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UNITED STATES
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, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission File Number: 0-27488
INCYTE PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 94-3136539
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
3174 Porter Drive, Palo Alto, California 94304 (650) 855-0555
(Address of principal executive offices) (Registrant's telephone number,
including area code)
Securities registered to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, par value $.001 per share
Series A Participating Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [X]Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates (based upon
the closing sale price on the Nasdaq National Market on February 28, 1999) was
approximately $782,993.
As of February 28, 1999, there were 27,901,268 shares of Common Stock, $.001
per share par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors), 11, 12 and 13 of Part III incorporate by reference
information from the registrant's proxy statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the registrant's 1999 Annual Meeting of Stockholders to be held on
June 8, 1999.
ITEM 1. BUSINESS
When used in this Report, the words "expects," "anticipates," "estimates,"
and similar expressions are intended to identify forward-looking statements.
These statements, which include statements as to the performance and utility of
the Company's and diaDexus' products and services, and future products and
services, are subject to risks and uncertainties that could cause actual results
to differ materially from those projected. These risks and uncertainties
include, but are not limited to, those risks discussed below, as well as, the
extent of utilization of genomic information by the pharmaceutical industry in
both research and development; risks relating to the development of new database
products and their use by potential collaborators of the Company; the impact of
technological advances and competition; the ability of the Company to obtain and
retain customers; competition from other entities; and the risks set forth below
under Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Factors That May Affect Results." These forward-looking
statements speak only as of the date hereof. The Company expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
OVERVIEW
Incyte Pharmaceuticals, Inc. ("Incyte" or the "Company"), is a leading
provider of genomic information-based tools and services. These tools and
services include database products, genomic data management software tools,
microarray-based gene expression services, genomic reagents and related
services. The Company focuses on genomic information-based tools that can assist
pharmaceutical and biotechnology companies in the discovery and development of
new drugs and assist agricultural companies in the development of new
agricultural products.
The Company's genomic databases integrate bioinformatics software with
proprietary and, when appropriate, publicly available genomic information to
create information-based tools used by pharmaceutical and biotechnology
companies in drug discovery and development. In building the databases, the
Company utilizes high-throughput, computer-aided gene sequencing and analysis
technologies to identify and characterize the expressed genes of the human
genome, as well as certain animal, plant and microbial genomes. By searching the
genomic databases, customers can integrate and analyze genomic information from
multiple sources in order to discover genes that may represent the basis for new
biological targets, therapeutic proteins, or gene therapy, antisense or
diagnostic products. The Company's genomic products and services are designed to
assist the pharmaceutical and biotechnology industries in utilizing genomic
information to accelerate the discovery and development of new diagnostic and
therapeutic products. The Company's products and services can be applied to gene
and target discovery, functional genomic studies, preclinical pharmacology and
toxicology studies, and can aid in understanding and analyzing the results of
clinical development studies.
The Company currently provides access to its genomic databases through
collaborations with pharmaceutical, biotechnology, and agricultural companies
worldwide. As of December 31, 1998, twenty-two companies had entered into
multi-year database agreements to obtain access to the Company's databases on a
non-exclusive basis. Revenues from these subscribers generally include database
access fees. The Company's database agreements also provide for future milestone
payments and royalties from the sale of products derived from proprietary
information contained in one or more database modules.
The Company's portfolio of database modules includes the LifeSeq human
gene sequence and expression database, the LifeSeq FL database of full-length
human genes, the LifeSeq AtlasTM mapping database, the PathoSeqTM microbial
genomic database, the ZooSeqTM animal genomic database, the LifeToolsTM suite of
bioinformatics software programs, the LifeArrayTM gene expression data
management and analysis software, and a variety of custom database and
sequencing services. Each database module consists of a relational database that
runs on UNIX-based client/server networks and incorporates HyperText Markup
Language ("HTML") and JAVA graphical user interfaces enabling subscribers to use
multiple search tools and browse various database modules. The databases are
available using either Oracle or Sybase database architectures and operate on
Sun Microsystems, Compaq Computer Corporation and Silicon Graphics workstations.
BACKGROUND
Genes, found in all living cells, are comprised of DNA, which in turn is
comprised of nucleotide base pairs or bases. Genes provide the necessary
information to code for the synthesis of proteins, the molecules which conduct
all functions within a cell. Many human diseases are associated with the
inadequate or inappropriate presence, production or performance of proteins. As
such, pharmaceutical and biotechnology companies often seek to develop drugs
that will bind to a targeted protein involved in disease in order to regulate,
inhibit or stimulate its biological activity. Other proteins, known as
therapeutic proteins, have direct biological activity and may be capable of
treating disease. Insulin and human growth hormone are examples of therapeutic
proteins. Understanding the role genes play in disease, and the protein targets
or therapeutic proteins which they encode, has thus become a significant area of
interest and research within the pharmaceutical and biotechnology industries.
Sequencing
One frequently employed method for determining gene function involves the
grouping of genes into "related" families based on similarities in DNA sequence.
DNA sequencing is a process that identifies the order in which the bases in DNA
are arranged in a particular section of DNA, or DNA fragment. Once a gene's
sequence is known, its function may be inferred by comparing its sequence with
the sequences of other human genes of known function, as genes with similar, or
homologous sequences may have related functions. Comparing gene sequences across
species has also become a useful tool for understanding gene function, as
frequently it is easier to assess gene function in lower organisms than it is in
humans.
Gene Expression
Another method used to determine gene function focuses on the analysis of
gene activity within a cell. When a gene is active, its DNA is copied into
messenger RNA or "mRNA." The population of mRNA within a cell can be isolated
and converted into copy DNA or "cDNA," thereby creating a cDNA library that
represents the population of mRNAs present in a cell type at a particular time.
In a process called "gene expression profiling," high-throughput cDNA
sequencing, computer analysis and microarray technologies can be used to
identify which genes are active or inactive and, if active, at what levels.
Expression profiles provide a more detailed picture of cellular genetics than
conventional laboratory techniques by indicating which genes, both known and
novel, are specifically correlated to discrete biological events in normal and
disease-state cells.
Microarray Technology
Microarray technology can be used to analyze the expression patterns or
sequence variations in a large number of genes simultaneously. A microarray
consists of DNA fragments attached to a surface, usually a glass, plastic or
silicon slide, in a grid-like formation. The DNA fragments serve as probes to
detect the presence of specific populations of mRNA within normal and diseased
cells. The DNA fragments on the microarray will detect specific mRNA
populations by pairing with the complementary cDNA that has been prepared from
mRNA samples from normal and diseased cells. Microarray technology allows the
fabrication of very small grids containing probes for thousands of different
genes. Microarrays can be used in drug discovery and development, to evaluate
the behavior of a large number of related genes in a diseased tissue or in
response to treatment with a new drug or in diagnostic testing to quickly detect
the presence of a large number of disease markers.
Bioinformatics
Due to improvements in sequencing technology, genomic information from both
public and private sources is increasing at a dramatic rate. As a result,
bioinformatics, or the use of computers and sophisticated algorithms to store,
analyze and interpret large volumes of biological data, is essential in order to
capture value from this growing pool of data. To date, the main focus of
bioinformatic and genomic tools has been drug discovery. The Company believes
these tools, as well as tools under development, will also assist researchers
with the preclinical and clinical development process. For example, with the
help of new technology and bioinformatic analyses scientists may be able to
correlate genetic and physiologic response in preclinical animal models, examine
gene expression profiles in drug-treated animals to assess the pharmacological
activity and toxicity of new drugs, and stratify clinical trial patients
according to their gene expression profiles.
Single Nucleotide Polymorphism ("SNP") Discovery
Due to genetic variation, individuals may respond differently to treatment
with the same drug. Few, if any, FDA-approved drugs are capable of successfully
treating every individual with a targeted disease. The differences in patients'
drug responses are believed to result in part from differences in the sequence
of nucleotides within genes. The most common form of sequence variation is known
as a single nucleotide polymorphism or "SNP." A SNP is defined as a single base
difference within the same DNA region between two individuals. Some SNPs are
"silent" and not associated with a disease or a patient's ability to respond to
a particular therapy, and some SNPs occur at a frequency that is too low to
justify large-scale patient screening. Thus, researchers need to do more than
identify SNPs; they must identify the most frequently occurring SNPs and
identify those which correlate with a patient's disease prognosis or ability to
respond to a drug. Through its acquisition of Hexagen Limited ("Hexagen") in
September 1998, the Company is developing fSSCP technology, a high-throughput
SNP discovery technology. fSSCP is particularly useful for identifying SNPs in
genes not expressed or more rarely expressed. This gel-based system detects SNPs
in multiple samples simultaneously by observing changes in the tertiary
structure of single stranded DNA fragments due to base pair changes. Incyte is
contributing technologies in the areas of electrophoresis, fluorescence
chemistries, sequencing and bioinformatics in order to continue to develop and
improve the accuracy and efficiency of this technology.
Gene Mapping
Mapping refers to the determination of the physical location of a gene in
the genome and the relative position of that gene to other genes along a
chromosome. Physiological processes and associated diseases can be extremely
complex and involve many genes. A gene can activate one or more different genes
forming a cascade of genetically controlled events or a "pathway." When the
genes involved in such a pathway are located within neighboring regions of DNA,
mapping can allow the location of one member of the pathway to be used to
identify the other members. In addition, genetically inherited diseases that
have been passed from generation to generation may be associated with visible
chromosome alterations, such as deletions of large segments of the chromosome or
insertions within the chromosome. These physical chromosome abnormalities allow
researchers to identify the DNA regions and genes that have a critical role in
causing the disease.
PRODUCTS AND SERVICES
The Company's current products and services include an integrated platform
of genomic databases, data management software tools, microarray-based gene
expression services, and related reagents.
GENOMIC DATABASES. The Company provides its database collaborators with
non-exclusive database access. Database collaborators receive periodic data
updates, typically monthly, as well as software upgrades and additional search
and analysis tools when they become available. The fees and the period of access
are negotiated with each company, with the initial term typically lasting for a
period of three years. Fees generally consist of database access fees,
non-exclusive or exclusive license fees and option fees corresponding to patent
rights on proprietary sequences. The Company may also receive future milestone
and royalty payments from database collaborators from the sale of their products
derived from the Company's technology and database information. Researchers can
browse not only Company-generated data, but also public domain information
provided through HTML links to the World Wide Web. The Company currently offers
the following database modules:
- - LifeSeq Database. The LifeSeq human gene sequence and expression
database consists of a proprietary sequence database module linked to a
proprietary gene expression database module. Researchers can easily move from
one module to another through HTML-based graphical interfaces. The sequence
database contains the Company's computer-edited gene sequence files and is used
by researchers to identify related or homologous genes. For example, a scientist
may wish to identify new genes homologous to a gene identified through their own
research and believed to be linked to a disease. The expression database
contains biological information about each sequence in the Company's sequence
database, including tissue source, homologies, and annotations regarding
characteristics of the gene sequence. Most importantly, the expression database
contains a gene expression profile for every tissue in the database combined
with proprietary bioinformatics software to allow collaborators to browse data
and compare differences in gene expression across cells, tissues, and different
disease states. Thus, the expression database can be used to assist researchers
in correlating the presence of specific genes to discrete biological events in
normal and disease-state cells. The Company continually adds additional
sequences and expression data from normal and diseased tissues to the LifeSeq
database.
- - LifeSeq FL Database. This database contains the full-length gene
sequences for DNA fragments of medically interesting genes found in the LifeSeq
human gene sequence and expression database. The Company's scientists and the
collaborators select genes for inclusion in this database based on a number of
factors, including their sequence homologies to known therapeutically important
gene families, unusual tissue or disease-related expression patterns and
chromosomal location. A variety of methods, including a proprietary,
high-throughput cloning technology and algorithms to identify secreted proteins,
are used to identify medically interesting genes and obtain the full-length
sequence.
- - LifeSeq AtlasTM Database. The LifeSeq Atlas database contains the
chromosomal locations for genes and gene fragments identified in the Company's
LifeSeq human gene sequence and expression database that the Company believes
may be of utility to its database collaborators. In particular, this database
may be useful for companies engaged in positional cloning, a technique used to
identify genes believed to be responsible for genetic disorders, which relies
heavily on comparative analysis of the chromosomes of members of families
afflicted by a disease.
- - LifeSeq Gold Database. The LifeSeq Gold database combines the Company's
LifeSeq, LifeSeq FL, and GeneAlbum into one enhanced database. LifeSeq Gold uses
a novel method to assemble cDNA sequence fragments (ESTs) into genes, providing
increased sensitivity for distinguishing between closely related sequences,
including splice variants.
- - PathoSeqTM Database. The PathoSeq database currently contains proprietary
and public domain genomic data for over three dozen medically relevant bacterial
and fungal microorganisms. With drug-resistant strains of bacteria and other
microorganisms posing an increasing threat to world health, pharmaceutical and
biotechnology companies are searching for genes unique to these pathogens that
will aid in the development of new drugs to treat infectious disease. PathoSeq's
software and bioinformatic tools edit all sequence data to remove artifacts and
contamination, assemble all sequences, display the relative position of the DNA
coding regions, and identify genes either common among multiple microorganisms
or unique to one microbial genome. The Company believes PathoSeq can help
researchers understand the biology of microorganisms, study the mechanisms of
drug resistance, identify genes that may make effective drug targets, and,
ultimately, develop new therapeutics to treat and prevent infectious disease.
- - ZooSeqTM Database. The ZooSeq database was developed to aid
pharmaceutical and biotechnology companies in designing and evaluating
preclinical drug studies in animals, a crucial step in the drug development
process. ZooSeq contains genomic information from animals commonly used in
preclinical drug pharmacology and toxicology studies. The database currently
contains gene sequence and expression data for the rat, mouse, and monkey,
animals most commonly used in preclinical drug toxicology and efficacy studies.
ZooSeq is designed to allow scientists to compare gene sequence, expression
patterns and function across species. By correlating a drug's effects on an
animal with the animal's genetic makeup, and then cross-referencing these data
with the Company's human LifeSeq database, a researcher may better predict the
drug's efficacy and side effects before moving to human clinical trials.
- - Public Domain Databases. The LifeSeq PD and PathoSeqTM PD databases use
the same database architecture as the LifeSeq and PathoSeq databases, but they
contain cDNA sequence data obtained solely from public-domain sources and do not
include the Company's proprietary sequences.
SATELLITE DATABASE SERVICES AND CONTRACT SEQUENCING. To construct
satellite databases, the Company generates sequence data and gene expression
profiles using genetic material from tissues or cells selected by the database
subscribers. These databases are provided exclusively for a negotiated time
period in a format compatible with the Company's non-exclusive database modules.
These tissues and cells can be provided by the database subscribers from their
own tissue banks, internal research programs or from other sources. In addition,
in 1998 the Company began to offer high volume contract sequencing services to
pharmaceutical, biotechnology, agricultural and academic researchers.
SOFTWARE. The Company has developed an enterprise-wide genomic information
management system capable of updating, reprocessing and integrating genetic data
from multiple sources and from different organisms. This system integrates the
Company's proprietary, subscriber-specific and public domain data, and is
capable of comparing information from humans, animals, microbes, fungi and
plants. The system incorporates the architecture necessary to integrate the
Company's software tools with three-dimensional visualization tools, data mining
programs and project management capabilities, and is capable of being integrated
with additional technologies developed to more efficiently manage and analyze
genomic data.
LifeTools, a suite of specialized bioinformatic software programs, consists
of high-throughput sequence analysis and data management tools for handling
complex genomic information from multiple sources. LifeTools blocks, reads and
edits raw sequence data, including data imported from public databases, and
annotates and clusters sequence fragments based on sequence similarity.
LifeTools SeqServer is a fast, scalable database search engine with intranet-
based graphical tools for interactive queries and analyses. LifeTools
Relational, a relational database management system, stores and distributes
sequence cluster, homology, tissue expression information and biological data.
The Company's database management architecture is based on open system
standards, providing interconnectivity between disparate systems and
applications, and enterprise-wide access to data and functions.
LifeArray software manages and analyzes data resulting from microarray
hybridization experiments. It includes a searchable database which can be loaded
with microarray experimental results from a variety of microarray platforms.
LifeArray provides an integrated data warehouse and analysis environment which
allows the customer to bring data from multiple microarray platforms into one
integrated environment. LifeArray enables the user to visualize differential
expression between biological samples and tracks all details of microarrays,
genes, biological samples, donor information, and experimental results in one
integrated environment Java-based interface. It is an enterprise-wide system
that can support as many simultaneous users as required, and grow to suit
changing microarray management needs. The Company intends to continue to develop
new bioinformatic software programs internally, as well as with third party
software developers and development groups.
MICROARRAY-BASED SERVICES. The Company offers microarray-based gene
expression services to the pharmaceutical, biotechnology and agricultural
industries. These services can be used to simultaneously evaluate the gene
expression profile of a large number of genes. The Company's GEMTM microarray
contains probes for up to 10,000 genes. Microarray applications include
identifying the genes involved in a complex disease pathway, examining a
drug-treated tissue to understand how the drug affected the expression of
important genes, and studying several new drug candidates to determine if one
has a more favorable effect on gene expression than the others. Experiments can
use either prefabricated arrays or custom arrays. Prefabricated arrays contain
either public domain genes or genes chosen from the Company's databases. The
Company currently offers over a dozen prefabricated microarrays including an
array containing the genes found in a microbial pathogen Staphlycoccus aureus,
an array containing the genes found in the rat liver and kidney, and a series of
arrays that contain Incyte proprietary genes. Custom arrays contain genes
provided by the customer or chosen by the customer from the Company's
proprietary databases.
DNA CLONE AND OTHER SERVICES. The Company offers a variety of DNA clone
and other services designed to assist its collaborators in using information
from its databases in internal lab-based experiments. The DNA fragments from
which the information in the Company's databases is derived represent valuable
resources for researchers, enabling them to perform bench-style experiments to
supplement the information obtained from searching the Company's databases. The
Company retains a copy of all isolated clones corresponding to the sequences in
the database. The Company's collaborators may request from the Company's clones
corresponding to a sequence of interest on a one-by-one basis or through LifeSeq
GeneAlbumTM, a subscription-based service that provides database collaborators
with large numbers of sequence verified DNA clones. In addition, the Company
produces a broad line of genomic research products, such as DNA clones and
insert libraries, and offers technical support services, including
high-throughput DNA screening, custom robotic services, contract DNA
preparation, and fluorescent in-situ hybridization, to assist researchers in the
identification and isolation of novel genes.
DATABASE PRODUCTION
The Company engages in the high-throughput automated sequencing of genes
derived from tissue samples followed by the computer-aided analysis of each gene
sequence to identify homologies to genes of known function in order to predict
the biological function of newly identified sequences. The derivation of
information in the Company's databases involves the following steps:
TISSUE ACCESS. The Company obtains tissue samples representing most major
organs in the human body from various academic and commercial sources. Where
possible, the Company obtains information as to the medical history and
pathology of the tissue. The genetic material is isolated from the tissue and
prepared for analysis. The results of this analysis as well as the corresponding
pathology and medical history information are incorporated into the databases.
HIGH-THROUGHPUT CDNA SEQUENCING. The Company utilizes specialized teams in
An integrated approach to its high-throughput sequencing and analysis effort.
Gene sequencing is performed using multiple work shifts to increase daily
throughput. One team develops and prepares cDNA libraries from biological
sources of interest, a second team prepares the cDNAs using robotic workstations
to perform key steps that result in purified cDNAs for sequencing, and a
third team operates the automated DNA sequencers.
BIOINFORMATICS. Sequence information generated from the Company's
high-throughput sequencing operations is uploaded to a network of servers. The
Company's proprietary bioinformatic software then assembles and edits the
sequence information. The sequence of each cDNA is compared via automated,
computerized algorithms to the sequences of known genes in the Company's
databases and public domain databases to identify whether the cDNA codes for a
known protein or is homologous to a known gene. Each sequence is annotated as to
its cell or tissue source, its relative abundance and whether it is homologous
to a known gene with known function. The bioinformatics staff monitors this
computerized analysis and may perform additional analyses on sequence
information. The finished data are then added to the Company's proprietary
sequence databases.
COLLABORATORS
The Company had database collaboration agreements with twenty-two
companies as of December 31, 1998. Each collaborator has agreed to pay, during
a typical term of three years, annual fees to receive non-exclusive access to
one or more of the Company's databases. For the years ended December 31, 1998
and 1997, the Company recognized revenue from twenty-two and eighteen of these
companies, respectively, one of which contributed 12% of total revenues in 1998.
No customer contributed 10% or more of total revenues in 1997. In 1996, the
Company recognized revenue from ten of these companies, three of which each
contributed in excess of 10% of total revenues. As of December 31, 1998, the
Company had database agreements with:
Abbott Laboratories Monsanto Company
ARIAD Pharmaceuticals, Inc. Novartis AG
BASF AG Novo Nordisk A/S
Bayer Corporation NV Organon
Bristol-Myers Squibb Company Pfizer Inc
Eli Lilly and Company Pharmacia & Upjohn, Inc.
F. Hoffmann-La Roche Ltd. Rhone-Poulenc S.A.
Genentech, Inc. Schering AG
Glaxo Wellcome plc Schering-Plough, Ltd.
Hoechst AG SmithKline Beecham
Johnson & Johnson Zeneca Ltd.
Certain of the Company's database agreements contain minimum annual update
requirements which if not met could result in the Company's breach of the
respective agreement. There can be no assurance that any of the Company's
database collaboration agreements will be renewed upon expiration or will not be
terminated earlier in accordance with their terms. The loss of revenues from any
individual database agreement, if terminated or not renewed, could have an
adverse impact on the Company's results of operations, although it is not
anticipated to have a material adverse impact on the Company's business or
financial condition. See Note 8 of Notes to the Consolidated Financial
Statements.
DEVELOPMENT PROGRAMS
Since its inception, The Company has made substantial investments in
research and technology development. During the years ended December 31, 1998,
1997, and 1996, the Company spent approximately $97.2 million, $72.5 million,
and $41.3 million, respectively, on research and development activities. This
investment in research and development includes an active program to enter into
relationships with other technology-driven companies and, when appropriate,
acquire licenses to technologies for evaluation or use in the production and
analysis process. Not all of these technologies or relationships survive the
evaluation process. The Company has entered into a number of research and
development relationships with companies and research institutions.
In January 1998, the Company announced a relationship with Oxford
GlycoSciences plc ("OGS"), to investigate the use of proteomics, the
large-scale, high-throughput analysis of protein expression, in the development
of new information-based products. As part of the relationship, the Company made
an equity investment in OGS. The Company and OGS entered into a collaborative
agreement under which the two parties are developing data, software and related
services, focusing on protein expression and sequence information from a variety
of human tissues. As part of the collaborative agreement, the Company has agreed
to reimburse OGS for up to $5.0 million in 1999 if revenues are not sufficient
to offset OGS' expenses for services rendered.
In August 1998, the Company initiated a series of programs in human genome
sequencing, accelerated human genome mapping and SNP discovery. The information
resulting from these efforts will be used to supplement existing databases and
to generate new databases and services. The Company is initiating SNP programs
focused on specific candidate genes, gene families, disease pathways,
therapeutic areas or drug targets that could be useful to individual
pharmaceutical partners. These programs may include the identification of genes
associated with a particular disease and an in depth study of the population
frequency and disease correlation of SNPs within a selected DNA region. The SNP
discovery efforts were assisted by the acquisition of Hexagen in September 1998.
The Company is developing various platforms that can be used for the high
throughput screening of patient samples in order to correlate SNPs with
patients' responses to drugs. This includes further development of existing
microarray platforms to enable the cost effective detection of SNPs. These
platforms may be used to offer genotyping and patient profiling services to
pharmaceutical companies to help identify statistically significant and
medically relevant associations between SNPs in specific genes and drug response
or disease susceptibility. The Company expects that this service will be used to
assist in the evaluation of new drugs in clinical trials and to assess clinical
trial design.
DIADEXUS JOINT VENTURE
In September 1997, the Company established a 50-50 joint venture company,
diaDexus, LLC ("diaDexus"), with SmithKline Beecham Corporation ("SB"). diaDexus
is applying genomic and bioinformatic technologies to the discovery and
commercialization of novel molecular diagnostic products. The Company has
provided diaDexus with non-exclusive access to its human and microbial databases
(LifeSeq, LifeSeq FL, LifeSeq Atlas, LifeSeq GeneAlbum, and PathoSeq) for
diagnostic applications. diaDexus has exclusive rights to develop diagnostic
tests based on novel molecular targets and genetic alterations identified as
part of SB's drug discovery efforts. SB and the Company have also each assigned
various additional technologies and intellectual property rights in the
diagnostic field and contributed a combined total of $25 million in funding to
diaDexus.
diaDexus is focusing initially on the generation of unique diagnostic
markers for so-called 'homebrew' tests - scientifically validated tests which
are awaiting formal regulatory approval - for reference laboratory testing and
for license to diagnostic kit manufacturers. Ultimately, diaDexus may develop
its own capacity to manufacture kits for sale to clinical testing laboratories.
The initial product range will focus on tests for disease detection. New tests
for improved diagnosis, staging and patient stratification in infectious disease
and oncology will be accorded particular emphasis.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's database business and competitive position are in part
dependent upon the Company's ability to protect its proprietary database
information and software technology. The Company relies on patent, trade secret
and copyright law, as well as nondisclosure and other contractual arrangements
to protect its proprietary information.
The Company's ability to license proprietary genes and SNPs may be dependent
upon the Company's ability to obtain patents, protect trade secrets and operate
without infringing upon the proprietary rights of others. Other pharmaceutical,
biotechnology and biopharmaceutical companies, as well as academic and other
institutions have filed applications for, may have been issued patents or may
obtain additional patents and proprietary rights relating to products or
processes competitive with those of the Company. Patent applications filed by
competitors may claim some of the same gene sequences or partial gene sequences
as those claimed in patent applications filed by the Company. The Company is
aware that some entities have made or have announced their intention to make
gene sequences publicly available, which may adversely affect the ability of the
Company and others to obtain patents on such genes. There can be no assurance
that such publication of sequence information will not adversely affect the
Company's ability to obtain patent protection for sequences that have been made
publicly available.
The Company's current policy is to file patent applications on what it
believes to be novel full-length and partial gene sequences obtained through
the Company's high-throughput computer-aided gene sequencing efforts. The
Company has filed U.S. patent applications in which the Company has claimed
certain partial gene sequences and has filed patent applications in the U.S. and
applications under the Patent Cooperation Treaty ("PCT"), designating countries
in Europe as well as Canada and Japan claiming full-length gene sequences
associated with cells and tissues that are the subject of the Company's
high-throughput gene sequencing program. To date, the Company holds a number of
issued U.S. patents with respect to full-length gene sequences and one issued
U.S. patent claiming multiple partial gene sequences. Currently, the Company has
no registered copyrights for the Company's database-related software.
In 1996, the United States Patent and Trademark Office ("USPTO") issued
guidelines limiting the number of gene sequences that can be examined in a
single patent application. Many of the Company's patent applications containing
multiple partial sequences contain more sequences than the maximum number
allowed under the new guidelines. The Company is reviewing its options, and it
is possible that due to the resources needed to comply with the guidelines, the
Company may decide to abandon patent applications for some of its partial gene
sequences.
The Company also plans to seek patent protection for patentable SNPs
identified with its LifeSeq database, through its human genome sequencing
program, and through the use of the Company's fSSCP discovery technology. These
patents will claim rights to SNPs for diagnostic and genotyping purposes. As
information relating to particular SNPs is developed, the Company plans to seek
additional rights in those SNPs that are associated with specific diseases,
functions or drug responses. The scope of patent protection for gene sequences,
including SNPs, is highly uncertain, involves complex legal and factual
questions and has recently been the subject of much controversy. No clear policy
has emerged with respect to the breadth of claims allowable for SNPs. There is
significant uncertainty as to what, if any, claims will be allowed on SNPs
discovered through high throughput discovery programs.
As the biotechnology industry expands, more patents are issued and other
companies engage in the business of discovering genes and other genomic-related
businesses, the risk increases that the Company's potential products, and the
processes used to develop these products, may be subject to claims that they
infringe the patents of others. Further, the Company is aware of several issued
patents in the field of microarray or gridding technology, which can be utilized
in the generation of gene expression information. Certain of these patents are
the subject of litigation. Therefore, the Company's operations may require it to
obtain licenses under any such patents or proprietary rights, and these licenses
may not be made available on terms acceptable to the Company. Litigation may be
necessary to defend against or assert claims of infringement, to enforce patents
issued to the Company, to protect trade secrets or know-how owned by the
Company, or to determine the scope and validity of the proprietary rights of
others. The Company believes that some of the Company's patent applications
cover genes which may also be claimed in patent applications filed by other
parties. Interference proceedings may be necessary to establish which party was
the first to invent a particular sequence for the purpose of patent protection.
Two such interferences involving the Company patent applications covering full
length genes have been declared. Such litigation or interference proceedings,
regardless of the outcome, could result in substantial costs to, and diversion
of effort by the Company, and may have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
there can be no assurance that such proceedings or litigation would be resolved
in the Company's favor.
In January and September 1998, Affymetrix, Inc. ("Affymetrix") filed
lawsuits in the United States District Court for the District of Delaware
alleging infringement of three U.S. patents by both Synteni and Incyte. Incyte
believes that it and Synteni have meritorious defenses and intend to defend
these suits vigorously. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Results - We Are
Involved In Patent Litigation."
COMPETITION
There is a finite number of genes in the human genome, and competitors may
seek to identify, sequence and determine in the shortest time possible the
biological function of a large number of genes in order to obtain a proprietary
position with respect to the largest number of new genes discovered. A number of
companies, institutions, and government-financed entities are engaged in gene
sequencing, gene discovery, gene expression analysis, positional cloning and
other genomic service businesses. Many of these companies, institutions and
entities have greater financial and human resources than the Company. In
addition, the Company is aware that other companies have developed databases
containing gene sequence, gene expression, genetic variation or other genomic
information and are marketing, or have announced their intention to market,
their data to pharmaceutical companies. The Company expects that additional
competitors may attempt to establish databases containing this information in
the future.
In addition, competitors may discover and establish patent positions with
respect to the gene sequences and polymorphisms in the Company's databases.
Further, certain entities engaged in or with stated intentions to engage in gene
sequencing have made or have stated their intention to make the results of their
sequencing efforts publicly available. These patent positions, or the public
availability of gene sequences comprising substantial portions of the human
genome or on microbial or plant genes, could decrease the potential value of the
Company's databases to the Company's subscribers and adversely affect the
Company's ability to realize royalties or other revenue from commercialization
of products based upon such genetic information.
The gene sequencing machines that are utilized in the Company's
high-throughput computer-aided gene sequencing operations are commercially
available and are currently being utilized by several competitors. Moreover,
some of the Company's competitors or potential competitors are in the process of
developing, and may successfully develop, proprietary sequencing technologies
that may be more advanced than the technology used by the Company. In addition,
the Company is aware that a number of companies are pursuing alternative methods
for generating gene expression information, including some that have developed
and are developing microarray technologies. At least one other company
currently offers microarray-based services that might be competitive with those
offered by the Company. These advanced sequencing or gene expression
technologies, if developed, may not be commercially available for purchase or
license by the Company on reasonable terms, if at all.
A number of companies have announced their intent to develop and market
software to assist pharmaceutical companies and academic researchers in the
management and analysis of their own genomic data, as well as the analysis of
sequence data available in the public domain. Some of these entities have access
to significantly greater resources than the Company, and their products may
achieve greater market acceptance than the products offered by the Company.
The SNP discovery platform used by the Company represents a modification of
a process that is in the public domain. Other companies could make similar or
superior improvements in this process.
The Company believes that the features and ease of use of its database
software, its experience in high-throughput gene sequencing, the cumulative size
of its database, the quality of the data, including the annotations in its
database, and its experience with bioinformatics and database software are
important aspects of the Company's competitive position.
The genomics industry is characterized by extensive research efforts and
rapid technological progress. New developments are expected to continue and
there can be no assurance that discoveries by others will not render the
Company's services and potential products noncompetitive. In addition,
Significant levels of research in biotechnology and medicine occur in
universities and other non-profit research institutions. These entities have
become increasingly active in seeking patent protection and licensing revenues
for their research results. These entities also compete with the Company in
recruiting talented scientists. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Factors That May Affect Results
- - We Experience Intense Competition and Rapid Technological Change."
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products that may be developed by a licensee of the Company or by
the Company. At the present time, the Company does not intend to develop any
pharmaceutical products itself. The Company's agreements with its database
subscribers provide for the payment to the Company of royalties on any
pharmaceutical products developed by such subscribers derived from proprietary
information obtained from the Company's genomic databases. Thus, the receipt and
timing of regulatory approvals for the marketing of such products may have a
significant effect in the future on the Company's revenues. Pharmaceutical
products developed by licensees will require regulatory approval by governmental
agencies prior to commercialization. In particular, human pharmaceutical
therapeutic products are subject to rigorous preclinical and clinical testing
and other approval procedures by the United States Food and Drug Administration
in the United States and similar health authorities in foreign countries.
Various federal and, in some cases, state statutes and regulations also govern
or influence the manufacturing, safety, labeling, storage, record keeping and
marketing of such pharmaceutical products, including the use, manufacture,
storage, handling and disposal of hazardous materials and certain waste
products. The process of obtaining these approvals and the subsequent compliance
with appropriate federal and foreign statutes and regulations require the
expenditure of substantial resources over a significant period of time, and
there can be no assurance that any approvals will be granted on a timely basis,
if at all. Any such delay in obtaining or failure to obtain such approvals could
adversely affect the Company's ability to earn milestone payments, royalties or
other license-based fees. Additional governmental regulations that might arise
from future legislation or administrative action cannot be predicted, and such
regulations could delay or otherwise affect adversely regulatory approval of
potential pharmaceutical products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Factors That May Affect Results
- - Our Revenues Are Derived Primarily from the Pharmaceutical and Biotechnology
Industries."
HUMAN RESOURCES.
As of December 31, 1998, the Company had 867 full-time equivalent employees
(140 of whom were contract or part-time employees), including 281 in sequencing,
microarray and reagent production, 238 in bioinformatics, 219 in research and
technology development, and 129 in marketing, sales and administrative
positions. None of the Company's employees is covered by collective bargaining
agreements, and management considers relations with its employees to be good.
The Company's future success will depend in part on the continued service of its
key scientific, software, bioinformatics and management personnel and its
ability to identify, hire and retain additional personnel, including personnel
in the customer service, marketing and sales areas. There is intense competition
for qualified personnel in the areas of the Company's activities, especially
with respect to experienced bioinformatics and software personnel, and there can
be no assurance that the Company will be able to continue to attract and retain
such personnel necessary for the development of the Company's business. Failure
to attract and retain key personnel could have a material adverse effect on the
Company's business, financial condition and operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Factors That May Affect Results - We May Have Difficulty Managing Our Growth"
and "- We Depend on Key Employees in a Competitive Market for Skilled
Personnel."
ITEM 2. PROPERTIES
Incyte's headquarters are in Palo Alto, California, where its main research
laboratories, sequencing facility, bioinformatics and administrative facilities
are located. Incyte also operates facilities in Fremont, California; St. Louis,
Missouri; and Cambridge, England. As of December 31, 1998, Incyte had multiple
sublease and lease agreements covering approximately 295,000 square feet that
expire on various dates ranging from March 1999 to March 2007. In July 1997, the
Company entered into a multi-year lease with respect to a 95,000 square foot
building being constructed adjacent to the Company's Palo Alto headquarters. The
Company believes that its current facilities are adequate to support its current
and anticipated near-term operations.
ITEM 3. LEGAL PROCEEDINGS
In January 1998, Affymetrix, Inc. filed a lawsuit in the United States
District Court for the District of Delaware alleging infringement of U.S. patent
number 5,445,934 (the "'934 Patent") by both Synteni and Incyte. The complaint
alleges that the '934 Patent has been infringed by the making, using, selling,
importing, distributing or offering to sell in the United States high density
arrays by Synteni and Incyte and that such infringement was willful. Affymetrix
seeks a permanent injunction enjoining Synteni and Incyte from further
infringement of the '934 Patent and, in addition, seeks damages, costs and
attorney's fees and interest. Affymetrix further requests that any such damages
be trebled based on its allegation of willful infringement by Incyte and
Synteni.
In September 1998, Affymetrix filed an additional lawsuit in the United
States District Court for the District of Delaware alleging infringement of the
U.S. patent number 5,800,992 (the "'992 Patent") and U.S. patent number
5,744,305 (the "'305 Patent") by both Synteni and Incyte. The complaint alleges
that the '305 Patent has been infringed by the making, using, selling,
importing, distributing or offering to sell in the United States high density
arrays by Synteni and Incyte, that the '992 Patent has been infringed by the use
of Synteni's and Incyte's GEMTM microarray technology to conduct gene expression
monitoring using two-color labeling, and that such infringement was willful.
Affymetrix seeks a permanent injunction enjoining Synteni and Incyte from
further infringement of the '305 and '992 Patents and, in addition, Affymetrix
seeks a preliminary injunction enjoining Incyte and Synteni from using Synteni's
and Incyte's GEM microarray technology to conduct gene expression monitoring
using two-color labeling as described in the '992 patent. In November 1998,
Incyte's motion to transfer the suits to the United States District Court for
the Northern District of California was granted. A hearing on Affymetrix's
request for a preliminary injunction is scheduled for April 30, 1999. No date
has been set regarding the trial of any of Affymetrix's other allegations.
In January 1999, the United States Patent and Trademark Office notified
Incyte of the patentability of claims directed to two-color hybridization
licensed exclusively to Incyte. The USPTO examiner has agreed with Incyte that
certain claims overlap with those of '992 assigned to Affymetrix. Therefore, the
USPTO has recommended that the Board of Patent Appeals and Interferences declare
an interference between Incyte's two-color hybridization claims and the
corresponding claims in the '992 patent.
Incyte and Synteni believe they have meritorious defenses and intend to
defend the suits vigorously. However, there can be no assurance that Incyte and
Synteni will be successful in the defense of these suits. At this time, the
Company cannot reasonably estimate the possible range of any loss resulting from
these suits due to uncertainty regarding the ultimate outcome. Regardless of the
outcome, this litigation has resulted and is expected to continue to result in
substantial expenses and diversion of the efforts of management and technical
personnel. Further, there can be no assurance that any license that may be
required as a result of this suit or the outcome thereof would be made available
on commercially acceptable terms, if at all.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, par value $.001 ("Common Stock"), is traded on
the Nasdaq National Market ("Nasdaq") under the symbol "INCY." The following
table sets forth, for the periods indicated, the range of high and low sales
prices for the Common Stock on Nasdaq as reported in its consolidated
transaction reporting system.
1997 HIGH LOW
First Quarter 37 1/4 24 1/16
Second Quarter 35 7/8 20 3/4
Third Quarter 42 1/4 29 13/16
Fourth Quarter 45 1/4 31 1/2
1998
First Quarter 50 3/8 36
Second Quarter 47 1/4 31 1/2
Third Quarter 42 18 1/2
Fourth Quarter 39 1/8 20 15/16
The above high and low sales prices for the Common Stock have been adjusted
to reflect the November 1997 two-for-one stock split effected in the form of a
stock dividend.
As of December 31, 1998, the Common Stock was held by 393 stockholders of
record. The Company has never declared or paid dividends on its capital stock
and does not anticipate paying any dividends in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related Notes included in Item 8 of
this Report.
YEAR ENDED
DECEMBER 31,
STATEMENT OF OPERATIONS DATA 1, 1998 1997 1996 1995 1994
------- ------- ------- -------- ---------
(in thousands, except per share data)
Revenues $134,811 $89,996 $41,895 $ 12,299 $ 1,512
Costs and expenses:
Research and development 97,192 72,452 41,337 19,272 11,169
Selling, general and administrative 25,438 13,928 6,957 3,952 2,328
Charge for purchase of in-process
research and development 10,978 - 3,165 - -
Acquisition-related charges 1,171 - - - -
--------- ------- -------- -------- -------
Total costs and expenses 134,779 86,380 51,459 23,224 13,497
Income (loss) from operations 32 3,616 (9,564) (10,925) (11,985)
Interest and other income, net and
Losses from joint venture 5,792 3,840 2,288 988 510
--------- ------- -------- -------- --------
Income (loss) before income taxes 5,824 7,456 (7,276) (9,937) (11,475)
Provision for income taxes 2,352 548 - - -
--------- ------- -------- -------- --------
Net income (loss) $ 3,472 $ 6,908 $(7,276) $ (9,937) $(11,475)
========= ======= ======== ======== =========
Basic net income (loss) per share $ 0.13 $ 0.28 $ (0.32) $ (0.53) $ (0.82)
======== ======= ======== ======== =========
Number of shares used in computation
of basic net income (loss) per share 26,921 24,300 22,398 18,819 14,060
======== ======= ======== ======== =========
Diluted net income (loss) per share $ 0.12 $ 0.26 $ (0.32) $ (0.53) $ (0.82)
======== ======= ======== ======== =========
Number of shares used in computation
of diluted net income (loss) per share 28,899 26,498 22,398 18,819 14,060
======== ======= ======== ======== =========
DECEMBER 31,
BALANCE SHEET DATA 1 1998 1997 1996 1995 1994
--------- --------- --------- -------- --------
(in thousands)
Cash, cash equivalents, and securities
available -for-sale $111,233 $113,095 $ 40,238 $ 41,218 $25,257
Working capital 81,437 90,700 21,351 39,015 20,866
Total assets 230,290 199,089 69,173 58,892 29,350
Noncurrent portion of capital lease
obligations and notes payable 796 801 37 147 148
Accumulated deficit (28,401) (30,129) (37,037) (29,761) (19,824)
Stockholders' equity 179,567 145,702 44,834 47,606 24,344
1 Financial data for the years ended December 31, 1994, 1995, and 1996, have
been restated to reflect the combined results and financial position of the
Company and Genome Systems, Inc. All periods through December 31, 1997 have been
restated to reflect combined results and financial position of the Company and
Synteni, Inc. See Note 9 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with "Selected
Consolidated Financial Data" and the Consolidated Financial Statements and
related Notes included elsewhere in this Report.
When used in this discussion, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. Such statements, which include statements as to expected net loss,
expected expenditure levels, expected cash flows, the adequacy of capital
resources, growth in operations and Year 2000 related actions, are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected. These risks and uncertainties include, but are not limited
to, those risks discussed below, as well as the extent of utilization of genomic
information by the biotechnology, pharmaceutical, and agricultural industries;
risks relating to the development of new products and their use by potential
collaborators of the Company; the impact of technological advances and
competition; the ability of the Company to obtain and retain customers;
competition from other entities; early termination of a database collaboration
agreement or failure to renew an agreement upon expiration; the ability to
successfully integrate the operations of recent business combinations; the cost
of accessing technologies developed by other companies; uncertainty as to the
scope of coverage, enforceability or commercial protection from patents that
issue on gene sequences and other genetic information; developments in and
expenses relating to litigation; the results and viability of joint ventures and
businesses in which the Company has purchased equity; uncertainties associated
with the Company's ability to raise capital through the sale of private or
public equity or otherwise; the ability of the Company to implement in a timely
manner the programs and actions related to the Year 2000 issue; and the matters
discussed in "Factors That May Affect Results." These forward-looking statements
speak only as of the date hereof. The Company expressly disclaims any obligation
or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
OVERVIEW
Incyte Pharmaceuticals, Inc. ("Incyte" and, together with its wholly owned
subsidiaries, the "Company") designs, develops and markets genomic
information-based tools including database products, genomic data management
software tools, microarray-based gene expression services and genomic reagents
and related services. The Company's genomic databases integrate bioinformatics
software with proprietary and, when appropriate, publicly available genetic
information to create information-based tools used by pharmaceutical and
biotechnology companies in drug discovery and development.
Revenues recognized by the Company consist primarily of non-exclusive
database access fees related to database agreements. Revenues also include the
sales of genomic screening products and services, fees for microarray-based gene
expression services, fees for contract sequencing services, and sales of genomic
data management software tools. The Company's database agreements provide for
future milestone payments and royalties from the sale of products derived from
proprietary information obtained through the databases. There can be no
assurance that any database subscriber will ever generate products from
information contained within the databases and thus that the Company will ever
receive milestone payments or royalties. The Company's ability to maintain and
increase revenues will be dependent upon its ability to obtain additional
database subscribers, retain existing subscribers, and to expand its customer
base for microarray services. The loss of revenues from any individual database
agreement, if terminated or not renewed, could have an adverse impact on the
Company's results of operations, although it is not anticipated to have a
material adverse impact on the Company's business or financial conditions.
The Company intends to invest approximately $45 million in its genomic
sequencing, mapping and SNP discovery programs in 1999, and as a result the
Company expects to report a net loss for 1999 of approximately $20 million. The
genomic sequencing and mapping programs are expected to be completed in 2000,
with the Company projecting a return to profitability in the second half of
2000. If the costs of these programs are greater than anticipated, or if these
programs take longer to complete, the Company may not return to profitability in
2000.
In September 1998, the Company completed the acquisition of Hexagen Limited
("Hexagen"), a privately held SNP discovery company based in Cambridge, England.
The Company issued 976,130 shares of its common stock and $5.0 million in cash
in exchange for all of Hexagen's outstanding capital stock. In addition, the
Company assumed Hexagen's stock options, which if fully vested and exercised,
would amount to 125,909 shares of its common stock. The intrinsic value of the
stock options was included in the purchase price of Hexagen. The transaction was
accounted for as a purchase with a portion of the purchase price, estimated to
be approximately $11.0 million, expensed in the third quarter of 1998 as a
charge for the purchase of in-process research and development. The remainder of
the purchase price, approximately $17.6 million, was allocated to goodwill
($16.3 million), developed technology ($0.7 million), and Hexagen's assembled
work force ($0.6 million), which are being amortized over 8, 5 and 3 years,
respectively. The Company will evaluate its intangible assets for impairment on
a quarterly basis.
The Company allocated Hexagen's purchase price based on the relative fair
value of the net tangible and intangible assets acquired. In performing this
allocation, the Company considered, among other factors, the technology research
and development projects in process at the date of acquisition. Hexagen's
in-process research and development program consisted of the development of its
fSSCP technology for SNP discovery. At the date of the acquisition, Hexagen's
research and development program was approximately 80% completed and total
continuing research and development commitments to complete the projects were
expected to be approximately $1.4 million. The projects were expected to be
successfully completed by mid-2000. The value assigned to purchased in-process
R&D was determined by estimating the costs to develop Hexagen's purchased
in-process research and development into commercially viable products,
estimating the resulting net cash flows from the projects and discounting the
net cash flows to their present value. The rates utilized to discount the net
cash flows to their present value were based on Hexagen's weighted average cost
of capital. A discount rate of 24.0% was used for valuing the in-process
research and development and is intended to be commensurate with Hexagen's
corporate maturity and the uncertainties in the economic estimates described
above. Additionally, this project will require maintenance expenditures when and
if it reaches a state of technological and commercial feasibility. Management
believes the Company has positioned itself to complete the research and
development program. However, there is risk associated with the completion of
the project, which includes the inherent difficulties and uncertainties in
completing the project and thereby achieving technological feasibility and risks
related to the impact of potential changes in future target markets. There is no
assurance that the project will meet either technological or commercial success.
Failure to complete the development of the fSSCP technology in its entirety, or
in a timely manner, could have a material adverse impact on the Company's
financial condition and results of operations.
The estimates used by the Company in valuing in-process research and
development were based upon assumptions the Company believes to be reasonable
but which are inherently uncertain and unpredictable. The Company's assumptions
may be incomplete or inaccurate, and no assurance can be given that
unanticipated events and circumstances will not occur. Accordingly, actual
results may vary from the projected results. Any such variance may result in a
material adverse effect on the financial condition and results of operations of
the Company.
In January 1998, the Company completed the acquisition of Synteni, Inc.
("Synteni"), a privately-held microarray-based gene expression company. The
transaction has been accounted for as a pooling of interests, and the
consolidated financial statements discussed herein and all historical financial
information have been restated to reflect the combined operations of both
companies. The Company's ability to generate revenues and operating profits from
microarray-based gene expression services will be dependent on the ability of
the Company to obtain high volume customers for microarray services. Prior to
the merger, Synteni's microarray service agreements consisted of small volume
pilot or feasibility agreements.
In September 1997, the Company formed a joint venture, diaDexus, LLC
("diaDexus"), with SmithKline Beecham Corporation ("SB") which will utilize
genomic and bioinformatics technologies in the discovery and commercialization
of molecular diagnostics. The Company and SB each hold a 50 percent equity
interest in diaDexus. The investment is accounted for under the equity method,
and the Company records its share of diaDexus' earnings and losses in its
statement of operations.
In August 1996, the Company acquired all the common stock of Combion, a
microarray technology company, in a stock for stock exchange, issuing 146,342
shares of its common stock. The acquisition was accounted for as a purchase,
with a purchase price of $3.2 million, including transaction fees, and
approximately $3.2 million was expensed as a charge for the purchase of
in-process research and development. Combion's in-process research and
development program consisted of the development of its microarray technology.
The Company allocated the purchase price to assets and liabilities based on the
relative fair value of the net tangible and intangible assets. In performing
this allocation, the Company considered, among other factors, the technology
research and development projects in-process at the date of acquisition. With
regard to the in-process research and development projects, the Company
considered factors such as the stage of development of the technology at the
time of acquisition, the importance of each project to the overall development
plan, alternative future use of the technology and the projected incremental
cash flows from the projects when completed and any associated risks. In 1998,
the Company continued to utilize the microarray technology purchased from
Combion for internal research and development purposes.
If the staff of the SEC chooses to review the Company's calculation of its
charge for the purchase of in-process research and development for either the
Hexagen or Combion acquisitions and the staff disagrees with the methodologies
and/or assumptions used in the computation of such amounts, the Company may be
required to adjust the portion of the purchase price allocated to in-process
research and development.
In July 1996, the Company issued 408,146 shares of common stock in exchange
for all of the capital stock of Genome Systems, Inc., a privately held genomics
company located in St. Louis, Missouri. Genome Systems provides genomic research
products and technical support services to scientists to assist them in the
identification and isolation of novel genes. The merger has been accounted for
as a pooling of interests and, accordingly, the Company's financial statements
and financial data have been restated to include the accounts and operations of
Genome Systems since inception.
The Company has made and intends to continue to make strategic equity
investments in, and acquisitions of, technologies and businesses that are
complementary to the businesses of the Company. As a result, the Company may
record losses or expenses related to the Company's proportionate ownership
interest in such long-term equity investments, record charges for the
acquisition of in-process technologies, or record charges for the recognition of
the impairment in the value of the securities underlying such investments.
In September 1998, one company in which the Company held an equity
investment, OncorMed, Inc., was acquired in a stock-for-stock merger by Gene
Logic Inc. The investment in Gene Logic is accounted for under the cost method
of accounting. In January 1998, the Company announced a relationship relating to
the joint development of proteomics data and related software with Oxford
GlycoSciences plc ("OGS"). As part of this relationship, the Company made a $5.0
million initial equity investment and a follow-on investment in April 1998 of
approximately $0.8 million as part of the OGS initial public offering of its
ordinary shares. As part of the collaborative agreement, the Company has agreed
to reimburse OGS for up to $5.0 million in 1999 if revenues are not sufficient
to offset OGS' expenses for services rendered. The market prices of the
securities of the companies in which the Company invests are highly volatile and
therefore subject to declines in market value. The Company will continue to
evaluate its long-term equity investments for impairment on a quarterly basis.
In an effort to broaden its business, the Company is investing in a number
of new areas, including microarray services, molecular diagnostics, genome
sequencing, SNP discovery and proteomics. Given that many of these address new
markets, or involve untested technologies, it is not known if any of them will
generate revenues or if the revenues will be sufficient to provide an adequate
return on the investment. Depending on the investment required and the timing of
such investments, expenses or losses related to these investments could
adversely affect operating results.
The Company has incurred and is likely to continue to incur substantial
expenses in its defense of the lawsuits filed in January and September 1998 by
Affymetrix, Inc. ("Affymetrix") alleging patent infringement by Synteni and
Incyte. Affymetrix seeks a preliminary injunction enjoining Incyte and Synteni
from using certain microarray technology in a manner alleged to infringe an
Affymetrix patent and a permanent injunction enjoining Incyte and Synteni from
further infringement of certain Affymetrix patents. In addition, Affymetrix
seeks damages, costs, attorneys' fees and interest. Affymetrix further requests
that any such damages be trebled on its allegation of willful infringement by
Incyte and Synteni. Incyte and Synteni believe they have meritorious defenses
and intend to defend these suits vigorously. However, there can be no assurance
that Incyte and Synteni will be successful in the defense of these suits. At
this time, the Company cannot reasonably estimate the possible range of any loss
related to these suits due to uncertainty regarding the ultimate outcome.
Regardless of the outcome, this litigation has resulted and is expected to
continue to result in substantial expenses and diversion of the efforts of
management and technical personnel. Any future litigation could result in
similar expenses and diversion of efforts. Further, there can be no assurance
that any license that may be required as a result of these suits or the outcome
thereof would be made available on commercially acceptable terms, if at all.
RESULTS OF OPERATIONS
The Company recorded net income for the years ended December 31, 1998 and
1997 of $3.5 million and $6.9 million, respectively, and a net loss of $7.3
million for the year ended December 31, 1996. On a per share basis, basic net
income per share was $0.13 and $0.28 for the years ended December 31, 1998 and
1997 and basic net loss per share was $0.32 for the year ended December 31,
1996. Diluted net income per share was $0.12 and $0.26 for the years ended
December 31, 1998 and 1997, respectively, and diluted net loss per share was
$0.32 for the year ended December 31, 1996. Excluding acquisition related
charges, the Company recorded net income of $15.5 million and basic and diluted
net income per share of $0.58 and $0.54, respectively, for the year ended
December 31, 1998. The net income per share in 1997 reflects the dilutive effect
of approximately 2.7 million shares issued in an August 1997 follow-on public
offering. The net loss per share in 1996 reflects the dilutive effect of
approximately 0.6 million shares issued in 1996 in connection with the Company's
business combinations with Genome Systems and Combion. The net income (loss) per
share for all periods presented reflects the issuance of approximately 2.3
million shares in January 1998 in connection with the Company's business
combination with Synteni. All share and per share data have been adjusted
retroactively for a two-for-one stock split effected in the form of a stock
dividend paid on November 7, 1997 to holders of record on October 17, 1997.
Revenues. Revenues for the years ended December 31, 1998, 1997, and 1996
were $134.8 million, $90.0 million, and $41.9 million, respectively. Revenues
resulted primarily from database access fees and, to a much lesser extent, from
genomic screening products and services, microarray-based gene expression
services, fees for contract sequencing, and genomic data management software
tools and maintenance. The increase in revenues from year to year was
predominantly driven by an increase in the number of database collaboration
agreements, expanded database agreements with existing customers and increased
revenues from microarray-related products and services.
Expenses. Total costs and expenses for the years ended December 31, 1998,
1997, and 1996 were $134.8 million, $86.4 million, and $51.5 million,
respectively. Total costs and expenses for the year ended December 31, 1998
included a one-time charge of $11.0 million for the purchase of in-process
research and development relating to the acquisition of Hexagen, and acquisition
related expenses of $1.2 million related to the combination with Synteni. Total
costs and expenses for the year ended December 31, 1996 included a one-time
charge of $3.2 million for the purchase of in-process research and development
relating to the acquisition of Combion. Total costs and expenses are expected to
increase in the foreseeable future due to the continued investment in new
products and services.
Research and development expenses for the years ended December 31, 1998,
1997, and 1996 were $97.2 million, $72.5 million, and $41.3 million,
respectively. The increase in research and development expenses in 1998 over
1997 resulted primarily from an increase in bioinformatics and software develop-
ment efforts and to a lesser extent microarray production capacity, genomic
sequencing, genetic mapping, SNP discovery efforts and from costs related to
technology development initiatives, costs related to intellectual property
protection. The increase in research and development expenses in 1997 over
1996 resulted primarily from an increase in bioinformatics and software
development efforts and to a lesser extent from increased gene sequence, micro-
array,and reagent production; costs related to intellectual property protection;
license and milestone payments under research and development alliances and
increased microarray research and development. The Company expects research
and development spending to increase over the next few years as the Company
continues to pursue the development of new database products and services,
expansion of existing database products as well as increases in sequencing,
microarray and SNP discovery operations, and investments in new technologies.
Selling, general and administrative expenses for the years ended December
31, 1998, 1997, and 1996 were $25.4 million, $13.9 million and $7.0 million,
respectively. The increase in selling, general and administrative expenses in
1998 over 1997 resulted primarily from the growth in sales and marketing
activities and to a lesser extent the expansion of the Company's United Kingdom
operations and increased personnel to support the growing complexity of the
Company's operations. The Company's 1998 operations were also impacted by legal
expenses from the patent infringement lawsuits filed by Affymetrix of
approximately $2.9 million. The increase in selling, general and administrative
expenses in 1997 over 1996 resulted primarily from the continued growth in sales
and marketing activities, the increase in expenses from the Company's Synteni
microarray division, and increased personnel to support the growing complexity
of the Company's operations. The Company expects that total selling, general
and administrative expenses will continue to increase due to continued growth
in marketing, sales and customer support; the expansion of the Company's United
Kingdom operations; and legal expenses related to the Company's defense of the
lawsuits filed by Affymetrix.
Interest and Other Income, Net. Interest and other income, net for the
years ended December 31, 1998, 1997, and 1996 were $7.3 million, $4.1 million,
and $2.3 million, respectively. Interest and other income, net increased as a
result of increased interest income from higher average combined cash, cash
equivalent and marketable securities balances and an increase in realized gains
on the sale of marketable securities.
Losses from Joint Venture. Losses from joint venture were $1.5 million and
$0.3 million for the years ended December 31, 1998 and 1997. The loss represents
the Company's share of diaDexus' losses from operations. The loss in 1998 was
net of $2.5 million of amortization of the excess of the Company's share of
diaDexus' net assets over its basis. As diaDexus was formed in September 1997,
no losses from joint venture were recognized prior to 1997. The Company expects
that losses from joint venture will increase in 1999, as diaDexus' losses are
expected to increase in 1999 and as the favorable impact of the amortization of
the excess of the Company's share of diaDexus' net assets over its basis was
fully recognized in the fourth quarter of 1998 and will not be recognized in
1999.
Income Taxes. The estimated effective annual income tax rate for 1998 was
14.0%, excluding the charge for the purchase of in-process research and
development, and for 1997 was 7.3%, which represents the provision of federal
and state alternative minimum taxes after utilization of net operating loss
carryforwards. The increase in the effective tax rate resulted primarily from
the Company's expectation that it would fully utilize all federal net operating
loss carryforwards available to benefit the income tax provision. No provision
was recorded in 1996 as the Company incurred net operating losses.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had $111.2 million in cash, cash
equivalents and marketable securities, compared to $113.1 million, excluding
restricted cash, as of December 31, 1997. The Company has classified all of its
marketable securities as short-term, as the Company may not hold its marketable
securities until maturity in order to take advantage of favorable market
conditions. Available cash is invested in accordance with the Company's
investment policy's primary objectives of liquidity, safety of principal and
diversity of investments.
Net cash provided by operating activities was $36.2 million for the year
ended December 31, 1998, compared to $18.0 million and $18.5 million for the
years ended December 31, 1997 and 1996. The increase in net cash provided by
operating activities in 1998 was primarily due to the increase in net income
before non-cash charges and the decrease in accounts receivable, partially
offset by the increase in prepaid and other assets and the decrease in deferred
revenues. The decrease in net cash provided by operating activities in 1997
resulted primarily from increases in accounts receivable partially offset by the
change from net loss to net income, increases in accrued and other liabilities
and increases in deferred revenue due to the prepayment of database
collaboration fees. Due to the significant investment in the Company's genomic
sequencing, mapping and SNP discovery programs, the Company does not expect to
generate positive cash flows from operations in 1999.
The Company's investing activities, other than purchases, sales and
maturities of marketable securities, have consisted predominantly of capital
expenditures and purchases of long-term investments. Capital expenditures for
the years ended December 31, 1998, 1997, and 1996 were $30.7 million, $27.2
million, and $20.5 million, respectively. Capital expenditures increased in 1998
and 1997 primarily due to investments in computer and laboratory equipment as
well as leasehold improvements related to the expansion of the Company's
facilities. Long-term investments in companies with which the Company has
research and development agreements were $7.1 million for the year ended
December 31, 1998 compared to $8.5 million and $0.3 million for the years ended
December 31, 1997 and 1996, respectively. In 1998, the Company paid $4.0
million, net of cash received, in connection with the purchase of Hexagen and in
1997 transferred $6.0 million to restricted cash for disbursement to diaDexus in
accordance with the diaDexus joint venture agreement. In the future, net cash
used by investing activities may fluctuate significantly from period to period
due to the timing of strategic equity investments, capital expenditures and
maturity/sales and purchases of marketable securities.
Net cash provided by financing activities was $4.0 million, $94.8 million,
and $1.5 million for the years ended December 31, 1998, 1997, and 1996,
respectively. Net cash provided by financing activities in 1997 was primarily
due to proceeds from follow-on public stock offerings in August 1997, while net
cash provided by financing activities in 1998 and 1996 was due to issuances of
common stock upon exercise of stock options.
The Company expects its cash requirements to increase significantly in 1999
as it: invests in its genomic sequencing, mapping and SNP discovery programs;
invests in data-processing-related computer hardware in order to support its
existing and new database products; continues to seek access to technologies
through investments, research and development alliances, license agreements
and/or acquisitions; and addresses its needs for larger facilities and/or
improvements in existing facilities. The Company has entered into a multi-year
lease with respect to a 95,000 square foot building being constructed adjacent
to the Company's Palo Alto headquarters. The Company's share of tenant
improvements is estimated to be between $10.0 million and $15.0 million, of
which approximately $6.8 million has been expended through December 31, 1998.
Based upon its current plans, the Company believes that its existing
resources and anticipated cash flow from operations will be adequate to satisfy
its capital needs at least through the next twelve months. However, the Company
may be unable to obtain additional collaborators or retain existing
collaborators for its databases, and its products and services may not produce
revenues which, together with the Company's cash, cash equivalents, and
marketable securities, would be adequate to fund the Company's cash
requirements. The Company's cash requirements depend on numerous factors,
including the ability of the Company to attract and retain collaborators for its
databases and other products and services; the cost required to complete the
genomic sequencing and human genome mapping programs; expenditures in connection
with alliances, license agreements and acquisitions of and investments in
complementary technologies and businesses; competing technological and market
developments; the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights; the purchase of additional
capital equipment, including capital equipment necessary to ensure the Company's
sequencing and microarray operations remain competitive; capital expenditures
required to expand the Company's facilities; and costs associated with the
integration of new operations assumed through mergers and acquisitions. Changes
in the Company's research and development plans or other changes affecting the
Company's operating expenses may result in changes in the timing and amount of
expenditures of the Company's capital resources.
The Company expects to continue to fund future operations with revenues
from database products and services; with its current cash, cash equivalents,
and marketable securities. Additional funding, if necessary, may not be
available on favorable terms, if at all. If adequate funds are not available
through the public markets and/or other sources, the Company may be required to
curtail operations significantly or to obtain funds by entering into
collaborative arrangements that may require the Company to relinquish rights to
certain of its technologies, product candidates, products or potential markets.
EURO CONVERSION
A single currency called the euro was introduced in Europe on January 1,
1999. Eleven of the fifteen member countries of the European Union agreed to
adopt the euro as their common legal currency on that date. Fixed conversion
rates between these participating countries' existing currencies (the "legacy
currencies") and the euro were established as of that date. The legacy
currencies are scheduled to remain legal tender as denominations of the euro
until at least January 1, 2002, but not later than July 1, 2002. During this
transition period, parties may settle transactions using either the euro or a
participating country's legal currency. The Company will evaluate the impact of
the euro conversion on its computer and financial systems, business processes,
market risk, and price competition. The Company does not expect this conversion
to have a material impact on its results of operations, financial position or
cash flows.
YEAR 2000
As a result of computer programs being written using two digits, rather
than four, to represent year dates, the performance of the Company's computer
systems and those of its suppliers and customers in the Year 2000 is uncertain.
Any computer programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in other normal business activities.
The Company is in the process of evaluating the Year 2000 readiness of the
software products sold by the Company ("Products"), the information technology
systems used in its operations ("IT Systems"), and its non-IT Systems, such as
building security, voice mail, and other systems. The Company currently
anticipates that this project will consist of the following phases: (i)
identification of all Products, IT Systems, and non-IT Systems; (ii) assessment
of repair or replacement requirements; (iii) repair or replacement; (iv)
testing; (v) implementation; and (vi) creation of contingency plans in the event
of Year 2000 failures.
The Company will initiate an assessment of all current versions of its
Products and believes that this will be completed in the first half of 1999.
Even so, whether a complete system or device in which a Product is embedded will
operate correctly for an end-user depends in large part on the Year 2000
compliance of the system's other components, most of which are supplied by
parties other than the Company. The supplier of the Company's current financial
and accounting software has informed the Company that such software is Year 2000
compliant. The Company relies, both domestically and internationally, upon
various vendors, government agencies, utility companies, telecommunications
service companies, delivery service companies, and other service providers who
are outside of the Company's control. There is no assurance that such parties
will not suffer a Year 2000 business disruption, which could have a material
adverse effect on the Company's financial condition and results of operations.
The Company relies for its successful operation upon goods and services
purchased from certain vendors. If these vendors fail to adequately address the
Year 2000 such that their delivery of goods and services to the Company is
materially impaired, it could have a material adverse impact on the Company's
operations and financial results. The Company is preparing to survey its
principal vendors to assess the effect the Year 2000 issue will have on their
ability to supply their goods and services without material interruption, and at
this time the Company cannot determine or predict the outcome of this effort.
Contingency plans will be developed and executed with respect to vendors who
will not be Year 2000 ready in a timely manner where such lack of readiness is
expected to have a material adverse impact on the Company's operations. However,
because the Company cannot be certain that its vendors will be able to supply
material goods and services without material interruption, and because the
Company cannot be certain that execution of its contingency plans will be
capable of implementation or result in a continuous and adequate supply of such
goods and services, the Company can give no assurance that these matters will
not have a material adverse effect on the Company's future consolidated
financial position, results of operations, or cash flows.
If the Company's customers fail to achieve an adequate state of Year 2000
readiness in their own operations, or if their Year 2000 readiness efforts
consume significant resources, their ability to purchase the Company's products
may be impaired. This could adversely affect demand for the Company's products
and, therefore, the Company's future revenues. The Company plans to develop a
contingency plan for Year 2000 noncompliant customers and at this time cannot
determine the impact it will have, if any.
To date, the Company has not incurred any material expenditures in
connection with identifying or evaluating Year 2000 compliance issues. Most of
its expenses have related to the opportunity cost of time spent by employees of
the Company evaluating its financial and accounting software, its products, and
general Year 2000 compliance matters. Absent a significant Year 2000 compliance
deficiency, management currently estimates that the cost to complete its Year
2000 compliance programs will be between $1.0 million and $1.5 million,
approximately 8%-12% of the total 1999 IT budget, which will be expensed as
incurred. The Company has not deferred any IT projects due to its efforts to
ensure Year 2000 compliance. The Company believes that available cash will be
sufficient to cover the projected costs associated with these activities.
`
The Company is focusing on identifying and addressing all aspects of its
operations that may be affected by the Year 2000 issue and is addressing the
most critical applications first. The Company intends to develop and implement,
if necessary, appropriate contingency plans to mitigate to the extent possible
the effects of any Year 2000 noncompliance, and expects to have such plans
completed in the second half of 1999. As part of the development of a
contingency plan, the Company will evaluate its worst case scenario in the event
of Year 2000 noncompliance. Although the full consequences are unknown, the
failure of either the Company's critical systems or those of its material third
parties to be Year 2000 compliant would result in the interruption of the
Company's business, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
FACTORS THAT MAY AFFECT RESULTS
All references to "we," "us," "our," or the "Company" in this section mean
Incyte Pharmaceuticals, Inc. and its subsidiaries, except where it is made clear
that the term means only the parent company. All references to "Incyte" in this
section mean Incyte Pharmaceuticals, Inc., the parent company.
The risks and uncertainties described below are not the only ones facing
our company. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial may also impair our business operations.
If any of the following risks actually occur, our business, financial
condition and results of operations could be materially and adversely affected.
WE HAVE HAD ONLY LIMITED PERIODS OF PROFITABILITY, AND WE EXPECT TO INCUR LOSSES
IN THE FUTURE AND MAY NOT RETURN TO PROFITABILITY
We had net losses each year from inception in 1991 through 1996, and
reported net income in 1997 and 1998. However, because of those prior year
losses, we had an accumulated deficit of $28.4 million as of December 31, 1998.
Because we intend to make a significant investment in the programs formerly
associated with the Incyte Genetics business unit over the next 12 to 24 months,
we expect to report a net loss for 1999 and possibly 2000. We may report net
losses in future periods as well.
We expect that our expenditures will continue to increase, due in part to:
- our continued investment in new product and technology development,
including the ramp-up of our genomic sequencing, mapping and SNP-discovery
programs,
- obligations under existing and future research and development
alliances, and
- our increasing investment in marketing, sales and customer service.
Our profitability depends on our ability to increase our revenues:
TO GENERATE SIGNIFICANT REVENUES, WE MUST OBTAIN ADDITIONAL DATABASE
COLLABORATORS AND RETAIN EXISTING COLLABORATORS. While we had 22 database
agreements as of December 31, 1998, we may be unable to enter into any
additional agreements. Our database agreements typically have a term of three
years, and we cannot assure you that any will be renewed upon expiration. Our
database revenues are also affected by the extent to which existing
collaborators expand their agreements with us to include our new database
products. Some of our database agreements require us to meet performance
obligations. A database collaborator can terminate its agreement before the end
of its scheduled term if we breach the agreement and fail to cure the breach
within a specified period.
OUR REVENUES AND PROFITABILITY WILL ALSO DEPEND ON OUR ABILITY TO EXPAND
OUR CUSTOMER BASE FOR MICROARRAY SERVICES. We acquired Synteni, Inc. in January
1998 primarily for this purpose. Synteni's contribution to our operating results
will depend on whether we can obtain high-volume customers for microarray
services and the costs associated with increasing our microarray production
capacity. Before we acquired Synteni, its microarray service agreements
consisted of small volume pilot or feasibility agreements.
WE DO NOT EXPECT MILESTONE OR ROYALTY PAYMENTS TO CONTRIBUTE TO REVENUES
FOR A SUBSTANTIAL PERIOD OF TIME. Part of our strategy is to license to
database collaborators our know how and patent rights associated with the gene
sequences and related information in our proprietary databases, for use in the
discovery and development of potential pharmaceutical, diagnostic or other
products. Any potential product that is the subject of such a license will
require several years of further development, clinical testing and regulatory
approval before commercialization. Accordingly, we do not expect to receive any
milestone or royalty payments from any of these licenses for a substantial
period of time, if at all.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY
Our operating results are unpredictable and may fluctuate significantly
from period to period due to a variety of factors, including:
- changes in the demand for our products and services;
- the introduction of competitive databases or services;
- the pricing of access to our databases;
- the nature, pricing and timing of other products and services
provided to our collaborators;
- changes in the research and development budgets of our collaborators
and potential collaborators;
- depreciation expense from capital expenditures;
- acquisition, licensing and other costs related to the expansion of
our operations, including operating losses of acquired businesses such as
Synteni and Hexagen Limited;
- losses and expenses related to our investments in joint ventures and
businesses, including our proportionate share of operating losses of our
diaDexus, LLC, joint venture with SmithKline Beecham Corporation;
- payments of milestones, license fees or research payments under the
terms of our increasing number of external alliances; and
- expenses related to, and the results of, litigation and other
proceedings relating to intellectual property rights (including the lawsuits
filed by Affymetrix, Inc. described below).
In particular, revenues from our database business are unpredictable
because:
- the timing of our database installations is determined by our
collaborators,
- the sales cycle for our database products is lengthy, and
- the time required to complete custom orders can vary significantly.
We expect our microarray services to represent an increasing amount of our
revenues. Revenues from these sources depend on volume of usage by our
collaborators, and can therefore fluctuate significantly.
We are investing in a number of new areas to try to broaden our business.
These areas include genomic sequencing and mapping, SNP discovery, molecular
diagnostics, and proteomics, or the large scale, high-throughput analysis of
protein expression. Because many of these address new markets or involve
untested technologies, they may not generate any revenues or provide an adequate
return on our investment. In these cases, we may have to recognize expenses or
losses.
We have significant fixed expenses, due in part to our need to continue to
invest in product development and extensive support for our database
collaborators. We may be unable to adjust our expenditures if revenues in a
particular period fail to meet our expectations, which would adversely affect
our operating results for that period. Forecasting operating and integration
expenses for acquired businesses may be particularly difficult, especially where
the acquired business focuses on technologies that do not have an established
market.
We believe that period-to-period comparisons of our financial results will
not necessarily be meaningful. You should not rely on these comparisons as an
indication of our future performance. If our operating results in any future
period fall below the expectations of securities analysts and investors, our
stock price will likely fall, possibly by a significant amount.
WE EXPERIENCE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE
GENOMIC BUSINESSES ARE INTENSELY COMPETITIVE The human genome contains a
finite number of genes. Our competitors may seek to identify, sequence and
determine the biological function of numerous genes in order to obtain a
proprietary position with respect to new genes. We believe that the first
company to sequence all, or the commercially relevant portion, of the human
genome should have a competitive advantage. A number of companies, other
institutions and government-financed entities are engaged in gene sequencing,
gene discovery, gene expression analysis, positional cloning, the study of
genetic variation, and other genomic service businesses. Many of these
companies, institutions and entities have greater financial and human resources
than we do.
Some of our competitors have developed databases containing gene sequence,
gene expression, genetic variation or other genomic information and are
marketing or plan to market their data to pharmaceutical companies. Additional
competitors may attempt to establish databases containing this information in
the future. We expect that competition in our industry will continue to
intensify. We also believe that some pharmaceutical companies are discussing the
possibility of working together to discover SNPs and share SNP-related data
among themselves. The formation of this sort of consortium could reduce the
prospective customer base for our SNP-related business.
PATENT POSITIONS OR PUBLIC DISCLOSURES MAY REDUCE THE VALUE OF OUR
DATABASES. Competitors may discover and establish patent positions with respect
to gene sequences in our databases. Further, certain entities engaged in gene
sequencing have made the results of their sequencing efforts publicly available.
The Celera Genomics Group of The Perkin-Elmer Corporation has announced plans to
sequence the entire human genome within three years and to make the basic human
sequence data publicly available. The public availability of gene sequences or
resulting patent positions covering substantial portions of the human genome or
microbial or plant genomes could reduce the potential value of our databases to
our collaborators. It could also impair our ability to realize royalties or
other revenue from any commercialized products based on this genetic
information.
COMPETITORS MAY DEVELOP SUPERIOR TECHNOLOGY. The gene sequencing machines
used in our computer-aided sequencing operations are commercially available and
are being used by at least one competitor. In addition, some of our competitors
and potential competitors are developing proprietary sequencing technologies
that may be more advanced than ours. Perkin-Elmer has announced that it has
begun commercial shipments of a new gel-based sequencing machine, and that a
large number of these machines will be provided to Celera. We may be unable to
obtain access to these machines on acceptable terms.
In addition, a number of companies are pursuing alternative methods for
generating gene expression information, including microarray technologies. These
advanced sequencing or gene expression technologies may not be commercially
available for us to purchase or license on reasonable terms, if at all. At least
one other company currently offers microarray-based services that might be
competitive with ours.
Our SNP discovery platform represents a modification of a process that is
in the public domain. We are seeking patent protection for these improvements,
but have not yet received any patents. Other companies could make similar or
superior improvements to this process without infringing our rights, and we may
not have access to those improvements. The discovery of SNPs is a competitive
area. Other companies may develop or obtain access to different SNP discovery
platforms, to which we may not have access, that may make our technology
obsolete.
We also face competition from providers of software. A number of companies
have announced their intent to develop and market software to assist
pharmaceutical companies and academic researchers in managing and analyzing
their own genomic data and publicly available data. Some of these entities have
access to significantly greater resources than we do, and their products may
achieve greater market acceptance than ours.
WE MUST CONTINUE TO INVEST IN NEW TECHNOLOGIES. The genomics industry is
characterized by extensive research efforts, resulting in rapid technological
progress. To remain competitive, we must continue to expand our databases,
improve our software, and invest in new technologies. New developments are
expected to continue, and discoveries by others may render our services and
potential products noncompetitive.
WE ARE INVOLVED IN PATENT LITIGATION
In January 1998, Affymetrix filed a lawsuit in federal court alleging
infringement of U.S. patent number 5,445,934 by both Synteni and Incyte. The
complaint alleges that the '934 patent has been infringed by Synteni's and
Incyte's making, using, selling, importing, distributing or offering to sell
high density arrays in the United States and that this infringement was willful.
Affymetrix seeks a permanent injunction enjoining Synteni and Incyte from
further infringement of the '934 patent and seeks damages, costs, attorneys'
fees and interest. Affymetrix also requests triple damages based on allegedly
willful infringement.
In September 1998, Affymetrix filed an additional lawsuit alleging
infringement of U.S. patent numbers 5,744,305 and 5,800,992 by Synteni and
Incyte. The complaint alleges that the '305 patent has been infringed by
Synteni's and Incyte's making, using, selling, importing, distributing or
offering to sell high density arrays in the United States. It also alleges that
the '992 patent has been infringed by the use of Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling and that this infringement was willful. Affymetrix seeks a preliminary
injunction enjoining Synteni and Incyte from using GEM microarray technology to
conduct this kind of gene expression monitoring, and a permanent injunction
enjoining Synteni and Incyte from further infringing the '305 and '992 patents.
The lawsuits were initially filed in the United States District Court for
the District of Delaware. In November 1998, the court granted Incyte's motion to
transfer the suits to the United States District Court for the Northern District
of California. A hearing on Affymetrix's request for a preliminary injunction is
scheduled for April 30, 1999. No date has been set regarding the trial of any
of Affymetrix's other allegations.
In January 1999, the United States Patent and Trademark Office notified
Incyte of the patentability of claims directed to two-color hybridization
licensed exclusively to Incyte. The USPTO examiner has agreed with Incyte that
certain claims overlap with those of the '992 patent. Therefore, the USPTO has
recommended that the Board of Patent Appeals and Interferences declare an
interference between Incyte's two-color hybridization claims and the
corresponding claims in the '992 patent.
We believe we have meritorious defenses and intend to defend these suits
vigorously. However, our defense may be unsuccessful. At this time, we cannot
reasonably estimate the possible range of any loss resulting from these suits
due to uncertainty about the ultimate outcome. We have spent and expect to
continue to spend a significant amount of money and management time on this
litigation. Also, if we are required to license any technology as a result of
these suits, we do not know whether we will be able to do so on commercially
acceptable terms, if at all.
WE ARE SPENDING A LOT OF MONEY ON NEW AND UNCERTAIN BUSINESSES AND DEMAND FOR
OUR PRODUCTS AND SERVICES MAY BE INSUFFICIENT TO COVER OUR COSTS
There is no precedent for our microarray-based gene expression service
business or the use of SNP-based genetic variation information. The usefulness
of the information generated by these businesses is unproven. Our collaborators
and potential collaborators may determine that our databases, software tools and
microarray-related services are not useful or cost-effective. Due to the nature
and price of the products and services we offer, only a limited number of
companies are potential collaborators for our products and services. If we do
not develop these new products and services in time to meet market demand or if
there is insufficient demand for these products and services, we may not be able
to cover our costs of developing these products and services or earn a
sufficient return on our investment.
Additional factors that may affect demand for our products and services
include:
- the extent to which pharmaceutical and biotechnology companies
conduct these activities in-house or through industry consortia;
- the emergence of competitors offering similar services at competitive
prices;
- the extent to which the information in our databases is made public
or is covered by others' patents;
- our ability to establish and enforce proprietary rights to our
products;
- regulatory developments or changes in public perceptions relating to
the use of genetic information and the diagnosis and treatment of disease based
on genetic information; and
- technological innovations that are more advanced than the
technologies that we have developed or that are available to us.
Many of these factors are beyond our control.
OUR NEW PROGRAMS RELATING TO THE ROLE OF GENETIC VARIATION IN DISEASE AND DRUG
RESPONSE ARE RISKY
We recently began to focus part of our business on developing databases and
other products and services to assist pharmaceutical companies in a new and
unproven area: the identification and correlation of genetic variation to
disease and drug response. Hexagen, which will be an important part of this
business, was founded in 1996 and has generated no revenues to date. We will
incur significant costs over the next several years in expanding our research
and development in this area. These increased costs will include costs resulting
from hiring a substantial number of new employees and reagent costs associated
with our genomic sequencing, gene mapping and SNP discovery programs. These
activities may never generate significant revenues or profitable operations.
This new aspect of our business will focus on SNPs, one type of genetic
variation. The role of SNPs in disease and drug response is not fully
understood, and relatively few, if any, therapeutic or diagnostic products based
on SNPs have been developed and commercialized. Among other things, demand in
this area may be adversely affected by ethical and social concerns about the
confidentiality of patient-specific genetic information and about the use of
genetic testing for diagnostic purposes.
Except for a few anecdotal examples, there is no proof that SNPs have any
correlation to diseases or a patient's response to a particular drug or class of
drug. Identifying statistically significant correlations is time-consuming and
could involve the collection and screening of a large number of patient samples.
We do not know if the SNPs we have discovered to date are suitable for these
correlation studies. Nor do we currently have access to the patient samples
needed or technology allowing us to rapidly and cost-effectively identify
pre-determined SNPs in large numbers of patients.
Most SNPs may occur too infrequently to warrant their use in analyzing
patients' genetic variation. We may have trouble identifying SNPs that both
correlate with diseases or drug responses and occur frequently enough to justify
their use by pharmaceutical companies.
Our success will also depend upon our ability to develop, use and enhance
new and relatively unproven technologies. Our strategy of using high-throughput
mutation detection processes and sequencing to identify SNPs and genes rapidly
is unproven. Among other things, we will need to improve the throughput of our
SNP-discovery technology. We may not be able to achieve these necessary
improvements, and other factors may impair our ability to develop our
SNP-related products and services in time to be competitively available.
OUR STRATEGIC INVESTMENTS MAY RESULT IN LOSSES AND OTHER ADVERSE EFFECTS
We make strategic investments in joint ventures or businesses that
complement our business. These investments, such as our investment in diaDexus,
may:
- often be made in securities lacking a public trading market or
subject to trading restrictions, either of which increases our risk and reduces
the liquidity of our investment,
- require us to record losses and expenses related to our ownership
interest,
- require us to record charges related to the acquisition of in-process
technologies or for the impairment in the value of the securities underlying our
investment, and
- require us to invest greater amounts than anticipated or to devote
substantial management time to the management of research and development
relationships and joint ventures.
The market values of many of these investments fluctuate significantly. We
evaluate our long-term equity investments for impairment of their values on a
quarterly basis. Impairment could result in future charges to our earnings.
These losses and expenses may exceed the amounts that we anticipated. In
addition, as part of our collaborative agreement with Oxford GlycoSciences plc
relating to the joint development of a proteomics database, we agreed to
reimburse Oxford GlycoSciences up to $5.0 million in 1999 if their revenues are
insufficient to offset their expenses for services rendered.
OUR SALES CYCLE IS LENGTHY
Our ability to obtain new subscribers for our databases, software tools and
microarray and other services depends upon prospective subscribers' perceptions
that our products and services can help accelerate drug discovery efforts. Our
sales cycle is typically lengthy because we need to educate our potential
subscribers and sell the benefits of our tools and services to a variety of
constituencies within potential subscriber companies. In addition, each database
subscription and microarray services agreement involves the negotiation of
unique terms. We may expend substantial funds and management effort with no
assurance that a subscription or services agreement will result. Actual and
proposed consolidations of pharmaceutical companies have affected the timing and
progress of our sales efforts. We expect that future proposed consolidations
will have similar effects.
PATENTS AND OTHER PROPRIETARY RIGHTS PROVIDE UNCERTAIN PROTECTION
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY INFORMATION. Our business and
competitive position depend upon our ability to protect our proprietary database
information and software technology, but our strategy of obtaining proprietary
rights in as many genes and SNPs as possible is unproven. Despite our efforts to
protect this information and technology, unauthorized parties may attempt to
obtain and use information that we regard as proprietary. Although our database
subscription agreements require our subscribers to control access to our
databases, policing unauthorized use of our databases and software may be
difficult.
We have been issued a number of patents with respect to the gene sequences
in our databases and have filed for patents on selected features of our
software. However, as of the date of this prospectus, we have no issued patents
or registered copyrights for that software. We cannot prevent others from
independently developing software that might be covered by copyrights issued to
us, and trade secret laws do not prevent independent development.
We pursue a policy of having our employees, consultants and advisors
execute proprietary information and invention agreements when they begin working
for us. However, these agreements may not provide meaningful protection for our
trade secrets or other proprietary information in the event of unauthorized use
or disclosure.
Our means of protecting our proprietary rights may not be adequate and our
competitors may:
- independently develop substantially equivalent proprietary
information and techniques,
- otherwise gain access to our proprietary information, or
- design around patents issued to us or our other intellectual
property.
OUR PATENT APPLICATIONS MAY CONFLICT WITH OTHERS. Our current policy is to
file patent applications on what we believe to be novel full-length and partial
gene sequences obtained through our gene sequencing efforts. We have filed U.S.
patent applications in which we have claimed certain partial gene sequences. We
have also applied for patents in the U.S. and other countries claiming
full-length gene sequences associated with cells and tissues involved in our
gene sequencing program. We hold a number of issued U.S. patents on full-length
genes and one issued U.S. patent claiming multiple partial gene sequences. A
number of entities make certain gene sequences publicly available, which may
adversely affect our ability to obtain patents on those genes.
We believe that some of our patent applications claim genes that may also
be claimed in patent applications filed by others. In some or all of these
applications, a determination of priority of inventorship may need to be decided
in an interference before the United States Patent and Trademark Office
("USPTO").
The USPTO has recommended that the Board of Patent Appeals and
Interferences declare an interference with respect to a patent application
directed to technology licensed exclusively to us and an Affymetrix patent that
is the subject of our litigation with Affymetrix. The Board of Patent Appeals
has also declared two interferences involving applications covering Incyte
full-length genes, and has advised us of approximately 15 additional
interferences that might be declared. We cannot predict whether any of the
interferences would be resolved in our favor. Regardless of the outcome,
interferences could be expensive and time-consuming.
ENFORCEMENT OF GENE PATENTS IS UNCERTAIN. One of our strategies is to
obtain proprietary rights in as many genes (including partial gene sequences)
and SNPs as possible. While the USPTO has issued patents covering full-length
genes, partial gene sequences and SNPs, we do not know whether or how courts may
enforce those patents, if that becomes necessary. If a court finds these types
of inventions to be unpatentable, or interprets them narrowly, the benefits of
our strategy may not materialize.
WE MAY DECIDE TO ABANDON PATENT APPLICATIONS. The USPTO has had a
substantial backlog of biotechnology patent applications, particularly those
claiming gene sequences. In 1996, the USPTO issued guidelines limiting the
number of partial gene sequences that can be examined within a single patent
application. Many of our patent applications contain more partial sequences than
the maximum number allowed under these guidelines. Due to the resources needed
to comply with the guidelines, we may decide to abandon patent applications for
some of our partial gene sequences.
Because filing large numbers of patent applications and maintaining issued
patents can be very costly, we may choose not to pursue every application. If we
do not pursue patent protection for all of our full-length and partial gene
sequences, the value of our intellectual property portfolio could be diminished.
Because of the possible delay in obtaining allowance of some of our patent
applications, and the secrecy of patent applications, we do not know if other
applications having priority over ours have been filed.
WE MAY NEED TO REFILE SOME OF OUR PATENT APPLICATIONS, AND THE PERIOD OF
PATENT PROTECTION HAS BEEN SHORTENED. The value of our patents depends in part
on their duration. The U.S. patent laws were amended in 1995 to change the term
of patent protection from 17 years from patent issuance to 20 years from the
earliest effective filing date of the application. Because the average time from
filing to issuance of biotechnology applications is at least one year and may be
more than three years depending on the subject matter, a 20-year patent term
from the filing date may result in substantially shorter patent protection,
which may adversely affect our rights under any patents that obtain. We may need
to refile applications claiming large numbers of gene sequences and, in these
situations, the patent term will be measured from the date of the earliest
priority application. This would shorten our period of patent exclusivity.
INTERNATIONAL PATENT PROTECTION IS PARTICULARLY UNCERTAIN. Biotechnology
patent law outside the United States is even more uncertain and is currently
undergoing review and revision in many countries. Further, the laws of some
foreign countries may not protect our intellectual property rights to the same
extent as U.S. laws. We may participate in opposition proceedings to determine
the validity of our or our competitors' foreign patents, which could result in
substantial costs and diversion of our efforts.
WE MAY BE SUBJECT TO ADDITIONAL LITIGATION AND INFRINGEMENT CLAIMS
The technology that we use to develop our products, and those that we
incorporate in our products, may be subject to claims that they infringe the
patents or proprietary rights of others. The risk of this occurring will tend to
increase as the genomics, biotechnology and software industries expand, more
patents are issued and other companies attempt to discover genes and SNPs and
engage in other genomic-related businesses.
As is typical in the genomics, biotechnology and software industries, we
have received, and we will probably receive in the future, notices from third
parties alleging patent infringement. We believe that we are not infringing the
patent rights of any such third party. Except for Affymetrix, no third party has
filed a patent lawsuit against us.
We may, however, be involved in future lawsuits alleging patent
infringement or other intellectual property rights violations. In addition,
litigation may be necessary to:
- assert claims of infringement,
- enforce our patents,
- protect our trade secrets or know-how, or
- determine the enforceability, scope and validity of the proprietary
rights of others.
We may be unsuccessful in defending or pursuing these lawsuits. Regardless
of the outcome, litigation can be very costly and can divert management's
efforts. An adverse determination may subject us to significant liabilities or
require us to seek licenses to other parties' patents or proprietary rights. We
may also be restricted or prevented from manufacturing or selling our products.
Further, we may not be able to obtain the necessary licenses on acceptable
terms, if at all.
WE MAY ENCOUNTER PROBLEMS IN MEETING CUSTOMERS' SOFTWARE NEEDS
Our databases also require extensive software support and will need to
incorporate features determined by database collaborators. If we experience
delays or difficulties in implementing our database software or collaborator-
requested features, we may be unable to service our collaborators.
OUR RECENT ACQUISITIONS INVOLVE SEVERAL RISKS
Our recent acquisitions of Synteni and Hexagen involve several potential
operating and business risks, including potential problems and costs associated
with integrating Synteni's and Hexagen's businesses, technologies and management
with ours. Our integration efforts may also result in the loss of efficiency or
employees.
The combined companies may not realize any revenue enhancements or cost
savings. Increases in other expenses and operating losses, including losses due
to problems in integrating the acquired companies with ours, may offset any cost
savings. Our combined operating results and financial condition may not be
superior to what we could have achieved without these acquisitions, even if we
integrate the acquired business efficiently, effectively and quickly. The
combination of these businesses with ours may also take longer than expected.
In particular, we began our integration of Hexagen recently. We will need
to integrate Hexagen's technology with our existing technology and improve its
throughput, in order to develop a SNP database. We may be unable to achieve the
necessary improvements, which could slow our efforts to develop a SNP-related
business. Also, since Hexagen is located in England, we may experience
difficulties in integrating their operations with our U.S.-based operations. We
may also incur an expense if the goodwill and other intangible assets associated
with the Hexagen purchase are determined to be impaired in the future.
FUTURE ACQUISITIONS WILL CREATE RISKS AND UNCERTAINTIES
As part of our business strategy, we may acquire other assets, technologies
and businesses. We acquired two companies in 1996, Synteni in January 1998, and
Hexagen in September 1998.
These and any future acquisitions involve risks such as the following:
- we may be exposed to unknown liabilities of acquired companies;
- our acquisition and integration costs may be higher than we
anticipated and may cause our quarterly and annual operating results to
fluctuate;
- we may experience difficulty and expense in assimilating the
operations and personnel of the acquired businesses, disrupting our business and
diverting management's time and attention;
- we may be unable to integrate or complete the development and
application of acquired technology;
- we may experience difficulties in establishing and maintaining
uniform standards, controls, procedures and policies;
- our relationships with key customers of acquired businesses may be
impaired, due to changes in management and ownership of the acquired businesses;
- we may be unable to retain key employees of the acquired businesses;
- we may incur amortization expenses if an acquisition results in
significant goodwill or other intangible assets; and
- our stockholders may be diluted if we pay for the acquisition with
equity securities.
In addition, if we acquire additional businesses that are not located near our
Palo Alto, California headquarters, we may experience more difficulty
integrating and managing the acquired businesses' operations.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH
We expect to continue to experience significant growth in the number of our
employees and the scope of our operations. This growth has placed, and may
continue to place, a significant strain on our management and operations. Our
ability to manage this growth will depend upon our ability to broaden our
management team and our ability to attract, hire and retain skilled employees.
Our success will also depend on the ability of our officers and key employees to
continue to implement and improve our operational and other systems and to hire,
train and manage our employees.
In addition, we must continue to invest in customer support resources as
the number of database collaborators and their requests for support increase.
Our database collaborators typically have worldwide operations and may require
support at multiple U.S. and foreign sites. To provide this support, we may need
to open offices in addition to our Palo Alto, California headquarters and our
offices in Fremont, California, St. Louis, Missouri and Cambridge, England,
which could result in additional burdens on our systems and resources.
WE DEPEND ON KEY EMPLOYEES IN A COMPETITIVE MARKET FOR SKILLED PERSONNEL
We are highly dependent on the principal members of our management,
operations and scientific staff, including Roy A. Whitfield, our Chief Executive
Officer, and Randal W. Scott, our President and Chief Scientific Officer. The
loss of any of these persons' services would have a material adverse effect on
our business. We have not entered into any employment agreement with any of
these persons and do not maintain a key person life insurance policy on the life
of any employee.
Our future success also will depend in part on the continued service of our
key scientific, software, bioinformatics and management personnel and our
ability to identify, hire and retain additional personnel, including customer
service, marketing and sales staff. We experience intense competition for
qualified personnel. We may not be able to continue to attract and retain
personnel necessary for the development of our business.
WE DEPEND ON THIRD PARTIES FOR NECESSARY EQUIPMENT, SUPPLIES AND DATA
WE RELY ON A SMALL NUMBER OF SUPPLIERS OF GENE SEQUENCING MACHINES AND
REAGENTS REQUIRED FOR GENE SEQUENCING. Although we are evaluating alternative
gene sequencing machines, they may not be available in sufficient quantities or
at acceptable costs. In addition, if a third party claims that our use of these
machines infringes their patent rights, our use of these machines could become
more costly or could be prevented. If we are unable to obtain additional
machines or an adequate supply of reagents or other materials at commercially
reasonable rates, our ability to identify genes and SNPs would be adversely
affected.
WE RELY ON OUTSIDE SOURCES FOR TISSUE SAMPLES FROM WHICH WE ISOLATE GENETIC
MATERIAL USED IN OUR OPERATIONS. Our business could be adversely affected if we
lose access to some of these sources, or if they charged us higher access fees
or imposed tighter restrictions on our use of the information generated from the
samples.
WE CANNOT CONTROL THE PERFORMANCE OF COLLABORATORS. We may enter into
research and development relationships with corporate and academic collaborators
and others. The success of these relationships depends upon third parties'
performance of their responsibilities. Our ability to develop these
relationships is uncertain, and any established relationships may prove
unsuccessful. Our collaborators may also be pursuing alternative technologies or
developing alternative products on their own or in collaboration with others,
including our competitors.
WE RELY ON THIRD-PARTY DATA SOURCES. We rely on scientific and other data
supplied by others, including our academic collaborators and sources of tissue
samples. These data could contain errors or other defects, which could corrupt
our databases. In addition, we cannot guarantee that our data sources acquired
this information in compliance with legal requirements. If either of these
happen and become known, our business prospects could be adversely affected.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE
Based upon our current plans, we believe that our existing resources and
anticipated cash flow from operations can satisfy our capital needs for at least
the next 12 months. However, our products and services may not produce revenues
which, together with our existing cash and other resources, are adequate to meet
our cash needs. Our cash requirements depend on numerous factors, including:
- our ability to attract and retain collaborators for our databases and
other products and services;
- expenditures in connection with alliances, license agreements and
acquisitions of and investments in complementary technologies and businesses;
- the need to increase research and development spending as a result of
competing technological and market developments;
- the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights;
- the purchase of additional capital equipment, including equipment
necessary to process data for our databases and to ensure that our sequencing
and microarray operations remain competitive;
- capital expenditures required to expand our facilities; and
- costs associated with the integration of acquired operations.
Changes in our research and development plans or other changes affecting
our operating expenses may alter the timing and amount of expenditures of our
capital resources. If we need additional funding, we may be unable to obtain it
on favorable terms, or at all. If adequate funds are not available, we may have
to curtail operations significantly or obtain funds by entering into
arrangements requiring us to relinquish rights to certain technologies, products
or markets. In addition, if we raise funds by selling stock or convertible
securities, our existing stockholders could suffer dilution.
OUR BUSINESS COULD BE AFFECTED BY THE YEAR 2000 ISSUE
As a result of computer programs being written using two digits, rather
than four, to represent year dates, the performance of our computer systems and
those of our suppliers and customers in the Year 2000 is uncertain. Any computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations which disrupt our operations, such as a temporary inability
to process transactions, send invoices or engage in other normal business
activities.
We are evaluating the Year 2000 readiness of the software products that we
sell, the information technology systems used in our operations, and our other
systems such as building security and voicemail. We currently anticipate that
this project will consist of the following phases:
- identifying all of our software products, information technology
systems and other systems;
- assessing repair or replacement requirements;
- repair or replacement;
- testing;
- implementation; and
- creating contingency plans in the event of Year 2000 failures.
We will initiate an assessment of all current versions of our software
products and believe that this will be completed in the first half of 1999. Even
so, whether a complete system or device in which a software product is embedded
will operate correctly for an end-user depends largely on the Year 2000
compliance of other components, most of which are supplied by third parties.
We rely, both domestically and internationally, upon various vendors,
government agencies, utility companies, telecommunications service companies,
delivery service companies and other service providers. We have no control over
these third parties and they may suffer a Year 2000 business disruption.
We also rely upon goods and services purchased from certain vendors, and
our business could be disrupted if they fail to adequately address the Year 2000
issue. We are preparing to survey our principal vendors to assess the potential
effect of the Year 2000 issue on their ability to supply us. We cannot currently
predict the outcome of this effort. We intend to develop contingency plans
regarding vendors whose failure to be Year 2000 ready is expected to have a
material adverse impact on our operations. However, our vendors may be unable to
supply important goods and services without material interruption and our
contingency plans may not keep us adequately supplied.
The demand for our products could also be affected by Year 2000 issues
affecting our customers. We plan to develop a contingency plan for customers
with Year 2000 problems, but we cannot presently determine what impact, if any,
it will have.
We are focusing on identifying and addressing all aspects of our operations
that may be affected by the Year 2000 issue and are addressing the most critical
applications first. We intend to develop and implement, if necessary,
appropriate contingency plans to mitigate the effects of any Year 2000
noncompliance. We expect to have these plans completed in the second half of
1999. As part of the development of a contingency plan, we will evaluate our
worst case scenario for Year 2000 noncompliance. Although the full consequences
are unknown, the failure of our critical systems or those of our material
vendors and other business partners to be Year 2000 complaint would interrupt
our business.
OUR ACTIVITIES INVOLVE HAZARDOUS MATERIALS AND MAY SUBJECT US TO ENVIRONMENTAL
LIABILITY
Our research and development involves the controlled use of hazardous and
radioactive materials and biological waste. We are subject to federal, state and
local laws and regulations governing the use, manufacture, storage, handling and
disposal of these materials and certain waste products. Although we believe that
our safety procedures for handling and disposing of these materials comply with
legally prescribed standards, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. In the event of an
accident, we could be held liable for damages, and this liability could exceed
our resources.
We believe that we are in compliance in all material respects with
applicable environmental laws and regulations and currently do not expect to
make material additional capital expenditures for environmental control
facilities in the near term. However, we may have to incur significant costs to
comply with current or future environmental laws and regulations.
OUR REVENUES ARE DERIVED PRIMARILY FROM THE PHARMACEUTICAL AND BIOTECHNOLOGY
INDUSTRIES
We expect that our revenues in the foreseeable future will be derived
primarily from products and services provided to the pharmaceutical and
biotechnology industries. Accordingly, our success will depend directly upon the
success of the companies within these industries and their demand for our
products and services. Our operating results may fluctuate substantially due to
reductions and delays in research and development expenditures by companies in
these industries. These reductions and delays may result from factors such as:
- changes in economic conditions;
- changes in the regulatory environment affecting health care and
health care providers;
- pricing pressures;
- market-driven pressures on companies to consolidate and reduce costs;
and
- other factors affecting research and development spending.
These factors are not within our control.
OUR BUSINESS COULD BE INTERRUPTED BY NATURAL DISASTERS
We conduct our sequencing and a significant portion of our other activities
at our facilities in Palo Alto, California, and conduct our microarray-related
activities at our facilities in Fremont, California. Both locations are in a
seismically active area. Although we maintain business interruption insurance,
we do not have or plan to obtain earthquake insurance. A major catastrophe (such
as an earthquake or other natural disaster) could result in a prolonged
interruption of our business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its
investments in short-term marketable securities and its note payable. The
Company's investment policy calls for investment in short term, low risk
instruments. As of December 31, 1998, investments in marketable securities was
$61.2 million. At December 31, 1998, the Company had a fixed rate note payable
balance of $0.7 million. Due to the nature of these investments and note, any
decrease in rates would not have a material impact on the Company's financial
statements.
The Company is exposed to equity price risks on the marketable portion of
equity securities included in its portfolio of investments and long-term
investments, entered into to further its business and strategic objectives.
These investments are in small capitalization stocks in the pharmaceutical/
biotech industry sector, in companies which the Company has research and
development or licensing agreements. The Company typically does not attempt to
reduce or eliminate its market exposure on these securities. As of December
31, 1998, long-term investments were $12.4 million.
The Company typically does not hedge its foreign currency exposure.
Management does not believe that the Company's exposure to foreign currency
rate fluctuations is material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
PAGE
CONSOLIDATED FINANCIAL STATEMENTS OF INCYTE PHARMACEUTICALS, INC.
Report of Ernst & Young LLP, Independent Auditors 43
Consolidated Balance Sheets at December 31, 1998 and 1997 44
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 45
Consolidated Statements of Comprehensive Income (Loss) 46
Consolidated Statement of Stockholders' Equity for the three
year period ended December 31, 1998 47
Consolidated Statements of Cash Flow for the years ended
December 31, 1998, 1997 and 1996 48
Notes to the Consolidated Financial Statements 50
Schedule II - Valuation and Qualifying Accounts 66
FINANCIAL STATEMENTS OF DIADEXUS, LLC, A DEVELOPMENT STAGE COMPANY
Report of PricewaterhouseCoopers LLP, Independent Accountants 67
Balance Sheet at December 31, 1998 and 1997 68
Statement of Operations for the year ended December 31,
1998 and for the period from inception
(September 1997) through December 31, 1997 and 1998 69
Statement of Changes In Members' Equity For the Period
From Inception (September 1997) through December 31, 1998 70
Statement of Cash Flow for the year ended
December 31, 1998 and for the period from inception
(September 1997) through December 31, 1997 and 1998 71
Notes to Financial Statements 72
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Incyte Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Incyte
Pharmaceuticals, Inc., as of December 31, 1998 and 1997, and the related
consolidated statements of operations, comprehensive net income (loss),
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. Our audits also included the financial statement
schedules listed in the Index at Item 14(a).These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits. We did not audit the financial statements of diaDexus, LLC, a joint
venture, which statements reflect total assets of $20,215,000 and $10,212,000 as
of December 31, 1998 and 1997 respectively, and total net loss of $7,928,000 and
$548,000, for the years then ended. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion insofar as it
relates to the loss from joint venture recorded under the equity method and
other data included for diaDexus, LLC, is based solely on the report of the
other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Incyte Pharmaceuticals, Inc., at December
31, 1998 and 1997, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/Ernst & Young LLP
Palo Alto, California
January 27, 1999
INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares and par value)
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 50,048 $ 55,598
Restricted cash - 6,000
Marketable securities - available-for-sale 61,185 57,497
Accounts receivable, net 14,318 19,983
Prepaid expenses and other current assets 5,813 3,836
-------------- --------------
Total current assets 131,364 142,914
Property and equipment, net 54,429 38,070
Long-term investments 20,653 14,800
Goodwill and other intangible assets, net 16,955 -
Deposits and other assets 6,889 3,305
-------------- --------------
Total assets $ 230,290 $ 199,089
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,244 $ 5,791
Accrued and other current liabilities 7,843 5,416
Accrued compensation 4,786 3,192
Due to joint venture - 6,000
Deferred revenue 29,054 31,815
-------------- --------------
Total current liabilities 49,927 52,214
Non-current portion of capital lease obligations and note payable 796 1,173
-------------- --------------
Total liabilities 50,723 53,387
-------------- --------------
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; none issued and outstanding at December 31,
1998 and 1997. - -
Common stock, $0.001 par value; 75,000,000 shares
authorized; 27,829,850 and 26,054,475 shares issued and
outstanding at December 31, 1998 and 1997, respectively. 28 26
Additional paid-in capital 209,192 175,749
Deferred compensation (1,209) -
Receivable from stockholders (33) -
Accumulated other comprehensive income (loss) (10) 56
Accumulated deficit (28,401) (30,129)
-------------- --------------
Total stockholders' equity 179,567 145,702
-------------- --------------
Total liabilities and stockholders' equity $ 230,290 $ 199,089
============== ==============
See accompanying notes
INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
YEAR ENDED
DECEMBER 31,
1998 1997 1996
--------- -------- --------
Revenues $134,811 $89,996 $41,895
Costs and expenses:
Research and development 97,192 72,452 41,337
Selling, general and administrative 25,438 13,928 6,957
Charge for the purchase of in-process research
and development 10,978 - 3,165
Acquisition-related charges 1,171 - -
--------- -------- --------
Total costs and expenses 134,779 86,380 51,459
Income (loss) from operations 32 3,616 (9,564)
Interest and other income 7,416 4,326 2,538
Interest and other expense (150) (186) (250)
Losses from joint venture (1,474) (300) -
--------- -------- --------
Income (loss) before income taxes 5,824 7,456 (7,276)
Provision for income taxes 2,352 548 -
--------- -------- --------
Net income (loss) $ 3,472 $ 6,908 $(7,276)
========= ======== ========
Basic net income (loss) per share $ 0.13 $ 0.28 $ (0.32)
========= ======== ========
Shares used in computing
basic net income (loss) per share 26,921 24,300 22,398
========= ======== ========
Diluted net income (loss) per share $ 0.12 $ 0.26 $ (0.32)
========= ======== ========
Shares used in computing
diluted net income (loss) per share 28,899 26,498 22,398
========= ======== ========
See accompanying notes
INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF COMPREHESIVE NET INCOME (LOSS)
(in thousands)
YEAR ENDED
DECEMBER 31,
1998 1997 1996
---------- -------- --------
Net income (loss) $ 3,472 $ 6,908 $(7,276)
Other comprehensive income (loss)
Unrealized gains (losses) on
marketable securities 338 127 (106)
Foreign currency translation adjustments (404) 2 -
---------- -------- --------
Other comprehensive income (loss) (66) 129 (106)
---------- -------- --------
Comprehensive income (loss) $ 3,406 $ 7,037 $(7,382)
========== ======== ========
INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except number of shares)
COMMON
ADDITIONAL STOCK
COMMON PAID-IN TO BE DEFERRED
STOCK CAPITAL ISSUED COMPENSATION
----------- ---------- ------- --------------
Balances at January 1, 1996 $ 21 $ 77,241 $ 100 $ (29)
Issuance of 457,296 shares of Common Stock
upon exercise of Stock options and 299,398
shares upon exercise of warrant. 1 1,581 - -
Issuance of 249,200 common stock previously
subscribed - 100 (100) -
Issuance of 146,342 shares of Common Stock in
exchange of Combion, Inc - 3,000 - -
Amortization of deferred compensation - - - 29
Net change in unrealized gains (losses) on
marketable securities - - - -
Net loss - - - -
----------- ----------- --------- ------------
Balances at December 31, 1996 22 81,922 - -
Issuance of 2,755,426 shares of Common Stock,
net of expenses and underwriters' fees of $5,065 3 87,239 - -
Issuance of 462,434 shares of Common Stock,
net of expenses of $41 1 3,559 - -
Issuance of 431,879 shares of Common Stock
upon exercise of stock options and 14,934
shares upon exercise of warrant. - 3,029 - -
Net change in unrealized gains (losses) on
marketable securities - - - -
Net change in cumulative translation adjustment - - - -
Net income - - - -
----------- ------------ --------- -----------
Balances at December 31, 1997 26 175,749 - -
Adjustment to conform fiscal year of pooled entity
Synteni (including issuance of
337,271 shares of common stock) - 3,732 - (1,658)
Issuance of 423,030 Common Stock upon
exercise of stock options; 38,944 shares issued
under ESPP 1 4,748 - -
Issuance of 976,130 shares of Common Stock in
purchase of Hexagen Limited 1 23,438 - -
Tax benefit from employee stock transactions - 1,525 - -
Amortization of deferred compensation - - - 449
Net change in unrealized gains (losses) on
marketable securities - - - -
Repayment of receivable from shareholder - - - -
Change in cumulative translation adjustment - - - -
Net income - - - -
----------- ----------- --------- -----------
Balances at December 31, 1998 $ 28 $ 209,192 $ - $ (1,209)
=========== ============ ========== ===========
ACCUMULATED
RECEIVABLE OTHER TOTAL
FROM COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
STOCKHOLDER INCOME DEFICIT EQUITY
------------- ------------- ------------- ------------
Balances at January 1, 1996 $ - $ 33 $ (29,761) $ 47,605
Issuance of 457,296 shares of Common Stock
upon exercise of Stock options and 299,398
shares upon exercise of warrant. - - - 1,582
Issuance of 249,200 common stock previously
subscribed - - - -
Issuance of 146,342 shares of Common Stock in
exchange of Combion, Inc - - - 3,000
Amortization of deferred compensation - - - 29
Net change in unrealized gains (losses) on
marketable securities - (106) - (106)
Net loss - - (7,276) (7,276)
------------- -------------- ------------- ---------------
Balances at December 31, 1996 - (73) (37,037) 44,834
Issuance of 2,755,426 shares of Common Stock,
net of expenses and underwriters' fees of $5,065 - - - 87,242
Issuance of 462,434 shares of Common Stock,
net of expenses of $41 - - - 3,560
Issuance of 431,879 shares of Common Stock
upon exercise of stock options and 14,934
shares upon exercise of warrant. - - - 3,029
Net change in unrealized gains (losses) on
marketable securities - 127 - 127
Net change in cumulative translation adjustment - 2 - 2
Net income - - 6,908 6,908
------------- ------------- ------------- ------------
Balances at December 31, 1997 - 56 (30,129) 145,702
Adjustment to conform fiscal year of pooled entity
Synteni (including issuance of 337,271 shares
of common stock) (49) - (1,744) 281
Issuance of 423,030 Common Stock upon
exercise of stock options; 38,944 shares
issued under ESPP - - - 4,749
Issuance of 976,130 shares of Common Stock in
purchase of Hexagen Limited - - - 23,439
Tax benefit from employee stock transactions - - - 1,525
Amortization of deferred compensation - - - 449
Net change in unrealized gains (losses) on
marketable securities - 338 - 338
Repayment of receivable from shareholder 16 - - 16
Change in cumulative translation adjustment - (404) - (404)
Net income - - 3,472 3,472
------------- ------------- ------------- ------------
Balances at December 31, 1998 $ (33) $ (10) $ (28,401) $ 179,567
============= ============= ============= ============
See accompanying notes
INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED
DECEMBER 31,
1998 1997 1996
---------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,472 $ 6,908 $ (7,276)
Adjustments to reconcile net income
(loss)to net cash provided by
operating activities:
Depreciation and amortization 17,827 10,633 6,529
Non-cash portion of the charge
for the purchase of in-process
research and development 10,978 - 3,000
Losses in joint venture 1,474 300 -
Adjustment to conform fiscal year
of pooled entity 278 - -
Changes in certain assets and liabilities:
Accounts receivable 5,885 (18,451) 5,174
Prepaid expenses and other assets (5,280) (3,495) (2,074)
Accounts payable 1,773 1,028 2,430
Accrued and other current
liabilities 1,826 14,404 10,143
Deferred revenue (2,000) 6,660 601
---------- --------- ---------
Net cash provided by operating activities 36,233 17,987 18,527
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (30,710) (27,225) (20,453)
Long-term investments (7,145) (8,537) (313)
Purchase of Hexagen (net of cash received) (3,977) - -
Transfer to restricted cash - (6,000) -
Proceeds from sale of assets leased back
under operating leases - 1,696 -
Purchases of marketable securities (98,512) (53,464) (16,526)
Sales of marketable securities 88,081 8,515 -
Maturities of marketable securities 6,900 18,225 16,336
---------- --------- ---------
Net cash used in investing activities (45,363) (66,790) (20,956)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 4,749 93,831 1,582
Proceeds from capital leases and note
payable - 1,000 -
Principal payments on capital lease
obligations and note payable (781) (46) (121)
Proceeds from repayment of receivable
from shareholders 16 - -
---------- --------- ---------
Net cash provided by financing activities 3,984 94,785 1,461
---------- --------- ---------
Effect of exchange rate on cash and cash
equivalents (404) - -
Net increase (decrease) in cash and cash
equivalents (5,550) 45,982 (968)
Cash and cash equivalents at beginning of period 55,598 9,616 10,584
---------- --------- ---------
Cash and cash equivalents at end of period $ 50,048 $ 55,598 $ 9,616
========== ========= =========
(Continued)
See accompanying notes
INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(in thousands)
YEAR ENDED DECEMBER 31,
1998 1997 1996
-------- -------- --------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest paid $ 138 $ 16 $ 17
======== ======== ========
Taxes paid $ 705 $ 252 $ -
======== ======== ========
CASH FLOW FOR ACQUISITION OF HEXAGEN
Tangible assets acquired
(excluding $1,023 cash received) $ 3,025
Purchased in-process R&D 10,978
Goodwill and other intangible
assets acquired 17,553
Acquisition costs incurred (1,029)
Liabilities assumed (3,112)
Common stock issued (23,438)
--------
Cash paid for acquisition (net of
$1,023 cash received) $ 3,977
========
See accompanying notes
INCYTE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business. Incyte Pharmaceuticals, Inc. (the "Company") was
incorporated in Delaware in April 1991. The Company designs, develops, and
markets genomic information-based tools including database products, genomic
data management software tools, microarray-based gene expression services and
genomic reagents and related services. The Company's genomic databases integrate
bioinformatics software with proprietary and, when appropriate, publicly
available genetic information to create information-based tools used by
pharmaceutical and biotechnology companies in drug discovery and development.
Principles of Consolidation. The consolidated financial statements include the
accounts of Incyte Pharmaceuticals, Inc., and its wholly owned subsidiaries. All
material intercompany accounts, transactions, and profits have been eliminated
in consolidation.
In September 1998, the Company completed the acquisition of Hexagen Limited
("Hexagen"), which was accounted for as a purchase. The Company issued 976,130
shares of the its common stock and $5.0 million in cash in exchange for all of
Hexagen's outstanding capital stock. In addition, the Company assumed Hexagen's
outstanding stock options, which if fully vested and exercised, would amount to
125,909 shares of common stock. The consolidated financial statements discussed
herein reflect the inclusion of the results of Hexagen from the date of
acquisition, September 21, 1998.
In January 1998, the Company issued shares of common stock in exchange for all
of the capital stock of Synteni, Inc. ("Synteni"). The merger has been accounted
for as a pooling of interests and, accordingly, the Company's financial
statements and financial data for all periods have been retroactively restated
to include the accounts and operations of Synteni since inception. Synteni's
fiscal year ends on September 30. Synteni's results of operations for the period
from October 1, 1997 to December 31, 1997 were recorded directly in retained
earnings in 1998.
In August 1996, the Company acquired Combion, Inc. ("Combion") for shares of the
Company's Common Stock. The acquisition of Combion has been accounted for as a
purchase, and the consolidated financial statements discussed herein reflect the
inclusion of the results of Combion from the date of acquisition, August 15,
1996.
In July 1996, the Company issued shares of its common stock in exchange for all
of the outstanding shares of Genome Systems, Inc. ("Genome Systems"). The
transaction has been accounted for as a pooling of interests, and the
consolidated financial statements discussed herein and all historical financial
information have been restated to reflect the combined operations of both
companies. See Note 9
Reclassifications. Certain reclassifications were made to prior periods'
balances to conform with the 1998 presentation.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Foreign Currency Translation. The financial statements of subsidiaries outside
the United States are measured using the local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
rates of exchange at the balance sheet date. The resultant translation
adjustments are included in the cumulative translation adjustment, a separate
component of stockholders' equity. Income and expense items are translated at
average monthly rates of exchange.
Concentrations of Credit Risk. Cash, cash equivalents, and short-term
investments, trade receivables, and long term strategic investments are
financial instruments which potentially subject the Company to concentrations of
credit risk. The estimated fair value of financial instruments approximates the
carrying value based on available market information. The Company primarily
invests its excess available funds in notes and bills issued by the U.S.
government and its agencies and corporate debt securities and, by policy, limits
the amount of credit exposure to any one issuer and to any one type of
investment, other than securities issued or guaranteed by the U.S. Government.
The Company's customers are pharmaceutical, biotechnology and agricultural
companies which are typically located in the United States and Europe. The
Company has not experienced any credit losses to date and does not require
collateral on receivables. The Company's long-term investments represent equity
investments in a number of companies whose businesses may be complementary to
the Company's business. The Company evaluates the long-term investments
quarterly for impairment, and to date has not incurred a material impairment
related to these investments. (See Long-Term Investments)
Cash and Cash Equivalents. Cash and cash equivalents are held in U.S. and U.K.
banks or in custodial accounts with U.S. and U.K. banks. Cash equivalents are
defined as all liquid investments with maturity from date of purchase of 90 days
or less that are readily convertible into cash and have insignificant interest
rate risk. All other investments are reported as marketable securities -
available-for-sale.
Restricted Cash. Restricted cash at December 31, 1997 consists of cash held in
an escrow account which was disbursed to the Company's joint venture, diaDexus,
LLC ("diaDexus"), in 1998 in accordance with the joint venture agreement (see
Joint Venture and Note 8).
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. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretions of discounts to maturity.
Such amortization is included in interest income. Realized gains and losses and
declines in value judged to be other than temporary for available-for-sale
securities are included in interest and other income/expense. The cost of
securities is sold is based on the specific identification method.
The following is a summary of the Company's investment portfolio, excluding the
Company's investment in diaDexus and including cash equivalents of $26,203,000
and $40,064,000 as of December 31, 1998 and 1997, respectively.
NET
UNREALIZED ESTIMATED
AMORTIZED GAINS FAIR
COST (LOSSES) VALUE
----------- ----------- --------
DECEMBER 31, 1998
U.S. Treasury notes and other U.S. government and
agency securities $ 72,635 $ 210 $ 72,845
Corporate debt securities 14,543 - 14,543
Long term equity investments 12,245 182 12,427
----------- ----------- --------
$ 99,423 $ 392 $ 99,815
=========== =========== ========
DECEMBER 31, 1997
U.S. Treasury notes and other U.S. government and
agency securities $ 53,951 $ 47 $ 53,998
Corporate debt securities 30,543 - 30,543
Floating rate notes 13,013 7 13,020
Long term equity investments 5,100 - 5,100
----------- ----------- --------
$ 102,607 $ 54 $102,661
=========== =========== ========
At December 31, 1998 and 1997, all of the Company's investments are classified
as short-term, as the Company has classified its investments as available for
sale and may not hold its investments until maturity in order to take advantage
of market conditions. At December 31, 1998, marketable securities with a market
value of $46,355,000 and an amortized cost of $46,227,000 had maturities under a
year and marketable securities with a market value of $41,033,000 and an
amortized cost of $40,958,000 had maturities over a year, but less than two
years. Unrealized losses were not material and have therefore been netted
against unrealized gains. Net realized gains of $380,000 from sales of
marketable securities were included in Interest and Other Income in 1998 and net
realized losses of $25,000 losses from sales of marketable securities were
included in Interest and Other Expense in 1997.
Accounts Receivable. Accounts receivable at December 31, 1998 and 1997 included
an allowance for doubtful accounts of $434,000 and $225,000, respectively.
Property and Equipment. Property and equipment is stated at cost, less
accumulated depreciation and amortization. Depreciation is recorded using the
straight-line method over the estimated useful lives of the respective assets
(generally two to five years). Leasehold improvements are amortized over the
shorter of the estimated useful life of the assets or lease term. Property and
equipment consists of the following:
DECEMBER 31,
1998 1997
-------- -------
Office equipment $ 3,577 $ 2,588
Laboratory equipment 25,665 18,939
Computer equipment 35,209 22,168
Leasehold improvements 26,026 14,495
-------- -------
90,477 58,190
Less accumulated depreciation and amortization 36,048 20,120
-------- -------
$ 54,429 $38,070
======== =======
Depreciation expense, including depreciation expense of assets under capital
leases, was $13,420,000, $8,758,000, and $5,298,000, for 1998, 1997, and 1996,
respectively. Amortization of leasehold improvements was $3,343,000, $2,260,000,
and $1,061,000 for 1998, 1997, and 1996, respectively.
Certain laboratory and computer equipment used by the Company could be subject
to technological obsolescence in the event that significant advancement is made
in competing or developing equipment technologies. Management continually
reviews the estimated useful lives of technologically sensitive equipment and
believes that those estimates appropriately reflect the current useful life of
its assets. In the event that a currently unknown significantly advanced
technology became commercially available, the Company would re-evaluate the
value and estimated useful lives of its existing equipment, possibly having a
material impact on the financial statements.
Long-Term Investments. The Company has made equity investments in a number of
companies whose businesses may be complementary to the Company's business. The
Company accounts for its investment in diaDexus ($8,226,000 and $9,700,000 at
December 31, 1998 and 1997, respectively) under the equity method of accounting
(see Joint Venture and Note 10 ). All investments in which the shares are freely
tradable or become freely tradable within one year of the balance sheet date are
accounted for in accordance with SFAS 115, with unrealized gains and losses
being reported as a separate component of stockholders' equity. In all other
cases, the cost method of accounting is used. The Company holds less than 10% of
each long-term investment and does not exert significant influence over these
investments.
Goodwill and Other Intangible Assets. Goodwill and other intangible assets were
generated in the acquisition of Hexagen. Goodwill is being amortized on a
straight line basis over 8 years and the other intangible assets of developed
technology and assembled workforce are being amortized on a straight line basis
over 5 and 3 years, respectively.
Software Costs. In accordance with the provisions of the Financial Accounting
Standards Board Statement No. 86, "Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed," the Company has capitalized software
development costs incurred in developing certain products once technological
feasibility of the products has been determined. The Company recorded
capitalized software, net of amortization of $6,315,000 and $2,987,000 at
December 31, 1998 and 1997, respectively, and recorded amortization of
capitalized software of $1,379,000, $391,000 and none for the years ended
December 31, 1998, 1997 and 1996, respectively
Accumulated Other Comprehensive Income. Accumulated Other Comprehensive Income
consists of the following at December 31:
1998 1997
----- ----
Unrealized gains on marketable securities 392 54
Cumulative Translation Adjustment (402) 2
----- ----
(10) 56
===== ====
Revenue Recognition. The Company recognizes revenue for database collaboration
agreements evenly over the term of each agreement. Revenue is deferred for fees
received before earned. Revenues from custom orders, such as contract
sequencing, and reagents are recognized upon completion and shipment. Revenues
from genomic screening services are recognized upon completion. Revenue from
gene expression microarray services includes; technology access fees, which are
generally recognized ratably over the access term; capacity ramp up charges,
which are recognized ratably as capacity is increased; and usage fees which are
recognized at the completion of key stages in the performance of the service, in
proportion to costs incurred. Generally, software revenue is allocated between
license fees and maintenance fees, in accordance with SOP 97-2, with the license
revenue being recognized upon installation, and maintenance fees recognized
evenly over the maintenance term.
Stock-Based Compensation. The Company accounts for stock option grants to
employees in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees. The Company currently grants stock options for a fixed number of
shares to employees and directors with an exercise price equal to the fair value
of the shares at the date of grant, and therefore records no compensation
expense. Prior to the merger with Incyte, Synteni recorded deferred compensation
of $1,658,000 for options issued to employees with an exercise price below the
fair market value of the underlying stock. The amount is being amortized over
the vesting period of the options issued.
Advertising Costs. All costs associated with advertising products are expensed
in the year incurred. Advertising expense for the years ended December 31, 1998,
1997, and 1996 were $1,092,000, $772,000, and $573,000, respectively.
Joint Venture. In September 1997, the Company formed a joint venture, diaDexus,
LLC with SmithKline Beecham Corporation ("SB"), which will utilize genomic and
bioinformatic technologies in the discovery and commercialization of molecular
diagnostics. The Company and SB each hold a 50 percent equity interest in
diaDexus and the Company accounts for the investment under the equity method.
See Note 10
New Pronouncements In June 1998, the FASB issued Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. ("SFAS 133"). This statement
is effective for fiscal years beginning after June 15, 1999. SFAS 133
established standards for reporting derivative instruments and hedging
activities. Application of SFAS 133 will have no impact on the consolidated
financial position or results of operations as currently reported.
NOTE 2. DATABASE AND MICROARRAY AGREEMENTS
As of December 31, 1998, the Company had entered into database collaboration
agreements with twenty-two pharmaceutical, biotechnology and agricultural
companies. Over 78% of revenues in 1998 were derived from such collaborations.
Each collaborator has agreed to pay, during the term of the agreement, annual
fees to receive non-exclusive access to selected modules of the Company's
databases. In addition, if a customer develops certain products utilizing the
Company's technology and proprietary database information, milestone and royalty
payments could potentially be received by the Company. The loss of revenues from
any individual database agreement, if terminated or not renewed, could have an
adverse impact on the Company's results of operations, although it is not
anticipated to have a material adverse impact on the Company's business or
financial condition.
The Company has also entered into microarray production agreements with
pharmaceutical, biotechnology and agricultural companies. The agreements range
from small volume pilot agreements to large volume production agreements. The
large volume production agreements require an up front technology access fee
that entitles the customer to order products and services at set prices over the
term of the agreement.
One of the collaborators contributed 12% of the Company's total revenues in
1998. No collaborators individually contributed more than 10% of the Company's
total revenues in 1997. Over 90% of the revenues in 1996 were derived from ten
collaborators, three of which individually contributed more than 10% of the
total, or approximately 37% in the aggregate.
NOTE 3. COMMITMENTS
At December 31, 1998, the Company had signed noncancelable operating leases on
multiple facilities, including facilities in Palo Alto and Fremont, California,
St. Louis, Missouri and Cambridge, England. The leases expire on various dates
ranging from March 1999 to March 2009. Rent expense for the years ended December
31, 1998, 1997, and 1996, was approximately $5,218,000, $3,490,000, and
$1,675,000, respectively.
The Company had laboratory and office equipment with a cost of approximately
$2,334,000 and $189,000 at December 31, 1998 and 1997, respectively, and related
accumulated amortization of approximately $177,000 and $136,000 at December 31,
1998 and 1997, respectively, under capital leases. These leases are secured by
the equipment leased thereunder.
At December 31, 1998, future noncancelable minimum payments under the operating
and capital leases and notes payable were as follows:
CAPITAL LEASES
OPERATING AND
LEASES NOTE PAYABLE
---------------- --------------
Year ended December 31, (in thousands)
1999 $ 10,912 $ 1,457
2000 10,567 702
2001 9,708 199
2002 7,958 -
2003 6,326 -
Thereafter 27,123 -
---------------- --------------
Total minimum lease payments $ 72,594 2,358
================
Less amount representing interest 425
--------------
Present value of minimum lease payments 1,933
Less current portion 1,137
--------------
Non-current portion $ 796
==============
In July 1997, Synteni obtained $1,000,000 in debt financing secured by its
property and equipment. The loan is repayable in 48 equal monthly installments
commencing on September 1, 1997 and carries an annual interest rate of 9%. In
connection with the financing, Synteni issued a warrant to purchase 2,569 shares
of common stock, exercisable for a period of seven years from the date of issue
at an exercise price of $7.79 per share. Using the Black-Scholes model to
determine the fair market value of the warrant, management has determined that
such fair value is nominal.
In July 1997, the Company entered into a multi-year lease with respect to a
95,000 square foot building to be constructed adjacent to the Company's Palo
Alto headquarters. The term of the lease is twelve years at an approximate
annual rent of $3.4 million. The Company's share of tenant improvements is
estimated to be between $10.0 million and $15.0 million, of which approximately
$6.8 million has been expended through December 31, 1998.
The Company has entered into a number of research and development alliances with
companies and research institutions. These agreements provide for the funding of
research activities by the Company and the possible payment of milestones,
license fees, and, in some cases, royalties. As part of a collaborative
agreement with Oxford GlycoSciences plc ("OGS") relating to the joint
development of a proteomics database, the Company has agreed to reimburse up to
$5.0 million in 1999 if OGS' revenues are not sufficient to offset expenses for
services rendered. The Company's commitments under any other of these agreements
do not represent a significant expenditure in relation to the Company's total
research and development expense.
NOTE 4. STOCKHOLDERS' EQUITY
Common Stock. At December 31, 1998, the Company had reserved a total of
5,996,589 shares of its Common Stock for issuance upon exercise of outstanding
stock options and purchases under the Employee Stock Purchase Plan described
below. In October 1997, the Company's Board of Directors authorized a
two-for-one stock split effected in the form of a stock dividend paid on
November 7, 1997 to holders of record on October 17, 1997. All share and per
share data have been adjusted retroactively to reflect the split.
On May 21, 1997, the Company's stockholders approved an increase in the number
of shares authorized for issuance from 20,000,000 to 75,000,000.
Sales of Stock. In August 1997, the Company completed a follow-on public stock
offering and issued 2,755,426 shares of common stock, including 355,426 shares
covered by the exercise of the underwriters' over-allotment option, at $33.50
per share. Net proceeds from this offering were approximately $87.2 million
after deducting the underwriting discount and offering expenses.
Stock Compensation Plans. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its stock compensation plans. Accordingly, no
compensation cost, excluding options issued by Synteni prior to the merger, has
been recognized for its fixed stock option plans. Had compensation cost for the
Company's three stock-based compensation plans been determined consistent with
FASB Statement No. 123, the Company's pro forma net loss in 1998, 1997 and 1996
would have been approximately $7.4 million, $0.5 million and $11.0 million,
respectively. The Company's pro forma basic and diluted net loss per share in
1998, 1997 and 1996 would have been $0.27 per share, $0.02 per share and $0.49
per share, respectively. The weighted average fair value of the options granted
during 1998, 1997 and 1996 are estimated at $16.59, $14.66 and $9.44 per share,
respectively, on the date of grant, using the Black-Scholes multiple-option
pricing model with the following assumptions: dividend yield 0%, 0% and 0%,
volatility of 57%, 56% and 55%, risk-free interest rate with an average of
5.06%, 6.05% and 6.10%, and an average expected life of 3.79, 3.37 and 3.25
years, for 1998, 1997 and 1996, respectively. The average fair value of the
employees' purchase rights under the Employee Stock Purchase Plan during 1998
and 1997 is estimated at $12.15 and $11.86, respectively, on the date of grant,
using the Black-Scholes multiple-option pricing model with the following
assumptions: dividend yield 0% and 0%, volatility of 57% and 56%, risk free
interest rate of 4.75% and 5.64%, and an expected life of 6 months,
respectively.
As FASB 123 is only applicable to options granted after December 31, 1994, the
pro forma effect was not fully reflected until 1998. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility and option life.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, because changes in the subjective input
assumptions can materially affect the fair value estimate, and because the
Company has a relatively limited history with option behavior, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
Summaries of stock option activity for the Company's three fixed stock option
plans as of December 31, 1998, 1997 and 1996, and related information for the
years ended December 31 are included in the plan descriptions below.
1991 Stock Plan. In November 1991, the Board of Directors adopted the 1991
Stock Plan (the "Stock Plan"), which was amended and restated in 1992, 1995,
1996 and 1997 for issuance of common stock to employees, consultants, and
scientific advisors. Options issued under the plan shall, at the discretion of
the compensation committee of the Board of Directors, be either incentive stock
options or nonstatutory stock options. The exercise prices of incentive stock
options granted under the plan are not less than the fair market value on the
date of the grant, as determined by the Board of Directors. The exercise prices
of nonstatutory stock options granted under the plan cannot be less than 85% of
the fair market value on the date of the grant, as determined by the Board of
Directors. Options generally vest over four years, pursuant to a formula
determined by the Company's Board of Directors, and expire after ten years. On
May 21, 1997, the Company's stockholders approved an increase in the number of
shares of Common Stock reserved for issuance under the plan from 4,000,000 to
4,800,000. On June 15, 1998, the Company's stockholders approved an increase in
the number of shares of Common Stock reserved for issuance under the plan from
4,800,000 to 6,300,000.
1996 Synteni Stock Plan. In December 1996, Synteni's board of directors
approved and adopted the 1996 Equity Incentive Plan ("Synteni Plan"). Under the
Synteni Plan, Synteni could grant incentive stock options, nonstatutory stock
options, stock bonuses or restricted stock purchase rights to purchase the
aggregate equivalent of 436,100 shares of Incyte Common Stock. Incentive stock
options could be granted to employees and nonstatutory options and rights to
purchase restricted stock may be granted to employees, directors or consultants
at exercise prices of no less than 100% and 85%, respectively, of the fair value
of the common stock on the grant date, as determined by the board of directors.
Options could be granted with different vesting terms from time to time and
options expire no more than 10 years after the date of grant. All outstanding
options at the time of the merger with Incyte were converted to options to
purchase Incyte Common Stock, and the Synteni Plan was terminated.
Activity under the combined plans was as follows:
SHARES SUBJECT TO
OUTSTANDING OPTIONS
WEIGHTED
SHARES AVERAGE
AVAILABLE EXERCISE
FOR GRANT SHARES PRICE
------------- ---------- ------
Balance at January 1, 1996 590,782 2,472,668 6.56
Additional authorization 800,000 - -
Options granted (1,052,300) 1,052,300 19.75
Options exercised - (446,556) 3.54
Options canceled 140,326 (140,326) 8.38
------------- ---------- ------
Balance at December 31, 1996 478,808 2,938,086 11.63
Additional authorization 800,000 - -
Shares authorized under Synteni Plan 436,100 - -
Options granted (1,159,508) 1,159,508 25.56
Options exercised - (408,171) 7.27
Options canceled 109,398 (109,398) 19.27
------------- ---------- ------
Balance at December 31, 1997 664,798 3,580,025 16.46
Additional authorization 1,500,000 - -
Options granted (1,002,834) 1,002,834 28.70
Options exercised - (421,010) 8.52
Options canceled 207,763 (207,763) 30.73
Termination of Synteni Plan (88,280) - -
------------- ---------- ------
Balance at December 31, 1998 1,281,447 3,954,086 $19.66
============= ========== ======
Included in the above table, in the 1998 activity, were stock options issued by
Synteni to purchase 89,587 Incyte equivalent common shares at a weighted average
exercise price of $1.49, in the period from October 1, 1997 to December 31,
1997. The Company recorded $1,658,000 of deferred compensation related to
these options, which is being amortized over the vesting period of the options.
Options to purchase a total of 2,447,539; 2,145,403 and 2,914,596 shares at
December 31, 1998, 1997 and 1996, respectively, were exercisable. Of the options
exercisable, 1,851,549; 1,197,542 and 803,004 shares were vested at December 31,
1998, 1997 and 1996, respectively.
Non-Employee Directors' Stock Option Plan. In August 1993, the Board of
Directors approved the 1993 Directors' Stock Option Plan (the "Directors'
Plan"), which was amended in 1995. The Directors' Plan provides for the
automatic grant of options to purchase shares of Common Stock to non-employee
directors of the Company. The maximum number of shares issuable under the
Directors' Plan is 400,000.
The Directors' Plan provides immediate issuance of options to purchase an
initial 40,000 shares of Common Stock to each new non-employee director joining
the Board. The initial options are exercisable in five equal annual
installments. Additionally, members who continue to serve on the Board will
receive annual option grants for 10,000 shares exercisable in full on the first
anniversary of the date of the grant. All options are exercisable at the fair
market value of the stock on the date of grant. Through December 31, 1998, the
Company had granted options under the Directors' Plan to purchase 287,500 shares
of Common Stock at a weighted average exercise price of $11.18 (267,500 and
227,500 shares of Common Stock at a weighted average exercise price of $8.71 and
$5.37 at December 31, 1997 and 1996, respectively); 241,500 shares are vested
and exercisable at December 31, 1998 (171,500 and 141,500 shares were vested
and exercisable at December 31, 1997 and 1996, respectively). To date, no
options under the Director's Plan have been exercised or canceled. The
Directors' Plan was amended in March 1998 by the Board of Directors to eliminate
the grant referred to above to each new non-employee director and to reduce the
annual grants from 10,000 shares to 5,000 shares.
The following table summarizes information about stock options outstanding at
December 31, 1998, for the 1991 Stock Plan, the 1993 Directors' Stock Option
Plan and the Synteni 1996 Equity Incentive Plan
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ---------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ---------------- -------------- ----------------- --------- ----------- ---------
0.50 - 2.00 471,028 6.07 $ 1.21 471,022 $ 1.21
2.03 - 7.25 542,577 6.71 5.41 433,648 6.23
7.38 - 8.88 643,808 6.77 8.60 643,808 8.60
9.00 - 19.13 492,043 7.16 15.09 480,043 15.03
19.25 - 20.94 537,690 7.85 20.79 328,087 20.69
21.00 - 31.69 464,818 8.82 26.35 171,111 26.52
32.25 - 35.63 464,728 9.53 34.58 37,803 34.42
36.63 - 42.25 431,400 8.92 37.38 109,464 37.42
43.88 - 47.00 193,500 9.13 44.99 14,053 43.88
-------------- ----------------- --------- ----------- ---------
0.50 - 47.00 4,241,592 7.72 $ 19.05 2,689,039 $ 12.40
============== ================= ========= =========== =========
In July 1996, in connection with the Genome Systems transaction described in
Note 9 below, the Company issued, in exchange for an option to purchase capital
stock of Genome Systems, an option to purchase 21,482 shares of Incyte Common
Stock at an exercise price of $0.0235 per share. The option was not issued under
the provisions of either plan described above. As of December 31, 1998, the
option has been exercised in full.
Employee Stock Purchase Plan. On May 21, 1997, the Company's stockholders
adopted the 1997 Employee Stock Purchase Plan ("ESPP"). The Company has
authorized 400,000 shares of Common Stock for issuance under the ESPP. Each
regular full-time and part-time employee is eligible to participate after one
year of employment. The Company issued 38,944 shares under the ESPP in 1998, and
361,056 shares remain available for issuance under the ESPP. As of December 31,
1998 and 1997, $162,000 and $238,000, respectively, has been deducted from
employees' payroll for the purchase of shares under the ESPP
Stockholders Rights Plan. On September 25, 1998, the Board of Directors adopted
a Stockholder Rights Plan (the "Rights Plan"), pursuant to which one preferred
stock purchase right (a "Right") was distributed for each outstanding share of
Common Stock held of record on October 13, 1998. One Right will also attach to
each share of Common Stock issued by the Company subsequent to such date and
prior to the distribution date defined below. Each Right represents a right to
purchase, under certain circumstances, a fractional share of the Company's
Series A Participating Preferred Stock at an exercise price of $200.00, subject
to adjustment. In general, the Rights will become exercisable and trade
independently from the Common Stock on a distribution date that will occur on
the earlier of (i) the public announcement of the acquisition by a person or
group of 15% or more of the Common Stock or (ii) ten days after commencement of
a tender or exchange offer for the Common Stock that would result in the
acquisition of 15% or more of the Common Stock. Upon the occurrence of certain
other events related to changes in ownership of the Common Stock, each holder of
a Right would be entitled to purchase shares of Common Stock, or an acquiring
corporation's common stock, having a market value of twice the exercise price.
Under certain conditions, the Rights may be redeemed at $0.01 per Right by the
Board of Directors. The Rights expire on September 25, 2008
NOTE 5. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
1998 1997
--------- --------
Current
Federal $ 2,012 $ 533
Foreign 165 15
State 175 -
--------- --------
Total provision for income taxes $ 2,352 $ 548
========= ========
No provision or benefit for income taxes was recorded in 1996 due to the
Company's net operating loss.
Income (loss) before provision for income taxes consisted of the following:
1998 1997 1996
-------- -------- --------
U.S. $ 5,536 $ 7,393 $(7,276)
Foreign 288 63 -
-------- -------- --------
$ 5,824 $ 7,456 $(7,276)
======== ======== ========
The provision (benefit) for income taxes differs from the federal statutory rate
as follows:
YEAR ENDED DECEMBER 31,
1998 1997 1996
-------- -------- --------
Provision (benefit) at U.S. federal statutory rate $ 2,038 $ 2,610 $(2,547)
State taxes, net of federal benefit 112 - -
Use of net operating loss carryforwards (4,208) (3,373) -
Unbenefitted net operating losses - 1,225 1,427
Non-deductible purchased in-process R&D 3,842 - 1,120
Non-deductible acquisition costs 410 - -
Other 158 86 -
-------- -------- --------
Provision for income tax $ 2,352 $ 548 $ -
======== ======== ========
Significant components of the Company's deferred tax assets are as follows:
DECEMBER 31,
1998 1997
--------- ---------
Deferred tax assets
Net operating loss carryforwards $ 6,200 $ 10,000
Research credits 6,900 4,000
Capitalized research and development 6,100 1,400
Accruals and reserves 2,600 2,000
Other, net 1,200 800
--------- ---------
Total deferred tax assets 23,000 18,200
Valuation allowance for deferred tax assets (23,000) (18,200)
--------- ---------
Net deferred tax assets $ - $ -
========= =========
The valuation allowance for deferred tax assets increased by approximately
$4,800,000, $3,300,000, and $2,800,000 during the years ended December 31, 1998,
1997 and 1996. Approximately $5,500,000 of the valuation allowance for deferred
tax assets relates to benefits of stock option deductions which, when
recognized, will be allocated directly to contributed capital.
The Company's management believes the uncertainty regarding the timing of the
realization of net deferred tax assets requires a valuation allowance.
As of December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $17,100,000. The Company also had federal
research and development tax credit carryforwards of approximately $4,900,000.
The net operating loss carryforwards will expire at various dates, beginning in
2009, through 2018 if not utilized.
Utilization of the net operating losses and credits may be subject to an annual
limitation, due to the "change in ownership" provisions of the Internal Revenue
Code of 1986 and similar state provisions.
NOTE 6. NET INCOME (LOSS) PER SHARE
On December 31, 1997, the Company adopted the Financial Accounting Standards
Board Statement No. 128, Earnings per Share, which required the Company to
change the method used to compute earnings per share and to restate all prior
periods. The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share amounts):
YEAR ENDED
DECEMBER 31,
1998 1997 1996
--------- --------- --------
Numerator:
Net income (loss) $ 3,472 $ 6,908 $(7,276)
========= ========= ========
Denominator:
Denominator for basic net income (loss)
Per share - weighted-average shares 26,921 24,300 22,398
Dilutive potential common shares - stock options 1,978 2,198 -
--------- --------- ---------
Denominator for diluted net income (loss) per share 28,899 26,498 22,398
========= ========= =========
Basic net income (loss) per share $ 0.13 $ 0.28 $ (0.32)
========= ========= =========
Diluted net income (loss) per share $ 0.12 $ 0.26 $ (0.32)
========= ========= =========
Options and warrants to purchase 654,000 and 3,194,000 shares of common stock
were outstanding at December 31, 1998, and 1996, respectively, but were not
included in the computation of diluted net income (loss) per share, as their
effect was anti-dilutive. There were no such anti-dilutive securities in 1997.
NOTE 7. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan covering all domestic employees.
Employees may contribute a portion of their compensation, which is then matched
by the Company, subject to certain limitations. Defined contribution expense for
the Company was $709,000, $520,000, and $244,000 in 1998, 1997, and 1996,
respectively.
NOTE 8. SEGMENT REPORTING
The Company adopted SFAS 131, Disclosure about Segments of an Enterprise and
Related Information, at December 31, 1998. SFAS 131 establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
The Company's operations are treated as one operating segment, the design,
development, and marketing of genomic information-based tools, as it only
reports profit and loss information on an aggregate basis to chief operating
decision makers of the Company. For the year ended December 31, 1998, the
Company recorded revenue from customers throughout the United States and in
Canada, Austria, Belgium, France, Germany, Israel, Netherlands, Switzerland, and
the United Kingdom. Export revenue for the years ended December 31, 1998, 1997,
and 1996 were $33,584,000, $25,694,000, and $9,743,000, respectively.
NOTE 9. BUSINESS COMBINATIONS
Acquisitions accounted for under the purchase method of accounting
In September 1998, the Company completed the acquisition of Hexagen Limited
("Hexagen"), a privately held SNP discovery company based in Cambridge, England.
The Company issued 976,130 shares of its common stock and $5.0 million in cash
in exchange for all of Hexagen's outstanding capital stock. In addition, the
Company assumed Hexagen's stock options, which if fully vested and exercised,
would amount to 125,909 shares of its common stock. The transaction was
accounted for as a purchase with a portion of the purchase price, estimated to
be approximately $11.0 million, expensed in the third quarter of 1998 as a
charge for the purchase of in-process research and development. The remaining
portion of the purchase price, approximately $17.6 million, was allocated to
goodwill ($16.3 million), developed technology ($0.7 million), and Hexagen's
assembled work force ($0.6 million), which are being amortized over 8, 5 and 3
years, respectively.
The Company allocated Hexagen's purchase price based on the relative fair value
of the net tangible and intangible assets acquired. In performing this
allocation, the Company considered, among other factors, the technology research
and development projects in process at the date of acquisition. Hexagen's
in-process research and development program consisted of the development of its
fSSCP technology for SNP discovery. At the date of the acquisition, Hexagen's
research and development program was approximately 80% completed and total
continuing research and development commitments to complete the projects were
expected to be approximately $1.4 million, and be successfully completed by
mid-2000. The value assigned to purchased in-process R&D was determined by
estimating the costs to develop Hexagen's purchased in-process research and
development into commercially viable products, estimating the resulting net cash
flows from the projects and discounting the net cash flows to their present
value. The rates utilized to discount the net cash flows to their present value
were based on Hexagen's weighted average cost of capital. A discount rate of
24.0% was used for valuing the in-process research and development and is
intended to be commensurate with Hexagen's corporate maturity and the
uncertainties in the economic estimates described above. Additionally, these
projects will require maintenance expenditures when and if they reach a state of
technological and commercial feasibility. Management believes the Company has
positioned itself to complete the research and development program. However,
there is risk associated with the completion of the project, which include the
inherent difficulties and uncertainties in completing each project and thereby
achieving technological feasibility and risks related to the impact of potential
changes in future target markets and there is no assurance that the project will
meet either technological or commercial success. Failure to complete the
development of the fSSCP technology in its entirety, or in a timely manner,
could have a material adverse impact on the Company's financial condition and
results of operations.
The estimates used by the Company in valuing in-process research and development
were based upon assumptions the Company believes to be reasonable but which are
inherently uncertain and unpredictable. The Company's assumptions may be
incomplete or inaccurate, and no assurance can be given that unanticipated
events and circumstances will not occur. Accordingly, actual results may vary
from the projected results. Any such variance may result in a material adverse
effect on the financial condition and results of operations of the Company. The
results of operations of Hexagen have been included in the consolidated results
of the Company from the date of acquisition in September 1998.
Associated risks include the inherent difficulties and uncertainties in
completing each project and thereby achieving technological feasibility and
risks related to the impact of potential changes in future target markets
The table below presents the pro forma results of operations and earnings per
share for Hexagen and the Company. The transaction is assumed to be completed on
January 1, 1998 for the period ended December 31, 1998 and January 1, 1997 for
the period ended December 31, 1997.
1998 1997
-------- -------
Revenues $134,811 $89,996
======== =======
Net income $ 7,323 $ 271
======== =======
Pro forma basic net income per share $ 0.27 $ 0.01
======== =======
Pro forma diluted net income per share $ 0.25 $ 0.01
======== =======
Pro forma shares for basic net income per share 27,340 25,276
======== =======
Pro forma shares for diluted net income per share 29,459 27,588
======== =======
In August 1996, the Company acquired all the common stock of Combion, a
microarray technology company, in a stock for stock exchange, issuing 146,342
shares of common stock. The acquisition was accounted for as a purchase, with a
purchase price of $3.2 million, including transaction fees, and approximately
$3.2 million was expensed as a charge for the purchase of in-process research
and development. In accordance with APB Opinion No. 16, the Company allocated
the purchase price to assets and liabilities based on the estimated fair value
of the net tangible and intangible assets. In performing this allocation, the
Company considered, among other factors, the technology research and development
projects in-process at the date of acquisition. With regard to the in-process
research and development projects, the Company considered factors such as the
stage of development of the technology at the time of acquisition, the
importance of each project to the overall development plan, alternative future
use of the technology and the projected incremental cash flows from the projects
when completed and any associated risks. Combion's in-process research and
development program consisted of the development of its microarray technology.
Associated risks include the inherent difficulties and uncertainties in
completing the in process research and development project and thereby achieving
technological feasibility and risks related to the impact of potential changes
in future target markets. The estimates used by the Company in valuing
in-process research and development were based upon assumptions the Company
believes to be reasonable but which are inherently uncertain and unpredictable.
The Company's assumptions may be incomplete or inaccurate, and no assurance can
be given that unanticipated events and circumstances will not occur.
Accordingly, actual results may vary from the projected results. Any such
variance may result in a material adverse effect on the financial condition and
results of operations of the Company. Pro Forma results of operations have not
been presented because the effect of this acquisition, exclusive of the charge
for in-process research and development, was not material to the Company's
consolidated results of operations or financial position. The results of
operations of Combion have been included in the consolidated results of the
Company from the date of acquisition.
Acquisitions accounted for under the pooling of interest method of accounting
In January 1998, the Company issued 2,340,237 shares of common stock in exchange
for all of the capital stock of Synteni, a privately held microarray-based
genomics company in Fremont, California. Synteni is developing and
commercializing technology for generating microarrays and related software and
services. The merger was accounted for as a pooling of interests and,
accordingly, the Company's financial statements and financial data have been
restated to include the accounts and operations of Synteni since inception.
In July 1996, the Company issued 408,146 shares of common stock in exchange for
all of the capital stock of Genome Systems, Inc., a privately held genomics
company located in St. Louis, Missouri. Genome Systems provides genomic research
products and technical support services to scientists to assist them in the
identification and isolation of novel genes. The merger has been accounted for
as a pooling of interests and, accordingly, the Company's financial statements
and financial data have been restated to include the accounts and operations of
Genome Systems since inception.
The table below presents the separate results of operations for Incyte, Genome
Systems, and Synteni prior to the respective mergers. Incyte's results include
Genome Systems from August 1996 and Synteni from January 1998.
Revenues: 1998 1997 1996
--------- -------- --------
Incyte $134,811 $88,351 $40,051
Genome - - 1,734
Synteni - 1,645 110
--------- -------- --------
$134,811 $89,996 $41,895
========= ======== ========
Net income (loss):
Incyte $ 4,532 $10,408 $(6,724)
Genome - - 106
Synteni - (3,500) (515)
Acquisition-related charges (1,060) - (143)
--------- -------- --------
$ 3,472 $ 6,908 $(7,276)
========= ======== ========
NOTE 10. JOINT VENTURE
In September 1997, the Company formed a joint venture, diaDexus, in conjunction
with SB, which will utilize genomic and bioinformatic technologies in the
discovery and commercialization of molecular diagnostics. The Company and SB
each hold a 50 percent equity interest in diaDexus and the Company accounts for
the investment under the equity method. Beginning in 1998, the Company's share
in diaDexus' net losses was partially offset by the amortization of the excess
of the Company's share of diaDexus' net assets over its basis, which was fully
amortized in 1998. Through December 31, 1998, the Company has recorded losses
from diaDexus of $1,774,000, net of excess of the Company's share of diaDexus'
net assets over its basis. At December 31, 1997 a portion of the investment was
reflected as restricted cash and in accrued liabilities on the balance sheet as
that balance was held in an escrow account. This was disbursed in full to
diaDexus in 1998 in accordance with the joint venture agreement. The following
is summary of diaDexus' financial information as of December 31, 1998 and 1997,
for the year ended December 31, 1998, and the period from inception (September
1997) through December 31, 1997 (in thousands):
1998 1997
------ ------
Current assets $16,866 $ 6,625
Total assets 20,215 10,212
Current liabilities 3,565 2,658
Total liabilities 3,681 2,760
Net loss 7,928 548
NOTE 11. LITIGATION
In January 1998, Affymetrix, Inc. ("Affymetrix") filed a lawsuit in the United
States District Court for the District of Delaware, subsequently transferred to
the United States District Court for the Northern District of California in
November 1998, alleging infringement of U.S. patent number 5,445,934 (the "'934
Patent") by both Synteni and Incyte. The complaint alleges that the '934 Patent
has been infringed by the making, using, selling, importing, distributing or
offering to sell in the United States high density arrays by Synteni and Incyte
and that such infringement was willful. Affymetrix seeks a permanent injunction
enjoining Synteni and Incyte from further infringement of the '934 Patent and,
in addition, seeks damages, costs and attorney's fees and interest. Affymetrix
further requests that any such damages be trebled based on its allegation of
willful infringement by Incyte and Synteni.
In September 1998, Affymetrix filed an additional lawsuit in the United States
District Court for the District of Delaware, subsequently transferred to the
United States District Court for the Northern District of California in November
1998, alleging infringement of the U.S. patent number 5,800,992 (the "'992
Patent") and U.S. patent number 5,744,305 (the "'305 Patent") by both Synteni
and Incyte. The complaint alleges that the '305 Patent has been infringed by the
making, using, selling, importing, distributing or offering to sell in the
United States high density arrays by Synteni and Incyte, that the '992 Patent
has been infringed by the use of Synteni's and Incyte's GEMTM microarray
technology to conduct gene expression monitoring using two-color labeling, and
that such infringement was willful. Affymetrix seeks a permanent injunction
enjoining Synteni and Incyte from further infringement of the '305 and '992
Patents and, in addition, Affymetrix seeks a preliminary injunction enjoining
Incyte and Synteni from using Synteni's and Incyte's GEM microarray technology
to conduct gene expression monitoring using two-color labeling as described in
the '992 patent. A hearing on Affymetrix's request for a preliminary injunction
is scheduled for April 30, 1999. No date has been set regarding the trial of any
of Affymetrix's other allegations.
In January 1999, the United States Patent and Trademark Office (PTO) notified
Incyte of the patentability of claims directed to two-color hybridization
licensed exclusively to Incyte. The PTO examiner has agreed with Incyte that
certain claims overlap with those of the '992 Patent assigned to Affymetrix.
Therefore, the PTO as recommended that the Board of Patent Appeals and
Interferences declare an interference between Incyte's two-color hybridization
claims and the corresponding claims in the '992 Patent.
Incyte and Synteni believe they have meritorious defenses and intend to defend
the suits vigorously. However, there can be no assurance that Incyte and Synteni
will be successful in the defense of these suits. At this time, the Company
cannot reasonably estimate the possible range of any loss resulting from these
suits due to uncertainty regarding the ultimate outcome. Regardless of the
outcome, this litigation has resulted and is expected to continue to result in
substantial expenses and diversion of the efforts of management and technical
personnel. Further, there can be no assurance that any license that may be
required as a result of this suit or the outcome thereof would be made available
on commercially acceptable terms, if at all.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- -------------------------------------- ----------- ---------- ----------- --------
( in thousands)
Allowance for doubtful accounts - 1996 - - - -
Allowance for doubtful accounts - 1997 - 260 (35) 225
Allowance for doubtful accounts - 1998 225 213 (4) 434
REPORT OF INDEPENDENT ACCOUNTANTS
January 15, 1999
To the Board of Directors and Members of
diaDexus, LLC
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in members' equity and of cash flows present fairly, in
all material respects, the financial position of diaDexus, LLC (a development
stage company) at December 31, 1998 and 1997, and the results of its operations
and its cash flows for the year ended December 31, 1998, for the period from
inception (September 1997) through December 31, 1997 and for the period from
inception (September 1997) through December 31, 1998, in conformity with
generally accepted accounting principles. 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 audit. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
\s\ PricewaterhouseCoopers LLP
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
- --------------
DECEMBER 31,
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $ 16,454,000 $ 6,540,000
Prepaid expenses and other current assets 412,000 85,000
------------- -------------
Total current assets 16,866,000 6,625,000
Property and equipment, net 3,280,000 3,516,000
Deposits 69,000 71,000
------------- -------------
$ 20,215,000 $ 10,212,000
------------- -------------
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Due to Members $ 2,690,000 $ 2,451,000
Accounts payable 239,000 -
Accrued liabilities 636,000 207,000
------------- -------------
Total current liabilities 3,565,000 2,658,000
Deferred rent 116,000 102,000
------------- -------------
Total liabilities 3,681,000 2,760,000
Commitments (Note 7)
Members' equity:
Series A preferred capital; 4,400,000 units authorized,
issued and outstanding 10,762,000 14,726,000
Series B preferred capital; 4,400,000 units authorized,
issued and outstanding 5,762,000 9,726,000
Common capital; 1,200,000 units
Authorized; no units issued and outstanding - -
Additional paid-in capital 10,000 -
Member contributions receivable - (17,000,000)
------------- -------------
Total Members' equity 16,534,000 7,452,000
------------- -------------
$ 20,215,000 $ 10,212,000
------------- -------------
The accompanying notes are an integral part of these financial statements.
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
- -------------------------
FOR THE PERIOD FROM INCEPTION
YEAR ENDED (SEPTEMBER 1997) THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997 1998
Operating expenses:
Research and development $ 6,761,000 $ 401,000 $ 7,162,000
General and administrative 1,882,000 279,000 2,161,000
-------------- -------------- ------------
Total operating expenses 8,643,000 680,000 9,323,000
Interest income 715,000 132,000 847,000
-------------- -------------- ------------
Net loss $ (7,928,000) $ (548,000) $(8,476,000)
-------------- -------------- ------------
The accompanying notes are an integral part of these financial statements.
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 1997) THROUGH DECEMBER 31, 1998
- --------------------------------------------------------------------------------
SERIES A SERIES B
PREFERRED CAPITAL PREFERRED CAPITAL
UNITS AMOUNT UNITS AMOUNT
Issuance, at inception,
of Series A Preferred
units at $3.41 per unit 4,400,000 $15,000,000 - $ -
Issuance, at inception,
of Series B Preferred
units at $2.27 per unit - - 4,400,000 10,000,000
Net loss - (274,000) - (274,000)
----------- ------------ ----------- ------------
Balance at December
31, 1997 4,400,000 14,726,000 4,400,000 9,726,000
Proceeds received
from Members - - - -
Issuance of options to
non-employees - - - -
Net loss - (3,964,000) - (3,964,000)
----------- ----------- ---------- ------------
Balance at December
31, 1998 4,400,000 $10,762,000 4,400,000 $ 5,762,000
----------- ----------- ---------- ------------
ADDITIONAL MEMBER
PAID-IN CONTIRUBITON TOTAL
CAPITAL RECEIVABLE
Issuance, at inception,
of Series A Preferred
units at $3.41 per unit - $(11,000,000) $ 4,000,000
Issuance, at inception,
of Series B Preferred
units at $2.27 per unit - (6,000,000) 4,000,000
Net loss - (548,000)
----------- ------------- ------------
Balance at December 31, 1997 (17,000,000) 7,452,000
Proceeds received from Members 17,000,000 17,000,000
Issuance of options to
non-employees 10,000 - 10,000
Net loss - - (7,928,000)
----------- ------------- ------------
Balance at December 31, 1998 10,000 - $16,534,000
---------- ------------- ------------
The accompanying notes are an integral part of these financial statements.
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
- --------------------------
< c>
FOR THE PERIOD FROM INCEPTION
YEAR ENDED (SEPTEMBER 1997) THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997 1998
Cash flow used in operating activities:
Net loss $(7,928,000) $(548,000) $(8,476,000)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation 1,657,000 2,000 1,659,000
Loss on disposal of property and equipment 23,000 - 23,000
Stock-based compensation 10,000 - 10,000
Changes in assets and liabilities:
Prepaid expenses and other current assets (319,000) (85,000) (404,000)
Accounts payable 239,000 - 239,000
Accrued liabilities 244,000 207,000 451,000
Due to Members 132,000 185,000 317,000
Deposits 2,000 (4,000) (2,000)
Deferred rent 14,000 102,000 116,000
------------ ---------- -----------
Net cash used in operating activities (5,926,000) (141,000) (6,067,000)
------------- ---------- -----------
Cash flow used in investing activities for
Purchases of property and equipment (1,160,000) (272,000) (1,432,000)
------------ ---------- -----------
Cash flow provided by financing activities:
Proceeds from issuance of Series A Preferred Units - 2,953,000 13,953,000
Proceeds from issuance of Series B Preferred Units - 4,000,000 10,000,000
Proceeds from Member contributions receivable 17,000,000 - -
------------ ----------- ------------
Net cash provided by financing activities 17,000,000 6,953,000 23,953,000
------------ ----------- ------------
Net increase in cash and cash equivalents 9,914,000 6,540,000 16,454,000
Cash and cash equivalents at beginning of period 6,540,000 - -
------------ ----------- ------------
Cash and cash equivalents at end of period $16,454,000 $6,540,000 $16,454,000
------------ ----------- ------------
Supplemental disclosure of noncash financing activities:
Capital contribution of property and equipment $ - $1,047,000 $ 1,047,000
------------ ----------- ------------
Construction in-progress funded by a Member $ 106,000 $2,199,000 $ 2,305,000
-------------- ----------- ------------
Deposit funded by a Member $ - $ 67,000 $ 67,000
-------------- ---------- ------------
The accompanying notes are an integral part of these financial statements.
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
diaDexus, LLC (the "Company") was formed in Delaware as a limited liability
company ("LLC") in September 1997 for the purpose of discovery and
commercialization of novel molecular diagnostic products. The Company's
founders and members ("Members") are SmithKline Beecham Corporation ("SmithKline
Beecham") and Incyte Pharmaceuticals, Inc. ("Incyte"). The Company is in the
development stage at December 31, 1998, devoting substantially all of its
efforts to recruiting personnel, financial planning, establishing its
facilities, defining its research and product development strategies and
conducting research and development.
In connection with forming the Company, SmithKline Beecham and Incyte entered
into several agreements during September 1997, including an Operating Agreement
(the "Operating Agreement") and a Master Strategic Relationship Agreement (the
"Master Agreement"). The Operating Agreement serves as the Company's by-laws
while the Master Agreement documents certain specific matters regarding the
operation of the Company. During September 1997, the Company issued 4,400,000
Series A Preferred Units to SmithKline Beecham in exchange for an initial
capital contribution of $4.0 million in cash and assets and a contractual
commitment for additional cash contributions of $11.0 million, which was
received in two installments on April 15 and July 15, 1998. Concurrently, the
Company issued 4,400,000 of Series B Preferred Units to Incyte in exchange for
an initial capital contribution of $4.0 million in cash and a contractual
commitment for additional cash contributions of $6.0 million, which was received
in two installments on April 15 and July 15, 1998.
In addition to the above contributions, SmithKline Beecham has granted the
Company various exclusive and non-exclusive rights to develop certain diagnostic
tests using genes identified by SmithKline Beecham, including genes identified
by SmithKline Beecham from the Human Genome Sciences, Inc. collaboration.
SmithKline Beecham has also granted the Company an exclusive license for a
number of diagnostic tests which are in late stage clinical validation. Incyte
has provided the Company with non-exclusive access to certain of its gene
sequence and expression databases for various exclusive and non-exclusive rights
to diagnostic applications. The Company will pay royalties to Incyte and Human
Genome Sciences, Inc. on the sale of certain products developed using their
respective proprietary databases. Both SmithKline Beecham and Incyte have also
non-exclusively licensed various additional technologies useful in the
diagnostic field to the Company. Non-cash assets received as capital
contributions have been recorded in amounts equal to the Members' net book
value, which was zero for all the property and rights described above.
The LLC will merge into a C corporation at the earliest of (i) the eighteen
month anniversary of the Company's formation (March 1999); (ii) any time after
January 1, 1999, if the Company's cash balance falls below $2.0 million, or
(iii) the mutual agreement of SmithKline Beecham and Incyte.
The Company has incurred a loss of $8,476,000 since inception and expects to
incur additional losses in 1999. Management believes that the aggregate amount
of cash and cash equivalents on hand at December 31, 1998 will provide
sufficient working capital to fund the Company's operations through at least
December 31, 1999.
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents at December 31,
1998 consist of a money market investment totaling $16,321,000, the carrying
amount of which approximates fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents.
The Company maintains its cash and cash equivalents in a money market fund with
a high-credit quality financial institution.
PROPERTY AND EQUIPMENT
Property and equipment are stated at the Company's cost, less accumulated
depreciation. Assets contributed by the Members are recorded at amounts equal
to the Members' net book value. Depreciation is computed using the
straight-line method over the estimated remaining useful lives of the assets,
which is generally one to three years. Leasehold improvements are depreciated
over the shorter of their useful lives or the term of the lease.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred.
EQUITY-BASED COMPENSATION
The Company has adopted the pro forma disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). As permitted, the Company continues to recognize
equity-based compensation under the intrinsic value method of accounting as
prescribed by Accounting Principles Board Opinion No. 25. The pro forma effect
of applying SFAS 123 is described in Note 6 to the financial statements. The
Company accounts for options issued to non-employees in accordance with the
provisions of SFAS 123.
INCOME TAXES
No provision or benefit for federal and state income taxes is reported in the
financial statements as the Company has elected to be taxed as a partnership.
The federal and state income tax effects of the Company's results of operations
are recorded by the Members in their respective income tax returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------
2. RELATED PARTY TRANSACTIONS
Under an Intercompany Services Agreement, SmithKline Beecham and Incyte have
agreed to provide the Company with certain services, including legal, financial
and research and development. Charges for these services are primarily based on
actual costs incurred by each Member and amounted to $159,000 and $26,000 for
SmithKline Beecham and Incyte, respectively, during the period from inception
(September 1997) to December 31, 1997. Of the total fiscal 1997 charges,
$120,000 and $65,000 were included in research and development and general and
administrative expense, respectively. During 1998, the Company incurred
additional charges of $86,000 and $72,000 from SmithKline Beecham and Incyte,
respectively, all of which has been included in research and development.
Additionally, SmithKline Beecham has agreed to pay, on the Company's behalf,
certain costs associated with the build-out of the Company's leased facility.
Such amounts were included in construction-in-progress at December 31, 1997 and
in leasehold improvements and laboratory equipment at December 31, 1998. In
1997, SmithKline Beecham also made a lease deposit on behalf of the Company of
$67,000.
In September 1998, the Company entered into a service agreement with SmithKline
Beecham and SmithKline Beecham plc. Under the agreement, SmithKline Beecham plc
will employ an individual to monitor journals and databases for information on
genes and proteins which may be of interest to the Company's research efforts.
The term of the agreement is one year, unless otherwise modified by the Company
and SmithKline Beecham plc. In consideration for such services, the Company
will pay a total of $200,000, of which $50,000 was included in the due to
Members balance at December 31, 1998.
In March 1998, the Company entered into a collaboration and license agreement
with Incyte and a third party (see Note 3). Through December 31, 1998, no
amounts had been recorded relating to this agreement.
At December 31, 1998 and 1997, due to Members consisted of $2,618,000 and
$2,425,000, respectively, due to SmithKline Beecham and $72,000 and $26,000,
respectively, due to Incyte. The Company's intention is to repay all amounts
due to Members during 1999.
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------
3. COLLABORATION AND LICENSE AGREEMENTS
In September 1998, the Company entered into a worldwide, exclusive,
royalty-bearing license agreement whereby the Company was granted the right to
develop, manufacture and sell certain products relating to diagnosis of cervical
disease. The Company paid a non-refundable fee of $250,000 upon signing the
agreement for access to related technology for a six month evaluation period.
The Company is amortizing the initial fee over the six month evaluation period
and, at December 31, 1998, approximately $191,000 is included in prepaid
expenses. Unless previously terminated by the Company, additional fees totaling
$1,750,000 will be due upon the earlier of specified dates or achievement of
designated milestones. The Company has the option to terminate the agreement
without penalty through the earlier of the successful completion of the
predetermined development plan or September 30, 2000. As the Company has not
sold or sublicensed any products relating to the license agreement, no royalty
obligations have accumulated or been paid through December 31, 1998.
In March 1998, the Company entered into a collaboration and license agreement
with Incyte and a third party (collectively, the "Licensor"). The agreement
provides the Company access to certain information and databases relating to
prostate disease for an initial option period which expires on the later of
March 18, 1999 or six months following the completion of certain research
activities, as defined. The Company may then, at its option, enter into either
an exclusive or a non-exclusive license arrangement with the Licensor. Future
consideration for entering into an exclusive license arrangement is $1,000,000
or $500,000 for a non-exclusive license. Additionally, should it choose to
obtain either license, the Company will owe the Licensor $100,000 upon approval
for sale in certain countries of each product developed as a result of the
collaboration and license agreement. The $100,000 payments are creditable
against future royalties on sales of the related products. Through December 31,
1998, the Company has not recorded any amounts relating to the collaboration and
license agreement.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
1998 1997
Leasehold improvements $ 2,111,000 $ -
Laboratory equipment 1,313,000 1,047,000
Computer equipment and software 599,000 168,000
Furniture and fixtures 428,000 75,000
Construction-in-progress 477,000 2,228,000
-------------- -----------
4,928,000 3,518,000
Less accumulated depreciation (1,648,000) (2,000)
-------------- -----------
$ 3,280,000 $3,516,000
-------------- -----------
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------
5. MEMBERS' EQUITY
In accordance with the terms of the Operating Agreement, the rights and
preference of the Members, as well as the allocation and distribution of net
income or losses, are as follows:
PREFERRED UNITS
At December 31, 1998 and 1997, the Company had authorized and outstanding
8,800,000 Preferred Units ("Preferred Units"), of which 4,400,000 are designated
Series A and 4,400,000 are designated as Series B. Each Preferred Unit is
entitled to one vote on all matters, other than the election of the Board of
Directors, including Member distributions. The holders of Series A and B
Preferred Units are each entitled, upon approval of the majority of the units
within each series, to elect two of the five Directors constituting the Board.
The fifth Board member is the Company's Chief Executive Officer who was elected
by the A/B Members, voting as a class (by vote of the holders of a majority of
the Series A and Series B Preferred Units).
In the event the Company makes a distribution, each Preferred Unit has a
distribution preference of $11.36 per unit (defined as the "Original Purchase
Price"), plus a 15% per annum compounded rate of return (the "Preference
Amount") on such Original Purchase Price.
When the Company merges into a C corporation, each Preferred Unit will
automatically convert into one share of preferred stock. Each member will also
receive 100 shares of common stock upon such conversion.
COMMON UNITS
At December 31, 1998 and 1997, the Company had authorized 1,200,000 Common Units
for issuance in connection with a unit option plan. Common Units have no voting
rights and, after payment of the Preference Amount to the Preferred Unit
holders, distributions (if any) are allocated ratably among holders of both the
Common and Preferred Units. As of December 31, 1998, no units had been issued
under the Company's option plan.
ALLOCATION OF NET LOSSES AND NET INCOME
Net losses of the Company are allocated (i) to the members of the Preferred and
Common Units in proportion to their relative number of units to the extent that
this would not cause such holders to have a capital deficit; (ii) to the extent
any holder's capital account would equal zero the loss is allocated to all other
holders in proportion to their relative ownership of units until such allocation
would cause those holders to have a capital account balance of zero; (iii)
thereafter, the remaining loss would be allocated to all holders in proportion
to their relative number of units.
Net income of the Company is allocated (i) to the holders of Preferred Units
proportionately based on their capital account deficit until all capital
accounts are zero; (ii) to the holders of Preferred Units whose capital account
is less than any declared but unpaid dividend in proportion to their respective
unpaid dividends; (iii) to the holders of Preferred Units whose capital account
is less than any unpaid Preference Amount in proportion to such amounts; (iv) to
each Common Unit that has a capital account less than any distributed amount in
proportion to such amounts; and (v) thereafter, to all holders in proportion to
their relative number of units.
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------
DIVIDENDS
The holders of the Preferred Units are entitled to receive a non-cumulative
dividend, if and when declared by the Board, at a rate of 8% per annum of the
undistributed Preference Amount attributable to each Preferred Unit, prorated
for any partial year, commencing on the first date each Preferred Unit is issued
and outstanding. Dividends shall be paid from available cash after approval of
at least 75% of the Preferred Unit holders.
LIQUIDATION
In the event of any liquidation of the Company, distributions, if any, will be
made to all unit holders in proportion to the positive balance in their
respective capital accounts, after giving cumulative effect to all
contributions, distributions and allocations for all periods and payment of
costs for winding up of the business, payment of debts, and establishment of
appropriate reserves.
6. EMPLOYEE BENEFIT PLANS
In January 1998, the Company's Board of Directors adopted the 1997 Incentive
Plan (the "1997 Plan") under which 1,200,000 shares of the Company's Common
Units ("Units") were reserved for issuance to employees and consultants of the
Company. Options granted under the 1997 Plan are for terms not to exceed ten
years. If the option is granted to an individual who, at the time of grant,
owns a membership interest in the Company representing more than 10% of the
voting power of all classes of membership interest of the Company or any parent
or subsidiary, the exercise price of the stock option must be at least 110% of
the estimated fair value of the Units at the date of grant. Exercise prices of
options granted to all other persons must be at least 85% of the estimated fair
value of the Units at the date of grant. Options under the 1997 Plan generally
vest over four to five years. The 1997 Plan expires in 2008.
Information regarding the Company's option activity is summarized below:
WEIGHTED
AVERAGE
OPTIONS OPTIONS EXERCISE
AVAILABLE OUTSTANDING PRICE
Options authorized 1,200,000 - $ -
Granted (760,500) 760,500 0.36
Canceled 44,250 (44,250) 0.35
---------- ------------
Balance at December 31, 1998 483,750 716,250 0.36
---------- ------------
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------
The following table summarizes information about options outstanding and
exercisable under the 1997 Plan at December 31, 1998:
WEIGHTED
AVERAGE
REMAINING
OPTIONS OPTIONS CONTRACTUAL
EXERCISE PRICE PER UNIT OUTSTANDING EXERCISABLE LIFE (YEARS)
0.35 691,250 11,509 9.18
0.75 25,000 - 9.85
----------- -----------
716,250 11,509 9.20
----------- -----------
Had compensation cost for the Company's option plan been determined based on the
fair value at the grant date as prescribed in SFAS 123, the Company's net loss
for 1998 would have included an additional $15,000 of compensation expense. The
fair value of each option grant is estimated on the date of grant using the
minimum value method with the following assumptions used for grants during the
applicable period: dividend yield of zero percent, risk-free interest rates of
5.4% and a weighted average expected option term of 5 years.
The Company offers its employees a 401(k) plan that qualifies as a deferred
salary arrangement under Section 401(k) of the Internal Revenue Code. Under the
401(k) plan, participating employees may defer a portion of their pretax
earnings not to exceed certain statutorily specified amounts ($10,000 for
calendar year 1998). The Company, at its discretion, may make contributions for
the benefit of eligible employees. In 1998, the Company made no contributions
under the 401(k) plan.
7. COMMITMENTS
The Company leases its office facilities under a noncancelable operating lease
agreement which expires in September 2002 and contains renewal provisions.
Future minimum lease payments under the noncancelable lease at December 31, 1998
are as follows:
YEAR ENDING
DECEMBER 31,
1999 $ 780,000
2000 799,000
2001 818,000
2002 624,000
----------
Total minimum lease payments $3,021,000
----------
DIADEXUS, LLC
A LIMITED LIABILITY COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------
Rent expense for the year ended December 31, 1998 was $825,000. Rent expense
for the period from inception (September 1997) through December 31, 1997 was
$310,000.
In 1998, the Company entered into a noncancelable sublease agreement relating to
a portion of its leased office facilities. The sublease agreement expires in
August 1999. Rental income for the year ended December 31, 1998 was $117,000.
Future minimum sublease payments receivable total $129,000 for 1999.
At December 31, 1998, the Company is committed to pay access fees to Incyte of
$5.0 million for use of certain of its gene sequence databases.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item (with respect to Directors) is
incorporated by reference from the information under the caption "Election of
Directors" contained in the Company's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Company's 1999 Annual Meeting of Stockholders to be held on June
8, 1999 (the "Proxy Statement").
The executive officers of the Company are as follows:
ROY A. WHITFIELD, age 46, has been Chief Executive Officer of the Company
since June 1993 and a director since June 1991. Mr. Whitfield served as
President of the Company from June 1991 until January 1997 and as Treasurer of
the Company from April 1991 until October 1995. Previously, Mr. Whitfield
served as the President of Ideon Corporation, which was a majority owned
subsidiary of Invitron Corporation ("Invitron"), a biotechnology company, from
October 1989 until April 1991. From 1984 to 1989, Mr. Whitfield held senior
operating and business development positions with Technicon Instruments
Corporation ("Technicon"), a medical instrumentation company, and its
predecessor company, CooperBiomedical, Inc., a biotechnology and medical
diagnostics company. Prior to his work at Technicon, Mr. Whitfield spent seven
years with the Boston Consulting Group's international consulting practice. Mr.
Whitfield received a B.S. with First Class Honors in mathematics from Oxford
University, and an M.B.A. with Distinction from Stanford University. Mr.
Whitfield is a director of Aurora Biosciences Corporation.
RANDAL W. SCOTT, PH.D., age 41, has been President of the Company since
January 1997. He has served as Chief Scientific Officer of the Company since
March 1995, Secretary of the Company since April 1991, and a director since June
1991. Dr. Scott served as Executive Vice President of the Company from March
1995 until January 1997 and Vice President, Research and Development of the
Company from April 1991 until February 1995. Dr. Scott was one of Invitron's
founding scientists and was employed by Invitron from March 1985 to June 1991.
In 1987, Dr. Scott started the Protein Biochemistry Department at Invitron's
California Research Division and became Senior Director of Research in November
1988. Dr. Scott was responsible for developing Invitron's proprietary products
and discovery programs and is an inventor of several of the Company's patents.
Prior to joining Invitron, he was a Senior Scientist at Unigene Laboratories, a
biotechnology company. Dr. Scott received his Ph.D. in Biochemistry from the
University of Kansas.
DENISE M. GILBERT, PH.D., age 41, has been Executive Vice President, Chief
Financial Officer and Treasurer of the Company since October 1995. From July
1993 to October 1995 Dr. Gilbert was Vice President and Chief Financial Officer
of Affymax N.V., a biopharmaceutical company. Prior to joining Affymax, Dr.
Gilbert spent seven years as a Wall Street biotechnology analyst, serving as a
Managing Director of Smith Barney from July 1991 to July 1993, Vice President at
NatWest Securities from July 1990 to July 1991, and senior analyst at Montgomery
Securities from July 1986 to July 1990. Dr. Gilbert received her B.A. in
Biological Sciences from Cornell University and Ph.D. in Cell and Developmental
Biology from Harvard University.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the captions "Election of Directors-Compensation of
Directors," "Executive Compensation," and "Report of the Compensation Committee
of the Board of Directors on Executive Compensation-Compensation Committee
Interlocks and Insider Participation" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information under the captions "Election of Directors - Compensation of
Directors," "Executive Compensation," and "Report of the Compensation Committee
of the Board of Directors on Executive Compensation - Compensation Committee
Interlocks and Insider Participation" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information contained under the caption "Certain Transactions" contained in the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements
Reference is made to the Index to Consolidated Financial Statements of Incyte
Pharmaceuticals, Inc. and the Index to Financial Statements of diaDexus, LLC, a
Limited Liability Company, under Item 8 of Part II hereof.
(2) Financial Statement Schedules
The following financial statement schedule of Incyte Pharmaceuticals, Inc. is
filed as part of this Form 10-K in included in Item 8 of Part II:
Schedule II- Valuation and Qualifying Accounts for each of the three years in
the period ended December 31, 1998.
All other financial statement schedules have been omitted because they are
not applicable or not required or because the information is included elsewhere
in the Consolidated Financial Statements or the Notes thereto.
(3) Exhibits
See Item 14(c) below. Each management contract or compensatory plan or
arrangement required to be filed has been identified.
(B) REPORTS ON FORM 8-K.
The Company filed one report on Form 8-K during the fiscal quarter ended
December 31, 1998, as follows:
i) Current Report on Form 8-K, filed on October 6, 1998, reporting under Item 2
the completion of the acquisition of Hexagen Limited effective September 21,
1998, as amended by Form 8-K/A filed on December 4, 1998 to file under Item 7 of
Form 8-K certain financial statements and information required thereunder.
(C) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- ---------------------------------------------------------------
2.1 Agreement and Plan of Merger dated as of December 23, 1997
among Incyte Pharmaceuticals, Inc., Bond Acquisition Corp.
and Synteni, Inc. (incorporated by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K dated January 22,
1998 (File No. 0-27488)).
2.2 Share Purchase Agreement, dated as of September 21, 1998, by
and among Incyte Pharmaceuticals, Inc., Hexagen Limited and
the shareholders of Hexagen Limited (incorporated by reference
to Exhibit 2.1 to the Company's Current Report on Form 8-K
dated September 21, 1998 (File No. 0-27488)).
3(i) Restated Certificate of Incorporation, as amended (incorporated
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-3 (File No. 333-31307)).
3(i)(a) Certificate of Designation of Series A Participating Preferred
Stock.
3(ii) Bylaws of the Company, as amended (incorporated by
reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-3 (File No. 333-31307)).
4.1 Form of Common Stock Certificate (incorporated by reference
to the exhibit of the same number to the Company's Registration
Statement on Form S-1 (File No. 33-68138)).
4.2 Rights Agreement dated as of September 25, 1998 between the
Company and Chase Mellon Shareholder Services, L.L.C.,
which includes as Exhibit B, the rights certificate (incorporated
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form 8-A relating to the Series A Participating
Preferred Stock Purchase Rights (filed on September 30, 1998).
10.1# 1991 Stock Plan of Incyte Pharmaceuticals, Inc., as amended
and restated (the "Plan") (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-8
(File No. 33-93666)).
10.2# Form of Incentive Stock Option Agreement under the Plan
(incorporated by reference to the exhibit of the
the Company's Registration reference to the exhibit of the same
number to the Company's Registration Statement on Form S-1 (File
No. 33-68138)).
10.3# Form of Nonstatutory Stock Option Agreement under the Plan
(incorporated by reference to the exhibit of to the
Company's Registration reference to the exhibit of the same number to
the Company's Registration Statement on Form S-1 (File No. 33-68138)).
10.4# Amended and Restated 1993 Directors' Stock Option Plan of
Incyte Pharmaceuticals, Inc. (incorporated by reference to the
exhibit of the same number to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997).
10.5# Form of Indemnity Agreement between the Company and its directors
and Form of Indemnity Agreement between the Company and its directors
and officers (incorporated by reference to 10.5 to the Company's
Registration Statement on Form S-1 (File No. 33-68138)).
10.6 Lease Agreement dated December 8, 1994 between the
Company and Matadero Lease Agreement dated December 8, 1994
between the Company and Matadero Creek (incorporated by reference
Exhibit 10.16 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994).
10.7 Lease dated July 18, 1991 between the Company and Harry J.
Fair, Jr., as Lease dated July 18, 1991 between the Company
and Harry J. Fair, Jr., as amended (incorporated by reference
to the Company's Registration Statement on Form S-1 (File
No. 33-68138)).
10.8 Lease Amendment and Extension to Lease dated July 18, 1991
between the Company and Harry J. Fair, Jr., as amended
(incorporated by reference to Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1993).
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -------------------------------------------------------------
10.9
Stock Purchase Agreement dated as of June 22, 1994 between the
Company and Pfizer Inc (incorporated by reference to
Exhibit B to the Company's Current Report on Form 8-K dated
June 23, 1994).
10.10 Registration Rights Agreement dated as of June 22, 1994 between
the Company and Pfizer Inc (incorporated by
reference to Exhibit C to the Company's Current Report on
Form 8-K dated June 23, 1994).
10.11+ Stock Purchase Agreement dated as of November 30, 1994
between the Company and The Upjohn Company
(incorporated by reference to Exhibit B to the Company's
Current Report on Form 8-K dated November 30, 1994, as
amended by Form 8-K/A filed with the Commission on March
27, 1995).
10.12 Registration Rights Agreement dated as of November 30, 1994
between the Company and The Upjohn Company
(incorporated by reference to Exhibit C to the Company's
Current Report on Form 8-K dated November 30, 1994).
10.13# 1996 Amendment to the Plan (incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form
S-8 (File No. 333-13449)).
10.14# 1997 Amendment to the Plan (incorporated by reference to
Exhibit 10.1 to the 1997 Amendment to the Plan (incorporated
by reference to Exhibit 10.1 to the Company's Registration
Form S-8 (File No. 333-31413)).
10.15# 1997 Employee Stock Purchase Plan of Incyte
Pharmaceuticals, Inc. (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-8
(File No. 333-31409)).
10.16 1998 amendment to the 1997 Employee Stock Purchase Plan
of Incyte Pharmaceuticals, Inc. (incorporated by reference to
Exhibit 99 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
10.17+ Master Strategic Relationship Agreement dated as of
September 2, 1997 between SmithKline Beecham Corporation,
Incyte Pharmaceuticals, Inc. and diaDexus, LLC (incorporated
by reference to Exhibit 10.18 to the Company's Quarterly
Report on Form 10-Q/A for the quarter ended September 30,
1997).
10.18# 1996 Synteni, Inc. Equity Incentive Stock Plan (incorporated
by reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-8 (File No. 333-46639)).
10.19# The Hexagen Limited Unapproved Company Share Option Plan
1996, as amended (incorporated by reference to Exhibit 10.1 to
the Company's Registration Statement on Form S-8 (File 333-
67691)).
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants
24.1 Power of Attorney (see page 86 of this Form 10-K)
27 Financial Data Schedule
+ Confidential treatment has been granted with respect to certain portions
of these agreements.
# Indicates management contract or compensatory plan or arrangement.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
INCYTE PHARMACEUTICALS, INC.
Date: March 23, 1999 By /s/ROY A. WHITFIELD
---------------------
Roy A. Whitfield
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Roy A. Whitfield, Randal W. Scott, and Denise M.
Gilbert, and each of them, his or her true and lawful attorneys-in-fact, each
with full power of substitution, for him or her in any and all capacities, to
sign any amendments to this report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or their substitute or substitutes may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
/s/ ROY A. WHITFIELD Chief Executive Officer March 23, 1999
- -------------------------------- (Principal Executive Officer
Roy A. Whitfield and Director
/s/ DENISE M. GILBERT Executive Vice President, March 23, 1999
- -------------------------------- Finance and Chief Financial
Denise M. Gilbert Officer (Principal Financial
Officer)
/s/ WILLIAM DELANEY Vice President of Finance, March 23, 1999
- -------------------------------- Corporate Controller
William Delaney (Principal Accounting Officer)
/s/ JEFFREY J. COLLINSON Chairman of the Board March 23, 1999
- --------------------------------
Jeffrey J. Collinson
/s/ BARRY M. BLOOM Director March 23, 1999
- --------------------------------
Barry M. Bloom
/s/ FREDERICK B. CRAVES Director March 23, 1999
- --------------------------------
Frederick B. Craves
/s/ JON S. SAXE Director March 23, 1999
- --------------------------------
Jon S. Saxe
/s/ RANDAL W. SCOTT President March 23, 1999
- --------------------------------
Randal W. Scott
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- ---------------------------------------------------------------
2.1 Agreement and Plan of Merger dated as of December 23, 1997
among Incyte Pharmaceuticals, Inc., Bond Acquisition Corp.
and Synteni, Inc. (incorporated by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K dated January 22,
1998 (File No. 0-27488)).
2.2 Share Purchase Agreement, dated as of September 21, 1998, by
and among Incyte Pharmaceuticals, Inc., Hexagen Limited and
the shareholders of Hexagen Limited (incorporated by reference
to Exhibit 2.1 to the Company's Current Report on Form 8-K
dated September 21, 1998 (File No. 0-27488)).
3(i) Restated Certificate of Incorporation, as amended (incorporated
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-3 (File No. 333-31307)).
3(i)(a) Certificate of Designation of Series A Participating Preferred
Stock.
3(ii) Bylaws of the Company, as amended (incorporated by
reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-3 (File No. 333-31307)).
4.1 Form of Common Stock Certificate (incorporated by reference
to the exhibit of the same number to the Company's Registration
Statement on Form S-1 (File No. 33-68138)).
4.2 Rights Agreement dated as of September 25, 1998 between the
Company and Chase Mellon Shareholder Services, L.L.C.,
which includes as Exhibit B, the rights certificate (incorporated
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form 8-A relating to the Series A Participating
Preferred Stock Purchase Rights (filed on September 30, 1998).
10.1# 1991 Stock Plan of Incyte Pharmaceuticals, Inc., as amended
and restated (the "Plan") (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-8
(File No. 33-93666)).
10.2# Form of Incentive Stock Option Agreement under the Plan
(incorporated by reference to the exhibit of the
the Company's Registration reference to the exhibit of the same
number to the Company's Registration Statement on Form S-1 (File
No. 33-68138)).
10.3# Form of Nonstatutory Stock Option Agreement under the Plan
(incorporated by reference to the exhibit of to the
Company's Registration reference to the exhibit of the same number to
the Company's Registration Statement on Form S-1 (File No. 33-68138)).
10.4# Amended and Restated 1993 Directors' Stock Option Plan of
Incyte Pharmaceuticals, Inc. (incorporated by reference to the
exhibit of the same number to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997).
10.5# Form of Indemnity Agreement between the Company and its directors
and Form of Indemnity Agreement between the Company and its directors
and officers (incorporated by reference to 10.5 to the Company's
Registration Statement on Form S-1 (File No. 33-68138)).
10.6 Lease Agreement dated December 8, 1994 between the
Company and Matadero Lease Agreement dated December 8, 1994
between the Company and Matadero Creek (incorporated by reference
Exhibit 10.16 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994).
10.7 Lease dated July 18, 1991 between the Company and Harry J.
Fair, Jr., as Lease dated July 18, 1991 between the Company
and Harry J. Fair, Jr., as amended (incorporated by reference
to the Company's Registration Statement on Form S-1 (File
No. 33-68138)).
10.8 Lease Amendment and Extension to Lease dated July 18, 1991
between the Company and Harry J. Fair, Jr., as amended
(incorporated by reference to Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1993).
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -------------------------------------------------------------
10.9
Stock Purchase Agreement dated as of June 22, 1994 between the
Company and Pfizer Inc (incorporated by reference to
Exhibit B to the Company's Current Report on Form 8-K dated
June 23, 1994).
10.10
Registration Rights Agreement dated as of June 22, 1994 between
the Company and Pfizer Inc (incorporated by
reference to Exhibit C to the Company's Current Report on
Form 8-K dated June 23, 1994).
10.11+ Stock Purchase Agreement dated as of November 30, 1994
between the Company and The Upjohn Company
(incorporated by reference to Exhibit B to the Company's
Current Report on Form 8-K dated November 30, 1994, as
amended by Form 8-K/A filed with the Commission on March
27, 1995).
10.12 Registration Rights Agreement dated as of November 30, 1994
between the Company and The Upjohn Company
(incorporated by reference to Exhibit C to the Company's
Current Report on Form 8-K dated November 30, 1994).
10.13# 1996 Amendment to the Plan (incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form
S-8 (File No. 333-13449)).
10.14# 1997 Amendment to the Plan (incorporated by reference to
Exhibit 10.1 to the 1997 Amendment to the Plan (incorporated
by reference to Exhibit 10.1 to the Company's Registration
Form S-8 (File No. 333-31413)).
10.15# 1997 Employee Stock Purchase Plan of Incyte
Pharmaceuticals, Inc. (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-8
(File No. 333-31409)).
10.16 1998 amendment to the 1997 Employee Stock Purchase Plan
of Incyte Pharmaceuticals, Inc. (incorporated by reference to
Exhibit 99 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
10.17+ Master Strategic Relationship Agreement dated as of
September 2, 1997 between SmithKline Beecham Corporation,
Incyte Pharmaceuticals, Inc. and diaDexus, LLC (incorporated
by reference to Exhibit 10.18 to the Company's Quarterly
Report on Form 10-Q/A for the quarter ended September 30,
1997).
10.18# 1996 Synteni, Inc. Equity Incentive Stock Plan (incorporated
by reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-8 (File No. 333-46639)).
10.19# The Hexagen Limited Unapproved Company Share Option Plan
1996, as amended (incorporated by reference to Exhibit 10.1 to
the Company's Registration Statement on Form S-8 (File 333-
67691)).
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants
24.1 Power of Attorney (see page 86 of this Form 10-K)
27 Financial Data Schedule
+ Confidential treatment has been granted with respect to certain portions
of these agreements.
# Indicates management contract or compensatory plan or arrangement.
Copies of above exhibits not contained herein are available to any stockholder
upon written request Investor Relations, Incyte Pharmaceuticals, Inc.,
3174 Porter Drive, Palo Alto, CA 94034