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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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 NO. 0-23317
GENE LOGIC INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1411336
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
708 QUINCE ORCHARD ROAD
GAITHERSBURG, MARYLAND 20878
(Address of principal executive offices)
Registrant's telephone number, including area code: (301) 987-1700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (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 the voting stock (which consists solely of
shares of Common Stock) held by non-affiliates of the registrant as of March
16, 1998 was approximately $87,897,063, based on the closing price on that
date of Common Stock on the Nasdaq National Stock Market.*
The number of shares outstanding of the Registrant's Common Stock, $.01
par value, was 13,900,333 as of March 16, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Proxy Statement to be filed with the Securities
and Exchange Commission (the "Commission") pursuant to Regulation 14A in
connection with the 1998 Annual Meeting of Stockholders to be held on June 5,
1998 is incorporated by reference into Part III of this Report on Form 10-K
to the extent stated herein.
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*Excludes 3,559,502 shares of Common Stock held by directors and officers and
stockholders whose beneficial ownership exceeds 10% of the shares outstanding on
March 16, 1998. Exclusion of shares held by any person should not be construed
to indicate that such person possesses the power, direct or indirect, to direct
or cause the direction of the management or policies of the Registrant, or that
such person is controlled by or under common control with the Registrant.
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PART I
ITEM 1. BUSINESS
WHEN USED IN THIS REPORT, THE WORDS "ANTICIPATES," "BELIEVES,"
"ESTIMATES," "EXPECTS," "INTENDS" AND OTHER SIMILAR EXPRESSIONS ARE INTENDED
TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS, WHICH INCLUDE
STATEMENTS AS TO THE TIMING OF AVAILABILITY OF PRODUCTS UNDER DEVELOPMENT,
THE ABILITY TO COMMERCIALIZE PRODUCTS DEVELOPED UNDER COLLABORATIONS AND
ALLIANCES, THE PERFORMANCE AND UTILITY OF THE COMPANY'S PRODUCTS AND
SERVICES, AND THE ADEQUACY OF CAPITAL RESOURCES, 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, THE
EXTENT OF UTILIZATION OF GENOMIC INFORMATION BY THE PHARMACEUTICAL INDUSTRY
IN BOTH RESEARCH AND DEVELOPMENT, RISKS RELATING TO THE DEVELOPMENT OF
GENOMIC DATABASE PRODUCTS AND THEIR USE BY POTENTIAL COLLABORATORS OF THE
COMPANY, THE IMPACT OF TECHNOLOGICAL ADVANCES AND COMPETITION, AS WELL AS
OTHER RISKS AND UNCERTAINTIES SET FORTH BELOW AND IN THE SECTIONS ENTITLED
"RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
READS-TM-, MuST-TM-, Flow-thru Chip-TM-, Molecular Topography-TM-, GENE
EXPRESS-TM-, ACCELERATED DRUG DISCOVERY-TM-, Pharmacology EXPRESS-TM-,
Toxicology EXPRESS-TM-, rEST-TM- and TAG-TM- are trademarks of the Company.
Tradenames and trademarks of other companies appearing in this Report on Form
10-K are the property of their respective holders.
SUMMARY
GENE LOGIC INC. ("Gene Logic" or the "Company") uses a proprietary
system, based on analysis of gene expression and gene regulation, designed to
discover drug targets and drug leads. The Company's objective is to provide
its pharmaceutical company partners with novel drug targets, drug leads and a
suite of genomic database products to reduce the time, cost and risk
associated with drug discovery. The Company believes that by building its
portfolio of partnerships it will generate current revenues and establish a
long-term economic interest in the product pipelines of multiple partners
through milestone and royalty payments. Gene Logic has established major
strategic alliances with Procter & Gamble Pharmaceuticals, Inc. ("Procter &
Gamble"), Japan Tobacco Inc. ("Japan Tobacco") and N.V. Organon ("Organon"),
a pharmaceutical business unit of Akzo Nobel NV.
The core of Gene Logic's ACCELERATED DRUG DISCOVERY system is its
proprietary READS (Restriction Enzyme Analysis of Differentially-expressed
Sequences) technology for analyzing patterns of gene expression. Gene Logic
uses READS in its drug target and drug lead discovery programs and to
generate genomic data for its database products.
DRUG TARGET DISCOVERY. Gene Logic identifies and analyzes
disease-associated genes and their functional pathways to determine
which genes might encode useful drug targets and prioritizes targets for
drug screening. Using READS, Gene Logic generates a gene expression
profile, or Molecular Topography, representing a quantitative snapshot
of the levels of expression of essentially all the genes expressed in a
tissue sample. The Company compares normal and diseased tissues through
a series of Molecular
2.
Topography snapshots to identify the changes in gene expression that
occur as the disease develops and progresses and to determine which
genes are associated with the disease. In addition, using its MuST
(Multiplex Selection of Transcription Factors) technology, Gene Logic
characterizes the regions of the genes that regulate their expression.
DRUG LEAD DISCOVERY. Gene Logic is developing a proprietary, reusable
Flow-thru Chip for high-throughput analysis of changes in the expression of
known genes. The Company believes the Flow-thru Chip will enable the
development of high-throughput screening assays to evaluate the effects of
compounds on the expression of disease-associated genes identified by
READS. For a given disease, the Company will design a customized Flow-thru
Chip incorporating probes specific for these genes and use the chip to test
the effects of compounds on cells. Compounds that have the desired effect
on expression of the relevant genes may be evaluated as drug leads. Gene
Logic believes this technology represents a new approach to drug discovery
and has the potential to accelerate substantially the identification of
drug leads.
GENOMIC DATABASES. Gene Logic is developing a suite of genomic database
products to accelerate the process of target identification and
prioritization, the discovery of lead compounds and the preclinical and
clinical development of drugs. The Company plans to market its genomic
database products, either in a single package or as separate modules, to
multiple pharmaceutical company customers. The Company's database products
are: (i) the GENE EXPRESS NORMAL database, a reference set of gene
expression profiles in a variety of normal tissues; (ii) the rare EST
(rEST) database containing sequences for rarely-expressed genes that are
not available through public sources; (iii) the Toxicology EXPRESS database
for screening of lead compounds for common classes of toxicological
effects; (iv) the Pharmacology EXPRESS database to predict efficacy of lead
compounds at the preclinical drug development stage and (v) The Annotated
Genome (TAG) database which assigns human genes to functional pathways
based on their patterns of expression and regulation.
The Company has designed and is continuing to develop a bioinformatics
system to manage and analyze the information it generates. The system
integrates Gene Logic's genomic data content with other proprietary or public
genomic databases, protein databases and the chemical, screening and assay
databases used by the Company's strategic partners.
Gene Logic's business strategy is to (i) establish strategic alliances
with pharmaceutical companies for drug target and drug lead discovery
programs, (ii) establish independent discovery programs and license resulting
data, drug targets or drug leads to pharmaceutical companies for further
development and commercialization, (iii) market its suite of genomic database
products under non-exclusive license to multiple pharmaceutical company
customers, and (iv) retain significant rights to new product opportunities,
including diagnostic products, therapeutic proteins, gene therapy products
and products in the fields of differential diagnosis, molecular staging of
disease and pharmacogenomic profiling. The Company expects to receive a
diversified stream of technology and database access fees, research funding,
milestone payments and royalty or profit-sharing income from its strategic
alliance partners and licensees.
3.
Gene Logic has established discovery programs in the fields of heart
failure, renal disease, certain diseases of the central nervous system,
osteoporosis and prostate cancer. The Company has collaborations with
academic institutions and commercial organizations for access to relevant
normal and diseased human tissues and cell types and animal disease models in
these areas.
To date, Gene Logic has established three major alliances with
pharmaceutical companies. In May 1997, the Company entered into a 4 1/2-year
strategic alliance with Procter & Gamble for drug target discovery in heart
failure; in September 1997, the Company and Japan Tobacco entered into a
5-year strategic alliance for drug target and drug lead discovery in renal
disease; and in December 1997, Gene Logic entered into a 3-year database
agreement for drug target discovery with Organon. Through these alliances,
Gene Logic will receive committed technology and database access fees and
research funding. In both the Procter & Gamble and Japan Tobacco alliances,
the Company's partner has the right to expand the alliance to include
discovery programs in two additional disease indications upon terms,
including committed payments, identical to those covering the initial
program. In each alliance, Gene Logic is also entitled to receive additional
payments for the achievement of specified target discovery and product
development milestones and royalties on worldwide net sales of all products
that may result from the alliances. Gene Logic has retained certain rights to
diagnostic products and certain classes of therapeutics under these
alliances. As part of its alliance, Japan Tobacco purchased $3.0 million of
Common Stock in the Company in a private placement concurrent with the
closing of the Company's initial public offering at a price of $8.00 per
share.
INDUSTRY BACKGROUND
DRUG DISCOVERY AND DEVELOPMENT
Diseases are the result of disturbances of, or abnormalities in, the
physiological pathways that regulate the functioning of cells in the human
body. The main components of these pathways are proteins, such as enzymes,
receptors or ion channels, encoded by genes expressed within the cells
affected by the disease. Drugs generally exert their therapeutic effects by
interacting with certain of these proteins, referred to as drug targets, in
such a way as to restore the normal functioning of the disease-affected
pathways or otherwise to compensate for the abnormalities. The process of
drug discovery involves the screening of collections of compounds against a
drug target to identify those compounds which interact with the target to
produce the desired effect.
In response to increasing competitive pressures to discover and develop
new drugs in a more rapid and cost-effective manner, pharmaceutical and
biotechnology companies have recently made significant advances in
combinatorial chemistry and high-throughput screening technologies which
enable the rapid generation and screening of large and diverse compound
libraries against many potential targets. However, the current drug discovery
process remains time-consuming and costly, in part because of the difficulty
and complexity of identifying novel drug targets using traditional
methodologies. In general, pharmaceutical companies rely upon their own basic
research and academic discoveries to identify drug targets. The Company
believes this approach provides an insufficient number of targets to fill the
industry's increasing annual screening objectives. Recent developments in
genomics have permitted the partial sequencing of tens of thousands of new
genes and the identification of the classes of proteins
4.
they encode. These developments have not enabled the rapid identification of
drug targets, because the gene sequence data by itself provides limited
information, if any, about a gene's relationship to a specific disease. There
remains a significant need for a rapid and cost-effective method to correlate
genes with specific diseases to discover drug targets.
GENES, GENE EXPRESSION AND DISEASE
The genetic content of humans, the human genome, is maintained in
chromosomes, which contain deoxyribonucleic acid ("DNA"). DNA is composed of
two strands of four constituent molecules known as bases or nucleotides:
adenine (A), thymine (T), guanine (G) and cytosine (C). The specific order,
or sequence, of these bases encodes genetic information within units defined
as genes, which are the hereditary units that control the structure, health
and function of all organisms. The beginning sequence of any gene is called 5
prime (5') and its end is called 3 prime (3'). The human genome is estimated
to comprise approximately three billion base pairs encoding 100,000 to
150,000 genes. While all of these genes are present in every human cell,
certain of these genes are switched "on" only in specific tissues or only at
certain developmental stages and are otherwise inactive. On average, in any
single cell type, 10,000 to 20,000 different genes are expressed out of the
possible 100,000 to 150,000. The cell's pattern of gene expression defines
the function of that cell.
Genes consist of coding and non-coding regions which ultimately direct
and regulate the production of the various proteins that maintain normal
cellular function. The coding regions, which account for less than five
percent of the human genome, direct the production of proteins, and the order
of the bases in these regions determine the order of amino acids in a given
protein. An enzyme reads these genes and makes a strand of RNA (a molecule
similar to DNA) that consists of a string of bases complementary to that of
the DNA of the gene. This process is known as transcription and results in
the production of messenger RNA ("mRNA"). Messenger RNA directs the assembly
of amino acids in a sequence that corresponds to the order of the bases of
the mRNA defining the sequence of a protein. The amount of mRNA in a cell
provides a direct indication of the level of activity of the corresponding
gene.
Some of the non-coding DNA sequences, referred to as promoter regions,
regulate genes in the different tissues. A series of regulatory proteins,
called transcription factors, bind to specific promoter regions, either
singularly or in unique, multi-component complexes, and act as switches
controlling the activity of the genes. The synthesis of regulatory proteins
is, in turn, directed by genes coding for transcription factors and their
accessory proteins. Together these control elements regulate the pattern of
gene expression in specific cells.
When a mutation occurs in a gene, the resulting protein may be abnormal
in function, resulting in disease. A number of relatively rare diseases, such
as cystic fibrosis and sickle cell anemia, result from such single gene
mutations, and the genes responsible for many of these monogenic diseases
have been identified over the last decade. Detailed knowledge of gene
sequences that encode defective proteins may facilitate development of novel
therapeutic products and diagnostic tests for these conditions. However,
almost all major common diseases, including heart failure, renal disease,
diseases of the central nervous system, osteoporosis and cancer, are believed
to involve multiple genes and, often, complex interactions of genetic and
5.
environmental factors. These conditions evolve over time as a result of
successive changes in the patterns of gene expression in the cells involved
in the disease.
THE NEED FOR NOVEL DRUG TARGETS
A critical step for drug development is the identification of suitable
drug targets for screening. The major pharmaceutical companies are facing
increasing pressures to introduce new drugs more rapidly than in the past.
Because most drug candidates fail during the development process, these
companies need to identify a large number of potential drug candidates by
screening compound libraries against large numbers of targets to improve
their chances of identifying commercially viable drugs. Recent estimates
suggest that major pharmaceutical companies may have to screen hundreds of
new targets each year in order to meet their drug discovery objectives. This
figure compares with a published 1995 industry source estimate that
approximately 300 targets in total were then in active screening by the
pharmaceutical industry.
The majority of drug targets are proteins that are encoded by genes
expressed within tissues affected by a disease. The importance of certain
protein classes, such as enzymes, receptors or ion channels, as targets is
illustrated by the world's top selling prescription drugs. Of the 100 most
prescribed drugs, approximately 80% interact with one of four classes of
proteins: 33 drugs inhibit 13 different enzymes; 22 bind to ten different
G-protein-coupled receptors; 13 interact with six different ion channels; and
15 bind to four different nuclear hormone receptors. It is estimated that
there are approximately 10,000 different enzymes, 1,000 different
G-protein-coupled receptors, 200 different ion channels and 100 different
nuclear hormone receptors encoded in the human genome. These proteins are key
components of the pathways involved in disease and, therefore, are likely to
be a rich source of new drug targets.
Proven drug targets share certain other characteristics which can only
be identified by understanding their expression levels in cells and cannot be
determined by their gene sequence alone. Drug targets are (i) often expressed
primarily in specific tissues, allowing for selectivity of pharmacological
action and reducing the potential for adverse side effects and (ii) generally
expressed at low abundance in the cells of the relevant organ. An effective
target discovery system would therefore enable the detection of genes that
encode for proteins expressed in specific tissues at low abundance, thereby
permitting the rapid identification of proteins which are likely to be
targets for therapeutic and diagnostic development.
LIMITATIONS OF TRADITIONAL GENOMICS TECHNOLOGIES
Although traditional genomics technologies have yielded sequence
information for many genes and have succeeded in identifying genes that
predispose individuals to certain diseases, the rate at which novel drug
targets can be identified from this information is limited. Traditional
genomics efforts are generally classified in two categories: gene sequencing
and positional cloning.
Most gene sequencing approaches use high-throughput methods to capture
partial sequences (known as expressed sequence tags or "ESTs") for many genes
on an essentially random basis. These ESTs are stored in public and
proprietary databases which, to date, contain an estimated three million
ESTs, representing partial and fragmentary sequence data for 50 to 60
6.
percent of human genes. Despite the widespread availability of a significant
amount of sequence data, these data have limited use in identifying targets
for therapeutic or diagnostic product development. This is because the gene
sequence data by itself provides limited information, if any, about a gene's
relationship to a specific disease. Also, the EST sequencing approach tends
to capture multiple times those genes which are abundantly expressed, while
missing the low-abundance, tissue-specific genes which may code for useful
drug targets.
Positional cloning is a method of identifying individual genes that,
when defective, cause or predispose individuals to particular diseases. The
process consists of genetic mapping, physical mapping and sequencing, and
typically requires an extensive collection of DNA samples from families
affected by the disease. Scientists test the DNA of both affected and
non-affected members of these families and, through statistical analysis,
attempt to identify the region or regions of the genome likely to contain a
gene related to the disease. Positional cloning requires large numbers of
samples from the affected families to demonstrate statistical significance
and becomes much more complicated when multiple genes are involved in the
disease. The accumulation of such samples is costly and time consuming.
Although researchers are attempting to use other methodologies, including
animal models of disease, to speed the process of gene discovery, the overall
process may take several years.
THE GENE LOGIC SOLUTION
Gene Logic believes that its proprietary technologies for analysis of
the overall patterns of gene expression and regulation in specific diseases
will enable the Company to identify multiple, novel drug targets more rapidly
than competing technologies. Gene Logic's ACCELERATED DRUG DISCOVERY system
allows the Company to display the changes in gene expression patterns as a
disease develops and progresses. The Company uses this information, in
conjunction with its proprietary suite of genomics databases and
bioinformatics tools, to identify genes and their associated pathways
implicated in disease and to discover and prioritize individual drug targets.
Pursuant to strategic alliances with corporate partners and in independent
programs, the Company is using its system to identify drug targets for major
common diseases, including heart failure, renal disease, diseases of the
central nervous system, osteoporosis and prostate cancer. In addition, Gene
Logic is developing a proprietary, reusable Flow-thru Chip for
high-throughput analysis of changes in the expression of known genes. The
Company believes the Flow-thru Chip will enable the development of
high-throughput screening assays to evaluate the effects of compounds on the
expression of disease-associated genes identified by READS. This technology
represents a new approach to drug discovery and has the potential to
accelerate substantially the identification of drug leads. By utilizing and
further developing the portfolio of technologies, genomics databases and
bioinformatics tools in its ACCELERATED DRUG DISCOVERY system, Gene Logic
believes it can significantly enhance many critical steps in the drug
development process and accelerate the development of novel pharmaceuticals
for the Company and its partners.
GENE LOGIC'S STRATEGY
Gene Logic's objective is to provide to its pharmaceutical company
partners novel drug targets, drug leads and a suite of genomic database
products in order to reduce the time, cost and risk associated with drug
discovery. The Company believes that by building its portfolio of
7.
partnerships it will generate current revenues and establish a long-term
economic interest in the product pipelines of multiple partners through
milestone and royalty payments. The Company believes that this portfolio
approach will maximize the likelihood of drugs being discovered and developed
using its system. The Company's strategy for building commercial value is to:
- PROVIDE AN INTEGRATED DRUG DISCOVERY PLATFORM. The Company has
established and intends to continue to build a broad technology
platform, the ACCELERATED DRUG DISCOVERY system, based on the analysis
of gene expression and gene regulation for the rapid discovery of
multiple, screenable drug targets and drug leads. The ACCELERATED DRUG
DISCOVERY system is designed to be integrated easily into the current
drug discovery processes of multiple partners.
- ESTABLISH DRUG TARGET AND LEAD DISCOVERY ALLIANCES. Gene Logic
intends to continue to establish strategic alliances with
pharmaceutical companies for drug target and drug lead discovery
programs. Such strategic alliances would generally require Gene Logic
to develop research databases of gene expression for drug target
discovery for its partner's specific programs and, in certain cases,
to use its Flow-thru Chip technology to identify drug leads. The
Company expects that these alliances would provide technology
and database access fees, research funding, milestone payments and
royalty or profit-sharing income from commercialization of products
resulting from the alliances. To date, Gene Logic has entered into
alliances of this type with Procter & Gamble, Japan Tobacco and
Organon.
- ESTABLISH INDEPENDENT DRUG TARGET AND LEAD DISCOVERY PROGRAMS.
Gene Logic has established and intends to expand independent drug
discovery programs based on its proprietary technologies, including
the Flow-thru Chip. The Company expects to license drug leads
discovered through its independent programs to pharmaceutical
companies for clinical development and commercialization and to
receive license fees, development milestone payments and royalty or
profit-sharing income from such licensees.
- MARKET GENOMIC DATABASE PRODUCTS UNDER NON-EXCLUSIVE LICENSE. The
Company plans to market its suite of genomic database products,
including its GENE EXPRESS NORMAL and rare EST (rEST) databases,
either in a single package or as separate modules, to multiple
pharmaceutical company partners. The Company intends to grant
non-exclusive licenses independent of, or in conjunction with,
strategic alliances. Such licenses would generally provide the
Company annual subscription fees, milestone payments and royalties.
To date, Gene Logic has granted Japan Tobacco and Organon
non-exclusive licenses to its GENE EXPRESS NORMAL database.
- RETAIN SIGNIFICANT RIGHTS TO NEW PRODUCT OPPORTUNITIES. Under its
strategic alliances, Gene Logic retains certain rights to diagnostic,
therapeutic protein and gene therapy applications. In addition, the
Company intends to use its databases and technological capabilities to
develop products for the evolving fields of differential diagnosis,
molecular staging of disease and pharmacogenomic
8.
profiling. The Company may pursue these applications independently
or in alliances with additional partners.
GENE LOGIC'S ACCELERATED DRUG DISCOVERY SYSTEM
Gene Logic is employing its proprietary technologies and bioinformatics
system for the discovery of drug targets and drug leads and to accelerate the
development of drugs. The elements of Gene Logic's ACCELERATED DRUG DISCOVERY
system include:
ANALYSIS OF GENE EXPRESSION AND REGULATION
READS TECHNOLOGY
Gene Logic has developed a proprietary, automated technology, known as
READS (Restriction Enzyme Analysis of Differentially-expressed Sequences),
for capturing and analyzing the overall gene expression profile of a given
cell or tissue type to identify drug targets. The Company has an exclusive
license from Yale University to a United States patent and patent
applications covering the READS technology. Gene Logic has also received
notice of allowance for an independent patent application, covering key
aspects of gene expression analysis, from the United States Patent and
Trademark Office (the "USPTO"). Using READS, Gene Logic rapidly generates a
gene expression profile representing a quantitative snapshot of the levels of
expression of essentially all the genes in a tissue sample. The Company
compares normal and diseased tissues through a series of such snapshots to
identify the changes in gene expression patterns that occur as the disease
develops and progresses and to determine which genes are associated with the
disease. The READS technology is accurate and highly sensitive, capable of
detecting essentially all mRNA transcripts including rarely expressed genes,
at the level of approximately one mRNA copy per cell. By employing its READS
technology in conjunction with its proprietary bioinformatics system, the
Company can then prioritize the proteins encoded by these disease-associated
genes as potential drug targets.
The READS process begins with the procurement of a relevant cell or
tissue sample, extraction of its total RNA content and preparation of
complementary DNA ("cDNA") using standard techniques. By applying proprietary
tagging and enzyme cleavage procedures to the cDNA pool, the Company
generates a unique set of identifiable signature fragments (3' ESTs) for each
mRNA species present in the cell. The fragments are separated by size using
gel-based, automated separation techniques and quantified using proprietary
image analysis software. The quantity of each signature fragment correlates
directly with the expression levels of the corresponding gene. The Company
uses its bioinformatics system to compile these data into a gene expression
profile which represents the levels of expression of genes active in the
sample. The READS process typically takes two days.
The READS technology has been highly automated through the use of
commercially available robotic liquid handling stations, thermocyclers and
fragment separation instruments. A single production unit is capable of
generating approximately 1,000 gene expression profiles per year. Gene Logic
has installed its first production unit and is scaling up operations. The
Company expects to install a second production unit during 1998. There can be
no assurance,
9.
however, that the Company will be able to increase its capacity as expected
or to realize the cost efficiencies of scale it anticipates.
MUST TECHNOLOGY
Gene Logic's proprietary MuST (Multiplex Selection of Transcription
Factors) technology enables the Company to identify the nucleotide sequences
of the transcription factor binding sites through which the expression of
genes is regulated. The Company believes that the information generated by
MuST, in combination with the information on gene expression levels generated
by its READS technology, will enable the Company to assign genes to
functional pathways based on the observation that genes in such pathways
share common regulatory mechanisms and are coordinately expressed. The
Company has an exclusive license from Yale University to patent applications
covering the MuST technology and has received a notice of allowance for the
original patent application, covering the key aspects of the MuST technology,
from the USPTO.
The MuST process starts with the extraction of nuclear proteins in the
cell or tissue sample. Proteins within this extract which exhibit
sequence-specific DNA binding properties are bound to a set of DNA probes and
separated from all unbound probes using electrophoretic separation
techniques. After purification and amplification, the binding sites are
sequenced and entered into a database. The result is a library of sequences
which represent the binding sites for the gene regulatory proteins contained
in the original nuclear extract.
THE FLOW-THRU CHIP
Gene Logic is developing its proprietary, reusable Flow-thru Chip for
high-throughput analysis of changes in the expression of known genes. The
Flow-thru Chip will enable the development of high-throughput screening
assays to evaluate the effects of compounds on the expression of
disease-associated genes identified by READS. This technology represents a
new approach to drug discovery and has the potential to accelerate
substantially the identification of drug leads. The Company has exclusive
licenses to the technology underlying the Flow-thru Chip from the United
States Department of Energy and the inventor of the technology.
In its drug discovery process, Gene Logic will use its READS technology
to identify which genes are associated with the disease. Once these genes are
known, the Company will design a customized Flow-thru Chip incorporating
probes specific to these genes and use the chip to test the effects of
compounds in cellular assays. Compounds that have the desired effect on
expression of the relevant genes, such as restoring the expression pattern to
normal or mimicking the effect of a known therapeutic, may be evaluated as
drug leads.
The substrate of the Flow-thru Chip is a glass or silicon wafer
traversed by a grid of micro-channels. The current version of the chip is
laid out in a format which is intended to be compatible with current
high-throughput cellular assay systems. Each well is configured to contain an
array of approximately 400 genes identified using the Company's READS
technology; the number of genes included in each well is expected to be
increased to approximately 1,000 in the second version of the Flow-thru Chip.
The Company expects to
10.
commence in-house testing during 1998, but there can be no assurance that
such testing will commence in 1998, or at all.
Based on disease-associated genes identified by READS, Gene Logic
designs and synthesizes custom oligonucleotide probes and binds them, using a
proprietary covalent attachment chemistry, within the micro-channels covering
a specific area of the chip. The function of each probe is to bind to its
complementary DNA or RNA in the sample being analyzed. The nucleic acid is
isolated from such a sample and fluorescently labeled by one of several
standard biochemical methods. The test sample is then flowed through the
substrate of the Flow-thru Chip where each attached probe captures, or
hybridizes to, any labeled nucleic acid present in the sample which is
complementary to that probe. When imaged using the Company's signal detection
system, the hybridized test sample generates a fluorescent signal which can
be correlated with the expression in the original sample of the gene captured
by the probe because the sequence and position of each complementary DNA
probe on the Flow-thru Chip is known. The level of signal is readily
quantifiable and reflects the degree to which the gene is expressed in the
sample.
The Company believes that several features make the Flow-thru Chip well
suited for monitoring the expression of known genes in high-throughput
cellular assays:
- SENSITIVITY. Because of the greater surface area available for
attachment of the oligonucleotide probes, the Company believes the
Flow-thru Chip will be sensitive enough to monitor changes in
expression of low-abundance transcripts.
- SPEED. The existence of the micro-channels accelerates the
hybridization reaction, reducing the time required for each assay. In
addition, because the walls of the micro-channels focus the
fluorescent signal, the Company expects to be able to use a
commercially available digital signal detection system to provide an
immediate read-out.
- COST. As a result of the proprietary covalent chemistry through which
the oligonucleotide probes are attached within the micro-channels,
each Flow-thru Chip can be used multiple times. Following each assay
the chip is washed to remove the hybridized material and is then ready
for reuse. The Company believes the reusability of the Flow-thru Chip
will make it suitable for use in high-throughput screening
applications.
In addition to its use as part of the Company's drug lead discovery
programs, the Flow-thru Chip will also serve as a platform for the screening
of lead compounds against the data in the Toxicology EXPRESS and Pharmacology
EXPRESS databases being developed by the Company. Gene Logic will design
Flow-thru Chips using oligonucleotide probes representative of the genes that
comprise patterns of gene expression which typify known classes of toxic or
pharmacological effects identified using READS. The Company may sell
Flow-thru Chips to its strategic partners in conjunction with subscriptions
to the Toxicology EXPRESS or Pharmacology EXPRESS databases or provide
screening services in conjunction with an alliance.
11.
The Company has established relationships with several third parties for
manufacture of the chip substrates and oligonucleotide probes which
constitute its Flow-thru Chip arrays and for the robotic and signal detection
systems associated with running high-throughput screening assays using the
chips. There can be no assurance, however, that the Company will be able to
maintain such relationships on terms acceptable to the Company.
There can be no assurance that further development and scale up of the
Flow-thru Chip will be successful or that the Company will be successful in
marketing the Flow-thru Chip to strategic partners or others.
GENE LOGIC'S BIOINFORMATICS SYSTEM
Gene Logic has designed and is continuing to develop a bioinformatics
system to manage and analyze the information it generates and to interface
with its databases, its partners' databases and databases in the public
domain. This system enables the functional integration of Gene Logic's
genomic data content with other proprietary or public genomic databases,
protein databases and strategic partners' chemical, screening and assay
databases. Gene Logic's bioinformatics system provides the analytical tools
necessary to enable the Company to discover and prioritize targets for drug
discovery. Moreover, the provision of Gene Logic's proprietary genomic data
in conjunction with its integrated bioinformatics system enables the Company
to introduce that system into strategic partners' drug discovery process in a
customized, expandable format that is compatible with partners' current
database architectures.
DATABASE INTEGRATION TOOLS
Gene Logic's bioinformatics system was developed using scientific data
management tools based on the Object Protocol Model ("OPM"). These tools
provide support for the rapid development of relational databases, the
integration of relational and flat file databases and for cross-database
queries. The Company's bioinformatics system works through customized and
configurable Web interfaces, regardless of the structure of the underlying
databases and without having to redevelop each database. The Company's
bioinformatics system enables the integration of Gene Logic's information
content into the data management systems of its strategic partners, and Gene
Logic believes that the system will also enhance the value of such partners'
existing databases by establishing interconnectivity of heterogeneous data
sources.
GENOMIC DATA ANALYTICAL TOOLS
The Company's bioinformatics system includes tools for the analysis of
data generated by READS for both normal and diseased cell and tissue types.
Gene expression data are analyzed using the Company's proprietary software
tools. The tools allow intuitive "point and click" navigation among the
expressed genes. The system can identify genes as known (represented in the
Company's databases of indexed 3' sequences) or unknown, and provides a wide
variety of statistical analyses of expression levels and correlations both
within and across cell, tissue and disease types.
Gene Logic has also developed proprietary methods to prioritize the
disease-associated genes it discovers as potential drug targets. This
prioritization depends upon a number of factors including: (i) a gene's
temporal association with the disease process; (ii) the tissue distribution
of
12.
its expression; (iii) any homology it may have with known target classes,
such as membrane receptors, enzymes or signaling proteins; (iv) its
involvement in known metabolic or signal transduction pathways; and (v) the
feasibility of developing a screening assay.
GENE LOGIC PROGRAMS AND PRODUCTS
DRUG TARGET AND LEAD DISCOVERY PROGRAMS - STRATEGIC ALLIANCES
As part of its business strategy, Gene Logic intends to establish
strategic alliances with pharmaceutical companies for drug target and drug
lead discovery programs. Gene Logic may also enter into strategic alliances
or joint ventures with additional partners to develop certain diagnostics,
therapeutic proteins and gene therapy products for which it has retained
rights. The Company's strategic alliances would generally provide for the
Company to receive technology and database access fees, research funding,
milestone payments and royalty or profit-sharing income. To date, Gene Logic
has entered into alliances with Procter & Gamble, Japan Tobacco and Organon.
PROCTER & GAMBLE PHARMACEUTICALS, INC.
In May 1997, the Company and Procter & Gamble entered into a 4 1/2-year
strategic alliance for drug target discovery in heart failure. Payments by
Procter & Gamble to the Company in the form of committed technology access
fees and research funding will total a minimum of $10.1 million if the
research program continues for its full term and the Company performs its
research obligations under the agreement. The parties may agree to extend the
research program for additional one-year periods. At any time during the
first 18 months of the alliance, Procter & Gamble has the right to expand the
alliance to include drug target discovery programs in two additional disease
indications upon terms, including committed research funding, identical to
those covering the initial program in heart failure. Procter & Gamble will be
obligated to make additional payments to the Company for the achievement of
specified target discovery, product development and associated regulatory
milestones. Procter & Gamble will also pay the Company royalties on worldwide
net sales of all products that may result from the alliance. Payments for
technology access fees and research and development support will be
recognized as revenue ratably over the period for which the payments are
made. Payments related to the achievement of milestones will be recognized as
revenue when the milestones are achieved.
There can be no assurance that the Company's research pursuant to the
agreement will be successful in discovering drug targets related to heart
failure or to either of the two option disease fields or that Procter &
Gamble will be successful in developing or commercializing any products based
upon such discoveries made by the Company. As a result, there can be no
assurance that Gene Logic will receive any milestone payments, royalties or
other payments contemplated by the agreement, nor can there be any assurance
that the alliance will not be terminated prior to the natural expiration of
its term pursuant to provisions under the alliance agreement.
13.
JAPAN TOBACCO INC.
In September 1997, the Company and Japan Tobacco entered into a 5-year
strategic alliance for drug target and drug lead discovery in renal disease.
Payments by Japan Tobacco to the Company in the form of committed technology
and database access fees and research funding total a minimum of $15.0
million if the research program continues for its full term and the Company
performs its research obligations under the agreement. Japan Tobacco may
extend the research program for one additional year. At any time during the
first two years of the alliance, Japan Tobacco has the right to expand the
alliance to include drug target and drug lead discovery programs in two
additional disease indications upon terms, including committed research
funding, identical to those covering the initial program in renal disease.
Japan Tobacco will be obligated to make additional payments to the Company
for the achievement of specified target discovery and related product
development and associated regulatory milestones. Pursuant to the terms of
the agreement, Japan Tobacco would pay a minimum of $12.5 million for each
therapeutic product if all milestones are achieved. Japan Tobacco will also
pay the Company royalties on worldwide net sales of all products that may
result from targets discovered pursuant to the alliance. Payments for
technology and database access fees and research and development support will
be recognized as revenue ratably over the period for which the payments are
made. Payments related to the achievement of milestones will be recognized as
revenue when the milestones are achieved.
As part of the alliance and during the research term of the alliance
agreement, the Company granted Japan Tobacco a non-exclusive license to the
GENE EXPRESS NORMAL database, and Gene Logic intends to use its Flow-thru
Chip technology for screening for drug leads in renal disease or, if Japan
Tobacco has exercised its options to additional disease indications, such
other disease indications. In consideration for such license and access,
Japan Tobacco purchased $3.0 million of Common Stock in a private transaction
concurrent with the Company's initial public offering at $8.00 per share.
Under the terms of the option, Japan Tobacco will pay Gene Logic chip design
fees, screening fees and a minimum of $17.5 million for each therapeutic
product based on a lead compound identified through such assays if all
milestones are achieved. The agreement also entitles the Company to royalties
on net sales of therapeutic products based on lead compounds identified
through such assays.
There can be no assurance that the Company's research pursuant to the
agreement will be successful in discovering drug targets or drug leads
related to renal disease or to either of the two option disease fields or
that Japan Tobacco will be successful in developing or commercializing any
products based upon such discoveries made by the Company. As a result, there
can be no assurance that Gene Logic will receive any milestone payments,
royalties or other payments contemplated by the agreement, nor can there be
any assurance that the alliance will not be terminated prior to the natural
expiration of its term pursuant to provisions under the alliance agreement.
N.V. ORGANON
In December 1997, the Company and Organon entered into a 3-year
strategic alliance for drug target discovery. Payments by Organon to the
Company in the form of committed database access fees and research funding
total a minimum of $12.5 million if the research program continues for its
full term and the Company performs its research obligations under the
14.
agreement. As part of the alliance and during the research term of the
alliance agreement, the Company granted Organon a non-exclusive license to
the GENE EXPRESS NORMAL database. Organon will be obligated to make
additional payments to the Company for the achievement of specified target
discovery and related product development milestones. Organon will also pay
the Company royalties on worldwide net sales of all products that may result
from targets discovered pursuant to the alliance. Payments for database
access fees and research and development support will be recognized as
revenue ratably over the period for which the payments are made. Payments
related to the achievement of milestones will be recognized as revenue when
the milestones are achieved.
There can be no assurance that the Company's research pursuant to the
agreement will be successful in discovering drug targets or that Organon will
be successful in developing or commercializing any products based upon such
discoveries made by the Company. As a result, there can be no assurance that
Gene Logic will receive any milestone payments, royalties or other payments
contemplated by the agreement, nor can there be any assurance that the
alliance will not be terminated prior to the natural expiration of its term
pursuant to provisions under the alliance agreement.
DRUG TARGET AND LEAD DISCOVERY PROGRAMS - INDEPENDENT PROGRAMS
Gene Logic has established independent discovery programs to identify
drug targets for certain diseases of the central nervous system, osteoporosis
and prostate cancer and has established collaborations with academic
institutions and commercial organizations for access to relevant normal and
diseased human tissues and cell types and animal disease models. The Company
uses these tissues for analysis of gene expression and gene regulation and to
build its genomic databases. Under the terms of these agreements, the Company
generally retains all commercial rights to gene discoveries made through the
use of cells and tissues provided by its collaborators. Gene Logic also
intends to obtain access to compound libraries from combinatorial chemistry
and pharmaceutical companies for screening using its Flow-thru Chip.
To date, the Company has established the following independent programs:
SCHIZOPHRENIA. Gene Logic is analyzing the patterns of gene expression
in brain cells from schizophrenics and animal treatment models to identify
novel drug targets. Gene Logic has entered into a collaboration with Johns
Hopkins University School of Medicine for access to post mortem tissue
samples from brains of schizophrenics. These samples were obtained from both
drug-treated and untreated individuals shortly after death. The Company has
also begun evaluating the effects of established and experimental
anti-psychotic drugs on gene expression in the brain in animal models.
DEPRESSION. The Company is using READS to discover new antidepressant
drug targets based on changes in the patterns of gene expression in brain
cells from patients with affective disorders. The Company has entered into a
collaboration with Johns Hopkins University School of Medicine for access to
post mortem samples from specific regions of the brains of both drug-treated
and untreated manic-depressives.
15.
ALZHEIMER'S DISEASE. Gene Logic has entered into a collaboration with
Molecular Geriatrics Corporation for access to micro-dissected samples of
relevant regions of human brain from patients with Alzheimer's disease
ranging from early stage through advanced degeneration. The samples have been
characterized using proprietary monoclonal antibodies to reveal cells
affected at the onset of the disease. The Company has exclusive rights to any
genes useful in the development of therapeutic products which are identified
through the collaboration. The Company may pursue such rights independently
or in alliance with a strategic partner. Molecular Geriatrics Corporation
retains rights to develop diagnostic products.
OSTEOPOROSIS. Gene Logic has commenced its discovery program in
osteoporosis with the Center for Clinical and Basic Research and Johns
Hopkins University School of Medicine providing normal and osteoporotic bone
samples. The Company intends to develop drug targets identified through these
programs independently or in alliance with a strategic partner.
PROSTATE CANCER. Gene Logic has established a collaboration for access
to staged and characterized prostate cancer tissue samples, together with
related clinical treatment and outcomes data, with Baylor College of
Medicine. In this program, the Company is focusing on the identification of
targets for the development of novel therapeutics and diagnostic products.
Gene Logic may develop these independently or in alliance with strategic
partners.
GENOMIC DATABASE PRODUCTS
Complementary to its drug target and drug lead discovery programs, Gene
Logic is developing a suite of genomic database products designed to
accelerate the process of target identification and prioritization, the
discovery of lead compounds and the preclinical and clinical development of
drugs. Gene Logic intends to market these genomic database products, in a
single package or as separate modules, to multiple partners on a
non-exclusive basis both independent of and in conjunction with drug target
and drug lead discovery alliances. The Company expects to receive annual
database access subscription fees, milestone payments based on utilization of
the data in licensees' drug and diagnostic discovery programs and royalties
on net sales of resulting products.
GENE EXPRESS NORMAL DATABASE
The GENE EXPRESS NORMAL database is a reference set of gene expression
profiles for a variety of normal human tissues, which enables the Company and
its partners to determine rapidly the expression level of genes in normal
tissues. The database will also contain gene expression profiles for normal
tissues in rat and mouse, the experimental animals most commonly used by the
pharmaceutical industry. This information facilitates the prioritization of
drug targets. The Company uses the database with its bioinformatics system to
correlate specific gene sequences to their expression levels and to interface
with other public or private sequence databases to which the licensee may
have access. The Company has granted non-exclusive licenses to the GENE
EXPRESS NORMAL database to Japan Tobacco and Organon.
RARE EST (REST) DATABASE
Approximately 80% of all human genes are rarely expressed (at the level
of fewer than five mRNA copies per cell), and fewer than an estimated 50% of
such genes are available in
16.
existing human EST databases. However, these low-abundance, tissue-specific
gene transcripts are those that are most promising as drug targets. Gene
Logic uses its READS technology on tissue samples to identify rarely
expressed genes. Unlike traditional EST sequencing methods, Gene Logic's
process is directed (non-random) and has a low level of redundancy. The
Company is developing a database of rare ESTs, with the potential to provide
promising drug targets not available through other sources of sequence data.
Gene Logic anticipates that the rEST database will be available in 1998, but
there can be no assurance that it will be available by such date, or at all.
TOXICOLOGY EXPRESS DATABASE
Gene Logic intends to use its READS technology to build a database of
the changes in gene expression that typify known toxicological effects of
compounds in the target organs subject to such effects. Patterns may be
identified by comparing gene expression in normal tissues to gene expression
in similar tissues exposed to known toxic substances. These patterns can be
used as references for the screening of new lead compounds for common classes
of toxicological effects in order to minimize the use of traditional animal
toxicology screening, which is both time-consuming and expensive. In
conjunction with the Toxicology EXPRESS database, Gene Logic plans to use its
Flow-thru Chip for the screening of lead compounds against the database. The
Company believes that screening against the Toxicology EXPRESS database will
provide a filter for the prioritization of lead compounds and will accelerate
the selection of those to be taken forward through full toxicological studies
in animals and those to be abandoned. The construction of the Toxicology
EXPRESS database is at an early stage. The Company anticipates that such
database will be available in 1998, but there can be no assurance that it
will be available by such date, or at all.
PHARMACOLOGY EXPRESS DATABASE
The Company is using its READS technology to build a database of
profiles of gene expression that characterize the pharmacological effects in
relevant target organs of compounds of known therapeutic benefit. These
patterns can be used as references for the screening of new lead compounds in
order to predict therapeutic efficacy at the preclinical development stage.
The Company believes that this technology may substantially reduce the risks
associated with clinical development of new drugs and provide a rapid filter
for the selection and prioritization of lead compounds. In conjunction with
its Pharmacology EXPRESS database, Gene Logic plans to use its Flow-thru Chip
for the screening of lead compounds against the database. The construction of
the Pharmacology EXPRESS database is at an early stage. The Company
anticipates that such database will be available in 1998, but there can be no
assurance that it will be available by such date, or at all.
THE ANNOTATED GENOME (TAG) DATABASE
The Human Genome Project is forecast to complete the sequencing of the
entire genome by the year 2005. Using expression data derived from the GENE
EXPRESS NORMAL database and the transcription factor binding site sequence
information generated by the Company's MuST technology, Gene Logic intends to
create a database, the TAG database, of human genomic sequence information
derived from the Human Genome Project annotated with expression levels,
17.
tissue distribution of expression and gene regulatory mechanisms. The Company
believes the analysis of this database will enable genes to be placed in
their functional pathways based upon coordinate expression and shared
transcriptional control elements, thereby allowing the selection and
prioritization of appropriate drug targets at multiple points along
disease-associated pathways. The development of the TAG database is at an
early stage and Gene Logic expects that it will accelerate as more human
genomic sequence data becomes available.
The statements made in this Report on Form 10-K regarding anticipated
dates for commercial availability of certain of its products are
forward-looking statements, and the actual dates of commercialization could
differ materially from those projected as a result of a variety of factors,
including progress of the Company's technologies, changes in the Company's
business priorities and other factors discussed in "Risk Factors." There can
be no assurance that the Company will not experience difficulties that could
delay or prevent the successful development and commercialization of products
or that the Company's products will address the requirements of the market or
achieve market acceptance.
NEW PRODUCT OPPORTUNITIES
Gene Logic intends to pursue commercial opportunities for diagnostic
applications of its discoveries, including molecular staging of disease,
differential diagnosis and pharmacogenomic profiling. The Company believes
that management of common diseases in the future will include gene
expression-based diagnostics to monitor the molecular evolution of the
disease. Gene expression analysis may enable differentiation among diseases
which share clinical symptoms but which differ at the level of molecular
mechanism. Gene Logic believes that pharmacogenomic profiling, using gene
expression-based assays to predict an individual's response to specific
drugs, may be especially valuable in new drug development and in modifying
drug therapies of known efficacy but which have toxic side effects in certain
groups of patients.
INTELLECTUAL PROPERTY
Gene Logic seeks United States and international patent protection for
major components of its technology platform, including elements of its READS,
MuST, Flow-thru Chip and bioinformatics technologies; it relies upon trade
secret protection for certain of its confidential and proprietary
information; and it uses license agreements both to access external
technologies and assets and to convey certain intellectual property rights to
others. The Company's commercial success will be dependent in part upon its
ability to obtain commercially valuable patent claims and to protect its
intellectual property portfolio.
As of March 16, 1998, Gene Logic had exclusive rights to 17 United
States patent applications relating to its technologies. The Company has
exclusive rights to a United States patent covering key aspects of the READS
gene expression analysis. The Company has also received notice of allowance
for a United States patent application covering key aspects of gene
expression analysis, and notice of allowance for a United States patent
application covering its MuST technology.
18.
The patent positions of pharmaceutical, biopharmaceutical and
biotechnology companies, including Gene Logic, are generally uncertain and
involve complex legal and factual questions. There can be no assurance that
any of the pending patent applications to which the Company has exclusive
rights will result in issued patents, that the claims of any patents which
are issued will provide meaningful protection, that the Company will develop
additional proprietary technologies that are patentable, that any patents
licensed or issued to the Company or its strategic partners will provide a
basis for commercially viable products or will provide the Company with any
competitive advantages or will not be challenged by third parties, or that
the patents of others will not have an adverse effect on the ability of the
Company to do business. In addition, patent law relating to the scope of
claims in the technology field in which the Company operates is still
evolving. The degree of future protection for the Company's proprietary
rights, therefore, is uncertain. Furthermore, there can be no assurance that
others will not independently develop similar or alternative technologies,
duplicate any of the Company's technologies, or, if patents are licensed or
issued to the Company, design around the patented technologies licensed to or
developed by the Company. In addition, the Company could incur substantial
costs in litigation if it is required to defend itself in patent suits
brought by third parties or if it initiates such suits.
The Company is aware of a number of United States patents and patent
applications and corresponding foreign patents and patent applications owned
by third parties relating to the analysis of gene expression or the
manufacture and use of DNA chips. There can be no assurance that these or
other technologies will not provide third parties with competitive advantages
over the Company and will not have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, certain
third party patent applications contain broad claims, and it is not possible
to determine whether or not such claims will be narrowed during prosecution
and/or will be allowed and issued as patents, even if such claims appear to
cover the prior art or have other defects. There can be no assurance that an
owner or licensee of a patent in the field will not threaten or file an
infringement action or that the Company would prevail in any such action.
There can be no assurance that the cost of defending an infringement action
would not be substantial and would not have a material adverse effect on the
Company's business, financial condition and results of operations.
Furthermore, there can be no assurance that any required licenses would be
made available on commercially viable terms, if at all. Failure to obtain any
required license could prevent the Company from utilizing or commercializing
one or more of its technologies and could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company has applied, and intends to make additional applications,
for patent protection for methods relating to gene expression, for the
disease-specific patterns of gene expression it identifies and for the
individual disease genes and targets it discovers. Such patents may include
claims relating to novel genes and gene fragments and to novel uses for known
genes or gene fragments identified through its discovery programs. There can
be no assurance that the Company will be able to obtain meaningful patent
protection for its discoveries; even if patents are issued, the scope of the
coverage or protection afforded thereby is uncertain. Failure to secure such
meaningful patent protection could have a material adverse effect on the
Company's business, financial condition and results of operations.
19.
Several groups are attempting to identify and patent gene fragments and
full-length genes, the functions of which have not been characterized, as
well as fully characterized genes. There is substantial uncertainty regarding
the possible patent protection for gene fragments or genes without known
function or correlation with specific diseases. To the extent any patents
issue to other parties on such partial or full-length genes, the risk
increases that the potential products and processes of the Company or its
strategic partners may give rise to claims of patent infringement. The public
availability of partial or full sequence information or the existence of
patent applications related thereto, even if not accompanied by relevant
function or disease association, prior to the time the Company applies for
patent protection on a corresponding gene could adversely affect the
Company's ability to obtain patent protection with respect to such gene or to
the related expression patterns. Furthermore, others may have filed, and in
the future are likely to file, patent applications covering genes or gene
products that are similar, or identical to, any for which the Company may
seek patent protection. No assurance can be given that any such patent
application will not have priority over patent applications filed by the
Company. Any legal action against the Company or its strategic partners
claiming damages and seeking to enjoin commercial activities relating to the
affected products and processes could, in addition to subjecting the Company
to potential liability for damages, require the Company or its strategic
partners to obtain a license in order to continue to manufacture or market
the affected products and processes. There can be no assurance that the
Company or its strategic partners would prevail in any such action or that
any license required under any such patent would be made available on
commercially acceptable terms, if at all. The Company believes that there is
likely to be significant litigation in the industry regarding patent and
other intellectual property rights. If the Company becomes involved in such
litigation, it could consume a substantial portion of the Company's
managerial and financial resources and have a material adverse effect on the
Company's business, financial condition and results of operations.
Enactment of legislation implementing the General Agreement on Tariffs
and Trade has resulted in certain changes to United States patent laws that
became effective on June 8, 1995. Most notably, the term of patent protection
for patent applications filed on or after June 8, 1995 is no longer a period
of 17 years from the date of grant. The new term of United States patents
will commence on the date of issuance and terminate 20 years from the
earliest effective filing date of the application. Because the time from
filing to issuance of biotechnology patent applications is often more than
three years, a 20-year term from the effective date of filing may result in a
substantially shortened period of patent protection which may adversely
affect the Company's patent position. If this change results in a shorter
period of patent coverage, the Company's business could be adversely affected
to the extent that the duration and level of the royalties it is entitled to
receive from its strategic partners are based on the existence of a valid
patent covering the product subject to the royalty obligation.
With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, the Company has chosen to
rely on trade secret protection and confidentiality agreements to protect its
interests. The Company believes that several elements of its ACCELERATED DRUG
DISCOVERY system involve proprietary know-how, technology or data which are not
covered by patents or patent applications. In addition, the Company has
developed a proprietary index of gene and gene fragment sequences which it
updates on an ongoing basis. Some of these data will be the subject of patent
applications whereas other data will be maintained as proprietary trade secret
information. The Company has taken security measures to
20.
protect its proprietary know-how and technologies and confidential data
and continues to explore further methods of protection. While Gene Logic
requires all employees, consultants and collaborators to enter into
confidentiality agreements, there can be no assurance that proprietary
information will not be disclosed, that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets, or that the Company can
meaningfully protect its trade secrets. In the case of a strategic
partnership or other collaborative arrangement which requires the sharing of
data, the Company's policy is to make available to its partner only such data
as are relevant to the partnership or arrangement, under controlled
circumstances, and only during the contractual term of the strategic
partnership or collaborative arrangement, and subject to a duty of
confidentiality on the part of its partner or collaborator. There can be no
assurance, however, that such measures will adequately protect the Company's
data. Any material leak of confidential data into the public domain or to
third parties may have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is a party to various license agreements which give it
rights to use certain technologies and biological materials in its research
and development processes. There can be no assurance that the Company will be
able to maintain such rights on commercially reasonable terms, if at all.
Failure by the Company to maintain such rights could have a material adverse
effect on the Company's business, financial condition and results of
operations.
COMPETITION
Competition among entities attempting to identify the genes associated
with specific diseases and to develop products based on such discoveries is
intense. Gene Logic faces, and will continue to face, competition from
pharmaceutical, biotechnology and diagnostic companies, academic and research
institutions and government agencies, both in the United States and abroad.
Several entities are attempting to identify and patent randomly sequenced
genes and gene fragments, while others are pursuing a gene identification,
characterization and product development strategy based on positional
cloning. The Company is aware that certain entities are utilizing a variety
of different gene expression analysis methodologies, including the use of
chip-based systems, to attempt to identify disease-related genes. In
addition, numerous pharmaceutical companies are developing genomic research
programs, either alone or in partnership with the Company's competitors.
Competition among such entities is intense and is expected to increase. In
order to compete against existing and future technologies, the Company will
need to demonstrate to potential customers that its technologies and
capabilities are superior to competing technologies.
Many of the Company's competitors have substantially greater capital
resources, research and development staffs, facilities, manufacturing and
marketing experience, distribution channels and human resources than the
Company. These competitors may discover, characterize or develop important
genes, drug targets or drug leads, drug discovery technologies or drugs in
advance of Gene Logic or which are more effective than those developed by
Gene Logic or its strategic partners, or may obtain regulatory approvals of
their drugs more rapidly than the Company and its strategic partners, any of
which could have a material adverse affect on any similar Gene Logic program.
Moreover, there can be no assurance that the Company's competitors will not
obtain patent protection or other intellectual property rights that would
limit
21.
the Company's or its strategic partners' ability to use the Company's drug
discovery technologies or commercialize therapeutic or diagnostic products,
which could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company also faces
competition from these and other entities in gaining access to cells, tissues
and nucleic acid samples used in its discovery programs.
The Company will rely on its strategic partners for support of certain
of its discovery programs and intends to rely on its strategic partners for
preclinical and clinical development of related potential products and the
manufacturing and marketing of such products. Each of the Company's strategic
partners is conducting multiple product development efforts within each
disease area which is the subject of its strategic alliance with Gene Logic.
Generally, the Company's strategic alliance agreements do not preclude the
strategic partner from pursuing development efforts utilizing approaches
distinct from that which is the subject of the alliance. Any product
candidate of the Company, therefore, may be subject to competition with a
potential product under development by a strategic partner.
Future competition will come from existing competitors as well as other
companies seeking to develop new technologies for drug discovery based on
gene sequencing, target gene identification, bioinformatics and related
technologies. In addition, certain pharmaceutical and biotechnology companies
have significant needs for genomic information and may choose to develop or
acquire competing technologies to meet such needs. Genomic technologies have
undergone and are expected to continue to undergo rapid and significant
change. The Company's future success will depend in large part on its
maintaining a competitive position in the genomics field. Rapid technological
development by the Company or others may result in products or technologies
becoming obsolete before the Company recovers the expenses it incurs in
connection with their development. Products offered by the Company could be
made obsolete by less expensive or more effective drug target and drug lead
technologies, including technologies which may be unrelated to genomics.
There can be no assurance that the Company will be able to make the
enhancements to its technology necessary to compete successfully with newly
emerging technologies.
GOVERNMENT REGULATION
The Company does not plan to conduct clinical trials in humans or
commercialize therapeutic products discovered as a result of its genes, drug
target and drug lead discovery programs but intends to rely on its strategic
partners to conduct such activities. Prior to marketing, any new drug
developed by the Company's strategic partners must undergo an extensive
regulatory approval process in the United States and other countries. This
regulatory process, which includes preclinical studies and clinical trials,
and may include post-marketing surveillance of each compound to establish its
safety and efficacy, can take many years and require the expenditure of
substantial resources. Data obtained from preclinical studies and clinical
trials are subject to varying interpretations that could delay, limit or
prevent regulatory approval. Delays or rejections may also be encountered
based upon changes in United States Food and Drug Administration ("FDA")
policies for drug approval during the period of product development and FDA
regulatory review of each submitted new drug application ("NDA") in the case
of new pharmaceutical agents, or product license application ("PLA") or
biologics license application ("BLA") in the case of biological therapeutics.
Similar delays may also be
22.
encountered in the regulatory approval of any diagnostic product, where such
approval is required, and in obtaining regulatory approval in foreign
countries. Delays in obtaining regulatory approvals could adversely affect
the marketing of any drugs developed by the Company or its strategic
partners, impose costly procedures upon the Company's and its partners'
activities, diminish any competitive advantages that the Company or its
partners may attain and adversely affect the Company's receipt of royalties.
There can be no assurance that regulatory approval will be obtained for any
drugs or diagnostic products developed by the Company or its strategic
partners. Furthermore, regulatory approval may entail limitations on the
indicated uses of a drug. Because certain of the products likely to result
from the Company's disease research programs involve the application of new
technologies and may be based upon a new therapeutic approach, such products
may be subject to substantial additional review by various government
regulatory authorities and, as a result, regulatory approvals may be obtained
more slowly than for products based upon more conventional technologies.
Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continuing review. Discovery of previously
unknown problems with a product may result in withdrawal of the product from
the market, and could have a material adverse effect on the Company's
business, financial condition and results of operations. Violations of
regulatory requirements at any stage during the regulatory process, including
preclinical studies and clinical trials, the approval process, post-approval
or in good manufacturing practices manufacturing requirements, may result in
various adverse consequences to the Company, including the FDA's delay in
approval or refusal to approve a product, withdrawal of an approved product
from the market or the imposition of criminal penalties against the
manufacturer and NDA, PLA or BLA holder. No investigational new drug
application ("IND") has been submitted for any product candidate resulting
from the Company's discovery programs, and no product candidate has been
approved for commercialization in the United States or elsewhere. The Company
intends to rely on its strategic partners to file INDs and generally direct
the regulatory approval process. There can be no assurance that the Company's
strategic partners will be able to conduct clinical testing or obtain
necessary approvals from the FDA or other regulatory authorities for any
products. Failure to obtain required governmental approvals will delay or
preclude the Company's strategic partners from marketing drugs or diagnostic
products developed through the Company's research or limit the commercial use
of such products and could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's research and development activities involve the controlled
use of certain biological and other hazardous materials, chemicals and
various radioactive materials. The Company is subject to federal, state and
local laws and regulations governing the use, storage, handling and disposal
of such materials and certain waste products. Although the Company believes
that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by federal, state and local laws and
regulations, the risk of accidental contamination or injury from these
materials cannot be eliminated. In the event of such an accident, the Company
could be held liable for any damages that result, and any liability could
exceed the resources of the Company. Other than such laws and regulations
governing the generation, use and disposal of hazardous materials and wastes,
and limiting workplace exposures to such materials, the Company does not
believe its current and proposed activities are subject to any specific
government regulation other than regulations affecting the operations of
companies generally.
23.
EMPLOYEES
As of March 16, 1998, the Company had 97 full-time employees, 34 of whom
hold M.D., Ph.D or D.Sc. degrees and 16 of whom hold other advanced degrees.
Of these, 76 were engaged in research and development, including
bioinformatics, and 21 were engaged in business development, finance and
general administration. None of the Company's employees is represented by a
labor union or covered by a collective bargaining agreement. The Company has
not experienced any work stoppages and considers its relations with its
employees to be good. The Company's future success depends in significant
part upon the continued service of its key scientific, technical and senior
management personnel and its continuing ability to attract and retain highly
qualified technical and managerial personnel. There is intense competition
for such qualified personnel in the areas of the Company's activities and
there can be no assurance that the Company will continue to attract and
retain the personnel necessary for the development of its business. Failure
to attract and retain key personnel could have a material adverse effect on
the Company's business, financial condition and results of operations.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names, ages and positions of the
executive officers of the Company as of March 16, 1998:
NAME AGE POSITION
Michael J. Brennan, M.D., Ph.D 40 President, Chief Executive Officer
and Director
Keith O. Elliston, Ph.D. 37 Senior Vice President, Research and
Development and Chief Scientific
Officer
Mark D. Gessler 36 Senior Vice President, Corporate
Development and Chief Financial
Officer
Daniel R. Passeri 37 Senior Vice President, Technology
and Program Management
- ------------------
MICHAEL J. BRENNAN, M.D., PH.D. has served as President, Chief Executive
Officer and a director of the Company since December 1995. From October 1993
to November 1995, he was Vice President, Business Development for Corange
International Limited's worldwide therapeutics business, Boehringer Mannheim
Therapeutics. From June 1990 to October 1993, Dr. Brennan was a director and
the general manager of Boehringer Mannheim South Africa. Dr. Brennan received
a Ph.D. in neurobiology and a M.D. from the University of the Witwatersrand,
Johannesburg, South Africa. In 1985, he completed his residency in neurology
at Boston City Hospital.
KEITH O. ELLISTON, PH.D. has served as Senior Vice President, Research
and Development and Chief Scientific Officer of the Company since February
1997. From July 1996 to February 1997, Dr. Elliston was Head of Genome
Sciences at Bayer Corporation, a pharmaceutical company, and also responsible
for establishing and directing its bioinformatics effort worldwide. From 1986
to July 1996, Dr. Elliston was involved in a wide range of genomics and drug
discovery programs at Merck & Co., Inc. ("Merck"), a pharmaceutical company.
In 1993, he founded the Department of
24.
Bioinformatics at Merck. He also co-founded and was the scientific director
of the Merck Gene Index project, involving the coordinated efforts of Merck,
Washington University, Lawrence Livermore National Laboratory, the University
of Pennsylvania and the National Center for Biotechnology Information. Dr.
Elliston received his M.S. degree in genetics from the University of
Minnesota and a Ph.D. in molecular genetics from Rutgers University. He is an
advisory board member of the National Center for Biotechnology Information,
National Institutes of Health, and the National Center for Genome Resources,
and an Adjunct Professor at Rutgers University.
MARK D. GESSLER has served as Senior Vice President, Corporate
Development and Chief Financial Officer of the Company since June 1996. From
February 1993 to June 1996, Mr. Gessler was with GeneMedicine, Inc., a gene
therapy company, most recently as Vice President, Corporate Development. From
1988 until January 1993, he was Director of Business Development at BCM
Technologies, Inc., the venture and technology subsidiary of Baylor College
of Medicine. While in that position, Mr. Gessler co-founded three
biotechnology companies and a software company. Mr. Gessler holds a MBA from
the University of Tennessee and was an Adjunct Professor of Business
Administration at Rice University from 1991 to 1996.
DANIEL R. PASSERI has served as Senior Vice President, Technology and
Program Management of the Company since January 1998. From March 1997 to
December 1997, he was the Company's Vice President, Business Development and
Intellectual Property. From March 1995 to March 1997, Mr. Passeri was
Director of Technology Management for the Boehringer Mannheim Group,
responsible for the assessment and acquisition or licensing of new biomedical
technologies. From January 1992 to February 1995 he was Acting Chief,
Cellular Growth and Regulation Branch of the Office of Technology Transfer of
the National Institutes of Health and its Senior Licensing Specialist. He
served as a Patent Examiner in the biotechnology section of the USPTO. Mr.
Passeri holds a M.Sc. in biotechnology from the Imperial College of Science,
Technology and Medicine, University of London. He holds a J.D. from George
Washington University. He is registered to practice before the USPTO and in
the State of Maryland and has been an adjunct professor at George Washington
University since 1995.
RISK FACTORS
THE FOLLOWING FACTORS, AMONG OTHERS, COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE CONTAINED IN FORWARD-LOOKING STATEMENTS MADE IN
THIS REPORT ON FORM 10-K AND PRESENTED ELSEWHERE BY MANAGEMENT FROM TIME TO
TIME.
TECHNOLOGICAL UNCERTAINTY AND PRODUCT DEVELOPMENT RISK. The Company has
developed and intends to continue to develop its ACCELERATED DRUG DISCOVERY
system, including its proprietary READS and MuST technologies, bioinformatics
system and Flow-thru Chip, for the identification of genes, drug targets and
drug leads useful for the discovery and development of therapeutic and
diagnostic products. These technologies are new and unproven approaches and
are based on the assumption that information about gene expression and gene
sequences may enable scientists better to understand complex disease
processes. Generally, there is limited understanding of the roles of genes in
these diseases, and relatively few therapeutic products based on gene
discoveries have been developed and commercialized. There can be no assurance
that the Company's technologies will enable it or its strategic partners to
identify genes, drug
25.
targets and drug leads useful for the discovery and development of
therapeutic and diagnostic products. Even if the Company is successful in
identifying genes and drug targets associated with specific diseases, there
can be no assurance that the Company or its strategic partners will be able
to discover drug leads or develop products based on such discoveries. To
date, no drug targets or drug leads have been identified based on the
Company's technologies, and the Company has not commercialized any
therapeutic or diagnostic products either alone or in conjunction with its
strategic partners. Failure to identify genes, drug targets and drug leads
useful for the discovery and development of therapeutic and diagnostic
products will have a material adverse effect on the Company's business,
financial condition and results of operations.
The development of therapeutic and diagnostic products based on the
Company's discoveries will also be subject to other risks of failure inherent
in pharmaceutical development. These risks include, among others, the
possibilities that any such products will be found to be ineffective or
toxic, or otherwise fail to receive necessary regulatory approvals; that any
of the products, if safe and effective, will prove difficult or impossible to
manufacture on a large scale or will be uneconomical to market; that the
proprietary rights of third parties will preclude the Company or its
strategic partners from marketing any products developed; and that third
parties will market equivalent or superior products. As a result, there can
be no assurance that the activities of the Company or its strategic partners
will result in any commercially viable products.
The Company has created a prototype of the Flow-thru Chip and plans to
commence in-house testing during 1998 but has not yet produced the Flow-thru
Chip on a commercial scale. The Company is in the process of developing its
suite of genomic database products, but, to date, only the GENE EXPRESS
NORMAL database is commercially available. Other than the option to require
the Company to develop Flow-thru Chip assays and the non-exclusive license to
the GENE EXPRESS NORMAL database granted to Japan Tobacco and the
non-exclusive license to the GENE EXPRESS NORMAL database granted to Organon,
the Company has not sold or licensed rights to its Flow-thru Chip or any of
its genomic database products. There can be no assurance that the development
or commercial scale up of the Flow-thru Chip or the genomic database products
will be successful or that the Company will be successful in marketing such
products.
The success of the Company's genomic database products will depend on
the Company's ability to generate genomic data content and analyze such data
using software tools. Gene Logic's database products are complex and
sophisticated and could contain design defects or software errors that could
be difficult to detect and correct. There can be no assurance that, despite
testing by the Company and its strategic partners and customers, errors, bugs
and viruses will not be found in current and future products, if any. Failure
to maintain and further develop the necessary bioinformatics platform to
support the drug discovery efforts of the Company and its partners could
result in the loss of or delay in revenues and market acceptance, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Because the Company's genomic database products
contain genomic information generated by the Company's technologies, the
development and commercialization of the Company's genomic database products
will be materially adversely affected in the event that its technologies fail
to generate such information. See "Gene Logic's ACCELERATED DRUG DISCOVERY
System" and "Gene Logic Programs and Products."
26.
RELIANCE ON STRATEGIC PARTNERS. The Company's strategy for development
and commercialization of therapeutic and diagnostic products based on its
discoveries depends, in large part, upon the formation of multiple strategic
alliances and licensing arrangements to pursue drug targets and drug leads.
The Company has established strategic alliances with Procter & Gamble, Japan
Tobacco and Organon. These strategic alliances have only been formed within
the past year. No drug targets have been identified pursuant to such
alliances, and there can be no assurance that the alliances will be
successful. There can also be no assurance that the Company will establish
additional strategic alliances or licensing arrangements that it deems
necessary to develop and commercialize products based upon its discovery
programs, that any such agreements will be made under terms acceptable to the
Company or that any future strategic alliances or licensing arrangements will
ultimately be successful. The Company has received a substantial portion of
its revenues since inception from alliances with its strategic partners and
expects to continue to do so in the near term. Failure of the Company to
enter into additional strategic alliances could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company's strategy includes entering into multiple, concurrent
strategic alliances. There can be no assurance that the Company will
successfully manage simultaneous collaborative programs. Failure by the
Company to manage existing and future strategic alliances, maintain
confidentiality among strategic partners or prevent the occurrence of
conflicts among strategic partners could lead to disputes that result in,
among other things, a significant strain on management resources, legal
claims involving significant time, expense and loss of reputation, loss of
capital or a loss of revenues, any of which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company intends to rely on strategic partners for preclinical
studies, clinical development, regulatory approval, manufacturing and
marketing of therapeutic and diagnostic products, if any, resulting from its
discovery programs. Agreements with strategic partners typically will allow
such partners significant discretion in electing whether to pursue any of
these activities. The Company cannot control the amount and timing of
resources its strategic partners may devote to the Company's programs or
potential products, and there can be no assurance that such partners will
perform their obligations as expected. A strategic partner's performance
under its alliance agreement with the Company could be materially adversely
affected if such partner were involved in certain third party transactions
such as a business combination or in the event that the partner had a
significant strategic shift in its business focus. If any strategic partner
were to breach its agreement with the Company, or otherwise fail to conduct
its collaborative activities in a timely manner, such conduct could have a
material adverse effect on the Company's business, financial condition and
results of operations. Each of the Company's current strategic alliances
provides the strategic partner with certain rights to terminate the alliance
agreement prior to the natural expiration of its term. The early termination
of any strategic alliance could have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company intends to continue to rely on its strategic partners for significant
funding in support of its research operations. The Company would be required
to devote additional internal resources to such programs, or to scale back or
terminate certain programs, if such funding were not available or were
reduced in amount.
27.
Should a strategic partner fail to develop or commercialize a product to
which it has the rights, the Company's business may be materially adversely
affected. There can be no assurance that a strategic partner will not
develop, either along or with others, alternative technologies or products
which are competitive with any that might result from the Company's research
program with the strategic partner. Possible disagreements between the
Company and its partners could lead to delays in collaborative research,
development or commercialization of certain products or could require or
result in litigation or arbitration, which would be time consuming and
expensive, and could have a material adverse effect on the Company's
business, financial conditions and results of operations. See "Gene Logic's
Strategy" and "Drug Target and Lead Discovery Programs - Strategic Alliances."
LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES; PROFITABILITY
UNCERTAIN. The Company has a limited operating history and is at an early
stage of development. The Company was founded in September 1994, but did not
scale up operations until May 1996 following its first major financing.
Substantially all of the Company's resources have been, and for the
foreseeable future will continue to be, dedicated to the development of the
Company's ACCELERATED DRUG DISCOVERY system and its application to the
identification of genes, drug targets and drug leads with therapeutic and
diagnostic potential. All of the Company's programs and strategic alliances
are at an early stage. The development of the Company's technologies and
their application to the discovery of genes, drug targets and drug leads will
require significant additional research and development and investment,
including testing to further validate performance and demonstrate cost
effectiveness. There can be no assurance that the Company's technologies will
continue to be successfully developed, or that any therapeutic or diagnostic
products discovered or developed through their utilization will prove to be
commercially useful, meet applicable regulatory standards in a timely manner
or at all, compete with other technologies and products, avoid infringing the
proprietary rights of others, be manufactured in sufficient quantities or at
reasonable costs or be marketed successfully. The Company expects that it
will be a number of years, if ever, before the Company will recognize revenue
from therapeutic or diagnostic product sales or royalties.
The Company has incurred operating losses in each year since its
inception, including net losses of approximately $2.9 million and $7.2
million during the years ended December 31, 1996 and 1997, respectively, and
as of December 31, 1997, had an accumulated deficit of $12.7 million. The
Company expects to incur additional losses for at least the next several
years and that such losses will increase as the Company expands its research
and development activities. The Company's losses to date have resulted
principally from costs incurred in research and development and from general
and administrative costs associated with the Company's operations. To date,
substantially all of the Company's revenues have been derived from payments
from strategic alliances and licensing arrangements, and the Company expects
that substantially all of its revenues for the foreseeable future will result
from payments from strategic alliances and licensing arrangements and
interest income. There can be no assurance that the Company will receive
additional revenues under existing strategic alliances or that the Company
will be successful in entering into any new strategic alliance that results
in revenues. The Company's ability to generate revenues and achieve
profitability is dependent in
28.
large part on the Company's ability to enter into additional strategic
alliances, and on the ability of the Company and its strategic partners to
discover genes and drug targets associated with particular diseases and,
thereafter, utilize such discoveries to identify drug leads, develop
therapeutic and diagnostic products, conduct preclinical studies and clinical
trials, obtain required regulatory approvals and successfully manufacture,
introduce and market such products. In addition, to the extent that the
Company relies upon others for these research, development and
commercialization activities, the Company's ability to achieve profitability
will be dependent in part upon the success of such outside parties. The time
required to reach profitability is highly uncertain and there can be no
assurance that the Company will be able to achieve profitability on a
sustained basis, if at all. Failure to achieve significant revenues or
profitability would have a material adverse effect on the Company's business,
financial condition and results of operations. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE UPON ACCESS TO CERTAIN MATERIALS AND INFORMATION AND LICENSED
TECHNOLOGIES. The Company obtains relevant normal and diseased human tissue
samples, related clinical and other biological information and animal disease
models through collaborations with academic institutions and commercial
organizations. Use of the Company's technologies to discover disease-related
genes and drug targets requires access to such materials and information and
there is substantial competition for such materials and information. There
can be no assurance that the Company will continue to be able to obtain
access to such materials and information upon terms acceptable to the
Company, if at all, and any material lack of availability of such materials
and information would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Gene Logic
Programs and Products."
Certain of the components of the ACCELERATED DRUG DISCOVERY system, such
as the technologies underlying READS, MuST and the Flow-thru Chip, have been
acquired or licensed from third parties. Changes in certain third party
license agreements and relationships, or termination thereof, could
materially adversely affect the Company's research and development
activities. There can be no assurance that the Company will be able to
acquire from third parties or develop new technologies, alone or with others.
Failure to license necessary technologies would have a material adverse
effect on the Company's business, financial condition and results of
operations. There also can be no assurance that there will not be disruptions
in the Company's relationships with third parties from whom the Company
derives technology, or that any disruptions that do arise will be resolved in
a timely and cost-effective manner, if at all. Any such disruptions could
have a material adverse effect on the Company's business, financial condition
and results of operations.
FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results may
fluctuate significantly from quarter to quarter as a result of a variety of
factors, including changes in the demand for the Company's technologies and
products, variations in payments under strategic alliances, including
milestone payments, royalties, license fees and other contract revenues, the
timing of new product introductions, if any, by the Company, changes in the
research and development budgets of the Company's strategic partners and any
potential partners, the introduction of new products by the Company's
competitors and other competitive factors, regulatory actions, adoption of
new technologies, manufacturing results, and the cost, quality and
29.
availability of cell and tissue samples, reagents and related components. If
revenue in a particular period does not meet expectations, the Company may
not be able to adjust significantly its level of expenditures in such period,
which would have an adverse effect on the Company's operating results. The
Company believes that quarterly comparisons of its financial results will not
necessarily be a meaningful indication of future performance. Due to the
foregoing and other unforeseen factors, in some future quarter or quarters
the Company's operating results may be below the expectations of public
market analysts and investors. In such event, the price of the Company's
Common Stock could be materially and adversely affected. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PATENTS AND PROPRIETARY RIGHTS; THIRD PARTY RIGHTS. Gene Logic seeks
United States and international patent protection for major components of its
technology platform, including elements of its READS, MuST, Flow-thru Chip
and bioinformatics technologies; it relies upon trade secret protection for
certain of its confidential and proprietary information; and it uses license
agreements both to access external technologies and assets and to convey
certain intellectual property rights to others. The Company's commercial
success will be dependent in part upon its ability to obtain commercially
valuable patent claims and to protect its intellectual property portfolio.
As of March 16, 1998, Gene Logic had exclusive rights to 17 United
States patent applications relating to its technologies. The Company has
exclusive rights to a United States patent covering key aspects of the READS
gene expression analysis. The Company has also received notice of allowance
for a United States patent application covering key aspects of gene
expression analysis, and notice of allowance for a United States patent
application covering its MuST technology.
The patent positions of pharmaceutical, biopharmaceutical and
biotechnology companies, including Gene Logic, are generally uncertain and
involve complex legal and factual questions. There can be no assurance that
any of the pending patent applications to which the Company has exclusive
rights will result in issued patents, that the claims of any patents which
are issued will provide meaningful protection, that the Company will develop
additional proprietary technologies that are patentable, that any patents
licensed or issued to the Company or its strategic partners will provide a
basis for commercially viable products or will provide the Company with any
competitive advantages or will not be challenged by third parties, or that
the patents of others will not have an adverse effect on the ability of the
Company to do business. In addition, patent law relating to the scope of
claims in the technology field in which the Company operates is still
evolving. The degree of future protection for the Company's proprietary
rights, therefore, is uncertain. Furthermore, there can be no assurance that
others will not independently develop similar or alternative technologies,
duplicate any of the Company's technologies, or, if patents are licensed or
issued to the Company, design around the patented technologies licensed to or
developed by the Company. In addition, the Company could incur substantial
costs in litigation if it is required to defend itself in patent suits
brought by third parties or if it initiates such suits.
The Company is aware of a number of United States patents and patent
applications and corresponding foreign patents and patent applications owned
by third parties relating to the analysis of gene expression or the
manufacture and use of DNA chips. There can be no assurance
30.
that these or other technologies will not provide third parties with
competitive advantages over the Company and will not have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, certain third party patent applications contain
broad claims, and it is not possible to determine whether or not such claims
will be narrowed during prosecution and/or will be allowed and issued as
patents, even if such claims appear to cover the prior art or have other
defects. There can be no assurance that an owner or licensee of a patent in
the field will not threaten or file an infringement action or that the
Company would prevail in any such action. There can be no assurance that the
cost of defending an infringement action would not be substantial and would
not have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, there can be no assurance
that any required licenses would be made available on commercially viable
terms, if at all. Failure to obtain any required license could prevent the
Company from utilizing or commercializing one or more of its technologies and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has applied, and intends to make additional applications,
for patent protection for methods relating to gene expression, for the
disease-specific patterns of gene expression it identifies and for the
individual disease genes and targets it discovers. Such patents may include
claims relating to novel genes and gene fragments and to novel uses for known
genes or gene fragments identified through its discovery programs. There can
be no assurance that the Company will be able to obtain meaningful patent
protection for its discoveries; even if patents are issued, the scope of the
coverage or protection afforded thereby is uncertain. Failure to secure such
meaningful patent protection could have a material adverse effect on the
Company's business, financial condition and results of operations.
Several groups are attempting to identify and patent gene fragments and
full-length genes, the functions of which have not been characterized, as
well as fully characterized genes. There is substantial uncertainty regarding
the possible patent protection for gene fragments or genes without known
function or correlation with specific diseases. To the extent any patents
issue to other parties on such partial or full-length genes, the risk
increases that the potential products and processes of the Company or its
strategic partners may give rise to claims of patent infringement. The public
availability of partial or full sequence information or the existence of
patent applications related thereto, even if not accompanied by relevant
function or disease association, prior to the time the Company applies for
patent protection on a corresponding gene could adversely affect the
Company's ability to obtain patent protection with respect to such gene or to
the related expression patterns. Furthermore, others may have filed, and in
the future are likely to file, patent applications covering genes or gene
products that are similar, or identical to, any for which the Company may
seek patent protection. No assurance can be given that any such patent
application will not have priority over patent applications filed by the
Company. Any legal action against the Company or its strategic partners
claiming damages and seeking to enjoin commercial activities relating to the
affected products and processes could, in addition to subjecting the Company
to potential liability for damages, require the Company or its strategic
partners to obtain a license in order to continue to manufacture or market
the affected products and processes. There can be no assurance that the
Company or its strategic partners would prevail in any such action or that
any license required under any such patent would be made available on
commercially acceptable terms, if at all. The Company believes that there is
likely to be significant litigation in the industry regarding patent and
other intellectual property rights.
31.
If the Company becomes involved in such litigation, it could consume a
substantial portion of the Company's managerial and financial resources and
have a material adverse effect on the Company's business, financial condition
and results of operations.
Enactment of legislation implementing the General Agreement on Tariffs
and Trade has resulted in certain changes to United States patent laws that
became effective on June 8, 1995. Most notably, the term of patent protection
for patent applications filed on or after June 8, 1995 is no longer a period
of 17 years from the date of grant. The new term of United States patents
will commence on the date of issuance and terminate 20 years from the
earliest effective filing date of the application. Because the time from
filing to issuance of biotechnology patent applications is often more than
three years, a 20-year term from the effective date of filing may result in a
substantially shortened period of patent protection which may adversely
affect the Company's patent position. If this change results in a shorter
period of patent coverage, the Company's business could be adversely affected
to the extent that the duration and level of the royalties it is entitled to
receive from its strategic partners are based on the existence of a valid
patent covering the product subject to the royalty obligation.
With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, the Company has chosen
to rely on trade secret protection and confidentiality agreements to protect
its interests. The Company believes that several elements of its ACCELERATED
DRUG DISCOVERY system involve proprietary know-how, technology or data which
are not covered by patents or patent applications. In addition, the Company
has developed a proprietary index of gene and gene fragment sequences which
it updates on an ongoing basis. Some of these data will be the subject of
patent applications whereas other data will be maintained as proprietary
trade secret information. The Company has taken security measures to protect
its proprietary know-how and technologies and confidential data and continues
to explore further methods of protection. While Gene Logic requires all
employees, consultants and collaborators to enter into confidentiality
agreements, there can be no assurance that proprietary information will not
be disclosed, that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets, or that the Company can meaningfully protect its
trade secrets. In the case of a strategic partnership or other collaborative
arrangement which requires the sharing of data, the Company's policy is to
make available to its partner only such data as are relevant to the
partnership or arrangement, under controlled circumstances, and only during
the contractual term of the strategic partnership or collaborative
arrangement, and subject to a duty of confidentiality on the part of its
partner or collaborator. There can be no assurance, however, that such
measures will adequately protect the Company's data. Any material leak of
confidential data into the public domain or to third parties may have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is a party to various license agreements which give it
rights to use certain technologies and biological materials in its research
and development processes. There can be no assurance that the Company will be
able to maintain such rights on commercially reasonable terms, if at all.
Failure by the Company to maintain such rights could have a material adverse
effect on the Company's business, financial condition and results of
operations.
32.
INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE. Competition among
entities attempting to identify genes associated with specific diseases and
to develop products based on such discoveries is intense. Gene Logic faces,
and will continue to face, competition from pharmaceutical, biotechnology and
diagnostic companies, academic and research institutions and government
agencies, both in the United States and abroad. Several entities are
attempting to identify and patent randomly sequenced genes and gene
fragments, while others are pursuing a gene identification, characterization
and product development strategy based on positional cloning. The Company is
aware that certain entities are utilizing a variety of different gene
expression analysis methodologies, including the use of chip-based systems,
to attempt to identify disease-related genes. In addition, numerous
pharmaceutical companies are developing genomic research programs, either
alone or in partnership with the Company's competitors. Competition among
such entities is intense and is expected to increase. In order to compete
against existing and future technologies, the Company will need to
demonstrate to potential customers that its technologies and capabilities are
superior to competing technologies.
Many of the Company's competitors have substantially greater capital
resources, research and development staffs, facilities, manufacturing and
marketing experience, distribution channels and human resources than the
Company. These competitors may discover, characterize or develop important
genes, drug targets or drug leads, drug discovery technologies or drugs in
advance of Gene Logic or which are more effective than those developed by
Gene Logic or its strategic partners, or may obtain regulatory approvals of
their drugs more rapidly than the Company and its strategic partners, any of
which could have a material adverse effect on any similar Gene Logic program.
Moreover, there can be no assurance that the Company's competitors will not
obtain patent protection or other intellectual property rights that would
limit the Company's or its strategic partners' ability to use the Company's
drug discovery technologies or commercialize therapeutic or diagnostic
products, which could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company also
faces competition from these and other entities in gaining access to relevant
samples used in its discovery programs.
The Company will rely on its strategic partners for support of certain
of its discovery programs and intends to rely on its strategic partners for
preclinical and clinical development of related potential products and the
manufacturing and marketing of such products. Each of the Company's strategic
partners is conducting multiple product development efforts within each area
which is the subject of its strategic alliance with Gene Logic. Generally,
the Company's strategic alliance agreements do not preclude the strategic
partner from pursuing development efforts utilizing approaches distinct from
that which is the subject of the alliance. Any product candidate of the
Company, therefore, may be subject to competition with a potential product
under development by a strategic partner. See "--Reliance on Strategic
Partners."
Future competition will come from existing competitors as well as other
companies seeking to develop new technologies for drug discovery based on
gene sequencing, gene expression analysis, bioinformatics and related
technologies. In addition, certain pharmaceutical and biotechnology companies
have significant needs for genomic information and may choose to develop or
acquire competing technologies to meet such needs. Genomic technologies have
undergone and are expected to continue to undergo rapid and significant
change. The Company's future success will depend in large part on its
maintaining a competitive position in the genomics
33.
field. Rapid technological development by the Company or others may result in
products or technologies becoming obsolete before the Company recovers the
expenses it incurs in connection with their development. Products offered by
the Company could be made obsolete by less expensive or more effective drug
target and drug lead technologies, including technologies which may be
unrelated to genomics. There can be no assurance that the Company will be
able to make the enhancements to its technology necessary to compete
successfully with newly emerging technologies.
FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ACCESS TO ADDITIONAL
FUNDING. The Company has invested significant capital in its infrastructure
and in its scientific and business development activities and expects capital
and operating expenditures to increase over the next several years as it
expands its operations. The Company believes that existing cash and
marketable securities and anticipated cash flow from its current strategic
alliances will be sufficient to support the Company's operations for at least
the next 24 months. This expectation is based on the Company's current
operating plan, which could change as a result of many factors, and the
Company could require additional funding sooner than expected. In addition,
the Company may choose to raise additional capital due to market conditions
or strategic considerations even if it has sufficient funds for its operating
plan. The estimate for the period for which the Company expects its
available cash balances and estimated cash flow from its current strategic
alliances to be sufficient to meet its capital requirements is a
forward-looking statement that involves risks and uncertainties as set forth
herein and in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Report on Form
10-K. The Company's actual future capital requirements and the adequacy of
its available funds will depend on many factors, including progress of its
discovery programs, the number and breadth of these programs, the ability of
the Company to establish and maintain strategic alliance and licensing
arrangements and the progress of the development and commercialization
efforts of the Company's strategic partners. These factors also include the
level of the Company's activities relating to its independent discovery
programs and to the development and commercialization rights it retains in
its strategic alliance arrangements, competing technological and market
developments, the costs associated with obtaining access to tissue samples
and related information and the costs involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims and other intellectual
property rights.
The Company expects that it will require significant additional funding
in the future, which it may seek through public or private equity offerings,
debt financings or additional strategic alliance and licensing arrangements.
No assurance can be given that additional financing or strategic alliance and
licensing arrangements will be available when needed, or that, if available,
such financing will be obtained on terms favorable to the Company or its
stockholders. To the extent that the Company raises additional capital by
issuing equity or convertible debt securities, ownership dilution to
stockholders will result. If adequate funds are not available when needed,
the Company may be required to curtail operations significantly or to obtain
funds by entering into strategic alliances and licensing arrangements, in
which case the Company may be required to relinquish rights to certain of its
technologies, discoveries or potential products, or to grant licenses on
terms that are not favorable to the Company, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In the event that adequate funds are not available,
the Company's business
34.
would be adversely affected. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
ATTRACTION AND RETENTION OF KEY EMPLOYEES. The Company is highly
dependent on the principal members of its management and scientific staff.
The loss of the services of any of these persons could significantly impede
the accomplishment of the Company's scientific and business objectives. The
Company's success is also dependent upon its ability to attract and retain
additional qualified scientific, technical and managerial personnel. There is
substantial competition among biotechnology, pharmaceutical and health care
companies, universities, government entities and non-profit organizations for
such personnel, and there can be no assurance that the Company will retain
its key scientific, technical and managerial employees or that it will be
able to attract, assimilate and retain such other highly qualified
scientific, technical and managerial personnel as may be required in the
future. The inability of the Company to retain its current scientific,
technical and managerial personnel and to attract and retain additional key
employees could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Competition" and
"Employees."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL; HAZARDOUS
MATERIALS. The Company does not plan to conduct clinical trials in humans or
commercialize therapeutic products discovered as a result of its genes, drug
target and drug lead discovery programs but intends to rely on its strategic
partners to conduct such activities. Prior to marketing, any new drug
developed by the Company's strategic partners must undergo an extensive
regulatory approval process in the United States and other countries. This
regulatory process, which includes preclinical studies and clinical trials,
and may include post-marketing surveillance of each compound to establish its
safety and efficacy, can take many years and require the expenditure of
substantial resources. Data obtained from preclinical studies and clinical
trials are subject to varying interpretations that could delay, limit or
prevent regulatory approval. Delays or rejections may also be encountered
based upon changes in FDA policies for drug approval during the period of
product development and FDA regulatory review of each submitted NDA in the
case of new pharmaceutical agents, or PLA or BLA in the case of biological
therapeutics. Similar delays may also be encountered in the regulatory
approval of any diagnostic product, where such approval is required, and in
obtaining regulatory approval in foreign countries. Delays in obtaining
regulatory approvals could adversely affect the marketing of any drugs
developed by the Company or its strategic partners, impose costly procedures
upon the Company's or its partners' activities, diminish any competitive
advantages that the Company or its partners may attain and adversely affect
the Company's receipt of royalties. There can be no assurance that regulatory
approval will be obtained for any drugs or diagnostic products developed by
the Company or its strategic partners. Furthermore, regulatory approval may
entail limitations on the indicated uses of a drug. Because certain of the
products likely to result from the Company's drug target and drug lead
discovery programs involve the application of new technologies and may be
based upon a new therapeutic approach, such products may be subject to
substantial additional review by various government regulatory authorities
and, as a result, regulatory approvals may be obtained more slowly than for
products based upon more conventional technologies.
Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continuing review. Discovery of previously unknown
problems with a product may
35.
result in withdrawal of the product from the market, and could have a
material adverse effect on the Company's business, financial condition and
results of operations. Violations of regulatory requirements at any stage
during the regulatory process, including preclinical studies and clinical
trials, the approval process, post-approval or in good manufacturing
practices manufacturing requirements, may result in various adverse
consequences to the Company, including the FDA's delay in approval or refusal
to approve a product, withdrawal of an approved product from the market or
the imposition of criminal penalties against the manufacturer and NDA, PLA or
BLA holder. No IND has been submitted for any product candidate resulting
from the Company's discovery programs, and no product candidate has been
approved for commercialization in the United States or elsewhere. The Company
intends to rely on its strategic partners to file INDs and generally direct
the regulatory approval process. There can be no assurance that the Company's
strategic partners will be able to conduct clinical testing or obtain
necessary approvals from the FDA or other regulatory authorities for any
products. Failure to obtain required governmental approvals will delay or
preclude the Company's strategic partners from marketing drugs or diagnostic
products developed through the Company's research or limit the commercial use
of such products and could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's research and development activities involve the controlled
use of certain biological and other hazardous materials, chemicals and
various radioactive materials. The Company is subject to federal, state and
local laws and regulations governing the use, storage, handling and disposal
of such materials and certain waste products. Although the Company believes
that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by federal, state and local laws and
regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident,
the Company could be held liable for any damages that result, and any
liability could exceed the resources of the Company. Other than such laws and
regulations governing the generation, use and disposal of hazardous materials
and wastes, and limiting workplace exposures to such materials, the Company
does not believe its current and proposed activities are subject to any
specific government regulation other than regulations affecting the
operations of companies generally.
ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF GENE-BASED DIAGNOSTICS. The
Company and its partners may seek to develop diagnostic products based on
genes it discovers. The prospect of broadly available gene-based diagnostic
tests raises issues regarding their appropriate utilization and the
confidentiality of the information provided by such testing. It is possible
that discrimination by third party payors, based on the results of such
testing, could lead to the increase of premiums by such payors to prohibitive
levels, outright cancellation of insurance or unwillingness to provide
coverage to individuals showing unfavorable gene expression profiles.
Similarly, employers could discriminate against employees with gene
expression profiles indicative of the potential for high disease-related
costs and lost employment time. Finally, government authorities could, for
social or other purposes, limit or prohibit the use of such tests under
certain circumstances. There can be no assurance that such ethical and social
factors or concerns about genetic testing and target identification will not
have a material adverse effect on market acceptance of the Company's
technologies and products.
36.
REIMBURSEMENT RISK. The levels of revenues and profitability of
pharmaceutical companies may be affected by the continuing efforts of
governments and third party payors to contain or reduce the costs of health
care through various means including by limiting prices paid for
pharmaceuticals. In both the United States and elsewhere, sale of
prescription pharmaceuticals are dependent in part on the availability of
reimbursement to the consumer from third party payors, such as government
insurance programs (Medicare and Medicaid) and private and corporate health
insurance plans. Third party payors are increasingly challenging the prices
charged for pharmaceuticals and, in some cases, refusing payment for
off-label use and other uses of pharmaceuticals they deem inappropriate.
EXPANSION OF OPERATIONS; MANAGEMENT OF GROWTH. The Company has recently
experienced, and expects to continue to experience, significant growth in the
number of its employees and the scope of its operations. The Company has
significantly increased the scale of its operations and number of employees
to support its partnered and independent discovery programs and to manage its
strategic alliances. The number of full-time employees of the Company
increased from three on January 1, 1996 to 72 on December 31, 1997, and in
March 1998 the Company relocated its principal business offices. This growth
and relocation has placed, and may continue to place, a significant strain on
the Company's management, operations and systems. The Company's ability to
manage such growth effectively will depend upon its broadening its management
team and attracting, hiring and retaining skilled employees. In addition, in
order to increase capacity to remain competitive and satisfy the needs of
current and future strategic partners, the Company will be required to
acquire additional capital equipment and resources. There can be no assurance
that the Company will be able to manage its growth, and the Company's
inability to manage growth effectively could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Employees."
LIMITED CLINICAL DEVELOPMENT, MANUFACTURING, MARKETING AND SALES
EXPERIENCE. The Company has made no investment in therapeutic or diagnostic
manufacturing, marketing or product sales resources and does not generally
expect to engage directly in the manufacturing, marketing or sale of
therapeutic or diagnostic products. Instead, the Company currently intends to
contract with others to pursue the commercialization of therapeutic or
diagnostic products based upon or discovered using its technologies. There
can be no assurance that the Company will be able to enter into such
arrangements on acceptable terms, if at all. The Company will be dependent to
a significant extent on partners, licensees or other entities for
development, manufacturing and commercialization of such products. The
Company's dependence upon third parties for the manufacture, marketing and
sales of therapeutic or diagnostic products may materially adversely affect
the Company's ability to develop and deliver such products on a timely and
competitive basis, if at all. To the extent the Company directly engages in
development, manufacturing and marketing of certain therapeutic or diagnostic
products, it will require substantial additional funds, personnel and
production facilities. See "Reliance on Strategic Partners."
PRODUCT LIABILITY EXPOSURE. Clinical trials, manufacturing, marketing
and sale of any of the Company's or its partners' potential therapeutic or
diagnostic products may expose the Company to liability claims from the use
of such products. The Company currently does not carry product liability
insurance. There can be no assurance that the Company or its partners will
37.
be able to obtain such insurance or, if obtained, that sufficient coverage
can be acquired at a reasonable cost. The inability to obtain sufficient
insurance coverage at an acceptable cost or to otherwise protect against
potential product liability claims could prevent or inhibit the
commercialization of pharmaceutical products developed by the Company or its
partners. A product liability claim or recall would have a material adverse
effect on the Company's business, financial condition and results of
operations.
POSSIBLE VOLATILITY OF STOCK PRICE. The market prices for securities of
biotechnology and pharmaceutical companies have been highly volatile, and the
market has experienced significant price and volume fluctuations that are
often unrelated to the operating performance of particular companies.
Announcements of technological innovations or new commercial products by the
Company or its competitors, disputes or other developments concerning
proprietary rights, including patents and litigation matters, developments
concerning strategic alliance agreements, publicity regarding actual or
potential results with respect to products or technology under development by
the Company, its strategic partners or to the efficacy of new technologies,
quarterly fluctuations in the Company's operating results, future sales of
substantial amounts of Common Stock by existing stockholders and comments by
securities analysts, as well as general market conditions and other factors,
may have a significant impact on the market price of the Common Stock. In
particular, the realization of any of the risks described in these "Risk
Factors" could have a material adverse impact on such market price.
ANTI-TAKEOVER PROVISIONS. The Company's Amended and Restated
Certificate of Incorporation (the "Restated Certificate") provides for
staggered terms for the members of the Board of Directors. In addition, the
Restated Certificate authorizes the Board of Directors of the Company,
without stockholder approval, to issues additional shares of Common Stock and
to fix the rights, preferences and privileges of and issue additional shares
of Preferred Stock with voting, conversion, dividend and other rights and
preferences that could adversely affect the voting power or other rights of
the holders of Common Stock. The issuance of Preferred Stock, rights to
purchase Preferred Stock or additional shares of Common Stock may have the
effect of delaying or preventing a change in control of the Company. In
addition, the possible issuance of Preferred Stock or additional shares of
Common Stock could discourage a proxy contest, make more difficult the
acquisition of a substantial block of the Company's
38.
Common Stock or limit the price that investors might be willing to pay for
shares of the Company's Common Stock. Further, the Restated Certificate
provides that any action required or permitted to be taken by stockholders of
the Company must be effected at a duly called annual or special meeting of
stockholders and may not be effected by written consent. Special meetings of
the stockholders of the Company may be called only by the Chairman of the
Board of Directors, the President of the Company or by the Board of Directors
pursuant to a resolution adopted by a majority of the total number of
authorized directors. These and other provisions contained in the Restated
Certificate and the Company's By-laws, as well as certain provisions of
Delaware law, could delay or make more difficult certain types of
transactions involving an actual or potential change in control of the
Company or its management (including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices)
and may limit the ability of stockholders to remove current management of the
Company or approve transactions that stockholders may deem to be in their
best interests and, therefore, could adversely affect the price of the
Company's Common Stock.
ITEM 2. PROPERTIES
Gene Logic's headquarters consist of approximately 50,000 square feet of
office and research laboratory space located at 708 Quince Orchard Road,
Gaithersburg, Maryland pursuant to a lease which expires in 2007. The
Company's Bioinformatics Systems Division occupies approximately 4,900 square
feet of office space located at 2001 Center Street, Berkeley, California
pursuant to a lease which expires in 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock of Gene Logic Inc. has been traded on the Nasdaq
National Market under the symbol GLGC since November 21, 1997. Prior to
November 21, 1997, the Company's Common Stock was not publicly traded. The
following table sets forth for the periods indicated the high and low closing
prices per share of the Common Stock as reported by the Nasdaq National
Market.
1997 HIGH LOW
- ---- ---------- ---------
Fourth Quarter (commencing November 21, $8.375 $7.625
1997)
39.
On March 16, 1998, the last sales price of the Common Stock as reported
on the Nasdaq National Market was $8.50 per share. As of March 16, 1998,
there were approximately 88 holders of record of the Company's Common Stock.
The Company has not paid any cash dividends since inception and does not
anticipate paying any cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1997, the Company has sold and issued the following
securities which were not registered under the Securities Act of 1933, as
amended (the "Securities Act"):
(1) During the period, the Company granted stock options to employees,
officers, directors and consultants of the Company under its 1996 Stock Plan
covering an aggregate of 2,248,881 shares of the Company's Common Stock.
Certain of these options vest over a period of time following their
respective dates of grant. In addition, 152,943 shares of Common Stock were
issued pursuant to the exercise of stock options granted under the 1996 Stock
Plan.
(2) During the period, the Company granted stock options to employees,
officers and directors of the Company under its 1997 Equity Incentive Plan
covering an aggregate of 238,500 shares of the Company's Common Stock.
Certain of these options vest over a period of time following their
respective dates of grant.
(3) In April 1997, the Company issued a warrant to purchase 25,758
shares of Series B Preferred Stock at an exercise price of $2.20 per share in
connection with an equipment loan agreement.
(4) In April 1997, the Company issued a warrant to purchase 13,636
shares of Series B Preferred Stock at an exercise price of $2.20 per share in
connection with the establishment of a capital lease facility.
(5) In July 1997, pursuant to the terms of an equity financing of the
Company, the Company issued 4,444,443 shares of Series C Preferred Stock to
30 investors for approximately $20.0 million. In addition, the Company paid
approximately $660,000 to Hambrecht & Quist LLC for services as placement
agent in connection with such financing, and approximately $67,000 to Bailey
& Company, Inc. for services in connection with the financing.
(6) In August 1997, in connection with the Company's facilities lease,
the Company issued a warrant to purchase 20,000 shares of the Company's
Common Stock at an exercise price of $5.40 per share. In November 1997, such
warrant was fully exercised for 6,500 shares of Common Stock pursuant to a
net exercise provision.
(7) In September 1997, the Company issued 50,000 shares of Common Stock
to Genaissance Pharmaceuticals, Inc. in connection with a negotiated
settlement.
(8) The Company issued a warrant to purchase 48,889 shares of its
Common Stock at an exercise price of $4.50 per share to Hambrecht & Quist LLC
for services as placement agent for
40.
the Company's Series C Preferred Stock financing, which closed on July 15,
1997. In November 1997, such warrant was fully exercised for 48,889 shares
of Common Stock.
(9) In September 1997, the Company issued a warrant to purchase 4,293
shares of Series B Preferred Stock at an exercise price of $2.20 per share in
connection with an equipment loan agreement.
(10) In November 1997, the Company issued 375,000 shares of Common
Stock at a purchase price of $8.00 per share to Japan Tobacco Inc. in
connection with a strategic alliance.
The grant of stock options described in paragraphs (1) and (2) above
were deemed to be exempt from registration under the Securities Act by virtue
of Rule 701 promulgated thereunder in that they were offered and sold either
pursuant to written compensatory benefit plans or pursuant to a written
contract relating to compensation, as provided by Rule 701.
The sales and issuances of securities in the transactions described in
paragraphs (3) through (10) above were deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2) and/or Regulation D
promulgated thereunder.
The recipients represented their intention to acquire the securities for
investment purposes only and not with a view to the distribution thereof.
Appropriate legends are affixed to the stock certificates issued in such
transactions. All recipients either received adequate information about the
Company or had access, through employment or other relationships, to such
information.
On November 20, 1997, the Company's Form S-1 registration statement
(File no. 333-37317) was declared effective by the Securities and Exchange
Commission. The registration statement, as amended, covered the offering of
3,000,000 shares of the Company's Common Stock, $.01 par value. The offering
commenced on November 21, 1997 and the sale to the public of 3,000,000 shares
of Common Stock at $8.00 per share was completed on November 26, 1997 for an
aggregate price of $24.0 million. The registration statement covered an
additional 450,000 shares of Common Stock that the underwriters had the
option to purchase solely to cover over-allotments. The managing
underwriters for the offering were BancAmerica Robertson Stephens, Hambrecht
& Quist LLC and UBS Securities LLC. On December 22, 1997, the underwriters
exercised their option to purchase 347,000 additional shares of Common Stock.
A total of 3,347,000 shares of Common Stock were sold in the offering at an
aggregate price of approximately $26.8 million. All of the shares sold in the
offering were sold by the Company.
Expenses incurred by the Company through December 31, 1997 in connection
with the issuance and distribution of Common Stock in the offering included
underwriting discounts, commissions and allowances and other expenses of
approximately $1.9 million and $1.0 million, respectively. Total offering
expenses of approximately $2.8 million resulted in net offering proceeds to
the Company of approximately $23.9 million. No expenses were paid to
directors, officers or affiliates of the Company or 10% owners of any class
of equity securities of the Company.
41.
Of the net offering proceeds to the Company of approximately $23.9 million,
through December 31, 1997, approximately $326,000 had been used to fund
tenant improvements, approximately $129,000 had been used to fund capital
expenditures, approximately $878,000 had been used for enhancement of
internal research and development capabilities and approximately $535,000 had
been used for general corporate purposes. No payments were made to directors,
officers or affiliates of the Company or 10% owners of any class of equity
securities of the Company. Approximately $22.1 million of the net offering
proceeds remain as working capital.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
statements of operations for the years ended December 31, 1997, 1996 and 1995
and with respect to the balance sheets at December 31, 1997 and 1996 have been
derived from audited financial statements included as part of this Form 10-K.
The statement of operations data for the period from September 22, 1994
(inception) through December 31, 1994 and the balance sheet data at December
31, 1995 and 1994 are derived from audited financial statements not included
in this Form 10-K. The following selected financial data should be read in
conjunction with the financial statements and notes thereto included
elsewhere in this Form 10-K.
PERIOD FROM
SEPTEMBER 22, 1994
YEARS ENDED DECEMBER 31, (INCEPTION)
----------------------------------------- THROUGH
1997 1996 1995 DECEMBER 31, 1994
---------- --------- --------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Revenues $ 2,047 $ - $ - $ -
Operating expenses:
Research and development 6,061 1,741 486 44
General and administrative 3,826 1,345 258 46
----------- ---------- -------- --------
Total operating expenses 9,887 3,086 744 90
Interest income, net 745 221 - -
Income tax expense 100 - - -
----------- ---------- -------- --------
Net loss $(7,195) $(2,865) $ (744) $ (90)
Basic and dilutive net loss per
common share $ (3.97) $ (5.87) $ (3.48)
----------- ---------- --------
----------- ---------- --------
Shares used in computing basic
and dilutive net loss per
common share 2,138 572 214
----------- ---------- --------
----------- ---------- --------
Pro forma net loss per
common share $ (0.90) $ (0.72)
----------- ----------
----------- ----------
Shares used in computing
pro forma net loss per
common share 8,004 3,987
----------- ----------
----------- ----------
DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994
--------- --------- --------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities $ 46,621 $ 5,671 $ 348 $ 298
Working capital 42,455 4,581 246 311
Total assets 53,972 7,819 424 311
Total long-term debt and capital lease obligation 1,551 446 - -
Total mandatorily redeemable convertible preferred stock - 10,471 1,153 400
Total stockholders' equity 46,067 (4,187) (833) (89)
42.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WHICH INVOLVE RISK AND UNCERTAINTIES. ACTUAL EVENTS AND RESULTS
MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THE MATTERS SET FORTH
UNDER THE CAPTION "RISK FACTORS" AND ELSEWHERE IN THIS REPORT ON FORM 10-K.
OVERVIEW
The Company was incorporated in September 1994, and has devoted
substantially all of its resources to the development of its genomics
technologies, bioinformatics systems and database products used to identify
the expression of genes, drug targets and drug leads. The Company has
incurred losses since inception and, as of December 31, 1997, had an
accumulated deficit of $12.7 million.
The Company entered into a strategic alliance with Procter & Gamble in
May 1997, with Japan Tobacco in September 1997, and with Organon in December
1997. These agreements provide the Company with various combinations of
technology and database access fees and research funding and may provide
certain additional payments upon the attainment of research product
development and/or regulatory milestones and royalty payments based on sales
of any products resulting from the strategic alliances. Revenue recognized
under the alliances with Procter & Gamble, Japan Tobacco and Organon through
December 31, 1997 totaled approximately $2.0 million. Procter & Gamble and
Japan Tobacco each have the option to expand the alliances to cover
additional disease indications. Japan Tobacco purchased $3.0 million of the
Company's Common Stock in a private placement that closed simultaneously with
the Company's initial public offering.
Gene Logic's future profitability will depend in part on the successful
development and marketing of the ACCELERATED DRUG DISCOVERY system, the
genomic database products and the Flow-thru Chip and the establishment of
strategic alliances. Payments from strategic alliance partners and interest
income are expected to be the only sources of revenue for the foreseeable
future. Such revenue is dependent in large part on the discovery of genes,
drug targets and drug leads using the Company's technologies. Royalties or
other revenue from commercial sales of products developed from any
therapeutic or diagnostic product identified using the Company's technologies
are not expected for at least several years, if at all. Payments under
strategic alliances will be subject to significant fluctuation in both timing
and amount, and, therefore, the Company's results of operations for any
period may not be comparable to the results of operations for any other
period. Furthermore, the generation of significant revenues and profitability
will depend upon the Company entering into additional alliances. There can be
no assurance that the Company will enter into additional alliances on
acceptable terms, if at all, or that such current or future alliances will be
successful.
The Company has incurred operating losses in each year since its
inception, including net losses of approximately $2.9 million and $7.2
million for the years ended December 31, 1996 and 1997, respectively, and, at
December 31, 1997, the Company had an accumulated deficit of approximately
$12.7 million. The Company's losses have resulted principally from costs
incurred in research and development and from general and administrative
costs associated with the Company's operations. These costs have exceeded the
Company's interest income and revenues which to date have been generated
principally from strategic alliances. The Company expects to incur additional
operating losses over the next few years as a result of increases in its
expenses for research and development capabilities.
43.
The Company's quarterly operating results may fluctuate significantly as
a result of a variety of factors, including changes in the demand for the
Company's technologies and products, variations in payments under strategic
alliances, including milestone payments, royalties, license fees and other
contract revenues, and the timing of new product introductions, if any, by
the Company. The Company's quarterly operating results may also fluctuate
significantly depending on changes in the research and development budgets of
the Company's strategic partners and any potential partners, the introduction
of new products by the Company's competitors and other competitive factors,
regulatory actions, adoption of new technologies, manufacturing results, and
the cost, quality and availability of cell and tissue samples, reagents and
related components.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
Revenue under strategic alliance agreements was $2.0 million for 1997.
There was no revenue in 1996. The 1997 revenue resulted from the Company's
strategic alliance agreements with Procter & Gamble, Japan Tobacco and
Organon. Under the terms of the strategic alliance agreements, payments for
technology and database access fees and research funding are recognized as
revenue ratably over the period for which the payments are made. Payments
related to the achievement of certain milestones are recognized as revenue
when the milestones are achieved.
Research and development expenses increased to $6.1 million for 1997
from $1.7 million in 1996. This increase was primarily attributable to
increased payroll and personnel expenses as the Company hired additional
research and development personnel, increased purchases of laboratory
supplies and increased equipment depreciation as a result of capital
expenditures. The Company expects research and development expenses to
continue to increase as personnel and research and development facilities are
expanded to accommodate new and existing strategic alliances.
General and administrative expenses increased to $3.8 million for 1997
from $1.3 million in 1996. This increase was primarily attributable to
increased payroll and personnel expenses as the Company hired additional
management and administrative personnel and professional fees in connection
with the overall scale up of the Company's operations and business
development efforts. The Company expects that general and administrative
expenses will continue to increase as the Company continues to expand its
operations.
Net interest income increased to $745,000 for 1997 from $221,000 in
1996. This increase was primarily due to larger cash and investment balances
on hand during 1997 as a result of private placements of equity securities
and the completion of the Company's initial public offering.
As of December 31, 1997, the Company had accumulated losses of $12.7
million since inception and, therefore, has not paid any federal income
taxes. Realization of deferred tax assets is dependent on future earnings, if
any, the timing and amount of which are uncertain.
44.
Accordingly, valuation allowances in amounts equal to the deferred tax assets
have been established to reflect these uncertainties. See Note 7 of Notes to
Financial Statements.
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
Research and development expenses increased to $1.7 million in 1996 from
$486,000 in 1995. This increase was primarily attributable to increased
payroll and personnel expenses as the Company hired additional research and
development personnel, increased purchases of laboratory supplies and
increased contracted services.
General and administrative expenses increased to $1.3 million in 1996
from $258,000 in 1995. This increase was primarily attributable to increased
payroll and personnel expenses as the Company hired additional management and
administrative personnel and professional fees in connection with the
expansion of the Company's operations and business development efforts.
The Company had net interest income of $221,000 in 1996 resulting from
interest earned on cash and marketable securities derived from private
placements of equity securities. The Company did not earn interest income in
1995.
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 31, 1997, the Company financed its
operations through proceeds from the Company's initial public offering and
private placements of equity securities, payment from strategic alliance
partners, a capital lease and an equipment loan. In November 1997, the
Company completed an initial public offering of 3,347,000 shares of its
Common Stock (including exercise of the underwriters' over-allotment option),
generating net proceeds of approximately $23.9 million. The private placement
of equity securities has provided the Company with aggregate gross proceeds
of approximately $33.2 million as of December 31, 1997. The Company has
received, as of December 31, 1997, $5.5 million under its strategic alliances
for technology and database access fees and research funding, of which $2.0
million has been recognized as revenue. The Company has also obtained
$471,000 of capital lease financing and $1.1 million under an equipment loan.
As of December 31, 1997, the Company had approximately $46.6 million in cash
and marketable securities.
During 1995, 1996 and 1997, the Company had expenditures relating to
intangible and other assets of approximately $63,000, $126,000 and $643,000,
respectively. These expenditures were primarily for patent costs and license
fees. The Company will amortize capitalized patent costs to research and
development expense once the patents issue. These expenditures are necessary
to protect the Company's intellectual property and to secure rights to
current technology and are expected to continue to increase.
Amounts financed for equipment under a capital lease for the year ended
December 31, 1996 were approximately $471,000. The Company also had purchases
of equipment of approximately $12,000, $1.3 million and $3.1 million during
1995, 1996 and 1997, respectively.
45.
The Company's new office and research laboratory facility was completed in
February 1998. Payments for tenant improvements were approximately $326,000
as of December 31, 1997. The Company anticipates funding additional
improvements for the new facility in the amount of $1.7 million in 1998. In
addition, the Company expects capital expenditures to increase over the next
several years as it expands its facilities and acquires significant
scientific and computer equipment to support the planned expansion of its
research and development efforts.
As of December 31, 1997, the Company had net operating loss
carryforwards of approximately $10.4 million to offset federal and state
income taxes. The Company's research and development tax credit carryforwards
were estimated to be approximately $279,000 as of December 31, 1997 for
federal income tax purposes. If not utilized, the federal and state net
operating loss carryforwards will expire through 2011. See Note 7 to Notes to
Financial Statements.
To date, all revenue received by the Company has been from its strategic
alliances. The Company expects that substantially all revenue for the
foreseeable future will come from strategic alliance partners and interest
income. Furthermore, the Company's ability to achieve profitability will be
dependent upon the ability of the Company to enter into additional strategic
alliances. There can be no assurance that the Company will be able to
negotiate additional strategic alliances in the future on acceptable terms,
if at all, or that current or future strategic alliances will be successful
and provide the Company with expected benefits.
The Company believes that existing cash and marketable securities and
anticipated cash flow from its current strategic alliances will be sufficient
to support the Company's operations for at least the next 24 months. The
estimate for the period for which the Company expects its available cash
balances and estimated cash flow from its current strategic alliances to be
sufficient to meet its capital requirements is a forward-looking statement
that involves risks and uncertainties as set forth herein and in Item 1 under
the caption "Risk Factors" and elsewhere in this Report on Form 10-K. The
Company's actual future capital requirements and the adequacy of its
available funds, will depend on many factors, including progress of its
discovery programs, the number and breadth of these programs, the ability of
the Company to establish and maintain additional strategic alliance and
licensing arrangements and the progress of the development and
commercialization efforts of the Company's strategic partners. These factors
also include the level of the Company's activities relating to its
independent discovery programs and to the development and commercialization
rights it retains in its strategic alliance arrangements, competing
technological and market developments, the costs associated with obtaining
access to tissue samples and related information and the costs involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims and
other intellectual property rights. The Company expects that it will require
significant additional financings in the future, which it may seek to raise
through public or private equity offerings, debt financing or additional
strategic alliance and licensing arrangements. No assurance can be given that
additional financing or strategic alliance and licensing arrangements will be
available when needed, if at all, or that, if available, such financing will
be obtained on terms favorable to the Company or its stockholders. To the
extent that the Company raises additional capital by issuing equity or
convertible debt securities, ownership dilution to stockholders will result.
If adequate financing is not available when needed, the Company may be
required to curtail significantly one or more of its research and development
programs or to obtain funds through arrangements with strategic partners or
others
46.
that may require the Company to relinquish rights to certain of its
technologies, discoveries or potential products, or to grant licenses on
terms that are not favorable to the Company, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In the event that adequate funds are not available,
the Company's business would be adversely affected.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and notes thereto, together with the
Independent Public Accountants Report thereon, appear at pages F-1 through
F-18 of this Report on Form 10-K and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
The information required by this item is incorporated by reference to
the information set forth in the section captioned "Election of Directors,"
contained in the Company's definitive Proxy Statement for the 1998 Annual
Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the end of the Company's fiscal year ended
December 31, 1997 (the "Proxy Statement").
IDENTIFICATION OF EXECUTIVE OFFICERS
The information required by this item is incorporated by reference to
the information set forth in the section entitled "Executive Officers of the
Company" in Part I, Item 1 of this Report on Form 10-K.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The information required by this item is incorporated by reference to the
information set forth in the section entitled "Compliance with the Reporting
Requirements of Section 16(a) of the Securities Exchange Act of 1934"
contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the information set forth in the section captioned "Executive Compensation"
contained in the Proxy Statement.
47.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the information set forth in the section captioned "Security Ownership of
Certain Beneficial Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information set forth in the section captioned "Certain Transactions"
contained in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS
The financial statements required by this item are submitted in a
separate section beginning on page F-1 of this Report on Form 10-K.
FINANCIAL STATEMENTS OF GENE LOGIC INC. PAGE
Report of Independent Public Accountants F-2
Balance Sheets as of December 31, 1997 and 1996 F-3
Statements of Operations for the Years Ended December 31, 1997,
1996 and 1995
F-4
Statements of Stockholders' Equity for the Years Ended December
31, 1997, 1996 and 1995 F-5
Statements of Cash Flows for the Years Ended December 31, 1997,
1996 and 1995 F-6
Notes to Financial Statements F-7
(a)2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not required, are not
applicable, or the information is included in the Financial Statements or
Notes thereto appearing elsewhere in this Annual Report on Form 10-K.
(a)3. INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
3.1 Amended and Restated Certificate of Incorporation. (1)
48.
3.2 By-Laws, as amended and restated. (1)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen stock certificate. (1)
*10.1 Form of Indemnity Agreement entered into between Registrant and its
directors and officers. (1)
*10.2 Registrant's 1997 Equity Incentive Plan (the "Stock Plan"). (1)
*10.3 Form of Stock Option Agreement under the Stock Plan. (1)
*10.4 Form of Stock Option Grant Notice. (1)
*10.5 Registrant's Employee Stock Purchase Plan and related offering
document. (1)
*10.6 Registrant's Non-Employee Directors' Stock Option Plan. (1)
*10.7 Form of Nonstatutory Stock Option under the Non-Employee Directors'
Stock Option Plan. (1)
*10.8 Stock Restriction Agreement, dated July 31, 1996, between the
Registrant and Mark D. Gessler. (1)
*10.9 Stock Restriction Agreement, dated December 20, 1996, between the
Registrant and Michael J. Brennan. (1)
*10.10 Stock Restriction Agreement, dated July 31, 1996, between the
Registrant and Michael J. Brennan. (1)
10.11 Amended and Restated Investor Rights Agreement, dated July 15,
1997, between the Registrant and certain investors. (1)
*10.12 Employment Agreement, dated October 31, 1995, between the
Registrant and Michael J. Brennan. (1)
*10.13 Amendment to the Employment Agreement, dated July 9, 1997, between
the Registrant and Michael J. Brennan. (1)
*10.14 Employment Agreement, dated May 16, 1996, between the Registrant
and Mark D. Gessler. (1)
*10.15 Amendment to the Employment Agreement, dated July 9, 1997, between
the Registrant and Michael J. Brennan. (1)
10.16 Series A-1 Convertible Preferred Stock Purchase Warrant, dated
August 1, 1995, issued to Oxford Bioscience Partners L.P. (1)
49.
10.17 Series A-1 Convertible Preferred Stock Purchase Warrant, dated
August 1, 1995, issued to Oxford Bioscience Partners (Bermuda)
Limited Partnership. (1)
10.18 Warrant for the purchase of shares of Common Stock dated August 29,
1997, between Registrant and ARE-708 Quince Orchard, LLC. (1)
10.19 Warrant, dated April 24, 1997, issued to Venture Lending & Leasing,
Inc. (1)
10.20 Warrant issued to Hambrecht & Quist LLC. (1)
10.21 Lease Agreement, dated May 7, 1997, between Registrant and M.O.R.
XVIII Associates Limited Partnership. (1)
10.22 Lease Agreement, dated August 22, 1997, between Registrant and ARE-
708 Quince Orchard, LLC, as amended. (1)
10.23 Warrant, dated April 15, 1997, between Registrant and Comdisco,
Inc. (1)
10.24 Target Discovery Collaboration and License Agreement, dated May 27,
1997, between Registrant and Procter & Gamble Pharmaceuticals, Inc.
("Procter & Gamble"). (1)
10.25 Promissory Note, dated May 27, 1997, between Registrant and Procter
& Gamble. (1)
10.26 Drug Target and Drug Lead Discovery Collaboration Agreement, dated
September 9, 1997, between Registrant and Japan Tobacco Inc. (1)
10.27 Share Purchase Agreement, dated September 9, 1997, between
Registrant and Japan Tobacco Inc. (1)
10.28 License Agreement, dated May 22, 1996, between Registrant and Yale
University. (1)
10.29 Amendment, dated October 1, 1997, to the License Agreement between
Registrant and Yale University. (1)
10.30 Sole Commercial Patent License Agreement, dated June 15, 1997,
between Registrant and Lockheed Martin Energy Research Company. (1)
10.31 License Agreement, dated May 30, 1997, between Registrant and
Dr. Kenneth L. Beattie. (1)
10.32 Warrant, dated September 30, 1997, issued to Venture Lending &
Leasing, Inc. (1)
+10.33 Genomic Database Collaboration and License Agreement between
Registrant
50.
and N.V. Organon dated as of December 31, 1997.
*10.34 Employment Agreement, dated February 5, 1997 between the Registrant
and Keith O. Elliston.
*10.35 Amendment to Employment Agreement, dated July 9, 1997, between the
Registrant and Keith O. Elliston.
*10.36 Employment Agreement, dated September 7, 1996, between the
Registrant and Eric M. Eastman.
*10.37 Amendment to Employment Agreement, dated July 9, 1997, between the
Registrant and Eric M. Eastman.
*10.38 Employment Agreement, dated February 17, 1997, between the
Registrant and Daniel R. Passeri.
*10.39 Amendment to Employment Agreement, dated July 9, 1997, between the
Registrant and Daniel R. Passeri
11.1 Statement re: computation of per share earnings.
24.1 Power of Attorney. Reference is made to the signature page of this
Report on Form 10-K.
27.1 Financial Data Schedule.
27.2 Amended Financial Data Schedule.
- ------------------
* Indicates management compensatory plan, contract or arrangement.
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions will be filed separately with the
Securities and Exchange Commission.
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No.
333-37317) and incorporated herein by reference
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1997.
51.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Gaithersburg, County of Montgomery, State of Maryland, on the 31st day of
March, 1998.
GENE LOGIC INC.
By: /S/ MICHAEL J. BRENNAN
---------------------------------------------------
Michael J. Brennan, M.D., Ph.D.
President, Chief Executive Officer and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael J. Brennan, M.D., Ph.D. and Mark D.
Gessler, or any of them, jointly and severally, as his true and lawful
attorney-in-fact and agent, each with the full power of substitution, for him
in any and all capacities, to sign any and all 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, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that each of
said attorneys-in-fact and agents, or his substitute or substitutes, may
lawfully 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.
NAME POSITION DATE
--------------------------------- ---------------------------------- -----------------
/S/ MICHAEL J. BRENNAN President, Chief Executive March 31, 1998
--------------------------------- Officer and Director
Michael J. Brennan, M.D, Ph.D. (PRINCIPAL EXECUTIVE OFFICER)
/S/ MARK D. GESSLER Senior Vice President, March 31, 1998
--------------------------------- Corporate Development, Chief
Mark D. Gessler Financial Officer and
Secretary
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
/S/ ALAN G. WALTON Chairman of the Board March 31, 1998
---------------------------------
Alan G. Walton, Ph.D., D.Sc.
/S/ JULES BLAKE Director March 31, 1998
---------------------------------
Jules Blake, Ph.D.
/S/ CHARLES L. DIMMLER Director March 31, 1998
---------------------------------
Charles L. Dimmler III
/S/ G. ANTHONY GORRY Director March 31, 1998
---------------------------------
G. Anthony Gorry, Ph.D.
/S/ JEFFREY D. SOLLENDER Director March 31, 1998
---------------------------------
Jeffrey D. Sollender
52.
GENE LOGIC INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Public Accountants................................................................... F-2
Balance Sheets as of December 31, 1997 and 1996............................................................ F-3
Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995.............................. F-4
Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995.................... F-5
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995.............................. F-6
Notes to Financial Statements.............................................................................. F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Gene Logic Inc.:
We have audited the accompanying balance sheets of Gene Logic Inc. (a
Delaware corporation) as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1997, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gene Logic Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years ended December 31, 1997, 1996 and 1995, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Baltimore, Maryland,
February 20, 1998
F-2
GENE LOGIC INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
1997 1996
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents....................... $ 46,521,732 $ 1,137,130
Marketable securities available for sale........ 99,054 4,534,353
Due from strategic partner...................... 1,000,000 --
Prepaid expenses................................ 481,382 37,424
Other current assets............................ 890,120 67,078
------------ ------------
Total Current Assets.......................... 48,992,288 5,775,985
Property and Equipment, net....................... 4,210,513 1,757,240
Notes Receivable from Employees................... -- 102,896
Intangibles and Other Assets, net................. 769,349 182,931
------------ ------------
Total Assets.................................. $ 53,972,150 $ 7,819,052
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................ $ 181,269 $ 91,074
Accrued expenses................................ 1,370,887 997,710
Current portion of capital lease obligation..... 115,005 106,195
Current portion of long-term debt............... 433,701 --
Deferred revenue................................ 4,436,147 --
------------ ------------
Total Current Liabilities..................... 6,537,009 1,194,979
Capital Lease Obligation.......................... 224,694 339,699
Long-Term Debt.................................... 777,155 --
Other Noncurrent Liabilities...................... 365,832 --
------------ ------------
Total Liabilities............................. 7,904,690 1,534,678
------------ ------------
Commitments and Contingencies
Series A Convertible Preferred Stock, $.01 par
value; 333,333 shares authorized; 0 and 333,333
shares issued and outstanding as of December 31,
1997 and 1996, respectively; liquidation
preference of $1.50 per share................... -- 500,000
Series A-1 Convertible Preferred Stock, $.01 par
value; 462,500 shares authorized; 0 and 412,500
shares issued and outstanding as of December 31,
1997 and 1996, respectively; liquidation
preference of $1.60 per share................... -- 653,722
Series B Convertible Preferred Stock, $.01 par
value; 4,154,167 shares authorized; 0 and
4,090,909 shares issued and outstanding as of
December 31, 1997 and 1996, respectively;
liquidation preference of $2.20 per share....... -- 9,317,611
Series C Convertible Preferred Stock, $.01 par
value; 4,600,000 shares authorized; 0 shares
issued and outstanding as of December 31, 1997
and 1996; liquidation preference of $4.50 per
share........................................... -- --
Stockholders' Equity:
Common stock, $.01 par value; 60,000,000 shares
authorized; and 13,899,250 and 692,733 shares
issued and outstanding as of December 31, 1997
and 1996, respectively........................ 138,993 6,927
Preferred stock, $.01 par value; 10,000,000
shares authorized; no shares issued and
outstanding as of December 31, 1997 and
1996.......................................... -- --
Additional paid-in capital...................... 64,881,819 13,450
Deferred compensation on stock options, net..... (6,277,529) --
Unrealized loss on marketable securities........ (1,536) (13,215)
Accumulated deficit............................. (12,674,287) (4,194,121)
------------ ------------
Total Stockholders' Equity.................... 46,067,460 (4,186,959)
------------ ------------
Total Liabilities and Stockholders' Equity.... $ 53,972,150 $ 7,819,052
------------ ------------
------------ ------------
The accompanying notes are an integral part of these balance sheets.
F-3
GENE LOGIC INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------- ------------- -----------
Revenues.............................................................. $ 2,047,187 $ -- $ --
Expenses:
Research and development............................................ 6,060,721 1,741,469 485,688
General and administrative.......................................... 3,825,834 1,344,961 258,491
------------- ------------- -----------
Total expenses.................................................... 9,886,555 3,086,430 744,179
------------- ------------- -----------
Loss from operations.............................................. (7,839,368) (3,086,430) (744,179)
Interest Income, net.................................................. 745,375 221,302 --
------------- ------------- -----------
Loss before income tax expense.................................... (7,093,993) (2,865,128) (744,179)
Income Tax Expense.................................................... 100,000 -- --
------------- ------------- -----------
Net loss.......................................................... (7,193,993) (2,865,128) (744,179)
Accretion of Mandatory Redemption Value of Preferred Stock............ 1,286,173 493,513 897
------------- ------------- -----------
Net loss attributable to common stockholders...................... $ (8,480,166) $ (3,358,641) $ (745,076)
------------- ------------- -----------
------------- ------------- -----------
Basic and Dilutive Net Loss Per Common Share.......................... $ (3.97) $ (5.87) $ (3.48)
------------- ------------- -----------
------------- ------------- -----------
Shares Used in Computing Basic and Dilutive Net Loss Per Common
Share............................................................... 2,137,688 572,337 214,274
------------- ------------- -----------
------------- ------------- -----------
Pro Forma Net Loss Per Common Share................................... $ (0.90) $ (0.72)
------------- -------------
------------- -------------
Shares Used in Computing Pro Forma Net Loss Per Common Share.......... 8,004,258 3,987,098
------------- -------------
------------- -------------
The accompanying notes are an integral part of these statements.
F-4
GENE LOGIC INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
PREFERRED STOCK
---------------------------
NUMBER OF
SHARES AMOUNT
----------- -------------
Balance at December 31, 1994....... 266,666 $ 400,000
Issuance of common stock......... -- --
Issuance of Series A Convertible
Preferred Stock................ 66,667 100,000
Issuance of Series A-1
Convertible Preferred Stock,
net of issuance costs.......... 412,500 651,928
Accretion of mandatory redemption
value of preferred stock....... -- 897
Net Loss......................... -- --
----------- -------------
Balance at December 31, 1995....... 745,833 1,152,825
Issuance of common stock......... -- --
Issuance of Series B Convertible
Preferred Stock, net of
issuance costs................. 4,090,909 8,824,995
Accretion of mandatory redemption
value of preferred stock....... -- 493,513
Net change in unrealized losses
from marketable securities..... -- --
Net Loss......................... -- --
----------- -------------
Balance at December 31, 1996....... 4,836,742 10,471,333
Issuance of Series C Convertible
Preferred Stock, net of
issuance costs................. 4,444,443 19,117,260
Cancellation of common stock..... -- --
Issuance of common stock in
connection with exercise of
stock options.................. -- --
Issuance of common stock......... -- --
Issuance of warrants............. -- --
Accretion of mandatory redemption
value of preferred stock....... -- 1,286,173
Conversion of preferred stock to
common stock in connection with
initial public offering........ (9,281,185) (30,874,766)
Issuance of common stock in
connection with initial public
offering, net of issuance
costs.......................... -- --
Issuance of common stock in
connection with exercise of
warrants....................... -- --
Net change in unrealized losses
from marketable securities..... -- --
Deferred compensation from stock
options........................ -- --
Amortization of deferred
compensation................... -- --
Net Loss......................... -- --
----------- -------------
Balance at December 31, 1997....... -- $ --
----------- -------------
----------- -------------
STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------
COMMON STOCK UNREALIZED
----------------------- ADDITIONAL LOSSES ON
NUMBER OF PAR PAID-IN DEFERRED MARKETABLE ACCUMULATED
SHARES VALUE CAPITAL COMPENSATION SECURITIES DEFICIT
----------- --------- ------------ ------------ ---------- ------------
Balance at December 31, 1994....... 100,000 $ 1,000 $ -- $ -- $ -- $ (90,404)
Issuance of common stock......... 180,000 1,800 -- -- -- --
Issuance of Series A Convertible
Preferred Stock................ -- -- -- -- -- --
Issuance of Series A-1
Convertible Preferred Stock,
net of issuance costs.......... -- -- -- -- -- --
Accretion of mandatory redemption
value of preferred stock....... -- -- -- -- -- (897)
Net Loss......................... -- -- -- -- -- (744,179)
----------- --------- ------------ ------------ ---------- ------------
Balance at December 31, 1995....... 280,000 2,800 -- -- -- (835,480)
Issuance of common stock......... 412,733 4,127 13,450 -- -- --
Issuance of Series B Convertible
Preferred Stock, net of
issuance costs................. -- -- -- -- -- --
Accretion of mandatory redemption
value of preferred stock....... -- -- -- -- -- (493,513)
Net change in unrealized losses
from marketable securities..... -- -- -- -- (13,215) --
Net Loss......................... -- -- -- -- -- (2,865,128)
----------- --------- ------------ ------------ ---------- ------------
Balance at December 31, 1996....... 692,733 6,927 13,450 -- (13,215) (4,194,121)
Issuance of Series C Convertible
Preferred Stock, net of
issuance costs................. -- -- -- -- -- --
Cancellation of common stock..... (55,000) (550) (7,700) -- -- --
Issuance of common stock in
connection with exercise of
stock options.................. 152,943 1,530 21,518 -- -- --
Issuance of common stock......... 425,000 4,250 3,003,250 -- -- --
Issuance of warrants............. -- -- 42,563 -- -- --
Accretion of mandatory redemption
value of preferred stock....... -- -- -- -- -- (1,286,173)
Conversion of preferred stock to
common stock in connection with
initial public offering........ 9,281,185 92,812 30,781,954 -- -- --
Issuance of common stock in
connection with initial public
offering, net of issuance
costs.......................... 3,347,000 33,470 23,910,909 -- -- --
Issuance of common stock in
connection with exercise of
warrants....................... 55,389 554 219,447 -- -- --
Net change in unrealized losses
from marketable securities..... -- -- -- -- 11,679 --
Deferred compensation from stock
options........................ -- -- 6,896,428 (6,896,428) -- --
Amortization of deferred
compensation................... -- -- -- 618,899 -- --
Net Loss......................... -- -- -- -- -- (7,193,993)
----------- --------- ------------ ------------ ---------- ------------
Balance at December 31, 1997....... 13,899,250 $ 138,993 $ 64,881,819 $(6,277,529) $ (1,536) $(12,674,287)
----------- --------- ------------ ------------ ---------- ------------
----------- --------- ------------ ------------ ---------- ------------
The accompanying notes are an integral part of these statements.
F-5
GENE LOGIC INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------- ------------- -----------
Cash Flows From Operating Activities:
Net loss............................................................ $ (7,193,993) $ (2,865,128) $ (744,179)
Adjustments to reconcile net loss to net cash flows from operating
activities:
Depreciation and amortization..................................... 631,682 67,602 1,395
Write-off of deferred financing fee............................... -- 2,500 --
Cancellation of notes receivable.................................. 94,646 -- --
Amount due under research agreement............................... 47,500 -- --
Amortization of deferred compensation............................. 618,899 -- --
Changes in operating assets and liabilities:
Due from strategic partner........................................ (1,000,000) -- --
Prepaid expenses.................................................. (443,958) (37,424) 11,445
Other current assets.............................................. (823,052) (65,978) (100)
Intangibles and other assets...................................... (642,504) (125,810) (63,139)
Accounts payable.................................................. 90,195 73,780 17,294
Accrued expenses.................................................. 373,177 911,461 86,249
Deferred revenue.................................................. 4,436,147 -- --
Other noncurrent liabilities...................................... 408,395 -- --
------------- ------------- -----------
Net Cash Flows From Operating Activities........................ (3,402,866) (2,038,997) (691,035)
------------- ------------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment................................. (3,068,868) (1,339,207) (12,366)
Increase in notes receivable from employees......................... -- (102,896) --
Purchase of marketable securities available for sale................ -- (4,547,568) --
Proceeds from sale and maturity of marketable securities available
for sale.......................................................... 4,446,978 -- --
------------- ------------- -----------
Net Cash Flows From Investing Activities........................ 1,378,110 (5,989,671) (12,366)
------------- ------------- -----------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock.............................. 30,019,049 17,577 1,800
Proceeds from issuance of preferred stock........................... 20,000,000 9,000,000 760,000
Payments for stock issuance costs................................... (3,714,352) (175,005) (8,072)
Proceeds from equipment loan........................................ 1,084,362 -- --
Proceeds from financing agreement................................... 281,325 -- --
Repayments of capital lease obligation and equipment loan........... (261,026) (25,252) --
------------- ------------- -----------
Net Cash Flows From Financing Activities........................ 47,409,358 8,817,320 753,728
------------- ------------- -----------
Net Increase in Cash and Cash Equivalents............................. 45,384,602 788,652 50,327
Cash and Cash Equivalents, beginning of period........................ 1,137,130 348,478 298,151
------------- ------------- -----------
Cash and Cash Equivalents, end of period.............................. $ 46,521,732 $ 1,137,130 $ 348,478
------------- ------------- -----------
------------- ------------- -----------
Supplemental Disclosure:
Interest expense paid............................................... $ 97,048 $ 9,024 $ --
------------- ------------- -----------
------------- ------------- -----------
Non-Cash Transactions:
Equipment acquired under capital lease.............................. $ -- $ 471,146 $ --
------------- ------------- -----------
------------- ------------- -----------
Issuance of warrants to lessor...................................... $ 42,563 $ -- $ --
------------- ------------- -----------
------------- ------------- -----------
The accompanying notes are an integral part of these statements.
F-6
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS
Gene Logic Inc. (the Company), formerly Senatics Corporation, was
incorporated on September 22, 1994, to commercialize technologies for the
discovery of disease-associated genes for the development of therapeutic and
diagnostic products. The Company was previously in the development stage and has
yet to generate any significant revenues.
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, liabilities, revenues
and expenses in the financial statements and in the disclosures of contingent
assets and liabilities. While actual results could differ from those estimates,
management believes that actual results will not be materially different from
amounts provided in the accompanying financial statements.
NEW PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 simplifies the standards for computing earnings per share
previously found in Accounting Principles Board Opinion No. 15, "Earnings Per
Share" ("APB Opinion No. 15"). It replaces the presentation of primary EPS with
a presentation of basic EPS and requires a reconciliation of the numerator and
denominator of the basic EPS calculation to the numerator and denominator of the
diluted EPS calculation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed similarly to primary
EPS pursuant to APB Opinion No. 15.
SFAS No. 128 is effective for interim periods and fiscal years ending after
December 15, 1997, and early adoption is not permitted.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 sets standards for reporting and presentation of
comprehensive income and its components in financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997, and early adoption
is permitted. When adopted, it will require reclassification adjustments and
changes in presentation for all prior periods shown. The impact of the adoption
of SFAS No. 130 on the Company has not been determined.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information", which establishes standards for reporting
information about operating segments in annual and interim financial statements
issued to shareholders. This statement also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company plans to adopt this statement in 1998.
F-7
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as liquid investments with original
maturities of 90 days or less that are readily convertible into cash. All other
investments are reported as marketable securities available for sale. Cash and
cash equivalents as of December 31, 1997 and 1996, are comprised of:
1997 1996
------------- ------------
Cash............................................................. $ 148,982 $ 117,407
Corporate commercial paper....................................... 46,372,750 --
Money market mutual fund......................................... -- 1,019,723
------------- ------------
$ 46,521,732 $ 1,137,130
------------- ------------
------------- ------------
MARKETABLE SECURITIES AVAILABLE FOR SALE
All marketable securities are classified as available for sale. Available
for sale securities are carried at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity. Realized gains and
losses and declines in value judged to be other than temporary for available for
sale securities are included in other income.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets as follows:
Furniture and fixtures............................................ 10 years
Computers and office equipment.................................... 5 years
Lab equipment..................................................... 5 years
Equipment under capital leases and leasehold improvements are depreciated
and amortized over their useful lives, or the term of the lease, whichever is
shorter.
INTANGIBLES AND OTHER ASSETS
Other assets consists primarily of organization costs, patent costs,
trademarks and licenses. These amounts are being amortized over periods of
approximately five to seventeen years. Accumulated amortization relating to
other assets was $19,610 and $3,518 as of December 31, 1997 and 1996,
respectively. The Company's success is heavily dependent upon its proprietary
technologies. The Company depends upon a combination of patents, trade secrets,
copyright and trademark laws, license agreements, nondisclosure and other
contractual provisions and various other security measures to protect its
technology rights.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred.
F-8
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
REVENUE RECOGNITION
The Company recognizes revenue from research and development support and
technology and database access fees as they are earned under the terms of the
agreement. Revenue is deferred for fees received before they are earned.
Revenues related to the achievement of certain milestones are recognized when
earned.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and net operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operations in the period that includes the enactment
date.
STOCK OPTION PLANS
Prior to January 1, 1996, the Company's policy was to account for its stock
option plans in accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No.
25"), and related interpretations. As such, compensation expense is recorded on
the date of grant only if the current fair value of the underlying stock exceeds
the exercise price. On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value based method defined in SFAS No. 123
had been applied. The Company elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
The Company uses the Black-Scholes option pricing model to estimate the fair
value of options and warrants granted.
PRO FORMA NET LOSS PER COMMON SHARE
Pro forma net loss per common share is computed using the weighted average
number of shares of common stock outstanding giving effect to the conversion of
convertible preferred shares that automatically converted to common stock upon
completion of the Company's initial public offering (the "IPO") (using the
if-converted method) from the original date of issuance. Common equivalent
shares from stock options and warrants are excluded from the computation for all
periods as their effect is antidilutive.
F-9
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. MARKETABLE SECURITIES:
The following is a summary of the Company's investment portfolio as of
December 31, 1997 and 1996:
GROSS
AMORTIZED UNREALIZED
COST LOSSES FAIR VALUE
------------ ----------- ------------
December 31, 1997
Unit Investment Trust............................... $ 100,590 $ (1,536) $ 99,054
Government Securities............................... -- -- --
------------ ----------- ------------
Total............................................. $ 100,590 $ (1,536) $ 99,054
------------ ----------- ------------
------------ ----------- ------------
December 31, 1996
Unit Investment Trust............................... $ 2,483,352 $ (13,215) $ 2,470,137
Government Securities............................... 2,064,216 -- 2,064,216
------------ ----------- ------------
Total............................................. $ 4,547,568 $ (13,215) $ 4,534,353
------------ ----------- ------------
------------ ----------- ------------
All marketable securities mature within one year or have no stated maturity.
As of December 31, 1997 and 1996, all of the Company's investments were
classified as current as the Company may not hold its investments until maturity
in order to take advantage of market conditions. During the year ended December
31, 1997, a portion of the Unit Investment Trust was sold for total proceeds of
$2,407,071, resulting in realized losses of $11,679.
NOTE 3. PROPERTY AND EQUIPMENT:
Property and equipment includes the following as of December 31, 1997 and
1996:
1997 1996
------------ ------------
Furniture and fixtures............................................ $ 190,787 $ 105,061
Computers and office equipment.................................... 2,096,015 276,912
Lab equipment..................................................... 1,765,756 932,479
Lab equipment under capital lease................................. 471,146 471,146
Leasehold improvements............................................ 367,883 37,121
------------ ------------
4,891,587 1,822,719
Less--Accumulated depreciation.................................... (681,074) (65,479)
------------ ------------
Property and Equipment, net....................................... $ 4,210,513 $ 1,757,240
------------ ------------
------------ ------------
Depreciation expense was $615,595, $64,779 and $700 for the years ended
December 31, 1997, 1996 and 1995, respectively.
F-10
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. ACCRUED EXPENSES:
Accrued expenses consists of the following as of December 31, 1997 and 1996:
1997 1996
------------ ----------
Property additions.................................................. $ 782,732 $ 877,962
Professional fees................................................... 418,596 56,039
Payroll taxes and benefits.......................................... 133,730 63,709
Consulting.......................................................... 35,829 --
------------ ----------
Total............................................................. $ 1,370,887 $ 997,710
------------ ----------
------------ ----------
NOTE 5. LICENSE ARRANGEMENTS:
The proprietary rights and technical information covered by various patent
applications have been licensed by the Company from third parties. These
licenses will continue for the life of the respective patent or until terminated
by either party. The license costs are being amortized over the useful life of
the related patents. The agreements call for the payment of royalties over the
life of the patents or a shorter life if no patents are issued.
NOTE 6. STRATEGIC ALLIANCES:
During May 1997, the Company entered into a 4 1/2-year strategic alliance
with Procter & Gamble Pharmaceuticals Inc., a division of Procter & Gamble
Company ("Procter & Gamble") for the discovery of drug targets in the field of
heart failure. Payments by Procter & Gamble to the Company in the form of
committed technology access fees and research funding will total a minimum of
$10.1 million if the research program continues for its full term and the
Company performs its research obligations under the agreement. Under the
alliance, approximately $1,167,000 has been recognized as revenue during the
year ended December 31, 1997. Procter & Gamble will be obligated to make
additional payments to the Company for the achievement of specified target
discovery and related product development and associated regulatory milestones.
Procter & Gamble will also pay the Company royalties on worldwide net sales of
all products that may result from the alliance. Procter & Gamble also has the
option to expand the alliance to include two additional fields upon terms,
including committed research funding, identical to those covering the initial
program in heart failure.
During September 1997, the Company entered into a 5-year strategic alliance
with Japan Tobacco Inc. ("Japan Tobacco") for the discovery of drug targets and
drug leads in the field of renal disease. Payments by Japan Tobacco to the
Company in the form of committed technology and database access fees and
research funding will total a minimum of $15.0 million if the research program
continues for its full term and the Company performs its research obligations
under the agreement. As part of the alliance and during the research term of the
alliance agreement, the Company granted Japan Tobacco a non-exclusive license to
the Gene Express-TM- Normal database, and the Company intends to use its
Flow-thru Chip-TM- technology for screening for drug leads in renal disease or,
if Japan Tobacco has exercised its options to additional disease indications,
such other disease indications. During the year ended December 31, 1997, the
Company has recognized approximately $878,000 of revenue under the alliance. In
addition, Japan Tobacco also made a $3.0 million investment in common stock of
the Company at the IPO. Japan Tobacco will be obligated to make additional
payments to the Company for the achievement of specified target discovery and
related product development and associated regulatory milestones. Japan Tobacco
will also
F-11
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. STRATEGIC ALLIANCES (CONTINUED):
pay the Company royalties on worldwide net sales of all products that may result
from targets discovered pursuant to the alliance. Japan Tobacco also has the
option to expand the alliance to include two other fields upon terms, including
committed research funding, identical to those covering the initial program in
renal disease.
During December 1997, the Company entered into a 3-year strategic alliance
with N.V. Organon ("Organon"), a pharmaceutical business unit of Akzo Nobel NV,
for the discovery of drug targets. Payments by Organon to the Company in the
form of committed database access fees and research funding will total a minimum
of $12.5 million if the research program continues for its full term and the
Company performs its research obligations under the agreement. As part of the
alliance and during the research term of the alliance agreement, the Company
granted Organon a non-exclusive license to the Gene Express-TM- Normal database.
Organon will be obligated to make additional payments to the Company for the
achievement of specified target discovery and related product development
milestones. Organon will also pay the Company royalties on worldwide net sales
of all products that may result from targets discovered pursuant to the
alliance.
Under the terms of the strategic alliance agreements, payments for
technology and database access fees and research and development support are
recognized as revenue ratably over the period for which the payment is made.
Payments related to the achievement of certain milestones are recognized as
revenue when the milestones are achieved.
The Company's strategy for developing and commercializing pharmaceutical
products based on its target discoveries depends on the formation of strategic
alliances with pharmaceutical companies. The Company has established three such
alliances in 1997. There can be no assurance that the Company will be able to
establish additional strategic alliances or that any alliances established will
be successful.
NOTE 7. INCOME TAXES:
The actual income tax expense for the years ended December 31, 1997, 1996
and 1995, is different from the amount computed by applying the statutory
federal income tax rates to losses before income tax expense. The reconciliation
of these differences is as follows:
1997 1996 1995
------------- ------------ -----------
Tax benefit at federal statutory rate............... $ (2,411,958) $ (977,518) $ (253,021)
State income taxes, net of federal income tax
effect............................................ (326,324) (132,827) (34,381)
Other............................................... 1,871 (49,813) 9,799
Increase in valuation allowance..................... 2,836,411 1,160,158 277,603
------------- ------------ -----------
Income tax expense.................................. $ 100,000 $ -- $ --
------------- ------------ -----------
------------- ------------ -----------
F-12
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES (CONTINUED):
The tax effect of cumulative temporary differences at December 31, 1997,
1996 and 1995, follows:
1997 1996 1995
------------- ------------- -----------
Deferred Tax Assets:
Japanese withholding............................. $ 100,000 $ -- $ --
Tax carryforwards................................ 4,065,913 1,128,927 --
Start-up costs................................... 312,443 403,889 316,937
Accrued vacation................................. 38,892 7,457 --
------------- ------------- -----------
4,517,248 1,540,273 316,937
Less: Valuation allowance........................ (4,313,506) (1,477,095) (316,937)
------------- ------------- -----------
Net deferred tax asset......................... $ 203,742 $ 63,178 $ --
------------- ------------- -----------
------------- ------------- -----------
Deferred Tax Liabilities:
Depreciation..................................... $ 117,984 $ 51,380 $ --
Prepaid expenses................................. 44,745 2,046 --
Capital leases................................... 41,013 9,752 --
------------- ------------- -----------
Net deferred tax liabilities................... $ 203,742 $ 63,178 $ --
------------- ------------- -----------
------------- ------------- -----------
Net operating loss carryforwards for income tax purposes are approximately
$10,384,000, as of December 31, 1997. The Company also has research and
development tax credit carryforwards of approximately $279,000 as of December
31, 1997. The carryforwards, if not utilized, will expire in increments through
2012. Utilization of the net operating losses and credits may be subject to an
annual limitation, due to the ownership change limitations provided by the
Internal Revenue Code of 1986.
NOTE 8. LONG-TERM DEBT:
Long-term debt at December 31, 1997, consists of the following:
Equipment loan.................................................. $ 929,531
Note payable.................................................... 281,325
---------
1,210,856
Less--Current portion........................................... (433,701)
---------
Total long-term debt............................................ $ 777,155
---------
---------
As of December 31, 1997, principal payments on long-term debt for the
following years are as follows:
Year ending December 31,
1998....................................... $433,701
1999....................................... 371,730
2000....................................... 299,480
2001....................................... 105,945
----------
$1,210,856
----------
----------
F-13
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. LONG-TERM DEBT (CONTINUED):
In March 1997, the Company entered into a loan agreement for the purchase of
laboratory and computer equipment. The Company may borrow up to $1.5 million,
bearing interest at 9.0%. In April 1997, the Company borrowed $1,084,362 under
this agreement. The loan will be repaid in 48 equal monthly installments. The
Company has granted the lender a security interest, collateralized by all of the
equipment and fixtures acquired under the loan. In conjunction with the
agreement, the Company granted warrants to the lender to purchase 30,051 shares
of the Company's Series B Convertible Preferred Stock at an exercise price of
$2.20 per share.
In December 1997, the Company entered into a note payable to finance the
purchase of directors and officers' insurance. The note bears interest at 8.0%
and is due in regular monthly installments of $16,747 through June 1999.
NOTE 9. CONVERTIBLE PREFERRED STOCK:
Four series of mandatory redeemable preferred stock have been issued: Series
A Convertible Preferred Stock ("Series A"), Series A-1 Convertible Preferred
Stock ("Series A-1"), Series B Convertible Preferred Stock ("Series B") and
Series C Convertible Preferred Stock ("Series C"). Each holder of common and
preferred stock is entitled to one vote for each share held.
During 1995, the Company sold 66,667 shares of Series A stock for $100,000
and 412,500 shares of Series A-1 stock for $660,000. Warrants to purchase an
additional 50,000 shares of Series A-1 stock at an exercise price of $1.60 per
share were issued and expire August 2005.
During 1996, the Company sold 4,090,909 shares of Series B stock for $9.0
million.
During July 1997, the Company sold 4,444,443 shares of Series C stock for
net proceeds of approximately $19.1 million. The Company also issued a warrant
for an additional 48,889 shares of Series C stock at an exercise price of $4.50.
At the time of issuance, the fair value of this warrant, approximately $118,000,
was recorded as Series C stock on the Company's balance sheet. The fair value of
this warrant was calculated using the Black-Scholes option pricing model using
the same assumptions used for options granted during the period (see Note 13).
This warrant was exercised by the warrantholder concurrent with the Company's
IPO.
All outstanding shares of preferred stock were converted to common stock in
conjunction with the Company's IPO on a one-to-one basis.
NOTE 10. STOCKHOLDERS' EQUITY:
In October 1996, an officer of the Company resigned. In January 1997, in
connection with the resignation, the 55,000 shares of the Company's common stock
held by the officer were canceled in satisfaction of the $50,000 note receivable
and accrued interest obligation from the officer to the Company (see Note 14).
During November 1997, the Company completed an IPO of 3,000,000 shares of
common stock at a price of $8 per share. In December 1997, the underwriters
exercised their over-allotment option on an additional 347,000 shares. Net
proceeds of the IPO (not including the concurrent Japan Tobacco investment
described in Note 6), after underwriting commissions and expenses, were
approximately $23,944,000. Concurrent with the IPO, a note receivable of $50,000
plus interest from an officer of the Company was
F-14
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. STOCKHOLDERS' EQUITY (CONTINUED):
forgiven, the vesting of certain options was accelerated and the authorized
capital stock of the Company was increased to 60,000,000 shares of common stock
and 10,000,000 shares of preferred stock.
NOTE 11. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASE
During October 1997, the Company renegotiated its current lease of
laboratory and office space under an agreement which expires February 28, 1998,
with an option to continue on a month-to-month basis with 60 days written notice
to terminate. The Company terminated this lease in February 1998 once the
relocation to the new facility was complete. In addition, the Company entered
into an operating sublease for office space in Berkeley, California. The lease
term is for 22 months with monthly rent payments of $9,158.
During August 1997, the Company entered into an operating lease for new
laboratory and office space. The Company is responsible for the design and
renovation of an existing facility owned by the lessor. These costs will be
funded by the lessor while the responsibility for performance and liability
during construction remains with the Company. The lease term is ten years with
monthly payments of $89,211 plus 3% annual inflation; however, monthly payments
could increase if construction costs exceed a certain amount. Rent expense on
the lease is being recognized on a straight-line basis over its term. The lease
also requires the Company to pay for building operating costs. In addition to
future minimum lease payments, the Company issued a warrant to purchase 20,000
shares of common stock at an exercise price of $5.40 per share in connection
with the lease. The fair value of the warrant, approximately $43,000, is being
recorded as rent expense over the term of the lease. The fair value of the
warrant was calculated using the Black-Scholes option pricing model using the
same assumptions used for options granted during the period (see Note 13). This
warrant was exercised by the lessor concurrent with the Company's IPO.
Future minimum lease payments on these operating leases as of December 31,
1997, are as follows:
Year ending December 31,
1998....................................... $1,183,110
1999....................................... 1,169,516
2000....................................... 1,138,572
2001....................................... 1,172,729
2002....................................... 1,207,912
2003 and thereafter........................ 6,485,463
------------
$12,357,302
------------
------------
Rent expense for the years ended December 31, 1997, 1996 and 1995, was
$492,559, $238,930 and $0, respectively.
CAPITAL LEASE
During 1996, the Company entered into a capital lease to purchase equipment
for $471,146. Accumulated amortization for this equipment was $147,239 and
$29,447 at December 31, 1997 and 1996,
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GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
respectively. Payments during the years ended December 31, 1997 and 1996,
totaled $106,195 and $25,252, respectively. Future minimum lease payments as of
December 31, 1997, are as follows:
Year ending December 31,
1998........................................................... $ 137,104
1999........................................................... 137,104
2000........................................................... 102,827
---------
Total minimum lease payments................................... 377,035
Less: Amounts representing imputed interest...................... (37,336)
---------
Present value of net minimum payments.......................... 339,699
Less: Current portion............................................ (115,005)
---------
Noncurrent portion of capital lease obligation................... $ 224,694
---------
---------
In conjunction with this lease agreement, the Company granted a warrant to
the lessor to purchase 13,636 shares of the Company's Series B Convertible
Preferred stock at an exercise price of $2.20 per share. Such warrant expires
five years from the date of the Company's IPO (see Note 10).
CONTINGENCIES
Clinical trials, manufacturing, marketing and sale of any of the Company's
partners' potential therapeutic or diagnostic products may expose the Company to
liability claims from the use of such pharmaceutical products. The Company
currently does not carry product liability insurance.
NOTE 12. 401(K) RETIREMENT PLAN:
During 1996, the Company established the Gene Logic Inc. 401(k) Retirement
Plan (the 401(k) Plan) for its employees under Section 401(k) of the Internal
Revenue Code. Under this plan, all employees over 21 years of age and with at
least six months of service with the Company are eligible to contribute from 2%
to 15% of their salary. Employee contributions are 100% vested. The Company is
not required to make any contributions to the 401(k) Plan and has not made any
contributions through December 31, 1997.
NOTE 13. STOCK BASED COMPENSATION:
During 1996, the Company instituted a stock plan (the "Stock Plan"), which
was amended and restated in 1997, whereby the Company's compensation committee
(the Committee), at its discretion, can grant options, award stock or provide
opportunities to make direct purchase of stock to employees, officers, directors
and consultants of the company and related corporations. The Stock Plan is
authorized to grant options of up to 6,100,000 shares of common stock. During
1997, the Company adopted a Directors' Stock Plan (the "Directors' Plan") to
provide for granting of options to non-employee directors of the Company. The
Directors' Plan is administered by the Committee and is authorized to grant
options of up to 125,000 shares of common stock. No options have been granted
under the Directors' Plan. Options are to be granted at the fair market value of
the common stock at the grant date. The options, awards and opportunities to
purchase stock expire at the earlier of termination or the date specified by the
Committee at the date of grant, but not more than ten years. During 1997, the
Company adopted an
F-16
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. STOCK BASED COMPENSATION (CONTINUED):
Employee Stock Purchase Plan (the "Purchase Plan") covering an aggregate of
250,000 shares of common stock. The Purchase Plan allows employees to purchase
common stock of the Company, through payroll deductions of up to a maximum of
15% of their salary, at 85% of the closing price of the shares at the time of
purchase. No shares were issued to employees at December 31, 1997.
The following is a rollforward of option activity for the years ended
December 31, 1997 and 1996:
1997 1996
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- ----------- ---------- -----------
Outstanding, beginning of period............... 424,000 $ 0.15 -- $ --
Granted...................................... 2,281,881 1.31 524,000 0.12
Exercised.................................... (152,943) 0.15 (100,000) 0.01
Canceled..................................... (55,578) 0.15 -- --
---------- ----------
Outstanding, end of period..................... 2,497,360 1.21 424,000 0.15
---------- ----------
---------- ----------
Exercisable, end of period..................... 859,315 0.35 77,710 0.15
---------- ----------
---------- ----------
Weighted average fair value of options
granted...................................... $ 3.22 $ 0.05
---------- ----------
---------- ----------
Available for grant at year end................ 3,249,697 1,376,000
---------- ----------
---------- ----------
During the year ended December 31, 1997, the Company granted options with
exercise prices below fair value. The Company has recorded deferred compensation
of $6,896,428 at December 31, 1997, and compensation expense of $618,899 for the
year then ended related to these options.
The following table provides further information on options granted with
exercise prices below fair value, compared to options granted with exercise
prices equal to fair value for the year ended December 31, 1997.
WEIGHTED
WEIGHTED WEIGHTED AVERAGE FAIR
AVERAGE AVERAGE VALUE OF
EXERCISE OPTION FAIR COMMON STOCK
SHARES PRICE VALUE ON GRANT DATE
---------- ----------- ------------- -------------
Options whose exercise price equals the fair
value of the stock on the grant date...... 53,000 $ 5.27 $ 2.36 $ 5.27
Options whose exercise price is less than
the fair value of the stock on the grant
date...................................... 2,228,881 1.22 3.24 4.31
F-17
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. STOCK BASED COMPENSATION (CONTINUED):
The following table summarizes information about stock options outstanding
at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -------------------------
WEIGHTED NUMBER
NUMBER AVERAGE WEIGHTED EXERCISABLE WEIGHTED
OUTSTANDING AT REMAINING AVERAGE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE
- ------------------------- -------------- ----------- ---------- ------------- ----------
$0.15-$0.99.............. 1,203,979 9.1 Years $ 0.16 728,363 $ 0.15
$1.00-$2.50.............. 1,204,381 9.7 Years $ 1.95 126,778 $ 1.38
$2.51-$8.38.............. 89,000 9.8 Years $ 5.31 4,174 $ 4.30
During 1996, an officer of the Company purchased 100,000 shares of common
stock for $0.15 per share under the Plan.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under the Plan,
consistent with the method of SFAS No. 123, the Company's net loss and loss per
common share would have been changed to the pro forma amounts for the years
ended December 31, 1997, 1996 and 1995 as indicated below:
1997 1996 1995
------------- ------------- -----------
Net loss:
As reported...................................... $ (7,193,993) $ (2,865,128) $ (744,179)
Pro forma........................................ (7,243,486) (2,873,805) (744,179)
Net loss per common share:
As reported...................................... $ (3.97) $ (5.87) (3.48)
Pro forma........................................ (3.99) (5.88) (3.48)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model, with the following assumptions:
Expected volatility................................ 60.0%
Risk-free interest rates........................... 5.72% to 5.86%
Expected lives..................................... 1-3 years
Dividend rate...................................... 0%
NOTE 14. RELATED PARTY TRANSACTIONS:
During 1996, the Company made loans to two officers of the Company of
$50,000 each to offset relocation costs. These notes receivable were secured by
common stock previously issued to the officers. In January 1997, one of these
notes was cancelled (see Note 10). The remaining note was forgiven concurrent
with the Company's IPO (see Note 10).
F-18