no
assurances as to the outcome of that appeal.
Invitrogen
On October 17, 2001, Invitrogen Corporation filed an action against the
Company in the United States District Court for the District of Delaware,
alleging infringement of three patents (U.S. patent number 5,244,797, U.S.
patent number 5,668,005, and U.S. patent number 6,063,608) that relate to the
use of reverse transcriptase with no RNase H activity in preparing
complimentary DNA from RNA. The complaint seeks unspecified money damages and
injunctive relief.
On November 21, 2001, the Company filed its answer to the complaint filed by
Invitrogen in the United States District Court for the District of Delaware. In
addition to its answers to Invitrogen's patent infringement claims, the Company
asserted seven counterclaims against Invitrogen seeking declaratory relief with
respect to the patents at issue, implied license, estoppel, laches, and patent
misuse. The Company also seeks its fees, costs, and expenses. Invitrogen filed
its answer to the Company's counterclaims on January 9, 2002.
Simultaneously with the filing of its answer, the Company filed a motion to
transfer the action from the United States District Court for the District of
Delaware to the United States District Court for the District of Maryland,
where Invitrogen Corporation is currently a party to three infringement actions
alleging infringement of the same patents-in-suit. The issue of transfer has
been fully briefed and submitted to the court for decision.
In addition, on November 21, 2001, the Company filed a complaint against
Invitrogen, as amended on December 21, 2001 and March 7, 2002, in the United
States District Court for the Southern District of California
61
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
alleging infringement of fourteen of the Company's patents. Nine of the
asserted patents (U.S. patent numbers 5,633,149, 5,637,462, 5,817,497,
5,840,535, 5,919,686, 5,925,542, 5,962,263, 5,789,198 and 6,001,598) are gene
patents. Three of the patents (U.S. patent numbers 5,716,785, 5,891,636, and
6,291,170) relate to RNA amplification and gene expression. Two of the patents
(U.S. patent numbers 5,807,522 and 6,110,426) relate to methods of fabricating
microarrays of biological samples. The complaint seeks a permanent injunction
enjoining Invitrogen from further infringement of the patents at issue, damages
for Invitrogen's conduct, as well as the Company's fees, costs, and interest.
The Company further seeks triple damages from the infringement claim based on
Invitrogen's willful infringement of the Company's patents. Invitrogen's
response to the Company's complaint is due in April 2002.
The Company believes it has meritorious defenses and intends to defend
vigorously the suit and potential counterclaims brought by Invitrogen. However,
the Company's defenses may be unsuccessful. At this time, the Company cannot
reasonably estimate the possible range of any loss resulting from this suit due
to uncertainty regarding the ultimate outcome. Regardless of the outcome, the
Invitrogen litigation is expected to result in substantial costs to the
Company. Further, there can be no assurance that any license that may be
required as a result of this litigation or the outcome thereof would be made
available on commercially acceptable terms, if at all.
Note 13. Related Party Transactions
The following are related party transactions as defined by FASB Statement
No. 57, Related Party Disclosures ("SFAS 57"). In each of the transactions
noted in which a director of the Company is in some way affiliated with the
other party to the transaction, such director has recused himself from voting
on the related party transaction. For the years ended December 31, 2001, 2000
and 1999, revenues from companies considered to be related parties as defined
by SFAS 57 were $24,615,000, $0, and $0, respectively. At December 31, 2001 and
2000, receivables from related parties were $10,936,000 and $0, respectively.
In March 2001, the Company entered into a LifeSeq Collaboration Agreement,
Patent License Agreement, Collaboration and Technology Transfer Agreement and
Proteome BioKnowledge Library License Agreement with Genomic Health, Inc.
("Genomic Health"). Randal W. Scott, who served as Chairman of the Board of the
Company until November 2001 and as a director of the Company through December
2001, is Chairman of the Board, President and Chief Executive Officer of
Genomic Health and owns more than 10% of the outstanding capital stock of
Genomic Health. Under the agreements, Genomic Health obtained access to the
Company's LifeSeq Gold database and BioKnowledge Library and received licenses
to certain of the Company's intellectual property. Amounts Genomic Health will
pay the Company under these agreements are similar to those paid to the Company
under agreements between the Company and unrelated third parties. The Company
received rights to certain intellectual property that Genomic Health may, in
the future, develop. At the same time, the Company entered into an agreement to
purchase shares of Series C Preferred Stock of Genomic Health for an aggregate
purchase price of $5.0 million which, together with shares of Series A
Preferred Stock purchased in November 2000 for an aggregate purchase price of
$1.0 million, resulted in the Company owning approximately 10.9% of the
outstanding capital stock of Genomic Health as of December 31, 2001. Under
certain circumstances and if Genomic Health so elects, the Company has agreed
to purchase in a future offering of Genomic Health's capital stock an aggregate
of $5.0 million of the shares being sold in that offering.
In May 2001, the Company entered into a Development and License Agreement
with Iconix Pharmaceuticals, Inc. ("Iconix"). Jon S. Saxe, a director of the
Company, is Chairman of the Board of Iconix. Under the agreement, Iconix
obtained an exclusive license to the Company's LifeExpress Lead database,
access to LifeSeq and ZooSeq databases, licenses to certain of the Company's
intellectual property and use of the Company's LifeArray expression array
technology. Amounts Iconix will pay the Company under these
62
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
agreements are similar to those paid to the Company under agreements between
the Company and unrelated third parties. The Company is the exclusive
distributor for the database product to be developed by Iconix. At the same
time, the Company entered into an agreement to purchase shares of Series E
Preferred Stock of Iconix for an aggregate purchase price of $10.0 million.
Under certain circumstances, the Company has agreed to purchase in a future
offering of Iconix's capital stock up to an aggregate of $5.0 million of the
shares being sold in that offering.
In September 2001, the Company entered into a Technology Access for Licensed
Reagent Manufacture Agreement with Epoch Biosciences, Inc. ("Epoch"). Frederick
B. Craves, a director of the Company, is Chairman of the Board of Epoch and Bay
City Capital, of which Dr. Craves is a partner, holds shares of Epoch stock.
Dr. Craves also holds shares of Epoch stock directly. Under the agreements,
Epoch obtained access to the Company's LifeSeq Gold and ZooSeq databases and
received licenses to certain of the Company's intellectual property. Amounts
Epoch will pay the Company under these agreements are similar to those paid to
the Company under agreements between the Company and unrelated third party
customers. The Company has identified Epoch as the preferred provider of
certain probes to Incyte's users of LifeSeq Gold. Additionally, Epoch will
supply the Company with certain probes for internal development purposes.
In September 2001, the Company entered into a Collaboration Agreement,
Patent License Agreement and two Unilateral Development and Commercialization
Agreements with Medarex, Inc. ("Medarex"). Frederick B. Craves, a director of
the Company, is also a director of Medarex and Bay City Capital, of which Dr.
Craves is a partner, holds shares of Medarex stock. Under the agreements,
Medarex obtained access to the Company's LifeSeq Gold database and received
licenses to certain of the Company's intellectual property. Amounts Medarex
will pay the Company under these agreements are similar to those paid to the
Company under agreements between the Company and unrelated third party
customers. Additionally, under the terms of the agreements, Medarex and the
Company expect to share equally the cost and responsibility of preclinical and
clinical development of antibody products. In addition, the two companies plan
to jointly commercialize any antibody products resulting from this
collaboration.
Note 14. Other Expenses
For the Year Provision
Ended Balance as of
December 31, Cash Non-Cash December 31,
2001 Payments Charges 2001
------------ -------- --------- -------------
(in thousands)
Restructuring expenses:
Workforce reduction..................................... $ 8,114 $(5,226) $ -- $ 2,888
Equipment and other assets.............................. 32,629 -- (32,629) --
Lease commitments and other restructuring charges....... 14,859 (753) (2,024) 12,082
-------- ------- --------- -------
55,602 (5,979) (34,653) 14,970
Impairment of goodwill and other intangible assets......... 68,666 -- (68,666) --
Impairment of other long-lived assets...................... 6,104 -- (6,104) --
-------- ------- --------- -------
Other expenses............................................. $130,372 $(5,979) $(109,423) $14,970
======== ======= ========= =======
On October 25, 2001, the Company announced a restructuring of its operations
in order to focus on its database and partnership programs and its therapeutic
drug discovery and development programs. As a part of the restructuring, the
Company is discontinuing its microarray-based gene expression products and
services, genomic screening products and services, public domain clone products
and related services, contract sequencing services
63
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and internal program on SNP discovery. These custom genomics activities
contributed approximately $45,267,000 of revenue in 2001. Consequently, this
resulted in the Company recording an expense of $55,602,000 related to the
restructuring activities. In addition, the Company recorded a reduction in
goodwill and other intangible assets and impairment of other long-lived assets
totaling $74,770,000.
The workforce reduction charge of approximately $8,718,000 was determined
based on the severance and fringe benefit charges for approximately 400
employees. These employees primarily worked in the activities being exited as
described above and related infrastructure support positions. As of December
31, 2001, approximately 370 employees had been terminated.
Equipment and other assets that were disposed of or removed from operations
were written down to their estimated fair value of $740,000 and that resulted
in a charge of $32,629,000. The write-down of equipment and other assets
primarily relates to leasehold improvements, computer equipment and related
software, lab equipment and office equipment associated with the activities
being exited and related infrastructure reduction. Additionally, the write-off
of equipment and other assets also includes certain software costs related to
products no longer being offered. The Company estimated the fair value of
equipment and other assets based on the current market conditions.
Lease commitments and other restructuring related charges have been accrued
of $14.9 million for facilities and equipment leases related to the activities
being exited and contract-related provisions and settlement and professional
fees. Specifically, the Company is exiting buildings located in St. Louis,
Missouri; Fremont, California; Palo Alto, California; and Cambridge, United
Kingdom. The Company estimated the costs based on the contractual terms of
agreements and then current real estate market conditions. It is estimated that
it will take the Company six to twelve months to sublease the various
properties that will be vacated. The leases related to activities being exited
expire on various dates ranging from May 2003 to March 2007.
The estimates above have been made based upon management's best estimate of
the amounts and timing of certain events included in the restructure plan that
will occur in the future. It is possible that the actual outcome of certain
events may differ from the estimates. Changes will be made to the restructuring
accrual at the point that the differences become known.
As a result of the Company's change in strategic direction and
restructuring, pursuant to SFAS 121, the Company performed an assessment of the
carrying value of its goodwill and other intangible assets recorded in
connection with its Hexagen and Proteome assets.
The activities acquired through the Hexagen acquisition related primarily to
a method of SNP discovery. Although SNP discovery will continue, the Hexagen
method is one of the activities that will not be continued after the change in
strategic direction and restructuring. As a result, it was determined that the
goodwill and intangible assets related to this acquisition have no future cash
flows to support their carrying value and a $10,201,000 charge was recorded to
write these assets down to their estimated fair value.
The Company acquired Proteome, Inc. in December 2000 and recorded goodwill
and other intangible assets of $70,800,000. At that time, the Company believed
the acquisition would strengthen its database offering with a larger collection
of protein annotation information. In the fourth quarter of 2001, the Company
found that collaborators were unwilling to pay fees to access the Proteome
databases that were sufficient to support the continued investment required to
build and sustain the Proteome's products. In addition, the Company eliminated
the positions of approximately 45% of Proteome employees. The Company
considered these events to be indicators of potential impairment and performed
an evaluation of the affected long-lived assets in accordance
64
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
with the Company's policy. The forecast of future cash flows indicated that the
long-lived assets were impaired. The Company estimated the fair value of
long-lived assets by discounting the cash flow forecast using a discount rate,
which represented the Company's weighted average cost of capital. As a result
of the evaluation, the Company concluded that unamortized goodwill and other
intangible assets were impaired, and accordingly, $58,465,000 was charged to
operations in the fourth quarter of 2001 to write these assets down to their
estimated fair value. The carrying value of these intangible assets is
$2,900,000 at December 31, 2001.
In reviewing its existing long-lived assets, the Company determined, based
on certain impairment indicators, that an asset relating to capitalized
software should be analyzed for impairment. As a result of this analysis, it
was determined that the net book value of the asset was in excess of future
revenues expected from sale of this software reduced by costs to sell.
Therefore, it was determined that this capitalized software was impaired and
recognized a $6,104,000 impairment charge.
65
Interim Consolidated Financial Information (Unaudited)
(in thousands, except per share data)
Fiscal 2001 Quarter Ended
--------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
Revenues.................................................... $ 51,121 $56,051 $ 57,319 $ 54,772
Loss before extraordinary item and cumulative effect of
accounting change/(1)/.................................... (14,977) (9,891) (17,827) (145,205)
Net loss/(1)/............................................ (10,312) (9,891) (17,827) (145,205)
Basic and diluted loss before extraordinary item and
cumulative effect of accounting change.................... $ (0.23) $ (0.15) $ (0.27) $ (2.18)
======== ======= ======== =========
Basic and diluted net loss per share........................ $ (0.16) $ (0.15) $ (0.27) $ (2.18)
======== ======= ======== =========
Shares used in computation of basic and diluted net loss per
share..................................................... 65,745 66,076 66,370 66,565
======== ======= ======== =========
Fiscal 2000 Quarter Ended
--------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
Revenues.................................................... $ 40,754 $46,015 $ 51,982 $ 55,416
Loss before extraordinary item.............................. (8,177) (6,590) (7,598) (10,507)
Net loss................................................. (8,177) (6,590) (7,598) (7,370)
Basic and diluted loss before extraordinary item............ $ (0.13) $ (0.10) $ (0.12) $ (0.16)
======== ======= ======== =========
Basic and diluted net loss per share........................ $ (0.13) $ (0.10) $ (0.12) $ (0.11)
======== ======= ======== =========
Shares used in computation of basic and diluted net loss per
share..................................................... 60,612 63,798 64,064 64,369
======== ======= ======== =========
- --------
(1) The December 31, 2001 quarter includes $130,372 of other expenses relating
primarily to restructuring charges and long-lived asset write-downs.
66
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning Costs and End of
Description--Year Ended December 31, of Period Expenses Deductions Period
------------------------------------ ---------- ---------- ---------- ----------
(in thousands)
Allowance for doubtful accounts--1999...................... $434 $ -- $(200) $ 234
Allowance for doubtful accounts--2000...................... 234 122 -- 356
Allowance for doubtful accounts--2001...................... 356 1,745 -- 2,101
67
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of diaDexus, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of members' and stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of diaDexus, Inc. (a
development stage company) at December 31, 2001 and 2000, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001 and for the cumulative period from August 29, 1997
(date of inception) to December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 14, 2002, except as
to Paragraph 2 of
Note 8 which is as of
January 31, 2002
68
DIADEXUS, INC.
(a development stage company)
BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
------------------
2000 2001
-------- --------
ASSETS
------
Current Assets:
Cash and cash equivalents............................................................... $ 13,043 $ 24,557
Short-term investments.................................................................. 33,874 41,194
Interest receivable..................................................................... 1,556 816
Prepaid expenses and other current assets............................................... 1,106 2,352
-------- --------
Total current assets................................................................ 49,579 68,919
Long-term investments...................................................................... 44,271 8,872
Restricted cash............................................................................ -- 161
Property and equipment, net................................................................ 2,152 5,110
Notes receivable from employees............................................................ -- 409
Other assets............................................................................... 70 67
-------- --------
Total assets........................................................................ $ 96,072 $ 83,538
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable........................................................................ $ 790 $ 908
Deferred revenue........................................................................ -- 475
Accrued liabilities..................................................................... 1,108 2,270
Due to related parties.................................................................. 486 67
-------- --------
Total current liabilities........................................................... 2,384 3,720
Deferred rent.............................................................................. 47 --
-------- --------
Total liabilities................................................................... 2,431 3,720
-------- --------
Commitments and contingencies (Notes 4 and 7)
Stockholders' Equity:
Series A preferred stock, $0.01 par value; 4,400,000 shares authorized, issued and
outstanding at December 31, 2000 and December 31, 2001 (liquidation value: $15,000)... 44 44
Series B preferred stock, $0.01 par value; 4,400,000 shares authorized, issued and
outstanding at December 31, 2000 and December 31, 2001 (liquidation value: $10,000)... 44 44
Series C preferred stock, $0.01 par value; 13,500,000 shares authorized at December 31,
2000 and December 31, 2001, 13,225,807 shares issued and outstanding at
December 31, 2000 and December 31, 2001 (liquidation value: $102,500)................. 132 132
Series D preferred stock, $0.01 par value; none authorized, issued and outstanding at
December 31, 2000, 21,000 shares authorized at December 31, 2001, 20,833 shares
issued and outstanding at December 31, 2001 (liquidation value: $250)................. -- --
Common stock, $0.01 par value; 50,000,000 shares authorized at December 31, 2000 and
December 31, 2001, 2,076,698 shares issued and outstanding at December 31, 2000 and
2,099,968 shares issued and outstanding at December 31, 2001.......................... 21 21
Additional paid-in capital.............................................................. 128,060 140,207
Deferred stock compensation............................................................. (12,773) (14,322)
Notes receivable from stockholders...................................................... (1,591) (1,697)
Accumulated other comprehensive income.................................................. 482 684
Deficit accumulated during the development stage........................................ (20,778) (45,295)
-------- --------
Total stockholders' equity.......................................................... 93,641 79,818
-------- --------
Total liabilities and stockholders' equity.......................................... $ 96,072 $ 83,538
======== ========
The accompanying notes are an integral part of these financial statements.
69
DIADEXUS, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Cumulative
Period from
August 29, 1997
(inception)
Year Ended December 31, through
---------------------------- December 31,
1999 2000 2001 2001
-------- -------- -------- ---------------
Revenues:
License revenue.......................................... $ -- $ -- $ 17 $ 17
Collaborative research revenue........................... -- -- 258 258
Product sales............................................ -- -- 2 2
License revenue from related party....................... 100 -- -- 100
-------- -------- -------- --------
Total revenues....................................... 100 -- 277 377
-------- -------- -------- --------
Operating expenses:
Research and development (including stock compensation
expense of $0, $2,811, $5,882 and $8,693 for the years
ended December 31, 1999, 2000, 2001, and the
cumulative period from inception through
December 31, 2001, respectively)....................... 9,461 12,297 20,911 49,831
General and administrative (including stock
compensation expense of $0, $12,345, $4,439 and
$16,784 for the years ended December 31, 1999, 2000,
2001 and the cumulative period from inception through
December 31, 2001, respectively)....................... 2,345 16,010 9,455 29,971
-------- -------- -------- --------
Total operating expenses................................. 11,806 28,307 30,366 79,802
-------- -------- -------- --------
Loss from operations........................................ (11,706) (28,307) (30,089) (79,425)
Interest and other income................................... 540 5,034 5,572 11,993
Interest expense............................................ (120) (73) -- (193)
-------- -------- -------- --------
Net loss.................................................... $(11,286) $(23,346) $(24,517) $(67,625)
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
70
DIADEXUS, INC.
(a development stage company)
STATEMENTS OF MEMBERS' AND STOCKHOLDERS' EQUITY
(in thousands, except share data)
Series A Series B Series A
Preferred Capital Preferred Capital Member Preferred Stock
------------------- ------------------- Contributions -----------------
Units Dollars Units Dollars Receivable Shares Dollars
---------- ------- ---------- ------- ------------- --------- -------
Issuance, at inception, of Series A units at
$3.41 per unit................................... 4,400,000 $15,000 -- $ -- $(11,000) -- $ --
Issuance, at inception, of Series B units at
$2.27 per unit................................... -- -- 4,400,000 10,000 (6,000) -- --
Net loss.......................................... -- (274) -- (274) -- -- --
---------- ------- ---------- ------- -------- --------- ----
Balances at December 31, 1997..................... 4,400,000 14,726 4,400,000 9,726 (17,000) -- --
Proceeds received from Members.................... -- -- -- -- 17,000 -- --
Stock-based compensation.......................... -- -- -- -- -- -- --
Net loss.......................................... -- (3,964) -- (3,964) -- -- --
---------- ------- ---------- ------- -------- --------- ----
Balances at December 31, 1998..................... 4,400,000 10,762 4,400,000 5,762 -- -- --
Stock-based compensation.......................... -- -- -- -- -- -- --
Net loss.......................................... -- (5,643) -- (5,643) -- -- --
---------- ------- ---------- ------- -------- --------- ----
Balances at December 31, 1999..................... 4,400,000 5,119 4,400,000 119 -- -- --
Net loss to April 4............................... -- (1,284) -- (1,284) -- -- --
Conversion to C corporation....................... (4,400,000) (3,835) (4,400,000) 1,165 -- 4,400,000 44
Issuance of Series C preferred stock upon
conversion of note payable to related party...... -- -- -- -- -- -- --
Issuance of Series C preferred stock, net of
issuance costs of $7,322......................... -- -- -- -- -- -- --
Issuance of common stock.......................... -- -- -- -- -- -- --
Deferred stock compensation....................... -- -- -- -- -- -- --
Amortization of deferred stock compensation....... -- -- -- -- -- -- --
Remeasurement of stock options.................... -- -- -- -- -- -- --
Notes receivable from stockholders, net of
discount......................................... -- -- -- -- -- -- --
Comprehensive loss:
Net loss from April 5............................ -- -- -- -- -- -- --
Change in unrealized gain on available-for-sale
securities...................................... -- -- -- -- -- -- --
Comprehensive loss................................
---------- ------- ---------- ------- -------- --------- ----
Balances at December 31, 2000..................... -- -- -- -- -- 4,400,000 44
---------- ------- ---------- ------- -------- --------- ----
Issuance of Series D preferred stock.............. -- -- -- -- -- -- --
Issuance of common stock.......................... -- -- -- -- -- -- --
Deferred stock compensation....................... -- -- -- -- -- -- --
Remeasurement of stock options.................... -- -- -- -- -- -- --
Amortization of deferred stock compensation....... -- -- -- -- -- -- --
Reversal of deferred compensation upon termination -- -- -- -- -- -- --
Notes receivable from stockholders, net of
discount......................................... -- -- -- -- -- -- --
Comprehensive loss: -- -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- -- --
Change in unrealized gain on available-for-sale
securities...................................... -- -- -- -- -- -- --
Comprehensive loss................................
---------- ------- ---------- ------- -------- --------- ----
Balances at December 31, 2001..................... -- $ -- -- $ -- $ -- 4,400,000 $ 44
========== ======= ========== ======= ======== ========= ====
Series B Series C Series D
Preferred Stock Preferred Stock Preferred Stock Common Stock
----------------- ------------------ --------------- -----------------
Shares Dollars Shares Dollars Shares Dollars Shares Dollars
--------- ------- ---------- ------- ------ ------- --------- -------
Issuance, at inception, of Series A units at
$3.41 per unit................................... -- $ -- -- $ -- -- $ -- -- $--
Issuance, at inception, of Series B units at
$2.27 per unit................................... -- -- -- -- -- -- -- --
Net loss.......................................... -- -- -- -- -- -- -- --
--------- ---- ---------- ---- ------ ---- --------- ---
Balances at December 31, 1997..................... -- -- -- -- -- -- -- --
Proceeds received from Members.................... -- -- -- -- -- -- -- --
Stock-based compensation.......................... -- -- -- -- -- -- -- --
Net loss.......................................... -- -- -- -- -- -- -- --
--------- ---- ---------- ---- ------ ---- --------- ---
Balances at December 31, 1998..................... -- -- -- -- -- -- -- --
Stock-based compensation.......................... -- -- -- -- -- -- -- --
Net loss.......................................... -- -- -- -- -- -- -- --
--------- ---- ---------- ---- ------ ---- --------- ---
Balances at December 31, 1999..................... -- -- -- -- -- -- -- --
Net loss to April 4............................... -- -- -- -- -- -- -- --
Conversion to C corporation....................... 4,400,000 44 -- -- -- -- -- --
Issuance of Series C preferred stock upon
conversion of note payable to related party...... -- -- 322,580 3 -- -- -- --
Issuance of Series C preferred stock, net of
issuance costs of $7,322......................... -- -- 12,903,227 129 -- -- -- --
Issuance of common stock.......................... -- -- -- -- -- -- 2,076,698 21
Deferred stock compensation....................... -- -- -- -- -- -- -- --
Amortization of deferred stock compensation....... -- -- -- -- -- -- -- --
Remeasurement of stock options.................... -- -- -- -- -- -- -- --
Notes receivable from stockholders, net of
discount......................................... -- -- -- -- -- -- -- --
Comprehensive loss: -- -- -- --
Net loss from April 5............................ -- -- -- -- -- -- -- --
Change in unrealized gain on available-for-sale
securities...................................... -- -- -- -- -- -- -- --
Comprehensive loss................................
--------- ---- ---------- ---- ------ ---- --------- ---
Balances at December 31, 2000..................... 4,400,000 44 13,225,807 132 -- -- 2,076,698 21
--------- ---- ---------- ---- ------ ---- --------- ---
Issuance of Series D preferred stock.............. -- -- -- -- 20,833 -- -- --
Issuance of common stock.......................... -- -- -- -- -- -- 23,270 --
Deferred stock compensation....................... -- -- -- -- -- -- -- --
Remeasurement of stock options.................... -- -- -- --
Amortization of deferred stock compensation....... -- -- -- -- -- -- -- --
Reversal of deferred compensation upon termination -- -- -- -- -- -- -- --
Notes receivable from stockholders, net of
discount......................................... -- -- -- -- -- -- -- --
Comprehensive loss: -- -- -- --
Net loss......................................... -- -- -- -- -- -- -- --
Change in unrealized gain on available-for-sale
securities...................................... -- -- -- -- -- -- -- --
Comprehensive loss................................
--------- ---- ---------- ---- ------ ---- --------- ---
Balances at December 31, 2001..................... 4,400,000 $ 44 13,225,807 $132 20,833 $ -- 2,099,968 $21
========= ==== ========== ==== ====== ==== ========= ===
Deficit
Notes Accumulated Accumulated
Additional Deferred Receivable Other During the
Paid-In Stock from Comprehensive Development
Capital Compensation Stockholders Income (Loss) Stage Total
---------- ------------ ------------ ------------- ----------- --------
Issuance, at inception, of Series A units at
$3.41 per unit................................... $ -- $ -- $ -- $ -- $ -- $ 4,000
Issuance, at inception, of Series B units at
$2.27 per unit................................... -- -- -- -- -- 4,000
Net loss.......................................... -- -- -- -- -- (548)
-------- -------- ------- ---- -------- --------
Balances at December 31, 1997..................... -- -- -- -- -- 7,452
Proceeds received from Members.................... -- -- -- -- -- 17,000
Stock-based compensation.......................... 10 -- -- -- -- 10
Net loss.......................................... -- -- -- -- -- (7,928)
-------- -------- ------- ---- -------- --------
Balances at December 31, 1998..................... 10 -- -- -- -- 16,534
Stock-based compensation.......................... 5 -- -- -- -- 5
Net loss.......................................... -- -- -- -- -- (11,286)
-------- -------- ------- ---- -------- --------
Balances at December 31, 1999..................... 15 -- -- -- -- 5,253
Net loss to April 4............................... -- -- -- -- -- (2,568)
Conversion to C corporation....................... 2,582 -- -- -- -- --
Issuance of Series C preferred stock upon
conversion of note payable to related party...... 2,497 -- -- -- -- 2,500
Issuance of Series C preferred stock, net of
issuance costs of $7,322......................... 92,549 -- -- -- -- 92,678
Issuance of common stock.......................... 2,487 -- -- -- -- 2,508
Deferred stock compensation....................... 18,331 (18,331) -- -- -- --
Amortization of deferred stock compensation....... -- 5,558 -- -- -- 5,558
Remeasurement of stock options.................... 9,599 -- -- -- -- 9,599
Notes receivable from stockholders, net of
discount......................................... -- -- (1,591) -- -- (1,591)
Comprehensive loss:
Net loss from April 5............................ -- -- -- -- (20,778) (20,778)
Change in unrealized gain on available-for-sale
securities...................................... -- -- -- 482 -- 482
--------
Comprehensive loss................................ (20,296)
-------- -------- ------- ---- -------- --------
Balances at December 31, 2000..................... 128,060 (12,773) (1,591) 482 (20,778) 93,641
-------- -------- ------- ---- -------- --------
Issuance of Series D preferred stock.............. 250 -- -- -- -- 250
Issuance of common stock.......................... 27 -- -- -- -- 27
Deferred stock compensation....................... 12,257 (12,257) -- -- -- --
Remeasurement of stock options.................... 102 102
Amortization of deferred stock compensation....... -- 10,219 -- -- -- 10,219
Reversal of deferred compensation upon termination (489) 489 -- -- -- --
Notes receivable from stockholders, net of
discount......................................... -- -- (106) -- -- (106)
Comprehensive loss:
Net loss......................................... -- -- -- -- (24,517) (24,517)
Change in unrealized gain on available-for-sale
securities...................................... -- -- -- 202 -- 202
--------
Comprehensive loss................................ (24,315)
-------- -------- ------- ---- -------- --------
Balances at December 31, 2001..................... $140,207 $(14,322) $(1,697) $684 $(45,295) $ 79,818
======== ======== ======= ==== ======== ========
The accompanying notes are an integral part of these financial statements.
71
DIADEXUS, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
(in thousands)
Cumulative
Period from
August 29, 1997
(Inception)
Year Ended December 31, through
---------------------------- December 31,
1999 2000 2001 2001
-------- -------- -------- ---------------
Cash flows from operating activities:
Net loss.................................................................... $(11,286) $(23,346) $(24,517) $ (67,625)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. 1,072 1,167 2,254 6,152
Stock compensation expense................................................ 5 15,157 10,321 25,493
Discount on notes receivable from stockholders............................ -- 1,281 -- 1,281
Imputed interest on notes receivable from stockholders.................... -- (12) (106) (119)
Loss on disposal of property and equipment................................ 3 -- -- 26
Changes in operating assets and liabilities:
Interest receivable...................................................... -- (1,556) 740 (816)
Prepaid expenses and other assets........................................ (24) (678) (1,244) (2,351)
Restricted cash.......................................................... -- -- (161) (161)
Accounts payable......................................................... (197) 748 118 908
Accrued liabilities...................................................... (177) 649 1,162 2,085
Issuance of notes receivable to stockholders............................. -- (465) -- (465)
Due to related parties................................................... (2,234) 153 (419) (2,183)
Deferred revenue......................................................... -- -- 475 475
Deferred rent............................................................ (29) (41) (43) 3
-------- -------- -------- ---------
Net cash used in operating activities.................................. (12,867) (6,943) (11,420) (37,297)
-------- -------- -------- ---------
Cash provided by (used in) investing activities:
Purchases of property and equipment......................................... (238) (877) (5,212) (7,759)
Proceeds from sale of equipment............................................. 9 -- -- 9
Purchases of other assets................................................... -- (1) -- (1)
Maturities of investments................................................... -- -- 57,327 57,327
Purchases of investments.................................................... -- (77,664) (29,049) (106,713)
-------- -------- -------- ---------
Net cash provided by (used in) investing activities.................... (229) (78,542) 23,066 57,137
-------- -------- -------- ---------
Cash provided by (used in) financing activities:
Discount on notes receivable from employees................................. -- -- 102 102
Imputed interest on notes receivable from employees......................... -- -- (11) (11)
Issuance of notes receivable to employees................................... -- -- (500) (500)
Proceeds from issuance of convertible notes payable to related parties...... 5,000 -- -- 5,000
Repayment of convertible note payable to related party...................... -- (2,621) -- (2,621)
Proceeds from related party contributions receivable........................ -- -- -- 17,000
Proceeds from issuance of Series A preferred units.......................... -- -- -- 2,953
Proceeds from issuance of Series B preferred units.......................... -- -- -- 4,000
Proceeds from issuance of Series C preferred stock, net of issuance costs... -- 92,678 -- 92,678
Proceeds from issuance of Series D preferred stock, net of issuance costs... -- -- 250 250
Proceeds from issuance of common stock...................................... -- 113 27 140
-------- -------- -------- ---------
Net cash provided by (used in) financing activities.................... 5,000 90,170 (132) 118,991
-------- -------- -------- ---------
Net increase (decrease) in cash and cash equivalents.......................... (8,096) 4,685 11,514 24,557
Cash and cash equivalents at beginning of period.............................. 16,454 8,358 13,043 --
-------- -------- -------- ---------
Cash and cash equivalents at end of period.................................... $ 8,358 $ 13,043 $ 24,557 $ 24,557
======== ======== ======== =========
Supplemental disclosures of cash flow information:
Interest paid............................................................... $ -- $ 193 $ -- $ 193
Noncash investing and financing activities:
Conversion of notes payable into Series C preferred stock................... -- 2,500 -- 2,500
Issuance of common stock in exchange for notes receivable from stockholders. -- 2,395 -- 2,395
The accompanying notes are an integral part of these financial statements.
72
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
Note 1. The Company:
diaDexus, Inc. (the "Company"), was founded as a Delaware limited liability
company in August 1997 by SmithKline Beecham Corporation ("SmithKline Beecham")
and Incyte Genomics, Inc. ("Incyte") (together, the "Members"). On April 4,
2000, the Company was converted to a Delaware corporation (see Note 2).
The Company focuses on the discovery, development and commercialization of
novel, patent-protected diagnostic and therapeutic products with high clinical
value. Since its formation in 1997, the Company has focused on discovering
molecular targets and developing novel diagnostic products for the improved
detection, classification and prognosis of diseases. Where possible, the
Company seeks to develop diagnostic and therapeutic products that are directed
at the same molecular target, enabling a diagnostic/therapeutic tandem approach
to detect and treat disease.
Note 2. Summary of Significant Accounting Policies:
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of income and expenses during the reporting
period. Actual results could differ from those estimates.
Concentration of credit risk and other risks and uncertainties
The Company's financial instruments that are subject to concentration of
credit risk consist primarily of cash and cash equivalents and marketable
securities. The Company's policy is to place its cash and cash equivalents and
marketable securities with high credit quality financial institutions in order
to limit the amount of credit exposure. The Company has not experienced any
losses to date.
The Company's future products may require approval from the U.S. Food and
Drug Administration ("FDA") and may require approval from certain international
regulatory agencies prior to commencing commercial sales. There can be no
assurance that the Company's products will receive any of these required
approvals. If the Company was denied such approvals or such approvals were
delayed, it would have a material adverse impact on the Company's results of
operations.
The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, new technological innovations,
dependence on key personnel, protection of proprietary technology, compliance
with government regulations, uncertainty of market acceptance of products,
product liability and the need to obtain additional financing.
SmithKline Beecham accounted for 100% of revenues during the year ended
December 31, 1999.
Cash and cash equivalents
The Company considers all highly liquid investments with original maturities
of less than 90 days to be cash equivalents. Investments with maturities of
less than one year from the balance sheet date and with original maturities
greater than 90 days are considered short-term investments. Investments consist
primarily of money market accounts, commercial paper, certificates of deposit
and other short-term instruments. These investments
73
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
typically bear minimal risk. This minimization of risk is consistent with the
Company's policy to maintain high liquidity and ensure safety of principal.
Restricted cash
Restricted cash represents term deposits held at a financial institution as
collateral under the Company's operating lease arrangement for research and
development facilities in South San Francisco for the remainder of the lease,
which expires in September 2003.
Investments
The Company's short-term and long-term investments are classified as
available-for-sale. Available-for-sale securities are carried at fair value
based on quoted market prices, with the unrealized gains and losses included in
accumulated other comprehensive income within stockholders' equity. The
amortized cost of debt securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization is
included in interest and other income. Realized gains and losses and declines
in value judged to be other-than-temporary on available-for-sale securities are
also included in interest and other income. Interest and dividends on
securities classified as available-for-sale are also included in interest and
other income. The cost of securities sold is based on the specific
identification method.
The amortized cost and fair value of securities, with gross unrealized gains
and losses, were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
Debt securities at December 31, 2000
Corporate bonds.................. $77,663 $493 $(11) $78,145
======= ==== ==== =======
Debt securities at December 31, 2001
Corporate bonds.................. $49,382 $684 $ -- $50,066
======= ==== ==== =======
The fair value of available-for-sale debt securities by contractual maturity
at December 31, 2000 and December 31, 2001 was as follows (in thousands):
December 31,
---------------
2000 2001
------- -------
Within 1 year.............................................. $33,874 $41,194
Greater than 1 year, less than 5 years..................... 44,271 8,872
------- -------
$78,145 $50,066
======= =======
Property and equipment
Property and equipment are recorded at cost and depreciated over their
estimated useful lives using the straight-line method. Assets contributed by
the Members during 1997 were recorded at amounts equal to the Members' net
carrying value. Laboratory equipment, computers, software, and office furniture
are depreciated over three years. Leasehold improvements are recorded at cost
and amortized over the term of the non-cancelable lease or their useful life,
whichever is shorter. Maintenance and repairs are expensed as incurred.
74
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Impairment of long-lived assets
The Company reviews long-lived assets for impairment whenever events or
circumstances suggest that the carrying amount of those assets may not be fully
recoverable or that the estimated useful life of those assets has changed
significantly. When expected future undiscounted cash flows that are expected
to be generated by an asset are less than its carrying amount, then an
impairment loss is recognized and the asset is written down to its estimated
fair value.
Revenue recognition
The amount received from SmithKline Beecham under a non-refundable license
arrangement was recognized during 1999 as the earnings process was completed
pursuant to the terms of the agreement and no remaining performance obligations
existed. Any amounts received in advance of completing the earnings process are
recorded as deferred revenue. As of July 11, 2001, the Company entered into a
research and license agreement with Fujirebio, Inc. Pursuant to the agreement,
the Company will receive an aggregate amount of $1,750,000 in the form of an
upfront license fee, an anniversary fee and research support payments. The
upfront license fee will be recognized as revenue over the three-year term of
the agreement and the anniversary payment will be recognized over the remaining
two-year term of the agreement. The research support payments will be
recognized as revenue as the research work is performed and the related
research costs are incurred. As of December 31, 2001, $375,000 was received as
upfront license fee and research support payments prior to completion of the
earnings process. This amount was recorded as deferred revenue as of December
31, 2001. During the last quarter of 2001, the Company entered into several
agreements for the sale of clinical diagnostic test kits to clinical reference
laboratories. Pursuant to these agreements, the Company received prior to
December 31, 2001 an aggregate amount of $100,000 prior to completion of the
earnings process. The amount of $100,000 was recorded as deferred revenue as of
December 31, 2001, and will be recognized as revenue upon completion of the
earnings process. Product sales are recognized as revenue upon completion of
the earnings process. The earning process is complete upon delivery, provided
that persuasive evidence of an arrangement exists, the price is fixed or
determinable and collection of the resulting receivable is reasonably assured.
The Company's revenue recognition practices are in accordance with SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
Research and development
The Company recognizes research and development expense as incurred.
Income taxes
From the Company's inception through April 4, 2000, no provision or benefit
for federal or state income taxes was recorded in the financial statements as
the Company was a limited liability company and, therefore, was taxed as a
partnership. Rather, the federal and state income tax effects of the Company's
results of operations were recorded by the Members in their respective income
tax returns. On April 4, 2000, in connection with completing the Series C
preferred stock financing, the Company became subject to the C corporation
provisions of the Internal Revenue Code. Accordingly, any earnings after this
date are taxed at federal and state corporate income tax rates.
Current income tax expense (benefit) is the amount of income taxes expected
to be payable (refundable) for the current year. A deferred income tax asset or
liability is computed for the expected future impact of the differences between
the financial reporting and tax bases of assets and liabilities as well as the
expected future
75
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
tax benefit to be derived from tax loss and tax credit carryforwards. Deferred
income tax expense (benefit) is generally the net change during the year in the
deferred income tax assets or liability. A valuation allowance is established
when necessary to reduce deferred tax assets to the amount more likely than not
to be realized in future tax returns.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), Financial Accounting
Standards Board Interpretation No. 28, "Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans" ("FIN No. 28"),
Financial Accounting Standards Board Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of APB No.
25" ("FIN No. 44"), and Emerging Issues Task Force No. 00-23, "Issues Related
to the Accounting for Stock Compensation Under APB No. 25 and FIN No. 44"
("EITF No. 00-23") and complies with the pro forma disclosure provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123").
Under APB No. 25, compensation expense is based on the difference, if any,
on the date of the grant between the estimated fair value of the Company's
common stock and the exercise price. SFAS No. 123 defines a "fair value" based
method of accounting for employee stock options. Pro forma disclosures of the
difference between compensation expense included in net loss and the related
cost measured by the fair value method are presented in Note 5.
The Company accounts for stock issued to non-employees in accordance with
the provisions of SFAS No. 123 and Emerging Issues Task Force No. 96-18,
"Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF No.
96-18").
Comprehensive income (loss)
The Company accounts for comprehensive income in accordance with Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and
displaying comprehensive income (loss) and its components. Comprehensive income
(loss) refers to revenues, expenses, gains and losses that under generally
accepted accounting principles are included in comprehensive income (loss) but
excluded from net income (loss).
Recent accounting pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141 "Business Combinations" which establishes financial accounting and
reporting for business combinations and supercedes APB Opinion No. 16,
"Business Combinations," and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." SFAS No. 141 requires that all
business combinations be accounted for using one method, the purchase method.
The provisions of this statement apply to all business combinations initiated
after June 30, 2001. The Company will adopt SFAS No. 141 during the first
quarter of fiscal 2002, and this adoption is expected to have no impact on the
Company's financial reporting and related disclosures.
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets," which establishes financial accounting and reporting for acquired
goodwill and other intangible assets and supercedes APB Opinion No. 17,
Intangible Assets. SFAS No. 142 addresses how intangible assets that are
acquired individually
76
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
or with a group of other assets (but not those acquired in a business
combination) should be accounted for in financial statements upon their
acquisition, and after they have been initially recognized in the financial
statements. The provisions, of this statement are effective for fiscal years
beginning after December 15, 2001. The Company will adopt SFAS No. 142 during
the first quarter of fiscal 2002, and this adoption is expected to have no
material impact on the Company's financial reporting and related disclosures.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," in that it removes goodwill from its impairment scope and
allows for different approaches in cash flow estimation. However, SFAS No. 144
retains the fundamental provisions of SFAS No. 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used and (b)
measurement of long-lived assets to be disposed of. SFAS No. 144 also
supercedes the business segment concept in APB Opinion No. 30, "Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," in that it permits presentation of a component of an entity,
whether classified as held for sale or disposed of, as a discontinued
operation. However, SFAS No. 144 retains the requirement of APB Opinion No. 30
to report discontinued operations separately from continuing operations. The
Company is required to adopt the provisions of SFAS No. 144 effective January
1, 2002, with earlier application encouraged. The Company believes that the
implementation of this standard will not have a material effect on the
Company's results of operations and financial position.
Note 3. Balance Sheet Components
Property and equipment consist of the following (in thousands):
December 31,
----------------
2000 2001
------- -------
Laboratory, computer and office equipment........ $ 3,382 $ 5,686
Leasehold improvements........................... 2,649 2,611
------- -------
Total............................................ 6,031 8,297
Less: Accumulated depreciation and amortization.. (3,879) (3,187)
------- -------
$ 2,152 $ 5,110
======= =======
Accrued liabilities consist of the following (in thousands):
December 31,
-------------
2000 2001
------ ------
Payroll and related.............................. $ 424 $ 658
Outside services................................. 347 60
Deposits......................................... 72 64
Accrued loss on the Santa Clara facility lease... -- 426
Accrued moving and relocation expenses........... -- 605
Accrued legal expenses........................... -- 160
Other............................................ 265 297
------ ------
$1,108 $2,270
====== ======
77
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 4. Commitments and Contingencies
The Company has an operating lease for laboratory and office facilities in
Santa Clara, California through September 30, 2002. The Company declined the
option to renew the lease. During 2001, the Company vacated the facility and
accrued for the loss on the facility lease.
In July 2001, the Company entered a facility lease agreement expiring in
September 2003. Minimum future lease payments as of December 31, 2001 are as
follows (in thousands):
Year Ending December 31,
------------------------
2002............................................. $1,580
2003............................................. 744
------
$2,324
======
Rent expense was $838,000, $804,000 and $1,413,438 for the years ended
December 31, 1999, 2000 and 2001, respectively. A security deposit of $67,000
relating to our facility lease was paid by SmithKline Beecham and is included
in due to related parties in the accompanying balance sheets.
The Company has subleased a portion of its leased office facilities in Santa
Clara under a non-cancelable lease agreement since 1998. Rental income for the
years ended December 31, 1999, 2000 and 2001 was $202,000, $299,000 and
$272,000, respectively. The aggregate minimum future lease payments to be
received by the Company under the sublease are $155,000.
The Company entered into a collaboration agreement with the University of
Pittsburgh Medical Center effective October 1, 2000 to analyze RNA expression
in human cancer tissues. Under this agreement, the University of Pittsburgh
Medical Center will perform RNA expression analysis on human cancer and
corresponding non-malignant tissues to establish genotypic classifications. The
Company will pay the University of Pittsburgh Medical Center approximately
$1,218,000 over the three year term of this agreement. The Company paid $0 and
$405,000 in relation to work done by the University of Pittsburgh Medical
Center for the years ended December 31, 2000 and 2001, respectively.
The Company entered into an agreement with Agilent Technologies, Inc. in
August 2000 for early access to Agilent's DNA microarray technology. Under the
terms of the agreement, the Company can purchase a number of custom in-situ
microarrays at a cost of approximately $405,000. The agreement expires in
August 2002 or when the products become available, whichever is sooner, and may
not be terminated by either party except under specified circumstances. The
Company paid $0 and $242,000 for the purchase of microarrays for the years
ended December 31, 2000 and 2001, respectively.
The Company has entered into employment agreements with certain key
executive officers. Such agreements provide for severance payments and, in one
case, provide for accelerated vesting of stock options following a change in
control of the Company.
On October 1, 2001, in connection with the relocation of its office and
laboratory premises, the Company offered a relocation assistance program to
employees who met specific criteria, for a period of one year from the date of
relocation. This relocation assistance program provides for qualified
relocating expense claims. Relocation expenses are expensed as incurred.
Employee relocation expense for the year ended December 31, 2001 was $708,000.
78
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
On December 18, 2001, the Company entered into a Services Agreement with
Compugen Ltd. ("Compugen"). Pursuant to the agreement, the Company is committed
to pay up to $1.1 million for services received from Compugen. In conjunction
with entering into the agreement, the Company also issued a warrant to Compugen
to purchase up to 393,571 shares of the company's common stock at a price of
$12.00 per share. The warrant will vest as certain future performance criteria
are met by Compugen. The warrant expires in December 2006 (see Note 5).
Note 5. Members' and Stockholders' Equity:
Preferred units and stock
In September 1997, the Company issued 4,400,000 Series A Preferred units, no
par value, to SmithKline Beecham, at $3.41 per unit. At the time these units
were issued, the Company received an initial capital contribution of $4,000,000
in cash and assets and a contractual commitment for additional cash
contributions of $7,000,000 and $4,000,000 which were received on April 15,
1998 and July 15, 1998, respectively. Upon conversion of the Company from a
limited liability company into a C corporation, the Series A Preferred units
were exchanged for shares of Series A Preferred Stock on a one-to-one basis.
The Series A Preferred Stock converts automatically to Common Stock upon
completion of an initial public offering by the Company that results in net
proceeds of at least $20,000,000 and an offering price of at least $10.00 per
share.
In September 1997, the Company also issued 4,400,000 Series B Preferred
units, no par value, to Incyte at $2.27 per unit. At the time these units were
issued, the Company received an initial capital contribution of $4,000,000 in
cash and a contractual commitment for additional cash contributions of
$2,000,000 and $4,000,000 which were received on April 15, 1998 and July 15,
1998, respectively. Upon conversion of the Company from a limited liability
company into a C corporation, the Series B Preferred units were exchanged for
shares of Series B Preferred Stock on a one-to-one basis. The Series B
Preferred Stock converts automatically to Common Stock upon completion of an
initial public offering by the Company that results in net proceeds of at least
$20,000,000 and an offering price of at least $10.00 per share.
In April 2000, the Company issued 13,225,807 shares of Series C Preferred
Stock, $0.01 par value, at $7.75 per share. Net proceeds were approximately
$92,678,000 after cash offering expenses of $7,322,000. The Series C Preferred
Stock converts automatically to Common Stock upon completion of an initial
public offering by the Company that results in net proceeds of at least
$20,000,000 and an offering price of at least $10.00 per share.
In connection with the sale of Series C Preferred Stock, the Company issued
a warrant in June 2000 to purchase 129,032 shares of Series C Preferred Stock
at $7.75 per share to the placement agent. The Series C Preferred Stock warrant
converts automatically to a Common Stock warrant upon completion of an initial
public offering by the Company that results in net proceeds of at least
$20,000,000 and an offering price of at least $10.00 per share. The warrant
becomes exercisable in 2005. The Company valued this warrant using the
Black-Scholes option pricing model with the following assumptions: expected
life of five years; risk free interest rate of 6.23%; expected dividend yield
of zero, and volatility of 85%. The fair value of the warrant of $846,367 is
included in the carrying value of the Series C Preferred Stock.
In connection with signing of the Fujirebio research and license agreement
in July 2001 (see Note 2), the Company issued 20,833 shares of Series D
Preferred Stock, $0.01 par value, at $12.00 per share. The Series D Preferred
Stock converts automatically to Common Stock upon completion of an initial
public offering by the Company that results in net proceeds of at least
$20,000,000 and an offering price of at least $10.00 per share.
79
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
At December 31, 2000 and 2001, the Company has reserved 22,154,839 and
22,175,672 shares respectively, of Common Stock for future issuance upon the
conversion of the Preferred Stock. Included in the December 31, 2000 and 2001
shares reserved for future issuance upon the conversion of Preferred Stock, is
a warrant to purchase 129,032 shares of Series C Preferred Stock.
Dividends
In the event dividends are paid on any share of Common Stock, an additional
dividend must be paid with respect to all outstanding shares of Preferred Stock
in an amount per share (on an as-if-converted basis) equal to the amount paid
or set aside for each share of Common Stock, whenever funds are legally
available. Such dividends are payable when, as and if declared by the Board of
Directors. No dividends accrue unless declared by the Board of Directors. As of
December 31, 2001, no dividends had been declared.
Liquidation preference
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, holders of the Series A, Series B, Series C
and Series D Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets to the holders of the
Common Stock, an amount per share equal to $3.41 for each outstanding share of
Series A Preferred Stock, $2.27 for each outstanding share of Series B
Preferred Stock and $7.75 for each outstanding share of Series C Preferred
Stock and $12.00 for each outstanding share of Series D Preferred Stock, plus
any declared but unpaid dividends on such shares of Series A, Series B, Series
C or Series D Preferred Stock. If upon the occurrence of such an event, the
assets and funds thus distributed among the holders of the Preferred Stock
shall be insufficient to permit the payment to such holders of the full
aforesaid preferential amounts, then the entire assets and funds of the Company
legally available for distribution shall be distributed ratably among the
holders of the Series A, Series B, Series C and Series D Preferred Stock in
proportion to the aggregate liquidation preference of such stock owned by each
such holder.
Upon completion of the distributions described above, all of the remaining
assets of the Company available for distribution to stockholders shall be
distributed among the holders of Common Stock pro rata based on the number of
shares of Common Stock held by each.
Voting rights
Holders of Series A, Series B, Series C and Series D Preferred Stock are
entitled to one vote for each share of Common Stock into which such shares can
be converted. The holders of the outstanding shares of Series A and Series B
Preferred Stock, voting as separate classes, are each entitled to elect one
member to the Company's Board of Directors and the holders of the outstanding
shares of Series C Preferred Stock, voting as a separate class, are entitled to
elect two members to the Company's Board of Directors. Any remaining board
members will be elected by the holders of Common Stock and the holders of
Preferred Stock voting together as a single class.
Conversion rights
Shares of Series A, Series B, Series C and Series D Preferred Stock are
convertible into shares of Common Stock at the option of the holder, or
automatically upon completing a public offering of at least $20,000,000 of
Common Stock at an offering price of at least $10.00 per share, upon the
written consent of the holders of at least 80% of the then outstanding shares
of Series A, Series B, Series C and Series D Preferred Stock voting together
80
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
as a single class on an as-if-converted basis. The conversion rate is one share
of Common Stock for one share of Preferred Stock (subject to certain
adjustments).
Common stock
As of December 31, 2001, the Company had issued 2,099,968 shares of Common
Stock, $0.01 par value, primarily in connection with the exercise of stock
options. No dividends have been declared. In the event of any liquidation,
dissolution or winding up of the Company, either voluntary or involuntary,
holders of Common Stock shall be entitled to receive the remaining assets of
the Company after distribution to holders of Preferred Stock, pro rata based on
the number of shares of Common Stock held by each holder.
In March 2000 the Company committed to grant a warrant to purchase 50,000
shares of Common Stock at $1.20 per share for services to be received. This
warrant has not been granted as of December 31, 2001.
Stock option plans
In January 1998, the Company's Board of Directors adopted the 1997 Incentive
Plan ("1997 Plan") under which 1,200,000 shares of the Company's Common Units
("Units") were reserved for issuance to employees and consultants of the
Company. During 1999, the Company increased the number of Units reserved for
future issuance by 1,000,000. Options granted under the 1997 Plan are for terms
not to exceed ten years. If the option is granted to an individual who, at the
time of grant, owns a membership interest in the Company representing more than
10% of the voting power of all classes of membership interest of the Company or
any parent or subsidiary, the exercise price of the option must be at least
110% of the estimated fair value of the Units at the date of grant. Exercise
prices of options granted to all other persons must be at least 85% of the
estimated fair value of the Units at the date of grant. Options under the 1997
Plan generally vest over four years. The 1997 Plan expires in 2008.
In April 2000, all of the Units originally granted under the 1997 Plan were
converted into options to acquire shares of Common Stock under the 2000 Equity
Incentive Plan (the "2000 Plan"), which provides for the issuance of options to
purchase up to 2,200,000 shares of the Company's Common Stock. The Board of
Directors has the authority to determine to whom options will be granted, the
number of shares, the term and exercise price (which cannot be less than the
estimated fair value at date of grant for incentive stock options or 85% of the
estimated fair value for nonstatutory stock options). Historically, estimated
fair value has been determined by the Board of Directors. If an employee owns
stock representing more than 10% of the outstanding shares, the price of each
share shall be at least 110% of estimated fair value. Options generally vest
ratably over four years and expire within ten years of the date of the grant.
In June 2000 and December 2001, the Company reserved an additional 2,500,000
and 2,500,000 shares of Common Stock, respectively, under the 2000 Plan.
In February 2001, the Company's Board of Directors adopted the 2000 Employee
Stock Purchase Plan (the "2000 ESPP") under which a total of 350,000 shares of
Common Stock were approved for issuance.
In February 2001, the Company's Board of Directors adopted the 2001 Equity
Incentive Plan (the "2001 Plan") which will become effective upon completion of
the Company's initial public offering. Under the 2001 Plan, a maximum of
2,500,000 shares of Common stock will be reserved for issuance in addition to
any shares of Common Stock that remain reserved for issuance under the 2000
Plan at the time of completion of the Company's initial public offering.
However, in no event shall the total number of shares reserved for issuance
under the 2001 Plan, together with the total number of shares originally
reserved under the 2000 Plan, exceed 7,200,000 shares.
81
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock option activity under the Company's plans is as follows:
Outstanding Options
--------------------
Weighted
Options Average
Available Number of Exercise
for Grant Options Price
---------- ---------- --------
Options reserved at the plan inception 1,200,000 -- $ --
Options granted....................... (760,500) 760,500 0.36
Options canceled...................... 44,250 (44,250) 0.35
---------- ----------
Balances, December 31, 1998........... 483,750 716,250 0.36
Additional shares reserved............ 1,000,000 -- --
Options granted....................... (1,055,083) 1,055,083 0.75
Options canceled...................... 433,738 (433,738) 0.47
---------- ----------
Balances, December 31, 1999........... 862,405 1,337,595 0.63
Additional shares reserved............ 2,500,000 -- --
Options granted....................... (2,438,213) 2,438,213 1.85
Options exercised..................... -- (2,076,498) 1.21
Options canceled...................... 204,303 (204,303) 0.68
---------- ----------
Balances, December 31, 2000........... 1,128,495 1,495,007 1.81
Additional shares reserved............ 2,500,000 -- --
Options granted....................... (1,759,590) 1,759,590 5.03
Options exercised..................... -- (23,270) 1.14
Options canceled...................... 189,089 (189,089) 2.07
---------- ----------
Balances, December 31, 2001........... 2,057,994 3,042,238 3.68
========== ==========
The following summarizes information about stock options outstanding at
December 31, 2001:
Options Outstanding Options Exercisable
------------------------------- -------------------
Weighted
Average Weighted
Remaining Average
Exercise Contractual Exercise Exercise
Prices Number Life (Years) Price Number Price
-------- --------- ------------ -------- ------- --------
$0.35 76,000 6.07 $0.35 67,672 $0.35
0.75 229,356 7.30 0.75 95,860 0.75
1.20 58,812 8.16 1.20 25,603 1.20
1.30 551,167 8.50 1.30 258,873 1.30
1.80 134,813 8.88 1.80 30,610 1.80
5.00 1,992,090 9.65 5.00 29,091 5.00
--------- -------
3,042,238 9.11 507,709 1.31
========= =======
The weighted average grant date fair value of options granted during the
years ended December 31, 1999, 2000 and 2001, was $0.14, $7.41 and $7.73 per
share, respectively.
82
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Had compensation cost for the Company's stock options been calculated based
upon the fair value at the date of grant, the Company's net loss would have
increased to the pro forma amounts shown in the table that follows:
Year Ended December 31,
------------------------------------
1999 2000 2001
-------- -------- --------
(in thousands, except per share data
Net loss:
As reported......................... $ 11,286 $ 23,346 $(24,517)
Pro forma........................... (11,313) (24,002) (25,305)
The fair value of each option grant is estimated at the grant date using the
minimum value method, assuming an expected option term of four years, no
dividend yield, and risk-free interest rates of 5.11% to 5.86%, 5.10% to 6.20%
and 3.58% to 4.88% for the years ended December 31, 1999, 2000 and 2001
respectively.
Deferred stock compensation
For the year ended December 31, 2000 and 2001, the Company recorded
$18,331,000 and $12,257,000 respectively of deferred stock compensation in
accordance with APB No. 25, SFAS No. 123 and EITF Issue No. 98-16 from the
grant of stock options to employees, directors and consultants. The difference
between exercise price of the option granted and the estimated fair value of
Common Stock on the grant date is recognized as deferred stock compensation.
Stock compensation expense is being recognized over the vesting period of the
related options in accordance with FIN No. 28. The Company amortized $5,558,000
and $10,219,000 of stock-based compensation expense during the years ended
December 31, 2000 and 2001, respectively.
In November 2000, the Company modified certain outstanding stock options
which were then exercised in exchange for full recourse non-interest bearing
notes. In accordance with APB 25 and FIN No. 44, the associated remeasurement
of such options resulted in a one-time compensation charge in the statements of
operations for the year ended December 31, 2000 of $9,599,000.
The notes mature over periods ranging from seven to ten years. The discount
associated with the use of non-interest bearing notes was calculated using an
interest rate of 6.5% and a weighted average term of 9.44 years, and resulted
in an immediate compensation charge of $1,281,000, of which $790,000 was
allocated to general and administrative expense and $491,000 was allocated to
research and development expense as of December 31, 2000. The discount will be
recognized as interest income over the life of the loans.
Warrant for Common Stock
In December 2001, the Company entered into a Service Agreement with Compugen
Ltd. ("Compugen"). In conjunction with entering into the agreement, the Company
issued a warrant to Compugen to purchase up to 393,571 shares of the Company's
common stock at a price of $12.00 per share. The warrant will vest upon the
outcome of certain future performance criteria expected to be met by Compugen
over the next six months, and will expire in December 2006. As the outcome of
these future events is not solely within Compugen's control, the Company valued
the warrant at its lowest aggregate fair value, which was zero, as of December
31, 2001.
401(k) savings plan
In January 1998, the Company has established a qualified savings plan for
employees under Section 401(k) (the "401(k) Plan") of the Internal Revenue
Service Code, in which employees may defer as much as 15% of
83
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
their pretax annual salary up to the statutory limits. The 401(k) Plan permits
discretionary matching and profit sharing contributions to be made by the
Company. Through December 31, 2001 the Company has not made any contributions
to the 401(k) Plan.
Note 6. Income Taxes:
On April 5, 2000, the Company became subject to the C corporation provisions
of the Internal Revenue Code. No provision or benefit for income taxes has been
recognized since April 5, 2000 as the Company has incurred net operating losses.
The significant components of deferred tax assets and liabilities are as
follows (in thousands):
December 31,
-------------
2000 2001
------ ------
Net operating loss carryforwards................. $ 212 $5,601
Depreciation and amortization.................... 2,635 2,560
Research tax credit carryforwards................ 530 1,165
Other............................................ 45 235
------ ------
Total deferred tax assets..................... 3,422 9,561
Deferred interest income......................... 620 --
Less: Valuation allowance........................ 2,802 9,561
------ ------
Net deferred taxes............................... $ -- $ --
====== ======
The Company has provided a full valuation allowance for its deferred tax
assets at December 31, 2000 and 2001 due to the uncertainty surrounding the
future realization of such assets.
At December 31, 2001, the Company had state and federal net operating loss
carryforwards of $5.1 million and $15.6 million, respectively, which expire in
2005 and 2020, respectively, and federal and state research tax credit
carryforwards of $1.2 million, which expire in 2020. Utilization of federal and
state net operating loss and tax credit carryforwards may be subject to an
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code.
Note 7. Related Party Transactions:
In connection with forming the Company, SmithKline Beecham, Incyte and the
Company entered into several agreements during September 1997, including an
Operating Agreement (the "Operating Agreement") and a Master Strategic
Relationship Agreement (the "Master Agreement"). The Operating Agreement served
as the Company's by-laws while the Master Agreement documents certain specific
matters regarding the operation of the Company. During September 1997, the
Company issued 4,400,000 shares of Series A Preferred units to SmithKline
Beecham in exchange for an initial capital contribution of $4,000,000 in cash
and assets and a contractual commitment for additional cash contributions of
$11,000,000, which was received in two installments on April 15 and July 15,
1998. Concurrently, the Company issued 4,400,000 shares of Series B Preferred
units to Incyte in exchange for an initial capital contribution of $4,000,000
in cash and a contractual commitment for additional cash contributions of
$6,000,000, which was received in two installments on April 15 and July 15,
1998.
The Operating Agreement specified that the limited liability company would
merge into a C corporation at the earliest of (i) the eighteen month
anniversary of the Company's formation (March 1999); (ii) any time after
84
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
January 1, 1999, if the Company's cash balance falls below $2,000,000, or (iii)
the mutual agreement of SmithKline Beecham and Incyte. Pursuant to the
Operating Agreement, the conversion of the Company into a C corporation was
deferred until completion of the Series C Preferred Stock financing in April
2000.
In addition to the above contributions, SmithKline Beecham has granted the
Company various exclusive rights under a Collaboration and License Agreement
entered into by SmithKline Beecham, Incyte and the Company in September 1997.
Under this agreement, as amended, SmithKline Beecham has granted to the Company
an exclusive sublicenseable license under certain of its patents and know-how
with respect to genes and gene products for use as diagnostics through
September 2, 2001. In September 1997, the Company also entered into a
Collaborative LifeSeq Agreement and a Collaborative PathoSeq Database Agreement
with Incyte. Under these agreements, as amended and described below, Incyte has
provided the Company with non-exclusive access to certain of its gene sequence
and expression databases for research, diagnostic and therapeutic applications
until September 2003. These non-cash assets received as capital contributions
from SmithKline Beecham and Incyte were recorded at zero value, which was equal
to the carrying value of such assets by SmithKline Beecham and Incyte.
Under the Collaboration and License Agreement as currently in effect, the
Company pays no milestones, royalties or other payments to SmithKline Beecham
but is obligated to pay pass-through royalties to Human Genome Sciences on
sales of products derived from the use of genes discovered by Human Genome
Sciences. In addition, although the Company has no plans to develop any
therapeutic products based on SmithKline Beecham's intellectual property, in
the event the Company does so, SmithKline Beecham has an exclusive license to
the Company's know-how or patents related to any such therapeutic products
until September 2005. In order to license the Company's products under this
arrangement, SmithKline Beecham must make milestone payments of up to an
aggregate of $4,000,000 for each patented product and up to an aggregate of
$1,600,000 for each product for which a patent is pending. As of December 31,
2001, no such milestone payments have been received or recognized by the
Company.
Pursuant to the 1997 Collaboration and License Agreement and the 2000
Collaborative Agreement, the Company has committed to purchase $5,000,000 in
gene sequencing and microarray services from Incyte, including services
obtained under the GEM Services Agreement. As of December 31, 2000, the Company
had fulfilled all of its purchase commitments to Incyte under these agreements.
Pursuant to an Intercompany Services Agreement, SmithKline Beecham and
Incyte provided the Company with certain legal, financial and research and
development services. Charges to the Company for these services were based upon
either actual costs or rates charged to other customers for similar services.
Such amounts, which were charged to research and development, were $0, $0 and
$0 in 1999, 2000 and 2001, respectively. Pursuant to the 1997 Collaboration and
License Agreement, and the Collaborative Agreement with Incyte, the Company
incurred costs which were charged to research and development of $449,000,
$2,600,000 and $0 during the years ended December 31, 1999, 2000 and 2001,
respectively.
On September 28, 1998, the Company entered into a Service Agreement with
SmithKline Beecham. Under this agreement, SmithKline Beecham provided the
Company personnel support to identify diagnostic leads and research for a
period of one year. Pursuant to this agreement, the Company incurred costs
which were charged to research and development of $150,000 during the year
ended December 31, 1999. No such costs were incurred during the year ended
December 31, 2000 and 2001.
On November 1, 1998, the Company entered into a GEM Services Agreement with
Incyte which was subsequently amended on September 1, 1999, pursuant to which
the Company obtains gene preparation and
85
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
expression services from Incyte which the Company uses to generate gene
expression information and data. The Company paid Incyte for its services
pursuant to a pricing schedule for the production of standard and custom
microarrays, which pricing schedule was substantially similar to that contained
in GEM Services Agreements between Incyte and unrelated third parties. The GEM
Services Agreement expired on November 1, 2000. Pursuant to this agreement, the
Company incurred costs which were charged to research and development of
$1,479,000, $95,000 and $0 during the years ended December 31, 1999, 2000 and
2001, respectively.
In February 1999, the Company entered into a License Agreement with
SmithKline Beecham Clinical Laboratories, Inc. Under the agreement, SmithKline
Beecham obtained licenses from the Company with respect to the Company's
technology for a potential molecular target for prostate cancer. Later during
1999, testing of this molecular target was discontinued and the parties agreed
that no additional work under the agreement was appropriate. Accordingly, the
non-refundable license fee of $100,000 was recognized as revenue in 1999.
In July 1999, the Company issued two convertible notes payable in the amount
of $2,500,000 each to SmithKline Beecham and Incyte. The notes were due and
payable in April 2000, accruing interest at 5.6% per annum. Upon closing the
Series C financing, the note to SmithKline Beecham was converted to 322,580
shares of Series C Preferred Stock. Additionally, the Company paid interest of
$97,000 on the note to SmithKline Beecham and paid Incyte principal of
$2,500,000 and accrued interest of $97,000.
In December 1999, the Company entered into a consulting agreement with Dr.
George Poste, Chairman of the Board of Directors to serve as the Company's
acting Chief Executive Officer and as a consultant to the Company for a
quarterly fee of $20,000, plus travel expenses. For each of the years ended
December 31, 2000 and 2001, the Company paid an aggregate of $80,000 pursuant
to this agreement. In January 2000, the Company entered into a special
consulting agreement with Dr. Poste to act as a consultant to the Company in
connection with the Series C preferred stock financing. Pursuant to this
agreement, the Company paid an aggregate of $15,000 to Dr. Poste in the year
ended December 31, 2000.
In December 1999, the Company entered into a LifeArray Software License
Agreement with Incyte. Under this agreement, the Company has access to computer
software from Incyte for the processing and analysis of microarray expression
data for a period of 12 months. The license fee paid for the use of the
software was $75,000 for the 12-month term.
In February 2000, the Company entered into a Collaborative Agreement with
Incyte to replace and expand the rights that existed under the 1997
Collaborative LifeSeq and 1997 Collaborative PathSeq Database Agreements. Under
this new agreement the Company retained access to Incyte's human database,
LifeSeq Gold, and microbial database, PathoSeq, at no subscription cost until
September 2, 2003. Under the agreement, along with other database subscribers,
the Company has non-exclusive access to database products and database patents
for research, the diagnostic field of use and the pharmaceutical field of use.
Additionally, the Company has an option to exclusively license in the future
certain Incyte patents in the pharmaceutical field of use. The Company may pay
up to an aggregate of $4,622,500 in licensing fees and milestone payments for
each therapeutic product and up to an aggregate of $2,385,000 in licensing fees
and milestone payments for each antisense product, in addition to royalty
payments on the sale of these products. In October 2001, the Company amended
this agreement so that, under certain circumstances, it could sublicense to
third parties the rights to certain drug products, such as therapeutic
antibodies and small molecules. The Company also clarified in the amendment
that it had the right to use third party collaborators to conduct research and
development with respect to certain products. As of December 31, 2001, no
licensing fees or milestone payments have been paid or recognized by the
Company.
86
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In June 2001, the Company made non-interest bearing secured loans totalling
$500,000 to two employees for the purchase of a home in connection with their
relocation to the Bay Area. These loans are repayable in a series of
installments, the first of which is due in November 2003 and the last in June
2006.
Note 8. Subsequent Event:
On January 4, 2002, the Company entered into an agreement with a third party
to purchase remnant anomyzed human biological material and corresponding
surgical pathology reports for an aggregate amount of $250,000 plus applicable
shipping costs not to exceed $6,000.
On January 30, 2002, the Company entered into a collaboration and licensing
agreement with a third party to discover novel diagnostic markers and
therapeutic targets. Pursuant to the terms of the agreement, the Company has
purchased $1,000,000 of the third party's preferred stock and has committed to
pay up to $3,000,000 in research fees over the 18-month term of the agreement.
87
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item (with respect to Directors) is
incorporated by reference from the information under the caption "Election of
Directors" contained in the Company's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Company's 2002 Annual Meeting of Stockholders to be held on
June 4, 2001 (the "Proxy Statement").
Item 415 of Regulation S-K calls for disclosure of any known late filing or
failure by an insider to file a report required by Section 16(a) of the
Exchange Act. This disclosure is contained in the section entitled
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement and is incorporated herein by reference.
The executive officers of the Company are as follows:
Paul A. Friedman, Ph.D., age 59, joined the Company as the Chief Executive
Officer and a Director in November 2001. From 1994 until October 2001, Dr.
Friedman served as President of DuPont Pharmaceuticals Research Laboratories,
of DuPont Pharmaceuticals Company (formerly The DuPont Merck Pharmaceutical
Company), and from 1991 to 1994 he served as Senior Vice President at Merck
Research Laboratories. Prior to his work at Merck and DuPont, Dr. Friedman was
an Associate Professor of Medicine and Pharmacology at Harvard Medical School.
Dr. Friedman is a Diplomat of the American Board of Internal Medicine, Member
of the American Society of Pharmacology and Experimental Therapeutics, Member
of the American Society of Clinical Investigation and a Member of the American
Society of Biological Chemist. He received his A.B. in Biology from Princeton
University and his M.D. from Harvard Medical School.
Roy A. Whitfield, age 48, co-founded the Company and has been a Director
since June 1991 and Chairman of the Board since November 2001. Mr. Whitfield
served as President of the Company from June 1991 until January 1997, as
Treasurer of the Company between April 1991 and October 1995 and as Chief
Executive Officer of the Company between June 1993 and November 2001.
Previously, Mr. Whitfield served as the President of Ideon Corporation, which
was a majority-owned subsidiary of Invitron Corporation, a biotechnology
company, from October 1989 until April 1991. From 1984 to 1989, he held senior
operating and business development positions with Technicon Instruments
Corporation, a medical instrumentation company, and its predecessor company,
CooperBiomedical, Inc., a biotechnology and medical diagnostics company. Prior
to his work at Technicon, Mr. Whitfield spent seven years with the Boston
Consulting Group's international consulting practice. Mr. Whitfield received a
B.S. with first class honors in Mathematics from Oxford University, and an
M.B.A. with distinction from Stanford University. Mr. Whitfield is also a
director of Inhale Therapeutics Systems, Inc.
Robert B. Stein, Ph.D., age 51, joined the Company in November 2001 as
President and Chief Scientific Officer and as a Director. From September 1996
to November 2001, Dr. Stein was the Executive Vice President of Research and
Preclinical Development of DuPont Pharmaceuticals Company (formerly The DuPont
Merck Pharmaceutical Company). From May 1990 to September 1996, Dr. Stein was
employed by Ligand Pharmaceuticals, Inc., serving as Senior Vice President and
Chief Scientific Officer from 1993 to 1996, as Vice President, Research and
Preclinical Development from 1992 to 1993 and Vice President, Research from
1990 to 1992. From 1982 to 1990, Dr. Stein held various positions with Merck,
Sharp & Dohme Research Laboratories, including Senior Director and Head of the
Department of Pharmacology from 1989 to 1990. Dr. Stein received his B.S. in
biology and chemistry from Indiana University, his doctorate in Physiology and
Pharmacology, and his M.D. from Duke University. He also serves on the Board of
Directors of Geron Corporation.
Michael D. Lack, age 50, has been the Chief Operating Officer of the Company
since July 1999 and became an Executive Vice President of the Company in June
2000. Prior to joining the Company, Mr. Lack was the President and Chief
Executive Officer of Silicon Valley Networks from July 1998 to July 1999.
Previously,
88
Mr. Lack served as Chief Executive Officer with several software startup
companies, including Aqueduct Software from July 1997 to July 1998 and Presidio
Systems, Inc. from May 1994 to May 1997. He also held various senior positions
with Cadence Design Systems, Inc., including Senior Vice President of Product
Operations, Division President of Integrated Circuit Design, and Division
President of Systems. Mr. Lack received his B.S. in Physics from the University
of California, Los Angeles.
John M. Vuko, age 51, joined the Company as Chief Financial Officer in
December 1999 and became an Executive Vice President of the Company in June
2000. Prior to joining the Company, Mr. Vuko was the primary financial
consultant of an affiliate of Achievement Radio Holdings, Inc. from October
1998 to December 1999. From April 1997 to September 1998, Mr. Vuko served as
the Senior Vice President and Chief Financial Officer of Achievement Radio
Holdings, Inc. From October 1989 to March 1997, Mr. Vuko served in various
positions with Ross Stores, Inc., most recently as Senior Vice President and
Chief Financial Officer. Prior to his work at Ross Stores, Mr. Vuko held the
positions of Corporate Development Executive, Vice President, Treasurer, and
Controller with the Cooper family of companies, including CooperVision, Inc.,
Cooper LaserSonics, Inc. and The Cooper Companies, Inc. Mr. Vuko received his
B.A. in Accounting from San Francisco State University.
James R. Neal, age 46, has been the Executive Vice President of Sales and
Marketing since July 1999. From July 1997 to immediately prior to joining
Incyte, Mr. Neal served as General Manager of the Solaris Group, a division of
Monsanto Company. From 1982, he also held various positions with Monsanto,
including Vice President of Global Business Development, Director of Brand
Marketing and Residential Products, and Manager of New Product Introduction.
Mr. Neal received his B.S. in Biology and his M.S. in Genetics and Plant
Breeding from the University of Manitoba, Canada as well as an Executive M.B.A.
from Washington University, St. Louis.
Lee Bendekgey, age 44, has been General Counsel of the Company since January
1998 and served as Interim Chief Financial Officer from June 1999 until
December 1999. Mr. Bendekgey became the Secretary of the Company in June 1998
and an Executive Vice President of the Company in June 2000. Prior to joining
the Company, Mr. Bendekgey was the Director of Strategic Relations at Silicon
Graphics, Inc. July 1997 through December 1997. He held various positions with
SGI from March 1993 through June 1997, including Director of Legal Services,
Products and Technology; Senior Counsel, Product Divisions; Group Counsel,
Computer Systems Group; and Division Counsel, MIPS Technologies, Inc. From 1982
to 1993, Mr. Bendekgey held associate and partner positions with Graham &
James, a law firm in San Francisco, where he specialized in intellectual
property protection and licensing. Mr. Bendekgey received his B.A. magna cum
laude in Political Science and French from Kalamazoo College and his J.D. from
Stanford University.
James P. Merryweather, Ph.D., age 51, has been an Executive Vice President
of the Company since November 2000. He has led the Company's Target Validation
Research organization since December 2002 and, prior to that, led the Company's
Business Development organization from November 2000 until December 2001. He
served as Senior Vice President of Client Business Management from July 1999
until November 2000 and served as Vice President of Partnership Programs from
March 1999 until July 1999. Prior to joining the Company, Dr. Merryweather was
the Vice President of Program Management at Millennium Pharmaceuticals, Inc.
from September 1996 until November 1998. Prior to joining Millennium
Pharmaceuticals, Dr. Merryweather was Director of Project Management at Chiron
Corporation. Dr. Merryweather held various positions at Chiron from November
1981, including Senior Scientist, Research Leader and Director of Regulatory
Affairs. Dr. Merryweather received his Ph.D. in Biochemistry from Washington
State University.
Brian W. Metcalf, Ph.D., age 56, has served as Executive Vice President and
Chief Drug Discovery Scientist since February 2002. From March 2000 to February
2002, Dr. Metcalf served as Senior Vice President and Chief Scientific Officer
of Kosan Biosciences Incorporated. From December 1983 to March 2000, Dr.
Metcalf held a number of executive management positions with SmithKline
Beecham, most recently as Senior Vice President, Discovery Chemistry and
Platform Technologies. Prior to joining SmithKline Beecham, Dr. Metcalf held
positions with Merrell Research Center from 1973 to 1983. Dr. Metcalf received
his B.S. and Ph.D. in organic chemistry from the University of Western
Australia. Dr. Metcalf is also a director of Argonaut Technologies, Inc.
89
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the
information under the captions "Election of Directors--Compensation of
Directors" and "Executive Compensation," contained in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
In March 2001, the Company entered into a LifeSeq Collaboration Agreement,
Patent License Agreement, Collaboration and Technology Transfer Agreement and
Proteome BioKnowledge Library License Agreement with Genomic Health, Inc.
("Genomic Health"). Randal W. Scott, who served as Chairman of the Board of the
Company until November 2001 and as a director of the Company through December
2001, is Chairman of the Board, President and Chief Executive Officer of
Genomic Health and owns more than 10% of the outstanding capital stock of
Genomic Health. Under the agreements, Genomic Health obtained access to the
Company's LifeSeq Gold database and BioKnowledge Library and received licenses
to certain of the Company's intellectual property. Amounts Genomic Health will
pay the Company under these agreements are similar to those paid to the Company
under agreements between the Company and unrelated third parties. The Company
received rights to certain intellectual property that Genomic Health may, in
the future, develop. At the same time, the Company entered into an agreement to
purchase shares of Series C Preferred Stock of Genomic Health for an aggregate
purchase price of $5.0 million which, together with shares of Series A
Preferred Stock purchased in November 2000 for an aggregate purchase price of
$1.0 million, resulted in the Company owning approximately 10.9% of the
outstanding capital stock of Genomic Health as of December 31, 2001. Under
certain circumstances and if Genomic Health so elects, the Company has agreed
to purchase in a future offering of Genomic Health's capital stock an aggregate
of $5.0 million of the shares being sold in that offering.
90
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) Financial Statements
Reference is made to the Index to Consolidated Financial Statements of
Incyte Genomics, Inc. and the Index to Financial Statements of diaDexus,
Inc., under Item 8 of Part II hereof.
(2) Financial Statement Schedules
The following financial statement schedule of Incyte Genomics, Inc. is
filed as part of this Form 10-K included in Item 8 of Part II:
Schedule II--Valuation and Qualifying Accounts for each of the three
years in the period ended December 31, 2001.
All other financial statement schedules have been omitted because they are
not applicable or not required or because the information is included elsewhere
in the Consolidated Financial Statements or the Notes thereto.
(3) Exhibits
See Item 14(c) below. Each management contract or compensatory plan or
arrangement required to be filed has been identified.
(b) Reports on Form 8-K.
The Company filed the following reports on Form 8-K during the fiscal
quarter ended December 31, 2001:
(i) Current Report on Form 8-K filed on November 13, 2001, reporting under
Item 5 the Company's restructuring of its operations and related
personnel reductions.
(ii) Current Report on Form 8-K filed on November 30, 2001, reporting under
Item 5 that it had filed a complaint against Invitrogen Corporation
alleging infringement of sixteen patents. The Company also reported the
appointment of Paul A. Friedman, M.D. as the Company's new Chief
Executive Officer and the appointment of Robert Stein, M.D. as the
Company's new President and Chief Scientific Officer.
(iii) Current Report on Form 8-K filed on December 28, 2001, reporting under
item 5 that Affymetrix, Inc. and the Company had agreed to settle
patent infringement lawsuits.
(c) Exhibits
Exhibit
Number Description of Document
- ------ -----------------------
3(i)(a) Restated Certificate of Incorporation, as amended (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000).
3(i)(b) Certificate of Designation of Series A Participating Preferred Stock (incorporated by reference to the
Company's Annual Report on 10-K for the year ended December 31, 1998).
3(ii)* Bylaws of the Company, as amended as of December 20, 2001.
4.1 Form of Common Stock Certificate (incorporated by reference to the exhibit of the same number to
the Company's Registration Statement on Form S-1 (File No. 33-68138)).
4.2 Rights Agreement dated as of September 25, 1998 between the Company and Chase Mellon
Shareholder Services, L.L.C., which includes as Exhibit B, the rights certificate (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on Form 8-A filed
September 30, 1998).
91
Exhibit
Number Description of Document
- ------ -----------------------
4.3 Indenture dated as of February 4, 2000 between the Company and State Street Bank and Trust
Company of California, N.A., as trustee (incorporated by reference to the exhibit of the same
number to the Company's Annual Report on Form 10-K for the year ended December 31, 1999).
10.1*# 1991 Stock Plan of Incyte Genomics, Inc., as amended and restated February 15, 2001 (the "Plan").
10.2# Form of Incentive Stock Option Agreement under the Plan (incorporated by reference to the exhibit
of the same number to the Company's Registration Statement on Form S-1 (File No. 33-68138)).
10.3# Form of Nonstatutory Stock Option Agreement under the Plan (incorporated by reference to the
exhibit of the same number to the Company's Registration Statement on Form S-1 (File
No. 33-68138)).
10.4*# Amended and Restated 1993 Directors' Stock Option Plan of Incyte Genomics, Inc., dated
February 27, 2002.
10.5# Form of Indemnity Agreement between the Company and its directors and officers (incorporated by
reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (File
No. 33-68138)).
10.6 Lease Agreement dated December 8, 1994 between the Company and Matadero Creek
(incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994).
10.9 Stock Purchase Agreement dated as of June 22, 1994 between the Company and Pfizer Inc
(incorporated by reference to Exhibit B to the Company's Current Report on Form 8-K dated
June 23, 1994).
10.10 Registration Rights Agreement dated as of June 22, 1994 between the Company and Pfizer Inc
(incorporated by reference to Exhibit C to the Company's Current Report on Form 8-K dated
June 23, 1994).
10.11 Stock Purchase Agreement dated as of November 30, 1994 between the Company and The Upjohn
Company (incorporated by reference to Exhibit B to the Company's Current Report on Form 8-K
dated November 30, 1994, as amended by Form 8-K/A filed with the Commission on March 27,
1995).
10.12 Registration Rights Agreement dated as of November 30, 1994 between the Company and The
Upjohn Company (incorporated by reference to Exhibit C to the Company's Current Report on
Form 8-K dated November 30, 1994).
10.13 Registration Rights Agreement dated as of February 4, 2000 among the Company and Deutsche
Bank Securities Inc. and Warburg Dillon Read LLC (incorporated by reference to the exhibit of
the same number to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999).
10.14 Lease Agreement dated June 19, 1997 between the Company and The Board of Trustees of the
Leland Stanford Junior University (incorporated by reference to the exhibit of the same number
to the Company's Annual Report on Form 10-K for the year ended December 31, 1999).
10.15*# 1997 Employee Stock Purchase Plan of Incyte Genomics, Inc. (as amended and restated June 26,
2001).
10.18# 1996 Synteni, Inc. Equity Incentive Stock Plan (incorporated by reference to Exhibit 10.19 to the
Company's Registration Statement on Form S-8 (File No. 333-46639)).
10.19# The Hexagen Limited Unapproved Company Share Option Plan 1996, as amended (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8 (File
No. 333-67691)).
92
Exhibit
Number Description of Document
- ------ -----------------------
10.20 Stock Purchase Agreement dated as February 24, 2000 between the Company and the investors
named therein (incorporated by reference to the exhibit of the same number to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999).
10.21 Registration Rights Agreement, dated as of December 28, 2000, by and among the Company and
the Stockholders of Proteome, Inc. (incorporated by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K filed January 10, 2001).
10.22# 1998 Employee, Director and Consultant Stock Option Plan of Proteome, Inc., as amended
(incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8
filed January 29, 2001 (File No. 333-54496)).
10.23*# Form of Restricted Stock Unit Agreement under the 1991 Stock Plan of Incyte Genomics, Inc.
10.24*# Transition Agreement, dated as of November 26, 2001, between Incyte Genomics, Inc. and Roy A.
Whitfield.
10.25*# Amended and Restated Employment Agreement, dated as of November 26, 2001, between Incyte
Genomics, Inc. and E. Lee Bendekgey.
10.26*# Amended and Restated Employment Agreement, dated as of November 26, 2001, between Incyte
Genomics, Inc. and Michael D. Lack.
10.27*# Amended and Restated Employment Agreement, dated as of November 26, 2001, between Incyte
Genomics, Inc. and James P. Merryweather.
10.28*# Amended and Restated Employment Agreement, dated as of November 26, 2001, between Incyte
Genomics, Inc. and James R. Neal.
10.29*# Amended and Restated Employment Agreement, dated as of November 26, 2001, between Incyte
Genomics, Inc. and John M. Vuko.
10.30*# Offer of Employment Letter, dated November 21, 2001, from the Company to Paul A. Friedman.
10.31*# Offer of Employment Letter, dated November 16, 2001, from the Company to Robert B. Stein.
10.32*# Employment Agreement, dated November 26, 2001, between Paul A. Friedman and Incyte
Genomics, Inc.
10.33*# Employment Agreement, dated November 26, 2001, between Robert B. Stein and Incyte Genomics,
Inc.
10.34*+ Settlement Agreement dated December 21, 2001, between Affymetrix, Inc. and Incyte Genomics,
Inc.
10.35* Lease Agreement, dated February 28, 2002, between Dupont Pharmaceuticals and Incyte Genomics,
Inc.
21.1* Subsidiaries of the Company.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1* Power of Attorney (see page 94 of this Form 10-K).
- --------
* Filed herewith.
+ Confidential treatment has been requested with respect to certain portions
of these agreements.
# Indicates management contract or compensatory plan or arrangement.
(d) Financial Statements and Schedules
Reference is made to Item 14(a)(2) above.
93
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.
INCYTE GENOMICS, INC.
By: /s/ PAUL A. FRIEDMAN
-----------------------------
Paul A. Friedman
Chief Executive Officer
Date: April 1, 2002
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Paul A. Friedman, E. Lee Bendekgey, and John M.
Vuko, and each of them, his true and lawful attorneys-in-fact, each with full
power of substitution, for him or her in any and all capacities, to sign any
amendments to this report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or their substitute or substitutes may do or cause to be done
by virtue hereof.
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
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ PAUL A. FRIEDMAN Chief Executive Officer April 1, 2002
- ----------------------------- (Principal Executive
Paul A. Friedman Officer) and Director
/s/ ROBERT B. STEIN President, Chief Scientific April 1, 2002
- ----------------------------- Officer and Director
Robert B. Stein
/s/ JOHN M. VUKO Chief Financial Officer April 1, 2002
- ----------------------------- (Principal Financial
John M. Vuko Officer)
/s/ TIMOTHY G. HENN Senior Vice President, April 1, 2002
- ----------------------------- Finance and Corporate
Timothy G. Henn Controller (Principal
Accounting Officer)
/s/ ROY A. WHITFIELD Chairman April 1, 2002
- -----------------------------
Roy A. Whitfield
/s/ JEFFREY J. COLLINSON Director April 1, 2002
- -----------------------------
Jeffrey J. Collinson
/s/ BARRY M. BLOOM Director April 1, 2002
- -----------------------------
Barry M. Bloom
/s/ FREDERICK B. CRAVES Director April 1, 2002
- -----------------------------
Frederick B. Craves
94
Signature Title Date
--------- ----- ----
/s/ JON S. SAXE Director April 1, 2002
- -----------------------------
Jon S. Saxe
/s/ BARRY M. ARIKO Director April 1, 2002
- -----------------------------
Barry M. Ariko
/s/ RICHARD U. DE SCHUTTER Director April 1, 2002
- -----------------------------
Richard U. De Schutter
/s/ PAUL A. BROOKE Director April 1, 2002
- -----------------------------
Paul A. Brooke
/s/ JULIAN C. BAKER Director April 1, 2002
- -----------------------------
Julian C. Baker
95
Exhibit Index
Exhibit
Number Description of Document
- ------ -----------------------
3(i)(a) Restated Certificate of Incorporation, as amended (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000).
3(i)(b) Certificate of Designation of Series A Participating Preferred Stock (incorporated by reference to the
Company's Annual Report on 10-K for the year ended December 31, 1998).
3(ii)* Bylaws of the Company, as amended as of December 20, 2001.
4.1 Form of Common Stock Certificate (incorporated by reference to the exhibit of the same number to
the Company's Registration Statement on Form S-1 (File No. 33-68138)).
4.2 Rights Agreement dated as of September 25, 1998 between the Company and Chase Mellon
Shareholder Services, L.L.C., which includes as Exhibit B, the rights certificate (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on Form 8-A filed
September 30, 1998).
4.3 Indenture dated as of February 4, 2000 between the Company and State Street Bank and Trust
Company of California, N.A., as trustee (incorporated by reference to the exhibit of the same
number to the Company's Annual Report on Form 10-K for the year ended December 31, 1999).
10.1*# 1991 Stock Plan of Incyte Genomics, Inc., as amended and restated February 15, 2001 (the "Plan").
10.2# Form of Incentive Stock Option Agreement under the Plan (incorporated by reference to the exhibit
of the same number to the Company's Registration Statement on Form S-1 (File No. 33-68138)).
10.3# Form of Nonstatutory Stock Option Agreement under the Plan (incorporated by reference to the
exhibit of the same number to the Company's Registration Statement on Form S-1 (File
No. 33-68138)).
10.4*# Amended and Restated 1993 Directors' Stock Option Plan of Incyte Genomics, Inc., dated
February 27, 2002.
10.5# Form of Indemnity Agreement between the Company and its directors and officers (incorporated by
reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (File
No. 33-68138)).
10.6 Lease Agreement dated December 8, 1994 between the Company and Matadero Creek (incorporated
by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
10.9 Stock Purchase Agreement dated as of June 22, 1994 between the Company and Pfizer Inc
(incorporated by reference to Exhibit B to the Company's Current Report on Form 8-K dated
June 23, 1994).
10.10 Registration Rights Agreement dated as of June 22, 1994 between the Company and Pfizer Inc
(incorporated by reference to Exhibit C to the Company's Current Report on Form 8-K dated
June 23, 1994).
10.11 Stock Purchase Agreement dated as of November 30, 1994 between the Company and The Upjohn
Company (incorporated by reference to Exhibit B to the Company's Current Report on Form 8-K
dated November 30, 1994, as amended by Form 8-K/A filed with the Commission on March 27,
1995).
10.12 Registration Rights Agreement dated as of November 30, 1994 between the Company and The
Upjohn Company (incorporated by reference to Exhibit C to the Company's Current Report on
Form 8-K dated November 30, 1994).
10.13 Registration Rights Agreement dated as of February 4, 2000 among the Company and Deutsche
Bank Securities Inc. and Warburg Dillon Read LLC (incorporated by reference to the exhibit of
the same number to the Company's Annual Report on Form 10-K for the year ended December 31,
1999).
Exhibit
Number Description of Document
- ------ -----------------------
10.14 Lease Agreement dated June 19, 1997 between the Company and The Board of Trustees of the
Leland Stanford Junior University (incorporated by reference to the exhibit of the same number to
the Company's Annual Report on Form 10-K for the year ended December 31, 1999).
10.15*# 1997 Employee Stock Purchase Plan of Incyte Genomics, Inc. (as amended and restated June 26,
2001).
10.18# 1996 Synteni, Inc. Equity Incentive Stock Plan (incorporated by reference to Exhibit 10.19 to the
Company's Registration Statement on Form S-8 (File No. 333-46639)).
10.19# The Hexagen Limited Unapproved Company Share Option Plan 1996, as amended (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8 (File
No. 333-67691)).
10.20 Stock Purchase Agreement dated as February 24, 2000 between the Company and the investors
named therein (incorporated by reference to the exhibit of the same number to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999).
10.21 Registration Rights Agreement, dated as of December 28, 2000, by and among the Company and the
Stockholders of Proteome, Inc. (incorporated by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K filed January 10, 2001).
10.22# 1998 Employee, Director and Consultant Stock Option Plan of Proteome, Inc., as amended
(incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8
filed January 29, 2001 (File No. 333-54496)).
10.23*# Form of Restricted Stock Unit Agreement under the 1991 Stock Plan of Incyte Genomics, Inc.
10.24*# Transition Agreement, dated as of November 26, 2001, between Incyte Genomics, Inc. and Roy A.
Whitfield.
10.25*# Amended and Restated Employment Agreement, dated as of November 26, 2001, between Incyte
Genomics, Inc. and E. Lee Bendekgey.
10.26*# Amended and Restated Employment Agreement, dated as of November 26, 2001, between Incyte
Genomics, Inc. and Michael D. Lack.
10.27*# Amended and Restated Employment Agreement, dated as of November 26, 2001, between Incyte
Genomics, Inc. and James P. Merryweather.
10.28*# Amended and Restated Employment Agreement, dated as of November 26, 2001, between Incyte
Genomics, Inc. and James R. Neal.
10.29*# Amended and Restated Employment Agreement, dated as of November 26, 2001, between Incyte
Genomics, Inc. and John M. Vuko.
10.30*# Offer of Employment Letter, dated November 21, 2001, from the Company to Paul A. Friedman.
10.31*# Offer of Employment Letter, dated November 16, 2001, from the Company to Robert B. Stein.
10.32*# Employment Agreement, dated November 26, 2001, between Paul A. Friedman and Incyte
Genomics, Inc.
10.33*# Employment Agreement, dated November 26, 2001, between Robert B. Stein and Incyte Genomics,
Inc.
10.34*+ Settlement Agreement dated December 21, 2001, between Affymetrix, Inc. and Incyte Genomics,
Inc.
10.35* Lease Agreement, dated February 28, 2002, between Dupont Pharmaceuticals and Incyte Genomics,
Inc.
21.1* Subsidiaries of the Company.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
Exhibit
Number Description of Document
------ -----------------------
23.2* Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1* Power of Attorney (see page 94 of this Form 10-K).
- --------
* Filed herewith.
+ Confidential treatment has been requested with respect to certain portions
of these agreements.
# Indicates management contract or compensatory plan or arrangement.
Copies of above exhibits not contained herein are available to any
stockholder upon written request to: Investor Relations, Incyte Genomics, Inc.,
3160 Porter Drive, Palo Alto, CA 94034.