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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-27488
INCYTE GENOMICS, INC.
(Formerly Incyte Pharmaceuticals, Inc.)
(Exact name of registrant as specified in its charter)
Delaware 94-3136539
(State or other jurisdiction of
incorporation (IRS Employer Identification No.)
or organization)
3160 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. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of Common Stock held by non-affiliates (based
upon the closing sale price on the Nasdaq National Market on February 28,
2001) was approximately $1,105,595,000.
As of February 28, 2001, there were 65,760,321 shares of Common Stock,
$.001 per share par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors and Section 16(a) Beneficial Ownership Reporting
Compliance), 11, 12 and 13 of Part III incorporate by reference information
from the registrant's proxy statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the
registrant's 2001 Annual Meeting of Stockholders to be held on June 5, 2001.
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Item 1. Business
When used in this Report, the words "expects," "anticipates," "estimates,"
"plans," "believes," and similar expressions are intended to identify forward-
looking statements. These are statements that relate to future periods and
include statements as to the Company's expected net losses, expected
expenditure levels and rate of growth of expenditures, expected cash flows,
the adequacy of capital resources, growth in operations, expected revenues and
sources of revenues, the ability to commercialize products developed under
collaborations and alliances, our ability to complete the sequence of full-
length genes in areas of therapeutic interest and file patents on these
potential drug targets, our ability to integrate companies, operations and
their products that we have acquired or will acquire, the scheduling and
timing of current and future litigation, our investments in our intellectual
property portfolio, our strategy with regard to protecting our proprietary
technology, the success of our drug target identification and validation
efforts, the success of our custom genomic products and services, our ability
to compete and respond to rapid technological change, our intention not to
develop pharmaceutical products, our competitive advantage as to the
annotation of the human proteome, the effect of government regulation, our
compliance with applicable environmental laws and regulations, the adequacy of
our current facilities and our ability to locate additional facilities at
reasonable rates, our exposure to foreign currency rate fluctuations, products
and services under development, and the performance, content and utility of
our products and services. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited to,
those risks discussed below, as well as the extent to which the pharmaceutical
and biotechnology industries use genomic information in research and
development, risks relating to development of new products and services and
their use by our potential customers and collaborators, our ability to develop
and commercialize products to improve human health, our ability to work with
our collaborators to meet the goals of our collaborators and alliances, our
ability to retain and obtain customers, the cost of accessing or acquiring
technologies or intellectual property, the effectiveness of our sequencing
efforts, the impact of alternative technological advances and competition,
uncertainties associated with changes in patent laws and developments in and
expenses related to litigation and interference proceedings; and the risks set
forth below under Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors That May Affect Results." These
forward-looking statements speak only as of the date hereof. The Company
expressly disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
In the sections of this report entitled "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors That May Affect Results," all references to "Incyte," "we," "us,"
"our" or the "Company" mean Incyte Genomics, Inc. and its subsidiaries, except
where it is made clear that the term means only the parent company.
Incyte, LifeSeq and PathoSeq are our registered trademarks. ZooSeq,
LifeTools, LifeArray, LifeProt, LifeExpress, LifeGrid, GeneAlbum, GEM, and
BioKnowledge Library are our trademarks. We also refer to trademarks of other
corporations and organizations in this document.
Overview
Incyte provides genomics technologies and products to the biotechnology and
pharmaceutical industries and research and academic institutions to aid in
better and faster prevention, diagnosis and treatment of disease. Our products
and services include databases, bioreagents, custom sequencing, gene
expression, SNP discovery and other services.
Our databases integrate bioinformatics software with proprietary and, when
appropriate, publicly available genomic information. In building the
databases, we utilize high-throughput, computer-aided gene sequencing and
analysis technologies to identify and characterize the expressed genes of the
human genome, as well as certain animal genomes. By searching our proprietary
genomic databases, customers can integrate and analyze genomic
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information from multiple sources to discover genes that may represent the
basis for new biological targets, therapeutic proteins, antisense or
diagnostic products. Our products and services can be applied to gene and
target discovery, functional genomics studies, preclinical pharmacology and
toxicology studies, and can aid in understanding and analyzing the results of
clinical development studies.
We provide access to our databases primarily through collaborations with
pharmaceutical and biotechnology companies worldwide. In addition, customers
may access select databases online via our website. As of December 31, 2000,
more than thirty companies had entered into multi-year agreements to obtain
access to our databases on a non-exclusive basis. Revenues from these
companies have primarily consisted of database access fees. Our agreements
also provide for future milestone payments and royalties from the sale of
products derived from proprietary information contained in one or more
database modules.
Our portfolio of products and services includes:
. LifeSeq Gold human gene sequence database;
. ZooSeq animal model gene sequence database;
. LifeExpress gene and protein expression database;
. Genetics program that identifies common DNA sequence variants between
individuals;
. Microarray-based expression services;
. Bioreagents; and
. Custom sequencing and other custom services.
The databases are available using the Oracle database architecture and
operate on Sun Microsystems, Compaq and SGI workstations. As part of our
strategy for expanding our customer base, online delivery of database and
software products is available from the Company's website at www.incyte.com.
Background
All living cells contain DNA, which is composed of two strands of
complementary molecules. These molecules, called nucleotides, are strung
together in specific patterns to create genes. Genes provide the necessary
information to create proteins, the molecules that carry out all functions
within a cell. Many human diseases are associated with the inadequate or
inappropriate presence, production or performance of proteins. As such,
pharmaceutical and biotechnology companies often seek to develop drugs that
will bind to a targeted protein involved in disease in order to regulate,
inhibit or stimulate its biological activity. Other proteins, known as
therapeutic proteins, have direct biological activity and may be capable of
treating disease. Insulin and human growth hormone are examples of therapeutic
proteins. Understanding the role genes play in disease, and the protein
targets or therapeutic proteins that they encode, has thus become a
significant area of interest and research within the pharmaceutical and
biotechnology industries.
Sequencing
DNA sequencing is a process that identifies the order in which nucleotides
are strung together in a segment of DNA. Once the sequence of a gene is known,
the function of the gene may be inferred by comparing its sequence with the
sequences of other human genes of known function. Genes with similar, or
homologous, sequences may have related functions. Comparing gene sequences
across species is also a useful tool for understanding gene function, as
frequently it is easier to first assess gene function in other organisms.
Gene Expression
Another method used to determine gene function focuses on the analysis of
gene activity, referred to as expression, 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 complementary DNA, or cDNA,
thereby
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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 fragments of DNA attached to a surface in a grid-like formation.
When fragments of DNA from normal and diseased cells are applied to the
microarray, complementary strands attach to each other. Microarray technology
allows the fabrication of very small grids containing probes for thousands of
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
Improvements in sequencing technology have caused the amount of genomic
information from both public and private sources to increase 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. We believe these tools, and those 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
Genetic variation may cause individuals to respond differently to disease
or treatment with the same drug. Few, if any, FDA-approved drugs can
successfully treat every individual diagnosed with a targeted disease. The
differences in patients' responses to a drug are believed to result in part
from differences in the sequence of nucleotides within genes. The most common
form of sequence variation is known as a single nucleotide polymorphism or
"SNP." A SNP is defined as a single nucleotide difference within the same DNA
region between two individuals. 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 that correlate
with a patient's disease prognosis or ability to respond to a drug. Through
our acquisition of Hexagen Limited in September 1998, we are developing
fluorescent single-strand confirmation polymorphism, or 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 applying technologies in the areas of electrophoresis,
fluorescence chemistries, sequencing and bioinformatics 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
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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 disease.
Proteomics
Proteomics is a relatively new field of study that involves the separation,
identification, and characterization of proteins present in a biological
sample. By comparing disease and control samples, it is possible to identify
disease-specific proteins. These may have potential as targets for drug
development or as molecular markers of disease.
Products and Services
Sequence Databases. We provide our database collaborators with non-
exclusive database access. Database collaborators receive periodic data
updates as well as software upgrades and additional search and analysis tools
when they become available. The fees and the period of access are negotiated
independently with each company. Fees generally consist of database access
fees, option fees, and non-exclusive or exclusive license fees corresponding
to patent rights on proprietary sequences. We may also receive future
milestone and royalty payments from database collaborators from the
development and sale of their products derived from our technology and
database information. Using our databases, researchers can browse not only
Incyte-generated data, but also public domain information. Customers may also
access select Incyte-hosted databases online via our website. We currently
offer the following database modules:
. LifeSeq Gold Database. Incyte's flagship database, LifeSeq Gold, currently
contains more than 6.7 million sequences, 5.3 million of which are Incyte
derived, from more than 1,200 different tissue libraries, representing more
than 90% of the human genes. The database also contains public domain
genomic data that has been curated and aligned with Incyte's gene
transcript data using our proprietary informatics processes. LifeSeq Gold
partners also have access to more than 215,000 sequence-verified clone
reagents archived in our LifeSeq GeneAlbum reagent set and data on SNPs.
Our LifeSeq Gold data can be accessed via a browser-based interface and
customers are provided with a full range of standard built-in gene query
and analysis tools. LifeSeq Gold is accessible to customers in several
different configurations. LifeSeq Gold is available for installation on the
intranet network at a company's site for complete access behind the
company's firewall. LifeSeq Gold Online allows Internet access to an
Incyte-hosted site providing the most current version of LifeSeq Gold.
LifeSeq Gene-by-Gene provides access to the LifeSeq human gene database and
reagent set on a pay-per-view basis. LifeSeq Subscriber Sponsored Access
Program allows access to LifeSeq through collaborations with participating
pharmaceutical partners.
. LifeSeq Public. LifeSeq Public utilizes our bioinformatics capabilities to
assemble public domain data plus some of our proprietary sequences. Once a
researcher finds a gene of interest using LifeSeq Public, the researcher
can purchase from Incyte sequence-verified reagents.
. ZooSeq Database. The ZooSeq multi-species gene sequence database provides
genetic data for animal model organisms used in drug discovery, drug
development and testing, and gene discovery. With rat, mouse, monkey, and
dog animal models currently available, ZooSeq enables individual and cross-
species comparison of genes. This information can help uncover previously
unknown homologs of human disease-relevant genes, improve understanding of
disease pathways, and provide a basis for optimizing drug selection before
moving on to expensive human clinical trials. ZooSeq data is accessed from
a browser-based interface that provides point-and-click control of analysis
tools included with the database.
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Expression
. LifeExpress Database. The LifeExpress database provides RNA and protein
expression data. LifeExpress Target provides comprehensive disease-
focused expression data for a number of key therapeutic areas, including
cancer, cardiovascular, central nervous system, immunology and
inflammation, and metabolic diseases (obesity, osteoporosis, and type 2
diabetes). Researchers can use LifeExpress Target to prioritize targets
earlier in the discovery cycle; discover genes and regulatory pathways
involved in disease; and more quickly identify disease-associated genes
by tissue type, cell line, or animal model. The protein expression module
has been developed in cooperation with our collaborator, Oxford
GlycoSciences Plc. The data can be accessed via our Java-based software
interface that provides a variety of analysis tools.
. GEM microarrays. Our GEM microarrays can provide researchers with a cost-
effective way to perform detailed analysis of differential gene
expression in normal and diseased or treated cells. We offer a variety of
GEM microarrays that contain DNA fragments, or clones, from both human
and animal genomes.
Genetics
. Custom SNP discovery service. We provide customers with high-throughput
SNP discovery services. Incyte uses its proprietary fSSCP screening
method on the customer's genes of interest to detect 95 percent of the
polymorphisms that have a frequency greater than or equal to 3.1 percent.
. IsSNPs. Our In silico SNP data is mined from the LifeSeq Gold database.
Researchers can use data derived from Incyte's genetics programs to
identify and characterize optimal therapeutic targets, gain a better
understanding of the relationship between disease phenotypes and genetic
variation, enable faster clinical proof of principle, and identify
genetic markers of disease progression.
. Custom Sequencing. Our custom sequencing services leverage several of our
core strengths, including library screening, library construction, high-
throughput cDNA sequencing and bioinformatics.
. Bioreagents and Other Services. We offer a variety of DNA reagents and
other services, including clones from our extensive libraries, GEM
microarray services, gene screening, clone resources, and robotics.
Database Production
We engage in the high-throughput automated sequencing of genes derived from
tissue samples followed by the computer-aided analysis of each gene sequence
to identify homologies to genes of known function in order to predict the
biological function of newly identified sequences. The derivation of
information in our databases involves the following steps:
. Tissue Access. We obtain tissue samples representing most major organs in
the human body from various academic and commercial sources. Where
possible, we obtain information as to the medical history and pathology
of the tissue. The genetic material is isolated from the tissue and
prepared for analysis. The results of this analysis, as well as the
corresponding pathology and medical history information, are incorporated
into the databases.
. High-Throughput cDNA Sequencing. We utilize specialized teams in an
integrated approach to our high-throughput sequencing and analysis
effort. Gene sequencing is performed using multiple work shifts to
increase daily throughput. One team develops and prepares cDNA libraries
from biological sources of interest, a second team prepares the cDNAs
using robotic workstations to perform key steps that result in purified
cDNAs for sequencing, and a third team operates the automated DNA
sequencers.
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. Bioinformatics. Sequence information generated from our high-throughput
sequencing operations is uploaded to a network of servers. Our
proprietary bioinformatic software then assembles and edits the sequence
information. The sequence of each cDNA is compared via automated,
computerized algorithms to the sequences of known genes in our databases
and public domain databases to identify whether the cDNA codes for a
known protein or is homologous to a known gene. Each sequence is
annotated as to its cell or tissue source, its relative abundance and
whether it is homologous to a known gene with known function. The
bioinformatics staff monitors this computerized analysis and may perform
additional analyses on sequence information. The finished data are then
added to our proprietary sequence databases.
Collaborators
As of December 31, 2000, we had database collaboration agreements with more
than 30 companies. Each collaborator has agreed to pay annual fees to receive
non-exclusive access to one or more of our databases. One customer contributed
11% of total revenues in 2000 and another accounted for 12% of total revenues
in 1998. No customer accounted for 10% or more of total revenues in 1999.
Some of our database agreements contain minimum annual update requirements,
which if not met could result in our breach of the respective agreement. We
cannot assure you that any of our database collaboration agreements will not
be terminated early in accordance with their terms. Loss of revenues from any
individual database agreement, if terminated or not renewed, could have an
adverse impact on our results of operations, although is not anticipated to
have a material adverse impact on our business or financial condition.
Information regarding revenues by geographic areas is included in Note 9 to
the Notes to the Consolidated Financial Statements.
Development Programs
Since our inception, we have made substantial investments in research and
technology development. During the years ended December 31, 2000, 1999, and
1998 we spent approximately $192.6 million, $146.8 million, and $97.2 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. We have entered into a number of research and development
relationships with companies and research institutions.
We are 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 our
acquisition of Hexagen in September 1998.
We are 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. 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. We expect that
this service will be used to assist in the evaluation of new drugs in clinical
trials and to assess clinical trial design.
We have increased our investments in identifying and validating drug
targets. We employ sophisticated data mining and functional biology tools
along with our sequence, gene expression and SNP data included in our
databases to identify drug targets. Our target validation efforts are
supported by our use of technologies that include biological assays and
readout, gene manipulation by antisense, retroviral transfection, and in vivo
gene knockouts. Our in-house and collaborative efforts are focused on high-
priority therapeutic areas such as cancer, cardiovascular disease, Type 2
diabetes and related metabolic disorders, inflammatory disease,
neurodegenerative disease, and osteoporosis.
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Proteome, Inc., Acquisition
In December 2000, we acquired Proteome, Inc., a privately held company
based in Beverly, Massachusetts. Founded in February 1995, Proteome has
developed an integrated biological knowledge system to provide researchers
with valuable information related to gene and protein function. This platform
reduces the complexity of the genomic information landscape by revealing
biological connections and relationships across species. Proteome employs its
proprietary processes to compile, distill and transform protein information
into meaningful biological knowledge. Proteome's database product line, the
BioKnowledge Library, consists of multispecies volumes that are interconnected
to allow searching between volumes using common protein and gene
characteristics. The BioKnowledge Library, available to commercial
subscribers, consists of individual volumes (proteome databases) for each
model organism, and includes software tools to produce a resource for
bioinformatic scientists and biologists of all disciplines. We believe that
Incyte's access to a comprehensive set of gene transcripts, combined with
Proteome's network of protein annotators, will provide the Company with a
competitive advantage in annotating the human proteome.
Patents and Proprietary Technology
Our database business and competitive position are in part dependent upon
our ability to protect our proprietary database information and software
technology. We rely on patent, trade secret and copyright law, as well as
nondisclosure and other contractual arrangements to protect our proprietary
information.
Our ability to license proprietary genes and SNPs may be dependent upon our
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 to our products or processes. Patent applications filed
by competitors may claim some of the same gene sequences or partial gene
sequences as those claimed in patent applications that we file. We are aware
that some entities have made or have announced their intention to make gene
sequences publicly available. Publication of sequence information may
adversely affect our ability to obtain patent protection for sequences that
have been made publicly available.
Our current policy is to file patent applications on what we believe to be
novel full-length gene sequences obtained through our high-throughput
computer-aided gene sequencing and characterization efforts. We have filed
U.S. patent applications in which we have claimed certain partial gene
sequences and have filed patent applications in the U.S. and applications
under the Patent Cooperation Treaty ("PCT"), designating countries in Europe
as well as Canada and Japan, claiming full-length gene sequences associated
with cells and tissues that are the subject of our high-throughput gene
sequencing program. To date, we hold over 500 U.S. patents with respect to
full-length gene sequences and one issued U.S. patent claiming multiple
partial gene sequences. Currently, we have no registered copyrights for our
database-related software.
In 1996, the United States Patent and Trademark Office issued guidelines
limiting the number of partial gene sequences that can be examined in a single
patent application. Many of our patent applications containing multiple
partial sequences contain more sequences than the maximum number allowed under
the new guidelines. We are reviewing our options, and due to the resources
needed to comply with the guidelines, we may decide to abandon patent
applications for some of our partial gene sequences.
In 2000, the U.S. Patent and Trademark Office issued new guidelines under
which its examiners are to determine whether gene patent applications comply
with the U.S. Patent Law's utility requirements. We believe that our gene
patent applications comply with these legal requirements, but uncertainty
remains regarding the application of these requirements to our gene patent
applications.
We have begun to file patent applications for patentable SNPs identified
with our LifeSeq Gold database, through our human genome sequencing program,
and through the use of our fSSCP discovery technology. These patents will
claim rights to SNPs for diagnostic and genotyping purposes. As information
relating to particular
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SNPs is developed, we plan to seek additional rights in those SNPs that are
associated with specific diseases, functions or drug responses. The scope of
patent protection for gene sequences, including SNPs, is highly uncertain,
involves complex legal and factual questions and has recently been the subject
of much controversy. No clear policy has emerged with respect to the breadth
of claims allowable for SNPs. There is significant uncertainty as to what, if
any, claims will be allowed on SNPs discovered through high throughput
discovery programs.
As the biotechnology industry expands, more patents are issued and other
companies engage in the business of discovering genes and other genomic-
related businesses, the risk increases that our potential products, and the
processes used to develop these products, may be subject to claims that they
infringe the patents of others. Further, we are aware of several issued
patents in the field of microarray or gridding technology, which can be
utilized in the generation of gene expression information. Some of these
patents are the subject of litigation. Therefore, our operations may require
us to obtain licenses under any of these patents or proprietary rights, and
these licenses may not be made available on terms acceptable to us. Litigation
may be necessary to defend against or assert claims of infringement, to
enforce patents issued to us, to protect trade secrets or know-how owned by
us, or to determine the scope and validity of the proprietary rights of
others. We believe that some of our patent applications cover genes that may
also be claimed in patent applications filed by other parties. Interference
proceedings may be necessary to establish which party was the first to invent
a particular sequence for the purpose of patent protection. Several
interferences involving our patent applications covering full length genes
have been declared. Litigation or interference proceedings, regardless of the
outcome, could result in substantial costs to us, and divert our efforts, and
may have a material adverse effect on our business, operating results and
financial condition. In addition, there can be no assurance that such
proceedings or litigation would be resolved in our favor.
In January and September 1998, Affymetrix, Inc. filed lawsuits in the
United States District Court for the District of Delaware alleging
infringement of three U.S. patents by the Company. The Company believes that
it has meritorious defenses and intends 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, which if not resolved favorably could require us to pay damages
and stop selling and using microarray products."
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 we do. In addition, we are aware that other companies have
developed databases containing gene sequence, gene expression, genetic
variation or other genomic information and are marketing, or have announced
their intention to market, their data to pharmaceutical companies. We expect
that additional competitors may attempt to establish databases containing this
information in the future.
In addition, competitors may discover and establish patent positions with
respect to the gene sequences and polymorphisms in our databases. Further,
some entities engaged in or with stated intentions to engage in gene
sequencing have made or have stated their intention to make the results of
their sequencing efforts publicly available. These patent positions, or the
public availability of gene sequences comprising substantial portions of the
human genome or on microbial or plant genes, could:
. decrease the potential value of our databases to our subscribers; and
. adversely affect our ability to realize royalties or other revenue from
commercialization of products based upon such genetic information.
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We are aware that a number of companies are pursuing alternative methods
for generating gene expression information, including some that have developed
and are developing microarray technologies. At least one other company
currently offers microarray-based services that might be competitive with
those we offer. These advanced sequencing or gene expression technologies, if
developed, may not be commercially available for our purchase or license on
reasonable terms, if at all.
Our SNP discovery platform represents a modification of a process that is
in the public domain. Other companies could make similar or superior
improvements in this process.
We believe that the following are important aspects of our competitive
position:
. the features and ease of use of our database software;
. our experience in high-throughput gene sequencing;
. the cumulative size of our databases;
. the quality of the data, including the annotations in our databases;
. our computing infrastructure; and
. our experience with bioinformatics and database software.
The genomics industry is characterized by extensive research efforts and
rapid technological progress. New developments are expected to continue and
there can be no assurance that discoveries by others will not render our
services and potential products noncompetitive. In addition, significant
levels of research in biotechnology and medicine occur in universities and
other non-profit research institutions. These entities have become
increasingly active in seeking patent protection and licensing revenues for
their research results. These entities also compete with us in recruiting
talented scientists. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors That May Affect Results--Our
industry is intensely competitive, and if we do not compete effectively, our
revenues may decline."
Government Regulation
Regulation by governmental authorities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products that may be developed by us or our licensees. At the
present time, we do not intend to develop any pharmaceutical products
ourselves. Our agreements with our LifeSeq Gold database subscribers provide
for the payment to us of royalties on any pharmaceutical products developed by
those subscribers derived from proprietary information obtained from our
genomic databases. Thus, the receipt and timing of regulatory approvals for
the marketing of such products may have a significant effect on our future
revenues. 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 our ability to earn
milestone payments, royalties or other license-based fees. Additional
governmental regulations that might arise from future legislation or
administrative action cannot be predicted, and 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--Because our revenues
are derived primarily from the pharmaceutical and biotechnology industries,
our revenues may fluctuate substantially due to reductions and delays in
research and development expenditures."
10
Corporate History
Incyte was incorporated in Delaware in April 1991 under the name Incyte
Pharmaceuticals, Inc. In June 2000, the Company's stockholders approved an
amendment to the Company's Certificate of Incorporation to change the
Company's name to Incyte Genomics, Inc.
Human Resources
As of December 31, 2000, we had 1,322 full-time equivalent employees (196
of whom were contract or part-time employees), including 493 in sequencing,
microarray, SNP and reagent production, 346 in bioinformatics, 231 in research
and technology development, and 252 in marketing, sales and administrative
positions. None of our employees is covered by collective bargaining
agreements, and management considers relations with our employees to be good.
Our future success will depend in part on the continued service of our key
scientific, software, bioinformatics and management personnel and our 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 our activities, especially with respect to
experienced bioinformatics and software personnel, and there can be no
assurance that we will be able to continue to attract and retain such
personnel necessary for the development of our business. Failure to attract
and retain key personnel could have a material adverse effect on our business,
financial condition and operating results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors that May
Affect Results--If we are unable to manage effectively our growth, our
operations, and ability to support our customers could be affected, which
could harm our revenues" and "--We depend on key employees in a competitive
market for skilled personnel, and the loss of the services of any of our key
employees would affect our ability to achieve our objectives."
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; Beverly, Massachusetts; and Cambridge,
England. As of December 31, 2000, Incyte had multiple sublease and lease
agreements covering approximately 446,000 square feet that expire on various
dates ranging from September 2001 to March 2011. The Company believes that its
current facilities are adequate to support its current and anticipated near-
term operations and believes that it can obtain additional space it may need
in the future on commercially reasonable terms.
Item 3. Legal Proceedings
Affymetrix
In January 1998, Affymetrix Inc, ("Affymetrix") filed a lawsuit in the
United States District Court for the District of Delaware, which was
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 by the Company. The complaint alleges that the Company
infringed the "934 patent by making, using, selling, importing, distributing
or offering to sell in the United States high density arrays and that this
infringement was willful. Affymetrix seeks a permanent injunction enjoining
the Company from further infringement of the "934 patent and, in addition,
seeks damages, costs, attorneys' fees and interest. Affymetrix also requests
triple damages based on its allegation of willful infringement by the Company.
In September 1998, Affymetrix filed an additional lawsuit in the United
States District Court for the District of Delaware, which was subsequently
transferred to the United States District Court for the Northern District of
California in November 1998, alleging the Company infringed U.S. patent number
5,800,992 and U.S. patent number 5,744,305. The complaint alleges that the
Company infringed the "305 patent by making, using, selling, importing,
distributing or offering to sell in the United States high density arrays. It
also alleges that the Company infringed the "992 patent by using their GEM
microarray technology to conduct gene expression monitoring and
11
other applications using two-color labeling, and that this infringement was
willful. Affymetrix seeks a permanent injunction enjoining the Company from
further infringement of the "305 and "992 patents. The court held a pretrial
hearing in November 2000 to determine how to construe the patent claims that
will be litigated in trial. In January 2001, the court issued a ruling
describing how the claims in the "934, "305 and "992 patents should be
interpreted.
In April 1999, the Board of Patent Appeals and Interferences of the United
States Patent and Trademark Office declared interferences between pending
patent applications licensed exclusively to the Company and the Affymetrix
"305 and "992 patents. The Board of Patent Appeals and Interferences invokes
an interference proceeding when more than one patent applicant claims the same
invention. During the proceeding, the Board of Patent Appeals and
Interferences evaluates all relevant facts, including those bearing on first
to invent, validity, enablement and scope of claims, and then makes a
determination as to who, if anyone, is entitled to the patent on the disputed
invention. In September 1999, the Board of Patent Appeals and Interferences
determined that the Company had not met its prima facie case, and ruled that
the patents licensed by the Company from Stanford University were not entitled
to priority over corresponding claims in the two Affymetrix patents. The
Company is seeking de novo review of the Board's decisions in the United
States District Court for the Northern District of California.
In August 2000, the Company filed a lawsuit against Affymetrix in federal
court alleging infringement of U.S. patent numbers 5,716,785 and 5,891,636.
The patents relate to technologies used in the amplification of RNA and the
generation of gene expression information. Affymetrix has filed counterclaims
in this lawsuit that allege, among other things, that the Company infringe
U.S. patent number 6,040,193 and U.S. patent number 5,871,928. These
counterclaims allege that the Company infringe these patents by making, using,
offering to sell and/or selling within the United States the inventions
claimed in the patents, including, in the case of the "193 patent, methods for
forming microarrays and, in the case of the "928 patent, methods for analyzing
nucleic acids. The counterclaims also allege that the Company engaged in acts
of unfair competition under California statutory and common law. Affymetrix
seeks a permanent injunction enjoining the Company from further infringement
of the "193 patent and "928 patent and, in addition, seeks damages, costs and
attorneys' fees and interest. Affymetrix further requests triple damages from
the infringement claims based on its allegation of willful infringement by the
Company.
In December 1999 and August 2000, the Company filed lawsuits against Gene
Logic Inc. in federal court alleging patent infringement. Gene Logic filed
counterclaims alleging, among other things, that the Company committed acts of
unfair competition under California statutory and common law. Gene Logic
sought, among other things, damages, costs and attorneys' fees. In January
2001, the Company reached a litigation settlement with Gene Logic pursuant to
which the lawsuits were dismissed, and Gene Logic will have a non-exclusive
license to practice the technology described in the patents.
The Company believes it has meritorious defenses and intends to defend
vigorously the suits and counterclaims brought by Affymetrix. However, the
Company's defenses may be unsuccessful. At this time, the Company cannot
reasonably estimate the possible range of any loss resulting from these suits
and counterclaims due to uncertainty regarding the ultimate outcome.
Regardless of the outcome, the Affymetrix litigation has resulted and is
expected to continue to result in substantial expenses and diversion of the
efforts of our management and technical personnel. Further, there can be no
assurance that any license that may be required as a result of this litigation
or the outcome thereof would be made available on commercially acceptable
terms, if at all. This litigation may also affect the Company's potential
customers' willingness to use its microarray services and gene expression
databases, which could adversely affect the Company's revenue.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock, par value $.001 ("Common Stock"), is traded on
the Nasdaq National Market ("Nasdaq") under the symbol "INCY." The following
table sets forth, for the periods indicated, the range of high and low sales
prices for the Common Stock on Nasdaq as reported in its consolidated
transaction reporting system.
High Low
------- ------
1999
First Quarter............................................. $ 19.75 $ 9.75
Second Quarter............................................ 13.56 8.38
Third Quarter............................................. 21.13 10.31
Fourth Quarter............................................ 36.56 8.22
2000
First Quarter............................................. 144.53 32.63
Second Quarter............................................ 60.25 21.69
Third Quarter............................................. 55.56 34.00
Fourth Quarter............................................ 43.00 22.06
As of December 31, 2000, the Common Stock was held by 400 stockholders of
record. The Company has never declared or paid dividends on its capital stock
and does not anticipate paying any dividends in the foreseeable future. The
above high and low sales prices for the Common Stock have been adjusted to
reflect the two-for-one stock split effected in the form of a stock dividend
in August 2000.
13
Item 6. Selected Consolidated Financial Data
Selected Annual Consolidated Financial Data
(in thousands, except per share data)
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related Notes included in Item 8 of
this Report.
Year Ended December 31,
----------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- ------- -------
Consolidated Statement of
Operations Data:(/1/)
Revenues...................... $194,167 $156,962 $134,811 $89,996 $41,895
Costs and expenses:
Research and development.... 192,556 146,833 97,192 72,452 41,337
Selling, general and
administrative............. 64,201 37,235 25,438 13,928 6,957
Charge for purchase of in-
process research and
development................ -- -- 10,978 -- 3,165
Acquisition-related
charges.................... -- -- 1,171 -- --
-------- -------- -------- ------- -------
Total costs and expenses.. 256,757 184,068 134,779 86,380 51,459
Income (loss) from
operations................... (62,590) (27,106) 32 3,616 (9,564)
Interest and other income,
net.......................... 31,206 5,169 7,266 4,140 2,288
Losses from joint venture..... (1,283) (5,631) (1,474) (300) --
-------- -------- -------- ------- -------
Income (loss) before income
taxes and extraordinary
item......................... (32,667) (27,568) 5,824 7,456 (7,276)
Provision (benefit) for income
taxes........................ 205 (800) 2,352 548 --
-------- -------- -------- ------- -------
Income (loss) before
extraordinary item........... (32,872) (26,768) 3,472 6,908 (7,276)
Extraordinary item, net of
taxes........................ 3,137 -- -- -- --
-------- -------- -------- ------- -------
Net income (loss)............. $(29,735) $(26,768) $ 3,472 $ 6,908 $(7,276)
======== ======== ======== ======= =======
Basic net income (loss) per
share........................ $ (0.47) $ (0.48) $ 0.06 $ 0.14 $ (0.16)
======== ======== ======== ======= =======
Number of shares used in
computation of basic net
income (loss) per share...... 63,211 56,276 53,842 48,600 44,796
======== ======== ======== ======= =======
Diluted net income (loss) per
share........................ $ (0.47) $ (0.48) $ 0.06 $ 0.13 $ (0.16)
======== ======== ======== ======= =======
Number of shares used in
computation of diluted net
income (loss) per share...... 63,211 56,276 57,798 52,996 44,796
======== ======== ======== ======= =======
December 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Consolidated Balance Sheet
Data:(/1/)
Cash, cash equivalents, and
securities available-for-
sale....................... $582,180 $ 66,937 $111,233 $113,095 $ 40,238
Working capital............. 571,583 58,043 81,437 90,700 21,351
Total assets................ 886,820 221,934 230,290 199,089 69,173
Non-current portion of
capital lease obligations
and notes payable.......... -- 194 796 801 37
Convertible subordinated
notes...................... 187,814 -- -- -- --
Accumulated deficit......... (84,904) (55,169) (28,401) (30,129) (37,037)
Stockholders' equity........ 622,694 170,282 179,567 145,702 44,834
- --------
(1) Financial data for the year ended December 31, 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 10 of Notes to Consolidated Financial
Statements.
14
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. These statements, which include statements as to the Company's
expected net losses, expected expenditure levels, expected uses of cash,
expected cash flows, expected expenditures including expenditures on
intellectual property and research and development, and expected investments,
the adequacy of capital resources, the effect of the adoption of SFAS 133, and
growth in operations, are subject to risks and uncertainties that could cause
actual results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, those risks discussed below, as
well as the extent of utilization of genomic information by the biotechnology
and pharmaceutical industries; actual and future consolidations of
pharmaceutical companies; risks relating to the development of new products
and their use by potential collaborators of the Company; the impact of
technological advances and competition; the ability of the Company to obtain
and retain customers; competition from other entities; early termination of a
database collaboration agreement or failure to renew an agreement upon
expiration; the cost of accessing or acquiring technologies developed by other
companies; uncertainty as to the scope of coverage, enforceability or
commercial protection from patents that issue on gene sequences and other
genetic information; developments in and expenses relating to litigation; the
results and businesses in which the Company has purchased equity; and the
matters discussed in "Factors That May Affect Results." These forward-looking
statements speak only as of the date hereof. The Company expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
Overview
Incyte Genomics, Inc. ("Incyte" or the "Company") designs, develops and
markets genomic information-based products and services. These products and
services include database products, microarray-based gene expression services
and SNP discovery services, 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 products and services used by pharmaceutical and
biotechnology companies and academic researchers to understand disease and to
discover and develop drugs.
In July 2000, the Company's board of directors approved a two-for-one stock
split in the form of a stock dividend. Incyte stockholders of record on August
7, 2000 received one additional share for each share of common stock held at
the time. The additional shares were distributed to eligible stockholders on
August 31, 2000. All share and per share data have been adjusted retroactively
to reflect the split.
Revenues recognized by the Company consist primarily of non-exclusive
database access fees related to database agreements, the sales of genomic
screening products and services, fees for contract sequencing services, fees
for research programs, and fees for microarray-based gene expression services.
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 additional milestone
payments or royalties. The Company's ability to maintain and increase revenues
depends on its ability to obtain additional database subscribers, to retain
existing subscribers, to expand its product and service offerings and to
expand its customer base. 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.
15
In 2001, the Company intends to make significant investments focused on the
further development of its intellectual property portfolio and its internal
disease pathway and therapeutic drug discovery programs. Depending on the
investment required and the timing of such investments, expenses or losses
related to these investments could adversely affect operating results. In
addition to its investments in these areas, the Company is continuing to
invest in its identification and characterization of full length genes, SNP
discovery, proteomics and protein annotation, and bioinformatics in 2001. As a
result, the Company expects to report a net loss at least through 2001. If the
costs of these new and existing programs are greater than anticipated, or if
these programs take longer to complete, or if losses are incurred from
strategic investments, the Company may incur losses in future periods as well.
In December 2000, the Company completed the acquisition of Proteome, Inc.,
a privately held proteomics database company. The Company issued 1,248,522
shares of its common stock and $37.7 million in cash in exchange for all of
Proteome's outstanding capital stock. In addition, the Company assumed
Proteome's stock options, which if fully vested and exercised, would amount to
216,953 shares of its common stock. The fair value of the stock options
assumed were allocated between additional purchase price and deferred
compensation in accordance with guidance provided by the Financial Accounting
Standards Board's Interpretation No. 44. The transaction was accounted for as
a purchase. The amount of the purchase price in excess of net tangible assets
acquired of approximately $70.8 million, was allocated to goodwill ($50.3
million), database ($16.6 million), developed technology ($0.6 million),
tradename ($1.7 million), and assembled workforce ($1.6 million), which are
being amortized over 8, 8, 5, 3 and 3 years, respectively. The Company
evaluates its intangible assets for impairment on a quarterly basis.
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.
The Company has incurred and may 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 the Company and in the
lawsuits filed by the Company against Affymetrix in August 2000. In August
2000, the Company filed a patent infringement suit against Affymetrix in the
United States Court for the Northern District of California. The suit alleges
infringement of the U.S. Patent Numbers 5,716,785 and 5,891,636. These patents
cover key technologies used in the creation of gene expression data.
In its lawsuits against the Company, Affymetrix seeks a permanent
injunction enjoining the Company 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
tripled on its allegation of willful infringement by the Company. With respect
to the lawsuits filed by the Company, Affymetrix has filed counterclaims
against the Company. See Note 12 of Notes to Consolidated Financial
Statements.
The Company believes it has meritorious defenses and intends to defend
these suits and counterclaims vigorously. However, there can be no assurance
that the Company 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 and counterclaims 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 and
counterclaims or the outcome thereof would be made available on commercially
acceptable terms, if at all.
16
Results of Operations
The Company recorded net losses for the years ended December 31, 2000 and
1999 of $29.7 million and $26.8 million, respectively, and net income for the
year ended December 31, 1998 of $3.5 million. On a basic and diluted per share
basis, net loss was $0.47 and $0.48 for the years ended December 31, 2000 and
1999, respectively. Basic and diluted net income per share was $0.06 for the
year ended December 31, 1998. Loss before extraordinary items for 2000 was
$32.9 million, or $0.52 per diluted share. The net loss per share in 2000
reflects the dilutive effect of approximately 4 million shares issued in a
February 2000 private equity offering. The net income per share for 1998
reflects the issuance of approximately 4.6 million shares in January 1998 in
connection with the Company's business combination with Synteni.
Revenues. Revenues for the years ended December 31, 2000, 1999, and 1998
were $194.2 million, $157.0 million, and $134.8 million, respectively.
Revenues resulted primarily from database access fees and, microarray-based
gene expression services, genomic screening products and services, fees for
contract sequencing, and fees from partnering programs. The increase in
revenues was primarily attributable to database agreements with new customers,
revenues from the Pfizer partner program, revenues from new products such as
the in silico Single Nucleotide Polymorphism ("isSNP") product, as well as
increased revenues from custom genomics products and services.
Expenses. Total costs and expenses for the years ended December 31, 2000,
1999, and 1998 were $256.8 million, $184.1 million, and $134.8 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 are expected to increase in the foreseeable
future due to our continuing investment in new products and services and
additional costs associated with Proteome operations.
Research and development expenses for the years ended December 31, 2000,
1999, and 1998 were $192.6 million, $146.8 million, and $97.2 million,
respectively. The increase from 2000 over 1999 resulted primarily from an
increase in bioinformatics and software development efforts, SNP discovery
efforts, microarray production, partner program expenses, expression database
development, an increase in internal disease pathway and therapeutic drug
discovery programs, and the development of internet and e-commerce products.
The increase from 1999 over 1998 resulted primarily from the Company's genomic
sequencing, genetic mapping, and SNP discovery initiatives that were started
in the second half of 1998, the Company's collaborations in the proteomics
field, the increase in microarray production, and the costs related to
intellectual property protection. The Company expects research and development
spending to increase as the Company continues to pursue the development of new
database products and services, including Proteome's proteomic database, and
as the Company expands its internal disease pathway and therapeutic drug
discovery programs.
Selling, general and administrative expenses for the years ended December
31, 2000, 1999, and 1998 were $64.2 million, $37.2 million, and $25.4 million,
respectively. The increase in selling, general and administrative expenses in
2000 over 1999 resulted primarily from the growth in the Company's sales and
marketing function, including its branding efforts, and increased personnel to
support the growing complexity of the Company's operations. The increase in
selling, general and administrative expenses in 1999 over 1998 resulted
primarily from the growth in sales and marketing activities and the increased
personnel to support the growing complexity of the Company's operations. The
Company's selling, general and administrative expenses were also impacted by
legal expenses related to the Company's patent infringement lawsuits with
Affymetrix and GeneLogic of approximately $8.9 million, $6.5 million and $2.9
million, in 2000, 1999, and 1998, respectively. The Company expects that total
selling, general and administrative expenses will continue to increase,
primarily due to the amortization of goodwill and other intangible assets
generated from the Proteome acquisition and expenses to support the growing
complexity of the Company's operations.
17
Interest and Other Income/Expense, Net. Interest and other income/expense,
net, for the years ended December 31, 2000, 1999, and 1998, was $41.7 million,
$5.5 million, and $7.4 million, respectively. The increase in 2000 from 1999
was primarily due to higher interest income, and a gain of $5.4 million from
the sale of one of the Company's long-term strategic investments. The higher
interest income was primarily due to the convertible debt offering and private
equity offering in February 2000 resulting in higher cash, cash equivalent and
marketable securities balances. The decrease in 1999 from 1998 was primarily
due to decreased interest income as a result of lower cash, cash equivalent
and marketable securities balances.
Interest Expense. Interest expense for the years ended December 31, 2000,
1999, and 1998 was $10.5 million, $0.3 million and $0.2 million, respectively.
The increase in 2000 from 1999 was primarily due to the interest from the
convertible subordinated notes issued by the Company in February 2000.
Interest expense remained relatively consistent in 1999 as compared to 1998.
Losses from Joint Venture. Losses from joint venture were $1.3 million,
$5.6 million, and $1.5 million for the years ended December 31, 2000, 1999,
and 1998, respectively. In September 1997, the Company formed a joint venture,
diaDexus, LLC ("diaDexus") with SmithKline Beecham Corporation. The loss
represents the Company's share of diaDexus' losses from operations. On April
4, 2000, diaDexus converted from an LLC to a corporation and completed a
private equity financing at which time the Company no longer had significant
influence over diaDexus. Accordingly, the Company began accounting for its
investment in diaDexus under the cost method of accounting as of the date of
the financing, and therefore did not reflect diaDexus' results of operations
in the Company's statement of operations subsequent to that date. 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.
Income Taxes. Due to the Company's net loss in 2000, the Company had a
minimal effective annual income tax rate. In 1999, the Company had an
effective income tax benefit rate of 3.0%, primarily due to the carryback of
the current year net operating loss. The effective tax rate for 1998 was
14.0%, excluding the charge for the purchase of in-process research and
development, which represents the provision of federal and state alternative
minimum taxes after utilization of net operating loss carryforwards.
Extraordinary item, net. In November 2000, the Company repurchased $15.0
million face value of its 5.5% convertible subordinated notes on the open
market. The repurchases resulted in a gain of $3.1 million, net of taxes.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), as amended by SFAS Nos. 137
and 138, which is required to be adopted in the first quarter of 2001. SFAS
133 established standards for accounting and reporting derivative instruments
and hedging activities. It requires companies to recognize all derivatives as
either assets or liabilities on the balance sheet and measure these
instruments at fair value. The adoption of SFAS 133 is not expected to have a
material adverse impact on the consolidated financial position or results of
operations of the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). Among other things, SAB 101 discusses the SEC staff's view on
accounting for non-refundable up-front fees. Adoption of SAB 101 had no
material impact on the Company's consolidated financial position or results of
operations.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation ("FIN 44"), which contains
rules designed to clarify the application of APB 25. The Company adopted FIN
44 on July 1, 2000 and the adoption had no material impact on the Company's
consolidated financial position or results of operations.
18
Liquidity and Capital Resources
As of December 31, 2000, the Company had $582.2 million in cash, cash
equivalents and marketable securities, compared to $66.9 million as of
December 31, 1999. The Company has classified all of its marketable securities
as short-term, as the Company may choose not to hold its marketable securities
until maturity in order to take advantage of favorable market conditions.
Available cash is invested in accordance with the Company's investment
policy's primary objectives of liquidity, safety of principal and diversity of
investments.
Net cash used in operating activities was $7.3 million and $21.4 million
for the years ended December 31, 2000 and 1999, respectively, and net cash
provided by operating activities was $36.2 million in the year ended December
31, 1998. The change in net cash used in 2000 as compared to 1999 was
primarily due to the increases in accounts payable and accrued and other
current liabilities and the slower increase of accounts receivables in 2000 as
compared to 1999. These were partially offset by the increase in prepaid
assets and the decrease in deferred revenues. The change in cash flows from
operations in 1999 compared to 1998 was primarily due to the Company's
investments in genomic sequencing, mapping, bioinformatics and SNP discovery
resulting in a net loss in 1999 as compared to net income in 1998, and the
increase in accounts receivable and prepaid expenses, partially offset by
increases in accrued and other current liabilities.
The Company's investing activities, other than purchases, sales and
maturities of marketable securities, have consisted predominantly of capital
expenditures and net purchases of long-term investments. Capital expenditures
for the years ended December 31, 2000, 1999, and 1998, were $59.5 million,
$34.8 million, and $30.7 million, respectively. Capital expenditures increased
in 2000 and 1999 primarily due to investments in computer equipment and
software, laboratory equipment, and leasehold improvements related to the
expansion of the Company's facilities. Long-term investments in companies with
which the Company has research and development agreements were $10.1 million
$4.2 million and $7.1 million for the years ended December 31, 2000, 1999 and
1998, respectively. In 2000 the Company sold stock in an investment, resulting
in proceeds of $7.9 million and a gain of $5.4 million and diaDexus repaid its
$2.5 million note to Incyte. In 1999 the Company liquidated its investment in
two such companies, resulting in proceeds of $4.3 million and a net realized
gain of $0.2 million. In 2000, the Company paid $36.9 million, net of cash
received, in connection with the acquisition of Proteome, and in 1998 paid
$4.0 million, net of cash received, in connection with the purchase of
Hexagen. 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 $619.1 million, $12.5
million, and $4.0 million, for the years ended December 31, 2000, 1999, and
1998, respectively. Net cash provided by financing activities in 2000 was
primarily due to the Company raising additional funds in two financing
transactions. In February 2000, the Company issued $200.0 million aggregate
principal amount of 5.5% convertible subordinated notes due 2007 in a private
placement, resulting in net proceeds of approximately $196.8 million. Also in
February 2000, the Company issued 4,000,000 shares of its common stock in a
private placement, for an aggregate purchase price of $422.0 million. Net
proceeds from the sale of those shares were $403.3 million. Net cash provided
by financing activities in 1999 and 1998 was due to the issuance of common
stock under the Company's stock option and employee stock purchase plans.
The Company expects to use net cash in 2001 as it: invests in its internal
disease pathway and therapeutic drug discovery programs, intellectual property
portfolio, sequencing, bioinformatics, and SNP discovery programs; invests in
data-processing-related computer hardware to support its existing and new
database products and to enable the on-line delivery of those products;
continues to seek access to technologies through investments, research and
development alliances, license agreements and/or acquisitions; makes strategic
investments; and continues to make improvements in existing facilities.
Based upon its current plans, the Company believes that its existing
resources will be adequate to satisfy its capital needs for at least the next
twelve months. The Company's cash requirements depend on numerous factors,
19
including the ability of the Company to attract and retain collaborators for
its databases and other products and services; expenditures in connection with
alliances, license agreements and acquisitions of and investments in
complementary technologies and businesses; expenditures in connection with its
recent expansion of internal disease pathway and therapeutic drug discovery
programs; 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.
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. This conversion to the euro had no
material impact on the Company's results of operations, financial position or
cash flows. The Company will continue to evaluate the potential impact of the
euro on its computer and financial systems, business processes, market risk,
and price competition.
20
FACTORS THAT MAY AFFECT RESULTS
We have had only limited periods of profitability, we expect to incur losses
in the future and we may not return to profitability
We had net losses from inception in 1991 through 1996 and again incurred
net losses in 1999 and 2000. Because of those losses, we had an accumulated
deficit of $84.9 million as of December 31, 2000. We intend to continue to
spend significant amounts on new product and technology development, including
therapeutic drug discovery and development programs and making our products
available online, and to increase our investment in marketing, sales and
customer service. The amounts we intend to spend on new product and technology
development include spending for our efforts to determine the sequence of
genes, or genomic sequencing, determine gene functions, develop database and
software products such as our gene expression database, discover SNPs, expand
research and development alliances, and develop electronic commerce products.
As a result, we expect to incur losses in 2001. We may report net losses in
future periods as well. We will not return to profitability unless we increase
our revenues or reduce our expenses.
To generate significant revenues, we must obtain additional database
collaborators and retain existing collaborators
As of December 31, 2000, we had over 30 database agreements. If we are
unable to enter into additional agreements, or if our current database
collaborators choose not to renew their agreements upon expiration, we may not
generate additional revenues or maintain our current revenues. Our database
revenues are also affected by the extent to which existing collaborators
expand their agreements with us to include our new database products and the
extent to which existing collaborators reduce the number of products or
services for which they subscribe, the impact of which will vary based upon
our pricing of those products and services. Some of our database agreements
require us to meet performance obligations, some or all of which we may not be
successful in attaining. A database collaborator can terminate its agreement
before the end of its scheduled term if we breach the agreement and fail to
cure the breach within a specified period.
Our longer-term strategy for profitability includes licenses under our gene-
related intellectual property, but these licenses may not contribute to
revenues for several years, and may never result in revenues
Part of our strategy is to license to database collaborators and to some of
our other customers our know-how and patent rights associated with the genetic
information in our proprietary databases, for use in the discovery and
development of potential pharmaceutical, diagnostic or other products. Any
potential product that is the subject of such a license will require several
years of further development, clinical testing and regulatory approval before
commercialization. Therefore, milestone or royalty payments from these
collaborations may not contribute to revenues for several years, if at all.
We may not be able to generate significant growth in revenue if we are not
able to generate significant revenues from our custom genomic products and
services
We expect that our custom genomic products and services will become a
greater percentage of our revenues. Whether this occurs, and whether these
products and services will generate significant revenues, depends on our
ability to increase our customer base, increase sales to existing customers,
and increase our production capacity in a timely manner and with consistent
volumes and quality to meet the increased demand.
21
Our operating results are unpredictable, which may cause our stock price to
decline and result in losses to investors
Our operating results are unpredictable and may fluctuate significantly
from period to period, which may cause our stock price to decline and result
in losses to investors. Some of the factors that could cause our operating
results to fluctuate include:
. changes in the demand for our products and services, including our
database business;
. the introduction of competitive databases or services, including
databases of publicly available, or public domain, genetic information;
. the nature, pricing and timing of products and services provided to our
collaborators;
. acquisition, licensing and other costs related to the expansion of our
operations, including operating losses of acquired businesses;
. losses and expenses related to our investments in joint ventures and
businesses;
. 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;
. changes in intellectual property laws that affect our rights in genetic
information that we sell;
. payments of milestones, license fees or research payments under the
terms of our 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 and counterclaims filed by Affymetrix.
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 harm our
operating results for that period. Forecasting operating and integration
expenses for acquired businesses may be particularly difficult, especially
where the acquired business focuses on technologies that do not have an
established market. We believe that period-to-period comparisons of our
financial results will not necessarily be meaningful. You should not rely on
these comparisons as an indication of our future performance. If our operating
results in any future period fall below the expectations of securities
analysts and investors, our stock price will likely fall, possibly by a
significant amount.
Our industry is intensely competitive, and if we do not compete effectively,
our revenues may decline
We compete in markets that are new, intensely competitive, rapidly
changing, and fragmented. Many of our current and potential competitors have
greater financial, human and other resources than we do. If we cannot respond
quickly to changing customer requirements, secure intellectual property
positions, or adapt quickly and obtain access to new and emerging
technologies, our revenues may decline. Our competitors include:
. Affymetrix, Inc.,
. Celera Genomics Group of Applera Corporation,
. CuraGen Corporation,
. Gene Logic Inc.,
. Human Genome Sciences, Inc.,
. major pharmaceutical companies, and
. universities and other research institutions, including The SNP
Consortium, which is funded by a number of pharmaceutical companies, and
those receiving funding from the federally funded Human Genome Project.
22
The human genome contains a finite number of genes. Our competitors may
seek to identify, sequence and determine the biological function of numerous
genes in order to obtain a proprietary position with respect to new genes.
In addition, we face competition from companies who are developing and may
seek to develop new technologies for discovering the functions of genes, gene
expression information, including microarray technologies, discovery of
variations among genes and related technologies. Also, if we are unable to
obtain the technology we currently use or new advanced technology on
acceptable terms, but other companies are, we will be unable to compete.
We also face competition from providers of software. A number of companies
have announced their intent to develop and market software to assist
pharmaceutical companies and academic researchers in managing and analyzing
their own genomic data and publicly available data. If pharmaceutical
companies and researchers are able to manage their own genomic data, they may
not subscribe to our databases.
Extensive research efforts resulting in rapid technological progress
characterize the genomics industry. To remain competitive, we must continue to
expand our databases, improve our software, and invest in new technologies.
New developments will probably continue, and discoveries by others may render
our services and potential products noncompetitive.
Our new investments in validating drug targets will lead to increased expenses
and may not result in commercial products or services
We have recently decided to invest in validating drug targets associated
with diseases that may be linked to several or many genes working in
combination. The process of discovering drugs based upon genomics is new and
evolving rapidly, and we have limited experience in discovering or developing
drugs. These efforts will result in increased expenses and may not result in
commercial products or services. There is limited scientific understanding
generally relating to the role of genes in diseases, and few, if any, products
based on gene discoveries have been developed and commercialized. Accordingly,
even if we are successful in identifying genes, biological pathways or drug
candidates associated with specific diseases, we or our collaborators may not
be able to develop or commercialize products to improve human health. Rapid
technological development by us or others may result in compounds, products or
processes becoming obsolete before we recover our development expenses.
Our revenues could decline due to patent positions becoming publicly
available, or due to our competitors publicly disclosing their discoveries
Our competitors may discover and establish patent positions with respect to
the genes in our databases. Our competitors and other entities who engage in
discovering the location of genes within a DNA strand and may make the results
of their sequencing efforts publicly available. Currently, academic
institutions and other laboratories participating in the Human Genome Project
make their gene sequence information available through a number of publicly
available databases, including the GenBank database. Also, Celera Genomics
Group has publicly stated that it is committed to make available to the public
basic human sequence data. The public availability of these discoveries or
resulting patent positions covering substantial portions of the human genome
could reduce the potential value of our databases to our collaborators. It
could also impair our ability to realize royalties or other revenue from any
commercialized products based on this genetic information.
We are involved in patent litigation, which if not resolved favorably could
require us to pay damages and stop selling and using microarray products
We are currently involved in patent litigation. If we lose this litigation
we could be prevented from producing and using our microarray products,
including uses of those products for purposes of providing gene expression
database products and gene expression services. We could also be required to
pay damages. In January
23
1998, Affymetrix filed a lawsuit in federal court alleging that we infringe of
U.S. patent number 5,445,934 by both the Company. The complaint alleges that
we infringed the "934 patent by making, using, selling, importing,
distributing or offering to sell in the United States high density arrays and
that this infringement was willful. Affymetrix seeks a permanent injunction
enjoining us from further infringement of the "934 patent and, in addition,
seeks damages, costs, attorneys' fees and interest. Affymetrix also requests
triple damages based on its allegation of willful infringement by us.
In September 1998, Affymetrix filed an additional lawsuit in Federal Court,
alleging we infringed U.S. patent number 5,800,992 and U.S. patent number
5,744,305. The complaint alleges that we infringed the "305 patent by making,
using, selling, importing, distributing or offering to sell in the United
States high density arrays. It also alleges that we infringed the "992 patent
by using their GEM(TM) microarray technology to conduct gene expression
monitoring and other applications using two-color labeling, and that this
infringement was willful. Affymetrix seeks a permanent injunction enjoining us
from further infringement of the "305 and "992 patents. The court held a
pretrial hearing in November 2000 to determine how to construe the patent
claims that will be litigated in trial. In January 2001, the court issued a
ruling describing how the claims in the "934, "305 and "992 patents should be
interpreted.
In April 1999, the Board of Patent Appeals and Interferences of the United
States Patent and Trademark Office declared interferences between pending
patent applications licensed exclusively to us and the Affymetrix "305 and
"992 patents. The Board of Patent Appeals and Interferences invokes an
interference proceeding when more than one patent applicant claims the same
invention. During the proceeding, the Board of Patent Appeals and
Interferences evaluates all relevant facts, including those bearing on first
to invent, validity, enablement and scope of claims, and then makes a
determination as to who, if anyone, is entitled to the patent on the disputed
invention. In September 1999, the Board of Patent Appeals and Interferences
determined that we had not met our prima facie case, and ruled that the
patents licensed by us from Stanford University were not entitled to priority
over corresponding claims in the two Affymetrix patents. We are seeking de
novo review of the Board's decisions in the United States District Court for
the Northern District of California.
In August 2000, we filed a lawsuit against Affymetrix in federal court
alleging infringement of U.S. patent numbers 5,716,785 and 5,891,636. The
patents relate to technologies used in the amplification of RNA and the
generation of gene expression information. Affymetrix has filed counterclaims
in this lawsuit that allege, among other things, that we infringe U.S. patent
number 6,040,193 and U.S. patent number 5,871,928. These counterclaims allege
that we infringe these patents by making, using, offering to sell and/or
selling within the United States the inventions claimed in the patents,
including, in the case of the "193 patent, methods for forming microarrays
and, in the case of the "928 patent, methods for analyzing nucleic acids. The
counterclaims also allege that we engaged in acts of unfair competition under
California statutory and common law. Affymetrix seeks a permanent injunction
enjoining us from further infringement of the "193 patent and "928 patent and,
in addition, seeks damages, costs and attorneys' fees and interest. Affymetrix
further requests triple damages from the infringement claims based on its
allegation of willful infringement by us.
We believe we have meritorious defenses and intend to defend the suits and
counterclaims brought by Affymetrix vigorously. However, our defenses may be
unsuccessful. At this time, we cannot reasonably estimate the possible range
of any loss resulting from these suits and counterclaims due to uncertainty
regarding the ultimate outcome. Regardless of the outcome, the Affymetrix
litigation has resulted and is expected to continue to result in substantial
expenses and diversion of the efforts of our management and technical
personnel. Further, there can be no assurance that any license that may be
required as a result of this litigation or the outcome thereof would be made
available on commercially acceptable terms, if at all. This litigation may
also affect our potential customers' willingness to use our microarray
services and gene expression databases, which could affect our revenue.
24
If we are subject to additional litigation and infringement claims, they could
be costly and disrupt our business
The technology that we use to develop our products, and the technology that
we incorporate in our products, may be subject to claims that they infringe
the patents or proprietary rights of others. The risk of this occurring will
tend to increase as the genomics, biotechnology and software industries
expand, more patents are issued and other companies attempt to discover genes
and SNPs and engage in other genomic-related businesses.
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 third parties. 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 and services. Further, we may not be able to obtain any necessary
licenses on acceptable terms, if at all.
We may be unable to protect our proprietary information, which may result in
its unauthorized use and a loss of revenue
Our business and competitive position depend upon our ability to protect
our proprietary database information and software technology. Despite our
efforts to protect this information and technology, unauthorized parties may
attempt to obtain and use information that we regard as proprietary. Although
our database subscription agreements require our subscribers to control access
to our databases, policing unauthorized use of our databases and software may
be difficult.
We pursue a policy of having our employees, consultants and advisors
execute proprietary information and invention agreements when they begin
working for us. However, these agreements may not provide meaningful
protection for our trade secrets or other proprietary information in the event
of unauthorized use or disclosure.
Our means of protecting our proprietary rights may not be adequate, and our
competitors may:
. independently develop substantially equivalent proprietary information
and techniques;
. otherwise gain access to our proprietary information; or
. design around patents issued to us or our other intellectual property.
If the inventions described in our patent applications on full-length or
partial genes are found to be unpatentable, our issued patents are not
enforced or our patent applications conflict with patent applications filed by
others, our revenues may decline
One of our strategies is to file patent applications on what we believe to
be novel full-length and partial genes and SNPs obtained through our efforts
to discover the order, or sequence, of the molecules, or bases, of
25
genes. We have filed U.S. patent applications in which we claimed partial
sequences of some genes. We have also applied for patents in the U.S. and
other countries claiming full-length gene sequences associated with cells and
tissues involved in our gene sequencing program. We hold a number of issued
U.S. patents on full-length genes and one issued U.S. patent claiming multiple
partial gene sequences. While the United States Patent and Trademark Office
has issued patents covering full-length genes, partial gene sequences and
SNPs, the Patent and Trademark Office may choose to interpret new guidelines
for the issuance of patents in a more restrictive manner in the future, which
could impact the issuance of our pending patent applications. We also do not
know whether or how courts may enforce our issued patents, if that becomes
necessary. If a court finds these types of inventions to be unpatentable, or
interprets them narrowly, the value of our patent portfolio and possibly our
revenues could be diminished.
We believe that some of our patent applications claim genes and partial
sequences of genes that may also be claimed in patent applications filed by
others. In some or all of these applications, a determination of priority of
inventorship may need to be decided in an interference before the United
States Patent and Trademark Office, before a patent is issued. If a full-
length or partial length sequence for which we seek a patent is issued to one
of our competitors, we may be unable to include that full-length or partial
length sequence on a microarray or in a library of bioreagents. This could
result in a loss of revenues.
If the effective term of our patents is decreased due to changes in the U.S.
patent laws or if we need to refile some of our patent applications, the value
of our patent portfolio and the revenues we derive from it may be decreased
The value of our patents depends in part on their duration. A shorter
period of patent protection could lessen the value of our rights under any
patents that we obtain and may decrease the revenues we derive from our
patents. The U.S. patent laws were amended in 1995 to change the term of
patent protection from 17 years from patent issuance to 20 years from the
earliest effective filing date of the application. Because the average time
from filing to issuance of biotechnology applications is at least one year and
may be more than three years depending on the subject matter, a 20-year patent
term from the filing date may result in substantially shorter patent
protection. Also, we may need to refile some of our applications claiming
large numbers of gene sequences and, in these situations, the patent term will
be measured from the date of the earliest priority application. This would
shorten our period of patent exclusivity and may decrease the revenues that we
might obtain from the patents.
International patent protection is particularly uncertain, and if we are
involved in opposition proceedings in foreign countries, we may have to expend
substantial sums and management resources
Biotechnology patent law outside the United States is even more uncertain
than in the United States and is currently undergoing review and revision in
many countries. Further, the laws of some foreign countries may not protect
our intellectual property rights to the same extent as U.S. laws. We may
participate in opposition proceedings to determine the validity of our foreign
patents or our competitors foreign patents, which could result in substantial
costs and diversion of our efforts.
If our programs relating to the role of genetic variation in disease and drug
response are not successful, they may not generate significant revenues or
result in profitable operations
Part of our business is focused on developing information-based and other
products and services to assist pharmaceutical companies in a new and unproven
area: the identification and correlation of variation in genetic composition
to disease and drug response. We will incur significant costs over the next
several years in expanding our research and development in this area. These
activities may never generate significant revenues or profitable operations.
This aspect of our business focuses on single nucleotide polymorphisms or
SNPs, one type of genetic variation. The role of SNPs in disease and drug
response is not fully understood, and relatively few, if any,
26
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 because the variations we discovered may not
occur frequently enough to justify use by a pharmaceutical company.
Our success in this area will also depend upon our ability to develop, use
and enhance new and relatively unproven technologies. Among other things, we
will need to continue 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.
If our strategic investments result in losses, our earnings may decline
We make strategic investments in joint ventures or businesses that
complement our business. These investments may:
. often be made in securities lacking a public trading market or subject to
trading restrictions, either of which increases our risk and reduces the
liquidity of our investment;
. require us to record losses and expenses related to our ownership
interest, such as the losses we reported in 1997, 1998, 1999 and the
first quarter of 2000 related to our investment in diaDexus, LLC;
. 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.
Because our sales cycle is lengthy, we may spend a lot of time and money
trying to obtain new or renewed subscriptions to our products and services but
may be unsuccessful, which could hurt our profitability
Our ability to obtain new subscribers for our databases, software tools and
microarray and other services or to obtain renewals or additions to existing
subscriptions depends upon prospective subscribers' perceptions that our
products and services can help accelerate drug discovery efforts. Our database
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 new, renewed or expanded subscription or
services agreement will result. These expenditures, without increased
revenues, will negatively impact our profitability. 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.
27
If we encounter problems in meeting customers' software needs, our revenues
could decline and we could lose our customers' goodwill
Our databases require 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, which could result in
a loss of revenues and customer goodwill.
We have encountered difficulties integrating companies we acquired, and if in
the future we cannot smoothly integrate businesses we acquire, our operations
and financial results could be harmed
In December 2000, we acquired Proteome, Inc. As part of our business
strategy, we may acquire other assets, technologies and businesses. Our past
acquisitions have involved and our future acquisitions may involve risks such
as the following:
. we may be exposed to unknown liabilities of acquired companies;
. our acquisition and integration costs may be higher than we anticipated
and may cause our quarterly and annual operating results to fluctuate;
. we may experience difficulty and expense in assimilating the operations
and personnel of the acquired businesses, disrupting our business and
diverting management's time and attention;
. we may be unable to integrate or complete the development and
application of acquired technology;
. we may experience difficulties in establishing and maintaining uniform
standards, controls, procedures and policies;
. our relationships with key customers of acquired businesses may be
impaired, due to changes in management and ownership of the acquired
businesses;
. we may be unable to retain key employees of the acquired businesses;
. we may incur amortization expenses if an acquisition results in
significant goodwill or other intangible assets; and
. our stockholders may be diluted if we pay for the acquisition with
equity securities.
In addition, if we acquire additional businesses that are not located near
our Palo Alto, California headquarters, we may experience more difficulty
integrating and managing the acquired businesses' operations.
If we are unable to manage effectively our growth, our operations and ability
to support our customers could be affected, which could harm our revenues
We may continue to experience growth in the number of our employees and the
scope of our operations. This growth has placed, and may continue to place, a
significant strain on our management and operations. Our ability to manage
this growth will depend upon 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 additional locations, which could result in additional
burdens on our systems and resources.
28
We depend on key employees in a competitive market for skilled personnel, and
the loss of the services of any of our key employees would affect our ability
to achieve our objectives
We are highly dependent on the principal members of our management,
operations and scientific staff. Our product development, operations and
marketing efforts would be delayed or curtailed if we lose the services of any
of these people.
Our future success also will depend in part on the continued service of our
executive management team, key scientific, software, bioinformatics and
management personnel and our ability to identify, hire, train and retain
additional personnel, including customer service, marketing and sales staff.
We experience intense competition for qualified personnel. If we are unable to
continue to attract, train and retain these personnel, we may be unable to
expand our business.
We rely on a small number of suppliers of products we need for our business,
and if we are unable to obtain sufficient supplies, we will be unable to
compete effectively
Currently, we use gene sequencing machines supplied by Molecular Dynamics,
a subsidiary of Amersham Pharmacia Biotech, Ltd., and chemicals used in the
sequencing process, called reagents, supplied by Sigma-Aldrich, Inc. in our
gene sequencing operations. If we are not able to obtain additional machines
or an adequate supply of reagents or other materials at commercially
reasonable rates, our ability to identify genes or genetic variations would be
slower and more expensive.
If the information we obtain from third-party data sources is corrupt or
violates the law, our revenues and operating results could decline
We rely on and include in our databases scientific and other data supplied
by others, including publicly available information from sources such as the
Human Genome Project. This data could contain errors or other defects, which
could corrupt our databases. In addition, we cannot guarantee that our data
sources acquired this information in compliance with legal requirements. If
this data caused database corruption or violated legal requirements, we would
be unable to sell subscriptions to our databases. These lost sales would harm
our revenue and operating results.
Security risks in electronic commerce or unfavorable internet regulations may
deter future use of our products and services, which could result in a loss of
revenues
We offer several products through our website on the Internet and may offer
additional products in the future. Our ability to provide secure transmissions
of confidential information over the Internet may limit online use of our
products and services by our database collaborators as we may be limited by
our inability to provide secure transmissions of confidential information over
the Internet. Advances in computer capabilities and new discoveries in the
field of cryptography may comprise the security measures we use to protect our
website, access to our databases, and transmissions to and from our website.
If our security measures are breached, our proprietary information or
confidential information about our collaborators could be misappropriated.
Also, a security breach could result in interruptions in our operations. The
security measures we adopt may not be sufficient to prevent breaches, and we
may be required to incur significant costs to protect against security
breaches or to alleviate problems caused by breaches. Further, if the security
of our website, or the website of another company, is breached, our
collaborators may no longer use the Internet when the transmission of
confidential information is involved. For example, recent attacks by computer
hackers on major e-commerce websites and other Internet service providers have
heightened concerns regarding the security and reliability of the Internet.
Because of the growth in electronic commerce, the United States Congress
has held hearings on whether to further regulate providers of services and
transactions in the electronic commerce market. The federal government could
enact laws, rules and regulations that would affect our business and
operations. Individual
29
states could also enact laws regulating the use of the Internet. If enacted,
these federal and state laws, rules and regulations could require us to change
our online business and operations, which could limit our growth and our
development of our online products.
Our customers may not consider the internet as an acceptable method for
accessing our products and services
We have expended a significant amount of time and money to make our
products available through the Internet. In 2000, we introduced our on-line
product LifeSeq Gene-by-Gene and made LifeSeq Gold and LifeExpress available
on-line. If only a few of our customers choose to use the Internet as a method
for accessing our products and services, we may have to incur a charge against
earnings to write-off Internet related assets.
Because our activities involve the use of hazardous materials, we may be
subject to costly environmental liability that could exceed our resources
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 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.
Because our revenues are derived primarily from the pharmaceutical and
biotechnology industries, our revenues may fluctuate substantially due to
reductions and delays in research and development expenditures
We expect that our revenues in the foreseeable future will be derived
primarily from products and services provided to the pharmaceutical and
biotechnology industries as well as to the academic community. Accordingly,
our success will depend in large part upon the success of the companies within
these industries and their demand for our products and services. Our operating
results may fluctuate substantially due to reductions and delays in research
and development expenditures by companies in these industries or by the
academic community. These reductions and delays may result from factors such
as:
. changes in economic conditions;
. consolidation in the pharmaceutical industry;
. changes in the regulatory environment, including governmental pricing
controls, affecting health care and health care providers;
. pricing pressures;
. 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.
30
If a natural disaster occurs, we may have to cease or limit our business
operations
We conduct our database, 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.
We may experience power blackouts and higher electricity prices as a result of
California's current energy crisis, which could disrupt our operations and
increase our expenses
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. We rely on the major Northern California
public utility, Pacific Gas & Electric Company, or PG&E, to supply electric
power to our facilities in Northern California. Due to problems associated
with the de-regulation of the power industry in California and shortages in
wholesale electricity supplies, customers of PG&E have been faced with
increased electricity prices, power shortages and, in some cases, rolling
blackouts. If blackouts interrupt our power supply, we may be temporarily
unable to continue operations at our facilities. Any such interruption in our
ability to continue operations at our facilities could delay our ability to
develop or provide our products and services, which could damage our
reputation and result in lost revenue, either of which could substantially
harm our business and results of operations.
We have a large amount of debt and our debt service obligations may prevent us
from taking actions that we would otherwise consider to be in our best
interests
As of December 31, 2000, we had
. total consolidated debt of approximately $187.8 million,
. stockholders' equity of approximately $622.7 million, and
. a deficiency of earnings available to cover fixed charges of $28.5
million for the year ended December 31, 2000.
A variety of uncertainties and contingencies will affect our future
performance, many of which are beyond our control. We may not generate
sufficient cash flow in the future to enable us to meet our anticipated fixed
charges, including our debt service requirements with respect to our
convertible subordinated notes due 2007 that we sold in February 2000. At
December 31, 2000, $185 million of those notes were outstanding. The following
table shows, as of December 31, 2000, the aggregate amount of our interest
payments due in each of the next five years listed:
Aggregate
Year Interest
---- ------------
2001.......................................................... $ 10,175,000
2002.......................................................... 10,175,000
2003.......................................................... 10,175,000
2004.......................................................... 10,175,000
2005.......................................................... 10,175,000
Our substantial leverage could have significant negative consequences for
our future operations, including:
. increasing our vulnerability to general adverse economic and industry
conditions;
. limiting our ability to obtain additional financing;
. requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness, thereby reducing the
amount of our expected cash flow available for other purposes, including
working capital and capital expenditures;
31
. limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; or
. placing us at a possible competitive disadvantage compared to less
leveraged competitors and competitors that have better access to capital
resources.
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. The Company's investment
policy calls for investment in short term, low risk instruments. As of
December 31, 2000, investments in marketable securities were $541.4 million.
Due to the nature of these investments, if market interest rates were to
increase immediately and uniformly by 10% from levels as of December 31, 2000,
the decline in the fair value of the portfolio would not be material.
The Company is exposed to equity price risks on the marketable portion of
equity securities included in its portfolio of investments and long-term
investments, entered into to further its business and strategic objectives.
These investments are in small capitalization stocks in the
pharmaceutical/biotechnology industry sector, in companies with which the
Company has research and development or licensing agreements. The Company
typically does not attempt to reduce or eliminate its market exposure on these
securities. As of December 31, 2000, long-term investments were $40.0 million.
The Company is exposed to foreign exchange rate fluctuations as the
financial results of its foreign operations are translated into U.S. dollars
in consolidation. As exchange rates vary, these results, when translated, may
vary from expectations and adversely impact the Company's financial position
or results of operations. All of the Company's revenues are denominated in
U.S. dollars. The Company does not enter into forward exchange contracts as a
hedge against foreign currency exchange risk on transactions denominated in
foreign currencies or for speculative or trading purposes. If currency
exchange rates were to fluctuate immediately and uniformly by 10% from levels
as of December 31, 2000, the impact to the Company's financial position or
results of operations would not be material.
32
Item 8. Financial Statements and Supplementary Data
INDEX
Page
----
Consolidated Financial Statements of Incyte Genomics, Inc.
Report of Ernst & Young LLP, Independent Auditors....................... 34
Consolidated Balance Sheets at December 31, 2000 and 1999............... 35
Consolidated Statements of Operations for the years ended December 31,
2000, 1999 and 1998.................................................... 36
Consolidated Statements of Comprehensive Income (Loss) for the years
ended December 31, 2000, 1999 and 1998................................. 37
Consolidated Statement of Stockholders' Equity for the three year period
ended December 31, 2000................................................ 38
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998.................................................... 39
Notes to the Consolidated Financial Statements.......................... 40
Interim Consolidated Financial Information (unaudited).................. 57
Schedule II--Valuation and Qualifying Accounts.......................... 58
Financial Statements of diaDexus, Inc., a Development Stage Company
Report of PricewaterhouseCoopers LLP, Independent Accountants........... 59
Balance Sheet at December 31, 2000 and 1999............................. 60
Statement of Operations for the years ended December 31, 2000, 1999,
1998 and for the period from inception (September 1997) through
December 31, 2000...................................................... 61
Statement of Changes In Members' Equity For the Period From Inception
(September 1997) through December 31, 2000............................. 62
Statement of Cash Flows for the years ended December 31, 2000, 1999,
1998 and for the period from inception (September 1997) through
December 31, 2000...................................................... 64
Notes to Financial Statements........................................... 65
33
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Incyte Genomics, Inc.
We have audited the accompanying consolidated balance sheets of Incyte
Genomics, Inc. (formerly Incyte Pharmaceuticals, Inc.) as of December 31, 2000
and 1999, and the related consolidated statements of operations, comprehensive
income (loss), stockholders' equity and cash flows for each of the three years
in the period ended December 31, 2000. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits. We did not audit the financial statements of
diaDexus, LLC, a joint venture, which statements reflect total assets of
$11,297,000 as of December 31, 1999, and net losses of $11,286,000 and
$7,928,000 for the years ended December 31, 1999 and 1998. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the losses 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 auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits and the
report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Incyte Genomics, Inc. at
December 31, 2000 and 1999, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Palo Alto, California
January 23, 2001
34
INCYTE GENOMICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares and par value)
December 31,
------------------
2000 1999
-------- --------
ASSETS
------
Current assets:
Cash and cash equivalents................................ $110,155 $ 32,220
Marketable securities--available-for-sale................ 472,025 34,717
Accounts receivable, net................................. 35,022 26,608
Prepaid expenses and other current assets................ 30,693 15,956
-------- --------
Total current assets................................... 647,895 109,501
Property and equipment, net................................ 98,948 67,293
Long-term investments...................................... 40,003 19,275
Goodwill and other intangible assets, net.................. 82,944 14,564
Deposits and other assets.................................. 17,030 11,301
-------- --------
Total assets........................................... $886,820 $221,934
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable......................................... $ 17,497 $ 6,501
Accrued compensation..................................... 13,023 6,731
Interest payable......................................... 4,310 --
Accrued and other current liabilities.................... 18,726 11,767
Deferred revenue......................................... 22,756 26,459
-------- --------
Total current liabilities.............................. 76,312 51,458
Non-current portion of capital lease obligations and note
payable................................................... -- 194
Convertible subordinated notes............................. 187,814 --
-------- --------
Total liabilities...................................... 264,126 51,652
-------- --------
Commitments and contingencies (see note 3)
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; none issued and outstanding at December 31,
2000 and 1999........................................... -- --
Common stock, $0.001 par value; 200,000,000 shares
authorized; 65,691,623 and 57,779,872 shares issued and
outstanding at December 31, 2000 and 1999,
respectively............................................ 66 58
Additional paid-in capital............................... 689,392 222,776
Deferred compensation.................................... (2,773) (806)
Receivable from stockholders............................. -- (20)
Accumulated other comprehensive income................... 20,913 3,443
Accumulated deficit...................................... (84,904) (55,169)
-------- --------
Total stockholders' equity............................. 622,694 170,282
-------- --------
Total liabilities and stockholders' equity............. $886,820 $221,934
======== ========
See accompanying notes
35
INCYTE GENOMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Revenues......................................... $194,167 $156,962 $134,811
Costs and expenses:
Research and development....................... 192,556 146,833 97,192
Selling, general and administrative............ 64,201 37,235 25,438
Charge for the purchase of in-process research
and development............................... -- -- 10,978
Acquisition-related charges.................... -- -- 1,171
-------- -------- --------
Total costs and expenses..................... 256,757 184,068 134,779
-------- -------- --------
Income (loss) from operations.................... (62,590) (27,106) 32
Interest and other income/expense, net........... 41,735 5,485 7,416
Interest expense................................. (10,529) (316) (150)
Losses from joint venture........................ (1,283) (5,631) (1,474)
-------- -------- --------
Income (loss) before income taxes and
extraordinary item.............................. (32,667) (27,568) 5,824
Provision (benefit) for income taxes............. 205 (800) 2,352
-------- -------- --------
Income (loss) before extraordinary item.......... (32,872) (26,768) 3,472
Extraordinary gain, net of taxes................. 3,137 -- --
-------- -------- --------
Net income (loss)............................ $(29,735) $(26,768) $ 3,472
======== ======== ========
Per share data:
Income (loss) before extraordinary item--
basic......................................... $ (0.52) $ (0.48) $ 0.06
Extraordinary gain, net of taxes--basic........ 0.05 -- --
-------- -------- --------
Basic net income (loss) per share.............. $ (0.47) $ (0.48) $ 0.06
======== ======== ========
Income (loss) before extraordinary item--
diluted....................................... $ (0.52) $ (0.48) $ 0.06
Extraordinary gain, net of taxes--diluted...... 0.05 -- --
-------- -------- --------
Diluted net income (loss) per share............ $ (0.47) $ (0.48) $ 0.06
======== ======== ========
Shares used in computing basic net income (loss)
per share....................................... 63,211 56,276 53,842
======== ======== ========
Shares used in computing diluted net income
(loss) per share................................ 63,211 56,276 57,798
======== ======== ========
See accompanying notes
36
INCYTE GENOMICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Year Ended December 31,
--------------------------
2000 1999 1998
-------- -------- ------
Net income (loss)................................... $(29,735) $(26,768) $3,472
Other comprehensive income (loss)
Unrealized gains on marketable securities......... 17,618 3,618 338
Foreign currency translation adjustment........... (148) (165) (404)
-------- -------- ------
Other comprehensive income (loss)................... 17,470 3,453 (66)
-------- -------- ------
Comprehensive income (loss)......................... $(12,265) $(23,315) $3,406
======== ======== ======
See accompanying notes
37
INCYTE GENOMICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except number of shares)
Accumulated
Additional Receivable Other Total
Common Paid-in Deferred From Comprehensive Accumulated Stockholders'
Stock Capital Compensation Stockholder Income Deficit Equity
------ ---------- ------------ ----------- ------------- ----------- -------------
Balances at January 1,
1998................... $52 $175,723 $ -- $ -- $ 56 $(30,129) $145,702
Adjustment to conform
fiscal year of pooled
entity--Synteni
(including issuance of
674,542 shares of
Common Stock).......... 1 3,731 (1,658) (49) -- (1,744) 281
Issuance of 846,060
shares of Common Stock
upon exercise of stock
options; 77,888 shares
of Common Stock shares
issued under ESPP...... 1 4,748 -- -- -- -- 4,749
Issuance of 1,952,260
shares of Common Stock
in purchase of Hexagen
Limited................ 2 23,437 -- -- -- -- 23,439
Tax benefit from
employee stock
transactions........... -- 1,525 -- -- -- -- 1,525
Amortization of deferred
compensation........... -- -- 449 -- -- -- 449
Repayment of receivable
from stockholder....... -- -- -- 16 -- -- 16
Net change in unrealized
gains (losses) on
marketable securities.. -- -- -- -- 338 -- 338
Change in cumulative
translation
adjustment............. -- -- -- -- (404) -- (404)
Net income.............. -- -- -- -- -- 3,472 3,472
--- -------- ------- ----- ------- -------- --------
Balances at December 31,
1998................... 56 209,164 (1,209) (33) (10) (28,401) 179,567
Issuance of 1,961,696
shares of Common Stock
upon exercise of stock
options; 158,754 shares
of Common Stock issued
under the ESPP......... 2 13,612 -- -- -- -- 13,614
Amortization of deferred
compensation........... -- -- 403 -- -- -- 403
Repayment of receivable
from stockholder....... -- -- -- 13 -- -- 13
Net change in unrealized
gains (losses) on
marketable securities.. -- -- -- -- 3,618 -- 3,618
Change in cumulative
translation
adjustment............. -- -- -- -- (165) -- (165)
Net loss................ -- -- -- -- -- (26,768) (26,768)
--- -------- ------- ----- ------- -------- --------
Balances at December 31,
1999................... 58 222,776 (806) (20) 3,443 (55,169) 170,282
Issuance of 2,448,612
shares of Common Stock
upon exercise of stock
options; 214,617 shares
of Common Stock issued
under the ESPP......... 3 28,625 -- -- -- -- 28,628
Issuance of 4,000,000
shares of Common Stock
in private equity
offering............... 4 403,351 -- -- -- -- 403,355
Issuance of 1,248,522
shares of Common Stock
and deferred
compensation from stock
options assumed in the
acquisition of Proteome
Inc.................... 1 34,640 (2,479) -- -- -- 32,162
Amortization of deferred
compensation........... -- -- 512 -- -- -- 512
Repayment of receivable
from stockholder....... -- -- -- 20 -- -- 20
Net change in unrealized
gains (losses) on
marketable securities.. -- -- -- -- 17,618 -- 17,618
Change in cumulative
translation
adjustment............. -- -- -- -- (148) -- (148)
Net loss................ -- -- -- -- -- (29,735) (29,735)
--- -------- ------- ----- ------- -------- --------
Balances at December 31,
2000................... $66 $689,392 $(2,773) $ -- $20,913 $(84,904) $622,694
=== ======== ======= ===== ======= ======== ========
See accompanying notes.
38
INCYTE GENOMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
-----------------------------
2000 1999 1998
--------- -------- --------
Cash flows from operating activities:
Net income (loss)............................... $ (29,735) $(26,768) $ 3,472
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization.................. 34,842 28,106 17,827
Gain on repurchase of convertible subordinated
notes......................................... (3,137) -- --
Gain on sale of long-term investments, net..... (4,384) (241) --
Non-cash portion of the charge for the
purchase of in-process research and
development................................... -- -- 10,978
Losses from joint venture...................... 1,283 5,631 1,474
Adjustment to conform fiscal year of pooled
entity........................................ -- -- 278
Changes in certain assets and liabilities:
Accounts receivable.......................... (8,414) (12,290) 5,885
Prepaid expenses and other assets............ (19,824) (17,973) (5,280)
Accounts payable............................. 10,816 (1,743) 1,773
Accrued and other current liabilities........ 14,912 6,427 1,826
Deferred revenue............................. (3,703) (2,595) (2,000)
--------- -------- --------
Net cash provided by (used in) operating
activities................................ (7,344) (21,446) 36,233
--------- -------- --------
Cash flows from investing activities:
Capital expenditures............................ (59,510) (34,758) (30,710)
Purchase of long-term investments............... (10,094) (4,181) (7,145)
Proceeds from the sale of long-term
investments.................................... 7,917 4,321 --
Purchase of Subsidiary (net of cash received)... (36,866) -- (3,977)
Purchases of marketable securities.............. (822,357) (22,998) (98,512)
Sales of marketable securities.................. 274,267 38,932 88,081
Maturities of marketable securities............. 112,950 10,000 6,900
--------- -------- --------
Net cash used in investing activities...... (533,693) (8,684) (45,363)
--------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock under
stock plans.................................... 31,297 13,614 4,749
Proceeds from the private equity offering....... 403,355 -- --
Proceeds from the issuance of Convertible
Subordinated Notes............................. 196,800 -- --
Repurchase of Convertible Subordinated Notes.... (11,872) -- --
Principal payments on capital lease obligations
and note payable............................... (480) (1,160) (781)
Proceeds from repayment of receivable from
stockholders................................... 20 13 16
--------- -------- --------
Net cash provided by financing activities.. 619,120 12,467 3,984
--------- -------- --------
Effect of exchange rate on cash and cash
equivalents.................................... (148) (165) (404)
Net increase (decrease) in cash and cash
equivalents.................................... 77,935 (17,828) (5,550)
Cash and cash equivalents at beginning of
period......................................... 32,220 50,048 55,598
--------- -------- --------
Cash and cash equivalents at end of period...... $ 110,155 $ 32,220 $ 50,048
========= ======== ========
Supplemental Schedule of Cash Flow Information
Interest paid................................... $ 6,219 $ 316 $ 138
========= ======== ========
Taxes paid...................................... $ 226 $ 224 $ 705
========= ======== ========
Cash Flow for Acquisition of Subsidiaries
Tangible assets acquired (excluding $808 and
$1,023 cash received in 2000 and 1998,
respectively).................................. $ 1,597 $ 3,025
Purchased in-process research and development... -- 10,978
Goodwill and other intangible assets acquired... 70,771 17,553
Acquisition costs incurred...................... (2,300) (1,029)
Liabilities assumed............................. (1,039) (3,112)
Deferred compensation assumed................... 2,479 --
Common stock issued............................. (34,642) (23,438)
--------- --------
Cash paid for acquisition (net of $808 and
$1,023 cash received in 2000 and 1998,
respectively)............................. $ 36,866 $ 3,977
========= ========
See accompanying notes
39
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies
Organization and Business. Incyte Genomics, Inc. (the "Company") was
incorporated in Delaware in April 1991 under the name Incyte Pharmaceuticals,
Inc. In June 2000, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation to change the Company's name to Incyte
Genomics, Inc. The Company 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 and academic researchers to understand disease and to
discover and develop drugs. The Company is also engaged in its own internal
disease pathway and therapeutic drug discovery programs.
Principles of Consolidation. The consolidated financial statements include
the accounts of Incyte Genomics, Inc., and its wholly owned subsidiaries. All
material intercompany accounts, transactions, and profits have been eliminated
in consolidation.
In December 2000, the Company completed the acquisition of Proteome, Inc.
("Proteome"), which was accounted for as a purchase. The Company issued
1,248,522 shares of its common stock and $37.7 million in cash in exchange for
all of Proteome's outstanding capital stock. In addition, the Company assumed
Proteome's outstanding stock options, which if fully vested and exercised,
would amount to 216,953 shares of common stock. The consolidated financial
statements discussed herein reflect the inclusion of the results of Proteome
from the date of acquisition, December 28, 2000.
In September 1998, the Company completed the acquisition of Hexagen Limited
("Hexagen"), which was accounted for as a purchase. The Company issued
1,952,260 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 outstanding stock options, which if fully vested and exercised,
would amount to 251,818 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 4,680,474 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 prior to the
acquisition were retroactively restated to include the accounts and operations
of Synteni since inception. Synteni's fiscal year ended on September 30.
Synteni's results of operations for the period from October 1, 1997 to
December 31, 1997 were recorded directly in accumulated deficit in 1998.
Reclassifications. Certain amounts reported in previous years have been
reclassified to conform to 2000 financial statement presentation.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Foreign Currency Translation. The financial statements of subsidiaries
outside the United States are measured using the local currency as the
functional currency. Assets and liabilities of these subsidiaries are
translated at the rates of exchange at the balance sheet date. The resultant
translation adjustments are included in the accumulated other comprehensive
income (loss), a separate component of stockholders' equity. Income and
expense items are translated at average monthly rates of exchange.
40
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 primarily pharmaceutical and biotechnology
companies which are typically located in the United States and Europe. The
Company has not experienced any significant 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.
Marketable Securities-Available-for-Sale. All marketable securities are
classified as available-for-sale. Available-for-sale securities are carried at
fair value, based on quoted market prices, with unrealized gains and losses
reported as a separate component of stockholders' equity. The amortized cost
of debt securities in this category is adjusted for amortization of premiums
and accretions of discounts to maturity. Such amortization is included in
interest income. Realized gains and losses and declines in value judged to be
other than temporary for available-for-sale securities are included in
interest and other income/expense. The cost of securities sold is based on the
specific identification method.
The following is a summary of the Company's marketable security portfolio
including cash equivalents of $69,330,000 and $2,803,000 as of December 31,
2000 and 1999, respectively.
Net
Unrealized Estimated
Amortized Gains Fair
Cost (Losses) Value
--------- ---------- ---------
(in thousands)
December 31, 2000
U.S. Treasury notes and other U.S.
government and agency securities......... $173,614 $ 226 $173,840
Corporate debt securities................. 365,896 1,619 367,515
Long term equity investments.............. 5,761 19,783 25,544
-------- ------- --------
$545,271 $21,628 $566,899
======== ======= ========
December 31, 1999
U.S. Treasury notes and other U.S.
government and agency securities......... $ 35,043 $ (326) $ 34,717
Corporate debt securities................. 2,800 3 2,803
Long term equity investments.............. 5,762 4,333 10,095
-------- ------- --------
$ 43,605 $ 4,010 $ 47,615
======== ======= ========
The Company had long term equity investments in privately held companies of
$14,459,000 and $4,086,000 that were excluded in the above tables as of
December 31, 2000 and 1999, respectively. In the year ended
41
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, the Company recognized a gain on the sale of one of its
long-term investments of $5,418,000. This gain was reported in interest and
other income/expense, net.
At December 31, 2000 and 1999, all of the Company's debt investments are
classified as short-term, as the Company has classified its investments as
available for sale and may not hold its investments until maturity in order to
take advantage of market conditions. Unrealized losses were not material and
have therefore been netted against unrealized gains. At December 31, 2000, the
Company's debt marketable securities had the following maturities:
Estimated
Amortized Fair
Cost Value
--------- ---------
(in thousands)
Less than one year..................................... $300,712 $300,910
Between one and two years.............................. 146,572 147,582
Between two and three years............................ 92,226 92,863
-------- --------
$539,510 $541,355
======== ========
Net realized gains of $172,000, $272,000 and $380,000 from sales of
marketable securities were included in Interest and Other Income in 2000, 1999
and 1998, respectively.
Accounts Receivable. Accounts receivable at December 31, 2000 and 1999
included an allowance for doubtful accounts of $356,000 and $234,000,
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,
------------------
2000 1999
-------- --------
(in thousands)
Office equipment....................................... $ 5,308 $ 4,630
Laboratory equipment................................... 32,286 25,297
Computer equipment..................................... 93,136 52,565
Leasehold improvements................................. 48,924 37,941
-------- --------
179,654 120,433
Less accumulated depreciation and amortization......... (80,706) (53,140)
-------- --------
$ 98,948 $ 67,293
======== ========
Depreciation expense, including amortization expense of assets under
capital leases, was $22,797,000, $16,711,000, and $13,420,000, for 2000, 1999,
and 1998, respectively. Amortization of leasehold improvements was $6,125,000,
$5,138,000, and $3,343,000, for 2000, 1999, and 1998, 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.
42
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-Term Investments. The Company has made equity investments in a number
of companies whose businesses may be complementary to the Company's business.
The Company accounts for its investments for which the shares are freely
tradable or become freely tradable within one year of the balance sheet date
in accordance with Statement of Financial Accounting Standard ("SFAS") 115,
with unrealized gains and losses being reported in accumulated other
comprehensive income (loss) as a separate component of stockholders' equity.
In all other cases, the cost method of accounting is used. The Company holds
less than 20% of each long-term investment, and does not have the ability to
exert significant influence over these investments.
Joint Venture. In September 1997, the Company formed a joint venture,
diaDexus, LLC, with SmithKline Beecham Corporation ("SB"), to utilize genomic
and bioinformatic technologies in the discovery and commercialization of
molecular diagnostics. The Company and SB each held a 50 percent equity
interest in diaDexus and the Company accounted for the investment under the
equity method. On April 4, 2000, diaDexus converted from an LLC to a
corporation and completed a private equity financing, at which time the
Company no longer had significant influence over diaDexus. Accordingly, the
Company began accounting for its investment in diaDexus under the cost method
of accounting as of the date of the financing. (See Note 11).
Goodwill and Other Intangible Assets. Goodwill and other intangible assets
were generated in the acquisition of Hexagen in 1998 and Proteome in 2000.
Goodwill generated in the Hexagen acquisition 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. Goodwill generated in the Proteome
acquisition is being amortized over 8 years and the other intangible assets of
database, developed technology, tradename and assembled workforce are being
amortized on a straight line basis over 8, 5, 3, and 3 years, respectively.
Goodwill and other intangible assets are evaluated quarterly for impairment.
At December 31, 2000 and 1999, accumulated amortization was $5,380,000 and
$2,989,000, 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. At
December 31, 2000 and 1999 capitalized software was $8,166,000 and $8,543,000,
respectively, net of accumulated amortization of $9,785,000 and $5,230,000,
respectively. Amortization expensewas $4,799,000; $3,418,000; and $1,379,000
for the years ended December 31, 2000, 1999, and 1998, respectively.
Internal Use Software. The Company accounts for software developed or
obtained for internal use in accordance with Statement of Position 98-1
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. The statement requires capitalization of certain costs incurred
in the development of internal-use software, including external direct
material and service costs, employee payroll and payroll related costs.
Capitalized software costs, which are included in property and equipment are
depreciated over three to five years.
Accumulated Other Comprehensive Income. Accumulated Other Comprehensive
Income consists of the following:
December 31,
---------------
2000 1999
------- ------
(in thousands)
Unrealized gains on marketable securities................. $21,628 $4,010
Cumulative Translation Adjustment......................... (715) (567)
------- ------
$20,913 $3,443
======= ======
43
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition. Revenues are recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
price is fixed and determinable and collectibility is reasonably assured. For
database collaboration agreements, revenues are recognized evenly over the
term of each agreement. Revenue is deferred for fees received before earned.
Revenues from custom orders, such as reagents are recognized upon completion
and delivery. Revenues from custom services are recognized upon completion.
Revenue from gene expression microarray services includes: technology access
fees, which are recognized ratably over the access term, 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.
Revenues recognized from multiple elements contracts are allocated to each
element of the arrangement based on the relative fair values of the elements.
The determination of fair value of each element is based on objective evidence
from historical sales of the individual element by us to other customers. If
such evidence of fair value for each element of the arrangement does not
exist, all revenue from the arrangement is deferred until such time that
evidence of fair value does exist or until all elements of the arrangement are
delivered. When contracts include non-monetary exchanges, the non-monetary
transaction is determined using the fair values of the assets or services
involved.
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. Included
in the acquisition price of Proteome is $2,479,000 of deferred compensation
related to the intrinsic value of the unvested stock options assumed by
Incyte. The amounts are 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, 2000, 1999, and 1998, was $2,482,000, $1,051,000, and $1,092,000,
respectively.
New Pronouncements. In June 1998, the FASB issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. ("SFAS 133"), as
amended by SFAS Nos. 137 and 138, which is required to be adopted in the first
quarter of 2001. SFAS 133 established standards for accounting and reporting
derivative instruments and hedging activities. It requires companies to
recognize all derivatives as either assets or liabilities on the balance sheet
and measure these instruments at fair value. The adoption of SFAS 133 is not
expected to have a material adverse impact on the consolidated financial
position or results of operations of the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). Among other things, SAB 101 discusses the SEC staff's view on
accounting for non-refundable up-front fees. Adoption of SAB 101 had no
material impact on the consolidated financial position or results of
operations.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation ("FIN 44"), which contains
rules designed to clarify the application of APB 25. The Company adopted FIN
44 on July 1, 2000 and the adoption had no material impact on the consolidated
financial position or results of operations.
44
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2. Database and Microarray Agreements
As of December 31, 2000, the Company had entered into database
collaboration agreements with over thirty pharmaceutical, biotechnology and
agricultural companies. Over 60% and 83% of revenues in 2000 and 1999,
respectively, 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 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.
One customer contributed 11% of total revenues in 2000 and another
accounted for 12% of total revenues in 1998. No customer accounted for 10% or
more of total revenues in 1999.
In June 2000, the Company sold the microbial sequence data unique to the
PathoSeq Database, and licensed related source code, software, patent rights
and the trademark for PathoSeq to Elitra Pharmaceuticals, Inc. ("Elitra").
Under the terms of the agreement, Elitra has the right to modify the licensed
software for internal purposes, and to add Elitra's proprietary antimicrobial
genomics information to the data included in PathoSeq. Elitra also obtained
the right to market and sell the PathoSeq Database. In exchange for these
items, the Company received a combination of cash and Elitra preferred stock
valued at $6.6 million.
Note 3. Commitments
At December 31, 2000, the Company had signed noncancelable operating leases
on multiple facilities, including facilities in Palo Alto and Fremont,
California; St. Louis, Missouri; Beverly, Massachusetts; and Cambridge,
England. The leases expire on various dates ranging from September 2001 to
March 2011. Rent expense for the years ended December 31, 2000, 1999, and
1998, was approximately $12,696,000, $8,674,000, and $5,218,000.
The Company had laboratory and office equipment with a cost of
approximately $2,308,000 at December 31, 1999, and related accumulated
amortization of approximately $716,000 at December 31, 1999, under capital
leases. These leases were secured by the equipment leased thereunder. The
Company had no capital leases as of December 31, 2000.
At December 31, 2000, future noncancelable minimum payments under the
operating leases were as follows:
Operating
Leases
--------------
(in thousands)
Year ended December 31, 2001................................ $ 16,684
2002...................................................... 14,211
2003...................................................... 12,202
2004...................................................... 9,906
2005...................................................... 9,353
Thereafter................................................ 42,313
--------
Total minimum lease payments............................ $104,669
========
45
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 5,138
shares of Incyte equivalent common stock, exercisable for a period of seven
years from the date of issue at an exercise price of $3.90 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 2000, the
Company repaid the note in full.
Note 4. Convertible Subordinated Notes
In February 2000, in a private placement, the Company issued $200.0 million
of convertible subordinated notes, which resulted in net proceeds of
approximately $196.8 million. The notes bear interest at 5.5%, payable semi-
annually on February 1 and August 1, and are due February 1, 2007. The notes
are subordinated to all senior indebtedness, as defined. The notes can be
converted at the option of the holder at an initial conversion price of $67.42
per share, subject to adjustment. The Company may, at its option, redeem the
notes at any time before February 7, 2003, but only if the Company's stock
price exceeds 150% of the conversion price for 20 trading days in a period of
30 consecutive trading days. On or after February 7, 2003 the Company may, at
its option, redeem the notes at specific prices. Holders may require the
Company to repurchase the notes upon a change in control, as defined. As of
December 31, 2000, the fair value of the notes was $120,042,000.
In November 2000, the Company repurchased on the open market, and retired,
$15.0 million in par value of the convertible subordinated notes. The Company
recognized a gain of $3.1 million on the transactions, which was reported as
an extraordinary gain.
Note 5. Stockholders' Equity
Common Stock. At December 31, 2000, the Company had reserved a total of
12,626,452 shares of its common stock for issuance upon exercise of
outstanding stock options and purchases under the Employee Stock Purchase Plan
described below and the conversion of the convertible subordinated notes
described in Note 4. In July 2000, the Company's Board of Directors authorized
a two-for-one stock split effected in the form of a stock dividend paid on
August 31, 2000 to holders of record on August 7, 2000. All share and per
share data have been adjusted retroactively to reflect the split.
On June 6, 2000, the Company's stockholders approved an increase in the
number of shares authorized for issuance from 75,000,000 to 200,000,000.
Preferred Stock. The Company is authorized to issue 5,000,000 shares of
preferred stock, none of which was outstanding at December 31, 2000 or 1999.
The Board of Directors may determine the rights, preferences and privileges of
any preferred stock issued in the future. The Company has reserved 500,000
shares of preferred stock designated as Series A Participating Preferred Stock
for issuance in connection with the Stockholders Rights plan described below.
Sales of Stock. In February 2000, in a private offering, the Company issued
4,000,000 shares of common stock at $105.50 per share. Net proceeds from this
offering were approximately $403.4 million, net of offering expenses.
Stock Compensation Plans. The Company applies APB Opinion No. 25 and
related Interpretations in accounting for its stock compensation plans.
Accordingly, no compensation cost, excluding options issued by Synteni prior
to the merger, has been recognized for its fixed stock option plans. Had
compensation cost for the Company's three stock-based compensation plans been
determined consistent with SFAS 123, the Company's pro forma net loss in 2000,
1999, and 1998 would have been approximately $50.5 million, $40.0 million, and
46
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$7.4 million, respectively. The Company's pro forma basic and diluted net loss
per share in 2000, 1999, and 1998 would have been $0.80, $0.71, and $0.13 per
share, respectively. The weighted average fair value of the options granted
during 2000, 1999, and 1998 are estimated at $28.30, $6.71, and $8.30 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 92% 66%, and 57%, risk-free interest rate of 6.26%, 5.43%,
and 5.06%, and an average expected life of 3.04, 3.32, and 3.79 years, for
2000, 1999, and 1998, respectively. The average fair value of the employees'
purchase rights under the Employee Stock Purchase Plan during 2000, 1999, and
1998 is estimated at $6.67, $4.07, and $6.08, 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 76%, 66%,
and 57%, risk free interest rate of 5.89%, 5.14%, and 4.75%, and an expected
life of 6 months, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility and option life. Because the Company's employee stock options have
characteristics significantly different from those of traded options, because
changes in the subjective input assumptions can materially affect the fair
value estimate, and because the Company has a relatively limited history with
option behavior, in management's opinion the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
Summaries of stock option activity for the Company's stock option plans as
of December 31, 2000, 1999, and 1998, 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. In June 2000, the Company's stockholders approved an increase in the
number of shares of common stock reserved for issuance under the plan from
14,800,000 to 17,400,000.
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 872,200 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.
1998 Proteome Stock Plan. In October 1998, Proteome's Board of Directors
approved and adopted the Proteome, Inc. 1998 Employee, Director and Consultant
Stock Option Plan, as amended through August 6, 1999 (the "Proteome Plan").
Under the Proteome Plan, Proteome could grant incentive stock options and non-
qualified options to purchase the equivalent of 216,953 shares of Incyte
common stock. Incentive stock options could be granted to employees at
exercise prices of no less than 100% of the fair value of the common stock on
47
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the grant date, as determined by the board of directors or a committee of the
board of directors. Non-qualified options could be granted to employees,
outside directors and consultants who provided services to Proteome at
exercise prices no less than par value of the common stock, as determined by
the board of directors or a committee of the board of directors. Options could
be granted with different vesting terms from time to time and options issued
under the Proteome Plan expire no more than 10 years after the date of grant.
All outstanding options at the time of the merger with Incyte were converted
to options to purchase Incyte common stock, and the Proteome Plan was assumed
by Incyte. No further options will be granted under the Proteome Plan.
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, 1998.................. 1,329,596 7,160,050 $ 8.23
Additional authorization.................. 3,000,000 --
Options granted........................... (2,005,668) 2,005,668 14.35
Options exercised......................... -- (842,020) 4.26
Options canceled.......................... 415,526 (415,526) 15.37
Termination of Synteni Plan............... (176,560) --
---------- ----------
Balance at December 31, 1998................ 2,562,894 7,908,172 9.83
Additional authorization.................. 2,200,000 --
Options granted........................... (5,142,088) 5,142,088 13.76
Options exercised......................... -- (1,961,696) 6.36
Options canceled.......................... 1,339,408 (1,339,408) 13.76
---------- ----------
Balance at December 31, 1999................ 960,214 9,749,156 12.08
Additional authorization.................. 2,600,000 -- --
Options granted........................... (861,711) 861,711 47.40
Options exercised......................... -- (2,328,612) 11.34
Options canceled.......................... 726,812 (726,812) 17.53
---------- ----------
Balance at December 31, 2000................ 3,425,315 7,555,443 $15.59
========== ==========
Included in the above table, in the 1998 activity, were stock options
issued by Synteni to purchase 179,156 Incyte equivalent common shares at a
weighted average exercise price of $0.75, 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 3,469,661; 3,725,352; and 4,895,078 shares
at December 31, 2000, 1999, and 1998, respectively, were exercisable. Of the
options exercisable, 3,469,661; 3,427,292; and 3,703,098 shares were vested at
December 31, 2000, 1999, 1998, respectively.
Options Assumed in Proteome Acquisition. As part of the Proteome
acquisition, Proteome stock option holders received options to purchase
216,953 shares of Incyte common stock. The options issued have a weighted
average exercise price of $7.60 and options to purchase 40,651 shares were
vested at December 31, 2000. The Company recognized $2,479,000 of deferred
compensation related to these options, which is being amortized over the
vesting period of the options.
48
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Non-Employee Directors' Stock Option Plan. In August 1993, the Board of
Directors approved the 1993 Directors' Stock Option Plan (the "Directors'
Plan"), which was amended in 1995. The Directors' Plan provides for the
automatic grant of options to purchase shares of common stock to non-employee
directors of the Company. The maximum number of shares issuable under the
Directors' Plan is 800,000.
Through the inception of the plan through March 1998, the Directors' Plan
provides immediate issuance of options to purchase an initial 80,000 shares of
common stock to each new non-employee director joining the Board. In March
1998, the Directors Plan was amended to eliminate this initial grant.
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, 2000, the Company had
granted options outstanding under the Directors' Plan to purchase 535,000
shares of common stock at weighted average exercise prices of $8.819 (615,000
and 575,000 shares of common stock at a weighted average exercise price of
$5.625 and $5.59 at December 31, 1999 and 1998, respectively); 495,000 shares
are vested and exercisable at December 31, 2000 (575,000 and 483,000 shares
were vested and exercisable at December 31, 1999 and 1998, respectively). In
2000, 120,000 shares of common stock were purchased under the Directors' Plan
at a weighted average exercise price of $1.36. No options were exercised prior
to 2000.
The following table summarizes information about stock options outstanding
at December 31, 2000, for the 1991 Stock Plan, the 1996 Synteni Stock Plan,
the 1998 Proteome Stock Plan, and the 1993 Non-employee Directors' Stock
Option Plan:
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted Weighted
Weighted Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Contractual Life Price Exercisable Price
------------------------ ----------- ---------------- -------- ----------- --------
$ 0.01- 3.63............ 1,041,242 3.99 $ 2.10 989,167 $ 2.17
3.69- 8.66............. 962,252 6.59 6.19 693,011 5.46
8.84- 10.47............ 869,224 6.95 9.84 585,426 10.04
10.50- 13.88........... 883,888 8.12 12.35 395,424 12.51
14.00- 15.06........... 1,409,019 8.32 14.60 487,368 14.60
15.22- 15.22........... 1,265,269 8.94 15.22 323,898 15.22
15.50- 18.31........... 898,201 7.39 17.54 492,207 17.55
20.13- 43.81........... 858,001 8.94 34.79 123,823 22.01
44.83-119.88........... 120,300 9.13 94.04 5,790 44.83
--------- ---------
8,307,396 7.48 14.97 4,096,114 9.87
--------- ---------
Employee Stock Purchase Plan. On May 21, 1997, the Company's stockholders
adopted the 1997 Employee Stock Purchase Plan ("ESPP"). The Company has
authorized 800,000 shares of common stock for issuance under the ESPP. In June
2000, the Company's stockholders approved an increase in the number of shares
of common stock reserved for issuance under the plan to 1,200,000. Each
regular full-time and part-time employee is eligible to participate after one
months of employment. The Company issued 214,617; 158,754; and 77,888 shares
under the ESPP in 2000, 1999 and 1998, respectively. As of December 31, 2000,
748,741 shares remain available for issuance under the ESPP. As of December
31, 2000 and 1999, $466,000 and $221,000 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
49
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
share of common stock issued by the Company subsequent to such date and prior
to the distribution date defined below. Each Right represents a right to
purchase, under certain circumstances, a fractional share of the Company's
Series A Participating Preferred Stock at an exercise price of $100.00,
subject to adjustment. In general, the Rights will become exercisable and
trade independently from the common stock on a distribution date that will
occur on the earlier of (i) the public announcement of the acquisition by a
person or group of 15% or more of the common stock or (ii) ten days after
commencement of a tender or exchange offer for the common stock that would
result in the acquisition of 15% or more of the common stock. Upon the
occurrence of certain other events related to changes in ownership of the
common stock, each holder of a Right would be entitled to purchase shares of
common stock, or an acquiring corporation's common stock, having a market
value of twice the exercise price. Under certain conditions, the Rights may be
redeemed at $0.01 per Right by the Board of Directors. The Rights expire on
September 25, 2008.
Note 6. Income Taxes
The provision for income taxes consists of the following (in thousands):
Year Ended
December 31,
-------------------
2000 1999 1998
----- ----- ------
Current
Federal.............................................. $ -- $(832) $2,012
Foreign.............................................. 125 (92) 165
State................................................ 80 124 175
----- ----- ------
Total provision (benefit) for income taxes......... $ 205 $(800) $2,352
===== ===== ======
Income (loss) before provision for income taxes consisted of the following
(in thousands):
Year Ended December 31,
--------------------------
2000 1999 1998
-------- -------- ------
U.S Taxable entities............................ $(29,735) $(27,869) $5,536
Other........................................... -- 301 288
-------- -------- ------
$(29,735) $(27,568) $5,824
======== ======== ======
The provision (benefit) for income taxes differs from the federal statutory
rate as follows (in thousands):
Year Ended December 31,
-------------------------
2000 1999 1998
-------- ------- ------
Provision (benefit) at U.S. federal statutory
rate........................................ $(10,407) $(9,649) $2,038
State taxes, net of federal benefit.......... 52 81 112
Use of net operating loss carryforwards...... -- -- (4,208)
Unbenefitted net operating losses............ 10,118 8,604 --
Purchased in-process research & development.. -- -- 3,842
Non-deductible acquisition costs............. -- -- 410
Other........................................ 442 164 158
-------- ------- ------
Provision (benefit) for income taxes......... $ 205 $ (800) $2,352
======== ======= ======
50
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the Company's deferred tax assets are as follows
(in thousands):
December 31
----------------
2000 1999
------- -------
Deferred tax assets:
Net operating loss carryforwards....................... $69,800 $18,700
Research credits....................................... 12,900 9,700
Capitalized research and development................... 13,000 7,700
Accruals and reserves.................................. 4,400 2,800
Other, net............................................. 400 4,500
------- -------
Total gross deferred tax assets...................... 100,500 43,400
Less valuation allowance for deferred tax assets......... (91,900) (43,400)
------- -------
Net deferred tax assets.................................. 8,600 --
Deferred tax liabilities:
Purchased intangibles.................................. 8,600 --
------- -------
Net deferred tax assets and liabilities.............. $ -- $ --
======= =======
The valuation allowance for deferred tax assets increased by approximately
$48,500,000, $20,400,000 and $4,800,000 during the years ended December 31,
2000, 1999 and 1998, respectively. Approximately $56,100,000 of the valuation
allowance for deferred tax assets relates to benefits from stock option
deductions which, when recognized, will be allocated directly to contributed
capital.
The Company's management believes the uncertainty regarding the timing of
the realization of net deferred tax assets requires a valuation allowance.
As of December 31, 2000, the Company had federal net operating loss
carryforwards of approximately $198,900,000. The Company also had federal
research and development tax credit carryforwards of approximately $8,700,000.
The net operating loss carryforwards will expire at various dates, beginning in
2009, through 2020 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.
51
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share amounts):
Year Ended December 31,
---------------------------
2000 1999 1998
-------- -------- -------
Numerator:
Net income (loss).......................... $(29,735) $(26,768) $ 3,472
======== ======== =======
Denominator:
Denominator for basic net income (loss) per
share--weighted-average shares
outstanding............................... 63,211 56,276 53,842
Dilutive potential common shares--stock
options................................... -- -- 3,956
-------- -------- -------
Denominator for diluted net income (loss)
per share................................. 63,211 56,276 57,798
======== ======== =======
Basic net income (loss) per share............ $ (0.47) $ (0.48) $ 0.06
======== ======== =======
Diluted net income (loss) per share.......... $ (0.47) $ (0.48) $ 0.06
======== ======== =======
Options to purchase 8,307,396; 10,364,156; and 1,308,000 shares of common
stock were outstanding at December 31, 2000, 1999 and 1998, respectively, but
were not included in the computation of diluted net income (loss) per share,
as their effect was anti-dilutive. The Company's Convertible Subordinated
Notes, convertible into 2,744,013 shares of common stock, were not included in
the computation of diluted net income (loss) per share, as the effect of their
assumed conversion would be anti-dilutive.
Note 8. Defined Contribution Plan
The Company has a defined contribution plan covering all domestic
employees. Employees may contribute a portion of their compensation, which is
then matched by the Company, subject to certain limitations. Defined
contribution expense for the Company was $1,735,000, $1,259,000 and $709,000
in 2000, 1999 and 1998, respectively.
Note 9. Segment Reporting
The Company's operations are treated as one operating segment, in
accordance with SFAS 131, 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, 2000, the Company recorded revenue from customers
throughout the United States and in Canada, Asia, Austria, Belgium, France,
Germany, Israel, Netherlands, Switzerland, and the United Kingdom. Export
revenue for the years ended December 31, 2000, 1999 and 1998, was $48,174,000,
$43,679,000 and $33,584,000, respectively.
Note 10. Business Combinations
Acquisitions accounted for under the purchase method of accounting
In December 2000, the Company completed the acquisition of Proteome, Inc.,
a privately held proteomics information company based in Beverly,
Massachusetts. The Company issued 1,248,522 shares of its common stock and
$37.7 million in cash in exchange for all of Proteome's outstanding capital
stock. In addition, the Company assumed Proteome's stock options, which if
fully vested and exercised, would amount to
52
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
216,953 shares of its common stock. The transaction was accounted for as a
purchase. The amount of the purchase price in excess of the net tangible
assets acquired of $70.8 million, was allocated to goodwill ($50.3 million);
database ($16.6 million); tradename ($1.7 million); Proteome's assembled work
force ($1.6 million); and developed technology ($0.6 million), each of which
is being amortized over 8, 8, 5, 3 and 3 years, respectively.
The Company allocated Proteome's purchase price based on the relative fair
value of the net tangible and intangible assets acquired. In performing this
allocation, the Company considered, among other factors, the technology
research and development projects in process at the date of acquisition. The
results of operations of Proteome have been included in the consolidated
results of the Company from the date of acquisition on December 28, 2000.
The table below presents the pro forma results of operations and earnings
per share for Proteome and the Company. The transaction is assumed to be
completed on January 1, 2000 and 1999 for the periods ended December 31, 2000
and 1999, respectively (in thousands except per share data).
2000 1999
-------- --------
Revenues............................................... $197,881 $158,773
======== ========
Loss before extraordinary item......................... $ 50,443 $ 38,122
======== ========
Net loss............................................... $ 47,306 $ 38,122
======== ========
Pro forma basic and diluted net loss per share......... $ 0.73 $ 0.66
======== ========
Pro forma shares for basic and diluted net loss per
share................................................. 64,460 57,525
======== ========
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 1,952,260 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 251,818 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. In 1999, the Company
completed the development of the fSSCP technology. There have been no
significant changes in the assumptions used to value the assets of Hexagen.
The results of operations of Hexagen have been included in the consolidated
results of the Company from the date of acquisition in September 1998.
53
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 (in
thousands except per share data).
1998
--------
Revenues......................................................... $134,811
========
Net income....................................................... $ 7,323
========
Pro forma basic net income per share............................. $ 0.13
========
Pro forma diluted net income per share........................... $ 0.12
========
Pro forma shares for basic net income per share.................. 54,680
========
Pro forma shares for diluted net income per share................ 58,918
========
Acquisitions accounted for under the pooling of interests method of
accounting
In January 1998, the Company issued 4,680,474 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.
The table below presents the separate results of operations for Incyte, and
Synteni prior to the merger (in thousands). Incyte's results include Synteni
from January 1998.
1998
--------
Revenues:
Incyte......................................................... $134,811
Synteni........................................................ --
--------
$134,811
========
Net income (loss):
Incyte......................................................... $ 4,532
Synteni........................................................ --
Acquisition-related charges.................................... (1,060)
--------
$ 3,472
========
Note 11. Joint Venture
In September 1997, the Company formed a joint venture, diaDexus, LLC
("diaDexus"), with SmithKline Beecham Corporation ("SB"), to utilize genomic
and bioinformatic technologies in the discovery and commercialization of
molecular diagnostics. The Company held a 50 percent equity interest in
diaDexus and accounted for the investment under the equity method. In July
1999, the Company and SB each invested an additional $2.5 million in diaDexus
through convertible notes.
On April 4, 2000, diaDexus obtained additional financing through a private
equity offering. In connection with the offering, diaDexus converted from an
LLC to a corporation and repaid in full the $2.5 million principal amount of,
together with accrued interest on, the convertible note held by the company.
Under diaDexus' new capital structure, the Company no longer has the ability
to exert significant influence over diaDexus. Accordingly, the Company
accounts for its investment in diaDexus under the cost method of accounting as
of the date of the financing.
54
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
diaDexus purchased $2.6 million and $1.9 million of contract sequencing,
microarray and software services from the Company in the year ended December
31, 2000 and 1999, respectively. diaDexus did not have similar purchases prior
to 1999. At December 31, 2000, the Company had $0.4 million of receivables
outstanding from diaDexus related to these services.
The following is a summary of diaDexus' financial information as of
December 31, 2000, 1999 and 1998, and for the years then ended (in thousands):
2000 1999 1998
------- ------- -------
Current assets..................................... $49,579 $ 8,786 $16,866
Total assets....................................... 96,072 11,297 20,215
Current liabilities................................ 2,384 5,957 3,565
Total liabilities.................................. 2,431 6,044 3,681
Net loss......................................... 23,346 11,286 7,928
Note 12. Litigation
In January 1998, Affymetrix Inc, ("Affymetrix") filed a lawsuit in the
United States District Court for the District of Delaware, which was
subsequently transferred to the United States District Court for the Northern
District of California in November 1998, alleging infringement of U.S. patent
number 5,444,934 by the Company. The complaint alleges that the Company
infringed the "934 patent by making, using, selling, importing, distributing
or offering to sell in the United States high density arrays and that this
infringement was willful. Affymetrix seeks a permanent injunction enjoining
the Company from further infringement of the "934 patent and, in addition,
seeks damages, costs, attorneys' fees and interest. Affymetrix also requests
triple damages based on its allegation of willful infringement by the Company.
In September 1998, Affymetrix filed an additional lawsuit in the United
States District Court for the District of Delaware, which was subsequently
transferred to the United States District Court for the Northern District of
California in November 1998, alleging the Company infringed U.S. patent number
5,800,992 and U.S. patent number 5,744,305. The complaint alleges that the
Company infringed the "305 patent by making, using, selling, importing,
distributing or offering to sell in the United States high density arrays. It
also alleges that the Company infringed the "992 patent by using its GEM
microarray technology to conduct gene expression monitoring and other
applications using two-color labeling, and that this infringement was willful.
Affymetrix seeks a permanent injunction enjoining the Company from further
infringement of the "305 and "992 patents. The court held a pretrial hearing
in November 2000 to determine how to construe the patent claims that will be
litigated in trial. In January 2001, the court issued a ruling describing how
the claims in the "934, "305 and "992 patents should be interpreted.
In April 1999, the Board of Patent Appeals and Interferences of the United
States Patent and Trademark Office declared interferences between pending
patent applications licensed exclusively to the Company and the Affymetrix
"305 and "992 patents. The Board of Patent Appeals and Interferences invokes
an interference proceeding when more than one patent applicant claims the same
invention. During the proceeding, the Board of Patent Appeals and
Interferences evaluates all relevant facts, including those bearing on first
to invent, validity, enablement and scope of claims, and then makes a
determination as to who, if anyone, is entitled to the patent on the disputed
invention. In September 1999, the Board of Patent Appeals and Interferences
determined that the Company had not met its prima facie case, and ruled that
the patents licensed by the Company from Stanford University were not entitled
to priority over corresponding claims in the two Affymetrix patents. The
Company is seeking de novo review of the Board's decisions in the United
States District Court for the Northern District of California.
55
INCYTE GENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In August 2000, the Company filed a lawsuit against Affymetrix in federal
court alleging infringement of U.S. patent numbers 5,716,785 and 5,891,636.
The patents relate to technologies used in the amplification of RNA and the
generation of gene expression information. Affymetrix has filed counterclaims
in this lawsuit that allege, among other things, that the Company infringe
U.S. patent number 6,040,193 and U.S. patent number 5,871,928. These
counterclaims allege that the Company infringe these patents by making, using,
offering to sell and/or selling within the United States the inventions
claimed in the patents, including, in the case of the "193 patent, methods for
forming microarrays and, in the case of the "928 patent, methods for analyzing
nucleic acids. The counterclaims also allege that the Company engaged in acts
of unfair competition under California statutory and common law. Affymetrix
seeks a permanent injunction enjoining the Company from further infringement
of the "193 patent and "928 patent and, in addition, seeks damages, costs and
attorneys' fees and interest. Affymetrix further requests triple damages from
the infringement claims based on its allegation of willful infringement by the
Company.
In December 1999 and August 2000, the Company filed lawsuits against Gene
Logic Inc. in federal court alleging patent infringement. Gene Logic filed
counterclaims alleging, among other things, that Incyte committed acts of
unfair competition under California statutory and common law. Gene Logic
sought, among other things, damages, costs and attorneys' fees. In January
2001, the Company reached a litigation settlement with Gene Logic pursuant to
which the lawsuits were dismissed, and Gene Logic will have a non-exclusive
license to practice the technology described in the patents.
The Company believes it has meritorious defenses and intends to vigorously
defend the suits and counterclaims brought by Affymetrix. However, the
Company's defenses may be unsuccessful. At this time, the Company cannot
reasonably estimate the possible range of any loss resulting from these suits
and counterclaims due to uncertainty regarding the ultimate outcome.
Regardless of the outcome, the Affymetrix litigation has resulted and is
expected to continue to result in substantial expenses and diversion of the
efforts of our management and technical personnel. Further, there can be no
assurance that any license that may be required as a result of this litigation
or the outcome thereof would be made available on commercially acceptable
terms, if at all. This litigation may also affect our potential customers'
willingness to use its microarray services and gene expression databases,
which could adversely affect the Company's revenue.
Note 13. Subsequent Events (Unaudited)
In the first quarter of 2001, the Company repurchased on the open market,
and retired, $8.0 million in par value of the convertible subordinated notes.
The Company recognized a gain of $2.4 million, net of tax, on the
transactions, which will be reported as an extraordinary gain.
56
Interim Consolidated Financial Information (Unaudited)
(in thousands, except per share data)
Fiscal 2000 Quarter Ended
-----------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
Revenues...................... $ 40,754 $ 46,015 $ 51,982 $ 55,416
Loss from operations.......... (15,401) (14,392) (15,746) (17,051)
Loss before extraordinary
item......................... (8,177) (6,590) (7,598) (10,507)
Net loss.................... (8,177) (6,590) (7,598) (7,370)
Basic and diluted loss before
extraordinary item........... $ (0.13) $ (0.10) $ (0.12) $ (0.16)
======== ======== ======== ========
Basic and diluted net loss per
share........................ $ (0.13) $ (0.10) $ (0.12) $ (0.11)
======== ======== ======== ========
Shares used in computation of
basic and diluted net loss
per share.................... 60,612 63,798 64,064 64,369
======== ======== ======== ========
Fiscal 1999 Quarter Ended
---------------------------------------------
June
March 31, 30, September 30, December 31,
--------- ------- ------------- ------------
Revenues........................ $37,630 $37,893 $ 35,415 $46,024
Loss from operations............ (1,993) (7,726) (10,448) (6,939)
Net loss...................... (1,910) (7,387) (11,066) (6,405)
Basic and diluted net loss per
share.......................... $ (0.03) $ (0.13) $ (0.20) $ (0.11)
======= ======= ======== =======
Shares used in computation of
basic and diluted net loss per
share.......................... 55,758 55,922 56,380 57,040
======= ======= ======== =======
57
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Description--Year ended December Beginning Costs and End of
31, of Period Expenses Deductions Period
-------------------------------- ---------- ---------- ---------- ----------
(in thousands)
Allowance for doubtful accounts--
1998............................. $225 $213 $ (4) $434
Allowance for doubtful accounts--
1999............................. 434 -- (200) 234
Allowance for doubtful accounts--
2000............................. 234 122 -- 356
58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of diaDexus, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of members' and stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of diaDexus, Inc. (a
development stage company) at December 31, 2000 and 1999, and the results of
its operations and its cash flows for the three years in the period ended
December 31, 2000 and for the cumulative period from August 29, 1997 (date of
inception) to December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 19, 2001,
except as to Note
8 which is as of
February 5, 2001
59
DIADEXUS, INC.
(a development stage company)
BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
----------------
1999 2000
------- --------
ASSETS
------
Current Assets:
Cash and cash equivalents.................................. $8, 358 $ 13,043
Short-term investments..................................... -- 33,874
Interest receivable........................................ -- 1,556
Prepaid expenses and other current assets.................. 428 1,106
------- --------
Total current assets..................................... 8,786 49,579
Long-term investments........................................ -- 44,271
Property and equipment, net.................................. 2,442 2,152
Other assets................................................. 69 70
------- --------
Total assets............................................. $11,297 $ 96,072
======= ========
LIABILITIES, MEMBERS' AND STOCKHOLDERS' EQUITY
----------------------------------------------
Current Liabilities:
Accounts payable........................................... $ 42 $ 790
Accrued liabilities........................................ 459 1,108
Convertible notes payable to related parties............... 5,000 --
Due to related parties..................................... 456 486
------- --------
Total current liabilities................................ 5, 957 2,384
Deferred rent................................................ 87 47
------- --------
Total liabilities........................................ 6,044 2,431
------- --------
Commitments and contingencies (Notes 4 and 7)
Members' and Stockholders' Equity:
Series A preferred capital; 4,400,000 units authorized,
issued and outstanding at December 31, 1999, none
authorized, issued or outstanding at December 31, 2000.... 5,119 --
Series B preferred capital; 4,400,000 units authorized,
issued and outstanding at December 31, 1999, none
authorized, issued or outstanding at December 31, 2000.... 119 --
Common capital; 2,200,000 units authorized, no units issued
and outstanding at December 31, 1999, none authorized,
issued or outstanding at December 31, 2000................ -- --
Series A preferred stock, $0.01 par value; 4,400,000 shares
authorized, issued and outstanding at December 31, 2000
(liquidation value: $15,000).............................. -- 44
Series B preferred stock, $0.01 par value; 4,400,000 shares
authorized, issued and outstanding at December 31, 2000
(liquidation value: $10,000).............................. -- 44
Series C preferred stock, $0.01 par value; 13,500,000
shares authorized at December 31, 2000, 13,225,807 shares
issued and outstanding at December 31, 2000 (liquidation
value: $102,500).......................................... -- 132
Common stock, $0.01 par value; 50,000,000 shares authorized
at December 31, 2000, 2,076,698 shares issued and
outstanding at December 31, 2000.......................... -- 21
Additional paid-in capital................................. 15 128,060
Deferred stock compensation................................ -- (12,773)
Notes receivable from stockholders......................... -- (1,591)
Accumulated other comprehensive income (loss).............. -- 481
Deficit accumulated during the development stage........... -- (20,777)
------- --------
Total members' and stockholders' equity.................. 5,253 93,641
------- --------
Total liabilities, members' and stockholders' equity..... $11,297 $ 96,072
======= ========
The accompanying notes are an integral part of these financial statements.
60
DIADEXUS, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
(in thousands)
Cumulative
Period from
August 29, 1997
(inception)
Year Ended December 31, through
--------------------------- December 31,
1998 1999 2000 2000
------- -------- -------- ---------------
License revenue from related
party........................... $ -- $ 100 $ -- $ 100
------- -------- -------- --------
Operating expenses:
Research and development
(including stock compensation
expense of $2,811 for the year
ended December 31, 2000 and
for the cumulative period from
inception through December 31,
2000)......................... 6,761 9,461 12,297 28,920
General and administrative
(including stock compensation
expense of $12,345 for the
year ended December 31, 2000
and for the cumulative period
from inception through
December 31, 2000)............ 1,882 2,345 16,010 20,516
------- -------- -------- --------
Loss from operations............. (8,643) (11,706) (28,307) (49,336)
Interest and other income........ 715 540 5,034 6,421
Interest expense................. -- (120) (73) (193)
------- -------- -------- --------
Net loss......................... $(7,928) $(11,286) $(23,346) $(43,108)
======= ======== ======== ========
The accompanying notes are an integral part of these financial statements.
61
DIADEXUS, INC.
(a development stage company)
STATEMENTS OF MEMBERS' AND STOCKHOLDERS' EQUITY
(in thousands, except share data)
Series A Series B Series A Series B
Preferred Capital Preferred Capital Member Preferred Stock Preferred Stock
------------------- ------------------- Contributions ----------------- -----------------
Units Dollars Units Dollars Receivable Shares Dollars Shares Dollars
---------- ------- ---------- ------- ------------- --------- ------- --------- -------
Issuance, at inception,
of Series A units at
$3.41 per unit......... 4,400,000 $15,000 -- $ -- $(11,000) -- $-- -- $--
Issuance, at inception,
of Series B units at
$2.27 per unit......... -- -- 4,400,000 10,000 (6,000) -- -- -- --
Net loss................ -- (274) -- (274) -- -- -- -- --
---------- ------- ---------- ------- -------- --------- ---- --------- ----
Balance at December 31,
1997................... 4,400,000 14,726 4,400,000 9,726 (17,000) -- -- -- --
Proceeds received from
Members................ -- -- -- -- 17,000 -- -- -- --
Stock-based
compensation........... -- -- -- -- -- -- -- -- --
Net loss................ -- (3,964) -- (3,964) -- -- -- -- --
---------- ------- ---------- ------- -------- --------- ---- --------- ----
Balance at December 31,
1998................... 4,400,000 10,762 4,400,000 5,762 -- -- -- -- --
Stock-based
compensation........... -- -- -- -- -- -- -- -- --
Net loss................ -- (5,643) -- (5,643) -- -- -- -- --
---------- ------- ---------- ------- -------- --------- ---- --------- ----
Balance at December 31,
1999................... 4,400,000 5,119 4,400,000 119 -- -- -- -- --
Net loss to April 4..... -- (1,284) -- (1,284) -- -- -- -- --
Conversion to C
corporation............ (4,400,000) (3,835) (4,400,000) 1,165 -- 4,400,000 44 4,400,000 44
Issuance of Series C
preferred stock upon
conversion of note
payable to related
party.................. -- -- -- -- -- -- -- -- --
Issuance of Series C
preferred stock, net of
issuance costs of
$7,322................. -- -- -- -- -- -- -- -- --
Issuance of common
stock.................. -- -- -- -- -- -- -- -- --
Deferred stock
compensation........... -- -- -- -- -- -- -- -- --
Amortization of deferred
stock compensation..... -- -- -- -- -- -- -- -- --
Remeasurement of stock
options................ -- -- -- -- -- -- -- -- --
Notes receivable from
stockholders, net of
discount............... -- -- -- -- -- -- -- -- --
Comprehensive loss:
Net loss from April 5.. -- -- -- -- -- -- -- -- --
Unrealized gain on
available-for-sale
securities............ -- -- -- -- -- -- -- -- --
Comprehensive loss.....
---------- ------- ---------- ------- -------- --------- ---- --------- ----
Balance at December 31,
2000................... -- $ -- -- $ -- $ -- 4,400,000 $ 44 4,400,000 $ 44
========== ======= ========== ======= ======== ========= ==== ========= ====
The accompanying notes are an integral part of these financial statements.
62
DIADEXUS, INC.
(a development stage company)
STATEMENTS OF MEMBERS' AND STOCKHOLDERS' EQUITY
(in thousands, except share data)
Deficit
Series C Notes Accumulated Accumulated
Preferred Stock Common Stock Additional Deferred Receivable Other During the
------------------ ----------------- Paid-In Stock from Comprehensive Development
Shares Dollars Shares Dollars Capital Compensation Stockholders Income (Loss) Stage Total
---------- ------- --------- ------- ---------- ------------ ------------ ------------- ----------- --------
Issuance, at
inception, of
Series A units
at $3.41 per
unit............ -- $-- -- $-- $ -- $ -- $ -- $-- $ -- $ 4,000
Issuance, at
inception, of
Series B units
at $2.27 per
unit............ -- -- -- -- -- -- -- -- -- 4,000
Net loss......... -- -- -- -- -- -- -- -- -- (548)
---------- ---- --------- ---- -------- -------- ------- ---- -------- --------
Balance at
December 31,
1997............ -- -- -- -- -- -- -- -- 7,452
Proceeds received
from Members.... -- -- -- -- -- -- -- -- -- 17,000
Stock-based
compensation.... -- -- -- -- 10 -- -- -- -- 10
Net loss......... -- -- -- -- -- -- -- -- -- (7,928)
---------- ---- --------- ---- -------- -------- ------- ---- -------- --------
Balance at
December 31,
1998............ -- -- -- -- 10 -- -- -- -- 16,534
Stock-based
compensation.... -- -- -- -- 5 -- -- -- -- 5
Net loss......... -- -- -- -- -- -- -- -- -- (11,286)
---------- ---- --------- ---- -------- -------- ------- ---- -------- --------
Balance at
December 31,
1999............ -- -- -- -- 15 -- -- -- -- 5,253
Net loss to April
4............... -- -- -- -- -- -- -- -- -- (2,568)
Conversion to C
corporation..... -- -- -- -- 2,582 -- -- -- -- --
Issuance of
Series C
preferred stock
upon conversion
of note payable
to related
party........... 322,580 3 -- -- 2,497 -- -- -- -- 2,500
Issuance of
Series C
preferred stock,
net of issuance
costs of
$7,322.......... 12,903,227 129 -- -- 92,549 -- -- -- -- 92,678
Issuance of
common stock.... -- -- 2,076,698 21 2,487 -- -- -- -- 2,508
Deferred stock
compensation.... -- -- -- -- 18,331 (18,331) -- -- -- --
Amortization of
deferred stock
compensation.... -- -- -- -- -- 5,558 -- -- -- 5,558
Remeasurement of
stock options... -- -- -- -- 9,599 -- -- -- -- 9,599
Notes receivable
from
stockholders,
net of
discount........ -- -- -- -- -- -- (1,591) -- -- (1,591)
Comprehensive
loss:
Net loss from
April 5........ -- -- -- -- -- -- -- -- (20,778) (20,778)
Unrealized gain
on available-
for-sale
securities..... -- -- -- -- -- -- -- 482 -- 482
-------- --------
Comprehensive
loss........... (20,296)
---------- ---- --------- ---- -------- -------- ------- ---- -------- --------
Balance at
December 31,
2000............ 13,225,807 $132 2,076,698 $ 21 $128,060 $(12,773) $(1,591) $482 $(20,778) $ 93,641
========== ==== ========= ==== ======== ======== ======= ==== ======== ========
The accompanying notes are an integral part of these financial statements.
63
DIADEXUS, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
(in thousands)
Cumulative
Period from
August 29, 1997
(Inception)
Year Ended December 31, through
--------------------------- December 31,
1998 1999 2000 2000
------- -------- -------- ---------------
Cash flows from operating
activities:
Net loss......................... $(7,928) $(11,286) $(23,346) $(43,108)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization... 1,657 1,072 1,167 3,898
Stock compensation expense...... 10 5 15,157 15,172
Discount on notes receivable
from stockholders.............. 1,281 1,281
Imputed interest on notes
receivable from stockholders... -- -- (12) (12)
Loss on disposal of property and
equipment...................... 23 3 -- 26
Changes in operating assets and
liabilities:
Interest receivable............ -- -- (1,556) (1,556)
Prepaid expenses and other
current assets................ (317) (24) (678) (1,108)
Accounts payable............... 239 (197) 748 790
Accrued liabilities............ 244 (177) 649 923
Issuance of notes receivable to
stockholders.................. -- -- (465) (465)
Due to related parties......... 132 (2,234) 153 (1,764)
Deferred rent.................. 14 (29) (41) 46
------- -------- -------- --------
Net cash used in operating
activities................... (5,926) (12,867) (6,943) (25,877)
------- -------- -------- --------
Cash used in investing activities:
Purchases of property and
equipment....................... (1,160) (238) (877) (2,547)
Proceeds from sale of equipment.. -- 9 -- 9
Purchases of other assets........ -- -- (1) (1)
Purchases of short-term
investments..................... -- -- (33,773) (33,773)
Purchases of long-term
investments..................... -- -- (43,891) (43,891)
------- -------- -------- --------
Net cash used in investing
activities................... (1,160) (229) (78,542) (80,203)
------- -------- -------- --------
Cash provided by financing
activities:
Proceeds from issuance of
convertible notes payable to
related parties................. -- 5,000 -- 5,000
Repayment of convertible note
payable to related party........ -- -- (2,621) (2,621)
Proceeds from related party
contributions receivable........ 17,000 -- -- 17,000
Proceeds from issuance of Series
A preferred units............... -- -- -- 2,953
Proceeds from issuance of Series
B preferred units............... -- -- -- 4,000
Proceeds from issuance of Series
C preferred stock, net of
issuance costs.................. -- -- 92,678 92,678
Proceeds from issuance of common
stock........................... -- -- 113 113
------- -------- -------- --------
Net cash provided by financing
activities................... 17,000 5,000 90,170 119,123
------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents............. 9,914 (8,096) 4,685 13,043
Cash and cash equivalents at
beginning of period.............. 6,540 16,454 8,358 --
------- -------- -------- --------
Cash and cash equivalents at end
of period........................ $16,454 $ 8,358 $ 13,043 $ 13,043
======= ======== ======== ========
Supplemental disclosures of cash
flow information:
Interest paid.................... $ -- $ -- $ 193 $ 193
Noncash investing and financing
activities:
Conversion of notes payable into
Series C preferred stock........ -- -- 2,500 2,500
Construction in-progress funded
by related party................ 106 -- -- 2,305
Capital contribution of property
and equipment................... -- -- -- 1,047
Issuance of common stock in
exchange for notes receivable
from stockholders............... -- -- 2,395 2,395
The accompanying notes are an integral part of these financial statements.
64
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
Note 1--The Company:
diaDexus, Inc. (the "Company"), was founded as a Delaware limited liability
company in August 1997 by SmithKline Beecham Corporation ("SmithKline
Beecham") and Incyte Genomics, Inc.("Incyte") (together, the "Members"). On
April 4, 2000, the Company was converted to a Delaware corporation (see Note
2).
The Company focuses on translating genomic sequence data into novel
diagnostic and therapeutic products. Since its formation in 1997, the initial
strategy of the Company has been to discover molecular targets and develop
novel diagnostic products for the improved detection, classification and
prognosis of diseases. The Company recently expanded its strategy to include
therapeutic discovery and development. Where possible, the Company seeks to
develop diagnostic and therapeutic products that are directed at the same
molecular target, enabling a diagnostic/therapeutic tandem approach to detect
and treat disease. The Company expects to extend its discovery platform beyond
the initial focus on cancer into other diagnostic and therapeutic areas.
Note 2--Summary of Significant Accounting Policies:
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of income and expenses during the reporting
period. Actual results could differ from those estimates.
Concentration of credit risk and other risks and uncertainties
The Company's financial instruments that are subject to concentration of
credit risk consist primarily of cash and cash equivalents and marketable
securities. The Company's policy is to place its cash and cash equivalents and
marketable securities with high credit quality financial institutions in order
to limit the amount of credit exposure. The Company has not experienced any
losses to date.
The Company's future products may require approval from the U.S. Food and
Drug Administration ("FDA") and may require approval from certain
international regulatory agencies prior to commencing commercial sales. There
can be no assurance that the Company's products will receive any of these
required approvals. If the Company was denied such approvals or such approvals
were delayed, it would have a material adverse impact on the Company's results
of operations.
The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, new technological innovations,
dependence on key personnel, protection of proprietary technology, compliance
with government regulations, uncertainty of market acceptance of products,
product liability and the need to obtain additional financing.
SmithKline Beecham accounted for 100% of revenues during the year ended
December 31, 1999.
Cash and cash equivalents
The Company considers all highly liquid investments with original
maturities of less than 90 days to be cash equivalents. Investments with
maturities of less than one year from the balance sheet date and with original
maturities greater than 90 days are considered short-term investments.
Investments consist primarily of money market accounts, commercial paper,
certificates of deposit and other short-term instruments. These investments
65
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
typically bear minimal risk. This minimization of risk is consistent with the
Company's policy to maintain high liquidity and ensure safety of principal.
Investments
The Company's short-term and long-term investments are classified as
available-for-sale. Available-for-sale securities are carried at fair value
based on quoted market prices, with the unrealized gains and losses included
in accumulated other comprehensive income within stockholders' equity. The
amortized cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest and other income. Realized gains and
losses and declines in value judged to be other-than-temporary on available-
for-sale securities are also included in interest and other income. Interest
and dividends on securities classified as available-for-sale are also included
in interest and other income. The cost of securities sold is based on the
specific identification method.
The amortized cost and fair value of securities, with gross unrealized
gains and losses, were as follows (in thousands):
December 31, 2000
---------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
Debt securities:
Corporate bonds.................. $77,663 $493 $(11) $78,145
======= ==== ==== =======
The fair value of available-for-sale debt securities by contractual
maturity at December 31, 2000 was as follows (in thousands):
Within 1 year..................................................... $33,874
Greater than 1 year, less than 5 years............................ 44,271
-------
$78,145
=======
Property and equipment
Property and equipment are recorded at cost and depreciated over their
estimated useful lives using the straight-line method. Assets contributed by
the Members during 1997 were recorded at amounts equal to the Members' net
carrying value. Laboratory equipment, computers, software, and office
furniture are depreciated over three years. Leasehold improvements are
recorded at cost and amortized over the term of the non-cancelable lease or
their useful life, whichever is shorter. Maintenance and repairs are expensed
as incurred.
Impairment of long-lived assets
The Company reviews long-lived assets for impairment whenever events or
circumstances suggest that the carrying amount of those assets may not be
fully recoverable or that the estimated useful life of those assets has
changed significantly. When expected future undiscounted cash flows that are
expected to be generated by an asset are less than its carrying amount, then
an impairment loss is recognized and the asset is written down to its
estimated fair value.
66
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue recognition
The amount received from SmithKline Beecham under a non-refundable license
arrangement was recognized during 1999 as the earnings process was completed
pursuant to the terms of the agreement and no remaining performance obligation
existed. Any amounts received in advance of completing the earnings process
are recorded as deferred revenue. The Company's revenue recognition practices
are in accordance with SEC Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements."
Research and development
The Company recognizes research and development expense as incurred.
Income taxes
From the Company's inception through April 4, 2000, no provision or benefit
for federal or state income taxes was recorded in the financial statements as
the Company was a limited liability company and, therefore, was taxed as a
partnership. Rather, the federal and state income tax effects of the Company's
results of operations were recorded by the Members in their respective income
tax returns. On April 4, 2000, in connection with completing the Series C
preferred stock financing, the Company became subject to the C corporation
provisions of the Internal Revenue Code. Accordingly, any earnings after this
date will be taxed at federal and state corporate income tax rates.
Current income tax expense (benefit) is the amount of income taxes expected
to be payable (refundable) for the current year. A deferred income tax asset
or liability is computed for the expected future impact of the differences
between the financial reporting and tax bases of assets and liabilities as
well as the expected future tax benefit to be derived from tax loss and tax
credit carryforwards. Deferred income tax expense (benefit) is generally the
net change during the year in the deferred income tax assets or liability. A
valuation allowance is established when necessary to reduce deferred tax
assets to the amount more likely than not to be realized in future tax
returns.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), Financial
Accounting Standards Board Interpretation No. 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans" ("FIN No.
28"), Financial Accounting Standards Board Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation--an Interpretation of
APB No. 25" ("FIN No. 44") and complies with the pro forma disclosure
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123").
Under APB No. 25, compensation expense is based on the difference, if any,
on the date of the grant between the estimated fair value of the Company's
common stock and the exercise price. SFAS No. 123 defines a "fair value" based
method of accounting for employee stock options. Pro forma disclosures of the
difference between compensation expense included in net loss and the related
cost measured by the fair value method are presented in Note 5.
The Company accounts for stock issued to non-employees in accordance with
the provisions of SFAS No. 123 and Emerging Issues Task Force No. 96-18,
"Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF No. 96-
18").
67
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Comprehensive income (loss)
The Company accounts for comprehensive income in accordance with Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and
displaying comprehensive income (loss) and its components. Comprehensive
income (loss) refers to revenues, expenses, gains and losses that under
generally accepted accounting principles are included in comprehensive income
(loss) but excluded from net income (loss).
Recent accounting pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS No. 133 requires that all derivatives be recognized at fair
value in the statement of financial position, and that the corresponding gains
or losses be reported either in the statement of operations or as a component
of comprehensive income (loss), depending on the type of hedge transaction. In
June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities--an Amendment of FASB Statement No.
133," ("SFAS No. 138"). The Company, to date, has not engaged in any
derivative or hedging activities. The Company will adopt SFAS No. 133, as
amended, in 2001. The Company does not expect the adoption of SFAS No. 133 to
have a material impact on its financial statements.
Note 3--Balance Sheet Components
Property and equipment consist of the following (in thousands):
December 31,
----------------
1999 2000
------- -------
Laboratory, computer and office equipment................ $ 2,523 $ 3,382
Leasehold improvements................................... 2,631 2,649
------- -------
Total.................................................. 5,154 6,031
Less: Accumulated depreciation and amortization.......... (2,712) (3,879)
------- -------
$ 2,442 $ 2,152
======= =======
Accrued liabilities consist of the following (in thousands):
December
31,
-----------
1999 2000
---- ------
Payroll and related............................................ $230 $ 424
Outside services............................................... -- 347
Deposits....................................................... 45 72
Other.......................................................... 184 265
---- ------
$459 $1,108
==== ======
68
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 4--Commitments and Contingencies
The Company has an operating lease for laboratory and office facilities in
Santa Clara, California through September 30, 2002. The Company has an option
to renew the lease through September 2007. Minimum future lease payments under
the non-cancelable lease as of December 31, 2000 are as follows (in
thousands):
Year Ending
December 31,
------------
2001................................................................ $ 818
2002................................................................ 624
------
$1,442
======
Rent expense was $825,000, $838,000 and $804,000 for the years ended
December 31, 1998, 1999 and 2000, respectively. A security deposit of $67,000
relating to our facility lease was paid by SmithKline Beecham and is included
in due to related parties in the accompanying balance sheets.
The Company has subleased a portion of its leased office facilities under a
non-cancelable lease agreement since 1998. Rental income for the years ended
December 31, 1998, 1999 and 2000 was $117,000, $202,000 and $299,000,
respectively. The aggregate minimum future lease payments to be received by
the Company under the sublease are $712,000.
The Company entered into a collaboration agreement with the University of
Pittsburgh Medical Center effective October 1, 2000 to analyze RNA expression
in human cancer tissues. Under this agreement, the University of Pittsburgh
Medical Center will perform RNA expression analysis on human cancer and
corresponding non-malignant tissues to establish genotypic classifications.
The Company will pay the University of Pittsburgh Medical Center approximately
$1,218,000 over the three year term of this agreement.
The Company entered into a one-year agreement with Agilent Technologies,
Inc. in August 2000 for early access to Agilent's DNA microarray technology.
Under the terms of the agreement, diaDexus will purchase a number of custom
in-situ microarrays at a cost of approximately $405,000.
The Company has entered into employment agreements with certain key
executive officers. Such agreements provide for severance payments and, in one
case, provide for accelerated vesting following a change in control of the
Company.
Note 5--Members' and Stockholders' Equity:
Preferred units and stock
In September 1997, the Company issued 4,400,000 Series A Preferred units,
no par value, to SmithKline Beecham, at $3.41 per unit. At the time these
units were issued, the Company received an initial capital contribution of
$4,000,000 in cash and assets and a contractual commitment for additional cash
contributions of $7,000,000 and $4,000,000 which were received on April 15,
1998 and July 15, 1998, respectively. Upon conversion of the Company from a
limited liability company into a C corporation, the Series A Preferred units
were exchanged for shares of Series A Preferred Stock on a one-to-one basis.
The Series A Preferred Stock converts automatically to Common Stock upon
completion of an initial public offering by the Company that results in net
proceeds of at least $20,000,000 and an offering price of at least $10.00 per
share.
In September 1997, the Company also issued 4,400,000 Series B Preferred
units, no par value, to Incyte at $2.27 per share. At the time these units
were issued, the Company received an initial capital contribution of
69
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
$4,000,000 in cash and a contractual commitment for additional cash
contributions of $2,000,000 and $4,000,000 which were received on April 15,
1998 and July 15, 1998, respectively. Upon conversion of the Company from a
limited liability company into a C corporation, the Series B Preferred units
were exchanged for shares of Series B Preferred Stock on a one-to-one basis.
The Series B Preferred Stock converts automatically to Common Stock upon
completion of an initial public offering by the Company that results in net
proceeds of at least $20,000,000 and an offering price of at least $10.00 per
share.
In April 2000, the Company issued 13,225,807 shares of Series C Preferred
Stock, $0.01 par value, at $7.75 per share. Net proceeds were approximately
$92,678,000 after cash offering expenses of $7,322,000. The Series C Preferred
Stock converts automatically to Common Stock upon completion of an initial
public offering by the Company that results in net proceeds of at least
$20,000,000 and an offering price of at least $10.00 per share.
In connection with the sale of Series C Preferred Stock, the Company issued
a warrant in June 2000 to purchase 129,032 shares of Series C Preferred Stock
at $7.75 per share to the placement agent. The Series C Preferred Stock
warrant converts automatically to a Common Stock warrant upon completion of an
initial public offering by the Company that results in net proceeds of at
least $20 million and an offering price of at least $10.00 per share. The
warrant becomes exercisable in 2005. The Company valued this warrant using the
Black-Scholes option pricing model with the following assumptions: expected
life of five years; risk free interest rate of 6.23%; expected dividend yield
of zero, and volatility of 85%. The fair value of the warrant of $846,367 is
included in the carrying value of the Series C Preferred Stock.
At December 31, 2000, the Company has reserved 22,154,839 shares of Common
Stock for future issuance upon the conversion of the Preferred Stock.
Dividends
In the event dividends are paid on any share of Common Stock, an additional
dividend must be paid with respect to all outstanding shares of Preferred
Stock in an amount per share (on an as-if-converted basis) equal to the amount
paid or set aside for each share of Common Stock, whenever funds are legally
available. Such dividends are payable when, as and if declared by the Board of
Directors. No dividends accrue unless declared by the Board of Directors. As
of December 31, 2000, no dividends had been declared.
Liquidation preference
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, holders of the Series A, Series B and Series
C Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets to the holders of the Common Stock, an
amount per share equal to $3.41 for each outstanding share of Series A
Preferred Stock, $2.27 for each outstanding share of Series B Preferred Stock
and $7.75 for each outstanding share of Series C Preferred Stock, plus any
declared but unpaid dividends on such shares of Series A, Series B or Series C
Preferred Stock. If upon the occurrence of such an event, the assets and funds
thus distributed among the holders of the Preferred Stock shall be insuffcient
to permit the payment to such holders of the full aforesaid preferential
amounts, then the entire assets and funds of the Company legally available for
distribution shall be distributed ratably among the holders of the Series A,
Series B and Series C Preferred Stock in proportion to the aggregate
liquidation preference of such stock owned by each such holder.
Upon completion of the distributions described above, all of the remaining
assets of the Company available for distribution to stockholders shall be
distributed among the holders of Common Stock pro rata based on the number of
shares of Common Stock held by each.
70
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Voting rights
Holders of Series A, Series B and Series C Preferred Stock are entitled to
one vote for each share of Common Stock into which such shares can be
converted. The holders of the outstanding shares of Series A and Series B
Preferred Stock, voting as separate classes, are each entitled to elect one
member to the Company's Board of Directors and the holders of the outstanding
shares of Series C Preferred Stock, voting as a separate class, are entitled
to elect two members to the Company's Board of Directors. Any remaining board
members will be elected by the holders of Common Stock and the holders of
Preferred Stock voting together as a single class.
Registration rights
The holders of the Company's Preferred Stock have the right to require the
Company to register their shares with the Securities and Exchange Commission
so that those shares may be publicly resold or to include their shares in any
registration statement filed by the Company.
Conversion rights
Shares of Series A, Series B and Series C Preferred Stock are convertible
into shares of Common Stock at the option of the holder, or automatically upon
completing a public offering of at least $20,000,000 of Common Stock at an
offering price of at least $10.00 per share, upon the written consent of the
holders of at least 80% of the then outstanding shares of Series A, Series B
and Series C Preferred Stock voting together as a single class on an as-if-
converted basis. The conversion rate is one share of Common Stock for one
share of Preferred Stock (subject to certain adjustments).
Common stock
As of December 31, 2000, the Company had issued 2,076,698 shares of Common
Stock, $0.01 par value, primarily in connection with the exercise of stock
options. No dividends have been declared. In the event of any liquidation,
dissolution or winding up of the Company, either voluntary or involuntary,
holders of Common Stock shall be entitled to receive the remaining assets of
the Company after distribution to holders of Preferred Stock, pro rata based
on the number of shares of Common Stock held by each holder.
In March 2000 the Company committed to grant a warrant to purchase 50,000
shares of Common Stock at $1.20 per share for services to be received. This
warrant has not been granted as of December 31, 2000.
Stock option plans
In January 1998, the Company's Board of Directors adopted the 1997
Incentive Plan ("1997 Plan") under which 1,200,000 shares of the Company's
Common Units ("Units") were reserved for issuance to employees and consultants
of the Company. During 1999, the Company increased the number of Units
reserved for future issuance by 1,000,000. Options granted under the 1997 Plan
are for terms not to exceed ten years. If the option is granted to an
individual who, at the time of grant, owns a membership interest in the
Company representing more than 10% of the voting power of all classes of
membership interest of the Company or any parent or subsidiary, the exercise
price of the option must be at least 110% of the estimated fair value of the
Units at the date of grant. Exercise prices of options granted to all other
persons must be at least 85% of the estimated fair value of the Units at the
date of grant. Options under the 1997 Plan generally vest over four years. The
1997 Plan expires in 2008.
71
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In April 2000, all of the Units originally granted under the 1997 Plan were
converted into options to acquire shares of Common Stock under the 2000 Equity
Incentive Plan (the "2000 Plan"), which provides for the issuance of options
to purchase up to 2,200,000 shares of the Company's Common Stock. The Board of
Directors has the authority to determine to whom options will be granted, the
number of shares, the term and exercise price (which cannot be less than the
estimated fair value at date of grant for incentive stock options or 85% of
the estimated fair value for nonstatutory stock options). Historically,
estimated fair value has been determined by the Board of Directors. If an
employee owns stock representing more than 10% of the outstanding shares, the
price of each share shall be at least 110% of estimated fair value. Options
generally vest ratably over four years and expire within ten years of the date
of the grant. In June 2000, the Company reserved an additional 2,500,000
shares of Common Stock under the 2000 Plan.
Stock option activity under the Company's plans is as follows:
Outstanding Options
--------------------
Weighted
Options Average
Available Number of Exercise
for Grant Options Price
---------- ---------- --------
Options reserved at the plan inception......... 1,200,000 -- $ --
Options granted................................ (760,500) 760,500 0.36
Options canceled............................... 44,250 (44,250) 0.35
---------- ----------
Balances, December 31, 1998.................... 483,750 716,250 0.36
Additional shares reserved..................... 1,000,000 -- --
Options granted................................ (1,055,083) 1,055,083 0.75
Options canceled............................... 433,738 (433,738) 0.47
---------- ----------
Balances, December 31, 1999.................... 862,405 1,337,595 0.63
Additional shares reserved..................... 2,500,000 -- --
Options granted................................ (2,438,213) 2,438,213 1.85
Options exercised.............................. -- (2,076,498) 1.21
Options canceled............................... 204,303 (204,303) 0.68
---------- ----------
Balances, December 31, 2000.................... 1,128,495 1,495,007 1.81
========== ==========
The following summarizes information about stock options outstanding at
December 31, 2000:
Options
Options Outstanding Exercisable
----------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Number Life (Years) Price Number Price
-------- --------- ------------ -------- ------- --------
$0.35 97,354 7.13 $0.35 64,159 $0.35
0.75 258,294 8.29 0.75 67,697 0.75
1.20 58,812 9.16 1.20 -- --
1.30 680,834 9.54 1.30 -- --
1.80 146,713 9.88 1.80 -- --
5.00 253,000 9.96 5.00 -- --
--------- -------
1,495,007 9.26 1.81 131,856 0.56
========= =======
The weighted average grant date fair value of options granted during the
years ended December 31, 1998, 1999 and 2000, was $0.07, $0.14 and $7.41,
respectively.
72
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Had compensation cost for the Company's stock options been calculated based
upon the fair value at the date of grant, the Company's net loss and net loss
per share would have increased to the pro forma amounts shown in the table
that follows:
Year Ended December 31,
---------------------------
1998 1999 2000
------- -------- --------
(in thousands, except per
share data)
Net loss:
As reported................................. $(7,928) $(11,286) $(23,346)
Pro forma................................... (7,943) (11,313) (24,002)
The fair value of each option grant is estimated at the grant date using
the minimum value method, assuming an expected option term of four years, no
dividend yield, and risk-free interest rates of 4.43% to 5.54%, 5.11% to 5.86%
and 5.10% to 6.20% for the years ended December 31, 1998, 1999 and 2000,
respectively.
Deferred stock compensation
For the year ended December 31, 2000, the Company recorded $18,331,000 of
deferred stock compensation in accordance with APB No. 25, SFAS No. 123 and
EITF Issue No. 98-16 from the grant of stock options to employees, directors
and consultants. The difference between exercise price of the option granted
and the estimated fair value of Common Stock on the grant date is recognized
as deferred stock compensation. Stock compensation expense is being recognized
over the vesting period of the related options in accordance with FIN No. 28.
Total stock compensation expense for the year ended December 31, 2000 was
$5,558,000.
In November 2000, the Company modified certain outstanding stock options
which were then exercised in exchange for full recourse non-interest bearing
notes. In accordance with APB 25 and FIN No. 44, the associated remeasurement
of such options resulted in a one-time compensation charge in the statements
of operations for the year ended December 31, 2000 of $9,599,000.
The notes mature over periods ranging from seven to ten years. The discount
associated with the use of non-interest bearing notes was calculated using an
interest rate of 6.5% and a weighted average term of 9.44 years, and resulted
in an immediate compensation charge of $1,281,000, of which $790,000 was
allocated to general and administrative expense and $491,000 was allocated to
research and development expense. The discount will be recognized as interest
income over the life of the loans.
401(k) savings plan
In January 1998, the Company has established a qualified savings plan for
employees under Section 401(k) (the "401(k) Plan") of the Internal Revenue
Service Code, in which employees may defer as much as 15% of their pretax
annual salary up to the statutory limits. The 401(k) Plan permits
discretionary matching and profit sharing contributions to be made by the
Company. As of December 31, 2000, the Company has not made any contributions
to the 401(k) Plan.
Note 6--Income Taxes:
On April 5, 2000, the Company became subject to the C corporation
provisions of the Internal Revenue Code. No provision or benefit for income
taxes has been recognized since April 5, 2000 as the Company has incurred net
operating losses.
73
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The significant components of deferred tax assets and liabilities are as
follows (in thousands):
December 31,
2000
------------
Net operating loss carryforwards.............................. $ 212
Depreciation and amortization................................. 2,635
Research tax credit carryforwards............................. 530
Other......................................................... 45
------
Total deferred tax assets................................... 3,422
Deferred interest income...................................... 620
Less: Valuation allowance..................................... 2,802
------
Net deferred taxes............................................ $ --
======
The Company has provided a full valuation allowance for its deferred tax
assets at December 31, 2000 due to the uncertainty surrounding the future
realization of such assets.
At December 31, 2000, the Company had state and federal net operating loss
carryforwards of $532,000 which expire in 2005 and 2020, respectively, and
federal and state research tax credit carryforwards of $530,000 which expire
in 2020. Utilization of federal and state net operating loss and tax credit
carryforwards may be subject to an annual limitation due to the "change in
ownership" provisions of the Internal Revenue Code.
Note 7--Related Party Transactions:
In connection with forming the Company, SmithKline Beecham, Incyte and the
Company entered into several agreements during September 1997, including an
Operating Agreement (the "Operating Agreement") and a Master Strategic
Relationship Agreement (the "Master Agreement"). The Operating Agreement
served as the Company's by-laws while the Master Agreement documents certain
specific matters regarding the operation of the Company. During September
1997, the Company issued 4,400,000 shares of Series A Preferred units to
SmithKline Beecham in exchange for an initial capital contribution of
$4,000,000 in cash and assets and a contractual commitment for additional cash
contributions of $11,000,000, which was received in two installments on April
15 and July 15, 1998. Concurrently, the Company issued 4,400,000 shares of
Series B Preferred units to Incyte in exchange for an initial capital
contribution of $4,000,000 in cash and a contractual commitment for additional
cash contributions of $6,000,000, which was received in two installments on
April 15 and July 15, 1998.
The Operating Agreement specified that the limited liability company would
merge into a C corporation at the earliest of (i) the eighteen month
anniversary of the Company's formation (March 1999); (ii) any time after
January 1, 1999, if the Company's cash balance falls below $2,000,000, or
(iii) the mutual agreement of SmithKline Beecham and Incyte. Pursuant to the
Operating Agreement, the conversion of the Company into a C corporation was
deferred until completion of the Series C Preferred Stock financing in April
2000.
In addition to the above contributions, SmithKline Beecham has granted the
Company various exclusive rights under a Collaboration and License Agreement
entered into by SmithKline Beecham, Incyte and the Company in September 1997.
Under this agreement, as amended, SmithKline Beecham has granted to the
Company an exclusive sublicenseable license under certain of its patents and
know-how with respect to genes and gene products for use as diagnostics
through September 2, 2001. In September 1997, the Company also entered into a
Collaborative LifeSeq Agreement and a Collaborative PathoSeq Database
Agreement with Incyte. Under these agreements, as amended and described below,
Incyte has provided the Company with non-exclusive
74
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
access to certain of its gene sequence and expression databases for research,
diagnostic and therapeutic applications until September 2003. These non-cash
assets received as capital contributions from SmithKline Beecham and Incyte
were recorded at zero value, which was equal to the carrying value of such
assets by SmithKline Beecham and Incyte.
Under the Collaboration and License Agreement as currently in effect, the
Company pays no milestones, royalties or other payments to SmithKline Beecham
but is obligated to pay pass-through royalties to Human Genome Sciences on
sales of products derived from the use of genes discovered by Human Genome
Sciences. In addition, although the Company has no plans to develop any
therapeutic products based on SmithKline Beecham's intellectual property, in
the event the Company does so, SmithKline Beecham has an exclusive license to
the Company's know-how or patents related to any such therapeutic products
until September 2005. In order to license the Company's products under this
arrangement, SmithKline Beecham must make milestone payments of up to an
aggregate of $4,000,000 for each patented product and up to an aggregate of
$1,600,000 for each product for which a patent is pending. As of December 31,
2000, no such milestone payments have been received or recognized by the
Company.
On September 28, 1998, the Company entered into a Service Agreement with
SmithKline Beecham. Under this agreement, SmithKline Beecham provided the
Company personnel support to identify diagnostic leads and research for a
period of one year. Pursuant to this agreement, the Company incurred costs
which were charged to research and development of $50,000 and $150,000 during
the years ended December 31, 1998 and 1999, respectively. No such costs were
incurred during the year ended December 31, 2000.
On November 1, 1998, the Company entered into a GEM Services Agreement with
Incyte which was subsequently amended on September 1, 1999, pursuant to which
the Company obtains gene preparation and expression services from Incyte which
the Company uses to generate gene expression information and data. The Company
paid Incyte for its services pursuant to a pricing schedule for the production
of standard and custom microarrays, which pricing schedule was substantially
similar to that contained in GEM Services Agreements between Incyte and
unrelated third parties. The GEM Services Agreement expired on November 1,
2000. Pursuant to this agreement, the Company incurred costs which were
charged to research and development of $72,000, $1,479,000 and $95,000 during
the years ended December 31, 1998, 1999 and 2000, respectively.
In February 1999, the Company entered into a license agreement with
SmithKline Beecham Clinical Laboratories, Inc. Under the agreement, SmithKline
Beecham obtained licenses from the Company with respect to the Company's
technology for a potential molecular target for prostate cancer. Later during
1999, testing of this molecular target was discontinued and the parties agreed
that no additional work under the agreement was appropriate. Accordingly, the
non-refundable license fee of $100,000 was recognized as revenue in 1999.
In July 1999, the Company issued two convertible notes payable in the
amount of $2,500,000 each to SmithKline Beecham and Incyte. The notes were due
and payable in April 2000, accruing interest at 5.6% per annum. Upon closing
the Series C financing, the note to SmithKline Beecham was converted to
322,580 shares of Series C Preferred Stock. Additionally, the Company paid
interest of $97,000 on the note to SmithKline Beecham and paid Incyte
principal of $2,500,000 and accrued interest of $97,000.
In December 1999, the Company entered into a LifeArray Software License
Agreement with Incyte. Under this agreement, the Company has access to
computer software from Incyte for the processing and analysis of microarray
expression data for a period of 12 months, with the option to extend for an
additional 12 month term. The license fee for the use of the software is
$75,000 per year.
In February 2000, the Company entered into a Collaborative Agreement with
Incyte to replace and expand the rights that existed under the 1997
Collaborative LifeSeq and 1997 Collaborative PathSeq Database
75
DIADEXUS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Agreements. Under this new agreement the Company retained access to Incyte's
human database, LifeSeq Gold, and microbial database, PathoSeq, at no
subscription cost until September 2, 2003. Under the agreement, along with
other database subscribers, the Company has non-exclusive access to database
products and database patents for research, the diagnostic field of use and
the pharmaceutical field of use. Additionally, the Company has an option to
exclusively license in the future certain Incyte patents in the pharmaceutical
field of use. The Company may pay up to an aggregate of $4,622,500 in
licensing fees and milestone payments for each therapeutic product and up to
an aggregate of $2,385,000 in licensing fees and milestone payments for each
antisense product, in addition to royalty payments on the sale of these
products. As of December 31, 2000, no licensing fees or milestone payments
have been paid or recognized by the Company.
Pursuant to the 1997 Collaboration and License Agreement and the 2000
Collaborative Agreement, the Company has committed to purchase $5,000,000 in
gene sequencing and microarray services from Incyte, including services
obtained under the GEM Services Agreement. As of December 31, 2000, the
Company has fulfilled all of its purchase commitments to Incyte under these
agreements.
Pursuant to an Intercompany Services Agreement, SmithKline Beecham and
Incyte provided the Company with certain legal, financial and research and
development services. Charges to the Company for these services were based
upon either actual costs or rates charged to other customers for similar
services. Such amounts, which were charged to research and development, were
$0, $0 and $86,000 in 2000, 1999 and 1998, respectively. Pursuant to the 1997
Collaboration and License Agreement, and the Collaborative Agreement with
Incyte, the Company incurred costs which were charged to research and
development of $72,000, $1,928,000 and $2,600,000 during the years ended
December 31, 1998, 1999 and 2000, respectively.
Note 8--Subsequent Events:
Employee Stock Purchase Plan
The Company's Board of Directors adopted the 2000 Employee Stock Purchase
Plan (the "2000 ESPP") on February 2, 2001, which was approved by the
Company's stockholders on February 5, 2001. The Board approved a total of
350,000 shares of Common Stock for issuance under the 2000 ESPP.
2001 Equity Incentive Plan
The Company's Board of Directors adopted the 2001 Equity Incentive Plan
(the "2001 Plan") on February 2, 2001, which was approved by the Company's
stockholders on February 5, 2001, as a successor equity plan to the 2000 Plan.
Under the 2001 Plan, a total of 3,543,995 shares of Common Stock have been
reserved for issuance, including 1,043,995 shares that remained reserved for
issuance under the 2000 Plan.
76
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable.
77
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 2001 Annual Meeting of Stockholders to be held on
June 5, 2001 (the "Proxy Statement").
Item 415 of Regulation S-K calls for disclosure of any known late filing or
failure by an insider to file a report required by Section 16(a) of the
Exchange Act. This disclosure is contained in the section entitled "Section
16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement and is
incorporated herein by reference.
The executive officers of the Company are as follows:
Roy A. Whitfield, age 47, co-founded the Company and has been Chief
Executive Officer 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 between April 1991 and October 1995.
Previously, Mr. Whitfield served as the President of Ideon Corporation, which
was a majority-owned subsidiary of Invitron Corporation, a biotechnology
company, from October 1989 until April 1991. From 1984 to 1989, he held senior
operating and business development positions with Technicon Instruments
Corporation, a medical instrumentation company, and its predecessor company,
CooperBiomedical, Inc., a biotechnology and medical diagnostics company. Prior
to his work at Technicon, Mr. Whitfield spent seven years with the Boston
Consulting Group's international consulting practice. Mr. Whitfield received a
B.S. with first class honors in Mathematics from Oxford University, and an
M.B.A. with distinction from Stanford University. Mr. Whitfield is a director
of Aurora Biosciences Corporation and Inhale Therapeutics Systems, Inc.
Michael D. Lack, age 49, has been the Chief Operating Officer of the
Company since July 1999. Prior to joining the Company, Mr. Lack was the
President and Chief Executive Officer of Silicon Valley Networks from July
1998 to July 1999. Previously, Mr. Lack served as Chief Executive Officer with
several software startup companies, including Aqueduct Software from July 1997
to July 1998 and Presidio Systems, Inc. from May 1994 to May 1997. He also
held various senior positions with Cadence Design Systems, Inc., including
Senior Vice President of Product Operations, Division President of Integrated
Circuit Design, and Division President of Systems. Mr. Lack received his B.S.
in Physics from the University of California, Los Angeles.
John M. Vuko, age 50, joined the Company as the Executive Vice President
and Chief Financial Officer in December 1999. Prior to joining the Company,
Mr. Vuko was the primary financial consultant of an affiliate of Achievement
Radio Holdings, Inc. from October 1998 to December 1999. From April 1997 to
September 1998, Mr. Vuko served as the Senior Vice President and Chief
Financial Officer of Achievement Radio Holdings, Inc. From October 1989 to
March 1997, Mr. Vuko served in various positions with Ross Stores, Inc., most
recently as Senior Vice President and Chief Financial Officer. Prior to his
work at Ross Stores, Mr. Vuko held the positions of Corporate Development
Executive, Vice President, Treasurer, and Controller with the Cooper family of
companies, including CooperVision, Inc., Cooper LaserSonics, Inc. and The
Cooper Companies, Inc. Mr. Vuko received his B.A. in Accounting from San
Francisco State University.
James R. Neal, age 45, has been the Executive Vice President of Sales and
Marketing since July 1999. From July 1997 to immediately prior to joining
Incyte, Mr. Neal served as General Manager of the Solaris Group, a division of
Monsanto Company. From 1982, he also held various positions with Monsanto,
including Vice President of Global Business Development, Director of Brand
Marketing and Residential Products, and Manager of New Product Introduction.
Mr. Neal received his B.S. in Biology and his M.S. in Genetics and Plant
Breeding from the University of Manitoba, Canada as well as an Executive
M.B.A. from Washington University, St. Louis.
78
E. Lee Bendekgey, age 43, has been General Counsel of the Company since
January 1998 and served as the Interim Chief Financial Officer from June 1999
until December 1999. Mr. Bendekgey became the Secretary of the Company in June
1998 and Executive Vice President in June 1999. Prior to joining the Company,
Mr. Bendekgey was the Director of Strategic Relations at Silicon Graphics,
Inc. July 1997 through December 1997. He held various positions with SGI from
March 1993 through June 1997, including Director of Legal Services, Products
and Technology; Senior Counsel, Product Divisions; Group Counsel, Computer
Systems Group; and Division Counsel, MIPS Technologies, Inc. From 1982 to
1993, Mr. Bendekgey held associate and partner positions with Graham & James,
a law firm in San Francisco, where he specialized in intellectual property
protection and licensing. Mr. Bendekgey received his B.A. magna cum laude in
Political Science and French from Kalamazoo College and his J.D. from Stanford
University.
James P. Merryweather, Ph.D., age 50, has been the Executive Vice President
of Business Development since November 2000. He served as Senior Vice
President of Client Business Management from July 1999 until November 2000 and
served as Vice President of Partnership Programs from March 1999 until July
1999. Prior to joining the Company, Dr. Merryweather was the Vice President of
Program Management at Millennium Pharmaceuticals, Inc. from September 1996
until November 1998. Prior to joining Millennium Pharmaceuticals, Dr.
Merryweather was Director of Project Management at Chiron Corporation. Dr.
Merryweather held various positions at Chiron from November 1981, including
Senior Scientist, Research Leader and Director of Regulatory Affairs. Dr.
Merryweather received his Ph.D. in Biochemistry from Washington State
University.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the
information under the captions "Election of Directors--Compensation of
Directors" and "Executive Compensation," contained in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from the
information under the captions "Election of Directors--Compensation of
Directors" and "Executive Compensation," contained in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Not applicable.
79
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) Financial Statements
Reference is made to the Index to Consolidated Financial Statements of
Incyte Genomics, Inc. and the Index to Financial Statements of diaDexus,
Inc., under Item 8 of Part II hereof.
(2) Financial Statement Schedules
The following financial statement schedule of Incyte Genomics, Inc. is
filed as part of this Form 10-K included in Item 8 of Part II:
Schedule II--Valuation and Qualifying Accounts for each of the three
years in the period ended December 31, 2000.
All other financial statement schedules have been omitted because they are
not applicable or not required or because the information is included
elsewhere in the Consolidated Financial Statements or the Notes thereto.
(3) Exhibits
See Item 14(c) below. Each management contract or compensatory plan or
arrangement required to be filed has been identified.
(b) Reports on Form 8-K.
The Company filed the following reports on Form 8-K during the fiscal
quarter ended December 31, 2000:
(i) Current Report on Form 8-K on October 4, 2000, reporting under item
5 a description of legal proceedings relating to Incyte Genomics,
Inc. and its wholly owned subsidiary Synteni, Inc. that updates and
revises the description set forth under Item 1 of Part II of the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2000.
(ii) Current Report on Form 8-K on December 21, 2000, reporting under
item 5 the Company announced that it entered into an agreement to
acquire Proteome, Inc., a privately held company based in Beverly,
Massachusetts.
(c) Exhibits
Exhibit
Number Description of Document
------- -----------------------
3(i)(a)* Restated Certificate of Incorporation, as amended.
3(i)(b) Certificate of Designation of Series A Participating Preferred
Stock, (incorporated by reference to the Company's Annual Report
on 10-K for the year ended December 31, 1998).
3(ii) Bylaws of the Company, as amended (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 filed September 30, 1998).
80
Exhibit
Number Description of Document
------- -----------------------
4.3 Indenture dated as of February 4, 2000 between the Company and State
Street Bank and Trust Company of California, N.A., as trustee
(incorporated by reference to the exhibit of the same number to the
Company's Annual Report on Form 10-K for the year ended December
31, 1999).
10.1# 1991 Stock Plan of Incyte Pharmaceuticals, Inc., as amended and
restated (the "Plan") (incorporated by reference to Exhibit 10.18
to the Company's Registration Statement on Form S-8 (File
No. 333-83291)).
10.2# Form of Incentive Stock Option Agreement under the Plan
(incorporated by reference to the exhibit of the same number to the
Company's Registration Statement on Form S-1 (File No. 33-68138)).
10.3# Form of Nonstatutory Stock Option Agreement under the Plan
(incorporated by reference to the exhibit of the same number to the
Company's Registration Statement on Form S-1 (File No. 33-68138)).
10.4# Amended and Restated 1993 Directors' Stock Option Plan of Incyte
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 officers (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (File No. 33-68138)).
10.6 Lease Agreement dated December 8, 1994 between the Company and
Matadero Creek (incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1994).
10.9 Stock Purchase Agreement dated as of June 22, 1994 between the
Company and Pfizer Inc (incorporated by reference to Exhibit B to
the Company's Current Report on Form 8-K dated June 23, 1994).
10.10 Registration Rights Agreement dated as of June 22, 1994 between the
Company and Pfizer Inc (incorporated by reference to Exhibit C to
the Company's Current Report on Form 8-K dated June 23, 1994).
10.11 Stock Purchase Agreement dated as of November 30, 1994 between the
Company and The Upjohn Company (incorporated by reference to
Exhibit B to the Company's Current Report on Form 8-K dated
November 30, 1994, as amended by Form 8-K/A filed with the
Commission on March 27, 1995).
10.12 Registration Rights Agreement dated as of November 30, 1994 between
the Company and The Upjohn Company (incorporated by reference to
Exhibit C to the Company's Current Report on Form 8-K dated
November 30, 1994).
10.13 Registration Rights Agreement dated as of February 4, 2000 among the
Company and Deutsche Bank Securities Inc. and Warburg Dillon Read
LLC (incorporated by reference to the exhibit of the same number to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1999).
10.14 Lease Agreement dated June 19, 1997 between the Company and The
Board of Trustees of the Leland Stanford Junior University
(incorporated by reference to the exhibit of the same number to the
Company's Annual Report on Form 10-K for the year ended December
31, 1999).
10.15# 1997 Employee Stock Purchase Plan of Incyte Pharmaceuticals, Inc.
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-8 (File No. 333-31409)).
81
Exhibit
Number Description of Document
------- -----------------------
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). [Still relevant?]
10.18# 1996 Synteni, Inc. Equity Incentive Stock Plan (incorporated by
reference to Exhibit 10.19 to the Company's Registration Statement
on Form S-8 (File No. 333-46639)).
10.19# The Hexagen Limited Unapproved Company Share Option Plan 1996, as
amended (incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-8 (File No. 333-67691)).
10.20 Stock Purchase Agreement dated as February 24, 2000 between the
Company and the investors named therein (incorporated by reference
to the exhibit of the same number to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999).
10.21 Registration Rights Agreement, dated as of December 28, 2000, by and
among the Company and the Stockholders of Proteome, Inc.
(incorporated by reference to Exhibit 99.1 to the Company's Current
Report on Form 8-K filed January 10, 2001).
10.22# 1998 Employee, Director and Consultant Stock Option Plan of
Proteome, Inc., as amended (incorporated by reference to Exhibit
99.1 to the Company's Registration Statement on Form S-8 filed
January 29, 2001 (File No. 333-54496)).
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 83 of this Form 10-K).
- --------
* Filed herewith
+ Confidential treatment has been granted with respect to certain portions of
these agreements.
# Indicates management contract or compensatory plan or arrangement.
(d) Financial Statements and Schedules
Reference is made to Item 14(c)(2) above.
82
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INCYTE GENOMICS, INC.
Date: March 29, 2001
/s/ Roy A. Whitfield
By: _________________________________
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, E. Lee Bendekgey, and John M.
Vuko, and each of them, his true and lawful attorneys-in-fact, each with full
power of substitution, for him or her in any and all capacities, to sign any
amendments to this report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or their substitute or substitutes may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Roy A. Whitfield Chief Executive Officer March 29, 2001
____________________________________ (Principal Executive
Roy A. Whitfield Officer) and Director
/s/ John M. Vuko Chief Financial Officer March 29, 2001
____________________________________ (Principal Financial
John M. Vuko Officer)
/s/ Timothy G. Henn Vice President, Finance and March 29, 2001
____________________________________ Corporate Controller
Timothy G. Henn (Principal Accounting
Officer)
/s/ Randal W. Scott Chairman of the Board March 29, 2001
____________________________________
Randal W. Scott
/s/ Jeffrey J. Collinson Director March 29, 2001
____________________________________
Jeffrey J. Collinson
/s/ Barry M. Bloom Director March 29, 2001
____________________________________
Barry M. Bloom
83
Signature Title Date
--------- ----- ----
/s/ Frederick B. Craves Director March 29, 2001
____________________________________
Frederick B. Craves
/s/ Jon S. Saxe Director March 29, 2001
____________________________________
Jon S. Saxe
84
EXHIBIT INDEX
Exhibit
Number Description of Document
------- -----------------------
3(i)(a)* Restated Certificate of Incorporation, as amended.
3(i)(b) Certificate of Designation of Series A Participating Preferred
Stock, (incorporated by reference to the Company's Annual Report on
10-K for the year ended December 31, 1998).
3(ii) Bylaws of the Company, as amended (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
filed September 30, 1998).
4.3 Indenture dated as of February 4, 2000 between the Company and State
Street Bank and Trust Company of California, N.A., as trustee
(incorporated by reference to the exhibit of the same number to the
Company's Annual Report on Form 10-K for the year ended December
31, 1999).
10.1# 1991 Stock Plan of Incyte Pharmaceuticals, Inc., as amended and
restated (the "Plan") (incorporated by reference to Exhibit 10.18
to the Company's Registration Statement on Form S-8 (File
No. 333-83291)).
10.2# Form of Incentive Stock Option Agreement under the Plan
(incorporated by reference to the exhibit of the same number to the
Company's Registration Statement on Form S-1 (File No. 33-68138)).
10.3# Form of Nonstatutory Stock Option Agreement under the Plan
(incorporated by reference to the exhibit of the same number to the
Company's Registration Statement on Form S-1 (File No. 33-68138)).
10.4# Amended and Restated 1993 Directors' Stock Option Plan of Incyte
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 officers (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (File No. 33-68138)).
10.6 Lease Agreement dated December 8, 1994 between the Company and
Matadero Creek (incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1994).
10.9 Stock Purchase Agreement dated as of June 22, 1994 between the
Company and Pfizer Inc (incorporated by reference to Exhibit B to
the Company's Current Report on Form 8-K dated June 23, 1994).
10.10 Registration Rights Agreement dated as of June 22, 1994 between the
Company and Pfizer Inc (incorporated by reference to Exhibit C to
the Company's Current Report on Form 8-K dated June 23, 1994).
10.11 Stock Purchase Agreement dated as of November 30, 1994 between the
Company and The Upjohn Company (incorporated by reference to
Exhibit B to the Company's Current Report on Form 8-K dated
November 30, 1994, as amended by Form 8-K/A filed with the
Commission on March 27, 1995).
10.12 Registration Rights Agreement dated as of November 30, 1994 between
the Company and The Upjohn Company (incorporated by reference to
Exhibit C to the Company's Current Report on Form 8-K dated
November 30, 1994).
85
Exhibit
Number Description of Document
------- -----------------------
10.13 Registration Rights Agreement dated as of February 4, 2000 among the
Company and Deutsche Bank Securities Inc. and Warburg Dillon Read LLC
(incorporated by reference to the exhibit of the same number to the
Company's Annual Report on Form 10-K for the year ended December 31,
1999).
10.14 Lease Agreement dated June 19, 1997 between the Company and The Board
of Trustees of the Leland Stanford Junior University (incorporated by
reference to the exhibit of the same number to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999).
10.15# 1997 Employee Stock Purchase Plan of Incyte 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). [Still relevant?]
10.18# 1996 Synteni, Inc. Equity Incentive Stock Plan (incorporated by
reference to Exhibit 10.19 to the Company's Registration Statement on
Form S-8 (File No. 333-46639)).
10.19# The Hexagen Limited Unapproved Company Share Option Plan 1996, as
amended (incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-8 (File No. 333-67691)).
10.20 Stock Purchase Agreement dated as February 24, 2000 between the
Company and the investors named therein (incorporated by reference to
the exhibit of the same number to the Company's Annual Report on Form
10-K for the year ended December 31, 1999).
10.21 Registration Rights Agreement, dated as of December 28, 2000, by and
among the Company and the Stockholders of Proteome, Inc.
(incorporated by reference to Exhibit 99.1 to the Company's Current
Report on Form 8-K filed January 10, 2001).
10.22# 1998 Employee, Director and Consultant Stock Option Plan of Proteome,
Inc., as amended (incorporated by reference to Exhibit 99.1 to the
Company's Registration Statement on Form S-8 filed January 29, 2001
(File No. 333-54496)).
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 83 of this Form 10-K).
- --------
* Filed herewith
+ 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 to: Investor Relations, Incyte Genomics, Inc.,
3160 Porter Drive, Palo Alto, CA 94034.
86