<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
Filed Pursuant to Rule 424(a)
File No. 333-32258
SUBJECT TO COMPLETION, DATED MARCH 13, 2000
[LOGO]
2,000,000 COMMON SHARES
Visible Genetics Inc. is offering 2,000,000 of its common shares. Our common
shares are traded on the Nasdaq National Market under the symbol "VGIN." On
March 9, 2000, the last reported sale price for the common shares on the Nasdaq
National Market was $93.00 per share.
--------------
INVESTING IN OUR COMMON SHARES INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price...................................... $ $
Underwriting Discounts and Commissions..................... $ $
Proceeds to Visible Genetics............................... $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Visible Genetics Inc. has granted the underwriters a 30-day option to
purchase up to an additional 300,000 common shares to cover over-allotments.
--------------
ROBERTSON STEPHENS
PAINEWEBBER INCORPORATED
WARBURG DILLON READ LLC
<PAGE>
ROTH CAPITAL PARTNERS, INC.
The date of this Prospectus is , 2000
<PAGE>
[INSERT PICTURE FOR INSIDE FRONT COVER]
Description of Picture Heading is entitled "The OpenGene-TM- Automated DNA
Sequencing System"
Picture of our hardware and list of the components constituting the hardware
Picture of our software and list of the components constituting the software
A picture of our TRUGENE test kit and a list of our test kits
Our company logo
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF
DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF THE COMMON SHARES. IN THIS
PROSPECTUS, REFERENCES TO "VISIBLE GENETICS," "WE," "US" AND "OUR" REFER TO
VISIBLE GENETICS INC. AND ITS SUBSIDIARIES.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 4
Forward-Looking Statements.................................. 19
Use of Proceeds............................................. 20
Price Range of Common Shares................................ 20
Dividend Policy............................................. 20
Capitalization.............................................. 21
Dilution.................................................... 22
Selected Consolidated Financial Data........................ 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Business.................................................... 31
Management.................................................. 51
Principal Shareholders...................................... 54
Underwriting................................................ 55
Description of Capital Shares............................... 58
Legal Matters............................................... 61
Experts..................................................... 61
Where You Can Find More Information......................... 61
Incorporation of Certain Documents by Reference............. 62
Index to Consolidated Financial Statements.................. F-1
</TABLE>
------------------------
TRADEMARKS OR TRADE NAMES OF VISIBLE GENETICS USED IN THIS PROSPECTUS
INCLUDE: CLIP-TM-, CLIPPER-TM-, GEL TOASTER-TM-, GENEKIT-TM-, GENEOBJECTS-TM-,
LONG-READ MICROCEL-TM-, LONG-READ TOWER-TM-, MICROCEL-TM-, OPENGENE-TM-,
SUREFILL-TM-, TRUGENE-TM- AND VISIBLE GENETICS-REGISTERED TRADEMARK-. EACH
TRADEMARK, TRADE NAME OR SERVICE MARK OF ANY OTHER COMPANY APPEARING IN THIS
PROSPECTUS BELONGS TO ITS HOLDER.
FORWARD LOOKING INFORMATION
Some of the matters discussed under the captions "Summary," "Risk Factors"
and elsewhere in this prospectus may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. This
information may involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by these forward-looking statements.
<PAGE>
SUMMARY
BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION THAT
MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, ESPECIALLY "RISK
FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES, BEFORE DECIDING TO
INVEST IN OUR COMMON SHARES. ALL FINANCIAL INFORMATION PROVIDED IN THIS
PROSPECTUS IS IN U.S. DOLLARS. EXCEPT WHERE WE STATE OTHERWISE, THE INFORMATION
PRESENTED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION.
OUR COMPANY
We develop, manufacture and sell integrated DNA sequencing systems that
analyze genetic information to improve the treatment of selected diseases. Our
strategy is to become a leader in the emerging field of pharmacogenomics.
Pharmacogenomics is the science of individualizing therapy based on genetic
differences across patients. Our genotyping technology, which employs DNA
sequencing, enables the analysis in the clinical diagnostic laboratory of
individual genetic variations. Genotyping is the act of selecting and reading
certain components of the sequence of a specific strand of DNA in order to
understand how mutations in the DNA may influence the onset and treatment of
some diseases and medical conditions. DNA sequencing is generally considered the
most thorough and accurate method for genotyping diseases. We believe that
individualizing therapy through pharmacogenomics will improve the treatment of
many diseases, such as Human Immunodeficiency Virus, or HIV, hepatitis B,
hepatitis C, tuberculosis and eventually some cancers.
Our OpenGene System consists of automated DNA sequencers, disposable gel
cassettes, related equipment and software and disease-specific GeneKits. Our
GeneKits contain the necessary chemicals, reagents, third-party licenses and
other consumables and materials required for sequencing specific
disease-associated genes. We have developed GeneKits for HIV and HLA (used for
tissue typing, for example, in organ transplants). We are developing GeneKits
for hepatitis B, hepatitis C and tuberculosis. We began selling our DNA
sequencers and related equipment and consumables to the research and clinical
research markets in the third quarter of 1996 and began selling GeneKits into
the same markets in the third quarter of 1997.
The first clinical diagnostic application we are targeting is HIV. We have
developed our HIV GeneKit to enable clinicians to genotype the major HIV species
infecting patients in order to improve the management of patient treatment. HIV
is a highly variable virus with high rates of mutations, which may lead to drug
resistance. One of the central challenges in maintaining HIV patients on
long-term drug therapy is to adjust each patient's medication as drug-resistant
strains of the virus emerge.
Two initial clinical trials, including one that we conducted, have shown
that patients whose drug therapy is managed using HIV genotyping had greater
reductions in viral load than HIV patients who were not genotyped. In June 1999,
we completed a European trial, which we call VIRADAPT, which showed, among other
things, that after six months patients who received standard of care treatment
and underwent periodic genotyping had a mean decrease in viral load of
approximately 93% as compared to a mean decrease in viral load of approximately
79% in the non-genotyping group. In addition, after 6 months, 32% of the
patients in the genotyping group had undetectable viral loads as compared to 14%
of patients in the non-genotyping group. The other trial, called GART, was
funded by the National Institutes of Health, or NIH, and was completed in the
United States in December 1998. It showed that, at the end of 8 weeks, patients
who received standard of care treatment and underwent periodic genotyping had a
mean decrease in viral load of approximately 93%, as compared to 76% to patients
in the non-genotyping group.
Also in June 1999, we initiated a trial called SEARCH to test the clinical
utility of our HIV OpenGene System in genotyping HIV infected patients. Based on
the results from the VIRADAPT and GART clinical trials, the FDA has advised us
that we are not required to complete the SEARCH trial and has indicated that we
will not be required to demonstrate further the clinical utility of our HIV
OpenGene System in the treatment of HIV infected individuals. We plan to apply
to the FDA during 2000 for approval to sell our HIV OpenGene System to the
clinical diagnostic market.
1
<PAGE>
OUR STRATEGY
Our objective is to be a leader in the emerging field of pharmacogenomics.
Our goal is to enable clinicians to use genetic information to monitor and
customize treatment of diseases, initially for HIV and later for other diseases.
Key elements of our business strategy are to:
- provide an integrated genotyping solution for the clinical diagnostic
market;
- target the HIV genotyping market;
- leverage our OpenGene System for additional applications;
- offer a wide range of testing and sequencing services;
- provide sophisticated software for the clinical research and diagnostic
markets;
- tailor our marketing efforts to local markets; and
- maintain our technological leadership in genotyping.
OUR ADDRESS
Our principal executive offices are located at 700 Bay Street, Suite 1000,
Toronto, Ontario, Canada M5G 1Z6. Our telephone number is (416) 813-3240.
THE OFFERING
<TABLE>
<S> <C>
Common shares offered by Visible Genetics.... 2,000,000 common shares
Common shares outstanding after the 14,785,419 common shares
offering...................................
Use of proceeds.............................. For working capital and other general
corporate purposes
Nasdaq National Market symbol................ VGIN
</TABLE>
The number of our common shares outstanding after this offering is based on
12,785,419 common shares outstanding as of February 29, 2000. It excludes
2,447,886 common shares reserved for issuance under our stock option plans, of
which 1,946,474 common shares were subject to outstanding options as of
February 29, 2000 at a weighted average exercise price of $9.60 per common
share. It also excludes 952,118 common shares that may be issued upon exercise
of outstanding warrants and 3,259,748 common shares issuable upon conversion of
our Series A preferred shares as of February 29, 2000. The number of common
shares issuable upon conversion of our Series A preferred shares will increase
as the dividends payable thereon accrue. After giving effect to this offering,
the number of voting shares outstanding as of February 29, 2000 is 18,045,167.
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THIS TABLE SUMMARIZES OUR STATEMENTS OF OPERATIONS DATA AND OUR BALANCE
SHEET DATA. THE AS ADJUSTED BALANCE SHEET DATA REFLECTS THE SALE BY VISIBLE
GENETICS OF 2,000,000 COMMON SHARES IN THE OFFERING AT AN ASSUMED PUBLIC
OFFERING PRICE OF $93.00 AND THE RECEIPT OF THE NET PROCEEDS OF THE OFFERING.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Sales.................................. $ -- $ 978 $ 3,033 $ 10,875 $ 13,627
Cost of sales.......................... -- 561 1,995 6,673 9,273
---------- ---------- ---------- ---------- ----------
Gross margin........................... -- 417 1,038 4,202 4,354
Sales, general and administrative
expense.............................. 1,476 3,377 7,448 11,516 19,074
Research and development expense....... 1,241 2,745 4,123 6,289 7,935
Other expense.......................... -- -- 654 420 1,329
---------- ---------- ---------- ---------- ----------
Loss from operations before interest... (2,717) (5,705) (11,187) (14,023) (23,984)
Interest income........................ 12 609 774 264 695
Interest and financing expense......... (19) (69) (3) (1,132) (1,998)
---------- ---------- ---------- ---------- ----------
Net loss............................... (2,724) (5,165) (10,416) (14,891) (25,287)
Cumulative preferred dividends and
accretion of discount attributable to
preferred shares..................... -- -- -- -- (1,770)
---------- ---------- ---------- ---------- ----------
Net loss attributable to common
shareholders......................... $ (2,724) $ (5,165) $ (10,416) $ (14,891) $ (27,057)
========== ========== ========== ========== ==========
Net loss per common share.............. $ (0.65) $ (0.89) $ (1.48) $ (1.91) $ (2.73)
Weighted average number of common
shares outstanding................... 4,181,599 5,791,367 7,059,578 7,782,094 9,916,954
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------
AS
ACTUAL ADJUSTED
-------- --------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments........................... $ 42,688 $218,738
Working capital........................................... 45,611 221,661
Total assets.............................................. 58,640 234,690
Mandatorily redeemable convertible preferred shares....... 27,556 27,556
Accumulated deficit....................................... (59,438) (59,438)
Shareholders' equity...................................... 24,351 200,401
</TABLE>
3
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON SHARES IS VERY RISKY. YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISK FACTORS IN ADDITION TO THE REMAINDER OF THIS
PROSPECTUS BEFORE PURCHASING OUR COMMON SHARES. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. MANY FACTORS,
INCLUDING THOSE DESCRIBED BELOW, MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM ANTICIPATED RESULTS.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE
PROSPECTS AND OUR PROSPECTS MUST BE CONSIDERED IN LIGHT OF THE DIFFICULTIES
FREQUENTLY ENCOUNTERED BY COMPANIES IN THE EARLY STAGES OF COMMERCIAL
MANUFACTURING AND MARKETING.
Although we began operations in 1993, we are only in the early stages of
commercially manufacturing and marketing our products. In late 1996, we began
manufacturing and selling to the research and clinical research markets, the
initial versions of our automated DNA sequencers and related products. Our
limited operating history makes it difficult to evaluate our business and our
prospects for future profitability. Our prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in the
early stages of commercial manufacturing and marketing. Sales for our fiscal
year ended December 31, 1999 were $13.6 million. In the future, sales may not
increase or they may decrease.
WE HAVE A HISTORY OF LOSSES, WE ANTICIPATE ADDITIONAL LOSSES AND WE MAY NEVER
BECOME PROFITABLE.
We incurred a net loss of $25.3 million in the year ended December 31, 1999.
As of December 31, 1999, our accumulated deficit was $59.4 million. Our losses
have resulted principally from expenses incurred in research and development of
our technology and products, and from expenses that we have incurred while
building our business infrastructure. We expect to continue to incur significant
operating losses in the future as we continue our research and development
efforts and clinical trials and expand our sales and marketing force and
business infrastructure, in an effort to achieve greater sales and expand our
business. It is uncertain when, if ever, we will become profitable. Our ability
to become profitable will depend on many factors including, among others:
- whether we obtain regulatory approval to sell our HIV OpenGene System and,
in the future, OpenGene Systems for other diseases, to the clinical
diagnostic market in the United States and abroad;
- the decision of third-party payors to reimburse clinicians and patients
for use of our HIV GeneKit and, in the future, our other products;
- our ability to successfully market and sell our HIV OpenGene System and,
in the future, OpenGene Systems for other diseases, to the clinical
diagnostic market;
- our ability to increase sales of our products to the research and clinical
research markets;
- our ability to effectively manage the growth of our business;
- our ability to continue to develop advanced versions of our products and
technologies and new products and technologies in a timely manner; and
- our ability to manufacture our products according to schedule and within
budget.
OUR OPERATING RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER DUE TO MANY FACTORS
AND, THEREFORE, YOU SHOULD NOT RELY ON PERIOD TO PERIOD COMPARISONS OF OUR
OPERATING RESULTS AS AN INDICATION OF FUTURE PERFORMANCE.
Our operating results have varied on a quarterly basis in the past and may
fluctuate significantly in the future as a result of a variety of factors, many
of which are outside our control. Factors that may affect our quarterly
operating results include, among others:
4
<PAGE>
- unanticipated costs or delays in carrying out our clinical trials;
- the amount and timing of operating costs and capital expenditures relating
to research and development, and the expansion of our business, operations
and infrastructure;
- our decision to increase or decrease sales of equipment, GeneKits and
other consumables at reduced prices;
- our decision to reduce prices of our products in response to price
reductions by competitors;
- general economic conditions, as well as economic conditions specific to
the biotechnology industry; and
- unanticipated costs or delays in manufacturing our products.
We believe that period to period comparisons of our operating results may
not be meaningful and you should not rely on any such comparisons as an
indication of our future performance. In addition, it is likely that in one or
more future quarters our operating results will fall below the expectations of
securities analysts and investors. In such event, the market price of our common
shares is likely to fall.
WE MAY NOT RECEIVE APPROVAL OF THE FDA OR FOREIGN REGULATORY AUTHORITIES FOR OUR
HIV OPENGENE SYSTEM AND, IN THE FUTURE, OTHER HIV PRODUCTS, AND, THEREFORE, WE
MAY NOT BE ABLE TO SELL OUR HIV PRODUCTS TO THE CLINICAL DIAGNOSTIC MARKET IN
THE UNITED STATES OR ABROAD.
We intend to seek FDA approval to sell our HIV OpenGene System for clinical
diagnostic purposes in the United States. In the future, we may seek FDA
approval to sell other HIV products for clinical diagnostic purposes in the
United States.
In order to obtain FDA approval for our HIV OpenGene System we must submit
an application supported by extensive human test data demonstrating the utility,
reliability and performance of our HIV GeneKit and OpenGene System. The FDA must
also confirm that we maintain good laboratory, clinical and manufacturing
practices. The FDA approval process is lengthy and expensive. You should be
aware of the following possibilities:
- we may never obtain approval from the FDA to sell our HIV products to the
clinical diagnostic market;
- it may be more expensive and time consuming than we anticipate to develop
the test data needed for the FDA;
- the FDA may disagree with us that the data are adequate, and we may
therefore have to do additional testing;
- the testing may show that our HIV products do not work at all or are not
reliable enough, and therefore cannot be authorized by the FDA, or the
testing may show that our HIV products do not work as well as they need to
for successful marketing, even if marketing is authorized by the FDA;
- the testing may be too costly to carry out, either because we lack
adequate funds or because the market potential for our HIV products does
not justify the costs;
- we may choose or be required to discontinue our clinical trials for a
number of reasons, including unanticipated interim trial reports, changes
in regulations or the adoption of new regulations, unexpected
technological developments by our competitors or problems or delays with
patient enrollment in our trials;
- there may be significant delays in the FDA review process;
- the FDA may approve the sale of our HIV products with conditions that
could limit the market for these products or make them more difficult or
expensive to sell than we anticipate; and
5
<PAGE>
- the FDA can revoke marketing authorization for our products for a variety
of reasons, such as our failure to comply with the FDA's device
requirements or poor product performance in terms of safety and
effectiveness.
If we fail to receive FDA approval, if FDA approval is delayed or if the FDA
imposes conditions that make it difficult to sell or market our products, we
will be unable to carry out our business plan to sell our HIV OpenGene System
for clinical diagnostic use in the United States and our business, financial
condition and results of operations will be materially harmed.
We also may be required to obtain approval from some foreign regulatory
authorities to sell our HIV products to the clinical diagnostic market in
countries outside of the United States. In some cases, we will face an approval
process similar to that required by the FDA. We cannot be certain that we will
obtain the necessary approvals to sell our HIV products to the clinical
diagnostic market in these countries. In some cases, the failure to obtain
approval could materially harm our business, financial condition and results of
operations.
WE PLAN TO SEEK FDA APPROVAL TO MARKET OUR HIV OPENGENE SYSTEM TO THE CLINICAL
DIAGNOSTIC MARKET THROUGH AN APPLICATION PROCESS THAT IS NEW AND INFREQUENTLY
USED, AND IF THE FDA DOES NOT GRANT OUR REQUEST, OUR ABILITY TO SELL OUR HIV
OPENGENE SYSTEM TO THE CLINICAL DIAGNOSTIC MARKET COULD BE DELAYED
SIGNIFICANTLY.
Our HIV OpenGene System is currently regulated as a Class III medical
device. To sell a Class III medical device a company must first get specific
approval of the FDA for the device by submitting a premarket approval
application, commonly known as a PMA. However, an FDA advisory committee
recently recommended that the FDA reclassify HIV genotyping tests from
Class III medical devices to Class II medical devices. To sell a Class II
medical device, a company must first obtain permission of the FDA by submitting
a 510(k) premarket notification, commonly known as a 510(k), showing that the
device is similar to a device already on the market. Generally, a 510(k)
notification to the FDA that a new device is similar to an existing device
requires less data and takes less time for the FDA to process than a PMA. The
FDA is supposed to act on a 510(k) notification within 90 days. By contrast, a
PMA application must be supported by more extensive data to prove the safety and
efficacy of the device, and a review of a PMA application involves a lengthier
process which may take one and one-half years or more from filing.
The FDA usually follows the advice of its advisory committees. However, to
reclassify a device from Class III to Class II, the FDA's administrative process
could take several years. Therefore, it is unlikely that reclassification of HIV
genotyping tests by the FDA would be effected for several years.
We currently plan to attempt to accelerate the reclassification process by
using an alternative provision of the 1997 Food and Drug Administration
Modernization Act. Under this alternative, we will submit a 510(k) notification
to the FDA, which the FDA will reject because our HIV OpenGene System is still a
Class III device. After receipt of the rejection, we will have 30 days to seek
reclassification of our HIV OpenGene System, and the FDA will have 60 days to
rule on this request. If the FDA grants our request, we will be able to
immediately market our HIV OpenGene System to the clinical diagnostic market.
We cannot guarantee that this alternative procedure will be successful in
shortening the time for FDA approval of our HIV OpenGene System. This process is
new and is used very infrequently, and, therefore, there is no assurance that
the FDA will grant our request for reclassification. If the FDA does not grant
our request to reclassify our HIV OpenGene System under this new
reclassification procedure, we either will have to submit a PMA application or
wait until the FDA acts to reclassify HIV genotyping tests as recommended by its
advisory committee. In either event, our ability to sell our HIV OpenGene System
for clinical diagnostic use will be delayed, and our business, financial
condition, and results of operations could be materially harmed.
6
<PAGE>
WE MAY NOT RECEIVE REGULATORY APPROVAL FOR OUR OTHER PRODUCTS AND THEREFORE MAY
NOT BE ABLE TO SELL THESE PRODUCTS FOR CLINICAL DIAGNOSTIC PURPOSES IN THE
UNITED STATES OR ABROAD.
In addition to our HIV OpenGene System, we have also developed and are
continuing to develop GeneKits for other clinical diagnostic applications. In
order to sell these GeneKits to the clinical diagnostic market, we may be
required to obtain the approval of the FDA and of foreign regulatory authorities
through approval procedures that are the same or similar to those required for
our HIV OpenGene System. Our failure to obtain necessary approvals to sell our
products for clinical diagnostic use in one or more significant markets could
cause material harm to our business, financial condition and results of
operations.
EACH TIME WE MAKE ALTERATIONS TO ANY FDA APPROVED PRODUCTS, WE MAY NEED TO SEEK
ADDITIONAL FDA APPROVAL, WHICH WILL LENGTHEN THE TIME AND INCREASE THE COST OF
BRINGING UPGRADED OR NEW PRODUCTS TO MARKET.
We may need to seek additional FDA approval if we make changes to a product
specifically approved by the FDA. Our HIV OpenGene System, as submitted to the
FDA, will contain specific reagents, dyes, enzymes, chemicals, software and
other materials. If we obtain approval through the 510(k) process, we will be
required to obtain prior clearance from the FDA for those product changes that
could significantly affect safety or effectiveness. If our HIV OpenGene System
is approved through the PMA process, the FDA would require that we obtain
additional approval for any change to the kit's components that could alter the
performance of the kit, such as changing certain enzymes or reagents. We also
may be required to obtain similar foreign regulatory approval. To obtain
additional approval, we may have to conduct additional human clinical trials to
demonstrate that the altered GeneKit will produce at least the same results as
the approved GeneKit or will be as safe and effective as the approved product.
Obtaining additional FDA or foreign regulatory approval is likely to be time
consuming and costly and, as a result, we may experience delays in bringing
these upgraded or new products to market.
OUR BUSINESS IS, AND IN THE FUTURE MAY BECOME, SUBJECT TO ADDITIONAL REGULATIONS
AND IF WE ARE UNABLE TO COMPLY WITH THEM OUR BUSINESS MAY BE MATERIALLY HARMED.
Our reference laboratory in Norcross, Georgia, is subject to stringent
regulation under the Clinical Laboratory Improvement Amendments of 1988, known
as CLIA. Under CLIA, laboratories must meet various requirements, including
requirements relating to the validation of tests, training of personnel, and
quality assurance procedures. The laboratory must also be certified by a
government agency. Our Norcross laboratory is certified under CLIA and licensed
by the state of Georgia. Our failure to comply with state or CLIA requirements
can result in various penalties, including loss of certification. The imposition
of such penalties could have an adverse impact on us. In addition, some states
regulate out-of-state laboratories. The failure to comply with these state
requirements could also adversely affect us.
We are or may become subject to various other federal, state, provincial and
local laws, regulations and recommendations. We are subject to various laws and
regulations in Canada, the United States and Europe, relating to product
emissions, use and disposal of hazardous or toxic chemicals or potentially
hazardous substances, infectious disease agents and other materials, and
laboratory and manufacturing practices used in connection with our research and
development activities. If we fail to comply with these regulations, we could be
fined, we may not be able to operate certain of our facilities or certain
portions of our business, and we may suffer other consequences that could
materially harm our business, financial condition or results of operations.
We are unable to predict the extent of future government regulations or
industry standards. You should assume that in the future there may be more
government regulations or standards. New regulations or standards may result in
increased costs, including costs for obtaining permits, delays or fines
resulting from loss of permits or failure to comply with regulations.
7
<PAGE>
THE MARKET FOR GENOTYPING PRODUCTS IS NEW AND GENOTYPING MAY NOT BECOME AN
ACCEPTED METHOD OF MANAGING DRUG TREATMENT.
An important part of our business strategy is our plan to sell our products
to the clinical diagnostic market. Our ability to do so will depend on the
widespread acceptance and use by doctors and clinicians of genotyping to manage
drug treatment of certain diseases or other medical conditions. The use of
genotyping by doctors and clinicians for this purpose is relatively new.
Existing DNA sequencing systems have been designed primarily for research
purposes and we are not aware of any DNA sequencing products that have been
approved by the FDA for clinical diagnostic purposes. We cannot be certain that
doctors and clinicians will want to use DNA sequencing systems designed for
these purposes. If genotyping is not accepted by this market, we will not be
able to carry out our business plan and our business, financial condition and
results of operations will be materially harmed.
IF GENOTYPING IS ACCEPTED AS A METHOD TO MANAGE DRUG TREATMENT, WE CANNOT BE
CERTAIN THAT OUR PRODUCTS WILL BE ACCEPTED IN THE CLINICAL DIAGNOSTIC MARKET.
If genotyping becomes widely accepted in the clinical diagnostic market, we
cannot predict the extent to which doctors and clinicians may be willing to
utilize our OpenGene System to manage drug treatment of selected diseases or
other medical conditions. Doctors and clinicians may prefer competing
technologies and products that can be used for the same purposes as our products
such as other DNA sequencers, DNA probe-based diagnostic systems, chip-based and
assay-based technologies, or homebrew genetic tests. If our products are not
accepted by the clinical diagnostic market, our business, financial condition
and results of operations will be materially harmed.
IF INSURANCE COMPANIES AND OTHER THIRD-PARTY PAYORS DO NOT REIMBURSE DOCTORS AND
PATIENTS FOR OUR PRODUCTS, OUR ABILITY TO SELL OUR PRODUCTS TO THE CLINICAL
DIAGNOSTIC MARKET WILL BE IMPAIRED.
Our ability to successfully sell our HIV GeneKit and other GeneKits to the
clinical diagnostic market will depend partly on the willingness of insurance
companies and other third-party payors to reimburse doctors and patients for use
of our products. Physicians' recommendations to use genotyping, as well as
decisions by patients to pursue genotyping, are likely to be influenced by the
availability of reimbursement for genotyping by insurance companies or other
third-party payors. Government and private third-party payors are increasingly
attempting to contain health care costs by limiting both the extent of coverage
and the reimbursement rate for testing and treatment products and services. In
particular, services that are determined to be investigational in nature or that
are not considered "reasonable and necessary" for diagnosis or treatment may be
denied reimbursement coverage. If adequate reimbursement coverage is not
available from insurers or other third-party payors, we expect that few, if any,
patients would be willing to pay for genotyping. In this case, our anticipated
revenues will be substantially reduced, our ability to achieve profitability
will be significantly impaired and our business, financial condition and results
of operations will be materially harmed.
WE DO NOT HAVE MARKETING EXPERIENCE IN THE CLINICAL DIAGNOSTIC MARKET, WE CANNOT
BE CERTAIN WE WILL SUCCESSFULLY DEVELOP THE MARKETING CAPABILITIES REQUIRED TO
SELL OUR PRODUCTS TO THIS MARKET AND IN SOME MARKETS WE WILL BE DEPENDENT ON THE
EFFORTS OF DISTRIBUTORS TO SELL OUR PRODUCTS.
We have no experience marketing products to the clinical diagnostic market.
If the FDA approves the sale of our HIV OpenGene System and, in the future,
other products, to the clinical diagnostic market in the United States, we
intend to expand our internal sales force to sell products to these markets in
North America and selected other countries. It will take significant time, money
and resources to expand our sales force. We cannot be certain that we will
develop the marketing capabilities necessary to successfully market and sell our
products to the clinical diagnostic market.
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In selected geographic markets outside North America and certain European
countries, beginning in 1999, we entered into distribution and marketing
arrangements with leading distributors to sell our products to the research and
clinical diagnostic markets. These agreements expire at various times from
April 2000 through April 2002, and, in certain cases, are subject to automatic
renewal. Certain of the agreements may also be terminated by either party upon
specified notice periods and may require us to make termination payments under
certain circumstances. Our ability to successfully sell products to the research
and clinical diagnostic markets in countries in which we rely on distribution
agreements will depend to a great extent on the efforts of the distributors.
Failure to successfully market our products will impede our ability to
generate significant revenues and become profitable.
IF WE ARE UNABLE TO CONTINUE DEVELOPING ADVANCED TECHNOLOGY, ADVANCED VERSIONS
OF OUR EXISTING PRODUCTS AND NEW PRODUCTS IN A TIMELY AND COST-EFFECTIVE MANNER,
OUR ABILITY TO GENERATE REVENUE AND BECOME PROFITABLE WILL BE IMPAIRED.
We believe that if we are to generate additional revenue and become
profitable, we must continue to develop advanced technology, advanced versions
of our existing products and new products. These technology and products must be
developed and introduced to the market in a timely and cost-effective manner to
meet both changing customer needs and technological developments. We cannot
assure you that we will be able to successfully or timely develop any new
technology, products or advanced versions of existing products, or that any new
technology, products or advanced versions of existing products will achieve
acceptance in the market. If we are unable to successfully develop new
technology, products or advanced versions of existing products in the future or
if those technologies or products are not accepted in the market, our ability to
generate significant revenues will be significantly impaired, we could
experience additional significant losses and our business, financial condition
and results of operations will be materially harmed.
MANUFACTURING PROBLEMS COULD HAMPER OR DELAY OUR ABILITY TO INTRODUCE OUR
PRODUCTS TO THE MARKETPLACE.
We have limited experience in large-scale assembly and manufacturing of our
products. Since we started assembling and manufacturing operations in 1996, we
have experienced delays, quality control problems and capacity constraints from
time to time. Our plant in Pittsburgh, which manufactures our HIV GeneKit,
currently has a limited production capacity. Our new facility in Atlanta,
Georgia is in the process of being built and equipped in accordance with our
specifications. Construction may take longer than expected, and the planned and
actual construction costs of building and qualifying the facility for regulatory
compliance may be higher than expected.
Any significant delay in making the Atlanta facility operational will limit
our ability to increase production. When we are in a position to increase
production and begin manufacturing and assembling new products, additional
problems may arise. These may include technological, engineering, quality
control and other production difficulties. We may also have difficulty complying
with FDA quality system regulations at each of our facilities. If we experience
these problems, we could be delayed in filling orders, shipping existing
products and introducing new products to the marketplace. These problems could
also adversely affect customer satisfaction and the market acceptance of our
products.
IF WE ARE UNABLE TO SUCCESSFULLY PROTECT OUR INTELLECTUAL PROPERTY OR OBTAIN
CERTAIN LICENSES, OUR COMPETITIVE POSITION WILL BE HARMED.
Our success will partly depend on our ability to obtain patents and licenses
from third parties and protect our trade secrets. We own or jointly own 33 U.S.
patents. We own or jointly own an additional 31 U.S. patent applications
pending, of which seven have been allowed. We own 12 foreign patents. We own or
jointly own foreign applications presently pending as PCT applications, or as
national phase PCT
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applications, designating intergovernmental agencies and multiple countries
including the European Patent Office, Australia, Canada and Japan. We cannot
assure you that our patent applications will result in patents being issued in
the United States or foreign countries. In addition, the U.S. Patent and
Trademark Office may reverse its decision or delay the issuance of patents that
have been allowed. We also cannot assure you that any technologies or products
that we may develop in the future will be patentable. In addition, competitors
may develop products similar to ours that do not conflict with our patents.
Others may challenge our patents and, as a result, our patents could be narrowed
or invalidated. From time to time, we may be required to obtain licenses from
third parties for some of the technology or components used or included in
certain of our GeneKits or other products. We cannot be certain that we will be
able to obtain these licenses on acceptable terms or at all. In certain
instances, if we are unable to obtain a required license, our ability to sell or
use certain products may be impaired.
To help protect our proprietary rights in unpatented trade secrets, we
generally require our employees, consultants and advisors to sign
confidentiality agreements. However, we cannot guarantee that these agreements
will provide us with adequate protection if confidential information is used or
disclosed improperly. In addition, in some situations, these agreements may
conflict with, or be limited by, the rights of third parties with whom our
employees, consultants or advisors have prior employment or consulting
relationships. Further, others may independently develop similar proprietary
information and techniques, or otherwise gain access to our trade secrets.
OTHERS COULD CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH
MAY RESULT IN COSTLY AND TIME CONSUMING LITIGATION.
Our success will also depend partly on our ability to operate without
infringing upon the proprietary rights of others, as well as our ability to
prevent others from infringing on our proprietary rights. We may be required at
times to take legal action in order to protect our proprietary rights. Also,
from time to time, we receive notice from third parties claiming that we may
infringe their patent or other proprietary rights. Despite our best efforts, we
may be sued for infringing on the patent or other proprietary rights of others.
Such litigation is costly, and, even if we prevail, the cost of such litigation
could harm us. If we do not prevail, in addition to any damages we might have to
pay, we could be required to stop the infringing activity or obtain a license.
We cannot be certain that any required license would be available to us on
acceptable terms, or at all. If we fail to obtain a license, or if the terms of
a license are burdensome to us, our business, financial condition and results of
operations could be materially harmed.
Perkin-Elmer Corporation, PE Biosystems Group filed a lawsuit against us in
the United States District Court for the Northern District of California
claiming that our DNA sequencing equipment and products infringe patents
licensed to Perkin-Elmer by the California Institute of Technology. The suit
requests among other remedies that the court enjoin us from continuing to
infringe these patents and an unspecified amount of damages. If Perkin-Elmer is
successful in this suit, we may be unable to manufacture our DNA sequencing
equipment and products without a license from Perkin-Elmer. There can be no
assurance that we would be able to obtain a license for these patents on terms
acceptable to us, or at all. If we fail to obtain a license, or if the terms of
a license are burdensome to us, our business, financial condition and results of
operations could be materially harmed. In addition, monetary damages awarded to
Perkin-Elmer could be substantial, and if so, our business, financial condition
and results of operations could be materially harmed. Dr. Lloyd M. Smith, one of
our directors, is a named inventor on the patents that we are alleged to have
infringed. Dr. Smith indirectly receives royalty payments for those patents from
Perkin-Elmer, through the California Institute of Technology. Dr. Smith is a
co-founder of Third-Wave Technologies Inc., which has announced that it will be
acquired by PE Biosystems in a stock-for-stock transaction. After the closing of
that transaction, Dr. Smith expects to be a consultant to PE Biosystems.
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CERTAIN SUPPLIES AND PARTS THAT WE NEED ARE AVAILABLE ONLY FROM LIMITED SOURCES
AND OUR BUSINESS WILL SUFFER IF WE CANNOT OBTAIN THESE SPECIALIZED ITEMS USED IN
OUR GENEKITS.
Our GeneKits include dyes, reagents and other chemicals supplied by third
parties. We believe that some dyes supplied by Amersham International Public
Limited Company under our exclusive worldwide license to use and sell Amersham
dyes within our GeneKits, may not be available from other suppliers. However,
our customers might be able to purchase some, but not all, of these dyes
directly from Amersham. In addition, certain reagents and other chemicals that
we use and include in our GeneKits are available only under license from their
manufacturers. We cannot be certain that we will be able to renew these licenses
upon expiration on favorable terms or at all. While we believe that alternative
dyes, chemicals and reagents are available, alternate products may not be as
effective as certain of the products that we presently use. If we switched to an
alternative dye, chemical or reagent, we may also have to adapt the GeneKit's
analysis software to the new product, which could take time. If the GeneKit is
FDA approved, we may also be required to seek FDA approval for the altered
GeneKit if the alternative product were to substantially alter the performance
of the GeneKit or if the changes could significantly affect safety or
effectiveness. This could cause delays in production and in bringing the changed
GeneKit to market.
We also use certain custom-designed components supplied by third parties in
our DNA sequencers and other equipment. We believe that there are alternative
suppliers for these custom-designed parts. However, we will incur costs in
switching to alternative suppliers and will likely experience delays in
production of the products that use any of these parts until such time as we are
able to locate alternate suppliers or parts on acceptable terms.
WE ARE DEPENDENT ON OUR LICENSE FOR THE POLYMERASE CHAIN REACTION TECHNOLOGY WE
USE IN OUR GENEKITS AND OUR BUSINESS WOULD SUFFER IF THE LICENSE IS TERMINATED
OR NOT RENEWED.
We license the polymerase chain reaction technology that we use in our
GeneKits from Roche Molecular Systems, Inc. and F. Hoffmann La Roche Ltd. These
licenses are not exclusive, and, therefore, may be granted by the Roche
companies to our competitors and others. We are required to pay royalties to the
Roche companies for these licenses. One license is for the life of the patents
included within the licensing agreement, which expire at various times
commencing July 2004. The second license expires in February 2003 but will be
automatically extended until July 2004, unless the Roche companies elect not to
renew the license. After the expiration of the initial term of this license, the
Roche companies may terminate the license at any time by giving us a one-year
notice. The termination of either of these licenses would have a material
adverse effect on our ability to produce or sell GeneKits. Consequently, we
could experience a deterioration of anticipated future sales of our GeneKits and
further losses.
WE FACE SUBSTANTIAL COMPETITION FROM MANY COMPANIES, AND WE MAY NOT BE ABLE TO
EFFECTIVELY COMPETE.
The biotechnology industry is highly competitive. We compete with entities
in the United States and abroad that are engaged in the development and
production of products that analyze genetic information. They include:
- manufacturers and distributors of DNA sequencers such as the PE Biosystems
Group of the Perkin-Elmer Corporation, Amersham and its Molecular Dynamics
subsidiary, LI-COR, Inc., Hitachi, Ltd. and Molecular and Genetic
BioSystems, Inc.;
- manufacturers and distributors of DNA probe-based diagnostic systems such
as Abbott Laboratories, Chiron Corp., Roche Diagnostics, Gene Probe Inc.,
Innogenetics NV, Digene Corporation and Johnson & Johnson;
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- manufacturers of new technologies used to analyze genetic information,
such as chip-based and assay-based technologies, including, Hyseq Inc.,
Affymetrix Inc., ChemCore Inc., CuraGen Corp., Nanogen, Inc.;
- manufacturers of cell cultured assays, including ViroLogic, Inc. and
VIRCO; and
- manufacturers of homebrew genetic tests, which typically have not
undergone clinical validation and have not been approved by the FDA or
other regulatory agencies.
Many of our competitors have much greater financial, technical research and
development resources and production and marketing capabilities than we do.
Smaller companies may also prove to be significant competitors, particularly
through collaborative arrangements with large pharmaceutical and biotechnology
companies. If any of our competitors were to devote significant resources to
developing an integrated solution for genotyping, we would experience
significantly more competitive pressure. We cannot predict whether we could
successfully compete with these pressures and, if we are unable to do so, our
business, financial condition and results of operations could suffer.
WE MAY NOT BE ABLE TO HIRE OR RETAIN THE QUALIFIED SCIENTIFIC, TECHNICAL,
MANAGEMENT AND SALES AND MARKETING PERSONNEL WE REQUIRE.
Because of the specialized scientific nature of our business, we are highly
dependent upon our ability to attract and retain qualified scientific and
technical personnel. We also must hire additional qualified management and sales
and marketing personnel as our business expands. Competition in our industry for
scientific, technical, management, and sales and marketing personnel is intense
and we cannot assure you that we will be able to hire a sufficient number of
qualified personnel. Loss of the services of our key personnel in these areas
could adversely affect our research and development and sales and marketing
programs and could impede the achievement of our goals. We do not maintain key
man life insurance on any of our personnel.
IF WE ARE UNABLE TO MANAGE OUR ANTICIPATED FUTURE GROWTH WE MAY NOT BE ABLE TO
IMPLEMENT OUR BUSINESS PLAN.
If we are successful in increasing sales and expanding our markets, there
will be additional demands on our management, marketing, distribution, customer
support and other operational and administrative resources and systems. To
accommodate future growth, we may add staff and information and other systems.
We cannot guarantee that we will be able to do so or that, if we do so, we will
be able to effectively integrate them to our existing staff and systems. In
addition, our current and future expense levels are based largely on our
investment plans and estimates of future revenues and are, to a large extent,
fixed. We may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Therefore, any significant shortfall in
revenues as compared to our planned expenditures will materially harm our
business, financial condition, and results of operations. If we are unable to
manage our growth, we may not be able to implement our business plan and our
business, financial condition and results of operations will be materially
harmed.
IF WE ARE UNABLE TO EFFECTIVELY INTEGRATE FUTURE ACQUISITIONS OF NEW OR
COMPLEMENTARY BUSINESSES, PRODUCTS OR TECHNOLOGY, OUR BUSINESS MAY BE HARMED.
We have made and in the future may make acquisitions of complementary
businesses, products, services or technologies. We have limited experience in
integrating newly acquired organizations into our operations. Acquisitions
expose us to many risks, including:
- difficulty in assimilating technologies, products, personnel and
operations;
- diversion of management's attention from other business concerns;
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- large write-offs and amortization expenses related to goodwill and other
intangible assets;
- entering markets in which we have no or limited experience; and
- incurrence of debt or assumption of other liabilities.
The occurrence of one or more of these factors could materially harm our
business, financial condition and results of operations.
A SIGNIFICANT PORTION OF OUR SALES DURING 1998 AND 1999 HAVE BEEN TO ONE
DISTRIBUTOR AND WE MAY CONTINUE IN THE FUTURE TO RELY HEAVILY ON THAT
DISTRIBUTOR FOR SALES TO THE RESEARCH AND CLINICAL RESEARCH MARKETS.
In February 1996, we granted Amersham an exclusive worldwide license to use
and sell the Seq4x4-TM- DNA sequencer and related products used and sold with
the sequencer, which is designed for the research market. During 1998 and 1999,
approximately 30% and 21%, respectively, of our revenues resulted from sales of
sequencers and other products to Amersham. Our agreement with Amersham expires
in February 2001 and is automatically renewed each year unless either party
notifies the other at least six months in advance of renewal that it wishes to
terminate the agreement. We cannot be certain that Amersham will be successful
in selling these products. In addition, we cannot be certain that the agreement
will not be terminated before expiration or that, upon expiration, it will be
renewed on favorable terms or at all.
WE MAY BE SUED BY CLINICIANS, PATIENTS OR THIRD-PARTY PAYORS AND OUR INSURANCE
MAY NOT SUFFICIENTLY COVER ALL CLAIMS BROUGHT AGAINST US.
The testing, manufacturing, sale and marketing of our products exposes us to
the risk of product liability claims. In addition, clinicians, patients,
third-party payors and others may at times seek damages based on testing or
analysis errors based on a technician's misreading of the sequencing results,
mishandling of the patient samples or similar claims. Although we have obtained
liability insurance coverage, we cannot guarantee that liability insurance will
continue to be available to us on acceptable terms or that our coverage will be
sufficient to protect us against all claims that may be brought against us. A
liability claim, even one without merit or for which we have substantial
coverage, could result in significant legal defense costs, thereby increasing
our expenses, lowering our earnings and, depending on revenues, potentially
resulting in additional losses.
OUR INTERNATIONAL OPERATIONS MAY BE ADVERSELY AFFECTED BY RISKS ASSOCIATED WITH
INTERNATIONAL BUSINESS.
We sell our products in many countries and operate offices in North America
and Europe. Therefore, we are subject to certain risks that are inherent in an
international business. These include:
- varying regulatory restrictions on sales of our products to certain
markets and unexpected changes in regulatory requirements;
- tariffs, customs, duties and other trade barriers;
- difficulties in managing foreign operations and foreign distribution
partners;
- longer payment cycles and problems in collecting accounts receivable;
- fluctuations in currency exchange rates;
- political risks;
- foreign exchange controls that may restrict or prohibit repatriation of
funds;
- varying laws relating to, among other things, employment and employment
termination;
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- export and import restrictions or prohibitions, and delays from customs
brokers or government agencies;
- seasonal reductions in business activity in certain parts of the world;
and
- potentially adverse tax consequences.
Depending on the countries involved, any or all of the foregoing factors
could materially harm our business, financial condition and results of
operations.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE AND WE CANNOT BE CERTAIN
THAT WE WILL BE ABLE TO RAISE CAPITAL WHEN NECESSARY ON ACCEPTABLE TERMS.
At this time, our sales are not sufficient to meet our anticipated financing
requirements. Based on our current plans, we believe that current cash balances,
including proceeds from our recently completed financings, the proceeds from
this offering and anticipated funds from operations will be sufficient to enable
us to meet our operating needs for at least the next 24 months. The proceeds of
this offering will be available for general corporate and working capital
purposes, including, among other things, to acquire complementary businesses,
products, services or technologies. Currently, we have no definitive agreements
to make any acquisition and we cannot be certain that the proceeds we will
receive from this public offering will be sufficient to complete any acquisition
we might make in the future. In addition, the actual amount of funds that we
will need during the next 24 months will be determined by many factors, some of
which are beyond our control. These factors include:
- our success in selling our products in the research and clinical research
markets during this period;
- the cost and length of time required to complete the clinical trials
needed for our application to the FDA for approval to sell our HIV
OpenGene System to the clinical diagnostic market;
- the timing of our submission of an application to the FDA for approval to
sell our HIV OpenGene System and the length of time it takes the FDA to
complete its review;
- our success in introducing new products during the period;
- our incurring significant fixed overhead and other expenses prior to
increasing our revenues; and
- the costs of acquiring and integrating any new business or technologies
during the period.
We may need to obtain additional funds sooner or in greater amounts than we
currently anticipate and we may need to obtain additional funds at the end of
this 24 month period. If we need to obtain funds at the end of 24 months, or
earlier, potential sources of financing include strategic relationships, public
or private sales of our shares or debt or other arrangements. Because of our
potential long term capital requirements, we may seek to access the public or
private equity markets whenever conditions are favorable, even if we do not have
an immediate need for additional capital at that time. We do not have any
committed sources of financing at this time and it is uncertain whether
additional funding will be available when we need it on terms that will be
acceptable to us or at all. If we raise funds by selling additional common
shares or other securities convertible into common shares, the ownership
interest of our existing shareholders will be diluted. If we are not able to
obtain financing when needed, we would be unable to carry out our business plan,
we would have to significantly limit our operations and our business, financial
condition and results of operations would be materially harmed.
WE MAY REQUIRE APPROVAL OF THE HOLDERS OF OUR SERIES A PREFERRED SHARES IN ORDER
TO OBTAIN CERTAIN TYPES OF FINANCING AND WE MAY BE PREVENTED FROM OBTAINING
THESE TYPES OF FINANCING BY THE HOLDERS OF OUR SERIES A PREFERRED SHARES.
We will be required to obtain the consent of the holders of a majority of
our then outstanding Series A preferred shares prior to issuing any equity
security that has rights as to dividends and liquidation
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that are senior or equal to those of the Series A preferred shares. Also, under
certain circumstances, if we propose to sell equity securities, including debt
securities convertible into equity securities, certain holders of our Series A
preferred shares will be entitled to preemptive rights which allow them to
purchase a proportional amount of the securities being offered. We will also be
required to obtain the consent of the holders of a majority of our then
outstanding Series A preferred shares if we wish to borrow money and at such
time or as a result of such loans, the total principal amount of our
indebtedness and capitalized lease obligations exceeds $15.0 million. In
addition, if we were to enter into a credit facility with a financial
institution, we may be subject to additional limitations on our ability to incur
additional indebtedness. As a result, we may be delayed in, or prohibited from,
obtaining certain types of financing.
OUR U.S. INVESTORS COULD SUFFER ADVERSE TAX CONSEQUENCES IF WE ARE CHARACTERIZED
AS A PASSIVE FOREIGN INVESTMENT COMPANY.
Although we do not believe that we were a passive foreign investment company
(or PFIC) for United States federal income tax purposes during 1999 there can be
no assurance that we will not be treated as a PFIC in 2000 or thereafter. We
would be a PFIC if 75% or more of our gross income in a taxable year is passive
income. We also would be a PFIC if at least 50% of the value of our assets
averaged over the taxable year produce, or are held for the production of,
passive income. For these purposes, the value of our assets is calculated based
on our market capitalization. Passive income includes, among other items,
interest, dividends, royalties, rents and annuities.
For the 1999 taxable year, approximately 8%, of our assets averaged over the
taxable year produced, or were held for the production of, passive income, and
approximately 5% of our gross income was passive income. During the third and
fourth quarter of 1999, we raised a total of approximately $52 million in
private financings, after repayment of outstanding indebtedness and offering
expenses, to be used for general working capital purposes. Since a significant
portion of these funds and the funds that we will receive from this offering
will be invested until needed, the percentage of our assets that are likely to
produce passive income during 2000 will increase.
If we become a PFIC, many of our U.S. shareholders will, in absence of
certain elections as discussed below, be subject to the following adverse tax
consequences:
- they will be taxed at the highest ordinary income tax rates in effect
during their holding period on certain distributions on our common shares,
and gain from the sale or other disposition of our common shares;
- they will be required to pay interest on taxes allocable to prior periods;
and
- the tax basis of our common shares will not be increased to fair market
value at the date of their deaths.
If we become a PFIC, our U.S. shareholders could avoid these tax
consequences by making a qualified electing fund election or a mark-to-market
election. These elections would need to be in effect for all taxable years
during which we were a PFIC and during which our U.S. shareholders held our
common shares. A U.S. shareholder who makes a qualified electing fund election,
will be taxed currently on our ordinary income and net capital gain (unless a
deferral election is in effect). A U.S. shareholder who makes a mark-to-market
election, will include as ordinary income each year an amount equal to the
excess of the fair market value of our common shares over the adjusted tax basis
as of the close of each year (with certain adjustments for prior years).
If we become a PFIC, our U.S. shareholders will generally be unable to
exchange our common shares for shares of an acquiring corporation on a
tax-deferred basis under the reorganization rules of the Internal Revenue Code,
and the benefits of many other nonrecognition provisions of the Internal Revenue
Code will not apply to transfers of our common shares. In addition, if we become
a PFIC, pledges of our common shares will be treated as sales for U.S. federal
income tax purposes. Our U.S. shareholders should
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note that state and local taxes may also apply if amounts are included in U.S.
federal taxable income under the PFIC rules of the Internal Revenue Code. The
PFIC rules are very complex. Our U.S. shareholders are strongly encouraged to
consult with their tax advisors concerning all of the tax consequences of
investing in our common shares and the possible benefits of making a tax
election given their circumstances. Additionally, our U.S. shareholders should
review the section entitled "Taxation--U.S. Federal Income Tax
Considerations--Tax Status of the Company--Passive Foreign Investment Companies"
contained in our Annual Report on Form 20-F for a more detailed description of
the PFIC rules and how they may affect their ownership of our common shares.
OUR AMENDED ARTICLES OF INCORPORATION AND BY-LAWS CONTAIN CERTAIN PROVISIONS
THAT MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY EVEN IF DOING SO
WOULD BE BENEFICIAL TO OUR SHAREHOLDERS AND, THEREFORE, OUR SHAREHOLDERS MAY NOT
BE ABLE TO MAXIMIZE THE RETURN ON THEIR INVESTMENT.
Our authorized capital consists of an unlimited number of preferred shares.
The Board of Directors, without any further vote by the common shareholders, has
the authority to issue preferred shares and to determine the price, preferences,
rights and restrictions, including voting and dividend rights, of these shares.
The rights of the holders of common shares are subject to the rights of holders
of any preferred shares that the Board of Directors may issue in the future.
That means, for example, that we can issue preferred shares with more voting
rights, higher dividend payments or more favorable rights upon dissolution, than
the common shares. If we issued certain types of preferred shares in the future,
it may also be more difficult for a third party to acquire a majority of our
outstanding voting shares.
In addition, we have a "classified" Board of Directors, which means that
only approximately one-third of our directors are eligible for election each
year. Therefore, if shareholders wish to change the composition of the Board of
Directors, it would take at least two years to remove a majority of the existing
directors, and three years to change all directors. Also, the holders of our
Series A preferred shares are entitled to vote as a class for one director. The
Series A Director serves for a one year term and any vacancy may be filled only
by a vote of the holders of Series A preferred shares. If we do not redeem our
Series A preferred shares as required during 2006, 2007, and 2008, then our
Series A shareholders will be entitled to special voting rights enabling them to
elect a majority of our Board of Directors, who will continue to serve as
directors until we have redeemed our Series A preferred shares as required.
Having a classified Board of Directors and these special rights of the
Series A preferred shareholders may, in some circumstances, deter or delay
mergers, tender offers or other possible transactions which may be favored by
some or a majority of our shareholders.
BECAUSE OUR PREFERRED SHAREHOLDERS ARE ENTITLED TO CERTAIN PREFERENCES OVER OUR
COMMON SHAREHOLDERS, UNDER CERTAIN CIRCUMSTANCES, OUR COMMON SHAREHOLDERS MAY
NOT RECEIVE A RETURN OF THE FULL AMOUNT THEY HAVE INVESTED IN OUR COMPANY.
In July 1999, we issued 33,948 Series A preferred shares. Our Series A
preferred shares entitle the holders to certain preferences over our common
shares (described elsewhere in this prospectus), including the following:
- we may not issue any securities that rank senior to, or in parity with,
the Series A preferred shares without obtaining the approval of the
holders of a majority of the Series A preferred shares;
- we may not issue dividends to holders of common shares until all accrued
and unpaid dividends on the Series A preferred shares are paid in full;
and
- if we liquidate or wind-up our company or if we sell our company or in
certain other circumstances, holders of Series A preferred shares are
entitled to receive an amount equal to $1,000 per Series A preferred
share, or approximately $34.0 million in the aggregate, plus accrued
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and unpaid dividends, before holders of common shares would be entitled to
receive any distribution.
THE VOLATILITY OF THE STOCK MARKET COULD DRIVE DOWN THE PRICE OF OUR COMMON
SHARES WHICH COULD RESULT IN LOSSES TO OUR SHAREHOLDERS.
The market prices for securities of life sciences companies, particularly
those that are not profitable, have been highly volatile, especially recently.
Publicized events and announcements may have a significant impact on the market
price of our common shares.
In addition, the stock market from time to time experiences extreme price
and volume fluctuations which particularly affect the market prices for emerging
and life sciences companies, such as ours, and which are often unrelated to the
operating performance of the affected companies. These broad market fluctuations
may make it difficult for a shareholder to sell shares at a price equal to or
above the price at which the shares were purchased.
FUTURE SALES BY EXISTING SHAREHOLDERS MAY LOWER THE PRICE OF OUR COMMON SHARES
WHICH COULD RESULT IN LOSSES TO OUR SHAREHOLDERS.
As of February 29, 2000, we had outstanding 16,045,167 voting shares,
including 3,259,748 shares issuable upon conversion of our Series A preferred
shares but excluding the shares covered by this prospectus. All of these shares
are eligible for sale under Rule 144, pursuant to currently effective
registration statements, or are otherwise freely tradable. Directors, executive
officers and certain shareholders who in the aggregate own 4,879,759 voting
shares have agreed to a 90-day lock-up with respect to their shares. FleetBoston
Robertson Stephens Inc. may release shareholders from the lockup agreement at
any time and without notice. Following the expiration of this lock-up period,
4,879,759 common shares subject to the lock-up agreements will become available
for immediate resale in the public market subject, in some instances, to the
volume and other limitations of Rule 144.
Subject to the lock-up agreements described above, our common shares are
eligible for sale into the public market as follows:
- Our affiliates own 1,971,325 shares that may be sold subject to volume
restrictions imposed by Rule 144. We have agreed to file a registration
statement with the Securities and Exchange Commission covering 1,927,134
of these shares, which will be filed no earlier than 90 days and no later
than 180 days after the completion of this offering. Our affiliates also
own options to acquire an additional 950,776 shares. The shares to be
issued upon exercise of these options have been registered and may be
freely sold when issued.
- Our employees and consultants who are not deemed affiliates hold options
to buy a total of 995,698 shares. The shares to be issued upon exercise of
these options have been registered and may be freely sold when issued.
- 3,069 shares issuable upon exercise of outstanding warrants are registered
for sale pursuant to a registration statement filed with the Securities
and Exchange Commission, and may be freely sold.
- We may issue options to purchase up to an additional 501,412 shares under
our stock option plans. The shares to be issued upon exercise of these
options have been registered and may be freely sold when issued.
- We have filed registration statements covering 1,916,000 common shares,
and an additional 5,283,758 common shares issuable upon conversion of our
Series A preferred shares and issued or issuable upon exercise of certain
warrants issued on July 15, 1999. These shares may be freely sold so long
as the registration statements covering them remain effective.
17
<PAGE>
Sales of substantial amounts of common shares into the public market could
lower the market price of our common shares.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has owned shares for at least
one year would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of (i) 1% of the number of our common
shares then outstanding (which equals approximately 147,854 common shares as of
February 29, 2000, after giving effect to this offering) or (ii) the average
weekly trading volume of our common shares during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about our
company. Under Rule 144(k), a person who is not deemed to have been our
affiliate at any time during the three months preceding a sale, and who has
owned the shares proposed to be sold for at least two years, is entitled to sell
his shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
WE MAY SUFFER LOSSES AS RESULT OF FLUCTUATIONS IN EXCHANGE RATES BETWEEN THE
U.S. DOLLAR AND FOREIGN CURRENCIES.
Our financial statements are prepared in U.S. dollars and much of our
business is conducted in U.S. dollars. However, we incur expenses in Canadian
dollars and in other foreign currencies. We also sell products to customers in
foreign countries and bill those customers in local currencies at predetermined
exchange rates. As our business expands, we anticipate that we will increasingly
incur expenses and bill and receive payments in local currencies at prevailing
exchange rates. As a result, we may suffer losses due to fluctuations in the
exchange rates between the U.S. dollar and the Canadian dollar and the U.S.
dollar and the currencies of other countries. We currently engage in limited
foreign exchange hedging activities by sometimes purchasing Canadian funds
before they are actually required to protect ourselves against the risk of
losses due to fluctuations in exchange rates. We do not currently engage in
hedging activities for any other foreign currencies.
WE HAVE DISCRETION AS TO THE USE OF PROCEEDS FROM THIS OFFERING AND WE MAY NOT
USE THE PROCEEDS FROM THIS OFFERING IN THE MOST EFFECTIVE MANNER.
We have broad discretion as to the use of the proceeds that we will receive
from this offering. We intend to use the net proceeds for working capital and
other general corporate purposes. We may also use a portion of the net proceeds
to acquire or invest in businesses, products, services or technologies that are
complementary to our business, although we have no such specific plans at this
time. We cannot assure you that management will apply the funds raised in this
offering effectively, nor can we assure you that the proceeds will be invested
to yield favorable returns. The ineffective use of the net proceeds may
materially harm our business, financial condition and results of operations.
PURCHASERS OF COMMON SHARES IN THIS OFFERING WILL INCUR IMMEDIATE AND
SUBSTANTIAL DILUTION.
You will incur immediate and substantial dilution of $78.44 per common share
in the net tangible book value of the common shares you purchase in this
offering based on an assumed public offering price of $93.00 per common share.
You may also experience additional dilution as a result of the issuance of
shares in future business acquisitions and otherwise and as a result of the
issuance and exercise of employee stock options and of warrants.
18
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. You can identify these
forward-looking statements when you see us using words such as "expect,"
"anticipate," "estimate," "believe," "intend," "may," "predict," and other
similar expressions. These forward looking statements cover, among other items:
- FDA and other regulatory approval for certain of our products;
- acceptance of our products in the clinical diagnostic market;
- acceptance of genotyping in the clinical diagnostic market;
- our marketing and sales plans;
- our expectations about the markets for our products;
- the performance of our products;
- our intention to introduce new products;
- our future capital needs;
- our clinical trials;
- reimbursement of our products by insurance companies and other third-party
payors;
- our ability to compete in the research, clinical research and clinical
diagnostic markets;
- our patent applications;
- our ability to bring our Atlanta manufacturing facility fully operational;
- our ability to modify our information systems to accommodate euro
transactions; and
- the status of year 2000 compliance efforts of our company, and our
material customers and suppliers.
We have based these forward-looking statements largely on our current
expectations. However, forward-looking statements are subject to a number of
risks and uncertainties, certain of which are beyond our control. Actual results
could differ materially from those anticipated as a result of the factors
described under "Risk Factors" including, among others:
- delays in obtaining, or our inability to obtain, approval by the FDA and
other regulatory authorities for our HIV OpenGene System and, in the
future, certain of our other products for the clinical diagnostic market;
- refusal of insurance companies and other third-party payors to reimburse
patients and clinicians for our products;
- uncertainty of acceptance of genotyping, in general, and of our products,
in particular, in the clinical diagnostic market;
- problems, delays and expenses we may face with our proposed clinical
trials;
- problems that we may face in manufacturing, marketing and distributing our
products;
- delays in the issuance of, or the failure to obtain, patents or licenses
for certain of our products and technologies;
- problems with important suppliers and business partners;
- delays in developing, or the failure to develop, new products and enhanced
versions of existing products; and
- the timing of our future capital needs or our inability to raise
additional capital when needed.
We do not undertake any obligation to publicly update or revise any
forward-looking statements contained in this prospectus or incorporated by
reference, whether as a result of new information, future events or otherwise.
Because of these risks and uncertainties, the forward-looking statements and
circumstances discussed in this prospectus might not transpire.
19
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of our common shares in this
offering will be approximately $176.1 million (approximately $202.6 million if
the underwriters exercise their overallotment option in full) at an assumed
public offering price of $93.00 per share, after deducting the underwriting
discounts and commissions and estimated offering expenses.
We intend to use the net proceeds of this offering for working capital and
other general corporate purposes. In addition, we may use a portion of the net
proceeds to acquire complementary businesses, products, services or
technologies. Currently we have no definitive agreements to make any
acquisition.
Until we use the net proceeds, we intend to invest the funds in
interest-bearing, investment grade securities.
PRICE RANGE OF COMMON SHARES
Our common shares are traded on the Nasdaq National Market under the symbol
"VGIN". Our common shares are not listed or quoted for trading on securities
markets outside of the United States. The following table sets forth, for the
periods indicated, high and low sale prices of our common shares as reported on
the Nasdaq National Market.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON SHARES
-----------------------
HIGH LOW
-------- --------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1998:
First Quarter........................................... $ 9.75 $ 6.00
Second Quarter.......................................... $ 11.38 $ 7.50
Third Quarter........................................... $ 13.06 $ 7.00
Fourth Quarter.......................................... $ 14.00 $ 9.25
FISCAL YEAR ENDED DECEMBER 31, 1999:
First Quarter........................................... $ 21.75 $10.00
Second Quarter.......................................... $ 21.81 $15.31
Third Quarter........................................... $ 22.81 $ 8.88
Fourth Quarter.......................................... $ 34.63 $15.00
FISCAL YEAR ENDED DECEMBER 31, 2000:
First Quarter (through March 9, 2000)................... $119.13 $29.00
</TABLE>
On March 9, 2000 the last reported sale price of our common shares on the
Nasdaq National Market was $93.00. As of February 29, 2000, there were 111
holders of record of our common shares. This number does not include an
indeterminable number of beneficial holders of these securities whose common
shares are held by financial institutions in "street name."
DIVIDEND POLICY
SERIES A PREFERRED SHARES. Dividends on our Series A preferred shares
accrue at the rate of 9% per year during the first three years after issuance,
and 4% per year thereafter. Dividends may not be paid for the first three years.
After three years, at our option, we may pay dividends in cash. If dividends are
not paid in cash, they will continue to accrue.
COMMON SHARES. We have not declared or paid any cash dividends on our
common shares. We currently intend to retain any future earnings for use in the
operation and expansion of our business. We do not anticipate paying any cash
dividends on our common shares in the foreseeable future.
20
<PAGE>
CAPITALIZATION
The following table shows our capitalization as of December 31, 1999, on an
actual basis, and on an as adjusted basis after giving effect to the sale of
2,000,000 common shares in this offering at an assumed public offering price of
$93.00 per share, after deducting the underwriting discounts and commissions and
estimated offering expenses.
You should carefully read our Consolidated Financial Statements and the
Notes to those statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
-------- ------------------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Series A mandatorily redeemable convertible preferred
shares, no par value, 33,950 authorized, 33,948 issued and
outstanding, actual and as adjusted....................... $ 27,556 $ 27,556
-------- ------------------------
Shareholders' equity:
Preferred shares, no par value, unlimited shares
authorized, no shares issued and outstanding, actual
and as adjusted....................................... -- --
Common shares, no par value, unlimited shares
authorized, 11,622,115 shares issued and outstanding,
actual; 13,622,115 shares issued and outstanding, as
adjusted.............................................. 75,422 251,472
Other equity................................................ 8,987 8,987
Cumulative translation adjustment........................... (620) (620)
Accumulated deficit......................................... (59,438) (59,438)
-------- ------------------------
Total shareholders' equity.......................... 24,351 200,401
-------- ------------------------
Total capitalization................................ $ 51,907 $ 227,957
======== ========================
</TABLE>
The number of common shares outstanding excludes:
- 2,145,553 common shares reserved for issuance pursuant to outstanding
stock options at a weighted average exercise price of $8.82;
- 542,221 common shares reserved for future issuance under our Employee
Option Plan;
- 75,000 common shares reserved for future issuance under our Director Share
Option Plan;
- 2,052,118 common shares reserved for issuance under outstanding warrants
at a weighted average price of $12.23; and
- 3,213,455 common shares issuable upon conversion of the Series A preferred
shares as of December 31, 1999. The number of common shares issuable upon
conversion of our Series A preferred shares will increase as the dividends
payable thereon accrue.
See Notes 10 and 11 to our Consolidated Financial Statements.
21
<PAGE>
DILUTION
As of December 31, 1999, our net tangible book value was approximately
$22.2 million, or $1.91 per common share. Net tangible book value per common
share represents the amount of our total tangible assets reduced by our total
liabilities and Series A mandatorily redeemable convertible preferred shares,
divided by the number of common shares outstanding. After giving effect to the
receipt of the estimated net proceeds from our sale of 2,000,000 shares in this
offering at an assumed public offering price of $93.00 per common share, our
adjusted net tangible book value as of December 31, 1999 would have been
approximately $198.3 million or $14.56 per common share. This represents an
immediate increase in net tangible book value of $12.65 per common share to
existing shareholders and an immediate dilution of $78.44 per common share to
new investors. The following table illustrates this per common share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per common share.............. $ 93.00
Net tangible book value per common share before this
offering.............................................. $ 1.91
Increase in net tangible book value per common share
attributable to new investors......................... 12.65
--------
Pro forma net tangible book value per common share after
this offering............................................. 14.56
--------
Pro forma dilution in net tangible book value per common
share to new investors.................................... $ 78.44
========
</TABLE>
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our Consolidated Financial Statements and the
Notes thereto. The Consolidated Statements of Operations data for fiscal years
1997, 1998, 1999 and the Consolidated Balance Sheet data as of December 31, 1998
and 1999, as set forth below, have been derived from our consolidated financial
statements which have been audited by PricewaterhouseCoopers LLP, Chartered
Accountants in Canada, whose report with respect to such financial statements is
included herein. The Consolidated Statements of Operations data for fiscal years
1995 and 1996 and the Consolidated Balance Sheet data as of December 31, 1995,
1996 and 1997, as set forth below, have been derived from audited consolidated
financial statements not included in this prospectus. Historical results are not
necessarily indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Sales.................................. $ -- $ 978 $ 3,033 $ 10,875 $ 13,627
Cost of sales.......................... -- 561 1,995 6,673 9,273
---------- ---------- ---------- ---------- ----------
Gross margin........................... -- 417 1,038 4,202 4,354
Sales, general and administrative
expense.............................. 1,476 3,377 7,448 11,516 19,074
Research and development expense....... 1,241 2,745 4,123 6,289 7,935
Other expense.......................... -- -- 654 420 1,329
---------- ---------- ---------- ---------- ----------
Loss from operations before interest... (2,717) (5,705) (11,187) (14,023) (23,984)
Interest income........................ 12 609 774 264 695
Interest and financing expense......... (19) (69) (3) (1,132) (1,998)
---------- ---------- ---------- ---------- ----------
Net loss............................... (2,724) (5,165) (10,416) (14,891) (25,287)
Cumulative preferred dividends and
accretion of discount attributable to
preferred shares..................... -- -- -- -- (1,770)
---------- ---------- ---------- ---------- ----------
Net loss attributable to common
shareholders......................... $ (2,724) $ (5,165) $ (10,416) $ (14,891) $ (27,057)
========== ========== ========== ========== ==========
Net loss per common share.............. $ (0.65) $ (0.89) $ (1.48) $ (1.91) $ (2.73)
Weighted average number of common
shares outstanding................... 4,181,599 5,791,367 7,059,578 7,782,094 9,916,954
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments................ $ 403 $18,928 $ 7,588 $11,274 $42,688
Working capital................................ 418 20,061 9,561 8,432 45,611
Total assets................................... 1,791 22,606 13,936 27,783 58,640
Indebtedness................................... 500 -- -- 7,495 --
Mandatorily redeemable convertible preferred
shares....................................... -- -- -- -- 27,556
Accumulated deficit............................ (3,680) (8,845) (19,260) (34,151) (59,438)
Shareholders' equity........................... 841 21,795 12,610 14,579 24,351
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We began operations in 1993. Until 1996, we devoted substantially all of our
resources to the research and development of our technology and products. In
late 1996, we began manufacturing and selling our products to the research and
clinical research markets.
Our products and services include:
- SEQUENCING SYSTEMS. Sequencing systems consist of automated DNA sequencers
and related equipment, and our proprietary DNA analysis and data
management software.
- GENEKITS AND OTHER CONSUMABLES. GeneKits consist of various reagents,
enzymes, primers and other chemicals, and other consumables consist of
disposable gel cassettes, acrylamide and other materials.
- TESTING, SEQUENCING AND OTHER SERVICES. We provide services, such as viral
load testing, genotyping and other molecular services, through our
wholly-owned subsidiaries, Applied Sciences, Inc., which we acquired in
1997, and Visible Genetics Europe S.A. (formerly known as ACT Gene S.A.),
which we acquired in 1998.
During 1996 and 1997, we generated revenues primarily by selling sequencing
systems. During this period, our business strategy focused on installing our DNA
sequencers and related equipment in research and clinical research facilities.
During 1998, we began to shift our strategy to target the clinical diagnostic
market and to place greater emphasis on generating recurring revenues from sales
of GeneKits and other consumables initially to the research and clinical
research markets and, subject to FDA approval, to the clinical diagnostic
market. As part of this strategy, we may sell our DNA sequencers at reduced
prices to customers who commit to purchase significant quantities of GeneKits
and other consumables. In addition, in 1998 and 1999, we bundled our DNA
sequencers and GeneKits for sale at reduced prices. We discontinued the practice
of bundled sales in the second half of 1999. This strategy may result,
initially, in reduced gross margins and additional losses as we attempt to
expand our installed base of DNA sequencers. However, we believe that this
strategy, over the long term, will help us maximize recurring sales of our HIV
GeneKit and other GeneKits to the clinical diagnostic market, should we receive
FDA approval.
OUR OPERATIONS
SALES. Sales consist of revenues from the sale of sequencing systems and
GeneKits and other consumables, as well as from the sale of testing services.
Sales include shipping charges, but exclude sales and excise taxes. Revenues
from the sale of our products are recognized when shipment occurs, title passes
to the customer or distributor and there is a reasonable assurance of
collectibility. Revenues from the sale of testing and other services are
recognized when the service is provided and there is a reasonable assurance of
collectibility. Sales of bundled sequencing systems and GeneKits are recognized
proportionately as the components of the bundle are shipped to customers. The
total sales price of the bundle is allocated to the components proportionately
based on the retail prices typically charged for such components if they were
sold individually rather than as part of the bundle.
We sell our products in North America, Europe, Asia, Australia and South
America. In the United States, Canada and many countries in Europe, we sell our
products directly through our own sales force. In selected geographic and
product markets, we seek to sell our products through distribution, marketing or
agency agreements with leading distributors. Currently, we have entered into
agreements with distributors or agents in Spain, Portugal, Japan, Australia, New
Zealand and Argentina.
24
<PAGE>
For an analysis of sales by product segment and geographic market, see
Note 15 to our Consolidated Financial Statements.
COST OF SALES. Cost of sales consists of manufacturing costs including
materials, labor and overhead chargeable to inventory. The gross margin from
sales of our products and services varies depending on product category,
distribution channel and geographic market. Gross margin is calculated by
subtracting cost of sales from sales.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses consist primarily of salaries and related expenses,
occupancy costs, utilities, professional fees, consulting fees, travel costs,
capital taxes, depreciation of fixed assets and amortization of costs paid to
patent counsel.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of salaries and related expenses for employees engaged in
research and development, occupancy costs, consulting fees, travel costs,
depreciation and amortization of fixed assets and costs related to FDA clinical
trials for our HIV OpenGene System.
INTEREST INCOME. Interest income consists of income earned on cash, cash
equivalents and marketable securities.
INTEREST AND FINANCING EXPENSE. Interest and financing expense consists of
interest paid or accrued, and amortization of warrant costs and other financing
expenses.
Our financial statements are presented in U.S. dollars and are prepared in
accordance with generally accepted accounting principles in the United States.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1999 TO FISCAL YEAR ENDED
DECEMBER 31, 1998
SALES. Sales increased 25% to $13.6 million in 1999, from $10.9 million in
1998. This increase resulted primarily from increased sales of our GeneKits and
other consumables. In 1999, 340 sequencing systems were sold, as compared to 412
sequencing systems sold in 1998. The decrease in sequencing systems sold in 1999
as compared to 1998 is due to a decline in Seq4x4 sales to Amersham, which
decreased from 273 units in 1998 to 85 units in 1999. In 1998 Amersham began to
actively market the Seq4x4 and initial sales were high as Amersham filled their
distribution pipeline. Subsequently, Amersham's marketing effort has been
transferred to the Long-Read Tower at a higher unit price but lower anticipated
volume. In 1999, sequencing systems accounted for 57% of total sales, compared
to 74% of total sales in 1998. In 1999, GeneKits and other consumables accounted
for 35% of total sales, compared to 13% of total sales in 1998. Testing services
accounted for 8% of sales in 1999, compared to 13% of sales in 1998. Sales in
North America, Europe, Japan and the rest of the world were $5.2 million,
$5.5 million, $1.6 million and $1.3 million, respectively, for 1999, as compared
to $4.4 million, $4.6 million, $1.6 million and $0.3 million, respectively,
during 1998. During 1999, Amersham accounted for approximately 21% of sales, of
which 19% comprised sequencing systems and 2% comprised GeneKits and other
consumables. During 1998, Amersham accounted for 30% of sales, of which 29%
comprised sequencing systems and 1% comprised GeneKits and other consumables.
The sales to Amersham were made on the same general terms and conditions as the
majority of other sales during the respective periods.
COST OF SALES. Cost of sales increased 39% to $9.3 million in 1999, from
$6.7 million in 1998. In 1999, cost of sales aggregated 68% of sales, compared
to 61% of sales in 1998. This increase in cost of sales as a percentage of sales
was primarily related to a write-off of obsolete and discontinued instruments
and related parts totaling $0.6 million recorded in the second quarter of 1999.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses increased 66% to $19.1 million in 1999, from
$11.5 million in 1998. This increase resulted primarily from increased
25
<PAGE>
payroll and personnel costs due to the continued growth of our business, costs
of quality control and regulatory departments established in 1998 and the
continued expansion of our sales force in North America and Europe. Sales and
marketing expenses included in sales, general and administrative expenses
increased 79% to $11.1 million in 1999, from $6.2 million in 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 26% to $7.9 million in 1999, from $6.3 million in 1998. This increase
resulted from increased payroll and personnel costs, along with increased
purchases of laboratory supplies, as we developed additional GeneKits and
continued our research programs. Additionally, we incurred costs for
pre-clinical and clinical trials related to our FDA submission for our HIV
OpenGene System.
EXIT AND TERMINATION COSTS. During 1999, we incurred exit and termination
costs of $1.3 million. There were no such costs in 1998. Of this amount,
$0.8 million related to the planned relocation of certain of our activities to a
new location in Atlanta, and $0.5 million was for termination benefits payable
to two senior officers in connection with the termination of their employment
with our company.
INTEREST INCOME. Interest income increased to $0.7 million in 1999, from
$0.3 million in 1998. The increase reflects interest earned on higher average
cash balances as a result of the proceeds received from financings completed
during the third and fourth quarters of 1999.
INTEREST AND FINANCING EXPENSE. Interest and financing expense increased to
$2.0 million in 1999, from $1.1 million in 1998. This increase was due to
interest and financing costs on our term loan agreements entered into in April
and September 1998 and the Warburg Pincus financing in July 1999. Of the total
interest and financing expense, $1.5 million was a non-cash charge due to the
amortization of costs attributable to warrants issued in connection with our
term loans and the Warburg Pincus financing, compared to $0.6 million during
1998.
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1998 TO FISCAL YEAR ENDED
DECEMBER 31, 1997
SALES. Sales increased 259% to $10.9 million in 1998 from $3.0 million in
1997. This increase resulted from increased sales of our sequencing systems,
GeneKits and other consumables and testing, sequencing and other services. In
1998, 412 sequencing systems were sold, an increase of 353% from the 91 systems
sold in 1997. In 1998, sequencing systems accounted for 74% of sales, compared
to 90% of sales in 1997. GeneKits and other consumables accounted for 13% of
sales in 1998, compared to 8% in 1997. Testing services accounted for 13% of
sales in 1998 compared to 2% of sales in 1997 as a result of our acquisitions in
1997 and 1998 of DNA diagnostic testing companies. Sales during 1998 in North
America, Europe, Japan and the rest of the world were $4.4 million,
$4.6 million, $1.6 million and $0.3 million, respectively, as compared to
$2.8 million, $0.2 million, nil and $0.05 million, respectively, during 1997.
During 1998, Amersham accounted for 30% of sales, of which 29% comprised
sequencing systems and 1% comprised GeneKits and other consumables. The sales to
Amersham were made on the same general terms and conditions as the majority of
other sales during the year. During 1997, no customer accounted for more than
10% of sales.
COST OF SALES. Cost of sales increased 235% to $6.7 million in 1998 from
$2.0 million in 1997. In 1998, cost of sales aggregated 61% of sales, a decrease
from 66% of sales in 1997. Cost of sales decreased in 1998 as a percentage of
sales due to improvements in our manufacturing processes, as well as economies
of scale as production of sequencing systems, GeneKits and other consumables
increased compared to the previous year.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses increased 55% to $11.5 million in 1998 from
$7.4 million in 1997. This increase resulted primarily from increased payroll
and personnel costs due to the growth of our business, establishment of quality
control and regulatory departments and development of a sales force in North
America and in certain countries in Europe. Sales
26
<PAGE>
and marketing expenses included in sales, general and administrative expenses
increased 72% to $6.2 million in 1998 from $3.6 million in 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 53% to $6.3 million in 1998 from $4.1 million in 1997. This increase
in research and development expenses resulted from increased payroll and
personnel costs along with increased purchases of laboratory supplies as we
continued to develop GeneKits and expanded our research programs.
In April 1998, we acquired 100% of the shares of ACT Gene S.A., a DNA
diagnostic testing company, for 85,000 common shares and cash payable of
$0.7 million. This acquisition was accounted for as a purchase, and resulted in
the recording of an excess of purchase price over tangible net assets of
$0.5 million, of which $0.4 million was determined to be in-process research and
development, and reflected as an expense in 1998. The in-process research and
development related to the cost and time pertaining to the development of a test
kit and research clinical samples necessary for the development of several kits
designed for use with sequencing systems. As of April 1998, the test kit was
approximately 80% completed, with an estimated cost to complete the kit of
approximately $650,000. At that time we expected to complete the kit during
1999. We currently estimate the cost to date plus additional cost to complete
the kit will total approximately $900,000. We currently expect development of
the kit to be completed during 2000. At the date of acquisition, the test kit
had not yet reached technological feasibility and had no alternative future uses
in the clinical diagnostic market.
INTEREST INCOME. Interest income declined to $0.3 million in 1998 from
$0.8 million in 1997.
INTEREST AND FINANCING EXPENSE. Interest and financing expense increased to
$1.1 million in 1998 from approximately nil in 1997 due to interest paid or
accrued and the amortization of costs attributable to warrants issued in
connection with term loans entered into in April and September 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
placements of equity and an initial public offering in June 1996. We have also
borrowed funds from institutional lenders.
INSTITUTIONAL LOANS. On April 30, 1998, our subsidiary, Visible Genetics
Corp., or VGC, borrowed $7.0 million from various funds, which we refer to as
the Hilal Funds, for which Hilal Capital Management LLC serves as general
partner, investment advisor or management company. In September 1998, VGC
borrowed an additional $1.0 million from these lenders. The interest rate of the
loans was 10% per year. Interest and principal on the $7.0 million loan were
payable on or about April 29, 1999, and, on the $1.0 million loan, were payable
on December 28, 1999.
On April 30, 1999, we and the Hilal Funds agreed to delay the payment date
of the $7.0 million loan to December 31, 1999, and to move up the payment date
of the $1.0 million loan to July 1, 1999. The Hilal Funds later extended the
payment date to the earlier of July 22, 1999, or the completion of the Warburg
Pincus financing described below. In addition, the Hilal Funds agreed to permit
us to borrow up to an additional $5.0 million of loans from other lenders which
would be senior to the $7.0 million loan and junior to the $1.0 million loan.
We guaranteed VGC's obligations under both loans. We gave the Hilal Funds a
security interest in most of our assets to secure our obligations under the
guaranty, including a pledge of the outstanding stock of VGC. Both the loan
agreements and the guaranty imposed certain restrictions on us and our
subsidiaries, including limitations on loans and other obligations that we may
incur.
As part of the loan arrangements, we granted the Hilal Funds warrants to
purchase our common shares. Initially, we granted the Hilal Funds warrants to
purchase 420,000 common shares which may be exercised until April 2003, at a
price of $10.00 per share. When we borrowed an additional $1.0 million from the
Hilal Funds in September 1998, we granted them warrants for an additional
120,000 common
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shares which may be exercised until September 2003, at a price of $10.00 per
share. The warrants were valued using the Black-Scholes option valuation model.
The total proceeds received from the Hilal Funds were allocated between the
warrants and term loans based on the relative fair value of each component,
resulting in $0.9 million and $0.2 million of the total proceeds from the
April 1998 and September 1998 term loans, respectively, being allocated to
warrants. The value of the term loans were to be increased to their face value
at their respective maturity dates, resulting in a charge to financing expense
and warrants, by their pro rata share, over the remaining term of the loans. As
a result, non-cash charges of $0.6 million were recorded as financing expenses
in 1998. The remaining $0.6 million was recorded as non-cash financing expenses
in 1999.
On April 30, 1999, we granted the Hilal Funds warrants to purchase an
additional 140,000 common shares which may be exercised until April 30, 2006, at
a price of $17.00 per share. The warrants were valued using the Black-Scholes
option valuation model, resulting in a value being attributed to these warrants
of $0.9 million. This amount was recorded as a deferred charge on the balance
sheet and was to be amortized to financing expense over the remaining term of
the loan maturing on December 31, 1999. As a result, the entire amount was
recorded as a non-cash charge to financing expense in 1999.
On July 15, 1999, we repaid or satisfied all of the loans made to us by the
Hilal Funds. Of the $8.0 million principal amount of the loans, we paid
$4.1 million of principal plus accrued interest on the loan in cash. The Hilal
Funds converted the remaining $3.9 million principal amount plus accrued
interest into 3,948 Series A preferred shares and 147,098 warrants to purchase
our common shares. The warrants were valued using the Black-Scholes option
valuation model. The value of the net proceeds was allocated between convertible
preferred shares and warrants based on the relative fair value of each
instrument. The total amount allocated to warrants and preferred shares, was
$0.9 million and $3.0 million, respectively. The value of the warrants is
treated as a discount to the preferred shares and will be charged directly to
retained earnings or, in the absence of retained earnings, against other equity
over seven years, the time period when redemption of the preferred shares first
becomes mandatory. The increase in value of the preferred shares to their
mandatory redemption price as well as the accrual of dividends on the preferred
shares will reduce earnings attributable to common shareholders. The Series A
preferred shares and warrants have the same terms as those granted to Warburg
Pincus as described below.
WARBURG PINCUS FINANCING. On July 15, 1999, certain affiliated funds
managed by E.M. Warburg, Pincus & Co., LLC, who we refer to as the Warburg
Pincus Funds, invested $30.0 million in our company. In consideration for this
investment, we issued to the Warburg Pincus Funds 30,000 Series A preferred
shares convertible at the holders' option into common shares at $11.00 per
share, and warrants to purchase 1,100,000 common shares exercisable for four
years at a purchase price of $12.60 per share. The warrants were valued using
the Black-Scholes option valuation model. The value of the net proceeds was
allocated between convertible preferred shares and warrants based on the
relative fair value of each instrument. The total amount allocated to warrants
and preferred shares was $6.4 million and $22.8 million, respectively. The value
of the warrants is treated as a discount to the preferred shares and will be
charged directly to retained earnings or, in the absence of retained earnings,
against other equity over seven years, the time period when redemption of the
preferred shares first becomes mandatory. The increase in value of the preferred
shares to their mandatory redemption price as well as the accrual of dividends
on the preferred shares will reduce earnings attributable to common
shareholders. In February 2000, the Warburg Pincus Funds exercised all of their
warrants. Under the terms of our warrant agreement, the Warburg Pincus Funds
elected to pay the exercise price for the warrants through a non-cash exercise.
As a result, the Warburg Pincus Funds received 847,749 of our common shares
rather than 1,100,000 common shares they otherwise would have received upon
exercise in cash of all of their warrants.
DECEMBER 1999 PRIVATE PLACEMENT. In December 1999, various institutional
investors purchased 1,916,000 common shares of our company in a private
placement. The investors paid $15 per share and we received net proceeds of
$26.7 million from the private placement. The institutional investors included
the
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Warburg Pincus Funds, the Hilal Funds, certain investors who had purchased our
common shares in a November 1998 private placement and certain new institutional
investors.
CAPITAL EXPENDITURES. Additions to fixed assets were approximately
$1.9 million, $3.3 million and $1.3 million for the years ended December 31,
1999, 1998 and 1997, respectively. We expect capital expenditures to increase
over the next several years as we expand our facilities and acquire additional
manufacturing and scientific equipment.
CURRENT AND FUTURE FINANCING NEEDS. We have incurred negative cash flow
from operations since we started our business. We have spent, and expect to
continue to spend, substantial amounts to complete our planned product
development efforts, expand our sales and marketing activities, conduct our
clinical trials, conduct research, build our business infrastructure and expand
our manufacturing capabilities. At this time, funds from operations are not
sufficient to meet our operating needs and other anticipated financial
requirements.
Based on our current plans, we believe that our cash on hand, anticipated
funds from operations and net proceeds from this offering, will be sufficient to
enable us to meet our operating needs for at least the next 24 months. The
proceeds of this offering will be available for general corporate and working
capital purposes, including, among other things, to acquire complementary
businesses, products, services or technologies. Currently, we have no definitive
agreements to make any acquisition and we cannot be certain that the proceeds we
will receive from this offering will be sufficient to complete any acquisition
we might make in the future. In addition, the actual amount of funds we will
need to operate for the next 24 months is subject to many factors, some of which
are beyond are control. We may need to obtain additional funds sooner or in
greater amounts than we currently anticipate and we may need to obtain
additional funds at the end of the 24 month period. If we need to obtain funds
at the end of 24 months, or earlier, potential sources of financing include
strategic relationships, public or private sales of our shares or debt or other
arrangements. Because of our potential long term capital requirements, we may
seek to access the public or private equity markets whenever conditions are
favorable, even if we do not have an immediate need for additional capital at
that time. We do not have any committed sources of financing at this time and it
is uncertain whether additional funding will be available when we need it on
terms that will be acceptable to us or at all. If we raise funds by selling
additional common shares or other securities convertible into common shares, the
ownership interest of our existing shareholders will be diluted. If we are not
able to obtain financing when needed, we would be unable to carry out our
business plan, we would have to significantly limit our operations and our
business, financial condition and results of operations would be materially
harmed.
If we wish to issue equity securities or obtain additional financing, we
will need, under certain circumstances, the consent of the Series A preferred
shareholders. We will be required to obtain the consent of the holders of a
majority of the then outstanding Series A preferred shares prior to issuing any
equity security that has rights as to dividends and liquidation that are senior
or equal to those of the Series A preferred shares. We will also be required to
obtain the consent of the holders of a majority of the then outstanding
Series A preferred shares if we wish to borrow money and at such time or as a
result of such loans, the total principal amount of our indebtedness and
capitalized lease obligations exceeds $15.0 million. As a result, we may be
delayed in, or prohibited from, obtaining certain types of financing.
YEAR 2000
We have conducted a comprehensive examination of our information technology
systems and the software applications sold with our products to determine year
2000 compliance. Based on our examination, we believe that these systems and
software are year 2000 compliant and to date none of these systems or
applications have experienced year 2000 problems.
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We have spent approximately $470,000 on our year 2000 compliance efforts, of
which $454,000 was for a new enterprise system purchased in 1998. While we did
not purchase the new system specifically in response to year 2000 issues, our
efforts at compliance accelerated the timetable for purchasing the system.
We have contacted our material customers, suppliers and third-party service
providers to identify year 2000 problems and provide solutions to prevent any
disruption of business activities. We completed a review of the compliance
efforts by these parties in the third quarter of 1999. Based on the information
we have received, our most significant year 2000 risk would involve disruption
of our material supply and distribution channels, and in particular the supply
of certain instrument parts and supplies from single-source suppliers. This
would likely lead to material interruption in product development and sales of
our products. In addition, we could encounter significant expenses in remedying
any problems or switching to year 2000 compliant vendors and suppliers. As of
the date of this prospectus, we are not aware of any year 2000 problems
affecting any of our material customers, suppliers or third-party service
providers that might materially disrupt our business.
EURO CONVERSION
Effective January 1, 1999, 11 of the 15 member countries of the European
Union adopted the euro as their common legal currency and each participant
established fixed conversion rates between their sovereign, or legacy,
currencies and the common euro currency. The legacy currencies of the individual
countries are scheduled to remain legal tender as denominations of the euro
until January 1, 2002, when euro-denominated bills and coins will be introduced.
During this transition period, public and private parties may choose to pay for
goods and services using either the euro or the participating country's legacy
currency. By July 1, 2002, the legacy currencies will be phased out entirely as
legal tender.
We currently conduct business operations in U.S. and Canadian dollars and
several other currencies. Since our information systems and processes generally
accommodate multiple currencies, we anticipate that any necessary modification
to our information systems, equipment and processes to accommodate euro
transactions will be made on a timely basis and do not expect any failures that
would have a material adverse effect on our financial position or results of
operations.
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BUSINESS
OVERVIEW
We develop, manufacture and sell integrated DNA sequencing systems that
analyze genetic information to improve the treatment of selected diseases. Our
strategy is to become a leader in the emerging field of pharmacogenomics.
Pharmacogenomics is the science of individualizing therapy based on genetic
differences across patients. Our genotyping technology, which employs DNA
sequencing, enables the analysis in the clinical diagnostic laboratory of
individual genetic variations. DNA sequencing is generally considered the most
thorough and accurate method for genotyping diseases. We believe that
individualizing therapy through pharmacogenomics will improve the treatment of
many diseases, such as Human Immunodeficiency Virus, or HIV, hepatitis B,
hepatitis C, tuberculosis and eventually some cancers.
Our OpenGene System consists of automated DNA sequencers, disposable gel
cassettes, related equipment and software and disease-specific GeneKits. Our
GeneKits contain the necessary chemicals, reagents, third-party licenses and
other consumables and materials required for sequencing specific
disease-associated genes. We have developed GeneKits for HIV and HLA (used for
tissue typing, for example, in organ transplants). We are developing GeneKits
for hepatitis B, hepatitis C and tuberculosis. We began selling our DNA
sequencers and related equipment and consumables to the research and clinical
research markets in the third quarter of 1996 and began selling GeneKits into
the same markets in the third quarter of 1997.
The first clinical diagnostic application we are targeting is HIV. We have
developed our HIV GeneKit to enable clinicians to genotype the major HIV species
infecting patients in order to improve the management of patient treatment. HIV
is a highly variable virus with high rates of mutations, which may lead to drug
resistance. One of the central challenges in maintaining HIV patients on
long-term drug therapy is to adjust each patient's medication as drug-resistant
strains of the virus emerge.
Two initial clinical trials, including one that we conducted, have shown
that patients whose drug therapy is managed using HIV genotyping had greater
reductions in viral load than HIV patients who were not genotyped. In June 1999,
we completed a European trial, which we call VIRADAPT, which showed, among other
things, that after six months patients who received standard of care treatment
and underwent periodic genotyping had a mean decrease in viral load of
approximately 93% as compared to a mean decrease in viral load of approximately
79% in the non-genotyping group. In addition, after 6 months, 32% of the
patients in the genotyping group had undetectable viral loads as compared to 14%
of patients in the non-genotyping group. The other trial, called GART, was
funded by the NIH and was completed in the United States in December 1998. It
showed that, at the end of 8 weeks, patients who received standard of care
treatment and underwent periodic genotyping had a mean decrease in viral load of
approximately 93%, as compared to 76% to patients in the non-genotyping group.
Also in June 1999, we initiated a trial called SEARCH to test the clinical
utility of our HIV OpenGene System in genotyping HIV infected patients. Based on
the results from the VIRADAPT and GART clinical trials, the FDA has advised us
that we are not required to complete the SEARCH trial and has indicated that we
will not be required to demonstrate further the clinical utility of our HIV
OpenGene System in the treatment of HIV infected individuals. We plan to apply
to the FDA during 2000 for approval to sell our HIV OpenGene System to the
clinical diagnostic market.
SCIENTIFIC BACKGROUND
DNA. All cells contain DNA, a complex material that stores the genetic
blueprint, or makeup, of an organism. DNA is composed of four chemical building
blocks called nucleotides. Each nucleotide consists of, among other things, one
of four chemical bases: adenine (A), thymine (T), guanine (G) and cytosine (C).
These four bases are the genetic alphabet that is used to write messages and
instructions which direct the
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synthesis or expression of the proteins inside the cell, required to make the
cell function. A sequence is the particular order of the nucleotides in the DNA.
Changes in the DNA sequence, also called mutations, may occur from time to time.
These mutations may alter the function of the cell proteins and affect cell
functions.
PHARMACOGENOMICS. Different people often respond in different ways to the
same drug. A drug that is safe and effective in one patient may be toxic or
ineffective in another. We believe that some of these differences in response
may reflect underlying genetic differences between the individuals concerned.
Pharmacogenomics seeks to establish correlations between specific genetic
variations and specific responses to drugs. By establishing such correlations,
pharmacogenomics may permit both new and existing drugs to be targeted to those
patients in whom they are most likely to be both effective and safe.
GENOTYPING. Genotyping is the act of selecting and reading the sequence of
nucleotides in a specific strand of DNA in order to understand how changes in
the DNA may influence the onset and treatment of some diseases and medical
conditions.
Genotyping is used by scientists, researchers and clinicians to identify:
- genes as potential targets for therapeutic intervention;
- mutations in a gene that may predispose an individual to a particular
disease;
- genetic variation among individuals that may cause different reactions to
drug treatment; and
- mutations in the genes of infectious organisms (such as viruses and
bacteria) and tumors that may result in drug resistance, thereby
influencing treatment methods.
Genotyping is performed using tests that rely on either DNA probe or DNA
sequencing technologies.
DNA PROBES. A DNA probe is a single-stranded piece of DNA made to be
complementary to the unique base sequence of the target gene. These probes are
based on the principle that single strands of DNA seek out complementary strands
to form a chemical bond. The DNA probes are placed into prepared samples, which
may include the target gene. If the target gene is present, the probe will bind
to the target, indicating its presence.
DNA probes are highly specific, target single mutations, and require advance
knowledge of the target mutation. Probes are susceptible to producing erroneous
results because they are affected by variations in the sequence immediately
surrounding their targeted mutation. As a result, DNA probes are effective in
detecting diseases only when the disease-associated mutation is at a fixed,
known location within a gene or when the sequence within a particular gene is
stable. However, in diseases where the mutation causing the disease is not
known, probe-based technology is not as effective. Probes also may not
effectively provide genotypes for infectious pathogens, such as viruses, in
which the DNA sequence is highly variable or where mutations occur to evade
immune responses or to develop drug resistance.
DNA SEQUENCING. DNA sequencing identifies all the chemical bases of the DNA
strand to be examined, one-by-one, readily detecting variations or new mutations
within the DNA sequence. Unlike DNA probes, sequencing reads long segments of
DNA and can therefore detect new mutations, multiple mutations and insertions
and deletions of DNA within a sequence. DNA sequencing is also less sensitive
than probes to surrounding variations in the sequence being examined. As a
result, sequencing is generally considered the most thorough and accurate method
for genotyping diseases, such as cancer, and certain viruses, such as HIV, which
have high rates of mutation or have numerous strains. DNA sequencing is also
used to assess predisposition to many diseases and for tissue typing.
The DNA sequencing process involves several steps, some of which must be
performed manually and are labor intensive. DNA first must be extracted from the
sample, which usually is blood, other body fluid or tissue. After the DNA is
extracted, it is amplified, or copied, in order to provide enough DNA so that
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the DNA sequence can be easily detected. This process of extraction and
amplification typically requires the use of various reagents, primers and other
chemicals, as well as proprietary processes and technologies, some of which must
be licensed from third parties. Some laboratories prepare and use their own
homebrew reagents and chemicals which usually are not subject to standardized
procedures or quality control processes necessary to ensure reliable results.
Once the DNA is extracted and amplified, a process called gel
electrophoresis is performed. This process involves placing the DNA on a gel
substance and running an electrical current through it. This separates the DNA
so that the DNA sequence can be read. While historically many scientists
performed the entire DNA sequencing process manually, automated DNA sequencers
using a number of disposable products have been developed which simplify and
expedite parts of this process.
DNA SEQUENCING MARKETS
DNA sequencing is an important tool for the research, clinical research and
clinical diagnostic markets.
THE RESEARCH MARKET. The research market includes academic institutions,
hospitals, governmental agencies, life science companies and pharmaceutical
companies performing molecular genetics and molecular biology research.
Researchers generally use DNA sequencing equipment for gene discovery and other
large scale research projects which typically must analyze large numbers of
samples and sequence long DNA segments.
THE CLINICAL RESEARCH MARKET. The clinical research market includes
hospitals, life science companies, pharmaceutical companies, academic
institutions and clinical reference laboratories engaged in developing new
diagnostic tests, conducting clinical trials, developing drugs and researching
targeted therapeutics. Researchers in this sector often work both with DNA
probes and DNA sequencing. Researchers typically rely on repetitive sequencing
of relatively short DNA strands of targeted gene segments, for which sequencing
systems that are smaller in scale than those used in the research market are
generally considered most efficient.
THE CLINICAL DIAGNOSTIC MARKET. The clinical diagnostic market consists of
life science companies, hospitals, reference laboratories, medical clinics and
doctors' offices which use clinical molecular genetic tests for the diagnosis
and management of diseases and for tissue typing. Current tests typically rely
on DNA probe-based and other technology including homebrew DNA sequencing tests.
Unlike the research market, genotyping for clinical diagnostic purposes
generally relies on the sequencing of relatively short DNA strands with high
degrees of accuracy. DNA sequencers and related instrumentation used for
diagnostic purposes should enable clinicians to rapidly and accurately sequence
and analyze a high volume of patient samples at relatively low costs, and fit
within the space constraints of a typical clinical laboratory.
LIMITATIONS OF EXISTING DNA SEQUENCING PRODUCTS
Historically, automated DNA sequencers and related products used for
genotyping have been developed primarily to meet the needs of the research and
clinical research markets. We are not aware of any FDA approved DNA sequencing
tests for the clinical diagnostic market. Existing DNA sequencing products
typically do not address the needs of the clinical diagnostic market because:
- they cannot sequence DNA strands quickly enough to satisfy diagnostic
turnaround times;
- they are designed to sequence long DNA segments and therefore may not be
efficient for sequencing shorter DNA segments typical in clinical
diagnostic testing;
- they are expensive;
- they are too large for most clinical laboratories;
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- they use gels usually prepared manually in a process that is time
consuming and may result in exposure of laboratory technicians to
dangerous chemicals; and
- they use homebrew tests, reagents, chemicals and protocols that are not
typically subject to the standardized procedures or quality control
processes necessary for reliable results.
OUR SOLUTION
Our OpenGene System consists of automated DNA sequencers, disposable gel
cassettes, related equipment and software and disease-specific GeneKits. Our
OpenGene System has been designed expressly to meet the needs of the clinical
diagnostic market. We believe that our integrated OpenGene System provides a
cost effective and efficient clinical diagnostic solution that will make DNA
sequencing a viable diagnostic tool for the management of selected diseases and
medical conditions because:
- it reads DNA strands faster than existing sequencers designed for the
research market;
- it is designed to efficiently read and analyze the shorter DNA strands
typically used for clinical diagnosis;
- it is significantly less expensive than comparable sequencers designed for
the research market;
- it is small and lightweight;
- it utilizes easy to use disposable gel cassettes;
- it includes our proprietary software package designed for DNA analysis and
patient data management;
- our GeneKits include the reagents, primers and other chemicals,
third-party licenses, software and other materials required to conduct
tests for specific disease-associated genes; and
- our GeneKits are standardized, validated and undergo quality control
testing to provide reliable, reproducible results.
We must obtain approval from the FDA and comparable foreign regulatory
authorities prior to selling our products for clinical diagnostic use.
While our OpenGene System and GeneKits are designed to serve the clinical
diagnostic market, they also fulfill many important requirements within the
research and clinical research markets. Researchers in the clinical research
market also work with short DNA strands, rely on a repetitive sequencing of gene
segments and need quick and efficient sequencing systems. In the research
market, our products complement existing instruments by performing tasks such as
primer labeling, chemistry verification, short sample sequencing and other
preparatory and supportive functions for which speed, cost and efficiency are a
premium. We also have developed a sequencer that is able to read longer segments
required for some research applications.
To date, a substantial portion of our revenues have been generated from
sales to the research and clinical research markets. We expect to continue to
sell to both of these markets even if we receive FDA approval for clinical
diagnostic use of our HIV OpenGene System and other products.
OUR BUSINESS STRATEGY
Our objective is to be a leader in the emerging field of pharmacogenomics.
Our goal is to enable clinicians to use genetic information to monitor and
customize treatment of diseases, initially for HIV and later for other diseases.
Key elements of our business strategy are to:
- PROVIDE AN INTEGRATED GENOTYPING SOLUTION FOR THE CLINICAL DIAGNOSTIC
MARKET. We intend to meet the needs of the clinical diagnostic market by
providing an efficient, inexpensive, easy-to-use
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genotyping solution. Our integrated OpenGene System, which we believe
incorporates these features, includes automated DNA sequencers, disposable
gel cassettes, related equipment and software, and disease-specific
GeneKits. We designed this system for the clinical diagnostic market.
- TARGET THE HIV GENOTYPING MARKET. We are focusing initially on the HIV
market because there is clinical evidence to suggest that genotyping may
be effective in managing the treatment of this disease. By identifying
mutations in HIV through genotyping and consistently countering these
mutations with appropriate drug therapy, we believe drug treatment can be
administered and monitored more effectively. We intend to seek approval
from the FDA and other regulatory authorities to sell our HIV OpenGene
System for clinical diagnostic use in the United States and elsewhere.
- LEVERAGE OUR OPENGENE SYSTEM FOR ADDITIONAL APPLICATIONS. We are
developing other disease-specific GeneKits that we believe have the
potential to eliminate or reduce more time consuming and/or expensive
tests and that may enable clinicians to better monitor and manage patient
treatment. In addition to our HIV GeneKit, we have developed GeneKits for
HLA (used for tissue typing, for example, in organ transplants), and are
developing GeneKits for hepatitis B, hepatitis C, tuberculosis and other
species of HIV not tested for in our current HIV GeneKit.
- OFFER A WIDE RANGE OF TESTING AND SEQUENCING SERVICES. We maintain
accredited reference testing laboratories that provide genotyping and
other testing services for HIV, hepatitis B, hepatitis C, other infectious
diseases and various genes associated with cancer. We believe that the
data which we obtain in providing these services will also assist us in
our efforts to develop new GeneKits and other technologies.
- PROVIDE SOPHISTICATED SOFTWARE FOR THE CLINICAL RESEARCH AND DIAGNOSTIC
MARKETS. Our GeneObjects Software operates our OpenGene System, analyzes
the results, and prints out a report that shows the drugs to which a
patient has become resistant. This software was designed to meet the needs
of the clinical research and clinical diagnostic markets. We also are
developing an enhanced version of this software, called TRUGENE CMS, which
is specifically targeted to the clinical diagnostic market and will
simplify the work flow and report generation for disease specific
applications.
- TAILOR OUR MARKETING EFFORTS TO LOCAL MARKETS. We have established and are
expanding our sales and marketing force in the United States, Canada,
selected European countries and in other areas where we believe that the
size of the market and our familiarity with regulatory and other local
conditions justify the development of our own sales force. In selected
geographic and product markets where we believe that regulatory and other
market factors make it more prudent to rely on a third-party local sales
and marketing effort, we seek to enter into distribution and marketing
arrangements with leading distributors.
- MAINTAIN OUR TECHNOLOGICAL LEADERSHIP IN GENOTYPING. We plan to continue
to invest significant resources in research and development so that we may
continue to provide customers with advanced genotyping technologies and
products. Where we believe it is cost effective or otherwise appropriate,
we will continue to license and acquire technologies and products to
include in our OpenGene System and GeneKits. We will also seek to continue
to collaborate with hospitals, academic institutions, pharmaceutical
companies and life science companies to develop additional GeneKits and
other products.
OUR INTEGRATED OPENGENE SYSTEM
Our integrated OpenGene System includes the following components:
SEQUENCING SYSTEMS. Sequencing systems consist of automated DNA sequencers
and related equipment.
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SOFTWARE SYSTEMS. Software systems consist of our proprietary GeneObjects
and TRUGENE CMS DNA analysis and data management software.
GENEKITS AND OTHER CONSUMABLES. GeneKits consist of various reagents,
enzymes, primers and other chemicals, and other consumables consist of
disposable gel cassettes, acrylamide and other materials.
SEQUENCING SYSTEMS
LONG-READ TOWER AUTOMATED DNA SEQUENCER. The Long-Read Tower is a two-dye
automated sequencer that can read 400 bases in approximately 40 minutes with
high accuracy, suitable for clinical diagnostic applications, and can also read
longer DNA sequences used in some research applications. Using our proprietary
Long-Read MicroCel cassettes, the Long-Read Tower can read 1,000 bases in under
4 hours with high accuracy. The Long-Read Tower can read 16 lanes and test up to
8 patient samples per gel cassette, and can be networked with other Long-Read
Towers or Clippers so that multiple units can run from a single workstation,
thereby allowing for a significantly greater number of patient samples to be
tested simultaneously. The Long-Read Tower is small (47cm x 39cm x 26cm) and
lightweight relative to competitive instruments, and sells at retail prices
significantly below comparable automated DNA sequencers. The Long-Read Tower can
be connected to almost any computer network, has no moving parts and consumes
only 300 watts of power.
CLIPPER. The MicroGene Clipper automated DNA sequencer is a smaller version
of our Long-Read Tower which, using our proprietary MicroCel cassettes, can read
300 bases in approximately 30 minutes with high accuracy, and is suitable for
clinical diagnostic applications. The Clipper can read 16 lanes and test up to 8
patient samples per gel cassette, and can be networked so that multiple units
can run from a single workstation, thereby allowing for a significantly greater
number of patient samples to be tested simultaneously. The Clipper is small (35
cm x 40 cm x 26 cm) and lightweight. The Clipper sells at retail prices
significantly below comparable automated DNA sequencers. The Clipper can be
connected to almost any computer network, has no moving parts and consumes only
300 watts of power.
SEQ4X4. The Seq4x4 automated DNA sequencer is marketed by Amersham as the
Amersham Pharmacia Biotech Seq4x4-TM- built to Amersham's specifications to work
with Amersham's one color Cy 5.5 terminator chemistry and ThermoSequenase-TM-
Kits. The Seq4x4 is a less expensive version of the Clipper that includes many
of the features of the Clipper; however, it is a 16 lane one-dye sequencer, and
cannot be networked with other sequencers. The Seq4x4 is sold to the research
market where it can be used to complement or replace significantly slower manual
DNA sequencing methods and to complement currently available, more expensive
automated DNA sequencers.
GEL TOASTER. The Gel Toaster is a compact (47 cm x 39 cm x 26 cm),
lightweight device that uses ultraviolet light to polymerize, or cure, liquid
acrylamide that has been injected into the Long-Read MicroCel. The acrylamide
gel is the medium through which the DNA is separated for sequencing. We also
sell a toaster for use with the Seq4x4. This toaster's dimensions are 33 cm x
11.4 cm x 30.5 cm.
SOFTWARE SYSTEMS
GENEOBJECTS. GeneObjects is our DNA analysis and data management software
package which we have designed for use with our sequencing systems. It automates
portions of the test process and facilitates analysis and diagnosis. It also
automates certain laboratory management tasks. GeneObjects software is able to
sort, analyze and store data by patient (regardless of the test or gel source
from which the data is derived) or by the test performed. GeneObjects can also
be used to control multiple sequencers over the network from a single
workstation. It can use existing microcomputers and sequencers, or be installed
as a turnkey system with state-of-the-art hardware.
TRUGENE CMS. TRUGENE CMS, an enhanced version of our GeneObjects software,
is a software system we are developing for genotypic analysis of large
quantities of patient samples in a clinical
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diagnostic setting. The first application will be for HIV. The software design
is based on the assembly line concept. A sample, once received by a laboratory
for processing, will be registered with TRUGENE CMS. The new sample will be
placed on the assembly line's conveyer so that it can be passed along from stage
to stage in a specific order. The final product of this assembly line is a
report for the registered sample. TRUGENE CMS is being designed to work with
various protocols, each of which defines how many stages are on the assembly
line, what each stage should do, and what information the final report should
contain.
GENEKITS AND OTHER CONSUMABLES
GENEKITS. We sell to the research and clinical research markets a series of
GeneKits which assist in identifying disease-associated genetic mutations and
gene sequences. Our HIV GeneKit is described in the section of this prospectus
entitled "--Applications for our OpenGene System--HIV." Other GeneKits which we
sell or are developing are described in the section of this prospectus entitled
"--Applications For Our OpenGene System."
GENEKIT TECHNOLOGIES. We developed and are developing GeneKits with
features designed to make our GeneKits suitable for the clinical diagnostic
market. We use certain technologies proprietary to us, and other technologies
licensed to us, to ensure that our GeneKits will meet the needs of this market.
These technologies include our stratified matrix testing method, CLIP and CAS
technology, polymerase chain reaction technology, or PCR, and an extraction
technology referred to as Boom technology. We have U.S. patents covering our
stratified matrix testing method and CLIP technology. We license the PCR
technology from Roche Molecular Systems, Inc. and F. Hoffmann-LaRoche Ltd., the
CAS technology from Genassiance Pharmaceuticals Inc. and the Boom technology
from Organon Teknika.
Our proprietary CLIP technology enables DNA samples to be prepared in a
single test-tube, single-step process that replaces the multiple individual
steps currently required to prepare a sample for DNA sequencing. This technology
saves time and reduces the cost of DNA sequence-based diagnostic testing, which
is important to the clinical diagnostic market. Our CLIP technology is also more
sensitive than traditional techniques, which is especially useful for managing
viral diseases because it permits the genotyping of patients with very low viral
loads that other methods cannot detect. As a result, using CLIP, HIV patients
with low viral loads can be genotyped and treated before drug resistance
develops and their viral loads increase. Our exclusive license from Genassiance
Pharmaceuticals permits us to use CAS technology solely for diagnostic
applications. CAS technology performs similar functions to CLIP technology,
using different enzyme chemistry on DNA.
PCR is a powerful laboratory technique that can detect, copy and amplify
specific DNA sequences. Amplifying the DNA is an essential part of DNA
sequencing because it allows the technician to start with minute amounts of DNA
and finish with at least a million-fold increase in the number of DNA molecules,
ensuring that a sufficient amount of DNA is available to obtain the sequence.
Boom technology enables sensitive, reproducible and accurate extractions of
RNA and DNA from blood plasma samples, and from body fluids such as semen and
cerebral spinal fluid. The Boom method is especially valuable in HIV genotyping
for patients with low viral loads. In connection with obtaining the Boom
technology license, we granted Organon Teknika a right of first refusal to
certain improvements we may develop to DNA sequencing and extraction technology
and to some of our reagents and uses of our CLIP technology.
MICROCEL CASSETTE. The MicroCel Cassette is a disposable, polyacrylamide
electrophoretic gel cassette which acts as the detection medium for the
Long-Read Tower, Clipper and the Seq4x4. The gel is injected into the cassette.
After the cassette is cured, it is placed into the sequencer for DNA sequencing
and other tests. The cassette is comprised of two small glass plates, has a 50
micron gap and can be filled with acrylamide and cured in three minutes through
a semi-automated process which uses our Gel Toaster and SureFill products.
Competitive sequencers typically use significantly thicker (200-500 micron gap)
gel
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systems which are assembled manually by technicians and must be disassembled and
cleaned after use. We manufacture the MicroCel cassette in three sizes for use
with our different DNA sequencers.
SUREFILL CARTRIDGE. The acrylamide injected into the MicroCel cassettes is
supplied in a 10 cm long disposable syringe-based SureFill cartridge that
contains necessary ingredients to fill 10 MicroCels. SureFill protects the
technician from directly handling potentially dangerous chemicals and simplifies
the gel preparation process.
TESTING, SEQUENCING AND OTHER SERVICES
We provide DNA testing, sequencing and other services for HIV, hepatitis B,
hepatitis C, and other infectious diseases as well as for certain cancers.
We operate an accredited reference testing laboratory in Norcross, Georgia,
that specializes in high resolution genotyping of HIV and other viruses
associated with secondary opportunistic infections of patients with AIDS. This
facility also provides high resolution DNA sequencing of hepatitis B,
cytomegalovirus and other viruses that commonly infect AIDS patients. Our
facility in Evry, France, carries out DNA diagnostic testing and sequencing
services in Europe, including genotyping tests for HIV, hepatitis C and other
tests.
We also maintain a library of cultures of HIV strains with known drug
resistant mutations and a patient database on viral drug resistance and high
resolution DNA sequencing data. This data may be used to screen new drugs for
possible viral resistance and to identify patterns of cross resistance to new
drugs as well as for the development of new AIDS treatment strategies.
APPLICATIONS FOR OUR OPENGENE SYSTEM
HIV
Our HIV OpenGene System will enable physicians to genotype the major HIV
species infecting patients and to diagnose and treat HIV based upon the
mutations present in the virus. Our HIV GeneKit contains all of the reagents,
chemicals, third-party licenses and other materials required to sequence the DNA
from the protease and reverse transcriptase regions of the virus, which are
known to develop mutations that make the virus resistant to drugs. We initiated
the sale of our HIV GeneKit, which we call the TRUGENE HIV-1 Genotyping Kit, for
use in the clinical research market in the fourth quarter of 1998. We have a
patent application pending in the United States and in some foreign countries
covering various aspects of our HIV GeneKit.
HIV OVERVIEW. HIV is a virus that attacks the cells in the human immune
system. Without effective treatment, HIV significantly weakens the immune
system, which results in opportunistic infections, neurological dysfunctions,
malignant tumors and eventually death. HIV infected patients may develop
Acquired Immune Deficiency Syndrome, or AIDS, which is a syndrome of infections,
diseases and medical conditions resulting from a weakened immune system. Since
the early 1980's, when the HIV epidemic was first identified, it is estimated
that more than 16.3 million people worldwide have died as a result of
complications from AIDS. Approximately 900,000 people in North America, 880,000
in Europe and Central Asia and a total of 33 million people worldwide are
infected with HIV. In 1999 alone, there were approximately 5.6 million new HIV
infections, including 44,000 in North America, and 2.6 million deaths worldwide
as a result of complications from AIDS.
HIV is a highly variable virus with a high rate of mutations. Because of
HIV's high mutation rate, drugs used to treat the virus, while generally
effective for a period of time, often result in the survival of a virus with
mutations that confer resistance to those drugs. Today, there are more than 140
known HIV mutations associated with drug resistance.
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Currently, there are 14 approved anti-HIV drugs. These drugs specifically
target the protease and reverse transcriptase enzymes to interfere with and
reduce HIV replication. Mutations in the genetic information of the virus that
codes for these two enzymes can result in the development of drug resistance.
Current drug therapy usually relies on the use of drug cocktails of two or more
antiviral drugs, targeting different stages of the HIV life cycle. A number of
studies have shown that drugs given in various combinations reduce the viral
load in most patients and can significantly improve these patients' overall
health. Viral load is a generally used measurement of the concentration of virus
in a patient's blood. HIV patients fail drug therapy in many cases either
because the virus mutates and develops resistance to drugs, or because the side
effects of drugs or the strict dosing regimens are intolerable, leading patients
to skip doses or discontinue using the drugs.
One of the central challenges in maintaining HIV patients on long-term drug
therapy is to adjust each patient's medication as drug-resistant strains of the
virus emerge. Because they rely only on viral load, current disease management
methods usually provide a warning that the drugs are no longer working only
after the drug-resistant virus has asserted itself and viral load has increased.
These methods usually do not tell clinicians which drugs are failing due to
emerging resistance or to which drugs the patient should be switched. As a
result, there is a need to provide doctors and clinicians with information about
HIV drug resistance to enable clinicians to better manage HIV drug therapy.
GENOTYPING AND HIV. Genotyping HIV enables clinicians to identify mutations
in the genetic material in the virus. Two initial clinical trials, one of which
we conducted, suggest that by sequencing the patient's HIV, clinicians may be
able to detect early in the process that a resistant mutant has emerged and make
appropriate changes in medication to manage viral load. Sustaining a low viral
load is believed to be a key factor in prolonging the life of an HIV patient.
Achieving and maintaining low viral loads may also significantly reduce medical
costs because patients with low or undetectable viral loads have fewer
opportunistic infections and other symptoms and, therefore, require fewer and
shorter hospital stays and fewer other medical services.
To test the clinical usefulness of genotyping HIV to manage a patient's drug
therapy, the Community Programs for Clinical Research on AIDS, in conjunction
with several universities and funded by the NIH, conducted a 12-week prospective
trial in the United States of 100 HIV positive patients. This trial, completed
in December 1998, is known as GART, which stands for Genotypic Antiretroviral
Resistance Testing. To be eligible, each patient had to have a minimum viral
load of 10,000 copies per milliliter. The patients were randomly split into two
groups. One group received accepted standard of care treatment, but did not
undergo HIV genotyping. The other group received accepted standard of care
treatment plus HIV genotyping. Physicians of patients in the genotyping group
were able, at their discretion, to adjust medication in response to the
genotyping results. The study results showed that the patients treated in the
genotyping group had a mean decrease in viral load of approximately 93% at the
end of eight weeks, compared to an approximately 76% decrease in patients in the
non-genotyping group. This difference was found to be statistically significant.
OUR CLINICAL TRIALS. In December 1998, the FDA allowed us to initiate human
clinical trials of our HIV OpenGene System under our Investigational Device
Exemption, or IDE, application. In June 1999, we completed a clinical trial in
Europe called VIRADAPT, which demonstrated that patients who received standard
of care treatment and whose drug treatments were selected using periodic
genotyping had lower viral loads than patients who received standard of care
treatment but whose drug treatments were selected without the use of genotyping.
This trial was not part of our IDE, but results from this trial will be
submitted to support our market approval application. Also in June 1999, we
initiated a trial under our IDE called SEARCH to test the clinical utility of
our HIV OpenGene System in genotyping HIV infected patients. Based on positive
clinical trial results to date, the FDA has advised us that we are not required
to complete the SEARCH trial. We began our proficiency trials, under our IDE, in
the third quarter of 1999. In January 2000, we also began a large-scale trial
called Vigilance II which will be an open label, cost recovery HIV genotyping
study conducted under our IDE.
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The following is a summary of each of these trials:
- VIRADAPT. In March 1997, prior to our IDE allowance, we sponsored a
prospective trial in Europe called VIRADAPT to determine the usefulness of
genotyping in managing the treatment of HIV infected patients. The
VIRADAPT trial involved 108 HIV infected patients and was scheduled to
last 12 months. To be eligible, each patient had to have a minimum viral
load of 10,000 copies per milliliter. The patients were randomly split
into two groups. The control group received standard of care treatment,
but did not undergo periodic genotyping. The genotyping group received
standard of care treatment and underwent periodic genotyping allowing the
physicians, at their discretion, to adjust medication in response to the
genotyping results. Genotypes were done using either homebrew DNA testing
methods or an early version of our HIV GeneKit. At the end of six months,
interim results showed that patients treated in the genotyping group of
the study had a mean decrease in their viral loads of approximately 93%
(32% of patients in the genotyping group had undetectable viral loads), as
compared to an approximately 79% decrease in viral loads in the
non-genotyping group (14% of patients in the non-genotyping group had
undetectable viral loads). This difference was found to be statistically
significant. In January 1999, on the recommendation of the data safety
management committee for the VIRADAPT trial, the control group was stopped
on ethical grounds. The committee decision was based in part on the
interim results of the VIRADAPT trial and in part on the release of the
results of the GART trial in December 1998 which showed decreases in viral
loads for the genotyping patients consistent with the VIRADAPT trial. As a
result, beginning in January 1999, all patients received standard of care
treatment and underwent periodic genotyping. At the end of 12 months,
results showed that 28.4% of patients in the original genotyping arm had
undetectable viral loads. The mean viral loads for this group were
maintained at substantially the same level that existed after six months.
The data also showed that of those patients who were switched from
standard of care treatment only to standard of care treatment and
genotyping, 26% had undetectable viral loans as compared to 14% of
patients in this group at the end of six months before the treatment was
switched. We are reanalyzing the samples collected in the GART and the
VIRADAPT trials using our HIV GeneKit and OpenGene System and plan to
include those results in support of our market approval application.
- SEARCH. The SEARCH trial was intended to test whether patients whose
doctors rely on genotyping using our HIV OpenGene System would experience
greater reductions in viral load than those patients whose doctors rely
only on standard of care treatment. This trial was intended to demonstrate
the clinical utility of our system. We began the SEARCH trial in June
1999. To be eligible, each patient must have had a minimum viral load of
1,000 copies per milliliter. Like GART and VIRADAPT, the patients were
randomly split into two groups. The control group received standard of
care treatment without genotyping, and the genotyping arm received
standard of care treatment plus genotyping. In November 1999, the FDA
advised us that we are not required to complete the SEARCH trial. The FDA
has indicated that it will not require us to demonstrate further the
clinical utility of our HIV OpenGene System in the treatment of HIV
infected individuals. Based on the FDA's position, we will continue to
provide genotyping to all 128 patients currently enrolled in the SEARCH
trial. However, enrollment of new patients into SEARCH has been closed.
- PROFICIENCY TRIAL. The proficiency trial is intended to demonstrate the
reliability and performance characteristics of our HIV GeneKits and
OpenGene System, which is required by the FDA. We are genotyping
approximately 500 plasma samples. We are genotyping the samples using our
HIV OpenGene System at our subsidiary, Applied Sciences, and at six other
U.S. sites with certified technicians. To demonstrate the reproducibility
of results produced using our GeneKits, samples from the same patients are
tested at multiple sites. Multiple technicians test the same samples and
multiple batches of our GeneKits are used to test the same samples. In
addition, various interfering drugs or chemical agents are introduced to a
series of samples to test the effect of those drugs and
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agents on the results produced with our GeneKits. We began this trial in
the third quarter of 1999 and expect this trial to be completed during the
second quarter of 2000.
- VIGILANCE II. Vigilance II is a prospective, open label, trial with an
enrollment of up to 30,000 patients located throughout the United States.
We began this trial in January 2000. Testing will be performed at
approximately 50 to 100 sites. All patients will undergo HIV genotyping
and the genotyping results will be provided to their physicians. Doctors
who choose not to change drug treatment based on the genotyping results
will be required to so inform us, and results on these patients will be
separately recorded. We plan to use the data collected in Vigilance II in
two ways. First, we hope to compile data showing the prevalence of certain
mutations in patients from different areas of the country. We believe that
this data may be useful in directing doctors in a particular region to use
certain drugs because of the prevalence of certain mutations identified in
that region. Second, we intend to create a database of the clinical
outcome from changes made in drug therapy. Under our IDE, we intend to
charge patients for the use of our HIV OpenGene System to recover the
costs of conducting this trial. We do not intend to submit the results of
this clinical trial as part of our FDA application.
MARKETING OF THE HIV OPENGENE SYSTEM. Our marketing strategy for the HIV
OpenGene System consists of several components. In the United States, should we
obtain FDA approval, we intend to establish relationships with leading doctors,
laboratories and healthcare providers in the HIV diagnostics market and train
them to use our products. We believe that the use of our products by these
industry leaders will facilitate our marketing efforts in the rest of the HIV
clinical diagnostic market. In addition, we believe that these industry leaders
will help shape reimbursement policies of insurance companies and other
third-party payors for HIV genotyping.
We have begun to establish a dedicated team to work closely with insurance
companies and other third-party payors who will determine whether to reimburse
users of HIV GeneKits and related products in the management of their drug
therapies. We are also forming a dedicated sales force to sell our HIV OpenGene
System to major pharmaceutical companies engaged in research and development of
HIV drugs and treatments.
Outside North America, some European countries and other selected areas, we
seek to enter into distribution arrangements with leading distributors of HIV
products to sell our HIV OpenGene System for clinical diagnostic purposes. If
government approval is required for sales in those markets, we intend to rely on
our local partners to obtain the required authorizations.
We intend to continue to market and sell our HIV OpenGene System to
hospitals, pharmaceutical companies, academic institutions and clinical
reference laboratories for research and clinical research purposes. We expect to
continue to service this market regardless of whether the FDA authorizes us to
sell our HIV products for clinical diagnostic purposes.
HLA
Successful transplants of bone marrow, tissue and organs generally require
that the human leukocyte antigens, known as HLA, of the donor and the recipient
be matched as precisely as possible. HLAs are proteins that exist on the surface
of the cell and are vital for determining whether a transplant will be accepted
or rejected. In 1998, there were approximately 21,000 organ transplants in the
United States and approximately 1,300 bone marrow transplants. DNA sequencing of
HLA is increasingly being recognized as the most reliable method of HLA
matching. For example, recent statistics show approximately 500,000 potential
bone marrow donors are genotyped every month worldwide. By sequencing the
particular genes in the multi-gene HLA complex, a clinician can determine
whether the donor's and recipient's HLA match. It is widely believed that
matching significantly increases the chances of success of the transplant. We
have developed four GeneKits for research use only for the A, B and C loci for
Class I and for DRB1 for Class II genes. We began selling this GeneKit for
research purposes in October 1997. We have two U.S. patents covering various
aspects of this GeneKit. This GeneKit is currently being sold only to the
research and clinical research markets.
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HEPATITIS B
We have developed and are currently testing a GeneKit for hepatitis B.
Hepatitis is an inflammation of the liver. Hepatitis B is one type of virus that
causes this inflammation. There are more than 350 million people worldwide that
are chronically infected with hepatitis B, of which approximately one million
are located in the United States. Hepatitis B is treated with interferon, drugs
or certain reverse transcriptase inhibitors. Genotyping may be used to identify
the type of hepatitis virus present (e.g., B or C) and to detect mutations in
the virus that cause the disease to become resistant to anti-viral drugs.
HEPATITIS C
We are currently developing a GeneKit for hepatitis C. Hepatitis C is a
second type of virus that causes inflammation of the liver. There are
approximately 175 million people worldwide that are chronically infected with
hepatitis C, of which approximately 3.2 million are in the United States. Unlike
hepatitis B, interferon drugs work with only certain hepatitis C genotypes. We
have developed and are currently testing a Hepatitis C GeneKit that can be used
to identify the genotypes of the virus, so that the appropriate drug treatment
may be prescribed. Protease inhibitors are also being used experimentally to
treat hepatitis C. Our Hepatitis C GeneKit can also be used to detect mutations
that may confer resistance to these anti-viral drugs.
TUBERCULOSIS
We are currently developing a GeneKit for tuberculosis. Tuberculosis,
commonly known as TB, is a highly contagious bacterial disease of the
respiratory system. There are approximately three million deaths per year
worldwide caused by TB and eight million new infections per year worldwide. In
addition, there is an increase in the number of TB infections which are
multi-drug resistant. In order to be infected with TB, a patient must carry a
certain mycobacterium. People who test positive for non-TB mycobacterium can be
treated at home with certain drugs. Due to the highly contagious nature of TB,
people who test positive for TB mycobacterium must be kept in isolation during
the early stage of treatment. Current testing methods can take from several days
to several weeks to identify whether a patient's mycobacterium is TB or non-TB,
forcing hospitals to quarantine both TB and non-TB patients during this period.
Quarantining patients for any prolonged period uses significant medical
resources. We are developing and currently testing a TB GeneKit designed to
genotype the genetic material in the mycobacterium within approximately one day
to identify the presence of TB or non-TB mycobacterium. Our TB GeneKit can also
be used to detect mutations that confer resistance to drugs used to treat TB. We
intend to market and sell our TB GeneKit in those geographic areas where TB
poses significant health threats, including Asia, Central Europe, parts of the
former Soviet Union and Africa.
OTHER HIV
We are developing additional HIV GeneKits for HIV species not covered by our
existing HIV GeneKit.
REGULATION BY THE FDA AND OTHER GOVERNMENT AGENCIES
We currently sell our products for research and clinical research purposes.
In the future, we intend to sell products for clinical diagnostic purposes. We
do not believe we need authorization from the FDA or health authorities in
foreign countries to sell our products for research purposes, as long as they
are properly labeled. We will, however, require authorization to sell our
products for clinical diagnostic purposes.
FDA APPROVAL PROCESS. Products that are used to diagnose diseases in people
are considered medical devices, which are regulated by the FDA. To obtain FDA
authorization for a new medical device, a
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company may have to submit data relating to safety and efficacy based on
extensive testing. This testing, and the preparation of necessary applications
and the processing of those applications by the FDA, are expensive and may take
several years to complete. The following describes several important aspects of
the FDA authorization process.
The FDA has three classes for medical devices:
- Class I devices (for example, bandages, manual wheelchairs and ice
bags) are the least regulated, but they must still comply with the
FDA's labeling, manufacturing, recordkeeping, and other basic
requirements. Most Class I devices do not require premarket
authorization from the FDA.
- Class II devices (for example, portable oxygen generators and
hypodermic needles) may be subject to additional regulatory controls,
such as performance standards and postmarket surveillance.
- Class III devices (for example, cardiac pacemakers) require specific
FDA approval prior to marketing and distribution, and are, as well,
subject to the FDA's basic requirements.
To sell a Class II medical device, a company must first obtain permission of
the FDA by submitting a 510(k) premarket notification, commonly known as a
510(k), showing that the device is similar to a device already on the market. To
sell a Class III medical device, a company must first get specific approval of
the FDA for the device by submitting a premarket approval application, commonly
known as a PMA application. A company may have to include test data in a 510(k)
notification, including human test data. It will almost always have to include
such test data in a PMA application.
If human test data are required for either a 510(k) or a PMA application,
and if the device presents a significant risk, the manufacturer must first file
an Investigational Device Exemption submission, or IDE, with the FDA. The IDE
must contain data, such as animal and laboratory testing, showing that the
device is safe for human testing. If the IDE is granted, human testing may
begin.
Generally, a 510(k) notification to the FDA that a new device is similar to
an existing device requires less data and takes less time for the FDA to process
than a PMA. The FDA is supposed to act on a 510(k) notification within 90 days.
According to the most recent FDA data available, the FDA completes its review of
more than 66% of 510(k)s within 90 days. By contrast, a PMA application must be
supported by more extensive data to prove the safety and efficacy of the device,
and review of a PMA application involves a lengthier FDA process. The FDA
conducts a preliminary review of the PMA application. If complete, the PMA
application is filed by the FDA. Officially, the FDA then has 180 days to review
the PMA application, however, as a practical matter, PMA reviews usually take
much longer, up to one-and-a-half years or more from filing. The FDA may grant
expedited (fast-track) review of a PMA application if certain criteria relating
to public health importance are met, but that decision is within the FDA's
discretion and affects only the timing of the review process, not the outcome.
NEED FOR FDA APPROVAL OF SOME OF OUR PRODUCTS. We intend to market some of
our products in the U.S. for clinical diagnostic purposes, and therefore we will
have to obtain prior FDA authorization, as described above. We believe our HIV
GeneKit is currently considered by the FDA as a Class III medical device.
However, the FDA recently asked an advisory committee of experts whether HIV
genotyping tests should be reclassified from Class III to Class II. The advisory
committee recommended reclassification subject to certain controls including
post-market surveillance of the performance of these products. If the FDA
reclassifies HIV genotyping tests from Class III to Class II, we will be able to
obtain FDA permission to market our HIV OpenGene System by submitting a 510(k),
rather than a PMA. A 510(k) generally contains less data than a PMA and is
usually reviewed and approved by the FDA more quickly than a PMA. Although it is
likely that the FDA will follow the recommendation of its advisory committee, to
do so the FDA is required to issue a proposed regulation, allow the opportunity
for public comment
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and then publish a final regulation reclassifying HIV genotyping tests. This
process could take several years to complete.
Under the Food and Drug Administration Modernization Act of 1997, there is
an alternative option for us to obtain faster reclassification of our HIV
OpenGene System. Under this new procedure we can ask the FDA to classify our HIV
OpenGene System based upon an evaluation of the risks presented by the device to
patients. The FDA has 60 days to make a decision on this request. However, in
order for us to use this new procedure, we would first have to submit a 510(k)
to the FDA and have the FDA reject the 510(k), which would occur because the
device is still in Class III. Once the FDA rejects our 510(k), we would then
immediately submit our request for classification of our HIV OpenGene System in
Class II. This option is likely to be faster than waiting for the FDA to go
through its normal reclassification procedures.
We currently plan to follow this alternate option. However, since this
process is new and is used very infrequently, there is no assurance that the FDA
would grant our request for reclassification. If the FDA does not grant our
request to reclassify our HIV GeneKit under this procedure, we will either have
to submit a PMA application or wait until the FDA acts to reclassify HIV
Genotyping tests as recommended by its advisory committee.
We believe that some of our other products will be regulated as Class II or
Class III medical devices.
OTHER FDA REQUIREMENTS. In addition to government requirements relating to
marketing authorization for medical device products, we will also be subject to
other FDA requirements. We will have to be registered as a medical device
manufacturer with the FDA. We will be inspected on a routine basis by the FDA
for compliance with the FDA's quality system regulations, which prescribe
standards for manufacturing, testing, distribution, storage, design control and
service activities. In addition, because we will manufacture some of our
products in Canada, the FDA, in conjunction with the U.S. Customs Service, could
impose a ban on our products if the FDA were to conclude that the products
appeared to be in violation of the FDA's regulatory requirements, including
restrictions that apply to the sale of research-use only products. Also, the
FDA's medical device reporting regulation will require us to provide information
to the FDA on deaths or serious injuries associated with the use of our devices,
as well as product malfunctions that are likely to cause or contribute to death
or serious injury if the malfunction were to recur.
Finally, the FDA prohibits promoting a device for unauthorized uses and
reviews company labeling for accuracy. The FDA has become aware that certain
products being sold by other companies for research purposes only, were in fact
being used by some customers for clinical diagnostic purposes. The FDA recently
issued a policy statement describing the conditions under which companies may
sell research-use only products. These conditions may restrict our ability to
sell research-use only products in the United States. We do not believe these
conditions will have any negative effect on our sale of GeneKits for legitimate
scientific research.
REGULATORY APPROVAL OUTSIDE THE UNITED STATES. We plan to market our
products outside the United States, initially in Canada, Japan, countries in
Europe and South America. Government authorization requirements similar to the
FDA's exist in some of these and many other foreign countries. Therefore,
authorization to sell our products for clinical diagnostic purposes in Canada,
Japan, Europe and South America may also require lengthy and costly testing
procedures. In addition, the regulatory bodies in other countries may be
affected or influenced by significantly different criteria than those used by
the FDA. Sale of our products in these areas may be materially affected by the
policies of these regulatory bodies or the domestic politics of the countries
involved.
OTHER GOVERNMENT REGULATIONS. We are or may become subject to various
federal, state, provincial and local laws, regulations and recommendations,
including those relating to workers compensation, safe
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working conditions, and laboratory and manufacturing practices used in
connection with our research and development activities.
In addition, our reference laboratory in Norcross, Georgia, is subject to
stringent regulation under the Clinical Laboratory Improvement Amendments of
1988, known as CLIA. Under CLIA, laboratories must meet various requirements,
including requirements relating to the validation of tests, training of
personnel, and quality assurance procedures. The laboratory must also be
certified by a government agency. Our Norcross laboratory performs high
complexity tests, and is therefore subject to the most stringent level of
regulation under CLIA. This laboratory is certified under CLIA and by the state
of Georgia.
We are also subject to various laws and regulations in Canada, the United
States and Europe, including those relating to product emissions use and
disposal of hazardous or toxic chemicals or potentially hazardous substances,
infectious disease agents and other materials, workers compensation, safe
working conditions, and laboratory and manufacturing practices used in
connection with our research and development activities.
SALES AND MARKETING
We market our OpenGene System in North America and in many European
countries to the research and clinical research markets through our direct sales
force. We have a sales and marketing force of 58 people. Many members of our
sales force have scientific backgrounds. Our marketing force includes a team of
trained application specialists who provide intensive on-site training,
after-sales support and site-by-site trouble shooting. We offer service
contracts to our customers on our sequencers, certain equipment and software. We
have established a toll-free telephone number in North America for customer
service. The members of our internal sales force are compensated on a commission
and salary basis.
For other areas of the world and in selected product markets, our strategy
is to establish relationships with leading distributors to market and sell our
products. We granted Amersham the exclusive worldwide license to use and sell
the Seq4x4 and related products used and sold with the sequencer, which is
designed for the research market. In November 1999, we granted
Amersham-Pharmacia Biotech K.K. the exclusive right to distribute our products
to the research market in Japan. During 1999 approximately 21% of our revenues
were derived from sales of sequencers and other products to Amersham.
In 1999, we granted exclusive rights to distribute our GeneKits and OpenGene
System to Werfen Medical S.A. in Argentina and Diagnostic Technology Pty Ltd. in
Australia and New Zealand. We also entered into an agreement in 1999 with Roche
Diagnostics, S.L. to act as our exclusive agent in Spain and Portugal in the
clinical diagnostic market. These agreements expire at various times from
April 2000 through April 2002, and in certain cases, are subject to automatic
renewal. Certain of the agreements may also be terminated by either party upon
specified notice periods and may require us to make termination payments under
certain circumstances. Certain of the agreements also provide for minimum annual
purchases for specified periods.
Our marketing efforts also include product advertisement and participation
in trade shows and product seminars.
RESEARCH AND DEVELOPMENT
We currently conduct research and development through our own staff and
through collaborations with researchers at scientific and academic institutions
and hospitals. Our current research and development activities are focused on:
- developing additional GeneKits, including additional HIV GeneKits for
different HIV species, and GeneKits for hepatitis B, hepatitis C and
tuberculosis;
- developing new technology for our sequencers and related equipment and
software;
45
<PAGE>
- refining existing proprietary, disposable gel cassette technology in order
to improve performance of our sequencers; and
- exploring new technologies for future commercial products.
As of February 29, 2000, our research and development staff consisted of 60
people. This includes a team of software developers who have developed our
GeneObjects software and are developing our TRUGENE CMS software. Our software
developers are working on an advanced version of our GeneObjects software as
well as additional software applications for the clinical diagnostic market. Our
research and development staff is also working to prepare our planned
application to the FDA to sell our HIV OpenGene system to the clinical
diagnostic market.
We incurred $7.9 million of research and development expenses in 1999, $6.3
million in 1998 and $4.1 million in 1997. We have four facilities in the United
States and Canada where we conduct research and development.
MANUFACTURING
We assemble our DNA sequencers and related equipment at a manufacturing
facility in Toronto, Canada. Component parts are manufactured by third parties
in accordance with our design specifications. We manufacture our disposable gel
cassettes at our second manufacturing facility in Toronto. We make GeneKits in
our Pittsburgh, Pennsylvania facility. We also plan to make GeneKits at a new
facility in Atlanta, Georgia, which is in the process of being built. We
manufacture certain chemicals and other components included in the GeneKits.
Other GeneKits components are manufactured by, or licensed from, third parties.
Our new facility in Atlanta is being designed to enable us to increase
significantly our production of GeneKits. Based upon our experience with our
Pittsburgh facility, we believe that we will be in a position to qualify our
Atlanta facility under applicable FDA standards. We expect that this new
approximately 100,000 square foot facility will become available to us in stages
and that we will be in a position to commence commercial production at this
facility in the first quarter of 2001.
We have documented and installed design and production practices in our
Toronto facilities to comply with the FDA's quality system regulations. We are
in the process of documenting and installing design and production practices in
our Pittsburgh facility to comply with the FDA's quality system regulations. We
have implemented a quality management system at these manufacturing facilities
in order to ensure product performance, reliability and quality. We intend to
take the same actions at our new Atlanta facility. We also are seeking
certification of compliance to ISO 9001 for our Toronto facilities. In addition
to adhering to ISO goals and FDA quality standards, we have implemented our own
quality control and quality assurance standards and programs.
We provide one year warranty coverage for product defects on the instrument
component of our sequencers. All product repairs are performed by our employees
at one of our manufacturing facilities.
In connection with our GeneKits, sequencers and related equipment, we use
certain dyes and custom-designed component parts supplied by third parties. We
believe that some dyes supplied by Amersham under our exclusive worldwide
license to use and sell Amersham dyes within our GeneKits, may not be available
from other suppliers, although our customers might be able to purchase some, but
not all, dyes directly from Amersham. In addition, certain reagents and other
chemicals that we use and include in our GeneKits are available only under
license from their manufacturers. While we believe that alternative reagents and
chemicals are available, alternate supplies may not be as effective as certain
of the products that we presently use. In addition, we believe that there are
alternative suppliers for our custom-designed DNA sequencer parts, but that we
would incur costs in switching to alternative suppliers and would likely
experience delays in production of the products that use any of these parts
until such time as we were able to locate alternate suppliers or parts.
46
<PAGE>
PROPRIETARY RIGHTS
We rely on patents, licenses from third parties, trade secrets, trademarks,
copyright registrations and non-disclosure agreements to establish and protect
our proprietary rights in our technologies and products.
We own or jointly own 33 U.S. patents. We own or jointly own an additional
31 U.S. patent applications pending, of which seven have been allowed. We own 12
foreign patents. We own or jointly own foreign applications presently pending as
PCT applications, or as national phase PCT applications, designating
intergovernmental agencies and multiple countries including the European Patent
Office, Australia, Canada and Japan. Our issued and allowed patents and patent
applications cover various aspects of our products and technologies, including
viral load testing, several of our GeneKits and various DNA sequencing and
GeneKit technologies, including the stratified matrix testing technology, the
MicroCel technology, basecalling technology, and the CLIP technology.
Our competitive position is also dependent upon unpatented trade secrets. We
are developing a substantial database of information concerning our research and
development and have taken security measures to protect our data. However, trade
secrets are difficult to protect. In an effort to protect our trade secrets, we
have a policy of requiring our employees, consultants and advisors to execute
non-disclosure agreements. These agreements provide that confidential
information developed or made known to an individual during the course of their
relationship with us must be kept confidential, and may not be used, except in
specified circumstances.
On December 27, 1999, Perkin-Elmer Corporation, PE Biosystems Group filed a
lawsuit against our company in the United States District Court for the Northern
District of California claiming that our DNA sequencing equipment and products
infringe patents licensed to Perkin-Elmer by the California Institute of
Technology. The complaint offers no details to support the allegation of
infringement. The suit requests among other remedies that the court enjoin us
from continuing to infringe these patents and an unspecified amount of damages.
We have previously studied these patents and have received legal advice that we
are not liable for any claims of infringement. We believe that Perkin-Elmer's
claim is without merit and we plan to vigorously defend the suit. Dr. Lloyd M.
Smith, one of our directors, is a named inventor on the patents that we are
alleged to have infringed. Dr. Smith indirectly receives royalty payments for
those patents from Perkin-Elmer, through the California Institute of Technology.
Dr. Smith is a co-founder of Third-Wave Technologies Inc., which has announced
that it will be acquired by PE Biosystems in a stock-for-stock transaction.
After the closing of that transaction, Dr. Smith expects to be a consultant to
PE Biosystems.
From time to time, we receive notice from third parties claiming that we may
infringe their patents.
COMPETITION
The biotechnology industry is highly competitive. We compete with entities
in the United States and abroad that are engaged in the development and
production of products that analyze genetic information. They include:
biotechnology, pharmaceutical, chemical and other companies; academic and
scientific institutions; governmental agencies; and public and private research
organizations.
Some of our major competitors include:
- manufacturers and distributors of DNA sequencers such as the PE Biosystems
Group, Amersham and its Molecular Dynamics subsidiary, LI-COR, Inc.,
Hitachi, Ltd. and Molecular and Genetic BioSystems, Inc.;
- manufacturers and distributors of DNA probe-based diagnostic systems such
as Abbott Laboratories, Chiron Corp., Roche Diagnostics, Gene Probe Inc.,
Innogenetics NV, Digene Corporation and Johnson & Johnson;
47
<PAGE>
- manufacturers of new technologies used to analyze genetic information,
such as chip-based and assay-based technologies, including, Hyseq Inc.,
Affymetrix Inc., ChemCore Inc., CuraGen Corp., Nanogen, Inc.; and
- manufacturers of cell cultured assays, including ViroLogic, Inc. and
VIRCO.
Many of these companies and many of our other competitors have much greater
financial, technical and research and development resources and production and
marketing capabilities than we do.
Our GeneKits also compete with homebrew genetic tests for HIV and other
diseases designed by laboratories and some of the companies listed above.
Homebrew tests include a variety of small-scale genotyping tests which typically
have not undergone clinical validation and have not been approved by the FDA or
other regulatory agencies.
We believe that we are able to compete primarily on the basis of the
following:
- our ability to provide an integrated DNA sequencing system;
- ease of use;
- speed of sequencing;
- cost-effectiveness;
- clinical data with respect to the HIV market; and
- with respect to the HIV market, FDA approval of our HIV OpenGene System,
if and when we obtain it.
EMPLOYEES
As of February 29, 2000, we employed 248 full-time employees (including
executive officers) and 21 independent contractors, of whom:
- 60 are engaged in research and development;
- 58 are involved in sales and marketing activities;
- 84 in manufacturing and operations; and
- 67 are involved in finance, legal and administrative functions.
Our employees are not represented by a union or other collective bargaining
unit and we have never experienced a work stoppage. We believe that our employee
relations are good.
48
<PAGE>
FACILITIES
The table below lists the locations of our facilities and summarizes certain
information about each location.
<TABLE>
<CAPTION>
SQUARE
FEET
LOCATION USE (APPROXIMATE)
-------- --- -------------
<S> <C> <C> <C>
1. Bay Street Research, sales and principal executive 20,643
Toronto, Canada offices
2. Etobicoke MicroCel manufacturing 8,482
Ontario, Canada
3. Etobicoke Sequencer manufacturing 10,500
Ontario, Canada
4. Oakville Research and development 8,000
Ontario, Canada
5. University of Kit manufacturing and research and 8,171
Pittsburgh development
Applied Research
Center, Pittsburgh,
Pennsylvania
6. Technology Park Research and development and laboratory 7,313
Norcross, Georgia
7. Suwanee, Georgia* GeneKit manufacturing, research and 99,822
development, laboratory and sales and
administrative offices
8. Evry, European head office 6,000
France
9. Meyerside Drive** Kit development 3,100
Mississauga,
Canada
10. Kestrel Road** Kit manufacturing 22,600
Mississauga,
Canada
11. Technology Park,** Research and development and laboratory 21,032
Norcross, Georgia
<CAPTION>
TERM OF LEASE
-------------
<S> <C>
1. June 1995 -
May 2000
2. June 1996 -
May 2001
3. September 1998 -
August 2003
4. September 1998 -
August 2003
5. September 1997 -
August 2000
6. March 1998 -
February 2003
7. February 2000 -
March 2010
8. March 1999 -
February 2001
9. May 1999 -
April 2004
10. May 1999 -
April 2004
11. November 1999 -
October 2004
</TABLE>
- ------------------------
* This facility is not yet operating.
** We do not intend to use these facilities and are currently attempting to
sublease them.
In addition to the foregoing, we have entered into a short term lease in
Norcross, Georgia for temporary office space until our new facility in Suwanee,
Georgia is complete.
We believe that additional facilities will be available at reasonable market
rates to meet any future needs we may have for additional space.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings other than the suit
described under "Proprietary Rights".
49
<PAGE>
SERVICE AND ENFORCEMENT OF LEGAL PROCESS
Our company is incorporated under the laws of the Province of Ontario,
Canada and a substantial portion of our assets are located in Canada. Certain of
our directors and officers and certain of the experts named in this prospectus
are residents of Canada, and all or a substantial portion of their assets are
located outside the United States. As a result, if any of our shareholders were
to bring a lawsuit against our officers, directors or experts in the United
States it may be difficult for them to effect service of legal process within
the United States upon those people who are not residents of the United States
or to realize in the United States upon judgments of courts of the United States
based upon civil liability under the Securities Act of 1993, as amended, or the
Securities Exchange Act of 1934, as amended (including the rules promulgated
thereunder by the Securities and Exchange Commission). In addition, our
attorneys in Canada, Osler, Hoskin & Harcourt LLP, have advised us that there is
doubt as to the enforceability in Canada against our company, our directors and
officers, or the experts named in this prospectus, in each case if not a
resident of the United States, of liabilities predicated solely upon U.S.
federal securities laws.
50
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to our
executive officers and directors. This information is supplied based upon our
records and information furnished by our executive officers and directors.
<TABLE>
<CAPTION>
DIRECTOR'S
YEAR TERM
NAME AGE POSITION APPOINTED EXPIRES
- ---- -------- --------------------------------------------------- --------- ----------
<S> <C> <C> <C> <C>
Richard T. Daly(3)........ 50 President, Chief Executive Officer and Director 1998 2001
Thomas J. Clarke.......... 51 Chief Financial Officer 2000
Timothy W. Ellis.......... 52 Chief Operating Officer 1999
Dr. Arthur W.G. Cole...... 49 Executive Vice President; President, Visible 1996
Genetics Europe S.A.
Dr. James M. Dunn......... 45 Vice President, Technology 1994
Marguerite Ethier......... 36 Vice President, General Counsel and Director 2000 2000
Michael A. Cardiff(2)..... 40 Director 1999 2000
Sheldon Inwentash(1)...... 44 Director 1994 2002
Jonathan S. Leff(1)(2).... 31 Director 1999 2000
Robert M. MacIntosh....... 77 Director 2000 2002
Prof. J. Robert S.
Prichard(1)(2)(3)....... 50 Director 1999 2002
Dr. Lloyd M. Smith........ 44 Director 1995 2001
Dr. Konrad M. Weis........ 71 Director 1997 2001
</TABLE>
- ------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Corporate Governance Committee
The following is the business experience for at least the last five years of
each of our executive officers and directors:
RICHARD T. DALY has been a Director of our company since June 1998,
Executive Vice President since March 1999 and President and Chief Executive
Officer since July 1999. Prior to joining Visible Genetics, Mr. Daly founded,
and, from March 1989 through July 1998, served as Chairman and Chief Executive
Officer of Clinical Partners, Inc., a San Francisco-based company providing
comprehensive, therapy-specific management of HIV and AIDS patients for
employers and managed health-care organizations. Prior to founding Clinical
Partners, Mr. Daly spent over 15 years in the healthcare industry with several
companies in a variety of executive positions in sales, marketing and general
management, including serving as the President of Baxter Canada for a period of
four years, and President of the Health Data Institute.
THOMAS J. CLARKE has been Chief Financial Officer of our company since
January 2000. From July 1997 to January 2000, Mr. Clarke was Chief Operating
Officer of CCS TrexCom, Inc., a telecommunications software company. From 1991
to July 1997, Mr. Clarke was Chief Financial Officer of CCS TrexCom. From 1989
to 1990, Mr. Clarke was Chief Financial Officer of Medaphis Corporation, a
medical transaction-processing company. From 1986 to 1989, Mr. Clarke was Senior
Vice President and Chief Financial Officer of Days Inn Corporation. From 1985 to
1986, Mr. Clarke was Controller of Quadram Corporation. From 1980 to 1985, Mr.
Clarke held various financial positions at Contel Corporation. Mr. Clarke is a
Certified Public Accountant.
51
<PAGE>
TIMOTHY W. ELLIS has been Chief Operating Officer of our company since
November 1999. From January 1998 to November 1999, Mr. Ellis operated his own
management consultant practice. From 1991 to 1997, Mr. Ellis was President of
Dynex Technologies. From 1988 to 1991, Mr. Ellis was President of Genetic
Systems Corporation. From 1985 to 1988, Mr. Ellis was General Manager of Abbott
Laboratories' Clinical Chemistry Business Unit.
DR. ARTHUR W. G. COLE has been Executive Vice President of our company since
May 1996 and the President of our Visible Genetics Europe S.A. subsidiary since
September 1999. From May 1996 to September 1999, Dr. Cole served as Chief
Business Officer of our company. From 1995 to May 1996, Dr. Cole was a business
consultant to companies in the biotechnology industry through AC Consulting.
From 1981 to 1995, Dr. Cole worked at Pharmacia Biotech, AB, a Swedish
biotechnology supply company in a range of positions, including five years as
Vice President. During his time with Pharmacia, Dr. Cole ran the division
responsible for worldwide sales of DNA sequencing equipment and supplies.
DR. JAMES M. DUNN has been Vice President, Technology of our company since
June 1998 and was our Director of Molecular Test Development from January 1994
to June 1998. Prior to joining our company, Dr. Dunn was a research consultant
to the Hospital for Sick Children from August 1993 to January 1994 and a
National Cancer Institute of Canada research fellow at the Division of Biology,
California Institute of Technology from 1990 to 1993. Dr. Dunn received a B.Sc.
in chemistry from the University of British Columbia and a Ph.D. from the
University of Toronto.
MARGUERITE ETHIER has been Vice President, General Counsel of our company
since January 2000 and has been a Director of our company since February 2000.
From 1998 to 1999, Ms. Ethier was a partner in the law firm of McCarthy
Tetrault, and from 1995 to 1997 and 1992 to 1993, Ms. Ethier was an associate
with McCarthy Tetrault. From 1993 to 1995, Ms. Ethier was an associate with the
law firms of Townsend & Townsend Khourie & Crew and Howard Rice Nemerovski
Canady Falk & Rabkin. Ms. Ethier holds a B.Sc. degree from the University of
Alberta, an M.Sc. degree from the University of Toronto, and an LL.B. degree
from Osgoode Hall Law School. Ms. Ethier is a member of the Ontario and
California bars, and is qualified as both a registered Canadian Patent Agent and
a United States Patent Attorney.
MICHAEL A. CARDIFF has been a Director of our company since June 1999. Since
September 1999, Mr. Cardiff has been President and Chief Executive Officer of
Prologic Corporation. From October 1996 to September 1999, Mr. Cardiff was
Executive Vice President, Financial Services of EDS Canada. From November 1994
to September 1996, Mr. Cardiff was Senior Vice President of Sales and Marketing
of EDS Canada and from 1989 to 1994, he held several positions with Stratus
Computer Corp. Mr. Cardiff presently is a member of the boards of directors of
Visible Decisions Inc. (which company is not related to our company), SOLCORP
Insurance Software Solutions Corp. and Spectra Securities Software Inc.
SHELDON INWENTASH has been a Director of our company since April 1994. Since
November 1993, Mr. Inwentash has been the Chairman and Chief Executive Officer
of GeneVest Inc. (formerly known as Gene Screen Inc.), a Canadian company which
is a principal shareholder of our company. Since February 1992, Mr. Inwentash
has been the Chairman and Chief Executive Officer of Pinetree Capital Corp., a
venture capital firm.
JONATHAN S. LEFF has been a director of our company since July 1999, serving
as the nominee of the Series A preferred shareholders. Mr. Leff joined E.M.
Warburg, Pincus & Co., LLC in July 1996 as an Associate. In January 1999, he
became a Vice President, and in January 2000, he became a Managing Director.
Mr. Leff is also a director of VitalCom Inc., Intermune Pharmaceuticals Inc. and
a number of private health care companies.
ROBERT M. MACINTOSH has been a Director of our company since March 2000.
From 1980 until his retirement in 1989, Mr. MacIntosh was President of the
Canadian Bankers Association. Mr. MacIntosh presently is a member of the board
of directors of Chase Manhattan Bank of Canada.
52
<PAGE>
PROF. J. ROBERT S. PRICHARD has been a Director of our company in May 1999.
Prof. Prichard has been President of the University of Toronto since 1990. From
1984 to 1990, Prof. Prichard was Dean of the Faculty of Law at the University of
Toronto. Prof. Prichard is past Chairman of the Council of Ontario Universities,
a Director of the Association of American Universities and a Director of the
Association of Universities and Colleges of Canada and the International
Association of Universities. Prof. Prichard presently serves as a Director of
the University Health Network, Onex Corporation, BioChem Pharmaceuticals, Moore
Corporation, Four Seasons Hotels Inc. and Tesma International Inc.
DR. LLOYD M. SMITH has been a Director of our company since March 1995.
Since June 1994, Dr. Smith has been Professor of Chemistry at the University of
Wisconsin-Madison. Dr. Smith has been involved in the development of
fluorescence-based automated DNA sequencers for over 15 years, has written
numerous scientific papers and is a named inventor on a number of U.S. patents.
Dr. Smith is a past member of the National Institutes of Health National Human
Genome Research Institute Study Section. Dr. Smith is a member of the Scientific
Advisory Board of CuraGen Corp. He also serves, or has served, on the editorial
boards of GENOME RESEARCH, DNA SEQUENCE GENETIC ANALYSIS: TECHNIQUES AND
APPLICATIONS and JOURNAL OF CAPILLARY ELECTROPHORESIS and was a member of the
scientific advisory boards of Fotodyne Incorporated and Boehringer Mannheim
Corp. Dr. Smith is a co-founder of Third-Wave Technologies, Inc., a
biotechnology company, which has agreed to be acquired by PE Biosystems in a
stock-for-stock transaction.
DR. KONRAD M. WEIS has been a Director of our company since 1997. Dr. Weis
has been the honorary Chairman of Bayer Corporation since 1991. He was President
and Chief Executive Officer of the company that later became Bayer Corporation
from 1974 until his retirement in 1991. He presently is a member of the boards
of directors of Demegen Inc., Michael Baker Corporation and Titan
Pharmaceuticals, Inc.
53
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our outstanding voting shares, as of February 29, 1999, for
(i) all shareholders known to beneficially own or exercise control or direction
over more than 10% of our common shares, and (ii) all directors and executive
officers as a group (13 persons):
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED SHARES BENEFICIALLY
PRIOR TO THE OWNED AFTER THE
OFFERING(1)(2) OFFERING(2)
-------------------- --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------ --------- -------- --------- --------
<S> <C> <C> <C> <C>
Warburg Pincus Funds (3)................................ 2,908,434 18.1% 2,908,434 16.1%
GeneVest Inc. (4)....................................... 1,927,134 12.0% 1,927,134 10.7%
All directors and executive officers as a group (13
persons)(5)........................................... 409,134 2.5% 409,134 2.2%
</TABLE>
- ---------
(1) The information in this table is based on our records, information provided
to us by directors and executive officers and a review of any Schedules 13D
and 13G filed in 1999 and 2000 by our shareholders with the Securities and
Exchange Commission. Beneficial ownership is determined in accordance with
rules of the Securities and Exchange Commission and includes shares over
which the indicated beneficial owner exercises voting and/or investment
power. Our common shares subject to options currently exercisable or
exercisable within 60 days are deemed outstanding for computing the
percentage ownership of the person holding the options but are not deemed
outstanding for computing the percentage ownership of any other person.
(2) This information is based on 16,045,167 voting shares outstanding as of
February 29, 2000, which includes 3,259,748 common shares issuable upon
conversion of our Series A preferred shares as of February 29, 2000, and
18,045,167 shares outstanding after this offering, which includes 3,259,748
common shares issuable upon conversion of our Series A preferred shares as
of February 29, 2000. The number of common shares issuable upon conversion
of our Series A preferred shares will increase as the dividends payable
thereon accrue.
(3) Consists of (i) 1,374,236 common shares held by Warburg, Pincus Equity
Partners, L.P., which includes 1,361,122 common shares issuable upon
conversion of their Series A preferred shares; (ii) 1,454,217 common shares
held by Warburg, Pincus Ventures International, L.P., which includes
1,440,341 common shares issuable upon conversion of their Series A preferred
shares; (iii) 43,626 common shares held by Warburg, Pincus Netherlands
Equity Partners, I, C.V., which includes 43,210 common shares issuable upon
conversion of their Series A preferred shares; (iv) 29,084 common shares
held by Warburg, Pincus Netherlands Equity Partners, II, C.V., which
includes 28,807 common shares issuable upon conversion of their Series A
preferred shares; and (v) 7,271 common shares held by Warburg, Pincus
Netherlands Equity Partners III, C.V., which includes 7,202 common shares
issuable upon conversion of their Series A preferred shares.
Warburg, Pincus & Co. ("WP") is the sole general partner of each of these
shareholders. Each of these shareholders is managed by E.M. Warburg, Pincus
& Co., LLC ("EMW LLC"). Lionel I. Pincus is the managing partner of WP and
the managing member of EMW LLC, and may be deemed to control both entities.
Jonathan S. Leff, a director of our company, is a general partner of WP and
a managing director and member of EMW LLC. Mr. Leff may be deemed to have an
indirect pecuniary interest (within the meaning of Rule 16a-1 under the
Securities Exchange Act of 1934, as amended) in an indeterminate portion of
the shares beneficially owned by these shareholders. Mr. Leff disclaims
beneficial ownership of all such shares.
(4) GeneVest Inc. is a Canadian company incorporated pursuant to the laws of
Alberta, Canada. Mr. Sheldon Inwentash, one of our directors, is the
President and Chief Executive Officer of GeneVest and, together with his
affiliates, beneficially owns approximately 45% of GeneVest's issued and
outstanding common shares.
(5) Includes an aggregate of 364,943 shares subject to options, exercisable
within 60 days from February 29, 2000, held by our directors and executive
officers, but excludes the shares held by GeneVest Inc. and the Warburg
Pincus Funds.
54
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives
FleetBoston Robertson Stephens Inc., PaineWebber Incorporated, Warburg Dillon
Read LLC and Roth Capital Partners, Inc., have each separately agreed with us,
subject to the terms and conditions of the underwriting agreement, to purchase
from us the number of common shares set forth below opposite their respective
names. The underwriters are committed to purchase and pay for all shares if any
are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ----------
<S> <C>
FleetBoston Robertson Stephens Inc..........................
PaineWebber Incorporated....................................
Warburg Dillon Read LLC.....................................
Roth Capital Partners, Inc..................................
INTERNATIONAL UNDERWRITER
- ------------------------------------------------------------
FleetBoston Robertson Stephens International Limited........
PaineWebber International (U.K.) Ltd........................
UBS AG......................................................
Roth Capital Partners, Inc..................................
----------
Total..................................................... 2,000,000
==========
</TABLE>
The representatives have advised us that the underwriters propose to offer
the common shares to the public at the public offering price set forth on the
cover page of this prospectus and to certain dealers at that price less a
concession not in excess of $____ per share, of which $____ may be reallowed to
other dealers. After this offering, the public offering price, concession and
reallowance to dealers may be reduced by the representatives. No such reduction
of this type will change the amount of proceeds to be received by us as set
forth on the cover page of this prospectus. The common shares are offered by the
underwriters as stated in this prospectus subject to receipt and acceptance by
them and subject to their right to reject any order in whole or in part. The
underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
OVER-ALLOTMENT OPTION
We have granted to the underwriters an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to 300,000 additional
common shares, to cover over-allotments, if any, at the public offering price
less the underwriting discount set forth on the cover page of this prospectus.
If the underwriters exercise their over-allotment option to purchase any of the
additional 300,000 common shares, the underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof as the number of common shares to be purchased by each of them bears to
the total number of common shares offered in this offering. If purchased, these
additional common shares will be sold by the underwriters on the same terms as
those on which the common shares offered hereby are being sold. We will be
obligated, pursuant to the over-allotment option, to sell common shares to the
underwriters to the extent the over-allotment option is exercised. The
underwriters may exercise the over-allotment option only to cover
over-allotments made in connection with the sale of the common shares offered in
this offering.
55
<PAGE>
The following table summarizes the compensation to be paid to the
underwriters by us:
<TABLE>
<CAPTION>
TOTAL
-------------------------------
PER WITHOUT WITH
SHARE OVER-ALLOTMENT OVER-ALLOTMENT
-------- -------------- --------------
<S> <C> <C> <C>
Underwriting Discounts and Commissions
payable by us...........................
</TABLE>
The expenses of this offering are estimated at $650,000 and are payable
entirely by us.
INDEMNITY
The underwriting agreement contains covenants of indemnity among the
underwriters and us against certain civil liabilities, including liabilities
under the Securities Act, and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
LOCK-UP AGREEMENTS
Each of our executive officers, directors and 10% beneficial owners have
agreed, subject to specified exceptions, not to offer to sell, contract to sell,
or otherwise dispose of, loan, pledge or grant any rights with respect to any
common shares or any options or warrants to purchase any common shares, or any
securities convertible into or exchangeable for common shares owned as of the
date of this prospectus or thereafter acquired directly by those holders or with
respect to which they have the power of disposition, without the prior written
consent of FleetBoston Robertson Stephens Inc. This restriction terminates after
the close of trading of our common shares on the 90th day following the day the
common shares offered hereby commenced trading on the Nasdaq National Market.
However, FleetBoston Robertson Stephens Inc. may, in its sole discretion and at
any time or from time to time before the termination of the 90-day period,
without notice, release all or any portion of the securities subject to lock-up
agreements. There are no existing agreements between the representatives and any
of our shareholders who have executed a lock-up agreement providing consent to
the sale of shares prior to the expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior consent of FleetBoston Robertson Stephens Inc., subject to
certain exceptions, consent to the disposition of any common shares held by
shareholders subject to lock-up agreements prior to the expiration of the
lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any
common shares, any options or warrants to purchase any common shares or any
securities convertible into, exercisable for or exchangeable for common shares
other than our sale of shares in this offering, the purchase and sale of our
common shares under our Employee Share Purchase Plan, the issuance of our common
shares upon the exercise of outstanding options or warrants or upon the
conversion of our Series A preferred shares, and the issuance of options under
our existing employee and director share option plans provided that those
options do not vest prior to the expiration of the lock-up period.
STABILIZATION
The representatives have advised us that, pursuant to Regulation M under the
Securities Exchange Act of 1934, certain persons participating in this offering
may engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, that may have the effect of
stabilizing or maintaining the market price of our common shares at a level
above that which might otherwise prevail in the open market. A "stabilizing bid"
is a bid for or the purchase of our common shares on behalf of the underwriters
for the purpose of fixing or maintaining the price of our common shares. A
"syndicate covering transaction" is a bid for or the purchase of our common
shares on behalf of the underwriters to reduce a short position incurred by the
underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the representatives to reclaim the selling concession otherwise
accruing to an underwriter or syndicate member in connection with the offering
if the common shares
56
<PAGE>
originally sold by that underwriter or syndicate member are purchased by the
representatives in a covering transaction and has therefore not been effectively
placed by such underwriter or syndicate member. The representatives have advised
us that these transactions may be affected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.
PASSIVE MARKET MAKING
In connection with this offering and before the commencement of offers or
sales of our common shares, certain underwriters who are qualified market makers
on the Nasdaq National Market may engage in passive market making transactions
in our common shares on the Nasdaq National Market in accordance with Rule 103
of Regulation M under the Exchange Act, during the business day prior to the
pricing of the offering. Passive market makers must comply with applicable
volume and price limitations and must be identified as such. In general, a
passive market maker must display its bid at a price not in excess of the
highest independent bid for such security; if all independent bids are lowered
below the passive market maker's bid, however, such bid must then be lowered
when certain purchase limits are exceeded.
PaineWebber Incorporated and Roth Capital Partners, Inc. received customary
compensation in exchange for their placement agent services in connection with
our December 1999 private placement. From time to time the underwriters have
performed and may, in the future perform, investment banking or other services
for us.
Our common shares have not been qualified by prospectus for distribution in
any province of Canada and may be offered for sale in Canada only pursuant to
exemptions from the prospectus requirements of the applicable province. Such
sales may be made only by dealers registered under the laws of such province or
pursuant to exemptions from the applicable registered dealer requirements.
57
<PAGE>
DESCRIPTION OF CAPITAL SHARES
GENERAL
The current authorized capital of our company consists of an unlimited
number of common shares and an unlimited number of preferred shares. Any series
of preferred shares that our Board of Directors may issue could have rights
equal or superior to the rights of the common shares.
COMMON SHARES
The holders of our common shares are entitled to receive dividends if, as
and when declared by our Board of Directors, subject to the rights of the
holders of any other class of our shares entitled to receive dividends in
priority to the common shares. If our company were liquidated or dissolved, the
holders of common shares would be entitled to receive all assets remaining after
the rights of the holders of any other class of shares entitled to receive
assets in priority to the holders of the common shares have been satisfied.
The holders of the common shares are entitled to one vote for each common
share held at all meetings of our shareholders.
PREFERRED SHARES
Our Board of Directors is authorized to issue an unlimited number of
preferred shares in one or more series, to fix the number of preferred shares
and determine the designations, rights (including voting and dividend rights),
privileges, restrictions and conditions attaching to the shares of each such
series, without further vote or action by the shareholders. Because the terms of
the preferred shares may be fixed by our Board of Directors without shareholder
action, the preferred shares could, subject to regulatory policies, be issued
quickly, with terms calculated to defeat a takeover of our company or to make
the removal of our directors and executive officers more difficult. Under
certain circumstances, this could have the effect of decreasing the market value
of our common shares. The preferred shares may have voting rights superior to
our common shares and may rank senior to the common shares as to dividends and
as to the distribution of assets in the event our company were liquidated or
dissolved.
On July 15, 1999, our Board of Directors authorized the issuance of 33,950
shares of Series A mandatorily redeemable convertible preferred shares. We have
issued 33,948 Series A Preferred Shares. The Series A preferred shares are
convertible at the holders' option into common shares at $11.00 per share. Upon
conversion, the holders will also receive common shares, at the conversion price
of $11.00 per share, equal to the amount of all accrued and unpaid dividends.
The Series A preferred shares contain provisions under which the conversion
price would be reduced on a weighted average basis if we issue shares, options
or certain other securities at prices lower than the conversion price (subject
to certain exceptions), and will also be adjusted upon the issuance of certain
other securities, certain recapitalization events and in certain other
circumstances to protect the holders against the dilutive effect of those
events.
Dividends on the Series A preferred shares accrue quarterly at the rate of
9% per year during the first three years after issuance, and 4% per year
thereafter and are compounded annually. Dividends are not payable for the first
three years. After three years, at our option, we may pay dividends in cash. If
dividends are not paid in cash, they will continue to accrue.
After the third anniversary and prior to the seventh anniversary of the date
of issuance of the Series A preferred shares, we have the right to redeem the
outstanding Series A preferred shares at a price, which we call the redemption
price, equal to $1,000 per share, plus accrued but unpaid dividends, provided
that the price of our common shares on the Nasdaq National Market equals or
exceeds 150% of the conversion price for 20 trading days during a consecutive
30-day period ending within 10 days before we notify shareholders of the
redemption. We will be required to redeem one-third of any remaining outstanding
Series A preferred shares on each of the seventh, eighth and ninth anniversaries
of the date of issuance at
58
<PAGE>
the redemption price, and we will be permitted to redeem the preferred shares at
any time beginning on the seventh anniversary after issuance. If we fail to
redeem the Series A Preferred shares as required, holders may appoint a majority
of our Board of Directors, who will continue to serve until we have redeemed the
Series A preferred shares as required.
The holders of Series A preferred shares are entitled to vote as a group
with the holders of common shares on all matters, except that holders of Series
A preferred shares are entitled to vote separately for one director and are not
entitled to participate in the vote for any other directors of our company. On
all other matters, each holder of Series A preferred shares is entitled to the
number of votes corresponding to the number of common shares the holder is
entitled to receive upon conversion of his Series A preferred shares. Our
agreements with the holders of, and the terms of the, Series A preferred shares
provide that we are prohibited from declaring or issuing any dividends to
holders of our common shares before paying all accrued and unpaid dividends on
the Series A preferred shares. We also are prohibited from issuing any equity
securities that have rights as to dividends and liquidation that are senior or
equal in rank to the Series A preferred shares without approval of the holders
of a majority of the Series A preferred shares. If our company were to be
liquidated or sold or under certain other circumstances, holders of Series A
preferred shares would be entitled to receive an amount equal to $1,000 per
share, plus accrued dividends, before holders of our common shares would be
entitled to any distributions.
Certain holders of our Series A preferred shares are also entitled to
certain other rights, including the right to participate, on a pro rata basis,
in future company financings, subject to certain exceptions. If we propose to
sell equity securities of any kind, including debt securities convertible into
equity securities, certain holders of our Series A preferred shares are entitled
to purchase a proportional amount of the securities being offered based on the
number of common shares they own assuming conversion of all convertible
securities. These holders are not entitled to exercise this right in connection
with securities issued: (i) to the public in a firm commitment underwriting;
(ii) upon exercise of any of our options or warrants outstanding on July 15,
1999; (iii) pursuant to the acquisition of another entity by us or one of our
subsidiaries by merger, purchase of substantially all of the assets or other
form of reorganization; (iv) in connection with our acquisition or license of
technology rights or other assets; (v) pursuant to our stock option plans, stock
bonus plans, stock purchase plans or other compensation equity agreements or
programs; or (vi) upon conversion or exercise of any equity securities, such as
warrants, options, or other rights to acquire equity securities and debt
securities convertible into equity securities. The right of these holders of
Series A preferred shares to participate in future offerings in this manner
provides those shareholders with the opportunity to avoid having their ownership
interest in our company diluted under certain circumstances when the interest of
our common shareholders would be diluted.
We also are prohibited from incurring indebtedness for borrowed money and
capital lease obligations in excess of $15.0 million outstanding at any one
time, without first obtaining approval of the holders of a majority of the
Series A preferred shares.
We are required to obtain the consent of the holders of a majority of our
then outstanding Series A preferred shares if we wish to borrow money and at
such time or as a result of such loans, the total principal amount of our
indebtedness and capitalized lease obligations exceeds $15.0 million. In
addition, if we were to enter into a credit facility with a financial
institution, we may be subject to additional limitations on our ability to incur
additional indebtedness.
WARRANTS
In connection with our leased property in Gwinnett County, Georgia, we are
obligated to issue 10,000 warrants to the landlord. Each warrant is exercisable
at any time from the third anniversary of the date of issuance until the ninth
anniversary of the date of issuance, at an initial purchase price of $31.875,
subject to customary antidilution provisions.
59
<PAGE>
For a description of additional warrants which we have issued, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" and our Annual Report on Form 20-F.
CLASSIFIED BOARD
Our Board of Directors is divided into three classes. The classification of
the Board of Directors was implemented in March 1996.
The holders of our Series A preferred shares are entitled to vote as a class
for one director. Each Series A Director serves for a one year term and any
vacancy may be filled only by a vote of the holders of Series A preferred
shares. In the event that we do not redeem our Series A preferred shares as
required during 2006, 2007 and 2008, then our Series A shareholders will be
entitled to special voting rights enabling them to elect a majority of our Board
of Directors, who will continue to serve as directors until we have redeemed our
Series A preferred shares as required.
TRANSFER AGENT
The transfer agent and registrar for our common shares is ChaseMellon
Shareholder Services, LLC, Overpeck Center, 85 Challenger Road, Ridgefield Park,
New Jersey 07660.
60
<PAGE>
LEGAL MATTERS
The validity of the common shares being offered hereby has been passed upon
for us by our attorneys, Osler, Hoskin & Harcourt LLP, Toronto, Ontario. Certain
other matters relating to this offering with respect to United States securities
laws will be passed upon by our attorneys, Baer Marks & Upham LLP, New York, New
York, and the underwriters' attorneys, Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts. Certain matters relating to regulation by the U.S. Food and Drug
Administration will be passed upon by our attorneys, Hyman, Phelps & McNamara,
P.C., Washington, D.C. Certain matters relating to patents will be passed upon
by our attorneys, Oppedahl & Larson, L.L.P., Frisco, Colorado.
EXPERTS
Our Consolidated Financial Statements as of December 31, 1999 and 1998 and
for the years ended December 31, 1999, 1998 and 1997, included in this
prospectus, have been audited by PricewaterhouseCoopers LLP, Chartered
Accountants in Canada, as stated in their report appearing herein. The
Consolidated Financial Statements have been included herein in reliance upon
such report, given upon the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form F-3 under the Securities Act with respect to the common shares
offered hereby. This prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement. Certain items of the Registration Statement are contained in exhibits
and schedules as permitted by the rules and regulations of the Securities and
Exchange Commission. Statements made in this prospectus as to the contents of
any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement or to our Annual Report, certain
items of which are incorporated by reference into this prospectus, reference is
made to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such reference.
We are subject to the informational requirements of the Exchange Act and
file reports and other information with the Securities and Exchange Commission.
Reports and other information which we file with the Securities and Exchange
Commission, including the Registration Statement on Form F-3 of which this
prospectus is a part, may be inspected and copied at the public reference
facilities of the Securities and Exchange Commission at:
Judiciary Plaza
450 Fifth Street, N.W.
Room 1024 Washington, D.C. 20549
7 World Trade Center
New York, New York 10048
500 West Madison Street
Suite 1400
Chicago, Illinois 60661
You can also obtain copies of this material by mail from the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. Additionally, copies of this
material may also be obtained from the Securities and Exchange Commission's
Internet site at http://www.sec.gov. The Commission's telephone number is
1-800-SEC-0330.
61
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which we have filed with the Securities and
Exchange Commission, are incorporated by reference in this prospectus:
the following sections of our Annual Report on Form 20-F for the year
ended December 31, 1999:
Item 6--Exchange Controls and Other Limitations Affecting Security
Holders
Item 7--Taxation
Item 11--Compensation of Directors and Officers
Item 12--Options to Purchase Securities from Registrant or Subsidiaries
Item 13--Interest of Management in Certain Transactions
Item 14--Description of Securities to Be Registered
Item 15--Defaults Upon Senior Securities
Item 16--Changes in Securities and Changes in Security for Registered
Securities;
In addition, all documents that we file with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of
1934, as amended, after the date of the this prospectus and before termination
of the offering, including all annual reports on Form 20-F or Form 10-K, and all
filings on Forms 10-Q and 8-K, will be deemed to be incorporated by reference in
this prospectus and to be a part of this prospectus from the date those
documents are filed. We may also incorporate in this prospectus any Form 6-K
that we file with the Securities and Exchange Commission by identifying in such
form that it is being incorporated by reference into this prospectus. Any
statement contained in a document that is incorporated, or deemed to be
incorporated, by reference into this prospectus, shall be considered modified or
superseded for purposes of this prospectus to the extent that a statement
contained in this prospectus or in any other subsequently filed document that
also is, or is deemed to be, incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
prospectus.
You may request a copy of any document incorporated by reference in this
prospectus at no cost. To receive a copy, write us at:
Visible Genetics Inc.
700 Bay Street
Suite 1000
Toronto, Ontario, Canada M5G 1Z6
Attention: Mr. Thomas J. Clarke
Or you can call us at (416) 813-3240. See "Where You Can Find More
Information."
62
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Audited Consolidated Financial Statements for the years
ended December 31, 1999, 1998 and 1997
Auditors' Report............................................ F-2
Consolidated Balance Sheets as at December 31, 1999 and
1998...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... F-4
Consolidated Statements of Deficit for the years ended
December 31, 1999, 1998 and 1997.......................... F-5
Consolidated Statements of Comprehensive Loss for the years
ended December 31, 1999, 1998 and 1997.................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
AUDITORS' REPORT
TO THE SHAREHOLDERS OF VISIBLE GENETICS INC.
We have audited the consolidated balance sheets of Visible Genetics Inc. as
at December 31, 1999 and 1998 and the consolidated statements of operations,
deficit, comprehensive loss, and cash flows for the years ended December 31,
1999, 1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1999 and 1998
and the results of its operations and its cash flows for the years ended
December 31, 1999, 1998 and 1997 in accordance with generally accepted
accounting principles in the United States of America.
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Canada
February 18, 2000
F-2
<PAGE>
VISIBLE GENETICS INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 2,792,985 $ 6,165,924
Short-term investments.................................... 39,894,978 5,108,254
Trade receivables (net of allowance for doubtful accounts
of $1,180,801; 1998--$470,926).......................... 5,657,822 4,770,796
Other receivables (Note 4)................................ 668,748 1,445,820
Prepaid and deposits...................................... 729,307 233,072
Inventory (Note 5)........................................ 2,600,007 3,912,336
------------ ------------
Total current assets........................................ 52,343,847 21,636,202
------------ ------------
Fixed assets (Note 6)....................................... 4,173,335 3,877,163
Patents and licenses (Note 7)............................... 2,122,367 2,269,170
------------ ------------
$ 58,639,549 $ 27,782,535
============ ============
LIABILITIES
Current liabilities
Notes payable (Note 8).................................... $ -- $ 7,494,877
Accounts payable.......................................... 3,110,442 3,985,103
Accrued liabilities (Note 9).............................. 3,622,110 1,723,840
------------ ------------
Total current liabilities................................... 6,732,552 13,203,820
------------ ------------
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SHARES
(Note 10)................................................. 27,555,652 --
------------ ------------
SHAREHOLDERS' EQUITY
Share capital (Note 11)..................................... 75,422,070 46,412,685
Other equity (Note 11)...................................... 8,987,328 2,232,465
Cumulative translation adjustment........................... (619,911) 84,822
Deficit..................................................... (59,438,142) (34,151,257)
------------ ------------
24,351,345 14,578,715
------------ ------------
$ 58,639,549 $ 27,782,535
============ ============
COMMITMENTS AND CONTINGENCY (Note 16)
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
Approved by the Board.
<TABLE>
<C> <S> <C>
/s/ RICHARD T. DALY
-------------------------------------------
Richard T. Daly, Director
/s/ SHELDON INWENTASH
-------------------------------------------
Sheldon Inwentash, Director
</TABLE>
F-3
<PAGE>
VISIBLE GENETICS INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Sales
Products........................................... $ 12,455,775 $ 9,421,933 $ 2,967,695
Services........................................... 1,171,145 1,453,415 65,041
------------ ------------ ------------
13,626,920 10,875,348 3,032,736
------------ ------------ ------------
Costs of sales
Products........................................... 8,593,774 5,995,869 1,963,312
Services........................................... 679,112 677,712 31,520
------------ ------------ ------------
9,272,886 6,673,581 1,994,832
------------ ------------ ------------
Gross margin......................................... 4,354,034 4,201,767 1,037,904
------------ ------------ ------------
Expenses:
Sales, general and administrative (Note 7)......... 19,073,546 11,515,757 7,447,861
Research and development........................... 7,935,327 6,289,032 4,122,916
Acquired research and development (Note 12)........ -- 420,043 654,621
Exit and termination costs (Note 13)............... 1,329,083 -- --
------------ ------------ ------------
28,337,956 18,224,832 12,225,398
------------ ------------ ------------
Loss from operations before interest................. (23,983,922) (14,023,065) (11,187,494)
Interest income...................................... 694,549 264,195 774,462
Interest and financing expense (Note 8).............. (1,997,512) (1,132,091) (2,714)
------------ ------------ ------------
Net loss for the year................................ (25,286,885) (14,890,961) (10,415,746)
Cumulative preferred dividends and accretion of
discount attributable to preferred shares
(Note 10).......................................... (1,770,069) -- --
------------ ------------ ------------
Net loss attributable to common shareholders......... $(27,056,954) $(14,890,961) $(10,415,746)
============ ============ ============
Weighted average number of common shares
outstanding........................................ 9,916,954 7,782,094 7,059,578
Basic and diluted loss per common share.............. $ (2.73) $ (1.91) $ (1.48)
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
VISIBLE GENETICS INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF DEFICIT
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Deficit, beginning of year........................... $(34,151,257) $(19,260,296) $ (8,844,550)
Net loss for the year................................ (25,286,885) (14,890,961) (10,415,746)
------------ ------------ ------------
Deficit, end of year................................. $(59,438,142) $(34,151,257) $(19,260,296)
============ ============ ============
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss for the year................................ $(25,286,885) $(14,890,961) $(10,415,746)
Other comprehensive income:
Foreign currency translation adjustments........... (704,733) 112,477 --
------------ ------------ ------------
Comprehensive loss for the year...................... $(25,991,618) $(14,778,484) $(10,415,746)
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
VISIBLE GENETICS INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash provided by (used in) operating activities
Net loss for the year................................... $(25,286,885) $(14,890,961) $(10,415,746)
Add: Items not involving cash
Depreciation.......................................... 1,708,923 1,090,086 495,388
Amortization.......................................... 393,979 206,640 130,593
Patents and licenses written off...................... 451,085 -- --
Deferred compensation cost related to options
granted............................................. -- 77,469 250,067
Non cash financing expense related to warrants
granted............................................. 1,466,691 580,981 --
Amortization of discount on accounts receivable....... (48,158) -- --
Foreign exchange loss................................. 26,789 28,453 37,067
In-process research and development acquired.......... -- 420,043 654,621
Increase (decrease) from changes in
Trade receivables..................................... (1,804,006) (2,327,121) (1,193,858)
Other receivables..................................... 719,519 (850,270) (142,757)
Prepaids and deposits................................. (501,742) 28,913 (92,247)
Inventory............................................. 1,290,997 (3,149,740) (441,957)
Refundable investment tax credits..................... -- -- 476,393
Accounts Payable...................................... (734,230) 2,490,594 624,278
Accrued liabilities................................... 1,956,660 1,159,952 (80,460)
------------ ------------ ------------
(20,360,378) (15,134,961) (9,698,618)
------------ ------------ ------------
Investing activities
Purchase of fixed assets................................ (1,905,129) (3,348,261) (1,265,825)
Licenses and patents acquired........................... (698,261) (877,796) (815,925)
Purchase of short-term investments...................... (50,503,643) (13,705,737) (3,221,329)
Redemption of short-term investments.................... 15,716,919 14,616,777 7,432,233
Acquisition of ACT Gene S.A............................. -- (536,929) --
------------ ------------ ------------
(37,390,114) (3,851,946) 2,129,154
------------ ------------ ------------
Financing activities
Preferred shares issued, net of expenses................ 22,719,748 -- --
Warrants issued in connection with preferred shares..... 6,397,448 -- --
Common shares issued, net of expenses................... 29,009,385 14,640,188 419,167
Warrants issued in connection with private placement.... -- 444,572 --
Issuance of notes payable............................... -- 6,817,559 --
Warrants issued in connection with notes payable........ -- 1,182,441 --
Repayment of note payable............................... (4,100,000) -- --
Other equity............................................ 29,851 8,259 38,392
Repayment of loan from an officer....................... 323,405 -- --
------------ ------------ ------------
54,379,837 23,093,019 457,559
------------ ------------ ------------
Effect of exchange rate fluctuations on cash.............. (2,284) 193,133 151,982
------------ ------------ ------------
Increase (decrease) in cash during the year............... (3,372,939) 4,299,245 (6,959,923)
Cash, beginning of year................................. 6,165,924 1,866,679 8,826,602
------------ ------------ ------------
Cash, end of year....................................... $ 2,792,985 $ 6,165,924 $ 1,866,679
============ ============ ============
Supplemental information
Interest paid........................................... $ 786,585 $ 48,073 $ 2,714
Income taxes paid....................................... $ -- $ -- $ --
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-6
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF OPERATIONS
Visible Genetics Inc. (the "Company") develops, manufactures and sells
integrated DNA sequencing systems that analyze genetic information. Such systems
are designed to identify mutations in the DNA of genes associated with certain
diseases. The Company's products are intended for research and clinical
purposes. Prior to marketing any products for use in the clinical diagnostic
market, the Company will require appropriate regulatory approval.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in United States dollars, in
accordance with the accounting principles generally accepted in the United
States. The principal accounting policies of the Company, which have been
consistently applied, are summarized as follows:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of the Company include
the following wholly owned subsidiaries: Visible Genetics Corp., Visible
Genetics B.V., Applied Sciences, Inc., Gene Foundry Inc., Visible Genetics
Europe S.A. (formerly ACT Gene S.A.), Visible Genetics Israel Ltd. and Visible
Genetics Srl. All intercompany accounts and transactions have been eliminated
upon consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION AND WARRANTY
Revenues from the sale of the Company's products are recognized when
shipment occurs and title passes to the customer or distributor and there is
reasonable assurance of collectibility. There are no significant customer
acceptance requirements or post shipment obligations on the part of the Company.
Revenues from the sale of services are recognized when the services are provided
and there is reasonable assurance of collectibility. A provision is made for
estimated warranty costs at the time of the sale. Revenues from extended
warranty contracts are recognized over the life of the contract. Sales of
bundled sequencing systems and testing kits are recognized pro rata as the
components of the bundle are shipped to customers.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
As required under Statement of Financial Accounting Standards (SFAS)
No. 95, cash equivalents consist of short-term investments that are highly
liquid, are readily convertible to cash and have initial terms to maturity of
three months or less. Short-term investments consist of United States treasury
bills and corporate debt securities. They are classified as held-to-maturity and
are recorded at amortized cost. Contractual maturities of short-term investments
at December 31, 1999 and December 31, 1998 range from one to eight months.
F-7
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
The carrying values of the Company's financial instruments consisting of
cash and cash equivalents, short-term investments, trade and other receivables,
accounts payable and notes payable, approximate their fair values due to their
short-term nature.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentration of
credit risk consist primarily of cash and cash equivalents, short-term
investments and receivables. The Company maintains its accounts for cash and
cash equivalents and short-term investments with the United States treasury and
a number of large low-credit-risk financial institutions and corporations in
Canada and the United States in order to reduce its exposure. In addition, the
Company limits its maximum investment to any one counterparty to limit its
credit exposure. At December 31, 1999 and December 31, 1998 no customers
accounted for greater than 10% of gross trade receivables.
INVENTORY
Inventory is stated at the lower of cost and estimated realizable value.
Cost is determined by the first-in first-out method, and includes material,
labor, and an allocation of overhead.
FIXED ASSETS
Fixed assets are recorded at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, as follows:
<TABLE>
<S> <C>
Laboratory and computer equipment 2 to 5 years
Leasehold improvements term of the lease
</TABLE>
PATENTS AND LICENSES
External costs of patents and licenses are recorded at cost and amortized
over their estimated useful lives, which are generally up to ten years. If the
carrying amount of a patent or license is no longer recoverable, the related
unamortized cost is written down to fair value.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the Company reviews long-lived assets, including fixed assets, patents and
licenses, for impairment whenever events or changes in business circumstances
indicate that the carrying amount of the asset may not be fully recoverable.
Under SFAS No. 121, an impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition are less than its carrying amount. Impairment, if any,
is assessed using discounted cash flows.
F-8
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities denominated in foreign currencies are
translated into United States dollars at the exchange rate prevailing at the
balance sheet date. Other assets, liabilities and operating items are translated
at exchange rates prevailing at the respective transaction dates. Resulting
translation adjustments are included in the consolidated statement of
operations. Assets and liabilities of subsidiaries with functional currencies
other than United States dollars are translated at the exchange rate prevailing
at the balance sheet date, and the results of their operations are translated at
average exchange rates for the year. The resulting translation adjustments are
reflected in a separate component of shareholders' equity. Other exchange gains
or losses are included in the consolidated statement of operations.
INCOME TAXES
The Company provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which prescribes an asset and liability approach
that results in the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
consolidated financial statements or tax returns.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed in the period incurred. The
Company is entitled to certain Canadian federal and provincial tax incentives
for qualified research and development. They are accounted for as a reduction of
the related expenditure for current expenses and a reduction of the related
asset for capital assets when it is more likely than not that the credit will be
realized. The Company is entitled to Canadian federal investment tax credits at
a rate of 20% on eligible current and capital expenditures, claimable against
income taxes otherwise payable.
ADVERTISING COSTS
The Company expenses the cost of advertising as incurred. The Company
incurred advertising costs of approximately $560,000, $271,000 and $408,000 for
1999, 1998 and 1997, respectively.
STOCK OPTIONS
The Company follows SFAS No. 123 which permits the use of APB No. 25 to
account for stock options issued to employees. Under that method, the Company
uses the intrinsic value method to measure the cost associated with the granting
of stock options to employees. The amount by which the market price of the
underlying shares exceeds the exercise price of the options is accounted for as
compensation expense over the periods in which services are rendered. Options
issued to consultants are recorded at their fair market value at the date of the
grant. This amount is charged to operations over the periods in which services
are rendered.
EARNINGS (LOSS) PER SHARE
The company follows SFAS No. 128 "Earnings Per Share" to calculate basic and
diluted earnings (loss) per share. Basic earnings (loss) per share is calculated
using the weighted average number of common shares outstanding during the year.
Diluted earnings (loss) per share is calculated using the weighted average
number of common and potential common shares outstanding during the year.
Potential
F-9
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
common shares consist of the incremental common shares issuable upon conversion
of outstanding convertible preferred shares (using the if converted method) and
shares issuable upon the exercise of stock options and warrants (using the
treasury stock method). Potential common shares are excluded from the
calculation if their effect is anti-dilutive, as was the case for the years
ended December 31, 1999, 1998 and 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities and is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company does not anticipate that SFAS No. 133 will have a significant impact
on its financial position or results of operations.
NOTE 3--COLLABORATIVE AND DISTRIBUTION AGREEMENTS
COLLABORATIVE AGREEMENTS
The Company has agreements with several parties for the use of certain
intellectual property in the manufacture of the Company's products, the most
significant of which are as follows:
The Polymerase Chain Reaction (PCR) is used in most of the GeneKits made by
the Company and is produced and sold under license from Roche Molecular Systems,
Inc. and F. Hoffman-La Roche, Ltd. The reverse transcriptase enzyme used in the
TRUGENE HIV-1 Genotyping Kit is the Superscript II-TM- licensed from Life
Technologies. A portion of the method of CLIP sequencing which is used by most
of the GeneKits made by the Company is licensed from Genaissance
Pharmaceuticals, Inc. UNG (Uracin N-Glycosylase) is a method of incorporating
Uracil into a PCR product, which can be subsequently destroyed enzymatically.
This method is used to control carry-over contamination between sequential
samples under going PCR. At present, none of the Company's products uses this
method, however, it is expected that future GeneKit production may incorporate
this technology. This method is licensed from Life Technologies.
Under these agreements, the Company is required to make certain up-front
payments and certain royalty payments on specified sales to customers ranging
from 0.5% to 15%, and up to 25% on specified product sales to certain
distributors. Included in accounts payable is an amount of approximately
$461,000 and $148,000, relating to royalties payable, at December 31, 1999 and
1998, respectively.
DISTRIBUTION AGREEMENTS
Commencing in 1999, the Company entered into various distribution and
marketing arrangements with distributors to sell the Company's products to the
research and clinical diagnostic markets in selected geographic markets outside
North America and certain European countries. These agreements expire at various
times from April 2000 through April 2002 and, in certain cases, are subject to
automatic renewal. Certain of the agreements may also be terminated by either
party upon specified notice periods and may require us to make termination
payments under certain circumstances. Certain of the agreements also provide for
minimum annual purchases for specified periods.
F-10
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--OTHER RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1999 1998
-------- ----------
<S> <C> <C>
Refundable taxes............................................ $105,007 $ 616,214
Other....................................................... 563,741 829,606
-------- ----------
$668,748 $1,445,820
======== ==========
</TABLE>
NOTE 5--INVENTORY
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Raw materials............................................... $1,346,951 $2,231,994
Work in process............................................. 221,771 339,109
Finished goods.............................................. 1,031,285 1,341,233
---------- ----------
$2,600,007 $3,912,336
========== ==========
</TABLE>
NOTE 6--FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
COST
Laboratory and computer equipment....................... $6,511,025 $4,581,794
Leasehold improvements.................................. 1,264,022 1,198,488
---------- ----------
7,775,047 5,780,282
---------- ----------
ACCUMULATED DEPRECIATION AND AMORTIZATION
Laboratory and computer equipment....................... 3,118,913 1,650,840
Leasehold improvements.................................. 482,799 252,279
---------- ----------
3,601,712 1,903,119
---------- ----------
$4,173,335 $3,877,163
========== ==========
</TABLE>
F-11
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--PATENTS AND LICENSES
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
COST
Patents................................................. $1,078,173 $1,050,276
Licenses................................................ 1,596,591 1,616,032
---------- ----------
2,674,764 2,666,308
---------- ----------
ACCUMULATED AMORTIZATION
Patents................................................. 207,197 166,548
Licenses................................................ 345,200 230,590
---------- ----------
552,397 397,138
---------- ----------
$2,122,367 $2,269,170
========== ==========
</TABLE>
The net book value of patents and licenses at December 31, 1999 is after
reflecting an impairment loss of $401,085 and $50,000, respectively, recorded
during the year and included in "Sales, general and administrative" expenses in
the statement of operations. The impairment loss was recorded as a result of the
Company abandoning certain patents and licensed technologies.
NOTE 8--NOTES PAYABLE
On April 30, 1998, the Company, through its subsidiary, Visible Genetics
Corp., borrowed $7,000,000 under a term loan agreement with certain
institutional lenders. The loan bore interest at 10% per annum, and interest and
principal were payable in full on or about April 29, 1999. The loan was secured
by a security interest in substantially all of the assets of the Company, and it
imposed certain restrictive covenants, including a limit on the total
indebtedness the Company could incur. In connection with the loan, the Company
granted warrants to the lenders to purchase an aggregate of 420,000 common
shares at an exercise price of $10.00 per share. On September 28, 1998, the term
loan facility was extended under similar terms and the Company borrowed an
additional $1,000,000 under the expanded loan facility. The additional loan was
due on December 28, 1999. In connection with the additional loan, the Company
granted warrants to the lenders to acquire 120,000 common shares at an exercise
price of $10.00 per share. The fair market value of the warrants granted in
connection with both loans was estimated at the date of grant using the
Black-Scholes option valuation model based upon the following assumptions:
dividend yield--nil, risk-free interest rate--5.0%, average expected
volatility--65%, expected term--2 years.
The total proceeds received from the institutional lenders were allocated
between the warrants and term loans based on the relative fair value of each
component, resulting in $944,836 and $237,805 of the total proceeds from the
April 1998 and September 1998 term loans, respectively, being allocated to
warrants. The value of the term loans was accreted to their face value,
resulting in a charge to financing expense over the term of the loans. As a
result, $601,660 and $580,981 were recorded as financing expense in 1999 and
1998, respectively.
F-12
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--NOTES PAYABLE (CONTINUED)
On April 30, 1999, the Company and the institutional lenders agreed to delay
the payment date of the $7,000,000 loan to December 31, 1999, and to move up the
payment date of the $1,000,000 loan to July 1, 1999. The institutional lenders
later extended the payment date of the $1,000,000 loan to the earlier of
July 22, 1999, or the completion of the Warburg Pincus financing (see Note 10).
In addition, the institutional lenders agreed to permit the Company to borrow up
to an additional $5,000,000 of loans from other lenders which would be senior to
the $7,000,000 loan and junior to the $1,000,000 loan. The amended terms of the
loans did not result in the loans being considered substantially different, as
the cash flow effect on a present value basis was less than 10%. Accordingly, no
debt extinguishment gain or loss was recognized in the statement of operations.
In connection with the modification of the term loans, on April 30, 1999,
the Company granted the institutional lenders warrants to purchase an additional
140,000 common shares at an exercise price of $17.00 per share. The fair market
value of the warrants was estimated at the date of grant using the Black-
Scholes option valuation model based upon the following assumptions: dividend
yield--nil, risk-free interest rate--5.0%, average expected volatility--65%,
expected term--2.5 years, resulting in a value attributed to these warrants of
$865,031. This amount was recorded as a deferred charge and was to be amortized
to financing expense over the term of the loan maturing on December 31, 1999.
On July 15, 1999, the Company repaid all of the loans made to the
institutional lenders. Of the $8,000,000 principal amount of loans, the Company
paid $4,100,000 of principal plus accrued interest on the loans in cash with the
balance of principal plus accrued interest being converted into 3,948 Series A
preferred shares (see Note 10) and 147,098 warrants to purchase common shares.
As a result, the unamortized balance of the deferred charge was recorded as
financing expense at that time.
NOTE 9--ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Warranty provision.......................................... $ 387,103 $ 90,107
Salaries and benefits....................................... 1,149,279 79,640
Professional fees........................................... 393,196 161,251
Interest.................................................... 13,000 503,037
Value added taxes........................................... 492,711 335,944
Provision for exit costs.................................... 789,849 --
Other....................................................... 396,972 553,861
---------- ----------
$3,622,110 $1,723,840
========== ==========
</TABLE>
NOTE 10--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SHARES
(A) AUTHORIZED AND ISSUED
Authorized share capital consists of an unlimited number of preferred shares
which may be issued in one or more series.
On July 15, 1999, the Board of Directors authorized the issuance of 33,950
Series A Convertible Preferred Shares, of which 33,948 were issued during 1999.
F-13
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SHARES (CONTINUED)
On July 15, 1999, the Company issued 30,000 preferred shares and warrants to
purchase 1,100,000 common shares to certain affiliated funds managed by E.M.
Warburg, Pincus & Co., LLC (Warburg Pincus) for net proceeds of $29,219,854. In
addition, on July 15, 1999 in connection with the repayment of certain loans
with institutional lenders specified in note 8, the Company issued 3,948
preferred shares and warrants to purchase 147,098 common shares for net proceeds
of $3,845,008.
The fair market value of the warrants was estimated at the date of grant
using the Black-Scholes option valuation model based upon the following
assumptions: dividend yield--nil, risk-free interest rate--5.61%, average
expected volatility--70%, expected term--4 years.
The value of the net proceeds was allocated between warrants and mandatorily
redeemable convertible preferred shares based on the relative fair value of each
instrument. The total amount relating to Warburg Pincus, net of issue costs of
$780,146 allocated to warrants and mandatorily redeemable convertible preferred
shares, was $6,420,672 and $22,799,182, respectively. The total amount relating
to the institutional investors, net of issue costs of $102,992 allocated to
warrants and mandatorily redeemable convertible preferred shares, was $858,607
and $2,986,401, respectively.
The value of the warrants is treated as a discount to the mandatorily
redeemable convertible preferred shares and will be charged directly to retained
earnings or, in the absence of retained earnings, against other equity, over
seven years, the time period when redemption of the mandatorily redeemable
convertible preferred shares first becomes mandatory.
(B) RIGHTS AND CONDITIONS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
SHAREHOLDERS
CONVERSION
The mandatorily redeemable convertible preferred shares are convertible at
any time, at the option of the holders into common shares of the Company at a
conversion price of $11.00, subject to certain adjustments. Upon conversion, the
holders will also receive common shares, at the conversion price of $11.00 per
share, equal to the amount of all accrued and unpaid dividends. The mandatorily
redeemable convertible preferred shares contain provisions under which the
conversion price would be reduced on a weighted average basis if the Company
issues shares, options or certain other securities at prices lower than the
conversion price (subject to certain exceptions), and will also be adjusted upon
the issuance of certain other securities, certain recapitalization events and in
certain other circumstances to protect the holders against the dilutive effect
of those events.
This conversion right will terminate on any redemption of the mandatorily
redeemable convertible preferred shares or any liquidation of the Company. Each
mandatorily redeemable convertible preferred share will automatically convert
into common shares at its then effective conversion price, if at least a
majority of the mandatorily redeemable convertible preferred shares are either
voted to be converted or have already been converted into common shares.
DIVIDENDS
Dividends on the mandatorily redeemable convertible preferred shares accrue
quarterly at the rate of 9% per year during the first three years after
issuance, and 4% per year thereafter and are compounded annually. Dividends are
not payable for the first three years. After three years, at the Company's
option, dividends are payable in cash. If dividends are not paid in cash, they
will continue to accrue. The
F-14
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SHARES (CONTINUED)
Company is prohibited from declaring or issuing any dividends to holders of
common shares before paying all unpaid dividends on the mandatorily redeemable
convertible preferred shares. The Company is also prohibited from issuing any
equity securities that are senior or equal in rank to the mandatorily redeemable
convertible preferred shares without approval of the holders of a majority of
such shares. If the Company were to be liquidated or sold or under certain other
circumstances, holders of mandatorily redeemable convertible preferred shares
would be entitled to receive an amount equal to $1,000 per share, plus accrued
and unpaid dividends, before holders of common shares would be entitled to any
distributions.
REDEMPTION
After the third anniversary and prior to the seventh anniversary of the date
of issuance of the mandatorily redeemable convertible preferred shares, the
Company has the right to redeem the outstanding mandatorily redeemable
convertible preferred shares at the redemption price, equal to $1,000 per share,
plus accrued but unpaid dividends, subject to certain conditions. The Company
will be required to redeem one-third of any remaining outstanding mandatorily
redeemable convertible preferred shares on each of the seventh, eighth and ninth
anniversaries of the date of issuance at the redemption price. If the Company
fails to redeem the shares as required, holders may appoint a majority of our
Board of Directors, who will continue to serve until the Company has redeemed
the mandatorily redeemable convertible preferred shares as required.
VOTING
The holders of the mandatorily redeemable convertible preferred shares are
entitled to vote as a group with the holders of common shares on all matters
except that holders of the mandatorily redeemable convertible preferred shares
are entitled to vote separately for one director and are not entitled to
participate in the vote for any other directors of the Company. On all other
matters, each holder of mandatorily redeemable convertible preferred shares is
entitled to the number of votes equal to the number of common shares the holder
is entitled to receive upon conversion of the holder's mandatorily redeemable
convertible preferred shares.
OTHER
Certain holders of mandatorily redeemable convertible preferred shares are
also entitled to certain other rights, including the right to participate, on a
pro rata basis, in future Company financings, subject to certain exceptions. The
right of holders of mandatorily redeemable convertible preferred shares to
participate in future offerings in this manner provides those shareholders with
the opportunity to avoid having their ownership interest in the Company diluted
under certain circumstances when the interest of common shareholders would be
diluted.
The Company is also prohibited from incurring indebtedness for borrowed
money and capital lease obligations in excess of $15,000,000 outstanding at any
one time, without first obtaining approval of the holders of a majority of the
mandatorily redeemable convertible preferred shares.
F-15
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--SHARE CAPITAL
(A) AUTHORIZED AND ISSUED SHARE CAPITAL
Authorized share capital consists of an unlimited number of common shares,
without par value.
<TABLE>
<CAPTION>
NUMBER OF AVERAGE
COMMON ISSUE
SHARES PRICE AMOUNT
---------- -------- -----------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.................................. 6,962,198 $30,339,955
========== ===========
Issued for cash under stock option arrangements........... 191,498 $ 2.19 419,167
Issued for acquisition of Applied Sciences, Inc........... 95,000 $ 5.50 522,500
---------- ------ -----------
BALANCE, DECEMBER 31, 1997.................................. 7,248,696 31,281,622
========== ===========
Issued for cash under stock option arrangements........... 385,548 $ 2.39 921,395
Issued for acquisition of ACT Gene S.A.................... 85,000 $ 5.78 490,875
Issued for private placement offering, net of issue 1,528,989
costs (i)............................................... $ 9.88 13,718,793
---------- ------ -----------
BALANCE, DECEMBER 31, 1998.................................. 9,248,233 46,412,685
========== ===========
Issued for cash under stock option arrangements........... 457,882 $ 5.12 2,343,603
Issued for private placement offering, net of issue 1,916,000
costs................................................... $13.92 26,665,782
---------- ------ -----------
BALANCE, DECEMBER 31, 1999.................................. 11,622,115 $75,422,070
========== ===========
</TABLE>
- ------------------------
(i) The value of the warrants issued in connection with the private placement
(Note 11(e)) in the amount of $444,572 has been recorded as a reduction of
the proceeds of issue and an increase to warrants included in Other equity
(Note 11(b)). The fair market value of the warrants is estimated at the date
of grant using the Black-Scholes option valuation model based upon the
following assumptions: dividend yield--nil, risk-free interest rate--4.0%,
average expected volatility--65%, expected term--2.5 years.
(B) OTHER EQUITY
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
Deferred compensation costs............................... $ -- $ -- $ (77,469)
Options................................................... 922,714 922,714 922,714
Warrants.................................................. 9,782,470 1,610,791 80,115
Contributed surplus....................................... 61,250 61,250 61,250
Cumulative preferred dividends attributable to mandatorily
redeemable convertible preferred shares................. (1,400,344) -- --
Cumulative accretion of discount attributable to
mandatorily redeemable convertible preferred shares..... (369,728) -- --
Loan to an officer to purchase shares..................... -- (323,405) (323,405)
Employee share purchase loans............................. (9,034) (38,885) (47,144)
----------- ---------- ---------
$ 8,987,328 $2,232,465 $ 616,061
=========== ========== =========
</TABLE>
F-16
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--SHARE CAPITAL (CONTINUED)
Employee share purchase loans are non-recourse and secured only by the
shares themselves. The loan to an officer was made in July 1996 to purchase
shares of the Company. The loan was interest free and was originally repayable
in 2006. In November 1999, the loan was repaid.
(C) DEFERRED COMPENSATION COSTS
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
BALANCE, BEGINNING OF YEAR.................................. $ -- $(77,469) $(354,786)
Options granted less cancellation........................... -- -- 27,250
Charged to expense during the year.......................... -- 77,469 250,067
---- -------- ---------
BALANCE, END OF YEAR........................................ $ -- $ -- $ (77,469)
==== ======== =========
</TABLE>
(D) OPTIONS
The Company has incentive plans under which options to purchase common
shares may be granted to its employees, consultants or directors at the
discretion of the Board of Directors. Options for an aggregate of 3,750,901
shares may be granted, subject to shareholder ratification. Under the plans,
each option is for the purchase of one common share, expires up to ten years
from the date of issue, and is generally earned over a three to four year
period. There are no repurchase features. Options issued to employees may be
cancelled if employment is terminated within three years. The number of options
that may be cancelled is reduced in stages over that period. Options issued to
employees after May, 1996 must be exercised within 90 days of the termination of
employment.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE
--------- ----------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1996.................................. 1,235,625 $ 3.56
========= ======
Granted at $3.50 to $11.50................................ 527,580 $ 5.25
Exercised................................................. (191,498) $ 2.19
Cancelled................................................. (20,237) $ 3.50
--------- ------
BALANCE, DECEMBER 31, 1997.................................. 1,551,470 $ 4.32
========= ======
Granted at $7.70 to $10.98................................ 580,364 $ 8.26
Exercised................................................. (387,881) $ 2.41
Cancelled................................................. (45,902) $ 4.01
--------- ------
BALANCE, DECEMBER 31, 1998.................................. 1,698,051 $ 6.11
========= ======
Granted at $3.50 to $19.08................................ 1,001,545 $11.69
Exercised................................................. (383,749) $ 4.82
Cancelled................................................. (170,294) $ 7.51
--------- ------
BALANCE, DECEMBER 31, 1999.................................. 2,145,553 $ 8.82
========= ======
</TABLE>
F-17
<PAGE>
VISIBLE GENETICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--SHARE CAPITAL (CONTINUED)
The fair market value of employee options granted in 1999 was approximately
$6,689,000 (1998--$2,397,000; 1997--$1,342,000). If employee options granted had
been recorded at their fair market value, the pro forma net loss in 1999 would
have been $(28,763,000) or $(3.08) per common share (1998--$(16,753,000) or
$(2.15) per common share; 1997--$(11,443,000) or $(1.62) per common share).
The fair market value of each option is estimated at the date of grant using
the Black-Scholes option valuation model based upon the following assumptions:
dividend yield--nil, risk-free interest rate (for four-year zero coupon
bond)--5.5% (1998 and 1997--5.0%), average expected volatility--70% (1998 and
1997--65%), expected average option term--4 years. The weighted average fair
value for options granted in 1999 was $6.68 (1998--$4.13; 1997--$2.63).
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.
Because the Company's stock option plans have characteristics significantly
different from those of traded options, and because change in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE EXERCISE NUMBER WEIGHTED AVERAGE
OUTSTANDING AT PRICE OF WEIGHTED EXERCISABLE AT EXERCISE PRICE OF
RANGE OF DECEMBER 31, OUTSTANDING AVERAGE DECEMBER 31, EXERCISABLE
EXERCISE PRICES 1999 OPTIONS REMAINING LIFE 1999 OPTIONS
- --------------------- -------------- ---------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Cdn$1.37-Cdn$3.42 182,541 Cdn$2.49 5.3 years 182,541 Cdn$2.49
US$3.50 340,998 US$3.50 6.7 years 317,826 US$3.50
$4.45-$6.07 23,250 $5.72 7.5 years 15,117 $5.62
$7.12-$7.84 230,757 $7.76 7.8 years 141,499 $7.76
$8.00-$9.35 506,182 $8.60 8.5 years 275,879 $8.39
$10.00-$11.50 608,625 $11.01 9.4 years 125,043 $11.33
$12.74-$16.45 119,200 $15.83 9.8 years 667 $12.74
$17.00-$19.08 134,000 $18.11 9.5 years 65,333 $18.18
--------- -------- ---------
2,145,553 $8.82 1,123,905
========= ======== =========
</TABLE>
F-18
<PAGE>
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