<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER 000-30469
deCODE GENETICS, INC.
(Exact Name of Registrant as specified in its Charter)
Delaware 04-3326704
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Lynghals 1, Reykjavik, Iceland
(Address of principal executive offices)
+354-570-1900
(Registrant's telephone number, including area code)
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or such shorter period that the registrant is required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes _____ No X
The aggregate number of shares of the registrant's common stock outstanding on
July 31, 2000 was 44,430,343.
<PAGE> 2
deCODE genetics, Inc.
INDEX
Page No.
PART I. FINANCIAL INFORMATION ........................................ 3
Item 1. Financial Information ........................................ 3
Condensed Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 .......................................... 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2000 and 1999 .......... 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and 1999 .................... 5
Notes to Condensed Consolidated Financial Statements ......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk ... 32
PART II. OTHER INFORMATION ........................................... 32
Item 2. Changes in Securities and Use of Proceeds .................... 32
Item 6. Exhibits and Reports on Form 8-K ............................. 33
(a) Exhibits ................................................. 33
(b) Reports on Form 8-K ...................................... 34
Signatures ........................................................... 35
Index to Exhibits .................................................. 36
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
Item 1. Financial Information
deCODE genetics, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------- -------------
ASSETS (UNAUDITED)
Current assets:
<S> <C> <C>
Cash and cash equivalents .............................................. $ 34,007,257 $ 29,845,664
Receivable from share issuance ......................................... 0 33,143,836
Prepaid expenses and other current assets .............................. 4,927,474 3,695,351
------------- -------------
Total current assets ............................................. 38,934,731 66,684,851
Investments and other long-term assets ..................................... 852,792 790,217
Property and equipment, net ................................................ 16,298,222 13,051,466
------------- -------------
Total assets ..................................................... $ 56,085,745 $ 80,526,534
============= =============
LIABILITIES, REDEEMABLE, CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses .................................. $ 7,355,989 $ 4,314,115
Current portion of capital lease obligations ........................... 1,988,657 2,218,726
Deferred research revenue .............................................. 1,932,778 2,238,333
Payable to preferred shareholders ...................................... 0 17,467,077
------------- -------------
Total current liabilities ........................................ 11,277,424 26,238,251
Capital lease obligations, net of current portion .......................... 3,690,593 4,549,809
Other long-term liabilities ................................................ 383,547 921,245
Redeemable, convertible preferred stock, $0.001 par value;
32,641,926 shares authorized:
Series A;
Designated: 11,041,926 shares
Issued and outstanding: 9,624,282 shares
(liquidation value $12,145,761) at June 30, 2000 ............... 12,911,974 12,405,887
Series B;
Designated: 10,300,000 shares
Issued and outstanding: 10,043,814 shares
(liquidation value $108,652,267) at June 30, 2000 .............. 106,826,701 99,865,152
Series C;
Designated: 4,583,334 shares
Issued and outstanding: 4,066,667 shares
(liquidation value $11,615,290) at June 30, 2000 ............... 11,894,824 9,318,328
------------- -------------
Total redeemable, convertible preferred stock .......................... 131,633,499 121,589,367
------------- -------------
Stockholders' equity (deficit):
Common stock, $0.001 par value;
Authorized: 60,000,000 shares
Issued and outstanding: 9,653,262 and 9,604,012 shares
at June 30, 2000 and December 31, 1999, respectively ................ 9,653 9,604
Additional paid-in capital ............................................. 36,644,223 35,072,575
Notes receivable ....................................................... (9,593,996) (9,597,830)
Deferred compensation .................................................. (10,219,223) (12,549,757)
Dividends accreted on redeemable, convertible preferred stock .......... (13,064,516) (8,384,951)
Accumulated deficit .................................................... (94,694,084) (77,324,190)
Accumulated other comprehensive income ................................. 18,625 2,411
------------- -------------
Total stockholders' equity (deficit) .............................. (90,899,318) (72,772,138)
------------- -------------
Total liabilities, redeemable, convertible preferred stock and
stockholders' equity (deficit) ............................. $ 56,085,745 $ 80,526,534
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
deCODE genetics, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------- ---------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUE
<S> <C> <C> <C> <C>
Research collaborative contract $ 3,798,333 $ 3,548,333 $ 8,235,555 $ 7,402,222
Other revenue .................. 30,194 13,828 211,358 667,428
------------ ------------ ------------ ------------
Total revenue ............ 3,828,527 3,562,161 8,446,913 8,069,650
OPERATING EXPENSES
Research and development ....... 9,971,227 7,771,797 19,205,595 14,576,943
General and administrative ..... 4,794,871 1,256,371 7,741,208 3,465,120
------------ ------------ ------------ ------------
Total operating expenses . 14,766,098 9,028,168 26,946,803 18,042,063
------------ ------------ ------------ ------------
Operating loss ..................... (10,937,571) (5,466,007) (18,499,890) (9,972,413)
Equity in net earnings (loss) of
affiliate ...................... (68,237) (30,899) (68,237) (309,679)
Interest income and other, net ..... 614,360 76,857 1,278,540 174,371
Taxes .............................. 0 0 0 0
------------ ------------ ------------ ------------
Net loss ........................... (10,391,448) (5,420,049) (17,289,587) (10,107,721)
Accrued dividends and amortized
discount on preferred stock ........ (2,380,493) (2,580,435) (4,759,871) (3,442,695)
Net loss available to common ------------ ------------ ------------ ------------
stockholders ................... $(12,771,941) $ (8,000,484) $(22,049,458) $(13,550,416)
============ ============ ============ ============
Basic and diluted net loss per share $ (1.65) $ (1.27) $ (2.91) $ (2.25)
Shares used in computing basic and
diluted net loss per share ..... 7,717,614 6,283,118 7,578,244 6,027,114
Pro forma basic and
diluted net loss per share ..... $ (0.34) $ (0.21) $ (0.56) $ (0.39)
Shares used in computing
pro forma basic and diluted net
loss per share ................. 30,796,821 26,389,776 30,604,251 25,855,785
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
deCODE genetics, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2000 1999
------------ ------------
Cash flows from operating activities: (UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net loss .................................................................. $(17,289,587) $(10,107,721)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .......................................... 1,727,893 1,403,964
Equity in net loss of affiliate ........................................ 68,237 309,679
Amortization of deferred stock compensation ............................ 3,427,121 2,674,746
Other stock-based remuneration ......................................... 3,415,930 515,000
Accrued interest on receivable from share issuance ..................... 893,836 0
Equipment received for services provided ............................... 0 (414,000)
Other .................................................................. (280,394) 0
Changes in operating assets and liabilities:
Prepaid expenses and other current assets ............................... (1,411,786) (75,185)
Accounts payable and accrued expenses ................................... 1,786,096 (314,129)
Deferred research revenue ............................................... (305,555) 527,778
Other long-term liabilities ............................................. 66,666 66,666
------------ ------------
Net cash used in operating activities ................................ (7,901,543) (5,413,202)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment ..................................... (3,458,926) (1,262,788)
Investment in affiliated company, net .................................. (518,851) (254,444)
------------ ------------
Net cash used in investing activities ................................ (3,977,777) (1,517,232)
------------ ------------
Cash flows from financing activities:
Forfeiture of common stock .............................................. (1) (331)
Issuance of preferred stock and warrants ................................ 34,534,276 4,158,444
Issuance of common stock ................................................ 63,000 5
Repurchase of preferred stock ........................................... (17,467,077) 0
Repayment of notes receivable for common stock .......................... 0 112,000
Installment payments on capital lease obligations ....................... (1,089,285) (976,669)
------------ ------------
Net cash provided by financing activities ............................ 16,040,913 3,293,449
------------ ------------
Net increase (decrease) in cash ........................................... 4,161,593 (3,636,985)
Cash and cash equivalents at beginning of period .......................... 29,845,664 25,075,844
------------ ------------
Cash and cash equivalents at end of period ................................ $ 34,007,257 $ 21,438,859
============ ============
Supplemental schedule of non-cash transactions:
Payable related to purchase of property ............................... $ 1,423,000 $ 0
Series B Preferred Stock issued in
exchange for shares in affiliate ................................... 0 779,064
Supplies received in exchange for services provided ................... $ 0 $ 239,600
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
deCODE genetics, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
deCODE genetics, Inc. ("deCODE") is a genomics and health informatics company
which applies and develops modern informatics to collect and analyze data about
the Icelandic population in order to develop products and services for the
healthcare industry. deCODE was founded in 1996 and its facilities are located
in Reykjavik, Iceland, where all of deCODE's operations take place.
BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by deCODE, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The condensed balance sheet as of December 31, 1999 has
been derived from the audited financial statements as of that date, but does not
include all disclosures required by generally accepted accounting principles.
deCODE believes the disclosures included in the unaudited condensed consolidated
financial statements when read in conjunction with the financial statements and
the notes thereto included in deCODE's Registration Statement on Form S-1 are
adequate to make the information presented not misleading.
The unaudited condensed consolidated financial statements have been prepared on
the same basis as the annual financial statements and, in the opinion of
management, reflect all adjustments, which include only normal recurring
adjustments, necessary for a fair presentation of deCODE's financial position,
results of operations and cash flows for the periods presented. The results of
operations for the three and six month periods ended June 30, 2000 are not
necessarily indicative of the results that may be expected for any other interim
period or for the full fiscal year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and operations of
deCODE and its wholly owned subsidiary, Islensk erfdagreining ehf., which is an
Icelandic company registered in Reykjavik. deCODE conducts all of its operations
through this subsidiary and owns all of its outstanding share capital, all of
which is fully-paid. No dividends have been paid by this subsidiary. All
significant intercompany accounts and transactions are eliminated upon
consolidation. Investments in which deCODE has significant influence, but does
not control, are accounted for using the equity method.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain 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 reported
period. Actual results could differ from those estimates.
6
<PAGE> 7
deCODE genetics, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
COMPUTATION OF NET LOSS PER COMMON SHARE
Net loss per share is computed under Statement of Financial Accounting Standards
No. 128, "Earnings Per Share." Basic net loss per share is computed using net
loss available to common stockholders and the weighted-average number of common
shares outstanding. The weighted-average number of common shares outstanding
during the period is the number of shares determined by relating the portion of
time within a reporting period that common shares have been outstanding to the
total time in that period.
Net loss available to common stockholders consisted of the following:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------ ----------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net loss ................................. $(10,391,448) $ (5,420,049) $(17,289,587) $(10,107,721)
Accrued dividends on Series A,
Series B and Series C preferred stock (2,340,340) (832,873) (4,679,565) (1,695,133)
Amortized discount on Series A
and Series C preferred stock ......... (40,153) (1,747,562) (80,306) (1,747,562)
------------ ------------ ------------ ------------
Accrued dividends and amortized
discount on preferred stock .......... (2,380,493) (2,580,435) (4,759,871) (3,442,695)
Net loss available to
------------ ------------ ------------ ------------
common stockholders .................. $(12,771,941) $ (8,000,484) $(22,049,458) $(13,550,416)
============ ============ ============ ============
</TABLE>
Diluted net loss per share is computed using the weighted-average number of
common shares outstanding during the period, plus the dilutive effect of
potential common shares. Diluted net loss per share does not differ from basic
net loss per share since potential common shares from the conversion of
preferred stock, stock options and warrants are antidilutive for all periods
presented and are, therefore, excluded from the calculation. For the three and
six month periods ended June 30, 2000 and for the three and six month periods
ended June 30, 1999, preferred stock convertible into 23,737,081 and 20,417,618
shares of common stock, respectively, options to purchase 30,000 and 32,000
shares of common stock, respectively, and options and warrants to purchase
1,492,500 and 2,110,037 shares of preferred stock, respectively, were not
included in the computation of diluted loss per share since their inclusion
would be antidilutive.
7
<PAGE> 8
deCODE genetics, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
PRO FORMA NET LOSS PER SHARE
Pro forma basic and diluted net loss per share is computed assuming the
conversion of all outstanding shares of preferred stock into common stock, as if
the preferred shares had converted immediately upon their issuance. Accordingly,
in the calculation of pro forma net loss per share, net loss has not been
increased for the accumulated dividends or amortized discounts on preferred
stock. The calculation of pro forma net loss per share for the three month
periods ended June 30, 2000 and 1999 and the six month periods ended June 30,
2000 and 1999 is as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net loss available to common stockholders ......... $(12,771,941) $ (8,000,484) $(22,049,458) $(13,550,416)
Pro forma adjustments to reflect assumed conversion
of preferred stock:
Accrued dividends and amortized discounts on
preferred stock ............................... (2,380,493) (2,580,435) (4,759,871) (3,442,695)
Net loss used in computing pro forma basic and
------------ ------------ ------------ ------------
diluted net loss per share .................... $(10,391,448) $ (5,420,049) $(17,289,587) $(10,107,721)
============ ============ ============ ============
Shares used in computing pro forma basic and
diluted net loss per share .................... 7,717,614 6,283,118 7,578,244 6,027,114
Pro forma adjustment to reflect weighted effect of
assumed conversion of preferred stock ......... 23,079,207 20,106,658 23,026,007 19,828,671
Shares used in computing pro forma basic and
------------ ------------ ------------ ------------
diluted net loss per share .................... 30,796,821 26,389,776 30,604,251 25,855,785
============ ============ ============ ============
Pro forma basic and diluted net loss per share .... $ (0.34) $ (0.21) $ (0.56) $ (0.39)
</TABLE>
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures About
Segments of an Enterprise and Related Information." This statement requires
companies to report information about operating segments in interim and annual
financial statements. It also requires segment disclosures about products and
services, geographic areas and major customers.
Management plans to organize deCODE's main business units along three avenues of
commercialization: discovery services, database services, and healthcare
informatics. Through June 30, 2000, deCODE has substantially undertaken only
discovery services and, as such, has only this single reportable segment under
SFAS No. 131. Discovery services, or the development and application of
proprietary bioinformatics tools to discover disease-related genes and
associated drug targets, are currently carried-out in collaboration with Roche
and in deCODE's own research programs. This business unit will also ultimately
encompass diagnostic and therapeutic products and pharmacogenomic services. The
database services business unit will involve the construction and
commercialization of the Icelandic Health Sector Database containing
non-personally identifiable data from Icelandic healthcare records, and the
deCODE Combined Data Processing system to cross-reference data from the
Icelandic Health Sector Database with genealogical and genotypic data. deCODE
expects to derive revenues from the database services business unit by providing
services through the deCODE Combined Data Processing system to pharmaceutical
and biotechnology companies, healthcare providers and other participants in the
healthcare industry. The healthcare informatics business unit will seek to
commercialize bioinformatics tools developed in deCODE's gene and drug target
discovery and database efforts. Products of the healthcare informatics business
unit are expected to include medical decision-support systems designed to assist
the decision making process in the delivery of healthcare and privacy protection
products derived from deCODE's expertise in encryption tools for complex and
sensitive medical and genetic data.
All of deCODE's revenues from inception through June 30, 2000 have been
generated in Iceland, and all of deCODE's long-lived assets are located in
Iceland.
8
<PAGE> 9
deCODE genetics, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 2. LITIGATION
In January 2000, Porsteinn Jonsson and Genealogia Islandorum hf., the
holders of copyrights to approximately 100 books of genealogical information,
commenced an action against deCODE in the District Court of Reykjavik in
Iceland. They allege that deCODE's genealogy database infringes their copyrights
and seek damages in the amount of approximately $9,000,000 and a declaratory
judgment to prevent deCODE from using the allegedly infringing data. deCODE
believes the suit is without merit and intends to defend this action vigorously;
however, the ultimate resolution of this matter cannot yet be determined.
In January 2000, an individual advised deCODE that he believes that he and
another individual are entitled to receive, collectively, 1,000,000 shares of
deCODE common stock pursuant to an agreement with deCODE. The other individual
has not asserted a claim to these shares. deCODE believes that this assertion is
without merit and intends to defend vigorously any action that this party may
commence. On April 10, 2000, Ernir Snorrason, original stockholder of deCODE,
filed a complaint in the Court of Chancery of the State of Delaware for New
Castle County alleging that deCODE improperly exercised an option to repurchase
256,637 shares of common stock that deCODE issued to Mr. Snorrason in 1996
pursuant to a Founders' Stock Purchase Agreement. The complaint seeks an order
requiring deCODE to recognize Mr. Snorrason as the owner of these shares. deCODE
believes that it has good defenses to this action and intends to defend it
vigorously; however, the ultimate resolution of this matter cannot yet be
determined.
In February 2000, Mannvernd, an organization known as the Association of
Icelanders for Ethics in Science and Medicine, issued a press release announcing
its intention to file lawsuits against the State of Iceland and any other
relevant parties, including deCODE, to test the constitutionality of the Act. In
its press release, Mannvernd indicated that it hopes to halt the construction
and/or operation of the Icelandic Health Sector Database. Mannvernd has not
commenced litigation against deCODE and deCODE is not aware of any other
litigation commenced by Mannvernd with respect to the Act. The ultimate
resolution of this matter cannot yet be determined.
NOTE 3. COLLABORATIVE AGREEMENTS
In May 2000, deCODE entered into a strategic alliance agreement and crosswalk
development agreement with Partners HealthCare System, Inc., The General
Hospital Corporation (d.b.a. Massachusetts General Hospital) and The Brigham and
Women's Hospital, Inc. (collectively, "Partners") pursuant to which (a) deCODE
will fund research by investigators of Partners pursuant to sponsored research
agreements and/or clinical trial agreements to be entered into from time to
time, (b) deCODE will collaborate with Partners on, and provide funding for,
development of an information technology bridge, called the crosswalk, to
facilitate studies with the deCODE Combined Data Processing system and Partners'
Research Patient Data Registry and (c) deCODE will develop and market, in
consultation with Partners, new information technology products and services
relating to the use of the crosswalk for future pharmaceutical and biotechnology
applications. deCODE's management does not believe that the amount of
funding it has agreed to provide over the terms of the agreements is material to
deCODE.
The strategic alliance agreement provides that a steering committee, the
membership of which is equally divided between the parties, will oversee the
alliance (including the development of the crosswalk) and select the research
projects and/or clinical trials that will be funded. deCODE will have an
exclusive option to acquire an exclusive license to any patents or copyrights
developed under such sponsored research or clinical trial agreements on
financial terms to be negotiated by the parties based on pre-determined criteria
contained in the strategic alliance agreement. Each party has the right to use
the crosswalk to facilitate studies with the databases for non-commercial
internal research
9
<PAGE> 10
deCODE genetics, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
purposes. Each party also has the right to use the crosswalk to facilitate
studies with its own database to conduct commercially sponsored research.
Partners is required to pay deCODE a royalty on revenue it receives from such
use. In addition, deCODE has the exclusive right to use the crosswalk to develop
and market products and services, and deCODE is obligated to pay Partners a
royalty on revenue it receives from the sale of such products and services.
Because deCODE has not yet developed such products or services and Partners has
not yet entered into any commercially sponsored research agreements, deCODE
cannot estimate the amount of royalties if may receive or be required to pay
under the agreements. The agreements are for a three year term, which, in the
case of the strategic alliance agreement, may be extended for an additional two
year term by the mutual agreement of the parties and, in the case of the
crosswalk development agreement, may be extended for an additional term to be
agreed upon by the parties. The agreements may also be terminated by either
party if the other party is in default. In addition, deCODE may terminate the
agreements under certain circumstances, including infeasibility of the alliance
or if the alliance jeopardizes the mission or objectives of either party.
NOTE 4. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting Comprehensive
Income," which establishes standards for reporting and presentation of
comprehensive income. This standard defines comprehensive income as the changes
in equity of an enterprise except those resulting from stockholders
transactions. The following table presents the calculation of comprehensive
income as required by SFAS No. 130:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net loss ................ $(10,391,448) $ (5,420,049) $(17,289,587) $(10,107,721)
Other comprehensive
income (loss):
Foreign currency
translation ............ 24,031 9,431 16,214 10,034
------------ ------------ ------------ ------------
Total comprehensive
income (loss) ........... $(10,367,417) $ (5,410,618) $(17,273,373) $(10,097,687)
============ ============ ============ ============
</TABLE>
NOTE 5. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
In July 2000, deCODE completed its initial public offering of common stock. A
total of 11,040,000 shares were sold by deCODE at a price of $18.00 per share.
The offering resulted in net proceeds to deCODE of approximately $182.0 million,
net of an underwriting discount of $13.9 million and estimated offering expenses
of $2.8 million.
CONVERSION OF PREFERRED STOCK
Effective upon the closing of deCODES's initial public offering, the outstanding
shares of Series A, Series B, and Series C preferred stock were converted into
9,624,282, 10,046,132 and 4,066,667 shares of common stock, respectively, and
warrants to purchase 1,075,833 shares of Series A preferred stock and 416,667
shares of Series C preferred stock were converted into warrants to purchase the
same number of shares of common stock.
10
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This Management's Discussion and Analysis of Financial Condition
and Results of Operations as of June 30, 2000 and for the three and six month
periods ended June 30, 2000 and 1999 should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto set
forth in Item 1 of this report.
OVERVIEW
deCODE was incorporated in August 1996. deCODE is a genomics and health
informatics company which develops products and services for the healthcare
industry. Our approach to the discovery of healthcare knowledge brings together
three key types of non-personally identifiable population data derived from the
Icelandic nation: information from the healthcare system, information about
relationships among individuals covered by this system and associated molecular
genetics data. We have three avenues of commercialization which are: Discovery
Services, with a focus on gene and drug target discovery; Database Services,
with a focus on the construction and commercialization of the Icelandic Health
Sector Database, which contains non-personally identifiable data from Icelandic
healthcare records, and the deCODE Combined Data Processing system, to
cross-reference data from the Icelandic Health Sector Database with genealogical
and genotypic data; and Healthcare Informatics, which is computerized analysis
of healthcare data, with a focus on bioinformatics, which is the computerized
analysis of biological information, decision-support tools and privacy products.
In February 1998, we entered into a research collaboration and
cross-license agreement with F.Hoffmann-La Roche, or Roche, regarding research
into the genetic causes of twelve diseases. Under the terms of the agreement,
Roche has made equity investments and is funding our gene discovery programs in
the twelve diseases. Under the agreement, we may receive a total of more than
$200 million in research funding and milestone payments and we will receive
royalty payments on the sale of diagnostic and therapeutic products resulting
from the collaboration. The term of the agreement will continue until February
1, 2003 provided that Roche elects to extend the agreement for the one-year
periods commencing on the third and the fourth anniversaries of the agreement.
Revenues recognized by us have consisted primarily of revenues generated under
the research collaboration and cross-license agreement with Roche.
In May 2000, we entered into a strategic alliance agreement and
crosswalk development agreement with Partners Healthcare System, Inc., The
General Hospital Corporation, d.b.a. Massachusetts General Hospital and The
Brigham and Women's Hospital, Inc., (collectively "Partners") pursuant to
which (a) we will fund research by investigators of Partners pursuant to
sponsored research agreements and/or clinical trial agreements to be entered
into from time to time, (b) we will collaborate with Partners on, and provide
funding for, development of an information technology bridge, called the
crosswalk, to facilitate studies with the deCODE Combined Data Processing system
and Partners' Research Patient Data Registry and (c) we will develop and
market, in consultation with Partners, new information technology products and
services relating to the use of the crosswalk for future pharmaceutical and
biotechnology applications.
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We have a number of collaborative agreements with local medical
institutions and doctors regarding particular disease research. These agreements
generally extend for a period of five years. Under the agreements, these
institutions and/or physicians contribute data or other clinical information
and we contribute equipment, research supplies and our molecular genetics and
experimental design expertise. The agreements also require us to reimburse all
project-related expenses. If we sell project results, the agreements require us
to make specified payments and pay a portion of performance-based milestone
payments that we receive. In addition, we have a settlement agreement with a
non-Icelandic medical institution whereby we are committed to pay royalties and
milestone payments if we are successful in developing and commercializing
products which result from a particular technology jointly owned by us and the
medical institution.
We anticipate that collaborations will remain an important element of
our business strategy and future revenues. Our ability to generate revenue
growth and become profitable is dependent, in part, on our ability to enter into
additional collaborative arrangements and on our ability and our collaborative
partners' ability to enter into additional collaborative arrangements and on
our ability and our collaborative partners' ability to successfully
commercialize products incorporating, or based on, our work. There can be no
assurance that we will be able to maintain or expand our existing
collaborations, enter into future collaborations to develop applications based
on existing or future research agreements or successfully commercialize the
deCODE Combined Data Processing system.
We intend to invest in all of our three business units, discovery
services, database services and healthcare informatics, in the year 2000 and
expect to report net losses for the next few years. If the costs of these
investments are greater than anticipated, or if they take longer to complete, or
if losses are incurred from strategic investments, we may incur losses for a
longer period of time.
We have made and intend to continue to make strategic equity
investments in, and acquisitions of, technologies and businesses that are
complementary to our business. As a result, we may record losses or expenses
related to our proportionate ownership interest in such long-term equity
investments, record charges for the acquisition of in-process technologies, or
record charges for the recognition of the impairment in the value of the
securities underlying such investments.
RESULTS OF OPERATIONS
Comparison of the Quarters Ended June 30, 2000 and 1999
Revenues for the three months ended June 30, 2000 increased to $3.8
million as compared to $3.6 million for the corresponding period in 1999, an
increase of 7.5%. Revenues related to our agreement with Roche increased to $3.8
million up from $3.5 million for the same period in 1999, an increase of 7.1%.
This increase was the result of an increase in revenue recognized due to
milestone payments.
Research and development expenses for the three months ended June 30,
2000 increased to $10.0 million as compared to $7.8 million for the same period
in the previous year, an increase of 28.3%. This increase was primarily
attributable to the
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continued expansion of operations, including our hiring of additional research
personnel and the resulting salary and benefits costs, an expansion of our
laboratory facilities and the resulting depreciation, and our increased research
efforts. License fee costs payable to the Icelandic government, as required by
the Icelandic Health Sector Database operating license, were also recorded in
the three months ended June 30, 2000; no such costs were recorded in the three
months ended June 30, 1999 because the license had not yet been issued. We
expect research and development spending to increase as we continue to pursue
our research efforts and accelerate the development of the database services.
General and administrative expenses for the three months ended June 30,
2000 increased to $4.8 million compared to $1.3 million for the corresponding
period in 1999, an increase of 281.6%. The increase in our general and
administrative expenses resulted primarily from stock-based remuneration expense
of approximately $3.0 million due to a charitable contribution of 150,000 shares
of our Series B preferred stock which we issued in May 2000 and which converted
into 150,000 shares of common stock upon the closing of our initial public
offering. This was recorded in the quarter ended June 30, 2000. We expect that
general and administrative expenses will increase throughout 2000.
Stock-based compensation and remuneration expenses increased to $4.7
million for the three months ended June 30, 2000 as compared to $1.4 million for
the three months ended June 30, 1999, an increase of 234.7%. This increase was
primarily attributable to an approximately $3.0 million charitable contribution
of our Series B stock and the resulting expense recorded in the quarter ended
June 30, 2000. The increase was also due to an increase in the number of
full-time employees in the quarter ended June 30, 2000 over the number for the
same period in 1999, and thus, an increase in the number of stock option grants
resulting in compensation expense.
Equity in net loss of affiliate was approximately $68,000 for the three
months ended June 30, 2000, compared to approximately $31,000 for the
corresponding quarter in 1999, an increase of 120.8%.
Interest income and other, net for the three months ended June 30,
2000, increased to $0.6 million as compared to $0.1 million for the same period
in 1999, an increase of 699.4%. This increase is primarily due to higher average
cash reserves in the three months ended June 30, 2000 as compared to the same
period in 1999.
Net loss available to common stockholders and basic and diluted net
loss per share were $12.8 million and $1.65 for the three months ended June 30,
2000, respectively, as compared to $8.0 million and $1.27 for the same period in
1999, respectively. This is an increase of 59.6% and 29.9%, respectively.
Comparison of the Six Months Ended June 30, 2000 and 1999
Revenues for the six months ended June 30, 2000, increased to $8.4
million as compared to $8.1 million for the corresponding period in 1999, an
increase of 4.7%. Revenues related to our agreement with Roche increased to $8.2
million from $7.4
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million for the same period in 1999, an increase of 11.3%. This increase was the
result of an increase in revenue recognized due to milestone payments.
Research and development expenses for the six months ended June 30,
2000, increased to $19.2 million as compared to $14.6 million for the same
period in 1999, an increase of 31.8%. This increase was primarily attributable
to the continued expansion of operations, including our hiring of additional
research personnel and the resulting salary and benefits costs, an expansion of
our laboratory facilities and the resulting depreciation, and our increased
research efforts. License fee costs, payable to the Icelandic government, as
required by the Icelandic Health Sector Database operating license, were also
recorded in the six months ended June 30, 2000; no such costs were recorded in
the six months ended June 30, 1999 because the license had not yet been issued.
We expect research and development spending to increase as we continue to pursue
its research efforts and accelerate the development of the database services.
General and administrative expenses for the six months ended June 30,
2000 increased to $7.7 million compared to $3.5 million for the corresponding
period in 1999, an increase of 123.4%. The increase in our general and
administrative expenses resulted primarily from stock-based remuneration expense
of approximately $3.0 million due to a charitable contribution of 150,000 shares
of our Series B preferred stock which we issued in May 2000 and which converted
into 150,000 shares of common stock upon the closing of our initial public
offering. This was recorded in the six month period ended June 30, 2000. We
expect that general and administrative expenses will increase throughout 2000.
Stock-based compensation and remuneration expenses increased to $6.8
million for the six months ended June 30, 2000 as compared to $3.2 million for
the six months ended June 30, 1999, an increase of 114.5%. This increase was
primarily attributable to an approximately $3.0 million charitable contribution
of our Series B stock and the resulting expense recorded in the six months ended
June 30, 2000. The increase was also due to an increase in the number of
full-time employees in the six months ended June 30, 2000 over the number for
the same period in 1999, and thus, an increase in the number of stock option
grants resulting in compensation expense.
Equity in net loss of affiliate decreased to $0.1 million for the six
months ended June 30, 2000, compared to $0.3 million for the corresponding
period in 1999, a decrease of 78.0%.
Interest income and other, net for the six months ended June 30, 2000,
increased to $1.3 million as compared to $0.2 million for the same period in
1999, a 633.2% increase. This increase is primarily due to higher average cash
reserves in the first half of 2000 as compared to the first half of 1999.
Net loss available to common stockholders and basic and diluted net
loss per share were $22.0 million and $2.91 for the six months ended June 30,
2000, respectively, as compared to $13.6 million and $2.25 for the same period
in 1999, respectively. This is an increase of 62.7% and 29.3%, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had $34.0 million in cash and cash equivalents.
Available cash is invested in accordance with our investment policy's
primary objectives of liquidity, safety of principal and diversity of
investments.
Net cash used in operating activities was $7.9 million for the six
months ended June 30, 2000, as compared to $5.4 million for the six months ended
June 30, 1999. The increase was primarily due to higher research and development
and general and administrative expenses in the period ended June 30, 2000, as
compared to the period ended June 30, 1999, which were only partly offset by
higher revenues in 2000.
deCODE's investing activities have consisted of capital expenditures
and long-term strategic equity investments in, and acquisitions of, technologies
and businesses that are complementary to our business. Purchase of property and
equipment for the six months ended June 30, 2000 was $3.5 million compared to
$1.3 million in the same period in 1999, primarily due to the expansion of our
facilities and operations. Net cash used in investing activities may in the
future fluctuate significantly from quarter to quarter due to the timing of
capital expenditures and investments.
Net cash provided by financing activities was $16.0 million for the six
months ended June 30, 2000 as compared to $3.3 million for the six months ended
June 30, 1999. This increase was primarily due to higher proceeds from the
issuance of preferred stock and warrants for the period in 2000 than for the
same period in 1999.
We expect cash requirements to continue to increase significantly in
2000 as we: invest in genotyping, sequencing and bioinformatics capabilities;
invest in software and hardware to support the continuing development of the
database services; continue to seek access to technologies through investments,
research and development alliances, license agreements and/or acquisitions; and
continue to make improvements in existing facilities and invest in new
facilities.
In July 2000, we completed our initial public offering of our common
stock with net proceeds of approximately $182.0 million.
Based upon our current plans, and taking into consideration the
proceeds of the initial public offering, we believe that our existing resources
will be adequate to satisfy our capital needs for several years. deCODE's
cash requirements depend on numerous factors, including our ability to obtain
new research collaboration agreements, to obtain subscription and collaboration
agreements for the database services; expenditures in connection with alliances,
license agreements and acquisitions of and investments in complementary
technologies and businesses; competing technological and market developments;
the cost of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights; the purchase of additional capital equipment,
including capital equipment necessary to ensure that our sequencing and
genotyping operations remain competitive; capital expenditures required to
expand the company's facilities. Changes in our research and development
plans or other changes affecting our operating expenses may result in changes in
the timing and amount of expenditures of our capital resources.
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FORWARD LOOKING STATEMENTS AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
WE MAY NOT SUCCESSFULLY DEVELOP OR DERIVE REVENUES FROM ANY PRODUCTS OR SERVICES
DISCOVERY SERVICES
Our gene discovery programs are still in the early stages of development and
may not result in marketable products. We direct our technology and development
focus primarily toward identifying genes or gene fragments which are responsible
for, or indicate the presence of, certain diseases. We have only identified
twelve specific candidate genes under our research programs and have not yet
validated any disease genes. Our technologies and approach to gene discovery may
not enable us to identify successfully the specific genes that cause or
predispose individuals to the complex diseases that are the targets of our gene
discovery program, even where we have identified candidate genes. In addition,
the diseases we are targeting are generally believed to be caused by a number of
genetic and environmental factors. It may not be possible to address such
diseases through gene-based therapeutic or diagnostic products. Accordingly,
even if we are successful in identifying specific genes, our discoveries may not
lead to the development of commercial products.
Even if we, or our collaborators, are able to develop pharmaceutical
products, those products will fail to produce revenues unless they:
- are safe and effective;
- meet regulatory standards in a timely manner;
- successfully compete with other technologies and products;
- avoid infringing on the proprietary rights of others;
- can be manufactured in sufficient quantities at reasonable costs; and
- can be marketed successfully.
We are not certain that we will be able to achieve these conditions for
product revenues. We expect that it will be a number of years, if ever, before
we will recognize revenue from therapeutic or diagnostic product sales or
royalties on such sales.
Our initiatives in pharmacogenomics and the study of the function of genes,
a field known as functional genomics, are not certain to provide any revenues.
There may be no market for these services because of competition, lack of market
acceptance or our inability to develop these services successfully. We may not
be able to develop our functional genomics capabilities to a state that is
adequate for realizing revenues.
DATABASE SERVICES
We, through our wholly-owned subsidiary Islensk erfdagreining ehf.,
received a license permitting us to develop and operate the Icelandic Health
Sector Database in
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January 2000, and accordingly, are at the very early stages of its development.
The collection of genotypic data, which is another integral part of the deCODE
Combined Data Processing system, is also in the early stages of development. We
expect that it will take several years before we have fully developed the deCODE
Combined Data Processing system. We are presently devoting substantial resources
to the development of the deCODE Combined Data Processing system and its
components. We plan to continue to devote substantial resources to this
development for the foreseeable future. We cannot be sure that the deCODE
Combined Data Processing system will result in marketable products or services.
Our intended method for cross-referencing genealogical, genotypic and healthcare
data is central to the development of the deCODE Combined Data Processing system
and is unproven. The success of our database services is contingent upon:
- the development of the Icelandic Health Sector Database and collection
of genotypic data;
- the creation of database and cross-reference software that is free from
design defects or errors;
- compliance with governmental requirements regarding the Icelandic Health
Sector Database;
- the security and reliability of encryption technology;
- the cooperation of the Icelandic healthcare system;
- the ability to obtain blood samples from consenting Icelanders and
consents to the use of their genotypic data by cross-referencing through
the deCODE Combined Data Processing system;
- the usefulness of information derived through the deCODE Combined Data
Processing system in disease management, analysis of drug response, gene
discovery and drug target validation; and
- the development of marketing and pricing methods that the intended users
of the deCODE Combined Data Processing system will accept.
If we fail to successfully commercialize our database services, we will not
realize revenues from this part of our business.
HEALTHCARE INFORMATICS
Our bioinformatics, decision-support and privacy protection products have,
to date, been tested only in connection with our own use of them and they may
not meet the needs of potential customers. We are at an early stage of
development of our medical decision-support systems for healthcare providers,
and we have generated no revenues from sales or licenses of bioinformatics,
decision-support, or privacy protection products. To date we have not produced
any decision-support tools and there can be no assurance that we can
successfully develop or commercialize medical decision-support systems or that
there will be a market for our bioinformatics, decision-support or privacy
protection products for healthcare delivery.
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IF OUR ASSUMPTION ABOUT THE ROLE OF GENES IN DISEASE IS WRONG, WE MAY NOT BE
ABLE TO DEVELOP USEFUL PRODUCTS
The products we hope to develop involve new and unproven approaches. They
are based on the assumption that information about genes may help scientists
better understand complex disease processes. Scientists generally have a limited
understanding of the role of genes in diseases, and few products based on gene
discoveries have been developed. Of the products that exist, all are diagnostic
products. To date, we know of no therapeutic products based on disease gene
discoveries. If our assumption about the role of genes in the disease process is
wrong, our gene discovery programs may not result in products, the genetic data
included in our database and informatics products may not be useful to our
customers and those products may lose any competitive advantage.
IF WE CONTINUE TO INCUR OPERATING LOSSES FOR A PERIOD LONGER THAN ANTICIPATED,
OR IN AN AMOUNT GREATER THAN ANTICIPATED, WE MAY BE UNABLE TO CONTINUE OUR
OPERATIONS
We incurred net losses of $17,289,587 for the six months ended June 30,
2000, and $23,788,447 for the year ended December 31, 1999. As of June 30, 2000,
we had an accumulated deficit of $94,694,084. To date, we have never generated a
profit and we have not generated any significant revenues except for payments
received in connection with our research collaboration with Roche and interest
revenues. The development of our technologies will require substantial increases
in expenditures over the next several years. In addition, we expect to spend
more in connection with our internal research programs and the preparation of
the Icelandic Health Sector Database, the deCODE Combined Data Processing system
and informatics. As a result, we expect to incur operating losses for several
years. If the time required to generate product revenues and achieve
profitability is longer than we currently anticipate or the level of operating
losses is greater than we currently anticipate, we may not be able to continue
our operations.
IF WE ARE NOT ABLE TO OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET OUR EXPANDING
CAPITAL REQUIREMENTS, WE MAY BE FORCED TO REDUCE OR TERMINATE OUR RESEARCH
PROGRAMS AND PRODUCT DEVELOPMENT
We have used substantial amounts of cash to fund our research and
development activities. We expect our capital and operating expenditures to
increase over the next several years as we expand our research and development
activities, construct the Icelandic Health Sector Database and the deCODE
Combined Data Processing system, collect the genotype data and develop
healthcare informatics products. Many factors will influence our future capital
needs, including:
- the progress of our discovery and research programs;
- the number and breadth of these programs;
- our ability to attract collaborators for, subscribers to or customers
for our products and services;
- our achievement of milestones under our research collaboration agreement
with
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\ Roche;
- our ability to establish and maintain additional collaborations;
- our collaborators' progress in commercializing our gene discoveries;
- the level of our activities relating to commercialization rights we
retain in our collaborations;
- competing technological and market developments;
- the costs involved in enforcing patent claims and other intellectual
property rights; and
- the costs and timing of regulatory approvals.
We intend to rely on Roche and future collaborators for significant funding
in support of our research efforts. In addition, we may seek additional funding
through public or private equity offerings and debt financings. Additional
financing may not be available when needed. If available, such financing may not
be on terms favorable to us or our stockholders. Stockholders' ownership will be
diluted if we raise additional capital by issuing equity securities. If we raise
additional funds through collaborations and licensing arrangements, we may have
to relinquish rights to certain of our technologies or product candidates, or
grant licenses on unfavorable terms. If adequate funds are not available, we
would have to scale back or terminate our discovery and research programs and
product development. We believe that the net proceeds from our initial public
offering, other cash and investment securities and anticipated cash flow from
Roche will be sufficient to support our current operating plan for several
years. We have based this belief on assumptions that may prove wrong.
IF WE DO NOT MAINTAIN THE GOODWILL AND RECEIVE THE COOPERATION OF THE ICELANDIC
POPULATION, WE MAY BE UNABLE TO PURSUE OUR GENE IDENTIFICATION PROGRAMS,
PHARMACOGENOMICS OR FUNCTIONAL GENOMICS EFFORTS, COLLECT GENOTYPE DATA OR
DEVELOP THE ICELANDIC HEALTH SECTOR DATABASE AND THE deCODE COMBINED DATA
PROCESSING SYSTEM
Our approach to gene identification and the development and maintenance of
genotype data, the Icelandic Health Sector Database and the deCODE Combined Data
Processing system depend on the goodwill and cooperation of the Icelandic
population, including the Icelandic government and the healthcare system. Our
development of the Icelandic Health Sector Database will be impaired if
individual Icelanders refuse to allow information from their medical records to
be included in the Icelandic Health Sector Database or healthcare providers
attempt to prevent us from having access to medical records of their patients.
Individuals may opt-out of having their records included in the Icelandic Health
Sector Database. To date approximately 6.5% of the population has exercised this
right. Some doctors practicing in Iceland have expressed opposition to the
Icelandic Health Sector Database and may attempt to withhold their patients'
data from inclusion in such database or encourage their patients to exercise
their opt-out rights. Our development of genotype data and our cross-
referencing through the deCODE Combined Data Processing system of that data with
information about the manifestations of disease, which are known as phenotypes,
in the Icelandic Health
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Sector Database require that a substantial portion of the Icelandic population
provide us with blood samples for genotyping and consent to the use of their DNA
to cross-reference molecular genetics data with the Icelandic Health Sector
Database. To date, between eighty and ninety percent of individuals that we have
asked to participate in our research projects have done so. Because only a small
portion of the Icelandic population may carry certain mutations, the
unwillingness of even a small portion of the population to participate in our
programs could diminish our ability to develop and market information based on
the use of genotypic data.
OUR RELIANCE ON THE ICELANDIC POPULATION IN OUR GENE DISCOVERY PROGRAMS AND
DATABASE SERVICES MAY LIMIT THE APPLICABILITY OF OUR DISCOVERIES TO CERTAIN
POPULATIONS
In general, the genetic make-up and prevalence of disease vary across
populations around the world. Common complex diseases generally occur with a
similar frequency in Iceland as in other western countries. We are already
studying some of these diseases in our gene discovery programs. However, the
populations of other western nations may be genetically predisposed to certain
diseases because of mutations not present in the Icelandic population. As a
result, we and our partners may take more time or may be unable to develop
diagnostic products that are effective on all, or a portion, of those people
with such diseases. Similarly, any difference between the Icelandic population
and the populations of other countries may have an effect on the usefulness of
the Icelandic Health Sector Database and deCODE Combined Data Processing system
in studying disease in populations of countries other than Iceland. We do not
anticipate developing any products solely for the Icelandic market. For our
business to succeed, we must apply discoveries that we make on the basis of the
Icelandic population to other markets.
OUR CREATION AND OPERATION OF THE ICELANDIC HEALTH SECTOR DATABASE IS BASED UPON
A LICENSE FROM THE ICELANDIC MINISTRY OF HEALTH AND SOCIAL SECURITY AND IS
SUBJECT TO GOVERNMENT SUPERVISION AND REGULATION, WHICH MAY MAKE OUR DEVELOPMENT
OF DATABASE PRODUCTS MORE EXPENSIVE AND TIME-CONSUMING THAN WE ANTICIPATED
We may construct the Icelandic Health Sector Database and cross-reference it
with our genealogical and genetic data, through the deCODE Combined Data
Processing system, only in accordance with the stipulations of the Icelandic
Health Sector Database license which the Ministry of Health and Social Security,
or the Ministry, granted us pursuant to the Act on a Health Sector Database no.
139/1998, or the Act. The license permits the processing of healthcare data from
healthcare records and other relevant data into the Icelandic Health Sector
Database. The Monitoring Committee, the Data Protection Commission of Iceland
and an Interdisciplinary Ethics Committee will supervise our construction and
operation of the Icelandic Health Sector Database. These committees report to
the Ministry. In addition, the Icelandic Bioethics Committee will review our
operation of the Icelandic Health Sector Database. The Ministry may withdraw our
license in the event that we violate the terms and conditions of the Icelandic
Health Sector Database license, the Act or its rules. In addition, the Icelandic
parliament could amend the Act in ways which would adversely affect our ability
to develop or market the Icelandic Health Sector Database and, consequently, the
deCODE Combined Data Processing system. Because the Icelandic parliament and
government recently adopted the Act and its rules, there is no precedent
interpreting the Act or the rules.
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In preparing the Icelandic Health Sector Database, we must comply with the
Data Protection Commission's technical requirements. These technical
requirements cover areas such as data encryption and privacy protection. The
Data Protection Commission may review these requirements from time to time and
may require greater technical capabilities than we currently have. Compliance
with these requirements can be expensive and time-consuming and may delay the
development of the Icelandic Health Sector Database and the deCODE Combined Data
Processing system or make such development more expensive than we anticipated.
In addition, the agencies imposing these requirements will evaluate our
compliance efforts. We cannot control the time required for this evaluation, and
accordingly, the evaluation process may lead to delay in the development of the
Icelandic Health Sector Database and the deCODE Combined Data Processing system.
The Interdisciplinary Ethics Committee has the power to withdraw permission
for any types of research programs in the Icelandic Health Sector Database not
conducted in accordance with international rules of bioethics.
At the expiration of the Icelandic Health Sector Database license, we are
required to ensure that the Ministry or its designee will receive, without
payment of consideration, intellectual property rights necessary for the
creation and operation of the database for public health purposes and for
scientific research.
We are subject to a very extensive indemnity clause in our agreement with
the Ministry, pursuant to which:
- we have agreed not to make any claim against the government if the Act
or the license are amended as a result of the Act or rules relating to
the Icelandic Health Sector Database being found to be inconsistent with
the rules of the European Economic Area, or EEA, or other international
rules and agreements to which Iceland is or becomes a party;
- we have agreed that if the Icelandic State, by a final judgment, is
found to be liable or subject to payment to any third party as a result
of the passage of legislation on the Icelandic Health Sector Database
and/or issuance of the Icelandic Health Sector Database license, we will
indemnify it against all damages and costs in connection with the
litigation; and
- we have agreed to compensate any third parties with whom the Icelandic
government negotiates a settlement of liability claims arising from the
legislation on the Icelandic Health Sector Database and/or the issuance
of the Icelandic Health Sector Database license, provided that the
Icelandic government demonstrates that it was justified in agreeing to
make payments pursuant to the settlement.
IF WE ARE NOT ABLE TO ENTER INTO AGREEMENTS WITH ICELANDIC HEALTH INSTITUTIONS,
AS THE ICELANDIC HEALTH SECTOR DATABASE LICENSE REQUIRES, IN ORDER TO COLLECT
DATA FROM THE INSTITUTIONS, WE WILL NOT BE ABLE TO CONSTRUCT AND OPERATE THE
ICELANDIC HEALTH SECTOR DATABASE
The Icelandic Health Sector Database license requires us to enter into
agreements
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with Icelandic health institutions and self-employed health service workers
regarding access to and the processing of information from medical records. To
date we have not entered into any such agreements. We cannot be certain that we
will be able to enter into such agreements or that such agreements will be on
terms favorable to us. Some doctors practicing in Iceland have expressed
opposition to the Icelandic Health Sector Database and it is possible that they
may refuse to enter into such agreements or may encourage health institutions
which employ them to refuse to do so. We cannot be certain that individuals
within health institutions will adhere to the requirements of such agreements.
The Icelandic Medical Association is currently publicly opposing the Icelandic
Health Sector Database. Our inability to enter into such agreements on favorable
terms or in a timely manner, or to obtain others' compliance with the terms of
such agreements, could have a material adverse effect on our ability to
construct and operate the Icelandic Health Sector Database.
IF WE CANNOT OBTAIN AN EXTENSION OF THE TERM OF THE ICELANDIC HEALTH SECTOR
DATABASE LICENSE BEYOND ITS EXPIRATION DATE IN JANUARY 2012, WE WILL NOT BE ABLE
TO OPERATE OR DERIVE RESOURCES FROM THE ICELANDIC HEALTH SECTOR DATABASE OR THE
deCODE COMBINED DATA PROCESSING SYSTEM AFTER THAT DATE
Even if we are successful in creating and marketing the Icelandic Health
Sector Database and the deCODE Combined Data Processing system, the Icelandic
Health Sector Database license will expire in January 2012 unless we are able to
obtain an extension. There is no assurance that we will obtain further access
rights on favorable terms, if at all. Our negotiations with healthcare
institutions, the process of genotyping and the development of database
infrastructure, among other factors, will determine when we can begin marketing
the deCODE Combined Data Processing system. We expect that the Icelandic Health
Sector Database and the deCODE Combined Data Processing system will not be fully
operational for up to five years. The Icelandic Health Sector Database license
will be subject to a review in 2008, and at that time, in accordance with an
agreement we entered into with the Ministry simultaneously with the granting of
the Icelandic Health Sector Database license, we and the Ministry will enter
into discussions on renewal of the license at the end of the term. The Ministry
might not renew the Icelandic Health Sector Database license and we cannot
guarantee any renewal.
WE MAY NOT BE ABLE TO FORM AND MAINTAIN THE COLLABORATIVE RELATIONSHIPS THAT OUR
BUSINESS STRATEGY REQUIRES
Our strategy for deriving revenues from the discovery of genes and the
development of products based upon our discoveries depends upon the formation of
research collaborations and licensing arrangements with several partners at the
same time. We currently have only two collaborative relationships. To succeed,
we will have to maintain these relationships and establish additional
collaborations. We cannot be sure that we will be able to establish the
additional research collaborations or licensing arrangements necessary to
develop and commercialize products using our technology, that any future
collaborations or licensing arrangements will be on terms favorable to us, or
that current or future collaborations or licensing arrangements ultimately will
be successful. If we are not able to manage multiple collaborations
successfully, our programs will suffer.
We also expect to rely on collaborations in other parts of our business such
as the construction of the deCODE Combined Data Processing system. During the
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development of the deCODE Combined Data Processing system, we intend to pursue
collaborations to assist us in the development of certain of its components.
Such collaborations may involve the use of particular technologies or
collaborative development and marketing activities. If we are unable to enter
into such collaborations on favorable terms, our ability to commercialize the
deCODE Combined Data Processing system will be adversely affected.
To develop our healthcare informatics products, we also plan to rely on
collaborative relationships. To date we have not established any such
collaborative relationships. If we are unable to form or maintain such
collaborative arrangements, our healthcare informatics operations will be
adversely affected.
OUR DEPENDENCE ON COLLABORATIVE RELATIONSHIPS MAY LEAD TO DELAYS IN PRODUCT
DEVELOPMENT AND DISPUTES OVER RIGHTS TO TECHNOLOGY
Under our current strategy, and for the foreseeable future, we do not expect
to develop or market pharmaceutical products on our own. As a result, we will be
dependent on collaborators for the pre-clinical study and clinical development
of therapeutic and diagnostic products and for regulatory approval,
manufacturing and marketing of any products that result from our technology. Our
agreements with pharmaceutical collaborators or collaborators for gene research
projects will typically allow them significant discretion in electing whether to
pursue such activities. We cannot control the amount and timing of resources
collaborators will devote to our programs or potential products. Our
collaborations may have the effect of limiting the areas of research that we may
pursue either alone or with others.
In addition, we expect to develop our database products, in part, with
various collaborators, and we may develop healthcare informatics tools which are
designed to work in conjunction with or to enhance the healthcare informatics
tools of other developers. These arrangements may place responsibility for key
aspects of product development and marketing on our collaborative partners.
Accordingly, the performance of these key aspects is uncertain and beyond our
direct control. If our collaborators fail to perform their obligations, our
database products could contain erroneous data, design defects, viruses or
software defects that are difficult to detect and correct and may adversely
affect our revenues and the market acceptance of our products.
If any pharmaceutical, healthcare informatics or database collaborator were
to breach or terminate its agreement with us, or otherwise fail to conduct
collaborative activities successfully and in a timely manner, the development or
commercialization of products, services, technologies or research programs may
be delayed or terminated.
Competing products that our collaborators develop or to which our
collaborators have rights may result in their withdrawal of support for our
products and services.
Disputes may arise in the future over the ownership of rights to any
technology developed with collaborators. These and other possible disagreements
between us and our collaborators could lead to delays in the collaborative
research, development or commercialization of products. Such disagreements could
also result in litigation or require arbitration to resolve.
ETHICAL AND PRIVACY CONCERNS MAY LIMIT OUR ABILITY TO DEVELOP AND USE THE
ICELANDIC
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HEALTH SECTOR DATABASE AND THE DECODE COMBINED DATA PROCESSING SYSTEM AND MAY
LEAD TO LITIGATION AGAINST US OR THE ICELANDIC GOVERNMENT
The Icelandic parliament's passage of the Act and the Ministry's granting of
the Icelandic Health Sector Database license have raised ethical and privacy
concerns in Iceland and internationally among healthcare professionals and
others including the Icelandic Medical Association and the World Medical
Association. In April 1999, the World Medical Association stated that it
supported the position of the Icelandic Medical Association in opposing the Act.
At its October 1999 annual general meeting, the Icelandic Medical Association
adopted resolutions declaring its opposition to the Act based on various ethical
concerns. Ethical and privacy concerns about the development and use of the
Icelandic Health Sector Database and the deCODE Combined Data Processing system
may lead to litigation in U.S., Icelandic or other national courts, or in
international courts such as the European Court of Human Rights in Strasbourg
(e.g., on the basis of an alleged breach of the patient-doctor confidential
relationship, constitutional privacy issues, international conventions dealing
with protection of privacy issues or human rights conventions). The results of
such litigation could have a material adverse affect on our ability to construct
and operate the Icelandic Health Sector Database and the deCODE Combined Data
Processing system.
CERTAIN PARTIES HAVE ANNOUNCED AN INTENTION TO INSTITUTE LITIGATION TESTING THE
CONSTITUTIONALITY OF THE ACT, WHICH COULD DELAY OR PREVENT US FROM DEVELOPING
AND OPERATING THE ICELANDIC HEALTH SECTOR DATABASE AND THE deCODE COMBINED DATA
PROCESSING SYSTEM
In February 2000, an organization known as The Association of Icelanders for
Ethics in Science and Medicine, or Mannvernd, and a group of physicians and
other citizens issued a press release announcing their intention to file
lawsuits against the State of Iceland and any other relevant parties, including
deCODE, to test the constitutionality of the Act. According to the press
release, the intended lawsuit will allege that the Act and the Icelandic Health
Sector Database license involve human rights violations and will challenge the
validity of provisions of the Act which allow the use of presumed consent for
the processing of health data into the Icelandic Health Sector Database and the
grant of a license to operate a single database. deCODE believes that any such
litigation would be without merit and intends to defend vigorously any such
action in which we become a party. However, in the event that the Icelandic
State by a final judgment is found to be liable or subject to payment to any
third party as a result of the passage of legislation on the Icelandic Health
Sector Database and/or the issuance of the Icelandic Health Sector Database
license, our agreement with the Ministry requires us to indemnify the Icelandic
State against all damages and costs incurred in connection with such litigation.
In addition, the pendency of such litigation could lead to delay in the
development of the Icelandic Health Sector Database and the deCODE Combined Data
Processing System, and an unfavorable outcome would prevent us from developing
and operating the Icelandic Health Sector Database and the deCODE Combined Data
Processing system.
IF WE FAIL TO PROTECT CONFIDENTIAL DATA ADEQUATELY, WE COULD INCUR LIABILITY OR
LOSE OUR LICENSE
The Act and our license require us to encrypt all patient data and to take
other actions to ensure confidentiality of data included in the Icelandic Health
Sector Database and
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restrict access to it. We are developing the Icelandic Health Sector Database
according to the Data Protection Commission's technology, security and
organizational terms. The Data Protection Commission may periodically review and
amend such terms in light of new technology or change of circumstances. We must
comply with any such revised data protection terms within a deadline which the
Data Protection Commission may establish when it revises the terms. Although, to
date, one expert in this field has criticized the security terms, we believe
that they are, and will continue to be, in line with international best
industry-practice standards. In addition, the customers for other products we
may develop may impose confidentiality requirements. Accidental disclosures of
confidential data may result from technical failures in encryption technology or
from human error by our employees or those of our customers or collaborators.
Any failure to comply fully with all confidentiality requirements could lead to
liability for damages incurred by individuals whose privacy is violated, the
loss of the Icelandic Health Sector Database license, the loss of our customers
and reputation and the loss of the goodwill and cooperation of the Icelandic
population including healthcare professionals.
ETHICAL AND PRIVACY CONCERNS MAY LIMIT THE USE OF GENETIC TESTING AND THEREFORE
THE COMMERCIAL LIABILITY OF ANY PRODUCTS WE DEVELOP
Other companies have developed genetic predisposition tests that have raised
ethical concerns. It is possible that employers or others could discriminate
against people who have a genetic predisposition to certain diseases. Concern
regarding possible discrimination may result in governmental authorities
enacting restrictions or bans on the use of all, or certain types of, genetic
testing. Similarly, such concerns may lead individuals to refuse to use genetics
tests even if permissible. These factors may limit the market for, and therefore
the commercial viability of, products that we and our collaborators develop.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH BIOTECHNOLOGY COMPANIES AND
ESTABLISHED PHARMACEUTICAL COMPANIES IN THE DEVELOPMENT AND MARKETING OF
PRODUCTS BASED UPON THE IDENTIFICATION OF DISEASE-CAUSING GENES
A number of companies are attempting to rapidly identify and patent genes
that cause diseases or an increased susceptibility to diseases. Competition in
this field is intense and is expected to increase. We have numerous competitors,
including major pharmaceutical and diagnostic companies, specialized
biotechnology firms, universities and other research institutions, the United
States-funded Human Genome Project and other government-sponsored entities. Many
of our competitors have considerably greater capital resources, research and
development staffs and facilities, and technical and other resources than we do,
which may allow them to discover important genes before we do. We believe that a
number of our competitors are developing competing products and services that
may be commercially successful and that are further advanced in development than
our potential products and services. To succeed, we, together with our
collaborators, must discover disease-predisposing genes, characterize their
functions, develop genetic tests or therapeutic products and related information
services based on such discoveries, obtain regulatory and other approvals, and
launch such services or products before competitors. Even if our collaborators
or we are successful in developing effective products or services, our products
and services may not successfully compete with those of our competitors. Our
competitors may succeed in developing and marketing products and services that
are more effective than ours or that
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are marketed before ours.
Our collaboration with Roche does not prevent it from initiating its own
gene research or developing products based upon its, or any other party's, gene
research. Such products may compete with any products that we develop through
our gene discovery programs. We expect that future collaborations may allow our
future partners to undertake research and develop products on their own or with
third parties.
Competitors have established, and in the future may establish, patent
positions with respect to gene sequences related to our research projects. Such
patent positions or the public availability of gene sequences comprising
substantial portions of the human genome could decrease the potential value of
our research projects and make it more difficult for us to compete. We may also
face competition from other entities in gaining access to DNA samples used for
research and development purposes.
We expect competition to intensify as technical advances are made and become
more widely known. Our future success will depend in large part on maintaining a
competitive position in the genomics field. Others' or our rapid technological
development may result in products or technologies becoming obsolete before we
recover the expenses we incur in developing them. Less expensive or more
effective technologies could make future products obsolete. We cannot be certain
that we will be able to make the necessary enhancements to any products we
develop to compete successfully with newly emerging technologies.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH ESTABLISHED COMPANIES AND
GOVERNMENT AGENCIES IN THE FIELD OF DATABASE SERVICES
Others are currently developing or marketing a number of databases to assist
participants in the healthcare industry and academic researchers in the
management and analysis of their own genomic data and data available in the
public domain. Although we believe that our existing genealogy database and our
license to construct and operate the Icelandic Health Sector Database provide us
with a unique opportunity to cross-reference databases that include genetic
makeup, genealogy, medical history, disease symptoms, resource use and treatment
outcomes, we cannot be sure that any of the databases that we create will
achieve greater market acceptance than those of our competitors. We plan to
grant limited Internet access to our genealogy data to the Icelandic public for
non-business use. Although our genealogy data will be restricted both by
technical and legal means, it is possible that this Internet access will in some
way facilitate the construction of similar databases intended for commercial
purposes.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN THE FIELD OF
HEALTHCARE INFORMATICS
The healthcare informatics field is highly competitive. Many companies
compete with us to develop healthcare informatics similar to our expected
products, including products relating to medical record maintenance, medical
decision-support systems and systems design. We expect that competition will
continue to intensify. Many of our competitors have significantly greater
financial resources and market presence than we have. We cannot be sure that any
products that we develop in the field of healthcare informatics, including
medical decision-support systems, will compete effectively with those of our
competitors.
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REGULATORY AUTHORITIES MAY DETERMINE THAT OUR LICENSE TO DEVELOP THE ICELANDIC
HEALTH SECTOR DATABASE INFRINGES UPON COMPETITION RULES IN THE EUROPEAN ECONOMIC
AREA, OR EEA, WHICH COULD NEGATIVELY AFFECT OUR ABILITY TO DERIVE REVENUES FROM
THE ICELANDIC HEALTH SECTOR DATABASE AND THE deCODE COMBINED DATA PROCESSING
SYSTEM
Iceland is a member of the European Free Trade Association, or EFTA,
together with Norway, Switzerland and Liechtenstein. Through this membership,
Iceland has become a part of the EEA which was created by the EEA agreement
between EFTA and the European Union, or EU. The EEA agreement extends the EU
internal market and its regulations to EFTA countries that adopt certain EU
legislation. Accordingly, Iceland is subject to both EFTA and EU competition and
public procurement rules. In April 1999, Mannvernd announced that it had filed a
complaint with the EFTA Surveillance Authority alleging that, by passing the
Act, the Icelandic government violated its obligations under the EEA agreement.
By letters dated April 17, 2000, the EFTA Surveillance Authority notified the
Ministry and Mannvernd that on the basis of information then available to it, it
was of the opinion that there is currently no reason for it to take further
action in this matter. However, the EFTA Surveillance Authority may reconsider
the matter in the event of legal or factual changes. A determination that the
Act or our Icelandic Health Sector Database license is in breach of such rules
could result in a revocation or dilution of the license and could have a
negative impact on the profitability and marketing potential of the deCODE
Combined Data Processing system.
OTHERS MAY CLAIM INTELLECTUAL PROPERTY RIGHTS TO OUR GENEALOGY DATABASE, WHICH
COULD PREVENT US FROM USING SOME OR ALL OF OUR DATABASE AND IMPAIR OUR ABILITY
TO DERIVE REVENUES FROM OUR DATABASE AND GENE DISCOVERY SERVICES
We are aware that there are other firms and individuals who have prepared,
or are currently preparing, genealogy databases similar to the one we have
developed. If any parties should successfully claim that the creation or use of
any of our databases infringes upon their intellectual property rights, it could
have a material adverse effect on our business. Recently, two holders of
copyrights in approximately 100 Icelandic genealogy books have filed a copyright
infringement suit against us in Iceland claiming that we have used data from
these books in the creation of our genealogy database, in violation of their
rights. The claimants seek a declaratory judgment to prevent our use of the
database and monetary damages in the amount of approximately $9,000,000. We
believe that this suit is without merit and intend to defend it vigorously, but
if it were successful it could have a material adverse effect on our database
and gene discovery services.
WE MAY NOT BE ABLE TO PROTECT THE PROPRIETARY RIGHTS THAT ARE CRITICAL TO OUR
SUCCESS
Our success will depend on our ability to protect our genealogy database and
genotypic data and any other proprietary databases that we develop, proprietary
software and other proprietary methods and technologies. Despite our efforts to
protect our proprietary rights, unauthorized parties may be able to obtain and
use information that we regard as proprietary.
Our commercial success will depend in part on obtaining patent protection.
The
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patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including ours, are generally uncertain and involve complex legal and
factual considerations. We cannot be sure that any of our pending patent
applications will result in issued patents, that we will develop additional
proprietary technologies that are patentable, that any patents issued to us or
our partners will provide a basis for commercially viable products, will provide
us with any competitive advantages or will not be challenged by third parties,
or that the patents of others will not have an adverse effect on our ability to
do business.
In addition, patent law relating to the scope of claims in the area of
genetics and gene discovery is still evolving. There is substantial uncertainty
regarding the patentability of genes or gene fragments without known functions.
The laws of some European countries provide that genes and gene fragments may
not be patented. The Commission of the EU has passed a directive which prevents
the patenting of genes in their natural state. The U.S. Patent and Trademark
Office initially rejected a patent application by the National Institutes of
Health on partial genes. Accordingly, the degree of future protection for our
proprietary rights is uncertain and, we cannot predict the breadth of claims
allowed in any patents issued to us or to others. We could also incur
substantial costs in litigation if we are required to defend ourselves in patent
suits brought by third parties or if we initiate such suits.
Others may have filed and in the future are likely to file patent
applications covering genes or gene products that are similar or identical to
our products. We cannot be certain that our patent applications will have
priority over any patent applications of others. The mere issuance of a patent
does not guarantee that it is valid or enforceable; thus even if we are granted
patents we cannot be sure that they would be valid and enforceable against third
parties. Further, a patent does not provide the patent holder with freedom to
operate in a way that infringes the patent rights of others. Any legal action
against us or our partners claiming damages and seeking to enjoin commercial
activities relating to the affected products and processes could, in addition to
subjecting us to potential liability for damages, require us or our partners to
obtain a license in order to continue to manufacture or market the affected
products and processes. There can be no assurance that we or our partners would
prevail in any action or that any license required under any patent would be
made available on commercially acceptable terms, if at all. If licenses are not
available, we or our partners may be required to cease marketing our products or
practicing our methods.
If expressed sequence tags, single nucleotide polymorphisms, or SNPs, or
other sequence information become publicly available before we apply for patent
protection on a corresponding full-length or partial gene, our ability to obtain
patent protection for those genes or gene sequences could be adversely affected.
In addition, other parties are attempting to rapidly identify and characterize
genes through the use of gene expression analysis and other technologies. If any
patents are issued to other parties on these partial or full-length genes or
uses for such genes, the risk increases that the sale of our or our
collaborators' potential products or processes may give rise to claims of patent
infringement. The amount of supportive data required for issuance of patents for
human therapeutics is highly uncertain. If more data than we have available is
required, our ability to obtain patent protection could be delayed or otherwise
adversely affected. Even with supportive data, the ability to obtain patents is
uncertain in view of evolving examination guidelines, such as the utility and
written description guidelines that the U.S. Patent and Trademark Office has
proposed.
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While we require employees, academic collaborators and consultants to enter
into confidentiality agreements, there can be no assurance that proprietary
information will not be disclosed, that others will not independently develop
substantially equivalent proprietary information and techniques, otherwise gain
access to our trade secrets or disclose such technology, or that we can
meaningfully protect our trade secrets.
If the information processed by the deCODE Combined Data Processing system
is disclosed without our authorization, demand for our products and services may
be adversely affected.
IF WE OR OUR COLLABORATORS ARE UNABLE TO OBTAIN REGULATORY APPROVALS FOR
PRODUCTS RESULTING FROM OUR GENE DISCOVERY PROGRAMS, WE WILL NOT BE ABLE TO
DERIVE REVENUES FROM THESE PRODUCTS
Government agencies must approve new drugs and diagnostic products in the
countries in which they are to be marketed. We cannot be certain that regulatory
approval for any drugs or diagnostic products resulting from our gene discovery
programs will be obtained. The regulatory process can take many years and
require substantial resources. Because some of the products likely to result
from our disease research programs involve the application of new technologies
and may be based upon a new therapeutic approach, various government regulatory
authorities may subject such products to substantial additional review. As a
result, these authorities may grant regulatory approvals for these products more
slowly than for products using more conventional technologies. Furthermore,
regulatory approval may impose limitations on the use of a drug or diagnostic
product.
After initial regulatory approval, a marketed product and its manufacturer
must undergo continuing review. Discovery of previously unknown problems with a
product may have adverse effects on our business, financial condition and
results of operations, including withdrawal of the product from the market.
OUR DEPENDENCE UPON A SINGLE THIRD PARTY FOR SEQUENCING MACHINES MAY IMPAIR OUR
RESEARCH PROGRAMS
We currently use a single manufacturer to supply the gene sequencing
machines that we use in our gene discovery programs. While other types of gene
sequencing machines are available from other manufacturers, we do not believe
that the other machines are as efficient as the machines we currently use. We
cannot be sure that the gene sequencing machines will remain available in
sufficient quantities at acceptable costs. If we cannot obtain additional gene
sequencing machines at commercially reasonable rates, or if we are required to
change to a new supplier of gene sequencing machines, our gene discovery
programs would be adversely affected.
WE MAY NOT BE ABLE TO OBTAIN NECESSARY TECHNOLOGY
We have acquired or licensed certain components of our technologies from
third parties. Changes in or termination of these third party agreements could
materially adversely affect our discovery or research programs. We cannot be
certain that we will be able to acquire any new technologies which we need.
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WE WILL HAVE TO RELY ON OTHERS FOR CLINICAL TRIALS, MANUFACTURING, MARKETING,
REGULATORY COMPLIANCE AND SALES CAPABILITIES, WHICH MAY IMPAIR OUR ABILITY TO
DELIVER PRODUCTS
In our research collaborations, we will seek to retain rights to develop and
market certain therapeutic and diagnostic products or services. If we are able
to retain these rights and successfully develop products, we expect to contract
with others for conducting clinical trials, manufacturing, marketing and sales.
We are not certain that we will be able to enter into such arrangements on
favorable terms, if at all. Our dependence upon third parties for the conduct of
clinical trials, the obtaining of governmental approvals or the manufacture,
marketing or sales of products may adversely affect our ability to develop and
deliver products on a timely and competitive basis. Our current facilities and
staff are inadequate for commercial production and distribution of products. If
we choose in the future to engage directly in the development, manufacturing and
marketing of certain products, we will require substantial additional funds,
personnel and production facilities.
EFFORTS TO REDUCE HEALTHCARE COSTS MAY REDUCE MARKET ACCEPTANCE OF OUR PRODUCTS
Our success will depend in part on the extent to which government and health
administration authorities, private health insurers and other third party payors
will pay for our products. Reimbursement for newly approved healthcare products
is uncertain. Third party payors, including Medicare in the U.S., are
increasingly challenging the prices charged for medical products and services.
Government and other third party payors are increasingly attempting to contain
healthcare costs by limiting both coverage and the level of reimbursement for
new therapeutic products. We cannot be certain that any third party insurance
coverage will be available to patients for any products we discover or develop.
If government or other third party payors do not provide adequate coverage and
reimbursement levels for our products, the market acceptance of these products
may be materially reduced.
OUR OPERATIONS MAY BE IMPAIRED UNLESS WE CAN SUCCESSFULLY MANAGE OUR GROWTH
We have recently experienced significant growth in the number of our
employees and the scope of our operations. We intend to hire additional
personnel to construct the Icelandic Health Sector Database and the deCODE
Combined Data Processing system, and to develop our healthcare informatics
products. Our management and operations are, and may continue to be, under
significant strain due to this growth. To manage such growth, we must strengthen
our management team and attract and retain skilled employees. Our success will
also depend on our ability to improve our management information, research
information and operational control systems and to expand, train and manage our
workforce.
USE OF THERAPEUTIC OR DIAGNOSTIC PRODUCTS DEVELOPED AS A RESULT OF OUR PROGRAMS
MAY RESULT IN LIABILITY CLAIMS FOR WHICH WE HAVE INADEQUATE INSURANCE
The users of any therapeutic or diagnostic products developed as a result of
our discovery or research programs or the use of our database or medical
decision-support products may bring product liability claims against us. We
currently do not carry liability insurance to cover such claims. We are not
certain that we or our collaborators will be
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able to obtain such insurance or, if obtained, that sufficient coverage can be
acquired at a reasonable cost. If we cannot protect against potential liability
claims, we or our collaborators may find it difficult or impossible to
commercialize products.
WE MAY BE UNABLE TO HIRE AND RETAIN THE KEY PERSONNEL UPON WHOM OUR SUCCESS
DEPENDS
We depend on the principal members of our management and scientific staff,
including Dr. Kari Stefansson, Chairman, President, Chief Executive Officer and
Secretary, Hannes Smarason, Executive Vice President and Senior Business and
Finance Officer, Dr. Jeffrey Gulcher, Vice President, Research and Development
and Dr. C. Augustine Kong, Director of Statistics. We have not entered into
agreements with any of these persons that bind them to a specific period of
employment. If any of these people leaves us, our ability to conduct our
operations may be negatively affected. Our future success also will depend in
part on our ability to attract, hire and retain additional personnel. There is
intense competition for such qualified personnel and we cannot be certain that
we will be able to continue to attract and retain such personnel. Failure to
attract and retain key personnel could have a material adverse effect on us.
OUR OPERATIONS INVOLVE A RISK OF INJURY FROM HAZARDOUS MATERIALS, WHICH COULD BE
VERY EXPENSIVE TO US
Our research and manufacturing activities involve the generation, use and
disposal of hazardous materials and wastes, including various chemicals and
radioactive compounds. We are subject to laws and regulations governing the use,
storage, handling and disposal of these materials, including standards
prescribed by Iceland and applicable EU standards. Although we believe that our
safety procedures comply with such laws and regulations, we cannot eliminate the
risk of environmental contamination or injury. In the event of such an
occurrence, we could be held liable for any damages that result, which could
exceed our resources. Although we believe that we comply in all material aspects
with applicable environmental laws and regulations and do not expect to make
additional material capital expenditures in this area, we cannot predict whether
new regulatory restrictions on the production, handling and marketing of
biotechnology products will be imposed. Any such new regulatory restrictions
could require us to incur significant costs to comply.
CURRENCY FLUCTUATIONS MAY NEGATIVELY AFFECT OUR FINANCIAL CONDITION
Our revenues and cash reserves are denominated in U.S. dollars, but a
portion of our operating costs are denominated in Icelandic kronas. A
strengthening of the Icelandic krona against the U.S. dollar may, therefore,
have a negative impact on our financial condition.
YEAR 2000 RISKS MAY HARM OUR BUSINESS
Despite the passing of January 1, 2000, Year 2000 issues continue to pose
risks that could adversely affect our business in a number of significant ways.
Although we believe that our internally developed systems and technology are
Year 2000 compliant, latent Year 2000 problems nevertheless could substantially
impair or cause a failure of our information technology systems. Additionally,
we rely on information technology and automated laboratory equipment supplied by
third parties. Year 2000 problems that we
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or any such third parties experience could materially adversely affect our
business.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The primary objective of our investment activities is to preserve
principal while maximizing income we receive from our investments without
significantly increasing risk. Some of the securities in our investment
portfolio may be subject to market risk. This means that a change in prevailing
interest rates may cause the market value of the investment to fluctuate. For
example, if we hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the market
value of the investment will probably decline. To minimize this risk in the
future, we intend to maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, money market
funds and government and non-government debt securities. In general, money
market funds are not subject to market risk because the interest paid on such
funds fluctuates with the prevailing interest rate. As of June 30, 2000, all of
our cash and cash equivalents were in money market and checking accounts.
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) During the period covered by this quarterly report on Form 10-Q, the
Company sold the following securities that were not registered under the
Securities Act:
(1) In May 2000, the Company sold 5,000 shares of common stock
to three collaborators for services rendered as invoiced at $115,945.
(2) In May 2000, the Company issued 150,000 shares of Series B
preferred stock to the Children's Advocacy Fund for $150, with the
balance of the fair market value of the shares being treated as a
charitable donation by the Company to the Children's Advocacy Fund.
(3) In May 2000, the Company sold 15,000 shares of common
stock to Fridrik Skulason ehf. for $15 in consideration of its
agreement to amend an agreement with the Company concerning publication
of the genealogical database.
(4) In June 2000, the Company sold 555,556 shares of Series C
preferred stock and a warrant to purchase 55,556 shares of Series C
preferred stock to SAPAC Corporation Ltd. for cash proceeds of
$2,222,280.
The sale and issuance of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2) and/or Regulation D as transactions not involving any public
offering or Regulation S as offers and sales that occurred outside the United
States. Where appropriate, the purchasers represented their intention to acquire
the securities for investment only and not with a view to the distribution
thereof or that they were non-U.S. persons. Appropriate legends are affixed to
the stock certificates issued in those transactions. All
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recipients either received adequate information about the Company or had access,
through employment or other relationships, to adequate information.
The shares of Series B preferred stock and Series C preferred stock
were automatically converted into shares of the Company's common stock upon the
closing of the Company's initial public offering on July 21, 2000.
(d) The Company commenced an initial public offering of its common stock,
$.001 par value, on July 17, 2000 pursuant to registration statements on Form
S-1 (Registration Nos. 333-31984 and 333-41598) (collectively, the "Registration
Statement"), which were declared effective by the Securities and Exchange
Commission on July 17, 2000. The Registration Statement related to the offering
of 11,040,000 shares of common stock for a gross aggregate offering price of
$198,720,000. All of such shares were sold prior to the date hereof for such
gross aggregate amount. The managing underwriter was Morgan Stanley & Co.,
Incorporated. In connection with the offering, the Company incurred underwriting
discounts and commissions of $13,910,400, expenses paid to or for the
underwriters of $575,000 and other expenses estimated to be approximately
$2,200,000. The total of such expenses is $16,685,400. All of such expenses were
payable to parties other than the Company's directors, officers or their
associates; persons owning 10 percent or more of any class of equity securities
of the Company; or affiliates of the Company. Net proceeds to the Company after
deduction of the foregoing expenses were approximately $182,000,000. The ending
date of the reporting period covered by this quarterly report preceded the
effective date of the Registration Statement. Accordingly, the information
regarding the use of net proceeds described in Item 701(f)(4)(vii) of Regulation
S-K will be reported in the Company's quarterly report on Form 10-Q for the
quarter ended September 30, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Description of Exhibit
3.1 Amended and Restated Certificate of Incorporation, as further
amended (Incorporated by reference to Exhibit 3.1 and Exhibit
3.3 to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000.)
3.2 Bylaws, as amended (Incorporated by reference to Exhibit 3.2
to Company's Registration Statement on Form S-1 (Registration
No. 333-31984) which became effective on July 17, 2000.)
10.1** Strategic Alliance Agreement between Partners Healthcare
System, Inc., The General Hospital Corporation, d.b.a.
Massachusetts General Hospital, The Brigham and Women's
Hospital, Inc. and deCODE genetics Ltd., dated May 11, 2000.
(Incorporated by reference to Exhibit 10.48 to Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000.)
33
<PAGE> 34
10.2** Crosswalk Development Agreement between Partners HealthCare
System, Inc., The General Hospital Corporation, d.b.a.
Massachusetts General Hospital, the Brigham and Women's
Hospital, Inc. and deCODE genetics Ltd., dated May 11, 2000.
(Incorporated by reference to Exhibit 10.49 to Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000.)
10.3 Property Leasing Contract On Premises at Hlidarsmari 15
between Veigur ehf. and Islensk erfdagreining ehf., dated
April 2000. (Incorporated by reference to Exhibit 10.50 to
Company's Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000.)
10.4** Research Contract on the Co-Operation between a Research Team
for the Epidemiology and Heredity Lung Cancer and Islensk
erfdagreining ehf., dated as of June 26, 2000. (Incorporated
by reference to Exhibit 10.51 to Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000.)
27.1 Financial Data Schedule
---------------
**Confidential treatment has been granted with respect to a portion of
this Exhibit.
(b) Reports on Form 8-K.
No current reports on Form 8-K were filed during the reporting period.
34
<PAGE> 35
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereto duly authorized.
deCODE genetics, Inc.
/s/ Kari Stefansson
______________________________________
Kari Stefansson
Chairman, President,
Chief Executive Officer and Director
/s/ Axel Nielsen
______________________________________
Axel Nielsen
Vice President, Finance and
Treasurer (principal financial
officer and principal accounting officer)
35
<PAGE> 36
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
3.3 Amended and Restated Certificate of Incorporation, as further
amended (Incorporated by reference to Exhibit 3.1 and Exhibit
3.3 to the Company's Registration Statement on Form S-1
(Registration No. 333-31984) which became effective on July
17, 2000.)
3.4 Bylaws, as amended (Incorporated by reference to Exhibit 3.2
to Company's Registration Statement on Form S-1 (Registration
No. 333-31984) which became effective on July 17, 2000.)
10.1** Strategic Alliance Agreement between Partners Healthcare
System, Inc., The General Hospital Corporation, d.b.a.
Massachusetts General Hospital, The Brigham and Women's
Hospital, Inc. and deCODE genetics Ltd., dated May 11, 2000.
(Incorporated by reference to Exhibit 10.48 to Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000.)
10.2** Crosswalk Development Agreement between Partners HealthCare
System, Inc., The General Hospital Corporation, d.b.a.
Massachusetts General Hospital, the Brigham and Women's
Hospital, Inc. and deCODE genetics Ltd., dated May 11, 2000.
(Incorporated by reference to Exhibit 10.49 to Company's
Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000.)
10.3 Property Leasing Contract On Premises at Hlidarsmari 15
between Veigur ehf. and Islensk erfdagreining ehf., dated
April 2000. (Incorporated by reference to Exhibit 10.50 to
Company's Registration Statement on Form S-1 (Registration No.
333-31984) which became effective on July 17, 2000.)
10.4** Research Contract on the Co-Operation between a Research Team
for the Epidemiology and Heredity Lung Cancer and Islensk
erfdagreining ehf., dated as of June 26, 2000. (Incorporated
by reference to Exhibit 10.51 to Company's Registration
Statement on Form S-1 (Registration No. 333-31984) which
became effective on July 17, 2000.)
27.1 Financial Data Schedule
---------------
**Confidential treatment has been granted with respect to a portion of
this Exhibit.
