<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1997
REGISTRATION NO. 333-37317
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GENE LOGIC INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8731 06-1411336
(State or jurisdiction of (Primary Standard Industrial I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number
</TABLE>
10150 OLD COLUMBIA ROAD
COLUMBIA, MARYLAND 21046
(410) 309-3100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------
MICHAEL J. BRENNAN, M.D., PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GENE LOGIC INC.
10150 OLD COLUMBIA ROAD
COLUMBIA, MARYLAND 21046
(410) 309-3100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
FREDERICK T. MUTO, ESQ. LESLIE E. DAVIS, ESQ.
L. KAY CHANDLER, ESQ. LAWRENCE A. GOLD, ESQ.
NANCY E. DENYES, ESQ. TESTA, HURWITZ & THIBEAULT, LLP
COOLEY GODWARD LLP HIGH STREET TOWER
4365 EXECUTIVE DRIVE, SUITE 1100 125 HIGH STREET
SAN DIEGO, CA 92121 BOSTON, MA 02110
(619) 550-6000 (617) 248-7000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
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, 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 of 1933, 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. / /
------------------------
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 20, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[LOGO]
3,000,000 SHARES
COMMON STOCK
All of the 3,000,000 shares of Common Stock offered hereby are being sold by
GENE LOGIC INC. ("Gene Logic" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price of the Common Stock will be
between $10.00 and $12.00 per share. See "Underwriting" for information relating
to the method of determining the initial public offering price.
Japan Tobacco Inc. ("Japan Tobacco") is a party to a strategic alliance with
the Company. As part of the strategic alliance, Japan Tobacco has agreed to
purchase $3,000,000 of the Company's Common Stock in a private transaction
concurrent with this offering at a price per share equal to the price per share
at which Common Stock is sold in this offering. See "Business--Strategic
Alliances--Japan Tobacco Inc."
----------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY (1)
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total (2).................................. $ $ $
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $600,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 450,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ , respectively.
----------------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco,
California, on or about , 1997.
BANCAMERICA ROBERTSON STEPHENS
HAMBRECHT & QUIST
UBS SECURITIES
The date of this Prospectus is , 1997
<PAGE>
GENE LOGIC INC.
MOLECULAR TOPOGRAPHY-TM- OF GENE EXPRESSION
[GRAPHICAL DEPICTION OF MOLECULAR TOPOGRAPHY]
Above is a Molecular Topographic representing a quantitative snapshot of the
expression of essentially all of the genes in a human cell sample. The data were
generated using, Gene Logic's proprietary READS technology and are represented
using Gene Logic's Molecular Topography software tool. Gene Logic intends to use
these technologies to discover drug targets and drug leads and to develop
database products.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary........................................................................................ 4
Risk Factors................................................................................... 7
Use of Proceeds................................................................................ 20
Dividend Policy................................................................................ 20
Capitalization................................................................................. 21
Dilution....................................................................................... 22
Selected Financial Data........................................................................ 23
Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 24
Business....................................................................................... 28
Management..................................................................................... 48
Certain Transactions........................................................................... 56
Principal Stockholders......................................................................... 58
Description of Capital Stock................................................................... 60
Shares Eligible For Future Sale................................................................ 62
Underwriting................................................................................... 64
Legal Matters.................................................................................. 65
Experts........................................................................................ 65
Additional Information......................................................................... 66
Index to Financial Statements.................................................................. F-1
</TABLE>
------------------------
READS-TM-, MuST-TM-, Flow-thru Chip-TM-, Molecular Topography-TM-, GENE
EXPRESS-TM-, ACCELERATED DRUG DISCOVERY-TM-, Pharmacology EXPRESS-TM-,
Toxicology EXPRESS-TM-, rEST-TM-, TAG-TM- and quEST-TM- are trademarks of the
Company. Tradenames and trademarks of other companies appearing in this
Prospectus are the property of their respective holders.
The Company was incorporated in Delaware in 1994. The Company's executive
offices are located at 10150 Old Columbia Road, Columbia, Maryland 21046, and
its telephone number is (410) 309-3100.
3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
GENE LOGIC INC. ("Gene Logic" or the "Company") uses a proprietary system,
based on analysis of gene expression and gene regulation, designed to accelerate
the discovery of drug targets and drug leads. The Company's objective is to
provide its pharmaceutical company partners with novel drug targets, drug leads
and a suite of genomic database products to reduce the time, cost and risk
associated with drug discovery. The Company believes that by building its
portfolio of partnerships it will generate current revenues and establish a
long-term economic interest in the product pipelines of multiple partners
through milestone and royalty payments. Gene Logic has established major
strategic alliances with Procter & Gamble Pharmaceuticals, Inc. ("Procter &
Gamble") and Japan Tobacco Inc. ("Japan Tobacco").
The core of Gene Logic's ACCELERATED DRUG DISCOVERY system is its
proprietary READS (Restriction Enzyme Analysis of Differentially-expressed
Sequences) technology for analyzing patterns of gene expression. Gene Logic uses
READS in its drug target and drug lead discovery programs and to generate
genomic data for its database products.
DRUG TARGET DISCOVERY. Gene Logic identifies and analyzes
disease-associated genes and their functional pathways to determine which
genes might encode useful drug targets and prioritizes targets for drug
screening. Using READS, Gene Logic generates a gene expression profile, or
Molecular Topography, representing a quantitative snapshot of the levels of
expression of essentially all the genes expressed in a tissue sample. The
Company compares normal and diseased tissues through a series of Molecular
Topography snapshots, a "molecular movie," to identify the changes in gene
expression that occur as the disease develops and progresses and to
determine which genes are associated with the disease. In addition, using
its MuST (Multiplex Selection of Transcription Factors) technology, Gene
Logic characterizes the regions of the genes that regulate their expression.
This allows the Company to identify genes which share common regulatory
mechanisms with disease-associated genes and are therefore in the same
functional pathways. Gene Logic has received notices of allowance for patent
applications covering the key aspects of the READS and MuST technologies
from the United States Patent and Trademark Office.
DRUG LEAD DISCOVERY. Gene Logic is developing a proprietary, reusable
Flow-thru Chip for high-throughput analysis of changes in the expression of
known genes. The Company believes the Flow-thru Chip will enable the
development of high-throughput screening assays to evaluate the effects of
compounds on the expression of disease-associated genes identified by READS.
For a given disease, the Company will design a customized Flow-thru Chip
incorporating probes specific for these genes and use the chip to test the
effects of compounds on cells. Compounds that have the desired effect on
expression of the relevant genes may be evaluated as drug leads. Gene Logic
believes this technology represents a new approach to drug discovery and has
the potential to accelerate substantially the identification of drug leads.
GENOMIC DATABASES. Gene Logic is developing a suite of genomic database
products to accelerate the process of target identification and
prioritization, the discovery of lead compounds and the preclinical and
clinical development of drugs. The Company plans to market its genomic
database products, either in a single package or as separate modules, to
multiple pharmaceutical company customers. The Company's database products
are: (i) the GENE EXPRESS NORMAL database, a reference set of gene
expression profiles in a wide variety of normal tissues; (ii) the rare EST
(rEST) database containing sequences for rarely-expressed genes that are not
available through public sources; (iii) The Annotated Genome (TAG) database
which assigns human genes to functional pathways based on their patterns of
expression and regulation; (iv) the Pharmacology EXPRESS database to predict
efficacy of lead compounds at the preclinical drug development stage; and
(v) the Toxicology EXPRESS database for screening of lead compounds for
common classes of toxicological effects.
4
<PAGE>
The Company has designed and is continuing to develop a bioinformatics
system to manage and analyze the information it generates. The system integrates
Gene Logic's genomic data content with other proprietary or public genomic
databases, protein databases and the chemical, screening and assay databases
used by the Company's strategic partners.
Gene Logic's business strategy is to (i) establish strategic alliances with
pharmaceutical companies for drug target and drug lead discovery programs in
specific disease areas, (ii) establish independent discovery programs and
license resulting drug targets and drug leads to pharmaceutical companies for
further development and commercialization, (iii) market its suite of genomic
database products under non-exclusive license to multiple pharmaceutical company
customers, and (iv) retain significant rights to new product opportunities,
including diagnostic products, therapeutic proteins, gene therapy products and
products in the fields of differential diagnosis, molecular staging of disease
and pharmacogenomic profiling. The Company expects to receive a diversified
stream of technology license fees, research funding, milestone payments and
royalty or profit-sharing income from its strategic alliance partners and
licensees.
Gene Logic has established discovery programs in the fields of heart
failure, renal disease, certain diseases of the central nervous system,
osteoporosis and prostate cancer. The Company has collaborations with academic
institutions and commercial organizations for access to relevant normal and
diseased human tissues and cell types and animal disease models in these areas.
To date, Gene Logic has partnered two of its discovery programs with
pharmaceutical companies. In May 1997, the Company entered into a 4 1/2-year
strategic alliance with Procter & Gamble for drug target discovery in heart
failure. In September 1997, the Company and Japan Tobacco entered into a
five-year strategic alliance for drug target and drug lead discovery in renal
disease. Through both alliances, Gene Logic will receive committed technology
access fees and research funding. In each case, the Company's partner has the
right to expand the alliance to include discovery programs in two additional
disease indications upon terms, including committed payments, identical to those
covering the initial program. Gene Logic will also be entitled to receive
additional payments for the achievement of specified target discovery, product
development and associated regulatory milestones and royalties on worldwide net
sales of all products that may result from each alliance. As part of its
alliance, Japan Tobacco has agreed to purchase $3.0 million of Common Stock in
the Company in a private placement concurrent with this offering at a price per
share equal to the price per share at which Common Stock is sold in this
offering. The Company also granted Japan Tobacco a non-exclusive license to the
GENE EXPRESS NORMAL database, and Gene Logic intends to use its Flow-thru Chip
technology for drug screening. Japan Tobacco is obligated to pay Gene Logic chip
design fees and screening fees for use of the Flow-thru Chip and an accelerated
schedule of milestone and royalty payments on any resulting products. The
Company has retained certain rights to diagnostic products and certain classes
of therapeutics under these alliances.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company............ 3,000,000 shares
Common Stock Outstanding after the Offering.... 13,382,377 shares (1)
Use of Proceeds................................ For research and development, capital
expenditures, working capital and general
corporate purposes, including possible
acquisitions of complementary
technologies, products or businesses. See
"Use of Proceeds."
Proposed Nasdaq National Market Symbol......... GLGC
</TABLE>
5
<PAGE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ----------------------
1995 1996 1996 1997
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues......................................................... $ -- $ -- $ -- $ 774
Operating expenses:
Research and development...................................... 486 1,741 982 3,338
General and administrative.................................... 258 1,345 791 2,443
--------- --------- ----------- ---------
Total operating expenses........................................ 744 3,086 1,773 5,781
Interest income, net............................................ -- 221 111 355
Income tax expense.............................................. -- -- -- 100
--------- --------- ----------- ---------
Net loss........................................................ $ (744) $ (2,865) $ (1,662) $ (4,752)
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Pro forma net loss per share (2)................................ $ (0.31) $ (0.46)
--------- ---------
--------- ---------
Shares used in computing pro forma
net loss per share (2)........................................ 9,198 10,269
</TABLE>
- ------------------------
(1) Based on shares outstanding as of September 30, 1997. Includes (i) the sale
of 272,727 shares of Common Stock to Japan Tobacco at a price equal to the
assumed initial public offering price of $11.00 per share and (ii) 9,281,185
shares of Preferred Stock which will convert to Common Stock concurrent with
the initial public offering. Excludes (i) 2,424,381 shares of Common Stock
issuable upon exercise of outstanding stock options as of September 30, 1997
at a weighted average exercise price of $1.05 per share, and (ii) 162,576
shares of Common Stock issuable upon exercise of outstanding warrants at a
weighted average exercise price of $3.10 per share. Also excludes 56,000
shares of Common Stock issuable upon exercise of stock options granted after
September 30, 1997 with an exercise price of $3.50 per share. See
"Business--Strategic Alliances," "Management--Equity Incentive Plans" and
"Description of Capital Stock--Warrants."
(2) See Note 1 of Notes to Financial Statements for a description of the
computation of pro forma net loss per share.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
ACTUAL AS ADJUSTED (1)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities............................................. $ 22,143 $ 55,233
Working capital........................................................... 18,776 51,866
Total assets.............................................................. 27,621 60,711
Total mandatorily redeemable convertible preferred stock.................. 30,508 --
Total stockholders' equity................................................ (9,614) 53,984
</TABLE>
- ----------------
(1) As adjusted to give effect to the conversion of all outstanding shares of
Preferred Stock into 9,281,185 shares of Common Stock upon the closing of
this offering and the sale by the Company of 3,000,000 shares of Common
Stock offered hereby at an assumed initial public offering of $11.00 per
share and 272,727 shares of Common Stock to Japan Tobacco at a price equal
to the assumed initial public offering price per share and the application
of the estimated net proceeds therefrom. See "Use of Proceeds" and
"Business--Strategic Alliances."
----------------
EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) HAS BEEN
ADJUSTED TO GIVE EFFECT TO THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED
STOCK INTO COMMON STOCK UPON THE COMPLETION OF THIS OFFERING AND (II) ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "CAPITALIZATION" AND
"UNDERWRITING."
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the matters set forth in the following risk factors and elsewhere in
this Prospectus.
TECHNOLOGICAL UNCERTAINTY AND PRODUCT DEVELOPMENT RISK
The Company has developed and intends to continue to develop its ACCELERATED
DRUG DISCOVERY system, including its proprietary READS and MuST technologies,
bioinformatics system and Flow-thru Chip, for the identification of genes, drug
targets and drug leads useful for the discovery and development of therapeutic
and diagnostic products. These technologies are new and unproven approaches and
are based on the assumption that information about gene expression and gene
sequences may enable scientists better to understand complex disease processes.
Generally, there is limited understanding of the roles of genes in these
diseases, and relatively few therapeutic products based on gene discoveries have
been developed and commercialized. There can be no assurance that the Company's
technologies will enable it or its strategic partners to identify genes, drug
targets and drug leads useful for the discovery and development of therapeutic
and diagnostic products. Even if the Company is successful in identifying genes
and drug targets associated with specific diseases, there can be no assurance
that the Company or its strategic partners will be able to discover drug leads
or develop products based on such discoveries. To date, no drug targets or drug
leads have been identified based on the Company's technologies, and the Company
has not commercialized any therapeutic or diagnostic products either alone or in
conjunction with its strategic partners. Failure to identify genes, drug targets
and drug leads useful for the discovery and development of therapeutic and
diagnostic products will have a material adverse effect on the Company's
business, financial condition and results of operations.
The development of therapeutic and diagnostic products based on the
Company's discoveries will also be subject to other risks of failure inherent in
pharmaceutical development. These risks include, among others, the possibilities
that any such products will be found to be ineffective or toxic, or otherwise
fail to receive necessary regulatory approvals; that any of the products, if
safe and effective, will prove difficult or impossible to manufacture on a large
scale or will be uneconomical to market; that the proprietary rights of third
parties will preclude the Company or its strategic partners from marketing any
products developed; and that third parties will market equivalent or superior
products. As a result, there can be no assurance that the activities of the
Company or its strategic partners will result in any commercially viable
products.
The Company has created a prototype of the Flow-thru Chip and plans to
commence in-house testing during 1998 but has not yet produced the Flow-thru
Chip on a commercial scale. The Company is in the process of developing its
suite of genomic database products, but, to date, only the GENE EXPRESS NORMAL
database is commercially available. Other than the option to require the Company
to develop Flow-thru Chip assays and the non-exclusive license to the GENE
EXPRESS NORMAL database granted to Japan Tobacco, the Company has not sold or
licensed rights to its Flow-thru Chip or any of its genomic database products.
There can be no assurance that the development or commercial scale-up of the
Flow-thru Chip or the genomic database products will be successful or that the
Company will be successful in marketing such products.
The success of the Company's genomic database products will depend on the
Company's ability to generate genomic data content and analyze such data using
software tools. Gene Logic's database products are complex and sophisticated and
could contain design defects or software errors that could be difficult to
detect and correct. There can be no assurance that, despite testing by the
Company and its strategic partners and customers, errors, bugs and viruses will
not be found in current and future products, if any.
7
<PAGE>
Failure to maintain and further develop the necessary bioinformatics platform to
support the drug discovery efforts of the Company and its partners could result
in the loss of or delay in revenues and market acceptance, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Because the Company's genomic database products contain
genomic information generated by the Company's technologies, the development and
commercialization of the Company's genomic database products will be materially
adversely affected in the event that its technologies fail to generate such
information. See "Business--Gene Logic's ACCELERATED DRUG DISCOVERY System" and
"--Gene Logic Programs and Products."
RELIANCE ON STRATEGIC PARTNERS
The Company's strategy for development and commercialization of therapeutic
and diagnostic products based on its discoveries depends, in large part, upon
the formation of multiple strategic alliances and licensing arrangements to
pursue drug targets and drug leads in different disease areas. The Company has
established strategic alliances with Procter & Gamble and Japan Tobacco in
certain disease fields. These strategic alliances have only been formed in
recent months. No drug targets have been identified pursuant to such alliances,
and there can be no assurance that the alliances will be successful. There can
also be no assurance that the Company will establish additional strategic
alliances or licensing arrangements that it deems necessary to develop and
commercialize products based upon its discovery programs, that any such
agreements will be made under terms acceptable to the Company or that any future
strategic alliances or licensing arrangements will ultimately be successful. The
Company has received a substantial portion of its revenues since inception from
alliances with its strategic partners and expects to continue to do so in the
near term. Failure of the Company to enter into additional strategic alliances
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's strategy includes entering into multiple, concurrent strategic
alliances. There can be no assurance that the Company will successfully manage
simultaneous collaborative programs. Failure by the Company to manage existing
and future strategic alliances, maintain confidentiality among strategic
partners or prevent the occurrence of conflicts among strategic partners could
lead to disputes that result in, among other things, a significant strain on
management resources, legal claims involving significant time, expense and loss
of reputation, loss of capital or a loss of revenues, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company intends to rely on strategic partners for preclinical studies,
clinical development, regulatory approval, manufacturing and marketing of
therapeutic and diagnostic products, if any, resulting from its discovery
programs. Agreements with strategic partners typically will allow such partners
significant discretion in electing whether to pursue any of these activities.
The Company cannot control the amount and timing of resources its strategic
partners may devote to the Company's programs or potential products, and there
can be no assurance that such partners will perform their obligations as
expected. A strategic partner's performance under its alliance agreement with
the Company could be materially adversely affected if such partner were involved
in certain third party transactions such as a business combination or in the
event that the partner had a significant strategic shift in its business focus.
If any strategic partner were to breach its agreement with the Company, or
otherwise fail to conduct its collaborative activities in a timely manner, such
conduct could have a material adverse effect on the Company's business,
financial condition and results of operations. Each of the Company's current
strategic alliances provides the strategic partner with certain rights to
terminate the alliance agreement without cause by giving Gene Logic six months
notice at any time after 12 months from the date of commencement of the research
program under such agreement. The early termination of any strategic alliance
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company intends to continue to rely on
its strategic partners for significant funding in support of its research
operations. The Company would be required to devote additional internal
resources to such
8
<PAGE>
programs, or to scale back or terminate certain programs, if such funding were
not available or were reduced in amount.
Under its current strategic alliances, the Company has agreed not to conduct
certain research, independently or with other commercial third parties, that is
in the same field as the research conducted under the alliance agreement.
Consequently, such arrangements could have the effect of limiting the areas of
research the Company may pursue, either alone or with others. Should a strategic
partner fail to develop or commercialize a product to which it has rights, the
Company's business may be materially adversely affected. There can be no
assurance that a strategic partner will not develop, either alone or with
others, alternative technologies or products which are competitive with any that
might result from the Company's research program with the strategic partner.
Possible disagreements between the Company and its partners could lead to delays
in collaborative research, development or commercialization of certain products
or could require or result in litigation or arbitration, which would be time
consuming and expensive, and could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Gene Logic's Strategy" and "--Strategic Alliances."
EARLY STAGE OF DEVELOPMENT; LIMITED OPERATING HISTORY; PROFITABILITY UNCERTAIN
The Company is at an early stage of development. There is limited historical
information available upon which an investor can base an evaluation of an
investment in the Company. The Company was founded in September 1994, but did
not scale up operations until May 1996 following its first major financing.
Substantially all of the Company's resources have been, and for the foreseeable
future will continue to be, dedicated to the development of the Company's
ACCELERATED DRUG DISCOVERY system and its application to the identification of
genes, drug targets and drug leads with therapeutic and diagnostic potential.
All of the Company's programs and strategic alliances are at an early stage. The
development of the Company's technologies and their application to the discovery
of genes, drug targets and drug leads will require significant additional
research and development and investment, including testing to further validate
performance and demonstrate cost effectiveness. There can be no assurance that
the Company's technologies will continue to be successfully developed, or that
any therapeutic or diagnostic products discovered or developed through their
utilization will prove to be commercially useful, meet applicable regulatory
standards in a timely manner or at all, compete with other technologies and
products, avoid infringing the proprietary rights of others, be manufactured in
sufficient quantities or at reasonable costs or be marketed successfully. The
Company expects that it will be a number of years, if ever, before the Company
will recognize revenue from therapeutic or diagnostic product sales or
royalties.
The Company has incurred operating losses in each year since its inception,
including net losses of approximately $2.9 million and $4.8 million during the
year ended December 31, 1996 and the nine months ended September 30, 1997,
respectively, and as of September 30, 1997, had an accumulated deficit of $9.9
million. The Company expects to incur additional losses for at least the next
several years and that such losses will increase as the Company expands its
research and development activities. The Company's losses to date have resulted
principally from costs incurred in research and development and from general and
administrative costs associated with the Company's operations. To date,
substantially all of the Company's revenues have been derived from payments from
strategic alliances and licensing arrangements, and the Company expects that
substantially all of its revenues for the foreseeable future will result from
payments from strategic alliances and licensing arrangements and interest
income. There can be no assurance that the Company will receive additional
revenues under existing strategic alliances or that the Company will be
successful in entering into any new strategic alliance that results in revenues.
The Company's ability to generate revenues and achieve profitability is
dependent in large part on the Company's ability to enter into additional
strategic alliances, and on the ability of the Company and its strategic
partners to discover genes and drug targets associated with particular diseases
and, thereafter, utilize such discoveries to identify drug leads, develop
therapeutic and diagnostic products, conduct preclinical studies and clinical
trials, obtain required regulatory approvals and successfully manufacture,
introduce and market such
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products. In addition, to the extent that the Company relies upon others for
these research, development and commercialization activities, the Company's
ability to achieve profitability will be dependent in part upon the success of
such outside parties. The time required to reach profitability is highly
uncertain and there can be no assurance that the Company will be able to achieve
profitability on a sustained basis, if at all. Failure to achieve significant
revenues or profitability would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE UPON ACCESS TO CERTAIN MATERIALS AND INFORMATION AND LICENSED
TECHNOLOGIES
The Company obtains relevant normal and diseased human tissue samples,
related clinical and other biological information and animal disease models
through collaborations with academic institutions and commercial organizations.
Use of the Company's technologies to discover disease-related genes and drug
targets requires access to such materials and information and there is
substantial competition for such materials and information. There can be no
assurance that the Company will continue to be able to obtain access to such
materials and information upon terms acceptable to the Company, if at all, and
any material lack of availability of such materials and information would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Gene Logic Programs and Products."
Certain of the components of the ACCELERATED DRUG DISCOVERY system, such as
the technologies underlying READS, MuST and the Flow-thru Chip, have been
acquired or licensed from third parties. Changes in certain third party license
agreements and relationships, or termination thereof, could materially adversely
affect the Company's research and development activities. There can be no
assurance that the Company will be able to acquire from third parties or develop
new technologies, alone or with others. Failure to license necessary
technologies would have a material adverse effect on the Company's business,
financial condition and results of operations. There also can be no assurance
that there will not be disruptions in the Company's relationships with third
parties from whom the Company derives technology, or that any disruptions that
do arise will be resolved in a timely and cost-effective manner, if at all. Any
such disruptions could have a material adverse effect on the Company's business,
financial condition and results of operations.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results may fluctuate significantly from quarter to
quarter as a result of a variety of factors, including changes in the demand for
the Company's technologies and products, variations in payments under strategic
alliances, including milestone payments, royalties, license fees and other
contract revenues, the timing of new product introductions, if any, by the
Company, changes in the research and development budgets of the Company's
strategic partners and any potential partners, the introduction of new products
by the Company's competitors and other competitive factors, regulatory actions,
adoption of new technologies, manufacturing results, and the cost, quality and
availability of cell and tissue samples, reagents and related components. If
revenue in a particular period does not meet expectations, the Company may not
be able to adjust significantly its level of expenditures in such period, which
would have an adverse effect on the Company's operating results. The Company
believes that quarterly comparisons of its financial results will not
necessarily be a meaningful indication of future performance. Due to the
foregoing and other unforeseen factors, in some future quarter or quarters the
Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
could be materially and adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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PATENTS AND PROPRIETARY RIGHTS; THIRD PARTY RIGHTS
Gene Logic seeks United States and international patent protection for major
components of its technology platform, including elements of its READS, MuST,
Flow-thru Chip and bioinformatics technologies; it relies upon trade secret
protection for certain of its confidential and proprietary information; and it
uses license agreements both to access external technologies and assets and to
transfer certain intellectual property rights to others. The Company's
commercial success will be dependent in part upon its ability to obtain
commercially valuable patent claims and to protect its intellectual property
portfolio.
As of October 20, 1997, the Company had exclusive rights to nine United
States patent applications, as well as corresponding international and foreign
patent applications, relating to its technologies. The Company has received
notices of allowance for two United States patent applications covering the key
aspects of the READS technology, and notice of allowance for one United States
patent application covering the key aspects of MuST technology. However, no
patents have issued to date.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including Gene Logic, are generally uncertain and involve complex
legal and factual questions. There can be no assurance that any of the pending
patent applications to which the Company has exclusive rights will result in
issued patents, that the claims of any patents which are issued will provide
meaningful protection, that the Company will develop additional proprietary
technologies that are patentable, that any patents licensed or issued to the
Company or its strategic partners will provide a basis for commercially viable
products or will provide the Company with any competitive advantages or will not
be challenged by third parties, or that the patents of others will not have an
adverse effect on the ability of the Company to do business. In addition, patent
law relating to the scope of claims in the technology field in which the Company
operates is still evolving. The degree of future protection for the Company's
proprietary rights, therefore, is uncertain. Furthermore, there can be no
assurance that others will not independently develop similar or alternative
technologies, duplicate any of the Company's technologies, or, if patents are
licensed or issued to the Company, design around the patented technologies
licensed to or developed by the Company. In addition, the Company could incur
substantial costs in litigation if it is required to defend itself in patent
suits brought by third parties or if it initiates such suits.
The Company is aware of a number of United States patents and patent
applications and corresponding foreign patents and patent applications owned by
third parties relating to the analysis of gene expression or the manufacture and
use of DNA chips. There can be no assurance that these or other technologies
will not provide third parties with competitive advantages over the Company and
will not have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, certain third party patent
applications contain broad claims, and it is not possible to determine whether
or not such claims will be narrowed during prosecution and/or will be allowed
and issued as patents, even if such claims appear to cover the prior art or have
other defects. There can be no assurance that an owner or licensee of a patent
in the field will not threaten or file an infringement action or that the
Company would prevail in any such action. There can be no assurance that the
cost of defending an infringement action would not be substantial and would not
have a material adverse effect on the Company's business, financial condition
and results of operations. Furthermore, there can be no assurance that any
required licenses would be made available on commercially viable terms, if at
all. Failure to obtain any required license could prevent the Company from
utilizing or commercializing one or more of its technologies and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In general, the Company intends to continue to apply for patent protection
for methods relating to gene expression and to apply for patent protection for
the individual disease genes and drug targets it discovers. Such patents may
include claims relating to novel genes and gene fragments and to novel uses for
known genes or gene fragments identified through its discovery programs. There
can be no assurance that the Company will be able to obtain meaningful patent
protection for its discoveries; even if patents are
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issued, the scope of the coverage or protection afforded thereby is uncertain.
Failure to secure such meaningful patent protection could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Several groups are attempting to identify and patent gene fragments and
full-length genes, the functions of which have not been characterized, as well
as fully characterized genes. There is substantial uncertainty regarding the
possible patent protection for gene fragments or genes without known function or
correlation with specific diseases. To the extent any patents issue to other
parties on such partial or full-length genes, the risk increases that the
potential products and processes of the Company or its strategic partners may
give rise to claims of patent infringement. The public availability of partial
or full sequence information or the existence of patent applications related
thereto, even if not accompanied by relevant function or disease association,
prior to the time the Company applies for patent protection on a corresponding
gene could adversely affect the Company's ability to obtain patent protection
with respect to such gene or related expression patterns. Furthermore, others
may have filed, and in the future are likely to file, patent applications
covering genes or gene products that are similar or identical to any for which
the Company may seek patent protection. No assurance can be given that any such
patent application will not have priority over patent applications filed by the
Company. Any legal action against the Company or its strategic partners claiming
damages and seeking to enjoin commercial activities relating to the affected
products and processes could, in addition to subjecting the Company to potential
liability for damages, require the Company or its strategic partners to obtain a
license in order to continue to manufacture or market the affected products and
processes. There can be no assurance that the Company or its strategic partners
would prevail in any such action or that any license required under any such
patent would be made available on commercially acceptable terms, if at all. The
Company believes that there is likely to be significant litigation in the
industry regarding patent and other intellectual property rights. If the Company
becomes involved in such litigation, it could consume a substantial portion of
the Company's managerial and financial resources and have a material adverse
effect on the Company's business, financial condition and results of operations.
Enactment of legislation implementing the General Agreement on Tariffs and
Trade has resulted in certain changes to United States patent laws that became
effective on June 8, 1995. Most notably, the term of patent protection for
patent applications filed on or after June 8, 1995 is no longer a period of 17
years from the date of grant. The new term of United States patents will
commence on the date of issuance and terminate 20 years from the earliest
effective filing date of the application. Because the time from filing to
issuance of biotechnology patent applications is often more than three years, a
20-year term from the effective date of filing may result in a substantially
shortened period of patent protection which may adversely affect the Company's
patent position. If this change results in a shorter period of patent coverage,
the Company's business could be adversely affected to the extent that the
duration and level of the royalties it is entitled to receive from its strategic
partners are based on the existence of a valid patent covering the product
subject to the royalty obligation.
With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, the Company has chosen to
rely on trade secret protection and confidentiality agreements to protect its
interests. The Company believes that several elements of its ACCELERATED DRUG
DISCOVERY system involve proprietary know-how, technology or data which are not
covered by patents or patent applications. In addition, the Company has
developed a proprietary index of gene and gene fragment sequences which it
updates on an ongoing basis. Some of these data will be the subject of patent
applications whereas other data will be maintained as proprietary trade secret
information. The Company has taken security measures to protect its proprietary
know-how and technologies and confidential data and continues to explore further
methods of protection. While Gene Logic requires all employees, consultants and
collaborators to enter into confidentiality agreements, there can be no
assurance that proprietary information will not be disclosed, that others will
not independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade
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secrets, or that the Company can meaningfully protect its trade secrets. In the
case of a strategic partnership or other collaborative arrangement which
requires the sharing of data, the Company's policy is to make available to its
partner only such data as are relevant to the partnership or arrangement, under
controlled circumstances, and only during the contractual term of the strategic
partnership or collaborative arrangement, and subject to a duty of
confidentiality on the part of its partner or collaborator. There can be no
assurance, however, that such measures will adequately protect the Company's
data. Any material leak of confidential data into the public domain or to third
parties may have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is a party to various license agreements which give it rights to
use certain technologies and biological materials in its research and
development processes. There can be no assurance that the Company will be able
to maintain such rights on commercially reasonable terms, if at all. Failure by
the Company to maintain such rights could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Intellectual Property."
INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE
Competition among entities attempting to identify genes associated with
specific diseases and to develop products based on such discoveries is intense.
Gene Logic faces, and will continue to face, competition from pharmaceutical,
biotechnology and diagnostic companies, academic and research institutions and
government agencies, both in the United States and abroad. Several entities are
attempting to identify and patent randomly sequenced genes and gene fragments,
while others are pursuing a gene identification, characterization and product
development strategy based on positional cloning. The Company is aware that
certain entities are utilizing a variety of different gene expression analysis
methodologies, including the use of chip-based systems, to attempt to identify
disease-related genes. In addition, numerous pharmaceutical companies are
developing genomic research programs, either alone or in partnership with the
Company's competitors. Competition among such entities is intense and is
expected to increase. In order to compete against existing and future
technologies, the Company will need to demonstrate to potential customers that
its technologies and capabilities are superior to competing technologies.
Many of the Company's competitors have substantially greater capital
resources, research and development staffs, facilities, manufacturing and
marketing experience, distribution channels and human resources than the
Company. These competitors may discover, characterize or develop important
genes, drug targets or drug leads, drug discovery technologies or drugs in
advance of Gene Logic or which are more effective than those developed by Gene
Logic or its strategic partners, or may obtain regulatory approvals of their
drugs more rapidly than the Company and its strategic partners, any of which
could have a material adverse effect on any similar Gene Logic program.
Moreover, there can be no assurance that the Company's competitors will not
obtain patent protection or other intellectual property rights that would limit
the Company's or its strategic partners' ability to use the Company's drug
discovery technologies or commercialize therapeutic or diagnostic products,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company also faces competition from
these and other entities in gaining access to relevant samples used in its
discovery programs.
The Company will rely on its strategic partners for support of certain of
its discovery programs and intends to rely on its strategic partners for
preclinical and clinical development of related potential products and the
manufacturing and marketing of such products. Each of the Company's strategic
partners is conducting multiple product development efforts within each area
which is the subject of its strategic alliance with Gene Logic. Generally, the
Company's strategic alliance agreements do not preclude the strategic partner
from pursuing development efforts utilizing approaches distinct from that which
is the subject of the alliance. Any product candidate of the Company, therefore,
may be subject to competition with a potential product under development by a
strategic partner. See "--Reliance on Strategic Partners."
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Future competition will come from existing competitors as well as other
companies seeking to develop new technologies for drug discovery based on gene
sequencing, gene expression analysis, bioinformatics and related technologies.
In addition, certain pharmaceutical and biotechnology companies have significant
needs for genomic information and may choose to develop or acquire competing
technologies to meet such needs. Genomic technologies have undergone and are
expected to continue to undergo rapid and significant change. The Company's
future success will depend in large part on its maintaining a competitive
position in the genomics field. Rapid technological development by the Company
or others may result in products or technologies becoming obsolete before the
Company recovers the expenses it incurs in connection with their development.
Products offered by the Company could be made obsolete by less expensive or more
effective drug target and drug lead technologies, including technologies which
may be unrelated to genomics. There can be no assurance that the Company will be
able to make the enhancements to its technology necessary to compete
successfully with newly emerging technologies. See "Business--Competition."
FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ACCESS TO ADDITIONAL FUNDING
The Company has invested significant capital in its infrastructure and in
its scientific and business development activities and expects capital and
operating expenditures to increase over the next several years as it expands its
operations. The Company believes that the net proceeds from this offering and
the sale of shares to Japan Tobacco, existing cash and marketable securities and
anticipated cash flow from strategic alliances will be sufficient to support the
Company's operations for at least the next 24 months. However, this expectation
is based on the Company's current operating plan, which could change as a result
of many factors, and the Company could require additional funding sooner than
expected. In addition, the Company may choose to raise additional capital due to
market conditions or strategic considerations even if it has sufficient funds
for its operating plan. The Company's actual future capital requirements and the
adequacy of its available funds will depend on many factors, including progress
of its discovery programs, the number and breadth of these programs, the ability
of the Company to establish and maintain strategic alliance and licensing
arrangements and the progress of the development and commercialization efforts
of the Company's strategic partners. These factors also include the level of the
Company's activities relating to its independent discovery programs and to the
development and commercialization rights it retains in its strategic alliance
arrangements, competing technological and market developments, the costs
associated with obtaining access to tissue samples and related information and
the costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims and other intellectual property rights.
The Company expects that it will require significant additional funding in
the future, which it may seek through public or private equity offerings, debt
financings or additional strategic alliance and licensing arrangements. No
assurance can be given that additional financing or strategic alliance and
licensing arrangements will be available when needed, or that, if available,
such financing will be obtained on terms favorable to the Company or its
stockholders. To the extent the Company raises additional capital by issuing
equity or convertible debt securities, ownership dilution to stockholders will
result. If adequate funds are not available when needed, the Company may be
required to curtail operations significantly or to obtain funds by entering into
strategic alliances and licensing arrangements, in which case the Company may be
required to relinquish rights to certain of its technologies, discoveries or
potential products, or to grant licenses on terms that are not favorable to the
Company, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. In the event that
adequate funds are not available, the Company's business would be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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ATTRACTION AND RETENTION OF KEY EMPLOYEES
The Company is highly dependent on the principal members of its management
and scientific staff. The loss of the services of any of these persons could
significantly impede the accomplishment of the Company's scientific and business
objectives. The Company's success is also dependent upon its ability to attract
and retain additional qualified scientific, technical and managerial personnel.
There is substantial competition among biotechnology, pharmaceutical and health
care companies, universities, government entities and non-profit organizations
for such personnel, and there can be no assurance that the Company will retain
its key scientific, technical and managerial employees or that it will be able
to attract, assimilate and retain such other highly qualified scientific,
technical and managerial personnel as may be required in the future. The
inability of the Company to retain its current scientific, technical and
managerial personnel and to attract and retain additional key employees could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Competition," "--Scientific Advisers"
and "--Employees."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL; HAZARDOUS MATERIALS
The Company does not plan to conduct clinical trials in humans or
commercialize therapeutic products discovered as a result of its genes, drug
target and drug lead discovery programs but intends to rely on its strategic
partners to conduct such activities. Prior to marketing, any new drug developed
by the Company's strategic partners must undergo an extensive regulatory
approval process in the United States and other countries. This regulatory
process, which includes preclinical studies and clinical trials, and may include
post-marketing surveillance of each compound to establish its safety and
efficacy, can take many years and require the expenditure of substantial
resources. Data obtained from preclinical studies and clinical trials are
subject to varying interpretations that could delay, limit or prevent regulatory
approval. Delays or rejections may also be encountered based upon changes in
United States Food and Drug Administration ("FDA") policies for drug approval
during the period of product development and FDA regulatory review of each
submitted new drug application ("NDA") in the case of new pharmaceutical agents,
or product license application ("PLA") or biologics license application ("BLA")
in the case of biological therapeutics. Similar delays may also be encountered
in the regulatory approval of any diagnostic product, where such approval is
required, and in obtaining regulatory approval in foreign countries. Delays in
obtaining regulatory approvals could adversely affect the marketing of any drugs
developed by the Company or its strategic partners, impose costly procedures
upon the Company's or its partners' activities, diminish any competitive
advantages that the Company or its partners may attain and adversely affect the
Company's receipt of royalties. There can be no assurance that regulatory
approval will be obtained for any drugs or diagnostic products developed by the
Company or its strategic partners. Furthermore, regulatory approval may entail
limitations on the indicated uses of a drug. Because certain of the products
likely to result from the Company's drug target and lead discovery programs
involve the application of new technologies and may be based upon a new
therapeutic approach, such products may be subject to substantial additional
review by various government regulatory authorities and, as a result, regulatory
approvals may be obtained more slowly than for products based upon more
conventional technologies.
Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continuing review. Discovery of previously unknown
problems with a product may result in withdrawal of the product from the market,
and could have adverse effects on the Company's business, financial conditions
and results of operations. Violations of regulatory requirements at any stage
during the regulatory process, including preclinical studies and clinical
trials, the approval process, post-approval or in good manufacturing practices
manufacturing requirements, may result in various adverse consequences to the
Company, including the FDA's delay in approval or refusal to approve a product,
withdrawal of an approved product from the market or the imposition of criminal
penalties against the manufacturer and NDA, PLA or BLA holder. No
investigational new drug application ("IND") has been submitted for any
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product candidate resulting from the Company's discovery programs, and no
product candidate has been approved for commercialization in the United States
or elsewhere. The Company intends to rely on its strategic partners to file INDs
and generally direct the regulatory approval process. There can be no assurance
that the Company's strategic partners will be able to conduct clinical testing
or obtain necessary approvals from the FDA or other regulatory authorities for
any products. Failure to obtain required governmental approvals will delay or
preclude the Company's strategic partners from marketing drugs or diagnostic
products developed through the Company's research or limit the commercial use of
such products and could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's research and development activities involve the controlled use
of certain biological and other hazardous materials, chemicals and various
radioactive materials. The Company is subject to federal, state and local laws
and regulations governing the use, storage, handling and disposal of such
materials and certain waste products. Although the Company believes that its
safety procedures for handling and disposing of such materials comply with the
standards prescribed by federal, state and local laws and regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result, and any liability could exceed the resources of the
Company. Other than such laws and regulations governing the generation, use and
disposal of hazardous materials and wastes, and limiting workplace exposures to
such materials, the Company does not believe its current and proposed activities
are subject to any specific government regulation other than regulations
affecting the operations of companies generally. See "Business--Government
Regulation."
ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF GENE-BASED DIAGNOSTICS
The Company and its partners may seek to develop diagnostic products based
on genes it discovers. The prospect of broadly available gene-based diagnostic
tests raises issues regarding their appropriate utilization and the
confidentiality of the information provided by such testing. It is possible that
discrimination by third party payors, based on the results of such testing,
could lead to the increase of premiums by such payors to prohibitive levels,
outright cancellation of insurance or unwillingness to provide coverage to
individuals showing unfavorable gene expression profiles. Similarly, employers
could discriminate against employees with gene expression profiles indicative of
the potential for high disease-related costs and lost employment time. Finally,
government authorities could, for social or other purposes, limit or prohibit
the use of such tests under certain circumstances. There can be no assurance
that such ethical and social factors or concerns about genetic testing and
target identification will not have a material adverse effect on market
acceptance of the Company's technologies and products.
REIMBURSEMENT RISK
The levels of revenues and profitability of pharmaceutical companies may be
affected by the continuing efforts of governments and third party payors to
contain or reduce the costs of health care through various means including by
limiting prices paid for pharmaceuticals. In both the United States and
elsewhere, sale of prescription pharmaceuticals are dependent in part on the
availability of reimbursement to the consumer from third party payors, such as
government insurance programs (Medicare and Medicaid) and private and corporate
health insurance plans. Third party payors are increasingly challenging the
prices charged for pharmaceuticals and, in some cases, refusing payment for
off-label use and other uses of pharmaceuticals they deem inappropriate.
EXPANSION OF OPERATIONS; MANAGEMENT OF GROWTH
The Company has recently experienced, and expects to continue to experience,
significant growth in the number of its employees and the scope of its
operations. The Company has significantly increased the scale of its operations
and number of employees to support its partnered and independent discovery
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programs and to manage its strategic alliances. The number of employees of the
Company increased from three on January 1, 1996 to 57 on September 30, 1997.
This growth has placed, and may continue to place, a significant strain on the
Company's management, operations and systems. The Company's ability to manage
such growth effectively will depend upon its broadening its management team and
attracting, hiring and retaining skilled employees. In addition, in order to
increase capacity to remain competitive and satisfy the needs of current and
future strategic partners, the Company will be required to acquire additional
capital equipment and resources. There can be no assurance that the Company will
be able to manage its growth, and the Company's inability to manage growth
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Employees" and
"--Facilities."
LIMITED CLINICAL DEVELOPMENT, MANUFACTURING, MARKETING AND SALES EXPERIENCE
The Company has made no investment in therapeutic or diagnostic
manufacturing, marketing or product sales resources and does not generally
expect to engage directly in the manufacturing, marketing or sale of therapeutic
or diagnostic products. Instead, the Company currently intends to contract with
others to pursue the commercialization of therapeutic or diagnostic products
based upon or discovered using its technologies. There can be no assurance that
the Company will be able to enter into such arrangements on acceptable terms, if
at all. The Company will be dependent to a significant extent on partners,
licensees or other entities for development, manufacturing and commercialization
of such products. The Company's dependence upon third parties for the
manufacture, marketing and sales of therapeutic or diagnostic products may
materially adversely affect the Company's ability to develop and deliver such
products on a timely and competitive basis, if at all. To the extent the Company
directly engages in development, manufacturing and marketing of certain
therapeutic or diagnostic products, it will require substantial additional
funds, personnel and production facilities. See "--Reliance on Strategic
Partners."
PRODUCT LIABILITY EXPOSURE
Clinical trials, manufacturing, marketing and sale of any of the Company's
or its partners' potential therapeutic or diagnostic products may expose the
Company to liability claims from the use of such products. The Company currently
does not carry product liability insurance. There can be no assurance that the
Company or its partners will be able to obtain such insurance or, if obtained,
that sufficient coverage can be acquired at a reasonable cost. The inability to
obtain sufficient insurance coverage at an acceptable cost or to otherwise
protect against potential product liability claims could prevent or inhibit the
commercialization of pharmaceutical products developed by the Company or its
partners. A product liability claim or recall would have a material adverse
effect on the Company's business, financial condition and results of operations.
CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS
Upon completion of this offering, the Company's executive officers,
directors and affiliated individuals and entities together will beneficially own
approximately 35.3% of the outstanding shares of Common Stock (34.2% if the
Underwriters' over-allotment option is exercised in full). As a result, these
stockholders, acting together, will be able to influence significantly and
possibly control most matters requiring approval by the stockholders of the
Company, including approvals of amendments to the Company's Certificate of
Incorporation, mergers, a sale of all or substantially all of the assets of the
Company, going private transactions and other fundamental transactions. In
addition, the Company's Certificate of Incorporation, as it is proposed to be
amended and restated concurrently with the closing of this offering (the
"Restated Certificate"), does not provide for cumulative voting with respect to
the election of directors. Consequently, the present executive officers,
directors and affiliated individuals and entities will be able to control the
election of the members of the Board of Directors of the Company. Such a
17
<PAGE>
concentration of ownership could affect the liquidity of the Company's Common
Stock and have an adverse effect on the price of the Common Stock, and may have
the effect of delaying or preventing a change in control of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices. See "Principal Stockholders"
and "Description of Capital Stock."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after this offering or that the market price
of the Common Stock will not decline below the initial public offering price.
The initial public offering price will be determined by negotiations between the
Company and the Underwriters and is not necessarily indicative of the market
price at which the Common Stock of the Company will trade after this offering.
See "Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The market prices for securities of biotechnology
and pharmaceutical companies have been highly volatile, and the market has
experienced significant price and volume fluctuations that are often unrelated
to the operating performance of particular companies. Announcements of
technological innovations or new commercial products by the Company or its
competitors, disputes or other developments concerning proprietary rights,
including patents and litigation matters, developments concerning strategic
alliance agreements, publicity regarding actual or potential results with
respect to products or technology under development by the Company, its
strategic partners or its competitors, regulatory developments in both the
United States and foreign countries, public concern as to the efficacy of new
technologies, quarterly fluctuations in the Company's operating results, future
sales of substantial amounts of Common Stock by existing stockholders and
comments by securities analysts, as well as general market conditions and other
factors, may have a significant impact on the market price of the Common Stock.
In particular, the realization of any of the risks described in these "Risk
Factors" could have a material adverse impact on such market price.
ANTI-TAKEOVER PROVISIONS
The Restated Certificate provides for staggered terms for the members of the
Board of Directors. In addition, the Restated Certificate authorizes the Board
of Directors of the Company, without stockholder approval, to issue additional
shares of Common Stock and to fix the rights, preferences and privileges of and
issue additional shares of Preferred Stock with voting, conversion, dividend and
other rights and preferences that could adversely affect the voting power or
other rights of the holders of Common Stock. The issuance of Preferred Stock,
rights to purchase Preferred Stock or additional shares of Common Stock may have
the effect of delaying or preventing a change in control of the Company. In
addition, the possible issuance of Preferred Stock or additional shares of
Common Stock could discourage a proxy contest, make more difficult the
acquisition of a substantial block of the Company's Common Stock or limit the
price that investors might be willing to pay for shares of the Company's Common
Stock. Further, the Restated Certificate provides that any action required or
permitted to be taken by stockholders of the Company must be effected at a duly
called annual or special meeting of stockholders and may not be effected by
written consent. Special meetings of the stockholders of the Company may be
called only by the Chairman of the Board of Directors, the President of the
Company or by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors. These and other provisions
contained in the Restated Certificate and the Company's By-laws, as well as
certain provisions of Delaware law, could delay or make more difficult certain
types of transactions involving an actual or potential change in control of the
Company or its management (including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices)
and may limit the ability of stockholders to remove current management of the
Company or approve transactions that stockholders may deem to be in their best
interests and, therefore, could adversely affect the price of the Company's
Common Stock. See "Description of Capital Stock."
18
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE AND POTENTIAL ADVERSE EFFECT ON MARKET PRICE
Future sales of Common Stock in the public market following this offering
could adversely affect the market price of the Common Stock. Upon completion of
this offering, the Company will have 13,382,377 shares of Common Stock
outstanding, assuming no exercise of currently outstanding options or warrants.
Of these shares, the 3,000,000 shares sold in this offering (plus any additional
shares sold upon exercise of the Underwriters' over-allotment option) will be
freely transferable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), unless they are held by "affiliates" of the
Company as that term is used under the Securities Act and the regulations
promulgated thereunder. The remaining 10,382,377 shares of Common Stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144 of the Securities Act (the "Restricted Shares"). Restricted Shares may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701 under the Securities Act.
As a result of contractual restrictions and the provisions of Rules 144 and 701,
additional shares will be available for sale in the public market as follows:
(i) no Restricted Shares will be eligible for immediate sale on the date of this
Prospectus; (ii) approximately 5,732 Restricted Shares will be eligible for sale
90 days after the date of this Prospectus; (iii) approximately 5,609,475
Restricted Shares will be eligible for sale 180 days after the effective date of
this offering upon expiration of lock-up agreements and upon expiration of their
respective holding periods under Rule 144; and (iv) the remainder of the
Restricted Shares will be eligible for sale from time to time thereafter upon
expiration of their respective holding periods under Rule 144. In addition,
1,192,918 shares issuable upon exercise of vested stock options will become
eligible for sale 180 days after the date of this Prospectus upon expiration of
lock-up agreements. The holders of 9,281,185 shares of Common Stock and the
holders of warrants to purchase 30,051 shares of Common Stock have the right in
certain circumstances to require the Company to register their shares under the
Securities Act for resale to the public beginning three months after the
effective date of this offering. If such holders, by exercising their demand
registration rights, cause a large number of shares to be registered and sold in
the public market, such sales could have an adverse effect on the market price
for the Company's Common Stock. If the Company were required to include in a
Company-initiated registration shares held by such holders pursuant to the
exercise of their piggyback registration rights, such sales may have an adverse
effect on the Company's ability to raise needed capital. In addition, the
Company expects to file a registration statement on Form S-8 registering a total
of approximately 6,134,268 shares of Common Stock subject to outstanding stock
options or reserved for issuance under the Company's equity incentive plans.
Such registration statement is expected to be filed and to become effective 180
days after the effective date of this offering. Shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to affiliates, be available for sale in the open market, unless such shares are
subject to vesting restrictions with the Company or the lock-up agreements
described above. See "Management--Equity Incentive Plans," "Description of
Capital Stock--Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."
DILUTION; ABSENCE OF CASH DIVIDENDS
Purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
investment from the initial public offering price. Additional dilution will
occur upon exercise of outstanding options and warrants. See "Dilution" and
"Shares Eligible for Future Sale." The Company has never paid any dividends and
does not anticipate paying dividends in the foreseeable future. See "Dividend
Policy."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered by the Company hereby and the sale of 272,727 shares of
Common Stock to Japan Tobacco are estimated to be approximately $33,090,000
($37,693,500 if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $11.00 per share, after deducting
the underwriting discounts and commissions and estimated offering expenses
payable by the Company.
The Company intends to use the net proceeds from this offering and the sale
of shares to Japan Tobacco as follows: approximately $2,000,000 to fund tenant
improvements; approximately $10,000,000 to fund capital expenditures; and the
remainder to fund its research and development activities, including scale-up of
its laboratory, database and business development operations, and for working
capital and general corporate purposes. The Company's management will retain
broad discretion in the allocation of such net proceeds. The Company may also
use a portion of the net proceeds to fund acquisitions of complementary
technologies, products or businesses, although the Company has no current
agreements or commitments for any such acquisitions. Pending such uses, the
Company intends to invest the net proceeds of this offering and the sale of
shares to Japan Tobacco in short-term, interest bearing, investment-grade
securities.
The amounts actually expended for each purpose may vary significantly
depending upon numerous factors, including progress of the Company's programs,
the number and breadth of these programs, future revenue growth, if any,
achievement of milestones under strategic alliances and licensing arrangements,
the ability of the Company to establish and maintain strategic alliances and
other arrangements, the progress of the development efforts of the Company's
strategic partners and the amount of cash, if any, generated by the Company's
operations. Such factors also include the pace and amount of any acquisitions or
investments, competing technological and market developments that make the
Company's technologies and database products relatively less attractive to
strategic partners and the costs involved in enforcing patent claims and other
intellectual property rights.
The Company believes that its existing capital resources, together with the
net proceeds from this offering and the sale of shares to Japan Tobacco,
interest income and future payments due under its existing strategic alliances,
will be sufficient to satisfy its current and projected funding requirements for
at least the next 24 months. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid dividends on its Common Stock and
does not anticipate paying any dividends on its Common Stock in the forseeable
future. The Company currently intends to retain any future earnings to fund the
development of its business.
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997, and as adjusted to reflect the conversion of all outstanding
shares of Preferred Stock into 9,281,185 shares of Common Stock upon the closing
of this offering and the sale of 3,000,000 shares of Common Stock offered hereby
at an assumed initial public offering price of $11.00 per share and the sale of
272,727 shares of Common Stock to Japan Tobacco at a price equal to the assumed
initial public offering price per share and the application of the estimated net
proceeds therefrom:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------
<S> <C> <C>
ACTUAL (1) AS ADJUSTED (2)
----------- -----------------
<CAPTION>
(in thousands)
<S> <C> <C>
Current portion of long-term debt and capital lease obligations........ $ 358 $ 358
----------- -------
----------- -------
Noncurrent portion of long-term debt and capital lease obligations..... $ 998 $ 998
Series A, A-1, B and C convertible preferred stock, $0.01 par value;
9,550,000 shares authorized; 9,281,185 shares issued and outstanding,
actual; no shares issued and outstanding, as adjusted (2)............ 30,508 --
Stockholders' equity:
Preferred Stock, $.01 par value; no shares authorized, actual;
10,000,000 shares authorized, as adjusted; no shares issued or
outstanding, actual and as adjusted................................ -- --
----------- -------
Common Stock, $.01 par value; 17,000,000 shares authorized, actual;
60,000,000 shares authorized, as adjusted; 828,465 shares issued
and outstanding, actual; 13,382,377 shares issued and outstanding,
as adjusted........................................................ 8 134
Additional paid-in capital........................................... 6,765 70,237
Deferred compensation, net........................................... (6,530) (6,530)
Unrealized loss on marketable securities............................. (1) (1)
Accumulated deficit.................................................. (9,856) (9,856)
----------- -------
Total stockholders' equity......................................... (9,614) 53,984
----------- -------
Total capitalization............................................. $ 21,892 $ 54,982
----------- -------
----------- -------
</TABLE>
- ------------------------
(1) Excludes: (i) 2,424,381 shares of Common Stock issuable upon exercise of
outstanding stock options as of September 30, 1997 at a weighted average
exercise price of $1.05 per share; and (ii) 162,576 shares of Common Stock
issuable upon exercise of outstanding warrants at a weighted average
exercise price of $3.10 per share. Also excludes 56,000 shares of Common
Stock issuable upon exercise of stock options granted after September 30,
1997 with an exercise price of $3.50 per share. See "Management--Equity
Incentive Plans," "Description of Capital Stock--Warrants" and Note 13 of
Notes to Financial Statements.
(2) See the Financial Statements and Note 9 of Notes to the Financial Statements
for descriptions of the authorized, issued and outstanding shares,
liquidation preferences and conversion features of the individual Series of
Preferred Stock.
21
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of September 30,
1997 was $20,489,747 or $2.03 per share of Common Stock. Pro forma net tangible
book value per share represents the amount of the Company's total tangible
assets less total liabilities, divided by the number of shares of Common Stock
outstanding after giving effect to the conversion of all outstanding shares of
Preferred Stock into Common Stock.
Pro forma net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in this offering and the net tangible book value per share of the Common
Stock immediately after completion of this offering. After giving effect to the
sale by the Company of 3,000,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $11.00 per share and after deducting
the underwriting discounts and commissions and estimated offering expenses
payable by the Company, and the sale of 272,727 shares of Common Stock to Japan
Tobacco at a price equal to the assumed initial public offering price per share
and assuming no other changes in the net tangible book value after September 30,
1997, the Company's pro forma net tangible book value as of September 30, 1997
would have been $53,579,747 or $4.00 per share. This represents an immediate
increase in pro forma net tangible book value of $1.97 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$7.00 per share to new purchasers of Common Stock in this offering and in the
sale of shares of Common Stock to Japan Tobacco, as illustrated by the following
table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............ $ 11.00
Pro forma net tangible book value per share as of
September 30, 1997..................................... $ 2.03
Increase attributable to new investors................... 1.97
---------
Pro forma net tangible book value per share after the
offering................................................. 4.00
---------
Dilution to new investors.................................. $ 7.00
---------
---------
</TABLE>
The following table sets forth on a pro forma basis, as of September 30,
1997, the difference between the number of shares of Common Stock purchased from
the Company, the total consideration paid and the average price per share paid
by the existing holders of Common Stock and by the new investors, before
deducting the underwriting discounts and commissions and estimated offering
expenses payable by the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1).......................... 10,109,650 75.5% $ 30,199,910 45.6% $ 2.99
New investors...................................... 3,272,727 24.5 36,000,000 54.4 11.00
------------ ----- ------------- -----
Total............................................ 13,382,377 100.0% $ 66,199,910 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
- ------------------------
(1) Gives effect to the conversion of all outstanding shares of Preferred Stock
into 9,281,185 shares of Common Stock upon the closing of this offering.
The calculation of net tangible book value and the other computations above
assume no exercise of outstanding options and warrants. As of September 30,
1997, 2,586,957 shares of Common Stock were subject to outstanding options and
warrants at a weighted average exercise price of $1.18 per share. To the extent
additional shares are purchased pursuant to the exercise of outstanding options
and warrants, there will be further dilution to new investors. See
"Management--Equity Incentive Plans," "Description of Capital Stock-- Warrants"
and Note 13 of Notes to Financial Statements.
22
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for the period from September
22, 1994 (inception) through December 31, 1994, the years ended December 31,
1995 and 1996 and the nine months ended September 30, 1997 and at December 31,
1994, 1995 and 1996 and September 30, 1997 are derived from the Company's
financial statements audited by Arthur Andersen LLP, independent auditors, which
are included elsewhere in this Prospectus. The statement of operations data for
the nine months ended September 30, 1996 and the balance sheet data at September
30, 1996 have been derived from unaudited financial statements; however,
management believes such financial statements include all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position and results of
operations for these periods. Operating results for the nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the entire year ended December 31, 1997. The data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 22, 1994 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) DECEMBER 31, SEPTEMBER 30,
THROUGH -------------------- ----------------------
DECEMBER 31, 1994 1995 1996 1996 1997
--------------------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ -- $ -- $ -- $ -- $ 774
Operating expenses:
Research and development..................... 44 486 1,741 982 3,338
General and administrative................... 46 258 1,345 791 2,443
--- --------- --------- ----------- ---------
Total operating expenses......................... 90 744 3,086 1,773 5,781
Interest income, net............................. -- -- 221 111 355
Income tax expense............................... -- -- -- -- 100
--- --------- --------- ----------- ---------
Net loss......................................... $ (90) $ (744) $ (2,865) $ (1,662) $ (4,752)
--- --------- --------- ----------- ---------
--- --------- --------- ----------- ---------
Pro forma net loss per share (1)................. $ (0.31) $ (0.46)
--------- ---------
--------- ---------
Shares used in computing pro forma net loss per
share (1)...................................... 9,198 10,269
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- ----------- ---------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities............................. $ 298 $ 348 $ 5,671 $ 5,930 $ 22,143
Working capital............................................ 311 246 4,581 5,832 18,776
Total assets............................................... 311 424 7,819 7,126 27,621
Total long-term debt and capital lease obligations......... -- -- 446 471 1,356
Total mandatorily redeemable convertible
preferred stock.......................................... 400 1,153 10,471 9,301 30,508
Total stockholders' equity................................. (89) (833) (4,187) (2,810) (9,614)
</TABLE>
- ------------------------
(1) See Note 1 of Notes to Financial Statements for a description of the
computation of the pro forma net loss per share.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements which
involve risk and uncertainties. Actual events and results may differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including the matters set forth under the caption "Risk
Factors" and elsewhere in this Prospectus.
OVERVIEW
The Company was incorporated in September 1994, and has devoted
substantially all of its resources to the development of its genomics
technologies, bioinformatics systems and database products used to identify the
expression of genes, drug targets and drug leads. The Company has incurred
losses since inception and, as of September 30, 1997, had an accumulated deficit
of $9.9 million.
The Company entered into a strategic alliance with Procter & Gamble in the
field of heart failure in May 1997 and with Japan Tobacco in the field of renal
disease in September 1997. These agreements provide the Company with various
combinations of technology and database access fees and research funding and may
provide certain additional payments upon the attainment of research and
regulatory milestones and royalty payments based on sales of any products
resulting from the collaborations. Revenue recognized under the alliances with
Procter & Gamble and Japan Tobacco through September 30, 1997 totalled
approximately $774,000. Each strategic partner has the option to expand the
collaboration to cover two additional disease indications. In addition, Japan
Tobacco is also obligated to purchase $3.0 million of the Company's Common Stock
in a private placement to close simultaneously with this offering.
The Company's future profitability will depend in part on the successful
development and marketing of the ACCELERATED DRUG DISCOVERY system, the genomic
database products and the Flow-thru Chip and the establishment of strategic
alliances. Payments from strategic alliance partners and interest income are
expected to be the only sources of revenue for the foreseeable future. These
payments will include committed technology access fees and milestone payments
for the discovery of drug targets and leads. Such revenue is dependent in large
part on the discovery of genes, drug targets and drug leads using the Company's
technologies. Royalties or other revenue from commercial sales of products
developed from any therapeutic or diagnostic product identified using the
Company's technologies are not expected for at least several years, if at all.
Payments under strategic alliances will be subject to significant fluctuation in
both timing and amount, and, therefore, the Company's results of operations for
any period may not be comparable to the results of operations for any other
period. Furthermore, the generation of significant revenues and profitability
will depend upon the Company entering into additional alliances. There can be no
assurance that the Company will enter into additional alliances on acceptable
terms, if at all, or that such current or future alliances will be successful.
The Company has incurred operating losses in each year since its inception,
including net losses of approximately $2.9 million and $4.8 million for the year
ended December 31, 1996 and the nine months ended September 30, 1997,
respectively, and at September 30, 1997, the Company had an accumulated deficit
of approximately $9.9 million. The Company's losses have resulted principally
from costs incurred in research and development and from general and
administrative costs associated with the Company's operations. These costs have
exceeded the Company's interest income and revenues which to date have been
generated principally from strategic alliances. The Company expects to incur
substantial additional operating losses over the next few years as a result of
increases in its expenses for research and development capabilities.
The Company's quarterly operating results may fluctuate significantly as a
result of a variety of factors, including changes in the demand for the
Company's technologies and products, variations in payments under strategic
alliances, including milestone payments, royalties, license fees and other
contract
24
<PAGE>
revenues, and the timing of new product introductions, if any, by the Company.
The Company's quarterly operating results may also fluctuate significantly
depending on changes in the research and development budgets of the Company's
strategic partners and any potential partners, the introduction of new products
by the Company's competitors and other competitive factors, regulatory actions,
adoption of new technologies, manufacturing results, and the cost, quality and
availability of cell and tissue samples, reagents and related components.
Compensation expense of approximately $48,000 will be recorded as a result
of the accelerated vesting of Common Stock options upon completion of this
offering. The conversion of Preferred Stock that will occur upon completion of
this offering will have no impact on the Company's income statement.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
Revenue under strategic alliance agreements was $774,000 for the nine months
ended September 30, 1997. There was no revenue for the nine months ended
September 30, 1996. The 1997 revenue resulted from the Company's strategic
alliance agreements with Procter & Gamble and Japan Tobacco. Under the terms of
the strategic alliance agreements, payments for technology access fees and
research and development support are recognized as revenue ratably over the
period for which the payments are made. Payments related to the achievement of
certain milestones are recognized as revenue when the milestones are achieved.
Research and development expenses increased to $3,338,000 for the nine
months ended September 30, 1997 from $982,000 for the comparable period in 1996.
This increase was primarily attributable to increased payroll and personnel
expenses as the Company hired additional research and development personnel,
increased purchases of laboratory supplies and increased equipment depreciation
as a result of capital expenditures. The Company expects research and
development expenses to continue to increase as personnel and research and
development facilities are expanded to accommodate new and existing strategic
alliances.
General and administrative expenses increased to $2,443,000 for the nine
months ended September 30, 1997 from $791,000 for the comparable period in 1996.
This increase was primarily attributable to increased payroll and personnel
expenses as the Company hired additional management and administrative personnel
and professional fees in connection with the overall scale-up of the Company's
operations and business development efforts. The Company expects that general
and administrative expenses will continue to increase as the Company continues
to expand its operations.
Net interest income increased to $355,000 for the nine months ended
September 30, 1997 from $111,000 for the comparable period in 1996. This
increase was primarily due to larger cash and investment balances on hand during
1997 as a result of private placements of equity securities.
As of September 30, 1997, the Company had accumulated losses of $9.9 million
since inception and, therefore, has not paid any federal income taxes.
Realization of deferred tax assets is dependent on future earnings, if any, the
timing and amount of which are uncertain. Accordingly, valuation allowances in
amounts equal to the deferred tax assets have been established to reflect these
uncertainties. See Note 7 of Notes to Financial Statements.
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
Research and development expenses increased to $1,741,000 in 1996 from
$486,000 in 1995. This increase was primarily attributable to increased payroll
and personnel expenses as the Company hired additional research and development
personnel, increased purchases of laboratory supplies and increased contracted
services.
25
<PAGE>
General and administrative expenses increased to $1,345,000 in 1996 from
$258,000 in 1995. This increase was primarily attributable to increased payroll
and personnel expenses as the Company hired additional management and
administrative personnel and professional fees in connection with the expansion
of the Company's operations and business development efforts.
The Company had net interest income of $221,000 in 1996 resulting from
interest earned on cash and marketable securities derived from private
placements of equity securities. The Company did not earn interest income in
1995.
YEAR ENDED DECEMBER 31, 1995 AND PERIOD FROM SEPTEMBER 22, 1994 (INCEPTION)
THROUGH
DECEMBER 31, 1994
Research and development expenses increased to $486,000 in 1995 from $44,000
in the 1994 period. This increase was primarily due to the inclusion of a full
year of operations in 1995 and expenditures for certain contracted research
activities.
General and administrative expenses increased to $258,000 in 1995 from
$46,000 in the 1994 period. This increase was primarily due to the inclusion of
a full year of operations in 1995 as well as increased contracted services.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 1997, the Company financed its
operations through private placements of equity securities, payment from a
strategic alliance partner, a capital lease and an equipment loan. The private
placement of equity securities has provided the Company with aggregate gross
proceeds of approximately $30,160,000 as of September 30, 1997. The Company also
has obtained $3,000,000 under its strategic alliance with Procter & Gamble, as
of September 30, 1997, comprised of an initial research and technology access
payment of $1,000,000 and a $2,000,000 note which will be forgiven over the
initial 18 months of the agreement upon the Company's performance of research
obligations. The Company has also obtained $471,000 of capital lease financing
and $1,084,000 under an equipment loan. As of September 30, 1997, the Company
had approximately $22,143,000 in cash and marketable securities.
During the years ended December 31, 1995 and 1996 and the nine months ended
September 30, 1997, the Company had expenditures relating to intangible and
other assets of approximately $63,000, $126,000 and $275,000, respectively.
These expenditures were primarily for patent costs and license fees. The Company
will amortize capitalized patent costs to research and development expense once
the patents issue. These expenditures are necessary to protect the Company's
intellectual property and to secure rights to current technology and are
expected to continue to increase.
Amounts financed for equipment under a capital lease for the year ended
December 31, 1996 were approximately $471,000. The Company also had purchases of
equipment of approximately $12,000, $1,339,000 and $1,785,000 during the years
ended December 31, 1995 and 1996 and the nine months ended September 30, 1997,
respectively. Although the Company had no material commitments for capital
expenditures as of September 30, 1997, the Company expects capital expenditures
to increase over the next several years as it expands its facilities and
acquires scientific and computer equipment to support the planned expansion of
its research and development efforts.
As of September 30, 1997, the Company had net operating loss carryforwards
of approximately $7,726,000 to offset federal and state income taxes. The
Company's research and development tax credit carryforwards were estimated to be
approximately $56,000 as of December 31, 1996 for federal income tax purposes.
If not utilized, the federal and state net operating loss carryforwards will
expire through 2011. See Note 7 to Notes to Financial Statements.
To date, all revenue received by the Company has been from its strategic
alliances. The Company expects that substantially all revenue for the
foreseeable future will come from strategic alliance partners
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and interest income. Furthermore, the Company's ability to achieve profitability
will be dependent upon the ability of the Company to enter into additional
strategic alliances. There can be no assurance that the Company will be able to
negotiate additional strategic alliances in the future on acceptable terms, if
at all, or that current or future strategic alliances will be successful and
provide the Company with expected benefits.
The Company believes that the net proceeds from this offering and the sale
of shares to Japan Tobacco, existing cash and marketable securities and
anticipated cash flow from its current strategic alliances will be sufficient to
support the Company's operations for at least the next 24 months. The Company's
actual future capital requirements and the adequacy of its available funds,
however, will depend on many factors, including progress of its discovery
programs, the number and breadth of these programs, the ability of the Company
to establish and maintain additional strategic alliance and licensing
arrangements and the progress of the development and commercialization efforts
of the Company's strategic partners. These factors also include the level of the
Company's activities relating to its independent discovery programs and to the
development and commercialization rights it retains in its strategic alliance
arrangements, competing technological and market developments, the costs
associated with obtaining access to tissue samples and related information and
the costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims and other intellectual property rights. The Company expects that
it will require significant additional financings in the future, which it may
seek to raise through public or private equity offerings, debt financing or
additional strategic alliance and licensing arrangements. No assurance can be
given that additional financing or strategic alliance and licensing arrangements
will be available when needed, if at all, or that, if available, such financing
will be obtained on terms favorable to the Company or its stockholders. To the
extent the Company raises additional capital by issuing equity or convertible
debt securities, ownership dilution to stockholders will result. If adequate
financing is not available when needed, the Company may be required to curtail
significantly one or more of its research and development programs or to obtain
funds through arrangements with strategic partners or others that may require
the Company to relinquish rights to certain of its technologies, discoveries or
potential products, or to grant licenses on terms that are not favorable to the
Company, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. In the event that
adequate funds are not available, the Company's business would be adversely
affected.
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BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
GENE LOGIC INC. ("Gene Logic" or the "Company") uses a proprietary system,
based on analysis of gene expression and gene regulation, to discover drug
targets and drug leads. Gene Logic uses READS in its drug target and drug lead
discovery programs and to generate genomic data for its database products. The
Company's objective is to provide its pharmaceutical company partners with novel
drug targets, drug leads and a suite of genomic database products to reduce the
time, cost and risk associated with drug discovery. The Company believes that by
building its portfolio of partnerships it will generate current revenues and
establish a long-term economic interest in the product pipelines of multiple
partners through milestone and royalty payments. Gene Logic has established
major strategic alliances with Procter & Gamble and Japan Tobacco.
INDUSTRY BACKGROUND
DRUG DISCOVERY AND DEVELOPMENT
Diseases are the result of disturbances of, or abnormalities in, the
physiological pathways that regulate the functioning of cells in the human body.
The main components of these pathways are proteins, such as enzymes, receptors
or ion channels, encoded by genes expressed within the cells affected by the
disease. Drugs generally exert their therapeutic effects by interacting with
certain of these proteins, referred to as drug targets, in such a way as to
restore the normal functioning of the disease-affected pathways or otherwise to
compensate for the abnormalities. The process of drug discovery involves the
screening of collections of compounds against a drug target to identify those
compounds which interact with the target to produce the desired effect.
In response to increasing competitive pressures to discover and develop new
drugs in a more rapid and cost-effective manner, pharmaceutical and
biotechnology companies have recently made significant advances in combinatorial
chemistry and high-throughput screening technologies which enable the rapid
generation and screening of large and diverse compound libraries against many
potential targets. However, the current drug discovery process remains
time-consuming and costly, in part because of the difficulty and complexity of
identifying novel drug targets using traditional methodologies. In general,
pharmaceutical companies rely upon their own basic research and academic
discoveries to identify drug targets. The Company believes this approach
provides an insufficient number of targets to fill the industry's increasing
annual screening objectives. Recent developments in genomics have permitted the
partial sequencing of tens of thousands of new genes and the identification of
the classes of proteins they encode. These developments have not enabled the
rapid identification of drug targets, because the gene sequence data by itself
provides limited information, if any, about a gene's relationship to a specific
disease. There remains a significant need for a rapid and cost-effective method
to correlate genes with specific diseases to discover drug targets.
GENES, GENE EXPRESSION AND DISEASE
The genetic content of humans, the human genome, is maintained in
chromosomes, which contain deoxyribonucleic acid ("DNA"). DNA is composed of two
strands of four constituent molecules known as bases or nucleotides: adenine
(A), thymine (T), guanine (G) and cytosine (C). The specific order, or sequence,
of these bases encodes genetic information within units defined as genes, which
are the
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hereditary units that control the structure, health and function of all
organisms. The beginning sequence of any gene is called 5 prime (5') and its end
is called 3 prime (3'). The human genome is estimated to comprise approximately
three billion base pairs encoding 100,000 to 150,000 genes. While all of these
genes are present in every human cell, certain of these genes are switched "on"
only in specific tissues or only at certain developmental stages and are
otherwise inactive. On average, in any single cell type, 10,000 to 20,000
different genes are expressed out of the possible 100,000 to 150,000. The cell's
pattern of gene expression defines the function of that cell.
Genes consist of coding and non-coding regions which ultimately direct and
regulate the production of the various proteins that maintain normal cellular
function. The coding regions, which account for less than five percent of the
human genome, direct the production of proteins, and the order of the bases in
these regions determine the order of amino acids in a given protein. An enzyme
reads these genes and makes a strand of RNA (a molecule similar to DNA) that
consists of a string of bases complementary to that of the DNA of the gene. This
process is known as transcription and results in the production of messenger RNA
("mRNA"). Messenger RNA directs the assembly of amino acids in a sequence that
corresponds to the order of the bases of the mRNA defining the sequence of a
protein. The amount of mRNA in a cell provides a direct indication of the level
of activity of the corresponding gene.
Some of the non-coding DNA sequences, referred to as promoter regions,
regulate genes in the different tissues. A series of regulatory proteins, called
transcription factors, bind to specific promoter regions, either singularly or
in unique, multi-component complexes, and act as switches controlling the
activity of the genes. The synthesis of regulatory proteins is, in turn,
directed by genes coding for transcription factors and their accessory proteins.
Together these control elements regulate the pattern of gene expression in
specific cells.
When a mutation occurs in a gene, the resulting protein may be abnormal in
function, resulting in disease. A number of relatively rare diseases, such as
cystic fibrosis and sickle cell anemia, result from such single gene mutations,
and the genes responsible for many of these monogenic diseases have been
identified over the last decade. Detailed knowledge of gene sequences that
encode defective proteins may facilitate development of novel therapeutic
products and diagnostic tests for these conditions. However, almost all major
common diseases, including heart failure, renal disease, diseases of the central
nervous system, osteoporosis and cancer, are believed to involve multiple genes
and, often, complex interactions of genetic and environmental factors. These
conditions evolve over time as a result of successive changes in the patterns of
gene expression in the cells involved in the disease.
THE NEED FOR NOVEL DRUG TARGETS
A critical step for drug development is the identification of suitable drug
targets for screening. The major pharmaceutical companies are facing increasing
pressures to introduce new drugs more rapidly than in the past. Because most
drug candidates fail during the development process, these companies need to
identify a large number of potential drug candidates by screening compound
libraries against large numbers of targets to improve their chances of
identifying commercially viable drugs. Recent estimates suggest that major
pharmaceutical companies may have to screen hundreds of new targets each year in
order to meet their drug discovery objectives. This figure compares with a
published 1995 industry source estimate that approximately 300 targets in total
were then in active screening by the pharmaceutical industry.
The majority of drug targets are proteins that are encoded by genes
expressed within tissues affected by a disease. The importance of certain
protein classes, such as enzymes, receptors or ion channels, as targets is
illustrated by the world's top selling prescription drugs. Of the 100 most
prescribed drugs, approximately 80% interact with one of four classes of
proteins: 33 drugs inhibit 13 different enzymes; 22 bind to ten different
G-protein-coupled receptors; 13 interact with six different ion channels; and 15
bind to four different nuclear hormone receptors. It is estimated that there are
approximately 10,000 different
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enzymes, 1,000 different G-protein-coupled receptors, 200 different ion channels
and 100 different nuclear hormone receptors encoded in the human genome. These
proteins are key components of the pathways involved in disease and, therefore,
are likely to be a rich source of new drug targets.
Proven drug targets share certain other characteristics which can only be
identified by understanding their expression levels in cells and cannot be
determined by their gene sequence alone. Drug targets are (i) often expressed
primarily in specific tissues, allowing for selectivity of pharmacological
action and reducing the potential for adverse side effects and (ii) generally
expressed at low abundance in the cells of the relevant organ. An effective
target discovery system would therefore enable the detection of genes that
encode for proteins expressed in specific tissues at low abundance, thereby
permitting the rapid identification of proteins which are likely to be targets
for therapeutic and diagnostic development.
LIMITATIONS OF TRADITIONAL GENOMICS TECHNOLOGIES
Although traditional genomics technologies have yielded sequence information
for many genes and have succeeded in identifying genes that predispose
individuals to certain diseases, the rate at which novel drug targets can be
identified from this information is limited. Traditional genomics efforts are
generally classified in two categories: gene sequencing and positional cloning.
Most gene sequencing approaches use high-throughput methods to capture
partial sequences (known as expressed sequence tags or "ESTs") for many genes on
an essentially random basis. These ESTs are stored in public and proprietary
databases which, to date, contain an estimated three million ESTs, representing
partial and fragmentary sequence data for 50 to 60 percent of human genes.
Despite the widespread availability of a significant amount of sequence data,
these data have limited use in identifying targets for therapeutic or diagnostic
product development. This is because the gene sequence data by itself provides
limited information, if any, about a gene's relationship to a specific disease.
Also, the EST sequencing approach tends to capture multiple times those genes
which are abundantly expressed, while missing the low-abundance, tissue-specific
genes which may code for useful drug targets.
Positional cloning is a method of identifying individual genes that, when
defective, cause or predispose individuals to particular diseases. The process
consists of genetic mapping, physical mapping and sequencing, and typically
requires an extensive collection of DNA samples from families affected by the
disease. Scientists test the DNA of both affected and non-affected members of
these families and, through statistical analysis, attempt to identify the region
or regions of the genome likely to contain a gene related to the disease.
Positional cloning requires large numbers of samples from the affected families
to demonstrate statistical significance and becomes much more complicated when
multiple genes are involved in the disease. The accumulation of such samples is
costly and time consuming. Although researchers are attempting to use other
methodologies, including animal models of disease, to speed the process of gene
discovery, the overall process may take several years.
THE GENE LOGIC SOLUTION
Gene Logic believes that its proprietary technologies for analysis of the
overall patterns of gene expression and regulation in specific diseases will
enable the Company to identify multiple, novel drug targets more rapidly than
competing technologies. Gene Logic's ACCELERATED DRUG DISCOVERY system allows
the Company to display the changes in gene expression patterns as a disease
develops and progresses. The Company uses this information, in conjunction with
its proprietary suite of genomics databases and bioinformatics tools, to
identify genes and their associated pathways implicated in disease and to
discover and prioritize individual drug targets. Pursuant to strategic alliances
with corporate partners and in independent programs, the Company is using its
system to identify drug targets for major common diseases, including heart
failure, renal disease, diseases of the central nervous system, osteoporosis and
prostate cancer. In addition, Gene Logic is developing a proprietary, reusable
Flow-thru Chip for high-throughput analysis of changes in the expression of
known genes. The Company believes the Flow-thru
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Chip will enable the development of high-throughput screening assays to evaluate
the effects of compounds on the expression of disease-associated genes
identified by READS. This technology represents a new approach to drug discovery
and has the potential to accelerate substantially the identification of drug
leads. By utilizing and further developing the portfolio of technologies,
genomics databases and bioinformatics tools in its ACCELERATED DRUG DISCOVERY
system, Gene Logic believes it can significantly enhance many critical steps in
the drug development process and accelerate the development of novel
pharmaceuticals for the Company and its partners.
GENE LOGIC'S STRATEGY
Gene Logic's objective is to provide to its pharmaceutical company partners
novel drug targets, drug leads and a suite of genomic database products in order
to reduce the time, cost and risk associated with drug discovery. The Company
believes that by building its portfolio of partnerships it will generate current
revenues and establish a long-term economic interest in the product pipelines of
multiple partners through milestone and royalty payments. The Company believes
that this portfolio approach will maximize the likelihood of drugs being
discovered and developed using its system. The Company's strategy for building
commercial value is to:
- PROVIDE AN INTEGRATED DRUG DISCOVERY PLATFORM. The Company has established
and intends to continue to build a broad technology platform, the
ACCELERATED DRUG DISCOVERY system, based on the analysis of gene
expression and gene regulation for the rapid discovery of multiple,
screenable drug targets and drug leads. The ACCELERATED DRUG DISCOVERY
system is designed to be integrated easily into the current drug discovery
processes of multiple partners.
- ESTABLISH DISEASE-SPECIFIC DRUG TARGET AND LEAD DISCOVERY ALLIANCES. Gene
Logic intends to continue to establish strategic alliances in specific
disease areas with pharmaceutical companies for drug target and drug lead
discovery programs. Such strategic alliances would generally provide the
Company technology license fees, research funding, milestone payments and
royalty or profit-sharing income from commercialization of products
resulting from the alliances. To date, Gene Logic has entered into a
target discovery alliance with Procter & Gamble in the field of heart
failure and a target and lead discovery alliance with Japan Tobacco in the
field of renal disease.
- ESTABLISH INDEPENDENT DRUG TARGET AND LEAD DISCOVERY PROGRAMS. Gene Logic
has established and intends to expand independent drug discovery programs
based on its proprietary technologies, including the Flow-thru Chip. The
Company plans to license drug leads discovered through its independent
programs to pharmaceutical companies for clinical development and
commercialization and expects to receive license fees, development
milestone payments and royalty or profit-sharing income from such
licensees.
- MARKET GENOMIC DATABASE PRODUCTS UNDER NON-EXCLUSIVE LICENSE. The Company
plans to market its suite of genomic database products, including its GENE
EXPRESS NORMAL and rare EST (rEST) databases, either in a single package
or as separate modules, to multiple pharmaceutical company partners. The
Company intends to grant non-exclusive licenses independent of, or in
conjunction with, strategic alliances. Such licenses would generally
provide the Company annual subscription fees, milestone payments and
royalties. To date, Gene Logic has granted Japan Tobacco a non-exclusive
license to its GENE EXPRESS NORMAL database.
- RETAIN SIGNIFICANT RIGHTS TO NEW PRODUCT OPPORTUNITIES. Under its
strategic alliances, Gene Logic retains certain rights to diagnostic,
therapeutic protein and gene therapy applications. In addition, the
Company intends to use its databases and technological capabilities to
develop products for the evolving fields of differential diagnosis,
molecular staging of disease and pharmacogenomic profiling. The Company
may pursue these applications independently or in alliances with
additional partners.
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GENE LOGIC'S ACCELERATED DRUG DISCOVERY SYSTEM
Gene Logic is employing its proprietary technologies and bioinformatics
system for the discovery of drug targets and drug leads and to accelerate the
development of drugs. The elements of Gene Logic's ACCELERATED DRUG DISCOVERY
system include:
ANALYSIS OF GENE EXPRESSION AND REGULATION
READS TECHNOLOGY
The Company has developed a proprietary, automated technology, known as
READS (Restriction Enzyme Analysis of Differentially-expressed Sequences), for
capturing and analyzing the overall gene expression profile of a given cell or
tissue type to identify drug targets. The Company has an exclusive license from
Yale University to patent applications covering the READS technology. The
Company has received notices of allowance for two patent applications, covering
the key aspects of the READS technology, from the United States Patent and
Trademark Office (the "USPTO"). Using READS, Gene Logic rapidly generates a gene
expression profile, or Molecular Topography, representing a quantitative
snapshot of the levels of expression of essentially all the genes in a tissue
sample. The Company compares normal and diseased tissues through a series of
Molecular Topography snapshots, a "molecular movie," to identify the changes in
gene expression patterns that occur as the disease develops and progresses and
to determine which genes are associated with the disease. The READS technology
is accurate and highly sensitive, capable of detecting essentially all mRNA
transcripts including rarely expressed genes, at the level of approximately one
mRNA copy per cell. By employing its READS technology in conjunction with its
proprietary bioinformatics system, the Company can then prioritize the proteins
encoded by these disease-associated genes as potential drug targets.
The READS process begins with the procurement of a relevant cell or tissue
sample, extraction of its total RNA content and preparation of complementary DNA
("cDNA") using standard techniques. By applying proprietary tagging and enzyme
cleavage procedures to the cDNA pool, the Company generates a unique set of
identifiable signature fragments (3' ESTs) for each mRNA species present in the
cell. The fragments are separated by size using gel-based, automated separation
techniques and quantified using proprietary image analysis software. The
quantity of each signature fragment correlates directly with the expression
levels of the corresponding gene. The Company uses its bioinformatics system to
compile these data into a Molecular Topography snapshot which represents the
levels of expression of genes active in the sample. This process typically takes
two days and is tracked by the Company's laboratory information management
system, which captures both process and quality control data.
The READS technology has been highly automated through the use of
commercially available robotic liquid handling stations, thermocyclers and
fragment separation instruments. A single production unit may be utilized for
two shifts per day and is capable of generating approximately 1,000 Molecular
Topography snapshots per year. Gene Logic has installed its first production
unit and has scaled up operations to two shifts per day. The Company expects to
install a second production unit during 1998. There can be no assurance,
however, that the Company will be able to increase its capacity as expected or
to realize the cost efficiencies of scale it anticipates.
MUST TECHNOLOGY
Gene Logic's proprietary MuST (Multiplex Selection of Transcription Factors)
technology enables the Company to identify the nucleotide sequences of the
transcription factor binding sites through which the expression of genes is
regulated. The Company believes that the information generated by MuST, in
combination with the information on gene expression levels generated by its
READS technology, will enable the Company to assign genes to functional pathways
based on the observation that genes in such pathways share common regulatory
mechanisms and are coordinately expressed. The Company has an exclusive license
from Yale University to patent applications covering the MuST technology and has
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received a notice of allowance for the original patent application, covering the
key aspects of the MuST technology, from the USPTO.
The MuST process starts with the extraction of nuclear proteins in the cell
or tissue sample. Proteins within this extract which exhibit sequence-specific
DNA binding properties are bound to a set of DNA probes and separated from all
unbound probes using electrophoretic separation techniques. After purification
and amplification, the binding sites are sequenced and entered into a database.
The result is a library of sequences which represent the binding sites for the
gene regulatory proteins contained in the original nuclear extract. The entire
process is tracked by the Company's laboratory information management system,
which captures both process and quality control data.
The Company has established the technical resources to construct a library
of transcription factor binding sequences for any given cell type in a period of
four weeks and has begun to process samples in order to expand the database.
Over 50% of the transcription factor binding sequences Gene Logic has identified
to date in a variety of different human cell types are not included in public
domain databases.
GENE LOGIC'S BIOINFORMATICS SYSTEM
The Company has designed and is continuing to develop a bioinformatics
system to manage and analyze the information it generates and to interface with
its databases, its partners' databases and databases in the public domain. This
system enables the functional integration of Gene Logic's genomic data content
with other proprietary or public genomic databases, protein databases and
strategic partners' chemical, screening and assay databases. Gene Logic's
bioinformatics system provides the analytical tools necessary to enable the
Company to discover and prioritize targets for drug discovery. Moreover, the
provision of Gene Logic's proprietary genomic data in conjunction with its
integrated bioinformatics system may enable the Company to introduce that system
into strategic partners' drug discovery process in a customized, expandable
format that is compatible with partners' current database architectures.
DATABASE INTEGRATION TOOLS
The Company's bioinformatics system was developed using scientific data
management tools based on the Object Protocol Model ("OPM"). These tools provide
support for the rapid development of relational databases, the integration of
relational and flat file databases and for cross-database queries. The Company's
bioinformatics system works through customized and configurable Web interfaces,
regardless of the structure of the underlying databases and without having to
redevelop each database. The Company's bioinformatics system enables the
integration of Gene Logic's information content into the data management systems
of its strategic partners, and the Company believes that the system will also
enhance the value of such partners' existing databases by establishing
interconnectivity of heterogeneous data sources.
GENOMIC DATA ANALYTICAL TOOLS
The Company's bioinformatics system includes tools for the analysis of data
generated by READS and MuST for both normal and diseased cell and tissue types.
Gene expression data are analyzed using the Company's proprietary Molecular
Topography data tool. The tool allows intuitive "point and click" navigation
among the expressed genes and is also an analytical tool. The system can
identify genes as known (represented in the Company's databases of indexed 3'
ESTs and full-length sequences) or unknown, and provides a wide variety of
statistical analyses of expression levels and correlations both within and
across cell, tissue and disease types.
Underlying the Molecular Topography tool is the quEST software developed by
the Company. quEST includes a reference set of indexed, human 3' ESTs,
representing the Company's universe of known genes. The Company processes these
ESTs to eliminate artifacts and redundancies which are commonly found in the
public data. The quEST tool also includes a searching and matching algorithm
which allows 3' EST
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signature fragments from READS to be correlated with known genes. The Company
routinely sequences signature fragments which are not in its databases as they
are identified by READS and is capable of sequencing over 1,000 such fragments
per week. Once the sequence of a gene is captured in the Company's database, a
fragment derived from that gene can thereafter be identified in a Molecular
Topography without the need for further sequencing.
Gene Logic has also developed proprietary methods to prioritize the
disease-associated genes it discovers as potential drug targets. This
prioritization depends upon a number of factors including: (i) a gene's temporal
association with the disease process; (ii) the tissue distribution of its
expression; (iii) any homology it may have with known target classes, such as
membrane receptors, enzymes or signaling proteins; (iv) its involvement in known
metabolic or signal transduction pathways; and (v) the feasibility of developing
a screening assay.
THE FLOW-THRU CHIP
Gene Logic is developing its proprietary, reusable Flow-thru Chip for
high-throughput analysis of changes in the expression of known genes. The
Company believes that the Flow-thru Chip will enable the development of
high-throughput screening assays to evaluate the effects of compounds on the
expression of disease associated genes identified by READS. This technology
represents a new approach to drug discovery and has the potential to accelerate
substantially the identification of drug leads. The Company has exclusive
licenses to the technology underlying the Flow-thru Chip from the United States
Department of Energy and the inventor of the technology.
In its drug discovery process, Gene Logic will use its READS technology to
identify which genes are associated with the disease. Once these genes are
known, the Company will design a customized Flow-thru Chip incorporating probes
specific to these genes and use the chip to test the effects of compounds in
cellular assays. Compounds that have the desired effect on expression of the
relevant genes, such as restoring the expression pattern to normal or mimicking
the effect of a known therapeutic, may be evaluated as drug leads.
The substrate of the Flow-thru Chip is a silicon or glass wafer traversed by
a grid of micro-channels. The current version of the chip is laid out in a
format which is compatible with current high-throughput cellular assay systems.
Each well is configured to contain an array of approximately 400 genes
identified using the Company's READS technology; the number of genes included in
each well is expected to be increased to approximately 1,000 in the second
version of the Flow-thru Chip. The Company expects to commence in-house testing
during 1998.
Based on disease-associated genes identified by READS, Gene Logic designs
and synthesizes custom oligonucleotide probes and binds them, using a
proprietary covalent attachment chemistry, within the micro-channels covering a
specific area of the chip. The function of each probe is to bind to its
complementary DNA or RNA in the sample being analyzed. The nucleic acid is
isolated from such a sample and fluorescently labeled by one of several standard
biochemical methods. The test sample is then flowed through the substrate of the
Flow-thru Chip where each attached probe captures, or hybridizes to, any labeled
nucleic acid present in the sample which is complementary to that probe. When
imaged using the Company's signal detection system, the hybridized test sample
generates a fluorescent signal which can be correlated with the expression in
the original sample of the gene captured by the probe because the sequence and
position of each complementary DNA probe on the Flow-thru Chip is known. The
level of signal is readily quantifiable and reflects the degree to which the
gene is expressed in the sample.
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FLOW-THRU CHIP-TM-
[graphical depiction of cross-sections of Flow-thru Chip]
Cut-away of a micro-channel containing covalently-linked oligonucleotide
probes.
Area of chip containing probes for a single gene.
Portion of one cm2 chip with 400 sites each containing probes for individual
genes.
Each high-throughput screening assay comprises 96 wells, each containing the
full 400 gene set.
The Company believes that several features make the Flow-thru Chip well
suited for monitoring the expression of known genes in high-throughput cellular
assays:
- SENSITIVITY. Because of the greater surface area available for attachment
of the oligonucleotide probes, the Company believes the Flow-thru Chip
will be sensitive enough to monitor changes in expression of low-abundance
transcripts.
- SPEED. The existence of the micro-channels accelerates the hybridization
reaction, reducing the time required for each assay. In addition, because
the walls of the micro-channels focus the fluorescent signal, the Company
is able to use a commercially available digital signal detection system
which provides an immediate read-out.
- COST. As a result of the proprietary covalent chemistry through which the
oligonucleotide probes are attached within the micro-channels, each
Flow-thru Chip can be used multiple times. Following each assay the chip
is washed to remove the hybridized material and is then ready for reuse.
The Company believes the reusability of the Flow-thru Chip will make it
suitable for use in high- throughput screening applications.
In addition to its use as part of the Company's drug lead discovery
programs, the Flow-thru Chip will also serve as a platform for the screening of
lead compounds against the data in the Toxicology EXPRESS and Pharmacology
EXPRESS databases being developed by the Company. Gene Logic will design
Flow-thru Chips using oligonucleotide probes representative of the genes that
comprise patterns of gene expression which typify known classes of toxic or
pharmacological effects identified using READS. The Company may sell Flow-thru
Chips to its strategic partners in conjunction with subscriptions to the
Toxicology EXPRESS or Pharmacology EXPRESS databases or provide screening
services in conjunction with an alliance.
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The Company has established relationships with several third parties for
manufacture of the chip substrates and oligonucleotide probes which constitute
its Flow-thru Chip arrays and for the robotic and signal detection systems
associated with running high-throughput screening assays using the chips. There
can be no assurance, however, that the Company will be able to maintain such
relationships on terms acceptable to the Company.
There can be no assurance that further development and scale-up of the
Flow-thru Chip will be successful or that the Company will be successful in
marketing the Flow-thru Chip to strategic partners or others.
GENE LOGIC PROGRAMS AND PRODUCTS
DRUG TARGET AND LEAD DISCOVERY PROGRAMS
The ACCELERATED DRUG DISCOVERY system is applicable to a broad range of
diseases. As part of its business strategy, Gene Logic focuses on large medical
markets that are poorly served by current drug treatments and intends to
establish strategic alliances in specific disease areas with pharmaceutical
companies for drug target and drug lead discovery programs. To date, the Company
has established two strategic alliances in the fields of heart failure and renal
disease. Gene Logic has established independent discovery programs to identify
drug targets for certain diseases of the central nervous system, osteoporosis
and prostate cancer. Gene Logic also intends to obtain access to compound
libraries from combinatorial chemistry and pharmaceutical companies for
screening using its Flow-thru Chip.
Gene Logic has collaborations with academic institutions and commercial
organizations for access to relevant normal and diseased human tissues and cell
types and animal disease models. The Company uses these tissues for analysis of
gene expression and gene regulation and to build its genomic databases. Under
the terms of these agreements, the Company generally retains all commercial
rights to gene discoveries made through the use of cells and tissues provided by
its collaborators.
HEART FAILURE
An estimated 4.8 million Americans suffer from heart failure. Heart failure
refers to a progressive reduction in the ability of the ventricles of the heart
to pump an adequate volume of blood. Although many causes for heart failure have
been identified, common to all is loss of the normal ability of the cells
comprising heart muscle to respond to stress. Normally, muscle becomes stronger
with exercise; in heart failure, increasing load on the heart muscle weakens
rather than strengthens the muscle. Better knowledge of altered patterns of gene
expression in the heart muscle cells as the disease progresses may offer insight
into the disease mechanism.
In May 1997, Gene Logic entered into a 4 1/2-year strategic alliance with
Procter & Gamble for the discovery of drug targets for heart failure. In
connection with this alliance, the Company has obtained access to muscle tissue
from normal and failing human hearts through several heart transplant programs.
Pursuant to the alliance research program, Gene Logic is using READS to identify
changes in the expression of genes which underlie the pathological process to
prioritize targets for the development of innovative drugs and prognostic
indicators. The Company has processed samples and generated Molecular Topography
snapshots for samples received to date from Procter & Gamble and is providing
Procter & Gamble with on-line access to such results. See "--Strategic
Alliances--Procter & Gamble Pharmaceuticals, Inc."
RENAL DISEASE
Approximately 200,000 Americans suffer from end-stage renal disease. The
management of chronic renal failure consumes a significant portion of the health
care budget in the United States. The major causes of renal failure are
glomerulonephritis, diabetes mellitus and hypertension.
In September 1997, the Company entered into a five-year strategic alliance
with Japan Tobacco for the discovery of drug targets and drug leads for renal
disease. As part of the alliance, the Company granted Japan Tobacco a
non-exclusive license to the GENE EXPRESS NORMAL database and Gene Logic may
also use its Flow-thru Chip technology for screening for drug leads in renal
disease. Pursuant to the alliance, Gene Logic is establishing collaborations for
access to a broad range of human tissues and animal disease
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models relevant to renal disease. The Company is using its ACCELERATED DRUG
DISCOVERY system to identify drug targets and leads for the development of novel
therapeutics and diagnostic and molecular staging products for renal disease.
See "--Strategic Alliances--Japan Tobacco Inc."
DISEASES OF THE CENTRAL NERVOUS SYSTEM
Gene Logic is employing its ACCELERATED DRUG DISCOVERY system to identify
drug targets for schizophrenia, affective disorders and Alzheimer's disease.
SCHIZOPHRENIA. Schizophrenia is a severe mental disorder affecting
approximately one percent of the worldwide population. Current treatments for
schizophrenia are inadequate because a significant percentage of schizophrenics
are resistant to all treatments and others respond only partially to drug
therapy and remain too affected to work or lead normal lives. The underlying
chemical alterations in the brain which cause schizophrenia are not well
understood.
Gene Logic is analyzing the patterns of gene expression in brain cells from
schizophrenics and animal treatment models to identify novel drug targets. Gene
Logic has entered into a collaboration with Johns Hopkins University School of
Medicine for access to POST MORTEM tissue samples from brains of schizophrenics.
These samples were obtained from both drug-treated and untreated individuals
shortly after death. The Company has also begun evaluating the effects of
established and experimental anti-
psychotic drugs on gene expression in the brain in animal models.
AFFECTIVE DISORDERS. There are two broad categories of affective disorders:
unipolar affective disorder, or depression, which affects an estimated 15
million Americans, and bipolar affective disorder, also known as
manic-depression, which affects an estimated two million people in the United
States. Although drug therapies exist for these disorders, pharmaceutical
companies are attempting to develop new products having a more rapid onset of
action and efficacy in a higher percentage of patients.
The Company is using READS to discover new antidepressant drug targets based
on changes in the patterns of gene expression in brain cells from patients with
affective disorders. The Company has entered into a collaboration with Johns
Hopkins University School of Medicine for access to POST MORTEM samples from
specific regions of the brains of both drug-treated and untreated
manic-depressives.
ALZHEIMER'S DISEASE. Between three and four million Americans suffer from
disabling age-related dementia, or Alzheimer's disease. The primary therapeutic
goal is postponement of the onset of disease in predisposed individuals and
slowing of disease progression.
Gene Logic has entered into a collaboration with Molecular Geriatrics
Corporation for access to micro-dissected samples of relevant regions of human
brain from patients with Alzheimer's disease ranging from early stage through
advanced degeneration. The samples have been characterized using proprietary
monoclonal antibodies to reveal cells affected at the onset of the disease. The
Company has exclusive rights to any genes useful in the development of
therapeutic products which are identified through the collaboration. The Company
may pursue such rights independently or in alliance with a strategic partner.
Molecular Geriatrics Corporation retains rights to develop diagnostic products.
OSTEOPOROSIS
Osteoporosis is a condition characterised by low bone mass and
susceptibility to fracture. Osteoporosis affects over 20 million American women,
a number which continues to grow as the average age of the population increases.
Loss of bone mass in postmenopausal women can be substantially retarded or
prevented by hormone replacement therapy. However, there is no available
treatment that significantly restores bone mass that has already been lost.
Because effective prevention requires early diagnosis, there is also a large and
immediate market for more sensitive diagnostics.
Gene Logic has commenced its discovery program in osteoporosis with the
Center for Clinical and Basic Research and Johns Hopkins University School of
Medicine providing normal and osteoporotic bone samples. The Company intends to
develop drug targets identified through these programs independently or in
alliance with a strategic partner.
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PROSTATE CANCER
Prostate cancer is the most commonly diagnosed cancer in American men with
317,000 new cases reported in 1996 and is the second leading cause of all male
cancer deaths in the United States.
Gene Logic has established a collaboration for access to staged and
characterized prostate cancer tissue samples, together with related clinical
treatment and outcomes data, with Baylor College of Medicine. In this program,
the Company is focusing on the identification of targets for the development of
novel therapeutics and diagnostic products. Gene Logic may develop these
independently or in alliance with strategic partners.
GENOMIC DATABASE PRODUCTS
Complementary to its disease-specific target discovery programs, the Company
is developing a suite of genomic database products designed to accelerate the
process of target identification and prioritization, the discovery of lead
compounds and the preclinical and clinical development of drugs. Gene Logic
intends to market its suite of genomic database products, in a single package or
as separate modules, to multiple partners on a non-exclusive basis both
independent of and in conjunction with drug target and drug lead discovery
alliances. The Company expects to receive annual database access subscription
fees, milestone payments based on utilization of the data in licensees' drug and
diagnostic discovery programs and royalties on net sales of resulting products.
GENE EXPRESS NORMAL DATABASE
The GENE EXPRESS NORMAL database is a reference set of gene expression
profiles for a wide variety of normal human tissues, which enables the Company
and its partners to determine rapidly the expression level of genes in normal
tissues. The database will also contain gene expression profiles for normal
tissues in rat and mouse, the experimental animals most commonly used by the
pharmaceutical industry. This information facilitates the prioritization of drug
targets. The database uses the Company's bioinformatics system to correlate
specific gene sequences to their expression levels and to interface with other
public or private sequence databases to which the licensee may have access. The
Company has granted the first non-exclusive license to the GENE EXPRESS NORMAL
database to Japan Tobacco.
RARE EST (REST) DATABASE
Approximately 80% of all human genes are rarely expressed (at the level of
fewer than five mRNA copies per cell), and fewer than an estimated 50% of such
genes are available in existing human EST databases. However, these
low-abundance, tissue-specific gene transcripts are those that the Company
believes will be most promising as drug targets. Gene Logic uses its READS
technology on tissue samples to identify rarely expressed genes. Unlike
traditional EST sequencing methods, Gene Logic's process is directed
(non-random) and has a low level of redundancy. The Company is developing a
database of rare ESTs, with the potential to provide promising drug targets not
available through other sources of sequence data. The Company anticipates that
the rEST database will be commercially available in 1998, but there can be no
assurance that it will be available by such date, or at all.
THE ANNOTATED GENOME (TAG) DATABASE
The Human Genome Project is forecast to complete the sequencing of the
entire genome by the year 2005. Using expression data derived from the GENE
EXPRESS NORMAL database and the transcription factor binding site sequence
information generated by the Company's MuST technology, Gene Logic intends to
create a database, the TAG database, of human genomic sequence information
derived from the Human Genome Project annotated with expression levels, tissue
distribution of expression and gene regulatory mechanisms. The Company believes
the analysis of this database will enable genes to be placed in their functional
pathways based upon coordinate expression and shared transcriptional control
elements, thereby allowing the selection and prioritization of appropriate drug
targets at multiple points along disease-associated pathways. The development of
the TAG database is at an early stage and Gene Logic expects that it will
accelerate as more human genomic sequence data becomes available.
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PHARMACOLOGY EXPRESS DATABASE
The Company is using its READS technology to build a database of profiles of
gene expression that characterize the pharmacological effects in relevant target
organs of compounds of known therapeutic benefit. These patterns can be used as
references for the screening of new lead compounds in order to predict
therapeutic efficacy at the preclinical development stage. The Company believes
that this technology may substantially reduce the risks associated with clinical
development of new drugs and provide a rapid filter for the selection and
prioritization of lead compounds. In conjunction with its Pharmacology EXPRESS
database, Gene Logic plans to use its Flow-thru Chip for the screening of lead
compounds against the database. The construction of the Pharmacology EXPRESS
database is at an early stage. The Company anticipates that such database will
be commercially available in 1998, but there can be no assurance that it will be
available by such date, or at all.
TOXICOLOGY EXPRESS DATABASE
Gene Logic intends to use its READS technology to build a database of the
changes in gene expression that typify known toxicological effects of compounds
in the target organs subject to such effects. Patterns may be identified by
comparing gene expression in normal tissues to gene expression in similar
tissues exposed to known toxic substances. These patterns can be used as
references for the screening of new lead compounds for common classes of
toxicological effects in order to minimize the use of traditional animal
toxicology screening, which is both time-consuming and expensive. In conjunction
with the Toxicology EXPRESS database, Gene Logic plans to use its Flow-thru Chip
for the screening of lead compounds against the database. The Company believes
that screening against the Toxicology EXPRESS database will provide a filter for
the prioritization of lead compounds and will accelerate the selection of those
to be taken forward through full toxicological studies in animals and those to
be abandoned. The construction of the Toxicology EXPRESS database is at an early
stage. The Company anticipates that such database will be commercially available
in 1998, but there can be no assurance that it will be available by such date,
or at all.
The statements made in this Prospectus regarding anticipated dates for
commercial availability of certain of its products are forward-looking
statements, and the actual dates of commercialization could differ materially
from those projected as a result of a variety of factors, including progress of
the Company's technologies, changes in the Company's business priorities and
other factors discussed in "Risk Factors." There can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development and commercialization of products or that the Company's
products will address the requirements of the market or achieve market
acceptance.
NEW PRODUCT OPPORTUNITIES
Gene Logic intends to pursue commercial opportunities for diagnostic
applications of its discoveries, including molecular staging of disease,
differential diagnosis and pharmacogenomic profiling. The Company believes that
management of common diseases in the future will include gene expression-based
diagnostics to monitor the molecular evolution of the disease. Gene expression
analysis may enable differentiation among diseases which share clinical symptoms
but which differ at the level of molecular mechanism. Gene Logic believes that
pharmacogenomic profiling, using gene expression-based assays to predict an
individual's response to specific drugs, may be especially valuable in new drug
development and in modifying drug therapies of known efficacy but which have
toxic side effects in certain groups of patients.
STRATEGIC ALLIANCES
As part of its business strategy, Gene Logic intends to continue to
establish strategic alliances for drug target and lead discovery programs in
specific disease areas with pharmaceutical companies. Gene Logic may also enter
into strategic alliances or joint ventures with additional partners to develop
certain diagnostics, therapeutic proteins and gene therapy products for which it
has retained rights. The Company's strategic alliances would generally provide
for the Company to receive technology license fees, research funding, milestone
payments and royalty or profit-sharing income. To date, Gene Logic has
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entered into a target discovery alliance with Procter & Gamble in the field of
heart failure and a target and lead discovery alliance with Japan Tobacco in the
field of renal disease.
Gene Logic's objective is to structure its alliances in a flexible manner.
Subject to a commitment by a strategic partner, the Company is able to allocate
a variable portion of its production capacity to any individual program. An
alliance might embrace a field as restricted as one specific project within a
single disease indication or as broad as an entire category of disease involving
several indications.
PROCTER & GAMBLE PHARMACEUTICALS, INC.
In May 1997, the Company and Procter & Gamble entered into a 4 1/2-year
strategic alliance for drug target discovery in heart failure. Payments by
Procter & Gamble to the Company in the form of committed technology access fees
and research funding will total a minimum of $10.1 million if the research
program continues for its full term and the Company performs its research
obligations under the agreement. The parties may agree to extend the research
program for additional one-year periods. At any time during the first 18 months
of the alliance, Procter & Gamble has the right to expand the alliance to
include drug target discovery programs in two additional disease indications
upon terms, including committed research funding, identical to those covering
the initial program in heart failure. Procter & Gamble will be obligated to make
additional payments to the Company for the achievement of specified target
discovery, product development and associated regulatory milestones. Procter &
Gamble will also pay the Company royalties on worldwide net sales of all
products that may result from the alliance. Payments for technology access fees
and research and development support will be recognized as revenue ratably over
the period for which the payments are made. Payments related to the achievement
of milestones will be recognized as revenue when the milestones are achieved.
The agreement provides Procter & Gamble with exclusive, worldwide,
royalty-bearing rights to develop and commercialize small molecule therapeutics,
therapeutic proteins and diagnostics based on the Company's discoveries in the
field of heart failure. Gene Logic has retained all rights to develop and
commercialize products discovered pursuant to the alliance outside of the
alliance field. Procter & Gamble has agreed to assign to Gene Logic any and all
interest it may have in inventions related to the Company's core technologies
and to products developed pursuant to the alliance to the extent necessary for
Gene Logic to exercise its retained commercial rights.
Procter & Gamble has the right to terminate the research program with
respect to heart failure by giving Gene Logic six months notice at any time
after 12 months from the date of commencement of the research program under the
agreement and has comparable rights to terminate the research program in the
options fields. Accordingly, the minimum duration of any research program is 18
months. If Procter & Gamble terminates the agreement, it may elect to recommence
the research program for up to two additional years. Each party also has the
right to terminate the agreement upon certain change of control events with
respect to the other party. Unless earlier terminated in accordance with its
terms, the agreement will remain in effect until the expiration of the
last-to-expire obligations of Procter & Gamble to pay royalties under the
agreement.
There can be no assurance that the Company's research pursuant to the
agreement will be successful in discovering drug targets related to heart
failure or to either of the two option disease fields or that Procter & Gamble
will be successful in developing or commercializing any products based upon such
discoveries made by the Company. As a result, there can be no assurance that
Gene Logic will receive any milestone payments, royalties or other payments
contemplated by the agreement.
JAPAN TOBACCO INC.
In September 1997, the Company and Japan Tobacco entered into a five-year
strategic alliance for drug target and drug lead discovery in renal disease.
Payments by Japan Tobacco to the Company in the form of committed technology
access fees and research funding total a minimum of $15.0 million if the
research program continues for its full term and the Company performs its
research obligations under the Agreement. Japan Tobacco may extend the research
program for one additional year. At any time during the first two years of the
alliance, Japan Tobacco has the right to expand the alliance to include drug
target and drug lead discovery programs in two additional disease indications
upon terms, including committed
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research funding, identical to those covering the initial program in renal
disease. Japan Tobacco will be obligated to make additional payments to the
Company for the achievement of specified target discovery and related product
development and associated regulatory milestones. Pursuant to the terms of the
agreement, Japan Tobacco would pay a minimum of $12.5 million for each
therapeutic product if all milestones are achieved. Japan Tobacco will also pay
the Company royalties on worldwide net sales of all products that may result
from targets discovered pursuant to the alliance. Payments for technology access
fees and research and development support will be recognized as revenue ratably
over the period for which the payments are made. Payments related to the
achievement of milestones will be recognized as revenue when the milestones are
achieved.
As part of the alliance and during the research term of the alliance
agreement, the Company granted Japan Tobacco a non-exclusive license to the GENE
EXPRESS NORMAL database, and Gene Logic intends to use its Flow-thru Chip
technology for screening for drug leads in renal disease or, if Japan Tobacco
has exercised its options to additional disease indications, such other disease
indications. In consideration for such license and access, Japan Tobacco has
agreed to purchase $3.0 million of Common Stock in a private transaction
concurrent with this offering at a price per share equal to the price per share
at which Common Stock is sold in this offering. Under the terms of the option,
Japan Tobacco will pay Gene Logic chip design fees, screening fees and a minimum
of $17.5 million for each therapeutic product based on a lead compound
identified through such assays if all milestones are achieved. The agreement
also entitles the Company to royalties on net sales of therapeutic products
based on lead compounds identified through such assays.
The agreement provides Japan Tobacco with exclusive, worldwide,
royalty-bearing rights to develop and commercialize small molecule therapeutics
and therapeutic antibodies and proteins based on the Company's discoveries in
the course of the alliance. Gene Logic has retained all rights to develop and
commercialize gene therapy and antisense drugs and diagnostic products
discovered pursuant to the alliance. Japan Tobacco has agreed to assign to Gene
Logic any and all interest it may have in inventions related to the Company's
core technologies and to products developed pursuant to the alliance to the
extent necessary for Gene Logic to exercise its retained commercial rights.
Japan Tobacco has the right to terminate the research program with respect
to renal disease by giving Gene Logic six months notice at any time after 12
months from the date of commencement of the research program under the agreement
and has comparable rights to terminate the research program in the option
fields. Accordingly, the minimum duration of any research program is 18 months.
Unless earlier terminated in accordance with its terms, the agreement will
remain in effect until the expiration of the last-to-expire obligations of Japan
Tobacco to pay royalties under the agreement.
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There can be no assurance that the Company's research pursuant to the
agreement will be successful in discovering drug targets or drug leads related
to renal disease or to either of the two option disease fields or that Japan
Tobacco will be successful in developing or commercializing any products based
upon such discoveries made by the Company. As a result, there can be no
assurance that Gene Logic will receive any milestone payments, royalties or
other payments contemplated by the agreement.
INTELLECTUAL PROPERTY
Gene Logic seeks United States and international patent protection for major
components of its technology platform, including elements of its READS, MuST,
Flow-thru Chip and bioinformatics technologies; it relies upon trade secret
protection for certain of its confidential and proprietary information; and it
uses license agreements both to access external technologies and assets and to
convey certain intellectual property rights to others. The Company's commercial
success will be dependent in part upon its ability to obtain commercially
valuable patent claims and to protect its intellectual property portfolio.
As of October 20, 1997, the Company had exclusive rights to nine United
States patent applications, as well as corresponding international and foreign
patent applications, relating to its technologies. The Company has received
notices of allowance for two United States patent applications covering the key
aspects of the READS technology, and notice of allowance for one United States
patent application covering the key aspects of the MuST technology. However, no
patents have issued to date.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including Gene Logic, are generally uncertain and involve complex
legal and factual questions. There can be no assurance that any of the pending
patent applications to which the Company has exclusive rights will result in
issued patents, that the claims of any patents which are issued will provide
meaningful protection, that the Company will develop additional proprietary
technologies that are patentable, that any patents licensed or issued to the
Company or its strategic partners will provide a basis for commercially viable
products or will provide the Company with any competitive advantages or will not
be challenged by third parties, or that the patents of others will not have an
adverse effect on the ability of the Company to do business. In addition, patent
law relating to the scope of claims in the technology field in which the Company
operates is still evolving. The degree of future protection for the Company's
proprietary rights, therefore, is uncertain. Furthermore, there can be no
assurance that others will not independently develop similar or alternative
technologies, duplicate any of the Company's technologies, or, if patents are
licensed or issued to the Company, design around the patented technologies
licensed to or developed by the Company. In addition, the Company could incur
substantial costs in litigation if it is required to defend itself in patent
suits brought by third parties or if it initiates such suits.
The Company is aware of a number of United States patents and patent
applications and corresponding foreign patents and patent applications owned by
third parties relating to the analysis of gene expression or the manufacture and
use of DNA chips. There can be no assurance that these or other technologies
will not provide third parties with competitive advantages over the Company and
will not have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, certain third party patent
applications contain broad claims, and it is not possible to determine whether
or not such claims will be narrowed during prosecution and/or will be allowed
and issued as patents, even if such claims appear to cover the prior art or have
other defects. There can be no assurance that an owner or licensee of a patent
in the field will not threaten or file an infringement action or that the
Company would prevail in any such action. There can be no assurance that the
cost of defending an infringement action would not be substantial and would not
have a material adverse effect on the Company's business, financial condition
and results of operations. Furthermore, there can be no assurance that any
required licenses would be made available on commercially viable terms, if at
all. Failure to obtain any required license could prevent the Company from
utilizing or commercializing one or more of its technologies and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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In general, the Company intends to apply for patent protection for methods
relating to gene expression and to apply for patent protection for the
individual disease genes and targets it discovers. Such patents may include
claims relating to novel genes and gene fragments and to novel uses for known
genes or gene fragments identified through its discovery programs. There can be
no assurance that the Company will be able to obtain meaningful patent
protection for its discoveries; even if patents are issued, the scope of the
coverage or protection afforded thereby is uncertain. Failure to secure such
meaningful patent protection could have a material adverse effect on the
Company's business, financial condition and results of operations.
Several groups are attempting to identify and patent gene fragments and
full-length genes, the functions of which have not been characterized, as well
as fully characterized genes. There is substantial uncertainty regarding the
possible patent protection for gene fragments or genes without known function or
correlation with specific diseases. To the extent any patents issue to other
parties on such partial or full-length genes, the risk increases that the
potential products and processes of the Company or its strategic partners may
give rise to claims of patent infringement. The public availability of partial
or full sequence information or the existence of patent applications related
thereto, even if not accompanied by relevant function or disease association,
prior to the time the Company applies for patent protection on a corresponding
gene could adversely affect the Company's ability to obtain patent protection
with respect to such gene or to the related expression patterns. Furthermore,
others may have filed, and in the future are likely to file, patent applications
covering genes or gene products that are similar, or identical to, any for which
the Company may seek patent protection. No assurance can be given that any such
patent application will not have priority over patent applications filed by the
Company. Any legal action against the Company or its strategic partners claiming
damages and seeking to enjoin commercial activities relating to the affected
products and processes could, in addition to subjecting the Company to potential
liability for damages, require the Company or its strategic partners to obtain a
license in order to continue to manufacture or market the affected products and
processes. There can be no assurance that the Company or its strategic partners
would prevail in any such action or that any license required under any such
patent would be made available on commercially acceptable terms, if at all. The
Company believes that there is likely to be significant litigation in the
industry regarding patent and other intellectual property rights. If the Company
becomes involved in such litigation, it could consume a substantial portion of
the Company's managerial and financial resources and have a material adverse
effect on the Company's business, financial condition and results of operations.
Enactment of legislation implementing the General Agreement on Tariffs and
Trade has resulted in certain changes to United States patent laws that became
effective on June 8, 1995. Most notably, the term of patent protection for
patent applications filed on or after June 8, 1995 is no longer a period of 17
years from the date of grant. The new term of United States patents will
commence on the date of issuance and terminate 20 years from the earliest
effective filing date of the application. Because the time from filing to
issuance of biotechnology patent applications is often more than three years, a
20-year term from the effective date of filing may result in a substantially
shortened period of patent protection which may adversely affect the Company's
patent position. If this change results in a shorter period of patent coverage,
the Company's business could be adversely affected to the extent that the
duration and level of the royalties it is entitled to receive from its strategic
partners are based on the existence of a valid patent covering the product
subject to the royalty obligation.
With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, the Company has chosen to
rely on trade secret protection and confidentiality agreements to protect its
interests. The Company believes that several elements of its ACCELERATED DRUG
DISCOVERY system involve proprietary know-how, technology or data which are not
covered by patents or patent applications. In addition, the Company has
developed a proprietary index of gene and gene fragment sequences which it
updates on an ongoing basis. Some of these data will be the subject of patent
applications whereas other data will be maintained as proprietary trade secret
information. The Company
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has taken security measures to protect its proprietary know-how and technologies
and confidential data and continues to explore further methods of protection.
While Gene Logic requires all employees, consultants and collaborators to enter
into confidentiality agreements, there can be no assurance that proprietary
information will not be disclosed, that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets, or that the Company can meaningfully
protect its trade secrets. In the case of a strategic partnership or other
collaborative arrangement which requires the sharing of data, the Company's
policy is to make available to its partner only such data as are relevant to the
partnership or arrangement, under controlled circumstances, and only during the
contractual term of the strategic partnership or collaborative arrangement, and
subject to a duty of confidentiality on the part of its partner or collaborator.
There can be no assurance, however, that such measures will adequately protect
the Company's data. Any material leak of confidential data into the public
domain or to third parties may have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company is a party to various license agreements which give it rights to
use certain technologies and biological materials in its research and
development processes. There can be no assurance that the Company will be able
to maintain such rights on commercially reasonable terms, if at all. Failure by
the Company to maintain such rights could have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION
Competition among entities attempting to identify the genes associated with
specific diseases and to develop products based on such discoveries is intense.
Gene Logic faces, and will continue to face, competition from pharmaceutical,
biotechnology and diagnostic companies, academic and research institutions and
government agencies, both in the United States and abroad. Several entities are
attempting to identify and patent randomly sequenced genes and gene fragments,
while others are pursuing a gene identification, characterization and product
development strategy based on positional cloning. The Com-
pany is aware that certain entities are utilizing a variety of different gene
expression analysis methodologies, including the use of chip-based systems, to
attempt to identify disease-related genes. In addition, numerous pharmaceutical
companies are developing genomic research programs, either alone or in
partnership with the Company's competitors. Competition among such entities is
intense and is expected to increase. In order to compete against existing and
future technologies, the Company will need to demonstrate to potential customers
that its technologies and capabilities are superior to competing technologies.
Many of the Company's competitors have substantially greater capital
resources, research and development staffs, facilities, manufacturing and
marketing experience, distribution channels and human resources than the
Company. These competitors may discover, characterize or develop important
genes, drug targets or drug leads, drug discovery technologies or drugs in
advance of Gene Logic or which are more effective than those developed by Gene
Logic or its strategic partners, or may obtain regulatory approvals of their
drugs more rapidly than the Company and its strategic partners, any of which
could have a material adverse affect on any similar Gene Logic program.
Moreover, there can be no assurance that the Company's competitors will not
obtain patent protection or other intellectual property rights that would limit
the Company's or its strategic partners' ability to use the Company's drug
discovery technologies or commercialize therapeutic or diagnostic products,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company also faces competition from
these and other entities in gaining access to cells, tissues and nucleic acid
samples used in its discovery programs.
The Company will rely on its strategic partners for support of certain of
its discovery programs and intends to rely on its strategic partners for
preclinical and clinical development of related potential products and the
manufacturing and marketing of such products. Each of the Company's strategic
partners
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is conducting multiple product development efforts within each disease area
which is the subject of its strategic alliance with Gene Logic. Generally, the
Company's strategic alliance agreements do not preclude the strategic partner
from pursuing development efforts utilizing approaches distinct from that which
is the subject of the alliance. Any product candidate of the Company, therefore,
may be subject to competition with a potential product under development by a
strategic partner.
Future competition will come from existing competitors as well as other
companies seeking to develop new technologies for drug discovery based on gene
sequencing, target gene identification, bioinformatics and related technologies.
In addition, certain pharmaceutical and biotechnology companies have significant
needs for genomic information and may choose to develop or acquire competing
technologies to meet such needs. Genomic technologies have undergone and are
expected to continue to undergo rapid and significant change. The Company's
future success will depend in large part on its maintaining a competitive
position in the genomics field. Rapid technological development by the Company
or others may result in products or technologies becoming obsolete before the
Company recovers the expenses it incurs in connection with their development.
Products offered by the Company could be made obsolete by less expensive or more
effective drug target and drug lead technologies, including technologies which
may be unrelated to genomics. There can be no assurance that the Company will be
able to make the enhancements to its technology necessary to compete
successfully with newly emerging technologies.
GOVERNMENT REGULATION
The Company does not plan to conduct clinical trials in humans or
commercialize therapeutic products discovered as a result of its genes, drug
target and drug lead discovery programs but intends to rely on its strategic
partners to conduct such activities. Prior to marketing, any new drug developed
by the Company's strategic partners must undergo an extensive regulatory
approval process in the United States and other countries. This regulatory
process, which includes preclinical studies and clinical trials, and may include
post-marketing surveillance of each compound to establish its safety and
efficacy, can take many years and require the expenditure of substantial
resources. Data obtained from preclinical studies and clinical trials are
subject to varying interpretations that could delay, limit or prevent regulatory
approval. Delays or rejections may also be encountered based upon changes in FDA
policies for drug approval during the period of product development and FDA
regulatory review of each submitted NDA in the case of new pharmaceutical
agents, or PLA or BLA in the case of biological therapeutics. Similar delays may
also be encountered in the regulatory approval of any diagnostic product, where
such approval is required, and in obtaining regulatory approval in foreign
countries. Delays in obtaining regulatory approvals could adversely affect the
marketing of any drugs developed by the Company or its strategic partners,
impose costly procedures upon the Company's and its partners' activities,
diminish any competitive advantages that the Company or its partners may attain
and adversely affect the Company's receipt of royalties. There can be no
assurance that regulatory approval will be obtained for any drugs or diagnostic
products developed by the Company or its strategic partners. Furthermore,
regulatory approval may entail limitations on the indicated uses of a drug.
Because certain of the products likely to result from the Company's disease
research programs involve the application of new technologies and may be based
upon a new therapeutic approach, such products may be subject to substantial
additional review by various government regulatory authorities and, as a result,
regulatory approvals may be obtained more slowly than for products based upon
more conventional technologies.
Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continuing review. Discovery of previously unknown
problems with a product may result in withdrawal of the product from the market,
and could have adverse effects on the Company's business, financial conditions
and results of operations. Violations of regulatory requirements at any stage
during the regulatory process, including preclinical studies and clinical
trials, the approval process, post-approval or in good manufacturing practices
manufacturing requirements, may result in various adverse consequences to the
Company, including the FDA's delay in approval or refusal to approve a product,
withdrawal of an
45
<PAGE>
approved product from the market or the imposition of criminal penalties against
the manufacturer and NDA, PLA or BLA holder. No IND has been submitted for any
product candidate resulting from the Company's discovery programs, and no
product candidate has been approved for commercialization in the United States
or elsewhere. The Company intends to rely on its strategic partners to file INDs
and generally direct the regulatory approval process. There can be no assurance
that the Company's strategic partners will be able to conduct clinical testing
or obtain necessary approvals from the FDA or other regulatory authorities for
any products. Failure to obtain required governmental approvals will delay or
preclude the Company's strategic partners from marketing drugs or diagnostic
products developed through the Company's research or limit the commercial use of
such products and could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's research and development activities involve the controlled use
of certain biological and other hazardous materials, chemicals and various
radioactive materials. The Company is subject to federal, state and local laws
and regulations governing the use, storage, handling and disposal of such
materials and certain waste products. Although the Company believes that its
safety procedures for handling and disposing of such materials comply with the
standards prescribed by federal, state and local laws and regulations, the risk
of accidental contamination or injury from these materials cannot be eliminated.
In the event of such an accident, the Company could be held liable for any
damages that result, and any liability could exceed the resources of the
Company. Other than such laws and regulations governing the generation, use and
disposal of hazardous materials and wastes, and limiting workplace exposures to
such materials, the Company does not believe its current and proposed activities
are subject to any specific government regulation other than regulations
affecting the operations of companies generally.
SCIENTIFIC ADVISERS
The Company has established a select group of scientists and physicians to
advise it on scientific and technical matters in areas of the Company's
business. The scientific advisers are compensated by retainer and on a time and
expenses basis, and certain of them have received shares of Common Stock of the
Company. The Company has entered into consulting agreements with a number of the
scientific advisers.
None of the scientific advisers is employed by the Company, and they may
have other commitments to or consulting or advisory contracts with their
employers or other entities that may conflict or compete with their obligations
to the Company. Accordingly, such persons are expected to devote only a limited
portion of their time to the Company. The Company's scientific advisers include:
KENNETH L. BEATTIE, PH.D., Senior Research Staff Member, Oak Ridge National
Laboratory. Dr. Beattie, the inventor of the Flow-thru Chip, is an exclusive
consultant to the Company in its program for the development of analytical
microsystems for gene expression profiling. He is an inventor of several key
patents in the area of DNA probe and sequencing technologies and genome mapping.
Dr. Beattie holds a Ph.D. from the University of Tennessee.
RONALD FALK, M.D., Professor of Medicine and Chief, Division of Nephrology,
University of North Carolina. Dr. Falk consults with the Company in the field of
kidney disease. He is co-director of the Glomerular Disease Collaboration
Network. Dr. Falk holds a M.D. from the University of North Carolina.
J. CHARLES JENNETTE, M.D., Professor of Medicine, Pathology and Laboratory
Medicine, University of North Carolina. Dr. Jennette consults with the Company
in the field of kidney disease. He is Director of the Nephropathology Laboratory
at the University of North Carolina, Jennette holds a M.D. from the University
of North Carolina.
AARON KLUG, PH.D., Director, MRC Laboratory of Molecular Biology, University
of Cambridge, England and Fellow of Peterhouse College. Professor Klug, a
scientific founder of the Company, has been widely recognized for his
contributions to modern molecular biology. He was elected a fellow of the Royal
46
<PAGE>
Society in 1969, received the Nobel Prize for Chemistry in 1982 and the Copley
Medal of the Royal Society in 1985 and was knighted in 1988.
RONALD A. MORTON, JR., M.D., Assistant Professor in Urology, Baylor College
of Medicine. Dr. Morton is Director of Laboratories at the Baylor Prostate
Center, one of three National Cancer Institute prostate cancer SPORE
(Specialized Programs of Research Excellence) centers, and is responsible for
developing and expanding its extensive library of normal and malignant human
prostate tissues. He is an exclusive consultant to Gene Logic in the field of
gene discovery in prostate cancer. Dr. Morton holds a M.D. from Johns Hopkins
University School of Medicine. He is an American Foundation for Urologic Disease
Research Scholar.
JAY R. SHAPIRO, M.D., Professor, Division of Geriatric Medicine, Johns
Hopkins University School of Medicine. Dr. Shapiro is an expert in human bone
diseases and an exclusive consultant to the Company in the field of
osteoporosis. He holds a M.D. from Boston University School of Medicine.
SHERMAN M. WEISSMAN, M.D., Sterling Professor of Genetics and Medicine, Yale
University School of Medicine. Dr. Weissman, the inventor of the READS and MuST
technologies, is a scientific founder of and a key adviser to the Company. Dr.
Weissman graduated with advanced degrees in mathematics from the University of
Chicago and a M.D. from Harvard Medical School. He is a member of the National
Academy of Sciences, a fellow of the American Association for the Advancement of
Science and sits on the editorial board of the PROCEEDINGS OF THE NATIONAL
ACADEMY OF SCIENCES and other eminent journals.
ROBERT H. YOLKEN, M.D., Professor of Pediatrics and Director, The Stanley
Laboratory for the Study of Schizophrenia and Bipolar Disorder, Johns Hopkins
University School of Medicine. Dr. Yolken consults with the Company in the
fields of gene target discovery in schizophrenia and affective disorders. Dr.
Yolken holds a M.D. from Harvard University.
EMPLOYEES
As of September 30, 1997, the Company had a total of 57 employees, 18 of
whom hold M.D., Ph.D or D.Sc. degrees and ten of whom hold other advanced
degrees, and one part-time employee. Of these, 46 were engaged in research and
development and 11 were engaged in business development, finance and general
administration. The Company's future success depends in significant part upon
the continued service of its key scientific, technical and senior management
personnel and its continuing ability to attract and retain highly qualified
technical and managerial personnel. None of the Company's employees is
represented by a labor union or covered by a collective bargaining agreement.
The Company has not experienced any work stoppages and considers its relations
with its employees to be good.
FACILITIES
The Company's facilities are located in Columbia, Maryland. The Company
leases approximately 21,000 square feet of laboratory and office space. These
facilities are leased through February 28, 1998. The Company recently entered
into a ten-year lease for approximately 50,000 square feet of laboratory and
office space in Gaithersburg, Maryland and plans to relocate its operations to
such facility in January 1998. The Company believes that, upon such relocation,
the Company's facilities will be adequate for its current and projected needs
and that additional space will be available as needed. The Company has leased
approximately 5,000 square feet of office space in Berkeley, California.
LEGAL PROCEEDINGS
Gene Logic is not a party to any material legal proceedings.
47
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding the Company's
directors, executive officers and key employees as of September 30, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Alan G. Walton, Ph.D., D.Sc. (1)..................... 61 Chairman of the Board of Directors
Michael J. Brennan, M.D., Ph.D. ..................... 40 President, Chief Executive Officer and Director
Keith O. Elliston, Ph.D. ............................ 36 Senior Vice President and Chief Scientific Officer
Mark D. Gessler...................................... 36 Senior Vice President, Corporate Development and
Chief Financial Officer
Eric M. Eastman, Ph.D. .............................. 45 Vice President, Technology Management
Gregory G. Lennon, Ph.D. ............................ 40 Vice President, Genomics Research
Victor M. Markowitz, D.Sc. .......................... 44 Vice President, Bioinformatics Systems
Daniel R. Passeri, J.D. ............................. 36 Vice President, Business Development and Intellectual
Property
Jules Blake, Ph.D. (1)(2)............................ 73 Director
Charles L. Dimmler III (1)(2)........................ 55 Director
G. Anthony Gorry, Ph.D. ............................. 56 Director
Jeffrey D. Sollender................................. 37 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
ALAN G. WALTON, PH.D., D.SC. has served as Chairman of the Board of
Directors of the Company since its inception in September 1994. He has been a
General Partner of Oxford Bioscience Partners, a private equity investment firm,
since 1991 and a member of the Board of Directors of Collaborative Clinical
Research since 1994. In 1981, Dr. Walton co-founded University Genetics Co., a
public corporation specializing in technology transfer from academic
institutions to industry and in the seed financing of high-technology start-ups,
and served as President and Chief Executive Officer until 1987. He has lectured
extensively at various universities, including Harvard Medical School, Indiana
University and Case Western Reserve University where he was Professor of
Macromolecular Science and Director of the Laboratory for Biological
Macromolecules. Dr. Walton received a Ph.D. in chemistry and a D.Sc. in
biological chemistry from Nottingham University, England.
MICHAEL J. BRENNAN, M.D., PH.D. has served as President, Chief Executive
Officer and a director of the Company since December 1995. From October 1993 to
November 1995, he was Vice President, Business Development for Corange
International Limited's worldwide therapeutics business, Boehringer Mannheim
Therapeutics. From June 1990 to October 1993, Dr. Brennan was a director and the
general manager of Boehringer Mannheim South Africa. Dr. Brennan received a
Ph.D. in neurobiology and a M.D. from the University of the Witwatersrand,
Johannesburg, South Africa. In 1985, he completed his residency in neurology at
Boston City Hospital.
KEITH O. ELLISTON, PH.D. has served as Senior Vice President and Chief
Scientific Officer of the Company since February 1997. From July 1996 to
February 1997, Dr. Elliston was Head of Genome Sciences at Bayer Corporation, a
pharmaceutical company, and also responsible for establishing and
48
<PAGE>
directing its bioinformatics effort worldwide. From 1986 to July 1996, Dr.
Elliston was involved in a wide range of genomics and drug discovery programs at
Merck & Co., Inc. ("Merck"), a pharmaceutical company. In 1993, he founded the
Department of Bioinformatics at Merck. He also co-founded and was the scientific
director of the Merck Gene Index project, involving the coordinated efforts of
Merck, Washington University, Lawrence Livermore National Laboratory, the
University of Pennsylvania and the National Center for Biotechnology
Information. Dr. Elliston received his M.S. degree in genetics from the
University of Minnesota and a Ph.D. in molecular genetics from Rutgers
University. He is an advisory board member of the National Center for
Biotechnology Information, National Institutes of Health, and the National
Center for Genome Resources, and an Adjunct Professor at Rutgers University.
MARK D. GESSLER has served as Senior Vice President, Corporate Development
and Chief Financial Officer of the Company since June 1996. From February 1993
to June 1996, Mr. Gessler was with GeneMedicine, Inc., a gene therapy company,
most recently as Vice President, Corporate Development. From 1988 until January
1993, he was Director of Business Development at BCM Technologies, Inc., the
venture and technology subsidiary of Baylor College of Medicine. While in that
position, Mr. Gessler co-founded three biotechnology companies and a software
company. Mr. Gessler holds a MBA from the University of Tennessee and was an
Adjunct Professor of Business Administration at Rice University from 1991 to
1996.
ERIC M. EASTMAN, PH.D. has served as Vice President, Technology Management
of the Company since August 1997. He served as Vice President, Scientific
Operations of the Company from September 1996 to August 1997. From June 1993 to
September 1996, Dr. Eastman was Director of Gene Expression and Process Research
& Development at GeneMedicine, Inc. He was a founder and served as Vice
President and Chief Scientific Officer of Lark Sequencing Technologies, Inc., a
molecular biology services company, from 1989 to June 1993. Dr. Eastman holds a
M.S. from the University of Connecticut and received a M.Phil. degree and a
Ph.D. in human genetics and development from Columbia University College of
Physicians and Surgeons.
GREGORY G. LENNON, PH.D. has served as Vice President, Genomics Research
since September 1997. Prior to joining Gene Logic, Dr. Lennon was a senior
scientist of the Human Genome Center at Lawrence Livermore National Laboratory
and manager of the functional genomics research portfolio for the Department of
Energy's Joint Genome Institute from October 1991 to August 1997. Dr. Lennon is
a founder and the director of the I.M.A.G.E. (Integrated Molecular Analysis of
Gene Expression) Consortium funded by the Department of Energy. He was a
participant in both the Merck Gene Index project and the National Cancer
Institute's Cancer Genome Anatomy Project. Dr. Lennon holds a Ph.D. in genetics
from the University of Pennsylvania. He is an adviser to the National Cancer
Institute of the National Institutes of Health.
VICTOR M. MARKOWITZ, D.SC. has served as Vice President, Bioinformatics
Systems since September 1997. Prior to joining Gene Logic, Dr. Markowitz was a
staff scientist at Lawrence Berkeley National Laboratory from 1987 to August
1997, serving most recently as project leader in the Data Management Research
and Development Group. He is the principal architect of the Object Protocol
Model (OPM) software. Dr. Markowitz received his M.Sc. and D.Sc. in computer
science from Technion, the Israel Institute of Technology.
DANIEL R. PASSERI, J.D. has served as Vice President, Business Development
and Intellectual Property of the Company since March 1997. From March 1995 to
March 1997, he was Director of Technology Management for the Boehringer Mannheim
Group, responsible for the assessment and acquisition or licensing of new
biomedical technologies. From January 1992 to February 1995 he was Acting Chief,
Cellular Growth and Regulation Branch of the Office of Technology Transfer of
the National Institutes of Health and its Senior Licensing Specialist. He served
as a Patent Examiner in the biotechnology section of the USPTO. Mr. Passeri
holds a M.Sc. in biotechnology from the Imperial College of Science, Technology
and Medicine, University of London. He holds a J.D. from George Washington
University. He is registered
49
<PAGE>
to practice before the USPTO and in the State of Maryland and has been an
adjunct professor at George Washington University since 1995.
JULES BLAKE, PH.D. has served as a director of the Company since its
inception. From 1973 until his retirement in 1989, Dr. Blake served as Vice
President of Research and Development and Vice President, Corporate Scientific
Affairs, for Colgate-Palmolive, Inc., a consumer products company. Dr. Blake was
appointed as an Industrial Research Institute Fellow at the United States Office
of Science and Technology Policy, Executive Office of the President, where he
served until 1991. Dr. Blake serves on the boards of directors of the public
companies Martek Biosciences Corporation and ProCyte Corporation. Dr. Blake
holds a Ph.D in organic chemistry from the University of Pennsylvania.
CHARLES L. DIMMLER III has served as a director of the Company since May
1996. Since 1988, Mr. Dimmler has been a General Partner of Hambro International
Equity Partners, an equity investment firm, and is currently also the principal
investment officer of Cross Atlantic Partners Funds, an equity investment firm,
and an operating officer of Hambro Health International, Inc., an affiliate of
Hambros Bank Limited, a global merchant bank based in London. Mr. Dimmler serves
as a director of SunPharm, Inc., a public company, and various private
companies. He holds an honors degree from the University of California at Davis.
G. ANTHONY GORRY, PH.D. has served as a director of the Company since
January 1997. Since April 1992, Dr. Gorry has been Vice President for
Information Technology and Professor of Computer Science at Rice University. He
is the Chairman and a founder of The Forefront Group, Inc., a public information
technology company. From 1975 to April 1992, he served as Vice President for
Information Technology and Professor of Medical Informatics and Neuroscience at
Baylor College of Medicine, as well as Director of the W. M. Keck Center for
Computational Biology and Adjunct Professor of Computer Science at Rice
University. Dr. Gorry holds a M.S. in chemical engineering from the University
of California at Berkeley and a Ph.D. in computer science from Massachusetts
Institute of Technology. He is a fellow of the American College of Medical
Informatics and a member of the Institute of Medicine and of the National
Academy of Sciences.
JEFFREY D. SOLLENDER has served as a director of the Company since July
1997. Mr. Sollender is a founder of and adviser to Biotechvest L.P., a venture
capital investment firm formed in 1993. From 1994 through December 1995, Mr.
Sollender served as an adviser to Forward Ventures, a venture capital investment
firm. Mr. Sollender became a venture partner of Forward Ventures in 1996 and a
general partner in September 1997. Mr. Sollender co-founded Triangle
Pharmaceuticals, Inc., a biopharmaceutical company, in 1995, CombiChem Inc., a
combinatorial chemistry company, in 1994 and GenQuest, Inc., a functional
genomics company, in 1995. He served as Vice President of Operations and
Business Development for CombiChem Inc. and GenQuest, Inc. until January 1995
and February 1996, respectively. Mr. Sollender co-founded AriZeke
Pharmaceuticals, an oral drug delivery company, in 1997 and continues to serve
as Chairman and Chief Executive Officer of the company. Mr. Sollender received
his MBA from the University of Chicago Graduate School of Business.
COMMITTEES OF THE BOARD OF DIRECTORS
The Compensation Committee consists of Dr. Walton, Dr. Blake and Mr.
Dimmler. The Compensation Committee makes recommendations regarding the
Company's 1997 Equity Incentive Plan, Non-Employee Directors' Stock Option Plan
and Employee Stock Purchase Plan and determines salaries for the executive
officers and incentive compensation for employees and consultants of the
Company.
The Audit Committee consists of Dr. Blake and Mr. Dimmler. The Audit
Committee makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent auditors and reviews
and evaluates the Company's audit and control functions.
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<PAGE>
DIRECTOR COMPENSATION
The Company's non-employee directors who are not affiliated with
stockholders of the Company currently receive $6,000 per year for their
attendance at Board meetings and all directors are reimbursed for certain
expenses in connection with attendance at Board and committee meetings.
Non-employee directors receive automatic grants of options under the Company's
Non-employee Directors' Stock Option Plan as described below. See "--Equity
Incentive Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee. See "Certain Transactions" for a description of transactions between
the Company and entities affiliated with members of the Compensation Committee.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
paid by, or accrued for services rendered to, the Company during the fiscal year
ended December 31, 1996 to the Company's Chief Executive Officer and the two
other most highly compensated executive officers who earned in excess of
$100,000 in salary and bonus during the fiscal year ended December 31, 1996 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------
------------------------------------ SECURITIES ALL OTHER
SALARY UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) BONUS ($) OPTIONS(#) ($)
- -------------------------------------------------- --------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Michael J. Brennan, M.D. Ph.D. ................... 1996 $ 200,000 $ 30,000(2) 245,000 --
President, Chief Executive Officer and
Director
Mark D. Gessler................................... 1996 95,363 40,000 25,000 --
Senior Vice President, Corporate
Development and Chief Financial
Officer
Richard E. Kouri, Ph.D. (3)....................... 1996 106,875 30,000 -- 90,000(4)
Senior Vice President and Chief
Technical Officer
</TABLE>
- ------------------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), the compensation described in this table does not include
medical, group life insurance or other benefits received by the Named
Executive Officers which are available generally to all salaried employees
of the Company, and certain perquisites and other personal benefits received
by the Named Executive Officers which do not exceed the lesser of $50,000 or
10% of any such officer's salary and bonus disclosed in this table.
(2) Includes an amount that was assigned to a corporation of which Dr. Brennan
is the sole stockholder.
(3) Dr. Kouri resigned from the Company effective on October 15, 1996.
(4) Represents a $90,000 severance payment to Dr. Kouri in connection with his
resignation from the Company.
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<PAGE>
STOCK OPTION GRANTS
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth, for the fiscal year ended December 31, 1996,
certain information regarding options granted to each of the Named Executive
Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------- POTENTIAL REALIZABLE
PERCENTAGE VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATES
SECURITIES OPTIONS OF STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION
OPTIONS EMPLOYEES IN EXERCISE PRICE FOR OPTION TERM ($)(3)
GRANTED FISCAL PER SHARE EXPIRATION --------------------------
NAME (#) YEAR (%)(1) ($)(2) DATE 5% 10%
- ------------------------------------- ----------- --------------- --------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Brennan, M.D., Ph.D....... 100,000 20.5% $ 0.01 2/28/06 $ 1,790,784 $ 2,852,117
145,000 29.8 0.15 12/19/06 2,576,337 4,115,269
Mark D. Gessler...................... 25,000 5.1 0.15 12/19/06 444,196 709,529
Richard E. Kouri, Ph.D............... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Based on options to purchase 487,000 shares granted to employees in fiscal
1996, including the Named Executive Officers. The options were granted under
the Company's 1997 Equity Incentive Plan. Options granted under such plan
generally vest monthly over four years. The foregoing options accelerate
upon achievement of certain performance-based goals, including vesting of
80% of such options upon completion of this offering and the remaining 20%
180 days thereafter.
(2) Represents the fair market value of the underlying Common Stock as
determined by the Board of Directors on the date of grant.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years) and the assumed initial public offering
price of $11.00. It is calculated assuming that the stock price on the date
of grant appreciates at the indicated annual rate, compounded annually for
the entire term of the option and that the option is exercised and sold on
the last day of its term for the appreciated stock price. These amounts
represent certain assumed rates of appreciation only, in accordance with the
rules of the Commission, and do not reflect the Company's estimate or
projection of future stock price performance. Actual gains, if any, are
dependent on the actual future performance of the Company's Common Stock.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
The following table sets forth, with respect to each of the Named Executive
Officers, information regarding the number and value of securities underlying
unexercised options held by the Named Executive Officers as of December 31,
1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE MONEY OPTIONS AT
FISCAL YEAR-END (#) FISCAL YEAR-END ($)(1)
SHARES ACQUIRED VALUE ---------------------------- --------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- --------------- ----------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Brennan, M.D., Ph.D....... 100,000 $ 14,000 3,021 141,979 $ 32,778 $ 1,540,472
Mark D. Gessler...................... -- -- 521 24,479 5,653 265,597
Richard E. Kouri, Ph.D............... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Based on the assumed initial public offering price of $11.00 per share, less
the exercise price.
EMPLOYMENT AGREEMENTS
On December 1, 1995, Michael J. Brennan, the President, Chief Executive
Officer and a director and stockholder of the Company, entered into an
employment agreement with the Company. Dr. Brennan will be paid $200,000 in
salary for 1997 under such agreement. The employment agreement has a five-year
term and provides, among other things, for the payment to Dr. Brennan of annual
bonuses and the acceleration of certain unvested options upon achievement of
certain performance-based goals, including vesting of 80% of such options upon
completion of this offering and the remaining 20% 180 days thereafter. Of Dr.
Brennan's total outstanding options to purchase 538,962 shares, options to
purchase
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<PAGE>
131,000 shares will be exercisable upon completion of this offering. The
employment agreement also provides that Dr. Brennan will be offered the
opportunity to participate in any future equity financings on a pro rata basis,
provided that such right terminates upon the closing of this offering. Dr.
Brennan and the Company have also entered into an Equity Adjustment Agreement
whereby the Company agreed to pay Dr. Brennan a cash bonus upon the occurrence
of a change in control of the Company. The Equity Adjustment Agreement
terminates upon the closing of this offering.
On May 16, 1996, Mark D. Gessler, the Senior Vice President, Corporate
Development and Chief Financial Officer of the Company and a stockholder of the
Company, entered into an employment agreement with the Company. The employment
agreement has a four-year term and provides, among other things, for the payment
to Mr. Gessler of annual bonuses and the acceleration of certain unvested
options upon achievement of certain performance-based goals, including vesting
of 80% of such options upon completion of this offering and the remaining 20%
180 days thereafter. Of Mr. Gessler's total outstanding options to purchase
346,981 shares, options to purchase 140,000 shares will be exercisable upon
completion of this offering. Mr. Gessler will be paid $185,000 in salary for
1997 under such agreement.
EQUITY INCENTIVE PLANS
1997 EQUITY INCENTIVE PLAN
The Company adopted its 1996 Stock Plan in January 1996 and amended and
restated the 1996 Stock Plan in September 1997 as the 1997 Equity Incentive Plan
(the "Stock Plan"). An aggregate of 6,100,000 shares of the Company's Common
Stock have been reserved for issuance pursuant to the exercise of stock awards
granted to employees, directors and consultants under the Stock Plan. The Stock
Plan will terminate in September 2007, unless sooner terminated by the Board.
The Stock Plan permits the granting of options intended to qualify as
incentive stock options ("Incentive Stock Options") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to
employees (including officers and employee directors), and options that do not
so qualify ("Nonstatutory Stock Options," and, together with Incentive Stock
Options, the "Options") to employees (including officers and employee directors)
and consultants (including non-employee directors). In addition, the Stock Plan
permits the granting of stock appreciation rights (SARs) appurtenant to or
independently of Options, as well as stock bonuses and rights to purchase
restricted stock (Options, SARs, stock bonuses and rights to purchase restricted
stock are hereinafter referred to as "Stock Awards"). No person is eligible to
be granted Options and SARs covering more than 700,000 shares of the Company's
Common Stock in any 12-month period.
The Stock Plan is administered by the Board or a committee appointed by the
Board. Subject to the limitations set forth in the Stock Plan, the Board has the
authority to select the persons to whom grants are to be made, to designate the
number of shares to be covered by each Stock Award, to determine whether an
Option is to be an Incentive Stock Option or a Nonstatutory Stock Option, to
establish vesting schedules, to specify the Option exercise price and the type
of consideration to be paid to the Company upon exercise and, subject to certain
restrictions, to specify other terms of Stock Awards.
The maximum term of Options granted under the Stock Plan is ten years. The
aggregate fair market value, determined at the time of grant, of the shares of
Common Stock with respect to which Incentive Stock Options are exercisable for
the first time by an optionee during any calendar year (under all such plans of
the Company and its affiliates) may not exceed $100,000. Options granted under
the Stock Plan generally are non-transferable and expire three months after the
termination of an optionee's service to the Company. In general, if an optionee
is permanently disabled or dies during his or her service to the Company, such
person's Option may be exercised up to 12 months following such disability and
up to 18 months following such death.
The exercise price of Options granted under the Stock Plan is determined by
the Board of Directors in accordance with the guidelines set forth in the Stock
Plan. The exercise price of an Incentive Stock Option cannot be less than 100%
of the fair market value of the Common Stock on the date of the grant. The
53
<PAGE>
exercise price of a Nonstatutory Stock Option cannot be less than 85% of the
fair market value of the Common Stock on the date of grant. Options granted
under the Stock Plan vest at the rate specified in the option agreement. The
exercise price of Incentive Stock Options granted to any person who at the time
of grant owns stock representing more than 10% of the total combined voting
power of all classes of the Company's capital stock must be at least 110% of the
fair market value of such stock on the date of grant and the term of such
Incentive Stock Options cannot exceed five years.
Any stock bonuses or restricted stock purchase awards granted under the
Stock Plan will be in such form and will contain terms and conditions as the
Board deems appropriate. The purchase price under any restricted stock purchase
agreement will not be less than 85% of the fair market value of the Company's
Common Stock on the date of grant. Stock bonuses and restricted stock purchase
agreements awarded under the Stock Plan are generally non-transferable.
Pursuant to the Stock Plan, shares subject to Stock Awards that have expired
or otherwise terminated without having been exercised in full again become
available for the grant, but shares subject to exercised stock appreciation
rights will not again become available for the grant. The Board of Directors has
the authority to reprice outstanding Options and SARs and to offer optionees and
holders of SARs the opportunity to replace outstanding options and SARs with new
options or SARs for the same or a different number of shares.
Upon certain changes in control of the Company, all outstanding Stock Awards
under the Stock Plan must either be assumed or substituted by the surviving
entity. In the event the surviving entity determines not to assume or substitute
such Stock Awards, with respect to persons then performing services as
employees, directors or consultants, the time during which such Stock Awards may
be exercised will be accelerated and such Stock Awards terminated if not
exercised prior to such change in control. In the event that any person who was
providing services as an employee, director or consultant immediately prior to
the consummation of a change of control is terminated other than for cause
within 12 months following such change of control, any stock awards held by such
persons shall immediately become vested and exercisable or free from repurchase
rights.
As of September 30, 1997, the Company had issued 100,000 shares of Common
Stock pursuant to the exercise of purchase rights granted under the Stock Plan,
and had granted Incentive and Nonstatutory Stock Options to purchase an
aggregate of 2,716,881 shares of Common Stock. As of September 30, 1997,
3,334,887 shares of Common Stock remained available for future grants under the
Stock Plan.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In September 1997, the Company adopted a Non-employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of Common Stock to non-employee directors of the
Company. The Directors' Plan is administered by the Board, unless the Board
delegates administration to a committee of disinterested directors.
The maximum number of shares of Common Stock that may be issued pursuant to
options granted under the Directors' Plan is 125,000. Pursuant to the terms of
the Directors' Plan: (i) each person who after the effective date of this
offering for the first time becomes a Non-employee Director automatically will
be granted, upon the date of his or her initial appointment or election to be a
Non-employee Director, a one-time option to purchase 30,000 shares of Common
Stock (the "Initial Options"); and (ii) on the date of each annual meeting of
the stockholders of the Company after the effective date of this offering (other
than any such annual meeting held in 1997), each person who is a Non-employee
Director following such annual meeting (other than a person who receives a grant
in accordance with (i) above on or during the three-month period preceding such
date) automatically will be granted an option to purchase 7,500 shares of Common
Stock (the "Annual Options").
No options granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. The Initial Options
granted under the Directors' Plan vest on an annual basis over four years. The
Annual Options vest on the anniversary of the date of grant. The exercise price
of options under the Directors' Plan will equal 100% of the fair market value of
the Common Stock on the date of
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<PAGE>
grant. Options granted under the Directors' Plan are generally non-transferable.
Unless otherwise terminated by the Board of Directors, the Directors' Plan
automatically terminates in September 2007. As of September 30, 1997, no options
to purchase shares of Common Stock had been granted under the Directors' Plan.
EMPLOYEE STOCK PURCHASE PLAN
In September 1997, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 250,000 shares of Common Stock. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code. Under the Purchase Plan, the Board may
authorize participation by eligible employees, including officers, in periodic
offerings following the commencement of the Purchase Plan. The initial offering
under the Purchase Plan will commence on the date of this Prospectus and
terminate on January 31, 2000.
Unless otherwise determined by the Board, employees are eligible to
participate in the Purchase Plan only if they are employed by the Company or a
subsidiary of the Company designated by the Board for at least 20 hours per week
and are customarily employed by the Company or a subsidiary of the Company
designated by the Board for at least five months per calendar year. Employees
who participate in an offering may have up to 15% of their earnings withheld
pursuant to the Purchase Plan. The amount withheld is then used to purchase
shares of the Common Stock on specified dates determined by the Board. The price
of Common Stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the Common Stock at the commencement date of
each offering period or the relevant purchase date. Employees may end their
participation in this offering at any time during this offering period, and
participation ends automatically on termination of employment with the Company.
In the event of a merger, reorganization, consolidation or liquidation
involving the Company, the Board has discretion to provide that each right to
purchase Common Stock will be assumed or an equivalent right substituted by the
successor corporation, or the Board may shorten this offering period and provide
for all sums collected by payroll deductions to be applied to purchase stock
immediately prior to such merger or other transaction. The Board has the
authority to amend or terminate the Purchase Plan, provided, however, that no
such action may adversely affect any outstanding rights to purchase Common
Stock.
401(K) PLAN
The Company has established a tax-qualified employee savings and retirement
plan (the "401(k) Plan"). The 401(k) Plan provides that each participant may
contribute between 2% and 15% of his or her pre-tax gross compensation (up to a
statutorily prescribed annual limit of $9,500 in 1997). Employees must be
twenty-one years old to participate and are eligible on the first day of the
quarter following six months as an employee of the Company. All amounts
contributed by employee participants and earnings on these contributions are
fully vested at all times. Employee participants may elect to invest their
contributions in various established funds.
LIMITATIONS OF DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION
The Company's Restated Certificate of Incorporation provides that directors
of the Company will not be personally liable to the Company or its stockholders
for monetary damages for any breach of fiduciary duty as a director, except to
the extent that such exemption from liability or limitation thereof is not
permitted by the Delaware General Corporation Law as currently in effect or as
the same is subsequently amended. Such limitation of liability does not apply to
liabilities arising under the federal securities laws and does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company's Amended and Restated By-laws provide that the Company will
indemnify its directors and executive officers and may indemnify its other
officers, employees and agents to the fullest extent permitted by Delaware law.
The Company is also empowered under its Amended and Restated By-laws to enter
into indemnification contracts with its directors and officers and to purchase
insurance on behalf of any person it is required or permitted to indemnify.
Pursuant to this provision, the Company has entered into indemnification
agreements with each of its directors and executive officers.
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<PAGE>
CERTAIN TRANSACTIONS
Between November 1994 and July 1997, the Company completed several equity
financings. During 1994, the Company sold 266,666 shares of Series A Convertible
Preferred Stock ("Series A") for $400,000. During 1995, the Company sold 66,667
shares of Series A for $100,000, 412,500 shares of Series A-1 Convertible
Preferred Stock ("Series A-1") for $660,000 and issued warrants to purchase an
additional 50,000 shares of Series A-1. During 1996, the Company sold 4,090,909
shares of Series B Convertible Preferred Stock ("Series B") for $9.0 million.
During 1997, the Company sold 4,444,443 shares of Series C Convertible Preferred
Stock ("Series C") for net proceeds of approximately $19.1 million and issued
warrants to purchase an additional 48,889 shares of Series C.
Each series of the Preferred Stock has certain conversion rights and
protection against certain dilutive issuances of securities by the Company. The
Preferred Stock is redeemable at the election of the holders of a majority of
outstanding Preferred Stock for the original purchase price plus any declared,
accrued or unpaid dividends of Series A and Series A-1 and any accrued or unpaid
dividends of Series B and Series C, whether declared or undeclared. Each holder
of Preferred Stock is entitled to one vote for each share held. Holders of
Preferred Stock are also entitled to certain preferences over holders of Common
Stock with respect to dividends and in certain liquidation events.
All Preferred Stock will automatically convert into Common Stock upon the
closing of this offering. The holdings of such Common Stock (to be issued upon
conversion of the Preferred Stock) by affiliates of the Company's Directors are
described below.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
PURCHASER COMMON STOCK
- ------------------------------------------------------------------------- -------------------
<S> <C>
Biotechvest L.P. (1)..................................................... 333,334
Fruit of the Loom Senior Executive Officer Deferred
Compensation Trust (1)................................................. 333,333
Cross Atlantic Partners K/S (2).......................................... 880,233
Cross Atlantic Partners II K/S (2)....................................... 498,832
Cross Atlantic Partners III K/S (2)...................................... 173,334
Oxford Bioscience Partners (Adjunct) L.P. (3)............................ 138,952
Oxford Bioscience Partners (Bermuda) Limited Partnership (3)............. 276,119
Oxford Bioscience Partners L.P. (3)...................................... 995,282
Oxford Bioscience Management Partners (3)................................ 100,000
</TABLE>
- ------------------------
(1) Affiliated with Jeffrey D. Sollender, a Director.
(2) Affiliated with Charles L. Dimmler III, a Director.
(3) Affiliated with Alan G. Walton, a Director.
In February 1996, Dr. Kouri, formerly the Senior Vice President and Chief
Technical Officer of the Company, received 55,000 shares of Common Stock (the
"Shares") pursuant to his Employment Agreement. Pursuant to the terms of a Stock
Pledge Agreement, Dr. Kouri pledged the Shares as security for the Promissory
Note. Following Dr. Kouri's resignation from the Company on October 15, 1996,
the Promissory Note was canceled and the Company canceled the Shares effective
January 1, 1997.
To assist Mr. Gessler, the Company's Senior Vice President, Corporate
Development and Chief Financial Officer, with his relocation, the Company loaned
Mr. Gessler $50,000 in July 1996 pursuant to a Promissory Note. Pursuant to the
terms of a Stock Pledge Agreement, the Promissory Note is secured by certain
shares of Common Stock of the Company owned by Mr. Gessler. The Promissory Note
provides that the loan balance will be forgiven upon the completion of this
offering.
In March 1997, the Company loaned Dr. Eastman, the Company's Vice President,
Technology Management, $20,000, of which $11,000 remains outstanding. Such loan
is non-interest bearing and becomes due at the end of 1997.
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<PAGE>
The Company has entered employment agreements with each of its executive
officers. See "Management--Employment Agreements" for a description of the
employment agreements with Dr. Brennan and Mr. Gessler. The agreements with Dr.
Brennan, Mr. Gessler, Dr. Elliston, Dr. Eastman and Mr. Passeri provide, among
other things, for the acceleration of certain unvested options upon achievement
of certain performance-based goals (including 80% vesting upon completion of
this offering and the remaining 20% 180 days thereafter).
The Company has granted options to certain of its directors and executive
officers. The Company has also entered into an Indemnification Agreement with
each of its directors and executive officers.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions between the Company and its
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
disinterested directors, and will continue to be on terms no less favorable to
the Company than could be obtained from unaffiliated third parties.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 30, 1997, and
as adjusted to reflect the sale of the shares of Common Stock offered hereby and
the sale of 272,727 shares of Common Stock to Japan Tobacco, by (i) each of the
Company's Named Executive Officers, (ii) each of the Company's directors, (iii)
each holder of more than 5% of the Company's Common Stock and (iv) all current
directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (1)
SHARES ----------------------------
5% STOCKHOLDERS, DIRECTORS BENEFICIALLY BEFORE AFTER
AND NAMED EXECUTIVE OFFICERS OWNED (1) OFFERING OFFERING
- ----------------------------------------------------------------------------- ----------- ------------- -------------
<S> <C> <C> <C>
Alan G. Walton, Ph.D., D.Sc. (2)............................................. 1,565,353 15.4% 11.6%
Oxford Bioscience Partners
315 Post Road West
Westport, CT 06880
Oxford Bioscience Partners (3)............................................... 1,560,353 15.4 11.6
c/o Alan G. Walton, Ph.D., D.Sc.
315 Post Road West
Westport, CT 06880
Charles L. Dimmler III (4)................................................... 1,557,399 15.4 11.6
Hambro Health International, Inc.
650 Madison Avenue, 21st Floor
New York, NY 10022
Cross Atlantic Partners K/S (5).............................................. 1,552,399 15.4 11.6
c/o Charles L. Dimmler III
Hambro Health International, Inc.
650 Madison Avenue, 21st Floor
New York, NY 10022
New York Life Insurance Company.............................................. 676,767 6.7 5.1
c/o Mr. Dominique O. Semon
51 Madison Avenue
New York, NY 10010
Altamira Management Ltd. (6)................................................. 652,020 6.4 4.9
c/o Mr. Ian Ainsworth
250 Bloor Street West
Suite 300
Toronto M4W1E6
Canada
GIMV Investment Corporation.................................................. 526,465 5.2 3.9
Karel Oomsstraat 37, 2018
Antwerpen
Belgium
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (1)
SHARES ----------------------------
5% STOCKHOLDERS, DIRECTORS BENEFICIALLY BEFORE AFTER
AND NAMED EXECUTIVE OFFICERS OWNED (1) OFFERING OFFERING
- ----------------------------------------------------------------------------- ----------- ------------- -------------
<S> <C> <C> <C>
Michael J. Brennan, M.D., Ph.D. (7).......................................... 486,000 4.7 3.6
Gene Logic Inc.
10150 Columbia Road
Columbia, MD 21046
Mark D. Gessler (8).......................................................... 240,000 2.3 1.8
Jules Blake, Ph.D. (9)....................................................... 14,500 * *
G. Anthony Gorry, Ph.D. (10)................................................. 5,000 * *
Jeffrey D. Sollender (11).................................................... 2,500 * *
All directors and executive officers as a group (12 persons) (12)............ 4,979,221 46.0 35.3
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. Percentage of beneficial ownership is
based on 10,109,650 shares of Common Stock outstanding as of September 30,
1997 and 13,382,377 shares of Common Stock outstanding after completion of
this offering.
(2) Includes an aggregate of 1,510,353 shares and warrants to purchase up to
50,000 shares held of record by Oxford Bioscience Partners, of which Dr.
Walton is a general partner, and by entities related thereto. Also includes
5,000 shares subject to options held by Dr. Walton exercisable within 60
days of September 30, 1997.
(3) Includes 100,000 shares held of record by Oxford Bioscience Management
Partners, 276,119 shares and warrants to purchase 10,859 shares held of
record by Oxford Bioscience Partners (Bermuda) Limited Partnership, 138,952
shares held of record by Oxford Bioscience Partners (Adjunct) L.P. and
warrants to purchase 39,141 shares held of record by Oxford Bioscience
Partners, L.P..
(4) Includes 880,233 shares held of record by Cross Atlantic Partners K/S,
498,832 shares held of record by Cross Atlantic Partners II K/S and 173,334
shares held of record by Cross Atlantic Partners III K/S. Also includes
5,000 shares subject to options held by Mr. Dimmler exercisable within 60
days of September 30, 1997. Mr. Dimmler is the Chief Investment Officer of
Cross Atlantic Partners.
(5) Includes 498,832 shares held of record by Cross Atlantic Partners II K/S and
173,334 shares held of record by Cross Atlantic Partners III K/S.
(6) Includes 90,909 shares held of record by Altamira Science & Technology Fund,
136,364 shares held of record by Altamira Pooled U.S. Equity Fund and
113,636 shares held of record by Altamira Special Growth Fund.
(7) Includes 100,000 shares held of record by the Brennan Family Limited
Partnership and 131,000 shares subject to options exercisable upon
completion of this offering.
(8) Includes 30,000 shares held of record by the Gessler Family Limited
Partnership and 140,000 shares subject to options exercisable upon
completion of this offering.
(9) Includes 14,500 shares subject to options exercisable within 60 days of
September 30, 1997.
(10) Includes 5,000 shares subject to options exercisable within 60 days of
September 30, 1997.
(11) Includes 2,500 shares subject to options held by Mr. Sollender exercisable
within 60 days of September 30, 1997.
(12) See footnotes (2), (4) and (7) through (11) above.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 60,000,000 shares of
Common Stock, $.01 par value, and 10,000,000 shares of Preferred Stock, $.01 par
value.
COMMON STOCK
As of September 30, 1997, there were 10,109,650 shares of Common Stock
outstanding, after giving effect to the conversion of all outstanding shares of
Preferred Stock into 9,281,185 shares of Common Stock.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding shares of Preferred Stock, holders of Common Stock
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preferences of any outstanding shares of
Preferred Stock. Holders of Common Stock have no preemptive, conversion,
subscription or other rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
all shares of Common Stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred Stock
will be converted into 9,281,185 shares of Common Stock. See Note 9 of Notes to
Financial Statements for a description of the currently outstanding Preferred
Stock. Following the conversion, the Company's Restated Certificate of
Incorporation will be amended and restated to delete all references to such
shares of Preferred Stock. Under the Certificate of Incorporation, as amended
and restated upon the closing of this offering (the "Restated Certificate"), the
Board has the authority, without further action by stockholders, to issue up to
10,000,000 shares of Preferred Stock in one or more series and to fix the
rights, preferences, privileges, qualifications and restrictions granted to or
imposed upon such Preferred Stock, including dividend rights, conversion rights,
voting rights, rights and terms of redemption, liquidation preference and
sinking fund terms, any or all of which may be greater than the rights of the
Common Stock. The issuance of Preferred Stock could adversely affect the voting
power of holders of Common Stock and reduce the likelihood that such holders
will receive dividend payments and payments upon liquidation. Such issuance
could have the effect of decreasing the market price of the Common Stock. The
issuance of Preferred Stock could have the effect of delaying, deterring or
preventing a change in control of the Company. The Company has no present plans
to issue any additional shares of Preferred Stock.
WARRANTS
As of September 30, 1997, there were warrants outstanding to purchase an
aggregate of 162,576 shares of the Company's Common Stock at a weighted average
exercise price of $3.10 per share. In August 1995, the Company issued warrants
to purchase an aggregate of 50,000 shares of Common Stock in connection with an
equity financing. Such warrants are exercisable for $1.60 per share and expire
August 31, 2005. In March 1997, the Company issued a warrant to purchase 25,758
shares of Common Stock at an exercise price of $2.20 per share with an
expiration date of December 31, 2002 in connection with an equipment loan
agreement. Such loan agreement provides for the grant of additional warrants in
the event the Company draws down on the loan. Pursuant to such provision, in
September 1997 the Company issued an additional warrant to purchase 4,293 shares
of Common Stock at an exercise price of $2.20 per share with an expiration date
of December 31, 2002. In April 1997, in connection with the establishment of
capital lease facilities, the Company issued a warrant to purchase 13,636 shares
of Common Stock at an
60
<PAGE>
exercise price of $2.20 per share. Such warrant expires November 2002. In August
1997, in connection with Company's facilities lease, the Company issued a
warrant to purchase 20,000 shares of Common Stock at an exercise price of $5.40.
Such warrant will expire upon the completion of this offering. The Company
issued a warrant to purchase 48,889 shares of its Common Stock at an exercise
price of $4.50 per share to Hambrecht & Quist LLC for services related to the
Company's most recent preferred stock financing which closed on July 15, 1997.
Such warrant expires upon completion of this offering. Hambrecht & Quist LLC has
indicated that it intends to exercise such warrant contingent upon the closing
of this offering.
REGISTRATION RIGHTS
After this offering, the holders of 9,281,185 shares of Common Stock
(received upon conversion of the Company's Preferred Stock upon completion of
this offering) and the holder of warrants to purchase 30,051 shares of Common
Stock (issued in conjunction with an equipment loan agreement) will be entitled
to certain rights with respect to the registration of such shares under the
Securities Act, pursuant to an Amended and Restated Investor Rights Agreement
dated July 15, 1997 (the "Investor Rights Agreement"). Under the terms of the
Investor Rights Agreement, if the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled, subject to certain
limitations, to include shares therein. Commencing with the date that is three
months after this offering, the holders may also require the Company to file a
registration statement under the Securities Act with respect to their shares on
two occasions, and the Company is required to use its best efforts to effect
such registration. Furthermore, the holders may require the Company to register
their shares on Form S-3 when such form becomes available to the Company.
Generally, the Company is required to bear all registration expenses incurred in
connection with any such registrations, but not including any underwriting
discounts and selling commissions. These rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in such registration.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is governed by the provisions of Section 203 of the Delaware
Law. In general, Section 203 prohibits a public Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. A "business combination" includes mergers, asset sales or
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock. The existence of this provision would be expected to
have anti-takeover effects with respect to transactions not approved in advance
by the Board of Directors, such as discouraging takeover attempts that might
result in a premium over the market price of the Common Stock.
The Company's Restated Certificate provides for a Board of Directors that is
divided into three Classes. The Directors in Class I hold office until the first
annual meeting of stockholders following this offering, the Directors in Class
II hold office until the second annual meeting of stockholders following this
offering and the Directors in Class III hold office until the third annual
meeting of stockholders following this offering, (or, in each case, until their
successors are duly elected and qualified or until their earlier resignation,
removal from office or death), and, after each such election, the Directors in
each such class will then serve in succeeding terms of three years and until
their successors are duly elected and qualified. The classification system of
electing Directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of the Company and may maintain
the incumbency of the
61
<PAGE>
Board of Directors, as the classification of the Board of Directors generally
increases the difficulty of replacing a majority of the directors.
The Company's Restated Certificate provides further that any action required
or permitted to be taken by stockholders of the Company must be effected at a
duly called annual or special meeting of stockholders and may not be effected by
any consent in writing. The Company's Restated Certificate also specifies that
the authorized number of directors may be changed only by resolution of the
Board of Directors. In addition, the Company's Amended and Restated By-laws
provide that special meetings of the stockholders of the Company may be called
only by the Chairman of the Board, the President of the Company or by the Board
of Directors pursuant to a resolution adopted by a majority of the total number
of authorized directors. These and other provisions contained in the Restated
Certificate and the Company's Amended and Restated By-laws could delay or make
more difficult certain types of transactions involving an actual or potential
change in control of the Company or its management (including transactions in
which stockholders might otherwise receive a premium for their shares over then
current prices) and may limit the ability of stockholders to remove current
management of the Company or approve transactions that stockholders may deem to
be in their best interests and, therefore, could adversely affect the price of
the Company's Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Chase
Mellon Shareholder Services.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices. Furthermore,
since only a limited number of shares will be available for sale shortly after
the offering because of certain contractual and legal restrictions on resale
described below, sales of substantial amounts of Common Stock of the Company in
the public market after the restrictions lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
Upon completion of the offering, the Company will have 13,382,377 shares of
Common Stock outstanding, assuming no exercise of currently outstanding options.
Of these shares, the 3,000,000 shares sold in this offering (plus any additional
shares sold upon exercise of the Underwriters' over-allotment option) will be
freely transferable without restriction under the Securities Act, unless they
are held by "affiliates" of the Company as that term is used under the
Securities Act and the regulations promulgated thereunder ("Affiliates"). The
remaining 10,382,377 shares of Common Stock held by existing stockholders are
"restricted securities" as that term is defined in Rule 144 of the Securities
Act (the "Restricted Shares"). Restricted Shares may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rule 144 or Rule 701 under the Securities Act. As a result of contractual
restrictions and the provisions of Rules 144 and 701, additional shares will be
available for sale in the public market as follows: (i) no Restricted Shares
will be eligible for immediate sale on the date of this Prospectus; (ii)
approximately 5,732 Restricted Shares will be eligible for sale 90 days after
the date of this Prospectus; (iii) approximately 5,609,475 Restricted Shares
will be eligible for sale 180 days after the effective date of this offering
upon expiration of lock-up agreements and upon expiration of their respective
holding periods under Rule 144; and (iv) the remainder of the Restricted Shares
will be eligible for sale from time to time thereafter upon expiration of their
respective holding periods under Rule 144. In addition, 1,192,918 shares
issuable upon exercise of vested stock options will become eligible for sale 180
days after the effective date of this offering upon expiration of lock-up
agreements. The holders of 9,281,185 shares of Common Stock and the holders of
warrants to purchase 30,051 shares of Common Stock have the right in certain
circumstances to require the Company to register their shares under the
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<PAGE>
Securities Act for resale to the public beginning three months after the
effective date of this offering. If such holders, by exercising their demand
registration rights, cause a large number of shares to be registered and sold in
the public market, such sales could have an adverse effect on the market price
for the Company's Common Stock. If the Company were required to include in a
Company-initiated registration shares held by such holders pursuant to the
exercise of their piggyback registration rights, such sales may have an adverse
effect on the Company's ability to raise needed capital. In addition, the
Company expects to file a registration statement on Form S-8 registering a total
of approximately 6,134,268 shares of Common Stock subject to outstanding stock
options or reserved for issuance under the Company's equity incentive plans.
Such registration statement is expected to be filed and to become effective 180
days following the effective date of this offering. Shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to Affiliates, be available for sale in the open market, unless such shares are
subject to vesting restrictions with the Company or the lock-up agreements
described above.
In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of the offering, an Affiliate of the Company, or person (or
persons whose shares are aggregated) who has beneficially owned restricted
shares (as defined under Rule 144) for at least one year is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of (i) one percent of the then outstanding shares of the Company's
Common Stock or (ii) the average weekly trading volume of the Company's Common
Stock in the Nasdaq National Market during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Commission.
Sales pursuant to Rule 144 are subject to certain requirements relating to the
manner of sale, notice, and the availability of current public information about
the Company. A person (or persons whose shares are aggregated) who was not an
Affiliate of the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned restricted shares for at least two years
is entitled to sell such shares under Rule 144(k) without regard to the
limitations described above.
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus. In addition, non-Affiliates may sell Rule 701 shares
without complying with the public information, volume and notice provisions of
Rule 144.
63
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), acting through their
representatives,
BancAmerica Robertson Stephens, Hambrecht & Quist LLC and UBS Securities LLC
(the "Representatives"), have severally agreed with the Company, subject to the
terms and conditions of the Underwriting Agreement, to purchase from the Company
the number of shares of Common Stock set forth opposite their respective names
below. The Underwriters are committed to purchase and pay for all such shares if
any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- -------------------------------------------------------------------------------- ------------
<S> <C>
BancAmerica Robertson Stephens..................................................
Hambrecht & Quist LLC...........................................................
UBS Securities LLC..............................................................
------------
Total....................................................................... 3,000,000
------------
------------
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price, less a concession not in excess of $ per share,
of which $ may be reallowed to other dealers. After the initial public
offering, the public offering price, concession and reallowance to dealers may
be reduced by the Representatives. No such reduction shall change the amount of
proceeds to be received by the Company as set forth on the cover page of this
Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the same price per share as the Company
will receive for the 3,000,000 shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
3,000,000 shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 3,000,000
shares are being sold. The Company will be obligated, pursuant to the option, to
sell shares to the extent the option is exercised. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
shares of Common Stock offered hereby.
The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.
Each officer and director of the Company and certain stockholders together
holding approximately 10,326,645 shares of Common Stock (including Japan
Tobacco) have agreed in writing with the Representatives (the "Lock-Up
Agreements") that, until 180 days after the Registration Statement is declared
effective by the Commission, subject to certain limited exceptions, they will
not, directly or indirectly, sell, offer, contract to sell, pledge, grant any
option to purchase or otherwise dispose of any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock, or any securities
convertible into or exchangeable for, or any other rights to purchase or
acquire, Common Stock owned directly by them or acquired by them after the date
of the Lock-Up Agreements, or which may be deemed to be beneficially owned by
them, without the prior written consent of BancAmerica Robertson Stephens.
Approximately 5,609,475 of such shares will be eligible for immediate public
sale following expiration of the lock-up period pursuant to Rule 144.
BancAmerica Robertson Stephens may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to the
Lock-Up Agreements. In addition, the Company has agreed that, until 180 days
after the Registration Statement is declared effective by the
64
<PAGE>
Commission, the Company will not, without the prior written consent of
BancAmerica Robertson Stephens, subject to certain limited exceptions, sell,
offer, contract to sell, pledge, grant any option to purchase or otherwise
dispose of any shares of Common Stock, any options or warrants to purchase any
shares of Common Stock, or any securities convertible into or exchangeable for,
or any other rights to purchase or acquire, shares of Common Stock, other than
the Company's sale of shares in this offering and the sale of shares to Japan
Tobacco, the issuance of Common Stock upon the exercise of the outstanding
warrants or options, or the Company's grant of options and issuance of stock
under existing employee stock option or stock purchase plans. See "Shares
Eligible for Future Sale."
The Underwriters do not intend to confirm sales to any account over which
they exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby will be determined through negotiations among the Company
and the Representatives. Among the factors to be considered in such negotiations
include prevailing market conditions, certain financial information of the
Company, market valuations of other companies that the Company and the
Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present stage of the Company's
development and other factors deemed relevant.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock. A "syndicate covering transaction"
is the bid for or the purchase of the Common Stock on behalf of the Underwriters
to reduce a short position incurred by the Underwriters in connection with the
offering. A "penalty bid" is an arrangement permitting the Representatives to
reclaim the selling concession otherwise accruing to an Underwriter or syndicate
member in connection with the offering if the Common Stock originally sold by
such Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.
H&Q Gene Logic Investors, LP, a California limited partnership and a related
party to Hambrecht & Quist LLC, one of the Representatives, owns 111,111 shares
of the Company's Series C Preferred Stock, $.01 par value per share, which will
automatically convert into 111,111 shares of the Company's Common Stock upon the
closing of this offering. H&Q Gene Logic Investors, LP has agreed not to sell,
transfer, assign, pledge or hypothecate such shares for a period of one year
following the effective date of this offering. Approximately 22.5% of the
economic interests held in H&Q Gene Logic Investors, LP are held by persons
unaffiliated with Hambrecht & Quist LLC. In addition, Hambrecht & Quist LLC owns
a warrant which is exercisable for the purchase of 48,889 shares of the
Company's Series C Preferred Stock at an exercise price of $4.50 per share.
Hambrecht & Quist LLC received the warrant from the Company, in addition to a
cash payment, as compensation for Hambrecht & Quist LLC's services as placement
agent in connection with the Company's Series C Preferred Stock financing, which
closed on July 15, 1997. The warrant will expire upon the closing of this
offering. Hambrecht & Quist LLC has indicated that it intends to exercise such
warrant contingent upon the closing of this offering. Hambrecht & Quist LLC has
agreed not to sell, transfer, assign, pledge or hypothecate the shares to be
issued upon exercise of the warrant for a period of one year following the
effective date of this offering.
65
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP, San Diego, California. Certain legal
matters will be passed upon for the Underwriters by Testa, Hurwitz & Thibeault,
LLP, Boston, Massachusetts.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996 and
September 30, 1997 and for the period from September 22, 1994 (inception)
through December 31, 1994, the years ended December 31, 1995 and 1996 and the
nine months ended September 30, 1997 included in this Prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included in reliance upon the authority of said firm as experts
in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, with respect to the Common Stock offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus,
which is a part of the Registration Statement, omits certain information,
exhibits, schedules and undertakings set forth in the Registration Statement.
For further information pertaining to the Company and the Common Stock offered
hereby, reference is made to such Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents or
provisions of any contract or other document referred to herein are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. A copy of
the Registration Statement may be inspected without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of all or any part of the
Registration Statement may be obtained from such offices upon the payment of the
fees prescribed by the Commission. In addition, registration statements and
certain other filings made with the Commission through its Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") system are publicly available
through the Commission's web site on the Internet's World Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
66
<PAGE>
GENE LOGIC INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997..................................... F-3
Statements of Operations for the period from September 22, 1994 (inception) through December 31, 1994, the
years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 (unaudited) and
1997..................................................................................................... F-4
Statements of Stockholders' Equity for the period from September 22, 1994 (inception) through December 31,
1994, the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997............ F-5
Statements of Cash Flows for the period from September 22, 1994 (inception) through December 31, 1994, the
years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 (unaudited) and
1997..................................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Gene Logic Inc.:
We have audited the accompanying balance sheets of Gene Logic Inc. (a
Delaware corporation) as of December 31, 1995 and 1996 and September 30, 1997,
and the related statements of operations, stockholders' equity and cash flows
for the period from September 22, 1994 (inception) through December 31, 1994,
the years ended December 31, 1995 and 1996 and the nine months ended September
30, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gene Logic Inc. as of
December 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for the period from September 22, 1994 (inception)
through December 31, 1994, the years ended December 31, 1995 and 1996 and the
nine months ended September 30, 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Baltimore, Maryland
October 17, 1997
F-2
<PAGE>
GENE LOGIC INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AS OF
---------------------------- SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 348,478 $ 1,137,130 $21,993,266
Marketable securities available for sale........... -- 4,534,353 149,582
Due from strategic partner......................... -- -- 945,833
Prepaid expenses................................... -- 37,424 590,265
Other current assets............................... 1,100 67,078 299,702
------------- ------------- -------------
Total Current Assets............................. 349,578 5,775,985 23,978,648
Property and Equipment, net.......................... 11,666 1,757,240 3,161,690
Notes Receivable from Employees...................... -- 102,896 65,215
Intangibles and Other Assets, net.................... 62,444 182,931 415,333
------------- ------------- -------------
Total Assets..................................... $ 423,688 $ 7,819,052 $27,620,886
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................... $ 17,294 $ 91,074 $ 395,200
Accrued expenses................................... 86,249 997,710 1,510,757
Current portion of capital lease obligation........ -- 106,195 112,736
Current portion of long-term debt.................. -- -- 244,764
Deferred revenue................................... -- -- 2,938,889
------------- ------------- -------------
Total Current Liabilities........................ 103,543 1,194,979 5,202,346
Deferred Revenue..................................... -- -- 333,332
Capital Lease Obligation............................. -- 339,699 254,310
Long-Term Debt....................................... -- -- 743,917
Other Noncurrent Liabilities......................... -- -- 193,326
------------- ------------- -------------
Total Liabilities................................ 103,543 1,534,678 6,727,231
------------- ------------- -------------
Commitments and Contingencies
Series A Convertible Preferred Stock, $.01 par value;
333,333 shares authorized; 333,333 shares issued
and outstanding as of December 31, 1995 and 1996
and September 30, 1997, liquidation preference of
$1.50 per share.................................... 500,000 500,000 500,000 --
Series A-1 Convertible Preferred Stock, $.01 par
value; 462,500 shares authorized; 412,500 shares
issued and outstanding as of December 31, 1995 and
1996 and September 30, 1997, liquidation preference
of $1.60 per share................................. 652,825 653,722 654,395 --
Series B Convertible Preferred Stock, $.01 par value;
4,154,167 shares authorized; 4,090,909 shares
issued and outstanding as of December 31, 1996 and
September 30, 1997, liquidation preference of $2.20
per share.......................................... -- 9,317,611 9,872,539 --
Series C Convertible Preferred Stock, $.01 par value;
4,600,000 shares authorized, 4,444,443 shares
issued and outstanding as of September 30, 1997,
liquidation preference of $4.50 per share.......... -- -- 19,480,942 --
Stockholders' Equity:
Common stock, $.01 par value; 17,000,000 shares
authorized; 280,000, 692,733 and 828,465 shares
issued and outstanding as of December 31, 1995
and 1996 and September 30, 1997, respectively.... 2,800 6,927 8,284 101,096
Additional paid-in capital......................... -- 13,450 6,764,236 37,179,300
Deferred compensation on stock options, net........ -- -- (6,529,934) (6,529,934)
Unrealized losses on marketable securities......... -- (13,215) (1,303) (1,303)
Accumulated deficit................................ (835,480) (4,194,121) (9,855,504) (9,855,504)
------------- ------------- ------------- -------------
Total Stockholders' Equity....................... (832,680) (4,186,959) (9,614,221) 20,893,655
------------- ------------- ------------- -------------
Total Liabilities and Stockholders' Equity....... $ 423,688 $ 7,819,052 $27,620,886
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
GENE LOGIC INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 22, 1994
(INCEPTION) THROUGH YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
--------------------- ------------------------ --------------------------
1994 1995 1996 1996 1997
--------------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues............................. $ -- $ -- $ -- $ -- $ 773,612
-------- ---------- ------------ ------------ ------------
Expenses:
Research and development........... 44,438 485,688 1,741,469 981,842 3,338,143
General and administrative......... 45,966 258,491 1,344,961 791,249 2,442,417
-------- ---------- ------------ ------------ ------------
Total expenses................. 90,404 744,179 3,086,430 1,773,091 5,780,560
-------- ---------- ------------ ------------ ------------
Loss from operations........... (90,404) (744,179) (3,086,430) (1,773,091) (5,006,948)
Interest Income, net................. -- -- 221,302 110,848 354,960
-------- ---------- ------------ ------------ ------------
Loss before income tax
expense...................... (90,404) (744,179) (2,865,128) (1,662,243) (4,651,988)
Income Tax Expense................... -- -- -- -- 100,000
-------- ---------- ------------ ------------ ------------
Net loss....................... (90,404) (744,179) (2,865,128) (1,662,243) (4,751,988)
Accretion of Mandatory Redemption
Value of Preferred Stock........... -- 897 493,513 324,313 909,395
-------- ---------- ------------ ------------ ------------
Net loss attributable to common
shareholders..................... $ (90,404) $ (745,076) $ (3,358,641) $ (1,986,556) $ (5,661,383)
-------- ---------- ------------ ------------ ------------
-------- ---------- ------------ ------------ ------------
Pro Forma Net Loss Per Common
Share.............................. $ (0.31) $ (0.46)
------------ ------------
------------ ------------
Shares Used in Computing Pro Forma
Net Loss Per Common Share.......... 9,197,660 10,268,598
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
GENE LOGIC INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
---------------------------------------------------------------
PREFERRED COMMON
STOCK STOCK UNREALIZED
----------------------- -------------------- ADDITIONAL LOSSES ON
NUMBER NUMBER PAR PAID-IN DEFERRED MARKETABLE
OF SHARES AMOUNT OF SHARES VALUE CAPITAL COMPENSATION SECURITIES
---------- ----------- --------- --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Inception (September 22,
1994)....................... -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock.... -- -- 100,000 1,000 -- -- --
Issuance of Series A
Convertible Preferred
Stock..................... 266,666 400,000 -- -- -- -- --
Net Loss.................... -- -- -- -- -- -- --
---------- ----------- --------- --------- ---------- ------------- --------------
Balance at December 31,
1994........................ 266,666 400,000 100,000 1,000 -- -- --
Issuance of common stock.... -- -- 180,000 1,800 -- -- --
Issuance of Series A
Convertible Preferred
Stock..................... 66,667 100,000 -- -- -- -- --
Issuance of Series A-1
Convertible Preferred
Stock, net of issuance
costs..................... 412,500 651,928 -- -- -- -- --
Accretion of mandatory
redemption value of
preferred stock........... -- 897 -- -- -- -- --
Net Loss.................... -- -- -- -- -- -- --
---------- ----------- --------- --------- ---------- ------------- --------------
Balance at December 31,
1995........................ 745,833 1,152,825 280,000 2,800 -- -- --
Issuance of common stock.... -- -- 412,733 4,127 13,450 -- --
Issuance of Series B
Convertible Preferred
Stock, net of issuance
costs..................... 4,090,909 8,824,995 -- -- -- -- --
Accretion of mandatory
redemption value of
preferred stock........... -- 493,513 -- -- -- -- --
Net change in unrealized
losses from marketable
securities................ -- -- -- -- -- -- (13,215)
Net Loss.................... -- -- -- -- -- -- --
---------- ----------- --------- --------- ---------- ------------- --------------
Balance at December 31,
1996........................ 4,836,742 10,471,333 692,733 6,927 13,450 -- (13,215)
Issuance of Series C
Convertible Preferred
Stock, net of issuance
costs..................... 4,444,443 19,127,148 -- -- -- -- --
Cancellation of common
stock..................... -- -- (55,000) (550) (7,700) -- --
Stock issued in connection
with exercise of stock
options................... -- -- 140,732 1,407 19,695 -- --
Issuance of common stock.... -- -- 50,000 500 7,000 -- --
Issuance of warrants........ -- -- -- -- 42,563 -- --
Accretion of mandatory
redemption value of
preferred stock........... -- 909,395 -- -- -- -- --
Net change in unrealized
losses from marketable
securities................ -- -- -- -- -- -- 11,912
Deferred compensation from
stock options............. -- -- -- -- 6,689,228 (6,689,228) --
Amortization of deferred
compensation.............. -- -- -- -- -- 159,294 --
Net Loss.................... -- -- -- -- -- -- --
---------- ----------- --------- --------- ---------- ------------- --------------
Balance at September 30,
1997........................ 9,281,185 30,507,876 828,465 8,284 6,764,236 (6,529,934) (1,303)
Pro forma conversion of
Preferred Stock to Common
Stock (unaudited)........... (9,281,185) (30,507,876) 9,281,185 92,812 30,415,064 -- --
---------- ----------- --------- --------- ---------- ------------- --------------
Pro forma balance at
September 30, 1997
(unaudited)................. -- $ -- 10,109,650 $ 101,096 $37,179,300 $(6,529,934) $ (1,303)
---------- ----------- --------- --------- ---------- ------------- --------------
---------- ----------- --------- --------- ---------- ------------- --------------
<CAPTION>
ACCUMULATED
DEFICIT
------------
<S> <C>
Inception (September 22,
1994)....................... $ --
Issuance of common stock.... --
Issuance of Series A
Convertible Preferred
Stock..................... --
Net Loss.................... (90,404)
------------
Balance at December 31,
1994........................ (90,404)
Issuance of common stock.... --
Issuance of Series A
Convertible Preferred
Stock..................... --
Issuance of Series A-1
Convertible Preferred
Stock, net of issuance
costs..................... --
Accretion of mandatory
redemption value of
preferred stock........... (897)
Net Loss.................... (744,179)
------------
Balance at December 31,
1995........................ (835,480)
Issuance of common stock.... --
Issuance of Series B
Convertible Preferred
Stock, net of issuance
costs..................... --
Accretion of mandatory
redemption value of
preferred stock........... (493,513)
Net change in unrealized
losses from marketable
securities................ --
Net Loss.................... (2,865,128)
------------
Balance at December 31,
1996........................ (4,194,121)
Issuance of Series C
Convertible Preferred
Stock, net of issuance
costs..................... --
Cancellation of common
stock..................... --
Stock issued in connection
with exercise of stock
options................... --
Issuance of common stock.... --
Issuance of warrants........ --
Accretion of mandatory
redemption value of
preferred stock........... (909,395)
Net change in unrealized
losses from marketable
securities................ --
Deferred compensation from
stock options............. --
Amortization of deferred
compensation.............. --
Net Loss.................... (4,751,988)
------------
Balance at September 30,
1997........................ (9,855,504)
Pro forma conversion of
Preferred Stock to Common
Stock (unaudited)........... --
------------
Pro forma balance at
September 30, 1997
(unaudited)................. $(9,855,504)
------------
------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
GENE LOGIC INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 22, 1994
(INCEPTION)
THROUGH YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------------ --------------------- ------------------------
1994 1995 1996 1996 1997
------------------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash Flows From Operating Activities:
Net loss................................. $ (90,404) $(744,179) $(2,865,128) ($1,662,243) $(4,751,988)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization.......... -- 1,395 67,602 14,133 383,433
Write off of deferred financing fee.... -- -- 2,500 -- --
Cancellation of note receiveable....... -- -- -- -- 43,258
Amount due under research agreement.... -- -- -- -- 47,500
Amortization of deferred
compensation......................... -- -- -- -- 159,294
Changes in operating assets and
liabilities:
Due from strategic partner............. -- -- -- -- (945,833)
Prepaid expenses....................... (11,445) 11,445 (37,424) (132,944) (552,841)
Other current assets................... (1,000) (100) (65,978) (38,655) (232,624)
Intangibles and other assets........... -- (63,139) (125,810) (61,999) (275,437)
Accounts payable....................... -- 17,294 73,780 147,005 304,126
Accrued expenses....................... -- 86,249 911,461 (85,960) 516,594
Deferred revenue....................... -- -- -- -- 3,272,221
Other noncurrent liabilities........... -- -- -- -- 232,342
---------- --------- ---------- ----------- -----------
Net Cash Flows From Operating
Activities......................... (102,849) (691,035) (2,038,997) (1,820,663) (1,799,955)
---------- --------- ---------- ----------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment...... -- (12,366) (1,339,207) (324,560) (1,784,856)
Increase in notes receivable from
employees.............................. -- -- (102,896) (106,111) (13,827)
Purchase of marketable securities
available for sale..................... -- -- (4,547,568) (4,518,611) --
Proceeds from sale and maturity of
marketable securities available for
sale................................... -- -- -- -- 4,396,683
---------- --------- ---------- ----------- -----------
Net Cash Flows From Investing
Activities......................... -- (12,366) (5,989,671) (4,949,282) 2,598,000
---------- --------- ---------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock... 1,000 1,800 17,577 14,827 21,110
Proceeds from issuance of preferred
stock.................................. 400,000 760,000 9,000,000 8,000,000 20,000,000
Payments for stock issuance costs........ -- (8,072) (175,005) (163,974) (872,852)
Proceeds from equipment loan............. -- -- -- -- 1,084,362
Repayments of capital lease obligation
and equipment loan..................... -- -- (25,252) -- (174,529)
---------- --------- ---------- ----------- -----------
Net Cash Flows From Financing
Activities......................... 401,000 753,728 8,817,320 7,850,853 20,058,091
---------- --------- ---------- ----------- -----------
Net Increase in Cash and Cash
Equivalents.............................. 298,151 50,327 788,652 1,080,908 20,856,136
Cash and Cash Equivalents, beginning of
period................................... -- 298,151 348,478 348,478 1,137,130
---------- --------- ---------- ----------- -----------
Cash and Cash Equivalents, end of period... $ 298,151 $ 348,478 $1,137,130 $1,429,386 $21,993,266
---------- --------- ---------- ----------- -----------
---------- --------- ---------- ----------- -----------
Supplemental Disclosure:
Interest expense paid.................... $ -- $ -- $ 9,024 $ -- $ 64,191
---------- --------- ---------- ----------- -----------
---------- --------- ---------- ----------- -----------
Non-Cash Transactions:
Equipment acquired under capital
leases................................. $ -- $ -- $ 471,146 $ 471,146 $ --
---------- --------- ---------- ----------- -----------
---------- --------- ---------- ----------- -----------
Issuance of warrants to lessor........... $ -- $ -- $ -- $ -- $ 42,563
---------- --------- ---------- ----------- -----------
---------- --------- ---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
AND SEPTEMBER 30, 1996 AND 1997
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS
Gene Logic Inc. (the "Company"), formerly Senatics Corporation, was
incorporated on September 22, 1994, to commercialize technologies for the
discovery of disease-associated genes for the development of therapeutic and
diagnostic products. The Company was previously in the development stage and has
yet to generate any significant revenues.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company for the nine months ended
September 30, 1996, included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying unaudited interim
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company at September 30, 1996, and the results of its operations and cash flows
for the nine months ended September 30, 1996.
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, liabilities, revenues
and expenses in the financial statements and in the disclosures of contingent
assets and liabilities. While actual results could differ from those estimates,
management believes that actual results will not be materially different from
amounts provided in the accompanying financial statements.
NEW PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 simplifies the standards for computing earnings per share
previously found in Accounting Principles Board Opinion No. 15, "Earnings Per
Share" ("APB Opinion No. 15"). It replaces the presentation of primary EPS with
a presentation of basic EPS and requires a reconciliation of the numerator and
denominator of the basic EPS calculation to the numerator and denominator of the
diluted EPS calculation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed similarly to primary
EPS pursuant to APB Opinion No. 15.
SFAS No. 128 is effective for interim periods and fiscal years ending after
December 15, 1997, and early adoption is not permitted. When adopted, it will
require restatement of prior years' EPS. The adoption of SFAS No. 128 will have
no impact on the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 sets standards for reporting and presentation of
comprehensive income and its components in financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997, and early adoption
is permitted. When adopted,
F-7
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
it will require reclassification adjustments and changes in presentation for all
prior periods shown. The impact of the adoption of SFAS No. 130 on the Company
has not been determined.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as liquid investments with original
maturities of 90 days or less that are readily convertible into cash. All other
investments are reported as marketable securities available for sale. Cash and
cash equivalents as of December 31, 1995 and 1996 and September 30, 1997, are
comprised of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
---------- ------------ -------------
<S> <C> <C> <C>
Cash..................................................................... $ 348,478 $ 117,407 $ 13,425
Money market mutual fund................................................. -- 1,019,723 21,979,841
---------- ------------ -------------
$ 348,478 $ 1,137,130 $21,993,266
---------- ------------ -------------
---------- ------------ -------------
</TABLE>
MARKETABLE SECURITIES AVAILABLE FOR SALE
All marketable securities are classified as available for sale. Available
for sale securities are carried at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity. Realized gains and
losses and declines in value judged to be other than temporary for available for
sale securities are included in other income.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Furniture and fixtures............................................ 10 years
Computers and office equipment.................................... 5 years
Lab equipment..................................................... 5 years
</TABLE>
Equipment under capital leases and leasehold improvements are depreciated
and amortized over their useful lives, or the term of the lease, whichever is
shorter.
INTANGIBLES AND OTHER ASSETS
Other assets consists primarily of organization costs, patent costs,
trademarks and licenses. These amounts are being amortized over periods of five
to seventeen years. Accumulated amortization relating to other assets was $695,
$3,518 and $6,545 as of December 31, 1995 and 1996, and September 30, 1997,
respectively. The Company's success is heavily dependent upon its proprietary
technologies. The Company depends upon a combination of patents, trade secrets,
copyright and trademark laws, license agreements, nondisclosure and other
contractual provisions and various other security measures to protect its
technology rights.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred.
F-8
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
REVENUE RECOGNITION
The Company recognizes revenue from research and development support and
technology and database access fees as they are earned under the terms of the
agreement. Revenue is deferred for fees received before they are earned.
Revenues related to the achievement of certain milestones are recognized when
earned.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and net operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operations in the period that includes the enactment
date.
STOCK OPTION PLANS
Prior to January 1, 1996, the Company's policy was to account for its stock
options plans in accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No.
25"), and related interpretations. As such, compensation expense is recorded on
the date of grant only if the current fair value of the underlying stock exceeds
the exercise price. On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value based method defined in SFAS No. 123
had been applied. The Company elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
The Company uses the Black-Scholes option pricing model to estimate the fair
value of options and warrants granted.
PRO FORMA NET LOSS PER COMMON SHARE
Pro forma net loss per common share is computed using the weighted average
number of shares of common stock outstanding giving effect to the conversion of
convertible preferred shares that will automatically convert upon completion of
the Company's initial public offering (using the if-converted method) from the
original date of issuance. Common equivalent shares from stock options and
warrants are excluded from the computation for all periods as their effect is
antidulutive, except that, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins, common and common equivalent shares issued during
the 12-month period prior to the initial filing of the proposed offering at
prices below the assumed public offering price have been included in the
calculation as if they were outstanding for all periods presented.
The conversion of preferred stock will significantly reduce the net loss per
common share, decreasing the relevance of historical net loss per common share
information. As a result, historical net loss per common share is not shown.
F-9
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
The unaudited pro forma stockholders' equity information as of September 30,
1997 included with the accompanying balance sheets and statements of
stockholders' equity, gives effect to the automatic conversion of the Company's
outstanding preferred stock upon completion of the Company's initial public
offering.
NOTE 2. MARKETABLE SECURITIES:
The following is a summary of the Company's investment portfolio as of
December 31, 1995 and 1996 and September 30, 1997:
<TABLE>
<CAPTION>
GROSS
AMORTIZED UNREALIZED
COST LOSSES FAIR VALUE
------------ ----------- ------------
<S> <C> <C> <C>
December 31, 1995
Unit Investment Trust................................................... $ -- $ -- $ --
Government Securities................................................... -- -- --
------------ ----------- ------------
Total................................................................. $ -- $ -- $ --
------------ ----------- ------------
------------ ----------- ------------
December 31, 1996
Unit Investment Trust................................................... $ 2,483,352 $ (13,215) $ 2,470,137
Government Securities................................................... 2,064,216 -- 2,064,216
------------ ----------- ------------
Total................................................................. $ 4,547,568 $ (13,215) $ 4,534,353
------------ ----------- ------------
------------ ----------- ------------
September 30, 1997
Unit Investment Trust................................................... $ 150,885 $ (1,303) $ 149,582
Government Securities................................................... -- -- --
------------ ----------- ------------
Total................................................................. $ 150,885 $ (1,303) $ 149,582
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
All marketable securities mature within one year or have no stated maturity.
As of December 31, 1995 and 1996 and September 30, 1997, all of the Company's
investments were classified as current as the Company may not hold its
investments until maturity in order to take advantage of market conditions.
During the nine months ended September 30, 1997, a portion of the Unit
Investment Trust was sold for total proceeds of $2,357,044, resulting in
realized losses of $11,912.
F-10
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. PROPERTY AND EQUIPMENT:
Property and equipment includes the following as of December 31, 1995 and
1996 and September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
--------- ------------ -------------
<S> <C> <C> <C>
Furniture and fixtures............................... $ -- $ 105,061 $ 145,130
Computers and office equipment....................... -- 276,912 1,634,372
Lab equipment........................................ 12,366 932,479 1,315,446
Lab equipment under capital lease.................... -- 471,146 471,146
Leasehold improvements............................... -- 37,121 41,481
--------- ------------ -------------
12,366 1,822,719 3,607,575
Less--Accumulated depreciation....................... (700) (65,479) (445,885)
--------- ------------ -------------
Property and Equipment, net.......................... $ 11,666 $ 1,757,240 $ 3,161,690
--------- ------------ -------------
--------- ------------ -------------
</TABLE>
Depreciation expense was $0, $700, $64,779, $10,805, and $380,406 for the
period from September 22, 1994 (inception) through December 31, 1994, and the
years ended December 31, 1995 and 1996, and for the nine months ended September
30, 1996 and 1997, respectively.
NOTE 4. ACCRUED EXPENSES:
Accrued expenses consists of the following as of December 31, 1995 and 1996,
and September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
--------- ------------- -------------
<S> <C> <C> <C>
Consulting........................................... $ 68,155 $ -- $ 72,681
Property additions................................... -- 877,962 751,446
Professional fees.................................... 18,094 56,039 350,673
Payroll taxes and benefits........................... -- 63,709 173,546
Other................................................ -- -- 162,411
--------- ------------- -------------
Total............................................ $ 86,249 $ 997,710 $ 1,510,757
--------- ------------- -------------
--------- ------------- -------------
</TABLE>
NOTE 5. LICENSE ARRANGEMENTS:
The proprietary rights and technical information covered by various patent
applications have been licensed by the Company from third parties. These
licenses will continue for the life of the respective patent or until terminated
by either party. The license costs are being amortized over the useful life of
the related patents. The agreements call for the payment of royalties over the
life of the patents or a shorter life if no patents are issued.
NOTE 6. STRATEGIC ALLIANCES:
During May 1997, the Company entered into a strategic alliance with Procter
& Gamble Pharmaceuticals Inc., a division of Procter & Gamble Company ("Procter
& Gamble") for the discovery of drug targets in the field of heart failure. In
connection with the agreement, the Company received technology access fees and
research and development support of $3 million. Revenue from this initial
payment is being recognized ratably over the 18 month initial phase of the
agreement of which approximately $667,000 has been recognized as revenue during
the nine months ended September 30, 1997. Payments by Procter & Gamble to the
Company in the form of committed technology access fees and research funding
will total a minimum of $10.1 million if the research
F-11
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. STRATEGIC ALLIANCES (CONTINUED):
program continues for its 4 1/2 year term and the Company performs its research
obligations under the agreement. Procter & Gamble will be obligated to make
additional payments to the Company for the achievement of specified target
discovery and related product development and associated regulatory milestones.
Procter & Gamble will also pay the Company royalties on worldwide net sales of
all products that may result from the alliance. Procter & Gamble also has the
option to expand the alliance to include two additional fields upon terms,
including committed research funding, identical to those covering the initial
program in heart failure.
During September 1997, the Company entered into a strategic alliance with
Japan Tobacco Inc. ("Japan Tobacco") for discovery of drug targets and drug
leads in the field of renal disease. Payments by Japan Tobacco to the Company in
the form of committed technology access fees and research funding will total a
minimum of $15.0 million if the research program continues for its five year
term and the Company performs its research obligations under the agreement.
During the nine months ended September 30, 1997, the Company has recognized
approximately $107,000 of revenue under the alliance. In addition, Japan Tobacco
will also make a $3 million investment in common stock of the Company at the
time of an initial public offering by the Company, provided that an offering
closes within two years of the agreement date. Japan Tobacco will be obligated
to make additional payments to the Company for the achievement of specified
target discovery and related product development and associated regulatory
milestones. Japan Tobacco will also pay the Company royalties on worldwide net
sales of all products that may result from targets discovered pursuant to the
alliance. Japan Tobacco also has the option to expand the alliance to include
two other fields upon terms, including committed research funding, identical to
those covering the initial program in renal disease.
Under the terms of the strategic alliance agreements, payments for
technology access fees and research and development support are recognized as
revenue ratably over the period for which the payment is made. Payments related
to the achievement of certain milestones are recognized as revenue when the
milestones are achieved.
Both strategic alliance partners have the right to terminate their research
programs by giving the Company six months notice at any time after 12 months
from the date of commencement of the research program under the agreement and
have comparable rights to terminate the research programs in the optional
fields. Procter & Gamble also has the right to terminate the agreement upon
certain change of control events with respect to the Company. Neither strategic
alliance partner has any refund rights in the event of a termination.
The Company's strategy for developing and commercializing pharmaceutical
products based on its target discoveries depends on the formation of strategic
alliances with pharmaceutical companies. The Company has established two such
alliances, both in 1997. There can be no assurance that the Company will be able
to establish additional strategic alliances or that any alliances established
will be successful.
NOTE 7. INCOME TAXES:
The actual income tax expense for the period from September 22, 1994
(inception) to December 31, 1994, and the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1996 and 1997, is
F-12
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES (CONTINUED):
different from the amount computed by applying the statutory federal income tax
rates to losses before income tax expense. The reconciliation of these
differences is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 22, 1994 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) DECEMBER 31, SEPTEMBER 30,
THROUGH ---------------------- ------------------------
DECEMBER 31, 1994 1995 1996 1996 1997
------------------ --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Tax benefit at statutory
rate.................. $ (30,737) $(253,021) $ (977,518) $(626,507) $(1,540,264)
State income taxes, net
of federal income tax
effect................ (4,177) (34,381) (132,827) (85,131) (209,285)
Other................... (4,420) 9,799 (49,813) -- (14,646)
Increase in valuation
allowance............. 39,334 277,603 1,160,158 711,638 1,864,195
-------- --------- ----------- ----------- -----------
Income tax expense...... $ -- $ -- $ -- $ -- $ 100,000
-------- --------- ----------- ----------- -----------
-------- --------- ----------- ----------- -----------
</TABLE>
The tax effect of cumulative temporary differences at December 31, 1995 and
1996 and September 30, 1997, follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
---------- ------------- -------------
<S> <C> <C> <C>
Deferred Tax Assets:
Japanese withholding............................. $ -- $ -- $ 100,000
Tax carryforwards................................ -- 1,128,927 3,039,250
Start-up costs................................... 316,937 403,889 335,304
Accrued vacation................................. -- 7,457 32,437
---------- ------------- -------------
316,937 1,540,273 3,506,991
Less: Valuation allowance........................ (316,937) (1,477,095) (3,341,290)
---------- ------------- -------------
Net deferred tax asset......................... $ -- $ 63,178 $ 165,701
---------- ------------- -------------
---------- ------------- -------------
Deferred Tax Liabilities:
Depreciation..................................... $ -- $ 51,380 $ 112,532
Prepaid expenses................................. -- 2,046 13,169
Capital leases................................... -- 9,752 40,000
---------- ------------- -------------
Net deferred tax liabilities................... $ -- $ 63,178 $ 165,701
---------- ------------- -------------
---------- ------------- -------------
</TABLE>
Net operating loss carryforwards for income tax purposes are approximately
$7,726,000, as of September 30, 1997. The Company also has research and
development tax credit carryforwards of approximately $56,000 as of December 31,
1996. The carryforwards, if not utilized, will expire in increments through
2011. Utilization of the net operating losses and credits may be subject to an
annual limitation, due to the ownership change limitations provided by the
Internal Revenue Code of 1986.
F-13
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. LONG-TERM DEBT:
Long-term debt at September 30, 1997, consists of the following:
<TABLE>
<S> <C>
Equipment loan.................................................. $ 988,681
Less--Current portion........................................... (244,764)
---------
Total long-term debt............................................ $ 743,917
---------
---------
</TABLE>
As of September 30, 1997, principal payments on long-term debt for the next
five years are as follows:
<TABLE>
<S> <C>
Three months ending December 31,
1997.............................. $ 59,149
Year ending December 31, 1998....... 250,312
Year ending December 31, 1999....... 273,795
Year ending December 31, 2000....... 299,480
Year ending December 31, 2001....... 105,945
---------
$ 988,681
---------
---------
</TABLE>
In March 1997, the Company entered into a loan agreement for the purchase of
laboratory and computer equipment. The Company may borrow up to $1.5 million,
bearing interest at 9.0%. In April 1997, the Company borrowed $1,084,362 under
this agreement. The loan will be repaid in 48 equal monthly installments. The
Company has granted the lender a security interest, collateralized by all of the
equipment and fixtures acquired under the loan. In conjunction with the
agreement, the Company granted warrants to the lender to purchase 30,051 shares
of the Company's Series B Convertible Preferred stock at an exercise price of
$2.20 per share.
NOTE 9. CONVERTIBLE PREFERRED STOCK:
Four series of mandatory redeemable preferred stock have been issued--Series
A Convertible Preferred stock ("Series A"), Series A-1 Convertible Preferred
stock ("Series A-1"), Series B Convertible Preferred stock ("Series B") and
Series C Convertible Preferred stock ("Series C"). Each holder of common and
preferred stock is entitled to one vote for each share held.
During 1994, the Company sold 266,666 shares of Series A stock for $400,000.
During 1995, the Company sold 66,667 shares of Series A stock for $100,000
and 412,500 shares of Series A-1 stock for $660,000. Warrants to purchase an
additional 50,000 shares of Series A-1 stock at an exercise price of $1.60 per
share were issued and expires August 2005.
During 1996, the Company sold 4,090,909 shares of Series B stock for
$9,000,000.
During July 1997, the Company sold 4,444,443 shares of Series C Convertible
Preferred Stock for net proceeds of approximately $19.1 million. The Company
also agreed to issue a warrant for an additional 48,889 shares of Series C stock
at an exercise price of $4.50. The fair value of this warrant, approximately
$118,000, has been recorded as Series C stock in the accompanying balance sheet.
The fair value of this warrant was calculated using the Black-Scholes option
pricing model using the same assumptions used for options granted during the
period (see Note 13).
The preferred stock is convertible into an equal number of shares of common
stock at the option of the holder, with certain additional antidilutive
protection provided to the holder. Conversion is mandatory upon the closing of
an underwritten public offering that meets certain minimum conditions as to
offering price and net proceeds under the Securities Act of 1933. At the option
of a majority of the holders of outstanding preferred stock, the Company shall
redeem all preferred stock on March 31, 2002, 2003 and 2004, at a rate of
33-1/3%, 50%
F-14
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. CONVERTIBLE PREFERRED STOCK (CONTINUED):
and 100%, respectively, and at a price of $1.50 per share of Series A, $1.60 per
share of Series A-1, $2.20 per share of Series B and $4.50 per share of Series
C, plus any declared, accrued or unpaid dividends of Series A and Series A-1 and
any accrued or unpaid dividends of Series B and Series C whether declared or
undeclared. If funds are insufficient to redeem all outstanding shares, the
Company will redeem as many shares as funds are legally available to redeem on a
pro-rata basis among all preferred stockholders. The difference between the
redemption value of the preferred stock and its carrying value is being accreted
through a charge to retained earnings over the period until redemption.
With the approval of the holders of 66 2/3% of the outstanding shares of
preferred stock, the Company can declare or pay dividends in the amount of
$0.120, $0.128, $0.176 and $0.360 per share of Series A, Series A-1, Series B
and Series C preferred stock outstanding, respectively. Upon liquidation, Series
A, Series A-1, Series B and Series C stockholders will receive $1.50, $1.60,
$2.20 and $4.50 per share plus any accrued or unpaid dividends, whether or not
declared, respectively, prior to any other distributions.
NOTE 10. STOCKHOLDERS' EQUITY:
The Company is authorized to issue 17,000,000 shares of common stock and
9,550,000 shares of preferred stock as of September 30, 1997.
In October 1996, an officer of the Company resigned. In January 1997, in
connection with the resignation, the 55,000 shares of the Company's common stock
held by the officer were canceled in satisfaction of the $50,000 note receivable
and accrued interest obligation from the officer to the Company (see Note 14).
NOTE 11. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASE
During October 1997, the Company renegotiated its current lease of
laboratory and office space under an agreement which expires February 28, 1998,
with an option to continue on a month-to-month basis with 60 days written notice
to terminate. The Company intends to renew on a month-to-month basis until the
relocation to the new facility is complete. In addition, the Company entered
into an operating sublease for office space in Berkeley, California. The lease
term is for 22 months with monthly rent payments of $9,158.
During August 1997, the Company entered into an operating lease for new
laboratory and office space. The Company is responsible for the design and
renovation of an existing facility owned by the lessor. These costs will be
funded by the lessor while the responsibility for performance and liability
during construction remains with the Company. The lease term is ten years with
monthly payments of $89,211 plus 3% annual inflation; however, monthly payments
could increase if construction costs exceed a certain amount. The lease also
requires the Company to pay for building operating costs. In addition to future
minimum lease payments, the Company has issued a warrant to purchase 20,000
shares of common stock at an exercise price of $5.40 per share in connection
with the lease. The fair value of the warrant, approximately $43,000, is being
recorded as rent expense over the term of the lease. The fair value of the
warrant was calculated using the Black-Scholes option pricing model using the
same assumptions used for options granted during the period (see Note 13). Such
warrant will expire upon the completion of the Company's initial public offering
(see Note 15).
F-15
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Future minimum lease payments on these operating leases areas follows:
<TABLE>
<S> <C>
Three months ending December 31, 1997.......................... $ 237,929
Year ending December 31, 1998.................................. 1,278,919
Year ending December 31, 1999.................................. 1,169,516
Year ending December 31, 2000.................................. 1,138,572
Year ending December 31, 2001.................................. 1,172,729
Year ending December 31, 2002 and thereafter................... 7,693,371
----------
$12,691,036
----------
----------
</TABLE>
Rent expense for the period from September 22, 1994 (inception) through
December 31, 1994, the years ended December 31, 1995 and 1996, and the nine
months ended September 30, 1996 and 1997, were $0, $0, $238,930, $168,619 and
$218,758, respectively.
CAPITAL LEASE
During 1996, the Company entered into a capital lease to purchase equipment
for $471,146. Accumulated amortization for this equipment was $29,447 and
$88,343 at December 31, 1996 and September 30, 1997, respectively. Payments
during the year ended December 31, 1996 and the nine months ended September 30,
1997, totaled $25,252 and $102,825, respectively. Future minimum lease payments
are as follows:
<TABLE>
<S> <C>
Three months ending December 31, 1997................ $ 34,275
Year ending December 31, 1998........................ 137,104
Year ending December 31, 1999........................ 137,104
Year ending December 31, 2000........................ 102,827
---------
Total minimum lease payments..................... 411,310
Less: Amounts representing imputed interest.......... (44,264)
---------
Present value of net minimum payments............ 367,046
Less: Current portion................................ (112,736)
---------
Noncurrent portion of capital lease obligation... $ 254,310
---------
---------
</TABLE>
In conjunction with this lease agreement, the Company granted a warrant to
the lessor to purchase 13,636 shares of the Company's Series B Convertible
Preferred stock at an exercise price of $2.20 per share. Such warrant expires
five years from the completion of an initial public offering (see Note 15).
Clinical trials, manufacturing, marketing and sale of any of the Company's
partners' potential therapeutic or diagnostic products may expose the Company to
liability claims from the use of such pharmaceutical products. The Company
currently does not carry product liability insurance.
NOTE 12. 401(K) RETIREMENT PLAN:
During 1996, the Company established the Gene Logic Inc. 401(k) Retirement
Plan (the "401(k) Plan") for its employees under Section 401(k) of the Internal
Revenue Service code. Under this plan, all employees over 21 years of age and
with at least six months of service with the Company are eligible to contribute
from 2% to 15% of their salary. Employee contributions are 100% vested. The
Company is not required to make any contributions to the 401(k) Plan and has not
made any contributions through September 30, 1997.
F-16
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. STOCK BASED COMPENSATION:
During 1996, the Company instituted a stock plan (the "Plan") whereby the
Company's compensation committee (the "Committee"), at its discretion, can grant
options, award stock or provide opportunities to make direct purchases of stock
to employees, officers, directors and consultants of the company and related
corporations. The Plan is authorized to grant options of up to 6,100,000 shares
of common stock. Options are to be granted at the fair market value of the
common stock at the grant date. The options, awards and opportunities to
purchase stock expire at the earlier of termination or the date specified by the
Committee at the date of grant, but not more than ten years.
The following is a rollforward of option activity for the year ended
December 31, 1996 and the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
---------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding, beginning of period.................................... -- $ -- 424,000 $ 0.15
Granted........................................................... 524,000 0.12 2,192,881 1.15
Exercised......................................................... (100,000) 0.01 (140,732) 0.15
Cancelled......................................................... -- -- (51,768) 0.15
--------- ----------
Outstanding, end of period.......................................... 424,000 0.15 2,424,381 1.05
--------- ----------
Exercisable, end of period.......................................... 77,710 0.15 367,272 0.22
--------- ----------
--------- ----------
Weighted average fair value of options granted...................... $ 0.05 $ 2.04
--------- ----------
--------- ----------
Weighted average remaining contractual life (in years).............. 9.86 9.59
--------- ----------
--------- ----------
</TABLE>
During the nine months ended September 30, 1997, the Company granted options
with exercise prices below fair value. The Company has recorded deferred
compensation of $6,689,228 at September 30, 1997, and compensation expense of
$159,294 for the nine months then ended for these options.
The following table provides further information on options granted with
exercise prices below fair value, compared to options granted with exercise
prices equal to fair value for the nine months ended September 30, 1997.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE FAIR
WEIGHTED VALUE OF
WEIGHTED AVERAGE COMMON
AVERAGE OPTION FAIR STOCK ON
SHARES EXERCISE PRICE VALUE GRANT DATE
---------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Options whose exercise price equals the fair value of the
stock on the grant date.................................. 20,000 $ 0.15 $ 0.07 $ 0.15
Options whose exercise price is less than the fair value of
the stock on the grant date.............................. 2,172,881 1.16 2.04 4.24
</TABLE>
Also, subsequent to September 30, 1997, the Company granted additional
options with exercise prices below fair value. In connection with these grants
the Company will record additional deferred compensation of
F-17
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. STOCK BASED COMPENSATION (CONTINUED):
$207,200 during the three months ended December 31, 1997 which will be
recognized as compensation expense over the four year vesting period of the
option.
During 1996, an officer of the Company purchased 100,000 shares of common
stock for $0.15 per share under the Plan, subject to a declining buy-back right
of the Company.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under the Plan,
consistent with the method of SFAS No. 123, the Company's net loss and loss per
share would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
<S> <C> <C> <C>
NINE MONTHS ENDED
SEPTEMBER 30,
1995 1996 1997
---------- ------------ ------------------
Net loss:
As reported..................................................... $ (744,179) $ (2,865,128) $ (4,751,988)
Pro forma....................................................... (744,179) (2,873,805) (4,708,951)
Net loss:
As reported..................................................... $ (0.13) $ (0.31) $ (0.46)
Pro forma....................................................... (0.13) (0.31) (0.46)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model, with the following assumptions:
<TABLE>
<S> <C>
Expected volatility......................................................... 60.0%
Risk-free interest rates.................................................... 5.72% to 5.85%
Expected lives.............................................................. 1-3 years
Dividend rate............................................................... 0%
</TABLE>
NOTE 14. RELATED PARTY TRANSACTIONS:
During 1996, the Company made loans to two officers of the Company of
$50,000 each to offset relocation costs. These notes receivable were secured by
common stock previously issued to the officers. In January 1997, one of these
notes was cancelled (see Note 10). The remaining note is due in 2002 and bears
interest (see Note 15).
NOTE 15. CONTEMPLATED INITIAL PUBLIC OFFERING:
On October 7, 1997, the Company filed a registration statement with the
Securities and Exchange Commission for an initial public offering ("IPO") of
3,000,000 shares of common stock at an anticipated initial offering price of $11
per share. Net proceeds of the offering (not including the concurrent Japan
Tobacco investment previously described), after underwriting commissions and
expenses are expected to be approximately $30,090,000 ($37,693,500 if the
underwriters' over-allotment option is exercised in full). Concurrent with the
IPO, a note receivable of $50,000 plus interest, from an officer of the Company
will be forgiven, the vesting of certain options will be accelerated and the
authorized capital stock of the Company will be increased to 60,000,000 shares
of common stock and 10,000,000 shares of preferred stock. The Company intends to
use the proceeds for working capital to support research and development,
capital expenditures and general corporate purposes.
F-18
<PAGE>
DRUG TARGET DISCOVERY
"MOLECULAR MOVIE"
[graphical depiction of series of Molecular Topography snapshots] 10,000 GENES
DIFFERENTIALLY EXPRESSED, DISEASE-ASSOCIATED GENES
[graphical depiction of differential expression of disease-associated
genes] 50-500 GENES
PRIORITIZATION OF POTENTIAL DRUG TARGETS
[numbers and letters representing gene sequences] 5-50 GENES
The core of Gene Logic's Accelerated Drug Discovery system is its proprietary
READS-TM- (Restriction Analysis of Differentially-expressed Sequences)
technology for analyzing patterns of gene expression. Using READS-TM-. Gene
Logic rapidly generates a gene expression profile, or Molecular Topography-TM-,
representing a quantitative snapshot of the levels of expression of essentially
all the genes expressed in a tissue sample.
The drug target discovery process comprises the following steps:
1. The Company compares normal and diseased tissues through a series of
Molecular Topography snapshots, a "molecular movie," to identify the changes
in gene expression that occur as the disease develops and progresses.
2. Using its bioinformatics tools, Gene Logic analyzes these changes to
identify which expressed genes are associated with the disease.
3. Gene Logic prioritizes disease-associated genes as drug targets using its
bioinformatics system. This prioritization depends upon a number of factors
including: (i) a gene's temporal association with the disease process; (ii)
the tissue distribution of its expression; (iii) any homology it may have
with known target classes, such as membrane receptors, enzymes or ion
channels; (iv) its involvement in known metabolic or signal transduction
pathways; and (v) the feasibility of developing a screening assay.
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the Common Stock being registered. All the amounts
shown are estimates except for the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee.................................................................. $ 12,546
NASD filing fee................................................................... 4,640
Nasdaq Stock Market Listing Application fee....................................... 50,000
Blue sky qualification fees and expenses.......................................... 1,000
Printing and engraving expenses................................................... 120,000
Legal fees and expenses........................................................... 275,000
Accounting fees and expenses...................................................... 125,000
Transfer agent and registrar fees................................................. 10,000
Miscellaneous..................................................................... 1,814
---------
Total......................................................................... $ 600,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its Directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act.
The Registrant's Restated Certificate of Incorporation and Amended and
Restated By-laws include provisions to (i) eliminate the personal liability of
its directors for monetary damages resulting from breaches of their fiduciary
duty to the extent permitted by Section 102(b)(7) of the General Corporation Law
of Delaware (the "Delaware Law") and (ii) require the Registrant to indemnify
its Directors and officers to the fullest extent permitted by Section 145 of the
Delaware Law, including circumstances in which indemnification is otherwise
discretionary. Pursuant to Section 145 of the Delaware Law, a corporation
generally has the power to indemnify its present and former directors, officers,
employees and agents against expenses incurred by them in connection with any
suit to which they are or are threatened to be made a party by reason of their
serving in such positions so long as they acted in good faith and in a manner
they reasonably believed to be in or not opposed to, the best interests of the
corporation and with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. The Registrant believes that these
provisions are necessary to attract and retain qualified persons as Directors
and officers. These provisions do not eliminate the Directors' duty of care,
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware Law. In
addition, each Director will continue to be subject to liability for breach of
the Director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for acts or omissions that the Director believes to be contrary to the best
interests of the Registrant or its stockholders, for any transaction from which
the Director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the Director's duty to the Registrant or its
stockholders when the Director was aware or should have been aware of a risk of
serious injury to the Registrant or its stockholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the Director's duty to the Registrant or its stockholders, for improper
transactions between the Director and the Registrant and for improper
distributions to stockholders and loans to Directors and officers. The provision
also does not affect a
II-1
<PAGE>
Director's responsibilities under any other law, such as the federal securities
law or state or federal environmental laws.
The Registrant has entered into indemnity agreements with each of its
Directors and executive officers that require the Registrant to indemnify such
persons against expenses, judgments, fines, settlements and other amounts
incurred (including expenses of a derivative action) in connection with any
proceeding, whether actual or threatened, to which any such person may be made a
party by reason of the fact that such person is or was a Director or an
executive officer of the Registrant or any of its affiliated enterprises,
provided that such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable cause
to believe his conduct was unlawful. The indemnification agreements also set
forth certain procedures that will apply in the event of a claim for
indemnification thereunder.
At present, there is no pending litigation or proceeding involving a
Director, officer or key employee of the Registrant as to which indemnification
is being sought nor is the Registrant aware of any threatened litigation that
may result in claims for indemnification by any officer or Director.
The Registrant has an insurance policy covering the officers and Directors
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since September 22, 1994 (inception), the Registrant has sold and issued the
following unregistered securities:
1. During the period, the Registrant granted incentive stock options to
employees, officers and directors of the Registrant under its 1996 Stock
Plan (the "Stock Plan") covering an aggregate of 2,533,654 shares of the
Registrant's Common Stock. Certain of these options vest over a period of
time following their respective date of grant.
2. During the period, the Registrant granted non-statutory stock
options to employees, officers and directors of the Registrant under the
Stock Plan covering an aggregate of 239,227 shares of the Registrant's
Common Stock. Certain of these options vest over a period of time following
their respective date of grant.
3. During the period, the Registrant issued 642,733 shares of its
Common Stock to employees and consultants for $17,800 in cash and $2,127 in
services. An additional 240,732 shares were issued pursuant to the exercise
of incentive stock options granted under the Stock Plan.
4. In November 1994 and May 1995, pursuant to the terms of an equity
financing of the Registrant, the Registrant issued 333,333 shares of Series
A Preferred Stock to two investors for $500,000.
5. In September 1995, pursuant to the terms of an equity financing of
the Registrant, the Registrant issued 412,500 shares of Series A-1 Preferred
Stock to five investors for $660,000. In connection with such financing, the
Registrant issued warrants to purchase 50,000 shares of Series A-1 Preferred
Stock at an exercise price of $1.60 per share to certain of such investors.
6. In April through October 1996, pursuant to the terms of an equity
financing of the Registrant, the Registrant issued 4,090,909 shares of
Series B Preferred Stock to 20 investors for $9,000,000.
7. In April 1997, the Registrant issued a warrant to purchase 25,758
shares of Series B Preferred Stock at an exercise price of $2.20 per share
in connection with an equipment loan agreement.
II-2
<PAGE>
8. In April 1997, the Registrant issued a warrant to purchase 13,636
shares of Series B Preferred Stock at an exercise price of $2.20 per share
in connection with the establishment of a capital lease facility.
9. In July 1997, pursuant to the terms of an equity financing of the
Registrant, the Registrant issued 4,444,443 shares of Series C Preferred
Stock to 30 investors for $19,999,993.50. In addition, the Company paid
approximately $660,000 to Hambrecht & Quist LLC for services as placement
agent in connection with such financing, and approximately $67,000 to Bailey
& Company, Inc. for services in connection with the financing.
10. In August 1997, in connection with the Registrant's facilities
lease, the Registrant issued a warrant to purchase 20,000 shares of the
Registrant's Common Stock at an exercise price of $5.40 per share.
11. In September 1997, the Registrant issued 50,000 shares of its Common
Stock to Genaissance Pharmaceuticals, Inc. in connection with a negotiated
settlement.
12. The Registrant issued a warrant to purchase 48,889 shares of its
Common Stock at an exercise price of $4.50 per share to Hambrecht & Quist
LLC for services as placement agent for Registrant's Series C Preferred
Stock financing, which closed on July 15, 1997.
13. In September 1997, the Registrant issued a warrant to purchase 4,293
shares of Series B Preferred Stock at an exercise price of $2.20 per share
in connection with an equipment loan agreement.
The sales and issuances of securities in the transactions described in
paragraphs (1), (2) and (3) above were deemed to be exempt from registration
under the Securities Act by virtue of Rule 701 promulgated thereunder in that
they were offered and sold either pursuant to written compensatory benefit plans
or pursuant to a written contract relating to compensation, as provided by Rule
701.
With respect to the grant of stock options described in paragraphs (1) and
(2) above exemption from registration under the Securities Act was unnecessary
in that none of such transactions involved a "sale" of securities as such term
is used in Section 2(3) of the Securities Act.
The sales and issuances of securities in the transactions described in
paragraphs (4) through (13) above were deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2) and/ or Regulation D
promulgated thereunder.
The recipients represented their intention to acquire the securities for
investment purposes only and not with a view to the distribution thereof.
Appropriate legends are affixed to the stock certificates issued in such
transactions. Similar legends were imposed in connection with any subsequent
sales of any such securities. All recipients either received adequate
information about the Registrant of had access, though employment or other
relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1** Restated Certificate of Incorporation.
3.2** Amended and Restated Certificate of Incorporation, to be filed and become effective immediately
following this offering.
3.3** By-laws, as amended.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.4** By-laws, as amended and restated, to become effective immediately following this offering.
4.1** References made to Exhibits 3.1, 3.2 and 3.3.
4.2** Specimen Stock Certificate.
5.1** Opinion of Cooley Godward LLP.
10.1** Form of Indemnity Agreement entered into between Registrant and its directors and executive officers.
10.2** Registrant's 1997 Equity Incentive Plan (the "Stock Plan").
10.3** Form of Stock Option Agreement under the Stock Plan.
10.4** Form of Stock Option Grant Notice.
10.5** Registrant's Employee Stock Purchase Plan and related offering document.
10.6** Registrant's Non-Employee Directors' Stock Option Plan.
10.7** Form of Nonstatutory Stock Option under the Non-Employee Directors' Stock Option Plan.
10.8** Stock Restriction Agreement, dated July 31, 1996, between the Registrant and Mark D. Gessler.
10.9** Stock Restriction Agreement, dated December 20, 1996, between the Registrant and Mark D. Gessler.
10.10** Stock Restriction Agreement, dated February 29, 1996, between the Registrant and Michael J. Brennan.
10.11** Amended and Restated Investor Rights Agreement, dated July 15, 1997, between the Registrant and certain
investors.
10.12** Employment Agreement, dated October 31, 1995, between the Registrant and Michael J. Brennan.
10.13** Amendment to Employment Agreement, dated July 9, 1997, between the Registrant and Michael J. Brennan.
10.14** Employment Agreement, dated May 16, 1996, between the Registrant and Mark D. Gessler.
10.15** Amendment to Employment Agreement, dated July 9, 1997, between the Registrant and Mark D. Gessler.
10.16** Series A-1 Convertible Preferred Stock Purchase Warrant, dated August 1, 1995, issued to Oxford
Bioscience Partners L.P.
10.17** Series A-1 Convertible Preferred Stock Purchase Warrant, dated August 1, 1995, issued to Oxford
Bioscience Partners (Bermuda) Limited Partnership.
10.18** Warrant for the purchase of shares of Common Stock, dated August 29, 1997, between Registrant and
ARE-708 Quince Orchard, LLC.
10.19** Warrant, dated April 24, 1997, issued to Venture Lending & Leasing, Inc.
10.20** Warrant issued to Hambrecht & Quist LLC.
10.21** Lease Agreement, dated May 7, 1997, between Registrant and M.O.R. XVIII Associates Limited Partnership.
10.22** Lease Agreement, dated August 22, 1997, between Registrant and ARE-708 Quince Orchard, LLC, as amended.
10.23** Warrant, dated April 15, 1997, between Registrant and Comdisco, Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.24+ Target Discovery Collaboration and License Agreement, dated May 27, 1997, between Registrant and Procter
& Gamble Pharmaceuticals, Inc. ("Procter & Gamble").
10.25+ Promissory Note, dated May 27, 1997, between Registrant and Procter & Gamble.
10.26+ Drug Target and Drug Lead Discovery Collaboration Agreement, dated September 9, 1997, between Registrant
and Japan Tobacco Inc.
10.27** Share Purchase Agreement, dated September 9, 1997, between Registrant and Japan Tobacco Inc.
10.28**+ License Agreement, dated May 22, 1996, between Registrant and Yale University.
10.29**+ Amendment, dated October 1, 1997, to the License Agreement between Registrant and Yale University.
10.30**+ Sole Commercial Patent License Agreement, dated June 15, 1997, between Registrant and Lockheed Martin
Energy Research Company.
10.31**+ License Agreement, dated May 30, 1997, between Registrant and Dr. Kenneth L. Beattie.
10.32** Warrant, dated September 30, 1997, issued to Venture Lending & Leasing, Inc.
11.1** Statement Regarding Computation of Per Share Earnings.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1** Power of Attorney. Reference is made to page II-7.
27.1** Financial Data Schedule
</TABLE>
- ------------------------
** Previously filed.
+ Confidential Treatment has been requested with respect to certain portions
of this exhibit. Omitted portions will be filed separately with the
Securities and Exchange Commission.
(B) SCHEDULES
All schedules are omitted because they are not required, are not applicable
or the information is included in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 15 or otherwise, the registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant 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, the registrant will,
unless in the opinion of its 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 Act and
will be governed by the final adjudication of such issue.
II-5
<PAGE>
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Act, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d)
of the Exchange Act (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange Act)
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.
(2) That, for purposes of determining any liability under the 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 the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the 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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 3 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Columbia, County of Columbia, State of
Maryland, on the 20th day of November, 1997.
<TABLE>
<S> <C> <C>
By: /s/ MARK D. GESSLER
------------------------------------------
Mark D. Gessler
SENIOR VICE PRESIDENT, CORPORATE
DEVELOPMENT AND CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
* President, Chief Executive November 20, 1997
------------------------------------------- Officer and Director (PRINCIPAL
Michael J. Brennan, M.D., Ph.D. EXECUTIVE OFFICER)
/s/ MARK D. GESSLER Senior Vice President, Corporate November 20, 1997
------------------------------------------- Development and Chief Financial
Mark D. Gessler Officer (PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER)
* Chairman of the Board of November 20, 1997
------------------------------------------- Directors
Alan G. Walton, Ph.D., D.Sc.
* Director November 20, 1997
-------------------------------------------
Jules Blake, Ph.D.
* Director November 20, 1997
-------------------------------------------
Charles L. Dimmler III
* Director November 20, 1997
-------------------------------------------
G. Anthony Gorry, Ph.D.
* Director November 20, 1997
-------------------------------------------
Jeffrey D. Sollender
</TABLE>
<TABLE>
<S> <C>
*By: /s/ MARK D. GESSLER
-----------------------------------------
Mark D. Gessler
</TABLE>
II-7
<PAGE>
Exhibit 10.24
Confidential Treatment Requested
Under 17 C.F.R. Sections 200.80(b)(4),
200.83 and 230.406
*** Indicates omitted material that is the subject of a confidential
treatment request filed separately with the Commission.
TARGET DISCOVERY COLLABORATION
AND LICENSE AGREEMENT
BETWEEN
GENE LOGIC INC.
AND
PROCTER & GAMBLE PHARMACEUTICALS, INC.
DATED AS OF MAY 27, 1997
<PAGE>
Table Of Contents
Page
1. DEFINITIONS........................................................... 1
1.1 "Affiliate"...................................................... 1
1.2 "Agreement Term"................................................. 2
1.3 "Alliance Director".............................................. 2
1.4 "cDNA"........................................................... 2
1.5 "cDNA Sequence Analysis"......................................... 2
1.6 "Commercialization Field"........................................ 2
1.7 "Control"........................................................ 2
1.8 "Diagnostic Product"............................................. 2
1.9 "Drug Approval Application"...................................... 2
1.10 "Effective Date"................................................. 2
1.11 "FDA"............................................................ 2
1.12 "Field".......................................................... 2
1.13 "Further Research and Development"............................... 3
1.14 "Gene Product"................................................... 3
1.15 "Gene Target".................................................... 3
1.16 "Gene Logic Software"............................................ 3
1.17 "Gene Logic Technology".......................................... 3
1.18 "Heart Failure".................................................. 3
1.19 "IND"............................................................ 3
1.20 "Invention(s)"................................................... 3
1.21 "Major Market"................................................... 3
1.22 "NDA"............................................................ 3
1.23 "Net Sales"...................................................... 3
1.24 "Patent Right(s)"................................................ 4
1.25 "Product"........................................................ 4
1.26 "Protein Product"................................................ 4
1.27 "Regulatory Approval"............................................ 4
1.28 "Research Database".............................................. 5
1.29 "Research Management Committee" or "RMC"......................... 5
1.30 "Research Plan".................................................. 5
1.31 "Research Program"............................................... 5
1.32 "Research Term".................................................. 5
1.33 "Samples"........................................................ 5
1.34 "Scientific FTE"................................................. 5
1.35 "Stage I"........................................................ 5
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
Page
1.36 "Stage II"...................................................... 5
1.37 "Therapeutic Product"........................................... 5
1.38 "Third Party"................................................... 6
1.39 "Utility"....................................................... 6
2. Research Program..................................................... 6
2.1 Undertaking and Scope........................................... 6
2.2 Personnel and Resources......................................... 6
2.3 Establishment of Link to Research Database...................... 6
2.4 Term of the Research Program.................................... 7
2.5 Selection of Gene Targets....................................... 7
2.6 Selection of Gene Targets Following Termination of Research
Term .......................................................... 8
3. Research Management Committee; Alliance Directors;
Dispute Resolution................................................... 8
3.1 Research Management Committee.................................... 8
3.2 RMC Meetings..................................................... 9
3.3 Alliance Directors............................................... 9
3.4 Dispute Resolution............................................... 9
4. Patents, Know-How Rights And Inventions............................... 9
4.1 Ownership of Inventions.......................................... 9
4.2 Rights to Gene Logic Technology, Gene Logic Software and
Research Database............................................... 9
4.3 Rights to Improvements to Gene Logic Technology and Gene
Logic Software................................................... 10
4.4 Patent Protection................................................ 10
4.5 Infringement by Third Parties.................................... 11
4.6 Allegations of Infringement by Third Parties..................... 11
4.7 Independent Efforts.............................................. 12
5. Licenses............................................................... 12
5.1 Research Database and Software License to P&GP.................... 12
5.2 Licenses to Gene Logic............................................ 13
5.3 Gene Target License to P&GP....................................... 13
5.4 P&GP Right of First Negotiation .................................. 13
5.5 Gene Logic Right of First Negotiation ............................ 14
ii.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
Page
6. Diligence and Gene Target License Termination......................... 14
6.1 Diligence........................................................ 14
7. Reporting Obligations................................................. 15
7.1 Information and Reports Concerning the Research Program.......... 15
7.2 Diligence Reports................................................ 16
8. Collaboration Expansion Options....................................... 16
9. Payments and Royalties................................................ 16
9.1 Research Reimbursement Payments to Gene Logic.................... 16
9.2 Technology Access Payment to P&GP................................ 17
9.3 Gene Target Fees................................................. 17
9.4 Royalties Payable by P&GP........................................ 17
9.5 Currency of Payment.............................................. 18
9.6 Payment and Reporting............................................ 19
9.7 Records and Audits............................................... 19
10. Milestones............................................................ 19
10.1 Milestones for Therapeutic Products and Protein Products......... 19
10.2 Milestones for Diagnostic Products............................... 20
10.3 Payment of Milestones............................................ 20
11. Confidentiality and Security.......................................... 20
11.1 Security of Research Database.................................... 20
11.2 Confidentiality.................................................. 21
11.3 Permitted Disclosures............................................ 22
11.4 Publicity........................................................ 22
11.5 Publication...................................................... 22
12. Representations And Warranties........................................ 23
12.1 Legal Authority.................................................. 23
12.2 Valid Licenses................................................... 23
12.3 No Conflicts..................................................... 23
12.4 Disclaimer....................................................... 23
13. Term; termination..................................................... 24
13.1 Term............................................................. 24
iii.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
Page
13.2 Termination for Breach.......................................... 24
13.3 Effect of Bankruptcy............................................ 25
13.4 Remedies........................................................ 25
14. Arbitration........................................................... 25
15. General Provisions.................................................... 26
15.1 Mutual Indemnification........................................... 26
15.2 Assignment....................................................... 26
15.3 Change of Control................................................ 26
15.4 Non-Waiver....................................................... 27
15.5 Governing Law.................................................... 28
15.6 Partial Invalidity............................................... 28
15.7 Notice........................................................... 28
15.8 Headings......................................................... 28
15.9 No Implied Licenses or Warranties................................ 29
15.10 Force Majeure................................................... 29
15.11 Survival........................................................ 29
15.12 Entire Agreement................................................ 29
15.13 Amendments...................................................... 29
15.14 Independent Contractors......................................... 29
15.15 Counterparts.................................................... 30
iv.
<PAGE>
TARGET DISCOVERY COLLABORATION
AND LICENSE AGREEMENT
This Target Discovery Collaboration And License Agreement ("Agreement") is
made as of May 27, 1997, by and between Gene Logic inc., a Delaware corporation
("Gene Logic"), located at 10150 Old Columbia Road, Columbia, Maryland 21046 and
Procter & Gamble Pharmaceuticals, Inc. ("P&GP"), an Ohio corporation, having a
place of business at 8700 Mason-Montgomery Road, Mason, Ohio 45040.
Witnesseth:
Whereas, Gene Logic has developed technologies and know-how with respect to
high throughput analysis of gene expression and gene regulation for use in the
identification of gene targets and the discovery of pharmaceutical and
diagnostic products;
Whereas, P&GP is a company engaged in the development and commercialization
of pharmaceutical and diagnostic products;
Whereas, P&GP and Gene Logic wish to enter into a collaborative effort
directed toward the development of a Research Database (as defined herein) to
identify genes associated with the onset and progression of heart failure and
ischemic cardiomyopathies (the "Collaboration"); and
Whereas, the parties intend to use the genes so identified to discover,
develop and market human pharmaceutical and diagnostic products.
Now, Therefore, in consideration of the foregoing premises and the mutual
promises, covenants and conditions contained herein, Gene Logic and P&GP agree
as follows:
1. Definitions.
The following capitalized terms shall have the meanings indicated for
purposes of this Agreement:
1.1 "Affiliate" shall mean any corporation, association or other entity
which directly or indirectly controls, is controlled by or is under common
control with the party in question. As used in this definition of "Affiliate,"
the term "control" shall mean direct or indirect beneficial ownership of more
than 50% of the voting or income interest in such corporation or other business
entity.
1.
<PAGE>
1.2 "Agreement Term" shall mean the period from the Effective Date until,
with respect to each Product, the expiration of the last royalty obligation owed
by P&GP to Gene Logic with respect to such Product, or until this Agreement is
otherwise terminated pursuant to its terms.
1.3 "Alliance Director" shall have the meaning set forth in Section 3.3.
1.4 "cDNA" shall mean a DNA copy of a mRNA, including, without
limitation, all cDNA clones and cDNA templates derived from a given gene
transcript and its corresponding coding sequence, including the full length
sequence.
1.5 "cDNA Sequence Analysis" shall mean all sequence information from all
cDNA templates derived from the same gene within a given cDNA library.
1.6 "Commercialization Field" shall mean the development or
commercialization of Products for the prevention, treatment or diagnosis of
Heart Failure and ischemic cardiomyopathies in humans and other animals.
1.7 "Control" shall mean possession of the ability to grant the licenses
or sublicenses as provided for herein without violating the terms of any
agreement or other arrangement with any Third Party.
1.8 "Diagnostic Product" shall mean any product or service or combination
thereof used for the diagnosis, prognosis and/or monitoring of progression of
any disease or disorder in humans and other animals which is developed
utilizing, or is comprised of, any Gene Target or which incorporates any Gene
Target DNA or RNA sequence, other than a Protein Product.
1.9 "Drug Approval Application" shall mean an application for Regulatory
Approval required before commercial sale or use of a Product.
1.10 "Effective Date" shall mean the date of this Agreement first written
above.
1.11 "FDA" shall mean the United States Food and Drug Administration.
1.12 "Field" shall mean research, discovery and characterization of genes
associated with the onset and progression of Heart Failure and ischemic
cardiomyopathies through the application of bioinformatics and genomic
technologies to analyze Samples, and the use of such genes for the development
of Products. As used herein, the term "genomic technologies" shall mean,
without limitation, technologies for the analysis of gene expression and gene
regulation, hybridization array techniques, high speed sequencing and generation
of expressed sequence tags.
2.
<PAGE>
1.13 "Further Research and Development" shall have the meaning set forth
in Section 2.5.
1.14 "Gene Product" shall mean all partial cDNAs, DNAs, genes, full length
cDNAs corresponding thereto and proteins encoded therefrom.
1.15 "Gene Target" shall have the meaning set forth in Section 2.5.
1.16 "Gene Logic Software" shall mean Gene Logic's software programs for
the analysis of gene expression and gene regulation and the identification and
prioritization of gene targets, including all software programs and analysis
tools that are Controlled by Gene Logic as of the Effective Date or during the
Research Term.
1.17 "Gene Logic Technology" shall mean (i) all discoveries, inventions,
information, data, know-how, trade secrets and materials (whether or not
patentable) that are Controlled by Gene Logic as of the Effective Date or during
the Research Term, including without limitation, the Research Database, Gene
Logic's READS-TM- and MUST-TM- technologies and its Gene Express-TM- database
and (ii) all intellectual property rights of Gene Logic covering the foregoing.
1.18 "Heart Failure" shall mean the inability of the heart to maintain a
circulation sufficient to meet the needs of the body.
1.19 "IND" shall mean an Investigational New Drug Application to the FDA
to commence human clinical testing of a Product, as defined by the FDA, or the
equivalent application in any other Major Market.
1.20 "Invention(s)" shall have the meaning set forth in Section 4.1.
1.21 "Major Market" shall mean the European Union or any one or more of
the following countries: the United States, Canada, United Kingdom, France,
Germany, Italy or Japan.
1.22 "NDA" shall mean a New Drug Application or Product License
Application, as appropriate, and all supplements filed pursuant to the
requirements of the FDA, including all documents, data and other information
concerning Products which are necessary for or included in FDA approval to
market a Product, or the equivalent application in any other Major Market.
1.23 "Net Sales" shall mean the gross invoices delivered by P&GP or its
Affiliates or sublicensees, as appropriate, for the sale of a Product, less the
following deductions:
3.
<PAGE>
(1) Prompt payment or other trade or quantity discounts actually
allowed and taken in such amounts as are customary in the trade;
(2) Amounts repaid or credited by reason of timely rejections or
returns;
(3) Any sales or value-added taxes or any other taxes measured by
the amount of sales or gross receipts due on the sale of a Product; and
(4) Allowances for bad debt to the extent such amounts were
previously invoiced and included in Net Sales for royalty purposes and were
subsequently actually written off by P&GP; and
(5) Rebates or discounts actually allowed and taken by government
or other health care organizations, national or other health insurance schemes,
Medicare and Medicaid and the like, state-based or other formularies and managed
care organizations and discounts actually allowed and taken for special
purchases made by hospitals or clinics.
Notwithstanding the foregoing, amounts received by such party or its
Affiliates for the sale of Products among such party and its Affiliates whether
for their internal use or for resale or other disposition will not be included
in the computation of Net Sales hereunder.
1.24 "Patent Right(s)" shall mean, with respect to Gene Logic or P&GP,
all United States and foreign patents (including all reissues, extensions,
confirmations, registrations, re-examinations, and inventor's certificates) and
patent applications (including, without limitation, all substitutions,
continuations, continuations-in-part and divisionals thereof) owned or
Controlled by Gene Logic or P&GP at any time during the Agreement Term.
1.25 "Product" shall mean a Therapeutic Product, Protein Product, or
Diagnostic Product, as applicable.
1.26 "Protein Product" shall mean any product for the prevention or
treatment of any disease or disorder in humans and other animals which
incorporates a protein or peptide (excluding peptides discovered through
screening of Gene Targets) encoded by the full, partial or mutated RNA or DNA
sequence corresponding to a Gene Target RNA or DNA sequence, in any dosage form
for delivery by any route of administration.
1.27 "Regulatory Approval" shall mean (i) approval of an NDA or comparable
applicable filing by the FDA permitting commercial sale of a Product and (ii)
any comparable approval permitting commercial sale of a Product granted by
applicable authorities in any other Major Market.
4.
<PAGE>
1.28 "Research Database" shall mean the database created by Gene Logic
using the Gene Logic Technology pursuant to the Research Plan. The Research
Database shall contain data derived from experiments conducted with respect to
the Gene Products identified by Gene Logic pursuant to the Research Program,
including all derivative materials of the Samples and all cDNA sequences,
partial cDNAs and their corresponding full-length cDNAs and cDNA Sequence
Analysis.
1.29 "Research Management Committee" or "RMC" shall have the meaning set
forth in Section 3.1.
1.30 "Research Plan" shall have the meaning set forth in Section 2.1.
1.31 "Research Program" shall mean that program of research performed by
the parties in the Field pursuant to Section 2.
1.32 "Research Term" shall mean the period commencing on the Effective
Date and ending upon the last day of Stage II, subject to extension or earlier
termination as set forth herein.
1.33 "Samples" shall mean tissue samples supplied by P&GP to Gene Logic
for analyses pursuant to the Research Plan.
1.34 "Scientific FTE" shall mean the equivalent of a full-time
researcher's or program manager's work time expended on activities pursuant to
the Research Plan over a 12 month period (including normal vacations, sick days
and holidays).
1.35 "Stage I" shall mean the initial phase of the Research Program and
shall commence as of the Effective Date and extend until the earlier of (i)
the completion by Gene Logic of the READS-TM- analysis of [***] Samples, or
(ii) 18 months from the Effective Date.
1.36 "Stage II" shall mean the second phase of the Research Program,
commencing on the day following the last day of Stage I and extending until
the third anniversary thereof. Stage II may be extended upon mutual
agreement of the parties, as provided in Section 2.4(a).
1.37 "Therapeutic Product" shall mean any product for the prevention or
treatment of any disease or disorder in humans and other animals in any dosage
form by any route of administration, which product incorporates as an active
ingredient a molecule, compound or other agent that (a) is discovered utilizing,
in whole or in part, a Gene Target, whether or not during the Research Term, or
(b) was identified prior to the Effective Date but the utility of which is
discovered utilizing, in whole or in part, a Gene Target, whether or not during
the Research Term, excluding any Diagnostic Product and
5.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
any Protein Product. For example, "Therapeutic Product" expressly includes any
gene therapy product or antisense product which consists of any full, partial or
mutated RNA or DNA sequence corresponding to, or complementary to a Gene Target
RNA or DNA sequence (a "Biological Therapeutic Product").
1.38 "Third Party" shall mean any party other than P&GP or Gene Logic or
an Affiliate of either of them.
1.39 "Utility" of a target shall mean when the complete cDNA sequence is
available and the corresponding clone is characterized; the recombinant protein
corresponding to the cDNA has been expressed and is purified; and manipulation
of the expression or activity of the molecular target modulates heart function
in an animal model.
2. Research Program.
2.1 Undertaking and Scope. During the first 30 days after the Effective
Date, the parties shall work together to develop a plan for the creation and use
of the Research Database (a "Research Plan") by the parties. The Research
Management Committee will review and approve or modify the general direction of
such Research Plan. The Research Plan shall include such correspondence and
other material of the parties documenting the parties' work to create the
Research Database. At least 90 days before each anniversary of the Effective
Date during the Research Term, the parties shall propose to the RMC a Research
Plan for the subsequent year's work under the Research Program. The RMC shall
review, modify, if appropriate, and amend the Research Plan. Each party agrees
to use all reasonable efforts to perform the activities detailed in the Research
Plan, in a professional and timely manner.
2.2 Personnel and Resources. During the Research Term, each party
agrees to commit the personnel, consultants, facilities, expertise,
technology and other resources necessary to perform its obligations under
the Research Plan. During Stage I of the Research Term, Gene Logic shall
commit no fewer than [***] Scientific FTEs. During Stage II of the Research
Term, P&GP and Gene Logic will each maintain the number of Scientific FTEs
devoted to cooperative work as are required under the Research Plan; provided
that such research support at Gene Logic shall not be fewer than [***]
Scientific FTEs or at such lower level as the parties may mutually agree
taking into account the work to be accomplished pursuant to the Research
Plan. P&GP will provide funding to support Gene Logic's performance of its
obligations under the Research Plan as set forth in Section 9.1(c).
2.3 Establishment of Link to Research Database. During the 30 days after
the Effective Date, the parties shall work together to establish a secure
internet link to the
6.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Research Database at P&GP and Gene Logic will make a representative available
at P&GP's facility to assist in such process. In the event that access to the
link to the Research Database is disrupted for a period of one working day or
more, other than due to the fault of P&GP, then the period during which P&GP
shall have access to the Research Database under Section 5.1 shall be
commensurately extended for a period equal to the number of full working days
during which such access was disrupted.
2.4 Term of the Research Program.
(a) Work under the Research Program will commence as of the
Effective Date and, unless terminated earlier pursuant to the terms of this
Agreement or extended by mutual agreement of the parties, will terminate upon
expiration of the Research Term. The parties may extend Stage II of the
Research Term for additional one year periods by mutual written consent. The
Research Term may be terminated by P&GP upon expiration of Stage I with six
months' prior written notice to Gene Logic, or at any time subsequent to the
expiration of Stage I as long as P&GP has provided six months' prior written
notice to Gene Logic; provided, however, that both parties shall be obligated
to continue all Research Program studies ongoing at the time of such written
notice until the effective date of such termination. Upon early termination
by P&GP of the Research Term pursuant to the preceding sentence, Gene Logic
shall return to P&GP any Samples which have not been analyzed, but shall
retain all derivative materials of Samples previously analyzed. Gene Logic
shall not be entitled to terminate the Research Term during Stage I so long
as P&GP has made all required payments to Gene Logic during Stage I.
(b) If the Research Term is terminated by P&GP as provided in
Section 2.4(a), P&GP may elect to recommence the Research Program for up to
two additional one year periods of time (each, an "Additional Research
Program Year") by notifying Gene Logic of its election at least 90 days prior
to either (i) the first anniversary of the termination of the Research Term
or (ii) the expiration of the first Additional Research Program Year, as
applicable, subject to P&GP's payment to Gene Logic, at the time such notice
is provided, of the amounts set forth in Sections 9.1(b) and 9.1(c) to fund
the research to be performed under the Research Program during any such
Additional Research Program Year.
2.5 Selection of Gene Targets. Under the Research Program, the parties
will use reasonable efforts consistent with their respective obligations under
the Research Plans to identify Gene Products from Samples [***] as
potential targets within the Field. P&GP shall select certain of such Gene
Products as targets for further development of pharmaceutical and diagnostic
products using information obtained from the Research Database created by Gene
Logic pursuant to the Research Plan and the application of the Gene Logic
Software and other information available to P&GP,
7.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
including, without limitation, through public DNA sequence databases and
scientific publications. Any Gene Product identified in the Research Database
which P&GP uses in Further Research and Development (as defined below) shall be
a "Gene Target." Based upon P&GP's standard, internal research and development
criteria, P&GP will, in its sole discretion based upon Utility in Heart Failure,
decide whether to commence Further Research and Development with regard to a
particular Gene Product. P&GP shall notify Gene Logic in writing prior to using
any Gene Target in Further Research and Development and make the payment
described in Section 9.3. For purposes of this Agreement, "Further Research and
Development" of a Gene Target as (i) a Therapeutic Product will include the
[***] of (a) [***] or (b) [***]; (ii) a Protein Product will include the
[***]; and (iii) a Diagnostic Product will include the [***].
2.6 Selection of Gene Targets Following Termination of Research Term. If
P&GP elects to pursue a Gene Target in Further Research and Development within
[***] following expiration of the Research Term, P&GP agrees to notify Gene
Logic in writing and make the payment described in Section 9.3 prior to using
such Gene Target in Further Research and Development. P&GP will be obligated to
make the payments set forth in Sections 9.3, 9.4 and 10 with regard to such Gene
Target.
3. Research Management Committee; Alliance Directors; Dispute
Resolution.
3.1 Research Management Committee. Promptly after the Effective Date,
P&GP and Gene Logic will each appoint three representatives to a research
management committee (the "Research Management Committee" or "RMC"). Attached
as Schedule 3.1 is a list of the representatives the parties intend to appoint
to the RMC. Brian Chamberlain, Ph.D. will serve as chairman of the RMC for the
initial 12 months following the Effective Date. Thereafter, chairmanship will
rotate between a P&GP member and a Gene Logic member every 12 months. P&GP will
determine the scientific priorities and direction of the work to be performed
under the Research Plan, subject to discussion with Gene Logic. The RMC will
review, direct and supervise all operational and scientific aspects related to
the creation of the Research Database. The duties of the Research Management
Committee shall include approving the Research Plans, monitoring the parties'
progress under the Research Plans and evaluating the means through which P&GP
has access to the Research Database. The Research Management Committee will
meet quarterly, or more frequently if mutually agreed, and will alternate sites
of meetings between Cincinnati, Ohio and Columbia, Maryland. The RMC will
8.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
otherwise communicate regularly by telephone, facsimile and video conference.
Each party recognizes the importance of the Research Management Committee in the
success of the Collaboration and will use diligent efforts to cause all of its
representatives to such committee to attend all meetings of such committee. A
party may change any of its appointments to the Research Management Committee at
any time upon giving written notice to the other party. Any disputes or
disagreements within the RMC shall be resolved pursuant to Section 3.4.
3.2 RMC Meetings. All committees created hereunder may meet by telephone
or video conference or in person at such times as are agreeable to the members
of each such committee. Attendance at meetings shall be at the respective
expense of the participating parties. The chairman of the RMC shall assure that
agendas and minutes are prepared for each of its meetings. All actions taken
and decisions made by the RMC shall be by unanimous agreement, subject to P&GP's
rights to determine scientific priorities pursuant to Section 3.1. If personal
attendance is not possible for valid reasons, voting by proxy is permissible.
3.3 Alliance Directors. Each party shall designate one of its employees
as an alliance director ("Alliance Director") for all of the activities
contemplated under this Agreement. Such Alliance Directors will be responsible
for the day-to-day coordination of the performance of the Research Program and
will serve to facilitate communication between the parties with respect thereto.
Such Alliance Directors shall be experienced in managing research projects
relevant to the Research Program.
3.4 Dispute Resolution. Disputes or disagreements between the parties
arising hereunder will be referred to the Research Management Committee. If the
RMC is unable to resolve, after 30 days, a dispute regarding any issue presented
to it or arising in it, such dispute will be referred to the Chief Executive
Officer of Gene Logic and the Director, Research of P&GP for good faith
resolution, for a period of 90 days. If such dispute is not resolved by the end
of such 90-day period, then such issue shall be submitted for resolution through
arbitration within 30 days after either party requests arbitration, according to
the terms set forth in Section 14.
4. Patents, Know-How Rights And Inventions.
4.1 Ownership of Inventions. Except as otherwise set forth herein,
ownership of any inventions (whether or not patentable) that are conceived,
generated or reduced to practice during the course of the Research Program
("Inventions") shall be determined in accordance with United States laws of
inventorship.
4.2 Rights to Gene Logic Technology, Gene Logic Software and Research
Database. Notwithstanding the foregoing, subject to the grant of intellectual
property
9.
<PAGE>
rights to P&GP under the non-exclusive or exclusive licenses granted under
Section 5, Gene Logic shall be entitled to all rights to the Gene Logic
Technology, Gene Logic Software and the Research Database, including, but not
limited to, all data and progeny derived from the Samples, all cDNA sequences,
partial cDNAs, and their corresponding full length cDNAs, cDNA Sequence
Analyses, proteins and applications thereof and information relating thereto,
but not including Gene Targets which shall be subject to Section 4.1. P&GP
agrees to grant the license set forth in Section 5.2(b) in order to accomplish
the foregoing. The filing, prosecution and maintenance of patent(s), copyrights
and other proprietary rights directed at the protection of these rights shall be
the responsibility of, and at the discretion of, Gene Logic.
4.3 Rights to Improvements to Gene Logic Technology and Gene Logic
Software. Gene Logic Technology and Gene Logic Software shall also include any
enhancements or improvements to Gene Logic Technology and Gene Logic Software
discovered by either party during the course of the Collaboration. P&GP agrees
to grant the license set forth in Section 5.2(c) in order to accomplish the
foregoing.
4.4 Patent Protection.
(a) Solely Owned Inventions. Subject to Section 4.4(e), any party
that solely owns any patentable Invention shall have the right, at its option
and expense, to prepare, file and prosecute any patent applications with respect
to such Invention and to maintain any patents issued thereon.
(b) Jointly Owned Inventions. Subject to Section 4.4(e), the
parties shall decide which party shall be responsible for preparing, filing and
prosecuting any patent applications with respect to any Invention that is owned
jointly by the parties (a "Joint Invention") and maintaining any patents issued
thereon, using patent counsel reasonably acceptable to the other party; provided
that P&GP will be responsible for preparing, filing and prosecuting patent
applications with respect to Joint Inventions of Gene Targets and maintaining
any patents issued thereon. The parties shall share the out-of-pocket expenses
for such preparation, filing and prosecution.
(c) Cooperation. Each party agrees to cooperate with the party
responsible for the preparation and prosecution of all patent applications on
Inventions specific to the Field and Joint Inventions pursuant to this
Section 4.4 (the "Responsible Party") and in the maintenance of any patents
issued thereon. Such cooperation will include the execution of all documents
necessary or desirable for the Responsible Party to fulfill its obligations
hereunder.
(d) Communication Regarding Patent Protection. The Responsible
Party will prepare, prosecute and maintain (and shall keep the other party
currently
10.
<PAGE>
informed of all steps to be taken in such preparation, prosecution and
maintenance of) all Patent Rights which claim an Invention or Joint Invention
with respect to which it is responsible and shall furnish the other party with
copies of such Patent Rights which claim an Invention specific to the Field or
Joint Invention and other related correspondence relating thereto with respect
to which it is responsible to and from governmental patent agencies or other
authorities and permit the other party to offer its comments thereon before the
Responsible Party makes a submission to a governmental patent agency or other
authority which could materially affect the scope or validity of the patent
coverage that may result. The other party shall offer its comments promptly.
(e) Back-Up Rights. If the Responsible Party with respect to an
Invention specific to the Field or any Joint Invention decides to abandon or not
to pursue prosecution of any Patent Right which claims such Invention or Joint
Invention, it shall permit the other party, at its option and expense, to
undertake such obligations. The party not undertaking such actions shall fully
cooperate with the other party and shall provide to the other party whatever
assignments and other documents that may be needed in connection therewith.
(f) Reimbursement for Gene Target Patent Expenses. In the event
that P&GP selects a Gene Target for Further Research and Development and Gene
Logic has incurred patent expenses in connection with such Gene Target, P&GP
shall reimburse Gene Logic for reasonable out-of-pocket expenses incurred by
Gene Logic for protection of the Gene Target in the Field after the Gene Target
is selected for Further Research and Development within 30 days of receipt of
an invoice therefor.
4.5 Infringement by Third Parties. In the event Gene Logic or P&GP
becomes aware of any actual or threatened infringement of any Patent Right of
either party which claims an Invention or Joint Invention, that party shall
promptly notify the other party, and the parties shall (i) promptly discuss how
to proceed in connection with such actual or threatened infringement and (ii)
use their best efforts in cooperating with each other to terminate such
infringement without litigation, as appropriate and commercially reasonable. If
either party commences any actions or proceedings (legal or otherwise) pursuant
to this Section 4.5, it shall prosecute the same vigorously at its expense and
shall not abandon or compromise them or fail to exercise any rights of appeal
unless commercially reasonable to do so without giving the other party the right
to take over the prosecuting party's conduct at such other party's own expense.
4.6 Allegations of Infringement by Third Parties.
(a) The parties acknowledge that, in order to exploit the rights
contained herein, each party may require licenses under third party patent
rights that may be infringed by the use by such party of the rights granted
herein and it is hereby agreed that
11.
<PAGE>
it shall be the responsibility of the party requiring such license to satisfy
itself as to the need for such licenses and, if necessary, to obtain such
licenses.
(b) P&GP shall be solely responsible for any threatened or actual
claims for Third Party patent infringement or other Third Party intellectual
property right arising out of the manufacture, use, sale or importation of a
Product sold by P&GP, its Affiliates or sublicensees. Upon receiving notice of
such actual or threatened claims, P&GP shall promptly meet with Gene Logic to
discuss the course of action to be taken to resolve or defend any such
infringement litigation.
4.7 Independent Efforts. A party shall not, during the Research Term and
any period of time extended pursuant to Section 2.4(b) or Section 5.1, conduct,
have conducted or fund any research or discovery activities that are focused
primarily within the Field except pursuant to this Agreement without the prior
written consent of the other party. Attached hereto as Exhibit A is a listing
of research relationships established prior to the Effective Date which,
although not primarily focused in the Field, are exempt from the limitations of
the preceding sentence. During the Research Term, such Exhibit A shall be
updated from time to time as relationships are approved by written consent
pursuant to this Section 4.7.
5. Licenses.
5.1 Research Database and Software License to P&GP. Gene Logic hereby
grants to P&GP an exclusive, worldwide license to use the Research Database,
together with a nonexclusive license to use the Gene Logic Software, in each
case solely for research purposes in the Field to identify Gene Targets
during the Research Term and for one year thereafter. P&GP will have no
right to sublicense to third parties under such rights; and, except for
disclosure to P&GP employees and consultants to the extent permitted under
Section 11.3, shall not provide any Gene Logic Technology to any Third Party
without prior written consent. P&GP may elect to extend the term of the
foregoing exclusive Research Database license and nonexclusive Gene Logic
Software license (the "First Research Database Extension Option") for an
additional one year period (the "Extended Term") by providing written notice
of such election to Gene Logic at least 90 days prior to the date upon which
such exclusive license would otherwise expire and by paying an extension fee
to Gene Logic equal to [***] within 10 working days from the effective date
of such notice. To the extent that P&GP elects to exercise the First
Database Research Option, P&GP may elect to extend the term of the foregoing
exclusive Research Database license and nonexclusive Gene Logic Software
license (the "Second Research Database Extension Option") for an additional
one year period by providing written notice of such election to Gene Logic at
least 90 days prior to expiration of the Extended Term and by paying an
extension fee to Gene Logic equal to [***] within 10 working days from the
effective date of such notice.
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<PAGE>
5.2 Licenses to Gene Logic.
(a) P&GP hereby grants to Gene Logic a nonexclusive, perpetual,
fully-paid, worldwide license to use and analyze the Samples.
(b) P&GP hereby grants to Gene Logic an exclusive, perpetual,
fully-paid worldwide license under its applicable Patent Rights, Inventions and
other intellectual property to any and all rights it may have in the Gene Logic
Technology, Gene Logic Software and the Research Database, including, but not
limited to, all data and progeny derived from the Samples, all cDNA sequences,
partial cDNAs, and their corresponding full length cDNAs, cDNA Sequence
Analyses, Gene Targets outside of the Commercialization Field, proteins and
applications thereof and information relating to the Gene Logic Technology, Gene
Logic Software and the Research Databases, but not including Gene Targets in the
Commercialization Field.
(c) P&GP hereby grants to Gene Logic an exclusive, perpetual,
fully-paid worldwide license under its applicable Patent Rights, Inventions and
other intellectual property to any enhancements or improvements to the Gene
Logic Technology and Gene Logic Software discovered by P&GP during the course of
the Collaboration, including, without limitation, any discoveries and Inventions
related to the function of Gene Targets outside of the Commercialization Field
included in the Research Database, but not including Gene Targets in the
Commercialization Field.
5.3 Gene Target License to P&GP. Subject to the terms and conditions of
this Agreement, Gene Logic hereby grants and agrees to grant to P&GP an
exclusive, worldwide license under Gene Logic's Patent Rights, if any, to use
each Gene Target for which P&GP has paid the fee described in Section 9.3 to
develop, make, have made, use, import, offer for sale and sell (with the right
to sublicense) Products for use in the Commercialization Field.
5.4 P&GP Right of First Negotiation. Gene Logic grants to P&GP, upon
the request of P&GP, a right of first negotation to obtain an exclusive,
worldwide license to use a Gene Target previously licensed to P&GP in the
Commercialization Field in an additional field or fields outside of the
Commercialization Field upon commercially reasonable terms to be negotiated
in good faith by the parties during the [***]-day period following such
request by P&GP; provided, however, that the foregoing shall not apply to any
rights that Gene Logic has previously granted to any Affiliate or Third
Party. In the event the parties are unable to reach agreement on the terms
of such a license within such [***]-day period or to enter into a definitive
license agreement within [***] days following the mutual request by P&GP, the
parties shall have no further obligation under this Section 5.4 with respect
to a license to such Gene Target for use in such additional field or fields.
13.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
5.5 Gene Logic Right of First Negotiation. P&GP shall provide at
least [***] days' prior written notice of its intent to license rights to any
Protein Product or Biologicial Therapeutic Product under this Agreement (a
"Sublicensed Product") that P&GP proposes not to commercialize itself and to
sublicense to a Third Party. P&GP grants to Gene Logic a right of first
negotiation to obtain an exclusive, worldwide license under all Patent Rights
and other intellectual property rights of P&GP to make, have made, use, sell,
offer for sale and import the Sublicensed Product upon commercially
reasonable terms to be negotiated in good faith by the parties. Gene Logic
may exercise such right of first negotiation upon written notice to P&GP
within [***] days after receipt of notice from P&GP. In the event the
parties are unable to reach agreement on the terms of such a license within a
[***]-day period following the notice by Gene Logic or to enter into a
definitive agreement within [***] days following the notice by Gene Logic,
the parties shall have no further obligation under this Section 5.5 with
respect to a license to such Sublicensed Product.
6. Diligence and Gene Target License Termination.
6.1 Diligence.
(a) Gene Logic shall use commercially reasonable and diligent
efforts, consistent with the Research Plan and milestones thereof, to perform
analysis of the Samples utilizing the Gene Logic Technology. For purposes of
this Agreement, "commercially reasonable and diligent efforts" will mean, unless
the parties agree otherwise, those efforts consistent with the exercise of
prudent scientific and business judgment, as applied to other research efforts
and to products of similar scientific and commercial potential within such
party's relevant research programs and product lines.
(b) P&GP shall use commercially reasonable and diligent efforts to
conduct active, ongoing research activities utilizing the Research Database.
(c) Without limiting the foregoing, P&GP (or its Affiliates or
sublicensees) shall use commercially reasonable and diligent efforts to evaluate
the Gene Targets and to develop and commercialize Products in the
Commercialization Field. P&GP (or its Affiliates or sublicensees) shall be
deemed to have used commercially reasonable and diligent efforts with regard to
the Gene Targets if it is actively engaged in a development process of one or
more Gene Targets in at least one of the following activities: (i) [***];
(ii) [***]; or (iii) [***]. Gene Logic may provide [***] written notice to
P&GP if in its opinion, P&GP is not using commercially
reasonable and diligent efforts with
14.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
regard to the Gene Targets, whereupon the Alliance Directors shall meet within
said [***] period to determine what actions, if any, are necessary or
appropriate to rectify the situation. Upon recommendation by the Alliance
Directors, P&GP shall use commercially reasonable and diligent efforts to take
such recommended actions within [***] after receipt of said recommendation.
In the event that, in the determination of Gene Logic, P&GP has not taken steps
to accomplish such actions recommended by the Alliance Directors within such
[***] period, the parties agree to hold a meeting, attended by individuals with
decision-making authority, to attempt in good faith to negotiate a resolution of
the dispute. If, within [***] after such meeting, the parties have not
succeeded in negotiating a resolution of the dispute, then such dispute shall be
submitted for resolution through arbitration, according to the terms set forth
in Section 14. In the event that such arbitration results in a determination
that P&GP did not use commercially reasonable and diligent efforts with regard
to Gene Targets, then (i) Gene Logic shall be entitled to terminate the
exclusive license granted pursuant to Section 5.3 with respect to such Gene
Target, on a worldwide basis, and (ii) P&GP shall automatically grant to Gene
Logic an exclusive, perpetual, fully-paid worldwide license under its applicable
Patent Rights, Inventions and other intellectual property to any and all rights
it may have in the Gene Targets in the Commercialization Field.
(d) In addition, in the event that P&GP elects not to pursue
exploitation of any Gene Target or development or commercialization of any
Product subject to this Agreement for any reason, P&GP shall promptly notify
Gene Logic thereof, and, upon such notice, (i) the exclusive license granted
pursuant to Section 5.3 with respect to such Gene Target on a worldwide basis
will be terminated, and (ii) P&GP shall automatically grant to Gene Logic an
exclusive, perpetual, fully-paid worldwide license under its applicable Patent
Rights, Inventions and other intellectual property to any and all rights it may
have in the Gene Target in the Field. In the event P&GP automatically grants
the license described in this Section 6.1(d)(ii), the parties shall negotiate a
commercially reasonable royalty rate to be paid by Gene Logic based upon the
value of P&GP's Patent Rights covering such Gene Target.
7. Reporting Obligations.
7.1 Information and Reports Concerning the Research Program. All
information, technology or inventions specific to the Field made by either party
in the course of the Research Program will be promptly disclosed to the other,
with significant discoveries or advances being communicated as soon as
practicable after such information is obtained or its significance is
appreciated. The RMC shall produce a written report at least quarterly
presenting a meaningful summary of the activities performed under this
Agreement; including, without limitation, a summary of the number of Samples
analyzed and consideration of Gene Logic's performance compared to the
milestones set forth in the Promissory Note issued by Gene Logic pursuant to
Section 9.2.
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CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
7.2 Diligence Reports. P&GP hereby agrees to keep Gene Logic informed on
a reasonable basis of its efforts to select Gene Targets and to develop Products
in the Commercialization Field, and to provide written reports to Gene Logic on
a semi-annual basis (the "Diligence Reports"). The Diligence Reports shall
provide, as applicable, the following information: (i) a listing of the Gene
Products which P&GP has identified as prospects for Further Research and
Development, (ii) P&GP's progress toward selection of particular Gene Products
for Further Research and Development, (iii) P&GP's plans for Further Research
and Development with regard to selected Gene Targets, and (iv) P&GP's progress
in screening, pre-clinical or clinical development for Gene Targets.
8. Collaboration Expansion Options.
From the Effective Date and prior to the completion of Stage I (the
"Expansion Option Period"), P&GP shall have options to enter collaborations with
Gene Logic in the areas of [***] (the "[***] Option") and [***] (the "[***]
Option"), upon the same terms and conditions contained in this
Agreement, including the research funding, milestone payments and royalty
provisions set forth in Sections 9 and 10 and in the aggregate commensurate with
the research and development funding of Gene Logic by P&GP in the [***]
this Agreement. In addition, P&GP shall have the option to extend for one year
the term of the Expansion Option Period for the [***] Option or the [***] Option
with payment of [***] for each option extended. In the event that P&GP does
not exercise the [***] Option or the [***] Option prior to the expiration of the
applicable Expansion Option Period, then Gene Logic shall thereafter be free to
grant rights to a Third Party in the areas of [***] or [***], as applicable.
In the event P&GP does exercise the [***] Option or the [***] Option, the
parties will enter an agreement with terms consistent with the requirements of
this Section 8 in the areas of [***] or [***], as applicable.
9. Payments and Royalties.
9.1 Payments to Gene Logic.
(a) P&GP shall pay Gene Logic $3,000,000 within five business days
of the Effective Date in connection with the licenses granted under this
Agreement and to defray research costs associated with the Research Plans
during Stage I, including, but not limited to, creating the Research Database,
analyzing Samples pursuant to the Research Plans and development of Gene
Logic Technology and upgrades thereof during the Research Term.
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CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
(b) P&GP shall pay Gene Logic [***] upon the commencement of
Stage II and on each anniversary of the commencement of Stage II in connection
with the licenses granted under this Agreement and to defray research costs
associated with the Research Plans during Stage II, including, but not limited
to, creating the Research Database, analyzing Samples pursuant to the Research
Plans and development of Gene Logic Technology and upgrades thereof during the
Research Term. If Stage II of the Research Program ends on an anniversary of
the commencement of Stage II (or within one day thereof) then no [***]
payment shall be due on such anniversary.
(c) During Stage II, P&GP shall provide Gene Logic with financial
support for the Research Program for Gene Logic's Scientific FTEs at a rate of
[***] for 1997 per Scientific FTE. The FTE payment rate payable pursuant to
this Section 9.1(c) shall be reevaluated annually and adjusted in proportion to
the percentage increase for the prior year in the Consumer Price Index of all
urban consumers as provided by the U.S. Bureau of Labor Statistics. The number
of Scientific FTEs for each year of Stage II will be set forth in the applicable
Research Plan; provided that such research funding shall not support fewer than
[***] Scientific FTEs ([***] for 1997) in any one year period commencing with
the start of Phase II or any anniversary thereof (each, a "Program Year") or at
such lower level as the parties may mutually agree taking into account the work
to be accomplished pursuant to the Research Plan.
(d) The research funding to be provided pursuant to Section 9.1(c)
shall be made in four quarterly payments during each Program Year. Such
payments shall be payable in arrears and shall be made within 30 days from the
receipt of an invoice therefor.
9.2 Technology Access Payment to P&GP. On the Effective Date, Gene Logic
shall execute a Promissory Note payable to P&GP in the amount of $2,000,000, in
the form attached as Exhibit B. Except as expressly provided in the Promissory
Note, P&GP shall not be entitled to offset any amount owed by Gene Logic under
such Promissory Note against any payment owed by P&GP to Gene Logic hereunder.
9.3 Gene Target Fees. P&GP shall pay [***] to Gene Logic for each
Gene Target which P&GP selects for Further Research and Development pursuant to
Section 2.5 within 30 days following notification thereof.
9.4 Royalties Payable by P&GP. P&GP will pay Gene Logic royalties at the
following rates on Net Sales of each Product sold by P&GP, its Affiliates and
sublicensees pursuant to this Agreement.
17.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Therapeutic Protein
Annual Worldwide Net Sales Product Product
- --------------------------- ------------ --------
[***]............................................. [***] [***]
[***]............................................. [***] [***]
[***]............................................. [***] [***]
[***]............................................. [***] [***]
P&GP shall pay Gene Logic a [***] royalty on annual Net Sales of each
Diagnostic Product sold by P&GP, its Affiliates and sublicensees pursuant to
this Agreement.
Net Sales shall be calculated on a calendar year basis. A sample royalty
calculation is set forth on Schedule 9.4.
P&GP shall remain responsible for all royalty payments payable to Gene
Logic pursuant to this Section 9 whether P&GP or its Affiliates or sublicensees
generate Net Sales.
In the event that P&GP obtains a license under any third party patent
rights to a Gene Target required to make, have made, use, sell, offer to sell or
import any Protein Product or Biological Therapeutic Product, the royalty
payable to Gene Logic under this Section 9.4 for any payment period will be
reduced by an amount equal to [***] of royalties actually paid by P&GP to such
third party for such period; provided that, in no event shall the royalty
payable to Gene Logic be reduced to less than [***] of the applicable royalty
rate set forth above for such period.
Royalties shall be payable on all Net Sales of any Product for the period
of time commencing on the date such Product is first sold commercially in any
country and ending, on a country-by-country basis, upon the later of (a) 10
years from the date of such first commercial sale of such Product in such
country, or (b) the expiration of the last to expire of P&GP's Patent Rights
covering such Product in such country; provided that, if there are multiple
Products derived from a single Gene Target, then the maximum amount of time
that royalties will be payable upon Products will be 20 years from the
date of filing the patent for the first Product or the filing of any
continuation or CIP thereof.
9.5 Currency of Payment. All payments to be made under this Agreement
shall be made in United States dollars in the United States to a bank account
designated by Gene Logic. All amounts payable by P&GP to Gene Logic pursuant to
this Section 9 shall be non-refundable and non-creditable against any other
payments due under this Agreement (except as expressly provided in the
Promissory Note executed pursuant to Section 9.2). Royalties shall be
determined based on Net Sales in the currency of the country in which they are
earned converted to its equivalent in United States currency. The buying rates
involved for the currency of the United States into which the currencies
involved are being exchanged shall be the one quoted by The Wall Street Journal
(or if not available, by Citibank (or its successor in interest) in New York,
New York) at the
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CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
close of business on the last business day of the quarterly period in which the
royalties were earned shall be used to determine any such conversion.
9.6 Payment and Reporting. All amounts payable by P&GP to Gene Logic
pursuant to this Section 9 shall be made by wire transfer pursuant to the
instructions set forth on Schedule 9.6. By March 1 of each calendar year, P&GP
will communicate to Gene Logic a forecast of Net Sales for each Product to be
sold pursuant to this Agreement in a given calendar year on a country-by-country
basis, including a calculation of the royalty amount payable for each Product
using such forecast (the "Forecast Royalty Amount") starting the quarter in
which the first commercial sale is made for such Product. Gene Logic will issue
an invoice to P&GP on the first day of the months of April, July and October for
an amount equal to 25% of the Forecast Royalty Amount, payable within 30 days
after the date of such invoice. Within 30 days after the end of each calendar
year, P&GP will communicate to Gene Logic the actual Net Sales for the Products
sold pursuant to this Agreement for such calendar year, including a calculation
of the royalty amount payable on such actual Net Sales (the "Actual Royalty
Amount"). Gene Logic will promptly issue either an invoice to P&GP for the
amount, if any, by which the Actual Royalty Amount exceeds all royalty payments
already made for such calendar year, payable within 30 days after the date of
such invoice or a credit to be applied to the next quarter if an overpayment has
occurred.
9.7 Records and Audits. P&GP shall keep complete and accurate records
pertaining to the sale or other disposition of Products sold by P&GP, its
Affiliates and sublicensees pursuant to this Agreement in sufficient detail to
permit Gene Logic to confirm the accuracy of all payments due hereunder. Gene
Logic shall have the right to cause an independent, certified public accountant
reasonably acceptable to P&GP to audit such records and audit work pages as
presented by Deloitte & Touche to confirm Net Sales and royalty and other
payments for the preceding year. Such audits may be exercised during normal
business hours once a year upon at least 30 working days prior written notice to
P&GP. Gene Logic shall bear the full cost of such audit unless such audit
discloses a variance of more than 5% from the amount of the Net Sales or
royalties or other payments due under this Agreement. In such case, P&GP shall
bear the full cost of such audit and Gene Logic shall have the right to audit
all prior years not previously audited, limited to the 3 previous years.
10. Milestones.
10.1 Milestones for Therapeutic Products and Protein Products. P&GP
shall pay Gene Logic the following amounts with respect to each Therapeutic
Product and each Protein Product sold by P&GP, its Affiliates and sublicensees
pursuant to this Agreement with respect to which each stated milestone is
achieved, within 30 days following the achievement of such milestone:
19.
<PAGE>
(a) [***] (subject to the limitations
set forth below)................................... [***]
(b) [***].............................................. [***]
(c) [***].............................................. [***]
(d) [***].............................................. [***]
With regard to amounts payable pursuant to Section 10.1(a), P&GP will not
be obligated to pay Gene Logic additional [***] milestone payments for
subsequent [***].
10.2 Milestones for Diagnostic Products. P&GP shall pay Gene Logic the
following amounts with respect to each Diagnostic Product sold by P&GP, its
Affiliates and sublicensees pursuant to this Agreement with respect to which
each stated milestone is achieved, within 30 days following the achievement
of such milestone:
(a) [***] [***]
(b) [***] [***]
10.3 Payment of Milestones. Milestone payments made under this section
shall be non-refundable and non-creditable against any other payments due
under this Agreement. All such payments shall be made by wire transfer
pursuant to the instructions set forth on Schedule 9.6. Milestone payments
made under this section shall fund in substantial part the research costs
associated with this Agreement.
11. Confidentiality and Security.
11.1 Security of Research Database.
(a) The parties agree that the following additional terms and
conditions apply to the information and data contained in or derived from the
Research Database that is disclosed under the provisions of this Agreement:
(i) P&GP may use the Research Database only for its own
internal use in secure work facilities by authorized personnel and shall not
make any copies of the Research Database.
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CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
(ii) P&GP will be provided with access to the Research Database
only through a secure, encrypted link to Gene Logic's computer system.
(iii) P&GP will promptly notify Gene Logic of any (i) loss,
theft or unauthorized disclosure of information or data derived from the
Research Database and (ii) unauthorized access to the Research Database.
(iv) Upon termination of the Research Program as provided in
Section 2.5, P&GP shall immediately discontinue use of the Research Database
and of any information or data derived from the Research Database (except for
Gene Targets that are the subject of exclusive licenses as set forth in
Section 5.3), and P&GP shall cooperate with Gene Logic to terminate the
encrypted link to Gene Logic's computer system.
11.2 Confidentiality.
(a) Except as specifically permitted hereunder (including without
limitation all rights granted under Section 5), each party hereby agrees to
hold in confidence and not use on behalf of itself or others all technology,
data, samples, technical and economic information (including the economic
terms hereof), commercialization, clinical and research strategies, know-how
and trade secrets provided by the other party (the "Disclosing Party") from
the date of that certain confidentiality agreement between the parties dated
February 27, 1997 and through the end of the Agreement Term (collectively the
"Confidential Information"), except that the term "Confidential Information"
shall not include:
(i) information that is or becomes part of the public domain
through no fault of the non-Disclosing Party or its Affiliates;
(ii) information that is obtained after the date hereof by the
non-Disclosing Party or one of its Affiliates from any Third Party which is
lawfully in possession of such Confidential Information and not in violation
of any contractual or legal obligation to the Disclosing Party with respect
to such Confidential Information;
(iii) information that is known to the non-Disclosing Party or
one or more of its Affiliates prior to disclosure by the Disclosing Party, as
evidenced by the non-Disclosing Party's written records;
(iv) information that is required to be disclosed to any
governmental authorities or pursuant to any regulatory filings, but only to
the limited extent of such legally required disclosure; and
21.
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(v) information which has been independently developed by the
non-Disclosing Party without the aid or use of Confidential Information as
shown by competent written evidence.
(b) The obligations of this Section 11.2 shall survive the
expiration or termination of this Agreement for a period of 10 years.
11.3 Permitted Disclosures. Confidential Information may be disclosed to
employees, agents, consultants or sublicensees of the non-Disclosing Party or
its Affiliates, but only to the extent required to accomplish the purposes of
this Agreement and only if the non-Disclosing Party obtains prior agreement
from its employees, agents, consultants and sublicensees to whom disclosure
is to be made to hold in confidence and not make use of such information for
any purpose other than those permitted by this Agreement. Each party will
use at least the same standard of care as it uses to protect proprietary or
confidential information of its own to ensure that such employees, agents,
consultants or sublicensees do not disclose or make any unauthorized use of
the Confidential Information. Notwithstanding any other provision of this
Agreement, each party may disclose the terms of this Agreement to lenders,
investment bankers and other financial institutions of its choice solely for
purposes of financing the business operations of such party either (i) upon
the written consent of the other party or (ii) if the disclosing party
obtains a signed confidentiality agreement with such financial institution
with respect to such information, upon terms substantially similar to those
contained in this Section 11.
11.4 Publicity. All publicity, press releases and other announcements
relating to this Agreement or the transaction contemplated hereby shall be
reviewed in advance by, and shall be subject to the approval of, both
parties, which approval shall not be unreasonably withheld; provided,
however, that either party may (i) publicize the existence and general
subject matter of this Agreement consistent with previous press releases and
statements without the other party's approval and (ii) disclose the terms of
this Agreement only to the extent required to comply with applicable
securities laws.
11.5 Publication. The parties shall cooperate in appropriate
publication of the results of research and development work performed
pursuant to this Agreement, but subject to the predominating interest to
obtain patent protection for any patentable subject matter. To this end,
prior to any public disclosure of such results, the party proposing
disclosure shall send the other party a copy of the information to be
disclosed, and shall allow the other party 30 days from the date of receipt
in which to determine whether the information to be disclosed contains
subject matter for which patent protection should be sought prior to
disclosure, or otherwise contains Confidential Information of the reviewing
party. The party proposing disclosure shall be free to proceed with the
disclosure unless prior to the expiration of such 30-day period the
non-disclosing party
22.
<PAGE>
notifies the other party that the disclosure contains subject matter for which
patent protection should be sought or Confidential Information of the
non-disclosing party, and the party proposing publication shall then delay
public disclosure of the information for an additional period of up to three
months to permit the preparation and filing of a patent application on the
subject matter to be disclosed or for the parties to determine a mutually
acceptable modification to such publication to protect the Confidential
Information of the non-disclosing party adequately. The party proposing
disclosure shall thereafter be free to publish or disclose the information. The
determination of authorship for any paper shall be in accordance with accepted
scientific practice.
12. Representations And Warranties.
12.1 Legal Authority. Each party represents and warrants to the other
that it has the legal power, authority and right to enter into this Agreement
and to perform its respective obligations set forth herein.
12.2 Valid Licenses. P&GP represents and warrants that (i) it has
authority to grant the rights and licenses set forth in this Agreement with
respect to the Samples and all derivative materials of such Samples and (ii)
to the best of P&GP's knowledge, Gene Logic shall have free and clear right
to all derivative materials of such Samples. Gene Logic represents and
warrants that it has authority to grant the rights and licenses set forth in
this Agreement.
12.3 No Conflicts. Each party represents and warrants that as of the
date of this Agreement it is not a party to any agreement or arrangement with
any Third Party or under any obligation or restriction, including pursuant to
its Certificate of Incorporation or By-Laws, which in any way limits or
conflicts with its ability to fulfill any of its obligations under this
Agreement.
12.4 Disclaimer. Except as expressly set forth in this Agreement, EACH
PARTY MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER
EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT THE USE OF THE
INFORMATION, MATERIALS, SOFTWARE AND OTHER TECHNOLOGY PROVIDED HEREUNDER WILL
NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK, OR OTHER RIGHTS OF ANY THIRD
PARTY. NEITHER PARTY MAKES ANY WARRANTY OF ANY KIND AS TO THE PATENTABILITY
OF ANY DISCOVERY MADE OR TECHNOLOGY DEVELOPED UNDER THIS AGREEMENT. EACH
PARTY ACKNOWLEDGES THAT THIS AGREEMENT PROVIDES FOR AN INNOVATIVE PROGRAM
UTILIZING NEW TECHNOLOGIES AND THAT NO
23.
<PAGE>
WARRANTY IS MADE AS TO THE UTILITY OF ANY INFORMATION, MATERIALS, SOFTWARE OR
OTHER TECHNOLOGY PROVIDED HEREUNDER.
13. Term; termination.
13.1 Term. The term of this Agreement shall commence upon the Effective
Date and shall expire upon the expiration of all royalty obligations set
forth in Section 9.
13.2 Termination for Breach.
(a) Breach by Gene Logic. If Gene Logic breaches a material term
of this Agreement at any time, and has not cured such breach within 60 days
after written notice thereof from P&GP, then P&GP shall have the right to
terminate this Agreement effective upon written notice thereof, whereupon all
rights and obligations of the parties under this Agreement shall terminate
except as set forth in Section 15.11 and subject to the following: (i) the
licenses granted to P&GP under Section 5 shall remain in full force and
effect for so long as P&GP is not in breach of its obligations to Gene Logic
under this Agreement, (ii) the license granted to Gene Logic under Section
5.2(a) shall remain in full force and effect, (iii) the licenses granted to
Gene Logic under Sections 5.2(b) and 5.2(c) shall terminate, (iv) the right
of first negotiation granted to Gene Logic pursuant to Section 5.5 shall
terminate and (v) Gene Logic shall return to P&GP all Confidential
Information of P&GP.
(b) Breach by P&GP. If P&GP breaches a material term of this
Agreement at any time, and has not cured such breach within 60 days (or
within 15 days in the event of a material breach by P&GP of its obligations
to make any payments due pursuant to Sections 9 and 10) after written notice
thereof from Gene Logic, then Gene Logic shall have the right to terminate
this Agreement effective upon written notice thereof, whereupon all rights
and obligations of the parties under this Agreement shall terminate except as
set forth in Section 15.11 and subject to the following: (i) the licenses
granted to Gene Logic under Section 5 shall remain in full force and effect,
(ii) the option to recommence the Research Program pursuant to Section 2.4(b)
shall terminate, (iii) the license granted to P&GP pursuant to Section 5.1
shall terminate (including all options to extend such license), (iv) the
license granted to P&GP pursuant to Section 5.3 shall terminate (v) the right
of first negotiation granted to P&GP pursuant to Section 5.4 shall terminate,
(vi) the [***] Option and the [***] Option granted pursuant to Section 8 shall
terminate, and (vii) P&GP shall return to Gene Logic all Confidential
Information of Gene Logic. In the event of an uncured material breach by P&GP
of its obligations to pay any royalties due and owing with respect to a Product
pursuant to Section 9, if Gene Logic terminates the licenses it has granted to
P&GP pursuant to Section 5 in respect of such Product, at Gene Logic's request,
P&GP shall grant to Gene Logic an exclusive (even as to P&GP) worldwide license
(with the right to
24.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
sublicense) to such Product, to the extent necessary to make, use or sell
such Product subject to payment of a royalty to P&GP on Net Sales of such
Product (the parties shall negotiate a commercially reasonable royalty rate
to be paid by Gene Logic based upon the value of P&GP's Patent Rights
covering such Product), and shall further assign to Gene Logic all Regulatory
Approvals (to the extent permitted by law) in such countries.
(c) If a dispute arises between the parties relating to the grounds
for the termination under this Section 13.2, the parties agree to hold a
meeting, attended by individuals with decision-making authority, to attempt
in good faith to negotiate a resolution of the dispute. If, within 30 days
after such meeting the parties have not succeeded in negotiating a resolution
of the dispute, then such dispute shall be submitted for resolution through
arbitration, according to the terms set forth in Section 14.
13.3 Effect of Bankruptcy. If, during the Research Term, either party
files a voluntary petition in bankruptcy, is adjudicated a bankrupt, makes a
general assignment for the benefit of creditors, admits in writing that it is
insolvent or fails to discharge within 15 days an involuntary petition in
bankruptcy filed against it, then the Research Term and the entirety of this
Agreement may be immediately terminated by the other party. In addition, in
the event that Gene Logic files a voluntary petition in bankruptcy, is
adjudicated a bankrupt, makes a general assignment for the benefit of
creditors, admits in writing that it is insolvent or fails to discharge
within 15 days an involuntary petition in bankruptcy filed against it, then
the parties hereby acknowledge and agree that P&GP will have right of access
to the Research Database consistent with the terms of this Agreement for
purposes of 11 U.S.C. Section 365(n).
13.4 Remedies. In the event of any breach of any provision of this
Agreement, in addition to the termination rights set forth herein, each party
shall have all other rights and remedies at law or equity to enforce this
Agreement.
14. Arbitration.
14.1 Any controversy arising under or related to this Agreement, and any
disputed claim by either party against the other under this Agreement,
excluding any dispute relating to patent validity or infringement arising
under this Agreement, shall be settled by arbitration in accordance with the
then existing Commercial Arbitration Rules of the American Arbitration
Association.
14.2 Upon request by either party, arbitration will be by a panel of
three arbitrators within 30 days of such arbitration request. Each party
shall select one arbitrator and the third shall be mutually agreed upon in
writing by both parties. In any such arbitration, Gene Logic and P&GP shall
select a panel with relevant experience in
25.
<PAGE>
the pharmaceutical industry. Judgment upon the award rendered by the panel
shall be final and nonappealable and may be entered in any court having
jurisdiction thereof.
14.3 The parties shall be entitled to all discovery in like manner as if
the arbitration were a civil suit in the Delaware Superior Court.
14.4 Any arbitration shall be held in Wilmington, Delaware unless the
parties hereto mutually agree in writing to another place.
15. General Provisions.
15.1 Mutual Indemnification. Each party agrees to defend, indemnify and
hold harmless the other party and its Affiliates, employees, agents,
officers, directors and permitted from and against any judgments,
settlements, damages, awards, costs (including attorneys' fees and costs) and
other expenses arising out of any claims, actions or other proceedings by a
third party (collectively a "Claim") arising out of or resulting from the
development, manufacture, use, promotion, marketing, handling, storage or
sale of any Product, except to the extent that such Claim arises out of or
results from the negligence or misconduct of the party claiming a right of
indemnification under this Section 15.1. In the event either party seeks
indemnification under this Section 15.1, it shall inform the other party of a
Claim as soon as reasonably practicable after it receives notice of the
Claim, shall permit the other party to assume direction and control of the
defense of the Claim (including the right to settle the Claim solely for
monetary consideration), and shall cooperate as requested (at the expense of
the other party) in the defense of the Claim. The obligations set forth in
this section shall survive the expiration or termination of this Agreement.
15.2 Assignment. This Agreement shall not be assignable by either party
without the prior written consent of the other party, such consent not to be
unreasonably withheld or delayed, except a party may make such an assignment
without the other party's consent to Affiliates or to a successor to
substantially all of the pharmaceutical business of such party, whether in
merger, sale of stock, sale of assets or other transaction; provided,
however, that in the event of such transaction no intellectual property
rights of any Affiliate or Third Party that is an acquiring party shall be
included in the technology licensed hereunder. This Agreement shall be
binding upon and inure to the benefit of the parties' successors, legal
representatives and assigns.
15.3 Change of Control.
(a) In the event of a Change in Control, as that term is defined in
Section 15.3(b), of one party under this Agreement (the "Acquired Company")
during the Research Term (as may be extended), then the Acquired Company shall
notify the other party of any such Change of Control as soon as the Change in
Control may publicly be
26.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
announced. In the event that the Acquired Company is acquired by a Third
Party that (i) in the good faith determination of the Board of Directors
of the other party (the "Electing Company"), is a competitor of the Electing
Company in the Commercialization Field or (ii) has announced its intention
to cease operations of the Acquired Company, then the Electing Company shall
have the right to give notice to the Acquired Company within 60 days after
receipt of the Acquired Company's notification that the Electing Company
elects not to continue the Collaboration (the "Discontinuation Notice").
Within 30 days after receipt of the Discontinuation Notice, determination of
the Change of Control Fee pursuant to Section 15.3(c) will be made and such
Change of Control Fee will be paid to the Electing Company by the Acquired
Party or its acquiror. In addition, in the event that P&GP is the Electing
party, P&GP will continue to have access to the Research Database, on an
exclusive basis solely for research purposes in the field to identify Gene
Targets for one year after the date of payment of the Change of Control Fee
and will have a License under Section 5.3 to Gene Targets selected on or
prior to the end of such one-year period subject to P&GP's obligation to make
all required payments to Gene Logic (or its successor in interest) hereunder.
(b) For purposes of this Agreement, a "Change in Control" of a
company shall be deemed to have occurred in the event of (i) a merger or
consolidation of the company with another corporation, not including any
merger or consolidation if immediately thereafter the stockholders of the
company immediately before such transaction own Shares representing more than
50% of the outstanding voting securities of the surviving corporation (ii) a
sale of shares by the stockholders of the company if immediately thereafter
the stockholders of the Company immediately before such sale own shares
representing 50% or less of the outstanding voting securities of the
surviving corporation, or (iii) a sale of all or substantially all of the
company's assets. Notwithstanding the foregoing, The Procter & Gamble Company
directly or indirectly must have at least 60% of the combined voting power
of P&GP's outstanding voting securities, otherwise there shall be a Change of
Control of P&GP.
(c) The "Change of Control Fee" shall be determined as follows: As
of the date of the Discontinuation Notice the parties shall determine (i) the
[***], and (ii) the [***]. The Change of Control Fee shall be calculated by
subtracting [***] from [***] and multiplying [***].
15.4 Non-Waiver. The waiver by either of the parties of any breach of
any provision hereof by the other party shall not be construed to be a waiver
of any succeeding breach of such provision or a waiver of the provision
itself.
27.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
15.5 Governing Law. This Agreement shall be construed and interpreted in
accordance with the laws of the State of Delaware other than those provisions
governing conflicts of law.
15.6 Partial Invalidity. If and to the extent that any court or tribunal
of competent jurisdiction holds any of the terms or provisions of this
Agreement, or the application thereof to any circumstances, to be invalid or
unenforceable in a final nonappealable order, the parties shall use their
best efforts to reform the portions of this Agreement declared invalid to
realize the intent of the parties as fully as practicable, and the remainder
of this Agreement and the application of such invalid term or provision to
circumstances other than those as to which it is held invalid or
unenforceable shall not be affected thereby, and each of the remaining terms
and provisions of this Agreement shall remain valid and enforceable to the
fullest extent of the law.
15.7 Notice. Any notice to be given to a party under or in connection
with this Agreement shall be in writing and shall be (i) personally
delivered, (ii) delivered by a nationally recognized overnight courier, (iii)
delivered by certified mail, postage prepaid, return receipt requested or
(iv) delivered via facsimile, with receipt confirmed, to the party at the
address set forth below for such party:
To P&GP: To Gene Logic:
8700 Mason-Montgomery Road 10150 Old Columbia Road
Mason, Ohio 45040 Columbia, Maryland 21046
Attn: Director, Research P&GP
Phone: (513) 622-3067 Phone: (410) 309-3100
Fax: (513) 622-1264 Fax: (410) 309-3111
with a copy to: with a copy to:
Legal Department Frederick T. Muto, Esq.
8700 Mason-Montgomery Road Cooley Godward LLP
Mason, Ohio 45040 4365 Executive Drive, Suite 1100
San Diego, CA 92121
Phone: (513) 622-3950 Phone: (619) 550-6000
Fax: (513) 622-0270 Fax: (619) 453-3555
or to such other address as to which the party has given written notice
thereof. Such notices shall be deemed given upon receipt.
15.8 Headings. The headings appearing herein have been inserted solely
for the convenience of the parties hereto and shall not affect the
construction, meaning or interpretation of this Agreement or any of its terms
and conditions.
28.
<PAGE>
15.9 No Implied Licenses or Warranties. No right or license under any
patent application, issued patent, know-how or other proprietary information
is granted or shall be granted by implication. All such rights or licenses
are or shall be granted only as expressly provided in the terms of this
Agreement. Neither party warrants that (i) the Research Program shall achieve
any of the research objectives contemplated by them or (ii) any clinical or
other studies will be successful.
15.10 Force Majeure. No failure or omission by the parties hereto in the
performance of any obligation of this Agreement shall be deemed a breach of
this Agreement nor shall it create any liability if the same shall arise from
any cause or causes beyond the reasonable control of the affected party,
including, but not limited to, the following, which for purposes of this
Agreement shall be regarded as beyond the control of the party in question:
acts of nature; acts or omissions of any government; any rules, regulations,
or orders issued by any governmental authority or by any officer, department,
agency or instrumentality thereof; fire; storm; flood; earthquake; accident;
war; rebellion; insurrection; riot; invasion; strikes; and labor lockouts;
provided that the party so affected shall use its best efforts to avoid or
remove such causes of nonperformance and shall continue performance hereunder
with the utmost dispatch whenever such causes are removed.
15.11 Survival. Sections 4.1, 4.2, 4.3, 5.2, 11.2, 12, 13.2 (including
the provisions described therein that are contemplated to continue following
termination), 14, 15.1, 15.5 and 15.11 shall survive the termination or
expiration of this Agreement.
15.12 Entire Agreement. This Agreement constitutes the entire
understanding between the parties with respect to the subject matter
contained herein and supersedes any and all prior agreements, understandings
and arrangements whether oral or written between the parties relating to the
subject matter hereof.
15.13 Amendments. No amendment, change, modification or alteration of
the terms and conditions of this Agreement shall be binding upon either party
unless in writing and signed by the party to be charged.
15.14 Independent Contractors. It is understood that both parties hereto
are independent contractors and are engaged in the operation of their own
respective businesses, and neither party hereto is to be considered the agent
or partner of the other party for any purpose whatsoever. Neither party has
any authority to enter into any contracts or assume any obligations for the
other party or make any warranties or representations on behalf of the other
party.
29.
<PAGE>
15.15 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
In Witness Whereof, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the date first above written.
Gene Logic inc. Procter & Gamble
Pharmaceuticals, Inc.
By: /s/ Michael J. Brennan By: /s/ G. G. Cloyd
------------------------------ ----------------------------------
Name: Michael J. Brennan Name: G.G. Cloyd
------------------------------ --------------------------------
Title: President and CEO Title: President
--------------------------- -------------------------------
30.
<PAGE>
EXHIBIT A
Independent Efforts
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Schedule 3.1
RMC Representatives
Gene Logic Inc.
- ---------------
Keith O. Elliston, Ph.D.
Eric M. Eastman, Ph.D.
Mark D. Gessler
Proctor & Gamble Pharmaceuticals, Inc.
- --------------------------------------
Brian Chamberlain, Ph.D.
Richard Kawamoto, Ph.D.
Claus Doersen, Ph.D.
<PAGE>
Schedule 9.4
Sample Royalty Calculation
Example
- -------
The forecast for Net Sales of Therapeutic Product A in calendar year 2005 is
[***]. The calculation for the royalty is as follows:
[***]
[***]
[***]
[***]
------
TOTAL [***]
Gene Logic invoices P&GP for [***] on April 1, July 1 and October 1 of year
2005.
The actual Net Sales of Therapeutic Product A in calendar year 2005 are
[***]. The calculation for the royalty is as follows:
[***]
[***]
[***]
[***]
------
TOTAL [***]
Gene Logic invoices P&GP for [***].
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Schedule 9.6
Wire Transfer Payment Instructions
[***]
[***]
[***]
[***]
[***]
[***]
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
EXHIBIT 10.25
Confidential Treatment Requested
Under 17 C.F.R. Sections 200.80 (b)(4),
200.83 and 230.406
*** Indicates omitted material that is the subject of a confidential
treatment request filed separately with the Commission.
PROMISSORY NOTE
$ 2,000,000 May 27, 1997
San Diego, California
For Value Received, Gene Logic Inc., a Delaware corporation
("Borrower"), hereby unconditionally promises to pay to the order of Procter
& Gamble Pharmaceuticals, Inc., an Ohio corporation ("Lender"), in lawful
money of the United States of America and in immediately available funds, the
principal sum of Two Million Dollars ($2,000,000) (the "Loan"), payable on
the dates and in the manner set forth below.
This Promissory Note is the Note referred to in, and is executed and
delivered in connection with, that certain Target Discovery Collaboration and
License Agreement dated as of even date herewith, by and between Borrower and
Lender (as the same may from time to time be amended, modified or
supplemented, the "Collaboration Agreement"). All terms defined in the
Collaboration Agreement shall have the same definitions when used herein,
unless otherwise defined herein.
1. Principal Repayment. The outstanding principal amount of the Loan
and all accrued interest shall be due and payable, unless earlier as provided
in paragraphs 5 or 6 below, upon the expiration or termination of the
Collaboration Agreement in accordance with Section 13 thereof (the "Maturity
Date").
2. No Interest. No interest shall be due on the outstanding principal
amount hereof at any time.
3. Place of Payment. All amounts payable hereunder shall be payable at
the office of Lender, 8700 Mason-Montgomery Road, Mason, Ohio 45050,
Attention: Director of Research, Procter & Gamble Pharmaceuticals, Inc.
unless another place of payment shall be specified in writing by Lender.
4. No Offset. Lender shall not be entitled to offset any amount owed
by Borrower under this Note against any payment owed by Lender to Borrower
pursuant to the Collaboration Agreement; provided, however, that if an Event
of Default as defined in Section 6(b) or 6(c) occurs, then Lender shall be
entitled to offset the amount of the unpaid principal and other amounts owing
hereunder against any payment owed by Lender to Borrower pursuant to the
Collaboration Agreement.
-1-
<PAGE>
5. Waiver of the Loan Obligation. If any of the following events take
place, as confirmed by the Research Management Committee then a portion of
the outstanding principal under this Note shall be forgiven as provided below:
(a) Thirty Percent (30%) of the initial principal amount of this
Note ($600,000) shall be forgiven upon the earlier of (i) the date on which
Borrower completes READS analysis of a cumulative total of [***] Samples
under the Collaboration Agreement or (ii) the date six (6) months after the
commencement of Stage I, provided that Borrower has completed READS analysis
of that number of Samples (less than [***]) that have actually been provided
by Lender to Borrower within a reasonable time period to allow for the
completion of such analysis by Borrower;
(b) Thirty Percent (30%) of the initial principal amount of this
Note ($600,000) shall be forgiven upon the earlier of (i) the date on which
Borrower completes READS analysis of a cumulative total of [***] Samples
under the Collaboration Agreement or (ii) the first anniversary of the
commencmeent of Stage I, provided that Borrower has completed READS analysis
of that number of Samples (less than [***]) that have actually been provided
by Lender to Borrower within a reasonable time period to allow for the
completion of such analysis by Borrower; and
(c) The remaining Forty Percent (40%) of the initial principal
amount of this Note ($800,000) shall be forgiven upon the earlier of (i) the
date on which Borrower completes READS analysis of [***] Samples under the
Collaboration Agreement or (ii) the date eighteen (18) months after the
commencement of Stage I, provided that Borrower has completed READS analysis
of that number of Samples (less than [***]) that have actually been provided
by Lender to Borrower within a reasonable time period to allow for the
completion of such analysis by Borrower.
6. Default. Each of the following shall be an "Event of Default"
hereunder:
(a) Borrower fails to pay any of the principal amount due under this
Note on the date the same becomes due and payable or within five (5) calendar
days thereafter;
(b) Borrower files any petition or action for relief under any
bankruptcy, reorganization, insolvency or moratorium law, or any other law
for the relief of, or relating to, debtors, now or hereafter in effect, or
makes any assignment for the benefit of creditors, or takes any corporate
action in furtherance of any of the foregoing; or
(c) An involuntary petition is filed against Borrower (unless such
petition is dismissed or discharged within sixty (60) days), under any
bankruptcy statute now or hereafter in effect, or a custodian, receiver,
trustee, assignee for the benefit of
-2-
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
creditors (or other similar official) is appointed to take possession,
custody or control of any property of Borrower.
Upon the occurrence of an Event of Default hereunder, all unpaid
principal and other amounts owing hereunder shall, at the option of Lender,
be immediately collectible by Lender pursuant to applicable law.
7. Waiver. Borrower waives presentment and demand for payment, notice of
dishonor, protest and notice of protest of this Note, and shall pay all costs of
collection when incurred, including, without limitation, reasonable attorneys'
fees, costs and other expenses.
The right to plead any and all statutes of limitations as a defense to
any demands hereunder is hereby waived to the full extent permitted by law.
8. Governing Law. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of Delaware, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.
9. Successors and Assigns. The provisions of this Note shall inure to
the benefit of and be binding on any successor to Borrower and shall extend
to any holder hereof.
Borrower: Lender:
Gene Logic Inc. Procter & Gamble Pharmaceuticals, Inc.
By: /S/ Michael J. Brennan By: /S/ G.G. Cloyd
Printed Name: Michael J. Brennan Printed Name: G. G. Cloyd
Title: President and CEO Title: President
-3-
<PAGE>
EXHIBIT 10.26
Confidential Treatment Requested
Under 17 C.F.R. Sections 200.80 (b)(4),
200.83 and 230.406
*** Indicates omitted material that is the subject of a confidential
treatment request filed separately with the Commission.
DRUG TARGET AND DRUG LEAD DISCOVERY
COLLABORATION AGREEMENT
BETWEEN
GENE LOGIC INC.
AND
JAPAN TOBACCO INC.
DATED AS OF SEPTEMBER 9, 1997
<PAGE>
Table Of Contents
Page
1. Definitions........................................................... 1
1.1 "Affiliate"................................................. 1
1.2 "Agreement Date"............................................ 2
1.3 "Agreement Term"............................................ 2
1.4 "Alliance Director"......................................... 2
1.5 "Biological Therapeutic Product"............................ 2
1.6 "cDNA"...................................................... 2
1.7 "cDNA Sequence Analysis".................................... 2
1.8 "Control"................................................... 2
1.9 "Diagnostic Product"........................................ 2
1.10 "Drug Approval Application"................................. 2
1.11 "Effective Date"............................................ 2
1.12 "FDA"....................................................... 2
1.13 "Field"..................................................... 3
1.14 "Further Development"....................................... 3
1.15 "GENE EXPRESS("............................................. 3
1.16 "Gene Logic Assays"......................................... 3
1.17 "Gene Logic Software"....................................... 3
1.18 "Gene Logic Technology"..................................... 3
1.19 "Gene Products"............................................. 3
1.20 "Gene Target"............................................... 3
1.21 "IND"....................................................... 3
1.22 "Indication(s)"............................................. 4
1.23 "Invention(s)".............................................. 4
1.24 "NDA"....................................................... 4
1.25 "Net Sales"................................................. 4
1.26 "Patent Right(s)"........................................... 4
1.27 "Product"................................................... 4
1.28 "Program Term".............................................. 5
1.29 "Protein Product"........................................... 5
1.30 "Regulatory Approval"....................................... 5
1.31 "Research Databases"........................................ 5
1.32 "Research Management Committee" or "RMC".................... 5
1.33 "Research Plan"............................................. 5
1.34 "Research Program".......................................... 5
1.35 "Research Term"............................................. 5
1.36 "Samples"................................................... 5
i.
<PAGE>
Table Of Contents
(continued)
Page
1.37 "Scientific FTE"............................................ 6
1.38 "Therapeutic Product"....................................... 6
1.39 "Third Party"............................................... 6
2. Research Programs..................................................... 6
2.1 Undertaking and Scope....................................... 6
2.2 Personnel and Resources. ................................... 7
2.3 Information and Reports Concerning the Research Databases... 8
2.4 Visiting JT Employees....................................... 8
2.5 Acquisition of Samples...................................... 8
2.6 Term of the Research Program................................ 9
2.7 Selection of Gene Targets................................... 9
3. Research Management Committee; Alliance Directors;
Dispute Resolution.................................................... 10
3.1 Research Management Committee............................... 10
3.2 RMC Meetings................................................ 10
3.3 Alliance Directors.......................................... 10
3.4 Dispute Resolution.......................................... 11
4. Patents, Know-How Rights And Inventions............................... 11
4.1 Ownership of Inventions..................................... 11
4.2 Ownership of Gene Logic Technology, Gene Logic Software,
Gene Logic Assays and Research Databases.................... 11
4.3 Ownership of Improvements to Gene Logic Technology,
Gene Logic Software and Gene Logic Assays................... 11
4.4 Ownership of Products....................................... 12
4.5 Patent Protection........................................... 12
4.6 Infringement by Third Parties............................... 14
4.7 Allegations of Infringement by Third Parties................ 14
4.8 Independent Efforts......................................... 14
5. Grant of Rights....................................................... 15
5.1 Research Databases, GENE EXPRESS( and Software.............. 15
5.2 Samples..................................................... 15
5.3 Gene Targets................................................ 15
5.4 Diligence................................................... 15
5.5 Diligence Reports........................................... 16
ii.
<PAGE>
Table Of Contents
(continued)
Page
6. Collaboration Expansion Options....................................... 17
6.1 Expansion Options........................................... 17
6.2 Equity Funding Commitment................................... 17
7. Payments and Royalties................................................ 17
7.1 Research Reimbursement Payments to Gene Logic............... 17
7.2 Research Support............................................ 18
7.3 Gene Target Fees............................................ 19
7.4 Royalties Payable by JT..................................... 19
7.5 Currency of Payment......................................... 19
7.6 Payment and Reporting....................................... 19
7.7 Records and Audits.......................................... 20
8. Milestones for Therapeutic Products and Protein Products.............. 20
8.1 Milestones.................................................. 20
8.2 Milestone Payments.......................................... 21
8.3 Taxes....................................................... 21
9. Confidentiality and Security.......................................... 22
9.1 Security of Research Databases and Gene Logic Software...... 22
9.2 Confidentiality............................................. 22
9.3 Permitted Disclosures....................................... 23
9.4 Publication................................................. 23
10. Representations And Warranties........................................ 24
10.1 Legal Authority............................................. 24
10.2 Valid Rights and Licenses................................... 24
10.3 No Conflicts................................................ 24
10.4 Disclaimer.................................................. 24
11. Term; termination..................................................... 25
11.1 Term........................................................ 25
11.2 Termination for Breach...................................... 25
11.3 Effect of Bankruptcy........................................ 26
11.4 Remedies.................................................... 26
iii.
<PAGE>
Table Of Contents
(continued)
Page
12. Arbitration........................................................... 26
12.1 Arbitration................................................. 26
12.2 Procedure................................................... 27
13. General Provisions.................................................... 27
13.1 Mutual Indemnification...................................... 27
13.2 Assignment.................................................. 27
13.3 Non-Waiver.................................................. 28
13.4 Governing Law............................................... 28
13.5 Partial Invalidity.......................................... 28
13.6 Notice...................................................... 28
13.7 Headings.................................................... 29
13.8 Retained Rights............................................. 29
13.9 No Implied Licenses or Warranties........................... 29
13.10 Force Majeure............................................... 29
13.11 Survival.................................................... 29
13.12 Entire Agreement............................................ 29
13.13 Amendments.................................................. 30
13.14 Independent Contractors..................................... 30
13.15 Counterparts................................................ 31
iv.
<PAGE>
DRUG TARGET AND DRUG LEAD DISCOVERY
COLLABORATION AGREEMENT
This Drug Target and Drug Lead Discovery Collaboration
Agreement ("Agreement") is made as of September 9, 1997, by and between Gene
Logic Inc., a Delaware corporation ("Gene Logic"), located at 10150 Old
Columbia Road, Columbia, Maryland 21046 and Japan Tobacco Inc., a Japanese
corporation ("JT"), located at JT Building 2-1, Toranomon 2-chome, Minato-ku,
Tokyo 105, Japan.
Witnesseth:
Whereas, Gene Logic has developed technologies and know-how
with respect to high throughput analysis of gene expression and gene
regulation for use in the identification of gene targets and the discovery of
pharmaceutical products;
Whereas, JT is a company engaged in the development and
commercialization of pharmaceutical products;
Whereas, JT and Gene Logic wish to enter into a collaborative
effort directed toward the development of Research Databases (as defined
herein) to identify genes associated with Indication #1 (as such term is
defined on Exhibit A attached hereto, including an option for the development
and application of Gene Logic Assays (as defined herein) for the
identification of human pharmaceutical products and options to expand the
collaborative effort to include the development of Research Databases to
identify genes associated with certain other indications (the
"Collaboration"); and
Whereas, through the Collaboration the parties intend to
discover, develop and market human pharmaceutical products.
Now, Therefore, in consideration of the foregoing premises and
the mutual promises, covenants and conditions contained herein, Gene Logic
and JT agree as follows:
1. Definitions.
The following capitalized terms shall have the meanings
indicated for purposes of this Agreement:
1.1 "Affiliate" shall mean any corporation, association or
other entity which directly or indirectly controls, is controlled by or is
under common control with the party in question; provided, however, that the
Government of Japan shall not be deemed to be an Affiliate of JT. As used in
this definition of "Affiliate," the term "control" shall mean
1.
<PAGE>
direct or indirect beneficial ownership of more than 50% of the voting or
income interest in such corporation or other business entity.
1.2 "Agreement Date" shall mean the date of this Agreement
first written above.
1.3 "Agreement Term" shall mean the period from the Agreement
Date until, with respect to each Product, the expiration of the last royalty
obligation owed by JT to Gene Logic with respect to such Product, or until
this Agreement is otherwise terminated pursuant to its terms.
1.4 "Alliance Director" shall have the meaning set forth in
Section 3.3.
1.5 "Biological Therapeutic Product" shall mean any gene
therapy product or antisense product, in any dosage form or formulation by
any route of administration, which is or comprises any full, partial or
modified RNA or DNA sequence corresponding to or complementary to a Gene
Target RNA or DNA sequence.
1.6 "cDNA" shall mean a DNA copy of a mRNA, including,
without limitation, all cDNA clones and cDNA templates derived from a given
gene transcript and its corresponding coding sequence, including the full
length sequence.
1.7 "cDNA Sequence Analysis" shall mean all sequence
information from all cDNA templates derived from the same gene within a given
cDNA library.
1.8 "Control" shall mean possession of the ability to grant
the rights as provided for herein without violating the terms of any
agreement or other arrangement with any Third Party.
1.9 "Diagnostic Product" shall mean any product or service or
combination thereof used for the diagnosis, prognosis and/or monitoring of
progression of any disease or disorder in humans which is developed
utilizing, or is comprised of, any Gene Target or which incorporates any Gene
Target DNA or RNA sequence.
1.10 "Drug Approval Application" shall mean an application for
Regulatory Approval required before commercial sale or use of a Product.
1.11 "Effective Date" shall mean, with respect to each
Indication, the date on which the Research Management Committee approves the
initial Research Plan for the applicable Research Program pursuant to Section
2.1(a).
1.12 "FDA" shall mean the United States Food and Drug
Administration.
2.
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1.13 "Field" shall mean, with respect to each Indication, the
research, discovery and characterization of genes associated with such
Indication through the application of bioinformatics and genomic technologies
to analyze Samples, and the use of such genes for the development of
Products. As used herein, the term "genomic technologies" shall mean,
without limitation, technologies for the analysis of gene expression and gene
regulation, hybridization array techniques, high speed sequencing and
generation of expressed sequence tags.
1.14 "Further Development" shall have the meaning set forth in
Section 2.7.
1.15 "GENE EXPRESS-TM-" shall mean Gene Logic's GENE EXPRESS-TM-
Database of Normal Gene Expression Patterns.
1.16 "Gene Logic Assays" shall mean assays for the screening
of compounds to evaluate their effect or effects on the expression levels of
one or more genes, which assays utilize Gene Logic's proprietary Flow-Thru
Gene Chip technology. All current patent applications with respect to the
Flow-Thru Gene Chip technology are listed on Schedule 1.16, such schedule to
be updated by Gene Logic from time to time.
1.17 "Gene Logic Software" shall mean Gene Logic's software
programs for the analysis of gene expression and gene regulation and the
identification and prioritization of gene targets that are Controlled by Gene
Logic as of the Agreement Date or during the Research Term.
1.18 "Gene Logic Technology" shall mean (i) all discoveries,
inventions, information, data, know-how, trade secrets and materials (whether
or not patentable) that are Controlled by Gene Logic as of the Agreement Date
or during the Research Term, including without limitation, the Research
Databases, GENE EXPRESS-TM- and Gene Logic's READS-TM- and MuST-TM-
technologies, excluding the Gene Logic Software and any technology related to
the Gene Logic Assays, and (ii) all Patent Rights of Gene Logic covering the
foregoing. All current patent applications with respect to GENE EXPRESS-TM-
and Gene Logic's READS-TM- and MuST-TM- technologies are listed on Schedule
1.18, such schedule to be updated by Gene Logic from time to time.
1.19 "Gene Products" shall mean all partial cDNAs, DNAs,
genes, full length cDNAs corresponding thereto and proteins encoded therefrom.
1.20 "Gene Target" shall have the meaning set forth in Section
2.7.
1.21 "IND" shall mean an Investigational New Drug Application
to the FDA to commence human clinical testing of a Product, as defined by the
FDA, or the equivalent application in any country or jurisdiction other than
the United States.
3.
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1.22 "Indication(s)" shall mean Indication #1, Indication #2
and/or Indication #3, as appropriate.
1.23 "Invention(s)" shall have the meaning set forth in
Section 4.1.
1.24 "NDA" shall mean a New Drug Application or Product
License Application (or Biologics License Application), as appropriate, and
all supplements filed pursuant to the requirements of the FDA, including all
documents, data and other information concerning Products which are necessary
for or included in FDA approval to market a Product, or the equivalent
application in any country or jurisdiction other than United States.
1.25 "Net Sales" shall mean the gross invoices delivered by JT
or its Affiliates or sublicensees, as appropriate, for the sale of a Product,
less the following deductions:
(1) Prompt payment or other trade or quantity discounts
actually allowed and taken in such amounts as are customary in the trade;
(2) Amounts repaid or credited by reason of timely
rejections or returns;
(3) Taxes on the sale of a Product (other than franchise
or income taxes on the income of the seller) actually paid or withheld;
(4) Allowances for bad debt to the extent such amounts
were previously invoiced and included in Net Sales for royalty purposes and
were subsequently actually written off by such party (JT or its Affiliate or
sublicensee); and
(5) Transportation and delivery charges, including
insurance premiums, actually incurred.
Notwithstanding the foregoing, amounts received by such party
(JT or its Affiliate or sublicensee) or such party's Affiliates for the sale
of Products among such party and its Affiliates whether for their internal
use or for resale or other disposition will not be included in the
computation of Net Sales hereunder.
1.26 "Patent Right(s)" shall mean, with respect to Gene Logic
or JT, all United States and foreign patents relevant to the purpose of this
Agreement (including all reissues, extensions, confirmations, registrations,
re-examinations, and inventor's certificates) and patent applications
(including, without limitation, all substitutions, continuations,
continuations-in-part and divisionals thereof) owned or Controlled by Gene
Logic or JT at any time during the Agreement Term.
1.27 "Product" shall mean a Therapeutic Product or Protein
Product, as applicable.
4.
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1.28 "Program Term" shall mean, with respect to each
Indication, the period commencing on the Effective Date for such Indication
and ending upon the end of the Research Term, subject to extension or earlier
termination as set forth herein.
1.29 "Protein Product" shall mean any product for the
prevention or treatment of any disease or disorder in humans, in any dosage
form or formulation for delivery by any route of administration, which is or
comprises a protein or peptide encoded by the full, partial or mutated RNA or
DNA sequence corresponding to a Gene Target RNA or DNA sequence, but
excluding any therapeutic antibody.
1.30 "Regulatory Approval" shall mean (i) all necessary
approvals of an NDA or comparable applicable filing by the FDA permitting
commercial sale of a Product or (ii) all necessary comparable approvals
permitting commercial sale of a Product granted by applicable authorities in
any country or jurisdiction other than the United States.
1.31 "Research Databases" shall mean, with respect to and
related to each Indication, the databases created by Gene Logic using the
Gene Logic Technology pursuant to the Research Plan for such Indication. The
Research Databases for an Indication shall contain data derived from
experiments conducted with respect to the Gene Products identified by Gene
Logic pursuant to the Research Program for such Indication. To the extent
possible, the Research Databases for an Indication shall be created in a
manner to ensure that data derived from Samples obtained by Gene Logic can be
separated from data derived from Samples supplied by JT.
1.32 "Research Management Committee" or "RMC" shall have, with
respect to each Indication, the meaning set forth in Section 3.1.
1.33 "Research Plan" shall have, with respect to each
Indication, the meaning set forth in Section 2.1.
1.34 "Research Program" shall mean, with respect to each
Indication, that program of research performed by the parties in the Field
for such Indication pursuant to Section 2.
1.35 "Research Term" shall mean the period commencing on the
Agreement Date and ending upon the fifth anniversary of the Agreement Date,
subject to extension or earlier termination as set forth herein.
1.36 "Samples" shall mean human or animal tissue samples or
cell lines (i) obtained by Gene Logic pursuant to Section 2.5 or (ii)
supplied by JT to Gene Logic for analyses pursuant to the Research Plan, if
applicable.
5.
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1.37 "Scientific FTE" shall mean the equivalent of a full-time
researcher's or program manager's work time over a 12 month period (including
normal vacations, sick days and holidays).
1.38 "Therapeutic Product" shall mean any product for the
prevention or treatment of any disease or disorder in humans, in any dosage
form or formulation by any route of administration, which product is or
comprises a molecule, compound or other agent or any therapeutic antibody,
regardless of its function or utility, which is discovered or whose utility
is discovered utilizing, in whole or in part, a Gene Target, whether or not
in the course of a Research Program, or, if applicable, which is discovered
or whose utility is discovered through the use of any Gene Logic Assay,
excluding any Biological Therapeutic Product, Diagnostic Product or Protein
Product.
1.39 "Third Party" shall mean any party other than JT or Gene
Logic or an Affiliate of either of them.
2. Research Programs.
With respect to the Research Program for Indication #1 and, if
the applicable option under Section 6 is exercised by JT, the Research
Programs for Indication #2 and Indication #3, the following provisions shall
apply:
2.1 Undertaking and Scope.
(a) Prior to the earlier of (i) the initial meeting of
the Research Management Committee and (ii) in the case of Indication #1, 30
days from the Agreement Date, or in the case of the other Indications, 30
days from the date that the applicable option under Section 6 is exercised by
JT, the parties shall work together to agree upon a plan for the creation and
use of the Research Databases by the parties for the first year of the
Research Program. Such plan shall set forth the schedule of specific
activities to be undertaken during the applicable period of the Program Term,
the resources to be employed, including the allocation of Scientific FTEs and
each scientist's role, the intended acquisition of Samples during such period
(and the timing thereof) and the budget for such period. The Research
Management Committee will review and, in its discretion, approve or modify
the general direction of such plan. Such plan, as approved by the RMC for
any year of the Research Program, is referred to herein as the "Research
Plan." A timeline of the research to be performed under the Research Plan
for Indication #1 and the related staff allocation plan is attached to this
Agreement as Schedule 2.1 for reference purposes. At least 90 days before
each anniversary of the Effective Date during the Program Term, the parties
shall propose to the RMC a Research Plan to govern the further development of
the Research Databases during the following year of the Research Program, and
the RMC shall review, modify if appropriate, and
6.
<PAGE>
approve such Research Plan by such anniversary. At any time, the RMC may
modify or amend any such Research Plan as appropriate or necessary to reflect
the parties' experiences in performing the Research Program. Each party
agrees to use all reasonable efforts to perform the activities detailed in
the Research Plan in a professional and timely manner.
(b) Gene Logic shall use commercially reasonable and
diligent efforts to develop its Flow-Thru Gene Chip technology to permit the
development of Gene Logic Assays. At any time after notification by Gene
Logic to JT that Gene Logic's Flow-Thru Gene Chip technology is suitable for
the development of Gene Logic Assays, JT may request that Gene Logic develop
one or more Gene Logic Assays and run such Gene Logic Assays with respect to
one or more Gene Products within the Research Databases for JT for the
purpose of discovery or discovering the utility of Products in the Field.
Gene Logic shall advise JT of the anticipated schedule and budget to develop
such Gene Logic Assay and, following approval of such schedule and budget by
JT in writing, shall commence the development of such Gene Logic Assay;
provided, however, that it is understood that Gene Logic shall use
commercially reasonable and diligent efforts to comply with any such request
consistent with Gene Logic's internal development of the technology necessary
to implement such requests. To the extent that JT makes any request pursuant
to this Section 2.1(b), JT shall (i) pay Gene Logic a chip design fee of [***]
for each Gene Logic Assay to be developed by Gene Logic in response to such
request ([***]) and (ii) reimburse Gene Logic for all actual costs incurred
by Gene Logic in developing and running each Gene Logic Assay in response to
such request, such costs not to include any of Gene Logic's costs incurred in
developing the core Flow-Thru Gene Chip technology to the point that the
development of Gene Logic Assays is possible.
(c) At any time during a Research Program, JT may
request Gene Logic (i) to conduct its assays (other than Gene Logic Assays)
with respect to one or more Gene Products within the Research Databases; or
(ii) to conduct its assays (including Gene Logic Assays) with respect to
genes selected by JT from sources other than the Research Databases. Upon a
request to conduct an assay under this Section 2.1(c), both parties shall
negotiate in good faith regarding the terms and conditions under which Gene
Logic shall implement such request; provided, however, that neither party
shall assume any additional obligation with respect to such request unless
and until a separate agreement for such assay has been executed by both
parties in writing.
2.2 Personnel and Resources. Each party agrees to commit the
personnel, consultants, facilities, expertise, technology and other resources
necessary to perform its obligations under the Research Plan; provided,
however, that neither party warrants that the Research Program shall achieve
any of the research objectives contemplated by them. During the Research
Program, JT and Gene Logic will each maintain the number of
7.
CONFIDENTIAL TREATMENT REQUESTED
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Scientific FTEs, which in the case of Gene Logic shall not be fewer than
[***] Scientific FTEs, devoted to cooperative work as are required under the
Research Plan. The scientific priorities and direction of the work of such
Scientific FTEs will be determined by the Research Management Committee. JT
will provide funding to support Gene Logic's performance of its obligations
under the Research Plan as set forth in Section 7.
2.3 Information and Reports Concerning the Research
Databases. All information, technology or inventions specific to the Field
made by either party in the course of the Research Program will be promptly
disclosed to the other, with significant discoveries or advances being
communicated as soon as practicable after such information is obtained or its
significance is appreciated. The parties will exchange at least quarterly
written reports presenting a meaningful summary of their activities performed
under this Agreement and will otherwise exchange information concerning the
Research Program as frequently as is necessary.
2.4 Visiting JT Employees. Pursuant to the Research Plan,
JT may request that up to two of JT's scientific employees become employees
of Gene Logic or will otherwise work at Gene Logic during the Program Term;
provided that such employees will not have an employment start date earlier
than January 1, 1998. The nature and scope of the work to be accomplished by
such employees at Gene Logic shall be determined by the RMC, and such
employees shall be subject to periodic performance evaluations by the RMC.
All costs incurred by Gene Logic in connection with the employment of such
employees, which costs will include salary (including payroll tax
withholdings), fringe benefits (including medical, dental, life, disability,
workers' compensation or other insurance coverage provided to Gene Logic
employees), federal, state and local employment-related taxes (including
FICA, Medicare and unemployment insurance) and any other costs incident to
such employees' employment by Gene Logic, shall be reimbursed by JT
semi-annually within 30 days following receipt by JT of the documentation of
such costs reasonably satisfactory to JT (which reimbursement shall be in
addition to any payments to Gene Logic under Section 7.2). Such employees
will enter into Gene Logic's standard agreements regarding proprietary
information and inventions and will be deemed to be Gene Logic employees for
all purposes of this Agreement.
2.5 Acquisition of Samples. Gene Logic shall seek to
establish collaborations to obtain Samples from Third Parties for analysis
pursuant to the Research Plan. JT shall reimburse Gene Logic for any direct
payments (as documented to the reasonable satisfaction of JT) made by Gene
Logic to Third Parties in connection with the acquisition of such Samples.
Gene Logic shall acquire all Samples for purposes of the Research Program
during the Program Term only in accordance with its standard policies and
procedures exercising its typical standard of care, which may be reviewed and
reasonably modified by the RMC, if necessary and appropriate, and shall not
acquire any Samples for purposes of the Research Program during the Program
Term without the prior approval of
8.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
JT. Any Samples obtained by Gene Logic pursuant to this Section 2.5 shall be
owned by Gene Logic.
2.6 Term of the Research Program. Work under the Research
Program will commence as of the Effective Date and, unless terminated earlier
by either party pursuant to the terms of this Agreement or extended by JT for
an additional year with at least 90 days' prior written notice (which JT may
do without Gene Logic's approval no more than twice with respect to each
Research Program), will terminate upon expiration of the Research Term. Upon
the first anniversary of the Effective Date or at any time thereafter, the
Research Program may be terminated by JT by providing six months' prior
written notice to Gene Logic; provided, however, that if JT has exercised its
option to commence anytime prior to the date of termination another Research
Program in addition to the Research Program to be terminated, JT shall be
entitled to provide only 30 days' prior notice to Gene Logic of such
termination. Upon early termination by JT of a Research Program pursuant to
the preceding sentence, any rights granted to Gene Logic pursuant to Section
5.2 shall remain in full force and effect.
2.7 Selection of Gene Targets. Under the Research Program,
the parties will use commercially reasonable and diligent efforts consistent
with their respective obligations under the Research Plan to identify Gene
Products from Samples as potential targets within the Field. JT shall select
certain of such Gene Products as targets for further development of human
pharmaceutical products using information obtained from the Research
Databases created by Gene Logic pursuant to the Research Plan and the
application of the Gene Logic Software and other information available to JT,
including, without limitation, through public DNA sequence databases and
scientific publications. Any Gene Product identified in a Research Database
which JT uses in Further Development (as defined below) shall be a "Gene
Target." Based upon JT's standard, internal research and development
criteria, JT will, in its sole discretion, decide whether to commence Further
Development with regard to a particular Gene Product. JT shall notify Gene
Logic in writing and make the payment described in Section 7.3 prior to using
any Gene Target in Further Development. For purposes of this Agreement,
"Further Development" of a Gene Target as (i) a Therapeutic Product will be
the [***]; or (ii) a Protein Product will include the
[***].
9.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
3. Research Management Committee; Alliance Directors; Dispute
Resolution.
With respect to the Research Program for Indication #1 and, if
the applicable option under Section 6 is exercised by JT, the Research
Programs for Indication #2 and Indication #3, the following provisions shall
apply:
3.1 Research Management Committee. JT and Gene Logic will
each appoint four representatives to a research management committee (the
"Research Management Committee" or "RMC"). Attached as Schedule 3.1 is a
list of representatives the parties intend to appoint to the RMC for
Indication #1; in the case of the other Indications, JT and Gene Logic will
each appoint their respective representatives to the RMC promptly after the
date that the applicable option under Section 6 is exercised by JT but in any
event within 10 days. One of the representatives will be identified as
chairman of the RMC for the initial period ending 12 months following the
Effective Date; the initial chairman of the RMC for Indication #1 is
identified on Schedule 3.1. Thereafter, chairmanship will rotate between a JT
member and a Gene Logic member every 12 months. The RMC will review, direct
and supervise all operational and scientific aspects related to the creation
of the Research Databases. The duties of the Research Management Committee
shall include approving the Research Plan, agreeing to resource allocations
(including the allocation of Scientific FTEs), monitoring the parties'
progress under the Research Plan, evaluating the means through which JT has
access to the Research Databases and discussing any other matter related to
the Research Program. The Research Management Committee will meet quarterly,
or more frequently if mutually agreed, and will alternate sites of meetings
between Columbia, Maryland and Yokohama, Japan. Each party recognizes the
importance of the Research Management Committee in the success of the
Research Program and the overall Collaboration and will use diligent efforts
to cause all of its representatives to such committee to attend all meetings
of such committee. A party may change any of its appointments to the
Research Management Committee at any time upon giving written notice to the
other party. Any disputes or disagreements within the RMC shall be resolved
pursuant to Section 3.4.
3.2 RMC Meetings. The Research Management Committee may meet
by telephone or video conference or in person at such times as are agreeable
to the members of such committee. Attendance at meetings shall be at the
respective expense of the participating parties. The chairman of the RMC
shall assure that agendas and minutes are prepared for each of its meetings.
All actions taken and decisions made by the RMC shall be by unanimous
agreement. If personal attendance is not possible for valid reasons, voting
by proxy is permissible.
3.3 Alliance Directors. Each party shall designate one of
its employees as an alliance director ("Alliance Director") for all of the
activities contemplated under the
10.
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Research Program. Such Alliance Directors will be responsible for the
day-to-day coordination of the performance of the Research Program and will
serve to facilitate communication between the parties with respect thereto.
Such Alliance Directors shall be experienced in managing research projects
relevant to the Research Program.
3.4 Dispute Resolution. Disputes or disagreements between
the parties arising hereunder will be referred to the Research Management
Committee. If the RMC is unable to resolve, after 30 days, a dispute
regarding any issue presented to it or arising in it, such dispute will be
referred to the Chief Executive Officer of Gene Logic and the Executive Vice
President, Central Pharmaceutical Research Institute of JT for good faith
resolution, for a period of 90 days. If such dispute is not resolved by the
end of such 90-day period, then such issue shall be submitted for resolution
through arbitration within 30 days after either party requests arbitration,
according to the terms set forth in Section 12.
4. Patents, Know-How Rights And Inventions.
4.1 Ownership of Inventions. Except as otherwise set forth
herein, ownership of any inventions (whether or not patentable) that are
conceived, generated or reduced to practice during the course of a Research
Program ("Inventions") shall be determined in accordance with United States
laws of inventorship.
4.2 Ownership of Gene Logic Technology, Gene Logic Software,
Gene Logic Assays and Research Databases. Notwithstanding the foregoing,
subject to the grant of rights to JT under Section 5, Gene Logic shall own
all rights to the Gene Logic Technology, Gene Logic Software, Gene Logic
Assays and the Research Databases, including, but not limited to, all data
and progeny derived from the Samples, all cDNA sequences, partial cDNAs, and
their corresponding full length cDNAs, cDNA Sequence Analyses, Gene Targets,
proteins and applications thereof and information relating thereto. The
filing, prosecution and maintenance of patent(s), copyrights and other
proprietary rights directed at the protection of these rights shall be the
responsibility of, and at the discretion of, Gene Logic.
4.3 Ownership of Improvements to Gene Logic Technology, Gene
Logic Software and Gene Logic Assays. Gene Logic Technology, Gene Logic
Software and Gene Logic Assays shall also include any enhancements or
improvements to Gene Logic Technology, Gene Logic Software and Gene Logic
Assays discovered by either party during the course of the Collaboration,
including, without limitation, any discoveries and Inventions related to the
function of Gene Targets included in a Research Database. JT hereby
irrevocably assigns to Gene Logic all right, title and interest in and to
enhancements or improvements to such Gene Logic Technology, Gene Logic
Software and Gene Logic Assays discovered by JT. If JT has any rights that
cannot be assigned to Gene Logic, JT waives the enforcement of such rights,
and if JT has any rights that cannot
11.
<PAGE>
be assigned or waived, JT hereby grants to Gene Logic an exclusive,
irrevocable, perpetual, worldwide, fully-paid license, with right to
sublicense through multiple tiers of sublicense, to such rights. JT agrees
to cooperate with Gene Logic, both during and after the term of this
Agreement, in the procurement and maintenance of Gene Logic's rights to such
intellectual property and to execute, when requested, any other documents
deemed necessary by Gene Logic to carry out the purpose of this Section.
4.4 Ownership of Products.
(a) By JT. Gene Logic hereby irrevocably assigns to JT
all of its right, title and interest in and to any Patent Rights covering a
Product discovered pursuant to the Collaboration. The filing, prosecution
and maintenance of such Patent Rights shall be the responsibility of, and at
the discretion of, JT. Gene Logic agrees to cooperate with JT, both during
and after the term of this Agreement, in the procurement and maintenance of
such Patent Rights and to execute, when requested, any other documents deemed
necessary by JT to carry out the purpose of this Section 4.4(a); provided,
that JT shall reimburse Gene Logic for out-of-pocket expenses incurred by
Gene Logic in connection with such cooperation.
(b) By Gene Logic. JT hereby irrevocably assigns to
Gene Logic all of its right, title and interest in and to any Patent Rights
covering a Biological Therapeutic Product or Diagnostic Product discovered
pursuant to the Collaboration; provided, however, that in the event such
Patent Rights also cover a Product, then in lieu of such assignment, JT shall
grant to Gene Logic an exclusive, irrevocable, perpetual, worldwide,
fully-paid license, with right to sublicense through multiple tiers of
sublicense, to such Patent Rights for use as a Biological Therapeutic Product
or Diagnostic Product. The filing, prosecution and maintenance of such
assigned Patent Rights shall be the responsibility of, and at the discretion
of, Gene Logic, and the filing, prosecution and maintenance of such licensed
Patent Rights shall be the responsibility of, and at the discretion of, JT.
JT and Gene Logic shall cooperate, both during and after the term of this
Agreement, in the procurement and maintenance of such Patent Rights and to
execute, when requested, any other documents deemed necessary by the party
owning such Patent Rights to carry out the purpose of this Section 4.4(b);
provided, that the party owning such Patent Rights shall reimburse the other
party for its out-of-pocket expenses incurred in connection with such
cooperation.
4.5 Patent Protection.
(a) Solely Owned Inventions. Any party that solely owns
any patentable Invention shall have the right, at its option and expense, to
prepare, file and prosecute any patent applications or other appropriate
filings with respect to such Invention and to maintain any patents issued
thereon, copyrights or other similar rights.
12.
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(b) Jointly Owned Inventions. Subject to Section
4.5(e), the parties shall decide which party shall be responsible for
preparing, filing and prosecuting any patent applications or other
appropriate filings with respect to any Invention that is owned jointly by
the parties (a "Joint Invention") and maintaining any patents, copyrights or
other similar rights issued thereon, using patent counsel reasonably
acceptable to the other party. The parties shall share the out-of-pocket
expenses for such preparation, filing and prosecution.
(c) Cooperation. Each party agrees to cooperate with
the party responsible for the preparation and prosecution of all patent
applications or other appropriate filings on Inventions specific to the Field
and Joint Inventions pursuant to this Section 4.5 (the "Responsible Party")
and in the maintenance of any patents, copyrights or other similar rights
issued thereon. Such cooperation will include the execution of all documents
necessary or desirable for the Responsible Party to fulfill its obligations
hereunder.
(d) Communication Regarding Patent Protection. The
Responsible Party will prepare, prosecute and maintain (and shall keep the
other party currently informed of all steps to be taken in such preparation,
prosecution and maintenance of) all Patent Rights, copyrights or other
similar rights, which claim an Invention or Joint Invention with respect to
which it is responsible and shall furnish the other party with copies of
documentation of such Patent Rights, copyrights or other similar rights which
claim an Invention specific to the Field or Joint Invention and other related
correspondence relating thereto with respect to which it is responsible to
and from governmental patent agencies or other authorities and permit the
other party to offer its comments thereon before the Responsible Party makes
a submission to a governmental patent agency or other authority which could
materially affect the scope or validity of the coverage of any patent,
copyright or other similar rights that may result. The other party shall
offer its comments promptly.
(e) Back-Up Rights. If the Responsible Party with
respect to any Joint Invention decides to abandon or not to pursue
prosecution of any Patent Rights, copyrights or other similar rights which
claim a Joint Invention, it shall permit the other party, at its option and
expense, to undertake such obligations. The party not undertaking such
actions shall fully cooperate with the other party and shall provide to the
other party whatever assignments and other documents that may be needed in
connection therewith. If a party undertakes the obligations of a
"Responsible Party" under this Section 4 with respect to any such Patent
Right, copyright or other similar right which claims a Joint Invention under
this Section 4.5(e), it shall prosecute and maintain the same vigorously at
its own expense, and shall not abandon or compromise such rights or fail to
exercise any rights of appeal without giving the other party the right to
take over the prosecuting party's conduct, at such other party's own expense.
13.
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(f) Reimbursement for Gene Target Patent Expenses. In
the event that JT selects a Gene Target for Further Development and Gene
Logic has incurred patent expenses in connection with such Gene Target, JT
shall reimburse Gene Logic for [***] of the out-of-pocket expenses incurred by
Gene Logic after the Gene Target is selected for Further Development within
30 days of receipt of an invoice therefor.
4.6 Infringement by Third Parties. In the event Gene Logic
or JT becomes aware of any actual or threatened infringement of any Patent
Right, copyright, trademark, trade secret or other intellectual property
right of either party which claims an Invention or Joint Invention, that
party shall promptly notify the other party, and the parties shall (i)
promptly discuss how to proceed in connection with such actual or threatened
infringement and (ii) use their best efforts in cooperating with each other
to terminate such infringement without litigation. If either party commences
any actions or proceedings (legal or otherwise) pursuant to this Section 4.6,
it shall prosecute the same vigorously at its expense and shall not abandon
or compromise them or fail to exercise any rights of appeal without giving
the other party the right to take over the prosecuting party's conduct at
such other party's own expense.
4.7 Allegations of Infringement by Third Parties.
(a) The parties acknowledge that, in order to exploit
the rights contained herein, JT may require licenses under Third Party patent
rights that may be infringed by the use by JT of the rights granted herein
and it is hereby agreed that it shall be JT's responsibility to satisfy
itself as to the need for such licenses and, if necessary, to obtain such
licenses.
(b) JT shall be solely responsible for any threatened or
actual claims for Third Party patent infringement or other Third Party
intellectual property right arising out of the manufacture, use, sale or
importation of a Product sold by JT, its Affiliates or sublicensees. Upon
receiving notice of such actual or threatened claims, JT shall promptly meet
with Gene Logic to discuss the course of action to be taken to resolve or
defend any such infringement litigation.
4.8 Independent Efforts. A party shall not, during the
Research Term, conduct, have conducted or fund any research, discovery or
development activities primarily directed toward the development of a
database of gene expression, gene regulation or gene targets within any Field
utilizing high through-put analysis of gene expression except pursuant to
this Agreement without the prior written consent of the other party;
provided, however, that the foregoing shall not preclude JT from (a)
performing its obligations under those certain agreements described on
Schedule 4.8 or (b) commencing such independent efforts with respect to a
Field, the Research Program for which has been terminated by JT pursuant to
Section 2.6.
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5. Grant of Rights.
With respect to the Research Program for Indication #1 and, if
the applicable option under Section 6 is exercised by JT, the Research
Programs for Indication #2 and Indication #3, the following provisions shall
apply:
5.1 Research Databases, GENE EXPRESS-TM- and Software. Gene
Logic hereby grants to JT an exclusive, worldwide right to use the Research
Databases, together with a nonexclusive, worldwide right to use GENE
EXPRESS-TM- and a nonexclusive, worldwide right to use and perform the Gene
Logic Software, in each case solely for research purposes in the Field to
identify Gene Targets during the Program Term and for an additional 90 days
thereafter (such 90-day period shall be referred to as the "Research Database
Access Term"). JT will have no right to assign such rights to Third Parties
and shall not provide the Research Databases, the Gene Logic Software or any
Gene Logic Technology with respect thereto, to any Third Party (other than
consultants to whom disclosure is permitted under Section 9.3) without prior
written consent of Gene Logic. JT may elect to extend the term of the
foregoing exclusive right to the Research Databases and the foregoing
nonexclusive rights to GENE EXPRESS-TM- and the Gene Logic Software (the
"Research Database Extension Option") for an additional one year period
following the end of the Research Database Access Term (the "Extended Term")
by providing written notice of such election to Gene Logic at least 90 days
prior to the date upon which such rights would otherwise expire and by paying
an extension fee to Gene Logic equal to [***] at the time such notice is
provided.
5.2 Samples. In the event that JT provides Samples to Gene
Logic, JT grants to Gene Logic the right to use and analyze the Samples
provided by JT and the data and progeny derived therefrom on a nonexclusive,
perpetual, fully-paid, worldwide basis.
5.3 Gene Targets. Subject to the terms and conditions of
this Agreement, Gene Logic hereby grants and agrees to grant to JT the right
to use within the Field each Gene Target for which JT has paid the fee
described in Section 7.3 on an exclusive, worldwide basis to develop, make,
have made, use, import, offer for sale, and sell Products for any purpose.
5.4 Diligence.
(a) Gene Logic shall use commercially reasonable and
diligent efforts, consistent with the Research Program, to perform analysis
of the Samples utilizing the Gene Logic Technology. For purposes of this
Agreement, "commercially reasonable and diligent efforts" will mean, unless
the parties agree otherwise, those efforts consistent with the exercise of
prudent scientific and business judgment, as applied to other research
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CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
efforts and to products of similar scientific and commercial potential within
such party's relevant research programs and product lines.
(b) JT shall use commercially reasonable and diligent
efforts to conduct active, ongoing research activities utilizing the Research
Databases.
(c) Without limiting the foregoing, JT (or its
Affiliates or sublicensees) shall use commercially reasonable and diligent
efforts to evaluate Gene Targets, to pursue lead compounds identified through
the use of the Gene Logic Assays and to develop and commercialize Products.
JT (or its Affiliates or sublicensees) shall be deemed to have used
commercially reasonable and diligent efforts with regard to a particular Gene
Target if it is actively engaged in at least one of the following activities:
(i) [***]; (ii) [***]; or (iii) [***]. JT (or its Affiliates or
sublicensees) shall be deemed to have used commercially reasonable and
diligent efforts with regard to lead compound(s) identified through the use
of a Gene Logic Assay if it is [***]. Gene Logic may provide [***] written
notice to JT if in its opinion, JT (or its Affiliates or sublicensees) is not
using commercially reasonable and diligent efforts with regard to a Gene
Target, lead compound or Product, whereupon the parties agree to hold a
meeting, attended by individuals with decision-making authority, to attempt
in good faith to negotiate a resolution of the dispute. If, within [***]
after such meeting, the parties have not succeeded in negotiating a
resolution of the dispute, then such dispute shall be submitted for
resolution through arbitration, according to the terms set forth in Section
12.
(d) In addition, in the event that JT elects not to
pursue exploitation of any Gene Target or development or commercialization of
any Product subject to this Agreement for any reason, JT shall promptly
notify Gene Logic thereof, and, upon such notice, (i) the exclusive right
granted pursuant to Section 5.3 with respect to such Gene Target on a
worldwide basis will be terminated, and (ii) JT shall automatically grant to
Gene Logic an exclusive, perpetual, fully-paid worldwide license under its
applicable Patent Rights, Inventions and other intellectual property to any
and all rights it may have in such Gene Target or such Product in the Field.
In the event JT automatically grants the license described in this Section
5.4(d), the parties shall negotiate a commercially reasonable royalty rate to
be paid by Gene Logic based upon the value of JT's Patent Rights covering
such Gene Target or such Product.
5.5 Diligence Reports. JT hereby agrees to keep Gene Logic
informed on a reasonable basis of its efforts to select Gene Targets and to
develop Products, and to provide written reports to Gene Logic on a
semi-annual basis (the "Diligence Reports").
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The Diligence Reports shall provide, as applicable, the following
information: (i) a listing of the Gene Products which JT has identified as
prospects for Further Development, (ii) JT's progress toward selection of
particular Gene Products for Further Development, (iii) JT's plans for
Further Development with regard to selected Gene Targets, (iv) JT's progress
in screening, pre-clinical or clinical development for Gene Targets, and (v)
JT's progress in lead optimization and pre-clinical or clinical development
of lead compounds identified through the use of Gene Logic Assays, if
applicable.
6. Collaboration Expansion Options.
6.1 Expansion Options. For the first two years following the
Agreement Date, JT shall have options to expand the Collaboration to include
the areas of Indication #2 (as such term is defined on Exhibit A attached
hereto) (the "Indication #2 Option") and Indication #3 (as such term is
defined on Exhibit A attached hereto) (the "Indication #3 Option") upon the
terms and conditions contained in this Agreement. If the Research Program
with respect to Indication #1 is terminated by JT pursuant to Section 2.6
prior to the exercise or expiration of either Indication #2 Option or
Indication #3 Option, JT shall inform Gene Logic in writing prior to the
expiration of the applicable six-month notice period of whether or not JT
will be exercising either or both of such options prior to its expiration and
if so, when it will exercise such option. In the event that JT does not
exercise the Indication #2 Option or the Indication #3 Option prior to the
expiration of the two-year period following the Agreement Date or their
earlier termination as provided in this Section 6.1, then Gene Logic shall
thereafter be free to grant rights to a Third Party in the areas of
Indication #2 or Indication #3, as applicable.
6.2 Equity Funding Commitment. In consideration for the
Indication #2 Option and the Indication #3 Option, Gene Logic shall have the
right to require JT to purchase $3,000,000 of Gene Logic's Common Stock in a
private placement to close concurrently with Gene Logic's initial public
offering of Common Stock at the price per share in the initial public
offering provided that such initial public offering shall have closed within
two years from the Agreement Date.
7. Payments and Royalties.
With respect to the Research Program for Indication #1 and, if
the applicable option under Section 6 is exercised by JT, the Research
Programs for Indication #2 and Indication #3, the following provisions shall
apply:
7.1 Research Reimbursement Payments to Gene Logic. The
following payments will be made to Gene Logic to defray research costs
associated with creating the Research Databases and analyzing Samples
pursuant to the Research Plan:
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(a) JT shall pay Gene Logic [***] within 15 days of
the Effective Date for the first year of the Program Term.
(b) JT shall pay Gene Logic [***] in advance for
each subsequent year of the Program Term payable on each anniversary of the
Effective Date. Gene Logic shall issue signed invoices in advance for each
payment due hereunder.
7.2 Research Support.
(a) During the Program Term, JT shall provide Gene Logic
with financial support for the Research Program for Gene Logic's Scientific
FTEs (as documented to the reasonable satisfaction of JT) at a rate of
[***] per Scientific FTE. The FTE payment rate payable pursuant to this
Section 7.2(a) shall be adjusted annually in proportion to the percentage
increase or decrease in the U.S. Consumer Price Index, unless otherwise
agreed upon by the parties in writing. The number of Scientific FTEs for
each year of the Program Term will be set forth in the applicable Research
Plan; provided that such number shall be not less than [***] Scientific FTEs
in any one year period.
(b) Research funding payments shall be made in advance
in four quarterly payments during each year of the Program Term (i.e., on or
before April 1, July 1, October 1 and January 1 of each year for use in the
next quarter). An initial payment will be made within 15 days of the
Effective Date, pro-rated to cover the remainder of such calendar quarter.
The last payment for the Research Program shall be pro-rated to the end of
the Program Term.
(c) If the Research Program is terminated by JT pursuant
to Section 2.6, JT shall continue to provide Gene Logic with financial
support for the terminated Research Program for the number of Scientific FTEs
provided in the then applicable Research Plan as otherwise provided in this
Section 7.2 until the effective date of the termination following the notice
period as provided in Section 2.6; provided, however, that unless JT has
exercised its option to commence another Research Program in addition to the
Research Program to be terminated, such financial support shall be at [***] of
the rate otherwise provided in this Section 7.2 and such support shall be
discontinued at the earlier of (i) the Effective Date of another Research
Program in addition to the terminated Research Program or (ii) the effective
date of the termination of the Research Program following the notice period
as provided in Section 2.6.
(d) Gene Logic shall issue signed invoices in advance
for each payment due hereunder.
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7.3 Gene Target Fees. JT shall pay [***] to Gene Logic
for each Gene Target which JT selects for Further Development pursuant to
Section 2.7. The [***] payment shall be made to Gene Logic prior to
commencement of Further Development using such Gene Target. Gene Logic shall
issue signed invoices in advance for each payment due hereunder.
7.4 Royalties Payable by JT.
(a) JT will pay Gene Logic royalties at the following
rates on Net Sales of each Product:
(i) JT shall pay Gene Logic a [***] royalty on
Net Sales of each Therapeutic Product (other than any Therapeutic Product
which is discovered or whose utility is discovered through the use of a Gene
Logic Assay). JT shall pay Gene Logic a [***] royalty on Net Sales of each
Therapeutic Product which is discovered or whose utility is discovered
through the use of a Gene Logic Assay.
(ii) JT shall pay Gene Logic a [***] royalty on
Net Sales of each Protein Product.
(b) Royalties shall be payable on all Net Sales of any
Product for the period of time commencing on the date such Product is first
sold commercially in any country and ending, on a country-by-country basis,
upon the later of (i) ten years from the date of such first commercial sale
of such Product in such country, or (ii) the expiration of the last to expire
of any Patent Rights covering such Product in such country. JT shall remain
responsible for all royalty payments payable to Gene Logic pursuant to this
Section 7 whether JT or its Affiliates or sublicensees generate Net Sales.
7.5 Currency of Payment. All payments to be made under this
Agreement shall be made in United States dollars in the United States to a
bank account designated by Gene Logic. All amounts payable by JT to Gene
Logic pursuant to this Section 7 shall be non-refundable and non-creditable
against any other payments due under this Agreement. Royalties shall be
determined in the currency of the country in which they are earned and then
converted to its equivalent in United States currency. The buying rates
involved for the currency of the United States into which the currencies
involved are being exchanged shall be the one quoted by The Wall Street
Journal (or, if not available, by Citibank (or its successor in interest) in
New York, New York) at the close of business on the last business day of the
quarterly period in which the royalties were earned to determine any such
conversion.
7.6 Payment and Reporting. The royalties due under Section
7.4 shall be paid quarterly, within two months after the close of each
calendar quarter, or earlier if practicable (i.e., on or before the last day
of each of the months of May, August,
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CONFIDENTIAL TREATMENT REQUESTED
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November and February), immediately following each quarterly period in which
such royalties are earned. All amounts payable to Gene Logic pursuant to
this Agreement shall be made by wire transfer pursuant to the instructions
set forth on Schedule 7.6. With each quarterly payment, the payor shall
furnish the payee a royalty statement (the "Royalty Statement") setting forth
on a country-by-country basis the total number of units of each
royalty-bearing Product sold hereunder for the quarterly period for which the
royalties are due, gross invoices for such Products, the deductions applied
in arriving at Net Sales, and supporting data sufficient to confirm the
accuracy of such calculations.
7.7 Records and Audits. JT shall keep complete and accurate
records pertaining to the development and sale or other disposition of
Products in sufficient detail to permit Gene Logic to confirm the accuracy of
all payments due hereunder for a period consistent with JT's policies in
effect from time to time but in any event not less than five years from the
date of sale of such Product. Gene Logic shall have the right to cause an
independent, certified public accountant reasonably acceptable to JT to audit
such records to confirm Net Sales and royalty and other payments for the
preceding year. Such audits may be exercised during normal business hours
once a year upon at least 30 working days' prior written notice to JT. Gene
Logic shall bear the full cost of such audit unless such audit discloses a
variance of more than 5% from the amount of the Net Sales or royalties or
other payments due under this Agreement. In such case, JT shall bear the full
cost of such audit and Gene Logic shall have the right to audit all prior
years not previously audited to the extent that JT keeps such records
pursuant to this Section 7.7.
8. Milestones for Therapeutic Products and Protein Products.
8.1 Milestones.
(a) JT shall pay Gene Logic the following amounts with
respect to each Therapeutic Product (other than any Therapeutic Product which
is discovered or whose utility is discovered through the use of a Gene Logic
Assay, which shall be subject to Section 8.1(b)) and each Protein Product
with respect to which each stated milestone is achieved, within 30 days
following the achievement of such milestone:
(i) [***] (subject to the limitations [***]
set forth below)
(ii) [***] [***]
(iii) [***] [***]
(iv) [***] [***]
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(v) [***] [***]
With regard to amounts payable pursuant to Section 8.1(a)(i), JT will not be
obligated to pay Gene Logic additional [***] milestone payments for
subsequent [***] (A) for molecules directed at the same Gene Target or (B) in
additional countries or jurisdictions following the [***] of the [***] with
respect to such Product.
(b) JT shall pay Gene Logic the following amounts with
respect to each Therapeutic Product which is discovered or whose utility is
discovered through the use of a Gene Logic Assay with respect to which each
stated milestone is achieved, within 30 days following the achievement of
such milestone:
(i) [***] [***]
(ii) [***] [***]
(iii) [***] [***]
(iv) [***] [***]
(v) [***] [***]
(vi) [***] [***]
With regard to amounts payable pursuant to Section 8.1(b)(ii), JT will not be
obligated to pay Gene Logic additional [***] milestone payments for
subsequent [***] (A) for molecules identified using the same Gene Logic Assay
or (B) in additional countries or jurisdictions following the [***] of the
[***] with respect to such Therapeutic Product.
8.2 Milestone Payments. Milestone payments made under this
Section 8 shall be non-refundable and non-creditable against any other
payments due under this Agreement. Milestone payments made under this
Section 8 shall fund in substantial part the research costs associated with
this Agreement.
8.3 Taxes. All income taxes and taxes in lieu of income
taxes levied on account of the payments made by JT to Gene Logic under this
Agreement (including without limitation milestone and royalty payments) shall
be paid by Gene Logic for its own account. If provision is made in law or
regulation for withholding, such tax shall be deducted from the payments made
by JT to the proper taxing authority and a receipt of payment of the tax
secured and promptly delivered to Gene Logic. Each party agrees to
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assist the other party in claiming exemption from or credit for such
deductions or withholdings under any double taxation or similar agreement or
treaty from time to time in force.
9. Confidentiality and Security.
9.1 Security of Research Databases and Gene Logic
Software. The parties agree that the following additional terms and
conditions apply to the information and data contained in or derived from the
Research Databases that are disclosed and Gene Logic Software that is
provided under the provisions of this Agreement:
(a) JT may use the Research Databases and Gene Logic
Software only for its own internal use in secure work facilities by
authorized personnel and shall not make any copies of any Research Database
or the Gene Logic Software.
(b) JT will be provided with access to the Research
Databases and the Gene Logic Software only through a secure, encrypted link
to Gene Logic's computer system.
(c) JT will promptly notify Gene Logic of any (i) loss,
theft or unauthorized disclosure of information or data derived from a
Research Database or the Gene Logic Software or (ii) unauthorized access to a
Research Database or the Gene Logic Software.
(d) Upon termination of the Research Program as provided
in Section 2.6, JT shall immediately discontinue use of the Research
Databases and the Gene Logic Software and of any information or data derived
from a Research Database (except for Gene Targets that are the subject of
exclusive rights as set forth in Section 5.3), and JT shall (i) cooperate
with Gene Logic to terminate the encrypted link to Gene Logic's computer
system and (ii) promptly deliver to Gene Logic copies of any information and
data derived from a Research Database or the Gene Logic Software.
9.2 Confidentiality.
(a) Except as specifically permitted hereunder, each
party hereby agrees to hold in confidence and not use on behalf of itself or
others all technology, data, samples, technical information,
commercialization, clinical and research strategies, know-how and trade
secrets provided by the other party (the "Disclosing Party") during the
Agreement Term and all data, results and information developed pursuant to
the Collaboration and solely owned by the Disclosing Party or jointly owned
by the parties (collectively the "Confidential Information"), except that the
term "Confidential Information" shall not include:
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(i) information that is or becomes part of the
public domain through no fault of the non-Disclosing Party or its Affiliates;
(ii) information that is obtained after the date
hereof by the non-Disclosing Party or one of its Affiliates from any Third
Party which is lawfully in possession of such Confidential Information and
not in violation of any contractual or legal obligation to the Disclosing
Party with respect to such Confidential Information;
(iii) information that is known to the
non-Disclosing Party or one or more of its Affiliates prior to disclosure by
the Disclosing Party, as evidenced by the non-Disclosing Party's written
records; and
(iv) information that is required to be disclosed to
any governmental authorities or pursuant to any regulatory filings, but only
to the limited extent of such legally required disclosure.
(b) The obligations of this Section 9.2 shall survive
the expiration or termination of this Agreement.
9.3 Permitted Disclosures. Confidential Information may be
disclosed to employees, agents, consultants or sublicensees of the
non-Disclosing Party or its Affiliates, but only to the extent required to
accomplish the purposes of this Agreement and only if the non-Disclosing
Party obtains prior agreement from its employees, agents, consultants and
sublicensees to whom disclosure is to be made to hold in confidence and not
make use of such information for any purpose other than those permitted by
this Agreement. Each party will use at least the same standard of care as it
uses to protect proprietary or confidential information of its own to ensure
that such employees, agents, consultants or sublicensees do not disclose or
make any unauthorized use of the Confidential Information. Notwithstanding
any other provision of this Agreement, each party may disclose the terms of
this Agreement to lenders, investment bankers and other financial
institutions of its choice solely for purposes of financing the business
operations of such party either (i) upon the written consent of the other
party or (ii) if the disclosing party obtains a signed confidentiality
agreement with such financial institution with respect to such information,
upon terms substantially similar to those contained in this Section 9.
9.4 Publication. The parties shall cooperate in appropriate
publication of the results of research and development work performed
pursuant to the Research Programs, but subject to the predominating interest
to obtain patent protection for any patentable subject matter. To this end,
prior to any public disclosure of such results, the party proposing
disclosure shall send the other party a copy of the information to be
disclosed, and shall allow the other party 30 days from the date of receipt
in which to determine
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whether the information to be disclosed contains subject matter for which
patent protection should be sought prior to disclosure, or otherwise contains
Confidential Information of the reviewing party. The party proposing
disclosure shall be free to proceed with the disclosure unless prior to the
expiration of such 30-day period the non-disclosing party notifies the other
party that the disclosure contains subject matter for which patent protection
should be sought or Confidential Information of the non-disclosing party, and
the party proposing publication shall then delay public disclosure of the
information for an additional period to be mutually agreed upon to permit the
preparation and filing of a patent application on the subject matter to be
disclosed or for the parties to determine a mutually acceptable modification
to such publication to protect the Confidential Information of the
non-disclosing party adequately. The party proposing disclosure shall
thereafter be free to publish or disclose the information. The determination
of authorship for any paper shall be in accordance with accepted scientific
practice.
10. Representations And Warranties.
10.1 Legal Authority. Each party represents and warrants to
the other that it has the legal power, authority and right to enter into this
Agreement and to perform its respective obligations set forth herein.
10.2 Valid Rights and Licenses. Each party represents and
warrants that it has authority to grant the rights and licenses set forth in
this Agreement. Gene Logic further represents and warrants to JT that as of
the Agreement Date Gene Logic has not received notice of and there are no
claims pending or, to the best of its knowledge, threatened that Gene Logic's
current Patent Rights covering the Flow-Thru Gene Chip Technology and the
Gene Logic Technology infringe, violate or conflict with the patent rights of
any Third Party or that such Patent Rights are invalid or unenforceable.
10.3 No Conflicts. Each party represents and warrants that as
of the Agreement Date it is not a party to any agreement or arrangement with
any Third Party or under any obligation or restriction, including pursuant to
its Certificate of Incorporation or By-Laws or other charter documents, which
in any way limits or conflicts with its ability to fulfill any of its
obligations under this Agreement.
10.4 Disclaimer. Except as expressly set forth in this
Agreement, EACH PARTY MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF
ANY KIND, EITHER EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT
THE USE OF THE INFORMATION, MATERIALS, SOFTWARE AND OTHER TECHNOLOGY PROVIDED
HEREUNDER WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK,
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OR OTHER RIGHTS OF ANY THIRD PARTY. NEITHER PARTY MAKES ANY WARRANTY OF ANY
KIND AS TO THE PATENTABILITY OF ANY DISCOVERY MADE OR TECHNOLOGY DEVELOPED
UNDER THIS AGREEMENT. EACH PARTY ACKNOWLEDGES THAT THIS AGREEMENT PROVIDES
FOR AN INNOVATIVE PROGRAM UTILIZING NEW TECHNOLOGIES AND THAT NO WARRANTY IS
MADE AS TO THE UTILITY OF ANY INFORMATION, MATERIALS, SOFTWARE OR OTHER
TECHNOLOGY PROVIDED HEREUNDER.
11. Term; termination.
11.1 Term. The term of this Agreement shall commence upon the
Agreement Date and shall expire upon the expiration of all royalty
obligations set forth in Section 7.
11.2 Termination for Breach.
(a) Breach by Gene Logic. If Gene Logic breaches a
material term of this Agreement at any time, and has not cured such breach
within 60 days after written notice thereof from JT, then JT shall have the
right to terminate this Agreement effective upon written notice thereof,
whereupon all rights and obligations of the parties under this Agreement
shall terminate, including JT's commitment to purchase shares of Gene Logic
Common Stock pursuant to Section 6.2 (if such commitment has not already been
satisfied at the time of termination), except as set forth in Section 13.11
and subject to the following: (i) the rights granted to JT under Section 5
shall remain in full force and effect for so long as JT is not in breach of
its obligations to Gene Logic under this Agreement, and (ii) Gene Logic shall
return to JT (A) all Confidential Information of JT and (B) all unprocessed
Samples supplied by JT, including the physical progeny of Samples supplied by
JT, and a copy of data derived from the Samples supplied by JT to the extent
practicable; provided that the rights granted to Gene Logic under Section 5.2
shall remain in full force and effect with respect to data derived from the
Samples supplied by JT which are not practicably separable.
(b) Breach by JT. If JT breaches a material term of
this Agreement at any time, and has not cured such breach within 60 days (or
within 15 days in the event of a material breach by JT of its obligations to
make any payments due) after written notice thereof from Gene Logic, then
Gene Logic shall have the right to terminate this Agreement effective upon
written notice thereof, whereupon all rights and obligations of the parties
under this Agreement shall terminate except as set forth in Section 13.11 and
subject to the following: (i) the rights granted to Gene Logic under Section
5.2 shall remain in full force and effect, (ii) the rights granted to JT
pursuant to Section 5.1 (including all options to extend such rights) and
Section 5.3 shall terminate, (iii) the Indication #3 Option and the
Indication #2 Option granted pursuant to Section 6 shall terminate, and (iv)
JT shall return to Gene Logic all Confidential Information of Gene
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Logic. In the event of an uncured material breach by JT of its obligations
to pay any royalties due and owing with respect to a Product pursuant to
Section 7, if Gene Logic terminates the rights it has granted to JT pursuant
to Section 5 in respect of such Product, at Gene Logic's request, JT shall
grant to Gene Logic an exclusive (even as to JT) worldwide license (with the
right to sublicense) to such Product, to the extent necessary to make, use or
sell such Product subject to payment of a royalty, which shall be mutually
agreed upon by the parties but shall in no event exceed [***], to JT on Net
Sales of such Product, and shall further assign to Gene Logic all Regulatory
Approvals (to the extent permitted by law) in such countries; provided that,
if a dispute arises between the parties relating to the grounds for
termination and/or the applicable royalty rate under this Section 11.2(b) and
such dispute is submitted for resolution through arbitration according to the
terms set forth in Section 12, this sentence shall not apply.
(c) Dispute Relating to Grounds for Termination. If a
dispute arises between the parties relating to the grounds for the
termination under this Section 11.2, the parties agree to hold a meeting,
attended by individuals with decision-making authority, to attempt in good
faith to negotiate a resolution of the dispute. If, within 60 days after
such meeting the parties have not succeeded in negotiating a resolution of
the dispute, then such dispute shall be submitted for resolution through
arbitration, according to the terms set forth in Section 12.
11.3 Effect of Bankruptcy. If, during the Research Term,
either party files a voluntary petition in bankruptcy, is adjudicated a
bankrupt, makes a general assignment for the benefit of creditors, admits in
writing that it is insolvent or fails to discharge within 15 days an
involuntary petition in bankruptcy filed against it, then the Research Term
and the entirety of this Agreement may be immediately terminated by the other
party. In addition, in the event that Gene Logic files a voluntary petition
in bankruptcy, is adjudicated a bankrupt, makes a general assignment for the
benefit of creditors, admits in writing that it is insolvent or fails to
discharge within 15 days an involuntary petition in bankruptcy filed against
it, then the parties hereby acknowledge and agree that JT will have right of
access to the Research Databases, GENE EXPRESS-TM- and the Gene Logic
Software consistent with the terms of this Agreement for purposes of 11
U.S.C. Section 365(n).
11.4 Remedies. In the event of any breach of any provision of
this Agreement, in addition to the termination rights set forth herein, each
party shall have all other rights and remedies at law or equity to enforce
this Agreement.
12. Arbitration.
12.1 Arbitration. Any controversy arising under or related to
this Agreement, and any disputed claim by either party against the other
under this Agreement, excluding
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any dispute relating to patent validity or infringement arising under this
Agreement, shall be settled by arbitration in accordance with the then
existing arbitration rules of the International Chamber of Commerce.
12.2 Procedure. Upon request by either party, arbitration
will be by a Third Party arbitrator mutually agreed upon in writing by Gene
Logic and JT within 30 days of such arbitration request. In any such
arbitration, Gene Logic and JT shall select an arbitrator with relevant
experience in the biopharmaceutical industry. The parties shall be entitled
to all discovery in like manner as determined by the arbitrator. Any
arbitration shall be held in Geneva, Switzerland unless the parties hereto
mutually agree in writing to another place. Judgment upon the award rendered
by the arbitrator shall be final and nonappealable and may be entered in any
court having jurisdiction thereof.
13. General Provisions.
13.1 Mutual Indemnification. Each party agrees to defend,
indemnify and hold harmless the other party and its Affiliates, employees,
agents, officers, directors and permitted from and against any judgments,
settlements, damages, awards, costs (including attorneys' fees and costs) and
other expenses arising out of any claims, actions or other proceedings by a
Third Party (collectively a "Claim") arising out of or resulting from the
development, manufacture, use, promotion, marketing, handling, storage or
sale of any Product, except to the extent that such Claim arises out of or
results from the negligence or misconduct of the party claiming a right of
indemnification under this Section 13.1. In the event either party seeks
indemnification under this Section 13.1, it shall inform the other party of a
Claim as soon as reasonably practicable after it receives notice of the
Claim, shall permit the other party to assume direction and control of the
defense of the Claim (including the right to settle the Claim solely for
monetary consideration), and shall cooperate as requested (at the expense of
the other party) in the defense of the Claim. The obligations set forth in
this Section shall survive the expiration or termination of this Agreement.
13.2 Assignment. This Agreement shall not be assignable by
either party without the prior written consent of the other party, such
consent not to be unreasonably withheld or delayed, except a party may make
such an assignment without the other party's consent to Affiliates or to a
successor to substantially all of the pharmaceutical business of such party,
whether in merger, sale of stock, sale of assets or other transaction;
provided, however, that in the event of such transaction, no intellectual
property rights of any Affiliate or Third Party that is an acquiring party
shall be included in the technology licensed hereunder. This Agreement shall
be binding upon and inure to the benefit of the parties' successors, legal
representatives and assigns.
27.
<PAGE>
13.3 Non-Waiver. The waiver by either of the parties of any
breach of any provision hereof by the other party shall not be construed to
be a waiver of any succeeding breach of such provision or a waiver of the
provision itself.
13.4 Governing Law. This Agreement shall be construed and
interpreted in accordance with the laws of the State of Delaware other than
those provisions governing conflicts of law.
13.5 Partial Invalidity. If and to the extent that any court
or tribunal of competent jurisdiction holds any of the terms or provisions of
this Agreement, or the application thereof to any circumstances, to be
invalid or unenforceable in a final nonappealable order, the parties shall
use their best efforts to reform the portions of this Agreement declared
invalid to realize the intent of the parties as fully as practicable, and the
remainder of this Agreement and the application of such invalid term or
provision to circumstances other than those as to which it is held invalid or
unenforceable shall not be affected thereby, and each of the remaining terms
and provisions of this Agreement shall remain valid and enforceable to the
fullest extent of the law.
13.6 Notice. Any notice to be given to a party under or in
connection with this Agreement shall be in writing and shall be (i)
personally delivered, (ii) delivered by a nationally recognized overnight
courier, (iii) delivered by certified mail, postage prepaid, return receipt
requested or (iv) delivered via facsimile, with receipt confirmed, to the
party at the address set forth below for such party:
To JT: To Gene Logic:
JT Building 2-1, Toranomon 2-chome 10150 Old Columbia Road
Minato-ku, Tokyo 105 Japan Columbia, Maryland 21046
Attn: Vice President Pharmaceutical Attn: President
Business Development
Phone: +81-3-3582-3111 Phone: +1-410-309-3100
Fax: +81-3-5572-1449 Fax: +1-410-309-3111
with a copy to: with a copy to:
Isomi Suzuki, Esq. Frederick T. Muto, Esq.
Koga & Partners Cooley Godward LLP
22-1-401, Toranomon 3-chome 4365 Executive Drive, Suite 1100
Minato-ku, Tokyo 105 Japan San Diego, CA 92121
Phone: +81-3-3578-8681 Phone: +1-619-550-6000
Fax: +81-3-3578-8682 Fax: +1-619-453-3555
28.
<PAGE>
or to such other address as to which the party has given written notice
thereof. Such notices shall be deemed given upon receipt.
13.7 Headings. The headings appearing herein have been
inserted solely for the convenience of the parties hereto and shall not
affect the construction, meaning or interpretation of this Agreement or any
of its terms and conditions.
13.8 Retained Rights. Gene Logic retains all rights to
Biological Therapeutic Products and Diagnostic Products pursuant to Section
4.4(b) or otherwise. Upon the termination of the rights to use a Research
Database, GENE EXPRESS-TM- and Gene Logic Software pursuant to Section 5.1
(including any extension thereof), all rights to all Gene Products and
related information, excluding any Gene Target being pursued in Further
Development by JT, will revert to Gene Logic. JT retains all rights to
Therapeutic Products and Protein Products pursuant to Section 4.4(a) or
otherwise.
13.9 No Implied Licenses or Warranties. No right or license
under any patent application, issued patent, know-how or other proprietary
information is granted or shall be granted by implication. All such rights
or licenses are or shall be granted only as expressly provided in the terms
of this Agreement. Neither party warrants that (i) the Research Program shall
achieve any of the research objectives contemplated by them or (ii) any
clinical or other studies will be successful.
13.10 Force Majeure. No failure or omission by the
parties hereto in the performance of any obligation of this Agreement shall
be deemed a breach of this Agreement nor shall it create any liability if the
same shall arise from any cause or causes beyond the reasonable control of
the affected party, including, but not limited to, the following, which for
purposes of this Agreement shall be regarded as beyond the control of the
party in question: acts of nature; acts or omissions of any government; any
rules, regulations, or orders issued by any governmental authority or by any
officer, department, agency or instrumentality thereof; fire; storm; flood;
earthquake; accident; war; rebellion; insurrection; riot; invasion; strikes;
and labor lockouts; provided that the party so affected shall use its best
efforts to avoid or remove such causes of nonperformance and shall continue
performance hereunder with the utmost dispatch whenever such causes are
removed.
13.11 Survival. Sections 4.1, 4.2, 4.3, 9.2, 10, 11.2
(including the provisions therein that are contemplated to continue following
termination) 12, 13.1, 13.4 and 13.11 shall survive the termination or
expiration of this Agreement.
13.12 Entire Agreement. This Agreement, including the
exhibits and schedules hereto, together with the Share Purchase Agreement of
even date herewith and the exhibits thereto, constitutes the entire
understanding between the parties with respect to
29.
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the subject matter contained herein and supersedes any and all prior
agreements, understandings and arrangements whether oral or written between
the parties relating to the subject matter hereof, except for the
Confidentiality Agreement dated April 23, 1997.
13.13 Amendments. No amendment, change, modification or
alteration of the terms and conditions of this Agreement shall be binding
upon either party unless in writing and signed by the party to be charged.
13.14 Independent Contractors. It is understood that both
parties hereto are independent contractors and are engaged in the operation
of their own respective businesses, and neither party hereto is to be
considered the agent or partner of the other party for any purpose
whatsoever. Neither party has any authority to enter into any contracts or
assume any obligations for the other party or make any warranties or
representations on behalf of the other party.
13.15 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original and all of
which together shall constitute one and the same instrument.
30.
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In Witness Whereof, the parties hereto have caused this
Agreement to be executed by their duly authorized officers as of the date
first above written.
Gene Logic Inc. Japan Tobacco Inc.
By: /s/ Michael J. Brennan By: /s/ Masakazu Kakei
_______________________________ __________________________________
Michael J. Brennan, M.D., Ph.D. Masakazu Kakei
President and Chief Executive Officer Executive Director, Pharmaceutical
Business
Signature Page to Collaboration Agreement
31.
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Exhibit A
Definitions of Indications
The following capitalized terms shall have the meanings indicated for
purposes of this Agreement:
"Indication #1" shall mean [***].
"Indication #2" shall mean [***].
"Indication #3" shall mean [***].
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Schedule 1.16
Flow-Thru Gene Chip Technology Patent Rights
[***]
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Schedule 1.18
Gene Logic Technology Patent Rights
READS-TM-
[***]
MuST-TM-
[***]
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Schedule 2.1
Indication #1 Research Plan Timeline
and
Staff Allocation Plan
[***]
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Schedule 3.1
RMC Representatives
JT:
Tatsuji Chuman, Ph.D. Director, Pharmaceutical Frontier Research
Laboratories
Atsushi Mizushima, Ph.D. Deputy General Manager, Biological Research
Laboratories
Yasuo Urata Research Coordinator
Takayuki Naito, Ph.D. Group Leader, Genomic, Pharmaceutical Frontier
Research Laboratories
or
Hitoshi Sasai, Ph.D. Group Leader, Model mouse, Pharmaceutical Frontier
Research Laboratories
Gene Logic:
Keith O. Elliston, Ph.D. Senior Vice President and Chief Scientific Officer
Eric M. Eastman, Ph.D. Vice President, Scientific Operations
Daniel R. Passeri Vice President, Business Development and
Intellectual Property
Greg Lennon Vice President, Genomic Research
<PAGE>
Schedule 4.8
JT Agreements
[***]
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Schedule 7.6
Wire Transfer Payment Instructions
[***] [***]
[***] [***]
[***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Exhibit 23.1
[ARTHUR ANDERSEN LLP LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
Registration Statement.
/s/ Arthur Andersen LLP
Baltimore, Maryland,
November 20, 1997
