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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
Commission file number 0-27488
INCYTE PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3136539
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3174 Porter Drive
Palo Alto, California 94304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 855-0555
Securities registered to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of Common Stock held by nonaffiliates
(based upon the closing sale price on the Nasdaq National Market) on March 3,
1997 was approximately $ 521,225,888.
As of March 3, 1997, there were 10,458,924 shares of Common Stock,
$.001 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors), 11, 12 and 13 of Part III incorporate by
reference information from the registrant's proxy statement to be filed with
the Securities and Exchange Commission in connection with the solicitation of
proxies for the registrant's 1997 Annual Meeting of Stockholders to be held on
May 21, 1997.
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PART I
ITEM 1. BUSINESS.
When used in this Report, the word "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward- looking
statements. Such statements, which include statements as to the timing of
availability of products under development, the ability to commercialize
products developed under collaborations and alliances, the performance and
utility of the Company's products and services, and the adequacy of capital
resources, are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, those risks discussed below as
well as the extent of utilization of genomic information by the pharmaceutical
industry in both research and development, risks relating to the development of
new database products and their use by potential collaborators of the Company,
the impact of technological advances and competition, and the risks set forth
below under "Factors That May Affect Results." These forward-looking statements
speak only as of the date hereof. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
OVERVIEW
Incyte Pharmaceuticals, Inc. ("Incyte" or the "Company"), incorporated
in Delaware in 1991, is a leader in the design, development and marketing of
genomic database products, software tools, and related genomic reagents and
services. Genome Systems, Inc. ("Genome Systems"), a wholly owned subsidiary
that was acquired in July 1996, produces a line of genomic reagents and
services for scientists at academic institutions and pharmaceutical and
biotechnology companies. Combion, Inc. ("Combion"), acquired in August 1996,
contributed staff, advisors, and intellectual property which now serve as the
center of Incyte's microarray technology development group.
Incyte's genomic databases integrate bioinformatics software with both
proprietary and, when appropriate, publicly available genetic information to
create information-based tools used by pharmaceutical and biotechnology
companies in drug discovery and development. In building the databases, the
Company utilizes high-throughput, computer-aided gene sequencing and analysis
technologies to identify and characterize the expressed genes of the human
genome as well as certain animal, plant and microbial genomes. Each database
module consists of a relational database that runs on UNIX-based client/server
networks and incorporates HyperText Markup Language ("HTML") graphical user
interfaces enabling customers to use multiple search tools and browse various
database modules. The databases are available using either Oracle or Sybase
database architectures and operate on Sun, Digital Equipment Corporation and
Silicon Graphics workstations.
The portfolio of databases modules are available separately or as an
integrated set and include: the LifeSeq(R) gene sequence and expression
database, the LifeSeq FL(TM) database of full-length genes, the LifeSeq
Atlas(TM) mapping database, and the PathoSeq(TM) microbial database. In
addition, Incyte offers the LifeTools(TM) suite of software tools, the
GeneAlbum(TM) reagent set, and a variety of custom database and sequencing
services.
Incyte currently markets access to its genomic databases through
collaborations with top pharmaceutical and biotechnology companies worldwide.
As of March 3, 1997, thirteen pharmaceutical
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or biotechnology companies and one agricultural company had access to the
Company's databases on a non-exclusive basis through multi-year database
collaboration agreements. Revenues from these customers generally include
database access fees and in some cases include additional fees for specific
sequencing services, such as custom or "satellite" database services. The
Company's database agreements also provide for milestone payments and royalties
from the sale of products by collaborative partners derived from proprietary
information contained within one or more database modules.
SCIENTIFIC BACKGROUND
Genomics is the study of genetic information, particularly human genes
and their relationship to disease. Each gene encodes information which directs
the body to produce a specific molecule capable of assisting in every day
functions of a cell or defending the body against disease. Each cell type in
the body uses a different subset of the genome to carry out its functions. In
fact, a gene can be "active" or "inactive" in a particular cell as well as
activated at "high" levels or "low" levels. There are three main approaches
used by researchers to understand gene function.
Homology -- Frequently genes can be grouped into "related" families
based on similarities in structure or function. One approach is to search for
genes related to those for which a function is already known or related to
genes presumed to have an involvement in a disease process. Each gene consists
of some linear combination of four building blocks called nucleotide bases
(A,C,T,G). Thus by examining the "sequence" of the building blocks that make
up a set of genes, one can identify those with a high degree of "sequence
homology" and thus identify genes that may be part of a related family.
Gene expression profiles -- When a gene is active, its DNA is copied by
the body into a molecule called messenger RNA or "mRNA". Incyte isolates the
mRNA from cells and tissues and converts it into copy DNA or "cDNA", a molecule
which is easier to manipulate. In a process called "transcript imaging" or
"gene expression profiling", Incyte uses high-throughput cDNA sequencing and
computer analysis to quantify which genes are "active" or "inactive", and if
active at what levels. This process is performed to analyze the expression
profiles of different tissues, different disease states, or developmental
stages. These "transcript images" provide a picture of cellular genetics at a
level of detail greater than that possible with conventional laboratory
techniques, revealing which genes, both known and novel, are specifically
correlated to discrete biological events in normal and disease- state cells.
All of this information is incorporated into the appropriate database enabling
biology "in silico" -- computer-aided analysis to screen and identify human
genes that may have value as therapeutics, diagnostic markers, or as new
targets for drug development.
Mapping or Positional Cloning -- Genes are organized into discrete units
called chromosomes. Each person has 23 pairs of chromosomes containing an
estimated 100,000 to 150,000 genes. By studying the medical histories of a
population of patients in which a disease appears to be highly prevalent,
abnormalities, such as a deletion or insertion, in a specific chromosomal
region can be correlated with the presence of a particular disease. This
narrows down the genes associated with that disease to the genes contained
within that chromosomal region. By locating or "mapping" the genes uncovered
through a high-throughput sequencing effort onto the chromosomes, a reference
map can then be created which can assist in identifying selected genes
associated with disease.
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PRODUCTS
Incyte's products include an integrated platform of genomic databases,
software analysis tools, and genomic reagents and services.
Non-exclusive Genomic Databases. Non-exclusive database access is
provided through a collaboration agreement. Customers receive periodic data
updates, usually monthly, as well as software upgrades and additional search
and analysis tools when they become available. The fees and the period of
access are negotiated with each customer, but the initial terms are typically
for a period of three years. Fees generally consist of database access fees;
non-exclusive or exclusive license fees and option fees corresponding to patent
rights on proprietary sequences; and potential milestone and royalty payments
on the sale of products commercialized if a database collaborator develops any
products utilizing the Company's technology and database information.
Additional fees for specific sequencing and database services, and the supply
of DNA clones may be included as described below. Where appropriate, customers
can browse not only Incyte-generated data, but also the data found in external
sources of public domain information by HTML links through the World Wide Web.
The database modules currently offered include the following:
The LifeSeq(R) database consists of two integrated database modules, a
proprietary sequence database module and a gene expression database module.
Customers can easily move from one module to another through an HTML-based
graphical interface. The sequence database contains Incyte's
computer-edited gene sequence files and is used by customers to identify
related or homologous genes. For example, a customer may wish to identify
new genes homologous to a gene sequence identified through the customer's own
independent research and believed to be linked to a disease, or a customer
may wish to identify a potentially related family of genes homologous to an
interesting gene uncovered while searching another Incyte database module.
The expression database contains biological information about each sequence
in the Company's sequence database, including tissue source, homologies, and
annotations regarding characteristics of the gene sequence. Most
importantly, the expression database contains a gene expression profile or
"transcript image" for every tissue in the database combined with
proprietary bioinformatics software to allow customers to browse data and
compare differences in gene expression across cells, tissues, and different
disease states. Thus the expression database can be used to assist
researchers in correlating the presence of specific genes to discrete
biological events in normal and disease-state cells.
The LifeSeq FL(TM) database, first introduced in 1996, contains the
full-length gene sequences for DNA fragments of medically interesting genes
found in the LifeSeq(R) gene sequence and expression database. Incyte
scientists select genes for inclusion in the LifeSeq FL database based on
their sequence homology to therapeutically important gene families, unusual
expression patterns or chromosomal location. A proprietary, high-throughput
cloning technology is then used to obtain the full-length sequence.
The PathoSeq(TM) database, first introduced in 1996, currently contains
sequence information for medically relevant microbes. Sequence information
for additional bacterial and fungal pathogens will be added in 1997 as the
data is generated. With drug-resistant strains of bacteria and other
microorganisms posing an increasing threat to world health, pharmaceutical
and biotechnology companies are turning to microbial genomics to assist in
identifying genes unique to these pathogens that might serve as new drug
targets for combating infectious disease.
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The LifeSeq Atlas(TM) database, still under development, will contain the
chromosomal locations for genes that the Company believes may be of
particular utility to its customers. The database may be used to identify
genes responsible for genetic disorders.
Other Databases in development include: the PhytoSeq(TM) database, a
database of plant sequences targeting agricultural and agrochemical
companies interested in identifying genes responsible for desirable crop and
disease resistance characteristics; and the ZooSeq(TM) database, a reference
database of sequence and gene expression information from animal models
designed to assist in the analysis of physiological responses to the
preclinical testing of new drug therapies.
Custom or Satellite Database Services. Satellite databases provide
pharmaceutical company customers with the opportunity to conduct custom
sequencing and database programs. To construct a satellite database, Incyte
generates sequence data and transcript images using genetic material from
tissues or cells selected by the customer. Typically these cells and tissues
are provided by the customer from its own tissue bank or internal research
programs. The resulting information will be placed in a proprietary satellite
database, in a format compatible with the appropriate non-exclusive database
module, and available to the satellite database customer on an exclusive basis
for a negotiated period of time.
Software. Incyte has developed a sophisticated suite of data mining,
search, analysis, editing, and data visualization software tools in developing
its portfolio of genomic databases. These tools allow the user to compare
sequence data against public-domain databases, to manage data within a
relational database architecture and to present data with a graphical HTML
interface. Beginning in 1996 the Company began offering access to the
LifeTools(TM) suite of data analysis software tools. This will assist the
customer in capturing, storing, and analyzing internally generated
sequence-related data. LifeTools software is offered on a consultancy basis,
being installed and customized to meet specific client needs.
Reagent Services. Incyte offers a variety of reagent services
designed to assist its customers in using information from its databases in
internal lab-based experiments. The DNA fragments upon which the information
in Incyte's databases are derived represent valuable resources for researchers,
enabling them to perform bench-style experiments to supplement the information
obtained from searching Incyte's databases. Incyte retains a copy of all
isolated clones corresponding to the sequences in the database. Customers may
request from the Company a sample of all clones corresponding to a sequence of
interest, including the full-length DNA clone corresponding to the partial gene
fragment sequences found in the database. Typically, the Company's customers
require full-length clones to derive receptors for small molecule binding
studies or therapeutic proteins. Upon the request of a customer, the Company
will isolate a full-length clone, on a fee for service basis. Finally the
GeneAlbum(TM) program, which was introduced for the first time in 1996, allows
customers to subscribe to a service that provides them with large numbers of
DNA clones on an annual basis. This service is more economical for those
customers that desire large numbers of DNA clones.
Genome Systems' Reagents. Genome Systems produces a broad line of
genomic research products, such as DNA clones and insert libraries, and offers
technical support services, including high-throughput DNA screening, custom
robotic services, contract DNA preparation, and fluorescent in-situ
hybridization, to assist researchers in the identification and isolation of
novel genes.
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DATABASE PRODUCTION
The Company engages in the high-throughput automated sequencing of
genes derived from tissue samples followed by the computer-aided analysis of
each gene sequence to identify similarities, or homologies, to genes of known
function in order to predict the biological function of newly identified
sequences. The derivation of information in the Company's databases involves
the following steps:
Tissue Access. Incyte obtains tissue samples representing most major organs
in the human body from various academic and commercial sources. Where
possible, in addition to the tissue sample, the Company obtains information
as to the medical history and pathology of the tissue. The genetic material
is isolated from these tissues and prepared for analysis. The results of
this analysis as well as the corresponding pathology and medical history
information are incorporated into the database. This information enables
customers to relate gene expression information to biological function.
High-Throughput cDNA Sequencing. The Company utilizes specialized teams in
an integrated approach to its high-throughput sequencing and analysis
effort. Gene sequencing is performed using multiple work shifts to increase
daily throughput. The Company is currently sequencing approximately 10,000
cDNA sequences per day. One team develops and prepares cDNA libraries from
biological sources of interest. A second team prepares the cDNAs using
robotic workstations to perform key steps that result in purified cDNAs for
sequencing (called cDNA templates). A third team operates automated DNA
sequencers that typically sequence from 200 to 800 base pairs from each cDNA
template. These base pairs represent a portion of the entire cDNA sequence.
The Company believes that those partial gene sequences are often sufficient
to identify the expressed gene and allow for more rapid gene discovery.
Bioinformatics. The finished sequence is uploaded from the DNA sequencers
into the Company's proprietary sequence database. Automated bioinformatics
software eliminates low quality sequences from the database. The sequence
of each cDNA is then compared via automated, computerized algorithms, to the
sequences of known genes in the Company's databases and public domain
databases to identify whether the cDNA codes for a known protein. Each
sequence is annotated as to its cell or tissue source, its relative
abundance and whether it is a known gene with known function or previously
unidentified. The bioinformatics staff monitors this computerized analysis
and may perform additional analysis on sequence information.
CUSTOMERS
The Company has entered into database collaboration agreements with
thirteen pharmaceutical or biotechnology companies and one agricultural company
as of March 3, 1997. Each collaborator has agreed to pay, during an average
term of three years, annual fees to receive non-exclusive access to the
Company's databases. In 1996, the Company recognized revenue from ten of these
companies, three of which each contributed in excess of 10% of total revenues.
Certain of these agreements contain minimum annual database
requirements which if not met could result in Incyte's breach of the respective
agreement. The Company's first two database agreements expire at the end of
1997 and it is not known if either of these will be renewed, and if renewed,
under what terms. The loss of revenues from any customer could have a
significant effect on the Company's business, financial condition, and results
of operations. See "Factors That May Affect Results -- Limited Operating
History; History of Operating Losses; Uncertainty of Future Profitability
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or Continuing Revenues," "-- New and Uncertain Business," and "--Competition
and Technological Changes."
DEVELOPMENT PROGRAMS
Since its inception, the Company has made substantial investments in
research and technology development. During the years ended December 31, 1996,
1995 and 1994, the Company spent approximately $40.9 million, $19.2 million,
and $11.2 million, respectively, on research and development activities. The
investment in research and development includes an active program to enter into
alliances with other technology-driven companies and when appropriate, acquire
licenses to technologies for evaluation or use in the production and analysis
process. The Company has entered into a number of research and development
alliances with companies and research institutions. The Company's commitments
under any one of these agreements do not represent a significant expenditure in
relation to the Company's total research and development expense. Significant
areas of current technology and product development include the following:
Technology Development. Incyte has made, and intends to continue to
make, a substantial investment in searching for, and evaluating, new
technologies that can improve its DNA sequencing and analysis process. This
includes, but is not limited to tissue processing, DNA amplification and
advanced automated sequencing and expression profiling technologies. In
particular the Company is continually evaluating alternative technologies that
may result in additional productivity, efficiency and quality improvements. To
acquire access to these technologies, the Company may be required to pay
upfront license fees and ongoing research fees or make equity investments. In
1996 Incyte entered into alliances designed to evaluate the use of mass
spectrometry for high throughput expression profiling with GeneTrace Systems
Inc. and Perseptive Biosystems, Inc.
Incyte is making a significant investment in the area of microarray
technology development. Microarray technology consists of the attachment of
DNA fragments onto a solid substrate, such as a chemically treated glass
surface, in a specific grid formation ("gridding") so that the identity and
placement of each DNA fragment is known. These grids can then be used to probe
the expression patterns of thousands of genes at a time. In August 1996,
Incyte acquired Combion, a private company focusing on the creation of
microarrays using a proprietary "ink- jet" technology whereby presynthesized
DNA fragments ("GeneJet") or individual nucleotides ("ChemJet") are printed
onto designated sites on the array. This technology is being developed
in-house as a method of producing arrays of DNA fragments representing genes
from Incyte's databases for use by customers in their internal experimental
research programs. In addition, Incyte has an alliance with Affymetrix, Inc.
to utilize Affymetrix's array technology to develop a series of specific arrays
containing disease or application related genes. The two companies are jointly
developing such arrays, which are called LifeChips(TM), as research tools to
create information for disease-specific database modules.
There is no assurance that any of these agreements will be successful
or that competitors will not gain access to particular sequence- related or
microarray-related technologies to the exclusion of Incyte. See "Factors that
May Affect Results -- Risks Associated with Acquisitions" and "-- Dependence on
Others."
Database Product Development. Version 1.0 of Incyte's core database,
the LifeSeq(R) gene expression database, was introduced in 1994. Version 2.0,
introduced in the first half of 1995, was in a relational database format using
a Sybase platform running on UNIX systems. Version 3.0, introduced in October
1995, included for the first time an HTML-based graphical user interface which
enabled the
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user to access the gene expression relational database and provided links to
public domain data. Versions 4.0-4.3, introduced in 1996, consist of a
relational database format available on both a Sybase or an Oracle platform,
include automated search and annotation capabilities and contain a separate
sequence database with links to the gene expression relational database.
Future versions are being developed to include three dimensional data
visualization and mining tools and flexible annotation features. There can be
no assurance that subsequent versions of the LifeSeq(R) database will be
completed, or completed in a timely manner.
In addition, Incyte introduced a number of new database products
during 1996 including the LifeSeq FL(TM) database of full-length genes, the
LifeSeq Atlas(TM) mapping database, the PathoSeq(TM) database of microbial
sequences, and the LifeTools(TM) suite of software database analysis tools.
The Company is continuing to develop improvements to these modules, and to that
end is developing additional search and analysis features. The Company is
also focusing significant efforts on the development of new database products,
including the ZooSeq(TM) reference database of gene expression profiles for
commonly used animal modules to assist with the evaluation of data from the
preclinical testing of prospective new drugs; and LifeChips(TM) based database
modules in development as part of the Affymetrix collaboration. There can be
no assurance that improvements of these database modules or new modules will be
completed, or if completed, will be completed in a timely manner. See "Factors
That May Affect Results -- Competition and Technological Changes."
Incyte entered into a number of alliances intended to improve its
bioinformatics capabilities and to investigate the development of new data
analysis tools. Some of these programs include: the investigation of the use
of Oceania Inc.'s computerized patient medical record software to assist in the
organization and searching of tissue pathology data and patient medical
histories from the tissues used in Incyte's databases; and a collaboration with
the bioinformatics lab at the French National Center for Scientific Research
(the CNRS or Centre National de la Recherche Scientifique) to develop new
algorithms. There is no assurance that any of these agreements will be
successful. See "Factors That May Affect Results -- Dependence on Others."
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's database business and competitive position is dependent
upon its ability to protect its proprietary database information and software
technology. The Company relies on patent, trade secret and copyright law, and
nondisclosure and other contractual arrangements to protect its proprietary
information. To date, the Company has not been issued registered copyrights
for its database-related software and has been issued several patents with
respect to full-length gene sequences.
The Company's ability to license proprietary genes may be dependent
upon its ability to obtain patents, protect trade secrets and operate without
infringing upon the proprietary rights of others. Other pharmaceutical,
biotechnology and biopharmaceutical companies, as well as academic and other
institutions have filed applications for, may have been issued patents or may
obtain additional patents and proprietary rights relating to products or
processes competitive with those of the Company. Patent applications filed by
competitors, including Human Genome Sciences, Inc. ("HGS"), may claim some of
the same gene sequences or partial gene sequences as those claimed in patent
applications filed by the Company. Merck & Co., Inc. in conjunction with
Washington University has made certain gene sequences publicly available which
may adversely affect the ability of the Company and others to obtain patents on
genes. Furthermore, The Institute for Genomic Research ("TIGR") has made
publicly available partial gene sequences generated at TIGR and full-length
gene sequences assembled from partial gene sequences found in publicly
available databases or sequenced at TIGR; and there can be no
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assurance that TIGR will not continue to release such information. There can
be no assurance that such publication of sequence information will not
adversely affect the Company's ability to obtain patent protection for certain
sequences.
The Company is aware that certain of its patent applications cover
genes which are also contained in patent applications filed by others with
potentially competing patent claims. Some of these potential conflicts may be
decided in interference proceedings before the United States Patent and
Trademark Office ("USPTO"). Given the large number of applications filed by
the Company, a large number of interference proceedings could be expensive and
time consuming. In addition, it is impossible to predict how many, if any, of
these competing patent claims will be resolved in the Company's favor.
The Company's current policy is to file patent applications on what it
believes to be novel full-length cDNA sequences and partial sequences obtained
through the Company's high-throughput computer-aided gene sequencing efforts.
The Company has filed United States patent applications in which the Company
has claimed certain partial gene sequences and has filed U.S. and European
patent applications claiming full- length gene sequences associated with cells
and tissues that are the subject of the Company's high-throughput gene
sequencing program. To date the Company holds several issued U.S. patents on
full-length genes, and no patent has issued under any of the Company's patent
applications claiming partial gene sequences.
The patentability of gene sequences and other genetic information in
general is highly uncertain. Although no clear policy has emerged with respect
to the breadth of claims allowable for full-length genes as well as partial
gene fragments, there is significant uncertainty as to what claims, if any,
will be allowed on partial gene sequences derived through high-throughout gene
sequencing. The USPTO initially rejected an application filed by the National
Institutes of Health ("NIH") claiming a large number of partial gene sequences,
and the NIH announced in February 1994 that it would not pursue further such
applications. Certain court decisions suggest that disclosure of a partial
sequence may not be sufficient to support the patentability of a full-length
sequence. In 1996 the USPTO issued guidelines limiting the number of gene
sequences that can be contained within a single patent application. Many of
the Company's patent applications containing multiple partial sequences contain
more sequences than the maximum number allowed under the new guidelines. The
Company is reviewing its options, and it is possible that due to the excessive
resources needed to comply with the guidelines, the Company may decide to
abandon seeking patent protection for some of its partial gene sequences.
As a result, there can be no assurance that patent applications
relating to the Company's products or processes will result in patents being
issued, or that any issued patents will provide protection against competitors.
Even if patents are issued on the basis of gene sequences, there may be
uncertainty as to the scope of the coverage, enforceability or commercial
protection provided by any such patents. See "Factors That May Affect Results
- -- Uncertainty of Protection of Patents and Proprietary Rights."
The Company was formed in 1991 to acquire certain assets and
technology of Invitron Corporation ("Invitron"). The Company's initial
research and development programs focused on the discovery of proteins that
might have pharmaceutical activity. The Company has filed, or owns patent
applications and certain issued patents, in the U.S. and certain foreign
countries relating to distinct molecules and/or families of related molecules
developed from the Company's protein research programs. Patents that have
issued relate to Bacterial Permeability Inhibitor ("BPI") and certain uses
thereof, Protease Nexin-1 ("PN-1") and certain uses thereof, Galectin 14-1
("GL14-1"), and Defensin HNP-4 and other granulocyte proteins. There can be no
assurance that any pending patent applications will issue as patents or that
any issued patents will provide Incyte with adequate protection with respect to
the
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covered products, processes or technology. In particular, the Company is aware
that Xoma Corporation ("Xoma") is developing a BPI product, has several issued
patents related to BPI and has licensed an issued patent and patent
applications relating to BPI from New York University. In the event that Xoma
is successful in developing its BPI product and such product is believed by the
Company possibly to infringe or otherwise threaten the Company's patent rights
with respect to BPI, the Company may choose to protect or enforce such patent
rights through negotiations or litigation, which could require a protracted
period of time and could result in substantial cost to and diversion of effort
by the Company.
COMPETITION
There are a finite number of genes in the human genome, and
competitors in gene sequencing may seek to identify, sequence and determine in
the shortest time possible the biological function of a large number of genes
in order to obtain a proprietary position with respect to the largest number of
new genes discovered. There are a large number of companies, other
institutions, and government-financed entities, including HGS, the NIH, and the
Department of Energy, engaged in gene sequencing. Some of these companies,
institutions and entities have greater financial and human resources than the
Company.
HGS has entered into a collaboration with SmithKline Beecham
("SmithKline") to engage in large-scale gene sequencing and to develop from
gene sequence data therapeutic, vaccine and diagnostic products. HGS and
SmithKline have made certain gene sequence information available to a
consortium of four pharmaceutical companies and have announced their intention
to add at least one more pharmaceutical company to the consortium. HGS is
also funding gene sequencing and gene research at The Institue for Genomic
Research ("TIGR"), a not-for-profit research institute. TIGR has announced
that it, HGS and SmithKline have established a human cDNA database that is
available to academic researchers. In addition, Merck & Co, Inc. is funding
gene sequencing efforts at Washington University and making sequencing
information publicly available (the "Merck Gene Index"). The Company expects
that additional competitors may attempt to establish gene sequence or genomics
databases in the future. In addition, such entities or other persons may
discover and establish patent positions with respect to gene sequences in the
Company's databases. Such patent positions or the public availability of gene
sequences comprising substantial portions of the human genome would decrease
the potential value of the Company's databases to the Company's customers and
adversely affect the Company's ability to realize royalties or other revenue
from commercialization of products based upon such genetic information.
In addition, the gene sequencing machines that are utilized in the
Company's high-throughput computer-aided gene sequencing operations are
commercially available and are currently being utilized by several competitors.
Moreover, some of the Company's competitors or potential competitors are in the
process of developing, and may successfully develop, proprietary sequencing
technologies that may be more advanced than the technology used by the Company.
There can be no assurance that such advanced sequencing technology, if
developed, will be commercially available for purchase or license by the
Company on reasonable terms, or at all.
A number of companies have announced their intent to develop and
market software to assist pharmaceutical companies and academic researchers in
the management and analysis of their own genomic data as well as the analysis
of sequence data available in the public domain. Some of these entities have
access to significantly greater resources than the Company and there can be no
assurance that these products would not achieve greater market acceptance than
the products offered by the Company.
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The Company believes that the features and ease of use of its database
software, its experience in high-throughput gene sequencing, the cumulative
size of its database, the quality of the data, including the annotations in its
database, and its experience with bioinformatics and database software are
important aspects of the Company's competitive position.
The genomics industry is characterized by extensive research efforts
and rapid technological progress. New developments are expected to continue
and there can be no assurance that discoveries by others will not render the
Company's services and potential products noncompetitive. In addition,
significant levels of research in biotechnology and medicine occur in
universities and other non-profit research institutions. These entities have
become increasingly active in seeking patent protection and licensing revenues
for their research results. These entities also compete with the Company in
recruiting talented scientists. See "Factors That May Affect Results --
Competition and Technological Changes."
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products that may be developed by a licensee of the Company or
by the Company. At the present time the Company does not intend to develop any
pharmaceutical products itself. The Company will receive royalties from its
database collaborators on any pharmaceutical products developed by such
collaborators derived from information obtained from Incyte's genomic
databases. Thus, the receipt and timing of regulatory approvals for the
marketing of such products may have a significant effect in the future on the
Company's revenues. Pharmaceutical products developed by licensees will
require regulatory approval by governmental agencies prior to
commercialization. In particular, human pharmaceutical therapeutic products
are subject to rigorous preclinical and clinical testing and other approval
procedures by the FDA in the United States and similar health authorities in
foreign countries. Various federal and, in some cases, state statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, recordkeeping and marketing of such pharmaceutical products, including
the use, manufacture, storage, handling and disposal of hazardous materials and
certain waste products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations require the expenditure of substantial resources over a significant
period of time, and there can be no assurance that any approvals will be
granted on a timely basis, if at all. Any such delay in obtaining or failure
to obtain such approvals could adversely affect the Company's ability to earn
milestone payments, royalties or other license-based fees. Additional
governmental regulations that might arise from future legislation or
administrative action cannot be predicted, and such regulations could delay or
otherwise affect adversely regulatory approval of potential pharmaceutical
products. See "Factors That May Affect Results -- Uncertainty of
Pharmaceutical Pricing and Health Care Reform and Related Matters."
HUMAN RESOURCES
As of March 1, 1997, the Company had 458 employees (127 of whom are
contract or part-time employees), including 167 in sequencing production, 96 in
bioinformatics, 65 in research and technology development, 60 in marketing,
sales and administrative positions and 70 in the Company's Genome Systems
subsidiary. None of the Company's employees is covered by collective
bargaining agreements, and management considers relations with its employees to
be good. The Company's future success also will depend in part on the
continued service of its key scientific, software, bioinformatics and
management personnel and its ability to identify, hire and retain additional
personnel, including personnel in the customer service and marketing area.
There is intense competition for such qualified personnel
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in the areas of the Company's activities, especially with respect to
experienced bioinformatics and software personnel, and there can be no
assurance that the Company will be able to continue to attract and retain such
personnel necessary for the development of the Company's business. Failure to
attract and retain key personnel could have a material adverse effect on the
Company's business, financial condition and operating results. See "Factors
That May Affect Results -- Management of Growth" and "-- Dependence on Key
Employees."
FACTORS THAT MAY AFFECT RESULTS
Limited Operating History; History of Operating Losses; Uncertainty of
Future Profitability or Continued Revenues. The Company has had a limited
operating history and is at an early stage of development. For the years ended
December 31, 1996, 1995 and 1994, the Company had net losses of $6.8 million,
$9.9 million and $11.5 million, respectively, and as of December 31, 1996, the
Company had an accumulated deficit of $36.5 million. The Company's increase in
throughput of its gene sequencing and database efforts, together with the
development of new products and expansion of its marketing, sales and customer
service staff will require a substantial increase in expenditures in 1997 and
beyond. While the Company reported a small operating profit in the fourth
quarter of 1996, there can be no assurance that the Company can maintain
profitability. The Company's ability to achieve and maintain significant
revenues or profitability will be dependent upon the Company's ability to obtain
additional customers for its database and genomic products and services. While
the Company currently has fourteen database collaborations, there can be no
assurance that the Company will be able to obtain any additional agreements for
such products and services. Further, the Company's database collaborations
typically have a term of three years, which may be terminated earlier by a
partner if the Company breaches any material provision of the database
agreement, which may include certain performance obligations, and fails to cure
such breach within a specified period. There can be no assurance that any of
the Company's database agreements will be renewed upon expiration or not
terminated earlier upon a material breach thereof by the Company. The loss of
revenues from certain agreements would have a material adverse effect on the
Company's business and operating results.
An element of the Company's commercialization strategy is the
licensing to customers of the Company's patent rights to individual partial
genes or full-length cDNA sequences from the Company's proprietary sequence
database for development as a potential pharmaceutical, diagnostic or other
product. Any potential product that is the subject of such a license would
require several years of further development, clinical testing and regulatory
approval prior to commercialization. Accordingly, the Company does not expect
to receive any milestone or royalty payments from any such licenses for a
substantial period of time, if at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
New and Uncertain Business. The Company's genomic database business
and the use of its databases, software tools and related services to assist in
and improve the efficiency of the traditional drug discovery process represents
a business for which there is no precedent. There can be no assurance that
such companies will accept the usefulness of the Company's databases, software
tools and related services. The Company's strategy of using high-throughput
sequencing to identify genes rapidly and obtain proprietary rights in as many
genes as possible is unproven. In addition, the Company has limited experience
in providing software-based relational database products or services. The
Company's ability to achieve profitability depends on attracting additional
customers for its database and sequencing products and services. The high- end
nature and price of the Company's database and sequencing products and services
are such that there is a limited number of large pharmaceutical and
biotechnology companies that are potential customers for such products and
services. Additional factors that may affect
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demand for the Company's products and services include the extent to which the
Company's potential customers choose to conduct in-house gene sequencing and
bioinformatics analysis, the emergence of competitors offering similar services
at competitive prices, the ability of the Company to satisfactorily service its
existing customers, the extent to which the gene and related information in the
Company's database is made public by, or is the subject of, patents issued to
others, and the emergence of technological innovations in gene sequencing or
bioinformatics and relational database software that are more advanced than the
technology used by and available to the Company. There can be no assurance
that the Company will be able to attract additional customers on acceptable
terms for its products and services or develop a sustainable profitable
business.
Risks Associated with Acquisitions. As part of its business strategy,
the Company may from time to time acquire assets and businesses principally
relating to or complementary to its operations, including for the purpose of
acquiring specific technology. The Company acquired Genome Systems and Combion
in July 1996 and August 1996, respectively. Genome Systems, located in St.
Louis, Missouri and Combion, located in Pasadena, California, are
geographically disparate from the Company's Palo Alto, California headquarters,
which may make the integration and management of their operations more
difficult. These and any other acquisitions by the Company will be accompanied
by the risks commonly encountered in acquisitions of companies. Such risks
include, among other things, potential exposure to unknown liabilities of
acquired companies or to acquisition costs and expenses exceeding amounts
anticipated for such purposes, fluctuations in the Company's quarterly and
annual operating results due to the costs and expenses of acquiring and
integrating new businesses or technologies, the difficulty and expense of
assimilating the operations and personnel of the acquired businesses, the
potential disruption of the Company's ongoing business and diversion of
management time and attention, the inability to successfully integrate or to
complete the development and application of acquired technology and the
potential failure to achieve anticipated financial, operating and strategic
benefits from such acquisitions, difficulties in establishing and maintaining
uniform standards, controls, procedures and policies, the impairment of
relationships with and possible loss of key employees and customers of acquired
businesses as a result of changes in management and ownership, the incurrence
of amortization expenses if an acquisition is accounted for as a purchase, and
dilution to the stockholders of the Company if the consideration for the
acquisition consists of equity securities. There can be no assurance that the
Company will be successful in overcoming these risks or any other problems
encountered in connection with such acquisitions. If the Company is
unsuccessful in doing so, its business, financial condition and results of
operations could be materially and adversely affected.
Fluctuations in Operating Results. The Company's operating results
may fluctuate significantly from quarter to quarter as a result of a variety of
factors, including changes in the demand for the Company's products and
services, the pricing of database access to database collaborators, the nature,
pricing and timing of other products and services provided to the Company's
customers, changes in the research and development budgets of the Company's
customers and potential customers, capital expenditures and other costs related
to the expansion of Incyte's operations, and the introduction of competitive
databases or services. In particular, the Company has a limited ability to
control the timing of database installations, due to the lengthy sales cycle
required for the Company's database products, the Company's revenue levels are
difficult to forecast, the time required to complete custom orders can vary
significantly and the growing investment in external alliances could result in
significant quarterly fluctuations in expenses due to the payment of
milestones, license fees or research payments. The need for continued
investment in development of the Company's databases and related products and
services and for extensive ongoing customer support capabilities results in
significant fixed expenses. If revenue in a particular period does not meet
expectations, the Company would not be able to adjust significantly its level
of expenditures in such period, which would have an adverse effect on the
Company's operating results. The Company believes that quarterly comparisons
of its financial results will not necessarily be
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meaningful and should not be relied upon as an indication of future
performance. Due to the foregoing factors, it is likely that in some future
quarter or quarters the Company's operating results may be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Competition and Technological Changes. There are a finite number of
genes in the human genome, and competitors in gene sequencing may seek to
identify, sequence and determine in the shortest time possible the biological
function of a large number of genes in order to obtain a proprietary position
with respect to the largest number of new genes discovered. There are a number
of companies, other institutions, and government-financed entities, including
HGS, the NIH, and the Department of Energy, engaged in gene sequencing. Many
of these companies, institutions and entities have greater financial and human
resources than the Company.
In addition, the gene sequencing machines that are utilized in the
Company's high-throughput computer-aided gene sequencing operations are
commercially available and are currently being utilized by several competitors.
Moreover, some of the Company's competitors or potential competitors are in the
process of developing, and may successfully develop, proprietary sequencing
technologies that may be more advanced than the technology used by the Company.
There can be no assurance that such advanced sequencing technology, if
developed, will be commercially available for purchase or license by the
Company on reasonable terms, or at all.
HGS has entered into a collaboration with SmithKline to engage in
large-scale gene sequencing and to develop from gene sequence data,
therapeutic, vaccine and diagnostic products. HGS and SmithKline have made
certain gene sequence information available to a consortium of four
pharmaceutical companies and have announced their intention to add at least one
more pharmaceutical company to the consortium. HGS is also funding gene
sequencing and gene research at TIGR, a not-for-profit research institute.
TIGR has announced that it, HGS and SmithKline have established a human cDNA
database that is available to academic researchers. In addition, Merck & Co.
is funding gene sequencing efforts at Washington University that are making
sequencing information publicly available (the "Merck Gene Index"). The
Company expects that additional competitors may attempt to establish gene
sequence or genomic databases in the future. In addition, such entities or
other persons may discover and establish patent positions with respect to gene
sequences in Company's databases. Such patent positions or the public
availability of gene sequences comprising substantial portions of the human
genome or on microbial or plant genes could decrease the potential value of the
Company's databases to the Company's customers and adversely affect the
Company's ability to realize royalties or other revenue from commercialization
of products based upon such genetic information.
The Company's databases also require extensive software support and
incorporate features determined by customer needs. To the extent the Company
experiences delays or difficulties in implementing its database software or
customer requested features, its ability to service its customers may be
adversely affected, which might have an adverse effect on the Company's
business and operating results.
The genomics industry is characterized by extensive research efforts
and rapid technological progress. To remain competitive, the Company will be
required to continue to expand its databases and to enhance the functionality
of its bioinformatics and database software. New developments are expected to
continue and there can be no assurance that discoveries by others will not
render the Company's services and potential products noncompetitive. See
"Business -- Competition."
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<PAGE> 15
Uncertainty of Protection of Patents and Proprietary Rights. The
Company's database business and competitive position are dependent in part upon
its ability to protect its proprietary database information and software
technology. Despite the Company's efforts to protect its proprietary database
information and software technology, unauthorized parties may attempt to obtain
and use information that the Company regards as proprietary. Although the
Company's database collaboration agreements require its customers to provide
adequate security for the Company's databases and access thereto, policing
unauthorized use of the Company's databases and software by the Company or its
customers is difficult. The Company relies on patent, trade secret, and
copyright law, and nondisclosure and other contractual arrangements to protect
its proprietary information, although to date, the Company has only been issued
a small number of patents with respect to the gene sequences in the Company's
databases and has not been issued registered copyrights for its related
software. Patents cannot prevent others from developing, selling or licensing
databases which include sequences which might be covered by the Company's
patents and copyrights. The Company cannot prevent others from independently
developing software which might be covered by any copyrights issued to the
Company and trade secret laws do not prevent independent development. Thus,
there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's proprietary information, that such information
will not be disclosed or that the Company can effectively protect its rights to
unpatented trade secrets.
The Company pursues a policy of having its employees, consultants and
advisors execute proprietary information and invention agreements upon
commencement of employment or consulting relationships with the Company, which
agreements provide that all confidential information developed or made known to
the individual during the course of the relationship shall be kept confidential
except in specified circumstances. There can be no assurance, however, that
these agreements will provide meaningful protection for the Company's trade
secrets or other proprietary information in the event of unauthorized use or
disclosure of such information.
The patentability of gene sequences and other genetic information in
general is uncertain, involves complex legal and factual questions, and has
recently been the subject of much litigation. As a result, there can be no
assurance that patent applications relating to the Company's products or
processes will result in patents being issued, or that any issued patents will
provide protection against competitors. Even if patents are issued on the
basis of gene sequences, there may be uncertainty as to the scope of the
coverage, enforceability or commercial protection provided by any such patents.
Certain court decisions suggest that disclosure of a partial sequence may not
be sufficient to support the patentability of a full-length sequence.
The USPTO initially rejected an application filed by the NIH claiming
large number of partial sequences, and the NIH announced in February 1994 that
it will not pursue further such applications. There has been substantial
backlog of biotechnology patent applications especially applications disclosing
or claiming gene sequences, at the USPTO. In 1996 the USPTO issued guidelines
limiting the number of gene sequences that can be contained within a single
patent application. Many of the Company's patent applications containing
multiple partial sequences contain more sequences than the maximum number
allowed under the new guidelines. The Company is reviewing its options and it
is possible that due to the excessive resources needed to comply with the
guideline, the Company may decide to abandon seeking patent protection for some
of its partial gene sequences.
As a result of the foregoing there can be no assurance that patent
applications relating to the Company's products or processes will result in
patents being issued, or that any issued patents will provide protection
against competitors who successfully challenge the Company's patents, obtain
patents
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<PAGE> 16
that may have an adverse effect on the Company's ability to affect business, or
are able to circumvent the Company's patent position.
In view of the delay in obtaining allowance of patent applications,
and the secrecy of patent applications, the Company does not know if other
applications that would have priority over the Company's applications have been
filed. Furthermore, recent changes in U.S. patent laws resulting from the GATT
agreement became effective in June 1995. Most notably, the GATT agreement
resulted in U.S. law being amended to change the term of patent protection from
seventeen years from patent issuance to twenty years from the earliest
effective filing date of the application. Because the average time from filing
to issuance of biotechnology applications is often more than three years, a
twenty year patent term from the date of filing may result in a substantially
shortened term of patent protection, which may adversely affect the Company's
patent position. Pending applications claiming large numbers of gene sequences
may, in some situations, need to be refiled while claiming priority to the
earlier filing date and, in such situations, the patent term will be measured
from the earliest filing date, thereby reducing the patent term and having a
potentially adverse effect on the Company's period of exclusivity.
Biotechnology patent law outside the United States is even more
uncertain and is currently undergoing review and revision in many countries.
Further, the laws of certain foreign countries may not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States. The Company may participate in opposition proceedings to determine the
validity of its or its competitors non- U.S. patents, which could result in
substantial costs to and diversion of effort by the Company.
Incyte may be required to obtain licenses to patents or proprietary
rights of others. As the biotechnology industry expands, more patents are
issued and other companies engage in the business of discovering genes through
the use of high speed sequencers, the risk increases that the Company's
potential products may be subject to claims that they infringe the patents of
others. No assurance can be given that any licenses required under any such
patents or proprietary rights would be made available on terms acceptable to
the Company. Litigation may be necessary to defend against or assert claims of
infringement, to enforce patents issued to the Company, to protect trade
secrets or know-how owned by the Company, or to determine the scope and
validity of the proprietary rights of others. Such litigation could result in
substantial costs to and diversion of effort by the Company and may have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, there can be no assurance that these
efforts by the Company will be successful.
The Company holds issued patents and has several additional pending
patent applications relating to BPI and related molecules. The Company is
aware that Xoma is developing a BPI product, has several issued patents related
to BPI and has licensed a patent and patent applications relating to BPI from
New York University. In the event that Xoma is successful in developing its
BPI product and such product is believed by the Company possibly to infringe or
otherwise threaten the Company's patent rights with respect to BPI, the Company
may choose to protect or enforce such patent rights through negotiations or
litigation, which could require a protracted period of time and could result in
substantial cost to and diversion of effort by the Company. See "Business --
Patents and Proprietary Technology."
Lengthy Sales Cycle. The ability of the Company to obtain new
customers for the its databases, software tools and related services depends in
significant part upon prospective customers' perception that the Company's
databases, software tools, and related services can help accelerate drug
discovery efforts. The sales cycle is typically lengthy due to the education
effort that is required as well as the need to effectively sell the benefits of
the Company's databases, software tools, and related services to a variety of
constituencies within potential customer companies, including research and
development
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personnel and top management. In addition, each database collaboration
involves the negotiation of agreements containing terms that may be unique to
each partner, such as the scope of any licenses granted and whether satellite
database services or access to multiple database modules is desired. The
Company may expend substantial funds and management effort with no assurance
that a database collaboration will result.
Future Capital Needs; Uncertainty of Additional Funding. The Company
believes that its existing cash and cash equivalents, should be adequate to
satisfy the Company's projected working capital and capital expenditure
requirements at least through 1997. However, the Company can offer no
assurance that the Company will be able to obtain additional collaborators for
the Company's databases or that such database products and services will
produce revenues, which together with the Company's cash, cash equivalents, and
marketable securities, will be adequate to fund the Company's operating
expenses. The Company's cash requirements depend on numerous factors,
including the ability of the Company to attract collaborators to its databases
and genomic products and services; the Company's research and development
activities; competing technological and market developments; the cost of
filing, prosecuting, defending, and enforcing patent claims and other
intellectual property rights; the purchase of additional capital equipment,
including capital equipment necessary to insure that the Company's sequencing
operation remains competitive; and the costs associated with the integration of
new operations assumed through mergers and acquisitions. In particular the
Company expects its cash requirements to increase in 1997 as it increases its
investment in data-processing-related computer hardware in order to support its
existing and new database products; continues to seek access to technologies
through alliances, license agreements, and/or acquisitions; and addresses its
needs for larger facilities and/or improvements in existing facilities. There
can be no assurance that changes in the Company's research and development
plans or other changes affecting the Company's operating expenses will not
result in changes in the timing and amount of expenditure of the Company's
capital resources. To the extent that additional capital is raised through the
sale of equity or convertible debt securities, the issuance of such securities
could result in dilution to the Company's existing stockholders. There can be
no assurance that additional funding, if necessary, will be available on
favorable terms, if at all. If adequate funds are not available, the Company
may be required to curtail operations significantly or to obtain funds through
entering into collaborative arrangements that may require the Company to
relinquish rights to certain of its technologies, product candidates, products
or potential markets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Management of Growth. The Company has recently experienced, and
expects to continue to experience significant growth in the number of its
employees and the scope of its operations. This growth has placed, and may
continue to place, a significant strain on the Company's management and
operations. The Company's ability to manage effectively such growth will
depend upon its ability to broaden its management team and its ability to
attract, hire and retain skilled employees. The Company's success will also
depend on the ability of its officers and key employees to continue to
implement and improve its operational, management information and financial
control systems and to expand, train and manage its employee base. In
addition, the Company must continue to take steps to provide customer support
resources as the number of overall database collaborators and the number of
requests from collaborators increases. Further, the Company's database
collaborators typically have worldwide operations and may require support at
multiple U.S. and foreign sites. Providing this support will require the
Company to manage international customer support services from its Palo Alto,
California headquarters or to open non-U.S. offices, either of which could
result in additional burdens on the Company's systems and resources. The
Company's inability to effectively manage growth could have a material adverse
effect on the Company's business, financial condition and operating results.
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Dependence on Key Employees. The Company is highly dependent on the
principal members of its scientific and management staff, including Roy A.
Whitfield, its Chief Executive Officer, and Randal W. Scott, its President and
Chief Scientific Officer, the loss of whose services would have a material
adverse effect on the Company's business. The Company has not entered into any
employment agreements with any of such persons and does not maintain any key
person life insurance policy on the life of any employee. The Company's future
success also will depend in part on the continued service of its key
scientific, software, bioinformatics and management personnel and its ability
to identify, hire and retain additional personnel, including personnel in the
customer service and marketing area. There is intense competition for such
qualified personnel in the areas of the Company's activities, especially with
respect to experienced bioinformatics and software personnel, and there can be
no assurance that the Company will be able to continue to attract and retain
such personnel necessary for the development of the Company's business.
Failure to attract and retain key personnel could have a material adverse
effect on the Company's business, financial condition and operating results.
Dependence on Others. The Company currently uses a single supplier to
provide its gene sequencing machines and a single supplier to provide certain
reagents required in connection with the gene sequencing process. While other
gene sequencing machines are available, the Company does not believe that they
are as efficient as the machines currently used by the Company. In addition,
while the Company is evaluating certain second generation gene sequencing
machines, there can be no assurance that these second generation sequencing
machines will ever become commercially available, available at acceptable
costs, or prove to be more effective than current machines. Should the Company
be unable to obtain additional machines or an adequate supply of reagents or
other ingredients at commercially reasonable rates, its ability to continue to
identify genes through gene sequencing would be adversely affected. Although
the Company obtains tissue samples from which mRNA may be isolated from a
number of sources, the loss of access to some of these sources or increased
restrictions on use of the information generated could adversely affect the
Company's business. See "Business -- Products," "-- Database Production" and
"-- Development Programs."
The Company's strategy for the development of its database and
sequencing business and the commercialization of its portfolio of partial and
full-length gene sequences may require the Company to enter into various
alliances with corporate and academic collaborators and others. The success of
these alliances is dependent upon the performance of outside parties of their
responsibilities. There can be no assurance that the Company will be able to
establish collaborative arrangements or license agreements that the Company
deems necessary or acceptable to develop its database and sequencing business
or, in the future, to commercialize its portfolio of partial and full-length
gene sequences or that such collaborative arrangements or license agreements
will be successful. In addition, there can be no assurance that the
collaborators will not be pursuing alternative technologies or developing
alternative products either on their own or in collaboration with others,
including the Company's competitors.
The Company has relied on scientific, technical, pathology, commercial
and other data supplied and disclosed by others, including its academic
collaborators and sources of tissue samples, and may rely on such data in the
construction of its database. There can be no assurance that such data
contains no errors or omissions, the knowledge of which would adversely change
the prospects for the Company's business. See "Business -- Database
Production."
Hazardous Materials; Environmental Matters. The Company's research
and development involves the controlled use of hazardous and radioactive
materials and biological waste. The Company is subject to federal, state and
local laws and regulations governing the use, manufacture, storage, handling
and disposal of such materials and certain waste products. Although the Company
believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed
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by such laws and regulations, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company. Although the Company
believes that it is in compliance in all material respects with applicable
environmental laws and regulations and currently does not expect to make
material additional capital expenditures for environmental control facilities
in the near- term, there can be no assurance that the Company will not be
required to incur significant costs to comply with environmental laws and
regulations in the future, nor that the operations, business or assets of the
Company will not be materially or adversely affected by current or future
environmental laws or regulations. See "Business --Government Regulation."
Uncertainty of Pharmaceutical Pricing, Health Care Reform and Related
Matters. The levels of revenues and profitability of pharmaceutical companies
may be affected by the continuing efforts of governmental and third party
payors to contain or reduce the costs of health care through various means.
For example, in certain foreign markets pricing or profitability of
prescription pharmaceuticals is subject to government control. In the United
States, there have been, and the Company expects that there will continue to
be, a number of federal and state proposals to implement similar government
control. It is uncertain what legislative proposals will be adopted or what
actions federal, state or private payers for healthcare goods and services may
take in response to any healthcare reform proposals or legislation. The
Company cannot predict the effect healthcare reforms may have on its business,
and no assurance can be given that any such reforms will not have a material
effect on the Company. Further, to the extent that such proposals or reforms
have a material adverse effect on the business, financial condition or
profitability of pharmaceutical companies that are prospective collaborators or
licensees for the LifeSeq(R) database or the Company's potentially novel genes
that may lead to therapeutic or diagnostic products, the Company's ability to
commercialize such products may be adversely affected. In addition, in both
the United States and elsewhere, sales of prescription pharmaceuticals are
dependent in part on the availability of reimbursement to the consumer from
third party payors, such as government and private insurance plans. Third
party payors are increasingly challenging the prices charged for medical
products and services. If the Company or one of its database collaborators
seeks to commercialize one or more pharmaceutical products, there can be no
assurance that these products will be considered cost effective and that
reimbursement to the consumer will be available or will be sufficient to allow
the Company or its partner to sell its products on a competitive basis.
General Economic and Market Conditions. All of the Company's current
revenues are derived from, and the Company expects that all of its revenues in
the foreseeable future will be derived from, products and services provided to
the pharmaceutical industry. Accordingly, the Company's success in the
foreseeable future is directly dependent upon the success of the companies
within those industries and their continued demand for the Company's products
and services. The Company's operations may in the future be subject to
substantial period-to-period fluctuations as a consequence of economic
downturns and pricing pressures experienced by pharmaceutical companies that
lead to delays and reductions in research and development expenditures by such
companies, general domestic and foreign economic conditions affecting the
timing of orders from major customers, the current market-driven pressures on
companies to consolidate and reduce costs, and other factors affecting research
and development spending. There can be no assurance that such factors will not
have a material adverse effect on the Company's business, operating results and
financial condition.
Risk of Business Interruption. The Company conducts all of its
sequencing and other activities at its facilities in Palo Alto, California, a
seismically active area. Although the Company maintains business interruption
insurance, the Company does not currently have, nor does it plan to obtain,
earthquake insurance. A major catastrophe (such as an earthquake or other
natural disaster) could result in a prolonged interruption of the Company's
business.
-19-
<PAGE> 20
ITEM 2. PROPERTIES.
Incyte's headquarters are in Palo Alto, California where its main
research laboratories, sequencing facility, bioinformatics and administrative
facilities are located. Incyte also operates facilities in St. Louis,
Missouri, through its merger with Genome Systems and in Pasadena, California
through its acquisition of Combion. As of March 1, 1997 Incyte occupied
approximately 167,000 square feet under multiple sub-lease and primary building
lease agreements that expire on various dates ranging from September 1997 to
August 2006. The Company is currently pursuing options to obtain both
temporary and long-term space suitable to meet future growth requirements.
There can be no assurance that suitable additional space will be available to
it, when needed, on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company are as follows:
ROY A. WHITFIELD, age 44, has been Chief Executive Officer of the
Company since June 1993 and a director since June 1991. Mr. Whitfield served
as President of the Company from June 1991 until January 1997 and as Treasurer
of the Company from April 1991 until October 1995. Previously, Mr. Whitfield
served as the President of Ideon Corporation, which was a majority owned
subsidiary of Invitron Corporation ("Invitron"), a biotechnology company, from
October 1989 until April 1991. From 1984 to 1989, Mr. Whitfield held senior
operating and business development positions with Technicon Instruments
Corporation ("Technicon"), a medical instrumentation company, and its
predecessor company, CooperBiomedical, Inc., a biotechnology and medical
diagnostics company. Prior to his work at Technicon, Mr. Whitfield spent seven
years with the Boston Consulting Group's international consulting practice.
Mr. Whitfield received a B.S. with First Class Honors in mathematics from
Oxford University, and an M.B.A. with Distinction from Stanford University.
RANDAL W. SCOTT, PH.D., age 39, has been President of the Company
since January 1997. He has served as Chief Scientific Officer of the Company
since March 1995, Secretary of the Company since April 1991, and a director
since June 1991. Dr. Scott served as Executive Vice President of the Company
from March 1995 until January 1997 and Vice President, Research and Development
of the Company from April 1991 until February 1995. Dr. Scott was one of
Invitron's founding scientists and was employed by Invitron from March 1985 to
June 1991. In 1987, Dr. Scott started the Protein Biochemistry Department at
Invitron's California Research Division and became Senior Director of Research
in November 1988. Dr. Scott was responsible for developing Invitron's
proprietary products and discovery programs and is an inventor of several of
the Company's patents. Prior to joining Invitron, he was a Senior Scientist at
Unigene Laboratories, a biotechnology company. Dr. Scott received his Ph.D. in
Biochemistry from the University of Kansas.
-20-
<PAGE> 21
DENISE M. GILBERT, PH.D., age 39, has been Executive Vice President,
Chief Financial Officer and Treasurer of the Company since October 1995. From
July 1993 to October 1995 Dr. Gilbert was Vice President and Chief Financial
Officer of Affymax N.V., a biopharmaceutical company. Prior to joining
Affymax, Dr. Gilbert spent seven years as a Wall Street biotechnology analyst,
serving as a Managing Director of Smith Barney from July 1991 to July
1993, Vice President at NatWest Securities from July 1990 to July 1991, and
senior analyst at Montgomery Securities from July 1986 to July 1990. Dr.
Gilbert received her B.A. in Biological Sciences from Cornell University and
Ph.D. in Cell and Developmental Biology from Harvard University.
-21-
<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock, par value $.001 ("Common Stock"), was
traded on the American Stock Exchange ("ASE") under the symbol "IPI" from the
Company's initial public offering on November 4, 1993 until January 15, 1996.
Since January 16, 1996, the Company's Common Stock has been traded on the
Nasdaq National Market ("Nasdaq") under the symbol "INCY." The following table
sets forth, for the periods indicated, the range of high and low sales prices
for the Common Stock on the ASE or Nasdaq, as applicable, as reported in their
respective consolidated transaction reporting systems.
<TABLE>
<CAPTION>
1995 HIGH LOW
---- ---- ---
<S> <C> <C>
First Quarter . . . . . . . . . . . . . . . . . . $19 1/2 $12 7/8
Second Quarter . . . . . . . . . . . . . . . . . 17 1/4 14 1/4
Third Quarter . . . . . . . . . . . . . . . . . . 24 3/8 16
Fourth Quarter . . . . . . . . . . . . . . . . . 25 1/8 16 1/2
</TABLE>
<TABLE>
<CAPTION>
1996 HIGH LOW
---- ---- ---
<S> <C> <C>
First Quarter . . . . . . . . . . . . . . . . . . 39 3/8 24 5/8
Second Quarter . . . . . . . . . . . . . . . . . 39 7/8 23 1/8
Third Quarter . . . . . . . . . . . . . . . . . . 49 3/4 32 1/2
Fourth Quarter . . . . . . . . . . . . . . . . . 52 7/8 35 1/2
</TABLE>
As of March 3, 1997, the Common Stock was held by 151 stockholders of
record. The Company has never declared or paid dividends on its capital stock
and does not anticipate paying any dividends in the foreseeable future.
On July 22, 1996, the Company issued 204,073 shares of Common Stock to
the three stockholders of Genome Systems in exchange for all of the then
outstanding shares of Genome Systems and issued an option to purchase 10,741
shares of Common Stock in exchange for the then outstanding option to purchase
shares of capital stock of Genome Systems in reliance upon Section 4(2) of the
Securities Act of 1933 (the "Securities Act"). The option is exercisable at a
purchase price of $0.0466 per share (subject to adjustment) for six months
beyond the life of the optionee, subject to earlier termination in specified
circumstances.
On August 15, 1996, the Company issued 73,171 shares of Common Stock to
the stockholders of Combion in exchange for all of the then outstanding shares
of Combion in reliance upon Section 3(a)(10) of the Securities Act. The terms
and conditions of such issuance and exchange were approved, after a hearing
upon the fairness of such terms and conditions, at which all persons to whom it
was proposed to issue securities in such exchange had the right to appear, by
the California Department of Corporations on August 15, 1996.
-22-
<PAGE> 23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes
included as Items 7 and 8 in this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:1
Revenues . . . . . . . . . . . . . . . $41,785 $12,212 $ 1,512 $ 672 $ 1,701
Costs and expenses:
Research and development . . . . . 40,864 19,212 11,169 4,764 3,194
Selling, general and administrative 6,792 3,927 2,328 737 666
Charge for purchase of
in-process research
and development . . . . . . . . 3,165 -- -- -- --
------- ------- ------- ------- -------
Total costs and expenses . . . 50,821 23,139 13,497 5,501 3,860
------- ------ ------- ------ ------
Loss from operations . . . . . . . . . (9,036) (10,927) (11,985) (4,829) (2,159)
Interest income, net . . . . . . . . 2,275 990 510 60 33
------- ------- --------- -------- --------
Net loss . . . . . . . . . . . . . . . $(6,761) $(9,937) $(11,475) $(4,769) $(2,126)
======= ======= ======== ======= =======
Net loss per share . . . . . . . . . . $ (0.67) $ (1.19) $ (1.63) $ (2.01) $ (0.98)
======= ======= ======== ======== ========
Number of shares used in computation
of net loss per share . . . . . . 10,156 8,367 7,030 2,369 2,178
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:1
Cash, cash equivalents and
securities--available-for-sale . . . $38,250 $41,181 $25,257 $15,540 $ 5,480
Working capital . . . . . . . . . . . . 22,047 38,983 20,866 14,865 4,903
Total assets . . . . . . . . . . . . . 66,876 58,782 29,350 17,807 6,832
Noncurrent portion of capital lease
obligations and notes payable . . 37 147 148 517 372
Accumulated deficit . . . . . . . . . . (36,522) (29,761) (19,824) (8,349) (3,580)
Stockholders' equity . . . . . . . . . 45,247 47,503 24,344 16,451 5,861
</TABLE>
1 Restated to reflect combined results and financial position of Incyte and
Genome Systems.
-23-
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with
"Selected Consolidated Financial Data" and the Consolidated Financial
Statements and related Notes included in Items 6 and 8 in this Report.
When used in this discussion, the word "expects" and similar expressions
are intended to identify forward-looking statements. Such statements, which
include statements as to the expected achievement of profitability, expenditure
levels and the adequacy of capital resources, are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited to,
those risks discussed below as well as the ability of the Company to obtain and
retain customers; competition from other entities; the cost of accessing
technologies developed by other companies; and uncertainty as to the scope of
coverage, enforceability or commercial protection from patents that issue on
gene sequences and other genetic information, as well as those risks set forth
in Item 1 under the caption "Business -- Factors That May Affect Results."
These forward-looking statements speak only as of the date hereof. The Company
expressly disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward- looking statements contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
OVERVIEW
Incyte Pharmaceuticals, Inc. (the "Company") designs, develops and
markets genomic database products, software tools and genomic reagents and
services. The Company's database products and services integrate
bioinformatics software with both proprietary and, when appropriate, publicly
available genetic information to create information-based tools marketed on a
non-exclusive basis to the pharmaceutical and biotechnology industry for use in
drug discovery and development. In building its genomic databases, the Company
utilizes high-throughput, computer-aided gene sequencing and analysis
technologies to identify and characterize the expressed genes of the human
genome as well as certain animal, plant and microbial genomes. Seven new
database collaborators were added in 1996, and through March 3, 1997 two
additional partners had been added, to bring the total number of database
collaborators to fourteen.
In July 1996, the Company issued shares of its Common Stock in exchange
for all of the outstanding shares of Genome Systems, Inc. ("Genome Systems"),
a genomics service company in St. Louis, Missouri. The transaction has been
accounted for as a pooling of interests, and the consolidated financial
statements discussed herein and all historical financial information have been
restated to reflect the combined operations of both companies. Genome Systems
has retained its name and operations, and continues to offer a range of genomic
screening products and services used by scientists to assist in the
identification and isolation of novel genes.
In August 1996, the Company acquired for stock Combion, Inc.
("Combion"), a microarray technology company located in Pasadena, California.
The acquisition of Combion has been accounted for as a purchase, and the
consolidated financial statements discussed herein include the results of
Combion from the date of acquisition, August 15, 1996, forward. Combion
contributed staff, advisors and intellectual property which now form the core
of the Company's microarray technology development group.
-24-
<PAGE> 25
Revenues recognized by the Company are predominately non-exclusive
database access fees. Revenues also include fees for custom or "satellite"
database services and sales of genomic screening products and services. The
Company's database agreements also provide for future milestone payments and
royalties from the sale of products derived from proprietary information
obtained through the databases. There can be no assurance that any database
collaborators will ever generate products from information contained within the
databases and thus that the Company will ever receive milestone payments or
royalties. In addition, there can be no assurance that any of the Company's
database agreements will be renewed upon expiration, typically after a term of
three years, or will not be terminated earlier if the Company breaches any
material provision of the database agreement.
The Company has incurred annual operating losses since inception. While
the Company reported a slight profit in the fourth quarter of 1996, there can
be no assurance that the Company can maintain profitability. There can be no
assurance that the Company will be able to sustain significant annual revenues
by obtaining new customers and retaining existing customers for the Company's
databases and genomics products and services, or that given the significant
investment in new product development, marketing, sales and customer service
currently planned by the Company in 1997 and beyond, the revenue generated will
be adequate to fund operating expenses. In particular, the Company's first two
database collaboration agreements expire at the end of 1997 and it is not known
if either of these will be renewed, and if renewed, under what terms. The loss
of any database collaborator could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's operating results may fluctuate significantly from quarter
to quarter as a result of a variety of factors, including changes in the demand
for the Company's products and services, the pricing of database access to
database collaborators, and the introduction of competitive databases or
services by others. In particular, the Company has a limited ability to control
the timing of database installations due to the lengthy sales cycle required
for the Company's database products, the time required to complete custom
orders can vary significantly and the growing investment in external
collaborations could result in significant quarterly fluctuations in expenses
due to the payment of milestones, license fees, or research payments. The need
for continued investment in development of the Company's databases and related
products and services and for extensive ongoing customer support capabilities
results in significant fixed expenses. If revenue in a particular period does
not meet expectations, the Company would not be able to adjust significantly
its level of expenditures in such period, which would have an adverse effect on
the Company's operating results. The Company believes that quarterly
comparisons of its financial results will not necessarily be meaningful and
should not be relied upon as an indication of future performance.
The two acquisitions completed in 1996, Genome Systems and Combion, are
accompanied by risks commonly encountered in acquisitions of companies. Such
risks include, among other things, fluctuations in the Company's quarterly and
annual operating results due to the costs and expenses of acquiring and
integrating new businesses or technologies, the difficulty and expense of
assimilating the operations and personnel of the acquired businesses, the
potential disruption of the Company's ongoing business and diversion of
management time and attention, the inability to successfully integrate or to
complete the development and application of acquired technology and the
potential failure to achieve anticipated financial, operating and strategic
benefits from such acquisitions and difficulties in establishing and
maintaining uniform standards, controls, procedures and policies.
See "Business -- Factors That May Affect Results" in Item 1 for a
discussion of additional factors that could affect the Company's results of
operations.
-25-
<PAGE> 26
RESULTS OF OPERATIONS
Since inception, the Company has incurred annual operating losses and as
of December 31, 1996, had an accumulated deficit of $36.5 million. The Company
incurred a net loss for the year ended December 31, 1996 of $6.8 million,
compared to a loss of $9.9 million and $11.5 million for the same periods in
1995 and 1994, respectively. On a per share basis, the losses for the years
ended December 31, 1996, 1995 and 1994 were $0.67, $1.19 and $1.63,
respectively. The sequential decrease in net loss per share is due in part to
the decrease in net loss and in part due to the increase in the number of
shares used to calculate net loss per share from year to year. In November
1995 the Company completed a follow-on public offering of 1.8 million shares
and in 1996 the Company issued a total of 277,244 shares in connection with its
business combinations with Genome Systems and Combion.
Revenues. Total revenues were $41.8 million in 1996, $12.2 million in
1995 and $1.5 million in 1994. The Company records revenue from collaborators
upon database installation and thus, although the Company had twelve database
agreements at the end of 1996, revenues were earned from only ten in 1996,
compared to five in 1995. Genome Systems contributed $3.1 million, $2.3
million and $1.3 million in 1996, 1995 and 1994, respectively. The Company
recognizes revenue from these agreements evenly over the terms of the
agreements. Revenue is deferred for fees received before earned. Revenues for
reagents and genomic screening products are recognized when shipped and
revenues for genomic screening services are recognized upon completion.
Expenses. Total costs and expenses were $50.8 million in 1996, compared
to $23.1 million in 1995 and $13.5 million in 1994. Total costs and expenses
for 1996 include a one-time charge of $3.2 million for the purchase of
in-process research and development related to the acquisition of Combion.
Total costs and expenses are expected to continue to increase in the
foreseeable future due to continued investment in new product development and
data production, obligations under existing and future collaborative alliances,
and increased investment in marketing, sales, and customer services. The
magnitude of the Company's operating expenses will largely be a function of the
Company's ability to secure new collaborators for its database products and
services. However, if the Company does not obtain additional collaborators in
a timely manner, it may not be able to adjust significantly its level of
expenditures in any such period, which could have an adverse effect on the
Company's operating results.
Research and development expenses increased to $40.9 million in 1996
from $19.2 million in 1995 and $11.2 million in 1994. Increases in expenses
from 1995 to 1996 were primarily due to increases in sequencing production
levels, new product development, and increased investment in new technologies
through alliances. Increases in expenses from 1994 to 1995 were predominantly
associated with expanded sequencing production, software and database
development, sequencing technology assessment, and intellectual property
protection. The Company expects research and development spending to increase
over the next few years as the Company broadens its gene sequence production
operations, pursues the development of new database products and services,
invests in new technologies, and invests in the continued protection of its
intellectual property.
Selling, general, and administrative expenses were $6.8 million in 1996,
compared to $3.9 million in 1995 and $2.3 million in 1994. The increase from
1995 to 1996 was due primarily to growth in marketing, sales, and customer
services as well as growth in general management and corporate services. The
increase from 1994 to 1995 was due primarily to the recruitment of new database
collaborators, particularly with respect to increased marketing and business
development expenses, and the continued expansion of the company's sequencing
production and data analysis capabilities. The Company expects that selling,
general and administrative expenses will increase in 1997 due to continued
growth in marketing, sales, and customer support, as well as expanding
operations.
-26-
<PAGE> 27
Interest Income, Net. Interest income increased to $2.5 million in 1996
from $1.2 million in 1995 and $0.7 million in 1994. Interest income in 1996
was earned on generally larger cash balances during the year due to the
Company's November 1995 follow-on stock offering and increased revenues from
database collaborators. Interest income in 1995 was earned on larger cash
balances held by the Company primarily as a result of the full-year impact of
equity investments by Pfizer Inc and Pharmacia & Upjohn, Inc. in July and
December 1994, respectively, higher interest rates, payments for database
access, and the proceeds of a follow on public stock offering completed in late
1995. Interest and other expense, net, was relatively unchanged at $0.2
million in 1996, 1995, and 1994.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had $38.2 million in cash, cash
equivalents and marketable securities, compared to $41.2 million as of December
31, 1995. This decrease was primarily due to investments in capital equipment
and facilities during 1996, largely offset by cash provided by operations. The
Company has classified all of its investments as short-term at December 31,
1996, as the Company may not hold its investments until maturity in order to
take advantage of favorable market conditions. Available cash is invested in
accordance with the Company's investment policy's primary objectives of
liquidity, safety of principal, and diversity of investments.
Net cash provided by operating activities was $16.0 million in 1996,
compared to net cash used in operating activities of $8.8 million in 1995 and
$6.1 million in 1994. Net cash provided by operating activities in 1996
resulted from increases in deferred revenue and accounts payable and decreases
in the net loss and accounts receivable as compared to 1995. Cash used in
operating activities in 1995 was due to an increase in accounts receivable,
offset in part by an increase in deferred revenues as compared to 1994. Net
cash generated by operating activities may fluctuate significantly from period
to period due to the timing of large prepayments by database collaborators.
The Company's investing activities, other than purchases and maturities
of short-term investments, have consisted of capital expenditures, which
totaled $20.2 million in 1996, $8.0 million in 1995, and $3.0 million in 1994.
Capital expenditures increased in 1996, primarily due to investments in
computer equipment and laboratory equipment as well as leasehold improvements
related to the expansion of the Company's facilities. Capital expenditures in
1995 were primarily due to leasehold improvements in the Company's new
facilities and the purchases of new gene sequencing equipment and workstations
required in conjunction with the Company's expanded production and software
capabilities.
Net cash provided by financing activities decreased to $1.5 million in
1996 from $32.8 million in 1995 and $18.8 million in 1994. Net cash provided
by financing activities in 1996 is due to issuances of Common Stock upon
exercise of stock options, while net cash provided by financing activities in
1995 is primarily from the net proceeds of the November 1995 public offering.
Net cash provided by financing activities in 1994 reflects primarily the $19.4
million in net proceeds from the sales of Common Stock to Pfizer Inc and
Pharmacia & Upjohn, Inc., partially offset by principal payments on capital
lease obligations.
The Company expects its cash requirements to increase in 1997 as it
increases its investment in data-processing-related computer hardware in order
to support its existing and new database products, continues to seek access to
technologies through alliances, license agreements and/or acquisitions, and
addresses its needs for larger facilities and/or improvements in existing
facilities. The Company expects to continue to fund future operations with
revenues from genomic database products and services in addition to using its
current cash, cash equivalents, and investments when necessary. The Company
-27-
<PAGE> 28
expects these resources will satisfy the Company's projected working capital
and capital expenditure requirements at least through 1997. However, the
Company can offer no assurance that the Company will be able to obtain
additional collaborators for the Company's databases or that such database
products and services will produce revenues, which together with the Company's
cash, cash equivalents, and marketable securities, will be adequate to fund the
Company's operating expenses. The Company's cash requirements depend on
numerous factors, including the ability of the Company to attract and retain
collaborators for its databases and genomic products and services; the
Company's research and development activities; competing technological and
market developments; the cost of filing, prosecuting, defending, and enforcing
patent claims and other intellectual property rights; the purchase of
additional capital equipment, including capital equipment necessary to insure
that the Company's sequencing operation remains competitive; and the costs
associated with the integration of new operations assumed through mergers and
acquisitions. There can be no assurance that additional funding, if necessary,
will be available on favorable terms, if at all.
-28-
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors . . . . . . . . . . . . . . 30
Consolidated Balance Sheets at December 31, 1996 and 1995 . . . . . . . . . . .31
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . .32
Consolidated Statement of Stockholders' Equity for the three
year period ended December 31, 1996 . . . . . . . . . . . . . . . . . . . . . .33
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . .34
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . .35
</TABLE>
-29-
<PAGE> 30
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Incyte Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Incyte
Pharmaceuticals, Inc., as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Incyte
Pharmaceuticals, Inc., at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
February 7, 1997
-30-
<PAGE> 31
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
(In thousands, except number of shares and par value)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,628 $ 10,547
Marketable securities--available-for-sale . . . . . . . . . . . . . . . . . . . . . . 30,622 30,634
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,469 7,643
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . 2,456 756
------------ -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,175 49,580
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,936 9,084
Deposits and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765 118
------------ -----------
$ 66,876 $ 58,782
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,670 $ 2,344
Accrued expenses 1,121 714
Accrued compensation 386 187
Deferred revenue 14,878 7,268
Current portion of capital lease obligations and notes payable 73 84
------------ -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,128 10,597
Noncurrent portion of capital lease obligations and notes payable . . . . . . . . . . . 37 147
Noncurrent portion of accrued rent . . . . . . . . . . . . . . . . . . . . . . . . . . 464 535
Commitments
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000,000 shares authorized;
none issued and outstanding at December 31, 1996 and 1995 . . . . . . . . . . . . . -- --
Common Stock, $0.001 par value; 20,000,000 shares authorized;
10,447,301 shares issued and outstanding at December 31, 1996
(9,995,783 shares at December 31, 1995) . . . . . . . . . . . . . . . . . . . . . . 10 10
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,832 77,250
Unrealized gain (loss) on available-for-sale securities . . . . . . . . . . . . . . . (73) 33
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (29)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36,522) (29,761)
------------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,247 47,503
------------- -----------
$ 66,876 $ 58,782
============= ===========
</TABLE>
See accompanying Notes.
-31-
<PAGE> 32
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Revenues (Notes 1 and 2) . . . . . . . . . . . . . . . . . . . . . . $ 41,785 $ 12,212 $ 1,512
Costs and expenses:
Research and development. . . . . . . . . . . . . . . . . . . . . . 40,864 19,212 11,169
Selling, general and administrative . . . . . . . . . . . . . . . . 6,792 3,927 2,328
Charge for purchase of in-process research and development. . . . . 3,165 -- --
----------- ----------- -----------
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . 50,821 23,139 13,497
----------- ----------- -----------
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . (9,036) (10,927) (11,985)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,495 1,186 674
Interest and other expense, net . . . . . . . . . . . . . . . . . . . (220) (196) (164)
----------- ----------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,761) $ (9,937) $ (11,475)
=========== =========== ===========
Net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.67) $ (1.19) $ (1.63)
=========== =========== ===========
Shares used in computation of net loss per share . . . . . . . . . . 10,156 8,367 7,030
=========== =========== ===========
</TABLE>
See accompanying notes.
-32-
<PAGE> 33
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES UNREALIZED
ADDITIONAL RECEIVABLE GAIN/LOSS ON TOTAL
COMMON PAID-IN FROM MARKETABLE DEFERRED ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL STOCKHOLDERS SECURITIES COMPENSATION DEFICIT EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except number of shares)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1993 $ 7 $ 25,182 $ (34) $ -- $ (355) $ (8,349) $ 16,451
Issuance of 29,044 Shares
of Common Stock upon
exercise of stock options . . . . . -- 28 -- -- -- -- 28
Issuance of 1,501,333 shares
of Common Stock to
database collaborators. . . . . . . 1 19,141 -- -- -- -- 19,142
Payment of notes receivable
from shareholders . . . . . . . . . -- -- 34 -- -- -- 34
Deferred compensation,
Genome Systems. . . . . . . . . . . -- 142 -- -- (142) -- --
Amortization of deferred
compensation. . . . . . . . . . . . -- -- -- -- 142 -- 142
Net change in unrealized gains on
available-for-sale securities . . . -- -- -- 22 -- -- 22
Net loss . . . . . . . . . . . . . . -- -- -- -- -- (11,475) (11,475)
---- --------- ------ ---- ------- --------- ---------
BALANCES AT DECEMBER 31, 1994 8 44,493 -- 22 (355) (19,824) 24,344
Issuance of 28,815 shares
of Common Stock upon
exercise of stock options . . . . . -- 88 -- -- -- -- 88
Issuance of 1,837,000 shares
of Common Stock, net of
expenses and underwriters'
fees of $2,232. . . . . . . . . . . 2 32,669 -- -- -- -- 32,671
Amortization of deferred
compensation. . . . . . . . . . . . -- -- -- -- 326 -- 326
Net change in unrealized gains on
available-for-sale securities . . . -- -- -- 11 -- -- 11
Net loss . . . . . . . . . . . . . . -- -- -- -- -- (9,937) (9,937)
---- --------- ------ ---- ------ --------- ---------
BALANCES AT DECEMBER 31, 1995 . . . . 10 77,250 -- 33 (29) (29,761) 47,503
Issuance of 228,648 shares
of Common Stock upon
exercise of stock options and
149,699 shares upon exercise
of warrant . . . . . . . . . . . . . -- 1,582 -- -- -- -- 1,582
Issuance of 73,171 shares of
Common Stock in exchange
for shares of Combion, Inc.. . . . . -- 3,000 -- -- -- -- 3,000
Amortization of deferred
compensation . . . . . . . . . . . . -- -- -- -- 29 -- 29
Net change in unrealized gains on
available-for-sale securities. . . . -- -- -- (106) -- -- (106)
Net loss . . . . . . . . . . . . . . . -- -- -- -- -- (6,761) (6,761)
---- --------- ------ ----- ------ --------- ---------
BALANCES AT DECEMBER 31, 1996 $ 10 $ 81,832 $ -- $ (73) $ -- $ (36,522) $ 45,247
==== ========= ====== ===== ====== ========= =========
</TABLE>
See accompanying Notes
-33-
<PAGE> 34
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,761) $ (9,937) $ (11,475)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 6,461 2,750 982
Expense for abandoned equipment. . . . . . . . . . . . . . . . . . -- 124 442
Noncash portion of purchase of
in-process research and development . . . . . . . . . . . . . . . 3,000 -- --
Changes in certain assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . 5,174 (7,439) (69)
Prepaid expenses and other assets. . . . . . . . . . . . . . . . . (2,347) (571) (118)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 2,326 760 1,119
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . 7,610 4,498 2,769
Accrued vacation and other expenses. . . . . . . . . . . . . . . . 535 1,014 241
--------- ----------- -----------
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . 22,759 1,136 5,366
----------- ----------- -----------
Net cash provided by (used in) operating activities . . . . . . . . . 15,998 (8,801) (6,109)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . (20,188) (8,042) (2,978)
Purchases of short-term investments . . . . . . . . . . . . . . . . . (16,526) (74,037) (26,206)
Maturities of short-term investments . . . . . . . . . . . . . . . . 16,336 61,722 7,920
----------- ----------- -----------
Net cash (used in) investing activities . . . . . . . . . . . . . . . (20,378) (20,357) (21,264)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuances of common stock . . . . . . . . . . . . . 1,582 32,759 19,370
Payment of notes receivable from stockholders . . . . . . . . . . . . -- -- 34
Proceeds from capital leases and notes payable . . . . . . . . . . . -- 69 87
Principal payments on capital lease obligations . . . . . . . . . . . (121) (72) (709)
----------- ----------- -----------
Net cash provided by financing activities . . . . . . . . . . . . . . 1,461 32,756 18,782
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents . . . . . . . . (2,919) 3,598 (8,591)
Cash and cash equivalents at beginning of the period . . . . . . . . 10,547 6,949 15,540
----------- ----------- -----------
Cash and cash equivalents at end of the period . . . . . . . . . . . $ 7,628 $ 10,547 $ 6,949
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17 $ 45 $ 288
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Property and equipment acquired
pursuant to capital lease obligations . . . . . . . . . . . . . . . -- $ 69 $ 606
=========== =========== ===========
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . -- -- $ 142
=========== =========== ===========
Unrealized gain (loss) on marketable securities--
available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . $ (106) $ 11 $ 22
=========== =========== ===========
</TABLE>
See accompanying Notes.
-34-
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business. Incyte Pharmaceuticals, Inc. (the "Company") was
incorporated in Delaware in April 1991. The Company designs, develops, and
markets genomic databases, software tools, and related genomic reagents and
services. The Company's databases, available singly or in combination,
integrate bioinformatics software with both proprietary and, when appropriate,
publicly available genetic information. Non-exclusive access to the Company's
databases is offered to pharmaceutical and biotechnology companies worldwide
for use in the discovery and development of diagnostic and therapeutic
products.
Principles of Consolidation. The consolidated financial statements include the
accounts of Incyte Pharmaceuticals, Inc., and its wholly owned subsidiaries.
All material intercompany accounts, transactions, and profits have been
eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Concentrations of Credit Risk. Cash, cash equivalents, and short-term
investments and trade receivables are financial instruments which potentially
subject the Company to concentrations of credit risk. The estimated fair value
of financial instruments approximates the carrying value based on available
market information. The Company primarily invests its excess available funds
in notes and bills issued by the U.S. government and its agencies and, by
policy, limits the amount of credit exposure to any one issuer and to any one
type of investment, other than securities issued or guaranteed by the U.S.
Government. The Company has not experienced any credit losses to date and does
not require collateral on receivables.
Cash and Cash Equivalents. Cash and cash equivalents are held in U.S. banks or
in custodial accounts with U.S. banks. Cash equivalents are defined as all
liquid investments with maturity from date of purchase of 90 days or less that
are readily convertible into cash and have insignificant interest rate risk.
All other investments are reported as short-term investments.
Marketable Securities Available-for-Sale. All marketable securities are
classified as available-for-sale. Available-for-sale securities are carried at
fair value, with unrealized gains and losses reported as a separate component
of stockholders' equity. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretions of discounts
to maturity. Such amortization is included in interest income. Realized gains
and losses and declines in value judged to be other than temporary for
available-for-sale securities are included in interest and other income.
-35-
<PAGE> 36
The following is a summary of the Company's investment portfolio, including
cash equivalents of $398,000 and $2,173,000 as of December 31, 1996 and 1995,
respectively:
<TABLE>
<CAPTION>
NET
UNREALIZED ESTIMATED
AMORTIZED (LOSSES) FAIR
COST GAINS VALUE
- -----------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
DECEMBER 31, 1996
U.S. Treasury notes and other
U.S. government securities. . . . . . . . . . . . . . . . . . . . $ 30,695 $ (73) $ 30,622
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . 398 -- 398
----------- ----------- -----------
$ 31,093 $ (73) $ 31,020
=========== =========== ===========
DECEMBER 31, 1995
U.S. Treasury notes and other
U.S. government securities. . . . . . . . . . . . . . . . . . . . $ 31,779 $ 32 $ 31,811
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . 995 1 996
----------- ----------- -----------
$ 32,774 $ 33 $ 32,807
=========== =========== ===========
</TABLE>
All marketable securities -- available-for-sale mature within two years. At
December 31, 1996 and 1995, all of the Company's investments are classified as
short-term, as the Company may not hold its investments until maturity in order
to take advantage of market conditions. Of the marketable securities held at
December 31, 1996, $23,148,000 had maturities under a year and $7,872,000 had
maturities over a year. Unrealized gains were not material and have therefore
been netted against unrealized losses.
Property and Equipment. Property and equipment is stated at cost, less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line method over the estimated useful lives of the respective assets
(generally two to five years). Leasehold improvements are amortized over the
shorter of estimated useful life of the assets or lease term. Property and
equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 950 $ 406
Laboratory equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,982 6,825
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,935 1,950
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,679 3,179
----------- -----------
32,546 12,360
Less accumulated depreciation
and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,610) (3,276)
----------- -----------
$ 22,936 $ 9,084
============= ===========
</TABLE>
Depreciation expense was $5,230,000, $2,154,000, and $723,000 for 1996, 1995,
and 1994, respectively. Amortization was $1,061,000, $266,000, and $103,000
for 1996, 1995, and 1994, respectively.
Certain laboratory and computer equipment used by the Company could be subject
to technological obsolescence in the event that significant advancement is made
in competing or developing equipment technologies. Management continually
reviews the estimated useful lives of technologically sensitive equipment and
believes that those estimates appropriately reflect the current useful life of
its assets. In the event that a currently unknown significantly advanced
technology became commercially available, the Company would re-evaluate the
value and estimated useful lives of its existing equipment, possibly requiring
a material effect to the financial statements.
Software Costs. In accordance with the provisions of the Financial Accounting
Standards Board Statement No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," the Company has capitalized
software development costs incurred in developing certain products once
technological feasibility of the products has been determined. Capitalized
software costs are amortized over three years and have been immaterial to date.
-36-
<PAGE> 37
Stock-Based Compensation. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company currently grants stock options for a fixed number of shares to
employees and directors with an exercise price equal to the fair value of the
shares at the date of grant, and therefore records no compensation expense.
Revenue Recognition. The Company recognizes revenue for database collaboration
agreements evenly over the term of the agreement. Revenue is deferred for fees
received before earned. Revenues from custom orders, such as satellite
databases, are recognized upon shipment. Revenues from reagents and genomic
screening products are recognized when shipped, and revenues from genomic
screening services are recognized upon completion.
Businesses Acquired. In July 1996, the Company issued 204,073 shares of its
Common Stock in exchange for all of the outstanding shares of Genome Systems,
Inc. ("Genome Systems"), a privately held genomics service company in St.
Louis, Missouri. The transaction has been accounted for as a pooling of
interests, and the consolidated financial statements discussed herein and all
historical financial information have been restated to reflect the combined
operations of both companies. Genome Systems has retained its name and
operations, continuing to offer a range of customized genomic screening
products and services used by scientists to assist in the identification and
isolation of novel genes.
In August 1996, the Company acquired Combion, Inc. ("Combion"), a privately
held microarray technology company located in Pasadena, California, for 73,171
shares of the Company's Common Stock. The acquisition of Combion has been
accounted for as a purchase, and the consolidated financial statements
discussed herein reflect the inclusion of the results of Combion from the date
of acquisition, August 15, 1996.
See Note 6 of Notes to Consolidated Financial Statements.
Net Loss Per Share. Net loss per share is computed using the weighted average
number of shares of Common Stock outstanding. Common equivalent shares from
stock options and warrants are excluded from the computation, as their effect
is antidilutive.
NOTE 2. COLLABORATIVE AGREEMENTS
As of December 31, 1996, the Company had entered into database collaboration
agreements with eleven pharmaceutical companies and one agricultural company.
Each collaborator has agreed to pay, during the term of the agreement, annual
fees to receive non-exclusive access to selected modules of the Company's
databases. In addition, if a partner develops certain products utilizing the
Company's technology and database information, potential milestone and royalty
payments could be received by the Company. If these agreements are not renewed
and if the Company cannot sign a sufficient number of new database agreements,
the loss of revenue could have a material adverse effect on the Company's
business and operating results. Certain companies also have satellite database
agreements, whereby the Company provides custom sequencing services, which are
billed for separately. Satellite database services are provided to the
customer on an exclusive basis for a negotiated period of time. Over 90% of
the revenues in 1996 are derived from ten collaborators, three of which
individually contributed more than 10% of the total, or approximately 37% in
the aggregate. In 1995, the majority of the revenues were derived from five
collaborators, including three of which contributed more than 10% individually,
or approximately 73% in the aggregate. In 1994, the Company recognized its
first database collaboration revenues, primarily from one collaborator, which
contributed more than 10% of the total.
In addition to the database collaboration agreements, the Company has entered
into a number of research and development alliances with companies and research
institutions. These agreements provide for the funding of research activities
by the Company and the possible payment of milestones, license fees, and, in
some cases, royalties.
NOTE 3. COMMITMENTS
At December 31, 1996, the Company had signed noncancelable operating leases on
multiple facilities, including facilities in Palo Alto and Pasadena,
California, and St. Louis, Missouri. The leases expire on various dates
ranging from September 1997 to August 2006. Rent expenses for the years ended
December 31, 1996, 1995, and 1994 were approximately $1,645,000, $1,251,000,
and $443,000, respectively.
-37-
<PAGE> 38
The Company had laboratory equipment with a cost of approximately $370,000 at
December 31, 1996 and 1995, and related accumulated amortization of
approximately $268,000 and $194,000 at December 31, 1996 and 1995,
respectively, under capital leases. These leases are secured by the equipment
leased thereunder.
At December 31, 1996, future noncancelable minimum payments under the operating
and capital leases were as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES
AND
OPERATING NOTES
LEASES PAYABLE
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Year ended December 31:
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,228 $ 78
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,907 25
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,580 14
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,554 --
2001 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,666 --
---------- --------
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,935 117
===========
Less amount representing interest . . . . . . . . . . . . . . . . . . . . . . . . . (7)
--------
Present value of minimum
lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (73)
---------
Noncurrent portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37
=========
</TABLE>
The Company has entered into a number of research and development alliances
with companies and research institutions. The Company's commitments under any
one of these agreements do not represent a significant expenditure in relation
to the Company's total research and development expense. See Note 2 of Notes
to Consolidated Financial Statements.
NOTE 4. STOCKHOLDERS' EQUITY
Common Stock. At December 31, 1996, the Company had reserved a total of
1,917,315 shares of its Common Stock for issuance upon exercise of outstanding
warrants and stock options described below.
Sales of Stock. In November 1995, the Company completed a follow-on public
stock offering and issued 1,837,000 shares of Common Stock, including 137,000
shares issued on December 13, 1995 upon partial exercise of the underwriters'
over-allotment option, at $19.00 per share before deducting the underwriting
discount and offering expenses.
Warrants. As of December 31, 1996, the Company had outstanding a warrant to
purchase 8,868 shares of Common Stock at an exercise price of $10.50 per share.
The warrant was exercised in January 1997.
Stock Compensation Plans. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its stock compensation plans. Accordingly,
no compensation cost has been recognized for its fixed stock option plans. Had
compensation cost for the Company's two stock-based compensation plans been
determined consistent with FASB Statement No. 123, the Company's pro forma net
loss and loss per share in 1996 and 1995 would have been increased to
approximately $10.5 million and $10.6 million, or $1.03 per share and $1.27 per
share, respectively. The fair value of the options granted during 1996 and
1995 are estimated at $18.88 and $8.68 per share, respectively, on the date of
grant, using the Black-Scholes multiple-option pricing model with the following
assumptions: dividend yield 0%, volatility of 55%, risk-free interest rate with
an average of 6.10% and 6.68% for 1996 and 1995, respectively, and an average
expected life of 3.25 years.
The effects on pro forma disclosures of applying FASB 123 are not likely to be
representative of the effects on pro forma disclosures of future years. As
FASB 123 is only applicable to options granted after December 31, 1994, the pro
forma effect will not be fully reflected until 1998.
-38-
<PAGE> 39
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility
and option life. Because the Company's employee stock options have
characteristics significantly different from those of traded options, because
changes in the subjective input assumptions can materially affect the fair
value estimate, and because the Company has a relatively limited history with
option behavior, in management's opinion the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
Summaries of stock option activity for the Company's two fixed stock option
plans as of December 31, 1995 and 1996, and related information for the years
ended December 31 are included in the plan descriptions below.
1991 Stock Plan. In November 1991, the Board of Directors adopted the 1991
Stock Plan, which was amended and restated in 1992, 1995, and 1996, for
issuance of Common Stock to employees, consultants, and scientific advisors.
Options issued under the plan shall, at the discretion of the compensation
committee of the Board of Directors, be either incentive stock options or
nonstatutory stock options. The exercise prices of incentive stock options
granted under the plan are not less than the fair market value on the date of
the grant, as determined by the Board of Directors. Options generally vest
over approximately four years, pursuant to a formula determined by the
Company's Board of Directors, and expire after ten years. At December 31,
1996, the Company had reserved 2,000,000 shares of Common Stock for issuance
under the plan.
Activity under the plan was as follows:
<TABLE>
<CAPTION>
SHARES SUBJECT TO
OUTSTANDING OPTIONS
----------------------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE EXERCISE
FOR GRANT SHARES PRICE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1993 . . . . . . . . . . . . . . . . . . . 416,750 372,834 $ 2.60
Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . (310,700) 310,700 $ 13.28
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . -- (29,044) $ 0.97
Options canceled . . . . . . . . . . . . . . . . . . . . . . . . . 2,782 (2,782) $ 5.67
----------- ----------- --------
Balance at December 31, 1994 . . . . . . . . . . . . . . . . . . . 108,832 651,708 $ 7.71
Additional authorization . . . . . . . . . . . . . . . . . . . . . 800,000 -- --
Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . (623,400) 623,400 $ 18.28
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . -- (28,815) $ 3.06
Options canceled . . . . . . . . . . . . . . . . . . . . . . . . . 9,959 (9,959) $ 13.02
----------- ----------- --------
Balance at December 31, 1995 . . . . . . . . . . . . . . . . . . . 295,391 1,236,334 $ 13.12
Additional authorization . . . . . . . . . . . . . . . . . . . . . 400,000 -- --
Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . (526,150) 526,150 $ 39.49
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . -- (223,278) $ 7.08
Options canceled . . . . . . . . . . . . . . . . . . . . . . . . . 70,163 (70,163) $ 16.76
----------- ----------- --------
Balance at December 31, 1996 . . . . . . . . . . . . . . . . . . . 239,404 1,469,043 $ 23.26
=========== ===========
</TABLE>
Options to purchase a total of 1,457,298 and 1,161,137 shares at December 31,
1996 and 1995, respectively, were exercisable. Of the shares exercisable,
401,502 and 300,064 shares were vested at December 31, 1996 and 1995,
respectively.
Non-Employee Directors' Stock Option Plan. In August 1993, the Board of
Directors approved the 1993 Directors' Stock Option Plan (the "Directors'
Plan"), which was amended in 1995. The Directors' Plan provides for the
automatic grant of options to purchase shares of Common Stock to non-employee
directors of the Company. The maximum number of shares issuable under the
Directors' Plan is 200,000.
The Directors' Plan provides immediate issuance of options to purchase an
initial 20,000 shares of Common Stock to each new non-employee director joining
the Board. The initial options are exercisable in five equal annual
installments. Additionally, members who continue to serve on the Board will
receive annual option grants for 5,000 shares exercisable in full on the first
anniversary of the date of the grant. All options are exercisable at the fair
market value of the stock on the date of grant. Through December 31, 1996,
-39-
<PAGE> 40
the Company had granted options under the Directors' Plan to purchase 113,750
shares of Common Stock at exercise prices ranging from $4.00 per share to
$34.625 per share (98,750 shares of Common Stock at exercise prices ranging
from $4.00 per share to $15.13 per share at December 31, 1995); 70,750 shares
are vested and exercisable at December 31, 1996 (43,750 shares were vested and
exercisable at December 31, 1995).
The following table summarizes information about stock options outstanding at
December 31, 1996, for both the 1991 Stock Plan and the 1993 Directors' Stock
Option Plan.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.30- 2.00 141,594 6.02 $ 1.53 129,849 $ 1.49
$ 4.00-10.63 130,017 7.00 $ 6.26 102,017 $ 6.54
$10.88-15.13 247,273 8.01 $ 14.44 247,273 $ 14.44
$16.88-22.50 530,509 8.78 $ 18.41 530,509 $ 18.41
$30.25-46.75 533,400 9.68 $ 39.42 518,400 $ 39.56
----------- ----------- ----------- ----------- -----------
$ 0.30-46.75 1,582,793 8.57 $ 22.36 1,528,048 $ 22.71
</TABLE>
In July 1996, in connection with the Genome Systems transaction described in
Note 6 below, the Company issued, in exchange for an option to purchase
capital stock of Genome Systems, an option to purchase 10,741 shares of Common
Stock at an exercise price of $0.0466 per share. The option was not issued
under the provisions of either plan described above. The option has been
exercised with respect to 5,370 shares as of December 31, 1996.
NOTE 5. INCOME TAXES
As of December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $29,800,000. The net operating loss
carryforwards will expire at various dates, beginning on 2006, through 2011 if
not utilized.
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,100 $ 9,700
Research credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 900
Capitalized research and development . . . . . . . . . . . . . . . . . . . . . . . 1,600 1,400
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 100
--------- ---------
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,700 12,100
Valuation allowance for deferred tax assets . . . . . . . . . . . . . . . . . . . . . (14,700) (12,100)
--------- ---------
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ --
========= =========
</TABLE>
The valuation allowance for deferred tax assets increased by approximately $4.1
million during the year ended December 31, 1995.
Utilization of the net operating losses and credits may be subject to an annual
limitation, due to the ownership change limitations provided by the Internal
Revenue Code of 1986.
NOTE 6. BUSINESS COMBINATIONS
In July 1996, the Company issued 204,073 shares of Common Stock in exchange for
all of the capital stock of Genome Systems, a privately held genomics
company in St. Louis, Missouri. Genome Systems provides genomic research
products and technical support services to scientists to assist them in the
identification and isolation of novel genes. The merger has been accounted for
as a pooling of interests and, accordingly, the Company's financial statements
and financial data have been restated to include the accounts and operations of
Genome Systems since inception.
-40-
<PAGE> 41
The table below presents the separate results of operations for Incyte and
Genome Systems for the periods prior to the merger. Incyte's results of
operations include Genome Systems since the transaction:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Revenue:
Incyte . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,051 $ 9,908 $ 243
Genome Systems . . . . . . . . . . . . . . . . . . . . . . . . . 1,734 2,304 1,269
------------ ----------- ---------
$ 41,785 $ 12,212 $ 1,512
============ ============ =========
Net income (loss):
Incyte $ (6,724) $ (10,142) $ (11,500)
Genome Systems 106 205 25
Merger related expenses (143) -- --
------------ ------------ ----------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,761) $ (9,937) $ (11,475)
============= ============= ==========
</TABLE>
In August 1996, the Company acquired all the common stock of Combion, Inc., a
microarray technology company in Pasadena, California, in a stock-for-stock
exchange, issuing 73,171 shares of its Common Stock valued at $3 million. The
acquisition has been accounted for as a purchase transaction and, accordingly,
the purchase price was allocated to assets and liabilities based on the
estimated fair value as of the date of acquisition. The excess of the
consideration paid over the estimated fair value of net assets acquired has
been recorded as the purchase of in-process research and development.
Combion's results of operations have been included in the consolidated results
of operations since the date of acquisition. Pro forma results of operations
have not been presented because the effect of this acquisition was not material
to the Company's consolidated results of operations or financial position.
-41-
<PAGE> 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
The information required by this item (with respect to Directors) is
incorporated by reference from the information under the caption "Election of
Directors" contained in the Company's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Company's 1997 Annual Meeting of Stockholders to be held on May
21, 1997 (the "Proxy Statement").
The required information concerning Executive Officers of the Company is
contained in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from
the information under the captions "Election of Directors--Compensation of
Directors," "Executive Compensation," and "Report of the Compensation Committee
of the Board of Directors on Executive Compensation--Compensation Committee
Interlocks and Insider Participation" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from
the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from
the information contained under the caption "Certain Transactions" contained in
the Proxy Statement.
-42-
<PAGE> 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements
Reference is made to the Index to Consolidated Financial Statements
under Item 8 of Part II hereof.
(2) Financial Statement Schedules
All financial statement schedules have been omitted because they are not
applicable or not required or because the information is included elsewhere in
the Consolidated Financial Statements or the Notes thereto.
(3) Exhibits
See Item 14(c) below. Each management contract or compensatory plan or
arrangement required to be filed has been identified.
(b) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed by the Company during the
quarter ended December 31, 1996.
(c) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
3(i) Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (File No. 33-76344)).
3(ii) Bylaws of the Company, as amended (incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-8 (File No. 33-76344)).
4.1 Form of Common Stock Certificate (incorporated by reference to the exhibit of the same number to the
Company's Registration Statement on Form S-1 (File No. 33-68138)).
10.1# 1991 Stock Plan of Incyte Pharmaceuticals, Inc., as amended and restated (the "Plan") (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8 (File No. 33-93666)).
</TABLE>
-43-
<PAGE> 44
<TABLE>
<S> <C>
10.2# Form of Incentive Stock Option Agreement under the
Plan (incorporated by reference to the exhibit of the
same number to the Company's Registration Statement on
Form S-1 (File No. 33-68138)).
10.3# Form of Nonstatutory Stock Option Agreement under the
Plan (incorporated by reference to the exhibit of the
same number to the Company's Registration Statement on
Form S-1 (File No. 33-68138)).
10.4# 1993 Directors' Stock Option Plan of Incyte
Pharmaceuticals, Inc. (incorporated by reference to the
exhibit of the same number to the Company's
Registration Statement on Form S-1 (File No. 33-68138)).
10.5# Form of Indemnity Agreement between the Company and its
directors and officers (incorporated by reference to the
exhibit of the same number to the Company's
Registration Statement on Form S-1 (File No. 33-68138)).
10.6# Amendment No. 1 to the 1993 Directors' Stock Option
Plan of Incyte Pharmaceuticals, Inc. (incorporated by
reference to the exhibit of the same number to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995).
10.7 Lease Agreement dated December 8, 1994 between the
Company and Matadero Creek (incorporated by reference
to Exhibit 10.16 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994).
10.8 Lease dated July 18, 1991 between the Company and
Harry J. Fair, Jr., as amended (incorporated by
reference to the exhibit of the same number to the
Company's Registration Statement on Form S-1
(File No. 33-68138)).
10.9 Lease Amendment and Extension to Lease dated July 18,
1991 between the Company and Harry J. Fair, Jr., as
amended (incorporated by reference to Exhibit 10.11
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993).
10.10+ Collaborative Research Agreement dated as of July 1,
1994 between the Company and Pfizer Inc (incorporated
by reference to Exhibit A to the Company's Current
Report on Form 8-K dated June 23, 1994).
10.11 Stock Purchase Agreement dated as of June 22, 1994
between the Company and Pfizer Inc (incorporated by
reference to Exhibit B to the Company's Current Report
on Form 8-K dated June 23, 1994).
10.12 Registration Rights Agreement dated as of June 22,
1994 between the Company and Pfizer Inc (incorporated by
reference to Exhibit C to the Company's Current Report
on Form 8-K dated June 23, 1994).
10.13+ LIFESEQ(TM) Database Access and Satellite Database
Agreement dated as of November 30, 1994 between the
Company and The Upjohn Company (incorporated by
reference to Exhibit A to the Company's Current Report
on Form 8-K dated November 30, 1994, as amended by
Form 8-K/A filed with the Commission on March 27, 1995).
</TABLE>
-44-
<PAGE> 45
<TABLE>
<S> <C>
10.14+ Stock Purchase Agreement dated as of November 30, 1994
between the Company and The Upjohn Company
(incorporated by reference to Exhibit B to the
Company's Current Report on Form 8-K dated November 30,
1994, as amended by Form 8-K/A filed with the
Commission on March 27, 1995).
10.15 Registration Rights Agreement dated as of November 30,
1994 between the Company and The Upjohn Company
(incorporated by reference to Exhibit C to the
Company's Current Report on Form 8-K dated November 30,
1994).
10.16# 1996 Amendment to the Plan (incorporated by reference
to Exhibit 10.1 to the Company's Registration Statement
on Form S-8 (File No. 333-13449)).
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see Page 46 of this Form 10-K).
27 Financial Data Schedule
</TABLE>
_________
+ Confidential treatment has been granted with respect to certain portions
of these agreements.
# Indicates management contract or compensatory plan or arrangement.
(D) FINANCIAL STATEMENT SCHEDULES
Not applicable.
-45-
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
INCYTE PHARMACEUTICALS, INC.
Date: March 28, 1997 By ROY A. WHITFIELD
----------------------------------------------------------------------
Roy A. Whitfield
Chief Executive Officer
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Roy A. Whitfield, Randal W. Scott, and Denise M.
Gilbert, and each of them, his or her true and lawful attorneys-in-fact, each
with full power of substitution, for him or her in any and all capacities, to
sign any amendments to this report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or their substitute or substitutes may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
ROY A. WHITFIELD Chief Executive Officer (Principal Executive
- -------------------------------------------------
Roy A. Whitfield Officer) and Director March 28, 1997
Executive Vice President, Finance and Chief
DENISE M. GILBERT Financial Officer (Principal Financial Officer) March 28, 1997
- -------------------------------------------------
Denise M. Gilbert
Director of Finance and Administration
JANET L. NIBEL (Principal Accounting Officer) March 28, 1997
- -------------------------------------------------
Janet L. Nibel
JEFFREY J. COLLINSON Chairman of the Board March 28, 1997
- -------------------------------------------------
Jeffrey J. Collinson
BARRY M. BLOOM Director March 28, 1997
- -------------------------------------------------
Barry M. Bloom
</TABLE>
-46-
<PAGE> 47
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
FREDERICK B. CRAVES Director March 28, 1997
- -------------------------------------------------
Frederick B. Craves
JON S. SAXE Director March 28, 1997
- -------------------------------------------------
Jon S. Saxe
RANDAL W. SCOTT Director March 28, 1997
- -------------------------------------------------
Randal W. Scott
</TABLE>
-47-
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------ -----------------------
<S> <C>
3(i) Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (File No. 33-76344)).
3(ii) Bylaws of the Company, as amended (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement
on Form S-8 (File No. 33-76344)).
4.1 Form of Common Stock Certificate (incorporated by reference to the exhibit of the same number to the Company's
Registration Statement on Form S-1 (File No. 33-68138)).
10.1# 1991 Stock Plan of Incyte Pharmaceuticals, Inc., as amended and restated (the "Plan") (incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form S-8 (File No. 33-93666)).
10.2# Form of Incentive Stock Option Agreement under the Plan (incorporated by reference to the exhibit of the same
number to the Company's Registration Statement on Form S-1 (File No. 33-68138)).
10.3# Form of Nonstatutory Stock Option Agreement under the Plan (incorporated by reference to the exhibit of the same
number to the Company's Registration Statement on Form S-1 (File No. 33-68138)).
10.4# 1993 Directors' Stock Option Plan of Incyte Pharmaceuticals, Inc. (incorporated by reference to the exhibit of the
same number to the Company's Registration Statement on Form S-1 (File No. 33-68138)).
10.5# Form of Indemnity Agreement between the Company and its directors and officers (incorporated by reference to the
exhibit of the same number to the Company's Registration Statement on Form S-1 (File No. 33-68138)).
10.6# Amendment No. 1 to the 1993 Directors' Stock Option Plan of Incyte Pharmaceuticals, Inc. (incorporated by
reference to the exhibit of the same number to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.7 Lease Agreement dated December 8, 1994 between the Company and Matadero Creek (incorporated by reference to
Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994).
10.8 Lease dated July 18, 1991 between the Company and Harry J. Fair, Jr., as amended (incorporated by reference to the
exhibit of the same number to the Company's Registration Statement on Form S-1 (File No. 33-68138)).
10.9 Lease Amendment and Extension to Lease dated July 18, 1991 between the Company and Harry J. Fair, Jr., as amended
(incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
</TABLE>
-48-
<PAGE> 49
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------ -----------------------
<S> <C>
10.10+ Collaborative Research Agreement dated as of July 1, 1994
between the Company and Pfizer Inc (incorporated by reference to
Exhibit A to the Company's Current Report on Form 8-K dated
June 23, 1994).
10.11 Stock Purchase Agreement dated as of June 22, 1994 between the
Company and Pfizer Inc (incorporated by reference to Exhibit B
to the Company's Current Report on Form 8-K dated June 23,
1994).
10.12 Registration Rights Agreement dated as of June 22, 1994 between
the Company and Pfizer Inc (incorporated by reference to
Exhibit C to the Company's Current Report on Form 8-K dated
June 23, 1994).
10.13+ LIFESEQ(TM) Database Access and Satellite Database Agreement
dated as of November 30, 1994 between the Company and The Upjohn
Company (incorporated by reference to Exhibit A to the
Company's Current Report on Form 8-K dated November 30, 1994,
as amended by Form 8-K/A filed with the Commission on March 28,
1995).
10.14+ Stock Purchase Agreement dated as of November 30, 1994 between
the Company and The Upjohn Company (incorporated by reference to
Exhibit B to the Company's Current Report on Form 8-K dated
November 30, 1994, as amended by Form 8-K/A filed with the
Commission on March 28, 1995).
10.15 Registration Rights Agreement dated as of November 30, 1994
between the Company and The Upjohn Company (incorporated by
reference to Exhibit C to the Company's Current Report on
Form 8-K dated November 30, 1994).
10.16# 1996 Amendment to the Plan (incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on
Form S-8 (File No. 333-13449)).
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see Page 46 of this Form 10-K).
27 Financial Data Schedule.
</TABLE>
_________
+ Confidential treatment has been granted with respect to certain portions
of these agreements.
-49-
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF INCYTE PHARMACEUTICALS, INC.
<TABLE>
<CAPTION>
Jurisdiction of
Name Organization
---- ------------
<S> <C>
Combion, Inc. Delaware
Genome Systems, Inc. Missouri
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-76236 and 33-93668) pertaining to the 1993 Directors' Stock
Option Plan of Incyte Pharmaceuticals, Inc. and (Form S-8 Nos. 33-76344,
33-93666 and 333-13449) pertaining to the 1991 Stock Plan of Incyte
Pharmaceuticals, Inc. of our report dated February 7, 1997, with respect to the
consolidated financial statements of Incyte Pharmaceuticals, Inc. included in
the Annual Report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Palo Alto, California
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Item 1 of
Form 10-K for the period ended December 31, 1996 and is qualified in its
entirety by reference to such 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 7,628
<SECURITIES> 30,622
<RECEIVABLES> 2,469
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43,175
<PP&E> 32,546
<DEPRECIATION> (9,610)
<TOTAL-ASSETS> 66,876
<CURRENT-LIABILITIES> 21,128
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 45,237
<TOTAL-LIABILITY-AND-EQUITY> 66,876
<SALES> 0
<TOTAL-REVENUES> 41,785
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 44,029
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,761)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,761)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,761)
<EPS-PRIMARY> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
