UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
or
[ ] TRANSITION REPORTS 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 (IRS Employer Identification No.)
incorporation or organization)
3174 Porter Drive
Palo Alto, California 94304
(Address of principal executive offices)
(650) 855-0555
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
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.
[X] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 31,801,867 as of March 31, 2000.
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INCYTE PHARMACEUTICALS, INC.
INDEX
PART I: FINANCIAL INFORMATION PAGE
- ---------------------------------------------------------------------------------------------- ----
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ITEM 1 Financial Statements - Unaudited
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Comprehensive Income (Loss) . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . 7
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations. 11
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . 27
PART II: OTHER INFORMATION
- ----------------------------------------------------------------------------------------------
ITEM 1 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 2 Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ITEM 3 Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ITEM 4 Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . 29
ITEM 5 Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ITEM 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
</TABLE>
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
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INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<S> <C> <C>
MARCH 31, DECEMBER 31,
2000 1999*
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ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 421,334 $ 32,220
Marketable securities - available-for-sale . . . . . . . . . 270,820 34,717
Accounts receivable, net . . . . . . . . . . . . . . . . . . 14,368 26,608
Prepaid expenses and other current assets. . . . . . . . . . 22,418 15,956
----------- --------------
Total current assets . . . . . . . . . . . . . . . . . 728,940 109,501
Property and equipment, net. . . . . . . . . . . . . . . . . . . . 73,562 67,293
Long-term investments. . . . . . . . . . . . . . . . . . . . . . . 41,272 19,275
Goodwill and other intangible assets, net. . . . . . . . . . . . . 13,966 14,564
Deposits and other assets. . . . . . . . . . . . . . . . . . . . . 17,952 11,301
----------- --------------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 875,692 $ 221,934
=========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . $ 11,903 $ 6,501
Accrued compensation . . . . . . . . . . . . . . . . . . . . 6,816 6,731
Accrued and other current liabilities. . . . . . . . . . . . 11,138 11,767
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . 38,092 26,459
----------- --------------
Total current liabilities. . . . . . . . . . . . . . . 67,949 51,458
Non-current portion of capital lease obligations and note payable. - 194
Convertible subordinated notes . . . . . . . . . . . . . . . . . . 203,423 -
----------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . 271,372 51,652
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Stockholders' equity:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . 32 29
Additional paid-in capital . . . . . . . . . . . . . . . . . 641,873 222,805
Deferred compensation. . . . . . . . . . . . . . . . . . . . (514) (806)
Receivable from stockholders . . . . . . . . . . . . . . . . - (20)
Accumulated other comprehensive income (loss). . . . . . . . 26,275 3,443
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . (63,346) (55,169)
----------- --------------
Total stockholders' equity . . . . . . . . . . . . . . 604,320 170,282
----------- --------------
Total liabilities and stockholders' equity . . . . . . $ 875,692 $ 221,934
=========== ==============
<FN>
See accompanying notes
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INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
FOR THE THREE MONTHS ENDED
MARCH 31,
2000 1999
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Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,754 $37,630
Costs and expenses:
Research and development . . . . . . . . . . . . . . . . . . 41,334 31,244
Selling, general and administrative. . . . . . . . . . . . . 14,821 8,379
--------- --------
Total costs and expenses. . . . . . . . . . . . . . . . . . . 56,155 39,623
Loss from operations. . . . . . . . . . . . . . . . . . . . . (15,401) (1,993)
Interest and other income, net. . . . . . . . . . . . . . . . 10,404 1,597
Interest expense. . . . . . . . . . . . . . . . . . . . . . . (1,897) (138)
Losses from joint venture . . . . . . . . . . . . . . . . . . (1,283) (1,376)
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Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,177) $(1,910)
========= ========
Basic and diluted net loss per share. . . . . . . . . . . . . $ (0.27) $ (0.07)
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Shares used in computing basic and diluted net loss per share 30,306 27,879
========= ========
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See accompanying notes
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INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
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FOR THE THREE MONTHS ENDED
MARCH 31,
2000 1999
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Net loss . . . . . . . . . . . . . . . . . . . . . . . . $(8,177) $(1,910)
Other comprehensive income (loss), net of taxes:
Unrealized gains (losses) on marketable securities. 22,830 (402)
Foreign currency translation adjustments. . . . . . 2 (150)
Other comprehensive income (loss). . . . . . . . . . . . 22,832 (552)
-------- --------
Comprehensive income (loss). . . . . . . . . . . . . . . $14,655 $(2,462)
======== ========
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See accompanying notes
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INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
<S> <C> <C>
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,177) $ (1,910)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 8,114 6,029
Losses in joint venture . . . . . . . . . . . . . . . . . . . 1,283 1,376
Gain on sale of long-term investment. . . . . . . . . . . . . (5,417) -
Changes in certain assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . 12,240 4,605
Prepaid expenses and other assets. . . . . . . . . . . . (7,684) (1,186)
Accounts payable . . . . . . . . . . . . . . . . . . . . 5,402 (1,751)
Accrued and other current liabilities. . . . . . . . . . (275) 466
Deferred revenue . . . . . . . . . . . . . . . . . . . . 11,633 24,033
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Net cash provided by operating activities. . . . . . . . . . . . . . . 16,119 31,662
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of long-term investments . . . . . . . . . 5,417 -
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . (12,490) (8,927)
Purchases of marketable securities. . . . . . . . . . . . . . . . (247,851) (14,990)
Sales and maturities of marketable securities . . . . . . . . . . 11,298 25,824
---------- ---------
Net cash provided by (used in) investing activities. . . . . . . . . . (243,626) 1,907
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of employee stock options. . . . . . . . . 20,972 368
Proceeds from issuance of common stock. . . . . . . . . . . . . . 398,290 -
Proceeds from the issuance of convertible subordinated notes, net 196,800 -
Repayment of receivable from stockholder. . . . . . . . . . . . . 20 -
Principal payments on capital lease obligations and note
payable. . . . . . . . . . . . . . . . . . . . . . . . . . . (463) (289)
---------- ---------
Net cash provided by financing activities. . . . . . . . . . . . . . . 615,619 79
---------- ---------
Effect of exchange rate on cash and cash equivalents . . . . . . . . . 2 (150)
---------- ---------
Net increase in cash and cash equivalents. . . . . . . . . . . . . . . 389,114 33,498
Cash and cash equivalents at beginning of period . . . . . . . . . . . 32,220 50,048
---------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . $ 421,334 $ 83,546
========== =========
</TABLE>
See accompanying notes
<PAGE>
======
INCYTE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. ORGANIZATION AND BUSINESS
Incyte Pharmaceuticals, Inc. (the "Company") was incorporated in
Delaware in April 1991. The Company designs, develops, and markets genomic
information-based tools including database products, genomic data management
software tools, microarray-based gene expression services and genomic reagents
and related services. The Company's genomic databases integrate bioinformatics
software with proprietary and, when appropriate, publicly available genetic
information to create information-based tools used by pharmaceutical and
biotechnology companies and academic researchers to understand disease and to
discover and develop drugs. In the first quarter of 2000, the Company's Board of
Directors approved an amendment to the Company's Certificate of Incorporation to
change the Company's name to Incyte Genomics, Inc. The amendment will be
submitted for stockholder approval at the annual meeting to be held in June
2000.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. The consolidated balance sheet as of March 31, 2000, statements
of operations for the three months ended March 31, 2000 and 1999, statements of
comprehensive net income (loss) for the three months ended March 31, 2000 and
1999 and the statements of cash flows for the three months ended March 31, 2000
and 1999 are unaudited, but include all adjustments (consisting of normal
recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position, operating results and cash flows for the
periods presented. The balance sheet at December 31, 1999 has been derived from
audited financial statements.
Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information and footnote information normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission.
Results for any interim period are not necessarily indicative of results
for any future interim period or for the entire year. The accompanying financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of:
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MARCH 31, DECEMBER 31,
2000 1999
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Office equipment . . . . . . . . . . . . . . . $ 5,893 $ 4,630
Laboratory equipment . . . . . . . . . . . . . 25,735 25,297
Computer equipment . . . . . . . . . . . . . . 56,032 52,565
Leasehold improvements . . . . . . . . . . . . 44,412 37,941
----------- --------------
132,072 120,433
Less accumulated depreciation and amortization (58,510) (53,140)
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$ 73,562 $ 67,293
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4. CONVERTIBLE SUBORDINATED NOTES
In February 2000, in a private placement, the Company issued $200
million of convertible subordinated notes, which resulted in net proceeds of
approximately $196.8 million. The notes bear interest at 5.5%, payable
semi-annually on March 1 and September 1, and are due February 1, 2007. The
notes are subordinated to all senior indebtedness, as defined. The notes can be
converted at the option of the holder at an initial conversion price of $134.84
per share, subject to adjustment. The Company may, at its option, redeem the
notes at any time before February 7, 2003, but only if the Company's stock
exceeds 150% of the conversion price for 20 trading days in a period of 30
consecutive trading days. On or after February 7, 2003 the Company may, at its
option, redeem the notes at specific prices. Holders may require the Company to
repurchase the notes upon a change in control, as defined.
5. REVENUE RECOGNITION
Revenues are recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price is fixed
and determinable and collectibility is reasonably assured. For database
collaboration agreements, revenues are recognized evenly over the term of each
agreement. Revenue is deferred for fees received before earned. Revenues from
custom orders, such as custom sequencing, and reagents are recognized upon
completion and delivery. Revenues from genomic screening services are recognized
upon completion. Revenue from gene expression microarray services includes;
technology access fees, which are generally recognized ratably over the access
term, and usage fees which are recognized at the completion of key stages in the
performance of the service, in proportion to costs incurred. In accordance with
SOP 97-2, software revenue is allocated between license fees and maintenance
fees with the license revenue being recognized upon installation, and
maintenance fees recognized evenly over the maintenance term.
6. LOSS PER SHARE
Basic net loss per share is computed by dividing net loss available to
common stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period and excludes the dilutive effect of
stock options.
The following is a reconciliation of the numerators and denominators of the
basic and diluted net loss per share computations for the periods presented
below.
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THREE MONTHS ENDED
MARCH 31,
<S> <C> <C>
2000 1999
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Numerator:
Net loss . . . . . . . . . . . . . . . . . . . . $(8,177) $(1,910)
======== ========
Denominator:
Denominator for basic net loss
Per share - weighted-average shares. . . . 30,306 27,879
Dilutive potential common shares
Stock options. . . . . . . . . . . . - -
Convertible subordinated notes . . . - -
-------- --------
Denominator for diluted net loss per share 30,306 27,879
======== ========
Basic net loss per share. . . . . . . . . . . . . $ (0.27) $ (0.07)
======== ========
Diluted net loss per share. . . . . . . . . . . . $ (0.27) $ (0.07)
======== ========
</TABLE>
Options to purchase 4,237,496 and 4,944,707 shares of common stock
were outstanding at March 31, 2000 and 1999, respectively, and notes convertible
into 1,483,250 shares of common stock were outstanding at March 31, 2000, but
were not included in the computation of diluted net loss per share, as their
effect was antidilutive.
7. JOINT VENTURE
In September 1997, the Company formed a joint venture, diaDexus, LLC
("diaDexus"), with SmithKline Beecham Corporation ("SB") which will utilize
genomic and bioinformatic technologies in the discovery and commercialization of
molecular diagnostics. The Company held a 50 percent equity interest in diaDexus
and accounted for the investment under the equity method. In July 1999, the
Company and SB each invested an additional $2.5 million in diaDexus through
convertible notes that matured in April 2000. The notes had an interest at 5.6%,
and were subordinate to all other claims.
On April 6, 2000, diaDexus obtained additional financing through a private
equity offering. In conjunction with the offering, diaDexus repaid in full the
$2.5 million principal amount of, together with accrued interest on, the
convertible note held by the Company. Under diaDexus' new capital structure, the
Company 's investment is below 20% and the Company' no longer has the ability to
exert significant influence over diaDexus. Accordingly, the Company will account
for its investment in diaDexus under the cost method of accounting as of the
date of the financing.
diaDexus purchased $0.6 million of contract sequencing and microarray
services from the Company in the three months ended March 31, 2000, diaDexus did
not make similar purchases in 1999.
8. SEGMENT REPORTING
The Company operates primarily in one reportable segment: the design,
development, and marketing of genomic information based tools, and follows the
requirements of SFAS 131, Disclosures about Segments of an Enterprise and
Related Information. For the three months ended March 31, 2000, the Company
recorded revenue from customers throughout the United States and in Canada,
Austria, Belgium, France, Germany, Israel, Netherlands, Switzerland, and the
United Kingdom. Export revenue for the three months ended March 31, 2000 and
1999 were $11,487,000 and $10,783,000, respectively.
9. NEW PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities. ("SFAS 133"). SFAS 133
established standards for accounting and reporting derivative instruments and
hedging activities. In June 1999, The FASB issued Statement No. 137, Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133 ("SFAS 137"). This statement defers the effective
date of SFAS 133 until June 15, 2000. Application of SFAS 133 will have no
impact on the consolidated financial position or results of operations as
currently reported.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). Among other things, SAB 101 discusses the SEC staff's view on accounting
for non-refundable up-front fees. The Company is currently evaluating SAB 101 as
to whether it would have any material impact on the Company. Should the Company
determine that a change in its accounting policy is necessary, such a change
will be made effective in the second quarter of 2000 and would result in a
charge to results of operations for the cumulative effect of the change. This
amount, if recognized, would be recorded as deferred revenue and recognized as
revenue in future periods. Financial statements prior to January 1, 2000 will
not be restated.
10. LITIGATION
In January 1998, Affymetrix, Inc. ("Affymetrix") filed a lawsuit in
the United States District Court for the District of Delaware, subsequently
transferred to the United States District Court for the Northern District of
California in November 1998, alleging infringement of U.S. patent number
5,445,934 (the " '934 Patent") by both Synteni and Incyte. The complaint alleges
that the '934 Patent has been infringed by the making, using, selling,
importing, distributing or offering to sell in the U.S. high density arrays by
Synteni and Incyte and that such infringement was willful. Affymetrix seeks a
permanent injunction enjoining Synteni and Incyte from further infringement of
the '934 Patent and, in addition, seeks damages, costs and attorney's fees and
interest. Affymetrix further requests that any such damages be trebled based on
its allegation of willful infringement by Incyte and Synteni.
In September 1998, Affymetrix filed an additional lawsuit in the
United States District Court for the District of Delaware, subsequently
transferred to the United States District Court for the Northern District of
California in November 1998, alleging infringement of the U.S. patent number
5,800,992 (the " '992 Patent") and U.S. patent number 5,744,305 (the " '305
Patent") by both Synteni and Incyte. The complaint alleges that the '305 Patent
has been infringed by the making, using, selling, importing, distributing or
offering to sell in the United States high density arrays by Synteni and Incyte,
that the '992 Patent has been infringed by the use of Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling, and that such infringement was willful. Affymetrix seeks a permanent
injunction enjoining Synteni and Incyte from further infringement of the '305
and '992 Patents and, in addition, Affymetrix had sought a preliminary
injunction enjoining Incyte and Synteni from using Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling as described in the '992 Patent. Affymetrix's request for a preliminary
injunction was denied in May 1999. As a result of the assignment of the case to
a new judge, all scheduled trial and pretrial dates have been vacated. The court
is expected to set a new schedule in late July 2000.
In April 1999, the Board of Patent Appeals and Interferences of United
States Patent and Trademark Office (PTO) declared interferences between pending
patent applications licensed exclusively to Incyte and the Affymetrix '305 and
'992 Patents. An interference proceeding is invoked by the PTO when more than
one patent applicant claims the same invention. The Board of Patent Appeals and
Interferences evaluates all relevant facts, including those bearing on first to
invent, validity, enablement and scope of claims, and then makes a determination
as to who, if anyone, is entitled to the patent on the disputed invention. In
September 1999, the Board of Patent Appeals and Interferences determined that
Incyte had not met its prima facie case, and ruled that the patents licensed by
Incyte and Synteni from Stanford University were not entitled to priority over
corresponding claims in the two Affymetrix patents. The Company is seeking de
novo review of the Board decisions in the United States District Court for the
Northern District of California.
Incyte and Synteni believe they have meritorious defenses and intend to
defend the suits vigorously. However, there can be no assurance that Incyte and
Synteni will be successful in the defense of these suits. At this time, the
Company cannot reasonably estimate the possible range of any loss resulting from
these suits due to uncertainty regarding the ultimate outcome. Regardless of the
outcome, this litigation has resulted and is expected to continue to result in
substantial expenses and diversion of the efforts of management and technical
personnel. Further, there can be no assurance that any license that may be
required as a result of this suit or the outcome thereof would be made available
on commercially acceptable terms, if at all.
11. PRIVATE PLACEMENT OF EQUITY
In February 2000, in a private placement, the Company issued 2,000,000 of
its common stock at a price of $211.00 per share, resulting in net proceeds of
$398.3 million.
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations as of March 31, 2000 and for the three month periods ended
March 31, 2000 and 1999 should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto set forth in Item
1 of this report and the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in the Company's Annual Report
on Form 10-K for the year ended December 31, 1999.
When used in this discussion, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. These statements, which include statements as to expected net loss,
expected expenditure levels, expected cash flows, the adequacy of capital
resources, and growth in operations, 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
biotechnology, pharmaceutical, and agricultural industries; risks relating to
the development of new products and their use by potential collaborators of the
Company; the impact of technological advances and competition; the ability of
the Company to obtain and retain customers; competition from other entities;
early termination of a database collaboration agreement or failure to renew an
agreement upon expiration; the ability to successfully integrate the operations
of recent business combinations; the cost of accessing or acquiring technologies
developed by other companies; uncertainty as to the scope of coverage,
enforceability or commercial protection from patents that issue on gene
sequences and other genetic information; developments in and expenses relating
to litigation and interference proceedings; the results and viability of joint
ventures and businesses in which the Company has purchased equity; and the
matters discussed in "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.
Incyte, LifeSeq and PathoSeq are our registered trademarks. ZooSeq,
LifeTools, LifeArray, LifeProt, LifeExpress, GeneAlbum and GEM are our
trademarks. We also refer to trademarks of other corporations and organizations
in this document.
OVERVIEW
Incyte Pharmaceuticals, Inc. ("Incyte" and, together with its wholly owned
subsidiaries, the "Company") designs, develops and markets genomic
information-based products and services. These products and services include
database products, genomic data management software tools, microarray-based gene
expression services, genomic reagents, and related services. The Company's
genomic databases integrate bioinformatics software with proprietary and, when
appropriate, publicly available genetic information to create information-based
products and services used by pharmaceutical and biotechnology companies and
academic researchers to understand disease and to discover and develop drugs. In
the first quarter of 2000, the Company's Board of Directors approved an
amendment to the Company's Certificate of Incorporation to change the Company's
name to Incyte Genomics, Inc.The amendment will be submitted for stockholder
approval at the annual meeting to be held in June 2000.
Revenues recognized by the Company consist primarily of non-exclusive database
access fees related to database agreements. Revenues also include the sales of
genomic screening products and services, fees for contract sequencing services,
sales of genomic data management software tools, and fees for microarray-based
gene expression services. The Company's database agreements 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 subscriber will ever generate products from
information contained within the databases and thus that the Company will ever
receive additional milestone payments or royalties. The Company's ability to
maintain and increase revenues depends on its ability to obtain additional
database subscribers, to retain existing subscribers, to expand its product and
service offerings and to expand its customer base. The loss of revenues from any
individual database agreement, if terminated or not renewed, could have an
adverse impact on the Company's results of operations, although it is not
anticipated to have a material adverse impact on the Company's business or
financial conditions.
The Company intends to invest in its sequencing, bioinformatics, expression
database development, SNP discovery, and e-commerce programs in 2000 and as a
result expects to report a net loss at least through 2000. If the costs of these
programs are greater than anticipated, or if these programs take longer to
complete, or if losses are incurred from strategic investments, the Company may
incur losses in future periods, as well.
The Company has made and intends to continue to make strategic equity
investments in, and acquisitions of, technologies and businesses that are
complementary to the businesses of the Company. As a result, the Company may
record losses or expenses related to the Company's proportionate ownership
interest in such long-term equity investments, record charges for the
acquisition of in-process technologies, or record charges for the recognition of
the impairment in the value of the securities underlying such investments.
In September 1997, the Company formed a joint venture, diaDexus, LLC
("diaDexus"), with SmithKline Beecham Corporation ("SB") which will utilize
genomic and bioinformatics technologies in the discovery and commercialization
of molecular diagnostics. Through March 31, 2000, the Company and SB each held a
50 percent equity interest in diaDexus. The investment was accounted for under
the equity method, and the Company recorded its share of diaDexus' earnings and
losses in its statement of operations. On April 6, 2000, diaDexus completed a
private equity financing. Under the new capital structure, the Company's
investment is below 20% and the Company no longer has significant influence over
diaDexus. Accordingly, the Company will account for its investment in diaDexus
under the cost method of accounting as of the date of the financing.
In January 1998, the Company announced a relationship relating to the joint
development of proteomics data and related software with Oxford GlycoSciences
plc ("OGS"). As part of this relationship, the Company made a $5.0 million
initial equity investment and a follow-on investment in April 1998 of
approximately $0.8 million as part of the OGS initial public offering of its
ordinary shares. As part of the collaborative agreement, the Company reimbursed
OGS $5.0 million in 1999 for services rendered and will reimburse OGS up to $5.0
million in 2000 to offset OGS' expenses for services rendered. The market prices
of the securities of the companies in which the Company invests are highly
volatile and therefore subject to declines in market value. The Company will
continue to evaluate its long-term equity investments for impairment on a
quarterly basis.
In an effort to broaden its business, the Company is investing in a number of
new areas, including molecular diagnostics, genome sequencing, SNP discovery,
proteomics, microarray services and the sale of its products over the internet.
Given that many of these address new markets, or involve untested technologies,
it is not known if any of them will generate revenues or if the revenues will be
sufficient to provide an adequate return on the investment. Depending on the
investment required and the timing of such investments, expenses or losses
related to these investments could adversely affect operating results.
The Company has incurred and could continue to incur substantial expenses in its
defense of the lawsuits filed in January and September 1998 by Affymetrix, Inc.
("Affymetrix") alleging patent infringement by Synteni and Incyte. Affymetrix
seeks a preliminary injunction enjoining Incyte and Synteni from using certain
microarray technology in a manner alleged to infringe an Affymetrix patent and a
permanent injunction enjoining Incyte and Synteni from further infringement of
certain Affymetrix patents. In addition, Affymetrix seeks damages, costs,
attorneys' fees and interest. Affymetrix further requests that any such damages
be trebled on its allegation of willful infringement by Incyte and Synteni.
Incyte and Synteni believe they have meritorious defenses and intend to defend
these suits vigorously. However, there can be no assurance that Incyte and
Synteni will be successful in the defense of these suits. At this time, the
Company cannot reasonably estimate the possible range of any loss related to
these suits due to uncertainty regarding the ultimate outcome. Regardless of the
outcome, this litigation has resulted and is expected to continue to result in
substantial expenses and diversion of the efforts of management and technical
personnel. Any future litigation could result in similar expenses and diversion
of efforts. Further, there can be no assurance that any license that may be
required as a result of these suits or the outcome thereof would be made
available on commercially acceptable terms, if at all.
RESULTS OF OPERATIONS
Net loss and diluted net loss per share were $8.2 million and $0.27 for the
three months ended March 31, 2000, respectively, as compared to $1.9 million and
$0.07 in the same period a year ago, respectively. Diluted net loss per share
for the three months ended March 31, 2000 was impacted by a private equity
offering of 2,000,000 shares of common stock in February 2000.
Revenues for the three months ended March 31, 2000 increased to $40.8
million compared to $37.6 million for the corresponding period in 1999. Revenues
resulted primarily from database and related products and, to a much lesser
extent, from the Company's custom genomics product line, which includes genomic
screening products and services, gene expression services and custom sequencing
services. The increase in revenues was primarily attributed to revenues from new
products such as expression databases and in silico Single Nucleotide
Polymorphism ("isSNP") product as well as increased revenues from custom
genomics products.
Total costs and expenses for the three months ended March 31, 2000
increased to $56.2 million compared to $39.6 million for the corresponding
period in 1999. Total costs and expenses are expected to increase in the
foreseeable future due to the continued investment in the development of new
products and services, and in the expansion of the Company's customer base
Research and development expenses for the three months ended March 31, 2000
increased to $41.3 million compared to $31.2 million for the corresponding
period in 1999. The increase in research and development expenses resulted
primarily from an increase in bioinformatics and software development efforts,
gene mapping and SNP discovery efforts, microarray production, and the
development of e-commerce products. The Company expects research and development
spending to increase as the Company continues to pursue the development of new
database products and services, expansion of existing database products,
increases in sequencing, bioinformatics, expression database development and SNP
discovery operations, development of e-commerce products and services and
investments in new technologies.
Selling, general and administrative expenses for the three months ended
March 31, 2000 increased to $14.8 million compared to $8.4 million for the
corresponding period in 1999. The increase in selling, general and
administrative expenses resulted primarily from the growth in the Company's
sales and marketing function, including its branding efforts, and increased
personnel to support the growing complexity of the Company's operations. The
Company's operations were also impacted by legal expenses from the patent
infringement lawsuits filed by Affymetrix of approximately $1.4 million and $2.1
million in the three months ended March 31, 2000 and 1999, respectively. The
Company expects that selling, general and administrative expenses will increase
throughout 2000 due to continued growth in marketing, sales and customer support
functions, legal expenses related to the Company's defense of the patent
infringement lawsuit filed by Affymetrix and increases in personnel to support
the Company's growing complexity.
Interest and other income, net for the three months ended March 31, 2000
increased to $10.4 million from $1.6 million for the corresponding period in
1999. This increase was primarily a result of a $5.4 million gain from the
exercise and sale of a warrant in a long-term strategic investment as well as
increased interest income due to higher cash balances from the Company's
convertible subordinated note and private equity offerings in February 2000.
Interest expense for the three months ended March 31, 2000 increased to
$1.9 million from $0.1 million for the corresponding period in 1999. The
increase was due to the interest expense associated with the Company's
convertible subordinated notes issued in February 2000.
Losses from joint venture were $1.3 million for the three months ended
March 31, 2000 compared to $1.4 million for the corresponding period in 1999.
The loss represents the Company's share of diaDexus' losses from operations.
Beginning on April 6, 2000, the Company will account for its investment in
diaDexus under the cost method of accounting and therefore will no longer
reflect diaDexus' losses in the Company's statement of operations.
Due to the Company's expected loss in 2000, the Company expects a minimal
effective annual income tax rate, which is consistent with the corresponding
period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had $692.2 million in cash, cash
equivalents and marketable securities, compared to $66.9 million as of December
31, 1999. The Company has classified all of its marketable securities as
short-term, as the Company may choose not to hold its marketable securities
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 $16.4 million for the three
months ended March 31, 2000, as compared to $31.7 million for the three months
ended March 31, 1999. The decrease was primarily due to the higher net loss, net
of non-cash charges in 2000 as compared to 1999, increase in prepaid expenses in
2000 and the lower increase in deferred revenues in 2000 as compared to 1999.
These changes were partially offset by the larger decrease in accounts
receivable in 2000 as compared to 1999 and the increase in accounts payable in
2000. Net cash generated by operating activities may in the future fluctuate
significantly from quarter to quarter due to the timing of large prepayments by
database collaborators.
In February 2000, in a private placement, the Company issued $200
million of convertible subordinated notes, which resulted in net proceeds of
approximately $196.8 million. The notes bear interest at 5.5%, payable
semi-annually on March 1 and September 1, and are due February 1, 2007. The
notes are subordinated to senior indebtedness, as defined. The notes can be
converted at the option of the holder at an initial conversion price of $134.84
per share, subject to adjustment. The Company may redeem the notes at any time
before February 7, 2003, only if the Company's stock exceeds 150% of the
conversion price for 20 trading days in a period of 30 consecutive trading days.
On or after February 7, 2003 the Company may redeem the notes at specific
prices. Holders may require the Company to repurchase the notes upon a change in
control, as defined.
In February 2000, in a private placement, the Company issued 2,000,000
of its common stock at a price of $211.00 per share, resulting in net proceeds
of $398.3 million.
The Company's investing activities, other than purchases, sales and
maturities of marketable securities, have consisted of capital expenditures and
long-term investments. Capital expenditures for the three months ended March 31,
2000 were $12.5 million as compared to $8.9 million in the same period in 1999,
primarily due to the expansion of the Company's facilities. The Company
generated net proceeds of $5.4 million on the exercise of a warrant and sale of
the underlying common shares in one of its long term strategic investments. Net
cash used by investing activities may in the future fluctuate significantly from
quarter to quarter due to the timing of investments in and sales of strategic
equity investments, capital expenditures and maturity/sales and purchases of
marketable securities.
Net cash provided by financing activities was $616.3 million for the three
months ended March 31, 2000 as compared to $0.01 million for the three months
ended March 31, 1999. The 2000 activity included the issuance of common stock in
a private equity offering resulting in net proceeds of $398.3 million, the net
proceeds from the issuance of 5.5% Convertible Subordinated Notes of $196.8
million, and the proceeds from the exercise of employee stock options of $21.0
million.
The Company expects its cash requirements to continue to increase in 2000
as it: invests in its sequencing, bioinformatics, expression database
development, and SNP discovery programs; invests in data-processing-related
computer hardware to support its existing and new database products and to
enable the on-line delivery of those products; continues to seek access to
technologies through investments, research and development alliances, license
agreements and/or acquisitions; makes strategic investments; and continues to
make improvements in existing facilities.
Based upon its current plans, the Company believes that its existing
resources will be adequate to satisfy its capital needs for at least the next
twelve months. The Company's cash requirements depend on numerous factors,
including the ability of the Company to attract and retain collaborators for its
databases and other products and services; expenditures in connection with
alliances, license agreements and acquisitions of and investments in
complementary technologies and businesses; competing technological and market
developments; the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights; the purchase of additional
capital equipment, including capital equipment necessary to ensure the Company's
sequencing and microarray operations remain competitive; capital expenditures
required to expand the Company's facilities; and costs associated with the
integration of new operations assumed through mergers and acquisitions. Changes
in the Company's research and development plans or other changes affecting the
Company's operating expenses may result in changes in the timing and amount of
expenditures of the Company's capital resources.
EURO CONVERSION
A single currency called the euro was introduced in Europe on January 1,
1999. Eleven of the fifteen member countries of the European Union agreed to
adopt the euro as their common legal currency on that date. Fixed conversion
rates between these participating countries' existing currencies (the "legacy
currencies") and the euro were established as of that date. The legacy
currencies are scheduled to remain legal tender as denominations of the euro
until at least January 1, 2002, but not later than July 1, 2002. During this
transition period, parties may settle transactions using either the euro or a
participating country's legal currency. The Company will evaluate the impact of
the euro conversion on its computer and financial systems, business processes,
market risk, and price competition. The Company does not expect this conversion
to have a material impact on its results of operations, financial position or
cash flows.
FACTORS THAT MAY AFFECT RESULTS
The risks and uncertainties described below are not the only ones facing
our company. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial may also impair our business operations.
If any of the following risks actually occur, our business, financial
condition and results of operations could be materially and adversely affected.
WE HAVE HAD ONLY LIMITED PERIODS OF PROFITABILITY AND WE EXPECT TO INCUR LOSSES
IN THE FUTURE, WHICH MAY PREVENT US FROM RETURNING TO PROFITABILITY
We had net losses from inception in 1991 through 1996, and again
incurred net losses in 1999 and 2000. Because of those losses, we had an
accumulated deficit of $63.3 million as of March 31, 2000. We intend to continue
to make significant investments in sequencing, bioinformatics, expression
database development, single nucleotide polymorphism, or SNP, discovery and
development of e-commerce products. As a result, we expect to report a net loss
for the year ending December 31, 2000. We may report net losses in future
periods as well. We expect that our expenditures may continue to increase in
2000 due in part to our continued investment in new product and technology
development, including the continuation of our genomic sequencing,
bioinformatics, expression database development, SNP-discovery programs,
e-commerce initiative, obligations under existing and future research and
development alliances, and our increasing investment in marketing, sales and
customer service. Our profitability depends on our ability to increase our
revenues:
TO GENERATE SIGNIFICANT REVENUES, WE MUST OBTAIN ADDITIONAL DATABASE
COLLABORATORS AND RETAIN EXISTING COLLABORATORS. While we had over 20 database
agreements as of March 31, 2000, we may be unable to enter into any additional
agreements. Also, our database collaborators may choose not to renew their
agreements upon expiration. In 1999, one of our LifeSeq Gold database
collaborators did not renew its subscription. Our database revenues are also
affected by the extent to which existing collaborators expand their agreements
with us to include our new database products and to the extent that existing
collaborators reduce the number of products or services for which they
subscribe. Some of our database agreements require us to meet performance
obligations. A database collaborator can terminate its agreement before the end
of its scheduled term if we breach the agreement and fail to cure the breach
within a specified period.
OUR REVENUES AND PROFITABILITY WILL ALSO DEPEND ON OUR ABILITY TO
GENERATE PROFITS FROM EXPRESSION DATABASES AND MICROARRAY SERVICES. We acquired
Synteni, Inc. in January 1998 to provide microarray services and to generate
information for expression databases. The contribution of our microarray
operations to our operating results will depend on whether we can continue to
obtain high-volume customers for microarray services and expression databases,
whether we can continue to increase our microarray production capacity in a
timely manner and with consistent volumes and quality, and the costs associated
with increasing our microarray production capacity.
WE DO NOT EXPECT MILESTONE OR ROYALTY PAYMENTS TO SUBSTANTIALLY
CONTRIBUTE TO REVENUES FOR SEVERAL YEARS. Part of our strategy is to license to
database collaborators our know how and patent rights associated with the gene
sequences and related information in our proprietary databases, for use in the
discovery and development of potential pharmaceutical, diagnostic or other
products. Any potential product that is the subject of such a license will
require several years of further development, clinical testing and regulatory
approval before commercialization.
OUR OPERATING RESULTS ARE UNPREDICTABLE AND MAY ADVERSELY IMPACT OUR STOCK PRICE
Our operating results are unpredictable and may fluctuate
significantly from period to period due to a variety of factors, including:
- - changes in the demand for our products and services;
- - the introduction of competitive databases or services, including public
domain databases;
- - the pricing of access to our databases;
- - the nature, pricing and timing of other products and services provided to
our collaborators;
- - changes in the research and development budgets of our collaborators and
potential collaborators;
- - depreciation expense from capital expenditures;
- - acquisition, licensing and other costs related to the expansion of our
operations, including operating losses of acquired businesses;
- - losses and expenses related to our investments in joint ventures and
businesses;
- - payments of milestones, license fees or research payments under the terms
of our increasing number of external alliances; and
- - expenses related to, and the results of, litigation and other proceedings
relating to intellectual property rights (including the lawsuits filed by
Affymetrix, Inc. described below).
In particular, revenues from our database business are unpredictable
because:
- - the timing of our database installations is determined by our
collaborators;
- - the sales cycle for our database products is lengthy; and
- - the time required to complete custom orders can vary significantly.
We expect our expression databases to represent an increasing amount
of our revenues. These revenues may, however, be affected by developments in the
Affymetrix litigation, which may cause potential customers to postpone or change
their decision to use our microarray services or to purchase our expression
databases
We are investing in a number of new areas to try to broaden our
business. These areas include sequencing, bioinformatics, gene expression
databases, SNP discovery, molecular diagnostics, proteomics, or the large scale,
high-throughput analysis of protein expression, and the online delivery of our
database and software products. Because many of these address new markets or
involve untested technologies, they may not generate any revenues or provide an
adequate return on our investment. In these cases, we may have to recognize
expenses or losses.
We have significant fixed expenses, due in part to our need to
continue to invest in product development and extensive support for our database
collaborators. We may be unable to adjust our expenditures if revenues in a
particular period fail to meet our expectations, which would adversely affect
our operating results for that period. Forecasting operating and integration
expenses for acquired businesses may be particularly difficult, especially where
the acquired business focuses on technologies that do not have an established
market.
We believe that period-to-period comparisons of our financial results
will not necessarily be meaningful. You should not rely on these comparisons as
an indication of our future performance. If our operating results in any future
period fall below the expectations of securities analysts and investors, our
stock price will likely fall, possibly by a significant amount.
WE EXPERIENCE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE AND
IF WE DO NOT COMPETE EFFECTIVELY OUR REVENUES MAY DECLINE
GENOMIC BUSINESSES ARE INTENSELY COMPETITIVE. The human genome
contains a finite number of genes. Our competitors may seek to identify,
sequence and determine the biological function of numerous genes in order to
obtain a proprietary position with respect to new genes. A number of companies,
other institutions and government-financed entities are engaged in gene
sequencing, gene discovery, gene expression analysis, positional cloning, the
study of genetic variation, and other genomic service businesses. Many of these
companies, institutions and entities have greater financial and human resources
than we do.
Some of our competitors have developed databases containing gene
sequence, gene expression, genetic variation or other genomic information and
are marketing or plan to market their data to pharmaceutical companies.
Additional competitors may attempt to establish databases containing this
information in the future. We expect that competition in our industry will
continue to intensify. Several large pharmaceutical companies have formed a
consortium to create a SNPs database and to make all of the information publicly
available. The formation of this consortium could delay or reduce the potential
revenues related to our SNP-related business.
PATENT POSITIONS OR PUBLIC DISCLOSURES MAY REDUCE THE VALUE OF OUR
DATABASES. Competitors may discover and establish patent positions with respect
to gene sequences in our databases. Further, certain entities engaged in gene
sequencing have made the results of their sequencing efforts publicly available.
In April 2000, the Celera Genomics Group of PE Corporation announced that it has
completed the sequencing phase of one person's genome and will now begin to
assemble the sequenced fragments of the genome into their proper order. Celera
has announced that it has filed a provisional patent application on newly
discovered partial genes and stated its intention to file full applications on
medically important discoveries. The Human Genome Project, which is coordinated
by the U.S. Department of Energy and the National Institutes of Health, has
announced that a consortium of laboratories associated with the Project predicts
that they will produce at least 90% of the human genome sequence in a "working
draft form" by the spring of 2000 and that they intend to make the information
publicly available. The public availability of gene sequences or resulting
patent positions covering substantial portions of the human genome or microbial
or plant genomes could reduce the potential value of our databases to our
collaborators. It could also impair our ability to realize royalties or other
revenue from any commercialized products based on this genetic information.
COMPETITORS MAY DEVELOP SUPERIOR TECHNOLOGY. The gene sequencing
machines used in our computer-aided sequencing operations are commercially
available and are being used by at least one competitor. In addition, some of
our competitors and potential competitors are developing proprietary sequencing
technologies that may be more advanced than ours.
In addition, a number of companies are pursuing alternative methods
for generating gene expression information, including microarray technologies.
These advanced sequencing or gene expression technologies may not be
commercially available for us to purchase or license on reasonable terms, if at
all. At least one other company currently offers microarray-based services that
might be competitive with ours.
Our SNP discovery platform represents a modification of a process that
is in the public domain. We are seeking patent protection for these
improvements, but have not yet received any patents. Other companies could make
similar or superior improvements to this process without infringing our rights,
and we may not have access to those improvements. The discovery of SNPs is a
competitive area. Other companies may develop or obtain access to different SNP
discovery platforms, to which we may not have access, that may make our
technology obsolete.
We also face competition from providers of software. A number of
companies have announced their intent to develop and market software to assist
pharmaceutical companies and academic researchers in managing and analyzing
their own genomic data and publicly available data.
WE MUST CONTINUE TO INVEST IN NEW TECHNOLOGIES. The genomics industry
is characterized by extensive research efforts, resulting in rapid technological
progress. To remain competitive, we must continue to expand our databases,
improve our software, and invest in new technologies. New developments are
expected to continue, and discoveries by others may render our services and
potential products noncompetitive.
WE ARE INVOLVED IN PATENT LITIGATION, WHICH IF NOT RESOLVED FAVORABLY COULD HARM
OUR BUSINESS
In January 1998, Affymetrix filed a lawsuit in federal court alleging
infringement of U.S. patent number 5,445,934 by both Synteni and Incyte. The
complaint alleges that the '934 patent has been infringed by Synteni's and
Incyte's making, using, selling, importing, distributing or offering to sell
high density arrays in the United States and that this infringement was willful.
Affymetrix seeks a permanent injunction enjoining Synteni and Incyte from
further infringement of the '934 patent and seeks damages, costs, attorneys'
fees and interest. Affymetrix also requests triple damages based on allegedly
willful infringement.
In September 1998, Affymetrix filed an additional lawsuit alleging
infringement of U.S. patent numbers 5,744,305 and 5,800,992 by Synteni and
Incyte. The complaint alleges that the '305 patent has been infringed by
Synteni's and Incyte's making, using, selling, importing, distributing or
offering to sell high density arrays in the United States. It also alleges that
the '992 patent has been infringed by the use of Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling and that this infringement was willful. Affymetrix had sought a
preliminary injunction enjoining Synteni and Incyte from using GEM microarray
technology to conduct this kind of gene expression monitoring, and a permanent
injunction enjoining Synteni and Incyte from further infringing the '305 and
'992 patents.
The lawsuits were initially filed in the United States District Court
for the District of Delaware. In November 1998, the court granted Incyte's
motion to transfer the suits to the United States District Court for the
Northern District of California. Affymetrix's request for a preliminary
injunction was denied in April 1999. As a result of the assignment of the case
to a new judge, all scheduled trial and pretrial dates have been vacated. The
court is expected to set a new schedule in July 2000.
In April 1999, the Board of Patent Appeals and Interferences of United
States Patent and Trademark Office declared interferences between pending patent
applications licensed exclusively to us and the Affymetrix '305 and '992
patents. An interference proceeding is invoked by the Patent and Trademark
Office when more than one patent applicant claims the same invention. The Board
of Patent Appeals and Interferences evaluates all relevant facts, including
those bearing on first to invent, validity, enablement and scope of claims, and
then makes a determination as to who, if anyone, is entitled to the patent on
the disputed invention. In September 1999, the Board of Patent Appeals and
Interferences determined that Incyte had not met its prima facie case, and ruled
that patents licensed by Incyte and Synteni from Stanford University were not
entitled to priority over corresponding claims in the two Affymetrix patents. We
are seeking de novo review of the board decisions in the United States district
court for the Northern District of California.
We believe we have meritorious defenses and intend to defend these
suits vigorously. However, our defense may be unsuccessful. At this time, we
cannot reasonably estimate the possible range of any loss resulting from these
suits due to uncertainty about the ultimate outcome. We have spent and expect to
continue to spend a significant amount of money and management time on this
litigation. Also, if we are required to license any technology as a result of
these suits, we do not know whether we will be able to do so on commercially
acceptable terms, if at all.
WE SPEND A SUBSTANTIAL AMOUNT OF MONEY ON NEW AND UNCERTAIN BUSINESSES AND
DEMAND FOR OUR PRODUCTS AND SERVICES MAY BE INSUFFICIENT TO COVER OUR COSTS,
WHICH COULD IMPACT OUR PROFITABILITY
There is little precedent for microarray-based gene expression
database or service businesses or the use of SNP-based genetic variation
information. We and our potential customers are in the early stages of
evaluating the usefulness of the information generated by these businesses, and
market demand for this information is uncertain. Our collaborators and potential
collaborators may determine that our databases, software tools and
microarray-related services are not useful or cost-effective. Due to the nature
and price of some of the products and services we offer, only a limited number
of companies are potential collaborators for those products and services. If we
do not develop these new products and services in time to meet market demand or
if there is insufficient demand for these products and services, we may not be
able to cover our costs of developing these products and services or earn a
sufficient return on our investment.
Additional factors that may affect demand for our products and services
include:
- - the extent to which pharmaceutical and biotechnology companies conduct
these activities in-house or through industry consortia;
- - the emergence of competitors offering similar services at competitive
prices;
- - the extent to which the information in our databases is made public or is
covered by others' patents;
- - our ability to establish and enforce proprietary rights to our products;
- - regulatory developments or changes in public perceptions relating to the
use of genetic information and the diagnosis and treatment of disease based on
genetic information; and
- - technological innovations that are more advanced than the technologies
that we have developed or that are available to us.
Many of these factors are beyond our control.
OUR NEW PROGRAMS RELATING TO THE ROLE OF GENETIC VARIATION IN DISEASE AND DRUG
RESPONSE MAY NEVER GENERATE SIGNIFICANT REVENUES OR PROFITABLE OPERATIONS
We recently began to focus part of our business on developing
information-based products and services to assist pharmaceutical companies in a
new and unproven area: the identification and correlation of genetic variation
to disease and drug response. We will incur significant costs over the next
several years in expanding our research and development in this area. These
activities may never generate significant revenues or profitable operations.
This new aspect of our business will focus on SNPs, one type of
genetic variation. The role of SNPs in disease and drug response is not fully
understood, and relatively few, if any, therapeutic or diagnostic products based
on SNPs have been developed and commercialized. Among other things, demand in
this area may be adversely affected by ethical and social concerns about the
confidentiality of patient-specific genetic information and about the use of
genetic testing for diagnostic purposes.
Except for a few anecdotal examples, we have no precedent that SNPs
have any correlation to diseases or a patient's response to a particular drug or
class of drug. Identifying statistically significant correlations is
time-consuming and could involve the collection and screening of a large number
of patient samples. We do not know if the SNPs we have discovered to date are
suitable for these correlation studies. Nor do we currently have access to the
patient samples needed or technology allowing us to rapidly and cost-effectively
identify pre-determined SNPs in large numbers of patients.
Most SNPs may occur too infrequently to warrant their use in analyzing
patients' genetic variation. We may have trouble identifying SNPs that both
correlate with diseases or drug responses and occur frequently enough to justify
their use by pharmaceutical companies.
Our success will also depend upon our ability to develop, use and
enhance new and relatively unproven technologies. Our strategy of using
high-throughput mutation detection processes and sequencing to identify SNPs and
genes rapidly is unproven. Among other things, we will need to continue to
improve the throughput of our SNP-discovery technology. We may not be able to
achieve these necessary improvements, and other factors may impair our ability
to develop our SNP-related products and services in time to be competitively
available.
OUR STRATEGIC INVESTMENTS MAY RESULT IN LOSSES AND OTHER ADVERSE EFFECTS
We make strategic investments in joint ventures or businesses that
complement our business. These investments may:
- - often be made in securities lacking a public trading market or subject to
trading restrictions, either of which increases our risk and reduces the
liquidity of our investment;
- - require us to record losses and expenses related to our ownership
interest;
- - require us to record charges related to the acquisition of in-process
technologies or for the impairment in the value of the securities underlying our
investment; and
- - require us to invest greater amounts than anticipated or to devote
substantial management time to the management of research and development
relationships and joint ventures.
The market values of many of these investments fluctuate
significantly. We evaluate our long-term equity investments for impairment of
their values on a quarterly basis. Impairment could result in future charges to
our earnings. These losses and expenses may exceed the amounts that we
anticipated.
OUR SALES CYCLE IS LENGTHY AND THERE IS NO GUARANTEE THAT A SUBSCRIPTION OR
SERVICES AGREEMENT WILL RESULT
Our ability to obtain new subscribers for our databases, software
tools and microarray and other services depends upon prospective subscribers'
perceptions that our products and services can help accelerate drug discovery
efforts. Our database sales cycle is typically lengthy because we need to
educate our potential subscribers and sell the benefits of our tools and
services to a variety of constituencies within potential subscriber companies.
In addition, each database subscription and microarray services agreement
involves the negotiation of unique terms. We may expend substantial funds and
management effort with no assurance that a subscription or services agreement
will result. Actual and proposed consolidations of pharmaceutical companies have
affected the timing and progress of our sales efforts. We expect that future
proposed consolidations will have similar effects.
PATENTS AND OTHER PROPRIETARY RIGHTS PROVIDE UNCERTAIN PROTECTION OF OUR
PROPRIETARY INFORMATION AND OUR INABILITY TO PROTECT A PATENT OR OTHER
PROPRIETARY RIGHT MAY IMPACT OUR BUSINESS AND OPERATING RESULTS
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY INFORMATION, WHICH MAY
RESULT IN UNAUTHORIZED USE AND A LOSS OF REVENUE. Our business and competitive
position depend upon our ability to protect our proprietary database information
and software technology, but our strategy of obtaining and protecting
proprietary rights in pharmaceutically-relevant genes and SNPs is untested.
Despite our efforts to protect this information and technology, unauthorized
parties may attempt to obtain and use information that we regard as proprietary.
Although our database subscription agreements require our subscribers to control
access to our databases, policing unauthorized use of our databases and software
may be difficult.
We pursue a policy of having our employees, consultants and advisors
execute proprietary information and invention agreements when they begin working
for us. However, these agreements may not provide meaningful protection for our
trade secrets or other proprietary information in the event of unauthorized use
or disclosure.
Our means of protecting our proprietary rights may not be adequate and our
competitors may:
- - independently develop substantially equivalent proprietary information and
techniques;
- - otherwise gain access to our proprietary information; or
- - design around patents issued to us or our other intellectual property.
OUR PATENT APPLICATIONS MAY CONFLICT WITH OTHERS. Our current policy
is to file patent applications on what we believe to be novel full-length and
partial gene sequences obtained through our gene sequencing efforts. We have
filed U.S. patent applications in which we have claimed certain partial gene
sequences. We have also applied for patents in the U.S. and other countries
claiming full-length gene sequences associated with cells and tissues involved
in our gene sequencing program. We hold a number of issued U.S. patents on
full-length genes and one issued U.S. patent claiming multiple partial gene
sequences. A number of entities make certain gene sequences publicly available,
which may adversely affect our ability to obtain patents on those genes.
We believe that some of our patent applications claim genes that may
also be claimed in patent applications filed by others. In some or all of these
applications, a determination of priority of inventorship may need to be decided
in an interference before the United States Patent and Trademark Office.
ENFORCEMENT OF GENE PATENTS IS UNCERTAIN AND GENE PATENTS MAY BE FOUND
UNENFORCEABLE, RESULTING IN A LOSS OF COMPETITIVE BENEFIT. One of our strategies
is to obtain proprietary rights in pharmaceutically-relevant genes (including
partial gene sequences) and SNPs. While the USPTO has issued patents covering
full-length genes, partial gene sequences and SNPs, we do not know whether or
how courts may enforce those patents, if that becomes necessary. If a court
finds these types of inventions to be unpatentable, or interprets them narrowly,
the benefits of our strategy may not materialize.
WE MAY DECIDE TO ABANDON PATENT APPLICATIONS, WHICH COULD DIMINISH THE
VALUE OF OUR PATENT PORTFOLIO AND POSSIBLY OUR FUTURE REVENUES. The USPTO has
had a substantial backlog of biotechnology patent applications, particularly
those claiming gene sequences. In 1996, the USPTO issued guidelines limiting the
number of partial gene sequences that can be examined within a single patent
application. Many of our patent applications contain more partial sequences than
the maximum number allowed under these guidelines. Due to the resources needed
to comply with the guidelines, we may decide to abandon patent applications for
some of our partial gene sequences.
Because filing large numbers of patent applications and maintaining
issued patents can be very costly, we may choose not to pursue every
application. If we do not pursue patent protection for all of our full-length
and partial gene sequences, the value of our intellectual property portfolio
could be diminished. Because of the possible delay in obtaining allowance of
some of our patent applications, and the secrecy of patent applications, we do
not know if other applications having priority over ours have been filed.
WE MAY NEED TO REFILE SOME OF OUR PATENT APPLICATIONS AND THE PERIOD
OF PATENT PROTECTION HAS BEEN SHORTENED, WHICH MAY AFFECT OUR POTENTIAL REVENUES
AND PROFITS. The value of our patents depends in part on their duration. The
U.S. patent laws were amended in 1995 to change the term of patent protection
from 17 years from patent issuance to 20 years from the earliest effective
filing date of the application. Because the average time from filing to issuance
of biotechnology applications is at least one year and may be more than three
years depending on the subject matter, a 20-year patent term from the filing
date may result in substantially shorter patent protection, which may adversely
affect our rights under any patents that we obtain. We may need to refile
applications claiming large numbers of gene sequences and, in these situations,
the patent term will be measured from the date of the earliest priority
application. This would shorten our period of patent exclusivity.
INTERNATIONAL PATENT PROTECTION IS PARTICULARLY UNCERTAIN, AND
OPPOSITION PROCEEDINGS IN FOREIGN COUNTRIES MAY BE COSTLY AND DIVERT MANAGEMENT
RESOURCES. Biotechnology patent law outside the United States is even more
uncertain than in the United States and is currently undergoing review and
revision in many countries. Further, the laws of some foreign countries may not
protect our intellectual property rights to the same extent as U.S. laws. We may
participate in opposition proceedings to determine the validity of our or our
competitors' foreign patents, which could result in substantial costs and
diversion of our efforts.
WE MAY BE SUBJECT TO ADDITIONAL LITIGATION AND INFRINGEMENT CLAIMS THAT COULD BE
COSTLY AND DISRUPT OUR BUSINESS
The technology that we use to develop our products, and those that we
incorporate in our products, may be subject to claims that they infringe the
patents or proprietary rights of others. The risk of this occurring will tend to
increase as the genomics, biotechnology and software industries expand, more
patents are issued and other companies attempt to discover genes and SNPs and
engage in other genomic-related businesses.
As is typical in the genomics, biotechnology and software industries,
we have received, and we will probably receive in the future, notices from third
parties alleging patent infringement. We believe that we are not infringing the
patent rights of any such third party. Except for Affymetrix, no third party has
filed a patent lawsuit against us.
We may, however, be involved in future lawsuits alleging patent
infringement or other intellectual property rights violations. In addition,
litigation may be necessary to:
- - assert claims of infringement;
- - enforce our patents;
- - protect our trade secrets or know-how; or
- - determine the enforceability, scope and validity of the proprietary rights
of others.
We may be unsuccessful in defending or pursuing these lawsuits.
Regardless of the outcome, litigation can be very costly and can divert
management's efforts. An adverse determination may subject us to significant
liabilities or require us to seek licenses to other parties' patents or
proprietary rights. We may also be restricted or prevented from manufacturing or
selling our products. Further, we may not be able to obtain the necessary
licenses on acceptable terms, if at all.
WE MAY ENCOUNTER PROBLEMS IN MEETING CUSTOMERS' SOFTWARE NEEDS, WHICH COULD
ADVERSELY IMPACT OUR REVENUES AND THE GOODWILL OF OUR CUSTOMERS
Our databases also require software support and will need to
incorporate features determined by database collaborators. If we experience
delays or difficulties in implementing our database software or collaborator-
requested features, we may be unable to service our collaborators.
PAST ACQUISITIONS HAVE AND ANY FUTURE ACQUISITIONS THAT WE MAY MAKE COULD
ADVERSELY AFFECT OUR OPERATIONS OR FINANCIAL RESULTS
As part of our business strategy, we may acquire other assets,
technologies and businesses. We acquired Synteni in January 1998 and Hexagen in
September 1998.
These and any future acquisitions involve risks such as the following:
- - we may be exposed to unknown liabilities of acquired companies;
- - our acquisition and integration costs may be higher than we anticipated
and may cause our quarterly and annual operating results to fluctuate;
- - we may experience difficulty and expense in assimilating the operations
and personnel of the acquired businesses, disrupting our business and diverting
management's time and attention;
- - we may be unable to integrate or complete the development and application
of acquired technology;
- - we may experience difficulties in establishing and maintaining uniform
standards, controls, procedures and policies;
- - our relationships with key customers of acquired businesses may be
impaired, due to changes in management and ownership of the acquired businesses;
- - we may be unable to retain key employees of the acquired businesses;
- - we may incur amortization expenses if an acquisition results in
significant goodwill or other intangible assets; and
- - our stockholders may be diluted if we pay for the acquisition with equity
securities.
In addition, if we acquire additional businesses that are not located
near our Palo Alto, California headquarters, we may experience more difficulty
integrating and managing the acquired businesses' operations.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH, WHICH MAY IMPACT OUR ABILITY TO
OPTIMIZE OUR RESOURCES
We expect to continue to experience significant growth in the number
of our employees and the scope of our operations. This growth has placed, and
may continue to place, a significant strain on our management and operations.
Our ability to manage this growth will depend upon our ability to attract, hire
and retain skilled employees. Our success will also depend on the ability of our
officers and key employees to continue to implement and improve our operational
and other systems and to hire, train and manage our employees.
In addition, we must continue to invest in customer support resources
as the number of database collaborators and their requests for support increase.
Our database collaborators typically have worldwide operations and may require
support at multiple U.S. and foreign sites. To provide this support, we may need
to open offices in addition to our Palo Alto, California headquarters and our
offices in Fremont, California, St. Louis, Missouri and Cambridge, England,
which could result in additional burdens on our systems and resources.
WE DEPEND ON KEY EMPLOYEES IN A COMPETITIVE MARKET FOR SKILLED PERSONNEL AND THE
LOSS OF THE SERVICES OF ANY OF OUR KEY EMPLOYEES WOULD MATERIALLY AFFECT OUR
BUSINESS
We are highly dependent on the principal members of our management,
operations and scientific staff, including our executive officers. The loss of
services of these individuals may have a material adverse effect on our
business. We have not entered into any employment agreement with any of these
persons and do not maintain a key person life insurance policy on the life of
any employee.
Our future success also will depend in part on the continued service
of our executive management team, key scientific, software, bioinformatics and
management personnel and our ability to identify, hire and retain additional
personnel, including customer service, marketing and sales staff. We experience
intense competition for qualified personnel. We may not be able to continue to
attract and retain personnel necessary for the development of our business.
OUR INABILITY TO OBTAIN NECESSARY EQUIPMENT, SUPPLIES AND DATA FROM THIRD
PARTIES MAY ADVERSELY IMPACT OUR RESULTS
WE RELY ON A SMALL NUMBER OF SUPPLIERS OF GENE SEQUENCING MACHINES AND
REAGENTS REQUIRED FOR GENE SEQUENCING. Although we are evaluating alternative
gene sequencing machines, they may not be available in sufficient quantities or
at acceptable costs. In addition, if a third party claims that our use of these
machines infringes their patent rights, our use of these machines could become
more costly or could be prevented. If we are unable to obtain additional
machines or an adequate supply of reagents or other materials at commercially
reasonable rates, our ability to identify genes and SNPs would be adversely
affected.
WE RELY ON OUTSIDE SOURCES FOR TISSUE SAMPLES FROM WHICH WE ISOLATE
GENETIC MATERIAL USED IN OUR OPERATIONS. Our business could be adversely
affected if we lose access to some of these sources, or if they charged us
higher access fees or imposed tighter restrictions on our use of the information
generated from the samples.
WE CANNOT CONTROL THE PERFORMANCE OF COLLABORATORS. We may enter into
research and development relationships with corporate and academic collaborators
and others. The success of these relationships depends upon third parties'
performance of their responsibilities. Our ability to develop these
relationships is uncertain, and any established relationships may prove
unsuccessful. Our collaborators may also be pursuing alternative technologies or
developing alternative products on their own or in collaboration with others,
including our competitors.
WE RELY ON THIRD-PARTY DATA SOURCES. We rely on scientific and other
data supplied by others, including our academic collaborators and sources of
tissue samples. This data could contain errors or other defects, which could
corrupt our databases. In addition, we cannot guarantee that our data sources
acquired this information in compliance with legal requirements. If either of
these happen and become known, our business prospects could be adversely
affected.
SECURITY RISKS IN ELECTRONIC COMMERCE OR UNFAVORABLE INTERNET REGULATIONS MAY
DETER FUTURE USE OF OUR PRODUCTS AND SERVICES, WHICH COULD HARM OUR BUSINESS.
We plan to make our products available through our website on the Internet
and have recently introduced our first online product, the LifeSeq Gene-by-Gene
program. Online use of our products and services by our database collaborators
may be limited by our inability to provide secure transmissions of confidential
information over the Internet. The security measures we use to protect our
website, access to our databases, and transmissions to and from our website may
be compromised by advances in computer capabilities and new discoveries in the
field of cryptography. If our security measures are breached, our proprietary
information or confidential information about our collaborators could be
misappropriated. Also, a security breach could result in interruptions in our
operations. The security measures we adopt may not be sufficient to prevent
breaches and we may incur significant costs to protect against security breaches
or to alleviate problems caused by breaches. Further, if the security of our
website or the website of another company is breached, our collaborators may no
longer use the Internet when the transmission of confidential information is
involved. For example, recent attacks by computer hackers on major e-commerce
websites and other Internet service providers have heightened concerns regarding
the security and reliability of the Internet.
Because of the growth in electronic commerce, the United States Congress
has held hearings on whether to further regulate providers of services and
transactions in the electronic commerce market. The federal government could
enact laws, rules and regulations that affect our business and operations.
Individual states could also enact laws regulating the use of the Internet. If
enacted, these federal and state laws, rules and regulations could require us to
change our online business and operations, which could harm our business.
OUR ACTIVITIES INVOLVE HAZARDOUS MATERIALS AND MAY SUBJECT US TO COSTLY
ENVIRONMENTAL LIABILITY
Our research and development involves the controlled use of hazardous
and radioactive materials and biological waste. We are subject to federal, state
and local laws and regulations governing the use, manufacture, storage, handling
and disposal of these materials and certain waste products. Although we believe
that our safety procedures for handling and disposing of these materials comply
with legally prescribed standards, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of an
accident, we could be held liable for damages, and this liability could exceed
our resources.
We believe that we are in compliance in all material respects with
applicable environmental laws and regulations and currently do not expect to
make material additional capital expenditures for environmental control
facilities in the near term. However, we may have to incur significant costs to
comply with current or future environmental laws and regulations.
OUR REVENUES ARE DERIVED PRIMARILY FROM THE PHARMACEUTICAL AND BIOTECHNOLOGY
INDUSTRIES AND MAY FLUCTUATE SUBSTANTIALLY DUE TO REDUCTIONS AND DELAYS IN
RESEARCH AND DEVELOPMENT EXPENDITURES
We expect that our revenues in the foreseeable future will be derived
primarily from products and services provided to the pharmaceutical and
biotechnology industries as well as to the academic community. Accordingly, our
success will depend in large part upon the success of the companies within these
industries and their demand for our products and services. Our operating results
may fluctuate substantially due to reductions and delays in research and
development expenditures by companies in these industries or by the academic
community. These reductions and delays may result from factors such as:
- - changes in economic conditions;
- - consolidation in the pharmaceutical industry;
- - changes in the regulatory environment affecting health care and health
care providers;
- - pricing pressures;
- - market-driven pressures on companies to consolidate and reduce costs; and
- - other factors affecting research and development spending.
These factors are not within our control.
OUR BUSINESS COULD BE INTERRUPTED BY NATURAL DISASTERS
We conduct our sequencing and a significant portion of our other
activities at our facilities in Palo Alto, California, and conduct our
microarray-related activities at our facilities in Fremont, California. Both
locations are in a seismically active area. Although we maintain business
interruption insurance, we do not have or plan to obtain earthquake insurance. A
major catastrophe (such as an earthquake or other natural disaster) could result
in a prolonged interruption of our business.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH
FLOW
We have substantial amounts of outstanding indebtedness, primarily the
$200.0 million of convertible subordinated notes issued in February 2000. As a
result of this indebtedness, our principal and interest payment obligations have
increased substantially. There is the possibility that we may be unable to
generate cash sufficient to pay the principal of, interest on and other amounts
due in respect of our indebtedness when due.
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its
investments in short-term marketable securities and its note payable. The
Company's investment policy calls for investment in short term, low risk
instruments. As of March 31, 2000, investments in marketable securities was
$630.7 million. Due to the nature of these investments and note, if market
interest rates were to increase immediately and uniformly by 10% from levels as
of December 31, 1999, the decline in the fair value of the portfolio would not
be material.
The Company is exposed to equity price risks on the marketable portion of equity
securities included in its portfolio of investments and long-term investments,
entered into to further its business and strategic objectives. These investments
are in small capitalization stocks in the pharmaceutical/biotech industry
sector, in companies with which the Company has research and development or
licensing agreements. The Company typically does not attempt to reduce or
eliminate its market exposure on these securities. As of March 31, 2000,
long-term investments, excluding diaDexus, were $37.5 million.
The Company typically does not hedge its foreign currency exposure. Management
does not believe that the Company's exposure to foreign currency rate
fluctuations is material.
<PAGE>
PART II: OTHER INFORMATION
ITEM 1 Legal Proceedings
In January 1998, Affymetrix, Inc. ("Affymetrix") filed a lawsuit in
the United States District Court for the District of Delaware, subsequently
transferred to the United States District Court for the Northern District of
California in November 1998, alleging infringement of U.S. patent number
5,445,934 (the "'934 Patent") by both Synteni and Incyte. The complaint alleges
that the '934 Patent has been infringed by the making, using, selling,
importing, distributing or offering to sell in the U.S. high density arrays by
Synteni and Incyte and that such infringement was willful. Affymetrix seeks a
permanent injunction enjoining Synteni and Incyte from further infringement of
the '934 Patent and, in addition, seeks damages, costs and attorney's fees and
interest. Affymetrix further requests that any such damages be trebled based on
its allegation of willful infringement by Incyte and Synteni.
In September 1998, Affymetrix filed an additional lawsuit in the
United States District Court for the District of Delaware, subsequently
transferred to the United States District Court for the Northern District of
California in November 1998, alleging infringement of the U.S. patent number
5,800,992 (the "'992 Patent") and U.S. patent number 5,744,305 (the "'305
Patent") by both Synteni and Incyte. The complaint alleges that the '305 Patent
has been infringed by the making, using, selling, importing, distributing or
offering to sell in the United States high density arrays by Synteni and Incyte,
that the '992 Patent has been infringed by the use of Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling, and that such infringement was willful. Affymetrix seeks a permanent
injunction enjoining Synteni and Incyte from further infringement of the '305
and '992 Patents and, in addition, Affymetrix had sought a preliminary
injunction enjoining Incyte and Synteni from using Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling as described in the '992 Patent. Affymetrix's request for a preliminary
injunction was denied in May 1999. As a result of the assignment of the case to
a new judge, all scheduled trial and pretrial dates have been vacated. The court
is expected to set a new schedule in July 2000.
In April 1999, the Board of Patent Appeals and Interferences of United
States Patent and Trademark Office (PTO) declared interferences between pending
patent applications licensed exclusively to Incyte and the Affymetrix '305 and
'992 Patents. An interference proceeding is invoked by the PTO when more than
one patent applicant claims the same invention. The Board of Patent Appeals and
Interferences evaluates all relevant facts, including those bearing on first to
invent, validity, enablement and scope of claims, and then makes a determination
as to who, if anyone, is entitled to the patent on the disputed invention. In
September 1999, the Board of Patent Appeals and Interferences determined that
Incyte had not met its prima facie case, and ruled that the patents licensed by
Incyte and Synteni from Stanford University were not entitled to priority over
corresponding claims in the two Affymetrix patents. The Company is seeking de
novo review of the Board decisions in the United States District Court for the
Northern District of California.
Incyte and Synteni believe they have meritorious defenses and intend
to defend the suits vigorously. However, there can be no assurance that Incyte
and Synteni will be successful in the defense of these suits. At this time, the
Company cannot reasonably estimate the possible range of any loss resulting from
these suits due to uncertainty regarding the ultimate outcome. Regardless of the
outcome, this litigation has resulted and is expected to continue to result in
substantial expenses and diversion of the efforts of management and technical
personnel. Further, there can be no assurance that any license that may be
required as a result of this suit or the outcome thereof would be made available
on commercially acceptable terms, if at all.
<PAGE>
ITEM 2 Changes in Securities
(a) Not applicable
(b) Not applicable
(c) On February 4 and February 14, 2000, the Company completed the sale of
$150,000,000 and $50,000,000 aggregate principal amount of 5.5% Convertible
Subordinated Notes Due 2007 (the "Notes"). The Notes are convertible at the
option of the holder into shares of Common Stock, at any time prior to
redemption or maturity, at a conversion price of $134.839 per share (equal to a
conversion rate of 7.4163 shares per $1,000 principal amount of the Notes and
representing in the aggregate 1,483,250 shares), subject to adjustment under
certain circumstances.
The Notes were sold by the Company to Deutsche Bank Securities Inc. and Warburg
Dillon Read LLC, as initial purchasers (the "Initial Purchasers"), in a private
placement in reliance upon Section 4(2) of the Securities Act of 1933, as
amended (the "Act") and Regulation D under the Act. The aggregate offering
price of the Notes was $200,000,000 and the aggregate discount to the Initial
Purchasers was $6,000,000.
The Company has been advised that the Initial Purchasers resold $141,400,000
aggregate principal amount of the Notes to "qualified institutional buyers" in
reliance on Rule 144A under the Act and $8,600,000 aggregate principal amount of
the Notes in sales outside the United Stated to persons other than U.S. persons
in reliance on Regulation S under the Securities Act.
On February 28, 2000 the Company entered into a Stock Purchase Agreement with
each of Janus Aspen Series and Janus Investment Fund pursuant to which it issued
and sold 305,355 and 1,694,645 shares of Common Stock, respectively, for an
aggregate purchase price of $422,000,000. The Company relied on the exemption
provided by Section 4(2) of the Act and Regulation D under the Act, because the
transaction did not involve a public offering and each of Janus Aspen Series and
Janus Investment Fund represented that it was an "accredited investor" as such
term in defined by the rules of the SEC promulgated under the Act.
(d) Not applicable
ITEM 3 Defaults Upon Senior Securities
None
ITEM 4 Submission of Matters to a Vote of Security Holders
None
ITEM 5 Other Information
None
<PAGE>
ITEM 6 Exhibits and Reports on Form 8-K.
a) Exhibits
See Exhibit Index on Page 32
b) Reports on Form 8-K
The Company filed 5 reports on Form 8-K during the fiscal quarter covered by
this report, as follows:
(i) Current Report on Form 8-K, filed on February 1, 2000, reporting under
Item 5 the Company's financial information for the quarter and year ended
December 31, 1999 and announcement of the Company's proposed private offering of
convertible subordinated notes.
(ii) Current Report on Form 8-K, filed on February 17, 2000, reporting
under Item 5, the Company's announcement of the issuance of an additional $50
million of convertible subordinated noted.
(iii) Current Report on Form 8-K, filed on February 22, 2000, reporting
under Item 5, the Company's updated description of its business and risk
factors.
(iv) Current Report on Form 8-K, filed on February 24, 2000, reporting under
Item 5, the Company's announcement of the Company's issuance of 2,000,000 of its
common stock to selected institutional investors at a price of $211.00 per
share.
(v) Current Report on Form 8-K, filed on March 24, 2000, reporting under
Item 5, the June 5, 2000 date for the Company's 2000 Annual Meeting of
stockholders.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INCYTE PHARMACEUTICALS, INC.
Date: May 12, 2000 By: /s/ Roy A. Whitfield
-----------------------
Roy A. Whitfield
Chief Executive Officer
Date: May 12, 2000 By: /s/ John M. Vuko
-------------------
John M. Vuko
Chief Financial Officer
<PAGE>
INCYTE PHARMACEUTICALS, INC.
EXHIBIT INDEX
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