<PAGE>
As Filed With the Securities and Exchange Commission on February 28, 2000
Registration No. 333-30778
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
NANOGEN, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 3826 33-0489621
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
10398 Pacific Center Court,
San Diego, California 92121
(858) 410-4600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
Howard C. Birndorf
Chairman of the Board, Chief Executive Officer and President
Nanogen, Inc.
10398 Pacific Center Court, San Diego, California 92121
(858) 410-4600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
Copies to:
<TABLE>
<S> <C>
THOMAS E. SPARKS, JR., ESQ. FREDERICK W. KANNER, ESQ.
JOHN L. DONAHUE, ESQ. ROBERT M. SMITH, ESQ.
WILLIAM A. HINES, ESQ. DEWEY BALLANTINE LLP
ALAN G. SMITH, ESQ. 1301 AVENUE OF THE AMERICAS
PILLSBURY MADISON & SUTRO LLP NEW YORK, NY 10019-6092
50 FREMONT STREET
SAN FRANCISCO, CALIFORNIA 94105
</TABLE>
------------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
------------------------------
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. / /
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Each Class of Securities Amount to be Offering Price Per Aggregate Offering Amount of
to be Registered Registered Share (1) Price (1) Registration Fee (2)
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value 2,875,000 shares $56.25 $161,718,750 $42,694
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rules 457(c) and 457(g) of the Securities Act of 1933, and based
on the average of the high and low sales prices of the common stock, as
reported on the Nasdaq National Market on February 16, 2000.
(2) Previously paid.
------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to such Section 8(a),
may determine.
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<PAGE>
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD
RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
<PAGE>
Preliminary Prospectus Subject to Completion February 28, 2000
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2,500,000 Shares
[LOGO]
Common Stock
- ----------------------------------------------------------------------
We are offering 2,500,000 shares of our common stock to be sold in this
offering.
Our common stock is listed on the Nasdaq National Market under the symbol
"NGEN." On February 23, 2000, the last reported sale price of the common stock
on the Nasdaq National Market was $64.5625 per share.
Before buying any shares you should read the discussion of material risks of
investing in our common stock in "Risk Factors" beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
<TABLE>
<CAPTION>
Per share Total
<S> <C> <C>
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Public offering price $ $
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Underwriting discounts and commissions $ $
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Proceeds, before expenses, to us $ $
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</TABLE>
Certain of our stockholders, who are identified on page 46, have granted the
underwriters a 30-day option to purchase up to an additional 229,645 shares of
our common stock to cover over-allotments. We have granted the underwriters a
30-day option to purchase up to an additional 145,355 shares of our common stock
to cover over-allotments.
The underwriters are offering the common stock as set forth under
"Underwriting." Delivery of the shares will be made on or about ,
2000.
Warburg Dillon Read LLC
Lehman Brothers
Pacific Growth Equities, Inc.
Dain Rauscher Wessels
First Union Securities, Inc.
<PAGE>
[LOGO]
The NanoChip Molecular Biology Workstation
We integrate advanced microelectronics and molecular biology into a core
platform technology with broad and diverse commercial applications in the fields
of genomics, biomedical research, medical diagnostics, drug discovery,
forensics, agriculture, environmental testing, and potentially the electronics
and telecommunications industries. The first application we have developed is an
integrated bioassay system, the NanoChip molecular biology workstation.
<TABLE>
<C> <S>
ADVANTAGES
- Accuracy
- Multiple formats
- Flexibility/scalability
- Speed
[Picture of
NanoChip Molecular Biology Workstation]
- Throughput
- Diverse applications
- Ease of use
- Cost effectiveness
</TABLE>
<TABLE>
<S> <C>
COMMERCIALIZATION PLAN [Picture of NanoChip Cartridge]
- - In February 2000, we successfully completed
our third and final beta test for the NanoChip
system.
- - We plan to begin commercialization during
the second half of 2000.
</TABLE>
<PAGE>
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
Prospectus summary..................... 1
The offering........................... 3
How to contact us...................... 3
Summary consolidated financial and
operating data....................... 4
Risk factors........................... 5
Forward-looking information............ 14
Use of proceeds........................ 15
Dividend policy........................ 15
Price range of common stock............ 15
Capitalization......................... 16
Dilution............................... 17
Selected consolidated financial data... 18
Management's discussion and analysis of
financial condition and results of
operations........................... 19
Business............................... 23
Management............................. 43
Principal and selling stockholders..... 46
Underwriting........................... 48
Legal matters.......................... 50
Experts................................ 50
Where you can find additional
information.......................... 51
Documents incorporated by reference.... 51
Index to consolidated financial
statements........................... F-1
</TABLE>
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Nanogen-Registered Trademark-, Nanotronics-Registered Trademark-, NanoChip-TM-
and the Nanogen logo are our trademarks. All other trademarks, servicemarks or
trade names referred to in this prospectus are the property of their respective
owners.
------------------------
UNLESS OTHERWISE STATED HEREIN, ALL INFORMATION CONTAINED IN THIS PROSPECTUS
ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS.
<PAGE>
Prospectus summary
This summary highlights information contained in other parts of this prospectus.
Because it is a summary, it does not contain all of the information that you
should consider before investing in our common stock. You should read the entire
prospectus carefully, including "Risk factors" and the financial statements and
related notes, and the documents incorporated by reference in this prospectus,
before making an investment decision.
OUR BUSINESS
We integrate advanced microelectronics and molecular biology into a core
technology platform with broad and diverse commercial applications in the fields
of genomics, biomedical research, medical diagnostics, drug discovery,
forensics, agriculture, environmental testing and potentially the electronics
and telecommunications industries. The first application we have developed is an
integrated bioassay system, the NanoChip molecular biology workstation,
comprised of two automated instruments and a consumable cartridge. The NanoChip
cartridge, incorporating a proprietary microchip, provides a flexible tool for
the rapid identification and precision analysis of biological test samples
containing charged molecules.
Through the use of microelectronics, our technology enables the active movement
and concentration of charged molecules, such as DNA, to and from designated
microlocations, or test sites, on our microchips. This electronic concentration
of molecules greatly accelerates molecular binding at each microlocation. In
addition, our technology allows for the simultaneous analysis of multiple test
results, or "multiplexing," from a single sample. The open architecture design
of our system enables us to offer microchips with preloaded arrays designed for
specific applications or with arrays that can be customized by the end user. We
believe that our technology platform provides an accurate, versatile and highly
efficient integrated system that will shift bioassay analysis from current
manual and mechanical methods to microelectronic systems, thereby significantly
improving the quality and reducing the overall cost of research and healthcare.
In April of 1998 we completed our initial public offering. Since that time we
have:
- - designed and built production ready automated instruments for cartridge
loading, processing and analysis;
- - simplified the consumable cartridge design by reducing total parts by 75%;
- - strengthened our development, manufacturing and commercialization
infrastructure;
- - added an additional eight U.S. patents and six foreign patents to our
intellectual property portfolio;
- - validated our technology through the successful completion of three beta
site tests; and
- - expanded collaborations with Aventis Research and Technology, or Aventis,
and Hitachi, Ltd., or Hitachi, for technology development and manufacturing.
COMMERCIALIZATION PLAN
Successful beta site tests
In February 2000, we announced the completion of our third and final beta site
testing results for the NanoChip molecular biology workstation. These tests were
conducted at three commercial and academic centers: the Mayo Clinic, the
University of Texas Southwestern Medical Center and the Bode Technology Group.
In each case, the results indicated very high levels of accuracy for the
NanoChip system. The single nucleotide polymorphism, or SNP, studies performed
at the Mayo Clinic and the University of Texas Southwestern Medical Center both
reported 100% accuracy, exceeding the performance of their current
1
<PAGE>
"gold standard" techniques. The short tandem repeat, or STR, analysis results
from the Bode Technology Group showed greater than 99.5% concordance with
current techniques, results which have been further improved by subsequent
software upgrades.
Commercial launch
We plan to begin commercialization of our NanoChip molecular biology workstation
during the second half of 2000 to a select group of customers in the genomics
and biomedical research fields. The initial applications for the technology will
be for the analysis of DNA including SNPs, point mutations, or PMs, and STRs. It
is anticipated that the analysis of gene expression will be added as an
additional application. Because of the importance of the genomics and biomedical
research and markets, we anticipate being directly involved with marketing our
first product line to this non-regulated market segment. Additionally, we expect
to distribute products in Japan through the distribution arm of Hitachi, Ltd.
MARKET
Many bioassay techniques have been developed from a wide variety of different
scientific disciplines for molecular biology and clinical diagnostic
laboratories. Many of these techniques are often technically demanding,
difficult to perform, expensive, inflexible, and often lack acceptable clinical
accuracy. In addition, technologies well suited or targeted to one market, such
as the biomedical research or drug discovery markets, often are unable to bridge
the required gap to serve downstream markets such as clinical diagnostics.
NANOGEN SOLUTION
The NanoChip molecular biology workstation is designed to serve a wide range of
genomics and biomedical research markets as well as many other applications.
The NanoChip system provides the following advantages:
- - accuracy;
- - multiple formats;
- - flexibility/scalability;
- - speed;
- - throughput;
- - diverse applications;
- - ease of use; and
- - cost effectiveness.
STRATEGY
We intend to research, develop, manufacture and market instruments and
components, independently and in conjunction with highly regarded corporate and
government partners, to facilitate breakthrough genetic analyses. Our NanoChip
molecular biology workstation uniquely bridges the gap between the earliest
scientific research and much later stage clinical practice. Our strategy is to
make our proprietary bioassay technology platform a standard for molecular
identification and analysis across a broad range of applications. Our initial
commercial product will be a bench-top system for use in genomics and biomedical
research applications. The capabilities that are incorporated into this system,
such as electronics-based tools that we believe can provide improved accuracy,
speed and flexibility over current laboratory techniques, will form the core
technology platform that will serve as the basis for expanding into other
biological and non-biological areas.
2
<PAGE>
The offering
The following information assumes that the underwriters do not exercise the
over-allotment option granted by the selling stockholders and Nanogen to
purchase additional shares in the offering.
<TABLE>
<S> <C>
Common stock offered by Nanogen.............. 2,500,000 shares
Common stock to be outstanding after this
offering................................... 21,532,980 shares (1)
Nasdaq National Market symbol................ NGEN
Use of proceeds.............................. We intend to use the net proceeds from this
offering for continued development,
manufacturing and commercialization of
existing products and applications, research
and development of additional applications
and general corporate purposes, principally
working capital and capital expenditures. See
"Use of Proceeds."
Risk factors................................. Investing in our common stock involves
certain risks. Please see "Risk factors"
beginning on page 6 for a description.
</TABLE>
- ---------
(1) This share number is based on shares outstanding as of February 15, 2000,
but excludes:
- - 1,798,323 shares of common stock issuable upon exercise of outstanding
options with a weighted average exercise price of $19.65 per share,
343,977 shares reserved for future grant under our 1997 Stock Incentive Plan
and 140,238 shares issuable upon the exercise of outstanding warrants; and
- - 238,001 shares of common stock reserved for issuance under our employee
stock purchase plan.
How to contact us
Our principal executive offices are located at 10398 Pacific Center Court, San
Diego, California 92121 and our telephone number is (858) 410-4600. Our web site
is http://www.nanogen.com. The information found on our web site is not a part
of this prospectus.
3
<PAGE>
Summary consolidated financial and operating data
<TABLE>
<CAPTION>
Years Ended December 31,
Consolidated statement of operations data
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Revenues:
Sponsored research......................... $-- $-- $1,243 $5,461 $5,688
Contract and grant revenue................. 318 1,644 2,123 2,172 2,431
----------- ----------- ----------- ----------- -----------
Total revenues........................... 318 1,644 3,366 7,633 8,119
Operating expenses:
Research and development................... 3,356 6,931 11,769 23,002 25,260
General and administrative................. 1,646 2,427 3,910 6,420 9,097
Acquired in-process technology............. -- -- -- 1,193 --
----------- ----------- ----------- ----------- -----------
Total operating expenses................. 5,002 9,358 15,679 30,615 34,357
Equity in loss of joint venture.............. -- -- -- (610) (996)
Interest income (expense), net............... 96 (64) 975 2,650 2,035
----------- ----------- ----------- ----------- -----------
Net loss..................................... $(4,588) $(7,778) $(11,338) $(20,942) $(25,199)
=========== =========== =========== =========== ===========
Net loss per share-basic and diluted(1)...... $(5.95) $(8.08) $(8.42) $(1.60) $(1.39)
Number of shares used in computing net loss
per share-basic and diluted(1)............. 771 963 1,347 13,097 18,069
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
Consolidated balance sheet data
Actual As Adjusted(2)
<S> <C> <C>
- -------------------------------------------------------------------------------------------
Cash and cash equivalents................................... $41,021 $191,893
Working capital............................................. 33,508 184,380
Total assets................................................ 50,785 201,657
Accumulated deficit......................................... (72,630) (72,630)
Total stockholders' equity.................................. 38,121 188,993
</TABLE>
- ---------
(1) See Note 1 of Notes to Consolidated Financial Statements for a description
of the computation of the number of shares and net loss per share.
(2) The as adjusted balance sheet data reflects the sale by us of
2,500,000 shares in this offering at an assumed offering price of
$64.5625 per share and after deducting the estimated underwriting discount
and estimated offering expenses, and the application of the net proceeds
from the offering.
4
<PAGE>
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Risk factors
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH ALL OF
THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE MAKING AN INVESTMENT
DECISION. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL
CONDITION OR OPERATING RESULTS COULD BE HARMED. IN SUCH CASE, THE TRADING PRICE
OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.
Our products may not be successfully developed, which would harm us and force us
to curtail or cease operations.
We are at an early stage of development. All of our products are under
development. We have not sold any products and do not expect to sell any
products until at the earliest the last half of 2000. Our products may not be
successfully developed or commercialized on a timely basis, or at all. If we are
unable, for technological or other reasons, to complete the development,
introduction or scale-up of manufacturing of our new products, or if our
products do not achieve a significant level of market acceptance, we would be
forced to curtail or cease operations.
Our success will depend upon our ability to overcome significant technological
challenges and successfully introduce our products into the marketplace. A
number of applications envisioned by us need significant enhancements to our
basic technology platform.
Lack of market acceptance of our technology would harm us.
We may not be able to develop commercially viable products. Even if we develop a
product it may not be accepted in the marketplace. If we are unable to achieve
market acceptance, we will not be able to generate sufficient product revenue to
become profitable. Market acceptance will depend on many factors, including our
ability to:
- - convince prospective strategic partners and customers that our technology is
an attractive alternative to other technologies;
- - manufacture products in sufficient quantities with acceptable quality and at
an acceptable cost; and
- - place and service sufficient quantities of our products.
In addition, our technology platform could be harmed by limited funding
available for product and technology acquisitions by our customers, as well as
internal obstacles to customer approvals of purchases of our products.
Commercialization of some of our potential products depends on collaborations
with
others. If our collaborators are not successful or if we are unable to find
collaborators
in the future, we may not be able to develop these products.
Our strategy for the research, development and commercialization of some of our
products requires us to enter into contractual arrangements with corporate
collaborators, licensors, licensees and others. Our success depends in part upon
the performance by these collaborators of their responsibilities under these
arrangements. Some collaborators may not perform their obligations as we expect
or we may not derive any revenue from these arrangements.
We have collaborative agreements with several health care companies. We do not
know whether these companies will successfully develop and market any products
under our respective agreements. Moreover, some of our collaborators are also
researching competing technologies targeted by our collaborative
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5
<PAGE>
Risk factors
- --------------------------------------------------------------------------------
programs. We may be unsuccessful in entering into other collaborative
arrangements to develop and commercialize our products. In addition, disputes
may arise over ownership rights to intellectual property know-how or
technologies developed with our collaborators.
We currently have agreements with Aventis Research & Technologies, or Aventis,
Becton, Dickinson and Company, or Becton Dickinson, and Elan Corporation plc, or
Elan, that contemplate the commercialization of products resulting from research
and development collaboration agreements between the parties. In addition, we
have a manufacturing and distribution agreement with Hitachi. These
collaborations may not be successful. We have received no funding under our
collaboration with Becton Dickinson since the third quarter 1999 and we may
never receive any additional funds from Becton Dickinson. We have not yet agreed
upon specific program objectives with respect to our research and development
agreement with Elan, and we may never receive any additional funds from Elan.
We have a history of net losses. We expect to continue to incur net losses and
we may not achieve or maintain profitability.
We have not sold any products and do not expect to sell any products until at
the earliest the last half of 2000. From our inception to December 31, 1999, we
have incurred cumulative net losses totaling approximately $72.6 million.
Moreover, our negative cash flow and losses from operations will continue and
increase for the foreseeable future. We may never generate sufficient product
revenue to become profitable. We also expect to have quarter-to-quarter
fluctuations in revenues, expenses and losses, some of which could be
significant.
To develop and sell our products successfully, we will need to increase our
spending levels in research and development, as well as in selling, marketing,
and administration. We will have to incur these increased spending levels before
knowing whether our products can be sold successfully.
We may need additional capital in the future. If additional capital is not
available, we may have to curtail or cease operations.
We may need to raise more money to continue the research and development
necessary to bring our products to market and to establish manufacturing and
marketing capabilities. We may seek additional funds through public and private
stock offerings, arrangements with corporate partners, borrowings under lease
lines of credit or other sources. If we cannot raise more money we will have to
reduce our capital expenditures, scale back our development of new products,
reduce our workforce and license to others products or technologies that we
otherwise would seek to commercialize ourselves. The amount of money we will
need will depend on many factors, including among others:
- - the progress of our research and development programs;
- - the commercial arrangements we may establish;
- - the time and costs involved in:
- scaling up our manufacturing capabilities;
- obtaining necessary regulatory approvals; and
- filing, prosecuting, defending and enforcing patent claims; and
- - the scope and results of our future preclinical studies and clinical trials,
if any.
Additional capital may not be available on terms acceptable to us, or at all.
Any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may include restrictive covenants.
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6
<PAGE>
Risk factors
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Competing technologies may adversely affect us.
We expect to encounter intense competition from a number of companies that offer
products in our targeted application areas. We anticipate that our competitors
in these areas will include:
- - health care companies that manufacture laboratory-based tests and analyzers;
- - diagnostic and pharmaceutical companies; and
- - companies developing drug discovery technologies.
If we are successful in developing products in these areas, we will face
competition from established companies and numerous development-stage companies
that continually enter these markets.
In many instances, our competitors have substantially greater financial,
technical, research and other resources and larger, more established marketing,
sales, distribution and service organizations than us. Moreover, these
competitors may offer broader product lines and have greater name recognition
than us and may offer discounts as a competitive tactic.
In addition, several development-stage companies are currently making or
developing products that compete with or will compete with our potential
products. Our competitors may succeed in developing, obtaining FDA approval or
marketing technologies or products that are more effective or commercially
attractive than our potential products, or that render our technologies and
potential products obsolete. As these companies develop their technologies, they
may develop proprietary positions which may prevent us from successfully
commercializing products.
Also, we may not have the financial resources, technical expertise or marketing,
distribution or support capabilities to compete successfully in the future.
The uncertainty of patent and proprietary technology protection and our
potential
inability to license technology from third parties may adversely affect us.
Our success will depend in part on obtaining and maintaining meaningful patent
protection on our inventions, technologies and discoveries. Our ability to
compete effectively will depend on our ability to develop and maintain
proprietary aspects of our technology, and to operate without infringing the
proprietary rights of others, or to obtain rights to third-party proprietary
rights, if necessary. Our pending patent applications may not result in the
issuance of patents. Our patent applications may not have priority over others'
applications, and even if issued, our patents may not offer protection against
competitors with similar technologies. Any patents issued to us may be
challenged, invalidated or circumvented and the rights created thereunder may
not afford us a competitive advantage.
Our commercial success also depends in part on us neither infringing valid,
enforceable patents or proprietary rights of third parties, nor breaching any
licenses that may relate to our technologies and products. We are aware of
third-party patents that may relate to our technology. It is possible that we
may unintentionally infringe these patents or other patents or proprietary
rights of third parties. We may in the future receive notices claiming
infringement from third parties as well as invitations to take licenses under
third-party patents. Any legal action against us or our collaborative partners
claiming damages and seeking to enjoin commercial activities relating to our
products and processes affected by third-party rights may require us or our
collaborative partners to obtain licenses in order to continue to manufacture or
market the affected products and processes. In addition, these actions may
subject us to potential liability for damages. We or our collaborative partners
may not prevail in an action and any license required under a patent may not be
made available on commercially acceptable terms, or at all.
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7
<PAGE>
Risk factors
- --------------------------------------------------------------------------------
There are many U.S. and foreign patents and patent applications held by third
parties in our areas of interest, and we believe that there may be significant
litigation in the industry regarding patent and other intellectual property
rights. Litigation could result in substantial costs and the diversion of
management's efforts regardless of the result of the litigation. Additionally,
the defense and prosecution of interference proceedings before the U.S. Patent
and Trademark Office, or USPTO, and related administrative proceedings would
result in substantial expense to us and significant diversion of effort by our
technical and management personnel. We may in the future become subject to USPTO
interference proceedings to determine the priority of inventions. In addition,
laws of some foreign countries do not protect intellectual property to the same
extent as do laws in the U.S., which may subject us to additional difficulties
in protecting our intellectual property in those countries.
We are aware of U.S. and corresponding foreign patents and applications which
are assigned to Affymax Technologies, N.V., and Affymetrix, Inc. which relate to
certain devices having 1,000 or more groups of oligonucleotides occupying a
total area of less than 1 cm(2) and 400 different oligonucleotides per cm(2) on
a substrate. In the event that we proceed with the development of arrays with
more than 400 groups of oligonucleotides, we expect to design our devices
through, among other things, the selection of the physical dimensions, methods
of binding and selection of support materials to avoid infringing these patents.
We may not be able to design around these patents. We are aware of U.S. and
European patents and patent applications owned by Isis Innovations Ltd. (E. M.
Southern). We have opposed one allowed European patent which had broad claims to
array technology for analyzing a predetermined polynucleotide sequence. Isis
Innovations' position with respect to the opposed patent is that the claims
relate to what it terms the "diagnostic mode." Those claims have now all been
narrowed to the point that if the claims are accepted by the European Patent
Office, they would not be infringed by our technology. On May 5, 1998, the
Opposition Division of the European Patent Office issued a provisional
nonbinding opinion that the claims should be revoked. If the claims of the
original European patent survive the opposition or if an application relating to
arrays issues in another country with claims as broad as the original European
patent, we would be subject to infringement claims that could delay or preclude
sales of some or all of our anticipated diagnostic products. We are also aware
of a U.S. patent and corresponding foreign applications which are assigned on
their face to Massachusetts Institute of Technology, Houston Advanced Research
Center and Baylor College of Medicine. We believe that we have meritorious
positions regarding non-infringement and invalidity. Parties claiming to have
rights under the patent and applications have offered us a license. No assurance
can be made that a license will be available on commercially acceptable terms,
or that we would prevail in any ultimate action.
We also rely upon trade secrets, technical know-how and continuing inventions to
develop and maintain our competitive position. Others may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets or disclose our technology and we may not be
able to meaningfully protect our trade secrets, or be capable of protecting our
rights to our trade secrets. We seek to protect our technology and patents, in
part, by confidentiality agreements with our employees and contractors. Our
employees may breach their existing proprietary information, inventions, and
dispute resolution agreements and these agreements may not protect our
intellectual property. This could have a material adverse effect on us.
- --------------------------------------------------------------------------------
8
<PAGE>
Risk factors
- --------------------------------------------------------------------------------
The regulatory approval process is expensive, time consuming, uncertain and may
prevent us from obtaining required approvals for the commercialization of our
products.
We anticipate that the manufacturing, labeling, distribution and marketing of a
number of our diagnostic products will be subject to regulation in the U.S. and
other countries. These regulations could subject us to several problems such as:
- - failure to obtain necessary regulatory approvals or clearances for our
products on a timely basis, or at all;
- - delays in receipt of or failure to receive approvals or clearances;
- - the loss of previously received approvals or clearances;
- - limitations on intended uses imposed as a condition of approvals or
clearances; or
- - failure to comply with existing or future regulatory requirements.
In the U.S., the Food and Drug Administration, or FDA, regulates as medical
devices most diagnostic tests and IN VITRO reagents that are marketed as
finished test kits and equipment. Pursuant to the Federal Food, Drug, and
Cosmetic Act, the FDA regulates the preclinical and clinical testing, design,
efficacy, safety, manufacture, labeling, distribution and promotion of medical
devices. We will not be able to commence marketing or commercial sales in the
U.S. of these products until we receive clearance or approval from the FDA,
which can be a lengthy, expensive and uncertain process. We have not applied for
FDA or other regulatory approvals with respect to any of our products under
development. We may experience difficulties that could delay or prevent the
successful development, introduction and marketing of proposed products.
Regulatory clearance or approval or clearance of any proposed products may not
be granted by the FDA or foreign regulatory authorities on a timely basis, if at
all.
Noncompliance with applicable FDA requirements can result in:
- - administrative sanctions or judicially imposed sanctions such as
injunctions;
- - civil penalties, recall or seizure of products;
- - total or partial suspension of production, failure of the government to
grant premarket clearance or premarket approval for devices;
- - withdrawal of marketing clearances or approvals; and
- - criminal prosecution.
The FDA also has the authority to request the recall, repair, replacement or
refund of the cost of any regulated device manufactured or distributed by us.
Any devices manufactured or distributed by us pursuant to FDA clearance or
approvals are subject to thorough and continuing regulation by the FDA and
certain state agencies.
We depend on suppliers for materials which could impair our ability to
manufacture
our products.
Outside vendors provide key components and raw materials used in the manufacture
of our products. Although we believe that alternative sources for these
components and raw materials are available, any supply interruption in a limited
or sole source component or raw material would harm our ability to manufacture
our products until a new source of supply is identified and qualified. In
addition, an uncorrected defect or supplier's variation in a component or raw
material, either unknown to us or
- --------------------------------------------------------------------------------
9
<PAGE>
Risk factors
- --------------------------------------------------------------------------------
incompatible with our manufacturing process, could harm our ability to
manufacture products. We may not be able to find a sufficient alternative
supplier in a reasonable time period, or on commercially reasonable terms, if at
all. If we fail to obtain a supplier for the manufacture of components of our
potential products, we may be forced to curtail or cease operations.
We may not be able to manufacture products on a commercial scale.
We rely on subcontractors to manufacture the limited quantities of microchips
and other components we require for internal and collaborative purposes, as well
as for use in prototype products.
Manufacturing, supply and quality control problems may arise as we, either alone
or with subcontractors, attempt to scale up manufacturing procedures. We may not
be able to scale-up in a timely manner or at a commercially reasonable cost.
Problems could lead to delays or pose a threat to the ultimate commercialization
of our products and cause us to fail.
We or any of our contract manufacturers could encounter manufacturing
difficulties, including:
- - the ability to scale up manufacturing capacity;
- - production yields;
- - quality control and assurance; or
- - shortages of components or qualified personnel.
Our manufacturing facilities and those of our contract manufacturers are or will
be subject to periodic regulatory inspections by the FDA and other federal and
state regulatory agencies and these facilities are subject to Quality System
Regulation, or QSR, requirements of the FDA. If we or our third-party
manufacturers fail to maintain facilities in accordance with QSR regulations,
other international quality standards or other regulatory requirements then the
manufacture process could be suspended or terminated which would harm us.
We have little marketing or sales experience, and if we are unable to develop
our
own sales and marketing capability, we may not be successful in commercializing
our
products.
In order to market and sell our proprietary products, we will need to develop a
sales force and a marketing group with relevant experience, or make appropriate
arrangements with strategic partners to market and sell these products.
Developing a marketing and sales force is expensive and time consuming and could
delay any product launch. Our inability to successfully employ qualified
marketing and sales personnel and develop our sales and marketing capabilities
will harm our business.
If we fail to manage our growth, our business could be impaired.
We expect to continue to experience growth in the number of our employees and
the scope of our operating and financial systems. This growth has resulted in an
increase in responsibilities for both existing and new management personnel. Our
ability to manage growth effectively will require us to continue to implement
and improve our operational, financial and management information systems and to
recruit, train, motivate and manage our employees. We may not be able to manage
our growth and expansion, which would impair our business.
- --------------------------------------------------------------------------------
10
<PAGE>
Risk factors
- --------------------------------------------------------------------------------
We may have significant product liability exposure.
We face an inherent business risk of exposure to product liability and other
claims in the event that our technologies or products are alleged to have caused
harm. These risks are inherent in the testing, manufacturing and marketing of
our products. We may not be able to obtain insurance for such potential
liability on acceptable terms with adequate coverage, or at reasonable costs.
Any potential product liability claims could exceed the amount of our insurance
coverage or may be excluded from coverage under the terms of the policy. Our
insurance, once obtained, may not be renewed at a cost and level of coverage
comparable to that then in effect.
If we lose our key personnel or are unable to attract and retain additional
personnel,
we may not be able to pursue collaborations or develop our own products.
We are highly dependent on the principal members of our scientific,
manufacturing, marketing and management personnel, the loss of whose services
might significantly delay or prevent the achievement of our objectives. We face
competition from other companies, academic institutions, government entities and
other organizations in attracting and retaining personnel.
Health care reform and restrictions on reimbursement may limit our returns on
potential products.
Our ability to earn sufficient returns on our products will depend in part on
the extent to which reimbursement for our products and related treatments will
be available from:
- - government health administration authorities;
- - private health coverage insurers;
- - managed care organizations; and
- - other organizations.
If appropriate reimbursement cannot be obtained, it could prevent us from
successfully commercializing our potential products.
There are efforts by governmental and third party payors to contain or reduce
the costs of health care through various means. We expect that there will
continue to be a number of legislative proposals to implement government
controls. The announcement of proposals or reforms could impair our ability to
raise capital. The adoption of proposals or reforms could impair our business.
Additionally third party payors are increasingly challenging the price of
medical products and services. If purchasers or users of our products are not
able to obtain adequate reimbursement for the cost of using our products, they
may forego or reduce their use. Significant uncertainty exists as to the
reimbursement status of newly approved health care products, and whether
adequate third party coverage will be available.
If ethical and other concerns surrounding the use of genetic information become
widespread, we may have less demand for our products.
Genetic testing has raised ethical issues regarding confidentiality and the
appropriate uses of the resulting information. For these reasons, governmental
authorities may call for limits on or regulation of the use of genetic testing
or prohibit testing for genetic predisposition to certain conditions,
particularly for those that have no known cure. Any of these scenarios could
reduce the potential markets for our products, which could seriously harm our
business, financial condition and results of operations.
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11
<PAGE>
Risk factors
- --------------------------------------------------------------------------------
We use hazardous materials in our business. Any claims relating to improper
handling, storage or disposal of these materials could be time consuming and
costly.
Our research and development processes involve the controlled storage, use and
disposal of hazardous materials including biological hazardous materials and
radioactive compounds. We are subject to federal, state and local regulations
governing the use, manufacture, storage, handling and disposal of materials and
waste products. Although we believe that our safety procedures for handling and
disposing of these hazardous materials comply with the standards prescribed by
law and regulation, the risk of accidental contamination or injury from
hazardous materials cannot be completely eliminated. In the event of an
accident, we could be held liable for any damages that result, and any liability
could exceed the limits or fall outside the coverage of our insurance. We may
not be able to maintain insurance on acceptable terms, or at all. We could be
required to incur significant costs to comply with current or future
environmental laws and regulations.
Our stock price could continue to be highly volatile and you may not be able to
resell your shares at or above the price you paid for them.
The market price of our common stock, like that of many other life sciences
companies, has been highly volatile and is likely to continue to be highly
volatile. The following factors, among others, could have a significant impact
on the market price of our common stock:
- - the results of our premarket studies and clinical trials or those of our
collaborators or competitors or for DNA testing in general;
- - evidence of the safety or efficacy of our potential products or the products
of our competitors;
- - the announcement by us or our competitors of technological innovations or
new products;
- - developments concerning our patents or other proprietary rights or those of
our competitors, including litigation or patent office proceedings;
- - loss of key personnel;
- - governmental regulatory actions;
- - changes or announcements in reimbursement policies;
- - developments with our collaborators;
- - period-to-period fluctuations in our operating results;
- - market conditions for life science stocks in general; and
- - changes in estimates of our performance by securities analysts.
Unknown year 2000 issues could negatively affect us.
Although the date is now past January 1, 2000, and we have not experienced
immediate adverse impact from the transition to the Year 2000, we cannot provide
assurance that we or our suppliers and customers have not been affected in a
manner that is not yet apparent. In addition, some computer programs that were
date sensitive to the Year 2000 may not have been programmed to process the Year
2000 as a leap year, and any negative consequential effects remain unknown. As a
result, we will continue to monitor our Year 2000 compliance and the Year 2000
compliance of our suppliers and customers.
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12
<PAGE>
Risk factors
- --------------------------------------------------------------------------------
Our anti-takeover provisions could discourage potential takeover attempts and
make
attempts by stockholders to change management more difficult.
The approval of two-thirds of our voting stock is required to approve some
transactions and to take some stockholder actions, including the calling of a
special meeting of stockholders and the amendment of any of the anti-takeover
provisions contained in our certificate of incorporation. Further, pursuant to
the terms of our stockholder rights plan adopted in November 1998, we have
distributed a dividend of one right for each outstanding share of common stock.
These rights will cause substantial dilution to the ownership of a person or
group that attempts to acquire us on terms not approved by our board of
directors and may have the effect of deterring hostile takeover attempts.
If we make any acquisitions, we will incur a variety of costs and may never
realize the anticipated benefits.
If appropriate opportunities become available, we may attempt to acquire
businesses, technologies, services or products that we believe are a strategic
fit with our business. We currently have no commitments or agreements with
respect to any material acquisitions. If we do undertake any transaction of this
sort, the process of integrating an acquired business, technology, service or
product may result in operating difficulties and expenditures and may absorb
significant management attention that would otherwise be available for ongoing
development of our business. Moreover, we may never realize the anticipated
benefits of any acquisition. Future acquisitions could result in potentially
dilutive issuances of equity securities, the incurrence of debt, contingent
liabilities and/or amortization expenses related to goodwill and other
intangible assets, which could adversely affect our results of operations and
financial condition.
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13
<PAGE>
- --------------------------------------------------------------------------------
Forward-looking information
This prospectus includes forward-looking statements about our business and
results of operations that are subject to risks and uncertainties that could
cause our actual results to vary materially from those reflected in the
forward-looking statements. Words such as "believes," "anticipates," "plans,"
"estimates," "future," "could," "may," "should," "expect," "envision,"
"potentially," variations of such words and similar expressions are intended to
identify such forward-looking statements. Factors that could cause or contribute
to these differences include those discussed previously under the caption "Risk
Factors" and elsewhere in this prospectus. Investors are cautioned not to place
undue reliance on these forward-looking statements which speak only as of the
date hereof. We disclaim any intent or obligation to update these
forward-looking statements.
You should not unduly rely on forward-looking statements contained or
incorporated by reference in this prospectus. Actual results or outcomes may
differ materially from those predicted in our forward-looking statements due to
the risks and uncertainties inherent in our business, including among other
items, risks and uncertainties in:
- - market acceptance of and continuing demand for our products;
- - the attainment of patent protection for any of these products;
- - the impact of competitive products, pricing and reimbursement policies;
- - our ability to obtain additional financing to support our operations;
- - the continuation of our corporate collaborations;
- - clinical trial results;
- - obtaining and maintaining regulatory approval where required; and
- - changing market conditions and other risks detailed below.
You should read and interpret any forward-looking statements together with the
following documents:
- - our most recent Annual Report on Form 10-K;
- - our Quarterly Reports on Form 10-Q;
- - the risk factors contained in this prospectus under the caption "Risk
factors"; and
- - our other filings with the Securities and Exchange Commission.
Any forward-looking statement speaks only as of the date on which that statement
is made. We will not update any forward-looking statement to reflect events or
circumstances that occur after the date on which such statement is made.
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14
<PAGE>
- --------------------------------------------------------------------------------
Use of proceeds
We estimate that the net proceeds from the sale of the 2,500,000 shares of
common stock we are offering will be approximately $150.9 million. If the
underwriters fully exercise the over-allotment option, the net proceeds will be
approximately $159.7 million. "Net proceeds" is what we expect to receive after
we pay the estimated underwriting discount and other estimated expenses for this
offering. For the purpose of estimating net proceeds, we are assuming that the
public offering price will be $64.5625 per share.
We expect to use the net proceeds that we will receive from the offering for
continued development, manufacturing and commercialization of existing products
and applications, research and development of additional applications and for
general corporate purposes, which may include the purchase of equipment, the
expansion of facilities and the further expansion of our marketing and selling
efforts in support of our initial commercial product launch. We also may use a
portion of the net proceeds to acquire or invest in businesses, technologies,
products or services that are complementary to our business. From time to time
we have discussed potential strategic acquisitions and investments with third
parties. We currently have no agreements or commitments to complete any such
transaction. Pending our uses of the proceeds, we intend to invest the net
proceeds of this offering primarily in short-term, interest-bearing instruments.
Dividend policy
We have not declared or paid any cash dividends on our capital stock and do not
anticipate paying any cash dividends in the foreseeable future. Our current
policy is to retain all of our earnings to finance the growth and development of
our business.
Price range of common stock
Our common stock has been quoted on the Nasdaq National Market under the symbol
"NGEN" since our initial public offering in April 1998. The following table sets
forth, for the periods indicated, the high and low sales prices of the common
stock, as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
1998:
Second Quarter (from April 17, 1998)........................ $11.25 $5.38
Third Quarter............................................... 8.38 3.00
Fourth Quarter.............................................. 5.75 2.88
1999:
First Quarter............................................... $9.63 $3.88
Second Quarter.............................................. 9.75 6.25
Third Quarter............................................... 8.63 5.75
Fourth Quarter.............................................. 24.50 6.50
2000:
First Quarter (through February 23, 2000)................... $83.63 $18.00
</TABLE>
On February 23, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $64.56 per share. As of February 15, 2000, there were
approximately 195 holders of record of our common stock.
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15
<PAGE>
- --------------------------------------------------------------------------------
Capitalization
The following table sets forth the capitalization of Nanogen at December 31,
1999 and as adjusted to give effect to our receipt of the net proceeds from the
sale of 2,500,000 shares of common stock offered hereby:
<TABLE>
<CAPTION>
December 31, 1999
Actual As Adjusted
<S> <C> <C>
- ---------------------------------------------------------------------------------------
(in thousands)
Capital lease obligations, less current portion............. $2,831 $2,831
Stockholders' equity:
Convertible Preferred stock, $0.001 par value; 5,000,000
shares authorized; none outstanding...................... -- --
Common stock, $0.001 par value; 50,000,000 shares
authorized; 18,990,799 shares issued and outstanding,
actual; and 21,490,799 shares issued and outstanding, as
adjusted(1).............................................. 19 21
Additional paid-in capital................................ 113,574 264,444
Deferred compensation..................................... (1,473) (1,473)
Notes receivable from officers............................ (1,369) (1,369)
Accumulated deficit....................................... (72,630) (72,630)
----------- -----------
Total stockholders' equity.................................. 38,121 188,993
----------- -----------
Total capitalization........................................ $40,952 $191,824
=========== ===========
</TABLE>
- ---------
(1) Includes 651,116 shares of common stock purchased through early exercise of
stock options which remain subject to repurchase by us. Excludes as of such
date (i) 1,259,268 shares issuable upon the exercise of outstanding options
under our 1997 Stock Incentive Plan, (ii) 925,213 shares reserved for future
option grants under our 1997 Stock Incentive Plan, (iii) 238,001 shares
reserved for issuance pursuant to our Employee Stock Purchase Plan and
(iv) 140,238 shares of common stock issuable upon the exercise of
outstanding warrants.
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16
<PAGE>
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Dilution
Purchasers of the common stock in this offering will experience immediate and
substantial dilution in the net tangible book value of the common stock from the
public offering price. Net tangible book value per share represents the amount
of our total tangible assets reduced by the amount of our total liabilities,
divided by the number of shares of common stock outstanding.
- - As of December 31, 1999, our net tangible book value was $37.1 million, or
$1.95 per share.
- - As of December 31, 1999, our net tangible book value as adjusted for the
sale of the 2,500,000 shares offered by us in this offering and application
of the estimated net proceeds to us of $150.9 million (assuming a public
offering price of $64.5625 per share and deducting the underwriting
discounts and commissions and estimated offering expenses), would have been
approximately $8.75 per share.
This represents an immediate increase of $6.80 per share to existing
stockholders and an immediate and substantial dilution of $55.81 per share to
new investors purchasing common stock in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price............................... $64.56
Net tangible book value as of December 31, 1999........... $1.95
Increase attributable to new investors.................... 6.80
------------
Net tangible book value after the offering.................. 8.75
------------
Dilution to new investors................................... $55.81
============
</TABLE>
The above discussion and tables assume no exercise of the underwriter's
over-allotment options and except as set forth above no exercise of any stock
options outstanding as of December 31, 1999. As of December 31, 1999, there were
options outstanding to purchase a total of 1,259,268 shares of common stock at a
weighted average exercise price of $4.86 per share, of which 584,670 were
exercisable as of December 31, 1999 and warrants for the purchase of 140,238
shares of common stock at a weighted average exercise price of $7.82 per share.
If these options are exercised in the future it will be further dilutive to
investors who purchase shares in this offering. Options available for grant
under our stock option plans may be granted at exercise prices less than the
market value of common stock on the grant date. If we grant options below fair
market value it could be dilutive to investors who purchase shares in this
offering.
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17
<PAGE>
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Selected consolidated financial data
The selected consolidated financial data set forth below with respect to our
consolidated statements of operations for each of the three years in the period
ended December 31, 1999, and our consolidated balance sheet data at
December 31, 1998 and 1999, are derived from our consolidated financial
statements that have been audited by Ernst & Young LLP, which are included
elsewhere herein and are qualified by reference to such financial statements.
The consolidated balance sheet data at December 31, 1995, 1996 and 1997, and the
consolidated statement of operations data for the years ended December 31, 1995
and 1996, have been derived from financial statements audited by Ernst &
Young LLP which are not included herein. The selected consolidated financial
data set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and notes thereto appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Years Ended December 31,
Consolidated statement of operations data
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Revenues:
Sponsored research.............................. $-- $-- $1,243 $5,461 $5,688
Contract and grant revenue...................... 318 1,644 2,123 2,172 2,431
----------- ----------- ----------- ----------- -----------
Total revenues................................ 318 1,644 3,366 7,633 8,119
Operating expenses:
Research and development........................ 3,356 6,931 11,769 23,002 25,260
General and administrative...................... 1,646 2,427 3,910 6,420 9,097
Acquired in-process technology.................. -- -- -- 1,193 --
----------- ----------- ----------- ----------- -----------
Total operating expenses...................... 5,002 9,358 15,679 30,615 34,357
Equity in loss of joint venture................... -- -- -- (610) (996)
Interest income (expense), net.................... 96 (64) 975 2,650 2,035
----------- ----------- ----------- ----------- -----------
Net loss.......................................... $(4,588) $(7,778) $(11,338) $(20,942) $(25,199)
=========== =========== =========== =========== ===========
Net loss per share--basic and diluted (1)......... $(5.95) $(8.08) $(8.42) $(1.60) $(1.39)
=========== =========== =========== =========== ===========
Number of shares used in computing net loss per
share--basic and diluted (1).................... 771 963 1,347 13,097 18,069
=========== =========== =========== =========== ===========
Consolidated balance sheet data
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents......................... $4,318 $16,775 $19,498 $62,245 $41,021
Working capital................................... 3,931 14,853 16,775 57,701 33,508
Total assets...................................... 6,339 19,090 23,215 72,704 50,785
Capital lease obligations, less current portion... 631 935 1,193 4,176 2,831
Accumulated deficit............................... (7,372) (15,151) (26,489) (47,431) (72,630)
Total stockholders' equity........................ 4,950 15,680 18,599 61,051 38,121
</TABLE>
- ---------
(1) See Note 1 of Notes to Consolidated Financial Statements for a description
of the computation of the number of shares and net loss per share.
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18
<PAGE>
- --------------------------------------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations
The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and the notes to
those statements included elsewhere in this prospectus. This discussion may
contain forward-looking statements that involve risks and uncertainties. As a
result of many factors, such as those set forth under "Risk factors" and
elsewhere in this prospectus, our actual results may differ materially from
those anticipated in these forward-looking statements.
OVERVIEW
We integrate advanced microelectronics and molecular biology into a core
technology platform with broad and diverse commercial applications in the fields
of genomics, biomedical research, medical diagnostics, drug discovery,
forensics, agriculture, environmental testing and potentially the electronics
and telecommunications industries. The first application we have developed is an
integrated bioassay system, the NanoChip molecular biology workstation,
comprised of two automated instruments and a consumable cartridge. The NanoChip
cartridge incorporating a proprietary microchip provides a flexible tool for the
rapid identification and precision analysis of biological test samples
containing charged molecules.
Since commencing operations in 1993, we have applied substantially all of our
resources to our research and development programs. We have incurred losses
since inception and, as of December 31, 1999, had an accumulated deficit of
$72.6 million. We expect to incur significant losses over at least the next few
years as we continue our research and product development efforts and attempt to
commercialize our products.
We plan to introduce our first product into the marketplace in the second half
of 2000. We anticipate our main sources of revenues through at least 2000 will
be payments under our sponsored research agreements, contracts and grants. We
believe our future operating results may be subject to quarterly fluctuations
due to a variety of factors, including the achievement of milestones under our
collaborative agreements, whether and when new products are successfully
developed and introduced by us or our competitors, and market acceptance of
products under development. Payments under sponsored research agreements may be
subject to significant fluctuations in both timing and amount and therefore our
results of operations for any period may not be comparable to the results of
operations for any other period.
RESULTS OF OPERATIONS
Years ended December 31, 1999, 1998, and 1997
Revenue
For the year ended December 31, 1999, revenue from sponsored research totaled
$5.7 million compared to $5.5 million and $1.2 million for the years ended
December 31, 1998 and 1997, respectively. Revenues are recorded under these
arrangements as expenses are incurred. Payments received in advance under these
arrangements are recorded as deferred revenue until the expenses are incurred.
Sponsored research revenue recognized during the years ended December 31, 1999
and 1998 was earned in connection with our joint venture collaboration with
Becton Dickinson, our research and development agreement with Aventis and our
nonexclusive research and development agreement with Elan. We and Becton
Dickinson are considering modifications to the joint venture to take advantage
of potential third party opportunities on technology developed to date, as well
as field changes which would allow the joint venture access to additional
technologies or content in areas more strategically aligned with business
opportunities. Further joint venture funding will be determined based on a final
decision regarding such modifications and field charges. We have received no
funding from Becton Dickinson since the third quarter of 1999, and are uncertain
as to whether we will receive any additional funding from Becton Dickinson.
Nanogen and Aventis have added
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19
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
- --------------------------------------------------------------------------------
two new technology development programs to the existing molecular recognition
array development program. The two new programs will provide a maximum of
$12.0 million in additional funding to us through December 31, 2001, including
an up-front initiation fee of $2.0 million which was received during 1999 and
recorded as deferred revenue. Nanogen and Elan have not yet agreed upon specific
program objectives with respect to their nonexclusive research and development
program. We are uncertain if we will receive any additional funds from Elan.
Sponsored research revenue recognized during the year ended December 31, 1997
was earned in connection with a research agreement with Becton Dickinson
effective in May 1997 which was subsequently superceded by the joint venture
collaboration entered into in October 1997.
We fund some of our research and development efforts through contracts and
grants awarded by various federal and state agencies. Revenues are recognized
under these contracts and grants as expenses are incurred.
Continuation of sponsored research agreements, contracts and grants is dependent
upon us achieving specific contractual milestones. The recognition of revenue
under sponsored research agreements, contracts and grants may vary from quarter
to quarter and may result in significant fluctuations in operating results from
year to year.
Research and development expenses
Research and development expenses increased to $25.3 million during the year
ended December 31, 1999 from $23.0 million and $11.8 million for the years ended
December 31, 1998 and 1997, respectively. Research and development expenses
include salaries, lab supplies, consulting, travel, facilities, product design
and prototype development, and other expenditures relating to research and
product development. The increases from year to year are attributable to costs
associated with the development and refinement of engineering prototypes as we
move toward commercialization of our first product. Additionally, the increases
are attributable to the continued growth of research and product development
efforts, including hiring of additional scientific, engineering and operations
personnel, increased purchases of laboratory supplies, equipment and services to
support our sponsored research programs, and expansion of research and
development facilities. Research and development spending may increase over the
next several years as our research and product development efforts continue.
General and administrative expenses
General and administrative expenses totaled $9.1 million in 1999 compared to
$6.4 million in 1998 and $3.9 million in 1997. The year-to-year increases from
1997 through 1999 are primarily due to increased personnel costs as the company
expands its general and administrative organization, legal costs associated with
enhancing and maintaining our intellectual property portfolio, the expansion of
activities related to marketing our potential products, increased costs
associated with operating as a public company, and to additional deferred
compensation expense recognized during the year ended December 31, 1999 compared
to 1998 and 1997. Deferred compensation represents the excess of the fair value
for financial statement presentation purposes over the exercise price for common
stock issuable on exercise of stock options. The increase in 1999 compared to
1998 is also due in part to severance costs related to certain employees.
General and administrative expenses are expected to continue to increase as we
expand our sales and marketing and general and administrative organizations and
as we continue to enhance and maintain our intellectual property portfolio.
Acquired in-process technology
During the first quarter of 1998, we issued 200,000 shares of our Series D
Convertible Preferred Stock at $6.00 per share in exchange for all of the
outstanding shares of Nanotronics, Inc. This Series D Preferred Stock converted
into 132,334 shares of common stock at our initial public offering. The
in-process
- --------------------------------------------------------------------------------
20
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
- --------------------------------------------------------------------------------
technology acquired relates generally to nanotechnology and molecular
electronics. We recorded $1.2 million in expenses relating to acquired
in-process technology during the year ended December 31, 1998.
Interest income (expense), net
We had net interest income of $2.0 million in 1999 compared to net interest
income of $2.7 million and $975,000, in 1998 and 1997, respectively. The
decrease in net interest income for 1999 compared to 1998 can be attributed to
lower cash balances during 1999 compared to 1998, as a result of cash used in
operations. The significant increase in 1998 compared to 1997 was primarily
attributable to larger cash balances resulting from net proceeds received upon
the completion of our initial public offering and concurrent private placement
of equity securities in April 1998. Interest expense increased during 1999
compared to 1998 and 1997, due to greater amounts of equipment under capital
leases in 1999 than in 1998 and 1997.
Equity in loss of joint venture
We recognized a loss of $996,000 and $610,000 for the years ended December 31,
1999 and 1998, respectively, from the joint venture formed in 1997 with Becton
Dickinson, based on the loss allocation described in the joint venture agreement
which states that losses will be allocated in proportion to and not to exceed
cash contributions. There was no loss during 1997 as no cash contributions were
made by us to the joint venture during the year ended December 31, 1997.
Liquidity and capital resources
In April 1998, we completed our initial public offering of common stock
generating net proceeds of $38.7 million. Concurrent with the initial public
offering, we completed a private placement of our equity securities with Becton
Dickinson, Aventis and Elan for net proceeds of $6.0 million, $10.0 million and
$5.0 million, respectively. Prior to our initial public offering, we had
financed our operations primarily through the net proceeds received from private
placements of preferred equity securities totaling $44.1 million.
We fund most of our equipment acquisitions and leasehold improvements through
capital leasing facilities. During 1999, we received proceeds from equipment and
leasehold improvement financing of $881,000, compared to $5.7 million and
$1.2 million of proceeds received during 1998 and 1997, respectively. We
anticipate that we will continue to use capital equipment leasing or debt
facilities to fund most of our equipment acquisitions and leasehold
improvements. As of December 31, 1999, we had $4.4 million of available funding
under our equipment lease lines.
Net cash used in operating activities was $18.6 million, $15.2 million and
$9.8 million for 1999, 1998 and 1997, respectively. Cash used for operations was
primarily related to the costs associated with developing prototypes of our
initial product, the support of our expanding operations, including higher
personnel costs, and legal fees relating to establishing and maintaining our
intellectual property rights.
At December 31, 1999, we had $41.0 million in cash and cash equivalents. We
expect that the proceeds of this offering and our existing capital resources,
combined with anticipated revenues from potential product sales, sponsored
research agreements, contracts and grants will be sufficient to support our
planned operations through at least the next three years. This estimate of the
period for which we expect our available sources of liquidity to be sufficient
to meet our capital requirements is a forward-looking statement that involves
risks and uncertainties, and actual results may differ materially. Our future
liquidity and capital funding requirements will depend on numerous factors
including, but not limited to, the extent to which our products under
development are successfully developed and gain market acceptance, the timing of
regulatory actions regarding our potential products, the costs and timing of
expansion of sales, marketing and manufacturing activities, prosecution and
enforcement of patents important to our business,
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Management's discussion and analysis of financial condition and results of
operations
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the results of clinical trials, competitive developments, and our ability to
maintain existing collaborations and to enter into additional collaborative
arrangements. We have incurred negative cash flow from operations since
inception and do not expect to generate positive cash flow to fund our
operations for at least the next several years. We may need to raise additional
capital to fund our research and development programs, to scale up manufacturing
activities and expand our sales and marketing efforts to support the
commercialization of our products under development. Additional capital may not
be available on terms acceptable to us, or at all. If adequate funds are not
available, we may be required to curtail our operations significantly or to
obtain funds through entering into collaborative agreements or other
arrangements on unfavorable terms. Our failure to raise capital on acceptable
terms when needed could have a material adverse effect on our business,
financial condition or results of operations.
In January 1998, we acquired all of the outstanding capital stock of
Nanotronics. The in-process technology, which was acquired as a result of our
purchase of Nanotronics, relates generally to nanotechnology and molecular
electronics. Potential applications of the technology include high-density
optical storage systems for electronics applications and self-assembly
applications relating to microfabrication and nanofabrication. Nanotronics'
research is exploratory in nature and at a very early stage. If technological
feasibility is demonstrated, we expect to pursue corporate partnership
opportunities. Given the early stage of the technology, we have not yet
determined which applications may be developed and the extent of our resources
to be committed to each such application.
Net operating loss carryforwards
As of December 31, 1999, we had federal and California net operating loss, or
NOL, carryforwards of $64.3 million and $7.5 million, respectively, and
$2.9 million and $1.6 million of research and development, or R&D, tax credits
available to offset future federal and state income taxes, respectively. The
federal and California NOL carryforwards are subject to alternative minimum tax
limitations and to examination by the tax authorities. The federal tax loss
carryforwards will begin expiring in 2006, unless previously utilized, and the
California tax loss carryforwards will continue to expire in 2000, unless
previously utilized. The federal and California R&D tax credit carryforwards
will begin expiring in 2007 unless previously utilized. We believe that our
initial public offering combined with the concurrent private placement, which
occurred in April 1998, may constitute a "change of ownership" under federal
income tax regulations. As such, we may be limited in the amount of NOLs
incurred prior to our initial public offering, which may be utilized to offset
future taxable income. Similar limitations may also apply to utilization of R&D
tax credits to offset taxes payable. However, we do not believe such limitations
will have a material impact on our ability to utilize the NOLs. See Note 9 of
Notes to Consolidated Financial Statements.
Year 2000 compliance
In prior years, we discussed the nature and progress of our plans to become Year
2000 ready. In late 1999, we completed our remediation and testing of systems.
As a result of those planning and implementation efforts, we experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believe those systems successfully
responded to the Year 2000 date change. We expensed less than $150,000 during
1999 in connection with remediating our systems. We are not aware of any
material problems resulting from Year 2000 issues, either with our products
under development, our internal systems, or the products and services of third
parties. We will continue to monitor our mission critical computer applications
and those of our suppliers and vendors throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
Quantitative and qualitative disclosures about market risk
We invest our excess cash primarily in U.S. government securities and marketable
debt securities of financial institutions and corporations with strong credit
ratings. These instruments have maturities of three months or less when
acquired. We do not utilize derivative financial instruments, derivative
commodity instruments or other market risk sensitive instruments, positions or
transactions in any material fashion. Accordingly, we believe that, while the
instruments we hold are subject to changes in the financial standing of the
issuer of such securities, we are not subject to any material risks arising from
changes in interest rates, foreign currency exchange rates, commodity prices,
equity prices or other market changes that affect market risk sensitive
instruments.
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Business
OVERVIEW
We integrate advanced microelectronics and molecular biology into a core
technology platform with broad and diverse commercial applications in the fields
of genomics and biomedical research, medical diagnostics, drug discovery,
forensics, agriculture, environmental testing and potentially the electronics
and telecommunications industries. The first application we have developed is an
integrated bioassay system, the NanoChip molecular biology workstation,
comprised of two automated instruments and a consumable cartridge. The NanoChip
cartridge incorporating a proprietary microchip provides a flexible tool for the
rapid identification and precision analysis of biological test samples
containing charged molecules.
Through the use of microelectronics, our technology enables the active movement
and concentration of charged molecules, such as DNA, to and from designated
microlocations, or test sites, on our microchips. This electronic concentration
of molecules greatly accelerates molecular binding at each microlocation. In
addition, our technology allows the simultaneous analysis of multiple test
results, or "multiplexing," from a single sample. The open architecture design
of our system enables us to offer microchips with preloaded arrays designed for
specific applications or with arrays that can be customized by the end user. We
believe that our technology platform provides an accurate, versatile and highly
efficient integrated system that will shift bioassay analysis from current
manual and mechanical methods to microelectronic systems, thereby significantly
improving the quality and reducing the overall cost of research and healthcare.
In April of 1998 we completed our initial public offering. Since that time we
have:
- - designed and built production-ready automated instruments for cartridge
loading, processing and analysis;
- - simplified the consumable cartridge design by reducing total parts by 75%;
- - strengthened our development, manufacturing and commercialization
infrastructure;
- - added an additional eight U.S. patents and six foreign patents to our
intellectual property portfolio;
- - validated our technology through the successful completion of three beta
site tests; and
- - expanded collaborations with Aventis and Hitachi for technology development
and manufacturing.
COMMERCIALIZATION PLAN
Successful beta site tests
In February 2000, we announced the completion of our third and final beta site
testing results for the NanoChip molecular biology workstation. These tests were
conducted at three commercial and academic centers: the Mayo Clinic, the
University of Texas Southwestern Medical Center and the Bode Technology Group.
In each case, the results indicated very high levels of accuracy for the
NanoChip system. The SNP studies performed at the Mayo Clinic and the University
of Texas Southwestern Medical Center both reported 100% accuracy, exceeding the
performance of their current "gold standard" techniques. The STR analysis
results from the Bode Technology Group showed greater than 99.5% concordance
with current techniques, results which have been further improved by subsequent
software upgrades.
Commercial launch
We plan to begin commercialization of our NanoChip molecular biology workstation
during the second half of 2000 to a select group of customers in the genomics
and biomedical research fields. The initial applications for the technology will
be for the analysis of DNA including SNPs, PMs and STRs. It is
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anticipated that the analysis of gene expression will be added as an additional
application. Because of the importance of the genomics and biomedical research
markets, we anticipate being directly involved with marketing our first product
line to this non-regulated market segment. Additionally, we expect to distribute
products in Japan through the distribution arm of Hitachi.
COLLABORATIONS
We have established corporate alliances in the areas of drug discovery, high
throughput screening, infectious disease diagnostics and instrument
manufacturing and distribution. In 1998 we entered into a collaboration with
Aventis to develop drug discovery tools. In 1999 we extended our relationship
with Aventis by adding two additional programs focused on developing high
throughput screening and gene expression analysis tools. In early 2000 we formed
a collaboration with Hitachi for the manufacture and further development of the
NanoChip instruments. Hitachi has the right to distribute our instrument system
and related NanoChip consumable cartridges in Japan. Our collaborations permit
integration of our technology with the resources and technology of our partners,
while allowing us to independently pursue diagnostics, drug discovery and
genomics opportunities outside the scope of these collaborations.
LIMITATIONS OF CURRENT ASSAY TECHNOLOGIES
Many bioassay techniques have been developed from a wide variety of different
scientific disciplines for molecular biology and clinical diagnostic
laboratories. Many of these techniques are technically demanding, difficult to
perform, expensive, inflexible and often lack acceptable clinical accuracy. In
addition, technologies well suited or targeted to one market, such as the
biomedical research or drug discovery markets, often are unable to bridge the
required gap to serve downstream markets such as clinical diagnostics.
Despite recent advances in technology, most bioassays are too specialized or
inflexible to be used throughout the various departments of a life sciences
laboratory. Current bioassay tools were designed for large scale data
generation, the automation of repetitious tasks such as very high throughput
discovery and the narrowing of genetic targets from thousands of genes to a
small set of perhaps 1 to 20 genes that function in a selected biological
process. In addition, many of these systems are not useful in molecular,
protein, enzyme, cell biology, and forensics laboratories. These tools fall
primarily into three categories: high-density arrays; high throughput sequencing
and SNP discovery tools; and gel based methods. While these technologies each
have certain advantages, they also have significant drawbacks that inhibit their
broad applicability across the life sciences market.
THE NANOGEN SOLUTION
We believe that our initial product, the NanoChip molecular biology workstation,
provides the accuracy, flexibility and ease-of-use features required to serve a
wide range of genomic and biomedical as well as many other applications. We
intend to promote the Nanogen system as the laboratory standard for molecular
biologists, and the industry standard for accurate, targeted genomics in both
laboratory and non-laboratory settings. The Nanogen system provides the
following advantages:
Accuracy
Accuracy is critical in laboratory analysis. The Nanochip molecular biology
workstation, with its precision electronic addressing and high degree of
stringency, exceeded the accuracy of the current "gold standard" techniques in
the SNP studies conducted at the Mayo Clinic and the University of Texas
Southwestern Medical Center.
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Multiple formats
Nanogen's technology is designed to perform on a single sample up to 100
distinct assays, or, unlike existing technologies, several user-defined assays
on as many as 100 different samples. Each of the major bioassay formats, the
"dot blot" and the "reverse dot blot," are conveniently handled by the NanoChip
system. The system could perform 100 SNP assays on one sample, or several SNP
assays on 100 samples, each in a fully automated, user-defined manner. In
addition, STR assays are conveniently performed in a hybridization format on the
Nanogen system, with a similar degree of accuracy that the Nanogen system has
demonstrated in other assay formats.
Flexibility/scalability
Nanogen's technology is highly flexible. By using additional user-defined probe
sets, specific panels can be modified to include new assays or targets. Since as
many as eight loaders can be controlled by one reader, the user can prepare as
many as 32 programmed arrays in several hours. Due to this fact, labor is
minimized, and the system can be efficiently utilized in laboratories of various
sizes. Several different assay types may be combined on the same chip, for
example a SNP assay and an STR assay, and potentially assayed at the same time.
The NanoChip system should handle the flexibility requirements of the most
advanced research laboratory, while maintaining the ease of use and accuracy
requirements of the clinical laboratory. Nanogen's technology is a "bridging
technology" that should simplify the adoption of what were once previously
complex genetic tests by the routine clinical laboratory.
Speed
Nanogen's electronic concentration and hybridization technology greatly
accelerates the analysis process from hours to minutes. This may enable
point-of-care DNA diagnostics in the future, by allowing clinicians to perform
tests and choose appropriate therapy while a patient is still in the physician's
office.
Throughput
Our system's ability to assay as many as 100 samples at a time allows for much
higher throughput than is achievable with competitive technologies. This
throughput capacity permits highly efficient workflow for many biomedical
applications in a variety of laboratory settings.
Diverse applications
The flexibility of Nanogen's electronic-based technology is applicable to
biological analyses beyond genomics and biomedical research, including
immunoassays, enzyme assays, cell separation and cell receptor studies.
Ease of use
Nanogen assays are easy to perform. Our fully automated probe loader allows the
simultaneous programming of up to four NanoChip arrays. A loaded cartridge is
inserted and then analyzed on the Nanogen reader. The NanoChip system includes
proprietary software to automate assay operation and provide results in "real
time." There is no need for data interpretation, eliminating one source of
error. Furthermore, results can be downloaded into the user's laboratory
information system.
Cost effectiveness
We have designed the NanoChip system to be the cost-effective solution for most
molecular biology assays. The system is easy to use and may not require highly
skilled operators. Moreover, the custom features of the system allow users to
employ their own reagents in designing arrays for specific purposes. Since the
NanoChip system consumes very small quantities of reagents, generally at very
low concentration, bioassay reagent costs per result, such as DNA, are very low.
Walk-away automation conserves direct labor, while
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improving the overall effectiveness of the laboratory operation. In addition,
user definability allows important experiments to be done quickly, both
accelerating the discovery process and simplifying the validation of important
targets.
STRATEGY
We intend to research, develop, manufacture and market instruments and
components, independently and in conjunction with highly regarded corporate and
government partners, to facilitate breakthrough genetic analyses. Our NanoChip
molecular biology workstation uniquely bridges the gap between the earliest
scientific research and much later stage clinical practice. Our strategy is to
make our proprietary bioassay technology platform a standard for molecular
identification and analysis across a broad range of applications. Our initial
commercial product will be a bench-top system for use in biomedical research and
genomic applications. The capabilities that are incorporated into this system,
such as electronics-based tools that we believe can provide improved accuracy,
speed and flexibility over current laboratory techniques, will form the core
technology platform that will serve as the basis for expanding into other
biological and non-biological areas.
Continue to pursue genomics and biomedical research applications
Recent market research indicates that while researchers want to use high
throughput devices to discover genes and genetic mutations, they will want to
explore the function and impact of these genes and mutations with a more
targeted technology such as the NanoChip molecular biology workstation. We
intend to pursue the genomics and biomedical research markets by taking
advantage of the open architecture design of our technology that allows end
users to customize microchips to meet their individual research needs and help
drive development of novel applications. We believe that the speed and
flexibility of the "build-your-own-chip" feature will be very attractive to
researchers and will fulfill an unmet need for a powerful, versatile,
programmable, and cost effective analytical tool and help drive further
application development.
Pursue multiple applications
We intend to use substantially the same core hardware and consumable cartridge
platform across a spectrum of applications. By doing this, we believe we can
establish our platform as an industry standard and also reduce development costs
for follow-on applications. This approach should also allow us to achieve
manufacturing economies of scale that may help reduce our per unit cost of goods
sold over time. For our initial commercial market, the biomedical research
market, we do not anticipate the need for Food and Drug Administration or FDA or
other regulatory approval. Over time, it is expected that additional features,
such as sample-to-answer capabilities and portability at reduced cost, may
broaden the market potential from the research market to markets many times
larger that include drug discovery, diagnostics, forensics, agriculture and
environmental applications. Some of these applications would require FDA or
other regulatory approval.
Develop recurring revenue stream through bench-top and consumable product sales
We intend to sell bench-top instruments which we believe will lead to a
recurring stream of revenue from consumable cartridge sales. We believe that
widespread market penetration of our instruments and the open architecture of
the system will promote sustained demand for our cartridges.
Continue to establish strategic collaborations
We intend to continue to enter into collaborations to expand applications of our
technology platform and to accelerate the commercialization of our products. By
partnering with multinational healthcare and technology companies, we believe
that we can gain broader access to global markets without shifting our
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resources from the development of our core technology platform. In addition, as
part of these arrangements, we believe we can better focus our efforts on
tailoring our technology to expanding markets while our collaborative partners
contribute their technology and expertise in areas such as sales, marketing and
regulatory approvals.
OUR PLATFORM TECHNOLOGY
Our proprietary platform technology takes advantage of the fact that most
biological molecules are either positively or negatively charged. Through the
use of microelectronics, this technology enables the active movement and
concentration of electronically charged molecules such as DNA to and from
designated test sites on a semiconductor microchip. These test sites are
arranged in an array on our proprietary microchips. In addition, the technology
allows for the simultaneous analysis of multiple test results, or
"multiplexing," from a single sample. We believe these attributes make our
technology well suited to unraveling complex genetic information. We believe our
proprietary technology has applications for the analysis of unknown charged
biological molecules which are capable of binding specifically to known capture
molecules on a microchip. We have initially focused on DNA-based sample analysis
in developing applications utilizing our platform.
Our technology allows small sequences of DNA capture probes to be electronically
placed at, or "addressed" to, specific sites on the microchip. A test sample can
then be analyzed for the presence of target DNA molecules by determining which
of the DNA capture probes on the array bind, or hybridize, with complementary
DNA in the test sample. In contrast to nonelectronic or passive hybridization
with conventional arrays on paper or glass "chips," the use of electronically
mediated active hybridization to move and concentrate target DNA molecules
accelerates hybridization. Electronically mediated hybridization occurs in
minutes rather than the hours required for passive hybridization techniques.
We believe our technology may be applicable to a number of other analyses, in
addition to DNA applications, including antigen-antibody, enzyme-substrate,
cell-receptor, and cell separation techniques.
Our system can integrate in a single platform the following electronic
operational features:
Electronic addressing
Electronic addressing is the process by which we place charged molecules at
specific test sites. Since DNA has a strong negative charge, it can be
electronically moved to an area of positive charge. A test site or a group of
test sites on the microchip is electronically activated with a positive charge.
A solution of DNA probes is introduced onto the microchip. The negatively
charged probes rapidly move to the positively charged sites, where they
concentrate and are chemically bound to that site. The microchip is then washed
and another solution of distinct DNA probes can be added. Site by site, row by
row, an array of specifically bound DNA probes can be addressed on the
microchip. Multiplexed sites can be addressed simultaneously, allowing for speed
and flexibility of array assembly. With the ability to electronically address
capture probes to specific sites, the NanoChip molecular biology workstation
allows end users to build custom arrays through the placement of specific
capture probes on a microchip. These microchip arrays may provide research
professionals with a powerful and versatile tool to process and analyze
molecular information.
Electronic concentration and hybridization
Following electronic addressing, we use electronics to move and concentrate
target molecules to one or more test sites on the microchip. In contrast to the
passive hybridization process, the electronic concentration process has the
advantage of significantly accelerating the rate of hybridization of a given
target molecule with complementary capture probes.
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Stringency control
In addition to utilizing conventional thermal and chemical stringency
techniques, the NanoChip molecular biology workstation is capable of utilizing
electronic stringency control when appropriate. Electronic stringency control
can provide a means to quickly and easily remove non-complementary DNA as part
of the hybridization process. Electronic stringency can provide quality control
for the hybridization process and ensures that any bound pairs of DNA are truly
complementary. The precision, control, and accuracy of our platform technology
may permit the detection of single point mutations, single base pair mismatches
or other genetic mutations which have significant implications in a number of
disease states. Electronic control allows rapid and selective stringency
conditions to be applied to individual test sites, which cannot be achieved with
conventional methods. In contrast to conventional approaches, our technology can
also accommodate both short and long single-stranded fragments of DNA on the
same chip. This flexibility reduces the required number of probes and related
test sites on the microchip. Currently marketed DNA arrays are difficult to
control, require more uniformity in the preparation of the sample, and require
greater redundancy to improve accuracy.
Electronic multiplexing
Our electronic multiplexing feature allows the simultaneous analysis of multiple
tests from a single sample or multiple samples to be queried during the
hybridization process. Electronic multiplexing is facilitated by the ability to
control individual test sites (for addressing of capture probes and
concentration of test sample molecules) which allows for the simultaneous use of
biochemically unrelated molecules on the same microchip. Sites on a conventional
DNA array cannot be individually controlled, and therefore the same process
steps must be performed on the entire array. The use of electronics in our
technology provides increased versatility and flexibility over these
conventional methods.
Strand Displacement Amplification
Strand Displacement Amplification, or SDA, is a proprietary target amplification
process whereby very low numbers of diagnostic targets in a test sample are
enzymatically amplified to exponentially higher levels, greatly simplifying
accurate detection of these targets. Because this process does not require
thermal cycling, it is extremely fast, and complex instrumentation is not
required. The Nanogen/Becton Dickinson Partnership was granted rights to Becton
Dickinson's patents relating to SDA in infectious disease diagnostics. In
addition, we were granted rights to use SDA in the fields of IN VITRO human
genetic testing and cancer diagnostics for use outside The Nanogen/Becton
Dickinson Partnership. We believe that SDA may be an important element in the
development of sample-to-answer applications for our technology platform.
THE NANOCHIP MOLECULAR BIOLOGY WORKSTATION COMPONENTS
The NanoChip molecular biology workstation consists of both a consumable
cartridge containing a proprietary semiconductor microchip and a fully automated
instrument that controls all aspects of microchip operations, processing,
detection and reporting. The system has been designed so that after insertion of
a consumable cartridge containing a test sample into the instrument, all
subsequent steps are handled automatically under computer control. We have also
developed a bench-top microchip loader for those researchers wishing to
electronically address microchips with their own capture probes.
Consumable cartridge
The consumable NanoChip cartridge consists of a proprietary semiconductor
microchip with electrical and fluidic connections to the instrument. We are
finalizing designs for commercially manufacturing our cartridges based on
successful tests with a number of prototype cartridges. We expect that the
consumable cartridge and microchip will be manufactured in high volumes at a low
cost relative to many current technologies.
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SEMICONDUCTOR MICROCHIP
Our proprietary microchip utilizes advances in the semiconductor industry and is
designed and constructed using microlithography and fabrication techniques. Our
microchip is coated with a proprietary permeation layer to which capture probes
are attached and is mounted within the consumable cartridge. We have developed
arrays of various sizes utilizing both passive and active CMOS microchips, as
well as flip chip assembly technologies. We expect our initial production of
consumable cartridges to employ 100 different test sites on the microchip.
PERMEATION LAYER
Our proprietary permeation layer, which is critical to the proper functioning of
our system, is the interface between the surface of the microchip and the
biological test environment. The permeation layer isolates the biological
materials from the harsh electrochemical environment near the electrode surface
and provides the chemistry necessary for attachment of capture probes.
CAPTURE PROBES
Capture probes or other capture molecules are electronically addressed to the
desired microlocations and chemically attached to the permeation layer. Because
independent control can be applied at any test site on our microchip, different
capture probes can be addressed on the same microchip, allowing multiple tests
to be processed simultaneously. Our cartridges can be sold with preloaded sets
of capture probes or can be customized by the end user in "build-your-own-chip"
applications which will allow the customer to assemble specific probes onto a
microchip to perform individualized analyses.
Our instruments
Our fully integrated NanoChip instrument system consists of four major
subsystems: (1) a freestanding microchip loader to perform electronic addressing
of blank microchips, (2) a highly sensitive, laser-based fluorescence scanner
that detects molecular binding, (3) a fluid handling subsystem that controls
test sample application and washing steps and (4) computer hardware and software
that allow the operator to select assays from a graphical user menu which
controls all microchip operations, tabulates test results and prints test
reports.
MICROCHIP LOADER
For biomedical research applications, our system includes a cartridge/microchip
loader that will allow the user to electronically address their own probes to
test sites on up to four chips simultaneously. For the diagnostics market and
most other applications, a loader will not be required because we intend to
provide pre-addressed microchips for a specific panel of tests. Multiple loaders
can operate concurrently under the control of one system.
FLUORESCENT ARRAY SCANNER
The fluorescent scanner component of the system uses pattern recognition
techniques and optoelectronic technology to reduce instrument cost and size and
eliminate the need for complicated array positioning mechanics. In its present
configuration, the scanner is able to perform high sensitivity scans of arrays
of 100 test sites in less than two minutes.
FLUIDICS STATION
Within the fluorescent array scanner component of the system, the fluidics
station automates the movement of the reagents and test sample onto the
consumable cartridge. The fluidic subassembly of the instrument includes a panel
of precision syringe pumps, a cartridge-mounted sample assembly and fluidic
connections between the instrument and the consumable cartridge.
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COMPUTER HARDWARE AND SOFTWARE SYSTEM
A multi-tasking operating system and microprocessor control all aspects of the
systems operations, including bar-coded assay selection, assay operation,
fluorescent signal detection and signal processing, calculation of assay results
and report generation. Each of the individual array locations is separately
controlled by the microprocessor. Fluorescent signals emanating from positive
test sites are scanned, monitored and quantitated.
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<TABLE>
<S> <C> <C>
NanoChip Analysis Process
Cartridge
[LOGO] An active microelectronic chip is mounted within
a plastic molded cartridge. The bar-coded
cartridge is delivered in a ready-to-address
format with no genetic sequences pre-attached.
Electronic addressing
Users design and create their own genetic arrays
on the microelectronic chip with Nanogen's
automated system. A microtiter plate containing
up to 96 different genetic sequences is placed
in the loader instrument. The system then
automatically electronically addresses the
microchip to the user-defined arrays.
Electronic hybridization and stringency
Users add the test sample to the cartridge and
insert the cartridge into the reader. The
instrument then automatically performs
electronic hybridization and the appropriate
stringency control. The electronically enhanced
process speeds and improves the genetic
analysis, allowing single-base accuracy.
[LOGO]
Simple-to-read output
Within minutes of inserting the bar-coded
cartridge for analysis, easy-to-read and
interpret output is available. Data can be
automatically downloaded to network systems and
to standard software spreadsheet packages. The
entire electronic addressing and data output
process can be completed rapidly, allowing users
to accelerate their research process by creating
new genetic arrays based on previous
experimental results.
</TABLE>
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PRODUCTS AND APPLICATIONS UNDER DEVELOPMENT
Genomics and biomedical research applications
We expect to begin commercialization of the NanoChip molecular biology
workstation, a bench-top molecular analysis system, for use in the genomics and
biomedical research market during the second half of 2000. Unlike the
high-density arrays and sequencing technologies now in the marketplace, our
focus will be on the targeted analysis of data from the genomics
revolution--helping researchers define the function of genes rather than
discover new genes. We believe our technology is well suited for this research,
given the speed, user programmability, multiplexing capability and sensitivity
of our unique platform.
Given that researchers are just beginning to move beyond gene discovery into
this targeted analysis area referred to as functional genomics, the timing of
our anticipated product introduction may be well suited to meet this evolving
market need. An independent market research study by Strategic Directions
International published in December 1999 indicated that the market potential for
DNA microarrays is anticipated to grow rapidly from $200 million in 2000 to
almost $800 million by 2003.
Our initial strategy for entering this market will be to focus on sophisticated
commercial and academic users such as large pharmaceutical companies,
biotechnology companies and research and academic institutions. We intend to
provide technical support and applications specialists to assist these customers
in applying the technology. Our initial product offering is expected to include
features such as the ability to perform assays on SNPs, point mutations and
genetic repeats in a multiplexed format using a variety of different methods. We
plan to further define and develop additional capabilities, such as gene
expression, on-chip amplification and sample processing. As these capabilities
are added, we expect to start expanding our customer base to a wider group that
may ultimately encompass a significant percentage of the biomedical research
labs in the U.S. and other parts of the world.
Diagnostics applications
We anticipate the introduction of array-based diagnostic testing will grow as
effective technologies are introduced and validated. This multi-step process
will allow for both the development of relevant genetic-based tests that may
evolve from biomedical research, and for the awareness and confidence in
array-based technology to extend to medical practitioners. Finally, we
anticipate the need for regulatory approval of certain diagnostic tests. It is
our intention to begin serving the diagnostic market in advance of a regulatory
approved product by providing a flexible tool to be used for clinical research
and for an industry practice referred to as "home brew" or "in-house" testing.
PHARMACOGENOMICS
We believe that the ability of our technology to screen simultaneously for
various DNA sequences and the ability to differentiate between SNPs has
potentially wide applicability to the field of genetic testing in general and
pharmacogenomics in particular.
Our NanoChip molecular biology workstation may provide pharmaceutical and
biotechnology companies with the ability to identify important genetic
variations early in the drug development process. We believe our system may help
stratify patients during clinical trials and identify those receiving the
maximum benefit from treatment. We intend to ultimately develop a small
sample-to-answer, FDA-approved diagnostic test that can be used in a doctor's
office potentially while a patient is waiting. We have a development program
underway to develop a more compact version of our NanoChip instrument system.
INFECTIOUS DISEASES
We believe we have the potential to apply our technology in the field of
infectious disease diagnostics to develop automated tests to replace the manual
and time-intensive procedures used in hospitals and reference
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laboratories. The role of the clinical microbiology laboratory is to detect,
identify and determine antibiotic sensitivity of disease causing microorganisms.
To accomplish this task, colonies of microorganisms from patient specimens are
grown, or cultured, in various growth media. Following colony growth, various
direct and indirect techniques are utilized to determine the identity and, as
required, the sensitivity of the microorganism to specific antibiotics. Using
currently available technologies, the entire process may take days or weeks to
complete while the patient, requiring immediate therapy, must be treated by the
clinician based upon the best clinical facts available at that time. Upon
receipt of the diagnostic analysis from the laboratory, the initial patient
treatment protocol may need to be modified in order to treat the patient more
effectively.
Current culture-based methods detect a single microorganism at one time. Because
a particular infectious episode may be caused by one of many microorganisms or
several microorganisms together, multiple tests may be required to determine the
correct diagnosis. "Single tube" (one at a time) DNA probe diagnostics, which
were first introduced to the marketplace in the mid-1980's, have been
unsuccessful in displacing culture based diagnostic tests in part due to their
inability to identify several organisms simultaneously. Our technology addresses
these shortcomings by allowing the simultaneous analysis of multiple
microorganisms from a single patient sample. We believe our technology and
integrated system may speed the time-to-result for diagnostic tests and patient
treatment and offer our customers the opportunity to lower their costs and
improve productivity by automating all or a significant portion of their
labor-intensive testing.
OTHER GENETIC TESTING APPLICATIONS
As the Human Genome Project opportunity and other public and private genetic
sequencing efforts yield increasing amounts of genetic information, the demand
for genetic predisposition testing will continue to grow. Because many important
genetic diseases are ideally suited to diagnosis in multiplexed arrays, we
believe that our technology platform could contribute significantly to the
expansion of testing in this area. For example, in cancer diagnostics, certain
mutations are indicative of a predisposition to certain types of cancer.
Although many diseases involve multiple mutations, the ability to analyze all
possible mutations has previously been expensive and impracticable. Our
stringency control feature potentially permits rapid and accurate testing for
these single point mutations. While our development efforts in this area with
respect to specific genetic tests are still at an early stage, our core
technology platform for other diagnostic applications may be well suited for
these opportunities.
Drug discovery applications
We believe we have a powerful tool which will clarify appropriate pathways for
therapeutic intervention, identify and evaluate lead compounds and
simultaneously assess the efficacy and toxicology of these compounds in model
systems. It is estimated that the preclinical drug discovery process takes an
average of six and one-half years. Consequently, we believe there is a
significant demand for improved tools which accelerate the drug discovery
process.
We believe the microelectronic array format and independent test site control of
our system are well suited for applications in drug discovery. In addition, we
believe the use of electronics beyond the array format may provide a valuable
tool for the high throughput screening of compounds. Our electronic technology
is expected to enable the rapid manipulation of potential drug molecules against
targets such as bacteria, virus, tumor or immune response cells addressed to the
microchip to determine drug efficacy, thus simplifying the drug discovery
process. The combination of electronic addressing and the electronic protection
of specific areas of the microchip allows the targeting of chemical building
blocks to unique locations on the array. We believe our system may provide an
efficient automated method for drug lead optimization.
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To further advance our efforts in this area, we entered into a research and
development collaboration with Aventis in 1998. This collaboration is focused on
the development of novel electronic combinatorial approaches toward drug
screening and discovery. We expanded our relationship with Aventis in 1999 by
adding two additional projects. Nanogen and Aventis met all of the objectives
for the initial collaboration in 1998 and 1999 and agreed to extend the research
program through 2001.
Forensic applications
STRs are the genetic sequences chosen by the U.S. government and other foreign
governments to populate their national criminal identification databases. These
databases are intended to provide nationwide tools for identifying repeat
criminals by comparing a given piece of evidence or sample from a suspect with
the sequences stored in the database. We believe our NanoChip molecular biology
workstation may be useful in human identity testing.
Non-biological applications
We are applying our core microelectronics biochip technology to potential
applications in non-biological areas which include nanotechnology, data storage
and semiconductor manufacturing. Based on the intrinsic self-assembly and
programmable qualities of DNA, our technology uses electrical current to direct
the heterogeneous integration of a number of molecular and nonmolecular
components onto a microelectronic chip. Presently, there are a number of
academic groups, government research labs, and electronics companies involved in
the development of molecular electronic components, but no one has successfully
developed a way to integrate them into useful devices. Our integrated "host
substrate" or "motherboard" array capability could serve to provide useful new
tools with the ability to take advantage of these valuable components.
Our electronic "pick and place" technology may have several advantages compared
to the more difficult conventional processes. Our technology could facilitate
the movement and assembly of microelectronic components ranging in size from
molecular scale to micron scale, something traditional assembly methods cannot
achieve. Also, using electric field specificity control, we may have the ability
to form novel integrated devices in a more timely and cost-effective fashion.
For example, we are evaluating the use of this platform technology to facilitate
integration of different size components for the development of new photonic or
electronic devices.
COMMERCIALIZATION PLAN
Successful beta site tests
Beta site testing is the process of placing pre-commercial products into
potential customer laboratories, and allowing them to use the system and provide
feedback to the manufacturer regarding product performance and potential
opportunities for improvement. We beta tested our NanoChip molecular biology
workstation during 1999 at three highly visible commercial and academic centers:
the Mayo Clinic, the University of Texas Southwestern Medical Center and the
Bode Technology Group. The Mayo Clinic is a world-renowned clinical research
facility and clinical practice, the University of Texas Southwestern Medical
Center is a university-based genomics center and the Bode Technology Group is a
private forensics laboratory. The Mayo Clinic and the University of Texas
Southwestern Medical Center performed SNP analyses, while the Bode Technology
Group performed an STR analysis. In each case, the researchers at the beta sites
released results of their studies which all indicated a very high level of
accuracy. The Mayo Clinic and the University of Texas Southwestern Medical
School both reported 100% accuracy for the SNP studies performed using the
NanoChip molecular biology workstation, which exceeded the performance of their
current "gold standard" techniques. The STR analysis beta test results at the
Bode Technology Group
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showed greater than 99.5% accuracy for the NanoChip molecular biology
workstation. Additionally, all three sites provided input throughout the beta
testing process that helped us design improvements into the NanoChip molecular
biology workstation.
Commercial launch
We plan to begin commercialization of our NanoChip molecular biology workstation
during the second half of 2000 to a select group of customers in the genomics
and biomedical research field. The initial applications for the technology will
be for the analysis of DNA including SNPs, PMs and STRs. It is anticipated that
the analysis of gene expression will be added as an additional application.
COLLABORATIVE ALLIANCES
We have established collaborative alliances in the areas of infectious disease
diagnostics, drug discovery and genomics as part of our strategy to expand the
applications and accelerate the commercialization of products derived from our
technology. We have expanded our relationship with Aventis by increasing the
number of collaborative research and development projects from one to three. In
January 2000 we entered into a manufacturing, development and distribution
agreement with Hitachi. Because of the importance of the biomedical research and
genomics market as a beachhead, we anticipate being directly involved with
marketing our first product line to this non-regulated market segment.
Additionally, we expect to distribute products in Japan through the distribution
arm of Hitachi.
Aventis
In December 1997, we entered into a Letter Agreement with Aventis for an
exclusive research and development collaboration relating to new drug discovery
tools and immunodiagnostics research. In connection with the Letter Agreement,
we entered into a definitive Collaborative Research and Development Agreement
with an effective date of January 1, 1998. The arrangements for the
commercialization of products, if any, developed as a result of the
collaboration will be negotiated by the parties prior to completion of the
research and development phase. In addition, in September 1999 we expanded our
relationship with Aventis by adding two new research and development programs
focused on gene expression arrays and on an electronics-based high throughput
screening system. We retain full commercialization rights for the products
resulting from these new projects, while Aventis retains the right to use the
technology for internal research and development.
As part of our collaboration, we have agreed to issue a warrant for 120,238
shares of common stock to Aventis at an exercise price of $8.75 per share. We
have also agreed to issue to Aventis, upon the achievement of certain
milestones, warrants to purchase up to approximately 360,000 additional shares
of common stock as follows: upon announcement by the parties of entry into the
product development phase of the research and development collaboration, a
warrant for the purchase of approximately 180,000 shares of common stock at a
50 percent premium to the market price on the date of such entry, and upon the
first commercial sale by the joint venture or other joint relationship, a
warrant to purchase an additional 180,000 shares of common stock at a
50 percent premium to the market price on the date of such sale. The warrants
will have five-year maximum terms, provided that with respect to each such
warrant issuance, if at any time subsequent to the issuance of the warrant the
price of our common stock exceeds the exercise price by 50 percent or more,
Aventis must exercise such warrant no later than the end of its next fiscal
year.
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Hitachi
In January 2000, we executed an agreement with Hitachi for the full-scale
commercial manufacturing and distribution of our Nanogen molecular biology
workstation in specified research markets. Hitachi's Instrument Group will
provide technology and technical support to aid in the manufacturing scale up of
the Nanogen molecular biology workstation's components.
Hitachi will have the right to be the sole distributor of Hitachi-produced
Nanogen molecular biology workstations instruments in Japan. Hitachi will also
have the non-exclusive right to distribute NanoChip cartridges in Japan. We
retain the right to distribute, directly or through others, Hitachi produced
NanoChip molecular biology workstations outside of Japan. In addition, we will
develop and manufacture the NanoChip cartridges for distribution worldwide. The
agreement is non-exclusive and excludes certain clinical markets, and we
continue to have the right to form other manufacturing and distribution
agreements for all markets and for all non-Hitachi produced products.
Becton Dickinson
In connection with Nanogen's joint venture with Becton Dickinson in October
1997, The Nanogen/Becton Dickinson Partnership, or the Partnership, a Delaware
general partnership was established. The Partnership was formed to develop and
commercialize products in the field of IN VITRO nucleic acid-based diagnostic
and monitoring technologies in infectious diseases.
In 1999, Becton Dickinson and Nanogen agreed to discuss a change in the
Partnership's scope and field. Both parties are currently in discussions with
the intention of redefining the Partnership's scope and field to better align it
with the strategic goals of each party. We have received no research funding
from Becton Dickinson since the third quarter of 1999, and are uncertain whether
we will receive any additional research funding from Becton Dickinson.
Concurrently with the execution of the joint venture agreement, we entered into
a worldwide, royalty-bearing, nonexclusive license agreement with Becton
Dickinson, relating to Becton Dickinson's proprietary SDA technology for use by
us outside the Partnership in the fields of IN VITRO human genetic testing and
IN VITRO cancer diagnostics.
Elan
In December 1997, we entered into a nonexclusive research and development
agreement with Elan Pharmaceuticals, plc for the development of genomics and
gene expression research tools. The agreement contemplates that we will develop
products for discrimination of sequence variations such as single nucleotide
polymorphisms, allelic variations, genotyping, and mutation detection. We may
also develop products for use in expression monitoring of RNA levels for use in
gene discovery, drug discovery, target validation, animal studies, and toxicity
studies. In 1999 and 1998, revenues earned by us pursuant to this agreement were
approximately $568,000 and $929,000 respectively. We are uncertain if we will
receive any additional funds from Elan.
RESEARCH GRANTS
We have a number of active research grants and contracts administered by various
governmental agencies. In September 1998, we were awarded (1) a contract by the
Space and Naval Warfare Systems Center San Diego or SSC San Diego for the
Defense Advance Research Projects Agency of $7 million over a five year term and
(2) a grant from the National Institute of Justice or NIJ of approximately
$1 million over a five year term. The contract award which was made by SSC San
Diego for the Defense Advance Research Projects Agency, includes over
$2 million to be paid during the first two years, and options to extend the
program for up to an additional three years that would pay us up to an
additional $4.8 million. The goal of the program is to create an advanced
miniaturized lab for biological warfare defense applications. Under the
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grant awarded by the U.S. Department of Justice, Office of Justice Programs we
are continuing our work in the development of a portable microchip array-based
genetic detector for rapid forensic DNA testing and identification at the crime
scene.
RESEARCH AND PRODUCT DEVELOPMENT
Our research and product development is dedicated to:
- - developing our DNA analysis platform;
- - using this basic technology in a number of different product areas;
- - planning system modifications for specific applications using a common
platform; and
- - enhancing chip design and capabilities to simplify instrument design.
We have project teams focused on technology applications for the research market
and for drug discovery applications for the Aventis collaboration. In addition,
we have various groups supporting activities related to government contracts and
grants for both biologic and non-biologic applications.
PROPRIETARY TECHNOLOGY AND PATENTS
We have twelve issued U.S. patents, seven foreign issued patents and a number of
pending patent applications filed in the U.S. and abroad. In addition to
pursuing patents and patent applications relating to our platform technology, we
may enter into other license arrangements to obtain rights to third-party
intellectual property where appropriate.
Our or our licensors' patent applications may not be issued. Issued patents may
not be found valid if challenged. In addition, intellectual property rights
licensed by us may not be successfully integrated into commercial products.
Others may independently develop similar technologies or duplicate any
technology developed by us. Because of the extensive time required for
development, testing, and regulatory review of a potential product, it is
possible that, before any of our products can be commercialized, any related
patent may expire or remain in existence for only a short period following
commercialization, thus reducing any advantage of the patent, which could
adversely affect our ability to protect future product development and,
consequently, our business, financial condition and results of operations.
All of our inventions have originated in the U.S. and all patent applications
were originally filed in the U.S. We also seek to protect these inventions
through foreign counterpart applications filed in selected other countries.
Because patent applications in the U.S. are maintained in secrecy until the
patents are issued and since publication of discoveries in the scientific or
patent literature often lag behind actual discoveries, we cannot be certain that
we were the first to make the inventions covered by each of our issued or
pending patent applications or that we were the first to file for protection of
inventions set forth in such patent applications. Our planned or potential
products may be covered by third-party patents or other intellectual property
rights, in which case continued development and marketing of the products would
require a license. Required licenses may not be available to us on acceptable
terms, if at all. If we do not obtain these licenses, we could encounter delays
in product introductions while we attempt to design around the patents, or could
find that the development, manufacture or sale of products requiring these
licenses is foreclosed.
We are aware of U.S. and corresponding foreign patents and applications which
are assigned to Affymax Technologies, N.V., and Affymetrix which relate to
certain devices having 1,000 or more groups of oligonucleotides occupying a
total area of less than 1 cm(2) and 400 different oligonucleotides per cm(2) on
a substrate. In the event that we proceed with the development of arrays with
more than 400 groups of oligonucleotides, we expect to design our devices
through, among other things, the selection of the physical
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dimensions, methods of binding and selection of support materials to avoid
infringing these patents. We may not be able to design around these patents. We
are aware of U.S. and European patents and patent applications owned by Isis
Innovations Ltd. (E. M. Southern). We have opposed one allowed European patent
which had broad claims to array technology for analyzing a predetermined
polynucleotide sequence. Isis Innovations' position with respect to the opposed
patent is that the claims relate to what it terms the "diagnostic mode." Those
claims have now all been narrowed to the point that if the claims are accepted
by the European Patent Office, they would not be infringed by our technology. On
May 5, 1998, The Opposition Division of the European Patent Office issued a
provisional nonbinding opinion that the claims should be revoked. If the claims
of the original European patent survive the opposition or if an application
relating to arrays issues in another country with claims as broad as the
original European patent, we would be subject to infringement claims that could
delay or preclude sales of some or all of our anticipated diagnostic products.
We are also aware of a U.S. patent and corresponding foreign applications which
are assigned on their face to Massachusetts Institute of Technology, Houston
Advanced Research Center and Baylor College of Medicine. We believe that we have
meritorious positions regarding non-infringement and invalidity. Parties
claiming to have rights under the patent and applications have offered us a
license. No assurance can be made that a license will be available on
commercially acceptable terms, or that we would prevail in any ultimate action.
Litigation may be necessary to defend against or assert claims of infringement,
to enforce patents issued to us, to protect trade secrets or know-how owned by
us or to determine the scope and validity of the proprietary rights of others.
In addition, interference proceedings declared by the USPTO may be necessary to
determine the priority of inventions with respect to our patent applications.
Litigation or interference proceedings could result in substantial costs to and
diversion of our effort, and could have a material adverse effect on our
business, financial condition, and results of operations. Any such efforts may
not be successful.
We may rely on trade secrets to protect our technology. Trade secrets are
difficult to protect. We seek to protect our proprietary technology and
processes by confidentiality agreements with our employees and certain
consultants and contractors. These agreements may be breached, we may not have
adequate remedies for any breach and our trade secrets may otherwise become
known or be independently discovered by competitors. To the extent that our
employees or our consultants or contractors use intellectual property owned by
others in their work for us, disputes may also arise as to the rights in related
or resulting know-how and inventions.
MANUFACTURING
In January 2000 we formed a collaboration with Hitachi for the manufacture of
our NanoChip molecular biology workstation instruments. For the manufacture of
the NanoChip cartridge, we perform many of the proprietary assembly steps
in-house, including deposition of the permeation layer and final electronic
assembly and testing. We believe our technology allows for large-scale microchip
production at a relatively low cost. We believe this scalability and low cost
will help promote the rapid acceptance of our proprietary semiconductor-based
platform technology as an industry standard. However, achieving these
efficiencies will require substantial commercial volumes and there can be no
assurance we will be successful in generating sufficient demand to scale up
manufacturing capacity to levels that will allow our products to be priced
competitively.
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SALES AND MARKETING
We plan to field a focused, direct sales force in the United States and Europe
to coordinate the sale and marketing of our first product, the NanoChip
molecular biology workstation. The sales team will target sites for multi-unit
placements, strategic development of diagnostic content, and value-added
distribution partners for selected market segments.
Hardware service for our Hitachi-made NanoChip molecular biology workstations is
expected to be provided by Hitachi's technical service organization. Hitachi's
wholly-owned distribution partner, Nissei-Sangyo, will sell and service NanoChip
systems and cartridges in Japan.
In San Diego, we will support world-wide field activities with a customer
applications laboratory. This laboratory will be used to assist in early
customer demonstrations, protocol development and training.
COMPETITION
As we develop applications of our technology, we expect to encounter intense
competition from a number of companies that offer products competing in our
targeted applications. We anticipate that our competitors in these areas will
include health care companies that manufacture laboratory-based tests and
analyzers, diagnostic and pharmaceutical companies, as well as companies
developing drug discovery technologies. To the extent we are successful in
developing products in these areas, we will face competition from established
and development-stage companies.
In many instances, our competitors have substantially greater financial,
technical, research, and other resources and larger, more established marketing,
sales, distribution and service organizations than us. Moreover, competitors may
offer broader product lines and have greater name recognition than us, and may
offer discounts as a competitive tactic. In addition, several development stage
companies are making or developing products that compete with our potential
products. There can be no assurance that our competitors will not succeed in
developing or marketing technologies or products that are more effective or
commercially attractive than our potential products, or that would render our
technologies and products obsolete. Also, we may not have the financial
resources, technical expertise or marketing, distribution or support
capabilities to compete successfully in the future. Our success will depend in
large part on our ability to maintain a competitive position with respect to our
technologies. Rapid technological development by others may also result in
competing products or technologies.
GOVERNMENT REGULATION
For our initial commercial market, the biomedical research market, we do not
anticipate the need for FDA or other regulatory approval. We have not applied
for FDA or other regulatory approvals with respect to any of our products under
development. We anticipate, however, the manufacturing, labeling, distribution
and marketing of some or all of the diagnostic products we may develop and
commercialize in the future will be subject to regulation in the U.S. and in
other countries. In addition to clinical diagnostic markets, we also may pursue
forensic, agricultural, environmental, laboratory and industrial applications
for our products which may be subject to different government regulation.
Aspects of our manufacturing and marketing activities may also be subject to
federal, state and local regulation by various governmental authorities.
In the U.S., the FDA regulates, as medical devices, most diagnostic tests and IN
VITRO reagents that are marketed as finished test kits and equipment. Pursuant
to the Federal Food, Drug, and Cosmetic Act, and the regulations promulgated
thereunder, the FDA regulates the preclinical and clinical testing, design,
manufacture, labeling, distribution and promotion of medical devices. We will
not be able to commence
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marketing or commercial sales in the U.S. of new medical devices under
development that fall within the FDA's jurisdiction until we receive clearance
or approval from the FDA, which can be a lengthy, expensive, and uncertain
process. Noncompliance with applicable requirements can result in, among other
things, administrative or judicially imposed sanctions such as injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing clearances or approvals, or
criminal prosecution.
In the U.S., medical devices are generally classified into one of three classes
(I.E., Class I, II or III) on the basis of the controls deemed necessary by the
FDA to reasonably ensure their safety and effectiveness. Class I devices are
subject to general controls (E.G., labeling, premarket notification, and
adherence to QSR). Class II devices are subject to general and special controls
(E.G., performance standards, postmarket surveillance, patient registries and
FDA guidelines). Generally, Class III devices are those which must receive
premarket approval by the FDA to ensure their safety and effectiveness (E.G.,
life-sustaining, life-supporting, and implantable devices or new devices which
have been found not to be substantially equivalent to a legally marketed
devices). Before a new device can be introduced in the market, the manufacturer
must generally obtain FDA clearance of a 510(k) notification or approval of a
PMA application. Our products will vary significantly in the degree of
regulatory approvals required. We believe that certain of our products for
research, genomics, drug discovery and industrial applications will not require
regulatory approvals or clearance. Some diagnostic products will require 510(k)
approvals while other diagnostic and genetic testing products will require PMA
approvals.
A 510(k) clearance will generally only be granted if the information submitted
to the FDA establishes that the device is "substantially equivalent" to a
legally marketed predicate device. For any devices that are cleared through the
510(k) process, significant modifications or enhancements in the design or
intended use that could significantly affect safety or effectiveness will
require new 510(k) submissions. It generally takes from four to twelve months
from submission to obtain 510(k) premarket clearance but the process may take
longer.
The PMA approval process is more expensive, uncertain, and lengthy than the
510(k) clearance process. A PMA must prove the safety and effectiveness of the
device to the FDA's satisfaction, which typically requires extensive data,
including but not limited to, technical, preclinical, clinical trials,
manufacturing and labeling to demonstrate the safety and effectiveness of the
device. Although clinical investigations of most devices are subject to the
investigational device exemption requirements, clinical investigations of IN
VITRO diagnostic tests, such as our products and products under development, are
exempt from the investigational device exemption requirements, including the
need to obtain the FDA's prior approval, provided the testing is noninvasive,
does not require an invasive sampling procedure that presents a significant
risk, does not introduce energy into the subject, and is not used as a
diagnostic procedure without confirmation by another medically established test
or procedure. In addition, the IN VITRO diagnostic tests must be labeled for
research use only or investigational use only, and distribution controls must be
established to assure that IVDs distributed for research or clinical
investigation are used only for those purposes.
The FDA may determine that we must adhere to the more costly, lengthy, and
uncertain PMA approval process for our potential products. Significant
modifications to the design, labeling or manufacturing process of an approved
device may require approval by the FDA of a PMA supplement or a new PMA
application.
After a PMA is accepted for filing, the FDA begins its review of the submitted
information, which generally takes between one and two years, but may take
significantly longer. During this review period, the FDA may request additional
information or clarification of information already provided. Also during the
review period, an advisory panel of experts from outside the FDA will be
convened to review and evaluate the
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application and provide recommendations to the FDA as to the approvability of
the device. We may not be able to obtain necessary approvals on a timely basis,
if at all, and delays in obtaining or failure to obtain such approvals, the loss
of previously obtained approvals, or failure to comply with existing or future
regulatory requirements could have a material adverse effect on our business,
financial condition and results of operations.
Manufacturers of medical devices for marketing in the U.S. are required to
adhere to the QSR requirements (formerly Good Manufacturing Practices), which
include testing, control and documentation requirements. Manufacturers must also
comply with Medical Device Reporting requirements that a manufacturer report to
the FDA any incident in which its product may have caused or contributed to a
death or serious injury, or in which its product malfunctioned and would be
likely to cause or contribute to a death or serious injury upon recurrence.
Labeling and promotional activities are subject to scrutiny by the FDA and, in
certain circumstances, by the Federal Trade Commission. FDA enforcement policy
prohibits the marketing of approved medical devices for unapproved uses.
We are subject to routine inspection by the FDA and certain state agencies for
compliance with QSR requirements, medical device reporting requirements and
other applicable regulations. The recently finalized QSR requirements include
design controls that will likely increase the cost of compliance. We may incur
significant costs to comply with laws and regulations in the future and these
laws and regulations may have a material adverse effect upon our business,
financial condition and results of operation.
Any of our customers using our diagnostic devices for clinical use in the U.S.
may be regulated under the Clinical Laboratory Improvement Amendments of 1988 or
CLIA. CLIA is intended to ensure the quality and reliability of clinical
laboratories in the U.S. by mandating specific standards in the areas of
personnel qualification, administration, participation in proficiency testing,
patient test management, quality control, quality assurance and inspections. The
regulations promulgated under CLIA establish three levels of diagnostic tests
("waived," "moderately complex" and "highly complex"), and the standards
applicable to a clinical laboratory depend on the level of the tests it
performs. CLIA requirements may prevent some clinical laboratories from using
our diagnostic products. Therefore, CLIA regulations and future administrative
interpretations of CLIA may have a material adverse impact on us by limiting the
potential market for our products.
The Food and Drug Administration Modernization Act of 1997 makes changes to the
device provisions of the FD&C Act or the Act and other provisions in the Act
affecting the regulation of devices. Among other things, the changes will affect
the IDE, 510(k) and PMA processes, and also will affect device standards and
data requirements, procedures relating to humanitarian and breakthrough devices,
tracking and postmarket surveillance, accredited third-party review, and the
dissemination of off-label information. We cannot predict how or when these
changes will be implemented or what effect the changes will have on the
regulation of our products. There can be no assurance that the new legislation
will not impose additional costs or lengthen review times for our products.
Additionally, our food pathogen products will be subject to the regulations of
various domestic and foreign government agencies which regulate food safety and
food adulteration, including the U.S. Department of Agriculture.
FACILITIES
We currently lease approximately 45,000 square feet of commercial real estate in
San Diego, California, under a lease expiring in 2005. We have an option to
renew the lease on this facility for two additional five-year terms. The
facility currently houses our administrative offices and research and
development
- --------------------------------------------------------------------------------
41
<PAGE>
Business
- --------------------------------------------------------------------------------
laboratories, and is expected to be sufficient to meet our currently anticipated
facilities needs at least through 2000. If required, we believe we will be able
to obtain additional facilities space on commercially reasonable terms.
EMPLOYEES
As of December 31, 1999, we had 142 full-time employees, of whom 50 hold Ph.D.
degrees and 19 hold other advanced degrees. Approximately 90 are involved in
research and development, 26 in operations, manufacturing, and quality
assurance, and 26 in finance, legal, marketing and other administrative
functions. Our success will depend in large part upon our ability to attract and
retain employees. We face competition in this regard from other companies,
research and academic institutions, government entities and other organizations.
None of our employees is covered by a collective bargaining agreement, and we
believe that we maintain good relations with our employees.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
- --------------------------------------------------------------------------------
42
<PAGE>
- --------------------------------------------------------------------------------
Management
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Howard C. Birndorf...................... 50 Chairman of the Board, Chief Executive
Officer and President
Harry J. Leonhardt, Esq................. 43 Senior Vice President, General Counsel
and Secretary
Clare L. Bromley........................ 50 Senior Vice President, Sales and
Marketing
Michael Moore........................... 64 Senior Vice President, General Manager
Kieran T. Gallahue...................... 36 Senior Vice President, Chief Financial
Officer
James P. O'Connell, Ph.D................ 53 Vice President, Business Development
Michael J. Heller, Ph.D................. 55 Chief Technical Officer
Val Buonaiuto........................... 56 Director
Cam L. Garner........................... 51 Director
David G. Ludvigson...................... 49 Director
Thomas G. Lynch......................... 43 Director
Stelios Papadopoulos.................... 59 Director
</TABLE>
HOWARD C. BIRNDORF, a founder of Nanogen, has served as our Chairman of the
Board and Chief Executive Officer since October 1993 and has held the additional
title of President since January 2000. Mr. Birndorf also served as Chief
Financial Officer from December 1997 to July 1998 and from September 1993 to
October 1997. Mr. Birndorf was a co-founder and Chairman Emeritus of Ligand
Pharmaceuticals, Incorporated, where from January 1988 to November 1991 he was
President and Chief Executive Officer. He was also a co-founder, director and
Executive Vice President of Gen-Probe Incorporated, co-founder and Vice
President of Corporate Development at Hybritech, Incorporated, co-founder and
director of IDEC Pharmaceuticals Corporation, and was involved in the formation
of Gensia Pharmaceuticals, Inc. (currently known as Sicor Inc.) where he was a
director. He was a founding director of Neurocrine Biosciences Inc. and served
as a director from 1992 through 1997. From November 1991 to January 1994,
Mr. Birndorf was President of Birndorf Technology Development, an investment and
consulting company. He is a founding director of Graviton, Inc. and a director
of the Cancer Center of the University of California, San Diego. Mr. Birndorf
received a B.A. in biology from Oakland University, an M.S. in Biochemistry from
Wayne State University. Mr. Birndorf received an honorary Doctor of Science
degree from Oakland University.
HARRY J. LEONHARDT, ESQ. has served as our Senior Vice President, General
Counsel and Secretary since July 1999. Mr. Leonhardt served as our Vice
President, General Counsel and Secretary from July 1996 to June 1999. From 1990
to 1996, Mr. Leonhardt served in various capacities at Allergan, Inc., as Senior
Attorney and Head of Intellectual Property Litigation, Assistant General Counsel
and Head of Worldwide Litigation, and during a two-year expatriate assignment at
its European headquarters in England, served as General Counsel for Allergan's
European Operations. From 1983 to 1990, Mr. Leonhardt was an associate attorney
with the patent firm of Lyon & Lyon LLP in Los Angeles, where he represented a
number of high technology clients in the fields of biotechnology,
pharmaceuticals, diagnostic devices, genetic probes and genetic engineering.
Mr. Leonhardt received a B.Sc. in Pharmacy from the Philadelphia College of
Pharmacy and Science and a J.D. from the University of Southern California Law
Center.
CLARE L. BROMLEY joined Nanogen in October, 1998 as Senior Vice President,
Marketing and Business Development. In 1999, he became responsible for our sales
and marketing. Prior to joining Nanogen, from November 1995 to October 1998
Mr. Bromley was Senior Vice President, Sales and Marketing for
- --------------------------------------------------------------------------------
43
<PAGE>
Management
- --------------------------------------------------------------------------------
Molecular Dynamics, Inc., or Molecular Dynamics. For 18 years prior to November
1995, he held various postions with Hewlet-Packard in its Chemical Analysis
Group, including Manager of Information, Architecture, Worldwide Bioscience
Sales and Marketing Manager, Global Accounts Marketing Manager, Regional Sales
Manager for Japan and Korea, and Regional Sales Manager for Latin America and
South Africa. Mr.Bromley is a Director of the International Cancer Screening
Laboratory, Inc. and is a member of Lab Ventures, LLC. Mr. Bromley holds a B.S.
in Natural Sciences with a Chemistry concentration from Mercer University.
MICHAEL MOORE has served as our Senior Vice President, General Manager since
December 1999. In 1998, he was Chief Executive Officer, President and a director
of the Topometrix Corporation. From 1993 to 1997 he served as Vice President and
General Manager of Hitachi Instruments, Inc. From 1986 to 1990, he was
President, Chief Operating Officer and director of Fischer Imaging Corporation.
He was Senior Vice President and General Manager of the Instrument Group of
Perkin Elmer from 1981 to 1984. Mr. Moore received a B.S. from Rensselaer
Polytechnic Institute and an M.B.A. from Stanford University.
KIERAN T. GALLAHUE has served as our Senior Vice President, Chief Financial
Officer since February 2000 and prior to that time as Vice President, Chief
Financial Officer since July 1999. He has also served as Vice President,
Strategic Marketing since January 1998. From 1995 to 1997, he served as Vice
President of the Critical Care Business Unit for Instrumentation Laboratory, or
IL, where he was responsible for the worldwide strategic sales and marketing,
and research and development efforts for this business unit. From 1992 to 1995,
he held a variety of sales and marketing and finance positions within IL. In
addition, Mr. Gallahue held various marketing and financial positions within
Procter & Gamble from 1991 to 1992 and the General Electric Company from 1985 to
1989. Mr. Gallahue holds an M.B.A. from the Harvard Business School.
JAMES P. O'CONNELL, PH.D. has served as our Vice President, Business Development
since January, 2000. He previously served as our Vice President, Science and
Technology from January 1999 to January 2000 and as our Vice President of
Research and Product Development from December 1994 to January 1999. From
August 1988 to December 1994, Dr. O'Connell was Vice President, Research and
Development and Central Operations for Ortho Diagnostic Systems, a Johnson &
Johnson Company, where he was responsible for general management of research and
development, manufacturing and industrial engineering, purchasing and
procurement. Dr. O'Connell was also responsible for the research activities of
the Johnson & Johnson Biotechnology Center in La Jolla, California. Prior to
October 1988, Dr. O'Connell was Director of Immunodiagnostics Research and
Development at Becton Dickinson. He received a M.S. and Ph.D. in Microbiology
and Public Health from the University of North Carolina.
VAL BUONAIUTO has been a director of Nanogen since November 1999. Since 1997,
Mr. Buonaiuto has been Senior Advisor to Hitachi Instruments, Inc. He previously
served as President and Chief Executive Officer of Hitachi Instruments,
Incorporated from 1991 to 1997. Mr. Buonaiuto received his B.S. from Western
Connecticut State University.
CAM L. GARNER has been a director of Nanogen since September 1997. Since
May 1990, Mr. Garner has been Chief Executive Officer of Dura
Pharmaceuticals, Inc., or Dura, from 1990 to 1998 he served as President, and
since 1995 he has served as Dura's Chairman of the Board of Directors. Prior to
joining Dura, Mr. Garner served as President of Syntro Corporation, a
biotechnology company, from November 1987 to June 1989. Mr. Garner is currently
a director of DJ Pharmaceuticals, Inc., Cardio Dynamics International, a
manufacturer of medical devices, and Spiros Development Corporation II, Inc., a
developer of pulmonary drug delivery systems. Mr. Garner received a B.S. in
Biology from Virginia Wesleyan College and an M.B.A. from Baldwin-Wallace
College.
DAVID G. LUDVIGSON has been a director of Nanogen since 1996. Since
October 1999, Mr. Ludvigson has been Senior Vice President and Chief Operating
Officer of Matrix Pharmaceuticals, Inc. In addition, since
- --------------------------------------------------------------------------------
44
<PAGE>
Management
- --------------------------------------------------------------------------------
1998 he has also been Chief Financial Officer of Matrix. From February 1996 to
June 1998, Mr. Ludvigson was President and Chief Operating Officer of NeTpower.
From 1992 to 1995, Mr. Ludvigson was Senior Vice President and Chief Financial
Officer of IDEC Pharmaceuticals. Prior to that time, he served as Senior Vice
President of Sales and Marketing for Conner Peripherals and as Executive Vice
President, Chief Financial Officer and a director of MIPS Computer
Systems, Inc., a RISC microprocessor developer and systems manufacturer.
Mr. Ludvigson received a B.S. and an M.A.S. from the University of Illinois.
THOMAS G. LYNCH has been a director of Nanogen since February 1997. Mr. Lynch is
Executive Vice President, Chief Financial Officer and a director of Elan
Corporation, plc, or Elan, a drug delivery and biopharmaceutical company
headquartered in Dublin, Ireland, where he is responsible for finance, treasury,
strategic planning and corporate and investor relations. He is also a member of
the executive committee of Elan's board of directors. Prior to his appointment
at Elan in 1993, Mr. Lynch was a partner with KPMG Peat Marwick where he
specialized in securities matters and business advisory and accounting services.
Mr. Lynch is also a director of Pembroke Capital Limited, Icon plc, Axogen
Limited and Warner Chilcott, plc.
STELIOS PAPADOPOULOS has been a director of Nanogen since November 1999.
Mr. Papadopoulos has served as Chief Executive Officer and a director of CN
Biosciences, Inc., or CNBI, an affiliate of Merck KGaA, Darmstadt, Germany,
since January 1993. He has served as Chairman of the Board of CNBI since 1985.
He previously served as President of Fisher Scientific Worldwide, Inc. (now
Fisher Scientific International Inc.) from May 1989 to June 1992. From
October 1987 to May 1989, he was President of Instrumentation Laboratory.
Mr. Papadopoulos received his B.S. in Aeronautical Engineering from Northrop
Institute of Technology.
- --------------------------------------------------------------------------------
45
<PAGE>
- --------------------------------------------------------------------------------
Principal and selling stockholders
The following table sets forth certain information with respect to beneficial
ownership of our common stock as of February 15, 2000 and as adjusted to reflect
the sale of the common stock offered by this prospectus, by the following:
- - each of our directors and executive officers;
- - all of our directors and executive officers as a group;
- - each person or entity who is known by us to beneficially own more than 5% of
our common stock; and
- - the selling stockholders, all of whom are directors or executive officers
other than Dr. Heller.
<TABLE>
<CAPTION>
Number of shares Percentage of Percentage of
beneficially owned ownership prior ownership after
Stockholders(1)(2)(3) prior to offering to offering offering
- --------------------- ------------------ --------------- ---------------
<S> <C> <C> <C>
CitiGroup, Inc.(4)............................. 1,916,083 10.07% 8.84%
Elan Corporation, plc(5)....................... 1,287,878 6.77% 5.94%
Howard C. Birndorf(6)(7)(8).................... 1,286,271 6.75% 5.42%
Hoechst Research and Technology AG(9).......... 1,029,328 5.37% 4.72%
Val Buonaiuto.................................. -- * *
Cam L. Garner(10)(11).......................... 27,777 * *
David Ludvigson(12)............................ 23,194 * *
Thomas G. Lynch(5)(10)(13)..................... 1,326,766 6.96% 6.05%
Stelios B. Papadopoulos........................ -- * *
Clare L. Bromley(14)(7)(15).................... 170,987 * *
Kieran T. Gallahue(16)(7)(17).................. 165,326 * *
Michael Heller(18)(19)......................... 185,636 * *
W. J. Kitchen(20).............................. 104,720 * *
Harry J. Leonhardt(21)(7)(22).................. 210,153 1.10% *
Tina S. Nova(23)............................... 345,509 1.82% *
James P. O'Connell(24)(7)(25).................. 255,134 1.34% 1.08%
All Directors and Executive Officers as a group
(12 persons)(26)(7)(27).................... 3,915,837 20.29% 16.98%
</TABLE>
- ------------
* LESS THAN ONE PERCENT.
(1) TO NANOGEN'S KNOWLEDGE, THE PERSONS NAMED IN THE TABLE HAVE SOLE VOTING AND
INVESTMENT POWER WITH RESPECT TO ALL SHARES OF COMMON STOCK SHOWN AS
BENEFICIALLY OWNED BY THEM, SUBJECT TO COMMUNITY PROPERTY LAWS WHERE
APPLICABLE AND THE INFORMATION CONTAINED IN THE FOOTNOTES TO THIS TABLE.
(2) FOR PURPOSES OF COMPUTING THE PERCENTAGE OF OUTSTANDING SHARES HELD BY EACH
PERSON OR GROUP OF PERSONS NAMED ABOVE ON A GIVEN DATE, SHARES WHICH SUCH
PERSON OR GROUP HAS THE RIGHT TO ACQUIRE WITHIN 60 DAYS AFTER SUCH DATE ARE
DEEMED TO BE OUTSTANDING, BUT ARE NOT DEEMED TO BE OUTSTANDING FOR THE
PURPOSES OF COMPUTING THE PERCENTAGE OWNERSHIP OF ANY OTHER PERSON.
(3) CERTAIN STOCKHOLDERS IDENTIFIED BELOW HAVE GRANTED THE UNDERWRITERS AN
OPTION TO ACQUIRE SHARES OF COMMON STOCK TO COVER OVERALLOTMENTS. THE
SELLING STOCKHOLDERS' OPTIONS COVER AN AGGREGATE OF 229,645 SHARES.
(4) BASED UPON FORM 13G FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
FEBRUARY 14, 2000.
(5) INCLUDES 1,287,878 SHARES HELD BY ELAN INTERNATIONAL SERVICES LIMITED
("ELAN INTERNATIONAL"). MR. LYNCH, A DIRECTOR OF THE COMPANY, IS EXECUTIVE
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER OF ELAN, THE PARENT COMPANY OF
ELAN INTERNATIONAL, AND AS SUCH, MAY BE DEEMED TO SHARE VOTING AND
INVESTMENT POWER WITH RESPECT TO THE SHARES HELD BY ELAN INTERNATIONAL.
MR. LYNCH DISCLAIMS BENEFICIAL OWNERSHIP OF ALL SUCH SHARES EXCEPT TO THE
EXTENT OF HIS PECUNIARY INTEREST THEREIN.
(6) INCLUDES 20,311 SHARES ISSUABLE UPON THE EXERCISE OF OPTIONS WITHIN
60 DAYS OF FEBRUARY 15, 2000.
- --------------------------------------------------------------------------------
46
<PAGE>
Principal and selling stockholders
- --------------------------------------------------------------------------------
(7) INCLUDES UNVESTED SHARES SUBJECT TO REPURCHASE BY THE COMPANY AT
FEBRUARY 15, 2000, AS FOLLOWS: MR. BIRNDORF, 182,083; MR. BROMLEY, 15,000;
MR. GALLAHUE, 78,069; MR. LEONHARDT, 54,845; DR. O'CONNELL, 47,366.
(8) MR. BIRNDORF HAS GRANTED THE UNDERWRITERS AN OPTION TO ACQUIRE 109,915
SHARES OF COMMON STOCK OWNED BY HIM TO COVER OVER-ALLOTMENTS. IF SUCH
OPTION IS EXERCISED, AFTER THE OFFERING HE WILL BENEFICIALLY OWN 1,176,356
SHARES, REPRESENTING 5.46% OF THE COMMON STOCK OUTSTANDING AFTER THE
OFFERING.
(9) AVENTIS IS A SUBSIDIARY OF HOECHST RESEARCH AND TECHNOLOGY AG. INCLUDES
120,238 SHARES ISSUABLE UPON THE EXERCISE OF WARRANTS WITHIN 60 DAYS OF
FEBRUARY 15, 2000.
(10) INCLUDES 16,666 SHARES ISSUABLE TO EACH OF MR. LYNCH AND MR. GARNER UPON
THE EXERCISE OF OPTIONS EXERCISABLE WITHIN 60 DAYS OF FEBRUARY 15, 2000,
SUBJECT TO REPURCHASE OF UNVESTED SHARES.
(11) MR. GARNER HAS GRANTED THE UNDERWRITERS AN OPTION TO ACQUIRE 15,000 SHARES
OF COMMON STOCK OWNED BY HIM TO COVER OVER-ALLOTMENTS. IF SUCH OPTION IS
EXERCISED, AFTER THE OFFERING HE WILL BENEFICIALLY OWN 12,777 SHARES,
REPRESENTING LESS THAN 1% OF THE COMMON STOCK OUTSTANDING AFTER THE
OFFERING.
(12) MR. LUDVIGSON HAS GRANTED THE UNDERWRITERS AN OPTION TO ACQUIRE 10,000
SHARES OF COMMON STOCK OWNED BY HIM TO COVER OVER-ALLOTMENTS. IF SUCH
OPTION IS EXERCISED, AFTER THE OFFERING HE WILL BENEFICIALLY OWN 13,194
SHARES, REPRESENTING LESS THAN 1% OF THE COMMON STOCK OUTSTANDING AFTER
THE OFFERING.
(13) MR. LYNCH HAS GRANTED THE UNDERWRITERS AN OPTION TO ACQUIRE 15,000 SHARES
OF COMMON STOCK OWNED BY HIM TO COVER OVER-ALLOTMENTS. IF SUCH OPTION IS
EXERCISED, AFTER THE OFFERING HE WILL BENEFICIALLY OWN 1,311,766 SHARES,
REPRESENTING 6.09% OF THE COMMON STOCK OUTSTANDING AFTER THE OFFERING.
(14) INCLUDES 152,655 SHARES ISSUABLE UPON THE EXERCISE OF OPTIONS WITHIN
60 DAYS OF FEBRUARY 15, 2000, SUBJECT TO REPURCHASE OF UNVESTED SHARES.
(15) MR. BROMLEY HAS GRANTED THE UNDERWRITERS AN OPTION TO ACQUIRE 15,000
SHARES OF COMMON STOCK OWNED BY HIM TO COVER OVER-ALLOTMENTS. IF SUCH
OPTION IS EXERCISED, AFTER THE OFFERING HE WILL BENEFICIALLY OWN 155,987
SHARES, REPRESENTING LESS THAN 1% OF THE COMMON STOCK OUTSTANDING AFTER
THE OFFERING.
(16) INCLUDES 10,936 SHARES ISSUABLE UPON THE EXERCISE OF OPTIONS WITHIN
60 DAYS OF FEBRUARY 15, 2000.
(17) MR. GALLAHUE HAS GRANTED THE UNDERWRITERS AN OPTION TO ACQUIRE 15,000
SHARES OF COMMON STOCK OWNED BY HIM TO COVER OVER-ALLOTMENTS. IF SUCH
OPTION IS EXERCISED, AFTER THE OFFERING HE WILL BENEFICIALLY OWN 150,326
SHARES, REPRESENTING LESS THAN 1% OF THE COMMON STOCK OUTSTANDING AFTER
THE OFFERING.
(18) INCLUDES 42,706 SHARES ISSUABLE UPON THE EXERCISE OF OPTIONS WITHIN
60 DAYS OF FEBRUARY 15, 2000, SUBJECT TO REPURCHASE OF UNVESTED SHARES.
(19) DR. HELLER HAS GRANTED THE UNDERWRITERS AN OPTION TO ACQUIRE 15,000 SHARES
OF COMMON STOCK OWNED BY HIM TO COVER OVER-ALLOTMENTS. IF SUCH OPTION IS
EXERCISED, AFTER THE OFFERING HE WILL BENEFICIALLY OWN 170,636 SHARES,
REPRESENTING LESS THAN 1% OF THE COMMON STOCK OUTSTANDING AFTER THE
OFFERING.
(20) MR. KITCHEN'S EMPLOYMENT WITH NANOGEN TERMINATED ON DECEMBER 31, 1999.
(21) INCLUDES 10,937 SHARES ISSUABLE UPON THE EXERCISE OF OPTIONS WITHIN
60 DAYS OF FEBRUARY 15, 2000.
(22) MR. LEONHARDT HAS GRANTED THE UNDERWRITERS AN OPTION TO ACQUIRE 15,230
SHARES OF COMMON STOCK OWNED BY HIM TO COVER OVER-ALLOTMENTS. IF SUCH
OPTION IS EXERCISED, AFTER THE OFFERING HE WILL BENEFICIALLY OWN 194,923
SHARES, REPRESENTING LESS THAN 1% OF THE COMMON STOCK OUTSTANDING AFTER
THE OFFERING.
(23) DR. NOVA'S EMPLOYMENT WITH NANOGEN TERMINATED ON JANUARY 31, 2000.
(24) INCLUDES 40,519 SHARES ISSUABLE UPON THE EXERCISE OF OPTIONS WITHIN
60 DAYS OF FEBRUARY 15, 2000, SUBJECT TO REPURCHASE OF UNVESTED SHARES.
(25) DR. O'CONNELL HAS GRANTED THE UNDERWRITERS AN OPTION TO ACQUIRE 19,500
SHARES OF COMMON STOCK OWNED BY HIM TO COVER OVER-ALLOTMENTS. IF SUCH
OPTION IS EXERCISED, AFTER THE OFFERING HE WILL BENEFICIALLY OWN 235,634
SHARES, REPRESENTING 1.09% OF THE COMMON STOCK OUTSTANDING AFTER THE
OFFERING.
(26) INCLUDES AN AGGREGATE OF 268,690 SHARES ISSUABLE UPON THE EXERCISE OF
OPTIONS EXERCISABLE WITHIN 60 DAYS OF FEBRUARY 15, 2000, SUBJECT TO
REPURCHASE OF UNVESTED SHARES.
(27) THE DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (WHICH DOES NOT INCLUDE
DR. HELLER, WHO IS NOT AN EXECUTIVE OFFICER) HAVE GRANTED THE UNDERWRITERS
AN OPTION TO ACQUIRE 214,645 SHARES OF COMMON STOCK TO COVER
OVER-ALLOTMENTS. IF SUCH OPTION IS EXERCISED, AFTER THE OFFERING THE
DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP WILL BENEFICIALLY OWN
3,701,192 SHARES, REPRESENTING 16.98% OF THE COMMON STOCK OUTSTANDING
AFTER THE OFFERING.
- --------------------------------------------------------------------------------
47
<PAGE>
- --------------------------------------------------------------------------------
Underwriting
Nanogen and the underwriters for the offering named below have entered into an
underwriting agreement concerning the shares being offered. Subject to
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. Warburg Dillon Read LLC, Lehman
Brothers Inc., Pacific Growth Equities, Inc., Dain Rauscher Inc., and First
Union Securities, Inc. are the representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of shares
- ------------------------------------------------------------------------------
<S> <C>
Warburg Dillon Read LLC.....................................
Lehman Brothers Inc.........................................
Pacific Growth Equities, Inc................................
Dain Rauscher Inc...........................................
First Union Securities, Inc.................................
---------
Total................................................... 2,500,000
=========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have a 30-day option to buy up to 145,355 shares
from us and up to 229,645 shares from the selling stockholders at the public
offering price less the underwriting discounts and commissions to cover these
sales. If the option is exercised for less than the full amount, shares will be
purchased first from the selling stockholders pro rata in accordance with the
number of shares being offered by each and then from us. If any shares are
purchased under this option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase up to
an additional 375,000 shares.
<TABLE>
<CAPTION>
No exercise Full exercise
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Per Share................................................... $ $
Total................................................... $ $
</TABLE>
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $850,000.
Shares sold by the underwriters to the public will initially be offered at the
public offering price set forth on the cover of this prospectus. Any shares sold
by the underwriters to securities dealers may be sold at a discount of up to
$ per share from the public offering price. Any of these securities
dealers may resell any shares purchased from the underwriters to other brokers
or dealers at a discount of up to $ per share from the public offering
price. If all the shares are not sold at the public offering price set forth on
the cover of this prospectus, the representatives may change the offering price
and the other selling terms.
In addition, in connection with this offering, certain of the underwriters (and
selling group members) may engage in passive market making transactions in the
common stock on the Nasdaq National Market, prior to the pricing and completion
of the offering. Passive market making consists of displaying bids on the Nasdaq
National Market no higher than the bid prices of independent market makers and
making purchases at prices no higher than these independent bids and effected in
response to order flow. Net purchases by a passive market maker on each day are
limited to a specified percentage of the passive market maker's average daily
trading volume in the common stock during a specified period and must be
- --------------------------------------------------------------------------------
48
<PAGE>
Underwriting
- --------------------------------------------------------------------------------
discontinued when such limit is reached. Passive market making may cause the
price of the common stock to be higher than the price that otherwise would exist
in the open market in the absence of such transactions. If passive market making
is commenced, it may be discontinued at any time.
Nanogen, its directors, officers and certain of its stockholders have agreed
with the underwriters not to offer, sell, contract to sell, hedge or otherwise
dispose of, directly or indirectly, or file with the SEC a registration
statement under the Securities Act relating to, any of its common stock or
securities convertible into or exchangeable for shares of common stock during
the period from the date of this prospectus continuing through the date 90 days
after the date of this prospectus, without the prior written consent of Warburg
Dillon Read LLC. This agreement does not apply to any securities issued under
existing employee benefit plans.
In connection with the offering, the underwriters may purchase and sell shares
of common stock in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in the offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while the offering
is in progress.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise affect
the market price of the common stock. As a result, the price of the common stock
may be higher than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These transactions may be effected on the Nasdaq National Market, in
the over-the-counter market or otherwise.
We and the selling stockholders have agreed to indemnify the several
underwriters against some liabilities, including liabilities under the
Securities Act of 1933 and to contribute to payments that the underwriters may
be required to make in respect thereof.
- --------------------------------------------------------------------------------
49
<PAGE>
- --------------------------------------------------------------------------------
Legal matters
The validity of the common stock offered hereby will be passed upon for us by
Pillsbury Madison & Sutro LLP, San Francisco, California. A partner of Pillsbury
Madison & Sutro LLP owns 5,000 shares of common stock of Nanogen. Certain legal
matters relating to the offering will be passed upon for the underwriters by
Dewey Ballantine LLP, New York, New York.
Experts
Ernst & Young LLP, independent auditors, have audited our consolidated financial
statements at December 31, 1999 and 1998 and for each of the three years in the
period ended December 31, 1999, as set forth in their report, which is included
in this prospectus and in the registration statement. Our consolidated financial
statements are included in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
The statements in this prospectus as set forth under the captions "Risk
factors--The uncertainty of patent and proprietary technology protection and our
potential inability to license technology from third parties may adversely
affect us" and in "Business--Proprietary Technology and Patents" have been
passed upon by Lyon & Lyon LLP, Irvine, California, our patent counsel and
experts on such matters, and are included herein in reliance upon its review and
approval. A partner of Lyon & Lyon LLP owns 20,000 shares of common stock of
Nanogen.
- --------------------------------------------------------------------------------
50
<PAGE>
- --------------------------------------------------------------------------------
Where you can find additional information
We have filed with the SEC a registration statement on Form S-3, including the
exhibits and schedules thereto, under the Securities Act with respect to the
shares to be sold in this offering. This prospectus does not contain all the
information set forth in the registration statement. For further information
about us and the shares to be sold in this offering, please refer to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to, are not
necessarily complete, and in each instance please refer to the copy of the
contract, agreement or other document filed as an exhibit to the registration
statement, each statement being qualified in all respects by this reference.
You may read and copy all or any portion of the registration statement or any
reports, statements or other information we file with the SEC at the SEC's
public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.C.,
Washington, D.C. 20549 and at the regional offices of the SEC located at Seven
World Trade Center, 13th Floor, New York, New York 10048 and the Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You
can request copies of these documents upon payment of a duplicating fee, by
writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our SEC filings,
including the registration statement will also be available to you on the SEC's
Web site. The address of this site is http://www.sec.gov.
Documents incorporated by reference
The SEC allows us to incorporate by reference the information we file with it,
which means that we can disclose important information to you by referring you
to those documents. The information incorporated by reference is considered to
be part of this prospectus, and information we file later with the SEC will
automatically update and supersede this information. We incorporate by reference
the documents listed below and any future filings made by us with the SEC under
Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 until
the sale of all of the shares of common stock that are part of this offering.
The documents we are incorporating by reference are as follows:
- - our Annual Report on Form 10-K for the year ended December 31, 1999;
- - the description of our common stock contained in our registration statement
on Form 8-A declared effective by the SEC on April 13, 1998, including any
amendments or reports filed for the purpose of updating that description;
and
- - the description of the preferred stock purchase rights for our Series A
Participating Preferred Stock, par value $0.001 per share, contained in our
registration statement on Form 8-A filed with the SEC on November 24, 1998.
Any statement contained in a document that is incorporated by reference will be
modified or superseded for all purposes to the extent that a statement contained
in this prospectus (or in any other document that is subsequently filed with the
SEC and incorporated by reference) modifies or is contrary to that previous
statement. Any statement so modified or superseded will not be deemed a part of
this prospectus except as so modified or superceded.
You may request a copy of these filings at no cost (other than exhibits unless
such exhibits are specifically incorporated by reference therein) by writing or
telephoning our investor relations department at the following address and
telephone number:
Nanogen, Inc.
10398 Pacific Center Court
San Diego, California 92121
(858) 410-4600
- --------------------------------------------------------------------------------
51
<PAGE>
- --------------------------------------------------------------------------------
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
- ----------------------------------------------------------------------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Cash Flows....................... F-5
Consolidated Statements of Stockholders' Equity............. F-6
Notes to Consolidated Financial Statements.................. F-7-F-18
</TABLE>
- --------------------------------------------------------------------------------
F-1
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Nanogen, Inc.
We have audited the accompanying consolidated balance sheets of Nanogen, Inc.,
as of December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Nanogen, Inc. at
December 31, 1999 and 1998 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
San Diego, California
January 28, 2000
- --------------------------------------------------------------------------------
F-2
<PAGE>
Nanogen, Inc.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................. $41,021 $62,245
Receivables and other current assets...................... 2,320 2,933
-------- --------
Total current assets.................................... 43,341 65,178
Property and equipment, net................................. 6,154 6,980
Acquired technology rights.................................. 1,005 --
Restricted cash............................................. 219 270
Other assets................................................ 66 276
-------- --------
$50,785 $72,704
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable.......................................... $598 $1,066
Accrued liabilities....................................... 3,726 1,433
Deferred revenue.......................................... 3,373 3,065
Current portion of capital lease obligations.............. 2,136 1,913
-------- --------
Total current liabilities............................... 9,833 7,477
Capital lease obligations, less current portion............. 2,831 4,176
Commitments
Stockholders' equity:
Convertible preferred stock, $.001 par value, 5,000,000
shares authorized at December 31, 1999 and 1998; no
shares issued and outstanding at December 31, 1999 and
1998..................................................... -- --
Common stock, $.001 par value, 50,000,000 shares
authorized at December 31, 1999 and 1998; 18,990,799 and
18,835,461 shares issued and outstanding at December 31,
1999 and 1998, respectively.............................. 19 19
Additional paid-in capital................................ 113,574 111,489
Deferred compensation..................................... (1,473) (1,512)
Notes receivable from officers............................ (1,369) (1,514)
Accumulated deficit....................................... (72,630) (47,431)
-------- --------
Total stockholders' equity.................................. 38,121 61,051
-------- --------
$50,785 $72,704
======== ========
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
F-3
<PAGE>
Nanogen, Inc.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Sponsored research........................................ $5,688 $5,461 $1,243
Contract and grant revenue................................ 2,431 2,172 2,123
-------- -------- --------
Total revenues.............................................. 8,119 7,633 3,366
Operating expenses:
Research and development.................................. 25,260 23,002 11,769
General and administrative................................ 9,097 6,420 3,910
Acquired in-process technology............................ -- 1,193 --
-------- -------- --------
Total operating expenses.................................... 34,357 30,615 15,679
-------- -------- --------
Loss from operations........................................ (26,238) (22,982) (12,313)
Equity in loss of joint venture............................. (996) (610) --
Interest income, net........................................ 2,035 2,650 975
-------- -------- --------
Net loss.................................................... $(25,199) $(20,942) $(11,338)
======== ======== ========
Net loss per share--basic and diluted....................... $(1.39) $(1.60) $(8.42)
======== ======== ========
Number of shares used in computing net loss per share--basic
and diluted............................................... 18,069 13,097 1,347
======== ======== ========
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
F-4
<PAGE>
Nanogen, Inc.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Operating Activities:
Net loss.................................................... $(25,199) $ (20,942) $ (11,338)
Adjustments to reconcile net loss to net cash used in
operating activities:
Acquisition of in-process technology...................... -- 1,193 --
Equity in loss of joint venture........................... 996 610 --
Net (gain) loss from sale of property and equipment....... 24 (13) --
Depreciation and amortization............................. 1,709 1,168 527
Amortization of deferred compensation..................... 1,773 2,181 611
Stock-based compensation expense.......................... 237 -- --
Interest capitalized on notes receivable from officers.... (74) (75) (4)
Changes in operating assets and liabilities:
Accounts payable........................................ (468) 469 117
Accrued liabilities..................................... 2,293 424 (414)
Deferred revenue........................................ 308 2,053 1,012
Receivables and other assets............................ (182) (2,291) (326)
-------- --------- ---------
Net cash used in operating activities....................... (18,583) (15,223) (9,815)
Investing Activities:
Purchase of equipment..................................... (32) (72) (492)
Proceeds from sale of assets.............................. 6 29 --
Investment in joint venture............................... (996) (610) --
-------- --------- ---------
Net cash used in investing activities....................... (1,022) (653) (492)
Cash Flows From Financing Activities:
Decrease in restricted cash............................... 51 89 50
Principal payments on capital lease obligations........... (2,003) (1,561) (670)
Issuance of common stock.................................. 218 60,052 125
Note receivable payments from officers.................... 115 -- --
Issuance of convertible preferred stock, net of issuance
costs.................................................... -- 43 13,525
-------- --------- ---------
Net cash provided by (used in) financing activities......... (1,619) 58,623 13,030
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ (21,224) 42,747 2,723
Cash and cash equivalents at beginning of year.............. 62,245 19,498 16,775
-------- --------- ---------
Cash and cash equivalents at end of year.................... $ 41,021 $ 62,245 $ 19,498
======== ========= =========
Supplemental Disclosure Of Cash Flow Information:
Interest paid............................................... $ 580 $ 466 $ 225
======== ========= =========
Supplemental Schedule Of Noncash Investing And Financing
Activities:
Equipment acquired under capital leases..................... $ 881 $ 5,652 $ 1,159
======== ========= =========
Common stock issued in exchange for notes receivables from
officers.................................................. $ -- $ 310 $ 1,057
======== ========= =========
Issuance of convertible preferred stock and warrants in
exchange for in-process technology . $ -- $ 1,193 $ --
======== ========= =========
Exchange of notes receivable for acquired technology
rights.................................................... $ 1,005 $ -- $ --
======== ========= =========
Deferred compensation related to stock options and
restricted stock awards, net.............................. $ 1,734 $ 1,370 $ 2,934
======== ========= =========
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
F-5
<PAGE>
NANOGEN, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Notes
Convertible Additional Receivable
Preferred Stock Common Stock Paid-In Deferred From
Shares Amount Shares Amount Capital Compensation Officers
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996....... 10,785 $ 11 1,832 $ 2 $ 30,886 $ -- $ (68)
Issuance of common stock......... -- -- 207 -- 129 -- --
Repurchase of common stock....... -- -- (30) -- (4) -- --
Issuance of convertible preferred
stock.......................... 2,899 3 -- -- 13,522 -- --
Deferred compensation related to
stock options.................. -- -- -- -- 2,934 (2,934) --
Amortization of deferred
compensation................... -- -- -- -- -- 611 --
Exercise of stock options in
exchange for notes receivable
and accrued interest........... -- -- 1,175 1 1,056 -- (1,061)
Net loss......................... -- -- -- -- -- -- --
------- ---- ------ --- -------- ------- -------
Balance at December 31, 1997....... 13,684 14 3,184 3 48,523 (2,323) (1,129)
Issuance of common stock......... -- -- 555 1 329 -- --
Repurchase of common stock....... -- -- (123) -- (103) -- 90
Issuance of convertible preferred
stock.......................... 232 -- -- -- 1,236 -- --
Sale of common stock under
initial public offering, net of
expenses....................... -- -- 3,900 4 38,731 -- --
Sale of common stock in private
placement in conjunction with
initial public offering........ -- -- 1,909 2 20,998 -- --
Conversion of preferred stock
upon the the completion of
initial public offering........ (13,916) (14) 9,277 9 5 -- --
Deferred compensation related to
stock options.................. -- -- -- -- 1,370 (1,370) --
Amortization of deferred
compensation................... -- -- -- -- -- 2,181 --
Exercise of stock options in
exchange for notes receivable
and accrued interest........... -- -- 133 -- 400 -- (475)
Net loss......................... -- -- -- -- -- -- --
------- ---- ------ --- -------- ------- -------
Balance at December 31, 1998....... -- -- 18,835 19 111,489 (1,512) (1,514)
Issuance of common stock......... -- -- 94 -- 246 -- --
Repurchase of common stock....... -- -- (73) -- (114) 86 --
Cancellation of notes receivable
related to unvested restricted
stock.......................... -- -- (116) -- (104) -- 104
Restricted stock awards.......... -- -- 251 -- 1,820 (1,820) --
Stock-based compensation
expense........................ -- -- -- -- 237 -- --
Amortization of deferred
compensation................... -- -- -- -- -- 1,773 --
Payments received and accrued
interest on notes receivable
from officers.................. -- -- -- -- -- -- 41
Net loss......................... -- -- -- -- -- -- --
------- ---- ------ --- -------- ------- -------
Balance at December 31, 1999....... -- $ -- 18,991 $19 $113,574 $(1,473) $(1,369)
======= ==== ====== === ======== ======= =======
<CAPTION>
Total
Stockholders'
Accumulated Equity
Deficit (Deficit)
- ----------------------------------- ---------------------------
<S> <C> <C>
Balance at December 31, 1996....... $(15,151) $ 15,680
Issuance of common stock......... -- 129
Repurchase of common stock....... -- (4)
Issuance of convertible preferred
stock.......................... -- 13,525
Deferred compensation related to
stock options.................. -- --
Amortization of deferred
compensation................... -- 611
Exercise of stock options in
exchange for notes receivable
and accrued interest........... -- (4)
Net loss......................... (11,338) (11,338)
-------- --------
Balance at December 31, 1997....... (26,489) 18,599
Issuance of common stock......... -- 330
Repurchase of common stock....... -- (13)
Issuance of convertible preferred
stock.......................... -- 1,236
Sale of common stock under
initial public offering, net of
expenses....................... -- 38,735
Sale of common stock in private
placement in conjunction with
initial public offering........ -- 21,000
Conversion of preferred stock
upon the the completion of
initial public offering........ -- --
Deferred compensation related to
stock options.................. -- --
Amortization of deferred
compensation................... -- 2,181
Exercise of stock options in
exchange for notes receivable
and accrued interest........... -- (75)
Net loss......................... (20,942) (20,942)
-------- --------
Balance at December 31, 1998....... (47,431) 61,051
Issuance of common stock......... -- 246
Repurchase of common stock....... -- (28)
Cancellation of notes receivable
related to unvested restricted
stock.......................... -- --
Restricted stock awards.......... -- --
Stock-based compensation
expense........................ -- 237
Amortization of deferred
compensation................... -- 1,773
Payments received and accrued
interest on notes receivable
from officers.................. -- 41
Net loss......................... (25,199) (25,199)
-------- --------
Balance at December 31, 1999....... $(72,630) $ 38,121
======== ========
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
F-6
<PAGE>
NANOGEN, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. Organization and Summary of Significant Accounting Policies
Organization and business activity
Nanogen, Inc. ("Nanogen" or the "Company") was incorporated in California on
November 6, 1991 as Nanophore, Inc. ("Nanophore"), a wholly-owned subsidiary of
Nanotronics, Inc. ("Nanotronics"), and pursuant to a Plan of Corporate
Separation and Reorganization, Nanophore issued shares of its common stock to
the Nanotronics shareholders and commenced operations as Nanogen, Inc. on
September 1, 1993. In November 1997, the Company reincorporated in Delaware. The
Company was established to develop products which integrate advanced
microelectronics and molecular biology into a platform technology with broad
commercial applications in the fields of biomedical research, genomics, medical
diagnostics, genetic testing and drug discovery. The Company operates in one
business and operating segment.
Acquisition of Nanotronics, Inc.
In January 1998, the Company consummated an Agreement and Plan of Merger with
Nanotronics, Inc. ("Nanotronics"), pursuant to which a wholly owned California
subsidiary of the Company merged with and into Nanotronics. Upon the
consummation of the merger, the Company issued approximately 200,000 shares of
its Series D Convertible Preferred Stock at $6.00 per share in exchange for all
of the outstanding shares of Nanotronics. This Series D Preferred Stock
converted into 132,334 shares of common stock in connection with the Company's
initial public offering. The transaction has been accounted for using the
purchase method. The operations and net assets of Nanotronics were not material
to the Company's financial position or results of operations, but have been
consolidated in the Company's financial statements since the date of
acquisition. The technological feasibility of the acquired technology has not
been established nor have alternative uses been identified, therefore, the
purchase price of approximately $1.2 million was allocated to acquired
in-process technology and has been reflected as a charge in the Company's
statement of operations.
The following unaudited table shows the pro forma amounts as if the acquisition
had occurred on January 1, 1997:
<TABLE>
<CAPTION>
Years Ended
December 31,
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Revenue..................................................... $ 7,667 $ 3,699
Net loss.................................................... $(20,946) $(11,474)
Net loss per share--basic and diluted....................... $ (1.60) $ (8.52)
</TABLE>
Cash and cash equivalents
Cash and cash equivalents consist of cash and highly liquid investments which
include debt securities with remaining maturities of three months or less when
acquired.
Concentration of credit risk
Cash and cash equivalents are financial instruments, which potentially subject
the Company to concentration of credit risk. The Company invests its excess cash
primarily in U.S. government securities and marketable debt securities of
financial institutions and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities to
maintain safety and liquidity. These guidelines are reviewed periodically and
modified to take advantage of trends in yields and interest rates. The Company
has not experienced any material losses on its investments.
All of the Company's investments are with financial institutions and
organizations with strong credit ratings with maturities of three months or less
when acquired.
- --------------------------------------------------------------------------------
F-7
<PAGE>
NANOGEN, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1999
Restricted cash
During 1994, the Company obtained an irrevocable standby letter of credit in the
amount of $463,775 to secure its building lease. The letter of credit is secured
by a certificate of deposit, which is shown as restricted cash in the
accompanying balance sheet. The letter of credit is reduced by approximately
$50,000 annually, and had a balance of approximately $219,000 at December 31,
1999.
Property and equipment
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets, generally three to five years, using the
straight-line method. Leasehold improvements are stated at cost and amortized
over the shorter of the estimated useful lives of the assets or the lease term.
Acquired technology rights
Acquired technology rights are recorded at cost and amortized on a straight-line
basis over their estimated useful lives of five years.
Impairment of long-lived assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, if indicators of impairment exist, the Company assesses the
recoverability of the affected long-lived assets by determining whether the
carrying value of such assets can be recovered through undiscounted future
operating cash flows. If impairment is indicated, the Company will value the
asset at fair value. While the Company's current and historical operating and
cash flow losses are indicators of impairment, the Company believes the future
cash flows to be received from the long-lived assets will exceed the assets'
carrying value, and accordingly the Company has not recognized any impairment
losses through December 31, 1999.
Revenue recognition
Contract, grant and sponsored research revenue are recorded as the costs and
expenses to perform the research are incurred. Payments received in advance
under these arrangements are recorded as deferred revenue until the expenses are
incurred. Continuation of certain contracts, grants, and research agreements are
dependent upon the Company achieving specific contractual milestones.
Contract and grant revenue from one customer amounted to approximately 13% of
total revenues in 1999. Contract and grant revenue from a second customer
amounted to approximately 8%, 10% and 35% of total revenues in 1999, 1998 and
1997, respectively. Additionally, sponsored research (see Note 10) was 70%, 72%
and 37% of total revenue in 1999, 1998 and 1997, respectively.
Comprehensive income (loss)
As of January 1, 1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 requires that all components of comprehensive income,
including net income, be reported in the financial statements in the period in
which they are recognized. Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances from
non-owner sources. Net income and other comprehensive income, including foreign
currency translation adjustments, and unrealized gains and losses on
investments, shall be reported, net of their related tax effect, to arrive at
comprehensive income. Comprehensive loss was not different than net loss for the
years ended December 31, 1999 and 1998.
- --------------------------------------------------------------------------------
F-8
<PAGE>
Nanogen, Inc.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999
Net loss per share
The Company computes net income per share in accordance with SFAS No. 128,
"Earnings per Share". Under the provisions of SFAS No. 128, basic net income per
share is computed by dividing the net income available to common stockholders
for the period by the weighted average number of common shares outstanding
during the period. Diluted net income per share is computed by dividing the net
income for the period by the weighted average number of common shares
outstanding during the period and dilutive potential common shares outstanding.
Weighted average common shares outstanding during the period does not include
shares issued pursuant to the exercise of stock options prior to vesting. Due to
the losses incurred by the Company during the years ended December 31, 1999,
1998 and 1997, common stock equivalents resulting from the assumed exercise of
outstanding stock options and warrants have been excluded from the computation
of diluted net loss per share as their effect would be anti-dilutive.
Stock-based compensation
As permitted by SFAS No. 123, the Company has elected to follow Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related Interpretations ("APB 25"), in accounting for its employee stock
options. Under APB 25, when the exercise price of the Company's employee stock
options is equal to or exceeds the fair value of the underlying stock on the
date of grant, no compensation expense is recognized.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and related disclosures at
the date of the financial statements, and the amounts of revenues and expenses
reported during the period. Actual results could differ from those estimates.
Initial public offering
In April 1998, the Company completed an initial public offering (the "offering")
of 3,900,000 shares of common stock, providing the Company with net proceeds of
approximately $38.7 million. All outstanding shares of convertible preferred
stock outstanding at April 13, 1998 automatically converted into 9,277,275
common shares upon the closing of the offering.
Concurrently with the offering, the Company completed a private placement of
1,909,089 shares of its common stock to Becton, Dickinson and Company, Hoechst
AG (through a subsidiary) and Elan Corporation, plc, resulting in net proceeds
to the Company of $6.0 million, $10.0 million and $5.0 million, respectively.
- --------------------------------------------------------------------------------
F-9
<PAGE>
Nanogen, Inc.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999
2. Property and Equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C>
Scientific equipment........................................ $3,738 $3,130
Manufacturing equipment..................................... 42 --
Office furniture and equipment.............................. 2,156 2,030
Leasehold improvements...................................... 4,200 4,141
------- -------
10,136 9,301
Less accumulated depreciation and amortization.............. (3,982) (2,321)
------- -------
$ 6,154 $ 6,980
======= =======
</TABLE>
3. Accrued Liabilities
Accrued liabilities are comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C>
Accrued compensation and benefits........................... $2,034 $754
Accrued product development costs........................... 944 -
Other....................................................... 748 679
------ ------
$3,726 $1,433
====== ======
</TABLE>
4. Commitments
Licensing and Research Agreements
The Company is a party to licensing and research agreements with various
entities whereby the Company is obligated to pay certain license fees and
research funding. None of these agreements individually are considered material.
Under some of these agreements, the Company may be required to pay royalties on
future sales in the event that the Company incorporates the licensed technology
in one or more of its potential commercial products.
Leases
The Company leases its facilities and certain equipment under operating lease
agreements that expire at various dates through 2005. Rent expense was $577,000,
$532,000 and $461,000 in 1999, 1998, and 1997, respectively.
The Company leases certain equipment under capital lease obligations. Cost and
accumulated amortization of equipment under capital lease were $9,953,000 and
$3,872,000 at December 31, 1999 and $9,045,000 and $2,199,000 at December 31,
1998, respectively. Amortization of equipment under capital lease obligations is
included in depreciation expense.
- --------------------------------------------------------------------------------
F-10
<PAGE>
Nanogen, Inc.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999
Annual future minimum obligations for operating and capital leases as of
December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Capital
Operating Lease
Leases Obligations
- -------------------------------------------------------------------------------------
<S> <C> <C>
2000........................................................ $ 612 $2,555
2001........................................................ 626 1,994
2002........................................................ 651 660
2003........................................................ 677 188
2004........................................................ 705 130
Thereafter.................................................. 178 --
------ ------
Total minimum lease payments................................ $3,449 5,527
======
Less amount representing interest........................... 560
------
Present value of future minimum capital lease obligations... 4,967
Less amounts due in one year................................ 2,136
------
Long term portion of capital lease obligations.............. $2,831
======
</TABLE>
As of December 31, 1999, the Company has $4.4 million of available funding under
equipment lease lines.
5. Related Party Transactions
In November 1998, the Company entered into a Standstill Agreement and Right of
First Negotiation (the "Agreement") with Graviton, Inc. ("Graviton"), granting
the Company an exclusive period of time to negotiate a license to certain
technologies licensed to and/or developed by Graviton. In exchange for the
Agreement, the Company advanced to Graviton through a secured loan the sum of
$500,000. In May 1999, the Company advanced to Graviton through a secured loan
an additional $500,000, the proceeds of which were to be used by Graviton in
part to secure additional intellectual property rights which the Company could
license. In December 1999, the Company entered into a Collaboration and License
Agreement with Graviton. Pursuant to this agreement, the total loans of $1.0
million, plus accrued interest, were exchanged for license fees which are
reflected as "acquired technology rights" in the accompanying balance sheet.
Mr. Birndorf, Chairman of the Board, Chief Executive Officer and President and a
director of the Company, is also a director of and investor in Graviton.
Additionally, Dr. Tina Nova, the Company's President and Chief Operating Officer
during 1998 and 1999, is the spouse of the president of Graviton, Dr. Michael
Nova. Together, Messrs. Birndorf and Nova hold a controlling ownership interest
in Graviton. Given the interrelationship among the parties, the Company's Board
appointed a committee of disinterested Board members to evaluate this
opportunity. After full disclosure of the above-referenced interrelationships,
the Committee determined that it was in the best interests of the Company to
enter into the license agreement which was executed on December 15, 1999.
- --------------------------------------------------------------------------------
F-11
<PAGE>
NANOGEN, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999
6. Stockholders' Equity
Warrants
At December 31, 1999, there were outstanding warrants to purchase an aggregate
of 20,000 shares of common stock at an exercise price of $2.25 per share which
expire in April 2000. Pursuant to the research and development collaboration
agreement with Aventis Research and Technologies, an affiliate of Hoechst AG
("Aventis"), (see note 10), the Company agreed to issue to Aventis a warrant to
purchase 120,238 shares of common stock exercisable through March 2004 at an
exercise price of $8.75 per share.
Stock Option Plans
Under the Company's 1993 Stock Option Plan, as amended in April 1995, 654,671
shares of common stock were reserved for issuance upon exercise of stock options
granted by the Company. In April 1995, the Board of Directors adopted the 1995
Stock Option/Stock Issuance Plan under which 333,333 shares of common stock were
reserved for issuance. In April 1996, an additional 650,000 shares of common
stock were reserved for issuance under the 1995 Plan. The plans provide for the
grant of stock options to officers, directors, employees and consultants to the
Company.
In August 1997, the Board of Directors adopted the 1997 Stock Incentive Plan,
under which 1,641,341 shares of common stock were reserved for issuance upon
exercise of stock options granted by the Company. In November 1997 and June
1999, an additional 600,000 shares and 925,000 shares, respectively, were
reserved for issuance under the 1997 Plan.
The exercise price of incentive stock options to be granted under the stock
option plans shall not be less than 100% of the fair value of such shares on the
date of grant. The exercise price of nonqualified stock options to be granted
under the plans shall not be less than 85% of the fair value of such shares on
the date of grant. Options granted prior to April 13, 1998 (the date of the
initial public offering) are generally exercisable immediately; however, options
granted subsequent to the initial public offering are generally exercisable only
as they vest. All shares granted under the Stock Option Plans generally vest at
the rate of one fourth after one year and the remainder ratably over the
remaining three years. Options granted have a term of up to ten years.
- --------------------------------------------------------------------------------
F-12
<PAGE>
NANOGEN, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999
As of December 31, 1999, 925,213 shares are available for future grant under the
stock option plans. The following table summarizes stock option activity through
December 31, 1999:
<TABLE>
<CAPTION>
Weighted
average
exercise
Number of Price per price per
shares share share
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1996................... 233,875 $ .02 to $.15 $ .15
Granted.......................................... 1,586,223 $ .38 to $.90 $ .89
Exercised........................................ (1,381,766) $ .15 to $.90 $ .86
Cancelled........................................ (21,616) $ .15 to $.90 $ .53
-----------
Outstanding at December 31, 1997................... 416,716 $ .02 to $.90 $ .60
Granted.......................................... 1,344,874 $ 3.00 to $10.00 $ 4.48
Exercised........................................ (248,479) $ .15 to $3.00 $ 1.98
Cancelled........................................ (406,910) $ .15 to $10.00 $ 6.23
-----------
Outstanding at December 31, 1998................... 1,106,201 $ .02 to $5.00 $ 2.94
Granted.......................................... 849,326 $.001 to $21.875 $ 5.23
Exercised........................................ (314,870) $ .001 to $4.75 .49
Cancelled........................................ (381,389) $ .375 to $9.625 $ 3.75
-----------
Outstanding at December 31, 1999................... 1,259,268 $ .02 to $21.875 $ 4.86
===========
</TABLE>
The Company has the option to repurchase, at the original issue price, unvested
shares issued pursuant to early exercise of options in the event of termination
of employment or engagement. At December 31, 1999, 651,116 shares issued under
the stock option plans were subject to repurchase by the Company.
On September 25, 1998, the Compensation Committee of the Board of Directors
authorized a plan for certain option holders whereby each holder could have
exchanged all of his or her current vested and unvested options on a one-for-one
basis for new options priced at the market value as of September 25, 1998. An
aggregate of 365,463 options at an average price of $6.69 were exchanged for
options with an exercise price of $3.8125 per share. All of these replacement
options vest based on the original grant date. Generally, the replacement
options were not exercisable until September 26, 1999, or under certain
circumstances at an earlier date.
All replacement options are included in grants and cancellations in the above
summary of stock option activity.
The Company recognized an aggregate of $6,124,000 through December 31, 1999 as
deferred compensation for the excess of the fair value of the common stock
issuable on exercise of such options over the exercise price. The deferred
compensation expense is being recognized over the vesting period of the options.
Compensation expense related to these options was $1,773,000, $2,181,000 and
$611,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
F-13
<PAGE>
NANOGEN, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999
Following is a further breakdown of the options outstanding as of December 31,
1999:
<TABLE>
<CAPTION>
Weighted
Weighted average
average Weighted exercise
Range of remaining average price of
exercise Options life in exercise Options options
prices Outstanding years price Exercisable exercisable
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.02-$.90 179,764 5.71 $ .36 179,764 $ .36
$3.00-$3.94 482,652 8.50 $ 3.64 349,387 $ 3.57
$4.00-$4.75 194,048 9.03 $ 4.39 46,399 $ 4.38
$5.00-$6.97 87,029 8.41 $ 6.50 5,120 $ 5.73
$7.00-$7.25 149,550 9.64 $ 7.08 -- $ --
$8.00-$10.94 144,400 9.68 $ 9.28 4,000 $ 9.47
$21.88 21,825 10.00 $ 21.88 -- $ --
---------- ---------
$.02-$21.88 1,259,268 8.47 $ 4.86 584,670 $ 2.71
========== =========
</TABLE>
Adjusted pro forma information regarding net loss is required by SFAS 123 and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of SFAS 123. The fair value for these
options was estimated at the date of grant using the Black-Scholes valuation
model for option pricing with the following assumptions for 1999, 1998, and
1997: a risk-free interest rate of 6.0%, 5.75%, and 6.5%, respectively, a
dividend yield of zero; volatility factors of the expected market price of the
Company's common stock of 70%, 65%, and 65%, respectively, and a weighted
average expected life of the option of five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of adjusted pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period. The Company's adjusted
pro forma information is as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Adjusted pro forma net loss................................. $(26,443) $(21,379) $(11,383)
Adjusted pro forma net loss per share....................... $ (1.46) $ (1.63) $ (8.45)
</TABLE>
The weighted average fair value of options granted during 1999, 1998 and 1997
was $5.40, $2.68 and $.24 per share, respectively.
The pro forma effect on net loss for 1999, 1998 and 1997 is not necessarily
indicative of potential pro forma effects on results for future years.
- --------------------------------------------------------------------------------
F-14
<PAGE>
Nanogen, Inc.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999
Restricted Stock Awards
On July 27, 1999, the Board of Directors authorized the issuance of an aggregate
of 251,000 shares of the Company's common stock to certain officers and key
employees at a price per share of par value ($.001). All of these shares were
purchased by the respective officers and key employees and are subject to
repurchase if the officer or key employee leaves the Company prior to July 26,
2001. Repurchase rights as to certain of the shares lapse upon the attainment of
certain performance milestones or upon a change in control. Deferred
compensation aggregating $1,820,000 has been recorded for the excess of the fair
market value of the stock on the date of the award over the purchase price per
share and is being amortized over the restricted period.
These restricted shares have been included in the summary of stock option
activity under the caption STOCK OPTION PLANS above.
Employee Stock Purchase Plan
In November 1997, the Board of Directors approved the Employee Stock Purchase
Plan (the "Purchase Plan"). A total of 300,000 shares of common stock have been
authorized for issuance under the Purchase Plan. The Purchase Plan permits
eligible employees of the Company to purchase shares of common stock, at
semi-annual intervals, through periodic payroll deductions. Payroll deductions
may not exceed 15% of the participant's base salary subject to certain
limitations, and the purchase price will not be less than 85% of the lower of
the fair market value of the stock at either the beginning of the applicable
"offering period" or the last day of the accumulation period. Each offering
period is 24 months long, with new offering periods commencing every six months,
and an accumulation period is six months in duration. During the years ended
December 31, 1999 and 1998, 35,216 and 26,783 shares, respectively, were issued
under the Purchase Plan.
Shares Reserved for Future Issuance
The following shares of common stock are reserved for future issuance at
December 31, 1999:
<TABLE>
<S> <C>
Stock options............................................... 2,184,481
Employee stock purchase plan................................ 238,001
Warrants.................................................... 140,238
---------
2,562,720
</TABLE>
Shareholder Rights Plan
In November 1998, the Company's Board of Directors adopted a Stockholder Rights
plan which provides for a dividend of one Preferred Stock Purchase Right for
each share of common stock to stockholders of record on November 30, 1998. Each
Right will entitle stockholders to buy one one-thousandth of a share of Series A
Participating Preferred Stock of the Company at an exercise price of $50.00,
subject to antidilution adjustments. The Rights will become exercisable only if
a person or group becomes the beneficial owner of 15% or more of the common
stock, or commences a tender or exchange offer which would result in the offeror
beneficially owning 15% or more of common stock, which is not approved by the
Company's Board of Directors. The Board of Directors is entitled to redeem the
Rights at $0.01 per Right at any time prior to the public announcement of the
existence of a 15% holder.
- --------------------------------------------------------------------------------
F-15
<PAGE>
Nanogen, Inc.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999
7. 401(k) PLAN
The Company has a 401(k) defined contribution savings and retirement plan (the
"Plan"). The Plan is for the benefit of all qualifying employees and permits
employees voluntary contributions up to a maximum of 20% of base salary (as
defined), subject to annual limits. The Board of Directors may, at its sole
discretion, approve Company contributions. No such contributions have been made
as of December 31, 1999.
8. Notes Receivable From Officers and Employees
The Company has advanced funds aggregating $240,000 to certain officers in
connection with various employment agreements. These agreements provide for
forgiveness of the advances over four-year periods. If an individual terminates
the relationship with the Company, the unforgiven portion of the advances and
any accrued interest are due and payable upon termination. These advances are
secured by second trust deeds on the personal residences of the respective
officers. As of December 31, 1999, $110,000 of these advances has been forgiven,
$100,000 has been repaid to the Company in conjunction with the termination of
the respective employee, and $30,000 is included in other assets. In addition,
there are full-recourse notes receivable from certain officers totaling
approximately $1.4 million related to stock purchase agreements.
9. Income Taxes
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1999 and 1998 are shown below. A valuation allowance of
$29,928,000 has been recognized to offset the deferred tax assets as realization
of such assets is uncertain.
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 22,945 $ 14,846
Research and development credits.......................... 3,913 2,350
Capitalized research expenses............................. 2,931 1,981
Other..................................................... 522 308
-------- --------
Total deferred tax assets................................... 30,311 19,485
Valuation allowance for deferred tax assets................. (29,928) (19,250)
-------- --------
Net deferred tax assets..................................... 383 235
Deferred tax liabilities:
Depreciation.............................................. (383) (235)
-------- --------
Net deferred tax assets..................................... $ -- $ --
======== ========
</TABLE>
At December 31, 1999, the Company has federal and California net operating loss
carryforwards of approximately $64,319,000 and $7,534,000, respectively. The
difference between the federal and California tax loss carryforwards is
primarily attributable to the capitalization of research and development
expenses for California tax purposes and the fifty percent limitation on
California loss carryforwards. The federal tax loss carryforwards will begin
expiring in 2006 unless previously utilized. The California tax loss
carryforwards will continue to expire in 2000, unless previously utilized
(approximately $1,332,000 expired in 1999). The Company also has federal and
California research and development tax credit carryforwards of approximately
$2,861,000 and $1,619,000, respectively, which will begin expiring in 2007
unless previously utilized.
- --------------------------------------------------------------------------------
F-16
<PAGE>
Nanogen, Inc.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999
Under Sections 382 and 383 of the Internal Revenue Code, the annual use of the
Company's net operating loss and credit carryforwards may be limited because of
cumulative changes in ownership of more than 50% which occurred during 1995 and
1997. However, the Company does not believe such limitations will have a
material impact upon the ultimate utilization of these carryforwards.
10. Sponsored Research Agreements
Becton, Dickinson and Company
The Company entered into a Master Agreement with Becton, Dickinson and Company
("Becton Dickinson") in October 1997 to develop and commercialize products in
the field of IN VITRO nucleic acid-based diagnostic and monitoring technologies.
Pursuant to this Master Agreement, Becton Dickinson and Nanogen agreed to form
The Nanogen/Becton Dickinson Partnership (the "Partnership"). Pursuant to a
General Partnership Agreement, Becton Dickinson and Nanogen have contributed to
the Partnership their respective rights under a Collaborative Research and
Development Agreement established in May 1997, certain Intellectual Property
Licenses and, as of December 31, 1999 cash of approximately $8.6 million, of
which approximately $7.0 million was paid by Becton Dickinson and approximately
$1.6 million was paid by Nanogen. The amounts paid to the Partnership by Nanogen
during the years ended December 31, 1999 and 1998 have been recorded as
Nanogen's share of the joint venture's loss for those periods. The partners are
considering modifications to the joint venture to take advantage of potential
third party opportunities on technology developed to date. The partners are also
considering field changes which would allow the joint venture access to
additional technologies or content in areas more strategically aligned with
business opportunities. Further joint venture funding will be determined based
upon a final decision regarding such modifications and field changes. The
Company has received no research funding from Becton Dickinson since the third
quarter of 1999, and it is uncertain whether the Company will receive any
additional funding from Becton Dickinson.
Revenues are recognized under the agreements as expenses are incurred, and
totaled $1.6 million, $2.5 million and $1.2 million for the years ended December
31, 1999, 1998 and 1997, respectively.
Aventis Research and Technologies
In December 1997, the Company entered into an agreement with Aventis Research
and Technologies, an affiliate of Hoechst AG ("Aventis"), for an exclusive
research and development collaboration and the establishment of a joint venture
relating to the development of molecular recognition arrays. Aventis also
purchased common stock worth an aggregate of $10.0 million, at the offering
price, in the private placement in April 1998.
In December 1998, the Company entered into a Collaborative Research and
Development Agreement which, among other things, extended the guaranteed term of
the research program from two to three years. As a result of the signing of this
agreement, the Company agreed to issue to Aventis a warrant to purchase 120,238
shares of common stock exercisable through March 2004 at an exercise price of
$8.75 per share. The Company has also agreed to issue to Aventis, upon the
achievement of certain milestones, warrants to purchase up to approximately
360,000 additional shares of common stock at a 50 percent premium to the market
price on the date the milestone is achieved. These warrants will have five-year
maximum terms.
In September 1999, the Company announced the expansion of its drug discovery
collaboration with Aventis. Two new technology development programs were added
to the current program and will focus on the development of gene expression
tools utilizing electronic bioarrays and the development of high throughput
screening tools for kinase analyses. In total, the two new programs will provide
a maximum of
- --------------------------------------------------------------------------------
F-17
<PAGE>
Nanogen, Inc.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1999
$12.0 million in additional funding to the Company through December 31, 2001,
including an up-front initiation fee of $2.0 million which was received in the
fourth quarter of 1999 and accounted for as deferred revenue.
Revenue is recognized under these agreements as expenses are incurred, and
totaled $3.6 million and $2.1 million for the years ended December 31, 1999 and
1998, respectively. Funding received in advance of incurred expenses is recorded
as deferred revenue until the expenses are incurred, and totaled $3.4 million at
December 31, 1999.
Elan Corporation, Plc
In December 1997, the Company entered into an agreement with Elan Corporation,
plc ("Elan") for a non-exclusive research and development agreement for the
development of genomics and gene expression research tools. Pursuant to the
agreement, Elan purchased Company common stock worth an aggregate of $5.0
million, at the initial public offering price, in the private placement in April
1998. Nanogen and Elan have not yet agreed upon specific program objectives with
respect to the nonexclusive research and development program. The Company is
uncertain as to whether the Company will receive any additional funding from
Elan.
Revenue is recognized under the agreement as expenses are incurred, and totaled
$568,000 and $929,000 for the years ended December 31, 1999 and 1998,
respectively.
11. Contract and Grant Revenue
In September 1998, the Company was awarded a contract by the Space and Naval
Warfare Systems Center San Diego ("SSC San Diego") for the Defense Advance
Research Projects Agency in an amount that could total in excess of $7 million
over the next five years. The contract award which was made by SSC San Diego for
the Defense Advance Research Projects Agency includes over $2 million to be paid
during the first two years, and options to extend the program for up to an
additional three years that would pay the Company up to an additional $4.8
million. The goal of the program is to create an advanced miniaturized lab for
biological warfare defense applications. Revenue is recognized under the
agreement as expenses are incurred, and totaled $1.1 million and $109,000 for
the years ended December 31, 1999 and 1998, respectively.
- --------------------------------------------------------------------------------
F-18
<PAGE>
[LOGO]
<PAGE>
- --------------------------------------------------------------------------------
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimates
except the Securities and Exchange Commission registration fees and Nasdaq
filing fee.
<TABLE>
<CAPTION>
To be Paid
by the Registrant
- -------------------------------------------------------------------------------
<S> <C>
SEC Registration Fee........................................ $ 42,694
NASD fee.................................................... 16,672
Blue Sky fees and expenses.................................. 7,500
Accounting fees and expenses................................ 75,000
Legal fees and expenses..................................... 350,000
Printing and engraving...................................... 250,000
Registrar and transfer agent's fees......................... 10,000
NNM listing fee............................................. 17,500
Miscellaneous fees and expenses............................. 80,634
--------
Total................................................... $850,000
========
</TABLE>
Item 15. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law, or DGCL, permits
indemnification of officers, directors and other corporate agents under certain
circumstances and subject to certain limitations. Our Certificate of
Incorporation and Bylaws provide that we shall indemnify our directors,
officers, employees and agents to the full extent permitted by the DGCL,
including in circumstances in which indemnification is otherwise discretionary
under such law. In addition, with the approval of our Board of Directors and our
stockholders, we have entered into separate indemnification agreements with our
directors, officers and certain employees which require us, among other things,
to indemnify them against certain liabilities which may arise by reason of their
status or service (other than liabilities arising from willful misconduct of a
culpable nature) and to obtain directors' and officers' insurance, if available
on reasonable terms.
These indemnification provisions may be sufficiently broad to permit
indemnification of our officers, directors and other corporate agents for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act of 1933.
At present, there is no pending litigation or proceeding involving a director,
officer, employee or other agent of ours in which indemnification is being
sought nor are we aware of any threatened litigation that may result in a claim
for indemnification by any director, officer, employee or other agent of ours.
We have obtained liability insurance for the benefit of our directors and
officers.
- --------------------------------------------------------------------------------
II-1
<PAGE>
Part II
- --------------------------------------------------------------------------------
Item 16. Exhibits.
The following exhibits are filed with this Registration Statement:
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ------------------------------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement
4.1(1) Form of Common Stock Certificate
4.2(2) Rights Agreement dated as of November 17, 1998, between
Nanogen and BankBoston, N.A.
5.1** Opinion of Pillsbury Madison & Sutro LLP
23.1 Consent of Ernst & Young LLP, independent auditors
23.2** Consent of Pillsbury Madison & Sutro LLP (included in
Exhibit 5.1)
23.3 Consent of Lyon & Lyon LLP
24.1** Power of Attorney (included in the Signature Page contained
in Part II of the Registration Statement)
</TABLE>
- ---------
(1) Incorporated by reference to the exhibit of the same number included in our
registration statement on Form S-1 filed as of December 19, 1997 (File
No. 33-42791).
(2) Incorporated by reference to Exhibit 10.32 included in our registration
statement on Form S-1 filed as of December 19, 1997 (File No. 33-42791).
** Previously filed.
Item 17. Undertakings.
A. We hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, or the Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement; PROVIDED, HOWEVER, that paragraphs
(a)(1)(i) and (a)(1)(ii) do not apply if the information required
to be included in a post-effective amendment by those paragraphs
is contained in periodic reports filed by us pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the registration statement.
- --------------------------------------------------------------------------------
II-2
<PAGE>
Part II
- --------------------------------------------------------------------------------
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
B. We hereby undertake that, for purposes of determining any liability under
the Securities Act, each filing of our annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934 that
is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
C. We hereby undertake to deliver or cause to be delivered with the prospectus,
to each person to whom the prospectus is sent or given, the latest annual
report to security holders that is incorporated by reference in the
prospectus and furnished pursuant to and meeting the requirements of
Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and,
where interim financial information required to be presented by Article 3 of
Regulation S-X are not set forth in the prospectus, to deliver, or cause to
be delivered to each person to whom the prospectus is sent or given, the
latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
D. Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers, and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by a director, officer, or controlling person of
ours in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer, or controlling person in connection with
the securities being registered, we will, unless in the opinion of our
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
E. We hereby undertake that:
(1) For the purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
- --------------------------------------------------------------------------------
II-3
<PAGE>
- --------------------------------------------------------------------------------
Signatures
Pursuant to the requirements of the Securities Act of 1933, we certify that we
have reasonable grounds to believe that we meet all of the requirements for
filing on Form S-3 and have duly caused this amendment to registration statement
to be signed on our behalf by the undersigned, thereunto duly authorized in the
City of San Diego, State of California on February 25, 2000.
<TABLE>
<S> <C>
NANOGEN, INC.
By: /s/ KIERAN T. GALLAHUE
--------------------------------------------
Kieran T. Gallahue
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
* Chairman of the Board, Chief
- --------------------------------- Executive Officer and President February 25, 2000
Howard C. Birndorf (Principal Executive Officer)
/s/ KIERAN T. GALLAHUE Senior Vice President, Chief
- --------------------------------- Financial Officer (Principal February 25, 2000
Kieran T. Gallahue Financial and Accounting Officer)
*
- --------------------------------- Director February 25, 2000
Val Buonaiuto
*
- --------------------------------- Director February 25, 2000
Cam L. Garner
*
- --------------------------------- Director February 25, 2000
David G. Ludvigson
- --------------------------------- Director February , 2000
Thomas G. Lynch
*
- --------------------------------- Director February 25, 2000
Stelios Papadopoulos
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ KIERAN T. GALLAHUE
----------------------------
Kieran T. Gallahue
ATTORNEY-IN-FACT
</TABLE>
- --------------------------------------------------------------------------------
II-4
<PAGE>
- --------------------------------------------------------------------------------
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ------------------------------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement
4.1(1) Form of Common Stock Certificate
4.2(2) Rights Agreement dated as of November 17, 1998, between
Nanogen and BankBoston, N.A.
5.1** Opinion of Pillsbury Madison & Sutro LLP
23.1 Consent of Ernst & Young LLP, independent auditors
23.2** Consent of Pillsbury Madison & Sutro LLP (included in
Exhibit 5.1)
23.3 Consent of Lyon & Lyon LLP
24.1** Power of Attorney (included in the Signature Page contained
in Part II of the Registration Statement)
</TABLE>
- ---------
(1) Incorporated by reference to the exhibit of the same number included in our
registration statement on Form S-1 filed as of December 19, 1997 (File
No. 33-42791).
(2) Incorporated by reference to Exhibit 10.32 included in our registration
statement on Form S-1 filed as of December 19, 1997 (File No. 33-42791).
** Previously filed.
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3 No. 333-30778) and related Prospectus of
Nanogen, Inc. for the registration of 2,875,000 shares of its common stock and
to the use of and incorporation by reference therein of our report dated
January 28, 2000, with respect to the consolidated financial statements of
Nanogen, Inc. included therein and in its Annual Report (Form 10-K) for the year
ended December 31, 1999, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
San Diego, California
February 24, 2000
<PAGE>
Exhibit 23.3
Consent of Counsel
Lyon & Lyon LLP consents to the reference to it under the caption Experts in
the Registration Statement and related Prospectus of Nanogen, Inc. for the
registration of Nanogen Inc.'s common stock.
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<S> <C> <C>
Date: February 24, 2000 By: /s/ DAVID B. MURPHY
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David B. Murphy
LYON & LYON LLP
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