<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 9, 2001
REGISTRATION NO. 333-50318
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DIADEXUS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8731 77-0464949
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
3303 OCTAVIUS DRIVE
SANTA CLARA, CALIFORNIA 95054
(408) 496-6600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
PATRICK PLEWMAN
CHIEF EXECUTIVE OFFICER,
PRESIDENT AND CHIEF
OPERATING OFFICER
DIADEXUS, INC.
3303 OCTAVIUS DRIVE
SANTA CLARA, CALIFORNIA 95054
(408) 496-6600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MICHAEL W. HALL, ESQ. JOSEPH E. MULLANEY III, ESQ.
ROBERT A. KOENIG, ESQ. MINTZ, LEVIN, COHN, FERRIS,
LATHAM & WATKINS GLOVSKY AND POPEO, P.C.
135 COMMONWEALTH DRIVE ONE FINANCIAL CENTER
MENLO PARK, CALIFORNIA 94025-1105 BOSTON, MASSACHUSETTS 02111
(650) 328-4600 (617) 542-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
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, as amended (the "Securities Act") 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, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE CHART
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE(2)
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.01 par value........................ $112,700,000 $29,575
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933.
(2)An amount equal to $26,400 was paid in connection with the initial filing of
this registration statement on November 20, 2000. An additional amount equal
to $3,175 is being paid herewith.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING OFFERS TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 9, 2001
PROSPECTUS
7,000,000 Shares
[DIADEXUS, INC. LOGO]
COMMON STOCK
--------------------------------------------------------------------------------
This is our initial public offering of shares of common stock. We are offering
7,000,000 shares. No public market currently exists for our common stock.
We have applied to have our common stock approved for quotation on the Nasdaq
National Market under the symbol "DDXS." We expect the public offering price to
be between $12.00 and $14.00 per share.
INVESTING IN THE SHARES INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 5.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to diaDexus...................... $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to an additional
1,050,000 shares of common stock solely to cover over-allotments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on
or about , 2001.
--------------------------------------------------------------------------------
LEHMAN BROTHERS
CIBC WORLD MARKETS
PRUDENTIAL VECTOR HEALTHCARE
A UNIT OF PRUDENTIAL SECURITIES
FIDELITY CAPITAL MARKETS
, 2001
<PAGE> 3
[Graphical information regarding diaDexus, Inc. consisting of:
- a flowchart showing three sources of molecular targets ("Bioinformatic
Discovery", "Genomic Discovery" and "SmithKline Beecham Diagnostic
Collaboration") with arrows to "Novel Molecular Targets" with an arrow to
"Product Development" with arrows to "Therapeutic Products" and
"Diagnostic Products";
- diaDexus logo;
- pictures of microarrays; and
- bioinformatics computer results.]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 5
Forward-Looking Statements............ 14
Use of Proceeds....................... 15
Dividend Policy....................... 15
Capitalization........................ 16
Dilution.............................. 17
Selected Financial Data............... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 26
Management............................ 43
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Certain Relationships and Related
Party Transactions.................. 54
Principal Stockholders................ 56
Description of Capital Stock.......... 58
Shares Eligible for Future Sale....... 61
United States Tax Consequences to Non-
U.S. Holders........................ 63
Underwriting.......................... 66
Legal Matters......................... 70
Experts............................... 70
Where You Can Find More Information... 70
Index to Financial Statements......... F-1
</TABLE>
------------------------
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information that is different
from that contained in this prospectus. This prospectus may only be used where
it is legal to sell these securities. The information in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or any sale of common stock.
Until , 2001 (25 days after commencement of this offering), all
dealers selling shares of our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This 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.
i
<PAGE> 5
PROSPECTUS SUMMARY
The following summary contains basic information about our business and
this offering. It may not contain all of the information that you should
consider before investing in our common stock. You should read this prospectus,
including "Risk Factors" and our financial statements and the accompanying
notes, before making an investment decision. Except as otherwise indicated, all
information in this prospectus assumes the conversion of all outstanding shares
of preferred stock into shares of common stock upon the closing of this
offering, adoption of our restated certificate of incorporation and no exercise
of the underwriters' over-allotment option.
DIADEXUS, INC.
We are a post-genomics company focused on translating genomic sequence data
into novel diagnostic and therapeutic products. We believe our relationships
with our co-founders, SmithKline Beecham and Incyte Genomics, place our company
at the forefront of the commercial utilization of genomic information. Upon our
formation in 1997, our initial strategy was to discover disease-associated genes
and proteins in order to develop novel diagnostic products for the improved
detection, classification and prognosis of disease. We anticipate that these
diagnostic products will take the form of simple blood tests assessing the
presence of a novel gene or protein called a molecular target. We recently
expanded our strategy to include the discovery and development of therapeutic
products for the improved treatment of disease. Where possible, we will seek to
develop diagnostic and therapeutic products that are directed at the same
molecular target, enabling a diagnostic/therapeutic tandem approach to detect
and treat disease. Our initial focus has been on the discovery of novel
molecular targets related to cancer. We expect to extend our discovery platform
beyond cancer into other diseases. To date, we have identified thousands of
disease-associated molecular targets, evaluated over 300 potential molecular
targets using bioMVP, our proprietary target validation process, and advanced
over 40 product candidates into development, including five diagnostic product
candidates which are currently being evaluated in preclinical studies. We are
aggressively seeking patent protection for our discoveries.
We use three approaches to discover novel molecular targets:
- we perform large scale searches of Incyte's LifeSeq Gold, a leading human
genomic sequence database. Upon our formation, Incyte granted us a fully
paid subscription to LifeSeq Gold until September 2003;
- we integrate various cutting-edge gene and protein technologies to
supplement our database search efforts; and
- we receive, through our relationship with SmithKline Beecham, diagnostic
molecular targets that SmithKline Beecham identifies through September
2001 as having potential diagnostic utility, including diagnostic
molecular targets identified through its relationship with Human Genome
Sciences through June 2001.
MOLECULAR DIAGNOSTICS
We believe that recent advances in the study of genes and their protein
products have fundamentally altered the underlying economics of diagnostic
discovery which, when combined with intellectual property protection, have the
potential to convert the diagnostic industry from its current status as a
generally low margin sector to a higher margin sector based on patent-protected
tests that can command premium prices. We were one of the first companies to
recognize the potential of genomics for diagnostics, and we believe this
first-mover advantage is reflected in our product development pipeline.
Our goal is to discover and commercialize a portfolio of highly
differentiated, value-added diagnostic products. We believe these products will:
- expand the universe of diseases that can be readily detected in large
populations of apparently healthy people;
- enable the early detection of disease when treatment is often most
effective;
1
<PAGE> 6
- improve medical treatment by providing a more rigorous classification of
a patient's disease, enabling individual tailoring of therapy; and
- monitor the effectiveness of treatment for both approved drugs and drugs
under development.
Some diseases can be linked to a single gene and may be accurately detected
using single analyte tests that measure the relative level of an individual gene
or protein. Other diseases, however, are multi-factorial, involving the abnormal
expression of multiple genes. These multi-factorial diseases are currently
profiled using single analyte tests, but we believe that multi-analyte tests
that simultaneously measure the level of multiple genes or proteins will render
a more accurate diagnosis of disease. As a result, we plan to develop
multi-analyte tests that can identify novel patterns of multiple gene and
protein expression to detect and monitor disease.
Since its collaboration with Human Genome Sciences beginning in 1993,
SmithKline Beecham has been at the forefront of discovering novel molecular
targets. Recognizing that such targets could potentially have diagnostic as well
as therapeutic utility, SmithKline Beecham established a Molecular Diagnostics
Group to search the HGS database. Our company was formed from this Molecular
Diagnostics Group to develop, on an exclusive basis, diagnostic products based
on SmithKline Beecham's discoveries. Upon our formation, SmithKline Beecham
assigned us a portfolio of diagnostic product candidates discovered through its
research efforts.
We have continued the development of eight of these diagnostic product
candidates, including Lp-PLA(2), a novel risk factor for coronary heart disease,
and Cathepsin-K, a diagnostic marker for osteoporosis. We have completed initial
preclinical studies on Lp-PLA(2) and have commenced initial preclinical studies
on Cathepsin-K and three additional cancer diagnostic product candidates. The
New England Journal of Medicine recently published one of these studies,
identifying Lp-PLA(2) as a novel risk factor for coronary heart disease that we
believe is independent of, and potentially superior to, other known risk
factors. In addition, SmithKline Beecham has active therapeutic programs
targeting Lp-PLA(2) and Cathepsin-K.
We have an agreement with Quest Diagnostics, the world's largest clinical
testing laboratory, under which Quest has a right of first negotiation to
license our products for use in so-called "homebrew" tests. Homebrew tests are a
category of diagnostic tests that are conducted at a physician's request by a
clinical testing laboratory and do not currently require Food and Drug
Administration approval. We believe the ability to sell our products to these
laboratories prior to our seeking FDA approval will allow us to assess demand in
the market, increase awareness of our future products and generate early
revenues. We expect to generate revenues from the sale of Lp-PLA(2) reagents to
clinical testing laboratories for use in homebrew tests in 2001. Where
appropriate, we will seek FDA approval for our diagnostic products. We
ultimately expect to generate revenues from the sale of an FDA-approved
Lp-PLA(2) diagnostic kit. Eventually, we may license products to large
diagnostic companies to run on their testing platforms once significant demand
for these products is established.
EXTENSION INTO THERAPEUTICS
Recognizing that our discovery platform can yield molecular targets with
both diagnostic and therapeutic utility, we recently expanded our strategy to
include the discovery and development of therapeutic products. Our therapeutic
product discovery and development efforts will focus initially on a class of
drugs called therapeutic monoclonal antibodies that specifically target
disease-associated proteins found on the surface of cells. We plan to enter into
one or more collaborations to develop these drugs. We intend to advance our
therapeutic product candidates through early clinical development before
partnering with large biotechnology or pharmaceutical companies. We anticipate
generating revenues from these products initially through licensing fees and
milestone payments related to these products and, once FDA approval is obtained,
through royalties and direct sales. Additionally, we plan to discover and
develop therapeutic vaccines. A significant portion of the proceeds of this
offering will be used to establish discovery, validation and product development
efforts for therapeutic product candidates.
2
<PAGE> 7
We were founded in 1997 as a limited liability company and were
incorporated in Delaware in April 2000. Our principal executive offices are
located at 3303 Octavius Drive, Santa Clara, California 95054, and our telephone
number is (408) 496-6600. Our website address is www.diadexus.com. Information
contained in our website is not incorporated by reference into this prospectus,
and you should not consider information contained in our website as part of this
prospectus.
"diaDexus" is our registered trademark. This prospectus also contains
additional trade names, trademarks and service marks of other companies.
THE OFFERING
Common stock offered by diaDexus........ 7,000,000 shares
Common stock to be outstanding
after this offering................... 31,102,505 shares
Use of proceeds......................... To expand our discovery, validation
and product development
capabilities for diagnostic and
therapeutic product candidates and
for general corporate purposes. We
may also use a portion of the net
proceeds to acquire complementary
businesses, products and
technologies. See "Use of
Proceeds."
Proposed Nasdaq National Market
symbol.................................. DDXS
The number of shares of common stock to be outstanding after this offering
is based on 2,076,698 shares of common stock outstanding as of December 31, 2000
and includes the automatic conversion of all outstanding shares of preferred
stock into 22,025,807 shares of common stock upon the closing of this offering.
The number of shares of common stock to be outstanding after this offering
excludes, as of December 31, 2000:
- 1,495,007 shares of common stock issuable upon exercise of options
outstanding under our 2000 Equity Incentive Plan at a weighted average
exercise price of $1.81 per share;
- shares of common stock issuable upon exercise of options available
for issuance under our 2001 Equity Incentive Plan;
- 179,032 shares of common stock issuable upon exercise of warrants at a
weighted average exercise price of $5.92 per share; and
- shares of common stock available for purchase under our 2001
Employee Stock Purchase Plan.
3
<PAGE> 8
SUMMARY FINANCIAL DATA
The following table sets forth summary financial data for our company. You
should read this information in conjunction with the information under "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and the accompanying
notes included elsewhere in this prospectus. Pro forma amounts give effect to
the automatic conversion of all outstanding shares of preferred stock into
22,025,807 shares of common stock upon the closing of this offering. Pro forma
as adjusted amounts also give effect to the sale of 7,000,000 shares of common
stock in this offering at an assumed initial public offering price of $13.00 per
share, after deducting underwriting discounts and commissions and the estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
AUGUST 29,
1997 (INCEPTION) NINE MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------ -----------------------
1997 1998 1999 1999 2000
---------------- --------- ---------- ----------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
License revenue from related
party......................... $ -- $ -- $ 100 $ 100 $ --
----- ------- -------- ------- --------
Operating expenses:
Research and development...... 401 6,761 9,461 7,654 7,182
General and administrative.... 279 1,882 2,345 1,877 3,903
----- ------- -------- ------- --------
Loss from operations............ (680) (8,643) (11,706) (9,431) (11,085)
Interest and other income....... 132 715 540 564 3,359
Interest expense................ -- -- (120) (49) (73)
----- ------- -------- ------- --------
Net loss........................ $(548) $(7,928) $(11,286) $(8,916) $ (7,799)
===== ======= ======== ======= ========
Net loss per share, basic and
diluted....................... $ -- $ -- $ -- $ -- $(117.96)
===== ======= ======== ======= ========
Shares used to compute net loss
per share, basic and
diluted....................... -- -- -- -- 66
Pro forma net loss per share,
basic and diluted............. $ (1.28) $ (0.45)
======== ========
Shares used to compute pro forma
net loss per share,
basic and diluted............. 8,800 17,441
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments..................... $93,689 $93,689 $176,969
Working capital............................................ 70,079 70,079 153,359
Total assets............................................... 97,462 97,462 180,742
Total liabilities.......................................... 1,774 1,774 1,774
Total stockholders' equity................................. 95,688 95,688 178,968
</TABLE>
4
<PAGE> 9
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the following risks, as well as the other information
contained in this prospectus, before deciding to invest in shares of our common
stock. If any of the following risks actually occurs, our business, financial
condition and results of operations would suffer. In that case, the price of our
common stock could decline, and you could lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
WE ARE AN EARLY-STAGE COMPANY AND HAVE NOT DEVELOPED ANY PRODUCTS FOR COMMERCIAL
SALE. OUR PRODUCT CANDIDATES MAY NEVER BE FULLY DEVELOPED IN A MANNER SUITABLE
FOR COMMERCIAL SUCCESS.
We are an early-stage company and have not developed any products for
commercial sale or proven our ability to do so. We must conduct a substantial
amount of additional research and development before regulatory authorities will
approve any of our existing diagnostic product candidates or before these
diagnostic products may be sold in the homebrew market. Our most advanced
diagnostic product candidate, Lp-PLA(2), must undergo several additional studies
to confirm its clinical utility, and we do not expect regulatory approval for a
diagnostic kit utilizing Lp-PLA(2) until at least 2004. Our research may
conclude that Lp-PLA(2) or our other diagnostic product candidates are not safe
and effective, in which case regulatory authorities will not approve them. One
of our first product candidates, which we believed was a novel target for
prostate cancer, was found to be ineffective after we had incurred significant
research and development expense. Problems inherent in the development of new
products and the competitive environment in which we operate may limit our
ability to develop commercially successful products. Even if we develop products
for commercial use and obtain all necessary regulatory approvals, our future
products may not be accepted by the research, diagnostic, medical and
pharmaceutical marketplaces unless we are able to convince prospective customers
that our products are more reliable and cost-effective than other means of
detection and treatment of disease.
Our company was founded in 1997, and we have had no material revenues to
date. Our development of future products will be subject to the risks of failure
inherent in the development of new products based on new technologies. These
risks include, but are not limited to:
- unplanned delays or expenditures in product development;
- our failure to achieve validation of our product candidates in clinical
trials;
- our failure to achieve acceptance of our diagnostic tests by clinical
testing laboratories;
- our failure to receive regulatory approvals in a timely manner or at all;
- the emergence of superior products;
- our inability to have our products manufactured on a commercial scale;
- our reliance on collaborative partners to successfully complete
development of our product candidates; and
- the failure of any future products to achieve broad market acceptance.
If we are unsuccessful in addressing these risks and uncertainties, we may never
become profitable and our financial condition would suffer.
WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOWS AND ANTICIPATE CONTINUED
LOSSES FOR THE FORSEEABLE FUTURE.
We have incurred losses since our inception, including net losses of $11.3
million for the year ended December 31, 1999 and $7.8 million for the nine
months ended September 30, 2000. As of September 30, 2000, we had an accumulated
deficit of $5.2 million since our incorporation in April 2000. We must spend
5
<PAGE> 10
significant amounts to fund research and development and to expand our
discovery, validation and product development capabilities for diagnostic and
therapeutic product candidates. As a result, we expect to incur significant
operating losses and negative cash flows for the foreseeable future. We do not
know whether we will ever achieve profitability on a quarterly or annual basis.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND ANY FAILURE TO
MEET FINANCIAL EXPECTATIONS MAY RESULT IN A SIGNIFICANT DECLINE IN OUR STOCK
PRICE.
Our quarterly operating results have fluctuated in the past and are likely
to do so in the future. Some of the factors that could cause our operating
results to fluctuate include:
- the timing, release and competitiveness of Lp-PLA(2), Cathepsin-K and
other future product candidates and those of our competitors;
- our ability to develop, obtain regulatory clearance and introduce
Lp-PLA(2), Cathepsin-K and other future product candidates for commercial
sale on a timely basis;
- the timing and willingness of Quest Diagnostics and other future
collaborators to commercialize Lp-PLA(2), Cathepsin-K and other future
product candidates;
- our ability to obtain tissue samples through our collaboration with the
University of Pittsburgh Medical Center;
- our ability to obtain custom-printed microarrays through our agreement
with Agilent Technologies;
- changes in the cost, quality and availability of equipment, reagents and
components required to manufacture or use Lp-PLA(2), Cathepsin-K and
other future product candidates;
- general and industry-specific economic conditions, which may affect our
customers' research and development expenditures and use of Lp-PLA(2),
Cathepsin-K and other future product candidates; and
- availability of commercial and government funding to researchers who test
Lp-PLA(2), Cathepsin-K and other future product candidates.
We believe that quarter-to-quarter comparisons of our operating results are
not a good indication of our future performance. It is likely that in some
future quarter or quarters, our operating results will be below the expectations
of securities analysts or investors. In that case, our stock price could decline
significantly and our stockholders would experience a decline in the value of
their investment.
WE DEPEND ON SMITHKLINE BEECHAM FOR KEY GENOMIC INTELLECTUAL PROPERTY, AND OUR
CONTRACTUAL RELATIONSHIP WITH SMITHKLINE BEECHAM ENDS IN 2001.
In connection with our formation, SmithKline Beecham assigned several
diagnostic molecular targets to us, and agreed to assign to us on an exclusive
basis all additional targets it determines from its research and development
through September 2001 to have potential diagnostic utility, including targets
derived from SmithKline Beecham's collaboration with Human Genome Sciences. Our
rights do not extend to targets identified by SmithKline Beecham's vaccines
division. To date, eight of our 43 diagnostic molecular target product
candidates, including our two late stage diagnostic product candidates,
Lp-PLA(2) and Cathepsin-K, were derived from SmithKline Beecham's collaboration
with Human Genome Sciences. This collaboration terminates in June 2001, and we
will have no right to license additional diagnostic molecular targets derived
from Human Genome Sciences after the termination of this collaboration. We will
continue to have the right to develop and exploit molecular targets found prior
to September 2001 only to the extent we have filed research plans with
SmithKline Beecham with respect to each molecular target. In addition,
SmithKline Beecham's obligation to assign to us additional diagnostic molecular
targets discovered from its research and development efforts terminates in
September 2001. SmithKline Beecham may discover significant diagnostic molecular
targets after September 2001 or, alternatively, we may not identify until after
September 2001 the diagnostic utility of a molecular target which SmithKline
Beecham
6
<PAGE> 11
assigns to us prior to the termination of our contractual relationship. In
either case, we will have no rights to these molecular targets under our
agreement with SmithKline Beecham.
The termination of our relationship with SmithKline Beecham will result in
the loss to our company of a significant source of molecular targets. We do not
know whether SmithKline Beecham will contribute to our company a sufficient
number of molecular targets prior to the termination of our relationship in
2001. Furthermore, we do not know whether we will be able to obtain alternative
sources of molecular targets on commercially reasonable terms or at all. Our
business will fail if we are unable to identify and develop novel molecular
targets for the detection and treatment of disease.
In December 2000, SmithKline Beecham merged with Glaxo Wellcome to form
GlaxoSmithKline plc. While we do not believe that this merger will adversely
affect our relationship with SmithKline Beecham, we do not know whether we will
encounter unexpected difficulties as a result of the merger.
WE DEPEND ON INCYTE FOR ACCESS TO GENOMIC DATABASES, AND OUR CONTRACTUAL
RELATIONSHIP WITH INCYTE ENDS IN SEPTEMBER 2003.
In connection with our founding, Incyte granted us a fully paid
subscription to its LifeSeq Gold and PathoSeq databases. LifeSeq Gold is the
largest database of its kind in the world. Our subscription to Incyte's
databases terminates in September 2003, and we do not know whether we will be
able to renew our subscription at that time. One of our primary methods of
identifying potential molecular targets is through searches of LifeSeq Gold. If
we are unable to retain access to Incyte's databases, we do not know whether we
will be able to obtain access to an acceptable alternative genomic database on
commercially reasonable terms or at all.
Under our agreement with Incyte, we have no right to sub-license any
therapeutic monoclonal antibody products we may develop based on our access to
the LifeSeq Gold database unless the sub-licensee also subscribes to the LifeSeq
Gold database. Therapeutic monoclonal antibodies, which we believe have several
potential clinical and commercial advantages over traditional therapeutics, are
a therapeutic class of protein molecules that function by binding to target
proteins. This restriction on sublicensing may limit our ability to
commercialize therapeutic monoclonal antibody products we may discover from the
LifeSeq Gold database.
The termination of our subscription to Incyte's databases in September 2003
will result in the loss to our company of a significant source of molecular
targets. We do not know whether we will be able to discover a sufficient number
of molecular targets through our search of Incyte's databases prior to the
termination of our subscription in September 2003. Furthermore, we do not know
whether we will be able to obtain alternative sources of molecular targets on
commercially reasonable terms or at all. Our business will fail if we are unable
to identify and develop novel molecular targets for the detection and treatment
of disease.
WE MAY BE LESS ATTRACTIVE AS A TAKEOVER CANDIDATE BECAUSE OF TERMINATION
PROVISIONS IN OUR CONTRACTS WITH SMITHKLINE BEECHAM AND INCYTE.
If we merge with or are acquired by a pharmaceutical company prior to
September 2001, nearly all of SmithKline Beecham's obligations to us and our
rights to license diagnostic targets will immediately terminate. In addition,
our fully paid subscription to the Incyte databases will terminate under most
circumstances if we are acquired by a third party who is not a LifeSeq Gold
subscriber. This may have the effect of discouraging third parties from seeking
to acquire our company and depriving our stockholders of the opportunity to
obtain any premium associated with a takeover proposal.
OUR RELATIONSHIP WITH QUEST DIAGNOSTICS MAY DELAY THE COMMERCIALIZATION OF OUR
HOMEBREW DIAGNOSTIC PRODUCTS THROUGH OTHER PARTIES AND MAY LIMIT OUR ABILITY TO
ACHIEVE MARKET ACCEPTANCE.
Quest Diagnostics has a right of first negotiation for an exclusive license
to any homebrew products we develop through 2005. If Quest exercises this right
and our company and Quest are unable to agree on the terms of a license, the
entry of our products into the homebrew market could be significantly delayed.
7
<PAGE> 12
If we do enter into an exclusive arrangement with Quest, Quest may fail to meet
our sales expectations, which could impair market acceptance for our future
products.
IF WE FAIL TO IDENTIFY MOLECULAR TARGETS DETECTABLE IN BODILY FLUIDS, OUR
BUSINESS WILL BE SERIOUSLY HARMED.
Our business model assumes that we will generate significant revenue from
the sale of screening tests that can be performed on large populations of
apparently healthy people before symptoms appear. To be useful for screening
large numbers of asymptomatic people, screening tests must be non-invasive and
easy to administer. As a result, we believe that in order to gain widespread
market acceptance our diagnostic screening products must be detectable in bodily
fluids, such as blood or urine, and compatible with the existing installed base
of testing instruments in clinical laboratories. Not all molecular targets are
found in bodily fluids, however, and we may discover valid molecular targets
which are detectable only in tissue. Non-bodily fluid-based tests, such as
tissue biopsies, are generally too invasive and/or costly or difficult to
administer to be effective as screening tests. We may be unable to develop
diagnostic product candidates that are detectable in bodily fluids, even if such
molecular targets possess the requisite sensitivity and specificity to have
clinical utility. Furthermore, we may devote substantial efforts to the
development of a particular molecular target before concluding that such
molecular target is not detectable in bodily fluids. While there exists a market
for non-bodily fluids-based tests as confirmatory and monitoring tests, these
tests are administered to smaller populations and would not generate the level
of revenue assumed in our business model. If we do not identify bodily
fluid-based molecular targets which we can develop into marketable diagnostic
products, we will not generate the level of revenues assumed in our business
model. In that event, or if we identify bodily fluid-based molecular targets
which are otherwise not marketable, our business will be seriously harmed.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO ENTER INTO COLLABORATIONS WITH
OTHER COMPANIES. IF WE ARE UNABLE TO ENTER INTO SUCCESSFUL COLLABORATIONS IN THE
FUTURE, WE MAY NOT BE ABLE TO DEVELOP OUR TECHNOLOGIES OR PRODUCT CANDIDATES OR
SELL OUR FUTURE PRODUCTS COMMERCIALLY.
Our future success depends on our ability to enter into collaborations with
other companies. We will need to enter into collaborative arrangements for the
commercialization of all of our future diagnostic product candidates, including
Lp-PLA(2) and Cathepsin-K, and the development and commercialization of all of
our future therapeutic product candidates. For diagnostic product candidates, we
plan to seek collaborative partners for the commercialization of an assay once
we have completed preclinical testing of the assay. For therapeutic product
candidates, we are actively seeking collaborative partners to assist us in
further validating and pursuing clinical development of our therapeutic
molecular targets. There is a limited number of companies with the resources
necessary to develop our future products commercially and we may be unable to
attract any of these firms. A company that has entered into a collaboration
agreement with one of our competitors may choose not to enter into a
collaboration agreement with us. Even if we are successful in entering into one
or more collaboration agreements in the future, we have limited or no control
over the resources that any collaborator may devote to our product candidates.
Our collaborators may not perform their obligations as expected, either by
electing not to develop product candidates arising out of collaborative
arrangements or devoting insufficient resources to the development, manufacture,
marketing or sale of our future products. If we are unable to enter into
collaboration agreements or if our future collaborators fail to perform as
expected under these agreements, we may not be able to develop our technologies
or product candidates or sell our future products commercially. In that event,
we may be unable to generate the level of revenues assumed by our business model
and our business would be seriously harmed.
MANY OF OUR EXISTING AND PROSPECTIVE COMPETITORS WHO HAVE GREATER RESOURCES AND
EXPERIENCE MAY DEVELOP PRODUCTS FASTER THAN WE DO AND RENDER OUR FUTURE PRODUCTS
OBSOLETE.
The medical diagnostic and pharmaceutical industries are highly competitive
and are characterized by rapid technological change. The area of genomics and
proteomics, in particular, is a rapidly evolving field. Our future success will
depend on our ability to maintain a competitive position with respect to
8
<PAGE> 13
technological advances. Our existing or prospective competitors may develop
processes or products that are more effective than ours or be more effective at
implementing their technologies to develop commercial products faster.
We face, and will continue to face, intense competition from large
biotechnology, pharmaceutical and other companies, as well as academic and
scientific research institutions, government agencies and public and private
research organizations that are pursuing the same or competing molecular targets
and products derived from them. Many of our competitors have substantially
greater financial, technical, research, marketing, sales, distribution, service
and other resources than we do. Moreover, our competitors may offer broader
product lines and have greater name recognition than us. These organizations may
develop processes or products that are superior to ours. Our competitors may
succeed in obtaining patent protection or receiving regulatory approval for
commercializing products before us. Developments by competitors may render our
product candidates obsolete or non-competitive.
WE MUST RETAIN EXISTING AND ATTRACT ADDITIONAL QUALIFIED SCIENTIFIC
PROFESSIONALS IN ORDER TO EXECUTE OUR BUSINESS PLAN.
Recruiting and retaining qualified scientific professionals to perform
research and development work is critical to our future success. During the
second half of 1999, we refocused our business plan on the discovery of
molecular targets related to cancer and discontinued our work on several
projects outside this area of focus. We also terminated the employment of a
number of scientific personnel that had been working on these discontinued
projects and whose expertise was unrelated to our new focus on cancer. We do not
currently have sufficient senior scientific personnel to execute our business
plan, and we intend to aggressively hire additional scientists to expand our
discovery, validation and product development capabilities. There is currently a
shortage of skilled scientific personnel in Northern California, where our
executive offices and research and development facilities are located, which is
likely to continue. As a result, competition for experienced scientific
personnel is intense, and the turnover rate can be high. Competition for
experienced scientists from numerous companies and academic and other research
institutions may limit our ability to attract and recruit qualified personnel on
acceptable terms. Our failure to attract and retain scientific professionals
would prevent us from pursuing collaborations or developing our product
candidates or core technologies.
We work with scientific advisors and collaborators at academic and other
institutions. These scientists are not our employees and frequently have other
commitments that limit their availability. Although our scientific advisors
generally agree not to perform competing work, if a conflict of interest between
their work for our company and their work for another entity arises, we may lose
their services. If we lose the services of any of these advisors, the
achievement of our business objectives may be impeded.
WE WILL NEED ADDITIONAL CAPITAL TO FUND OUR FUTURE OPERATIONS. IF WE ARE UNABLE
TO OBTAIN ADDITIONAL CAPITAL, OUR ABILITY TO DEVELOP OUR PROCESSES AND PRODUCT
CANDIDATES MAY BE HARMED.
We expect to significantly increase cash expenditures on our operations
over the next 12 months. In particular, our research and development projects,
together with the filing, prosecution and enforcement of patent claims, will
require additional capital significantly in excess of historical levels. We do
not know whether our business or operations will change in a manner that would
consume available resources even more rapidly than anticipated. Our future
revenue may not be adequate to meet our operational needs and capital
requirements for product development and commercial sale. We may need to raise
additional capital as a result of:
- our progress with our research and development programs;
- our progress in developing and marketing our product candidates;
- our ability to establish and maintain successful collaborations; and
- the costs we incur in obtaining, enforcing and defending our patent
claims and other intellectual property rights.
9
<PAGE> 14
If we raise additional funds through the sale of equity, convertible debt
or other equity-linked securities, your percentage ownership in our company will
be reduced. These transactions may dilute the value of your common stock, and we
may issue securities that have rights, preferences and privileges senior to our
common stock.
Additional funds may not be available when needed on terms acceptable to us
or at all. If adequate funds are not available on acceptable terms, we may have
to reduce substantially or eliminate expenditures for the development and
commercial sale of our product candidates or obtain funds through arrangements
with collaborative partners that require us to relinquish rights to product
candidates. Either of these alternatives could have a material adverse effect on
our business and future growth prospects.
WE HAVE NO EXPERIENCE IN MANUFACTURING OR MARKETING PRODUCTS AND MAY ENCOUNTER
PROBLEMS OR DELAYS, WHICH WOULD RESULT IN LOST REVENUE.
We have no experience in manufacturing and marketing, and we do not have
the resources or capability to manufacture or market our future product
candidates on a commercial scale. In order for us to sell Lp-PLA(2), Cathepsin-K
and other future product candidates directly, we will need to develop, or obtain
through outsourcing or marketing and distribution agreements, manufacturing,
marketing and sales capabilities. We may not be able to develop or otherwise
obtain the requisite manufacturing, marketing and sales capabilities.
Contract manufacturers may utilize their own technology, our technology or
technology acquired or licensed from third parties to develop manufacturing
processes. In order to engage a contract manufacturer, we may need a license or
other technology transfer. Even if a license is available from a contract
manufacturer on reasonable terms, we may be unable to effect successfully the
transfer of the technology to the contract manufacturer. Also, any technology
transfer may require the transfer of requisite data for regulatory purposes. If
we were to rely on a contract manufacturer, our ability to change contract
manufacturers may be limited.
Our inability to control all of the factors that affect manufacturing
processes may prevent us from achieving production of our future product
candidates in volumes needed. As a result, manufacturing and quality control
problems may arise as we attempt to increase the production rate at
manufacturing facilities. We may not be able to increase production rates at
these facilities in a timely and cost-effective manner or at a commercially
reasonable cost.
PRODUCT LIABILITY LAWSUITS COULD ADVERSELY AFFECT OUR BUSINESS.
We may be held liable if Lp-PLA(2), Cathepsin-K or other future product
candidates, or any product that is made with our technologies, fails to
accurately diagnose or detect disease, causes injury or is found otherwise
unsuitable. Although we intend to seek product liability insurance, this
insurance is expensive and may not fully cover our potential liabilities. Our
inability to obtain sufficient insurance coverage at an acceptable cost or
otherwise to protect against potential product liability claims could prevent or
inhibit the commercial sale of Lp-PLA(2), Cathepsin-K or other future product
candidates. Furthermore, our customers may not indemnify us against these types
of claims or they may not be adequately insured or, in the case of smaller
companies, have a net worth sufficient to satisfy product liability claims. If
we are sued for any injury caused by our products, our liability could exceed
our total assets. Any claims against us, regardless of their merit, could harm
our business and cause our stock price to decline.
WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR
BUSINESS, AND ANY CLAIMS RELATING TO OUR IMPROPER HANDLING, STORAGE OR DISPOSAL
OF THESE MATERIALS COULD BE EXPENSIVE AND TIME CONSUMING.
Our research and development processes involve the use of hazardous
materials, including chemicals and radioactive and biological materials. Our
operations also produce hazardous waste products. We cannot eliminate the risk
of accidental contamination or discharge and any resultant injury from these
materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of
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<PAGE> 15
these materials. We could be subject to damages in the event of an improper or
unauthorized release of, or exposure of individuals to, hazardous materials. In
addition, claimants may sue us for injury or contamination that results from our
use, or the use by third parties, of these materials, and our liability may
exceed our total assets. Compliance with environmental laws and regulations is
expensive, and current or future environmental regulations may impair our
research, development or production efforts.
WE MUST OBTAIN REIMBURSEMENT CODES AND A SATISFACTORY REIMBURSEMENT RATE FOR OUR
PRODUCT CANDIDATES.
Our future success depends on our ability to sell homebrew products and FDA
approved diagnostic kits at prices representing a substantial premium above the
prices of existing diagnostic tests. In order to achieve these premiums, we will
need to obtain specific reimbursement codes for our products. Even if we are
successful in obtaining reimbursement codes, we do not know whether government
payers, such as Medicare and Medicaid, private health insurers and managed care
organizations, will be willing to cover tests performed with our future products
or if the level of payment associated with the reimbursement codes will be
consistent with the assumptions underlying our business strategy. We have not
yet begun the process of applying for these reimbursement codes, and the
assignment of these codes may take several years. Moreover, we do not expect
that we will obtain a reimbursement code before we launch our first product
candidate, Lp-PLA(2), in the homebrew market. We may not be able to obtain these
codes in a timely fashion or at all. If we fail to obtain the level of
reimbursement we are seeking, we may never achieve or maintain profitability.
WE MAY ENCOUNTER DIFFICULTIES IN CONNECTION WITH THE PLANNED RELOCATION OF OUR
FACILITIES, AND THESE DIFFICULTIES COULD DISRUPT OUR OPERATIONS.
We plan to relocate our facilities to accommodate our anticipated growth.
We anticipate entering into a lease for new facilities in 2001 and, after the
leased space has been built out to accommodate our needs, relocating all of our
operations. We may encounter unanticipated delays or disruptions in our
operations as a result of this transition. Prolonged delays or disruptions could
adversely affect our molecular target discovery and development efforts and harm
our business.
RISKS RELATED TO INTELLECTUAL PROPERTY
ANY INABILITY TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGIES AND PRODUCT
CANDIDATES COULD HARM OUR COMPETITIVE POSITION.
We will be able to protect our proprietary rights from unauthorized use by
third parties only to the extent that our proprietary technologies are covered
by valid and enforceable patents or are effectively maintained as trade secrets.
We plan to apply for patents covering our technologies and products as we deem
appropriate. However, while the U.S. Patent and Trademark Office, or USPTO, has
issued patents covering full-length genes and some partial gene sequences, the
USPTO has recently issued strict utility requirements for gene applications.
Under these new strict utility requirements, we do not know whether our pending
patent applications will issue as patents and, if they do, whether the scope of
the claims will be sufficiently broad to prevent third parties from utilizing
our technologies, commercializing our discoveries or developing competing
products. Any patents we have now or obtain in the future may not be
sufficiently broad to prevent others from utilizing our technologies,
commercializing our discoveries or developing competing products. Furthermore,
others may independently develop similar or alternative technologies or design
around our patented technologies. In addition, others may challenge or
invalidate our patents, or our patents may fail to provide us with any
competitive advantage.
We have rights in patents and patent applications owned by SmithKline
Beecham, Human Genome Sciences and Incyte that may provide important protection
on the composition of matter and utility of our product candidates. We do not,
however, control the prosecution and maintenance of these patents. SmithKline
Beecham, Human Genome Sciences and Incyte may allow these patents to go
abandoned or may not pursue meaningful claims for our products. Also, while the
USPTO has issued patents covering
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<PAGE> 16
full-length genes and some partial gene sequences, we do not know whether or how
courts will enforce these patents. If a court finds these types of inventions to
be unpatentable or interprets them narrowly, the benefits of our patent strategy
may not materialize. If any or all of these events occur, the value of our
intellectual property could be diminished.
OTHER RIGHTS AND MEASURES THAT WE RELY UPON TO PROTECT OUR INTELLECTUAL PROPERTY
MAY NOT BE ADEQUATE TO PROTECT OUR PRODUCT CANDIDATES AND COULD REDUCE OUR
ABILITY TO COMPETE IN THE MARKET.
In addition to patents, we rely on a combination of trade secrets,
copyright and trademark laws, non-disclosure agreements and other contractual
provisions and technical measures to protect our intellectual property rights.
While we require employees, collaborators, consultants and other third parties
to enter into confidentiality and/or non-disclosure agreements where
appropriate, any of the following could still occur:
- the agreements may be breached;
- we may have inadequate remedies for any breach;
- proprietary information could be disclosed to our competitors; and
- others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets
or disclose such technologies.
If for any of the above reasons our intellectual property is disclosed,
invalidated or misappropriated, it would harm our ability to protect our rights
and impair our competitive position.
THIRD PARTIES MAY HAVE PATENTS OF THEIR OWN WHICH COULD, IF ASSERTED, PREVENT US
FROM OBTAINING OR PRACTICING PATENTS ON OUR TECHNOLOGIES. THIS INABILITY TO
OBTAIN OR PRACTICE OUR OWN PATENTS COULD ADVERSELY AFFECT OUR BUSINESS AND
REVENUE.
We use databases that belong to Incyte. There are a number of other
companies that have access to the same genes and patent rights as we do. In
addition, a number of entities make gene sequences publicly available at no
cost. Either of these may adversely affect our ability to obtain meaningful
patent claims on our future products. Some of our patent applications involve
genes that may also be claimed in patent applications filed by others. In some
or all of these patent applications, a determination of priority of inventorship
may need to be decided in an interference proceeding before the USPTO. Some of
our patent applications claim genes useful as products that may also be
dominated by claims in patent applications filed by others. For some of our
product candidates, a license may be needed from the dominant patent holder to
manufacture, use or sell the products.
RISKS RELATED TO THIS OFFERING
MARKET PRICES OF EMERGING BIOTECHNOLOGY COMPANIES HAVE BEEN HIGHLY VOLATILE, AND
THE MARKET FOR OUR STOCK MAY EXHIBIT VOLATILITY AS WELL.
The financial markets, including the Nasdaq National Market, have
experienced significant price and volume fluctuations, and the market prices of
technology companies, particularly biotechnology companies, have been and
continue to be extremely volatile. Volatility in the price of our common stock
may be caused by factors outside of our control and may be unrelated or
disproportionate to our operating results. In the past, following periods of
volatility in the market price of a public company's securities, securities
class action litigation has often been instituted against that company.
Securities class action litigation could result in substantial costs and a
diversion of our management's attention and resources.
SOME OF OUR EXISTING STOCKHOLDERS WILL BE ABLE TO EXERT CONTROL OVER US AFTER
THIS OFFERING WHICH WILL LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME OF KEY
TRANSACTIONS.
After this offering, GlaxoSmithKline and Incyte together with our officers
and directors will own approximately 41% of our outstanding common stock. These
stockholders will be able to influence
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<PAGE> 17
significantly all matters requiring stockholder approval, including the approval
of significant corporate transactions. Circumstances may arise in which the
interests of these stockholders could conflict with the interests of our other
stockholders. These stockholders could delay or prevent a change in control of
our company even if such a transaction would be beneficial to our other
stockholders.
THE LARGE NUMBER OF SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD
CAUSE OUR STOCK PRICE TO DECLINE.
The market price of our common stock could decline as a result of sales of
a large number of shares after this offering or the perception that sales could
occur. The large number of shares eligible for sale might make it more difficult
for us to sell common stock in the future at a time and at a price that we deem
appropriate. After this offering, we will have an aggregate of 31,102,505 shares
outstanding. Of the outstanding shares, the 7,000,000 shares sold in this
offering will be freely tradable, other than shares purchased by our affiliates.
The remaining shares may be sold only pursuant to a registration statement under
the Securities Act or an exemption from the registration requirements of the
Securities Act. After the completion of this offering, holders of 22,025,807
shares of common stock will be entitled to registration rights with respect to
the registration of their shares under the Securities Act. For additional
information regarding these registration rights, please see "Description of
Capital Stock -- Registration Rights" and "Shares Eligible for Future Sale."
Each of our directors and executive officers and a substantial majority of our
current stockholders has agreed not to offer, sell or agree to sell, directly or
indirectly, or otherwise dispose of any equity shares without the prior written
consent of Lehman Brothers Inc. for a period of 180 days from the date of this
prospectus. Lehman Brothers Inc. may, in its sole discretion, at any time and
without notice, release all or any portion of the shares subject to the lockup
agreements. For additional information regarding possible future sales of our
securities, please see "Shares Eligible for Future Sale" and "Underwriting."
AS A NEW INVESTOR, YOU WILL INCUR SUBSTANTIAL DILUTION AS A RESULT OF THIS
OFFERING AND FUTURE EQUITY ISSUANCES.
The initial public offering price will be substantially higher than the pro
forma net tangible book value per share of our outstanding common stock. As a
result and based upon an assumed initial public offering price of $13.00 per
share, investors purchasing common stock in this offering will incur immediate
dilution of $6.88 per share. This dilution is due in large part to earlier
investors in our company having paid substantially less than the initial public
offering price when they purchased their shares. The exercise of outstanding
options and warrants will result in further dilution to new investors.
WE DO NOT PLAN TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.
We have never declared or paid cash dividends on our capital stock. We do
not anticipate paying any cash dividends on our common stock in the foreseeable
future. We currently intend to retain all available funds and any future
earnings to fund the development and growth of our business. Investors seeking
cash dividends should not purchase our common stock.
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<PAGE> 18
FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" and in other sections of this prospectus
that are forward-looking statements. In some cases, you can identify these
statements by forward-looking words such as "intend," "may," "might," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of these terms and other comparable
terminology. These forward-looking statements, which are subject to risks,
uncertainties and assumptions about us, may include, among other things,
projections of our future financial performance, our anticipated growth
strategies and anticipated trends in our business. These statements are only
predictions based on our current expectations and projections about future
events. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause our actual results,
level of activity, performance or achievements to differ from those expressed or
implied by the forward-looking statements, including those factors discussed
under the caption entitled "Risk Factors." You should specifically consider the
numerous risks outlined under "Risk Factors." Although we believe the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements.
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<PAGE> 19
USE OF PROCEEDS
Our net proceeds from the sale of 7,000,000 shares of common stock in this
offering will be approximately $83.3 million, or $96.0 million if the
underwriters' over-allotment option is exercised in full, based on an assumed
initial public offering price of $13.00 per share, after deducting underwriting
discounts and commissions and the estimated offering expenses payable by us. We
currently expect to use the net proceeds from this offering as follows:
- to expand our discovery, validation and product development capabilities
for diagnostic and therapeutic product candidates, including through the
hiring of additional qualified scientific personnel; and
- for general corporate purposes, including working capital and the funding
of operating losses.
We may also use a portion of the net proceeds to acquire or invest in
complementary businesses, products and technologies, although we have no current
agreements regarding any material transaction of this sort.
The principal purposes of this offering are to establish a public market
for our common stock, to increase our visibility in the industry and to
facilitate future access to public capital markets. The amounts that we actually
spend to expand our discovery, validation and product development capabilities
and for general corporate purposes will vary significantly depending on a number
of factors, including the amount of cash that we generate from operations. As a
result, we will retain broad discretion over the allocation of the net proceeds
from this offering. Pending these uses, we will invest the net proceeds of this
offering in short-term, investment grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We do
not anticipate paying any cash dividends on our capital stock in the foreseeable
future. We currently intend to retain all available funds and any future
earnings to fund the development and growth of our business.
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<PAGE> 20
CAPITALIZATION
The table below sets forth our capitalization as of September 30, 2000:
- on an actual basis;
- on a pro forma basis giving effect to the automatic conversion of all
outstanding shares of preferred stock into 22,025,807 shares of common
stock upon the closing of this offering; and
- on a pro forma as adjusted basis giving effect to the sale of 7,000,000
shares of common stock in this offering at an assumed initial public
offering price of $13.00 per share, after deducting underwriting
discounts and commissions and the estimated offering expenses payable by
us.
You should read this information in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and the accompanying notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term liabilities, less current portion................. $ 57 $ 57 $ 57
-------- -------- --------
Stockholders' equity:
Series A preferred stock, $0.01 par value, 4,400,000
shares authorized, issued and outstanding actual; no
shares authorized, issued or outstanding pro forma and
pro forma as adjusted.................................. 44 -- --
Series B preferred stock, $0.01 par value, 4,400,000
shares authorized, issued and outstanding actual; no
shares authorized, issued or outstanding pro forma and
pro forma as adjusted.................................. 44 -- --
Series C preferred stock, $0.01 par value, 13,500,000
shares authorized and 13,225,807 shares issued and
outstanding actual; no shares authorized, issued or
outstanding pro forma and pro forma as adjusted........ 132 -- --
Preferred stock, $0.01 par value, no shares authorized,
issued or outstanding, actual and pro forma, 5,000,000
shares authorized, no shares issued and outstanding pro
forma as adjusted...................................... -- -- --
Common stock, $0.01 par value, 50,000,000 shares
authorized actual and pro forma; 207,242 shares issued
and outstanding actual; 22,233,049 shares issued and
outstanding pro forma; 100,000,000 shares authorized
and 29,233,049 shares issued and outstanding pro forma
as adjusted............................................ 2 222 292
Additional paid-in capital................................ 105,896 105,896 189,106
Deferred stock compensation............................... (5,193) (5,193) (5,193)
Accumulated other comprehensive income (loss)............. (6) (6) (6)
Deficit accumulated during the development stage.......... (5,231) (5,231) (5,231)
-------- -------- --------
Total stockholders' equity............................. 95,688 95,688 178,968
-------- -------- --------
Total capitalization................................... $ 95,745 $ 95,745 $179,025
======== ======== ========
</TABLE>
The foregoing excludes, as of December 31, 2000:
- 1,495,007 shares of common stock issuable upon exercise of options
outstanding under our 2000 Equity Incentive Plan at a weighted average
exercise price of $1.81 per share;
- shares of common stock issuable upon exercise of options available
for issuance under our 2001 Equity Incentive Plan;
- 179,032 shares of common stock issuable upon exercise of warrants at a
weighted average exercise price of $5.92 per share; and
- shares of common stock available for purchase under our 2001
Employee Stock Purchase Plan.
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DILUTION
As of September 30, 2000, our pro forma net tangible book value was
approximately $95.7 million, or $4.30 per share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible assets
less total liabilities, divided by the pro forma number of shares of common
stock outstanding. After giving effect to the sale of 7,000,000 shares of common
stock in this offering at an assumed initial public offering price of $13.00 per
share, and after deducting underwriting discounts and commissions and the
estimated offering expenses payable by us, our pro forma as adjusted net
tangible book value as of September 30, 2000 would have been approximately
$178.9 million, or $6.12 per share of common stock. This represents an immediate
increase in pro forma as adjusted net tangible book value of $1.82 per share to
our existing stockholders and an immediate and substantial dilution in pro forma
as adjusted net tangible book value of $6.88 per share to new investors in this
offering. If the initial public offering price is higher or lower, the dilution
to new investors will be greater or less, respectively. The following table
summarizes this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
Pro forma net tangible book value per share as of
September 30, 2000..................................... $4.30
Increase per share attributable to new investors.......... 1.82
-----
Pro forma as adjusted net tangible book value per share
after this offering....................................... 6.12
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $ 6.88
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
2000, the differences between the number of shares of common stock issued by us
and the total consideration paid and the average price per share paid by our
existing stockholders and new investors:
<TABLE>
<CAPTION>
SHARES ISSUED TOTAL CONSIDERATION
------------------------ ------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
----------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 24,102,505 77.5% $128,961,175 58.6% $ 5.35
New investors................... 7,000,000 22.5 91,000,000 41.4 13.00
----------- ----- ------------ ------
Total...................... 31,102,505 100.0% $219,961,175 100.0%
=========== ===== ============ ======
</TABLE>
The foregoing excludes, as of December 31, 2000:
- 1,495,007 shares of common stock issuable upon exercise of options
outstanding under our 2000 Equity Incentive Plan at a weighted average
exercise price of $1.81 per share;
- shares of common stock issuable upon exercise of options
available for issuance under our 2001 Equity Incentive Plan;
- 179,032 shares of common stock issuable upon exercise of warrants at a
weighted average exercise price of $5.92 per share; and
- shares of common stock available for purchase under our 2001
Employee Stock Purchase Plan.
To the extent outstanding options or warrants are exercised, there will be
further dilution to new investors.
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<PAGE> 22
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for our company. You
should read this information in conjunction with the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the accompanying notes included
elsewhere in this prospectus. In connection with the sale of the Series C
Preferred Stock in April 2000, our company was converted from a limited
liability company to a corporation.
The statement of operations data for the period from August 29, 1997
(inception) through December 31, 1997, the years ended December 31, 1998 and
1999, the nine months ended September 30, 2000 and the cumulative period from
August 29, 1997 (inception) through September 30, 2000 and the balance sheet
data as of December 31, 1998 and 1999 and September 30, 2000 set forth below are
derived from our audited financial statements included elsewhere in this
prospectus. The statement of operations data for the nine months ended September
30, 1999 are derived from our unaudited financial statements included elsewhere
in this prospectus. The balance sheet data as of December 31, 1997 are derived
from our audited financial statements not included in this prospectus. Our
unaudited financial statements have been prepared on the same basis as our
audited financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
fairly present our results of operations for the unaudited interim period. The
results of operations for the nine months ended September 30, 2000 are not
necessarily indicative of our results for the year ending December 31, 2000 or
any future period.
<TABLE>
<CAPTION>
FOR THE CUMULATIVE
PERIOD FROM PERIOD FROM
AUGUST 29, AUGUST 29,
1997 1997
(INCEPTION) YEAR ENDED NINE MONTHS ENDED (INCEPTION)
THROUGH DECEMBER 31, SEPTEMBER 30, THROUGH
DECEMBER 31, ------------------ ---------------------- SEPTEMBER 30,
1997 1998 1999 1999 2000 2000
---------------- ------- -------- ----------- -------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
License revenue from related party............ $ -- $ -- $ 100 $ 100 $ -- $ 100
----- ------- -------- ------- -------- --------
Operating expenses:
Research and development (including stock
compensation expense of $794 for the nine
months ended September 30, 2000 and for
the cumulative period from inception
through September 30, 2000)............... 401 6,761 9,461 7,654 7,182 23,805
General and administrative (including stock
compensation expense of $2,183 for the
nine months ended September 30, 2000 and
for the cumulative period from inception
through September 30, 2000)............... 279 1,882 2,345 1,877 3,903 8,409
----- ------- -------- ------- -------- --------
Loss from operations.......................... (680) (8,643) (11,706) (9,431) (11,085) (32,114)
Interest and other income..................... 132 715 540 565 3,359 (4,746)
Interest expense.............................. -- -- (120) (49) (73) (193)
----- ------- -------- ------- -------- --------
Net loss...................................... $(548) $(7,928) $(11,286) $(8,915) $ (7,799) $(27,561)
===== ======= ======== ======= ======== ========
Net loss per share, basic and diluted......... $ -- $ -- $ -- $ -- $(117.96)
===== ======= ======== ======= ========
Shares used to compute net loss per share,
basic and diluted........................... -- -- -- -- 66
Pro forma net loss per share, basic and
diluted..................................... $ (1.28) $ (0.45)
======== ========
Shares used to compute pro forma net loss per
share, basic and diluted.................... 8,800 17,441
</TABLE>
18
<PAGE> 23
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1997 1998 1999 2000
------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments...................... $ 6,540 $16,454 $ 8,358 $93,689
Working capital............................................. 3,967 13,301 2,829 70,079
Total assets................................................ 10,212 20,215 11,297 97,462
Total liabilities........................................... 2,760 3,681 6,044 1,774
Total members' and stockholders' equity..................... 7,452 16,534 5,253 95,688
</TABLE>
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<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations in conjunction with our financial statements and the
accompanying notes included elsewhere in this prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of many factors,
including those set forth in the section entitled "Risk Factors" as well as
factors described elsewhere in this prospectus.
OVERVIEW
We are a post-genomics company focused on translating genomic sequence data
into novel diagnostic and therapeutic products. We were co-founded as a limited
liability company in August 1997 by SmithKline Beecham and Incyte. Since our
inception, we have concentrated primarily on the research and development of
diagnostic tests for cancer. Upon our formation, Incyte granted us a fully-paid
subscription to its genomic databases, LifeSeq Gold and PathoSeq, until
September 2003. In addition, SmithKline Beecham assigned us its existing
portfolio of diagnostic product candidates as well as the rights to any
additional targets with diagnostic potential discovered in the course of its
pharmaceutical research activities through September 2001, including targets
derived from SmithKline Beecham's collaboration with Human Genome Sciences
through June 2001. These non-cash assets, which represent capital contributions
made in 1997, were recorded at zero value which was equal to the carrying value
of such assets by SmithKline Beecham and Incyte.
From our inception in August 1997 through December 1997, we devoted
substantially all of our efforts to recruiting personnel, establishing our
facilities and defining our research and product development strategies.
During 1998, we focused on the discovery of novel molecular targets and the
development of novel diagnostic products for the improved detection,
classification and prognosis of disease. We also began to develop our rigorous
molecular target validation and prioritization process that we call bioMVP.
During the first half of 1999, we continued our discovery processes focused
on diagnostic molecular targets and refined our bioMVP process. During the
second half of 1999, we refocused our research efforts and discontinued our work
on several projects, including a diagnostic product candidate for prostate
cancer. We also reduced our total employee workforce by 20 individuals in order
to preserve cash. Throughout 1999, we aggressively sought multiple alternative
sources of capital.
In April 2000, we sold 13,225,807 shares of Series C preferred stock for
$7.75 per share to 75 accredited investors who were not affiliated with our
company. In connection with our Series C preferred stock financing, we were
incorporated in the State of Delaware. During 2000, we also expanded our
strategy to include the research and development of therapeutics to treat
cancer. We plan to focus our therapeutic development efforts on monoclonal
antibodies and therapeutic vaccines using the molecular targets we discover.
We have not achieved profitability on an annual or quarterly basis, and
since our inception have incurred losses totalling $27.6 million. As of
September 30, 2000, we had an accumulated deficit of $5.2 million since our
incorporation in April 2000. We expect to incur significant additional operating
losses as we continue to develop diagnostic and therapeutic product candidates.
REVENUE RECOGNITION
The amount received from SmithKline Beecham under a non-refundable license
arrangement was recognized during 1999 as the earnings process was completed
pursuant to the terms of the agreement and no remaining performance obligation
existed. Any amounts received in advance of completing the earnings process are
recorded as deferred revenue. The Company's revenue recognition practices are in
accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition".
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<PAGE> 25
STOCK-BASED COMPENSATION
As of September 30, 2000, we had recorded deferred stock compensation
aggregating $8.2 million for the difference at the date of grant between the
exercise price and the estimated fair value of the common stock underlying stock
options granted in the nine months ended September 30, 2000. Of this amount, we
recognized stock compensation expense of $2.9 million in the nine months ended
September 30, 2000. In addition, we expect to recognize $1.1 million in the
remainder of 2000, $2.5 million in 2001 and $1.7 million in later years. We also
presently expect to recognize additional stock compensation expense related to
option grants made subsequent to September 30, 2000 of approximately $8.3
million to be generally recognized over the vesting periods.
INCOME TAXES
From our inception through April 4, 2000, no provision or benefit for
federal and state income taxes was recorded in our financial statements as we
were a limited liability company and, therefore, taxed as a partnership. Rather,
the federal and state income tax effects of our results of operations were
recorded by our members in their respective income tax returns. On April 4, 2000
in connection with our Series C preferred stock financing, we were incorporated
in the State of Delaware and became subject to the C corporation provisions of
the Internal Revenue Code. Accordingly, any earnings after that date will be
taxed at federal and state corporate income tax rates.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September
30, 1999
License revenue from related party. License revenue of $100,000 in 1999
consists of revenue derived from a license agreement we entered into in February
1999 with SmithKline Beecham Clinical Laboratories. We recognized no license
revenue for the nine months ended September 30, 2000.
Research and development expense. Research and development expense
consists primarily of salaries, laboratory supplies, depreciation of laboratory
equipment and stock compensation expense. Our research and development expense
was approximately $7.2 million for the nine months ended September 30, 2000,
compared with approximately $7.7 million for the nine months ended September 30,
1999, a decrease of $0.5 million, or 7%. The decrease in research and
development expense for the nine months ended September 30, 2000 resulted
primarily from a $1,044,000 reduction in salary and laboratory supply expenses
resulting from our decrease in headcount and related termination of several
research projects during the second half of 1999 and a $477,000 reduction in
expenses related to license fees, partially offset by a $900,000 increase in
purchases of microarray chips from Incyte and a $80,000 increase in contract
research expenses. We anticipate that our research and development expense will
increase substantially in the future as we hire additional scientific personnel
and discover and develop diagnostic and therapeutic product candidates. Research
and development expense for the nine months ended September 30, 2000 includes
$0.8 million of stock compensation expense.
General and administrative expense. General and administrative expense
consists primarily of salaries, consultants fees, recruiting and travel expenses
and stock compensation expense. Our general and administrative expense was
approximately $3.9 million for the nine months ended September 30, 2000,
compared with approximately $1.9 million for the nine months ended September 30,
1999, an increase of approximately $2.0 million, or 105%. The increase in
general and administrative expense resulted primarily from stock compensation
expense of $2.2 million for the nine months ended September 30, 2000, partially
offset by a reduction in salary expense resulting from our decrease in headcount
during the second half of 1999. We anticipate that our general and
administrative expense will continue to increase as we expand our corporate
development and regulatory staff, add infrastructure and incur additional costs
related to being a public company.
Interest and other income. Interest and other income consists primarily of
interest received from our short and long-term investments and, to a lesser
extent, payments from the sublease of a portion of our
21
<PAGE> 26
facilities. Our interest and other income was approximately $3.3 million for the
nine months ended September 30, 2000, compared with approximately $0.6 million
for the nine months ended September 30, 1999, an increase of approximately $2.7
million, or 415%. The increase in interest and other income resulted primarily
from an increase in cash equivalents and investments on hand resulting from our
Series C preferred stock financing in April 2000, which resulted in net proceeds
of $92.7 million.
Interest expense. Interest expense consists primarily of interest due on
short-term notes issued to SmithKline Beecham and Incyte. Our interest expense
was approximately $73,000 for the nine months ended September 30, 2000, compared
with approximately $49,000 for the nine months ended September 30, 1999, an
increase of approximately $24,000, or 49%. The increase in interest expense
resulted primarily from these notes being outstanding for a longer period of
time during the nine months ended September 30, 2000.
Income taxes. For the period from April 4, 2000 through September 30,
2000, we recorded a net operating loss of $5.2 million.
As of September 30, 2000, we had state and federal net operating loss
carryforwards of $1.9 million that expire in 2005 and 2020, respectively, and
federal and state research tax credit carryforwards of $269,000 that expire in
2020. We have provided a full valuation allowance for our deferred tax assets as
of September 30, 2000 due to the uncertainty surrounding the future realization
of such assets. Utilization of federal and state net operating loss and tax
credit carryforwards will be subject to an annual limitation due to the "change
in ownership" provisions of the Internal Revenue Code.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
License revenue from related party. We recognized license revenue of
$100,000 for 1999 under a non-refundable license arrangement with SmithKline
Beecham Clinical Laboratories. We recognized no license revenue for 1998.
Research and development expense. Our research and development expense was
approximately $9.4 million for 1999, compared with approximately $6.8 million
for 1998, an increase of approximately $2.6 million, or 38%. The increase in
research and development expense resulted primarily from a $2.0 million increase
in the cost of sequencing and microarray services purchased from Incyte and, to
a lesser extent, increases in personnel costs as we expanded our operations
during the first half of 1999 and severance costs related to our reduction in
headcount during the second half of 1999. Notwithstanding the headcount
reduction in the second half of 1999, our average headcount in 1999 exceeded our
average headcount in 1998.
General and administrative expense. Our general and administrative expense
was approximately $2.3 million for 1999, compared with approximately $1.9
million for 1998, an increase of approximately $0.4 million, or 21%. The
increase in general and administrative expense resulted primarily from higher
salary expense of $0.5 million due to an increase in headcount during the first
half of 1999 and severance costs related to our reduction in headcount during
the second half of 1999. Notwithstanding the headcount reduction in the second
half of 1999, our average headcount in 1999 exceeded our average headcount in
1998.
Interest and other income. Our interest and other income was approximately
$0.5 million for 1999, compared with approximately $0.7 million for 1998, a
decrease of approximately $0.2 million, or 29%. The decrease in interest and
other income resulted primarily from a reduction in interest bearing cash
equivalents during 1999.
Interest expense. Our interest expense was approximately $120,000 for 1999
as a result of the notes issued in 1999. We had no interest expense in 1998.
Income taxes. For 1999 and 1998, we were a limited liability company and
therefore taxed as a partnership. As a result, the federal and state income tax
effects of our results of operations for 1998 and 1999 were recorded by
SmithKline Beecham and Incyte.
22
<PAGE> 27
Period From August 29, 1997 (Inception) to December 31, 1997
For the period from August 29, 1997 (inception) through December 31, 1997,
we devoted substantially all of our efforts to recruiting personnel,
establishing our facilities and defining our research and product development
strategies. As such, a comparison of the operating results of that period with
the operating results for 1998 would not be meaningful. Operating expenses of
$0.7 million consisted primarily of personnel and facility costs.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through the
private placement of equity securities, resulting in net cash proceeds of
approximately $126.5 million. In July 1999, we issued a $2.5 million note
convertible into Series C preferred stock to each of SmithKline Beecham and
Incyte. The notes were due in April 2000 and accrued interest at 5.6% per annum.
Upon closing the Series C financing, SmithKline Beecham converted the principal
amount of its note into 322,580 shares of Series C preferred stock.
Additionally, we paid accrued interest of $97,000 to SmithKline Beecham. Also
upon closing the Series C financing, we repaid the $2.5 million principal amount
of the note issued to Incyte, in addition to accrued interest of $97,000. As of
September 30, 2000, we had cash and cash equivalents and investments of $93.7
million.
Net cash used in operating activities was approximately $4.1 million, $12.9
million and $5.9 million for the nine months ended September 30, 2000 and for
the years ended December 31, 1999 and 1998, respectively. Net cash used in
operating activities for the nine months ended September 30, 2000 consisted
primarily of our net loss of $7.8 million, partially reduced by non-cash stock
compensation expense of $3.0 million and depreciation and amortization expense
of $0.8 million. Net cash used in operating activities for the year ended
December 31, 1999 consisted of our net loss of $11.3 million and changes in
working capital of approximately $2.5 million. Cash used in operating activities
for the year ended December 31, 1998 consisted primarily of our net loss of $7.9
million, partially reduced by non-cash depreciation and amortization expense of
$1.7 million.
Net cash used in investing activities was approximately $63.1 million, $0.2
million and $1.2 million for the nine months ended September 30, 2000 and for
the years ended December 31, 1999 and 1998, respectively. For the nine months
ended September 30, 2000, our investing activities consisted primarily of
purchases of short-term and long-term securities of $62.5 million. For the years
ended December 31, 1999 and 1998, our investing activities consisted of
purchases of property and equipment.
Net cash provided by financing activities was approximately $90.1 million,
$5.0 million and $17.0 million for the nine months ended September 30, 2000 and
for the years ended December 31, 1999 and 1998, respectively. For the nine
months ended September 30, 2000, our financing activities consisted of the sale
of Series C preferred stock to private investors, generating net proceeds of
approximately $92.7 million. During the same period, we repaid the principal and
interest on a $2.5 million note issued to Incyte. We converted the principal on
a $2.5 million note issued to SmithKline Beecham to Series C preferred stock,
while repaying the interest on the note. In 1999, we received $2.5 million of
cash from each of SmithKline Beecham and Incyte under these notes. In 1998, we
received $11.0 million in cash from SmithKline Beecham and $6.0 million in cash
from Incyte.
In September 1997, we entered into a $5.0 million agreement with Incyte for
microarray services and products and future sequencing services. As of September
30, 2000, we are committed under the agreement to pay Incyte approximately
$402,000 for future sequencing and microarray services and products through
February 2001.
In October 2000, we entered into a Collaborative Research Agreement with
the University of Pittsburgh Medical Center pursuant to which we expect to
obtain tissue samples for evaluation in our laboratory discovery processes.
Under this agreement, we are obligated to make cash payments to the University
of Pittsburgh Medical Center in an aggregate amount of approximately $1.2
million over the three year term of this agreement.
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<PAGE> 28
As part of our business strategy, we intend to invest significant amounts
of capital over the next 12 to 24 months on the research and development of
diagnostic product candidates for cancer and on developing monoclonal antibodies
and therapeutic vaccines to treat cancer using the molecular targets we
discover. This investment could be in the form of direct investment or through
the formation of joint ventures, strategic partnerships or similar collaborative
arrangements.
Our future capital requirements will depend on many factors, including the
following:
- our ability to enter into collaborative agreements;
- competing market developments;
- cost of filing, prosecuting, defending and enforcing patent claims and
other intellectual property rights;
- the purchase of additional capital equipment;
- our ability to progress our molecular targets and products into the
diagnostic and therapeutic markets in a timely manner;
- our ability to obtain FDA approval on our anticipated timeline; and
- the cost of clinical studies.
We believe that our cash and cash equivalents and short and long-term
investment balances, together with the proceeds of this offering, will be
sufficient to satisfy our cash requirements for at least the next two years. We
intend to invest our excess cash in high quality, interest-bearing securities.
For the next several years, we do not expect our operations to generate the
amounts of cash required for our future cash needs. In order to satisfy our cash
requirements, we expect to finance future cash needs through the sale of equity
securities, strategic collaborations and perhaps debt financing. We cannot
assure you that additional financing or collaboration and licensing arrangements
will be available when needed or that, if available, will be on terms favorable
to us or our stockholders. Insufficient funds may require us to delay, scale
back or eliminate some or all of our research or development programs, to lose
rights under existing licenses or to relinquish greater or all rights to product
candidates at an earlier stage of development or on less favorable terms than we
would otherwise choose or may adversely affect our ability to operate as a going
concern. If additional funds are obtained by issuing equity securities,
substantial dilution to existing stockholders may result.
If appropriate opportunities become available, we may seek to acquire
businesses, technologies, intellectual property, services or products that we
believe are a strategic fit with our business. We currently have no commitments
or agreements with respect to any material acquisitions. If we undertake any
transaction of this sort, the process of integrating an acquired business,
technology, service or product may result in unforeseen operating difficulties
and expenditures, and may absorb significant management attention that would
otherwise be available for ongoing development of our business. Moreover, we may
fail to realize the anticipated benefits of any acquisition. Future acquisitions
could dilute our stockholders' equity or cause us to incur debt, expose us to
unanticipated liabilities or result in significant amortization expenses related
to goodwill and other intangible assets.
In addition, recent proposed changes in the Financial Accounting Standards
rules for business combination accounting may affect the cost of making
acquisitions or of being acquired. For example, if we acquire another company
and these proposed changes become effective, we likely would have to record
goodwill or other intangible assets that may reduce our earnings. This would
adversely impact our future operating results and either reduce our
profitability or increase our losses. Further, accounting rule changes that
reduce the availability of immediate write-offs of the value of acquired
in-process research and development in connection with an acquisition could
result in the capitalization and amortization of these amounts, negatively
impacting our results of operations in future periods.
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<PAGE> 29
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our investments are only subject to interest rate risk and our interest
income may fluctuate due to changes in U.S. interest rates. By policy, we limit
our investments to money market instruments, debt securities of U.S. government
agencies and debt obligations of U.S. corporations. We manage market risk by our
diversification requirements, which limit the amount of our portfolio that can
be invested in a single issuer. We manage credit risk by limiting our purchases
to high quality issuers. Through our money manager, we maintain risk management
control systems to monitor interest rate risk. The risk management control
systems use analytical techniques, including sensitivity analysis. The
quantitative impact of interest rate changes is calculated based on Bloomberg's
proprietary duration modeling techniques. Assuming a hypothetical interest rate
increase of 10%, the fair value of our total investment portfolio as of
September 30, 2000 would have potentially incurred a loss of $363,000. There was
no exposure to interest rate risk as of December 31, 1999 as we had no
investments at year end.
All highly liquid investments with a maturity of three months or less from
the date of purchase are considered cash equivalents; investments with a
maturity of three to twelve months from the date of purchase are considered to
be short-term investments; investments with a maturity of more than twelve
months from the date of purchase are considered long-term investments.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," or SFAS No. 133. SFAS No. 133 establishes new standards
of accounting and reporting for derivative instruments and hedging activities.
SFAS No. 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedge transaction. In June 2000,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities -- an Amendment of FASB Statement No. 133," ("SFAS
No. 138"). To date, we have not engaged in derivative or hedging activities. We
do not anticipate any material impact resulting from the adoption of these
pronouncements on our financial position or results of operations. We will adopt
SFAS No. 133, as amended, in 2001.
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<PAGE> 30
BUSINESS
OVERVIEW
We are a post-genomics company focused on translating genomic sequence data
into novel diagnostic and therapeutic products. We were co-founded in 1997 by
SmithKline Beecham and Incyte Genomics to discover disease-associated genes and
proteins and to develop novel diagnostic products for the improved detection,
classification and prognosis of disease. We anticipate that these diagnostic
products will take the form of simple blood tests assessing the presence of a
novel gene or protein called a molecular target. We recently expanded our
strategy to include the discovery and development of therapeutic products for
the improved treatment of disease. Our initial focus has been on the discovery
of novel molecular targets related to cancer. We expect to extend our discovery
platform beyond cancer into other diseases. To date, we have identified
thousands of disease-associated molecular targets, evaluated over 300 potential
molecular targets using bioMVP, our proprietary target validation process, and
advanced over 40 product candidates into development, including five diagnostic
product candidates which are currently being evaluated in preclinical studies.
We intend to evaluate several thousand additional potential molecular targets
through the use of custom microarrays. We are aggressively seeking patent
protection for our discoveries.
Upon our formation, SmithKline Beecham assigned us a portfolio of
diagnostic product candidates discovered through its research efforts. We have
continued the development of eight of these diagnostic product candidates,
including Lp-PLA(2), a novel risk factor for coronary heart disease, and
Cathepsin-K, a diagnostic marker for osteoporosis. We have completed initial
preclinical studies on Lp-PLA(2) and have commenced initial preclinical studies
on Cathepsin-K and three additional cancer diagnostic product candidates.
We have an agreement with Quest Diagnostics, the world's largest clinical
testing laboratory, to license our future products for use in homebrew tests. We
believe the ability to sell our products to clinical testing laboratories prior
to our seeking FDA approval will allow us to assess demand in the market,
increase awareness of our future products and generate early revenues. Where
appropriate, we will seek FDA approval for our diagnostic products. Eventually,
we may license products to large diagnostic companies to run on their testing
platforms once significant demand for these products is established.
INDUSTRY BACKGROUND
The study of genes, or genomics, and their protein products, or proteomics,
provides a basis for understanding disease at the molecular level, powering
discoveries that will potentially lead to novel diagnostic and therapeutic
products. In the early 1990s, governments and foundations recognized the
potential impact of providing researchers with the sequence of the human genome
and sponsored an intensive program, which became known as the Human Genome
Project, to map and sequence the human genome. In parallel with the public
sector effort, a large private sector effort emerged in the mid-1990s. In July
2000, public and private researchers announced that they had completed a rough
draft of the complete sequence of the human genome.
Currently, the total portfolio of approved drugs and diagnostics is only
directed at approximately 500 protein targets. Genomics is providing an
unprecedented number of new potential targets for diagnostic and therapeutic
development. Scientists now face the challenge of determining which genes and
proteins are implicated in specific diseases.
We believe that genomics and proteomics fundamentally alter the underlying
economics of diagnostic discovery and, when combined with intellectual property
protection, have the potential to convert the diagnostic industry from its
current status as a generally low margin sector to a higher margin sector based
on patent-protected tests that can command premium prices. We were one of the
first companies to recognize the potential of genomics for diagnostics, and we
believe this first mover advantage is reflected in our product development
pipeline.
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<PAGE> 31
We expect that the distinction between diagnostics and therapeutics will
blur with the emergence of products based on the same molecular target. For
instance, a diagnostic product detecting expression levels of a gene called
HER2/neu is currently used in tandem with the drug Herceptin, a monoclonal
antibody targeting HER2/neu gene expression, for the treatment of metastatic
breast cancer. We believe this companion diagnostic/therapeutic approach marks
the arrival of a new era of individualized molecular medicine.
DNA, GENES AND PROTEINS
Deoxyribonucleic acid, or DNA, is present in all living cells. DNA contains
sequences of four distinct types of nucleotide building blocks. A small portion
of DNA contains sequences that are genes. The sequence of nucleotides in genes
comprise the instructions for making proteins.
The entire DNA content of an organism is called its genome. The human
genome is generally estimated to comprise three billion pairs of nucleotides
that contain the instructions for an estimated 40,000 to 100,000 distinct genes.
All cells contain a full copy of DNA, but each cell type activates, or
"expresses," only those genes necessary for their specific functions. Genes
program a cell by expression of its sequence into messenger ribonucleic acid, or
mRNA, which is used as a template to direct the synthesis of a protein. Proteins
carry out all cellular activities, such as relaying signals within and between
cells and controlling cellular replication.
DIFFERENTIAL GENE EXPRESSION AND DISEASE
The activation of a gene is referred to as gene expression. The selective
activation of genes within specific cells is referred to as differential gene
expression. All functions of cells, tissues and organs are controlled by
differential gene expression. Differential gene expression results in the
carefully regulated production of proteins.
Many diseases arise from the abnormal expression of genes, resulting in the
overproduction or underproduction of proteins or the expression of proteins of
altered chemical composition caused by mutations or other changes in the
nucleotide code for the altered gene. Scientists can compare the expression
levels of genes and proteins in samples taken from patients with disease to
those of healthy individuals to determine which genes or proteins are altered in
disease. Samples may be in the form of tissue or in the form of bodily fluids,
such as blood or urine. These differences in gene expression or composition of
genes or proteins can provide valuable information for the discovery of novel
diagnostic and therapeutic products.
DIAGNOSTIC TESTING
Diagnostic tests play a variety of roles in the medical assessment and
therapeutic decision-making process, including alerting the physician to the
presence of a disease and providing critical information necessary to select the
most effective treatment. Diagnostic tests may be performed on blood, urine or
tissue samples.
The effectiveness of a diagnostic test is defined by its "specificity" and
"sensitivity." Specificity measures a test's ability to correctly identify
individuals who are disease-free. A failure of specificity, known as a "false
positive," is the failure of a test to correctly identify an individual who is
disease-free, and results in a healthy person undergoing unnecessary additional
diagnostic procedures. Sensitivity measures a test's ability to detect the
presence of disease when the patient has disease. A test result that incorrectly
indicates that an affected patient does not have the disease is called a "false
negative," and results in an individual with a disease not being diagnosed or
treated.
There are several distinct kinds of diagnostic tests:
- Screening tests are performed on large populations of apparently healthy
people to help identify disease before symptoms appear. Examples of
screening tests include the prostate specific antigen, or PSA, test for
the early identification of prostate cancer, mammograms for breast cancer
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detection and pap smears for cervical cancer detection. To be useful for
screening large numbers of asymptomatic people, tests must be
non-invasive and easy to administer. As a result, screening tests are
typically simple blood-based tests. In addition, screening tests must be
highly specific to avoid costly follow-up procedures associated with
false positive diagnoses.
- Confirmatory tests, such as tissue biopsies, are performed upon
individuals who already have other test results or symptoms suggesting
the presence of disease and are used to help confirm the existence of, or
rule out, the disease in question. Unlike screening tests, confirmatory
tests are administered to a relatively small population and may require
invasive procedures.
- Monitoring tests, such as the CA-125 blood test for monitoring ovarian
cancer, are used to measure the recurrence or progression of a disease.
Monitoring tests are often used repeatedly during treatment, with the
results of the most recent test being compared to the results of prior
tests to assess the effectiveness of treatment. For example, rising
levels of CA-125 may indicate a patient's ovarian cancer is progressing.
- Pharmacogenomic and pharmacogenetic tests. Pharmacogenomic tests, such
as the HER2/neu test administered to breast cancer patients, indicate
whether patients have a specific sub-type of a particular disease and aid
the physician in prescribing the most appropriate treatment. For example,
only a certain sub-set of patients with metatstatic breast cancer express
the HER2 gene. Since Herceptin, a drug prescribed for the treatment of
metastatic breast cancer, is only approved for patients who test positive
for HER2/neu expression, the HER2/neu test determines which patients are
most likely to respond positively to treatment with Herceptin. Similarly,
pharmacogenetic tests indicate how patients are likely to respond to a
particular course of therapy because of their individual genetic makeup
and thus, like pharmacogenomic tests, aid physicians in prescribing the
most appropriate treatment to optimize drug efficacy and minimize the
risk of adverse events.
- Predisposition tests, such as the BRCA-1 test to determine a woman's
predisposition to breast cancer, classify patients into subgroups based
on their DNA sequence, rather than their gene expression or protein
levels. The members of the subgroups have various statistical probability
of developing a particular disease. In contrast to other forms of tests,
predisposition tests indicate the possibility of developing a disease,
rather than the actual presence of the disease.
Rapidly developing genomic and proteomic technologies will also generate
new test formats. The translation of genomic information into novel diagnostic
products will take place at both the gene and the protein level. Currently,
diagnostic products are primarily single analyte blood tests measuring the level
of a single gene or protein. We expect new technologies, such as arrays of genes
and/or proteins, will shift the focus away from the detection of single analytes
to the large-scale, parallel testing of altered expression patterns involving
tens, hundreds or perhaps ultimately thousands of genes and/or proteins in the
same multi-analyte test.
THERAPEUTIC PRODUCTS
There are four principal categories of therapeutic drugs: small molecules,
secreted proteins, therapeutic monoclonal antibodies and therapeutic vaccines.
- Small molecule therapeutics are low molecular weight organic molecules
that may be administered orally and interact with a protein in the body to
either block or enhance its action.
- Secreted protein therapeutics are naturally occurring proteins or near
relatives of natural proteins modified in the laboratory that are
typically administered by intravenous or intramuscular injection.
- Therapeutic monoclonal antibodies are similar to secreted protein
therapeutics in that they are also protein molecules. These antibodies are
made to bind specifically to target proteins. There are currently eight
therapeutic antibody products on the market in the United States which are
marketed for a wide range of diseases, including cancer, cardiovascular
disease, transplant rejection
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and infectious diseases. We believe that antibodies have several potential
clinical and commercial advantages over traditional therapies. These
advantages include the following:
-- faster product development;
-- fewer unwanted side effects as a result of the high specificity for
the applicable disease target;
-- greater patient compliance and higher efficacy; and
-- targeted delivery of various payloads, including drugs, radiation and
toxins, to specific disease sites.
- Therapeutic vaccines. Historically, vaccines were developed and used to
induce an immune response in order to prevent diseases. In contrast,
therapeutic vaccines are administered when the patient already suffers
from the disease. For a therapeutic vaccine to be effective in fighting
disease, such as cancer, it is necessary to first identify specific
molecular targets on the tumor cells, called tumor antigens. The more
selective the target is to the tumor, the greater the likelihood that the
stimulated immune response will be directed at attacking only the cancer
cells. The difficulty in identifying highly specific tumor-associated
antigens has been one of the limiting factors in the development of
useful cancer vaccines.
OUR STRATEGY
We aim to become a leader in the emerging field of molecular medicine
through the discovery and development of proprietary molecular targets for both
diagnostic and therapeutic applications. To achieve this goal, we intend to:
- Continue to enhance our integrated, comprehensive platform for molecular
target discovery and validation. By aggressively using cutting-edge
genomic and proteomic technologies, including access to Incyte's LifeSeq
Gold database, we have put in place a discovery and development program
that has already yielded a pipeline of over 40 disease-associated product
candidates. We intend to continue to enhance our discovery efforts by
continuously adding to our portfolio of target discovery and validation
technologies.
- Discover and validate a portfolio of proprietary diagnostic products that
can achieve rapid and broad market penetration utilizing existing
instrument platforms. We are focused on the discovery and development of
novel molecular targets that we believe will fundamentally transform the
detection of disease by providing high value-added information that
improves clinical decision making. In particular, we are focusing on
developing blood tests that can measure the presence of a single
disease-associated target gene or protein. We intend to perform
preclinical studies to confirm utility and then leverage these
discoveries into initial diagnostic products that run on the existing
installed base of testing instruments in clinical testing laboratories in
order to increase the potential for rapid and broad market penetration.
- Develop a next generation of diagnostic tests compatible with emerging
multi-analyte testing platforms. We believe our discovery program will
yield multi-analyte tests, or tests that analyze multiple gene and/or
protein expression levels, that will more accurately detect and profile a
patient's disease. We are pioneering a program focused on developing
multi-analyte tests for use in detecting various types of cancer.
- Focus our discovery efforts initially on cancer where there is a large
unmet need for better diagnostic and therapeutic products. The early
detection of cancer can greatly increase rates of survival, yet there are
few reliable diagnostic tests for many of the major cancers. We have
focused our initial research efforts on the discovery of novel molecular
targets in cancer. We are currently leveraging Incyte LifeSeq Gold
database as an excellent resource for cancer target discovery since it
contains information on a large number of cancer tissues.
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- Leverage potential diagnostic molecular targets from collaborative
relationships. Through our relationships with Incyte through 2003, we
have access to the world's largest genomic databases. Through our
relationship with SmithKline Beecham through September 2001 and its
relationship with Human Genome Sciences through June 2001, we have an
exclusive license to diagnostic intellectual property arising from
research and development efforts conducted by SmithKline Beecham,
including diagnostic rights arising from SmithKline Beecham's
collaboration with Human Genome Sciences. We intend to pursue additional
collaborative relationships with biotechnology, pharmaceutical and
genomics companies that expand our access to potential diagnostic
molecular targets.
- Partner with key clinical opinion leaders and major diagnostic players to
accelerate market acceptance of diagnostic products. We believe that our
agreement with Quest Diagnostics, the world's largest clinical testing
laboratory, will speed the sale of our future products into the homebrew
market, thereby generating rapid product awareness and early revenues. We
plan to work closely with key opinion leaders to perform clinical studies
on our product candidates that can be published in major peer-review
journals. Following the successful introduction of our diagnostic
products in the homebrew market, we can either seek FDA approval to
market diagnostic products to clinical laboratories and physicians, or
license our molecular targets to established diagnostic companies who
will develop tests utilizing their proprietary instrument platforms for
FDA approval.
- Extend molecular target discovery into the development of
immunotherapeutic products. In collaboration with leading therapeutic
monoclonal antibody companies, we intend to develop monoclonal antibodies
that exploit our novel molecular targets. In the future, we plan to
collaborate with leading therapeutic vaccine companies to develop
therapeutic vaccines.
- Continue to build a strong intellectual property portfolio. We are
building a diversified intellectual property portfolio and are
aggressively seeking patent protection for molecular targets that we
determine to be clinically useful. We believe that patents will be the
catalyst for increasing the profitability of the diagnostics industry and
will enable us to achieve margins similar to those enjoyed by patented
therapeutic products.
MOLECULAR TARGET DISCOVERY AND VALIDATION PLATFORM
We use three approaches to discover novel molecular targets. These methods
seek to find genes and proteins that are differentially expressed in diseased
tissue or bodily fluids compared to healthy tissue or bodily fluids. The first
approach is our Cancer Lead Automated Search Program, or CLASP, our proprietary
bioinformatics software to search, principally, Incyte's LifeSeq Gold database.
The second approach is our internal discovery program involving the screening of
diseased and healthy tissues in laboratory experiments. The third approach is
our collaboration with SmithKline Beecham, which entitles us to diagnostic
molecular targets that SmithKline Beecham identifies as having potential
diagnostic value through September 2001, including diagnostic molecular targets
identified through its relationship with Human Genome Sciences through June
2001.
Once we have identified a potential molecular target, we confirm that it is
differentially expressed in diseased tissue compared to normal tissue through a
rigorous validation and prioritization process that we call bioMVP. Following
bioMVP, only those molecular targets that meet our criteria for specificity and
sensitivity are advanced to the preclinical development stage. For potential
therapeutic targets, we then perform studies to verify the utility of the
molecular target as a candidate for therapeutic product development.
MOLECULAR TARGET DISCOVERY
Database Searches. We have developed proprietary bioinformatics software
to search public and private genomic databases to detect differences in gene
expression patterns between healthy and diseased states. The first search tool
that we developed was CLASP in 1998, which we have used to identify and
prioritize several thousand tissue-specific and cancer-associated molecular
targets. CLASP comprises a set
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of algorithms that interrogate Incyte's LifeSeq Gold database to identify genes
that are both specific to particular tissue types as well as differentially
expressed in tissues from patients with cancer. LifeSeq Gold is a leading human
genomic sequence database, and the multiplicity of samples contained in LifeSeq
Gold increases the probability of finding molecular targets that are
representative of the population at large. LifeSeq Gold contains information
about which genes are expressed in various tissues in the body and about the
dynamics of expression in both normal and diseased states.
CLASP first sorts the LifeSeq Gold database into more than 40 defined
tissue types, such as breast, ovary and prostate. Whereas over half of the
diseased samples in the LifeSeq Gold database are cancer-related, there is
considerable variability in the number of patient samples across different
cancers. CLASP then categorizes each tissue sample by disease state. Disease
states include "healthy," "cancer," "associated with cancer," "other disease"
and "other." These specified disease states allow us to filter out data that
might otherwise impair our ability to identify tissue and cancer-specific
molecular targets. CLASP then performs a simultaneous parallel search for genes
that are expressed both (1) selectively in the defined tissue type compared to
other tissue types and (2) differentially in the "cancer" disease state compared
to the other disease states affecting the same, or different, tissues. This
sorting is accomplished by using mathematical and statistical filters that
specify the minimum change in expression levels and the minimum frequency that
the differential expression pattern must be observed across the tissue samples
for the gene to be considered differentially expressed. The CLASP algorithm
permits quantification of the relative abundance of a particular gene in each
tissue type and in each disease state. With this information, the list of
potential molecular targets is reduced to a manageable number that can be
examined using our bioMVP target validation platform to confirm each potential
molecular target's association with a tissue type or cancer. Moreover, CLASP is
capable of detecting patterns of expression of multiple genes that, when
examined together, can greatly enhance the sensitivity and specificity of tests
compared to the use of a single molecular target alone.
The LifeSeq Gold database represents a catalog of gene expression in
tissues, but does not contain information regarding whether a particular protein
is expressed in bodily fluids, such as blood. Our database search approach is
therefore indifferent to whether the target protein is detectable in bodily
fluids. Following CLASP, we utilize proprietary and public algorithms to analyze
gene sequence information to predict whether the target protein is likely to be
secreted or found on the cell surface. This enables us to carefully select and
prioritize those targets that have greater potential as blood diagnostic tests.
The cell surface markers may be potential targets for therapeutic monoclonal
antibodies that can be developed to bind to the cell surface marker. Therapeutic
monoclonal antibodies can be used to deliver drugs, radiation or toxins to
cancerous cells.
We conduct a CLASP analysis on each new release of the LifeSeq Gold
database. By repeating CLASP analyses regularly, we are able to increase the
probability of discovering clinically important molecular targets.
Internal Discovery. Our second method for molecular target discovery
involves our direct examination of gene and protein expression in diseased and
healthy tissue and bodily fluids. This approach supplements our database search
efforts and enables us to:
- analyze additional tissues or bodily fluids in several cancers of
interest;
- segregate cancers by the stage of disease, allowing us to identify genes
and proteins that are differentially expressed at various stages of
disease progression;
- focus on tissues of a specific disease or organ that may be
under-represented in the LifeSeq Gold database;
- focus on molecular targets found in bodily fluids to facilitate
development of non-invasive diagnostic tests; and
- identify genes with lower levels of gene expression that are less likely
to appear in the LifeSeq Gold database.
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We use three methodologies to examine tissue and bodily fluid samples. The
first method is called "subtractive hybridization." In subtractive
hybridization, genes that are expressed similarly in both diseased and healthy
tissue are removed. The genes that remain are only those that are differentially
expressed in a diseased compared to a normal state. Once those differentially
expressed genes have been isolated, they are identified and further analyzed.
Through subtractive hybridization, we have identified thousands of disease-
associated genes, many of which we believe we were the first to identify. We are
aggressively pursuing intellectual property filings covering these genes.
The second method we use to examine tissue samples is through the use of
microarrays, which are glass or silicon wafers with a large number of known gene
fragments attached to their surface. We probe the microarray with diseased and
healthy tissue samples in order to identify genes that are differentially
expressed in diseased tissues. We have performed hundreds of experiments using
Incyte's microarrays and recently entered into an agreement with Agilent
Technologies to produce custom microarrays in each of our five major cancers of
interest: breast, colon, lung, ovary and prostate cancer. We believe our use of
custom microarrays will substantially increase our capacity to identify
molecular targets.
The third method we use to examine tissue and bodily fluids involves the
use of proteomic technologies to identify differentially expressed proteins in
tissues or bodily fluids using either two-dimensional gel profiling or protein
chip technology.
These analyses are currently conducted using commercially available tissue
samples. To supplement these public resources, we recently entered into an
agreement with the University of Pittsburgh Medical Center to obtain additional
tissue samples. We plan to establish similar collaborations with additional
sources of high-quality tissue samples in the future.
SmithKline Beecham Diagnostic Collaboration. Our third source of molecular
target discovery is SmithKline Beecham. As one of our founders, SmithKline
Beecham assigned nine diagnostic molecular targets to us and agreed to assign to
us on an exclusive basis diagnostic rights to additional targets it determines
from its research and development through September 2001 to have potential
diagnostic utility, including targets derived from SmithKline Beecham's
collaboration with Human Genome Sciences which ends in June 2001. Our rights do
not extend to targets identified by SmithKline Beecham's vaccines division.
Among the molecular targets assigned to us by SmithKline Beecham upon our
formation was Lp-PLA(2), our most advanced diagnostic product candidate.
SmithKline Beecham provides regular updates on molecular targets with potential
diagnostic utility. To date, eight of our 43 diagnostic molecular target product
candidates have come from SmithKline Beecham's collaboration with Human Genome
Sciences. In the past 12 months, SmithKline Beecham has offered to us more than
100 additional targets under this arrangement, of which we have accepted three
to date.
BIOMVP FOR MOLECULAR TARGET VALIDATION
Once we identify a potential molecular target, we subject it to a rigorous
laboratory validation and prioritization process called bioMVP, which represents
know-how that we have developed internally over the past three years. We use
quantitative and semi-quantitative polymerase chain reaction, or PCR, to
quantify levels of gene expression in a panel of over 120 tissue types. These
techniques confirm whether potential molecular targets are specific to the
tissue type suggested by the original expression pattern detected at the
discovery stage and have the requisite level of correlation with disease and/or
specific stages in disease progression. If the molecular target meets
specificity and sensitivity criteria, we then progress the molecular target into
reagent development. To date, we have conducted quantitative and semi-
quantitative PCR experiments on more than 300 molecular targets, 43 of which we
have advanced into reagent development. For a typical molecular target, the
bioMVP process requires three to six months to complete. We intend to evaluate
several thousand additional potential molecular targets through the use of
custom microarrays. These microarrays will allow us to simultaneously measure
expression levels of 2,500 molecular targets of interest in several healthy and
diseased tissues.
Quantitative and Semi-quantitative PCR. PCR is an amplification technology
for making copies of genetic material. PCR is often required because the
quantity of the molecular target in actual tissue
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samples is too small to measure. By using PCR, sufficient copies of a molecular
target can be made in order to assess their abundance. Quantitative PCR enables
the estimation of the level of gene expression in a sample by counting the
number of copies made over a specified period of time. We use two ABI Prism 7700
machines which are dedicated full time to conduct quantitative PCR activities.
Semi-quantitative PCR is similar to quantitative PCR, except that the number of
copies of a molecular target in a sample is assessed by visual inspection,
rather than by counting. As a result, semi-quantitative PCR can be performed
more rapidly than quantitative PCR and is useful for initial confirmation of
differentially expressed molecular targets. Semi-quantitative PCR provides a
useful discriminatory filter to reduce the number of targets to be evaluated by
quantitative PCR. We utilize 12 thermocyclers for our semi-quantitative PCR
analysis. Currently, approximately six members of our scientific staff are
engaged in bioMVP molecular target validation.
The following graph shows the bioMVP analysis for C106, a potential
molecular target for colorectal cancer we discovered through our search of the
LifeSeq Gold database using CLASP, in more than 120 tissue samples:
[graph of bioMVP analysis for C106]
We believe that C106 is a novel molecular marker for colorectal cancer, and
we have applied for a patent for diagnostic and therapeutic utility for C106. As
shown above, our analysis indicate that C106 is expressed almost exclusively in
colon tissue and is over-expressed in a significant number of the colorectal
cancer samples tested (red bars) compared to the normal adjacent tissue (blue
bars) of the same patient. The only sample that shows a small amount of
expression other than colorectal tissue is a liver cancer sample, which upon
further examination was revealed to be a sample from a patient with primary
colorectal cancer that had spread to the liver.
Microarrays. In our collaboration with Agilent, we have designed custom
microarrays with sequences of 2,500 molecular targets affixed to the surface of
each chip in order to increase the throughput of our molecular target validation
efforts. Instead of separately testing each molecular target against each of the
120 healthy and diseased tissue samples, we expect to be able to simultaneously
test all 2,500 molecular targets affixed to the surface of the chip against
several tissue types. While custom microarrays will enable us to analyze a large
number of molecular targets simultaneously, custom microarrays may be less
precise in distinguishing small variations in expression levels. If the
molecular target is suitably sensitive and specific, we will perform
quantitative PCR to determine the degree of differential expression and further
validate its relevance as a potential diagnostic and/or therapeutic molecular
target.
REAGENT DEVELOPMENT
Once a target protein has been selected, we develop antibodies, or
reagents, that bind specifically to the target protein. Where only a partial
sequence of a target gene is available, we can clone the full length gene and
express the protein. The expressed protein is then purified and used to generate
antibodies. The characteristics of the antibodies may be modified in vitro to
optimize their affinity to bind to the target protein. Typically, it takes up to
two years from discovery for a potential molecular target to complete this stage
of reagent and assay development. The purified protein and antibodies are then
used as key reagents for subsequent assay development for both diagnostics and
therapeutics.
DIAGNOSTIC PRODUCT DEVELOPMENT
Assay Development. Once a molecular target is selected for full product
development, we may develop tests or assays measuring both genes and proteins in
blood and tissue samples. To detect the expression of nucleic acids, such as
mRNA, we produce nucleic acid probes that bind specifically to the molecular
target of interest. In a typical assay, the "capture" antibody binds to the
protein and the "detection" antibody binds to a different portion of the same
protein, releasing a signal. The intensity of the signal quantifies the level of
expression of the protein. We currently use standard assay technology that is
widely available to clinical testing laboratories. Once an assay is configured,
it is used to determine if the
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molecular target is coding for a protein that is detectable in bodily fluids,
such as blood. If the assay can successfully detect the protein in bodily
fluids, the molecular target is advanced to preclinical validation studies to
determine the clinical utility of the test.
Diagnostic Preclinical Studies. A large number of patient blood samples
are tested for the presence or overabundance of the target protein. Once
sufficient data is available to validate a strong correlation with disease or
stage of disease, we publish our research findings in medical journals to
enhance awareness within the medical community.
THERAPEUTIC PRODUCT DEVELOPMENT
Our diagnostic discovery process is designed to identify novel molecular
targets that are highly specific to a tissue type and disease state. Some of
these molecular targets are cell-surface or secreted proteins and have the
potential to become targets for both diagnostic and therapeutic products. Other
molecular targets are found within cells and have more limited diagnostic
potential. To date, we have sought patent protection on many molecular targets
we have discovered, but have pursued diagnostic product development only on
cell-surface or secreted proteins due to the higher likelihood that such
proteins will be found in bodily fluids and can be developed into diagnostic
tests. More recently, we have expanded our focus to pursue the therapeutic
potential of the cell-surface and secreted proteins. In the future, we may also
seek to develop therapeutic product candidates as therapeutic vaccines based on
molecular targets found within cells.
Therapeutic preclinical validation. For molecular targets that are
cell-surface or secreted proteins, we intend to enter into collaborations to
develop therapeutic monoclonal antibodies. If appropriate, functional validation
studies confirming the localization and distribution of the protein in various
tissue samples will be followed by clinical studies to assess the safety and
efficacy of these product candidates in animals and humans. For molecular
targets found within cells, we intend to enter into collaborations to develop
therapeutic vaccines. If appropriate, functional validation studies will be
followed by studies to assess the safety and efficacy of these product
candidates in animals and humans.
OUR PRODUCT CANDIDATES
To date, we have identified several thousand novel, disease-associated
molecular targets using CLASP, and we are aggressively seeking patent protection
for all of our discoveries. Of the over 300 molecular targets that have
completed bioMVP, we have advanced 43 targets into reagent development. Five of
these diagnostic product candidates have progressed into diagnostic preclinical
studies. Our most advanced diagnostic product candidates are:
LP-PLA(2) -- A NOVEL RISK FACTOR FOR CORONARY HEART DISEASE
Our most advanced diagnostic product candidate, Lp-PLA(2), is a novel risk
factor for coronary heart disease discovered by SmithKline Beecham. SmithKline
Beecham assigned exclusive rights to us to develop Lp-PLA(2) as a diagnostic
test. There is a significant need for additional cardiovascular risk factors,
since approximately half of all persons with coronary artery disease do not
exhibit traditional risk factors, such as high blood pressure or LDL
cholesterol, commonly referred to as "bad" cholesterol.
In October 2000, The New England Journal of Medicine published the results
of a study on Lp-PLA(2). The study, which used our proprietary assay, concluded
that the level of circulating Lp-PLA(2) exhibited a strong correlation with risk
of coronary heart disease, independent of other known risk factors, such as LDL
cholesterol. The study used blood samples from middle-aged, caucasian men with
above-normal LDL cholesterol levels collected during the West of Scotland
Coronary Prevention Study, a landmark investigation that led to the approval of
pravastatin for the reduction of LDL cholesterol levels.
The Lp-PLA(2) study examined the cases of 580 men who had suffered adverse
coronary events, such as heart attacks, coronary-artery-bypass surgery or
angioplasty. These individuals were compared with
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1,160 case-controlled men who had not suffered a cardiac event. The comparison
was controlled for age and smoking status.
Examining five ranges of Lp-PLA(2) levels, the study found a strong
correlation between Lp-PLA(2) and coronary events, with a p-value of less than
0.001. The risk of an adverse coronary event was approximately two times greater
for subjects with the highest levels of Lp-PLA(2) compared to subjects with the
lowest levels of Lp-PLA(2). Lp-PLA(2) was shown to be a strong risk factor
independent of LDL cholesterol and other known markers of vascular inflammation,
such as C-reactive protein. We plan to conduct additional studies to confirm the
clinical utility of Lp-PLA(2) and to seek FDA approval for Lp-PLA(2) as a
diagnostic product. Future studies will be designed to accomplish the following
objectives:
- establish and confirm the specificity and sensitivity of the Lp-PLA(2)
assay;
- verify the results of the West of Scotland Coronary Prevention Study in a
broader population;
- investigate the relationship between Lp-PLA(2) levels and treatment with
HMG-CoA reductase inhibitors; and
- investigate the potential correlation between Lp-PLA(2) and surrogate
endpoints, such as coronary artery calcification and restenosis following
angioplasty and/or stent insertion.
We believe that an Lp-PLA(2) diagnostic test will enable physicians to
better identify and confirm individuals at risk for coronary heart disease.
These individuals can be treated with diet and exercise regimens, as well as
with drugs, particularly HMG-CoA reductase inhibitors. SmithKline Beecham has a
clinical program with Lp-PLA(2) as a therapeutic target. If SmithKline Beecham
is able to successfully develop and sell this therapeutic to treat patients with
high levels of Lp-PLA(2), we believe there will be significant parallel demand
for an Lp-PLA(2) diagnostic test.
CATHEPSIN-K -- A DIAGNOSTIC MARKER FOR OSTEOPOROSIS
Our other advanced diagnostic product candidate, Cathepsin-K, is a novel
diagnostic molecular target that shows specific expression in osteoclasts, which
are bone resorbing cells. Cathepsin-K was originally discovered by SmithKline
Beecham researchers while mining data from a cDNA library made from human
osteoclasts and is believed to be expressed exclusively in osteoclasts. We have
developed a proprietary immunoassay that is currently in preclinical studies to
evaluate its utility as a molecular target for disease states associated with
excessive bone resorption, such as osteoporosis and metastatic prostate cancer.
We believe that Cathepsin-K may also be used to monitor patients who are being
treated for osteoporosis. SmithKline Beecham has a preclinical drug research
program targeting Cathepsin-K.
ONCOLOGY
Since our inception in 1997, our primary research and development focus has
been oncology, where there is significant unmet clinical need and wide
acknowledgement that early detection dramatically impacts survival. Currently,
we have over 40 product candidates in development for various types of solid
tumors and hematopoietic neoplasms.
We intend to develop blood-based or other minimally invasive diagnostic
tests that have the requisite sensitivity and specificity to screen asymptomatic
individuals as part of routine physical examination. In addition, we intend to
develop tests for the examination of tissue that will more accurately
characterize the disease in terms of stage, grade and aggressiveness of tumor
than conventional methods, thereby facilitating more appropriate treatment. We
also believe that our molecular targets may be useful to detect the spread of a
disease from one part of the body to another, and we are currently assessing
techniques for using our molecular targets for that purpose.
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The following table shows the number of our product candidates at various
stages of development with respect to various forms of cancer:
<TABLE>
<CAPTION>
TYPE OF REAGENT ASSAY PRECLINICAL
CANCER DEVELOPMENT DEVELOPMENT STUDIES
------- ----------- ----------- -----------
<S> <C> <C> <C>
Colorectal............................... 10 -- 1
Breast................................... 7 -- --
Lung..................................... 7 -- --
Prostate................................. 7 -- 1
Ovarian.................................. 2 -- --
Other.................................... 3 2 1
-- -- --
Total............................... 36 2 3
== == ==
</TABLE>
MARKETING AND COLLABORATIVE RELATIONSHIPS
Diagnostic Clinical Validation and Commercialization. Once the clinical
utility of a diagnostic molecular target is validated in preclinical studies
which typically takes three years from initial discovery, the next step is to
make it available through the "homebrew" market. We believe that our agreement
with Quest Diagnostics will speed the penetration of our future products into
the homebrew market. Provided that we sell our products only to laboratories
qualified under the Clinical Laboratory Improvements Act, or CLIA, approval by
the FDA is not required. In addition, these diagnostic tests can be sold for use
in academic and biopharmaceutical laboratories for research purposes. We believe
that the use of our future products in these markets will help us further define
clinical utility, generate publications in medical journals and increase market
awareness.
In parallel with introduction of the diagnostic product into the homebrew
market, we can pursue FDA approval, either under our own auspices or in concert
with future strategic partners. We estimate that obtaining FDA approval will
take an additional two to three years. By making our molecular targets available
through the homebrew market prior to receiving FDA approval, we believe that we
can accelerate our market penetration if and when FDA approval is obtained. For
those molecular targets that do not demonstrate clear clinical utility, we will
continue to make them available to the homebrew market as long there is demand.
Collaborative Relationships. In July 2000, we entered into a Research
Agreement with the Sloan-Kettering Institute for Cancer Research pursuant to
which we will use a number of our molecular targets to evaluate tissues samples
provided by the Sloan-Kettering Institute for Cancer Research. This agreement,
which may be terminated by us upon 30 days' prior written notice, has a one year
term.
In August 2000, we entered into a DNA Microarray Technology Access Program
Master Early Access Agreement pursuant to which we have designed and Agilent
will manufacture custom microarrays with sequences of 2,500 molecular targets.
This agreement has a one year term and may not be terminated by either party
except under specified circumstances, including an uncured breach by the other
party.
In October 2000, we entered into a Collaborative Research Agreement with
the University of Pittsburgh Medical Center pursuant to which we expect to
obtain tissue samples for evaluation in our laboratory discovery processes. This
agreement has a three year term and may be terminated by either party upon 60
days' prior written notice. Under this agreement, we are obligated to make cash
payments to the University of Pittsburgh Medical Center in an aggregate amount
equal to approximately $1.2 million.
Marketing Channels. Initially, we plan to license our products for sale
through Quest Diagnostics and other clinical testing laboratories comprising the
homebrew market. Where we determine to pursue FDA approvals for our screening
products, our marketing strategies could utilize a number of channels and rely
on a staged market entry. We may choose to enter licensing and marketing
relationships with strategic partners that could include clinical testing
laboratories or pharmaceutical and diagnostic companies. Under such
relationships, we would rely largely or exclusively on the dedicated sales
forces of such partners for
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the marketing of our products. We or our potential partners may also enter into
business relationships with distributors of other medical products to sell our
products. In parallel with our attempt to establish such sales channels, the
Company plans to undertake a business development strategy, alone or in concert
with any strategic partners, focusing on (i) educating medical opinion makers
and senior staff of managed care organizations, insurance companies, large
employers and physician groups about the efficacy and cost-effectiveness of our
products and (ii) securing the maximum level of third-party reimbursement for
our products. While we may seek to establish internal direct sales capability
for any of our products, such an effort would likely be the last step in any
staged market entry strategy, and we have no current plans to undertake such an
effort.
For information regarding additional material agreements of our company,
please see "Certain Relationships and Related Party Transactions."
COMPETITION
We face competition from a number of companies in the field of novel
molecular target discovery. Large pharmaceutical and biotechnology companies,
such as Abbott Laboratories, Bayer AG, Genentech, Millennium Pharmaceuticals and
The Roche Group, have active in-house programs that focus on the discovery of
molecular targets.
In diagnostics, we face competition from divisions of large companies, such
as Millennium Pharmaceuticals' Predictive Medicine Division, that focus
specifically on molecular target discovery for disease detection. We also face
competition from companies focused on cancer diagnostics and the discovery of
single nucleotide polymorphisms, or SNPs. Cancer diagnostic companies, such as
Fujirebio Diagnostics (formerly Centocor Diagnostics) Matritech and Exact Corp.,
are actively developing diagnostic tests. SNP discovery companies, such as DNA
Sciences and Myriad Genetics, are focused on the analysis of DNA, determining
the association of a SNP with the predisposition to disease.
Diagnostics platform technology companies, such as Ciphergen Biosystems,
are using their specific technologies to identify proteins that are involved in
disease. Frequently, these companies are focused on the development of their
platform technology rather than the discovery of novel molecular targets. We
may, in the future, supply the content that will be measured using these
emerging platforms, and therefore view these companies as potential partners.
GOVERNMENT REGULATION
The U.S. Food and Drug Administration, or FDA, regulates all diagnostic
kits and pharmaceutical products, many of which must be approved before they can
be marketed in the United States. Comparable foreign regulatory agencies impose
similar requirements on the clinical development, manufacture and marketing of
pharmaceutical products and in vitro diagnostic devices in foreign countries.
These agencies regulate research and development activities and the testing,
manufacture, quality control, safety, effectiveness, labeling, storage, record
keeping, advertising and promotion of these products and services. The
regulatory process is expensive, time consuming and uncertain. Before receiving
approval from the FDA to market our product candidates, they must undergo
extensive testing, possibly including animal and human clinical trials, which
can take many years and require substantial expenditures.
Because our product candidates involve the application of new technologies
for the diagnosis and treatment of disease, they may be subject to substantial
review by government regulatory authorities. Government regulatory authorities
also may grant regulatory approvals more slowly for our products than for
products that use more conventional technologies. To date, we have not submitted
an application to the FDA or any other regulatory authority for any product
candidate.
Even after investing significant time and expenditures, we may not be able
to obtain regulatory approval for our product candidates. If we do receive
regulatory approval, this approval may entail limitations on the indicated uses
for which we can market our products. Further, once regulatory approval is
obtained, a marketed product and its manufacturer are subject to continual
regulation, and the discovery
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of previously unknown problems with a product or manufacturer may result in
additional restrictions on the product, manufacturer or manufacturing facility,
including withdrawal of the product from the market. Different centers within
FDA are responsible for regulating these products, depending on whether the
product is considered a pharmaceutical, biologic or medical device.
DIAGNOSTICS
The products under development that we intend to sell to reference
laboratories such as Quest Diagnostics will initially be analyte specific
reagents, or ASRs, and will be subject to distribution and labeling restrictions
under the Federal Food Drug and Cosmetic Act. Most are exempt from premarket
notification requirements, and their sale is generally limited to clinical
laboratories regulated under CLIA as qualified to perform high complexity
testing, in vitro diagnostics manufacturers and non-clinical laboratories that
do not use the reagents to provide diagnostic information to patients.
Manufacturers and suppliers of ASRs are required to register with the FDA, to
conform to the FDA's current good manufacturing practices requirements and to
comply with certain reporting and other record keeping requirements.
Because we do not currently provide any clinical testing services, we are
not required to register under CLIA, although we will have to register with the
FDA as an ASR manufacturer or supplier and comply with other applicable
requirements once we start selling ASRs. The clinical reference laboratories to
which we intend to sell reagents for their home brew tests must be
CLIA-certified. CLIA is intended to ensure the quality and reliability of
clinical laboratories in the U.S. by mandating specific standards in the areas
of personnel qualification, administration, participation in proficiency
testing, patient test management, quality control, quality assurance and
inspections. The regulation promulgated under CLIA establishes three levels of
diagnostic tests: (1) waived, (2) moderately complex and (3) highly complex. The
standards applicable to a clinical laboratory depend on the level of the tests
it performs. We cannot assure you that the CLIA regulations and future
administrative interpretations of CLIA will not have a materially adverse impact
on us by limiting the potential market for our future ASR products.
If we decide to develop in vitro diagnostic tests for broader use, our
products will be subject to additional regulation by the FDA under its authority
to regulate medical devices. In the U.S., medical devices are classified into
one of three classes on the basis of the controls deemed by the FDA to be
necessary to reasonably ensure their safety and effectiveness. Class I devices
are subject to general controls, including labeling, premarket notification and
adherence to quality systems regulations, or QSRs, which are device-specific
good manufacturing practices. Class II devices are subject to general controls
and special controls, including performance standards and postmarket
surveillance. Class III devices are subject to most of the previously identified
requirements as well as to premarket approval. Most in vitro diagnostic devices
are regulated as Class I or Class II devices, although certain diagnostic tests
are classified as Class III devices.
Before a new device can be introduced, its manufacturer must obtain
marketing clearance through either a premarket notification under Section 510(k)
of the Federal Food, Drug and Cosmetic Act or approval of a premarket approval
application, or PMA. A 510(k) premarket notice must demonstrate that the device
in question is substantially equivalent to another legally marketed device that
does not require premarket approval. The FDA is supposed to complete its review
of a 510(k) notice within 90 days of submission, but it may request additional
data, including clinical information, which increases the time necessary to
review the notice. Class I devices and many Class II devices are generally
exempt from the 510(k) requirement.
A manufacturer must file a PMA (1) if the FDA rejects the 510(k) notice,
(2) if the device is not equivalent to a marketed device or (3) if the use of a
510(k) notice is not otherwise appropriate. The PMA process is more complex,
costly and time consuming than the 510(k) clearance procedure. A PMA must be
supported by more detailed scientific evidence than a 510(k) notice, including
clinical data to demonstrate the safety and efficacy of the device. If the
device is determined to present a "significant risk," the sponsor of the trial
must file an investigational device exemption, or IDE, prior to commencing
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clinical trials. If the FDA approves the IDE application and the institutional
review boards, or IRBs, at the institutions at which the clinical trials will be
performed approve the clinical protocol and related materials, clinical trials
may begin at a specific number of investigational sites with a specific number
of patients, as approved by the FDA. Upon completion of the clinical trials, and
assuming that the results indicate that the product is safe and effective for
its intended purpose, the sponsor will then file a PMA.
While the FDA is required to review a PMA in 180 days, it typically
requests additional information and may refer the PMA to an FDA advisory
committee for additional review. A PMA application can take several years to
complete, and there is no assurance that any submitted PMA application will ever
be approved. Even when approved, the FDA may limit the indications for which the
product may be marketed or to whom it may be sold. Additionally, there can be no
assurance that the FDA will not request additional information or request the
performance of additional clinical studies as a condition of approval or after
the PMA is approved. We believe that most, if not all, of our diagnostic test
kits will ultimately require a PMA.
THERAPEUTICS
Although we currently do not intend to market our own therapeutic products,
we may develop products through Phase II before out-licensing. Therapeutic
product development is subject to extensive regulation. The process required by
the FDA before a pharmaceutical product or biologic may be marketed in the
United States generally involves the following:
- completion of preclinical laboratory and animal testing;
- submission of an investigational new drug application, or IND, which must
become effective before clinical trials in humans may begin;
- performance of adequate and well-controlled human clinical trials to
establish the safety and efficacy of the proposed drug for its intended
use; and
- approval by the FDA of a new drug application, or NDA, if the product is
a pharmaceutical, or a biologics license application, or BLA, if the
product is a biologic.
The testing and approval process requires substantial time, effort and
financial resources, and we do not know whether any approvals for our or any
collaborator's product candidate will be granted in a timely manner or at all.
Prior to commencing a clinical trial, a sponsor must submit an IND to the
FDA. The IND becomes effective 30 days after receipt by the FDA unless the FDA
within the 30-day period raises concerns or questions about the conduct of the
trial. In that case, the IND sponsor and the FDA must resolve any outstanding
concerns before the clinical trial may begin. The submission of an IND may never
result in FDA authorization to commence a clinical trial. In addition, an
independent institutional review board, or IRB, at each institution at which a
clinical trial is being performed must review and approve the clinical protocol
and related materials before is may begin.
Human clinical trials are typically conducted in three sequential phases
that frequently overlap. The FDA, an IRB or the sponsor may suspend a clinical
trial at any time for one or more reasons, including a belief that the subjects
are being exposed to an unacceptable health risk. These phases generally include
the following: Phase I, during which the drug is introduced into healthy human
subjects or occasionally into patients and tested for safety, dose tolerance and
metabolism; Phase II, during which the drug is introduced into a limited patient
population to determine the efficacy of the product of specific targeted
diseases, to determine dosage tolerance and optimal dosage and to identify
possible adverse effects and safety risks; and Phase III, during which the
clinical trial is expanded to a more diverse patient group in geographically
dispersed clinical trial sites to further evaluate clinical efficacy, optimal
dosage and safety.
The results of product development, preclinical animal studies and human
clinical studies are submitted to the FDA as part of an NDA or BLA. The FDA may
disapprove the NDA or BLA if the applicable regulatory criteria are not
satisfied or it may require additional clinical data. Even if approved,
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the FDA may withdraw product approval if compliance with regulatory standards is
not maintained or if problems occur after the product reaches the marketplace.
In addition, the FDA may require post-marketing studies to monitor the effect of
approved products, and may limit further marketing of the product based on the
results of these post-marketing studies. Further, if the sponsor wants to make
changes in a product after FDA approval, a new or supplemental application might
be required.
The satisfaction of FDA requirements or the applicable requirements of
foreign regulatory agencies typically takes several years, and the actual time
required may vary substantially based upon the type, complexity and novelty of
the product or disease. Government regulation may delay or prevent the marketing
of potential products for a considerable period of time and impose costly
procedures upon our activities. Success in early stage clinical trials does not
assure success in later stage clinical trials. Data obtained from clinical
activities is not always conclusive and may be susceptible to varying
interpretations that could delay, limit or prevent regulatory approval. Even if
a product receives applicable regulatory approval, the later discovery of
previously unknown problems can result in restrictions on the product or even
the complete withdrawal of the product from the market. The FDA has broad
regulatory and enforcement powers, including the ability to levy fines and civil
penalties, suspend or delay issuance of approvals, seize or recall products and
withdraw approvals, any one or more of which could have a material adverse
effect upon us.
We are also subject to various laws and regulations relating to safe
working conditions, laboratory and manufacturing practices, the experimental use
of animals and the use and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents used
in connection with our research. Compliance with these laws and regulations
relating to the protection of the environment has not had a material effect our
capital expenditures or competitive position. However, the extent of
governmental regulation that might result from any legislative or administrative
action cannot be accurately predicted.
INTELLECTUAL PROPERTY
Our initial source of intellectual property was our founders. We have an
exclusive license to diagnostic intellectual property arising from research and
development efforts conducted by SmithKline Beecham through September 2001,
including diagnostic rights arising from SmithKline Beecham's collaboration with
Human Genome Sciences through June 2001. We do not have any rights to diagnostic
intellectual property arising from research and development efforts at
SmithKline Beecham Biologicals, a subsidiary of SmithKline Beecham. Upon our
formation, SmithKline Beecham assigned to us the rights to nine potential
diagnostic molecular targets that it had discovered through its collaboration
with Human Genome Sciences, including Lp-PLA(2) and Cathepsin-K, our most
advanced diagnostic product candidates. We are currently developing eight of
these potential diagnostic molecular targets. We are currently prosecuting and
maintaining two issued U.S. patents, two pending U.S. utility applications and
five foreign counterpart applications related to these molecular targets.
Also upon our formation, Incyte granted us a fully-paid, non-exclusive
subscription to its LifeSeq Gold and PathoSeq databases through 2003. While we
may be able to rely on Incyte's composition of matter and utility patents on a
non-exclusive basis, we have filed several specific utility patent applications
on discoveries made by us through our database search tools, methods and
processes.
We have also filed applications on molecular targets that we have
identified through our internal discovery processes. We currently have pending
45 U.S. provisional applications, 12 U.S. utility applications, 15 PCT
applications and 15 related foreign applications and patents reflecting our own
discoveries. These applications are usually directed to the detection,
monitoring and treatment of various cancers, including colon, breast, prostate,
lung, ovarian, small intestine, stomach, bladder, uterine, endometrial, and
testicular cancer. Approximately 2,600 molecular targets are covered by these
applications and patents.
Our success will depend in large part on our ability to obtain patents and
maintain adequate protection of our intellectual property in the United States
and other countries. If we do not adequately
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protect our intellectual property, our competitors may be able to make use of
our molecular targets and erode our competitive advantage. In addition, the laws
of some foreign countries do not protect proprietary rights to the same extent
as the laws of the United States, and many companies have encountered
significant problems in protecting their proprietary rights in these foreign
countries. These problems can be caused by, for example, a lack of rules and
methods for defending intellectual property rights.
The patent positions of biopharmaceutical and biotechnology companies,
including our patent positions, are generally uncertain and involve complex
legal and factual questions. Our patent applications may not protect our
technologies or product candidates for any one or more of the following reasons:
- some or all of our pending patent applications may not result in issued
patents;
- we may develop additional proprietary technologies that are not
patentable;
- any patents issued to us may not cover commercially viable products;
- any patents issued to us may not provide us with sufficient scope so as
to block others from using our or similar technology;
- we may require access to patents issued to third parties in order to
operate; and
- any patents issued to us may be challenged, circumvented or invalidated
by third parties.
In the event our competitors file patent applications or are issued patents
claiming technology also claimed by us in pending applications, we may be
required to participate in interference proceedings governed by USPTO to
determine priority of invention. We, or our licensors, may also need to
participate in interference proceedings involving our patents and pending
applications. An unfavorable outcome in an interference proceeding could require
us to cease using the technology or license rights from prevailing third
parties. There is no guarantee that any prevailing party would offer us a
license or that we could acquire any license made available to us on
commercially acceptable terms.
We may not be able to obtain patents for our product consolidates or
methods. Even if we are able to obtain new patents, these patents may not
provide us with substantial or meaningful protection or be commercially
beneficial to us. The issuance of a patent is not conclusive as to its validity
or its enforceability. Further, a patent does not provide the patent holder with
an absolute right to practice such patented technology. Any patents issued to us
or to our licensors may be challenged and subsequently invalidated or
circumvented. It is quite possible that third parties may have patents of their
own which could, if asserted, prevent us from practicing our patented
technologies. This inability to practice our own patented technologies could
adversely affect our business and revenue.
Others have filed, and in the future are likely to file, patent
applications covering genes or gene fragments which we may wish to utilize, or
products that are similar to products developed with the use of our
technologies. Third parties may assert that we are using their proprietary
technologies without authorization. In addition, third parties may obtain
patents and claim that use of our technologies and products infringes these
patents. We could incur substantial costs and diversion of management and
technical personnel in defending against any of these claims or enforcing our
patents against others. Furthermore, parties making claims against us may be
able to obtain injunctive or other equitable relief which could effectively
block our ability to further develop and commercially sell our future products,
and could result in the award of substantial damages against us. In the event of
a successful claim of infringement against our company, we may be required to
pay damages and obtain one or more licenses from third parties. We may not be
able to obtain these licenses at a reasonable cost, if at all. In that event, we
could encounter delays in product introductions while we attempt to develop
alternative methods or products, which we may be unable to do.
We are aware of patents and patent applications owned by third parties
which may cover certain aspects of the development and commercialization of some
of our diagnostic product candidates. We intend either to seek licenses under
any patents that relate to our product candidates or to modify such product
candidates so as not to infringe. We may not be able to obtain such licenses on
acceptable terms
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or at all, and product candidate modifications may require substantial cost or
delay. If neither approach is feasible, we could be subject to a claim of patent
infringement which, if successful, could prevent us from commercializing these
diagnostic product candidates.
THIRD PARTY REIMBURSEMENT
Our products under development will initially be sold as testing services
to medical institutions, laboratories and physicians. Medical institutions and
physicians will be required to seek reimbursement for the use of these products
and services from third-party payors, including Medicare, Medicaid, private
health insurers and managed care organizations. As a result, market acceptance
of our future products may depend in large part on the extent to which third
party payors provide coverage for the diagnostic tests, drugs or therapeutic
vaccines that are developed from our product candidates and how much they will
pay for the tests and therapeutic products after they are approved.
The coverage and level of payment provided by U.S. and foreign third party
payors varies according to a number of factors, including the type of medical
provider, the payor, the location and cost. In the United States, many private
health care insurance carriers follow the recommendations of the Health Care
Financing Administration, or HCFA, which establishes guidelines for the coverage
of procedures, services and medical equipment and the payment of health care
providers treating Medicare patients. In recent years, it has taken an
increasing amount of time to obtain coverage from the HCFA for new medical
technology and to obtain appropriate codes for filing claims, even after that
technology is approved by FDA. While the HCFA has recently begun to respond to
pressure to make faster and more reasoned decisions regarding coverage and to
publicize the criteria that it uses to make those decisions, it is too early to
say whether these efforts will have a beneficial effect on reimbursement for our
product candidates.
Internationally, healthcare reimbursement systems vary significantly. In
many countries, the government sets the prices that will be paid.
MANUFACTURING
To date, we have not manufactured any products for either clinical or
commercial purposes, and we do not have any manufacturing facilities, technical
capabilities or the resources to do so. We have no present plans to establish a
manufacturing facility. We intend to utilize contract third-party manufacturers
or corporate collaborators for the production of material for use in clinical
trials and for the commercialization of our future products.
EMPLOYEES
As of December 31, 2000, we employed 43 full-time employees, including 11
in finance and administration and 32 in research and development. None of our
employees are represented by collective bargaining agreements, and our
management considers its relations with our employees to be good.
FACILITIES
We currently lease 30,600 square feet of office and research and
development facilities in Santa Clara, California. Our lease expires in
September 2002. We plan to relocate our facilities to the South San Francisco
area in the next 18 months.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors and key employees as of December 31, 2000
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Patrick Plewman........................... 34 Chief Executive Officer, President and
Chief Operating Officer and Director
Sharon E. Tetlow.......................... 41 Vice President, Finance and Chief
Financial Officer
Mohan S. Iyer............................. 37 Vice President, Business Development
Ronald M. Lindsay, Ph.D................... 53 Vice President, Research & Development and
Chief Science Officer
Robert L. Wolfert, Ph.D................... 46 Vice President, Diagnostics
George Poste, DVM, Ph.D................... 56 Chairman of the Board of Directors
Louis C. Bock............................. 35 Director
Randy W. Scott, Ph.D...................... 43 Director
Tadataka Yamada, M.D...................... 55 Director
</TABLE>
Patrick Plewman has served as our Chief Executive Officer since June 2000,
as a Director since April 2000, as our President since December 1999 and as our
Chief Operating Officer since July 1999. From our inception in August 1997
through June 1999, Mr. Plewman served as our Vice President of Corporate
Development. From 1989 to 1997, Mr. Plewman served in various capacities at
SmithKline Beecham, including most recently as Director, Business
Development -- Molecular Diagnostics. Mr. Plewman holds a B.A. in Chemistry and
Political Science from the University of North Carolina at Chapel Hill and an
M.B.A. from Harvard Business School.
Sharon E. Tetlow has served as our Vice President, Finance and Chief
Financial Officer since February 1999. From January 1998 to March 1999, Ms.
Tetlow was Chief Financial Officer of Reprogen, Inc., a biotechnology company.
From March 1997 to December 1997, Ms. Tetlow worked as a consultant to C.V.
Therapeutics, Inc., a biotechnology company. From January 1996 to February 1997,
Ms. Tetlow served as the Chief Financial Officer of Terrapin Technologies, Inc.,
a biotechnology company. Ms. Tetlow holds a B.A. in Psychology from the
University of Delaware and an M.B.A. from Stanford University Graduate School of
Business.
Mohan S. Iyer has served as our Vice President, Business Development since
December 1999 and as Vice President, Research & Development Operations and
Business Development from December 1999 to November 2000. From September 1998 to
December 1999, Mr. Iyer served as our Director of Business Development. From
September 1995 to September 1998, Mr. Iyer was Senior Consultant/Engagement
Manager for The Wilkerson Group, a healthcare consulting company. Mr. Iyer holds
a B.S. in Chemical Engineering from the University of Tennessee, an M.S. in
Biomedical Engineering from Duke University and an M.B.A. from Yale University
School of Management.
Ronald M. Lindsay, Ph.D. has served as our Vice President, Research and
Development and Chief Science Officer since November 2000. From January 1998,
Dr. Lindsay has served in various roles with Millenium Pharmaceuticals, Inc.,
including Senior Vice President, Biotherapeutics and Vice President, Preclinical
Research and Development, Millenium BioTherapeutics. From February 1989 to
December 1997, Dr. Lindsay served in various roles with Regeneron
Pharmaceuticals, including most recently as Vice President, Neurobiology. Dr.
Lindsay holds a B.S. in Chemistry from the University of Glasgow in Scotland and
a Ph.D. in Biochemistry from the University of Calgary.
Robert L. Wolfert, Ph.D. has served as our Vice President, Diagnostics
since November 2000. From May 1999 to October 2000, Dr. Wolfert was Vice
President, Research and Development of Atairgin Technologies, a biotechnology
company. From April 1984 to April 1999, Dr. Wolfert served in various capacities
at Hybritech Incorporated, a diagnostics company, including most recently as
Director of
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Immunodiagnostics Research. Dr. Wolfert holds a B.A. in Chemistry and Biology
from Cornell University and a Ph.D. in Biochemistry and Immunology from Tufts
University School of Medicine.
George Poste, DVM, Ph.D. has served as our Chairman of the Board of
Directors since September 1997 and as our acting Chief Executive Officer from
July 1999 to June 2000. Since January 2000, Dr. Poste has served as the Chief
Executive Officer of Health Technology Networks, a healthcare consulting
company. From September 1997 to December 1999, he was the Chief Science and
Technology Officer of SmithKline Beecham. From March 1992 to August 1997, Dr.
Poste was the President, Research and Development, of SmithKline Beecham and he
also served as Director from March 1992 to December 1999. In addition, Dr. Poste
currently serves on the Board of Directors of Maxygen, Illumina, Orchid
Biosciences and Structural GenomiX, where he serves as the Chairman of the Board
of Directors. Dr. Poste holds a Doctorate in Veterinary Medicine and a Ph.D. in
Virology from the University of Bristol in England.
Louis C. Bock has served as a Director since April 2000. Mr. Bock also
serves as a Managing Director of BA Venture Partners VI, LLC, which is the
general partner of BAVP, L.P. Mr. Bock joined BA Venture Partners in September
1997. Prior to that time, he was employed by Gilead Sciences, a
biopharmaceutical company, where he held positions in research, project
management, business development and sales from November 1992 to September 1997.
He currently serves on the Board of Directors of Dynavax Technologies, Prolinx,
Synthon, Seattle Genetics, Structural GenomiX and Neuron Therapeutics. He holds
a B.S. in Biology from California State University, Chico and an M.B.A. from
California State University, San Francisco.
Randy W. Scott, Ph.D. has served as a Director since our inception in
September 1997. Dr. Scott is a co-founder of Incyte where he has served as
Chairman since September 2000 and as Director since 1991. From January 1997 to
September 2000, he served as President and Chief Scientific Officer of Incyte.
From April 1991 to December 1996, he served as Incyte's Vice President of
Research and Development. He also currently serves on the Board of Directors of
Incyte, Genomic Health, Vocent, iTrenders and Highway Communications. Dr. Scott
holds a B.S. from Emporia State University and a Ph.D. in Biochemistry from the
University of Kansas.
Tadataka Yamada, M.D. has served as a Director since our inception in
September 1997. Since December 2000, Dr. Yamada has served as Chairman of
Research and Development at GlaxoSmithKline. From February 1999 to December
2000, Dr. Yamada has served as Chairman of Research and Development at
SmithKline Beecham. He has also served as President of SmithKline Beecham
Healthcare Services from February 1996 to February 1999. He has served as a
member of Board of Directors of SmithKline Beecham since 1994. Dr. Yamada joined
the University of Michigan School of Medicine as Professor of Internal Medicine
in 1983 and served as Chairman of the Department from 1990 to 1996. Dr. Yamada
holds a B.A. in History from Stanford University and an M.D. from the New York
University School of Medicine.
BOARD COMPOSITION
Our board of directors currently consists of five members. All directors
are elected to hold office until their successors have been elected and
qualified or until their earlier death, resignation, disqualification or
removal.
Our restated certificate of incorporation and bylaws that will become
effective immediately after the completion of this offering provide that our
board will be divided into three classes, Class I, Class II and Class III, with
each class serving staggered three-year terms. The Class I directors will stand
for re-election at the 2001 annual meeting of stockholders. The Class II
directors will stand for re-election at the 2002 annual meeting of stockholders.
The Class III director will stand for re-election at the 2003 annual meeting of
stockholders. Any additional directorships resulting from an increase in the
number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the directors. This
staggered classification of the board of directors may have the effect of
delaying or preventing changes in control or management.
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There are no familial relationships among any of our directors or executive
officers.
BOARD COMMITTEES
Our board of directors has an audit committee and a compensation committee.
Audit committee. The audit committee of our board of directors recommends
the appointment of our independent auditors, reviews our internal accounting
procedures and financial statements and consults with and reviews the services
provided by our independent auditors, including the results and scope of their
audit. The audit committee currently consists of .
Compensation committee. The compensation committee of our board of
directors reviews and recommends to the board the compensation and benefits of
all of our executive officers, administers our stock option plans and
establishes and reviews general policies relating to compensation and benefits
of our employees. The compensation committee currently consists of
.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our compensation committee has at any time been one
of our officers or employees. None of our executive officers currently serves,
or in the past year has served, as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving on our board of directors or compensation committee. Prior to the
creation of our compensation committee, all compensation decisions were made by
our full board of directors.
DIRECTOR COMPENSATION
Our directors do not receive any cash compensation for their services as
directors or members of committees of the board of directors but are reimbursed
for their reasonable expenses incurred in attending meetings of the board of
directors. Our directors are eligible to participate in our 2001 Equity
Incentive Plan and 2001 Equity Incentive Plan and employee-directors will be
able to participate in our 2001 Employee Stock Purchase Plan. Our 2001 Equity
Incentive Plan provides for formula grants to our non-employee directors of
non-qualified stock options to purchase 10,000 shares of common stock on the
date of each annual meeting of our stockholders. Formula grants to non-employee
directors become vested at a rate of 1/12 per month, commencing with the month
in which they are granted.
In December 1999, we entered into a consulting agreement with Dr. George
Poste, Chairman of our Board of Directors, to serve as our acting Chief
Executive Officer and as a consultant to our company for a quarterly fee of
$20,000, plus travel expenses. We paid an aggregate of $80,000 pursuant to this
consulting agreement to Dr. Poste who no longer serves as acting Chief Executive
Officer. In January 2000, we entered into a special consulting agreement with
Dr. Poste to act as a consultant to our company in connection with our Series C
preferred stock financing for a daily fee of $5,000, plus travel expenses. We
paid an aggregate of $15,000 to Dr. Poste pursuant to this special consulting
agreement.
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<PAGE> 50
EXECUTIVE COMPENSATION
The following table presents information regarding compensation paid in
2000 to our Chief Executive Officer and our other highest-paid executive
officers whose total annual salary and bonus exceeded $100,000 for the fiscal
year ended December 31, 2000. These executive officers are referred to as our
"named executive officers" elsewhere in this prospectus. There were no long-term
compensation awards or other compensation awarded to our named executive
officers during fiscal 2000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------------
NAME AND -------------------- SECURITIES ALL OTHER
PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS COMPENSATION
------------------ --------- -------- ------------------ ------------
<S> <C> <C> <C> <C>
Patrick Plewman(a)............................. $231,250 $42,400 525,000 --
Chief Executive Officer, President and Chief
Operating Officer
George Poste, DVM, Ph.D.(b).................... 95,000 -- 185,000 --
Chairman
Sharon E. Tetlow............................... 183,719 36,600 309,375 --
Vice President, Finance and Chief Financial
Officer
Mohan S. Iyer.................................. 162,750 32,550 178,125 --
Vice President, Business Development
David Cooper, M.D., Ph.D.(c)................... 141,704 21,105 -- --
Former Vice President, Research and
Development Operations
</TABLE>
---------------
(a) Mr. Plewman has served as our Chief Operating Officer since July 1999 and
was appointed as our President in December 1999 and Chief Executive Officer
in June 2000.
(b) Dr. Poste served as our acting Chief Executive Officer from July 1999 to
June 2000.
(c) Dr. Cooper resigned in May 2000. He received a housing and travel allowance
of $21,105.
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<PAGE> 51
OPTION GRANTS DURING THE FISCAL YEAR ENDED DECEMBER 31, 2000
The following table provides information relating to stock options awarded
to each of our named executive officers during the year ended December 31, 2000.
All such options were awarded under our 2000 Equity Incentive Plan. In
accordance with the rules of the SEC, the following table sets forth the
potential realizable value over the term of the options based on assumed rates
of stock appreciation of 5% and 10% compounded annually. The term of the options
are the period from the grant date to the expiration date, or 10 years. These
amounts do not represent our estimate of future stock price performance. Actual
realizable values, if any, of stock options will depend on the future
performance of the common stock.
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF SHARE
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(C)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ------------------------
NAME GRANTED(A) FISCAL YEAR SHARE(B) DATE 5% 10%
---- ----------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Patrick Plewman...... 475,000 19.5% $1.30 2010 $3,883,424 $9,841,359
50,000 2.1 5.00 2010 408,782 1,035,933
George Poste, DVM,
Ph.D. ............. 10,000 0.4 1.20 2010 81,756 207,187
155,000 6.3 1.30 2010 1,267,222 3,211,392
20,000 0.8 5.00 2010 163,513 414,373
Sharon E. Tetlow..... 37,500 1.5 1.20 2010 306,586 776,949
187,500 7.7 1.30 2010 1,532,931 3,884,747
84,375 3.5 1.80 2010 689,819 1,748,136
Mohan S. Iyer........ 122,500 5.0 1.30 2010 1,001,515 2,538,035
55,625 2.3 1.80 2010 454,769 1,152,475
David Cooper, M.D.,
Ph.D.(d)........... -- -- -- -- -- --
</TABLE>
---------------
(a) 25% of all options vest after the first year, and the remaining options vest
at a rate of 1/48 per month.
(b) The exercise price per share of each option was equal to the fair market
value of our common stock on the date of grant as determined by our Board of
Directors.
(c) Potential realizable values are computed by (1) multiplying the number of
shares of common stock subject to a given option by the assumed initial
public offering price of $13.00 per share, (2) assuming that the aggregate
stock value derived from that calculation compounds at the annual 5% or 10%
rate shown in the table for the entire ten-year term of the option, and (3)
subtracting from that result the aggregate option exercise price. The 5% and
10% assumed annual rates of stock price appreciation are mandated by the
rules of the SEC and do not represent our estimate or projection of future
common stock prices.
(d) Dr. Cooper resigned in May 2000. Upon his resignation, he was permitted to
exercise options covering 5,000 shares of our common stock.
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<PAGE> 52
OPTIONS EXERCISED DURING THE FISCAL YEAR ENDED DECEMBER 31, 2000 AND OPTION
VALUES AS OF DECEMBER 31, 2000
The following table sets forth information for each of our named executive
officers concerning option exercises for the fiscal year ended December 31, 2000
and vested and unvested options held at December 31, 2000. The value realized
upon exercise and the value of unexercised in-the-money options shown have been
calculated on the basis of the assumed initial public offering price of $13.00
per share, less the applicable exercise price per share, multiplied by the
number of shares underlying these options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AS OF IN-THE-MONEY OPTIONS AS OF
SHARES DECEMBER 31, 2000 DECEMBER 31, 2000
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE
---- ----------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Patrick Plewman............ 850,000 $10,171,250 -- 50,000 $ 400,000 --
George Poste, DVM,
Ph.D. ................... -- -- -- 2,376,984 $269,766
Sharon E. Tetlow........... 285,937 3,363,431 -- 173,438 2,055,319 --
Mohan S. Iyer.............. 180,000 2,126,438 -- 120,715 1,440,437 --
David Cooper M.D.,
Ph.D.(a)................. 5,000 61,250 -- -- -- --
</TABLE>
---------------
(a) Dr. Cooper resigned in May 2000. Upon his resignation, he was permitted to
exercise options covering 5,000 shares of our common stock.
EMPLOYMENT CONTRACTS, CHANGE OF CONTROL ARRANGEMENTS AND SEVERANCE AGREEMENTS
We have entered into an employment agreement with each of our executive
officers. Under these employment agreements, we agree to pay an annual base
salary to each of our executive officers and to make each of them eligible for
an incentive bonus. The base salaries for Mr. Plewman, Ms. Tetlow, Mr. Iyer and
Dr. Lindsay are $245,000, $184,000, $164,000 and $250,000, respectively. The
employment agreements provide that each of our executive officers is employed
"at-will" and the employment relationship may be terminated for any reason at
any time. If the executive officer terminates his or her employment with us
because of a reduction in his or her base salary or title, because we relocate
the executive or because we have materially breached the employment agreement,
or if we terminate the executive without cause, we must pay the executive a
severance payment of one year's base salary. In addition, all of Mr. Plewman's
stock options would immediately vest and become exercisable upon any of such
events. Our executive officers other than Mr. Plewman will become immediately
vested in their stock options only if any of such events occur within 12 months
following a change of control of our company.
George Poste, DVM, Ph.D. Dr. Poste served as our acting Chief Executive
Officer from July 1999 through June 2000. In December 1999, Dr. Poste entered
into a consulting agreement to serve as our acting Chief Executive Officer and
consultant for a quarterly fee of $20,000, plus travel expenses. We paid an
aggregate of $80,000 pursuant to this consulting agreement to Dr. Poste who no
longer serves as acting Chief Executive Officer. In January 2000, we entered
into a special consulting agreement with Dr. Poste to act as a consultant to our
company in connection with our Series C preferred stock financing for a daily
fee of $5,000, plus travel expenses. We paid an aggregate of $15,000 to Dr.
Poste pursuant to this special consulting agreement.
STOCK PLANS
2000 Equity Incentive Plan. Our 2000 Equity Incentive Plan provides for
the grant of incentive stock options to employees, including officers and
employee directors, and for the grant of non-qualified stock options and stock
purchase rights to employees, directors and consultants. Our 2000 Plan was
adopted by our Board of Directors in April 2000. Under the 2000 Plan, a total of
4,700,000 shares of common stock has been reserved for issuance, of which
options to acquire 1,495,007 shares have been issued and were outstanding as of
December 31, 2000, and a total of 2,076,498 shares have been issued and were
outstanding as of December 31, 2000 pursuant to the exercise of options granted
under our 2000 Plan. No
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<PAGE> 53
further grants will be made under the 2000 Plan after this offering provided
that the shares that remain reserved for issuance as of this offering or that
become available for issuance as a result of stock options expiring or becoming
unexercisable after this offering under our 2000 Plan may be issued under our
2001 Equity Incentive Plan.
Prior to this offering, the 2000 Plan may be administered by our Board of
Directors, or a committee thereof. Following this offering, a committee of our
Board of Directors shall administer the 2000 Plan, provided that the committee
consist solely of two or more members of our Board of Directors, each of whom is
an "outside director" within the meaning of Section 162(m) of the Code and a
"non-employee director" within the meaning of Rule 16b-3 of the Securities
Exchange Act of 1934, as amended. The administrator of our 2000 Plan has the
power to determine, among other things:
- the fair market value of our common stock;
- the selection of the officers, consultants and employees to whom the
options and stock purchase rights may from time to time be granted;
- the number of shares to be covered by each option and stock purchase
right granted under the 2000 Plan;
- the form of agreement for use under the 2000 Plan;
- the terms and conditions of any option or stock purchase right granted
under the 2000 Plan, including but not limited to, the exercise price and
any accelerated vesting provisions;
- whether to buy out previously granted options;
- the rules and regulations relating to the 2000 Plan;
- whether to permit 2000 Plan participants to have us withhold from shares
issuable upon exercise of options or stock purchase rights shares having
a value equal to the statutory minimum withholding amount;
- to amend any option or stock purchase right; and
- to construe and interpret the terms of the 2000 Plan and awards granted
under the 2000 Plan.
Our Board of Directors may amend, alter, suspend or discontinue the 2000 Plan at
any time. However, this action will not affect the rights of previously granted
options or stock purchase rights unless there is a written agreement to that
effect signed by the option holder or stock purchase right holder and our
company.
Our 2000 Plan provides that upon any changes in our capitalization, the
number of shares subject to each option and stock purchase right and the shares
reserved under our 2000 Plan, as well as the per share exercise price of
outstanding options will be adjusted appropriately by the 2000 Plan
administrator. In the event any dividend or other distribution (whether in the
form of cash, our common stock, other securities, or other property),
recapitalization, reclassification, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, liquidation, dissolution, or sale, transfer, exchange or other
disposition of all or substantially all of our assets, or exchange of our common
stock or other securities, issuance of warrants or other rights to purchase our
common stock or other securities, or other similar corporate transaction or
event, the 2000 Plan administrator may provide for the purchase of any option or
restricted stock; may provide that outstanding options become fully vested; may
provide that options and restricted stock be assumed by the successor or
survivor corporation, or a parent or subsidiary thereof, or be substituted for
by similar options, rights or awards covering the stock of the successor or
survivor corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices; or may adjust the
number and type of shares subject to outstanding options, and the terms,
conditions of and criteria included in, outstanding options or restricted stock;
and may provide that upon the consummation of such event, outstanding options
shall become fully vested and then terminate.
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<PAGE> 54
In the case of restricted stock purchased upon exercise of an unvested
option or a stock purchase right, unless the administrator determines otherwise,
the restricted stock purchase agreement will grant us a repurchase option
exercisable upon the termination of the purchaser's employment or consulting
relationship with our company for any reason, including death or disability. The
purchase price for shares repurchased pursuant to a restricted stock purchase
agreement may be the original price paid by the purchaser. The repurchase option
will lapse at a rate determined by the administrator. Options and stock purchase
rights granted under our 2000 Plan are generally not transferable by the
optionee, and each option and stock purchase right is exercisable during the
lifetime of the optionee only by the optionee. Options granted under our 2000
Plan must generally be exercised within three months after the end of the
optionee's status as an employee, director or consultant, or within one year
after the optionee's termination by disability or death, respectively, but in no
event later than the expiration of the option's term.
2001 Equity Incentive Plan. Our 2001 Equity Incentive Plan was adopted by
our Board of Directors in and was approved by our stockholders in
as a successor equity plan to our 2000 Equity Incentive Plan.
Under the 2001 Plan, a total of shares of common stock have been
reserved for issuance. In addition, shares that remained reserved for issuance
under our 2000 Plan as of this offering, together with shares that become
available for issuance as a result of stock options expiring or becoming
exercisable under our 2000 Plan after this offering may be issued under our 2001
Plan. However, in no event shall the total number of shares reserved for
issuance under our 2001 Plan, together with the total number of shares
originally reserved under our 2000 Plan shall exceed shares.
Our 2001 Plan provides for the grant of incentive stock options to
employees, including officers and employee directors, and for the grant of
non-qualified stock options and stock purchase rights to employees, directors
and consultants. Our 2001 Plan provides that we cannot issue options or stock
purchase rights after the tenth anniversary of the date on which the 2001 Plan
was adopted by our Board of Directors.
Our 2001 Plan may be administered by our Board of Directors or a committee
thereof. Following this offering, a committee of our Board of Directors will
administer our 2001 Plan, provided that the committee consist solely of two or
more members of our Board of Directors, each of whom is an "outside director"
within the meaning of Section 162(m) of the Code and a "non-employee director"
within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934, as
amended.
The administrator of our 2001 Plan has the power to determine, among other
things:
- the fair market value of our common stock;
- the selection of the officers, consultants and employees to whom the
options and stock purchase rights may from time to time be granted;
- the number of shares to be covered by each option and stock purchase
right granted under the 2001 Plan;
- the form of agreement for use under the 2001 Plan;
- the terms and conditions of any option or stock purchase right granted
under the 2001 Plan, including but not limited to the exercise price and
any accelerated vesting provisions;
- whether to buy out previously granted options;
- the rules and regulations relating to the 2001 Plan;
- whether to permit 2001 Plan participants to have us withhold from shares
issuable upon exercise of options or stock purchase rights shares having
a value equal to the statutory minimum withholding amount;
50
<PAGE> 55
- to amend any option or stock purchase right; and
- to construe and interpret the terms of the 2001 Plan and awards granted
under the 2001 Plan.
Our 2001 Plan provides for formula grants to our non-employee directors of
non-qualified stock options to purchase 10,000 shares of common stock on the
date of each annual meeting of our stockholders. Formula grants to non-employee
directors become vested at a rate of 1/12 per month, commencing with the month
in which they are granted.
In the case of restricted stock purchased upon exercise of an unvested
option or a stock purchase right, unless the administrator determines otherwise,
the restricted stock purchase agreement will grant us a repurchase option
exercisable upon the termination of the purchaser's employment or consulting
relationship with our company for any reason, including death or disability. The
purchase price for shares repurchased pursuant to a restricted stock purchase
agreement may be the original price paid by the purchaser. The repurchase option
will lapse at a rate determined by the administrator. Options and stock purchase
rights granted under the 2001 Plan are generally not transferable by the
optionee, and each option and stock purchase right is exercisable during the
lifetime of the optionee only by the optionee. Options granted under the 2001
Plan must generally be exercised within three months after the end of the
optionee's status as an employee, director or consultant, or within one year
after the optionee's termination by disability or death, respectively, but in no
event later than the expiration of the option's term.
The 2001 Plan provides that upon any changes in our capitalization the
number of shares subject to each option and stock purchase right and the shares
reserved under the 2001 Plan, as well as the per share exercise price of
outstanding options will be adjusted appropriately by the 2001 Plan
administrator. In the event any dividend or other distribution (whether in the
form of cash, our common stock, other securities, or other property),
recapitalization, reclassification, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, liquidation, dissolution, or sale, transfer, exchange or other
disposition of all or substantially all of our assets, or exchange of our common
stock or other securities, issuance of warrants or other rights to purchase our
common stock or other securities, or other similar corporate transaction or
event, the 2001 Plan administrator may provide for the purchase of any option or
restricted stock; may provide that outstanding options become fully vested; may
provide that options and restricted stock be assumed by the successor or
survivor corporation, or a parent or subsidiary thereof, or be substituted for
by similar options, rights or awards covering the stock of the successor or
survivor corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices; or may adjust the
number and type of shares subject to outstanding options, and the terms,
conditions of and criteria included in, outstanding options or restricted stock;
and may provide that upon the consummation of such event, outstanding options
will become fully vested and then terminate.
The 2001 Plan also provides that without regard to the discretionary
actions described above, in the event of a change of control of our company,
including our merger with or into another entity, if outstanding options, stock
purchase rights and shares of restricted stock are not assumed or substituted
for by the successor entity, the option, stock purchase right and restricted
stock shall automatically become fully vested prior to the change of control,
and will then terminate.
Employee Stock Purchase Plan. Our 2001 Employee Stock Purchase Plan was
adopted by our Board of Directors in and was approved by our
stockholders in . A total of shares of common
stock may be sold under the Purchase Plan, plus an annual increase to be added
on each anniversary of the Purchase Plan's adoption during the term of the
Purchase Plan equal to the lesser of shares or % of the
outstanding shares on such date or a lesser amount determined by our Board of
Directors. As of the date of this prospectus, no shares have been issued under
the Purchase Plan. The Purchase Plan, which is intended to qualify under Section
423 of the Internal Revenue Code, contains consecutive offer periods that are
generally 24 months in duration. The offer periods start on and
end on the last day of of each year, except for the first offer
period, which will commence on the date immediately preceding the first date on
which a share of common stock is traded on an exchange or quoted on Nasdaq or a
successor quotation system and end on
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<PAGE> 56
. Each offer period is comprised of four consecutive six-month
purchase periods. Employees are eligible to participate if they are customarily
employed by us or any participating subsidiary for at least twenty hours per
week. However, no employee may be granted a right to purchase stock under the
Purchase Plan (1) to the extent that, immediately after the grant of the right
to purchase stock, the employee would own, or be treated as owning, stock
possessing 5% or more of the total combined voting power or value of all classes
of our capital stock or (2) to the extent that his or her rights to purchase
stock under all of our employee stock purchase plans accrues at a rate which
exceed $25,000 worth of stock for each calendar year.
The Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 20% of the participant's base compensation. Base
compensation is defined as the participant's total compensation which he or she
receives on each payday as compensation for services to our company. The maximum
number of shares a participant may purchase with respect to a single purchase
period is shares. Amounts deducted and accumulated by the
participant are used to purchase shares of common stock at the end of each
purchase period. The price of stock purchased under the purchase plan is 85% of
the lesser of the fair market value of the common stock on (1) the first day of
the purchase period or (2) the last day of the purchase period. Participants may
end their participation at any time and they will be paid their payroll
deductions without interest to date. Participation ends automatically upon
termination of employment with our company.
Rights to purchase stock granted under the Purchase Plan are not
transferable by a participant other than by will, the laws of descent and
distribution, or as otherwise provided under the Purchase Plan. The Purchase
Plan provides that, in the event of a merger of our company with or into another
corporation or a sale of substantially all of our assets, each outstanding right
to purchase stock may be assumed or substituted for by the successor
corporation. Our Board of Directors has the authority to amend or terminate the
Purchase Plan. However, no action by our Board may adversely affect any
outstanding rights to purchase stock under the Purchase Plan, except that our
Board may terminate an offer period on any exercise date if our Board determines
that the termination of the Purchase Plan is in the best interests of our
company and stockholders. Unless sooner terminated by our Board of Directors,
the Purchase Plan will terminate on the tenth anniversary of its adoption.
401(k) PLAN
In January 1998, we adopted a retirement savings and investment plan, or
401(k) plan, covering our eligible full-time employees located in the United
States. The 401(k) plan is intended to qualify under Section 401(k) of the
Internal Revenue Code of 1986, as amended, so that contributions to the 401(k)
plan by employees are not taxable to employees until withdrawn from the 401(k)
plan. Pursuant to the 401(k) plan, participating employees may elect to reduce
their current compensation by up to the lesser of 15% of their annual
compensation or the statutorily prescribed annual limit ($10,500 in 2000), and
to have the amount of the reduction contributed to the 401(k) plan. The 401(k)
plan permits discretionary company matching and profit sharing contributions by
our company. To date, we have not made any contributions to the 401(k) plan on
behalf of any of our employees.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Following the completion of this offering, provisions in our restated
certificate of incorporation and restated bylaws will limit or eliminate the
personal liability of our directors for a breach of their fiduciary duty of care
as a director. The duty of care generally requires that, when acting on behalf
of the corporation, directors exercise an informed business judgment based on
all material information reasonably available to them. Consequently, a director
will not be personally liable to us or our stockholders for monetary damages or
breach of fiduciary duty as a director, except for liability for:
- any breach of the director's duty of loyalty to us or our stockholders;
- any act or omission not in good faith or that involve intentional
misconduct or a knowing violation of law;
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<PAGE> 57
- any act related to unlawful stock repurchases, redemptions or other
distributions or payment of dividends; or
- any transaction from which the director derived an improper personal
benefit.
These limitations of liability do not affect the availability of equitable
remedies such as injunctive relief or rescission. Our restated certificate of
incorporation will also authorize us to indemnify our officers, directors and
other agents to the full extent permitted under Delaware law.
Following the completion of this offering, our restated bylaws will provide
that:
- we are required to indemnify our directors and officers to the fullest
extent permitted by the Delaware General Corporation Law, subject to
limited exceptions;
- we may indemnify our other employees to the same extent;
- we are required to advance expenses, as incurred, to our directors and
officers in connection with a legal proceeding to the fullest extent
permitted by the Delaware General Corporation Law, subject to limited
exceptions; and
- the rights provided in our bylaws are not exclusive.
We have entered, and intend to continue to enter, into separate
indemnification agreements with each of our directors and officers which in
certain respects are broader than the specific indemnification provisions
contained in the Delaware General Corporation Law. These indemnification
agreements require us, among other things, to indemnify our officers and
directors against liabilities that may arise by reason of their status or
service as directors or officers. These indemnification agreements also require
us to advance any expenses incurred by the directors or officers as a result of
any proceeding against them as to which they could be indemnified and to obtain
directors' and officers' insurance if available on reasonable terms.
At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or agents in which indemnification by us is
sought, nor are we aware of any threatened litigation or proceeding that may
result in a claim for indemnification.
We intend to purchase a policy of directors' and officers' liability
insurance that insures our directors and officers against the cost of defense,
settlement or payment of a judgment in some circumstances.
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<PAGE> 58
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since our inception, there has not been, nor is there currently planned,
any transaction or series of similar transactions to which we were or are a
party in which the amount involved exceeds $60,000 and in which any director,
executive officer or holder of more than 5% of our capital stock or any member
of their respective immediate families had or will have a direct or indirect
material interest other than agreements which are described under the caption
"Management" and the transactions described below.
CERTAIN TRANSACTIONS
On September 2, 1997, we entered into a Master Strategic Relationship
Agreement with Incyte and SmithKline Beecham. Under this agreement, SmithKline
Beecham Corporation and Incyte contributed cash in the amounts of $15.0 million
and $10.0 million, respectively, and other property to form diaDexus, LLC, our
predecessor limited liability company. Under this agreement, we issued 4,400,000
units of diaDexus LLC to each of SmithKline Beecham and Incyte at a price per
unit of $3.41 and $2.27, respectively. Each of SmithKline Beecham's units was
converted to one share of Series A Preferred Stock and each of Incyte's units
was converted to one share of Series B Preferred Stock upon our conversion from
a limited liability company to a Delaware corporation immediately prior to the
closing of our Series C preferred stock offering in April 2000.
We entered into a Collaboration and License Agreement with SmithKline
Beecham Corporation, SmithKline Beecham plc and Incyte on September 2, 1997
which was subsequently amended on multiple occasions. Pursuant to the
Collaboration and License Agreement, among other things, each of SmithKline
Beecham Corporation and SmithKline Beecham plc granted to us an exclusive
sublicenseable license under certain of its patents and know-how with respect to
genes and gene products for use as diagnostics through September 2, 2001. We pay
no milestones, royalties or other payments to SmithKline Beecham under the
Collaboration and License Agreement but we are obligated to pay pass-through
royalties to Human Genome Sciences, Inc. on sales of products derived from the
use of genes discovered by Human Genome Sciences. Pursuant to this agreement, we
are committed to expend $5.0 million for gene sequencing and microarray services
from Incyte, including services obtained under the GEM Services Agreement
described in the succeeding paragraph. To date, we have spent approximately $4.6
million.
On November 1, 1998, we entered into a GEM Services Agreement with Incyte
which was subsequently amended on September 1, 1999, pursuant to which we obtain
gene preparation and expression services from Incyte which we use to generate
gene expression information and data. The GEM Services Agreement expired on
November 1, 2000.
On July 28, 1999, we entered into an amendment to the Collaboration and
License Agreement with SmithKline Beecham Corporation, SmithKline Beecham plc,
Incyte and Quest Diagnostics Incorporated. This amendment transferred to Quest
certain of our rights that we had previously granted to SmithKline Beecham
Clinical Laboratories, which was formerly owned by SmithKline Beecham and is now
owned by Quest. Pursuant to this amendment, we granted to Quest a first right to
license our clinical diagnostic tests before FDA approval is obtained. These
rights continue in effect until September 2, 2005.
On December 11, 1997, SmithKline Beecham Corporation assigned to us its
rights and obligations under the lease agreement for our company offices in
Santa Clara, California.
On September 28, 1998, we entered into a Service Agreement with SmithKline
Beecham. Under this agreement, SmithKline Beecham provided us personnel support
to identify diagnostic leads and research for a period of one year. In exchange,
we paid SmithKline Beecham a total of $200,000.
On February 10, 1999, we entered into a License Agreement with SmithKline
Beecham Clinical Laboratories, pursuant to which we granted to SmithKline
Beecham Clinical Laboratories an exclusive right and license to make, use and
sell as a homebrew a prostate cancer test. In exchange, we received a license
fee of $100,000 in addition to the right to receive fixed royalties on future
sales of homebrew tests. On July 28, 1999, this agreement was assigned to Quest
Diagnostics. At the time we entered into this agreement, this test was in the
early stages of preclinical development. Subsequent testing determined that
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<PAGE> 59
this test was ineffective and this project was discontinued during the second
half of 1999. This agreement is effective until February 10, 2004 unless
terminated earlier in accordance with the terms of the agreement, and Quest may
extend this agreement for three additional periods of one year each.
On March 31, 1999, we repaid to SmithKline Beecham $2.2 million for certain
leasehold improvements originally paid by it upon our formation.
On July 28, 1999, we entered into a bridge loan with each of SmithKline
Beecham and Incyte. Each bridge loan required us to repay an aggregate principal
amount of $2.5 million (or $5.0 million total), together with interest on the
unpaid balance from July 28, 1999 until April 28, 2000 unless earlier converted
into shares of Series C Preferred Stock. On April 6, 2000, SmithKline Beecham
converted its bridge loan into 322,580 shares of Series C preferred stock and we
paid accrued interest of approximately $97,000. We concurrently repaid Incyte's
bridge loan, in addition to accrued interest of approximately $97,000, in full.
In December 1999, we entered into a LifeArray Software License Agreement
with Incyte. Under this agreement, we use computer software from Incyte for the
processing and analysis of microarray expression data for a period of 12 months,
which we can extend for an additional 12 month term. The licensing fee for the
use of the software is $75,000 per year.
On February 17, 2000, we entered into a Collaborative Agreement with Incyte
to retroactively replace and expand our rights that existed in two prior, now
expired, collaborative agreements that were both entered into on September 2,
1997. Pursuant to this Collaborative Agreement, we have access to Incyte's human
database, LifeSeq Gold and microbial database, PathoSeq, at no subscription cost
until September 2, 2003. As with other database subscribers, this Collaborative
Agreement grants us non-exclusive access to database products and database
patents for research, the diagnostic field of use, and the pharmaceutical field
of use. We have an option to exclusively license certain Incyte patents in the
pharmaceutical field of use. We pay Incyte milestones and royalties on the sale
of diagnostic and therapeutic products.
On April 6, 2000, we sold 13,225,807 shares of our Series C preferred stock
for $7.75 per share to 75 accredited investors who were not affiliated with our
company. Such investors, as well as our founders SmithKline Beecham and Incyte,
were granted registration rights with respect to their shares of preferred
stock. See "Description of Capital Stock -- Registration Rights." Entities
affiliated with American Express, BA Venture Partners, Moore Capital, Brookside
Capital Partners and Rho Management respectively acquired 2,387,096, 1,548,387,
1,419,354, 967,741 and 903,225 Series C shares, each of which positions
constituted more than five percent of the total Series C shares issued.
In November 2000, we made loans to the following executive officers and key
employee in order to fund the exercise of a portion of the stock options held by
each of them:
<TABLE>
<CAPTION>
NAME AMOUNT NUMBER OF SHARES
---- ---------- ----------------
<S> <C> <C>
Patrick Plewman............................................. $1,198,154 850,000
Sharon E. Tetlow............................................ 431,922 285,937
Mohan S. Iyer............................................... 267,367 180,000
Ronald M. Lindsay, Ph.D. ................................... 783,125 437,500
Robert L. Wolfert, Ph.D. ................................... 179,000 100,000
</TABLE>
We have the right to repurchase unvested shares if the employee's
employment terminates under specified circumstances. Each loan was made under a
full-recourse, interest-free promissory note secured by pledge of the purchase
shares. The notes have maturity dates ranging from seven to ten years.
We have entered into indemnification agreements with certain of our
officers and directors containing provisions which may require us to, among
other things, indemnify our officers and directors against certain liabilities
that may arise by reason of their status or service as officers or directors and
to advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified. For a description of limitations of
liability and certain indemnification arrangements with respect to our directors
and officers, see "Management -- Limitation of Liability and Indemnification of
Officers and Directors."
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<PAGE> 60
PRINCIPAL STOCKHOLDERS
The following table presents information concerning the beneficial
ownership of the shares of our common stock as of December 31, 2000, by:
- each person we know to be the beneficial owner of 5% of more of our
outstanding shares of common stock;
- each of our named executive officers;
- each of our directors; and
- all of our executive officers and directors as a group.
Beneficial ownership is determined under the rules of the SEC and generally
includes voting or investment power over securities. Except in cases where
community property laws apply or as indicated in the footnotes to this table, we
believe that each stockholder identified in the table possesses sole voting and
investment power over all shares of common stock shown as beneficially owned by
the stockholder. Percentage of beneficial ownership is based on 24,102,505
shares of common stock outstanding as of December 31, 2000, and 31,102,505
shares of common stock outstanding after the completion of this offering. The
information set forth in the table gives effect to the automatic conversion of
all outstanding shares of preferred stock into shares of common stock upon the
closing of this offering. Shares of common stock subject to options that are
currently exercisable or exercisable within 60 days of December 31, 2000 are
considered outstanding and beneficially owned by the person holding the options
for the purpose of computing the percentage ownership of that person but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person. Unless indicated below, the address of each individual listed
below is c/o diaDexus, Inc., 3303 Octavius Drive, Santa Clara, California 95054.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF OUTSTANDING
SHARES ---------------------------
BENEFICIALLY PRIOR TO THIS AFTER THIS
BENEFICIAL OWNER OWNED OFFERING OFFERING
---------------- ------------ ------------- ----------
<S> <C> <C> <C>
Patrick Plewman(1)........................................ 850,000 3.6% 2.7%
Sharon E. Tetlow(1)....................................... 285,937 1.2 *
Mohan S. Iyer(1).......................................... 180,000 * *
George Poste DVM, Ph.D.(1)................................ 24,061 * *
Health Technology Networks
2338 Casmar Way
Gilbertsville, PA 19525
Louis C. Bock(2).......................................... 1,548,387 6.4 5.0
c/o BAVP, L.P.
950 Tower Lane
Foster City, CA 94404
Randy W. Scott, Ph.D.(3).................................. 4,400,100 18.3 14.1
3174 Porter Drive
Palo Alto, CA 94304
Tadataka Yamada, M.D.(4).................................. 4,729,762 19.6 15.2
One Franklin Plaza
Philadelphia, PA 19101-7929
All directors and officers as a group (8 persons)(5)...... 12,455,747 53.5 41.4
GlaxoSmithKline plc(6).................................... 4,722,680 19.6 15.2
One Franklin Plaza
Philadelphia, PA 19101-7929
Incyte Genomics, Inc.(7).................................. 4,400,100 18.3 14.1
3174 Porter Drive
Palo Alto, CA 94304
Entities affiliated with American Express(8).............. 2,387,096 9.9% 7.7%
c/o American Express Financial Corporation
733 Marquette Avenue
Minneapolis, MN 55402
</TABLE>
56
<PAGE> 61
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF OUTSTANDING
SHARES ---------------------------
BENEFICIALLY PRIOR TO THIS AFTER THIS
BENEFICIAL OWNER OWNED OFFERING OFFERING
---------------- ------------ ------------- ----------
<S> <C> <C> <C>
Entities affiliated with Bank of America Venture
Partners(9)............................................. 1,548,387 6.4 5.0
c/o BAVP, L.P.
950 Tower Lane
Foster City, CA 94404
Entities affiliated with Moore Global Investments(10)..... 1,419,354 5.9 4.6
1251 Avenue of the Americas -- 53rd Floor
New York, NY 10020
</TABLE>
---------------
* Less than 1%.
(1) We have the right to repurchase some or all of the shares if the
executive's employment terminates under some circumstances. The purchase
price for shares repurchased must be the original price paid by the
purchaser. The repurchase option will lapse at a rate determined by the
plan administrator.
(2)Includes 1,548,387 shares of Series C preferred stock held by BAVP, L.P. Mr.
Bock is a Managing Director of BAVP and, as such, may be deemed to share
voting and investment power with respect to such shares. Mr. Bock disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest in such shares.
(3) Consists solely of 4,400,100 shares of Series B preferred stock held by
Incyte. Dr. Scott is a co-founder and Chairman of the Board of Directors of
Incyte and, as such, may be deemed to share voting and investment power
with respect to such shares. Dr. Scott disclaims beneficial ownership of
such shares except to the extent of his pecuniary interest in such shares.
(4) Includes options to purchase 624 shares of common stock at an average
exercise price of $0.51 per share. Also includes 4,400,000 shares of Series
B preferred stock, 322,580 shares of Series C preferred stock and 100
shares of common stock held by GlaxoSmithKline. Dr. Yamada is the Chairman,
Research and Development of GlaxoSmithKline and, as such, may be deemed to
share voting and investment power with respect to such shares. Dr. Yamada
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest in such shares.
(5) Consists of securities described in notes 1-4 above.
(6) Consists of 4,400,000 shares of Series A preferred stock, 322,580 shares of
Series C preferred stock and 100 shares of common stock.
(7) Consists of 4,400,000 shares of Series B preferred stock and 100 shares of
common stock.
(8) Consists of 477,419 shares of Series C preferred stock held by IDS Life
Series Fund, Inc., 795,698 shares of Series C preferred stock held by AXP
Strategy Series, Inc. and 1,113,979 shares of Series C preferred stock held
by AXP Variable Portfolio, Inc.
(9) Consists of 1,548,387 shares of Series C preferred stock held by BAVP, L.P.
(10) Consists of 877,419 shares of Series C preferred stock held by Moore Global
Investment, Ltd., 322,581 shares of Series C preferred stock held by
Remington Investment Strategies, L.P. and 219,354 shares of Series C
preferred stock held by Moore Global Fixed Income Fund, Ltd. Moore Capital
Management, Inc. exercises voting and investment power with respect to
portfolio assets held for the account of Moore Global Investments, Ltd. and
Moore Global Fixed Income Fund Ltd. Moore Capital Advisors, L.L.C. is the
sole general partner of Remington Investment Strategies, L.P. Mr. Louis M.
Bacon is the majority shareholder of Moore Capital Management, Inc. and is
the majority equity holder of Moore Capital Advisors, L.L.C. As a result,
Mr. Bacon may be deemed to be the beneficial owner of the aggregate shares
held of record or beneficially by Moore Global Investments, Ltd., Remington
Investment Strategies, L.P. and Moore Global Fixed Income Fund Ltd.
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<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
The following is a summary of the rights of our common stock and preferred
stock. This summary is not complete. For more detailed information, please see
our restated certificate of incorporation which is filed as an exhibit to the
registration statement of which this prospectus is a part.
Upon the completion of this offering, our authorized capital stock will
consist of 100 million shares of common stock, $0.01 par value per share, and
five million shares of preferred stock, $0.01 par value per share.
COMMON STOCK
As of December 31, 2000, and assuming the automatic conversion of all
outstanding preferred stock into common stock upon the closing of this offering,
there were 24,102,505 shares of common stock outstanding held by 77 stockholders
and options outstanding to purchase 1,495,007 shares of common stock under our
2000 Equity Incentive Plan and other warrants outstanding to purchase 179,032
shares of common stock.
Dividend Rights. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive dividends out of assets legally available
at the times and in the amounts as our board of directors may from time to time
determine.
Voting Rights. Each common stockholder is entitled to one vote for each
share of common stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided for in our
restated certificate of incorporation, which means that the holders of a
majority of the shares voted can elect all of the directors then standing for
election.
No Preemptive or Similar Rights. Our common stock is not entitled to
preemptive rights and is not subject to conversion or redemption.
Right to Receive Liquidation Distributions. Upon our liquidation,
dissolution or winding-up, the assets legally available for distribution to our
stockholders are distributable ratably among the holders of our common stock and
any participating preferred stock outstanding at that time after payment of
liquidation preferences, if any, on any outstanding preferred stock and payment
of other claims of creditors. Each outstanding share of common stock is, and all
shares of common stock to be outstanding upon completion of this offering will
be, fully paid and nonassessable.
PREFERRED STOCK
Immediately prior to the completion of this offering, each outstanding
share of our preferred stock outstanding will be converted into one share of
common stock.
Following the offering, we will be authorized, subject to the limits
imposed by the Delaware General Corporation Law, to issue five million shares of
undesignated preferred stock in one or more series, to establish from time to
time the number of shares to be included in each series, to fix the price,
rights, preferences, privileges and restrictions of the shares of each wholly
unissued series, including dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, redemption prices, liquidation preferences
and the number of shares constituting a series or the designation of any series,
without any further vote or action by our stockholders.
Our board of directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of our common stockholders. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of delaying, deferring or preventing
our change in control and may cause the market price of our common stock to
decline or impair the voting and other rights of the holders of our common
stock. The issuance of preferred stock with voting and conversion rights may
adversely affect
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<PAGE> 63
the voting power of the holders of our common stock, including the loss of
voting control to others. We have no current plans to issue any shares of
preferred stock.
WARRANTS
In connection with our sale of Series C preferred stock in April 2000, we
issued a warrant to Prudential Securities Incorporated in June 2000 to purchase
129,032 shares of Series C preferred stock at an exercise price per share of
$7.75. This warrant may be exercised at any time prior to June 1, 2005. Upon the
closing of this offering, this warrant will automatically convert to a warrant
to purchase common stock. In addition, we will issue a warrant to purchase
50,000 shares of common stock at an exercise price per share of $1.20.
REGISTRATION RIGHTS
The holders of approximately 22,025,807 shares of preferred stock have the
right to require us to register their shares with the Securities and Exchange
Commission so that those shares may be publicly resold or to include their
shares in any registration statement we file.
Demand Registration Rights. At any time six months after the closing of
this offering the holders of at least 40% of the shares having registration
rights have the right to demand that we file a registration statement so long as
the aggregate amount of securities to be sold under the registration statement
exceeds $7.5 million. If we are eligible to file a registration statement on
Form S-3, the holders of at least 500,000 shares having registration rights have
the right to demand that we file a registration statement on Form S-3.
Piggyback Registration Rights. If we register any securities for public
sale, stockholders with registration rights will have the right to include their
shares in the registration statement. The underwriters of any underwritten
offering will have the right to limit the number of shares having registration
rights to be included in the registration statement, but not below 30% of the
total number of shares included in the registration statement, except for this
initial public offering in which the underwriters have excluded any sales by
existing investors.
Expenses of Registration. We will all pay expenses relating to any demand
or piggyback registration. However, we will not pay for the expenses of any
demand registration if the request is subsequently withdrawn by the holders of a
majority of the shares having registration rights, subject to very limited
exceptions.
Expiration of Registration Rights. The registration rights described above
will expire five years after this offering is completed. The registration rights
will terminate earlier for a particular stockholder if that holder, following
this offering, holds less than one percent of our common stock and such holder
can resell all of its securities in a three-month period under Rule 144 of the
Securities Act.
ANTITAKEOVER EFFECTS OF DELAWARE LAW AND PROVISIONS OF OUR CERTIFICATE OF
INCORPORATION AND BYLAWS
Delaware Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law. This
statute regulating corporate takeovers prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for three
years following the date that the stockholder became an "interested
stockholder," unless:
- prior to the date of the transaction, the board of directors of the
corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder;
- the interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding (a) shares
owned by persons who are directors and also officers, and (b) shares
owned
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<PAGE> 64
by employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or
- on or subsequent to the date of the transaction, the business combination
is approved by the board and authorized at an annual or special meeting
of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder.
Section 203 defines a "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Certificate of Incorporation and Bylaw Provisions
Provisions of our Restated Certificate of Incorporation and Restated Bylaws
to be in effect upon the completion of this offering will eliminate the right of
stockholders to act by written consent without a meeting, eliminate the right of
stockholders to call a special meeting of stockholders, specify procedures for
nominating directors and submitting proposals for consideration at stockholder
meetings and provide for a staggered Board of Directors, so that no more than
approximately one-third of our directors could be replaced each year and it
would take three successive annual meetings to replace all directors. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of our Board of Directors and in the policies formulated by our
Board of Directors and to discourage some transactions which may involve an
actual or threatened change of control of our company. These provisions are
designed to reduce the vulnerability of our company to an unsolicited
acquisition proposal and, accordingly, could discourage potential acquisition
proposals and delay or prevent a change in control of our company. These
provisions are also intended to discourage tactics that may be used in proxy
fights but could, however, have the effect of discouraging others from making
tender offers for our common stock and, consequently, may also inhibit
fluctuations in the market price of our common stock that could result from
actual or rumored takeover attempts. These provisions may also have the effect
of preventing changes in the management of our company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is
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<PAGE> 65
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock, and there can be no assurance that a significant public market for our
common stock will develop or be sustained after this offering. Future sales of
substantial amounts of common stock, including shares issued upon exercise of
outstanding options and warrants, in the public market following this offering
could adversely affect market prices prevailing from time to time and could
impair our ability to raise capital through the sale of our equity securities.
Furthermore, since no shares will be available for sale shortly after this
offering because of contractual and legal restrictions on resale described
below, sales of substantial amounts of our common stock in the public market
after the restrictions lapse could adversely affect the prevailing market price
and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding 31,102,505
shares of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercises of outstanding options or warrants. Of these shares, all
the shares sold in this offering, plus any shares issued upon exercise of the
underwriters' over-allotment option, will be freely tradable without restriction
or further registration under the Securities Act, unless purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act. The
remaining 24,102,505 shares of common stock outstanding are "restricted
securities" within the meaning of Rule 144 under the Securities Act. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which are summarized below.
As a result of contractual restrictions described below and the provisions
of Rules 144 and 701, the restricted shares will be available for sale in the
public market as follows:
- shares will become eligible for sale upon expiration of the
lock-up agreements described below, beginning 180 days after the date of
this prospectus;
- shares will be eligible for sale upon exercise of vested
options 180 days after the date of this prospectus; and
- shares will be eligible for sale pursuant to Rule 144 beginning
one year after the date of this prospectus.
LOCK-UP AGREEMENTS
Our directors, officers and stockholders have entered into lock-up
agreements with the underwriters of this offering generally providing that they
will not offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of our shares of common stock or any securities exercisable
for or convertible into our common stock owned by them prior to this offering
for a period of 180 days after the date of this prospectus without the prior
written consent of Lehman Brothers Inc., on behalf of the underwriters.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year, including the holding period of any prior owner
except an affiliate, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 311,025 shares immediately after this offering; or
- the average weekly trading volume of our common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us. Under Rule 144(k), a person who is not
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<PAGE> 66
deemed to have been an affiliate of us at any time during the three months
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years, including the holding period of any prior owner except
an affiliate, is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any of our employees, officers,
directors or consultants who purchased shares under a written compensatory plan
or contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. All holders of Rule 701 shares are
required to wait until 90 days after the date of this prospectus before selling
such shares. However, all Rule 701 shares are subject to lock-up agreements and
will only become eligible for sale at the earlier of the expiration of the
180-day lock-up agreements or no sooner than 90 days after the offering upon
obtaining the prior written consent of Lehman Brothers Inc.
STOCK OPTIONS
Within 90 days following the effectiveness of this offering, we intend to
file a registration statement on Form S-8 registering approximately
shares of common stock subject to outstanding options or reserved for future
issuance under our 2000 Equity Incentive Plan, our 2001 Equity Incentive Plan
and our 2001 Employee Stock Purchase Plan. As of December 31, 2000, options to
purchase a total of 2,287,250 shares were outstanding and 2,195,708 additional
shares were reserved for future issuance under our 2000 Equity Incentive Plan.
Also as of December 31, 2000, an additional shares were reserved for
issuance under our 2001 Equity Incentive Plan and an additional shares
were available for purchase under our 2001 Employee Stock Purchase Plan. Upon
the filing of the registration statement on Form S-8, common stock issued upon
exercise of outstanding options which are not subject to our right of repurchase
or which are issued under our Purchase Plan, other than common stock issued to
our affiliates, will be available for immediate resale in the open market. Also
beginning six months after the date of this offering, holders of approximately
22,025,807 restricted shares will be entitled to certain registration rights.
See "Description of Capital Stock -- Registration Rights" for more information
regarding these rights. Registration of such shares under the Securities Act
would result in such shares becoming freely tradable without restriction under
the Securities Act, except for shares purchased by affiliates, immediately upon
the effectiveness of such registration.
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UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following summary of the material United States federal income and
estate tax consequences of the purchase, ownership and disposition of our common
stock by non-U.S. holders is based upon the provisions of the Internal Revenue
Code of 1986, as amended, or the "Code," the United States Treasury regulations,
and rulings and judicial decisions issued with respect thereto, all of which are
subject to change, possibly with retroactive effect, or possible differing
interpretations. Any such change or different interpretation could affect the
continuing validity of this summary.
A non-U.S. holder is a holder of common stock that is not, for United
States federal income tax purposes, any of the following:
- a citizen or resident of the United States;
- a corporation, partnership or other entity created or organized in or
under the laws of the United States or any of its political subdivisions;
- an estate, the income of which is subject to United States federal income
taxation regardless of its source; or
- a trust (a) whose administration is subject to the primary supervision of
a United States court and which has one or more United States persons who
have the authority to control all substantial decisions of the trust, or
(b) which was in existence on August 20, 1996 and has properly elected to
continue to be received as a United States person.
This summary does not discuss all aspects of United States federal taxation
that may be important to a particular non-U.S. holder in light of specific facts
and circumstances relevant to that holder and may not apply to non-U.S. holders
subject to special treatment under applicable United States federal tax law,
including, without limitation, "controlled foreign corporations," "passive
foreign investment companies," "foreign personal holding companies" or certain
United States expatriates. In addition, this discussion does not address the
treatment of any non-U.S. holders under the laws of any state, local, foreign or
other taxing jurisdiction.
EACH PROSPECTIVE HOLDER IS URGED TO CONSULT ITS TAX ADVISOR WITH RESPECT TO
THE UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES OF ACQUIRING,
HOLDING AND DISPOSING OF OUR COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES THAT
MAY ARISE UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION.
DIVIDENDS
If you are a non-U.S. holder of our common stock, dividends paid to you
will generally be subject to withholding of United States federal income tax at
a 30% rate or a lower rate as may be specified by an applicable income tax
treaty. Under currently effective United States Treasury regulations, for
purposes of determining if dividends are subject to the 30% withholding tax,
dividends paid to an address in a foreign country are presumed to be paid to a
resident of that country, unless the person making the payment has knowledge to
the contrary. Under current interpretations of United States Treasury
regulations, this presumption also applies for purposes of determining whether a
lower withholding rate applies under an income tax treaty.
Under United States Treasury regulations that will generally apply to
dividends paid after December 31, 2000, or the "Final Withholding Regulations,"
a non-U.S. holder must satisfy certification requirements in order to claim the
benefit of a lower treaty rate. In addition, if the non-U.S. holder is a partner
in a foreign partnership, the holder, as well as the foreign partnership, must
satisfy the certification requirements, and the partnership must provide certain
information, including a taxpayer identification number. A look through rule
will apply in the case of tiered partnerships.
A non-U.S. holder of common stock that is eligible for a reduced rate of
United States withholding tax under a tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund with
the United States Internal Revenue Service.
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<PAGE> 68
If the dividends are "effectively connected" with a non-U.S. holder's
conduct of a trade or business within the United States, and, if an income tax
treaty applies, are attributable to a United States permanent establishment of
the non-U.S. holder in the United States, then dividends paid to a non-U.S.
holder will generally not be subject to withholding tax, provided that the
non-U.S. holder complies with applicable certification and disclosure
requirements. Instead, the "effectively connected" dividends will be subject to
United States federal income tax in the same manner as dividends paid to United
States citizens, resident aliens and domestic United States corporations. Any
effectively connected dividends received by a corporate non-U.S. holder may
also, under certain circumstances, be subject to an additional "branch profits
tax" at a 30% rate or a lower rate as may be specified by an applicable income
tax treaty.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be required to pay United States
federal income tax with respect to gain recognized on a sale or other
disposition of common stock unless one of the following conditions is satisfied:
- the gain is effectively connected with the conduct of a trade or business
in the United States, and, if an income tax treaty applies, is
attributable to a permanent establishment maintained in the United States
by the non-U.S. holder;
- in the case of a non-U.S. holder who is an individual and holds the
common stock as a capital asset, the holder is present in the United
States for 183 or more days in the taxable year of the sale or other
disposition and certain other conditions exist;
- we are or have been a "United States real property holding corporation"
for United States federal income tax purposes; or
- the non-U.S. holder is required to pay tax under certain provisions of
the Code applicable to United States expatriates.
Individual non-U.S. holders described in the first bullet point above will
be required to pay tax on the net gain derived from the sale of our common stock
at the regular graduated United States federal income tax rates. Individual
non-U.S. holders described in the second bullet point above will be subject to a
30% tax on the gain derived from the sale or other disposition of our common
stock, which may be offset by United States source capital losses (even though
the non-U.S. holder is not considered a resident of the United States). Amounts
received by corporate non-U.S. holders described in the first bullet point above
may also, under certain circumstances, be subject to an additional "branch
profits tax" at a 30% rate or a lower rate as may be specified by an applicable
income tax treaty.
We believe we are not currently, and do not anticipate becoming, a "United
States real property holding corporation" for United States federal income tax
purposes. If we were to become a "United States real property holding
corporation," gain recognized by a non-U.S. holder would not be subject to
United States tax if the non-U.S. holder were eligible for a treaty exemption or
if the shares were considered to be "regularly traded on an established
securities market," and the non-U.S. holder did not hold, directly or
indirectly, at any time during the shorter of the periods described above, more
than 5% of our common stock.
FEDERAL ESTATE TAX CONSEQUENCES
Common stock held by an individual non-U.S. holder at the time of death
will be included in the holder's gross estate for United States federal estate
tax purposes, and may be subject to United States federal estate tax, unless an
applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
We must report annually to the United States Internal Revenue Service and
to each non-U.S. holder the amount of dividends paid to, and the tax withheld
with respect to, any holder, regardless of whether
64
<PAGE> 69
any tax was actually withheld. This information may also be made available to
the tax authorities in the non-U.S. holder's country of residence.
Under current law, United States information reporting requirements, other
than reporting of dividend payments for purposes of the withholding tax noted
above, and backup withholding tax generally will not apply to dividends paid to
non-U.S. holders that are either subject to the 30% withholding discussed above
or that are not subject to withholding because an applicable tax treaty reduces
or eliminates the withholding. Otherwise, backup withholding of United States
federal income tax at a rate of 31% may apply to dividends paid with respect to
common stock to holders that are not "exempt recipients" and that fail to
provide certain information including the holder's United States taxpayer
identification number.
Under current law, unless the payor of dividends has actual knowledge that
the payee is a United States person, the payor generally may treat dividend
payments to a payee with a foreign address as exempt from information reporting
and backup withholding. However, under the Final Withholding Regulations,
dividend payments made after December 31, 2000 generally will be subject to
information reporting and backup withholding unless applicable certification
requirements are satisfied. See the discussion above with respect to the rules
applicable to foreign partnerships under the Final Withholding Regulations.
In general, United States information reporting and backup withholding
requirements also will not apply to the payment of disposition proceeds where
the transaction is effected through an office outside the United States of a
non-United States broker. However, United States information reporting, but not
backup withholding, will apply to a payment of sales proceeds, even if made
outside the United States, through an office of a broker that is (i) a United
States person, (ii) a foreign person that derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States, (iii) a "controlled foreign corporation" for United States federal
income tax purposes, or, (iv) in the case of payments made after December 31,
2000, a foreign partnership with certain connections to the United States,
unless the broker has documentary evidence in its records that the holder or
beneficial owner is a non-U.S. person and that certain conditions are met, or
the holder or beneficial owner otherwise establishes an exemption. Payment of
the proceeds of the sale of common stock to or through a United States office of
a broker is currently subject to both United States backup withholding and
information reporting unless the holder certifies its non-U.S. holder status
under penalties of perjury or otherwise establishes an exemption.
Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules are generally allowable as a refund or credit against a
non-U-S. holder's federal income tax liability, if any, provided that the
required information is furnished to the Internal Revenue Service.
65
<PAGE> 70
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, the underwriters named
below, for whom Lehman Brothers Inc., CIBC World Markets Corp., Prudential
Securities Incorporated and Fidelity Capital Markets, a division of National
Financial Services, LLC, are acting as representatives, have each agreed to
purchase from us the respective number of shares of common stock shown opposite
its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ----------
<S> <C>
Lehman Brothers Inc.........................................
CIBC World Markets Corp.....................................
Prudential Securities Incorporated..........................
Fidelity Capital Markets, a division of National Financial
Services, LLC.............................................
----------
Total............................................. 7,000,000
==========
</TABLE>
This is a firm commitment underwriting. This means that the underwriters
have agreed to purchase all of the shares offered by us in this prospectus,
other than those covered by the over-allotment option described below, if any
are purchased. Under the underwriting agreement, if an underwriter defaults in
its commitment to purchase shares, the commitments of non-defaulting
underwriters may be increased or the underwriting agreement may be terminated,
depending on the circumstances.
We have applied for quotation of our common stock on the NASDAQ National
Market under the symbol "DDXS."
COMMISSIONS AND EXPENSES
The representatives of the underwriters have advised us that the
underwriters propose to offer the common stock directly to the public at the
public offering price on the cover page of this prospectus, and to selected
dealers, who may include the underwriters, at the public offering price less a
selling concession not in excess of $ per share. The underwriters may allow,
and the selected dealers may reallow, a concession not in excess of $ per
share to brokers and dealers. After the completion of this offering, the
underwriters may change the offering price and other selling terms.
The following table summarizes the underwriting discounts and commissions
we will pay to the underwriters. These amounts are shown assuming both no
exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares. The underwriting discounts and commissions
are equal to the public offer price per share, less the amount paid to us per
share.
<TABLE>
<CAPTION>
PAID BY US
----------------------------------------------
NO EXERCISE OF FULL EXERCISE OF
OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------------------- ---------------------
<S> <C> <C>
Per Share............................. $ $
Total.................................
</TABLE>
We estimate that the total expenses of the offering, including
registration, filing and listing fees, printing fees and legal and accounting
expenses, but excluding underwriting discounts and commissions, will be
approximately $1,350,000.
OVER-ALLOTMENT OPTION
We have granted to the underwriters an option to purchase up to an
aggregate of 1,050,000 shares of common stock, exercisable solely to cover
over-allotments, if any, at the public offering price less the underwriting
discounts and commissions shown on the cover page of this prospectus. The
underwriters may exercise this option at any time until 30 days after the date
of this prospectus. To the extent the underwriters exercise this option, each
underwriter will be committed, so long as the conditions of the
66
<PAGE> 71
underwriting agreement are satisfied, to purchase a number of additional shares
proportionate to that underwriter's initial commitment as indicated in the
preceding table.
LOCK-UP AGREEMENTS
We, our directors, officers and other stockholders holding % of
securities have agreed not, directly or indirectly, to offer for sale, sell,
pledge, or otherwise dispose of any common stock or any securities which may be
converted into or exchanged for any common stock for a period of 180 days from
the date of this prospectus without the prior written consent of Lehman Brothers
Inc. However, shares acquired in the open market or in the directed share
program described below will not be subject to the lock-up agreements, nor will
transfers to immediate family members who agree to be bound by the lock-up
agreements. Lehman Brothers Inc., in its sole discretion, may release the shares
subject to the lock-up agreements in whole or in part at any time with or
without notice. However, Lehman Brothers Inc. has informed us that it has no
current plan to do so.
OFFERING PRICE DETERMINATION
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be negotiated between the
representatives of the underwriters and us. In determining the initial public
offering price of our common stock, the representatives will consider:
- prevailing market conditions;
- our historical performance and capital structure;
- estimates of our business potential and earnings prospects;
- an overall assessment of our management; and
- the consideration of these factors in relation to market valuation of
companies in related businesses.
INDEMNIFICATION
We have agreed to indemnify the underwriters against liabilities relating
to this offering, including liabilities under the Securities Act and liabilities
arising from breaches of the representations and warranties contained in the
underwriting agreement, and to contribute to payments that the underwriters may
be required to make for these liabilities.
STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids or purchases for the purpose
of pegging, fixing or maintaining the price of the common stock, in accordance
with Regulation M under the Securities Exchange Act.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specific maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
The underwriters may purchase and sell shares of common stock in the open
market. These transactions may include short sales, stabilizing transactions and
purchases to cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of shares than they are
67
<PAGE> 72
required to purchase in the offering. "Covered" short sales are sales made in an
amount not greater than the underwriters' option to purchase additional shares
from the issuer in the offering. The underwriters may close out any covered
short position by either exercising their option to purchase additional shares
or purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through-the
over-allotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the common stock in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing transactions consist
of various bids for or purchases of common stock made by the underwriters in the
open market prior to the completion of the offering.
Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the common stock or preventing or retarding a decline in the
market price of the common stock. As a result, the price of the common stock may
be higher than the price that might otherwise exist in the open market.
Neither we nor any of the underwriters make any representation or
prediction concerning the direction or magnitude of any effect that the
transactions described above may have on the price of our common stock. In
addition, neither we nor any of the underwriters make any representation that
the representatives will engage in these transactions or that any such
transaction, once commenced, will not be discontinued without notice.
OTHER MATTERS
Prudential Securities Incorporated, one of the representatives of the
underwriters of this public offering, acted as a placement agent in connection
with our sale of Series C preferred stock in April 2000, for which they were
paid customary fees, together with the grant of a warrant to purchase 129,032
shares of Series C preferred stock. Prudential Securities Incorporated also
received an option to participate as a co-manager or co-placement agent in any
public or private offering by us within one year of the closing of our Series C
financing. In addition, employees of Prudential Securities Incorporated
purchased 29,121 of Series C preferred stock. Prudential Securities Incorporated
and its employees have agreed not, directly or indirectly, to offer for sale,
sell, pledge or otherwise dispose of the warrant and shares of stock for a
period of 180 days from the date of this prospectus.
DISTRIBUTION
Lehman Brothers Inc. and CIBC World Markets Corp. intend to distribute and
deliver this prospectus only by hand or mail and intend to use only printed
prospectuses. Fidelity Capital Markets, a division of National Financial
Services LLC, is acting as an underwriter of this offering and will be
facilitating electronic distribution through the Internet. One of the
representatives, Prudential Securities Incorporated, also markets online through
its PrudentialSecurities.com division. Clients of Prudential Advisor may view
offering terms and a prospectus online and place orders through their financial
advisors. Other than the prospectus in electronic format, the information on
this website is not intended to be part of this prospectus or the registration
statement of which this prospectus forms a part and has not been approved or
endorsed by us or any underwriter in such capacity.
STAMP TAXES
Purchasers of the shares of our common stock offered by this prospectus may
be required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition of the offering price listed on the cover
of this prospectus.
68
<PAGE> 73
OFFER AND SALES IN CANADA
Any offers in Canada will be made only under an exception from the
requirements to file a prospectus in each relevant province of Canada where a
sale is made.
DIRECTED SHARE PROGRAM
At our request, Lehman Brothers Inc. has reserved up to 350,000 shares, or
5% of our common stock offered by this prospectus, for sale under a directed
share program to our officers, directors, employees and to our business
associates. All of the persons purchasing the reserved shares must commit to
purchase no later than the close of business on the day following the date of
the final prospectus in connection with this offering. The number of shares
available for sale to the general public will be reduced to the extent these
persons purchase the reserved shares. Shares committed to be purchased by
directed share participants which are not so purchased will be reallocated for
sale to the general public in the offering. All sales of shares pursuant to the
directed share program will be made at the initial public offering price set
forth on the cover page of this prospectus.
SALES TO DISCRETIONARY ACCOUNTS
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed 5% of the total number of shares of our
common stock offered by them.
69
<PAGE> 74
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Latham & Watkins, Menlo Park, California. Various legal matters relating to
the offering will be passed upon for the underwriters by Mintz, Levin, Cohn,
Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts. Latham & Watkins and
certain of its partners and employees beneficially own 16,772 shares of our
preferred stock, all of which will automatically convert to shares common stock
upon the closing of this offering, and will receive a warrant to purchase 50,000
shares of our common stock.
EXPERTS
The financial statements as of December 31, 1998, 1999 and September 30,
2000 and for the period from August 29, 1997 (date of inception) to December 31,
1997 and for the two years ended December 31, 1998 and 1999 and for the nine
month period ended September 30, 2000 and for the cumulative period from August
29, 1997 (date of inception) to September 30, 2000, included in this Prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act that registers the shares of common stock to be sold in this
offering. The registration statement, including the attached exhibits and
schedules, contain additional relevant information about us and our capital
stock. The rules and regulations of the SEC allow us to omit various information
included in the registration statement from this document.
In addition, upon completion of this offering, we will become subject to
the reporting and information requirements of the Exchange Act and, as a result,
will file periodic reports, proxy statements and other information with the SEC.
You may read and copy this information at the public reference room of the SEC
at 450 Fifth Street, N.W., Room 1024, Washington, DC 20549. You may call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information
about the operation of the public reference room. You also obtain copies of this
information by mail from the public reference section of the SEC, 450 Fifth St.,
N.W. Room 1024, Washington, DC 20549, at prescribed rates.
The SEC also maintains an internet website that contains reports, proxy
statements and other information about issuers, like us who file electronically
with the SEC. The address of that website is www.sec.gov.
We intend to furnish our stockholders with annual reports containing
audited financial statements, and make available to our stockholders quarterly
reports for the first three quarters of each fiscal year containing unaudited
interim financial information.
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<PAGE> 75
DIADEXUS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Members' and Stockholders' Equity............. F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 76
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of diaDexus, Inc.
The two new stock benefit plans described in Note 8 to the financial
statements have not been adopted as of January 9, 2001. When they are adopted by
the Board of Directors, we will be in a position to furnish the following
report:
"In our opinion, the accompanying balance sheets and the related statements
of operations, of members' and stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of diaDexus, Inc. (a
development stage company) at December 31, 1998, 1999 and September 30, 2000,
and the results of its operations and its cash flows for the period from August
29, 1997 (date of inception) to December 31, 1997 and for the two years ended
December 31, 1998 and 1999, and for the nine months ended September 30, 2000 and
for the cumulative period from August 29, 1997 (date of inception) to September
30, 2000, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion."
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
November 20, 2000, except as
to Note 8 which is
as of January , 2001
F-2
<PAGE> 77
DIADEXUS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------ SEPTEMBER 30, SEPTEMBER 30,
1998 1999 2000 2000
------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $16,454 $ 8,358 $ 31,235
Short-term investments.................................... -- -- 39,134
Interest receivable....................................... -- -- 1,074
Prepaid expenses and other current assets................. 412 428 353
------- -------- --------
Total current assets.................................... 16,866 8,786 71,796
Long-term investments....................................... -- -- 23,320
Property and equipment, net................................. 3,280 2,442 2,277
Other assets................................................ 69 69 69
------- -------- --------
Total assets............................................ $20,215 $ 11,297 $ 97,462
======= ======== ========
LIABILITIES, MEMBERS' AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 239 $ 42 $ 341
Accrued liabilities....................................... 636 459 628
Convertible notes payable to related parties.............. -- 5,000 --
Due to related parties.................................... 2,690 456 748
------- -------- --------
Total current liabilities............................... 3,565 5,957 1,717
Deferred rent............................................... 116 87 57
------- -------- --------
Total liabilities....................................... 3,681 6,044 1,774
------- -------- --------
Commitments and contingencies (Notes 4 and 7)
Members' and Stockholders' Equity
Series A preferred capital; 4,400,000 units authorized,
issued and outstanding at December 31, 1998 and 1999.... 10,762 5,119 -- $ --
Series B preferred capital; 4,400,000 units authorized,
issued and outstanding at December 31, 1998 and 1999.... 5,762 119 -- --
Common capital; 2,200,000 units authorized, no units
issued and outstanding.................................. -- -- -- --
Series A preferred stock, $0.01 par value; 4,400,000
shares authorized, issued and outstanding at September
30, 2000, none pro forma (liquidation value: $15,000 at
September 30, 2000)..................................... -- -- 44 --
Series B preferred stock, $0.01 par value; 4,400,000
shares authorized, issued and outstanding at September
30, 2000, none pro forma (liquidation value: $10,000 at
September 30, 2000)..................................... -- -- 44 --
Series C preferred stock, $0.01 par value; 13,500,000
shares authorized at September 30, 2000, 13,225,807
shares issued and outstanding at September 30, 2000,
none pro forma (liquidation value: $102,500 at September
30, 2000)............................................... -- -- 132 --
Common stock, $0.01 par value; 50,000,000 shares
authorized at September 30, 2000, 207,242 shares issued
and outstanding at September 30, 2000, 22,233,049 pro
forma................................................... -- -- 2 222
Additional paid-in capital................................ 10 15 105,896 105,896
Deferred stock compensation............................... -- -- (5,193) (5,193)
Accumulated other comprehensive income (loss)............. -- -- (6) (6)
Deficit accumulated during the development stage.......... -- -- (5,231) (5,231)
------- -------- -------- --------
Total members' and stockholders' equity................. 16,534 5,253 95,688 $ 95,688
------- -------- -------- ========
Total liabilities, members' and stockholders' equity.... $20,215 $ 11,297 $ 97,462
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 78
DIADEXUS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE CUMULATIVE
PERIOD FROM PERIOD FROM
AUGUST 29, 1997 AUGUST 29, 1997
(INCEPTION) NINE MONTHS ENDED (INCEPTION)
THROUGH YEAR ENDED DECEMBER 31, SEPTEMBER 30, THROUGH
DECEMBER 31, ----------------------- ---------------------- SEPTEMBER 30,
1997 1998 1999 1999 2000 2000
--------------- --------- ---------- ----------- -------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
License revenue from
related party........... $ -- $ -- $ 100 $ 100 $ -- $ 100
----- ------- -------- -------- -------- --------
Operating expenses:
Research and development
(including stock
compensation expense
of $794 for the nine
months ended
September 30, 2000
and for the
cumulative period
from inception
through September 30,
2000)................ 401 6,761 9,461 7,654 7,182 23,805
General and
administrative
(including stock
compensation expense
of $2,183 for the
nine months ended
September 30, 2000
and for the
cumulative period
from inception
through September 30,
2000)................ 279 1,882 2,345 1,877 3,903 8,409
----- ------- -------- -------- -------- --------
Loss from operations...... (680) (8,643) (11,706) (9,431) (11,085) (32,114)
Interest and other
income.................. 132 715 540 564 3,359 4,746
Interest expense.......... -- -- (120) (49) (73) (193)
----- ------- -------- -------- -------- --------
Net loss.................. $(548) $(7,928) $(11,286) $ (8,916) $ (7,799) $(27,561)
===== ======= ======== ======== ======== ========
Net loss per share, basic
and diluted............. $ -- $ -- $ -- $ -- $(117.96)
===== ======= ======== ======== ========
Shares used to compute net
loss per share, basic
and diluted............. -- -- -- -- 66
Pro forma net loss per
share, basic and
diluted................. $ (1.28) $ (0.45)
======== ========
Shares used to compute pro
forma net loss per
share, basic and
diluted................. 8,800 17,441
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 79
DIADEXUS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF MEMBERS' AND STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED CAPITAL PREFERRED CAPITAL MEMBER
-------------------- -------------------- CONTRIBUTIONS
UNITS DOLLARS UNITS DOLLARS RECEIVABLE
---------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Issuance, at inception, of
Series A units at $3.41
per unit.................. 4,400,000 $15,000 -- $ -- $(11,000)
Issuance, at inception, of
Series A units at $2.27
per unit.................. -- -- 4,400,000 10,000 (6,000)
Net loss................... -- (274) -- (274) --
---------- ------- ---------- ------- --------
Balance at December 31,
1997...................... 4,400,000 14,726 4,400,000 9,726 (17,000)
Proceeds received from
Members................... -- -- -- -- 17,000
Stock-based compensation... -- -- -- -- --
Net loss................... -- (3,964) -- (3,964) --
---------- ------- ---------- ------- --------
Balance at December 31,
1998...................... 4,400,000 10,762 4,400,000 5,762 --
Stock-based compensation... -- -- -- -- --
Net loss................... -- (5,643) -- (5,643) --
---------- ------- ---------- ------- --------
Balance at December 31,
1999...................... 4,400,000 5,119 4,400,000 119 --
Net loss to April 4........ -- (1,284) -- (1,284) --
Conversion to C
corporation............... (4,400,000) (3,835) (4,400,000) 1,165 --
Issuance of Series C
preferred stock upon
conversion of note payable
to related party.......... -- -- -- -- --
Issuance of Series C
preferred stock, net of
issuance costs of
$7,322.................... -- -- -- -- --
Issuance of common stock... -- -- -- -- --
Deferred stock
compensation.............. -- -- -- -- --
Amortization of deferred
stock compensation........ -- -- -- -- --
Comprehensive loss:
Net loss from April 5..... -- -- -- -- --
Unrealized loss on
available-for-sale
securities.............. -- -- -- -- --
Comprehensive loss........
---------- ------- ---------- ------- --------
Balance at September 30,
2000...................... -- $ -- -- $ -- $ --
========== ======= ========== ======= ========
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------- ------------------- -------------------- -----------------
SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS
--------- ------- --------- ------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance, at inception, of
Series A units at $3.41
per unit.................. -- $-- -- $-- -- $ -- -- $--
Issuance, at inception, of
Series A units at $2.27
per unit.................. -- -- -- -- -- -- -- --
Net loss................... -- -- -- -- -- -- -- --
--------- --- --------- --- ---------- ------- ------- ---
Balance at December 31,
1997...................... -- -- -- -- -- -- -- --
Proceeds received from
Members................... -- -- -- -- -- -- -- --
Stock-based compensation... -- -- -- -- -- -- -- --
Net loss................... -- -- -- -- -- -- -- --
--------- --- --------- --- ---------- ------- ------- ---
Balance at December 31,
1998...................... -- -- -- -- -- -- -- --
Stock-based compensation... -- -- -- -- -- -- -- --
Net loss................... -- -- -- -- -- -- -- --
--------- --- --------- --- ---------- ------- ------- ---
Balance at December 31,
1999...................... -- -- -- -- -- -- -- --
Net loss to April 4........ -- -- -- -- -- -- -- --
Conversion to C
corporation............... 4,400,000 44 4,400,000 44 -- -- -- --
Issuance of Series C
preferred stock upon
conversion of note payable
to related party.......... -- -- -- -- 322,580 3 -- --
Issuance of Series C
preferred stock, net of
issuance costs of
$7,322.................... -- -- -- -- 12,903,227 129 -- --
Issuance of common stock... -- -- -- -- -- -- 207,242 2
Deferred stock
compensation.............. -- -- -- -- -- -- -- --
Amortization of deferred
stock compensation........ -- -- -- -- -- -- -- --
Comprehensive loss:
Net loss from April 5..... -- -- -- -- -- -- -- --
Unrealized loss on
available-for-sale
securities.............. -- -- -- -- -- -- -- --
Comprehensive loss........
--------- --- --------- --- ---------- ------- ------- ---
Balance at September 30,
2000...................... 4,400,000 $44 4,400,000 $44 13,225,807 $ 132 207,242 $ 2
========= === ========= === ========== ======= ======= ===
<CAPTION>
ACCUMULATED DEFICIT
OTHER ACCUMULATED
ADDITIONAL DEFERRED COMPREHENSIVE DURING THE
PAID-IN STOCK INCOME DEVELOPMENT
CAPITAL COMPENSATION (LOSS) STAGE TOTAL
---------- ------------ ------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Issuance, at inception, of
Series A units at $3.41
per unit.................. $ -- $ -- $-- $ -- $ 4,000
Issuance, at inception, of
Series A units at $2.27
per unit.................. -- -- -- -- 4,000
Net loss................... -- -- -- -- (548)
---------- ------- --- ------- --------
Balance at December 31,
1997...................... -- -- -- -- 7,452
Proceeds received from
Members................... -- -- -- -- 17,000
Stock-based compensation... 10 -- -- -- 10
Net loss................... -- -- -- -- (7,928)
---------- ------- --- ------- --------
Balance at December 31,
1998...................... 10 -- -- -- 16,534
Stock-based compensation... 5 -- -- -- 5
Net loss................... -- -- -- -- (11,286)
---------- ------- --- ------- --------
Balance at December 31,
1999...................... 15 -- -- -- 5,253
Net loss to April 4........ -- -- -- -- (2,568)
Conversion to C
corporation............... 2,582 -- -- -- --
Issuance of Series C
preferred stock upon
conversion of note payable
to related party.......... 2,497 -- -- -- 2,500
Issuance of Series C
preferred stock, net of
issuance costs of
$7,322.................... 92,549 -- -- -- 92,678
Issuance of common stock... 83 -- -- -- 85
Deferred stock
compensation.............. 8,170 (8,170) -- -- --
Amortization of deferred
stock compensation........ -- 2,977 -- -- 2,977
Comprehensive loss:
Net loss from April 5..... -- -- -- (5,231) (5,231)
Unrealized loss on
available-for-sale
securities.............. -- -- (6) -- (6)
--------
Comprehensive loss........ (5,237)
---------- ------- --- ------- --------
Balance at September 30,
2000...................... $ 105,896 $(5,193) $(6) $(5,231) $ 95,688
========== ======= === ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 80
DIADEXUS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
AUGUST 29, PERIOD FROM
1997 AUGUST 29, 1997
(INCEPTION) (INCEPTION)
THROUGH YEAR ENDED NINE MONTHS ENDED THROUGH
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
------------ ------------------ ---------------------- ----------------
1997 1998 1999 1999 2000 2000
------------ ------- -------- ----------- -------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................... $ (548) $(7,928) $(11,286) $(8,916) $ (7,799) $(27,561)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............ 2 1,657 1,072 798 819 3,550
Stock compensation expense............... -- 10 5 3 2,977 2,992
Loss on disposal of property and
equipment.............................. -- 23 3 2 -- 26
Changes in operating assets and
liabilities:
Interest receivable.................... -- -- -- -- (1,074) (1,074)
Prepaid expenses and other current
assets............................... (89) (317) (24) 63 75 (355)
Accounts payable....................... -- 239 (197) 1,038 299 341
Accrued liabilities.................... 207 244 (177) 278 169 443
Due to related parties................. 185 132 (2,234) (2,570) 414 (1,503)
Deferred rent.......................... 102 14 (29) (1) (30) 57
------ ------- -------- ------- -------- --------
Net cash used in operating
activities......................... (141) (5,926) (12,867) (9,305) (4,150) (23,084)
------ ------- -------- ------- -------- --------
CASH USED IN INVESTING ACTIVITIES:
Purchases of property and equipment........ (272) (1,160) (238) (194) (653) (2,323)
Proceeds from sale of equipment............ -- -- 9 -- -- 9
Purchases of short-term investments........ -- -- -- -- (39,240) (39,240)
Purchases of long-term investments......... -- -- -- -- (23,221) (23,221)
------ ------- -------- ------- -------- --------
Net cash used in investing
activities......................... (272) (1,160) (229) (194) (63,114) (64,775)
------ ------- -------- ------- -------- --------
CASH PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes
payable to related parties............... -- -- 5,000 5,000 -- 5,000
Repayment of convertible notes payable to
related parties.......................... -- -- -- -- (2,621) (2,621)
Proceeds from related party contributions
receivable............................... -- 17,000 -- -- -- 17,000
Proceeds from issuance of Series A
preferred stock.......................... 2,953 -- -- -- -- 2,953
Proceeds from issuance of Series B
preferred stock.......................... 4,000 -- -- -- -- 4,000
Proceeds from issuance of Series C
preferred stock, net of issuance costs... -- -- -- -- 92,678 92,678
Proceeds from issuance of common stock..... -- -- -- -- 84 84
------ ------- -------- ------- -------- --------
Net cash provided by financing
activities......................... 6,953 17,000 5,000 5,000 90,141 119,094
------ ------- -------- ------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................ 6,540 9,914 (8,096) (4,499) 22,877 31,235
Cash and cash equivalents at beginning of
period..................................... -- 6,540 16,454 16,454 8,358 --
------ ------- -------- ------- -------- --------
Cash and cash equivalents at end of period... $6,540 $16,454 $ 8,358 $11,955 $ 31,235 $ 31,235
====== ======= ======== ======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid.............................. $ -- $ -- $ -- $ -- $ 194 $ 194
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of notes payable into Series C
preferred stock.......................... -- -- -- -- 2,500 2,500
Construction in-progress funded by related
party.................................... 2,199 106 -- -- -- 2,305
Capital contribution of property and
equipment................................ 1,047 -- -- -- -- 1,047
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 81
DIADEXUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY:
diaDexus, Inc. (the "Company"), was founded as a Delaware limited liability
company in August 1997 by SmithKline Beecham Corporation ("SmithKline Beecham")
and Incyte Genomics, Inc.("Incyte") (together, the "Members"). On April 4, 2000,
the Company was converted to a Delaware corporation (see Note 2).
The Company focuses on translating raw genomics data into novel diagnostic
and therapeutic products. Since its formation in 1997, the initial strategy of
the Company has been to discover molecular targets and develop novel diagnostic
products for the improved detection, classification and prognosis of diseases.
The Company recently expanded its strategy to include therapeutic discovery and
development. Where possible, the Company seeks to develop diagnostic and
therapeutic products that are directed at the same molecular target, enabling a
diagnostic/therapeutic tandem approach to detect and treat disease. The Company
expects to extend its discovery platform beyond the initial focus on cancer into
other diagnostic and therapeutic areas.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM RESULTS
The accompanying statements of operations and cash flows for the nine
months ended September 30, 1999 are unaudited. The unaudited interim financial
statements have been prepared on the same basis as the annual financial
statements and, in the opinion of management, reflect all adjustments, which
include only normal recurring adjustments, necessary to present fairly the
Company's results of operations and cash flows for the nine months ended
September 30, 1999. The financial data and other information disclosed in these
notes to the financial statements related to this period are unaudited. The
results of operations for any interim period are not necessarily indicative of
the results of operations for the full year.
INITIAL PUBLIC OFFERING
In November 2000, the Board of Directors authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock to the
public.
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
If the Company's initial public offering is completed under the terms
presently anticipated, all of the convertible preferred stock outstanding will
automatically convert into common stock. Unaudited pro forma stockholders'
equity at September 30, 2000, as adjusted for the assumed conversion of
preferred stock, is set forth on the accompanying balance sheets.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of income and expenses during the reporting
period. Actual results could differ from those estimates.
F-7
<PAGE> 82
DIADEXUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES
The Company's financial instruments that are subject to concentration of
credit risk consist primarily of cash and cash equivalents and marketable
securities. The Company's policy is to place its cash and cash equivalents and
marketable securities with high credit quality financial institutions in order
to limit the amount of credit exposure. The Company has not experienced any
losses to date.
The Company's future products may require approval from the U.S. Food and
Drug Administration ("FDA") and may require approval from certain international
regulatory agencies prior to commencing commercial sales. There can be no
assurance that the Company's products will receive any of these required
approvals. If the Company was denied such approvals or such approvals were
delayed, it would have a material adverse impact on the Company's results of
operations.
The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, new technological innovations,
dependence on key personnel, protection of proprietary technology, compliance
with government regulations, uncertainty of market acceptance of products,
product liability and the need to obtain additional financing.
SmithKline Beecham accounted for 100% of revenues during the year ended
December 31, 1999.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of less than 90 days to be cash equivalents. Investments with
maturities of less than one year from the balance sheet date and with original
maturities greater than 90 days are considered short-term investments.
Investments consist primarily of money market accounts, commercial paper,
certificates of deposit and other short-term instruments. These investments
typically bear minimal risk. This minimization of risk is consistent with the
Company's policy to maintain high liquidity and ensure safety of principal.
INVESTMENTS
The Company's short-term and long-term investments are classified as
available-for-sale. Available-for-sale securities are carried at fair value
based on quoted market prices, with the unrealized gains and losses included in
accumulated other comprehensive income within stockholders' equity. The
amortized cost of debt securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization is
included in interest and other income. Realized gains and losses and declines in
value judged to be other-than-temporary on available-for-sale securities are
also included in interest and other income. Interest and dividends on securities
classified as available-for-sale are included in interest and other income. The
cost of securities sold is based on the specific identification method.
The amortized cost and fair value of securities, with gross unrealized
gains and losses, were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Debt securities:
Corporate bonds....................... $62,460 $100 $(106) $62,454
======= ==== ===== =======
</TABLE>
F-8
<PAGE> 83
DIADEXUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The fair value of available-for-sale debt securities by contractual
maturity at September 30, 2000 was as follows (in thousands):
<TABLE>
<S> <C>
Within 1 year............................................... $39,134
Greater than 1 year less than 5 years....................... 23,320
-------
$62,454
=======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over their
estimated useful lives using the straight-line method. Assets contributed by the
Members during 1997 were recorded at amounts equal to the Members' net carrying
value. Laboratory equipment, computers, software, and office furniture are
depreciated over three years. Leasehold improvements are recorded at cost and
amortized over the term of the non-cancelable lease or their useful life,
whichever is shorter. Maintenance and repairs are expensed as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
circumstances suggest that the carrying amount of those assets may not be fully
recoverable or that the estimated useful life of those assets has changed
significantly. When expected future undiscounted cash flows that are expected to
be generated by an asset are less than its carrying amount, then an impairment
loss is recognized, and the asset is written down to its estimated fair value.
REVENUE RECOGNITION
The amount received from SmithKline Beecham under a non-refundable license
arrangement was recognized during 1999 as the earnings process was completed
pursuant to the terms of the agreement and no remaining performance obligation
existed. Any amounts received in advance of completing the earnings process are
recorded as deferred revenue. The Company's revenue recognition practices are in
accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition".
RESEARCH AND DEVELOPMENT
The Company recognizes research and development expense as incurred.
INCOME TAXES
From the Company's inception through April 4, 2000, no provision or benefit
for federal or state income taxes was recorded in the financial statements as
the Company was a limited liability company and, therefore, was taxed as a
partnership. Rather, the federal and state income tax effects of the Company's
results of operations were recorded by the Members in their respective income
tax returns. On April 4, 2000, in connection with completing the Series C
preferred stock financing, the Company became subject to the C corporation
provisions of the Internal Revenue Code. Accordingly, any earnings after this
date will be taxed at federal and state corporate income tax rates.
Current income tax expense (benefit) is the amount of income taxes expected
to be payable (refundable) for the current year. A deferred income tax asset or
liability is computed for the expected future impact of the differences between
the financial reporting and tax bases of assets and liabilities as well as the
expected future tax benefit to be derived from tax loss and tax credit
carryforwards. Deferred income tax expense (benefit) is generally the net change
during the year in the deferred income tax assets
F-9
<PAGE> 84
DIADEXUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
or liability. A valuation allowance is established when necessary to reduce
deferred tax assets to the amount more likely than not to be realized in future
tax returns.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and Financial
Accounting Standards Board Interpretation No. 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans" ("FIN No.
28") and complies with the pro forma disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123").
Under APB No. 25, compensation expense is based on the difference, if any,
on the date of the grant, between the estimated fair value of the Company's
common stock and the exercise price. SFAS No. 123 defines a "fair value" based
method of accounting for employee stock options. Pro forma disclosures of the
difference between compensation expense included in net loss and the related
cost measured by the fair value method are presented (see Note 5).
The Company accounts for stock issued to non-employees in accordance with
the provisions of SFAS No. 123 and Emerging Issue Task Force No. 96-18,
"Accounting for Equity Instruments that are issued Other Than Employees for
Acquiring or in Conjunction with Selling, Goods and Services" ("EITF No.
96-18").
COMPREHENSIVE INCOME (LOSS)
The Company accounts for comprehensive income in accordance with Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and
displaying comprehensive income (loss) and its components. Comprehensive income
(loss) refers to revenues, expenses, gains and losses that under generally
accepted accounting principles are included in comprehensive income (loss) but
excluded from net income (loss).
NET LOSS PER SHARE
The Company computes basic net loss per share by dividing net loss by the
weighted average number of common shares outstanding for the period. Diluted net
loss per share is computed using the weighted-average number of shares of common
stock outstanding and, when dilutive, potential common shares from options and
warrants to purchase common stock using the treasury stock method and from
convertible securities using the if-converted method. These potential common
shares are antidilutive for all periods presented and, therefore, have been
excluded from the calculation of diluted net loss per share.
The following potentially dilutive common shares were excluded from the
calculation of diluted net loss per share because their effect was antidilutive
(in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ---------------------
1997 1998 1999 1999 2000
----- ----- ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Convertible preferred stock.................. 8,800 8,800 8,800 8,800 22,026
Common stock options......................... -- 716 1,338 665 2,287
Preferred stock warrant...................... -- -- -- -- 129
----- ----- ------ ----- ------
8,800 9,516 10,138 9,465 24,442
===== ===== ====== ===== ======
</TABLE>
F-10
<PAGE> 85
DIADEXUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma basic and diluted net loss per share is calculated using the
weighted average number of shares of common stock outstanding, including
convertible preferred units or shares (using the if-converted method) that will
automatically convert to shares of Common Stock immediately prior to completion
of the initial public offering, as if they had been converted on January 1, 1999
or the original date of issuance if later. Potentially dilutive common shares
derived from stock options and warrants were excluded from this calculation
because their effect was antidilutive. The following table sets forth the
calculation of basic and diluted pro forma net loss per share (in thousands,
except per share data):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Net loss........................................... $(11,286) $(7,799)
Weighted average shares used to compute pro forma
basic and diluted net loss per share............. 8,800 17,441
Pro forma basic and diluted net loss per share..... $ (1.28) $ (0.45)
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes new standards
of accounting and reporting for derivative instruments and hedging activities.
SFAS No. 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income (loss), depending on the type of hedge transaction. In June
2000, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities -- an Amendment of FASB Statement No. 133," ("SFAS
No. 138"). The Company, to date, has not engaged in derivative or hedging
activities. The Company will adopt SFAS No. 133, as amended, in 2001. The
Company does not expect the adoption of SFAS No. 133 to have a material impact
on its financial statements.
NOTE 3 -- BALANCE SHEET COMPONENTS
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1998 1999 2000
------- ------- -------------
<S> <C> <C> <C>
Laboratory, computer and office equipment.......... $ 2,339 $ 2,523 $ 3,159
Leasehold improvements............................. 2,111 2,631 2,649
Construction in-progress........................... 477 -- --
------- ------- -------
Total.............................................. 4,927 5,154 5,808
Less: Accumulated depreciation and amortization.... (1,647) (2,712) (3,531)
------- ------- -------
$ 3,280 $ 2,442 $ 2,277
======= ======= =======
</TABLE>
F-11
<PAGE> 86
DIADEXUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------ SEPTEMBER 30,
1998 1999 2000
---- ---- -------------
<S> <C> <C> <C>
Payroll and related............................. $197 $230 $354
Deposits........................................ 45 45 62
Other........................................... 394 184 212
---- ---- ----
$636 $459 $628
==== ==== ====
</TABLE>
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
The Company has an operating lease for laboratory and office facilities in
Santa Clara, California through September 30, 2002. The Company has an option to
renew the lease through September 2007. Minimum future lease payments under the
non-cancelable lease as of September 30, 2000 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000........................................................ $ 203
2001........................................................ 818
2002........................................................ 624
------
$1,645
======
</TABLE>
Rent expense was $310,000, $825,000 and $838,000, and $606,000 for the
period from August 29, 1997 (inception) through December 1997, the years ended
December 31, 1998 and 1999, and for the nine months ended September 30, 2000,
respectively. A security deposit of $67,000 relating to our facility lease was
paid by SmithKline Beecham and is included in due to related parties in the
accompanying balance sheets.
The Company has subleased a portion of its leased office facilities under a
non-cancelable lease agreement since 1998. Rental income for the years ended
December 31, 1998 and 1999 and for the nine months ended September 30, 2000 was
$117,000, $202,000 and $242,000, respectively. The aggregate minimum future
lease payments to be received by the Company under the sublease are $709,000.
In September 1997, the Company entered into a $5,000,000 agreement with
Incyte for microarray services and products and future sequencing services. At
September 30, 2000, the Company is committed under the agreement to pay Incyte
approximately $402,000 through February 2001.
The Company entered into a collaboration agreement with the University of
Pittsburgh Medical Center effective October 1, 2000 to analyze RNA expression in
human cancer tissues. Under this agreement, the University of Pittsburgh Medical
Center will perform RNA expression analysis on human cancer and corresponding
non-malignant tissues to establish genotypic classifications. The Company will
pay the University of Pittsburgh Medical Center approximately $1,218,000 over
the three year term of this agreement.
The Company entered into a one-year agreement with Agilent Technologies,
Inc. in August 2000 for early access to Agilent's DNA microarray technology.
Under the terms of the agreement, diaDexus will purchase a number of custom
in-situ microarrays at a cost of approximately $405,000.
F-12
<PAGE> 87
DIADEXUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company has entered into employment agreements with certain key
executive officers. Such agreements provide for severance payments and, in one
case, provide for accelerated vesting following a change in control of the
Company.
NOTE 5 -- MEMBERS' AND STOCKHOLDERS' EQUITY:
PREFERRED UNITS AND STOCK
In September 1997, the Company issued 4,400,000 Series A Preferred units,
no par value, to SmithKline Beecham, at $3.41 per unit. At the time these units
were issued, the Company received an initial capital contribution of $4,000,000
in cash and assets and a contractual commitment for additional cash
contributions of $7,000,000 and $4,000,000 which were received on April 15, 1998
and July 15, 1998, respectively. Upon conversion of the Company from a limited
liability company into a C corporation, the Series A Preferred units were
converted into Series A Preferred Stock on a one-to-one basis. The Series A
Preferred Stock converts automatically to Common Stock upon completion of an
initial public offering by the Company that results in net proceeds of at least
$20,000,000 and an offering price of at least $10.00 per share.
In September 1997, the Company also issued 4,400,000 Series B Preferred
units, no par value, to Incyte at $2.27 per share. At the time these units were
issued, the Company received an initial capital contribution of $4,000,000 in
cash and a contractual commitment for additional cash contributions of
$2,000,000 and $4,000,000 which were received on April 15, 1998 and July 15,
1998, respectively. Upon conversion of the Company from a limited liability
company into a C corporation, the Series B Preferred units were converted into
Series B Preferred Stock on a one-to-one basis. The Series B Preferred Stock
converts automatically to Common Stock upon completion of an initial public
offering by the Company that results in net proceeds of at least $20,000,000 and
an offering price of at least $10.00 per share.
In April 2000, the Company issued 13,225,807 shares of Series C Preferred
Stock, $0.01 par value, at $7.75 per share. Net proceeds were approximately
$92,678,000 after cash offering expenses of $7,322,000. The Series C Preferred
Stock converts automatically to Common Stock upon completion of an initial
public offering by the Company that results in net proceeds of at least
$20,000,000 and an offering price of at least $10.00 per share.
In connection with the sale of Series C Preferred Stock, the Company issued
a warrant in June 2000 to purchase 129,032 shares of Series C Preferred Stock at
$7.75 per share to the placement agent. The Series C Preferred Stock warrant
converts automatically to a Common Stock warrant upon completion of an initial
public offering by the Company that results in net proceeds of at least $20
million and an offering price of at least $10.00 per share. The warrant becomes
exercisable in 2005. The Company valued this warrant using the Black-Scholes
option pricing model with the following assumptions: expected life of five
years; risk free interest rate of 6.23%; expected dividend yield of zero, and
volatility of 85%. The fair value of the warrant of $846,367 is included in the
carrying value of the Series C Preferred Stock.
At September 30, 2000, the Company has reserved 22,154,839 shares of Common
Stock for future issuance upon the conversion of the Preferred Stock.
DIVIDENDS
In the event dividends are paid on any share of Common Stock, an additional
dividend must be paid with respect to all outstanding shares of Preferred Stock
in an amount per share (on an as-if-converted basis) equal to the amount paid or
set aside for each share of Common Stock whenever funds are legally available.
Such dividends are payable when, as and if declared by the Board of Directors.
No dividends
F-13
<PAGE> 88
DIADEXUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
accrue unless declared by the Board of Directors. As of September 30, 2000, no
dividends had been declared.
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, holders of the Series A, Series B and Series C
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets to the holders of the Common Stock, an amount
per share equal to $3.41 for each outstanding share of Series A Preferred Stock,
$2.27 for each outstanding share of Series B Preferred Stock and $7.75 for each
outstanding share of Series C Preferred Stock plus any declared but unpaid
dividends on such share of Series A, Series B or Series C Preferred Stock. If
upon the occurrence of such an event, the assets and funds thus distributed
among the holders of the Preferred Stock shall be insufficient to permit the
payment to such holders of the full aforesaid preferential amounts, then, the
entire assets and funds of the Company legally available for distribution shall
be distributed ratably among the holders of the Series A, Series B and Series C
Preferred Stock in proportion to the aggregate liquidation preference of such
stock owned by each such holder.
Upon completion of the distributions described above, all of the remaining
assets of the Company available for distribution to stockholders shall be
distributed among the holders of Common Stock pro rata based on the number of
shares of Common Stock held by each.
VOTING RIGHTS
Holders of Series A, Series B and Series C Preferred Stock are entitled to
one vote for each share of Common Stock into which such shares can be converted.
The holders of the outstanding shares of Series A and Series B Preferred Stock,
voting as separate classes, are each entitled to elect one member to the
Company's Board of Directors and the holders of the outstanding shares of Series
C Preferred Stock, voting as a separate class, are entitled to elect two members
to the Company's Board of Directors. Any remaining board members will be elected
by the holders of Common Stock and the holders of Preferred Stock voting
together as a single class.
REGISTRATION RIGHTS
The holders of the Company's Preferred Stock have the right to require the
Company to register their shares with the Securities and Exchange Commission so
that those shares may be publicly resold or to include their shares in any
registration statement we file.
CONVERSION RIGHTS
Shares of Series A, Series B and Series C Preferred Stock are convertible
into shares of Common Stock at the option of the holder, or automatically upon
completing a public offering of at least $20,000,000 of Common Stock at an
offering price of at least $10.00 per share, upon the written consent of the
holders of at least 80% of the then outstanding shares of Series A, Series B and
Series C Preferred Stock voting together as a single class on an as-if-converted
basis. The conversion rate is one share of Common Stock for one share of
Preferred Stock (subject to certain adjustments).
COMMON STOCK
As of September 30, 2000, the Company had issued 207,242 shares of Common
Stock, $0.01 par value, primarily in connection with the exercise of stock
options. No dividends have been declared. In the event of any liquidation,
dissolution or winding up of the Company, either voluntary or involuntary,
holders
F-14
<PAGE> 89
DIADEXUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
of Common Stock shall be entitled to receive the remaining assets of the Company
after distribution to holders of Preferred Stock, pro rata based on the number
of shares of Common Stock held by each holder.
STOCK OPTION PLANS
In January 1998, the Company's Board of Directors adopted the 1997
Incentive Plan ("1997 Plan") under which 1,200,000 shares of the Company's
Common Units ("Units") were reserved for issuance to employees and consultants
of the Company. During 1999, the Company increased the number of Units reserved
for future issuance by 1,000,000. Options granted under the 1997 Plan are for
terms not to exceed ten years. If the option is granted to an individual who, at
the time of grant, owns a membership interest in the Company representing more
than 10% of the voting power of all classes of membership interest of the
Company or any parent or subsidiary, the exercise price of the option must be at
least 110% of the estimated fair value of the Units at the date of grant.
Exercise prices of options granted to all other persons must be at least 85% of
the estimated fair value of the Units at the date of grant. Options under the
1997 Plan generally vest over four years. The 1997 Plan expires in 2008.
In April 2000, all of the Units originally granted under the 1997 Plan were
converted into options to acquire shares of Common Stock under the 2000 Equity
Incentive Plan ("2000 Plan"), which provides for the issuance of options to
purchase up to 2,200,000 shares of the Company's Common Stock. The Board of
Directors has the authority to determine to whom options will be granted, the
number of shares, the term and exercise price (which cannot be less than the
estimated fair value at date of grant for incentive stock options or 85% of fair
market value for nonstatutory stock options). Historically, estimated fair value
has been determined by the Board of Directors. If an employee owns stock
representing more than 10% of the outstanding shares, the price of each share
shall be at least 110% of estimated fair value. Options generally vest ratably
over four years and expire within ten years of the date of the grant. In June
2000, the Company reserved an additional 2,500,000 shares of Common Stock under
the 2000 Plan.
Stock option activity under the Company's plans is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------
WEIGHTED
OPTIONS AVERAGE
AVAILABLE NUMBER OF EXERCISE
FOR GRANT OPTIONS PRICE
---------- --------- --------
<S> <C> <C> <C>
Options reserved at the plan inception.................... 1,200,000 -- $ --
Options granted........................................... (760,500) 760,500 0.36
Options canceled.......................................... 44,250 (44,250) 0.35
---------- ---------
Balances, December 31, 1998............................... 483,750 716,250 0.36
Additional shares reserved................................ 1,000,000 -- --
Options granted........................................... (1,055,083) 1,055,083 0.75
Options canceled.......................................... 433,738 (433,738) 0.47
---------- ---------
Balances, December 31, 1999............................... 862,405 1,337,595 0.63
Additional shares reserved................................ 2,500,000 -- --
Options granted........................................... (1,361,000) 1,361,000 1.30
Options exercised......................................... -- (207,042) 0.41
Options canceled.......................................... 204,303 (204,303) 0.68
---------- ---------
Balances, September 30, 2000.............................. 2,205,708 2,287,250 1.05
========== =========
</TABLE>
F-15
<PAGE> 90
DIADEXUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following summarizes information about stock options outstanding at
September 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE (YEARS) PRICE NUMBER PRICE
--------------------- --------- ------------ -------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.35 173,000 7.36 $0.35 111,285 $0.35
0.75 753,250 8.21 0.75 288,882 0.75
1.20 76,000 9.41 1.20 -- --
1.30 1,285,000 9.74 1.30 -- --
--------- -------
2,287,250 9.04 1.05 400,167 0.64
========= =======
</TABLE>
The weighted average grant date fair value of options granted during the
years ended December 31, 1998 and 1999, and the nine months ended September 30,
2000, was $0.07, $0.14 and $6.06, respectively.
Had compensation cost for the Company's stock options been calculated based
upon the fair value at the date of grant, the Company's net loss and net loss
per share would have increased to the pro forma amounts shown in the table that
follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
AUGUST 29, 1997 NINE MONTHS ENDED
(INCEPTION) YEAR ENDED DECEMBER 31, SEPTEMBER 30,
THROUGH ----------------------- -----------------------
DECEMBER 31, 1997 1998 1999 1999 2000
----------------- --------- ---------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss:
As reported.................. $(548) $(7,928) $(11,286) $(8,915) $ (7,799)
Pro forma.................... (548) (7,943) (11,313) (8,926) (7,819)
Basic and diluted net loss per
share:
As reported.................. $ -- $ -- $ -- $ -- $(117.96)
Pro forma.................... -- -- -- -- (118.42)
</TABLE>
The fair value of each option grant is estimated at the grant date using
the minimum value method, assuming an expected option term of four years, no
dividend yield, and risk-free interest rates of 4.43% to 5.54%, 5.11% to
5.86%and 5.86% to 6.20% for the years ended December 31, 1998 and 1999, and for
the nine months ended September 30, 2000, respectively.
DEFERRED STOCK COMPENSATION
In the nine months ended September 30, 2000, the Company recorded
$8,170,000 of deferred stock compensation in accordance with APB No. 25, SFAS
No. 123 and EITF Issue No. 98-16 from the grant of stock options to employees,
directors and consultants. The difference between exercise price of the option
granted and the estimated fair value of common stock on the grant date is
recognized as deferred stock compensation. Stock compensation expense is being
recognized over the vesting period of the related options in accordance with FIN
No. 28. Total stock compensation expense for the nine months ended September 30,
2000 was $2,977,000.
F-16
<PAGE> 91
DIADEXUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
401(K) SAVINGS PLAN
In January 1998, the Company has established a qualified savings plan for
employees under Section 401(k) (the "401(k) Plan") of the Internal Revenue
Service Code, in which employees may defer as much as 15% of their pretax annual
salary up to the statutory limits. The 401(k) Plan permits discretionary
matching and profit sharing contributions to be made by the Company. As of
September 30, 2000, the Company has not made any contributions to the 401(k)
Plan.
NOTE 6 -- INCOME TAXES:
On April 5, 2000, the Company became subject to the C corporation
provisions of the Internal Revenue Code. No provision or benefit for income
taxes has been recognized since April 5, 2000 as the Company has incurred net
operating losses.
The significant components of deferred tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000
-------------
<S> <C>
Net operating loss carryforwards............................ $ 753
Depreciation and amortization............................... 956
Research tax credit carryforwards........................... 269
Other....................................................... 83
-------
Total deferred tax assets.............................. 2,061
Deferred interest income.................................... (402)
Less: Valuation allowance................................... (1,659)
-------
Net deferred taxes.......................................... $ --
=======
</TABLE>
The Company has provided a full valuation allowance for its deferred tax
assets at September 30, 2000 due to the uncertainty surrounding the future
realization of such assets.
At September 30, 2000, the Company had state and federal net operating loss
carryforwards of $1,827,000 which expire in 2005 and 2020, respectively, and
federal and state research tax credit carryforwards of $269,000 which expire in
2020. Utilization of federal and state net operating loss and tax credit
carryforwards may be subject to an annual limitation due to the "change in
ownership" provisions of the Internal Revenue Code.
NOTE 7 -- RELATED PARTY TRANSACTIONS:
In connection with forming the Company, SmithKline Beecham, Incyte and the
Company entered into several agreements during September 1997, including an
Operating Agreement (the "Operating Agreement") and a Master Strategic
Relationship Agreement (the "Master Agreement"). The Operating Agreement served
as the Company's by-laws while the Master Agreement documents certain specific
matters regarding the operation of the Company. During September 1997, the
Company issued 4,400,000 shares of Series A Preferred units to SmithKline
Beecham in exchange for an initial capital contribution of $4,000,000 in cash
and assets and a contractual commitment for additional cash contributions of
$11,000,000, which was received in two installments on April 15 and July 15,
1998. Concurrently, the Company issued 4,400,000 shares of Series B Preferred
units to Incyte in exchange for an initial capital contribution of $4,000,000 in
cash and a contractual commitment for additional cash contributions of
$6,000,000, which was received in two installments on April 15 and July 15,
1998.
F-17
<PAGE> 92
DIADEXUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In addition to the above contributions, SmithKline Beecham has granted the
Company various exclusive and non-exclusive rights to develop certain diagnostic
tests using genes identified by SmithKline Beecham, including genes identified
by SmithKline Beecham from their collaboration with Human Genome Sciences, Inc.,
until June 2001. SmithKline Beecham has also granted the Company an exclusive
license for a number of diagnostic tests that are in late stage clinical
validation. Incyte has provided the Company with non-exclusive access to certain
of its gene sequence and expression databases for various exclusive and
non-exclusive rights to diagnostic and therapeutic applications until September
2003. The Company will pay royalties to Incyte and Human Genome Sciences on the
sale, if any, of certain products developed using their respective proprietary
databases. These non-cash assets received as capital contributions from
SmithKline Beecham and Incyte were recorded at zero value of which was equal to
the carrying value of such assets by SmithKline Beecham and Incyte.
The Operating Agreement specified that the limited liability company would
merge into a C corporation at the earliest of (i) the eighteen month anniversary
of the Company's formation (March 1999); (ii) any time after January 1, 1999, if
the Company's cash balance falls below $2,000,000, or (iii) the mutual agreement
of SmithKline Beecham and Incyte. Pursuant to the Operating Agreement, the
conversion of the Company into a C corporation was deferred until completion of
the Series C Preferred Stock financing in April 2000.
Pursuant to an Intercompany Services Agreement, SmithKline Beecham and
Incyte provided the Company with certain legal, financial and research and
development services. Charges to the Company for these services were based upon
either actual costs or rates charged to other customers for similar services.
Such amounts, which were charged to research and development, were $0 and
$86,000 in 1999 and 1998, respectively. The Company incurred similar costs from
Incyte, which were charged to research and development, of $72,000 and
$1,928,000 during the years ended December 31, 1998 and 1999, respectively.
In February 1999, the Company entered into a license agreement with
SmithKline Beecham Clinical Laboratories, Inc. Under the agreement, SmithKline
Beecham obtained licenses from the Company with respect to the Company's
technology for a potential molecular target for prostate cancer. Later during
1999 testing of this molecular target was discontinued and the parties agreed
that no additional work under the agreement was appropriate. Accordingly, the
non-refundable license fee of $100,000 was recognized as revenue in 1999.
In July 1999, the Company issued two convertible notes payable in the
amount of $2,500,000 each to SmithKline Beecham and Incyte. The notes were due
and payable in April 2000, accruing interest at 5.6% per annum. Upon closing the
Series C financing, the note to SmithKline Beecham was converted to 322,580
shares of Series C Preferred Stock. Additionally, the Company paid interest of
$97,000 on the note to SmithKline Beecham and paid Incyte principal of
$2,500,000 and accrued interest of $97,000.
In December 1999, the Company entered into a LifeArray Software License
Agreement with Incyte. Under this agreement, the Company has access to computer
software from Incyte for the processing and analysis of microarray expression
data for a period of 12 months, with the option to extend for an additional 12
month term. The license fee for the use of the software is $75,000 per year.
NOTE 8 -- SUBSEQUENT EVENTS:
EMPLOYEE STOCK PURCHASE PLAN
The Company's Board of Directors adopted, subject to stockholder approval,
the 2000 Employee Stock Purchase Plan (the "2000 ESPP") on December , 2000.
The Board has recommended that a total of 500,000 shares should be reserved for
issuance under the 2000 ESPP.
F-18
<PAGE> 93
DIADEXUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2001 EQUITY INCENTIVE PLAN
The Company's Board of Directors adopted, subject to stockholder approval,
the 2001 Equity Incentive Plan (the "2001 Plan") on December , 2000 as a
successor equity plan to the 2000 Plan. Under the 2001 Plan, a total of
shares of common stock have been reserved for issuance, including
shares that remained reserved for issuance under the 2000 Plan.
STOCK OPTIONS AND WARRANT
Subsequent to September 30, 2000, the Company granted options to purchase
1,077,213 shares of Common Stock at $1.80 per share. These grants will result in
deferred stock compensation of approximately $10,178,000 which will be
recognized over the vesting periods.
In December 2000 the Company committed to grant a warrant to purchase
50,000 shares of Common Stock at $1.20 per share for services to be received.
F-19
<PAGE> 94
[Graphical information regarding diaDexus, Inc. consisting of:
- diaDexus logo;
- text reading "A post-genomics company focused on translating genomic
sequence data into novel diagnostic and therapeutic products;
- pictures of microarrays; and
- bioinformatics computer results.]
<PAGE> 95
LOGO
7,000,000 Shares
[LOGO]
Common Stock
---------------------------
PROSPECTUS
, 2001
---------------------------
LEHMAN BROTHERS
CIBC WORLD MARKETS
PRUDENTIAL VECTOR HEALTHCARE
A UNIT OF PRUDENTIAL SECURITIES
FIDELITY CAPITAL MARKETS
<PAGE> 96
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all costs and expenses, other than the
underwriting discounts and commissions, payable by the Registrant in connection
with the sale and distribution of the common stock being registered. All amounts
shown are estimates except for the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq National Market application
fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 29,575
NASD filing fee............................................. 11,770
Nasdaq National Market listing fee.......................... 95,000
Blue sky qualification fees and expenses.................... 12,500
Printing and engraving expenses............................. 350,000
Legal fees and expenses..................................... 450,000
Accounting fees and expenses................................ 330,000
Transfer agent and registrar fees........................... 5,000
Miscellaneous expenses...................................... 66,155
----------
Total............................................. $1,350,000
==========
</TABLE>
---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Certificate of Incorporation in effect as of the date hereof, and our
Restated Certificate of Incorporation to be in effect upon the closing of this
offering (collectively, the "Certificate") provide that, except to the extent
prohibited by the Delaware General Corporation Law, as amended (the "DGCL"), the
Registrant's directors shall not be personally liable to the Registrant or its
stockholders for monetary damages for any breach of fiduciary duty as directors
of the Registrant. Under the DGCL, the directors have a fiduciary duty to the
Registrant which is not eliminated by this provision of the Certificate and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under the DGCL for breach of the director's
duty of loyalty to the Registrant, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are prohibited by the DGCL. This provision
also does not affect the directors' responsibilities under any other laws, such
as the federal securities laws. The Registrant may obtain liability insurance
for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL or (iv)
for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise. The Certificate eliminates the personal liability
of directors to the fullest extent permitted by Section 102(b)(7) of the DGCL
and provides that the Registrant may fully indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that such person is or was a director or
officer of the Registrant, or is or was serving at
II-1
<PAGE> 97
the request of the Registrant as a director or officer of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
(a) Since our inception in August 1997, we have issued and sold the
following unregistered securities:
(1) In September 1997, we issued 4,400,000 units of diaDexus LLC, the
predecessor to our company, to each of SmithKline Beecham and Incyte at a
price per unit of $3.41 and $2.27 respectively. Each of SmithKline
Beecham's units was converted into one share of Series A Preferred Stock
and each of Incyte's units was converted into one share of Series B
Preferred Stock upon our conversion from a limited liability company to a
Delaware corporation immediately prior to the closing of our Series C
Preferred Stock offering in April 2000. Also in connection with our
incorporation, each of SmithKline Beecham and Incyte received 100 shares of
our common stock.
(2) In April 2000, we issued and sold 13,225,807 shares of Series C
Preferred Stock to 75 investors for an aggregate consideration of
$102,500,004.
(3) In June 2000, we issued a warrant to Prudential Securities
Incorporated to purchase 129,032 shares of Series C Preferred Stock at an
exercise price per share of $7.75.
(4) In November 2000, we agreed to issue a warrant to our firm of
outside legal counsel to purchase 50,000 shares of common stock at an
exercise price per share of $1.25.
(5) Since our inception and as of September 30, 2000, we have granted
options to purchase 3,176,583 shares of common stock to employees,
directors and consultants under our 2000 Equity Incentive Plan at exercise
prices ranging from $0.35 to $1.30 per share. Of the options granted,
2,287,250 remain outstanding, 207,042 shares of common stock have been
purchased pursuant to exercises of stock options and 682,291 shares have
been cancelled and returned to the 2000 Equity Incentive Plan as of
September 30, 2000.
The issuances of securities in the transactions described above were deemed
exempt from registration under the Securities Act in reliance on Section 4(2),
Regulation D or Rule 701 promulgated thereunder as transactions pursuant to
compensatory benefit plans and contracts relating to compensation. The
recipients of securities in each such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and other instruments issued in such transactions. All
recipients either received adequate information about us or had access, through
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.
2.1** Conversion Agreement, dated as of April 3, 2000, by and
among diaDexus, LLC, SmithKline Beecham Corporation and
Incyte Pharmaceuticals, Inc.
3.1** Certificate of Incorporation.
3.2** Certificate of Amendment of Certificate of Incorporation.
3.3 Certificate of Amendment of Certificate of Incorporation.
3.4* Form of Restated Certificate of Incorporation to be
effective upon the closing of this offering.
</TABLE>
II-2
<PAGE> 98
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
3.5** Bylaws.
3.6* Form of Restated Bylaws to be effective upon the closing of
this offering.
4.1* Specimen stock certificate.
4.2** Investors' Rights Agreement, dated as of April 6, 2000, by
and among Registrant, SmithKline Beecham Corporation, Incyte
Pharmaceuticals, Inc. and the investors listed on the
signature pages thereto.
5.1* Opinion of Latham & Watkins.
10.1** Form of Indemnification Agreement by and between Registrant
and Registrant's directors and officers.
10.2** 2000 Equity Incentive Plan.
10.3* 2001 Equity Incentive Plan.
10.4* 2001 Employee Stock Purchase Plan.
10.5** Warrant for the Purchase of Shares of Preferred Stock, dated
as of June 1, 2000, by and between Registrant and Prudential
Securities, Incorporated.
10.6* Employment Agreement by and between Registrant and Patrick
Plewman.
10.7** Amendment of Stock Option Awards, dated as of November 11,
1999, by and between Registrant and Patrick Plewman.
10.8** Employment Agreement, dated as of August 25, 1999, by and
between Registrant and Sharon Tetlow.
10.9** Amendment of Stock Option Awards, dated as of November 11,
1999, by and between Registrant and Sharon Tetlow.
10.10** Employment Agreement, dated as of December 1, 1999, by and
between Registrant and Mohan Iyer.
10.11** Consultantship Agreement, dated as of December 20, 1999, by
and between Registrant and George Poste.
10.12** Special Consultantship Agreement, dated as of January 18,
2000, by and between Registrant and George Poste.
10.13** Lease Agreement, dated as of June 26, 1997, by and among
SmithKline Beecham Corporation, John Arrillaga and Richard
T. Peery.
10.14** Lease Assignment, dated as of December 11, 1997, by and
among Registrant, SmithKline Beecham Corporation, John
Arrillaga and Richard T. Peery.
10.15** Master Strategic Relationship Agreement, dated as of
September 2, 1997, by and among Registrant, SmithKline
Beecham Corporation and Incyte Pharmaceuticals, Inc.
10.16** Amendment No. 1 to the Master Strategic Relationship
Agreement, dated as of January 15, 1998, by and among
Registrant, SmithKline Beecham Corporation and Incyte
Pharmaceuticals, Inc.
10.17+* Collaboration and License Agreement, dated as of September
2, 1997, by and among Registrant, SmithKline Beecham
Corporation, SmithKline Beecham, plc and Incyte
Pharmaceuticals, Inc.
10.18** Amendment No. 1 to the Collaboration and License Agreement,
dated as of February 1, 1998, by and among Registrant,
SmithKline Beecham Corporation, SmithKline Beecham, plc and
Incyte Pharmaceuticals, Inc.
10.19+* Amendment No. 2 to the Collaboration and License Agreement,
dated as of July 2, 1998, by and among Registrant,
SmithKline Beecham Corporation, SmithKline Beecham, plc and
Incyte Pharmaceuticals, Inc.
</TABLE>
II-3
<PAGE> 99
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.20** Amendment to the Collaboration and License Agreement, dated
as of May 4, 1999, by and among Registrant, SmithKline
Beecham Corporation, SmithKline Beecham, plc and Incyte
Pharmaceuticals, Inc.
10.21+* Amendment No. 3 to the Collaboration and License Agreement,
dated as of July 28, 1999, by and among Registrant, Quest
Diagnostic Incorporated, SmithKline Beecham Corporation,
SmithKline Beecham, plc and Incyte Pharmaceuticals, Inc.
10.22** Amendment No. 4 to the Collaboration and License Agreement,
dated as of February 17, 2000, by and among Registrant,
SmithKline Beecham Corporation, SmithKline Beecham, plc and
Incyte Pharmaceuticals, Inc.
10.23** Amendment to the Collaboration and License Agreement, dated
as of March 30, 2000, by and among Registrant, SmithKline
Beecham Corporation, SmithKline Beecham, plc and Incyte
Pharmaceuticals, Inc.
10.24+* Collaborative Agreement, dated as of February 17, 2000, by
and between Registrant and Incyte Pharmaceuticals, Inc.
10.25+* GEM Services Agreement, dated as of November 1, 1998, by and
between Registrant and Incyte Pharmaceuticals, Inc.
10.26+* Amendment to GEM Services Agreement, dated as of September
27, 1999, by and between Registrant and Incyte
Pharmaceuticals, Inc.
10.27** LifeArray Software License Agreement by and between
Registrant and Incyte Pharmaceuticals, Inc.
10.28** Intercompany Services Agreement, dated as of September 2,
1997, by and among Registrant, SmithKline Beecham
Corporation, and Incyte Pharmaceuticals, Inc.
10.29** DNA Microarray Technology Access Program Master Early Access
Agreement, dated as of August 23, 2000, by and between
Registrant and Agilent Technologies, Inc.
10.30+* Antibody Development and License Agreement, dated as of
November 5, 1999, by and between Registrant and Biosite
Diagnostics Incorporated.
10.31+* License Agreement, dated as of February 10, 1999, by and
between Registrant and SmithKline Beecham Clinical
Laboratories, Inc.
10.32+* Research Agreement, dated as of July 11, 2000, by and
between Registrant and Sloan-Kettering Institute for Cancer
Research.
10.33+* Collaborative Research Agreement, dated as of October 1,
2000, by and between Registrant and University of Pittsburgh
of the Commonwealth System of Higher Education.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.2* Consent of Latham & Watkins (included in Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
---------------
* To be filed by amendment.
**Previously filed.
+ Registrant has requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit with
the Commission.
(b) FINANCIAL STATEMENT SCHEDULES.
Not applicable.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
II-4
<PAGE> 100
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act, and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by 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 hereunder, 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 Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 101
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Santa Clara, State of California, on
January 9, 2001.
DIADEXUS, INC.
By: /s/ PATRICK PLEWMAN
------------------------------------
Name: Patrick Plewman
Title: Chief Executive Officer,
President
and Chief Operating Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ PATRICK PLEWMAN Chief Executive Officer, January 9, 2001
--------------------------------------------------- President, Chief Operating
Patrick Plewman Officer and Director
(Principal Executive Officer)
/s/ SHARON E. TETLOW Vice President, Finance and January 9, 2001
--------------------------------------------------- Chief Financial Officer
Sharon E. Tetlow (Principal Financial and
Accounting Officer)
* Chairman of the Board of January 9, 2001
--------------------------------------------------- Directors
George Poste
* Director January 9, 2001
---------------------------------------------------
Louis C. Bock
* Director January 9, 2001
---------------------------------------------------
Randy W. Scott
* Director January 9, 2001
---------------------------------------------------
Tadataka Yamada
*By: /s/ PATRICK PLEWMAN
---------------------------------------------
Patrick Plewman
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 102
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1** Conversion Agreement, dated as of April 3, 2000, by and
among diaDexus, LLC, SmithKline Beecham Corporation and
Incyte Pharmaceuticals, Inc.
3.1** Certificate of Incorporation.
3.2** Certificate of Amendment of Certificate of Incorporation.
3.3 Certificate of Amendment of Certificate of Incorporation.
3.4* Form of Restated Certificate of Incorporation to be
effective upon the closing of this offering.
3.5** Bylaws.
3.6* Form of Restated Bylaws to be effective upon the closing of
this offering.
4.1* Specimen stock certificate.
4.2** Investors' Rights Agreement, dated as of April 6, 2000, by
and among Registrant, SmithKline Beecham Corporation, Incyte
Pharmaceuticals, Inc. and the investors listed on the
signature pages thereto.
5.1* Opinion of Latham & Watkins.
10.1** Form of Indemnification Agreement by and between Registrant
and Registrant's directors and officers.
10.2** 2000 Equity Incentive Plan.
10.3* 2001 Equity Incentive Plan.
10.4* 2001 Employee Stock Purchase Plan.
10.5** Warrant for the Purchase of Shares of Preferred Stock, dated
as of June 1, 2000, by and between Registrant and Prudential
Securities, Incorporated.
10.6* Employment Agreement by and between Registrant and Patrick
Plewman.
10.7** Amendment of Stock Option Awards, dated as of November 11,
1999, by and between Registrant and Patrick Plewman.
10.8** Employment Agreement, dated as of August 25, 1999, by and
between Registrant and Sharon Tetlow.
10.9** Amendment of Stock Option Awards, dated as of November 11,
1999, by and between Registrant and Sharon Tetlow.
10.10** Employment Agreement, dated as of December 1, 1999, by and
between Registrant and Mohan Iyer.
10.11** Consultantship Agreement, dated as of December 20, 1999, by
and between Registrant and George Poste.
10.12** Special Consultantship Agreement, dated as of January 18,
2000, by and between Registrant and George Poste.
10.13** Lease Agreement, dated as of June 26, 1997, by and among
SmithKline Beecham Corporation, John Arrillaga and Richard
T. Peery.
10.14** Lease Assignment, dated as of December 11, 1997, by and
among Registrant, SmithKline Beecham Corporation, John
Arrillaga and Richard T. Peery.
10.15** Master Strategic Relationship Agreement, dated as of
September 2, 1997, by and among Registrant, SmithKline
Beecham Corporation and Incyte Pharmaceuticals, Inc.
10.16** Amendment No. 1 to the Master Strategic Relationship
Agreement, dated as of January 15, 1998, by and among
Registrant, SmithKline Beecham Corporation and Incyte
Pharmaceuticals, Inc.
</TABLE>
<PAGE> 103
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.17+* Collaboration and License Agreement, dated as of September
2, 1997, by and among Registrant, SmithKline Beecham
Corporation, SmithKline Beecham, plc and Incyte
Pharmaceuticals, Inc.
10.18** Amendment No. 1 to the Collaboration and License Agreement,
dated as of February 1, 1998, by and among Registrant,
SmithKline Beecham Corporation, SmithKline Beecham, plc and
Incyte Pharmaceuticals, Inc.
10.19+* Amendment No. 2 to the Collaboration and License Agreement,
dated as of July 2, 1998, by and among Registrant,
SmithKline Beecham Corporation, SmithKline Beecham, plc and
Incyte Pharmaceuticals, Inc.
10.20** Amendment to the Collaboration and License Agreement, dated
as of May 4, 1999, by and among Registrant, SmithKline
Beecham Corporation, SmithKline Beecham, plc and Incyte
Pharmaceuticals, Inc.
10.21+* Amendment No. 3 to the Collaboration and License Agreement,
dated as of July 28, 1999, by and among Registrant, Quest
Diagnostic Incorporated, SmithKline Beecham Corporation,
SmithKline Beecham, plc and Incyte Pharmaceuticals, Inc.
10.22** Amendment No. 4 to the Collaboration and License Agreement,
dated as of February 17, 2000, by and among Registrant,
SmithKline Beecham Corporation, SmithKline Beecham, plc and
Incyte Pharmaceuticals, Inc.
10.23** Amendment to the Collaboration and License Agreement, dated
as of March 30, 2000, by and among Registrant, SmithKline
Beecham Corporation, SmithKline Beecham, plc and Incyte
Pharmaceuticals, Inc.
10.24+* Collaborative Agreement, dated as of February 17, 2000, by
and between Registrant and Incyte Pharmaceuticals, Inc.
10.25+* GEM Services Agreement, dated as of November 1, 1998, by and
between Registrant and Incyte Pharmaceuticals, Inc.
10.26+* Amendment to GEM Services Agreement, dated as of September
27, 1999, by and between Registrant and Incyte
Pharmaceuticals, Inc.
10.27** LifeArray Software License Agreement 1999, by and between
Registrant and Incyte Pharmaceuticals, Inc.
10.28** Intercompany Services Agreement, dated as of September 2,
1997, by and among Registrant, SmithKline Beecham
Corporation, and Incyte Pharmaceuticals, Inc.
10.29** DNA Microarray Technology Access Program Master Early Access
Agreement, dated as of August 23, 2000, by and between
Registrant and Agilent Technologies, Inc.
10.30+* Antibody Development and License Agreement, dated as of
November 5, 1999, by and between Registrant and Biosite
Diagnostics Incorporated.
10.31+* License Agreement, dated as of February 10, 1999, by and
between Registrant and SmithKline Beecham Clinical
Laboratories, Inc.
10.32+* Research Agreement, dated as of July 11, 2000, by and
between Registrant and Sloan-Kettering Institute for Cancer
Research.
10.33+* Collaborative Research Agreement, dated as of October 1,
2000, by and between Registrant and University of Pittsburgh
of the Commonwealth System of Higher Education.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.2* Consent of Latham & Watkins (included in Exhibit 5.1).
24.1** Power of Attorney (included on signature page).
27.1** Financial Data Schedule.
</TABLE>
<PAGE> 104
---------------
* To be filed by amendment.
**Previously filed.
+ Registrant has requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit with
the Commission.
