<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1996
REGISTRATION NO. 333-3648
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AFFYMETRIX, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 8731 77-0319159
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
3380 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051; (408) 522-6000
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
KENNETH J. NUSSBACHER, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
3380 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051; (408) 522-6000
(Name, Address Including Zip Code, and Telephone Number, Including
Area Code, of Agent For Service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
Julian N. Stern Alan K. Austin
August J. Moretti Elizabeth R. Flint
Stephen C. Ferruolo Elizabeth M. Kurr
Heller Ehrman White & McAuliffe Wilson, Sonsini, Goodrich & Rosati
525 University Avenue 650 Page Mill Road
Palo Alto, California 94301 Palo Alto, California 94304
(415) 324-7000 (415) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE FOLLOWING THE EFFECTIVENESS OF THIS REGISTRATION
STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) FEE (2)
<S> <C> <C> <C> <C>
COMMON STOCK 6,900,000 $13.00 $89,700,000 $30,932(3)
</TABLE>
(1) Includes 900,000 shares which the Underwriters will be granted the option to
purchase to cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(3) Of this amount, $25,776 was previously paid.
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- --------------------------------------------------------------------------------
<PAGE>
AFFYMETRIX, INC.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM AND HEADING
FOR S-1 REGISTRATION STATEMENT PROSPECTUS LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Outside Front Cover Page; Additional Information
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Summary; Risk Factors
4. Use of Proceeds...................................... Summary; Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page; Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Outside and Inside Front Cover Pages; Underwriting
9. Description of Securities to be Registered........... Summary; Capitalization; Description of Capital Stock
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Information with Respect to the Registrant........... Outside and Inside Front Cover Pages; Summary; Risk
Factors; Use of Proceeds; Dividend Policy;
Capitalization; Dilution; Selected Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Certain Transactions; Principal
Shareholders; Description of Capital Stock; Shares
Eligible for Future Sale; Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 3, 1996
LOGO
6,000,000 SHARES
COMMON STOCK
All of the 6,000,000 shares of Common Stock offered hereby are being sold by
Affymetrix, Inc. ("Affymetrix" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $11.00 and
$13.00 per share. See "Underwriting" for information relating to the method of
determining the initial public offering price.
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY (1)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................... $ $ $
- ---------------------------------------------------------------------------------
Total (2)..................... $ $ $
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $800,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 900,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions, and
Proceeds to Company will be $ , $ , and $ , respectively.
------------------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about , 1996.
ROBERTSON, STEPHENS & COMPANY
CS FIRST BOSTON
MONTGOMERY SECURITIES
The date of this Prospectus is , 1996
<PAGE>
Affymetrix GeneChip-TM- Technology Opportunities
- --------------------------------------------
All genomics programs are expected to be research collaborations.
All diagnostic product opportunities are in research and development
with the indicated collaborators, except for HIV, which Affymetrix
introduced as a "Research Use Only" product in April 1996.
Diagnostic use of the Company's products would be subject to FDA and
other applicable regulatory approvals, which have not been applied
for or received, and which may not be obtained for several years, if
at all.
- --------------------------------------------------------------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN
THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6,
10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
<PAGE>
Affymetrix GeneChip Technology
- -----------------------------------------
[Depictions of genes,
double helix and
probe array in cartridge]
Affymetrix GeneChip probe arrays provide the capacity to acquire, analyze, and
manage complex genetic information.
Integrated GeneChip System
<TABLE>
<S> <C> <C>
[PICTURE] [PICTURE] [PICTURE]
GeneChip Fluidics Station GeneChip Scanner GeneChip Software
Controls hybridization of the Quantitatively detects Analyzes and manages genetic
test sample to the probe hybridization of test sample information from the scanner.
array. to the probe array.
</TABLE>
<PAGE>
GeneChip Probe Array
A GeneChip probe array currently contains
from 16,000 to more than 100,000 different
DNA probes. Each probe array is packaged
in a catridge.
Probe Array Image
A GeneChip scanner image of an
HIV probe array for sequencing the
reverse transcriplase and protease
genes. Each small square represents
the quantitative hybridization
intensity of a labeled test sample to
a specific DNA probe.
[PICTURE]
[PICTURE]
GeneChip Software
GeneChip software translates the quantitative hybridization
intensities into sequence information which can also be used for
gene expression analysis and genetic mapping. The red "a" in the
Sequences window indicates a mutation in HIV causing resistance to
a class of HIV protease inhibitor drugs.
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THE PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 4
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 19
Dividend Policy........................................................... 19
Capitalization............................................................ 20
Dilution.................................................................. 21
Selected Financial Data................................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 27
Management................................................................ 49
Certain Transactions...................................................... 55
Principal Shareholders.................................................... 57
Description of Capital Stock.............................................. 59
Shares Eligible for Future Sale........................................... 61
Underwriting.............................................................. 63
Legal Matters............................................................. 64
Experts................................................................... 64
Additional Information.................................................... 64
Glossary.................................................................. 65
Index to Financial Statements............................................. F-1
</TABLE>
------------------
The Company's executive offices are located at 3380 Central Expressway,
Santa Clara, California 95051. The Company's telephone number is (408) 522-6000.
GeneChip-TM- and Affymetrix-TM- are trademarks of the Company. Tradenames
and trademarks of other companies appearing in this Prospectus are the property
of their respective holders.
3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS", AND THE FINANCIAL STATEMENTS AND NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. A GLOSSARY OF
TECHNICAL TERMS USED IN THIS PROSPECTUS APPEARS AT PAGE 64 OF THIS PROSPECTUS.
THE COMPANY
Affymetrix has developed and intends to establish its GeneChip system as the
platform of choice for acquiring, analyzing and managing complex genetic
information in order to improve the diagnosis, monitoring and treatment of
disease. The Company's system consists of disposable DNA probe arrays containing
gene sequences on a chip, instruments to process the probe arrays, and software
to analyze and manage genetic information. The Company commenced commercial
sales of the GeneChip system and an HIV probe array for research use in April
1996.
The Company manufactures its DNA probe arrays using an innovative and
proprietary process that combines photolithographic fabrication techniques from
the semicondutor industry with solid phase DNA synthesis to assemble large
amounts of genetic information on a small glass chip called a probe array. The
Company can manufacture a number of identical DNA probe arrays on a glass wafer,
which is then diced into individual probe arrays. Currently, each probe array
manufactured by the Company contains from 16,000 to more than 100,000 different
DNA probes.
Genes provide the fundamental basis for understanding human health and
disease. Increased knowledge of how genes encode the functions of living
organisms has generated a worldwide effort to identify and sequence genes of
many organisms, including the estimated 100,000 genes within the human genome.
This effort is being led by the Human Genome Project and related academic,
government and industry research projects. Once the genes and their sequences
are identified, it is anticipated that many years of additional research will be
required to understand the specific function of each gene and its role in
disease. Affymetrix believes that the GeneChip system can play an important role
in this research and its application in drug discovery and the development of
new diagnostic products. The Company intends to commercialize the GeneChip
system in two principal areas: genomics, or the study of genes and their
function, and diagnostics.
In genomics, Affymetrix intends to sell custom DNA probe arrays to
pharmaceutical and biotechnology companies through collaborative agreements. The
Company would receive revenues in the form of probe array design and development
fees, and subsequently through the sale of DNA probe arrays and instruments. In
addition, the Company may receive milestone payments and royalties from
discoveries made through the use of the DNA probe arrays. Affymetrix also
intends to use the GeneChip technology to help create and commercialize
databases containing information on the function of genes and their role in
disease. There can be no assurance that the Company will be successful in
marketing its GeneChip system for these genomics applications.
In diagnostics, Affymetrix intends to develop DNA probe arrays to analyze
genetic information from patient samples to improve the accuracy and speed of
diagnosis. The Company is pursuing diagnostic products and research applications
in infectious diseases, cancer and other areas, such as monitoring drug
metabolism. The Company intends to market its diagnostic GeneChip products
directly and through collaborative partnerships. Affymetrix believes its
GeneChip technology can also be used as a discovery tool for new diagnostic
markers to be used in conventional immunoassays. There can be no assurance that
the Company will be successful in marketing its GeneChip system for these
diagnostic applications.
The Company's first application for the GeneChip system is to help
researchers identify mutations in HIV that cause resistance to antiviral drugs,
such as AZT. The Company believes that monitoring such mutations may become an
important aspect of managing patients with AIDS. As of March 31, 1996,
Affymetrix had placed five prototype GeneChip systems for the HIV application in
academic research centers and pharmaceutical companies for research use.
An important part of the Company's strategy is to work with collaborative
partners to expand the applications of the Company's technology and to acquire
access to complementary technologies and resources such as manufacturing and
marketing. Affymetrix has two agreements with Genetics Institute, Inc. ("GI") to
apply the Company's technology to understand the function of human genes. The
Company will design, manufacture and supply custom probe arrays for use in GI's
drug discovery programs. Affymetrix also has a collaborative agreement with
Hewlett-Packard Company ("HP"), whereby HP will develop advanced instruments to
read the GeneChip probe arrays. In addition, in collaboration with HP, the
Company will develop and manufacture certain probe arrays to be marketed by HP.
Affymetrix began operations in 1991 as a division of Affymax N.V.
("Affymax"), was incorporated in California in March 1992 and began operating
independently as a wholly-owned subsidiary of Affymax in March 1993. In March
1995, Glaxo plc, now Glaxo Wellcome plc ("Glaxo"), purchased Affymax. Prior to
this offering, Glaxo indirectly owns approximately 46% of the Common Stock of
Affymetrix.
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The Company's GeneChip system and other potential products will
require significant additional development and investment. While the Company's
initial product sales for research use have not required regulatory approvals,
the Company expects that such approvals will be required for diagnostic
applications in the future. There can be no assurance that the Company will
obtain any required regulatory approvals for the GeneChip system or that the
GeneChip system will be successfully commercialized or obtain market acceptance.
Other risk factors include the Company's early stage of development,
uncertainties relating to technological approaches, history of losses and
expectation of future losses, intense competition, rapid technological change,
limited manufacturing capability and sales and marketing experience and the
Company's dependence on proprietary technology. See "Risk Factors."
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company........... 6,000,000 shares
Common Stock Outstanding after the Offering... 22,239,231 shares (1)
Use of Proceeds............................... For research and development (including product
development and core research), capital expenditures
(manufacturing scale-up, facilities and laboratory
equipment), expansion of sales and marketing, working
capital and other general corporate purposes. See "Use
of Proceeds."
Proposed Nasdaq National Market Symbol........ AFFX
</TABLE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract and grant revenue........................ $ -- $ 43 $ 1,413 $ 1,574 $ 4,625 $ 854 $ 1,416
Operating expenses:
Research and development...................... 1,576 4,106 6,566 9,483 12,420 2,274 4,177
General and administrative.................... 261 582 577 2,303 3,833 777 1,649
------- ------- ------- ------- -------- --------- ---------
Total operating expenses.................... 1,837 4,688 7,143 11,786 16,253 3,051 5,826
------- ------- ------- ------- -------- --------- ---------
Loss from operations.............................. (1,837) (4,645) (5,730) (10,212) (11,628) (2,197) (4,410)
Interest income (expense), net.................... -- (15) 138 532 881 23 489
------- ------- ------- ------- -------- --------- ---------
Net loss.......................................... $(1,837) $(4,660) $(5,592) $(9,680) $(10,747) $ (2,174) $ (3,921)
------- ------- ------- ------- -------- --------- ---------
------- ------- ------- ------- -------- --------- ---------
Pro forma net loss per share...................... $ (0.52) $ (0.55) $ (0.61) $ (0.12) $ (0.22)
------- ------- -------- --------- ---------
------- ------- -------- --------- ---------
Pro forma weighted average shares outstanding..... 10,715 17,653 17,664 17,663 17,664
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
AS
ACTUAL ADJUSTED (2)
-------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and short-term investments............... $ 34,837 $100,997
Total assets..................................................... 41,185 107,345
Long-term obligation............................................. 898 898
Deficit accumulated during development stage..................... (36,437) (36,437)
Total shareholders' equity....................................... 34,652 100,812
</TABLE>
- -------------
(1) Excludes 2,191,518 shares of Common Stock issuable upon exercise of
outstanding options under the Company's 1993 Stock Plan. Also excludes
203,881 shares issuable upon the exercise of warrants outstanding as of
March 31, 1996. See "Management -- Stock Plans" and Note 6 of Notes to
Financial Statements.
(2) As adjusted to reflect the sale of the 6,000,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$12.00 per share and the receipt of the estimated net proceeds therefrom.
See "Use of Proceeds."
UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS (I)
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION; (II) REFLECTS A
2-FOR-3 REVERSE STOCK SPLIT PRIOR TO THE EFFECTIVENESS OF THIS REGISTRATION
STATEMENT; AND (III) GIVES EFFECT TO THE CONVERSION OF ALL OUTSTANDING SHARES OF
PREFERRED STOCK INTO COMMON STOCK UPON THE CLOSING OF THIS OFFERING.
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus.
EARLY STAGE OF DEVELOPMENT
The Company is at an early stage of development. The Company has not
commercialized significant quantities of products based on its technologies. As
of March 31, 1996, the Company had placed only nine GeneChip systems, all of
which have been solely for research use and only five of which have been
purchased by customers. Substantially all of the Company's revenues have been
derived from payments from collaborative research and development agreements and
government research grants.
The Company's GeneChip system and other potential products will require
significant additional development and investment, including testing to further
validate performance and demonstrate cost effectiveness. While the Company's
initial product sales for research use have not required regulatory approval,
the Company expects that such approval will be required in the future. The
Company may need to undertake costly and time-consuming efforts to obtain this
approval. There can be no assurance that any products will be successfully
developed, be proven to be accurate and efficacious in any markets, meet
applicable regulatory standards in a timely manner or at all, be protected from
competition by others, avoid infringing the proprietary rights of others, be
manufactured in sufficient quantities or at reasonable costs, or be marketed
successfully.
The Company has experienced significant operating losses since inception and
expects these losses to continue for at least the next several years. Whether
the Company can successfully manage the transition to a commercial-scale
enterprise will depend upon a number of factors including establishing its
commercial manufacturing capability, developing its marketing capabilities,
establishing a direct sales force and entering into collaborative arrangements
to market its products. Failure to make such a transition successfully would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
UNCERTAINTIES RELATING TO TECHNOLOGICAL APPROACHES; NEED FOR ADDITIONAL RESEARCH
AND DEVELOPMENT
The Company intends to develop its GeneChip system for genomics and
diagnostics applications. The GeneChip system involves several new technologies,
including a complex chemical synthesis process necessary to create DNA probe
arrays. In addition, technicians using the GeneChip system require new technical
skills and training. There can be no assurance that technicians will not
experience difficulties with the system that would prevent or limit its use. The
instrumentation and software that comprise the GeneChip system are new and have
not been previously used in commercial applications. As the system is used, it
is possible that previously unrecognized defects will emerge. In addition, DNA
probe arrays are tested only on a random sample basis, and quality problems
could develop with the untested arrays. Further, in order for the Company to
address new applications for the GeneChip system, the Company may be required to
reduce the size of its probe arrays, increase the number of features on these
arrays, develop instruments capable of processing the information from such
probe arrays, and design software capable of managing such information. There
can be no assurance that the Company will be capable of validating or achieving
the improvements in the components of the GeneChip system necessary for its
successful commercialization. The Company's GeneChip technology will also need
to compete against well-established techniques and enhancements to such
techniques for analyzing genes and for diagnostics. There can be no assurance
that the GeneChip system will replace or compete successfully against existing
techniques and instruments. Furthermore, there can be no assurance that the
Company's GeneChip technology will be useful in providing information on the
function of genes or for the analysis of larger sequences of genes.
The development of diagnostic and therapeutic products based on the
Company's technologies will be subject to the risks of failure inherent in the
development of products based on new technologies. These risks include
possibilities that any products based on these technologies will be found to be
ineffective, unreliable or
6
<PAGE>
unsafe, or otherwise fail to receive necessary regulatory clearances; that
products will be difficult to manufacture on a large scale or will be
uneconomical to market; that proprietary rights of third parties will preclude
the Company or its collaborative partners from marketing products; or that third
parties will market superior or equivalent products. Furthermore, there can be
no assurance that the Company's research and development activities will result
in any commercially viable products. See "Business -- Technology."
UNCERTAINTY OF MARKET ACCEPTANCE
The commercial success of the Company's GeneChip system will depend upon
market acceptance by academic research centers, pharmaceutical and biotechnology
companies and reference laboratories. Market acceptance will depend on many
factors, including convincing researchers that the GeneChip system is an
attractive alternative to current technologies for the acquisition, analysis and
management of genetic information; the receipt of regulatory clearances in the
United States, Europe, Japan and elsewhere; the need for laboratories to license
other technologies, such as amplification technologies that may be required to
use the GeneChip system for certain applications; and the availability of new
proprietary markers that may be important to the diagnosis, monitoring and
treatment of disease for incorporation on the Company's probe arrays. Market
acceptance may be adversely affected by ethical concerns that may limit the use
of the GeneChip system for certain diagnostic applications or the analysis of
genetic information. In addition, potential customers will need skilled
laboratory technicians to operate the GeneChip system. Market acceptance of the
GeneChip system could also be adversely affected by limited funding available
for academic research centers and other research organizations that are the
potential customers for the GeneChip system.
Potential customers of the GeneChip system will need to acquire the
Company's fluidics station and probe array scanner in order to utilize the DNA
probe arrays. The cost of this instrumentation may deter certain potential
customers from purchasing probe arrays. The Company may be required to discount
the price of its GeneChip system in order to place the system with customers.
The failure of the Company to place sufficient quantities of the instruments for
the GeneChip system would have a material adverse effect on its ability to sell
the disposable probe arrays. There can be no assurance that academic research
centers, pharmaceutical or biotechnology companies or reference laboratories
will replace existing instrumentation and techniques with the GeneChip system.
Because of these and other factors, there can be no assurance that the Company's
products will gain market acceptance.
The Company expects that its customers will be concentrated in a small
number of academic research centers, pharmaceutical and biotechnology companies
and reference laboratories. As a result, the Company's financial performance may
depend on large orders from a limited number of customers. There are only three
major reference laboratories in the United States, two of which are associated
with large pharmaceutical companies. There can be no assurance that the Company
will be able to successfully market the GeneChip system to reference
laboratories or that the affiliation of these laboratories with pharmaceutical
companies will not adversely affect their decision to purchase GeneChip systems.
The Company's dependence on sales to a few large reference laboratories may also
strengthen the purchasing leverage of these potential customers, which could
reduce the sales price of the GeneChip system. Also, the Company believes that
the sales cycle for the GeneChip system will be lengthy due to the need to
educate potential customers about its characteristics. The failure of the
Company to gain additional customers, the loss of any customer or a significant
reduction in the level of sales to any customer would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Business Strategy" and "-- Sales and Marketing."
UNCERTAINTIES RELATED TO THE HIV PROBE ARRAY
The first commercial application of the Company's GeneChip system is an HIV
probe array designed to detect mutations in HIV, the virus that causes AIDS. The
HIV probe array provides sequence information from the reverse transcriptase and
protease genes of HIV and the system includes a fluidics station, a scanner and
related software. In April 1996, the Company introduced the HIV probe array for
research purposes only. The Company has placed only five HIV probe arrays at
customer sites to date, all in the United States. These systems have been in
operation for only a limited period of time, and their accuracy and efficacy
have not been fully demonstrated. There are other uncertainties relating to the
system, including that the Company has no prior experience in introducing a
commercial product, that technicians may encounter difficulties with the system
that would prevent
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or limit its use, and that the Company will rely on third parties to manufacture
and service its instruments. Furthermore, there can be no assurance that the
accuracy of the HIV probe array in providing sequence information from HIV will
be better than current technologies, such as gel-based sequencing techniques.
As new therapies and combinations of therapies for treating HIV are
employed, new mutations in the HIV genome may be discovered that would require
the Company to redesign its current probe array or develop new probe arrays.
Advanced therapies could be discovered that target other components of the virus
or which do not generate drug resistance. In addition, cost containment
pressures for treating HIV patients may limit the price the Company may be able
to charge potential customers for its HIV probe array. There can be no assurance
that the HIV probe array will provide useful diagnostic and monitoring
information, that it will operate without difficulties, that technicians will
have adequate training to use the system, or that the Company will not
experience manufacturing or marketing difficulties selling the HIV probe array
to academic research centers, pharmaceutical and biotechnology companies and
reference laboratories. Furthermore, there can be no assurance that the HIV
probe array will gain regulatory approval for clinical use. The Company's
product revenues in the near term are dependent upon the commercialization of
the HIV probe array. There can be no assurance that these revenues will be
realized in the near term, or at all. Failure of the Company to successfully
commercialize the HIV probe array could have a material adverse effect on the
Company's business, financial condition and results of operations, and may
adversely affect the Company's ability to commercialize any future products it
may develop. See "Business -- Business Strategy" and "-- Sales and Marketing."
HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES
The Company has incurred operating losses in each year since its inception,
including net losses of approximately $10.7 million during the year ended
December 31, 1995, and, at March 31, 1996, the Company had an accumulated
deficit of approximately $36.4 million. The Company's losses have resulted
principally from costs incurred in research and development and from general and
administrative costs associated with the Company's operations. These costs have
exceeded the Company's interest income and revenues which, to date, have been
generated principally from collaborative research and development agreements and
government research grants. The Company expects to incur substantial additional
operating losses over the next several years as a result of increases in its
expenses for research and product development, manufacturing scale-up, expanding
sales and marketing and capital expenditures. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
PROFITABILITY UNCERTAIN
The Company has experienced substantial operating losses and has never been
profitable. The Company expects that it may have to discount the price of the
GeneChip system to gain market acceptance, which could adversely affect gross
margins. The Company's future gross margins, if any, will be dependent on, among
other factors, the Company's ability to cost-effectively manufacture the
GeneChip system, product mix and the degree of price discounts required to
market its products to academic research centers, pharmaceutical and
biotechnology companies and reference laboratories. The amount of future
operating losses and time required by the Company to reach profitability, if
ever, are highly uncertain. The Company's ability to generate significant
revenues and become profitable is dependent in large part on the ability of the
Company to enter into additional collaborative arrangements and on the ability
of the Company and its collaborative partners to successfully commercialize
products developed under the collaborations. In addition, delays in receipt of
any necessary regulatory approvals by the Company or its collaborators, or
receipt of approvals by competitors, could adversely affect the successful
commercialization of the Company's technologies. There can be no assurance that
the Company will successfully commercialize any product or that the Company will
achieve product revenues or profitability. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly operating results will depend upon the volume and
timing of orders for GeneChip systems and probe arrays received and delivered
during the quarter, variations in payments under collaborative agreements,
including milestones, royalties, license fees, and other contract revenues, and
the timing of new product introductions by the Company. The Company's quarterly
operating results may also fluctuate significantly depending on other factors,
including the introduction of new products by the Company's
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competitors; regulatory actions; market acceptance of the GeneChip system and
other potential products; adoption of new technologies; manufacturing
capabilities; variations in gross margins of the Company's products;
competition; the cost, quality and availability of reagents and components; the
mix of products sold; changes in government funding; and third-party
reimbursement policies. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE
Competition in genomics and diagnostics is intense and expected to increase.
Further, the technologies for discovering genes associated with significant
diseases and approaches for commercializing those discoveries are new and
rapidly evolving.
Currently, the Company's principal competition comes from existing
technologies that are used to perform many of the same functions for which the
Company plans to market its GeneChip systems. In the diagnostic field, these
technologies are provided by established diagnostic companies, such as Abbott
Laboratories, Boehringer Mannheim GmbH, Hoffmann-LaRoche, Inc. ("Roche"),
Johnson & Johnson and SmithKline Beecham plc. These technologies include a
variety of established assays, such as immunoassays, histochemistry, flow
cytometry and culture, and newer DNA probe diagnostics to analyze certain
amounts of genetic information. In the genomics field, competitive technologies
include gel-based sequencing using instruments provided by companies such as the
Applied Biosystems division of Perkin Elmer and Pharmacia Biotech AB. In order
to compete against existing technologies, the Company will need to demonstrate
to potential customers that the GeneChip system provides improved performance
and capabilities.
The market for diagnostic products derived from gene discovery is currently
limited and will be highly competitive. Many companies are developing and
marketing DNA probe tests for genetic and other diseases. Other companies are
conducting research on new technologies for diagnostic tests based on advances
in genetic information. Established diagnostic companies could provide
significant competition to Affymetrix through the development of new products.
These companies have the strategic commitment to diagnostics, the financial and
other resources to invest in new technologies, substantial intellectual property
portfolios, substantial experience in new product development, regulatory
expertise, manufacturing capabilities and the distribution channels to deliver
products to customers. These companies also have an installed base of
instruments in several markets, including clinical and reference laboratories,
which are not compatible with the GeneChip system. In addition, these companies
have formed alliances with genomics companies which provide them access to
genetic information that may be incorporated into their diagnostic tests.
In the genomics field, future competition will likely come from existing
competitors as well as other companies seeking to develop new technologies for
sequencing and analyzing genetic information. In addition, pharmaceutical and
biotechnology companies, such as Genome Therapeutics Corporation, Human Genome
Sciences, Inc., Incyte Pharmaceuticals, Inc. ("Incyte"), Millennium
Pharmaceuticals, Inc., Myriad Genetics, Inc. and Sequana Therapeutics, Inc. have
significant needs for genomic information and may choose to develop or acquire
competing technologies to meet these needs.
Genomics and diagnostic technologies have undergone and are expected to
continue to undergo rapid and significant change. The Company's future success
will depend in large part on its ability to maintain a competitive position with
respect to these technologies. Rapid technological development by the Company or
others may result in products or technologies becoming obsolete. In addition,
products offered by the Company would be made obsolete by less expensive or more
effective tests based on other technologies or by new therapeutic or
prophylactic agents that obviate the need for diagnostic and monitoring
information. There is no assurance that the Company will be able to make the
enhancements to its technology necessary to compete successfully with newly
emerging technologies. See "Business -- Research and Development" and "--
Competition."
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DEPENDENCE UPON COLLABORATIVE PARTNERS
An important element of the Company's business strategy involves
collaborations with pharmaceutical, diagnostic and biotechnology companies that
have discovered genes and may seek to use the Company's technologies to discover
genetic mutations or develop diagnostic and therapeutic products. The Company
has significant collaborations with HP and GI.
In November 1994, the Company entered into a collaborative agreement with HP
to develop an advanced scanner for use with the GeneChip probe arrays. The HP
scanner is currently under development and, in 1997 the Company expects that HP
will be the sole source of its scanners. Accordingly, if the HP scanner does not
become available on a timely basis or fails to meet its performance and cost
specifications, it would have a material adverse effect on the Company's
business.
The Company has two agreements with GI, dated November 1994 and December
1995, relating to use of GeneChip technology to measure gene expression in order
for GI to develop new therapeutic proteins. If GI is not successful in using the
GeneChip technology or if the Company fails to maintain a satisfactory
relationship with GI, the Company could lose significant revenues and its
ability to obtain additional collaborations with other companies would be
impaired.
The Company has received a substantial portion of its revenues since
inception from its collaborative partners and intends to enter into
collaborative arrangements with other companies to apply its technology, fund
development, commercialize potential future products, and assist in obtaining
regulatory approval. There can be no assurance that any of the Company's present
or future collaborative partners will perform their obligations as expected or
will devote sufficient resources to the development, clinical testing or
marketing of the Company's potential products developed under the
collaborations. Any parallel development by a partner of alternative
technologies or components of the GeneChip system, preclusion of the Company
from entering into competitive arrangements, failure to obtain timely regulatory
approvals, premature termination of an agreement, or failure by a partner to
devote sufficient resources to the development and commercialization of the
Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's agreements with consultants and collaborators are complex.
There may be provisions within such agreements which give rise to disputes
regarding the rights and obligations of the parties. These and other possible
disagreements could lead to delays in collaborative research, development or
commercialization of certain products, or could require or result in litigation
or arbitration, which would be time-consuming and expensive, and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
There can be no assurance that the Company will be able to negotiate future
collaborative arrangements on acceptable terms, if at all, or that such
collaborations will be successful. See "Business -- Collaborative Agreements and
Grants."
NEED FOR ADDITIONAL FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL
The Company anticipates that its existing capital resources, together with
the net proceeds of this offering and interest earned thereon, will enable it to
maintain currently planned operations through at least 1998. However, this
expectation is based on the Company's current operating plan, which could change
as a result of many factors, and the Company could require additional funding
sooner than anticipated. In addition, the Company may choose to raise additional
capital due to market conditions or strategic considerations even if it has
sufficient funds for its operating plan. The Company's requirements for
additional capital will be substantial and will depend on many factors,
including payments received under existing and possible future collaborative
agreements; the availability of government research grant payments; the progress
of the Company's collaborative and independent research and development
projects; the costs of preclinical and clinical trials for the Company's
products; the prosecution, defense and enforcement of patent claims and other
intellectual property rights; and development of manufacturing, marketing and
sales capabilities. The Company has no credit facility or other committed
sources of capital. To the extent capital resources are insufficient to meet
future capital requirements, the Company will have to raise additional funds to
continue the development of its technologies. There can be no assurance that
such funds will be available on favorable terms, or at all. To the extent that
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additional capital is raised through the sale of equity or convertible debt
securities, the issuance of such securities could result in dilution to the
Company's shareholders. If adequate funds are not available, the Company may be
required to curtail operations significantly or to obtain funds through entering
into collaboration agreements on unattractive terms. The Company's inability to
raise capital would have a material effect on the Company's business, financial
condition and results of operations. See "Use of Proceeds."
ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF GENETIC PREDISPOSITION TESTING
The Company's success will depend in part upon the Company's ability to
develop genetic tests for genes discovered by the Company and others. Genetic
tests, such as certain of the Company's GeneChip tests, may be difficult to
perform and interpret and may lead to misinformation or misdiagnosis. Further,
even when a genetic test identifies the existence of a mutation in an
individual, the interpretation of the result is often limited to the
identification of a statistical probability that the tested individual will
develop the disease or condition for which the test is performed. In addition,
once available, such tests may be subject to ethical concerns or reluctance to
administer or pay for tests for conditions that are not treatable. Further, it
is possible that gene-based diagnostic tests marketed by other companies could
encounter specific difficulties, resulting in societal and governmental concerns
regarding genetic testing.
The prospect of broadly available genetic predisposition testing has raised
issues regarding the appropriate utilization and the confidentiality of
information provided by such testing. It is possible that discrimination by
insurance companies could occur through the raising of premiums by insurers to
prohibitive levels, outright cancellation of insurance or unwillingness to
provide coverage to patients shown to have a genetic predisposition to a
particular disease. In addition, employers could discriminate against employees
with a positive genetic predisposition due to the increased risk for disease
resulting in possible cost increases for health insurance and the potential for
lost employment time. Finally, governmental authorities could, for social or
other purposes, limit the use of genetic testing or prohibit testing for genetic
predisposition to certain conditions which could adversely affect the use of the
Company's products. There can be no assurance that ethical concerns about
genetic testing will not materially adversely affect market acceptance of the
Company's GeneChip system. See "Business -- Government Regulation."
LIMITED MANUFACTURING CAPABILITY; SOLE SOURCE SUPPLIERS
The Company has limited experience manufacturing products for commercial
purposes. To date, the Company has a small scale facility providing limited
quantities of probe arrays for internal and collaborative purposes and initial
sales of the GeneChip system to the research market. To achieve the production
levels of probe arrays necessary for successful commercialization of its
products, the Company will need to scale-up its manufacturing facilities and
establish automated manufacturing capabilities. The Company may also need to
comply with the current good manufacturing practices ("GMP") prescribed by the
United States Food and Drug Administration ("FDA") for sale of products in the
United States, ISO standards for sale of products in Europe, as well as other
standards prescribed by various federal, state and local regulatory agencies in
the United States and other countries. Although the Company does not currently
need to comply with GMP to manufacture probe arrays and related instrumentation
for sale for research purposes, it may need to be GMP compliant to sell these
products to clinical reference laboratories, and it will need to be compliant to
sell these products for clinical use. There can be no assurance that
manufacturing and quality control problems will not arise as the Company
attempts to scale-up its manufacturing facilities or that such scale-up can be
achieved in a timely manner or at commercially reasonable costs.
The Company's probe array manufacturing process is complex and involves a
number of technologies that have never before been combined in the manufacture
of a single product. The Company tests only selected probe arrays from each
wafer and only selected probes on each probe array. It is therefore possible
that defective probe arrays might not be identified before they are shipped. The
Company therefore relies on quality control procedures, including controls on
the manufacturing process and sample testing, to verify the correct completion
of the manufacturing process. In addition, there may be certain aspects of the
Company's manufacturing that are not fully understood and cannot be readily
replicated for commercial use. If the Company is unable to manufacture probe
arrays on a timely basis because of these or other factors, its business,
financial condition and results of operations could be adversely affected.
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As the Company's technologies evolve, new manufacturing techniques and
systems will be required. For example, it is anticipated that batch processing
systems will be needed to meet the Company's future probe array manufacturing
needs. Further, as products requiring increased density are developed,
miniaturization of the features on the arrays will be necessary, requiring new
or modified manufacturing equipment and processes. Further, the Company's
manufacturing equipment requires significant capital investment. The Company
will rely on a single manufacturing facility for its probe arrays for the
foreseeable future. This manufacturing facility is subject to natural disasters
such as earthquakes and floods. The former are of particular significance since
the manufacturing facility is located in an earthquake prone area. In the event
that its manufacturing facility were to be affected by accidental or natural
disasters, the Company would be unable to manufacture products for sale until
the facility was replaced or restored to operation.
Certain key parts of the GeneChip system, such as the probe array scanner,
the fluidics station, and certain reagents, are currently available only from a
single source or a few sources. The Company currently obtains the scanner for
its GeneChip probe arrays from Molecular Dynamics, Inc. ("Molecular Dynamics").
The Company is dependent on Molecular Dynamics for quality testing and service
of this instrument. The Company has entered into an agreement with HP to supply
a new scanner for the GeneChip system, which the Company expects to be available
for commercialization in 1997. The Company's ability to commercialize a probe
array with more features is dependent upon successful development of the HP
scanner. The Company has contracted with RELA, Inc. ("RELA"), a private company,
to supply the fluidics station that is part of the GeneChip system. The fluidics
stations of the nine GeneChip systems placed to date are prototypes manufactured
by the Company and not supplied by RELA. No assurance can be given that probe
array scanners, fluidics stations or reagents will be available in commercial
quantities at acceptable costs. If the Company is required to seek alternative
sources of supply, it could be time consuming and expensive. In addition, the
Company is dependent on its vendors to provide components of appropriate quality
and reliability and to meet applicable regulatory requirements. Consequently, in
the event that supplies from these suppliers were delayed or interrupted for any
reason, the Company's ability to develop and supply its products could be
impaired, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The GeneChip system is a complex set of instruments and includes DNA probe
arrays, which are produced in an innovative and complicated manufacturing
process. During the beta testing phase of the GeneChip system's development, the
Company and its vendors have encountered and addressed a number of technical
problems, including software failures, improper alignment of probe array wafers,
valve and tube failures in the fluidics station, sensor wiring issues and
scanner control problems. Due to the complexity and lack of operating history of
these products, the Company anticipates that additional technical problems may
occur or be discovered as more systems are placed into operation. If these
problems cannot be readily addressed, they could cause delays in shipments,
warranty expenses and damages to customer relationships, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Manufacturing."
LIMITED SALES AND MARKETING EXPERIENCE
The Company does not have a direct sales force and has only limited
experience in sales and marketing. As of March 31, 1996, the Company had placed
nine GeneChip systems, of which only five had been sold. The Company has not
placed any of its GeneChip systems outside the United States. The Company
intends to market its products to academic research centers, pharmaceutical and
biotechnology companies and reference laboratories. The Company intends to
market diagnostic tests through a direct sales force to its potential customers
for research use only. The Company intends to market the GeneChip system for
genomic applications through collaborations with pharmaceutical and
biotechnology companies. The Company anticipates a long sales cycle to market
the GeneChip system to its potential customers. The Company will be required to
enter into collaboration or distribution arrangements to commercialize its
products outside the United States. There can be no assurance that the Company
will be able to establish a direct sales force or to establish collaborative or
distribution arrangements to market its products. Failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Sales and Marketing."
UNCERTAINTIES RELATED TO GOVERNMENT FUNDING
A significant portion of the Company's products for research use are likely
to be sold to universities, government research laboratories, private
foundations and other institutions where funding is dependent upon
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grants from government agencies such as the National Institutes of Health
("NIH"). Research funding by the government, however, may be significantly
reduced under several budget proposals being discussed by the United States
Congress. Any such reduction may materially affect the ability of the Company's
prospective research customers to purchase the Company's products for research
use.
The Company has received and expects to continue to receive significant
funds under various United States Government research and technology programs.
While the programs are generally multi-year awards, they are subject to a yearly
appropriations process in the United States Congress. Proposed legislation being
debated in the United States Congress would eliminate or reduce the program
under which the Company's Advanced Technology Program ("ATP") grant is funded by
the Department of Commerce. There can be no assurance that the Company will
receive the entire $20.8 million of funding designated for it under the ATP
grant, and termination of the ATP grant could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's grants from the Departments of Commerce and Energy and the NIH
give the government certain rights to license for its own use inventions
resulting from funded work. There can be no assurance that the Company's
proprietary position will not be adversely affected should the government
exercise these rights. See "Business -- Collaborative Agreements and Grants."
UNCERTAINTIES RELATED TO THIRD-PARTY REIMBURSEMENT
The Company's ability to successfully commercialize its products may depend
on the Company's ability to obtain adequate levels of third-party reimbursement
for use of certain diagnostic tests in the United States, Europe and other
countries. Currently, availability of third-party reimbursement is limited and
uncertain for genetic tests.
In the United States, the cost of medical care is funded, in substantial
part, by government insurance programs, such as Medicare and Medicaid, and
private and corporate health insurance plans. Third-party payors may deny
reimbursement if they determine that a prescribed device or diagnostic test has
not received appropriate FDA or other governmental regulatory clearances, is not
used in accordance with cost-effective treatment methods as determined by the
payor, or is experimental, unnecessary or inappropriate. The Company's ability
to commercialize certain of its products successfully may depend on the extent
to which appropriate reimbursement levels for the costs of such products and
related treatment are obtained from government authorities, private health
insurers and other organizations, such as health maintenance organizations
("HMOs"). Third-party payors are increasingly challenging the prices charged for
medical products and services. The trend towards managed health care in the
United States and the concurrent growth of organizations such as HMOs, which
could control or significantly influence the purchase of health care services
and products, as well as legislative proposals to reform health care or reduce
government insurance programs, may all result in lower prices for certain of the
Company's products. The cost containment measures that health care providers are
instituting and the results of any health care reform could have an adverse
effect on the Company's ability to sell certain of its products and may have a
material adverse effect on the Company's business, financial condition and
results of operations.
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
The Company anticipates the manufacturing, labeling, distribution and
marketing of some or all of the Company's diagnostic products will be subject to
regulation in the United States and in certain other countries.
In the United States, the FDA regulates, as medical devices, most diagnostic
tests and IN VITRO reagents that are marketed as finished test kits or
equipment. Some clinical laboratories, however, purchase individual reagents
intended for specific analytes, and develop and prepare their own finished
diagnostic tests. Although the FDA has not generally exercised regulatory
authority over these individual reagents or the finished tests prepared from
them by the clinical laboratories. The FDA has recently proposed a rule that, if
adopted, would regulate the reagents sold to clinical laboratories as medical
devices. The proposed rule would also restrict sales of these reagents to
clinical laboratories certified under Clinical Laboratory Improvement Amendments
of 1988 ("CLIA") as high complexity testing laboratories. The Company intends to
market some diagnostic products as finished test kits or equipment and others as
individual reagents; consequently, some or all of these products will be
regulated as medical devices.
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Medical devices generally require FDA approval or clearance prior to
marketing in the United States. The process of obtaining FDA clearances or
approvals necessary to market medical devices can be time-consuming, expensive
and uncertain, and there can be no assurance that any clearance or approval
sought by the Company will be granted or that FDA review will not involve
delays, adversely affecting the marketing and sale of the Company's products.
Further, clearance or approval may place substantial restrictions on the
indications for which the product may be marketed or to whom it may be marketed.
Additionally, there can be no assurance that FDA will not request additional
data or request that the Company conduct further clinical studies.
If approval or clearance is obtained, the Company will be subject to
continuing FDA obligations. When manufacturing medical devices, the Company will
be required to adhere to regulations setting forth current GMP, which require
that the Company manufacture its products and maintain its records in a
prescribed manner with respect to manufacturing, testing and quality control
activities. In addition, among other requirements, the Company will be required
to comply with FDA requirements for labeling and promotion of its medical
devices. Further, if the Company wanted to make changes on a product after FDA
clearance or approval, including changes in indications or intended use or other
significant modifications to labeling, manufacturing or product design,
additional clearances or approvals would be required from the FDA.
Failure to obtain required regulatory approval or clearance or failure to
obtain timely approval or clearance, or the imposition of stringent labeling or
sales restrictions on the Company's products, could have a material adverse
effect on the Company. In addition, failure to comply with applicable regulatory
requirements could subject the Company to enforcement action, including product
seizures, recalls, withdrawal of clearances or approvals, restrictions on or
injunctions against marketing the Company's products, and civil and criminal
penalties, any one or more of which could have a material adverse effect on the
Company.
Medical device laws and regulations are also in effect in many countries
outside the United States. These range from comprehensive device approval
requirements for some or all of the Company's medical device products to
requests for product data or certifications. The number and scope of these
requirements are increasing. Failure to comply with applicable state and foreign
medical device laws and regulations may have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is also subject to numerous environmental and safety laws and
regulations, including those governing the use and disposal of hazardous
materials. Any violation of, and the cost of compliance with, these regulations
could adversely affect the Company's operations. See "Business -- Government
Regulation."
DEPENDENCE ON PROPRIETARY TECHNOLOGY AND UNPREDICTABILITY OF PATENT PROTECTION
As of April 15, 1996, Affymetrix had exclusive licenses from Affymax for
over 20 patents and patent applications in the United States related to its
business in the fields of clinical diagnostics and research supply. In addition,
Affymetrix is the assignee of 52 United States patent applications and one
issued patent in the United States. Many of these patents and applications have
been filed and/or issued in one or more foreign countries. Affymetrix also
relies upon those patents, copyright protection, trade secrets, know-how,
continuing technological innovation and licensing opportunities to develop and
maintain its competitive position. The Company's success will depend in part on
its ability to obtain patent protection for its products and processes, to
preserve its copyright and trade secrets and to operate without infringing the
proprietary rights of third parties.
The Company is party to various license option agreements (including
agreements with Affymax, Stanford University and the University of California)
which give it rights to use certain technologies. Failure of the Company to
maintain rights to such technology could have a material adverse effect on the
Company's business, financial condition and results of operations. For example,
inability of the Company to exercise the option for the Stanford technology
under commercially reasonable terms could have an adverse effect on the ability
of the Company to sell certain of its products.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including the Company, are generally uncertain and involve complex
legal and factual questions. There can be no assurance that any of the Company's
pending patent applications will result in issued patents, that the Company will
develop additional proprietary technologies that are patentable, that any
patents issued to the Company or its strategic partners will provide a basis for
commercially viable products or will provide the Company with any competitive
advantages or will not be challenged by third parties, or that the patents of
others will not have an
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adverse effect on the ability of the Company to do business. In addition, patent
law relating to the scope of claims in the technology fields in which the
Company operates is still evolving. The degree of future protection for the
Company's proprietary rights, therefore, is uncertain. Furthermore, there can be
no assurance that others will not independently develop similar or alternative
technologies, duplicate any of the Company's technologies, or, if patents are
issued to the Company, design around the patented technologies developed by the
Company. In addition, the Company could incur substantial costs in litigation if
it is required to defend itself in patent suits brought by third parties or if
it initiates such suits.
Others may have filed and in the future are likely to file patent
applications that are similar or identical to those of the Company. To determine
the priority of inventions, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office that could
result in substantial cost to the Company. No assurance can be given that any
such patent application will not have priority over patent applications filed by
the Company.
The commercial success of the Company also depends in part on the Company
neither infringing patents or proprietary rights of third parties nor breaching
any licenses that may relate to the Company's technologies and products. For
example, the Company, its collaborators and customers may need to acquire a
license for an amplification technology to use the GeneChip system, and there is
no assurance such a license will be available on commercially reasonable terms.
The Company is aware of third-party patents that may relate to the Company's
technology, including reagents used in probe array synthesis and in probe array
assays, probe array scanners, synthesis techniques, oligonucleotide
amplification techniques, assays, and probe arrays. There can be no assurance
that the Company will not infringe these patents, other patents or proprietary
rights of third parties. In addition, the Company has received and may in the
future receive notices claiming infringement from third parties as well as
invitations to take licenses under third party patents. Any legal action against
the Company or its collaborative partners claiming damages and seeking to enjoin
commercial activities relating to the affected products and processes could, in
addition to subjecting the Company to potential liability for damages, require
the Company or its collaborative partner to obtain a license in order to
continue to manufacture or market the affected products and processes. There can
be no assurance that the Company or its collaborative partners would prevail in
any such action or that any license (including licenses proposed by third
parties) required under any such patent would be made available on commercially
acceptable terms, if at all. There are a significant number of United States and
foreign patents and patent applications in the Company's areas of interest, and
the Company believes that there may be significant litigation in the industry
regarding patent and other intellectual property rights. If the Company becomes
involved in such litigation, it could consume a substantial portion of the
Company's managerial and financial resources, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The enactment of legislation implementing the General Agreement on Trade and
Tariffs has resulted in certain changes in United States patent laws that became
effective on June 8, 1995. Most notably, the term of patent protection for
patent applications filed on or after June 8, 1995 is no longer a period of
seventeen years from the date of grant. The new term of United States patents
will commence on the date of issuance and terminate twenty years after the
earliest effective filing date of the application. Because the time from filing
to issuance of biotechnology patent applications in the Company's area of
interest is often more than three years, a twenty-year term after the effective
date of filing may result in a substantially shortened term of the Company's
patent protection which may adversely affect the Company's patent position.
The Company also relies upon copyright and trade secret protection for its
confidential and proprietary information. There can be no assurance, however,
that such measures will provide adequate protection for the Company's trade
secrets or other proprietary information. In addition, there can be no assurance
that proprietary information will not be disclosed, that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's copyrights and trade
secrets or disclose such technology, or that the Company can meaningfully
protect its trade secrets.
The Company's academic collaborators have certain rights to publish data and
information in which the Company has rights. There is considerable pressure on
academic institutions to publish discoveries in the
15
<PAGE>
genetics and genomics fields. There can be no assurance that such publication
would not adversely affect the Company's ability to obtain patent protection for
some genes in which it may have a commercial interest. See "Business --
Intellectual Property."
ATTRACTION AND RETENTION OF KEY EMPLOYEES AND CONSULTANTS
The Company is highly dependent on the principal members of its management
and scientific staff. The loss of services of any of these persons could have a
material adverse effect on the Company's product development and
commercialization objectives. In addition, recruiting and retaining qualified
scientific personnel to perform future research and development work will be
critical to the Company's success. There can be no assurance that the Company
will be able to attract and retain such personnel.
Product development and commercialization will require additional personnel
in areas such as diagnostic testing, regulatory affairs, manufacturing and
marketing. The inability to acquire such services or to develop such expertise
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, the Company relies on its scientific advisors to assist the
Company in formulating its research and development strategy. All of the
scientific advisors are employed by employers other than the Company and have
commitments to other entities that may limit their availability to the Company.
Some of the Company's scientific advisors also consult for companies that may be
competitors of the Company. See "Business -- Scientific Advisory Board."
EXPOSURE TO PRODUCT LIABILITY CLAIMS
The Company's business exposes it to potential product liability claims that
are inherent in the testing, manufacturing, marketing and sale of human
diagnostic and therapeutic products. The Company intends to acquire clinical
liability insurance. There can be no assurance that it will be able to obtain
such insurance or general product liability insurance on acceptable terms or at
reasonable costs or that such insurance will be in sufficient amounts to provide
the Company with adequate coverage against potential liabilities. A product
liability claim or recall could have a material adverse effect on the Company's
business, financial condition and results of operations.
BROAD DISCRETION IN ALLOCATION AND USE OF PROCEEDS
Although the Company expects to use approximately $55,000,000 of the net
proceeds of this offering for research and development, including product
development and core research, manufacturing scale-up, and to expand sales and
marketing capabilities, the Company has not yet identified the specific amounts
and uses of approximately $11,000,000 (approximately 17%) of the net proceeds.
The Company's Board of Directors and management will retain broad discretion as
to the allocation of the net proceeds of the offering. See "Use of Proceeds."
CONTROL BY GLAXO, MANAGEMENT AND RELATED PERSONS
Upon completion of this offering, Glaxo will indirectly beneficially own
34.3% of the Company's outstanding Common Stock and executive officers,
directors and principal shareholders (other than Glaxo) will indirectly
beneficially own 14.3% of the Company's outstanding Common Stock. Accordingly,
Glaxo and these shareholders may be able to influence the outcome of shareholder
votes, including votes concerning the election of directors, adoption of
amendments to the Company's Articles of Incorporation and Bylaws and approval of
mergers and other significant corporate transactions. Glaxo and the Company have
executed a governance agreement that confers rights on Glaxo in certain
circumstances. See "Principal Shareholders" and "Certain Transactions."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws and
certain other contractual provisions could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, or control the Company. Such provisions could limit the
price that certain investors might be willing to pay in the future for shares of
the Company's Common Stock. Certain of these provisions allow the Company to
issue Preferred Stock with rights senior to those of the Common Stock without
any further vote or action by the shareholders, eliminate the right of
shareholders to act by written consent which could make it more difficult
16
<PAGE>
for shareholders to affect certain corporate actions. These provisions could
also have the effect of delaying or preventing a change in control of the
Company. The issuance of Preferred Stock could decrease the amount of earnings
and assets available for distribution to the holders of Common Stock or could
adversely affect the rights and powers, including voting rights, of the holders
of the Common Stock. In certain circumstances, such issuance could have the
effect of decreasing the market price of the Common Stock.
NO PRIOR TRADING MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE;
DILUTION
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market will
develop or be sustained after this offering. The initial public offering price
will be determined by negotiations among the Company and the Representatives of
the Underwriters and may not be indicative of future market prices. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The trading price of the Company's Common
Stock could be subject to significant fluctuations in response to announcements
of results of research activities, collaborative agreements, technological
innovations, or new commercial products by the Company, collaborative partners
or competitors, changes in government regulations, regulatory actions, changes
in patent laws, developments concerning proprietary rights, quarterly variations
in operating results, litigation and other events. The stock market has from
time to time experienced significant price and volume fluctuations which have
particularly affected the market prices of the stocks of technology companies,
and which may be unrelated to the operating performance of particular companies.
Further, there has been particular volatility in the market prices of securities
of biotechnology and other life sciences companies.
Purchasers of the Common Stock will incur an immediate and substantial
dilution in the net tangible book value of the Common Stock from the initial
public offering price. Additional dilution is likely to occur upon exercise of
options granted by the Company. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET PRICE
Future sales of substantial amounts of the Company's Common Stock in the
public market after this offering could adversely affect the market price of the
Common Stock. Of the 22,239,231 shares to be outstanding after the offering, the
6,000,000 shares of Common Stock offered hereby (plus any shares issued upon
exercise of the Underwriters' over-allotment option) will be freely tradeable
without restriction. Beginning 90 days after June , 1996 (the "Effective
Date"), approximately 50,100 additional shares will be eligible for sale in the
public market subject to compliance with Rule 701. In addition, beginning 90
days after the Effective Date approximately 186,140 shares subject to vested
options will be available for sale subject to compliance with Rule 701. Certain
shareholders of the Company, including the officers, directors, employees and
the affiliates of the Company are subject to contractual "lock-up" agreements
generally providing that they will not offer, sell, contract to sell or grant
any option to purchase or otherwise dispose of the shares of Common Stock of the
Company or any securities exercisable for or convertible into the Company's
Common Stock owned by them for a period of 180 days after the Effective Date
without the prior written consent of Robertson Stephens & Company. As a result
of these contractual restrictions, notwithstanding possible earlier eligibility
for sale under the provisions of Rules 144, 144(k) and 701 under the Securities
Act of 1933, as amended (the "Securities Act"), shares subject to lock-up
agreements will not be saleable until such agreements expire or are waived by
Robertson Stephens & Company. Beginning 180 days after the Effective Date,
approximately 10,411,408 additional shares will become eligible for sale subject
to the provisions of Rule 144 or Rule 701 upon the expiration of the lock-up
agreements not to sell such shares. Beginning 180 days after the Effective Date,
approximately 183,366 additional shares subject to vested options will be
available for sale subject to compliance with Rule 701 upon the expiration of
lock-up agreements not to sell such shares. Robertson, Stephens & Company may,
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. In addition, the
Company intends to register on Form S-8 under the Securities Act within 180 days
after the Effective Date shares of Common Stock issued or reserved for issuance
under the Company's 1993 Stock Plan (the "Stock Plan"), and the 1996 Nonemployee
Directors Stock Option Plan (the "Directors Plan") and such registrations will
be effective on filing. As of March 31, 1996, there were outstanding options for
the purchase of 2,191,518 shares under the Stock Plan, of which options for
158,490 shares were exercisable. No shares have been issued to date under the
Directors Plan. As of April 30, 1996, the holders of approximately 15,834,537
shares are entitled to certain registration rights with respect to such shares.
If a large
17
<PAGE>
number of such shares were registered and sold in the public market, such sales
could have an adverse effect on the market price for the Company's Common Stock.
If the Company were required to include in a Company-initiated registration the
shares held by such holders pursuant to the exercise of their registration
rights, such sales may have an adverse effect on the Company's ability to raise
needed capital. See "Management -- Stock Plans," "Description of Capital Stock
- -- Registration Rights of Certain Shareholders," "Shares Eligible for Future
Sale," and "Underwriting."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 6,000,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $12.00 per share are estimated to be approximately $66,160,000
($76,204,000 assuming the Underwriters' over-allotment option is exercised in
full), after deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company.
The Company intends to use the net proceeds from this offering to develop
new products and applications for the GeneChip system. Such products may be
developed by the Company internally or through collaborative arrangements using
the Company's existing technology and products or complementary products or
technologies acquired from third parties. While such collaborations and
acquisitions may represent a significant use of the proceeds of the offering, no
significant acquisitions are currently planned. The Company expects to use
approximately $30 million for research and development, including product
development and core research; approximately $18 million for capital
expenditures, including scale-up of manufacturing, facilities and laboratory
equipment; and approximately $7 million for expansion of sales and marketing.
The Company will use the balance of approximately $11 million (approximately
17%) of the net proceeds for working capital and other general corporate
purposes. The Company's Board of Directors and management will retain broad
discretion as to the allocation of the net proceeds of the offering.
The amounts actually expended for each purpose and the timing of such
expenditures will depend upon numerous factors, including payments received
under existing and possible future collaborative agreements; the availability of
government research grant payments; the progress of the Company's collaborative
and independent research and development projects; the costs of preclinical and
clinical trials for the Company's products; the prosecution, defense and
enforcement of patent claims and other intellectual property rights; and
development of manufacturing, marketing and sales capabilities. Pending such
uses, the Company intends to invest the net proceeds of this offering in
short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never paid dividends since its inception and does not intend
to pay any dividends in the foreseeable future. The Company currently intends to
retain any future earnings to fund the development of its business.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996, (i) on a pro forma basis to give effect to the automatic conversion of
all outstanding shares of the Company's Preferred Stock into Common Stock upon
the closing of this offering and (ii) as adjusted to reflect the receipt of the
estimated net proceeds from the sale of the 6,000,000 shares of Common Stock
offered hereby, at an assumed initial public offering price of $12.00 per share,
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company. This table should be read in
conjunction with the financial statements of the Company and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
PRO FORMA AS ADJUSTED
----------- -----------
(in thousands)
<S> <C> <C>
Noncurrent portion of capital lease obligation (1)....................................... $ 898 $ 898
Shareholders' equity:
Preferred stock; no par value, 27,500,000 shares authorized; pro forma and as adjusted,
no shares issued and outstanding...................................................... -- --
Common stock; no par value, 50,000,000 shares authorized;
pro forma 16,239,231 issued and outstanding; as adjusted,
22,239,231 issued and outstanding (2)................................................. 73,528 139,688
Notes receivable from officers......................................................... (41) (41)
Unrealized gain on available-for-sale securities....................................... 1 1
Deferred compensation.................................................................. (2,399) (2,399)
Deficit accumulated during the development stage....................................... (36,437) (36,437)
----------- -----------
Total shareholders' equity........................................................... 34,652 100,812
----------- -----------
Total capitalization............................................................... $ 35,550 $ 101,710
----------- -----------
----------- -----------
</TABLE>
- ------------
(1) See Note 5 of Notes to Financial Statements for a description of the
Company's obligation under capital lease.
(2) Excludes (i) 203,881 shares of Common Stock issuable upon exercise of
outstanding warrants at an exercise price of $8.25 per share, (ii) 2,191,518
shares issuable upon exercise of outstanding options at March 31, 1996, at a
weighted average price of $0.65 per share and (iii) 965,228 shares of Common
Stock reserved for future issuance under the Stock Plan. Also excludes
300,000 shares reserved for issuance under the Directors Plan, which was
adopted in April 1996. See "Management -- Stock Plans" and Note 6 of Notes
to Financial Statements.
20
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1996
was $34,652,000 or approximately $2.13 per share. Pro forma net tangible book
value per share represents the amount of the Company's total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding at March 31, 1996. Pro forma net tangible book value dilution per
share represents the difference between the amount per share paid by purchasers
of shares of Common Stock in the offering made hereby and the pro forma net
tangible book value per share immediately after completion of this offering.
After giving effect to the estimated net proceeds from the sale of the 6,000,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $12.00 per share, after deducting the underwriting discounts and
commissions and estimated offering expenses payable by the Company, the pro
forma net tangible book value of the Company as of March 31, 1996 would have
been $100,812,000 or approximately $4.53 per share of Common Stock. This
represents an immediate increase in net tangible book value of $2.40 per share
to existing shareholders and an immediate dilution in pro forma net tangible
book value of $7.47 per share to purchasers of Common Stock in this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price........................................ $ 12.00
Pro forma net tangible book value as of March 31, 1996............. $ 2.13
Increase attributable to new investors............................. 2.40
---------
Pro forma net tangible book value after the offering................. 4.53
---------
Dilution to new investors............................................ $ 7.47
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1996,
the number of shares of Common Stock purchased from the Company, the total cash
consideration paid and the average price per share paid by the existing
shareholders and by new investors before deducting the underwriting discounts
and commissions and estimated offering expenses payable by the Company at the
assumed initial public offering price of $12.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders................. 16,239,231 73.0% $ 70,860,000 49.6% $ 4.36
New investors......................... 6,000,000 27.0 72,000,000 50.4 12.00
------------ --------- -------------- ---------
Total............................... 22,239,231 100.0% $ 142,860,000 100.0%
------------ --------- -------------- ---------
------------ --------- -------------- ---------
</TABLE>
The foregoing table assumes no exercise of outstanding stock options or
warrants. As of March 31, 1996, there were outstanding warrants to purchase
203,881 shares of Common Stock at an exercise price of $8.25 per share and
outstanding options to purchase an aggregate of 2,191,518 shares of Common Stock
at a weighted average exercise price of $0.65 per share. To the extent that any
of these options or warrants or additional options or warrants are exercised,
there will be further dilution to new investors. See "Management -- Stock Plans"
and Note 6 of Notes to Financial Statements.
21
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data set forth below for the years ended
December 31, 1993, 1994 and 1995 and the balance sheet data as of December 31,
1994 and 1995 are derived from financial statements of the Company audited by
Ernst & Young LLP, independent auditors, which are included elsewhere in this
Prospectus. The statement of operations data for the years ended December 31,
1991 and 1992 and the balance sheet data as of December 31, 1991, 1992, and 1993
are derived from financial statements audited by Ernst & Young LLP, which are
not included in this Prospectus. The balance sheet data at March 31, 1996 and
the statement of operations data for the three months ended March 31, 1995 and
1996 and for the period from inception (January 1, 1991) to March 31, 1996 are
derived from unaudited financial statements included elsewhere in this
prospectus. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position and results of
operations for these periods. Operating results for the three months ended March
31, 1996 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1996. The Company has never declared or paid
any cash dividends on shares of its capital stock. The data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements,
related Notes thereto, and other financial information included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS ENDED INCEPTION
(JANUARY 1,
YEAR ENDED DECEMBER 31, MARCH 31, 1991) THROUGH
----------------------------------------------------- -------------------- MARCH 31,
1991 1992 1993 1994 1995 1995 1996 1996
--------- --------- --------- --------- --------- --------- --------- ---------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract and grant revenue..... $ -- $ 43 $ 1,413 $ 1,574 $ 4,625 $ 854 $ 1,416 $ 9,071
Operating expenses:
Research and development..... 1,576 4,106 6,566 9,483 12,420 2,274 4,177 38,328
General and administrative... 261 582 577 2,303 3,833 777 1,649 9,205
--------- --------- --------- --------- --------- --------- --------- -------
Total operating expenses... 1,837 4,688 7,143 11,786 16,253 3,051 5,826 47,533
--------- --------- --------- --------- --------- --------- --------- -------
Loss from operations........... (1,837) (4,645) (5,730) (10,212) (11,628) (2,197) (4,410) (38,462)
Interest income.............. -- 3 211 575 1,301 183 517 2,607
Interest expense............. -- (18) (73) (43) (420) (160) (28) (582)
--------- --------- --------- --------- --------- --------- --------- -------
Net loss....................... $ (1,837) $ (4,660) $ (5,592) $ (9,680) $ (10,747) $ (2,174) $ (3,921) $ (36,437)
--------- --------- --------- --------- --------- --------- --------- -------
--------- --------- --------- --------- --------- --------- --------- -------
Pro forma net loss per share
(1)........................... $ (0.52) $ (0.55) $ (0.61) $ (0.12) $ (0.22)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma weighted average
shares outstanding (1)........ 10,715 17,653 17,664 17,663 17,664
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.................................. $ -- $ 94 $ 20,392 $ 17,805 $ 38,883 $ 34,837
Working capital............................... 1 (320) 17,452 15,677 36,070 31,729
Total assets.................................. 1 813 22,817 19,861 44,552 41,185
Long-term obligations......................... -- 564 -- 7,135 948 898
Deficit accumulated during development
stage........................................ (1,837) (6,497) (12,089) (21,769) (32,516) (36,437)
Total shareholders' equity (net capital
deficiency).................................. 1 (181) 19,214 9,170 38,519 34,652
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing pro forma net loss
per share.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus.
OVERVIEW
Affymetrix is a development stage company which is developing GeneChip
systems and related applications and technologies for the acquisition, analysis
and management of complex genetic information. The business and operations of
Affymetrix were commenced in 1991 by Affymax and were initially conducted within
Affymax. In March 1992, Affymetrix was incorporated as a California corporation
and became a wholly-owned subsidiary of Affymax. In September 1993, Affymetrix
issued equity securities through a private financing of approximately $21
million that reduced Affymax' ownership to approximately 65%. In March 1995,
Glaxo acquired Affymax, including its then majority ownership interest in
Affymetrix. In August 1995, Affymetrix issued equity securities through a second
private financing of approximately $39 million, further reducing Affymax'
percentage ownership. Glaxo currently indirectly owns approximately 46% of
Affymetrix.
The Company has a limited operating history that, to date, has focused
primarily on the development of its technology. Based on its GeneChip technology
platform, Affymetrix is developing a portfolio of products for academic research
centers, pharmaceutical and biotechnology companies and reference laboratories.
As of March 31, 1996, the Company had placed nine of its GeneChip systems with
customers for validation, initial testing and certain research applications.
Only five of the systems have been purchased by customers, three of which were
for the HIV application. The payments received from the sale of these systems
were recorded as contract revenues pursuant to development agreements. The
Company commercially introduced its first product, the GeneChip system and the
HIV probe array for research use only, in April 1996. Failure of the Company to
successfully develop, manufacture and market additional products over the next
several years or to realize product revenues would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company has incurred operating losses in each year since its inception,
including net losses of approximately $10.7 million during the year ended
December 31, 1995, and at March 31, 1996, the Company had an accumulated deficit
of approximately $36.4 million. The Company's losses have resulted principally
from costs incurred in research and development and from general and
administrative costs associated with the Company's operations. These costs have
exceeded the Company's interest income and revenues which to date have been
generated principally from collaborative research and development agreements and
government research grants. The Company expects to incur substantial additional
operating losses over the next several years as a result of increases in its
expenses for research and product development, manufacturing and marketing
capabilities.
The Company's quarterly operating results will depend upon the volume and
timing of orders for GeneChip systems and probe arrays received and delivered
during the quarter, variations in payments under collaborative agreements,
including milestones, royalties, license fees, and other contract revenues, and
the timing of new product introductions by the Company. The Company's quarterly
operating results may also fluctuate significantly depending on other factors,
including the introduction of new products by the Company's competitors;
regulatory actions; market acceptance of the GeneChip system and other potential
products; adoption of new technologies; manufacturing capabilities; variations
in gross margins of the Company's products; competition; the cost, quality and
availability of reagents and components; the mix of products sold; changes in
government funding; and third-party reimbursement policies.
The Company expects that it may have to discount the price of the GeneChip
system to gain market acceptance, which could adversely affect gross margins.
The Company's future gross margins, if any, will be dependent on, among other
factors, the Company's ability to cost-effectively manufacture the GeneChip
system, product mix and the degree of price discounts required to market its
products to academic research centers,
23
<PAGE>
pharmaceutical companies and reference laboratories. The amount of future
operating losses and time required by the Company to reach profitability, if
ever, are highly uncertain. The Company's ability to generate significant
revenues and become profitable is dependent in large part on the ability of the
Company to enter into additional collaborative arrangements and on the ability
of the Company and its collaborative partners to successfully commercialize
products incorporating the Company's technologies. In addition, delays in
receipt of any necessary regulatory approvals by the Company or its
collaborators, or receipt of approvals by competitors, could adversely affect
the successful commercialization of the Company's technologies.
From inception through March 31, 1996, the Company has generated $11.7
million from government grants, collaborative agreements and interest income.
The Company has significant collaborative relationships with GI and HP and a
significant grant from the National Institute of Standards and Technology's
Advanced Technology Program. The Company began its collaboration with GI in
November 1994 to develop applications of the GeneChip system to the
identification of new genes and new uses of genes using expression monitoring.
Under this agreement, GI funded the Company's research to determine the
feasibility of this application of GeneChip technology and agreed to make
milestone and royalty payments. In December 1995, GI and the Company signed a
second agreement for the supply of custom probe arrays to GI in return for
up-front fees, milestone payments and royalties for products developed from use
of the probe arrays. As of March 31, 1996, the Company recognized contract
revenues totaling $1.3 million from GI. As a result of entering into an
agreement with Incyte in April 1996, Affymetrix is required to refund 30% of the
development funding received from GI and future funding from GI will be
proportionally reduced. The Company recorded an accrued liability for this
refund and believes that the reduction of future funding from GI will not have a
material effect on its operations. See "Business -- Collaborative Agreements and
Grants."
The Company entered into a collaboration with HP in November 1994 to
develop, manufacture and supply a more advanced scanner for use with the
Company's GeneChip probe arrays and for the Company, in collaboration with HP,
to develop, manufacture and supply certain probe arrays to HP for sale in
certain markets. As of March 31, 1996, the Company recognized contract revenues
totaling $1.5 million from HP.
In October 1994, the Company and Molecular Dynamics received a five-year
grant from the National Institute of Standards and Technology's Advanced
Technology Program in the amount of $31.5 million to develop a miniaturized DNA
diagnostic system based on the Company's technology. Pursuant to the grant,
$20.8 million is designated for the Company and its subcontractors and $10.7
million is designated for Molecular Dynamics and its subcontractors, subject to
the requirements of each company to match such funding. As of March 31, 1996,
the Company's revenues from this grant totaled $1.6 million.
Collaborations will continue to be an important element of the Company's
business strategy. There can be no assurance that the Company will be able to
maintain existing collaborations, enter into future collaborations to develop
applications of its GeneChip system or that any such collaborative arrangements
will be successful.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995
Contract and grant revenue increased by 66% for the three months ended March
31, 1996 to $1.4 million from $854,000 for the three months ended March 31,
1995. The increase was principally due to the sale of one GeneChip system
pursuant to a development agreement in the first quarter of 1996, as compared to
none in the first quarter of 1995, and an increase in ATP grant revenue.
Research and development expenses increased to $4.2 million for the three
months ended March 31, 1996 compared to $2.3 million for the three months ended
March 31, 1995. The increase was attributable primarily to the hiring of
additional research and development personnel, costs incurred to further product
development in anticipation of Affymetrix' initial product launch, and purchase
of research supplies. Affymetrix anticipates that research and development
expenses will continue to increase in future periods.
General and administrative expenses increased to $1.6 million for the three
months ended March 31, 1996 compared to $777,000 for the three months ended
March 31, 1995. The increase in general and administrative expenses was
primarily due to the hiring of additional management personnel and to legal and
other professional
24
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fees in connection with the overall scale-up of operations and business
development efforts. General and administrative expenses are expected to
increase significantly in future periods to support Affymetrix' operations and
business development efforts.
Interest income was $517,000 for the three months ended March 31, 1996
compared to $183,000 for the three months ended March 31, 1995. The increase was
primarily attributable to the investment of the net proceeds from the private
placement of Series B Senior Convertible Preferred Stock in August 1995 and
higher interest rates. Interest expense for the three months ended March 31,
1996 decreased by $132,000 as compared to the three months ended March 31, 1995,
primarily due to the conversion of a $6.0 million subordinated convertible
promissory note held by Affymax in August 1995.
YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
Contract and grant revenue increased to $4.6 million for 1995 from $1.6
million for 1994 as a result primarily of its ATP grant and revenue earned from
collaborative agreements with GI and HP.
Research and development expenses increased to $12.4 million for 1995
compared to $9.5 million for 1994. The increase in research and development
expenses was attributable primarily to the hiring of additional research and
development personnel, costs incurred to establish a pilot manufacturing
facility, and increased purchases of research supplies.
General and administrative expenses increased to $3.8 million for 1995
compared to $2.3 million for 1994. The increase in general and administrative
expenses was attributable primarily to the hiring of additional management
personnel and the incurring of legal and other professional fees in connection
with the overall scale-up of operations and business development efforts.
Interest income was $1.3 million for 1995 compared to $575,000 for 1994. The
increase resulted from the investment of net proceeds from Affymetrix' private
placement of Series B Senior Convertible Preferred Stock in August 1995.
Interest expense resulted from lease financing for manufacturing equipment and
facilities.
YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1993
Contract and grant revenue increased to $1.6 million for 1994 from $1.4
million for 1993 as a result of additional funding from government grants.
Research and development expenses increased to $9.5 million for 1994
compared to $6.6 million for 1993. The increase in research and development
expenses was attributable primarily to the hiring of additional research and
development personnel and increased purchases of research supplies.
General and administrative expenses increased to $2.3 million for 1994
compared to $577,000 for 1993. The increase in general and administrative
expenses was attributable primarily to the hiring of additional administrative
personnel and the incurring of legal and other professional fees in connection
with the expansion of Affymetrix' operations.
Interest income was $575,000 for 1994 compared to $211,000 for 1993. The
increase resulted from the investment of net proceeds from the private placement
of Series A Senior Convertible Preferred Stock in September 1993.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Affymetrix has financed its operations primarily through
private placements of equity securities, contributions from Affymax, government
grants, collaborative agreements, issuances of convertible debt, equipment lease
financings and interest income. Through March 31, 1996, Affymetrix has received
net cash of $71.4 million from financing activities, consisting principally of
approximately $53.6 million from issuances of common and preferred stock, $10.6
million from contribution by Affymax, $7.1 million from issuances of notes
payable, and $1.3 million in lease financing. As of March 31, 1996, $1.1 million
of notes have been repaid, $6.0 million of convertible notes held by Affymax
have been converted into shares of Series B Senior Convertible Preferred Stock,
and $10.6 million of contributions from Affymax have been converted to shares of
Series 1 Subordinated Convertible Preferred Stock.
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Affymetrix' net cash used in operating activities was $3.1 million for the
three months ended March 31, 1996, $10.2 million for 1995, $7.4 million for 1994
and $3.2 million for 1993. The cash used for operations was primarily to fund
research and development expenses and manufacturing start-up costs related to
the introduction and support of Affymetrix' products. Affymetrix has also
received collaborative research and government grant funding totaling $11.0
million, of which $9.1 million has been recognized as contract and grant
revenue.
The cash used by the Company in investing activities since its inception
through March 31, 1996 totaled $41.0 million. Capital expenditures totaled
$701,000 for the three months ended March 31, 1996. Capital expenditures totaled
$2.3 million in 1995, $1.2 million in 1994 and $1.5 million in 1993. Purchases
of available-for-sale securities were $2.0 million for the three months ended
March 31, 1996 and $38.4 million, $3.0 million, and $14.0 million for 1995,
1994, and 1993, respectively. Proceeds from sales and maturities of
available-for-sale securities were $3.6 million for the three months ended March
31, 1996 and $14.0 million and $5.3 million for 1995 and 1994, respectively.
There were no sales or maturities in 1993.
As of March 31, 1996, Affymetrix had cash, cash equivalents, and short-term
investments of $34.8 million. The Company anticipates that these existing
capital resources, together with the net proceeds of this offering and interest
earned thereon, will enable it to maintain currently planned operations through
at least 1998. However, this expectation is based on the Company's current
operating plan, which could change and the Company could require additional
funding sooner than anticipated. In addition, the Company may choose to raise
additional capital due to market conditions or strategic considerations even if
it continues to have sufficient funds for its operating plan. The Company's
requirements for additional capital will be substantial and will depend on many
factors, including payments received under existing and possible collaborative
agreements; the availability of government research grant payments; the progress
of the Company's collaborative and independent research and development
projects; the costs of preclinical and clinical trials for the Company's
products; the prosecution, defense and enforcement of patent claims and other
intellectual property rights; and the development of manufacturing, sales and
marketing capabilities. The Company has no credit facility or other committed
sources of capital. To the extent capital resources, including payments from
existing and possible future collaborative agreements and grants, together with
the net proceeds of the offering are insufficient to meet future capital
requirements, the Company will have to raise additional funds to continue the
development of its technologies. There can be no assurance that such funds will
be available on favorable terms, or at all. To the extent that additional
capital is raised through the sale of equity or convertible debt securities, the
issuance of such securities could result in dilution to the Company's
shareholders. If adequate funds are not available, the Company may be required
to curtail operations significantly or to obtain funds through entering into
collaborative agreements on unattractive terms. The Company's inability to raise
capital would have a material adverse effect on the Company's business,
financial condition and results of operations.
Affymetrix expects its capital requirements to increase over the next
several years as it expands its facilities and acquires scientific equipment to
support manufacturing and research and development efforts. The Company's
expenditure requirements will depend on numerous factors, including the progress
of its research and development programs; the development of commercial scale
manufacturing capabilities; its ability to maintain existing collaborative
arrangements and establish and maintain new collaborative arrangements; the
costs involved in preparing, filing, prosecuting, defending and enforcing
intellectual property rights; the effectiveness of product commercialization
activities and arrangements and other factors.
At December 31, 1995, Affymetrix' net operating loss carryforwards and
research tax credit carryforwards for income tax purposes were approximately
$22.0 million and $1.2 million, respectively. Because Affymetrix has experienced
ownership changes, future utilization of these carryforwards may be subject to
certain limitations as defined by Internal Revenue Code and similar state
regulations. If not utilized,the carryforwards expire at various dates beginning
in 2008 through 2010. As a result of the annual limitation, a portion of these
carryforwards may expire before ultimately becoming available to reduce income
tax liabilities.
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BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
Affymetrix has developed and intends to establish its GeneChip system as the
platform of choice for acquiring, analyzing and managing complex genetic
information in order to improve the diagnosis, monitoring and treatment of
disease. The Company's system consists of disposable DNA probe arrays containing
gene sequences on a chip, instruments to process the probe arrays, and software
to analyze and manage genetic information. The Company commenced commercial
sales of the GeneChip system and a HIV probe array for research use in April
1996.
BACKGROUND
GENES AND DISEASE
Genes provide the fundamental basis for understanding human health and
disease. Genomics, the study of genes and their functions, will lead to new
approaches to diagnose, monitor and treat disease.
The entire genetic content of an organism is known as its genome. DNA is the
molecule that makes up genes and encodes the genetic instructions. These
instructions are embodied in the sequence of the four nucleotide bases (A, C, G
and T) that are the chemical building blocks of DNA. The DNA molecule is a
combination of two strands held together by chemical bonds between nucleotide
bases on one strand and the other strand. Only certain pairs of nucleotide bases
can form these bonds: A always pairs with T, and C always pairs with G. Such
paired DNA strands are said to be complementary. When two DNA strands are
complementary, they bind together to form a double helix in a process called
hybridization. In humans, the DNA molecule contains 3 billion nucleotide pairs
organized into 46 chromosomes. The human genome is believed to contain over
100,000 genes.
Cells carry out their normal biological functions through the genetic
instructions encoded in their DNA. This process, known as gene expression,
involves several steps. In the first step, nucleotides in a gene are copied into
a related nucleic acid molecule called messenger RNA. Messenger RNA instructs
the cell to produce proteins. Proteins are molecules that regulate or perform
most of the physiological functions of the body. Because the order of
nucleotides in each gene is different, each gene directs the production of a
different protein. Each organism's characteristics are thus ultimately
determined by proteins encoded in its DNA. This process is illustrated below.
[DIAGRAM]
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The diversity of living organisms results from variability in their genomes.
Variability stems from differences in the sequences of genes and from
differences in gene expression. Changes in the sequences of normal genes may be
introduced by environmental or other factors, such as errors in replication of
genes. These changes are known as polymorphisms, and the affected genes can be
passed from generation to generation. In some cases, polymorphisms have no
effect on the organism. However, in other cases, polymorphisms can result in
altered function of the protein encoded by the gene. Such polymorphisms are
called mutations. Mutations in single genes have been associated with diseases
such as cystic fibrosis, and mutations in multiple genes have been associated
with diseases such as cancer and cardiovascular disease. Similarly, it has
recently been discovered that polymorphisms in the genome of HIV, the virus that
causes AIDS, enable that virus to develop resistance to antiviral drugs,
resulting in disease progression and ultimately death. In order to understand
how mutations in particular genes cause disease, scientists must compare genes
from healthy and diseased people. These efforts are laborious and time
consuming, requiring the repeated sequencing of genes from a large number of
people.
The genes expressed, as well as the order and level of their expression,
determine differences among cell types in an organism. Although most cells
contain an organism's full set of genes, only a small fraction of this set is
expressed in each cell. The expression of the wrong or defective genes, or the
expression of too much or too little of genes normally expressed, causes
disease. Such abnormalities in gene expression have been associated with human
diseases, including many types of cancer. The role of gene expression in disease
requires an understanding of how genes interact to cause disease and how
external stimuli, such as drugs, cause variations in gene expression.
THE ROLE OF GENOMICS IN UNDERSTANDING DISEASE
Increased knowledge of how DNA molecules encode the functions of living
organisms has generated a worldwide effort to identify and sequence genes of
many organisms, including the estimated 100,000 genes within the human genome.
This effort is being led by the Human Genome Project and related academic,
government and industry research projects. Once the genes and their nucleotide
sequences are identified, it is anticipated that many years of additional
research will be required to understand the specific function of each gene and
its role in disease. This research, commonly referred to as genomics, may lead
to new opportunities in drug discovery and diagnostics.
The general processes by which researchers are attempting to discover genes
fall into two principal categories: genetic mapping and high-throughput
sequencing. Once a gene has been identified, either through mapping or
high-throughput sequencing, researchers must understand the function of the gene
and how variability in the gene leads to disease. Many diseases are caused by
either changes in the sequence of the gene or by changes in the expression of
the gene. Understanding the role of a gene in disease requires either
quantitative gene expression monitoring or large scale polymorphism screening.
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[CHART]
THE CHART ABOVE ILLUSTRATES TECHNIQUES USED TO
IDENTIFY GENES AND UNDERSTAND THEIR FUNCTIONS, WHICH
CAN LEAD TO THE DEVELOPMENT OF NEW DIAGNOSTIC AND
THERAPEUTIC OPPORTUNITIES.
GENETIC MAPPING. Researchers use genetic mapping to identify the gene or
genes causing an observable and well-characterized disease or genetic disorder.
The gene mapping process is extensive and typically begins by assembling tissue
samples and histories from families where the disease of interest is prevalent.
Researchers then attempt to locate the position of the gene responsible for the
disease using a technique called linkage analysis. This technique relies on the
identification of genes using DNA sequences called markers, whose specific
locations are known among the three billion base pairs of the human genome. By
comparing the patterns of markers in generations of healthy and diseased people,
researchers can link genes to markers and thereby determine that a particular
marker is located near the gene responsible for the disease. By using more
markers, genes can be more precisely mapped. Since many major diseases, such as
diabetes and atherosclerosis, are believed to be caused by the interplay of
numerous genes, it is often necessary to try to map several genes
simultaneously. This mapping process requires extensive efforts and significant
computational capabilities. It is expected that increasing the speed and
accuracy of genetic mapping and improving the ability to analyze information
from thousands of different markers may accelerate the identification of disease
genes.
HIGH-THROUGHPUT SEQUENCING. High-throughput sequencing involves first
identifying genes and subsequently determining their function and possible role
in disease. When a gene is expressed in a particular cell, its DNA is copied
into messenger RNA. In this process, sequences that do not code for an expressed
gene are removed. Thus, messenger RNA contains only expressed gene sequences.
Using high-throughput sequencing methods, DNA copies of the messenger RNA can be
sequenced and thereby reveal the sequence of a gene. Corporate, academic and
government efforts have been successful in identifying a substantial number of
the 100,000 genes in the human genome using such techniques.
GENE EXPRESSION MONITORING. By monitoring the expression of a large number
of genes, researchers seek to correlate changes in expression patterns with a
particular disease. The effectiveness of monitoring gene
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expression is a function of the number of genes that can be monitored
simultaneously, the sensitivity (ability to measure low levels of gene
expression) and the ability of the method used to provide qualitative
information. Relative levels of gene expression are currently monitored
primarily through an intensive process of sequencing many copies of genes.
Scientists believe that the development of technologies that can quantitatively
monitor thousands of genes simultaneously will increase the effectiveness of
gene expression monitoring as a tool for understanding the roles of genes in
disease.
POLYMORPHISM SCREENING. Using polymorphism screening, researchers seek to
correlate variability in the sequence of genes with a specific disease. By
sequencing a gene of interest from a large number of healthy and diseased
persons, researchers are able to statistically correlate specific gene mutations
with the disease. Currently, the polymorphism screening process is done using
gel-based sequencing. A typical polymorphism screening project might require
sequencing 10 genes of 5,000 nucleotide bases each in up to 1,000 patients, or a
total of 50 million bases, to understand the role of these 10 genes in one
disease. Using high-throughput sequencing techniques, even at a cost of cents
per base, such projects are expensive and time consuming. It is expected that
new technologies will be needed to effectively screen the more than 100,000
human genes for polymorphisms that correlate with many known diseases.
OPPORTUNITIES IN DIAGNOSTICS AND THERAPEUTICS
Current diagnostic tests can monitor the physiological effects of disease,
detect infectious organisms by growing them in culture, or use specific markers,
such as proteins, known to be associated with disease. Diagnostic tests rely on
a patient sample of tissue, blood, or urine, and detect the physiological
effect, the infectious organism or the marker, in the sample. For example,
immunoassays detect and measure specific proteins already known to be associated
with a disease using antibodies generated against those proteins. However,
protein markers are not available or are not useful for diagnosing many
diseases. Diagnostic tests that monitor physiological effects are also limited
because different diseases can cause the same effect. For example, an elevated
white blood cell count can be caused by appendicitis, an acute infection or
leukemia.
Most infectious diseases are viral, bacterial or fungal. Diagnosis of
bacterial and fungal infections is generally achieved by growing a culture,
which may take several days. Even after the infectious organism is identified,
further analysis may be required to determine which antibiotics, if any, may be
effective in treating the disease. In the case of many viruses, diagnosis
depends on immunoassay tests that detect antibodies to the virus. However, these
tests provide no information as to whether the virus is resistant to drug
therapy or if the infection is active or latent.
Recent advances in gene-based diagnostic tests using DNA probes, DNA
amplification techniques and sequencing technologies have begun to address these
shortcomings by directly examining the genes associated with a given disease
rather than relying on physiological parameters or antibodies. For example,
amplification of specific genes from an infectious organism eliminates the need
to grow that organism in culture.
However, current techniques for gathering genetic information for diagnosis
and monitoring of disease have limitations. For example, gel-based sequencing
techniques used in some approaches are time-consuming, require skilled
operators, and can analyze only limited lengths of contiguous DNA sequences in a
given run. Gene-based diagnosis often requires rapid turnaround and examination
of noncontiguous DNA sequences. As a result, new techniques and tools are being
developed to improve the diagnosis, monitoring and treatment of disease.
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Using genetic mapping and high-throughput sequencing, scientists have been
successful in discovering many genes. Technological improvements that increase
the speed and decrease the cost of gene expression monitoring and polymorphism
screening will improve the ability of researchers to understand the function of
these genes and their role in disease. Such knowledge may assist in the
development of therapeutics with greater efficacy and fewer side effects, as
well as diagnostic products with greater sensitivity and accuracy.
BUSINESS STRATEGY
Affymetrix' objective is to establish the GeneChip system as the platform of
choice for acquiring, analyzing and managing complex genetic information in
order to improve the diagnosis, monitoring and treatment of disease. The
Company's GeneChip system consists of disposable DNA probe arrays containing
gene sequences on a chip, instruments to process the probe arrays, and software
to analyze and manage genetic information from the probe arrays. The Company
intends to commercialize the GeneChip system in two principal areas: genomics
and diagnostics.
GENOMICS
- ESTABLISH GENECHIP TECHNOLOGY AS A PLATFORM FOR GENOMICS RESEARCH. The
Company intends to develop the GeneChip system for use in several
applications where Affymetrix believes it has substantial advantages over
conventional tools used for DNA sequence analysis in the identification of
genes and their role in disease. Initially, four such applications have
been identified: gene discovery, gene mapping, gene expression monitoring
and polymorphism screening, all of which require analyzing and processing
large amounts of genetic information.
- COMMERCIALIZE CUSTOM PROBE ARRAYS THROUGH CORPORATE PARTNERSHIPS. The
Company intends to sell custom probe arrays to pharmaceutical and
biotechnology companies through collaborative agreements. The Company will
seek to receive revenues through design and development fees, milestone
payments and sales of DNA probe arrays and instruments to the
collaborative partner. If the collaborative partner is successful in
discovering products through the use of the GeneChip technology, the
Company would also seek to receive royalties from the sale of such
products.
- PARTICIPATE IN THE COLLECTION AND APPLICATION OF GENETIC INFORMATION.
Affymetrix intends to use the DNA sequence analysis capabilities of the
GeneChip technology to measure gene expression in order to create
databases containing information on the function of genes and their role
in disease. Affymetrix anticipates that such databases will be developed
and commercialized through partnerships with pharmaceutical and
biotechnology companies.
DIAGNOSTICS
- IMPROVE ACCURACY AND SPEED OF DIAGNOSIS. Affymetrix intends to develop DNA
probe arrays to obtain genetic information from patient samples so that
specific diseases can be rapidly diagnosed. Furthermore, such probe arrays
will be designed to simultaneously collect additional relevant
information, including drug resistance data.
- ESTABLISH DIRECT SALES EFFORTS AND PARTNERSHIPS. Affymetrix intends to
initially market its GeneChip products, for research use only, directly to
academic research centers and reference laboratories that conduct the
majority of gene-based diagnostic tests. In addition, the Company will
seek to partner with, or license technology to, established diagnostic
companies which could develop, seek regulatory approval, and commercialize
probe arrays for broader clinical use.
- DISCOVER NOVEL DIAGNOSTIC MARKERS. The Company intends to use information
from the Human Genome Project and related efforts to identify genes
associated with particular diseases and use the proteins encoded by these
genes in new diagnostic tests. The Company will seek to partner with
established diagnostic companies by providing these novel protein markers
for development and commercialization as conventional immunoassays.
There can be no assurance that the Company will be successful in
implementing its strategy or marketing its GeneChip system for these genomics
and diagnostic applications. The Company's GeneChip system and
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other potential products will require significant additional development and
investment, including testing to further validate performance and demonstrate
cost effectiveness. While the Company's initial product sales for research use
have not required regulatory approvals, the Company expects that such approvals
will be required for diagnostic applications in the future. The Company may need
to undertake costly and time-consuming efforts to obtain required approvals.
There can be no assurance that any products will be successfully developed, be
proven to be accurate and efficacious in any markets, meet applicable regulatory
standards in a timely manner or at all, be protected from competition by others,
avoid infringing the proprietary rights of others, be manufactured in sufficient
quantities or at reasonable costs, or be marketed successfully.
TECHNOLOGY
Affymetrix' probe array technology and systems integrate semiconductor
fabrication techniques, molecular biology, solid phase chemistry, software and
robotics. The Company's GeneChip system consists of four integrated parts:
disposable DNA probe arrays containing genetic information on a chip housed in a
cartridge, a fluidics station for introducing the test sample to the probe
arrays, a scanner to read the data from the probe arrays, and software to
control the instruments, analyze and manage the genetic information. The
GeneChip system is designed for use by pharmaceutical and biotechnology
companies, academic research centers and reference laboratories. The price of
the Company's GeneChip system, excluding probe arrays, is approximately
$120,000. The Company's HIV probe arrays, currently being sold commercially for
research use, are priced at $45 per array, with two arrays (one for each strand
of DNA) presently used per test.
DNA PROBE ARRAYS. The Company produces its DNA probe arrays using a process
based on semiconductor photolithographic fabrication techniques, which enables
it to assemble vast amounts of genetic information on a small glass chip called
a probe array. The genetic information is contained in sequences of DNA probes
that are built on the probe array. This process uses technology initially
developed at Affymax and exclusively licensed to the Company for selected
applications. The Company believes that this technology enables the efficient
use of a large number of DNA probes to analyze DNA or RNA sequences in a test
sample.
ILLUSTRATION OF THE LIGHT DIRECTED PROBE ARRAY SYNTHESIS PROCESS
[DIAGRAM]
The Company uses photolithography to synthesize large numbers of DNA
sequences simultaneously in specific locations on a glass chip. Photolithography
is a technique which uses light to induce chemical reactions that create
exposure patterns on the glass chip. The process begins by coating the chip with
light-sensitive chemical compounds (defined as "protecting" groups) that prevent
chemical coupling. Lithographic masks, which consist of predetermined patterns
that either block or transmit light, are used to selectively illuminate the
glass surface of the chip. Only those areas exposed to light are deprotected and
thus activated for chemical coupling through removal of the light-sensitive
protecting groups. The entire surface is then flooded with a
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solution containing the first in a series of DNA building blocks (A, C, G or T).
Coupling only occurs in those regions which have been deprotected through
illumination. The new DNA building block also bears a light-sensitive protecting
group so that the cycle can be repeated. This process of exposure to light and
subsequent chemical coupling can be repeated on the same chip in order to
generate an array of DNA sequences. The intricate illumination patterns allow
the Company to build arrays of many diverse DNA sequences in a small area. The
Company can manufacture a large number of identical DNA probe arrays on a large
glass wafer, which is then diced into single probe arrays.
Each probe array contains thousands of "features." Each feature contains
millions of copies of the same single-stranded DNA sequence, or probe. The
patterns of photolithographic masks and the order of DNA building blocks used in
the synthesis process dictate the sequence of the probes in each feature on the
chip surface. The number of synthesis cycles determines the length of the DNA
probes in each feature.
[DIAGRAM]
The Company's GeneChip technology enables it to effectively synthesize a
large number of DNA sequences, which would not be possible with existing
technologies. Unlike conventional synthesis, which generally uses a linear
process to create compounds, the Company's synthesis technology is
combinatorial, in that the number of compounds synthesized grows exponentially
with the number of cycles in the synthesis. For example, in a 40 cycle process,
Affymetrix has produced a probe array with over one million features, each
containing a unique DNA sequence. This process would take over ten million
cycles using standard DNA synthesis techniques.
The function of each single-stranded probe on the GeneChip probe array is to
bind to its complementary single strand of DNA or RNA from the patient sample.
Each feature on the GeneChip probe array contains identical copies of a single
strand of DNA. The nucleic acid to be tested is isolated from a sample, such as
blood or biopsy tissue, and fluorescently labeled by one of several standard
biochemical methods. The test sample is then washed over the probe array surface
and the labeled test sample binds, or hybridizes, to the complementary probes if
they are present in the probe array. When scanned by the laser in the GeneChip
scanner, the hybridized test sample generates a fluorescent signal. The presence
and sequence of the nucleic acid sample can be determined by detecting these
signals since the sequence and position of each complementary DNA probe on the
probe array are known. The Company's currently manufactured probe arrays contain
from 16,000 to more than 100,000 features.
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INSTRUMENTATION. The fluidics station controls the introduction of the test
sample to the probe array and the hybridization process. A technician places the
test sample in a small container in the fluidics station, which introduces the
test sample into the cartridge containing the DNA probe array. The technician
uses a computer to control the delivery of reagents and the timing and
temperature required for hybridization of the test sample to the probe array.
The process concludes with a reagent wash that leaves only the hybridized test
sample bound to the probe array. The fluidics station can process four probe
arrays simultaneously, typically taking less than one hour to process these
arrays.
After completion of hybridization on the fluidics station, the technician
places the cartridge in the scanner which reads the probe array. The GeneChip
scanner consists of a laser, high resolution optics, robotics to position and
scan the cartridge, a fluorescence detector and an interface to a personal
computer. The label on the test sample emits fluorescent signals when excited by
the light from the laser. The intensity of the fluorescent signal is recorded by
the scanner and stored in the computer. The current scanner can read 1.28X1.28
centimeter probe arrays with up to 64,000 features. An advanced scanner is being
developed to read 1.28X1.28 centimeter probe arrays with up to 400,000 features.
However, there can be no assurance that this scanner will be successfully
developed or commercialized.
SOFTWARE. The GeneChip product software is supplied as part of the
integrated system and runs on a Windows platform. The fluorescence intensity
data captured from the scanner are used in conjunction with computer files
containing the sequence and location of all the probes on the probe array to
determine the nucleotide sequence of the test sample. For the HIV GeneChip
product, the analysis takes less than 90 seconds for one probe array and the
resulting sequence is displayed on the computer. Customized software enables the
technician to rapidly identify polymorphisms in the test sample and to compare
genetic sequences across test samples.
GENOMICS APPLICATION AREAS
Affymetrix is applying the GeneChip technology to create a platform for
genomics and pharmaceutical research. Genomics applications include gene
discovery, genetic mapping, expression monitoring and polymorphism screening.
GENE DISCOVERY. The discovery of genes may be an important means to
understand disease and to design new therapies. A large number of the genes
identified to date have been classified into families based on common sequences
within these genes. One approach to gene discovery uses these common sequences
to search for and identify previously unknown members of these gene families. To
facilitate this approach, the Company designs DNA probe arrays containing a
large number of probes for both common and variable regions of known genes.
Using this technology, samples containing DNA are screened against the probe
arrays, and, for genes that are already known, both the variable and common
regions are detected from the sample. For previously unknown genes, only the
common regions are detected, thus identifying a new gene.
The Company believes that this approach to gene discovery may accelerate the
rate of new gene identification. In November 1994, Affymetrix established a
collaboration with GI to apply the GeneChip technology to the discovery of new
genes and uses of genes in selected gene areas. As part of this collaboration,
GI and the Company have undertaken a three-year research project whereby GI
provides research funding. In addition, Affymetrix supplies custom probe arrays
to GI for specified fees and may receive milestone payments and royalties.
GENETIC MAPPING. Genetic mapping is an important method for linking
diseases to particular genes. Over the last five years, over 60 genes have been
linked to known diseases by this method. However, the current technologies for
mapping genes are slow and labor intensive. This problem is exacerbated when
looking at complex diseases such as diabetes, asthma, and cardiovascular disease
which are believed to be associated with multiple genes. Using genetic mapping,
researchers attempt to find disease genes by using markers. The correlation
between markers in diseased and healthy people enables researchers to link such
genes to a particular disease state. Research to identify markers is currently
being conducted by various academic and scientific groups to improve genetic
mapping techniques. The Company has established a collaboration with the
Whitehead Institute for Biomedical Research at the Massachusetts Institute of
Technology ("MIT") to design probe arrays with new markers identified by
Whitehead scientists. The Company intends to develop mapping
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probe arrays based upon publicly available markers as well as custom probe
arrays based upon proprietary markers. The Company intends to market these
arrays to pharmaceutical and biotechnology companies for conducting genetic
mapping. There can be no assurance that these arrays will be successfully
developed or marketed to these or other customers.
EXPRESSION MONITORING. Currently, large amounts of genetic sequence
information are being generated, through the Human Genome Project and related
efforts, yet relatively little is understood about the function of most genes.
Affymetrix believes that monitoring gene expression is fundamental for
understanding the function of genes and their role in disease. To facilitate the
monitoring of gene expression, the Company designs probe arrays with DNA probes
that are complementary to a sequence within a gene of interest. By providing
sequence information, these probe arrays may enable researchers to identify the
particular gene and quantitatively measure its level of expression compared to
other genes of interest in the test sample. By synthesizing specific probes for
multiple genes on a single probe array, the Company also enables researchers to
quickly, quantitatively and simultaneously monitor the expression of a large
number of genes of interest. By monitoring the expression of such genes at
different times, researchers can use the probe arrays to understand gene
expression and how it is related to disease progression. The Company believes
that such information will be an important tool in the development of new
therapeutics.
Under its collaboration with GI established in November 1994, the Company is
receiving research funding to develop probe arrays for gene expression
monitoring. The Company will also design, manufacture, and supply custom probe
arrays for GI pursuant to a second agreement executed in December 1995. Multiple
custom DNA probe arrays will be designed by the Company to monitor the
expression patterns of approximately 15,000 genes to be specified by GI. GI
retains all rights to discovered genes and their uses. Affymetrix will supply
custom probe arrays for specified fees and may receive milestone payments and
royalties on certain therapeutic products based on the discovered genes. In
April 1996, the Company also entered into an agreement with Incyte to explore
the potential use of DNA probe arrays in the area of gene expression.
POLYMORPHISM SCREENING. As the identity of genes in the human genome is
determined, the need to understand the significance of the variability of
nucleotide sequences in these genes increases. Researchers must determine the
normal sequence of the gene, which mutations exist and how these mutations
correlate with a disease. This requires the sequencing of samples from a large
number of affected and unaffected individuals. Using sequencing strategies
developed for the HIV probe array, Affymetrix believes that GeneChip probe
arrays could significantly reduce the cost and time of polymorphism screening,
which is currently done through more labor intensive gel-based sequencing
techniques. In May 1996, the Company entered into an agreement with Glaxo to
design, test and supply probe arrays to demonstrate use of the arrays in
detecting polymorphisms in specific genes. Glaxo and Affymetrix will design and
test a probe array containing several genes specified by Glaxo. If successfully
developed, Affymetrix will supply Glaxo's requirements of such probe arrays for
research purposes.
There can be no assurance that the Company's collaborative partners will
perform their obligations as expected or will devote sufficient resources to the
development, testing or marketing of the Company's potential products developed
under the collaborations. Further, there can be no assurance that any products
for genomics applications will be successfully developed, be proven to be
accurate and efficacious in any markets, be protected from competition by
others, avoid infringing the proprietary rights of others, be manufactured in
sufficient quantities or at reasonable costs, or be marketed successfully.
DIAGNOSTIC PRODUCTS AND RESEARCH APPLICATIONS
Affymetrix intends to use the GeneChip platform in conjunction with public
and private gene databases to discover and develop diagnostic products. The
Company is pursuing diagnostic products and research applications in infectious
diseases, cancer and other areas, including drug metabolism.
INFECTIOUS DISEASES. The Company believes its GeneChip technology may
enable it to develop tests which, by sequencing large amounts of genetic
information and quantitatively measuring levels of gene expression, can provide
information that could improve treatments for many infectious diseases.
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Industry sources estimate that in North America and Europe approximately 1.5
million persons are infected with HIV and that approximately 100,000 persons are
diagnosed with AIDS annually. Many HIV symptomatic patients receive antiviral
treatment with reverse transcriptase inhibitors, such as AZT, or protease
inhibitors, both of which block proteins required for the virus to replicate.
The HIV genome encodes the reverse transcriptase and protease gene proteins
within approximately 1,400 bases (or approximately 15%) of the viral genome.
Mutations in the viral genome result from errors in replication. Some of these
mutations confer resistance to the antiviral drugs being administered to the
patient. It is believed that the identity of nucleotides in the reverse
transcriptase and protease genes will be essential in order to monitor a
patient's drug resistance profile.
Affymetrix has developed the GeneChip system with an HIV probe array as its
first product for commercialization. The Company believes this GeneChip system
will enable researchers to identify the mutations associated with drug
resistance in HIV infected patients and allow researchers to identify new
mutations. The HIV probe array contains DNA probes in approximately 20,000
features that represent sequences of the reverse transcriptase and protease
genes of the virus. These features can identify mutations at any of the sites in
the genes that have been associated with drug resistance. The Company expects to
initially market the HIV product for research use in identifying the correlation
between mutations in the virus and drug resistance. The Company believes that
monitoring drug resistance related mutations during therapy may become a
valuable aspect of patient management. Affymetrix has placed five GeneChip
systems for the HIV application in academic research and pharmaceutical
companies for evaluation and validation. The Company commenced commercial sales
of the GeneChip system and HIV probe array for research use only in April 1996.
The Company will rely on third parties to manufacture and service its
instruments. The Company has no prior experience in introducing a commercial
product. There can be no assurance that technicians will not experience
difficulties with the system that would prevent or limit its use. In addition,
there can be no assurance that the efficiency and accuracy of the HIV probe
array in providing sequence information from HIV will be better than current
technologies, such as gel-based sequencing.
The Company intends to develop additional diagnostic products in the
infectious disease area that could determine complex drug resistance and gene
identification information. The Company is evaluating the development of
additional GeneChip probe tests for bacterial, viral and fungal infections, such
as tuberculosis and cytomegalovirus (CMV). The Company intends to seek
collaborators to participate in the funding, development and marketing of these
tests.
CANCER. In the United States, approximately 1.1 million new cases of cancer
are diagnosed annually and the incidence of cancer deaths is approximately
520,000 individuals each year. Colorectal, breast, prostate and lung cancer
account for approximately half of all diagnoses.
The p53 gene encodes a protein whose normal function is to control cell
replication. However, mutations in the p53 gene can result in the loss of this
function and are known to contribute to the aggressive growth of some types of
cancer, including colorectal, breast and bladder cancers. Mutations have been
observed to date at more than 400 distinct sites in the p53 gene sequence.
Currently available diagnostic tests include IN VITRO assays that use antibodies
to detect the accumulation of p53 molecules in cells but cannot directly detect
mutations in the p53 gene. Gel-based sequencing methods are impractical because
mutations can occur over a large area of the genome, requiring many gels to be
processed to sequence the entire gene. As a result, these methods are unable to
predict the rate of cancer progression. Understanding the rate of progression is
often necessary to determine whether to treat the cancer with chemotherapy,
radiation or surgery.
The Company is currently developing a GeneChip p53 probe array that contains
DNA probes to detect known mutation sites, as well as to sequence areas of the
p53 gene where other mutations may occur but have currently not been identified.
Initially, the Company intends to market these p53 probe arrays to academic
research centers and reference laboratories to study the p53 gene. The Company
also intends to seek regulatory approval to use the p53 probe array for clinical
use to assist in monitoring cancer progression and improving patient therapy.
The Company is currently evaluating other genes associated with cancer for
potential product development. There can be no assurance that the p53 probe
array or other cancer products will be developed, receive regulatory approvals
or be successfully commercialized.
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OTHER APPLICATIONS. The Company is developing its GeneChip technology to
address other applications in pharmaceutical research, such as monitoring drug
metabolism.
Monitoring drug metabolism is an essential component in drug development.
Drug metabolism determines how quickly or slowly a drug is eliminated or
rendered inactive and whether any of the drug is processed into a toxic
compound. Genetic differences among patients are an important factor in drug
metabolism. Variations in drug metabolism are important to the development of
new drugs because these variations determine how patients will react to drugs
and which drugs will have relatively uniform effects across a broad population.
Certain of the genes coding for metabolic enzymes have been identified and
sequenced by researchers. Patients who have mutations in these genes are poor
metabolizers of drugs and may suffer from excessive drug accumulation and severe
toxicity from standard drug doses.
Affymetrix is collaborating with HP to develop a GeneChip probe array with
probes containing the gene sequence of mutations in two genes coding for
metabolic enzymes. Mutations in these two genes have been associated with
patients who are poor metabolizers of numerous drugs. HP will have worldwide
marketing rights for the probe arrays in the nonclinical market, which are to be
manufactured and supplied by the Company. The Company is entitled to royalties
and revenues, if any, from the supply of these probe arrays to HP. There can be
no assurance that these DNA probe arrays will be developed or commercialized or
will result in revenues to the Company.
NEW DIAGNOSTIC MARKERS. As genes are discovered through the Human Genome
Project and related efforts, the Company believes that additional correlations
will be found between genes and disease. Affymetrix believes that by using probe
arrays to monitor the levels of expression of many genes in parallel, it will be
able to identify proteins encoded by these genes that can serve as new markers
for conventional immunoassays. The Company intends to collaborate with
diagnostic companies to incorporate such protein markers into established
immunoassay formats. There can be no assurance that the Company will be able to
identify any new markers, negotiate such collaborative agreements on acceptable
terms, if at all, or that such collaborations will be successful.
There can be no assurance that any products for diagnostic applications will
be successfully developed, be proven to be accurate and efficacious in any
markets, meet applicable regulatory standards in a timely manner or at all, be
protected from competition by others, avoid infringing the proprietary rights of
others, be manufactured in sufficient quantities or at reasonable costs, or be
marketed successfully.
MANUFACTURING
The Company's strategy is to manufacture its disposable DNA probe arrays
in-house and contract with third-party suppliers to manufacture the fluidics
station and scanner for its GeneChip system.
The Company is currently manufacturing limited quantities of probe arrays
for internal and collaborative purposes and for initial product sales for
research use. The Company's probe array manufacturing process involves wafer
preparation, probe synthesis, dicing of synthesized wafers into chips, assembly
of chips into cartridges, and quality control. Glass wafers are prepared for
synthesis through the application of chemical coatings. DNA probes are
synthesized on the wafers using the Company's proprietary photolithographic
process. The completed wafers are then diced to yield individual probe arrays,
which are assembled into disposable cartridges and packaged for shipment. The
Company's probe array synthesis, dicing and assembly processes currently use
robotics and the Company's manufacturing process is partially automated. The
Company intends to further automate the manufacturing process. There can be no
assurance that manufacturing and quality control problems will not arise as the
Company attempts to scale-up its manufacturing facilities or that such scale-up
can be acheived in a timely manner or at commercially reasonable costs.
Affymetrix has developed software programs that automatically design
photolithographic masks used in probe array manufacturing and control the probe
array manufacturing lines.
The Company relies on outside vendors to manufacture its fluidics stations
and scanners. The Company has a supply agreement with Molecular Dynamics for its
current scanner, which can read up to 64,000 features per
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1.28X1.28 centimeter probe array. The Company's HIV probe array currently has
20,000 features on a 1.28X1.28 centimeter probe array and may be used with the
Molecular Dynamics scanner. The Company expects to purchase scanners from
Molecular Dynamics through the end of 1996.
As part of the Company's collaboration with HP, HP is developing a higher
resolution scanner. The HP scanner is designed to read probe arrays with up to
400,000 features per 1.28X1.28 centimeter probe array. The Company expects that
the HP scanner will be commercially available for use with the Company's probe
arrays in 1997.
The fluidics stations currently in the field are prototype versions that
were manufactured by the Company. The Company has entered into an agreement with
RELA, a private company, for the supply of fluidics stations. Pursuant to the
Company's supply agreement with RELA, the Company must provide a six-month
rolling forecast of its purchase requirements for fluidics stations and is
obligated to make certain minimum purchases, at prices that vary depending on
the volume ordered.
There can be no assurance that the HP scanner will be developed
successfully. Further, no assurance can be given that probe array scanners,
fluidics stations or reagents will be available in commercial quantities at
acceptable costs. If the Company is required to seek alternative sources of
supply, it could be time consuming and expensive. In addition, the Company is
dependent on its vendors to provide components of appropriate quality and
reliability and to meet applicable regulatory requirements. Consequently, in the
event that supplies from these suppliers were delayed or interrupted for any
reason, the Company's ability to develop and supply its products could be
impaired, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The GeneChip system is a complex set of instruments and includes DNA probe
arrays, which are produced in an innovative and complicated manufacturing
process. During the beta testing phase of the GeneChip system's development, the
Company and its vendors have encountered and satisfactorily addressed a number
of technical problems, including software failures, improper alignment of probe
array wafers, valve and tube failures in the fluidics station, sensor wiring
issues and scanner control problems. Due to the complexity and lack of operating
history of these products, the Company anticipates that additional technical
problems may occur or be discovered as more systems are placed into operation.
If these problems cannot be readily addressed, they could cause delays in
shipments, warranty expenses and damages to customer relationships, which would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Although the Company does not currently need to comply with GMP to
manufacture probe arrays and related instrumentation for sale for research
purposes, it may need to be GMP compliant to sell these products to clinical
reference laboratories and it will need to be compliant to sell these products
for clinical use. There can be no assurance that manufacturing and quality
control problems will not arise as the Company attempts to scale-up its
manufacturing facilities or that such scale-up can be achieved in a timely
manner or at a commercially reasonable cost.
SALES AND MARKETING
The Company intends to market the GeneChip system for diagnostic
applications through direct sales efforts and collaborative arrangements with
corporate partners and distributors. The Company intends to market the GeneChip
system for genomics applications through collaborations with corporate partners.
The Company's near term strategy is to commercialize the GeneChip system for
research use only. The Company's longer term strategy is to seek regulatory
approval for and to commercialize GeneChip systems as diagnostic tests for
clinical use. To date, the Company has placed nine systems for research use in
the United States. Five of these systems are for HIV applications.
The Company believes that the primary market for diagnostic applications in
the United States will be academic research centers, pharmaceutical and
biotechnology companies and reference laboratories. The Company intends to
establish a direct sales force to market to these potential customers for
research use. The Company believes that academic research centers could use the
GeneChip system in their disease related research. Affymetrix believes
pharmaceutical companies could use the GeneChip system to study genetic
variations in patients participating in clinical trials of new drugs. Currently,
there are three major reference laboratory companies in the United States, two
of which are associated with large pharmaceutical companies.
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These reference laboratories are specialized laboratories at multiple locations
that conduct complex testing for the diagnosis and monitoring of disease and
clinical trials and testing for pharmaceutical and biotechnology companies. The
Company believes that each of these reference laboratories could be a customer
for the GeneChip system and may require multiple systems at each location
depending on the volume and complexity of the tests.
The Company believes that the primary international customers for diagnostic
applications of its GeneChip system will be academic research centers,
pharmaceutical and biotechnology companies, and independent testing
laboratories. The Company initially intends to market to these customers through
collaborative partners. To date, the Company has not placed any of its GeneChip
systems outside the United States.
Affymetrix believes that the primary customers for genomics applications of
its GeneChip system will be pharmaceutical and biotechnology companies that
would use the GeneChip system in the discovery of new therapeutics. Affymetrix
intends to market to these customers directly and to form non-exclusive
contracts for the design, manufacture and supply of custom GeneChip probe
arrays. Affymetrix currently has a small internal technical support group to
service its GeneChip system, which the Company intends to expand as necessary.
The Company believes that it will need to develop a larger technical support
infrastructure to service these collaborations.
Under the Company's collaboration with HP, HP has worldwide rights to market
GeneChip systems in specified nonclinical markets. Affymetrix has the right to
market the system in the clinical diagnostic market, subject to HP's option to
certain rights in selected clinical markets.
Market acceptance will depend on many factors, including convincing
researchers the GeneChip system is an attractive alternative to current
technologies for the acquisition, analysis and management of genetic
information; the receipt of regulatory clearances in the United States, Europe,
Japan and elsewhere; the need for laboratories to license other technologies,
such as amplification technologies that may be required to use the GeneChip
system for certain applications; and the availability of new proprietary markers
that may be important to the diagnosis, monitoring and treatment of disease for
incorporation on the Company's probe arrays. Market acceptance may be adversely
affected by ethical concerns that may limit the use of the GeneChip system for
certain diagnostic applications or the analysis of genetic information. In
addition, potential customers will need skilled laboratory technicians to
operate the GeneChip system. Market acceptance of the GeneChip system could also
be adversely affected by limited funding available for academic research centers
and other research centers that are the potential customers for the GeneChip
system. The Company anticipates a long sales cycle to market the GeneChip system
to its potential customers. There can be no assurance that the Company will be
able to establish a direct sales force or to establish collaborative or
distribution arrangements to market its products. Failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations.
RESEARCH AND DEVELOPMENT
The Company believes that substantial investment in research and development
is essential to obtaining a competitive position in the genetic information and
diagnostics markets. Affymetrix focuses on three types of research and
development: applied research, including diagnostic product research and
discovery; core technology development, including manufacturing process
refinement, new instrumentation design, and novel chemical synthesis; and basic
research to explore and expand the potential uses of DNA probe arrays and to
discover new technologies.
APPLIED RESEARCH. Affymetrix has several diagnostic research projects in
three major diagnostic fields: infectious disease, cancer and other diseases. In
the infectious disease area, the Company is evaluating probe array applications
for several infectious organisms, such as tuberculosis and CMV. The Company's
research in cancer is focused on monitoring mutations associated with cancer
progression and the discovery of diagnostic markers for cancers such as breast
and colorectal cancers. The Company has a collaboration with Dr. Francis Collins
at the NIH for the development of probe arrays directed to the detection of
certain mutations believed to be associated with the development of breast
cancer.
Other research efforts at Affymetrix are currently focused on developing
probe arrays for the diagnosis of genetic diseases and certain other disorders.
Affymetrix has conducted a feasibility study funded by Roche to
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develop a probe array to detect mutations causing cystic fibrosis. Affymetrix
also intends to initiate research programs based on known markers, such as HLA,
for determining compatibility for tissue transplants. The Company intends to
initiate research programs to discover novel markers for prevalent chronic human
diseases, such as cardiovascular disease, osteoporosis and arthritis.
CORE TECHNOLOGY DEVELOPMENT. The Company conducts research in several
areas, including novel and improved synthesis chemistries, manufacturing
processes, new manufacturing instrumentation, and enhancements in the design of
fluidics stations and scanners. A significant research effort is dedicated to
designing data analysis software to extract information from DNA probe arrays.
BASIC RESEARCH. Affymetrix' basic research efforts are focused on expanding
the applications of the GeneChip system and discovering related new
technologies. These efforts are focused on improving sensitivity, increasing
capacity and conducting more complex assays.
The Company's research and development expenses for the years ended December
31, 1995, 1994 and 1993, were $12.4 million, $9.5 million and $6.6 million
respectively. Research and development expenses for the three-month period ended
March 31, 1996 and 1995 were $4.2 million and $2.3 million, respectively.
Genomics and diagnostic technologies have undergone and are expected to
continue to undergo rapid and significant change. Rapid technological
development by the Company or others may result in products or technologies
becoming obsolete. In addition, any products offered by the Company would be
made obsolete by less expensive or more effective tests based on other
technologies or by new therapeutic or prophylactic agents that obviate the need
for diagnostic and monitoring information. There is no assurance that the
Company will be able to make the enhancements to its technology necessary to
compete successfully with newly emerging technologies.
COLLABORATIVE AGREEMENTS AND GRANTS
The Company's strategy regarding collaborative agreements is to expand the
applications of the Company's technology and to acquire access to complementary
technologies and resources, such as manufacturing and marketing, from its
collaborative partners. Accordingly, the Company's agreements emphasize
preserving the Company's rights to technological improvements and future
business opportunities rather than large up-front fees or sizeable commitments
of research funding from its partners.
GENETICS INSTITUTE, INC.
In November 1994, the Company entered into a collaboration with GI to
develop and apply new technologies for understanding the functions of human
genes. Under the agreement, GI provides research funding to the Company for the
development of DNA probe arrays used in DNA sequence analysis to enable GI to
discover new genes and uses for genes and to rapidly screen for the expression
of specified genes in both normal and diseased tissues.
The initial term of the research collaboration with GI is three years. In
the event that the specified technical milestones are achieved prior to such
time, GI and the Company may either conclude the collaboration or agree to
continue the collaboration with additional milestones for the remainder of the
three years. The agreement provides that if the Company enters into similar
agreements for gene expression with other third parties, it may be required to
refund a portion of the development funding received from GI and future funding
may be proportionately reduced. As a result of the agreement entered into with
Incyte in April 1996, the Company expects to refund a portion of such funding to
GI in 1996. In addition, either party has the right to terminate the
collaboration for lack of feasibility or if the parties cannot reach agreement
on certain matters, in which event the Company could be obligated to refund up
to 50% of the funding paid by GI.
Until five years from the end of the research collaboration, Affymetrix has
agreed to supply custom probe arrays to GI for gene discovery and gene
expression research in certain designated fields in return for specified
payments. In addition, upon the achievement of technical milestones, GI pays
Affymetrix milestone payments. Until November 1999, the Company cannot develop
probe arrays duplicating specific characteristics of those developed for GI.
Thereafter, the Company can sell such probe arrays, provided that they do not
contain proprietary sequences or other confidential information belonging to GI.
GI will have all rights to therapeutic
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compounds discovered through the use of DNA probes provided by the Company, and
the Company will receive royalties on certain such therapeutic compounds. The
Company retains all rights to enhancements to the GeneChip system technology
developed in the collaboration.
In December 1995, the Company and GI expanded their relationship by entering
into a supply agreement in the field of genomics under which the Company will
manufacture and supply additional custom probe arrays based on specific genes
identified and selected by GI. Unlike the 1994 agreement with GI, this agreement
does not provide research funding to the Company. Pursuant to the agreement, GI
is obligated to purchase and the Company is obligated to supply certain minimum
quantities of the custom probe arrays developed for GI until the later of 2001
or four years after development of specified probe arrays. The Company will
receive fees for the design and delivery of the custom probe arrays, as well as
certain milestone payments and royalties on most therapeutic compounds if
developed by GI using these probe arrays. GI has exclusive rights to specific
probe arrays supplied by the Company.
As of March 31, 1996, the Company had received a total of $1.8 million from
GI, a portion of which is subject to refund.
HEWLETT-PACKARD COMPANY
In November 1994, the Company entered into a collaborative agreement with HP
to combine the Company's GeneChip technology and HP's measurement and instrument
capabilities to develop and manufacture a more advanced scanner for use with
GeneChip probe arrays.
Pursuant to the agreement, the Company will develop and manufacture probe
arrays and HP will develop and manufacture instruments to read the arrays. Each
of the parties is obligated to supply the components of the system developed by
it to the other party. Under certain circumstances, if either party ceases to
supply its component, the other party could obtain the manufacturing rights to
such component.
The agreement also specifies marketing rights outside of the clinical market
in certain non-clinical fields. HP has primary rights to market the GeneChip
system to the bioanalytical market, and the Company has primary rights to market
the GeneChip system in the biomedical research market. The Company has rights to
market the system for clinical use, subject to HP's option to certain rights in
selected clinical markets. The Company also has reserved rights to supply custom
probe arrays for collaborations in the genomics field.
As of March 31, 1996, the Company had received a total of $3.0 million from
HP under this collaboration, consisting of research funding, license fees and
option payments. The Company is also entitled to receive certain milestone
payments and royalties on HP's sales of the GeneChip system and HP is entitled
to receive royalties on any systems sold by the Company. The collaboration is
for a five-year term and is renewable for consecutive three-year terms
thereafter, subject to either party's right to terminate on six months notice.
Pursuant to the agreement, the Company, in collaboration with HP, will
manufacture and supply a limited number of custom probe array designs for HP in
the nonclinical field. HP also has a one-year option, to sponsor the development
of custom probe arrays in certain specified fields and to obtain exclusive
rights to such probe arrays. In the event that HP exercises such option, the
Company will be required to develop the probe arrays on a timely basis. If the
Company fails to provide the requested probe arrays, it will be required to
grant HP rights to develop and manufacture such probe arrays, subject to the
payment of established royalty rates to the Company.
ADVANCED TECHNOLOGY PROGRAM (UNITED STATES DEPARTMENT OF COMMERCE)
In October 1994, the Company and Molecular Dynamics were awarded a $31.5
million five-year grant to develop novel point-of-care diagnostic systems under
the National Institute of Standards and Technology's Advanced Technology
Program. Pursuant to the grant, $20.8 million is designated for the Company and
its subcontractors and $10.7 million for Molecular Dynamics and its
subcontractors subject to the requirement of each company to match such funding.
The grant specifies the development of an advanced miniaturized nucleic acid
diagnostic device intended to reduce the costs and increase the speed and
reliability of DNA diagnostic tests. The device would be used in point-of-care
settings, such as hospitals, clinics and doctors' offices. The research
agreements between the Company and its subcontractors under the ATP grant (the
University of
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California, Stanford University and the University of Washington) require that
the universities assign the rights to any project inventions made by them to the
Company subject to specified royalty payments. The ATP agreement provides that
the Company and Molecular Dynamics retain rights in their respective fields to
intellectual property developed as part of the project.
The ATP grant is administered by the United States Department of Commerce.
As of March 31, 1996, the Company had received $1.4 million under the ATP grant.
The grant is subject to yearly appropriations by the United States Congress for
the ATP program, and legislation has been introduced to eliminate the program.
There can be no assurance that funding for the ATP program will not be reduced
or eliminated at any time. The reduction or elimination of the ATP grant could
have a material adverse effect on the Company's business, financial condition
and results of operations.
NATIONAL INSTITUTES OF HEALTH
In August 1995, the Company received a three-year grant for approximately
$6.0 million from the NIH National Center for Human Genome Research, for a
project entitled "Sequencing and Mapping with DNA Probe Arrays." Under the
project, the Company is developing applications of DNA probe arrays for larger
scale gene sequencing and creating a laboratory at the Company for use by
outside researchers. The grant also includes a subcontract with Stanford
University to continue research and development of the DNA probe array
technology. The Company has been awarded approximately $2.0 million for the
first year of the grant, and the remaining amounts are subject to yearly
appropriations by the NIH. There can be no assurance that the NIH will obtain
the necessary funding from the United States Congress to continue to fund this
grant.
OTHER AGREEMENTS
The Company has agreements with several entities to develop and test probe
arrays for the detection of certain gene sequences, mutations or organisms.
These include a one-year feasibility agreement with Roche Molecular Systems,
Inc., entered into in November 1995, for detection of certain mutations
associated with the cystic fibrosis transmembrane regulator (CFTR) gene, a
six-month feasibility agreement with Incyte, entered into in April 1996 to
evaluate the use of DNA probe arrays to generate gene expression data, and a
development and supply agreement entered into in May 1996 with Glaxo for
detection of polymorphisms in specific genes, which has a term of up to three
years. Under such agreements, the Company is typically paid a development fee
and may receive milestone payments upon achievement of certain technical goals.
The Company also has research agreements with several universities and research
organizations. For example, the Company has an agreement with Dr. Francis
Collins at the NIH for the development of probe arrays to detect certain
mutations believed to be associated with the development of breast cancer, and
an agreement with Dr. Eric Lander at the Whitehead Institute for Biomedical
Research at MIT to collaborate in the investigation of single nucleotide
polymorphism markers using DNA probe arrays.
The Company generally obtains rights to intellectual property arising from
these agreements. If a project is successful, the Company and the third-party
collaborator would negotiate the right to commercialize products resulting from
such project. The Company has received a substantial portion of its revenues
since inception from its collaborative partners and intends to enter into
collaborative arrangements with other companies to apply its technology, fund
development, commercialize potential future products, and assist in obtaining
regulatory approval. There can be no assurance that any of the Company's present
or future collaborative partners will perform their obligations as expected or
will devote sufficient resources to the development, clinical testing or
marketing of the Company's potential products developed under the
collaborations. There can be no assurance that the Company will be able to
maintain its current collaborations, negotiate collaborative arrangements on
acceptable terms, if at all, or that any collaborations will be successful.
INTELLECTUAL PROPERTY
As of April 15, 1996, Affymetrix had exclusive licenses from Affymax for
over 20 patents and patent applications in the United States related to its
business in the fields of clinical diagnostics and research supply. In addition,
Affymetrix is the assignee of 52 United States patent applications and one
issued patent in the United States. Many of these patents and applications have
been filed and/or issued in one or more foreign countries. Affymetrix also
relies upon copyright protection, trade secrets, know-how, continuing
technological
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innovation and licensing opportunities to develop and maintain its competitive
position. The Company's success will depend in part on its ability to obtain
patent protection for its products and processes, to preserve its copyright and
trade secrets and to operate without infringing the proprietary rights of third
parties.
In 1993 Affymetrix and Affymax entered into a technology license agreement
(the "Technology License Agreement") pursuant to which Affymax granted to
Affymetrix an exclusive, worldwide, royalty-free license with right to
sublicense, among other things, certain patents and patent applications (and any
foreign counterparts) to develop, make, use and sell certain products for the
clinical diagnostic and research supply markets, including rights to sell DNA
probe arrays. The patents licensed to Affymetrix include those for the
light-directed synthesis technology and for several other technologies.
Affymetrix has the exclusive right to sell DNA probe array technology for DNA
sequencing and sequence analysis. The Company's rights to the other technologies
are for the fields of diagnostics and analytical and bioanalytical tests, and do
not include other fields such as drug discovery. In addition, Affymax granted to
Affymetrix an exclusive license to certain trademarks, including "Affymetrix."
Pursuant to the Technology License Agreement, Affymax also granted to
Affymetrix certain rights to future inventions made by, or on behalf of, Affymax
to use such inventions for the development and commercialization of, among other
things, certain products in the clinical diagnostics and research supply
markets, including rights to sell DNA probe arrays. These rights consist of
either an exclusive, worldwide royalty-free license with right to sublicense or
a right of first negotiation covering such inventions made during the period
until July 2000. In turn, Affymetrix granted to Affymax certain parallel rights
to future inventions made by, or on behalf of, Affymetrix during the same period
for the development and commercialization of products in drug discovery and
related fields, not including those related to DNA sequence analysis. The rights
granted to Affymax consist of an exclusive, worldwide royalty-free license with
right to sublicense, to develop and commercialize any new Affymetrix technology
that is dominated by one or more patents licensed to Affymetrix in drug
discovery and related fields, and the right of first negotiation with respect to
other Affymetrix inventions in these fields, not including those related to DNA
sequence analysis. In addition, Affymetrix agreed to notify Affymax in advance
of its intention to sell certain products in the research supply market to
ensure that such products cannot be used for drug discovery, as reagents for IN
VIVO imaging or certain other related purposes.
The Company is party to various license option agreements with third parties
(including Stanford University and the University of California) which give it
rights to use certain technologies. Failure of the Company to maintain rights to
such technology could have a material adverse effect on the Company's business,
financial condition and results of operations. For example, inability of the
Company to exercise the option for the Stanford technology under commercially
reasonable terms could have an adverse effect on the ability of the Company to
sell certain of its products.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including the Company, are generally uncertain and involve complex
legal and factual questions. There can be no assurance that any of the Company's
pending patent applications will result in issued patents, that the Company will
develop additional proprietary technologies that are patentable, that any
patents issued to the Company or its strategic partners will provide a basis for
commercially viable products or will provide the Company with any competitive
advantages or will not be challenged by third parties, or that the patents of
others will not have an adverse effect on the ability of the Company to do
business. In addition, patent law relating to the scope of claims in the
technology fields in which the Company operates is still evolving. The degree of
future protection for the Company's proprietary rights, therefore, is uncertain.
Furthermore, there can be no assurance that others will not independently
develop similar or alternative technologies, duplicate any of the Company's
technologies, or, if patents are issued to the Company, design around the
patented technologies developed by the Company. In addition, the Company could
incur substantial costs in litigation if it is required to defend itself in
patent suits brought by third parties or if it initiates such suits.
The commercial success of the Company also depends in part on the Company
neither infringing patents or proprietary rights of third parties nor breaching
any licenses that may relate to the Company's technologies and products. For
example, the Company, its collaborators and customers may need to acquire a
license for an amplification technology to use the GeneChip system, and there is
no assurance such a license will be available on commercially reasonable terms.
The Company is aware of third-party patents that may relate to the Company's
technology, including reagents used in probe array synthesis and in probe array
assays, probe array
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scanners, synthesis techniques, oligonucleotide amplification techniques,
assays, and probe arrays. There can be no assurance that the Company will not
infringe on these patents, other patents or proprietary rights of third parties.
In addition, the Company has received and may in the future receive a notice
claiming infringement from third parties as well as invitations to take licenses
under third party patents. Any legal action against the Company or its
collaborative partners claiming damages and seeking to enjoin commercial
activities relating to the affected products and processes could, in addition to
subjecting the Company to potential liability for damages, require the Company
or its collaborative partner to obtain a license in order to continue to
manufacture or market the affected products and processes. There can be no
assurance that the Company or its collaborative partners would prevail in any
such action or that any license (including licenses proposed by third parties)
required under any such patent would be made available on commercially
acceptable terms, if at all. There are a significant number of United States and
foreign patents and patent applications in the Company's areas of interest, and
the Company believes that there may be significant litigation in the industry
regarding patent and other intellectual property rights. If the Company becomes
involved in such litigation, it could consume a substantial portion of the
Company's managerial and financial resources, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Others may have filed and in the future are likely to file patent
applications that are similar or identical to those of the Company. To determine
the priority of inventions, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office that could
result in substantial cost to the Company. No assurance can be given that any
such patent application will not have priority over patent applications filed by
the Company.
The enactment of legislation implementing the General Agreement on Trade and
Tariffs has resulted in certain changes in United States patent laws that became
effective on June 8, 1995. Most notably, the term of patent protection for
patent applications filed on or after June 8, 1995 is no longer a period of
seventeen years from the date of grant. The new term of United States patents
will commence on the date of issuance and terminate twenty years after the
earliest effective filing date of the application. Because the time from filing
to issuance of biotechnology patent applications in the Company's area of
interest is often more than three years, a twenty-year term after the effective
date of filing may result in a substantially shortened term of the Company's
patent protection which may adversely affect the Company's patent position.
The Company also relies upon copyright and trade secret protection for its
confidential and proprietary information. There can be no assurance, however,
that such measures will provide adequate protection for the Company's trade
secrets or other proprietary information. In addition, there can be no assurance
that proprietary information will not be disclosed, that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's copyrights and trade
secrets or disclose such technology, or that the Company can meaningly protect
its trade secrets.
The Company's academic collaborators have certain rights to publish data and
information in which the Company has rights. There is considerable pressure on
academic institutions to publish discoveries in the genetics and genomics
fields. There can be no assurance that such publication would not adversely
affect the Company's ability to obtain patent protection for some genes in which
it may have a commercial interest.
COMPETITION
Competition in genomics and diagnostics is intense and expected to increase.
Further, the technologies for discovering genes associated with significant
diseases and approaches for commercializing those discoveries are new and
rapidly evolving.
Currently, the Company's principal competition comes from existing
technologies that are used to perform many of the same functions for which the
Company plans to market its GeneChip systems. In the diagnostic field, these
technologies are provided by established diagnostic companies such as Abbott
Laboratories, Boehringer Mannheim GmbH, Roche, Johnson & Johnson, and SmithKline
Beecham plc. These technologies include a variety of established assays, such as
immunoassays, histochemistry, flow cytometry and culture, and newer DNA probe
diagnostics to analyze certain limited amounts of genetic information. In the
genomics field, competitive technologies include gel-based sequencing using
instruments provided by companies such as the
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Applied Biosystems division of Perkin Elmer and Pharmacia Biotech AB. In order
to compete against existing technologies, the Company will need to demonstrate
to potential customers that the GeneChip system provides improved performance
and capabilities.
The market for diagnostic products derived from gene discovery is currently
limited and will be highly competitive. Many companies are developing and
marketing DNA probe tests for genetic and other diseases. Other companies are
conducting research on new technologies for diagnostic tests based on advances
in genetic information. Established diagnostic companies could provide
significant competition to Affymetrix through the development of new products.
These companies have the strategic commitment to diagnostics, the financial and
other resources to invest in new technologies, substantial intellectual property
portfolios, substantial experience in new product development regulatory
expertise, manufacturing capabilities and the distribution channels to deliver
products to customers. These companies also have an installed base of
instruments in several markets, including clinical and reference laboratories,
which are not compatible with the GeneChip system. In addition, these companies
have formed alliances with genomics companies which provide them access to
genetic information that may be incorporated into their diagnostic tests.
In the genomics field, future competition will likely come from existing
competitors as well as other companies seeking to develop new technologies for
sequencing and analyzing genetic information. In addition, pharmaceutical and
biotechnology companies, such as Genome Therapeutics Corporation, Human Genome
Sciences, Inc., Incyte, Millenium Pharmaceuticals, Inc., Myriad Genetics, Inc.
and Sequana Therapeutics, Inc. have significant needs for genomic information
and may choose to develop or acquire competing technologies to meet these needs.
GOVERNMENT REGULATION
The Company anticipates that the manufacturing, labeling, distribution and
marketing of some or all of the Company's diagnostic products will be subject to
government regulation in the United States and in certain other countries.
In the United States, the FDA regulates, as medical devices, most diagnostic
tests and IN VITRO reagents that are marketed as finished test kits or
equipment. Some clinical laboratories, however, purchase individual reagents
intended for specific analytes, and, using those reagents, to develop and
prepare their own finished diagnostic tests. Although the FDA has not generally
exercised regulatory authority over these individual reagents or the finished
tests prepared from them by the clinical laboratories. The FDA has recently
proposed a rule that, if adopted, would regulate reagents sold to clinical
laboratories as medical devices. The proposed rule would also restrict sales of
these reagents to clinical laboratories certified under CLIA as high complexity
laboratories. The Company intends to market some diagnostic products as finished
test kits or equipment and others as individual reagents; consequently, some or
all of these products will be regulated as medical devices.
The Food, Drug, and Cosmetic Act requires that medical devices introduced to
the United States market, unless exempted by regulation, be the subject of
either a premarket notification clearance (known as a "510(k)") or an approved
premarket approval ("PMA"). Some of the Company's products may require a PMA and
others may require a 510(k). With respect to devices reviewed through the 510(k)
process, a Company may not market a device until an order is issued by the FDA
finding the product to be substantially equivalent to a legally marketed device
known as a "predicate device." A 510(k) submission may involve the presentation
of a substantial volume of data, including clinical data, and may require a
substantial review. The FDA may agree that the product is substantially
equivalent to a predicate device and allow the product to be marketed in the
United States. The FDA, however, may (i) determine that the device is not
substantially equivalent and require a PMA, or (ii) require further information,
such as additional test data, including data from clinical studies, before it is
able to make a determination regarding substantial equivalence. By requesting
additional information, the FDA can further delay market introduction of a
company's products. If the FDA indicates that a PMA is required for any of the
Company's products, the application will require extensive clinical studies,
manufacturing information and likely review by a panel of experts outside the
FDA. Clinical studies to support either a 510(k) submission or a PMA application
would need to be conducted in accordance with FDA requirements. Failure to
comply with FDA requirements could result in the FDA's refusal to accept the
data or the imposition of regulatory sanctions. FDA review of a PMA application
could take significantly longer than that for a 510(k).
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There can be no assurance that the Company will be able to meet the FDA's
requirements or that any necessary approval will be received. Once granted, a
510(k) clearance or PMA approval may place substantial restrictions on how the
device is marketed or to whom it may be sold. Even where a device is exempted
from 510(k) clearance or PMA approval, the FDA may impose restrictions on its
marketing. In addition to requiring clearance or approval for new products, the
FDA may require clearance or approval prior to marketing products that are
modifications of existing products. There can be no assurance that any necessary
510(k) clearance or PMA approval will be granted on a timely basis or at all.
FDA imposed restrictions could limit the number of customers to whom particular
products could be marketed or what may be communicated about particular
products. Delays in receipt of or failure to receive any necessary 510(k)
clearance or PMA, or the imposition of stringent restrictions on the Company's
labeling and sales of its products could have a material adverse effect on the
Company.
As a medical device manufacturer, the Company would also be required to
register and list its products with the FDA. In addition, the Company would be
required to comply with the FDA's GMP regulations, which require that medical
devices be manufactured and records be maintained in a prescribed manner with
respect to manufacturing, testing and control activities. Further, the Company
would be required to comply with FDA requirements for labeling and promotion of
its medical devices. For example, the FDA prohibits cleared or approved devices
from being marketed for uncleared or unapproved uses. In addition, the medical
device reporting regulation would require that the Company provide information
to the FDA whenever there is evidence to reasonably suggest that one of its
devices may have caused or contributed to a death or serious injury, or that
there has occurred a malfunction that would be likely to cause or contribute to
a death or serious injury if the malfunction were to recur.
Medical device manufacturers are subject to periodic inspections by the FDA
and state agencies. Additionally, FDA will conduct a preapproval inspection for
all PMA devices and in some cases for 510(k) devices as well. If the FDA
believes that a company is not in compliance with applicable laws or
regulations, it can institute proceedings to issue a warning letter apprising of
violative conduct, detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against the company, its
officers or its employees. In addition, clearances or approvals could be
withdrawn in appropriate circumstances. Failure to comply with regulatory
requirements or any adverse regulatory action could have a material adverse
effect on the Company.
Medical device laws and regulations are also in effect in many of the
countries in which the Company may do business outside the United States. These
range from comprehensive device approval requirements for some or all of the
Company's medical device products to requests for product data or
certifications. The number and scope of these requirements are increasing.
Medical device laws and regulations are also in effect in some states in which
the Company does business. There can be no assurance that the Company will
obtain regulatory approvals in such countries or that it will not be required to
incur significant costs in obtaining or maintaining its foreign regulatory
approvals. In addition, the export by the Company of certain of its products
which have not yet been cleared for domestic commercial distribution may be
subject to FDA export restrictions. The failure to obtain product approvals in a
timely fashion or to comply with state or foreign medical device laws and
regulations may have a material adverse impact on the Company.
In addition, federal, state and foreign laws and regulations regarding the
manufacture and sale of medical devices are subject to future changes. For
example, the FDA is currently considering significant changes to its GMP and to
other regulations. The Company cannot predict what impact, if any, such changes
might have on its business; however, such changes could have a material impact
on the Company.
Any of the Company's customers using its diagnostic devices for clinical use
in the United States may be regulated under the CLIA. CLIA is intended to ensure
the quality and reliability of clinical laboratories in the United States by
mandating specific standards in the areas of personnel qualifications,
administration, participation in proficiency testing, patient test management,
quality control, quality assurance and inspections. The regulations promulgated
under CLIA establish three levels of diagnostic tests ("waived," "moderately
complex" and "highly complex") and the standards applicable to a clinical
laboratory depend on the level of the tests it performs. CLIA requirements may
prevent some clinical laboratories from using certain of the Company's
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diagnostic products. Therefore, there can be no assurance that the CLIA
regulations and future administrative interpretations of CLIA will not have a
material adverse impact on the Company by limiting the potential market for the
Company's products.
The Company is also subject to numerous environmental and safety laws and
regulations, including those governing the use and disposal of hazardous
materials. Any violation of, and the cost of compliance with, these regulations
could have a material adverse effect on the Company's business, financial
condition and results of operations.
REIMBURSEMENT
The Company's ability to successfully commercialize its products may depend
on the Company's ability to obtain adequate levels of third-party reimbursement
for use of certain diagnostic tests, in the United States, European and other
countries. Currently, the availability of third-party reimbursement is limited
and uncertain for genetic tests.
In the United States, the cost of medical care is funded, in substantial
part, by government insurance programs, such as Medicare and Medicaid, and
private and corporate health insurance plans. Third-party payors may deny
reimbursement if they determine that a prescribed device or diagnostic test has
not received appropriate FDA or other governmental regulatory clearances, is not
used in accordance with cost-effective treatment methods as determined by the
payor, or is experimental, unnecessary or inappropriate. The Company's ability
to commercialize certain of its products successfully may depend on the extent
to which appropriate reimbursement levels for the costs of such products and
related treatment are obtained from government authorities, private health
insurers and other organizations, such as HMOs. Third-party payors are
increasingly challenging the prices charged for medical products and services.
The trend towards managed health care in the United States and the concurrent
growth of organizations such as HMOs, which could control or significantly
influence the purchase of health care services and products, as well as
legislative proposals to reform health care or reduce government insurance
programs, may all result in lower prices for certain of the Company's products.
The cost containment measures that health care providers are instituting and the
impact of any health care reform could have an adverse effect on the Company's
ability to sell certain of its products and may have a material adverse effect
on the Company's business, financial condition and results of operations.
EMPLOYEES
As of March 31, 1996, Affymetrix had 117 full-time employees, 29 of whom
hold Ph.D. degrees. The employee group includes chemists, engineers, computer
scientists, mathematicians and molecular biologists with experience in the
diagnostic products, medical products, semiconductor, computer software or
electronics industries. None of the Company's employees is represented by a
collective bargaining agreement, nor has the Company experienced work stoppages.
The Company believes that its relations with its employees are good.
FACILITIES
Affymetrix subleases 47,000 square feet in Santa Clara, California from
Affymax for research laboratories and administrative offices under a lease
expiring in 1996. The Company has an option to renew the lease on this facility
for an additional seven years. The Company leases 20,000 square feet of space
for manufacturing operations in Sunnyvale, California under a lease that expires
in 2000. The Company has options to renew this lease for two successive
three-year terms. The Company also leases 31,000 square feet of research and
development space in Sunnyvale, California under a lease that expires in 1999.
The Company expects to add to its existing facilities over the next few years.
See "Certain Transactions."
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
SCIENTIFIC ADVISORY BOARD
The Company's scientific advisors have made significant contributions to the
development of Affymetrix technologies. Each scientific advisor spends between
one day per week and one day per quarter working on Company projects. Scientific
advisors are compensated on a retainer or per diem basis and have options to
acquire Common Stock of the Company subject to vesting during continued service.
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PAUL BERG, PH.D., is Cahill Professor in Cancer Research, Professor of
Biochemistry and Director of the Beckman Center for Molecular and Genetic
Medicine at Stanford University School of Medicine. He received the Nobel Prize
in Chemistry in 1980, the National Medal of Science in 1983 and is a member of
the National Academy of Sciences, the Royal Society, London, and the French
Academy of Sciences. Dr. Berg also serves as a member of the Company's Board of
Directors.
RONALD W. DAVIS, PH.D., is Professor of Biochemistry and Genetics at
Stanford University Medical School. He was elected to the National Academy of
Sciences in 1983 and has received numerous awards for his contributions to the
field of genetics. He has published more than 155 papers. Dr. Davis' research
focuses on developing new technologies and instrumentation to study genomic
organization and whole genome analysis, including whole genome DNA sequencing,
gene expression, gene deletion, functional analysis, protein interaction, and
point mutational analysis.
ERIC LANDER, D. PHIL., is a director of Whitehead Institute/MIT Center for
Genome Research and Professor of Biology at the Massachusetts Institute of
Technology. Dr. Lander was a MacArthur Prize Fellow from 1987 to 1992 and serves
as Chair of the Genome Research Review Committee of the National Center for
Human Genome Research. Dr. Lander's research focuses on genetic mapping and
genome structure in the mouse and human, genetic analysis of polygenic traits
and population genetics of human diseases.
JOSHUA LEDERBERG, PH.D., is Sackler Foundation Scholar and Research
Geneticist at Rockefeller University, where he was President from 1978 to 1990.
Dr. Lederberg received the Nobel Prize in Medicine in 1958 for his research in
the genetic structure and function of microorganisms and in 1989 was awarded the
National Medal of Science. Dr. Lederberg has been involved in artificial
intelligence programs and has served on the Advisory Health Research Council of
the World Health Organization for many years.
RICHARD A. MATHIES, PH.D., is Professor of Chemistry at the University of
California, Berkeley. Dr. Mathies is an expert on the development of new methods
for the detection and analysis of biomolecules, such as capillary array
electrophoresis and photolithographic chemical analysis systems. Dr. Mathies is
assisting Affymetrix with high sensitivity fluorescence detection methodologies,
photophysics and the development of microchemical nucleic acid preparation and
analysis systems. Dr. Mathies received an NIH Merit Award in 1991 and the
American Society for Photobiology Research Award in 1989. He has received
fellowships from the Helen Hay Whitney and Alfred P. Sloan Foundations.
R. FABIAN PEASE, PH.D., is Professor of Electrical Engineering at Stanford
University. Dr. Pease's current research focuses on micro- and nano-lithography,
novel ultra-small electron devices, and advanced packaging concepts. From 1971
to 1978, he was supervisor of the electron beam exposure group at Bell
Laboratories, where he and his colleagues developed the electron beam
mask-making process that was the semiconductor industry standard for over a
decade. Dr. Pease is assisting Affymetrix with the application of very large
scale integrated circuit technology to the development of the Company's
light-directed synthesis technology.
CALVIN F. QUATE, PH.D., is Professor of Applied Physics and Electrical
Engineering at Stanford University. Dr. Quate served as senior Research Fellow
of the Xerox Palo Alto Research Center from 1984 to 1994. He is a director of
Tencor Instruments and Park Scientific Instruments. Dr. Quate's awards include
the IEEE Morris N. Liebmann Award (1981), Rank Prize for Opto-Electronics
(1982), IEEE Achievement Award, Ultraoxics, Ferroelectrics and Frequency Control
Society (1986), IEEE Medal of Honor (1988), President's National Medal of
Science (1992) and Foreign Member Royal Society (1995).
LUBERT STRYER, M.D., Chairman of the Scientific Advisory Board, is Winzer
Professor in the School of Medicine and Professor of Neurobiology at Stanford
University. He served as President and Scientific Director of Affymax Research
Institute and Managing Director of Affymax in 1989 and 1990. He is a co-inventor
of the Company's light-directed synthesis technology. Dr. Stryer has pioneered
the development of novel fluorescence detection techniques and holds ten patents
involving fluorescence and light-activated chemical synthesis. Dr. Stryer is the
author of BIOCHEMISTRY, a major text used widely in colleges and universities
around the world. Dr. Stryer received the American Chemical Society Award in
Biological Chemistry (the Eli Lilly Award) and is a member of the National
Academy of Sciences and received an honorary Doctor of Science from the
University of Chicago.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
March 31, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
John D. Diekman........................... 53 Chairman and Chief Executive Officer
Stephen P.A. Fodor........................ 42 President, Chief Operating Officer and Director
Paul M. Kaplan............................ 50 Vice President of Product Development
Vernon A. Norviel......................... 37 Vice President and General Counsel
Kenneth J. Nussbacher..................... 43 Executive Vice President and Chief Financial Officer
Richard P. Rava........................... 38 Vice President of Research and Engineering
Paul Berg (1)............................. 69 Director
Douglas M. Hurt (2)....................... 39 Director
Vernon R. Loucks, Jr...................... 61 Director
Barry C. Ross............................. 47 Director
David B. Singer (2)....................... 33 Director
John A. Young (1)(2)...................... 64 Director
Alejandro C. Zaffaroni (1)................ 73 Director
</TABLE>
- ------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
JOHN D. DIEKMAN, PH.D., has served as a Director of the Company and Chairman
since the Company's inception and was appointed Chief Executive Officer in July
1995. Dr. Diekman served as President and Chief Operating Officer of Affymax
from July 1991 to March 1995 and as Chairman of the Affymax Board of Directors
from July 1994 to July 1995. Prior to 1991, Dr. Diekman served as President of
Monoclonal Antibodies Inc. (now Quidel Corp.), a diagnostic products company;
Salutar, Inc., an IN VITRO diagnostic company; and Zoecon Corporation, an
agrochemical company. Dr. Diekman also currently serves as a director of Quidel
Corp.
STEPHEN P.A. FODOR, PH.D., is the President and Chief Operating Officer of
the Company and has been a Director of the Company since February 1993. From
September 1994 to July 1995, he served as President and Chief Technical Officer
and, from February 1993 until September 1994, as Chief Technical Officer of the
Company. Dr. Fodor previously was Vice President and Director of Physical
Sciences at the Affymax Research Institute. For the invention of the
photolithographic synthesis technology used by the Company to manufacture its
probe arrays, Dr. Fodor and his colleagues were awarded the 1992 AAAS
Newcomb-Cleveland Prize for the best research article published in SCIENCE and
the 1993 "Distinguished Inventor Award" from the Intellectual Property Owners'
Association.
PAUL M. KAPLAN, PH.D., has been Vice President of Product Development since
joining the Company in April 1994. From 1988 to 1994, Dr. Kaplan served as Vice
President, Research and Development of the Diagnostic Division at Centocor,
Inc., where he was responsible for the identification, development and
commercialization of a variety of proprietary immunoassay products.
VERNON A. NORVIEL, J.D., was appointed Vice President and General Counsel of
the Company in February 1996. From 1989 to 1996, as a partner with Townsend and
Townsend and Crew LLP ("Townsend"), Mr. Norviel led the intellectual property
and patent prosecution efforts of the Company. Mr. Norviel continues as a
partner with Townsend on a part time basis.
KENNETH J. NUSSBACHER, J.D., joined the Company in September 1995 as
Executive Vice President and Chief Financial Officer. From 1989 to 1995, Mr.
Nussbacher held various management positions at Affymax, most
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recently as Executive Vice President for Business and Legal Affairs and Managing
Director of Affymax Technologies N.V. Prior to 1989, Mr. Nussbacher practiced
intellectual property law in the high technology field as General Counsel of
Daisy Systems, as Vice President, Intellectual Property for Atari, Inc., and
with Kirkland & Ellis, in Chicago.
RICHARD P. RAVA, PH.D., has served as Vice President of Research and
Engineering since September 1994. Dr. Rava joined the Company in February 1993
as Director of Biomedical Engineering. From 1992 to 1993, Dr. Rava was a Senior
Scientist at Affymax Research Institute. From 1990 to 1992, he was a Principal
Research Scientist in the George R. Harrison Spectroscopy Laboratory at MIT and
the research coordinator for the NIH Laser Biomedical Research Center at MIT.
PAUL BERG, PH.D., has been a Director of the Company since August 1993. Dr.
Berg is Cahill Professor in Cancer Research, Professor of Biochemistry and
Director of the Beckman Center for Molecular and Genetic Medicine at Stanford
University School of Medicine. He received the Nobel Prize in Chemistry in 1980,
the National Medal of Science in 1983 and is a member of the National Academy of
Sciences, the Royal Society, London, and the French Academy of Sciences. Dr.
Berg also serves as a member of the Company's Scientific Advisory Board.
DOUGLAS M. HURT, a Director of the Company since June 1995, is Senior Vice
President and Chief Financial Officer of Glaxo Wellcome, Inc. Mr. Hurt has held
various financial management positions at Glaxo since 1983 and was designated by
Glaxo to serve on the Board of Directors.
VERNON R. LOUCKS, JR., has been a Director of the Company since August 1993.
Mr. Loucks has served as Chief Executive Officer of Baxter International Inc.
("Baxter") since 1980 and Chairman of Baxter since 1987. Mr. Loucks also serves
as a director of The Dun and Bradstreet Corp., Emerson Electric Co., Quaker Oats
Co. and Anheuser-Busch Companies, Inc.
BARRY C. ROSS, PH.D., a Director of the Company since March 1995, has served
as Director of Group Research Strategy and Alliances at Glaxo Wellcome Research
and Development Ltd. since 1995. Dr. Ross joined Glaxo in 1984 and served as
Director, Medicinal Chemistry from 1989-93 and was designated by Glaxo to serve
on the Board of Directors.
DAVID B. SINGER, a Director of the Company since February 1993, served as
Vice Chairman from July 1995 to April 1996. From February 1993 to June 1995, Mr.
Singer was President and Chief Executive Officer of the Company. He served as
Vice President of Finance and Treasurer of Affymax from 1991 to 1993 and as
Director of Corporate Development at Affymax from 1990 to 1991.
JOHN A. YOUNG, a Director of the Company since August 1993, is the retired
President and Chief Executive Officer of Hewlett-Packard Co. Mr. Young also
serves as a director of Wells Fargo & Company, Chevron Corp., SmithKline Beecham
Corp., Novell, Inc., Ciphergen Bio Systems, Inc., General Magic, Inc., Shaman
Pharmaceuticals, Inc. and is a member of the Business Council.
ALEJANDRO C. ZAFFARONI, PH.D., a founder of the Company, has served as a
Director since February 1993. Dr. Zaffaroni is also the founder of Affymax, ALZA
Corporation ("ALZA"), DNAX Research Institute of Molecular & Cellular Biology,
Inc. and a co-founder of Syntex. Dr. Zaffaroni served as Chairman of Affymax
from its inception to July 1994 and as Chief Executive Officer and Managing
Director of Affymax from its inception until its acquisition by Glaxo Wellcome
in March 1995. He served as Chairman and Chief Executive Officer of ALZA from
1968 to 1987 and has been Co-Chairman of ALZA since 1987.
BOARD OF DIRECTORS COMMITTEES AND OTHER INFORMATION
All directors are elected at the annual meeting of shareholders and hold
office until the election and qualification of their successors at the next
annual meeting of shareholders. Officers of the Company serve at the discretion
of the Board of Directors. There are no family relationships among the Company's
directors and executive officers.
The Board of Directors currently has an Audit Committee and a Compensation
Committee. The Audit Committee oversees the actions taken by the Company's
independent auditors and reviews the Company's
50
<PAGE>
internal financial and accounting controls and policies. The Compensation
Committee is responsible for determining salaries, incentives and other forms of
compensation for officers and other employees of the Company and administers
various incentive compensation and benefit plans.
DIRECTOR COMPENSATION
During the fiscal year ending December 31, 1995, John D. Diekman, Stephen
P.A. Fodor and David B. Singer received the cash compensation described under
"Management -- Executive Compensation." During the same fiscal year each of the
remaining directors received a cash payment of $2,500 for each meeting attended
plus reasonable expenses. In December 1995, each nonemployee director received
an option to purchase 33,333 shares of Common Stock at $0.675 per share under
the Company's Stock Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for officers and other employees of
the Company and administers various incentive compensation and benefit plans.
The Compensation Committee consists of Paul Berg, John A. Young and Alejandro C.
Zaffaroni. Stephen P.A. Fodor, President and Chief Operating Officer of the
Company, participates in all discussions and decisions regarding salaries and
incentive compensation for all employees and consultants of the Company, except
that Dr. Fodor is excluded from discussions regarding his own salary and
incentive compensation.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation paid by the Company in
the year ended December 31, 1995 to the Company's Chief Executive Officer,
former Chief Executive Officer, and to the Company's other executive officers
who earned in excess of $100,000 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
- ----------------------------------------------------------- ------------ --------- ------------- -------------
<S> <C> <C> <C> <C>
John D. Diekman
Chief Executive Officer and Chairman...................... $ 97,304(1) $ -- 166,666 $ --
David B. Singer
Former President and Chief Executive Officer.............. 183,010 -- 33,333 6,189
Stephen P.A. Fodor
President and Chief Operating Officer..................... 188,819 -- 166,666 --
Paul M. Kaplan
Vice President of Product Development..................... 146,218 -- 26,666 33,638(2)
Richard P. Rava
Vice President of Research and Engineering................ 136,962 -- 60,000 --
</TABLE>
- ------------
(1) Represents Dr. Diekman's compensation commencing July 1, 1995, when he
joined the Company. Prior to March 1996 when he became a full-time employee,
Dr. Diekman devoted 80% of his time to the Company and 20% to Affymax.
(2) Includes reimbursement for certain relocation expenses of $21,556 and
housing allowances of $12,082.
51
<PAGE>
STOCK OPTION GRANTS
The following table contains information concerning the stock option grants
made to each of the Named Executive Officers for the year ended December 31,
1995:
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERMS (1)
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION --------------------------
NAME GRANTED (2) FISCAL YEAR SHARE DATE 5% 10%
- ---------------------------- ------------- --------------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John D. Diekman............. 100,000 9.7% $ 0.675 07/01/05 $ 1,887,300 $ 3,045,300
66,666 6.5 0.675 12/20/05 1,258,200 2,030,200
David B. Singer............. 33,333 3.2 0.675 12/20/05 629,100 1,015,100
Stephen P.A. Fodor.......... 166,666 16.2 0.675 12/20/05 3,145,500 5,075,500
Paul M. Kaplan.............. 26,666 2.6 0.675 12/20/05 503,300 812,100
Richard P. Rava............. 60,000 5.8 0.675 12/20/05 1,132,400 1,827,200
</TABLE>
- ------------
(1) Assumes a value of $12.00 for each share of Common Stock (the initial public
offering price for this offering) on the date of grant. Potential gains are
net of the exercise price but before taxes associated with the exercise. The
5% and 10% assumed annual rates of compounded stock appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the future Common Stock
price. Actual gains, if any, on stock option exercises are dependent on the
future financial performance of the Company, overall market conditions and
the option holders' continued employment through the vesting period.
(2) Grants generally vest at a rate of 20% each year following the date of
grant, as long as the optionee remains an employee with, consultant to, or
director of, the Company. The maximum term of each option granted is ten
years from the date of grant. The exercise price is equal to the fair market
value of the stock on the grant date as determined by the Board of
Directors.
The following table sets forth for each of the Named Executive Officers
certain information with respect to the exercise of options to purchase Common
Stock during the year ended December 31, 1995 and the number of shares subject
to both exercisable and unexercisable stock options as of December 31, 1995.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR-END AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1995 DECEMBER 31, 1995 (1)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED (2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John D. Diekman.......... -- -- -- 166,666 -- $ 1,887,500
David B. Singer.......... -- -- 50,000 33,333 $ 566,200 377,500
Stephen P.A. Fodor....... -- -- 20,000 246,666 226,500 2,793,500
Paul M. Kaplan........... -- -- 8,000 58,666 92,600 672,000
Richard P. Rava.......... 10,000 $ 3,750 1,333 88,666 15,000 1,013,000
</TABLE>
- ------------
(1) Based on an assumed initial offering price of $12.00 per share minus the
exercise price.
(2) Based on the fair market value at the date of exercise, as determined by the
Board of Directors, minus the exercise price.
52
<PAGE>
STOCK PLANS
1993 STOCK PLAN
The Company's Stock Plan was adopted by the Board of Directors in February
1993, approved by the shareholders in July 1993 and has been subsequently
amended. As of March 31, 1996, a total of 3,700,000 shares of Common Stock have
been reserved for issuance under the Stock Plan. As of March 31, 1996, options
to purchase a total of 543,254 shares of Common Stock had been exercised (of
which 148,889 are subject to repurchase by the Company), options to purchase a
total of 2,191,518 shares at a weighted average exercise price of $0.65 per
share were outstanding, and 965,228 shares remain available for future option or
purchase rights grants.
The purpose of the Stock Plan is to attract, retain and motivate officers,
key employees, consultants and directors of the Company by giving them the
opportunity to acquire Stock ownership in the Company. The Stock Plan provides
for the granting to employees of the Company (including officers and employee
directors) of "incentive stock options" within the meaning of Section 422 of the
Code, for the grant of nonstatutory stock options to employees and consultants
of the Company, and for the grant of purchase rights providing for the direct
sale of stock to eligible participants, subject to the Company's repurchase
rights. To the extent an optionee would have the right in any calendar year to
exercise for the first time incentive stock options for shares having an
aggregate fair market value (under all plans of the Company and determined for
each share as of the grant date) in excess of $100,000, any such excess options
shall be automatically converted to a nonstatutory stock option.
The Stock Plan is administered by the Board of Directors or a committee of
the Board of Directors (the "Administrator"). The Administrator determines the
type and terms of options and purchase rights granted under the Stock Plan,
including the number of shares covered, exercise or purchase price, term and
condition for exercise of the option or purchase right. The exercise price of
all stock options granted under the Stock Plan must be at least 100% (85% for
purchase rights) of the fair market value of the Common Stock of the Company on
the grant date. The term of an incentive stock option may not exceed ten years
from the date of grant. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of stock of the
Company, the exercise price of any stock option granted shall be at least 110%
(100% for purchase rights) of the fair market value of the Common Stock on the
grant date and the term of such option may not exceed five years. Payment of the
exercise price may be in cash, check, or, at the discretion of the
administrator, by promissory notes or shares of stock held by the optionee or
purchaser, or a combination thereof.
No option may be transferred by the optionee other than by will or the laws
of descent and distribution or pursuant to a qualified domestic relations order
("QDRO"). During the lifetime of an optionee, only the optionee (or the
optionee's spouse pursuant to a QDRO) may exercise an option. An option shall be
exercisable on or after each vesting date in accordance with the terms set forth
in the option agreement; provided, however, that the right to exercise an option
must vest at the rate of at least 20% per year over five years from the grant
date.
In the event of certain changes in control of the Company or a sale of
substantially all its assets, the Administrator may cancel each outstanding
option upon payment in cash to the optionee of the amount by which any cash and
any other property which the optionee would have received for the shares of
stock covered by the vested portion of the option exceeds the exercise price of
the option. The Board may amend, suspend or terminate the Stock Plan as long as
such action does not adversely affect any outstanding option or purchase right
and provided that shareholder approval shall be required for any amendment to
(i) increase the number of shares subject to the Stock Plan, (ii) materially
change eligibility for the grant of options or purchase rights, or (iii)
materially increase the benefits accruing to participants. If not terminated
earlier, the Stock Plan will terminate in 2003.
1996 NONEMPLOYEE DIRECTORS STOCK OPTION PLAN
The Company's Directors Plan was adopted by the Board of Directors in March
1996 and approved by the shareholders in April 1996. There are 300,000 shares of
Common Stock reserved for issuance under the Directors Plan. Only nonemployee
directors of the Company are eligible to participate in the Directors Plan and
53
<PAGE>
only nonstatutory stock options can be granted. The Directors Plan provides that
option grants to nonemployee directors of the Company are made on a mandatory
basis and not on a discretionary basis. The Directors Plan may be administered
by the Board of Directors or the Board may delegate its authority to a committee
composed of not less than two outside directors (the "Administrator") and may
delegate routine matters to management.
If a person who is neither an officer nor an employee of the Company and who
has not previously been a member of the Board is elected or appointed director,
the Company is required to grant that person an initial 10-year option to
purchase 33,333 shares of the Company's Common Stock at an exercise price equal
to the fair market value of Common Stock on the date of grant. Each such option
will become exercisable at the rate of one-fifth of the number of shares covered
by the option on each anniversary of the grant date so long as the director is
serving on the Board with full vesting over five years.
In addition, on the date of each annual meeting of the shareholders of the
Company held after January 1, 2001 for existing nonemployee directors who
continue on the Board and after 54 months after the initial option grant to new
nonemployee directors who continue on the Board, the Company will grant to each
nonemployee director a ten-year option to purchase 6,667 shares of the Company's
Common Stock, at an exercise price equal to the fair market value of Common
Stock on the date of grant. These options will vest one year after grant.
The consideration payable in connection with any option (including any
related taxes) may be paid in cash, by promissory note of the nonemployee
director or by delivery of shares of Common Stock of the Company. Options
generally terminate three months after a nonemployee director ceases to be, for
any reason, a director of the Company, with the following exceptions: if a
nonemployee director ceases to be a director due to death, disability or
retirement, the option may be exercised for 18 months after the termination.
The Board may amend, alter, or discontinue the Directors Plan or any option
at any time, except that the consent of a participant is required if the
participant's existing rights under an outstanding option would be impaired. In
addition, to the extent required under applicable tax and securities laws and
regulations, the shareholders of the Company must approve any amendment,
alteration, or discontinuance of the Directors Plan that would increase the
total number of shares reserved under the Directors Plan and in certain other
circumstances as the Board may deem advisable to comply with such laws and
regulations. In addition, the provisions of the plan governing who is granted
options, the number of shares covered by each option, the exercise price, and
the period of exercisability and the timing of option grants may not be amended
more than once every six months, other than for changes to comply with the
Internal Revenue Code of 1986 or the Employee Retirement Income Security Act of
1974.
In the event of a merger, consolidation, sale of all or substantially all of
the Company's assets, or any like occurrence, the options will vest at twice the
rates set forth above.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation limit the liability of directors for
monetary damages to the maximum extent permitted by California law. Such
limitation of liability has no effect on the availability of equitable remedies,
such as injunctive relief or rescission. The Company is also empowered under its
Articles of Incorporation to enter into indemnification agreements with its
directors and officers and to purchase insurance on behalf of any person whom it
is required to indemnify. The Company's Bylaws provide that the Company will
indemnify its directors and officers as a contractural obligation and may
indemnify its employees and agents against certain liabilities to the fullest
extent permitted by California law. The Company has entered into indemnification
agreements with each of its current directors and officers or persons
controlling the Company pursuant to the foregoing provisions.
54
<PAGE>
CERTAIN TRANSACTIONS
In September 1993, the Company sold an aggregate of 6,000,000 shares of
Series A Preferred Stock (the "Series A") at $3.50 per share in a private
placement transaction. In August 1995, in another private placement transaction,
the Company sold an aggregate of 8,666,666 shares of Series B Preferred Stock
(the "Series B") at $4.50 per share.
The purchasers of the Series A and Series B (collectively, the "Preferred
Stock") included, among others, the following executive officers and directors
of the Company and investors known to own beneficially more than 5% of the
Company's outstanding Common Stock (assuming conversion of all outstanding
shares of Preferred Stock into Common Stock) (see "Principal Shareholders"):
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------------
DIRECTORS AND EXECUTIVE OFFICERS SERIES A SERIES B
- ------------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
John D. Diekman................................................................ 20,000 40,000
Paul A. Berg................................................................... 10,000 15,000
John A. Young.................................................................. 20,000 40,000
Vernon R. Loucks, Jr........................................................... -- 40,000
Alejandro C. Zaffaroni......................................................... -- 450,000
<CAPTION>
5% SHAREHOLDERS
- -------------------------------------------------------------------------------
<S> <C> <C>
Glaxo Wellcome plc (indirectly through Affymax N.V.)........................... 1,250,000 1,333,333
College Retirement Equities Fund............................................... 1,428,570 800,000
R.A. Investment Group.......................................................... 570,000 856,000
</TABLE>
In July 1995, the Company and Glaxo entered into an agreement (the
"Governance Agreement") pursuant to which Glaxo has the right to designate a
number of directors based on the percentage of voting stock then held directly
or indirectly by Glaxo and is obligated to vote its shares for the slate of
directors recommended to the shareholders. Glaxo currently has the right to
designate four of the nine directors of the Company. See "Management --
Executive Officers and Directors." Pursuant to the Governance Agreement, Glaxo
also agreed that any merger, consolidation or business combination whereby the
Company would become a direct or indirect wholly-owned subsidiary of Glaxo and
any material transaction between the Company and Glaxo must be approved by a
majority of the independent directors of the Company. In addition, pursuant to
the Governance Agreement, the Company granted Glaxo certain registration rights
with respect to its shares. See "Description of Stock -- Registration Rights of
Certain Shareholders."
In December 1994, Affymax provided a bridge loan to the Company in the
principal amount of $6.0 million. The loan was evidenced by a subordinated
convertible promissory note, the terms of which were amended by the Governance
Agreement (the "Convertible Note") and was converted into 1,333,333 shares of
Series B Senior Convertible Preferred Stock in August 1995. Interest on the
Convertible Note through the date of conversion, amounting to $319,856, was
satisfied by the Company issuing Affymax three five-year warrants to purchase an
aggregate of 202,441 shares of Series 2 Subordinated Convertible Preferred Stock
at $5.50 per share.
In connection with the lease agreement between the Company and a third
party, in December 1994, Affymax agreed to relieve the Company of certain
financial covenants and to guarantee its obligation to the third party in
exchange for warrants to purchase Series 2 Subordinated Convertible Preferred
Stock. In December 1994, Affymax received a five-year warrant to purchase
103,382 shares of Series 2 Subordinated Convertible Preferred Stock at $5.50 per
share pursuant to this agreement.
Effective January 1, 1993, the Company entered into the Technology License
Agreement with Affymax whereby the Company was granted an exclusive worldwide
royalty free license from Affymax, with the right to sublicense, to certain
technology and to certain future inventions to be used in the development,
production and sale of products and services in the clinical diagnostic and
research supply markets. See "Intellectual Property." In August 1993, the
Company agreed to issue Affymax 8,500,000 shares of Series 1 Subordinated
Convertible Preferred Stock as consideration for the Technology License
Agreement and funding the Company's operations through September 1993.
55
<PAGE>
The Company and Affymax Research Institute, a subsidiary of Affymax ("ARI"),
entered into a Services Agreement dated October 1, 1993, pursuant to which ARI
agreed to perform certain administrative and management services for the
Company. For the fiscal year ended December 31, 1995, the Company made payments
to ARI in the aggregate amount of $834,000. John D. Diekman is a director of
ARI.
In February 1994, the Company entered into a sublease with Affymax providing
for the Company to sublease facilities in Santa Clara from Affymax until October
1, 1995. The sublease provides for its term to be extended until August 31, 2003
in the event that, at the Company's request, Affymax exercises its option to
extend the underlying lease until that date. In April 1995, the option was
exercised to extend the lease to October 1, 1996.
The Company believes that the agreements with Affymax are on terms no less
favorable to the Company than would be obtained from unaffiliated third parties.
In May 1996, the Company entered into an agreement with Glaxo to develop and
supply probe arrays to detect polymorphisms in specific genes. See "Business --
Genomics Application Areas" and "-- Collaborative Agreements and Grants."
In December 1993, in connection with grants to each of Stephen P.A. Fodor
and David B. Singer of rights to purchase 133,333 shares of Common Stock at
$0.30 per share, subject to repurchase at the Company's option, the Company
entered into Loan and Pledge Agreements with each of Dr. Fodor and Mr. Singer.
Pursuant to those agreements, the Company lent Dr. Fodor and Mr. Singer each
$40,000, which loans are evidenced by secured promissory notes due in July 1998
or when their employment is terminated. These notes bear interest at the rate of
5.07% per annum. Interest payments on the notes are due and payable each year
until the loan is repaid.
In November 1994, the Company agreed to guarantee a loan in the amount of
$117,000 of Stephen P. A. Fodor.
In June 1995, the Company entered into an agreement with David B. Singer in
connection with his assumption of the position of Vice Chairman of the Board.
Pursuant to Mr. Singer's transition from President, Chief Executive Officer and
Chief Financial Officer to Vice Chairman, Mr. Singer continues to be paid
$14,583 per month and may receive health care coverage until December 15, 1996.
In addition, pursuant to the agreement, the Company relinquished its right to
repurchase any of the 133,333 shares of Common Stock acquired by Mr. Singer in
December 1993, amended the option to purchase 100,000 shares granted to Mr.
Singer in December 1994 to fully vest 50,000 shares as of September 1995, and
waived its right to demand repayment of Mr. Singer's $40,000 promissory note
until July 1998. Pursuant to the agreement, Mr. Singer agreed to continue to
serve as a Director of the Company if nominated and elected by the shareholders,
to serve as Vice Chairman of the Board, and to provide consulting services to
the Company relating to the financing of the Company, grants and government
relations.
The Company and Symyx, Inc. ("Symyx") have entered into a sublease agreement
for a portion of the property leased to the Company in Sunnyvale at market
rates. Kenneth J. Nussbacher is a director, and Alejandro C. Zaffaroni is a
director and greater than 10% stockholder, of Symyx.
The Company has entered into indemnification agreements with each of its
directors and executive officers. Such agreements require the Company to
indemnify such persons to the fullest extent permitted by California law. See
"Management -- Limitation of Liability and Indemnification Matters."
56
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of April 30, 1996, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby by (i) each
person who is known by the Company to be the beneficial owner of more than 5% of
the Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers and (iv) all current directors and executive officers as a
group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY
OWNED (1)(2)
SHARES ---------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER OWNED (1) OFFERING OFFERING
- -------------------------------------------------------------------------------- ----------- ---------- ---------
<S> <C> <C> <C>
Glaxo Wellcome plc (3).......................................................... 7,705,067 46.8% 34.3%
Greenford Road
Greenford, Middlesex, UBG OHE, UK
College Retirement Equities Fund................................................ 1,507,991 9.3% 6.8%
730 Third Avenue
New York, NY 10017
R.A. Investment Group........................................................... 959,554 5.9% 4.3%
200 West Madison, Suite 3800
Chicago, IL 60606
Paul A. Berg, Ph.D (4).......................................................... 38,488 * *
John D. Diekman, Ph.D (5)....................................................... 76,177 * *
Stephen P.A. Fodor, Ph.D (6).................................................... 153,333 * *
Douglas M. Hurt (7)............................................................. 7,705,067 46.8 % 34.3%
Paul M. Kaplan (8).............................................................. 13,334 * *
Vernon R. Loucks, Jr............................................................ 59,999 * *
Richard P. Rava, Ph.D (9)....................................................... 11,333 * *
Barry C. Ross, Ph.D (7)......................................................... 7,705,067 46.8 % 34.3%
David B. Singer................................................................. 160,666 * *
John A. Young................................................................... 41,643 * *
Alejandro C. Zaffaroni, Ph.D (10)............................................... 140,000 * *
All directors and executive officers as a group (13 persons) (11)............... 8,426,706 50.9 % 37.4%
</TABLE>
- ------------
* Represents beneficial ownership of less than one percent of the Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of Shares
beneficially owned by a person and the percentage of ownership of that
person, shares of Common Stock subject to options held by that person that
are currently exercisable or exercisable within 60 days of April 30, 1996
are deemed outstanding. Such shares, however, are not deemed outstanding for
the purpose of computing the percentage ownership of each other person. The
persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and except as indicated
in the other footnotes to this table.
(2) Percentage of beneficial ownership is based on 16,248,148 shares of Common
Stock outstanding as of April 30, 1996 and 22,248,148 shares of Common Stock
outstanding after completion of this offering.
(3) Held through its subsidiary, Affymax N.V. Includes 203,881 shares issuable
upon exercise of outstanding warrants at $8.25 per share.
57
<PAGE>
(4) Includes 3,333 shares issuable upon exercise of options exercisable within
60 days of April 30, 1996.
(5) Includes 40,000 shares issuable upon exercise of options within 60 days of
April 30, 1996.
(6) Includes 20,000 shares issuable upon exercise of options within 60 days of
April 30, 1996.
(7) Represents 7,705,067 shares beneficially owned by Glaxo, of which Mr. Hurt
and Dr. Ross disclaim beneficial ownership.
(8) Represents 13,334 shares issuable upon exercise of options exercisable
within 60 days of April 30, 1996.
(9) Includes 1,333 shares issuable upon exercise of options within 60 days of
April 30, 1996.
(10) Includes 6,667 shares issuable upon exercise of options within 60 days of
April 30, 1996 and excludes any shares Dr. Zaffaroni may purchase in the
offering. See "Underwriting."
(11) Includes 98,000 shares issuable upon exercise of options within 60 days of
April 30, 1996. Also includes 7,705,067 shares owned by Glaxo, of which Mr.
Hurt and Dr. Ross disclaim beneficial ownership. Excludes any shares Dr.
Zaffaroni may purchase in the offering. See "Underwriting."
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, no par value, and
27,500,000 shares of Preferred Stock, no par value (the "Undesignated Preferred
Stock").
COMMON STOCK
At March 31, 1996, assuming the conversion of all outstanding Preferred
Stock and the issuance of 203,881 shares of Common Stock pursuant to the
exercise or conversion of outstanding warrants, 16,443,112 shares of Common
Stock were outstanding and held of record by shareholders. Options to purchase
an aggregate of 2,191,518 shares of Common Stock were also outstanding. See
"Management -- Stock Plans."
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior rights of
Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions available to the Common Stock. All outstanding shares of
Common Stock are fully paid and non-assessable.
PREFERRED STOCK
Effective upon the closing of this offering, the Company will be authorized
to issue 27,500,000 shares of Undesignated Preferred Stock. The Board of
Directors will have the authority to issue the Undesignated Preferred Stock in
one or more series and to determine the powers, preferences and rights and the
qualifications, limitation or restrictions granted to or imposed upon any wholly
unissued shares of Undesignated Preferred Stock and fix the number of shares
constituting any series and the designation of such series, without any further
vote or action by the shareholders. The issuance of Undesignated Preferred Stock
may have the effect of delaying, deferring or preventing a change in control of
the Company without further action by the shareholders and may adversely affect
the voting and other rights of the holders of Common Stock. At present, the
Company has no plans to issue any shares of Undesignated Preferred Stock.
REGISTRATION RIGHTS OF CERTAIN SHAREHOLDERS
Certain holders of Common Stock or their transferees are entitled to certain
rights with respect to the registration of such shares under the Securities Act.
Registration rights are held with respect to 9,871,185 shares of Common Stock
issuable upon the conversion of Preferred Stock under the terms of agreements
between the Company and the holders of Series A and B Senior Preferred Stock
(collectively the "Registrable Securities"). Subject to certain limitations in
the agreements, the holders of Registrable Securities have "piggyback" rights to
request that their shares be registered for public resale with respect to up to
four registrations of the Company's securities. However, if such piggyback
rights are exercised in connection with an underwritten offering of the
Company's Common Stock, the underwriter of such offering has the right to reduce
to 20% of the total the number of such shares to be included in such public
offering or, in the case of the initial public offering, to exclude such shares
entirely. In addition, at a time when the Company is eligible to register
securities on Form S-3, holders of Registrable Securities not already registered
may demand that the Company file a Form S-3, provided that the aggregate
offering price of the Registrable Securities would be at least $2,000,000. The
Company will pay certain expenses in connection with the exercise of the
foregoing rights. These registration rights expire five years after an initial
public offering of the Company's securities.
Pursuant to the Governance Agreement, the Company also has granted to Glaxo,
as long as Glaxo and its subsidiaries hold more than 10% of the outstanding
Common Stock of the Company, the right to demand, at any time after six months
following the Company's initial public offering, that the Company file an
underwritten registration statement covering the registration of at least 40% of
the Common Stock held by Glaxo and its subsidiaries. Glaxo's registration rights
cover 7,705,067 shares of Common Stock issuable on conversion of Preferred Stock
(including Series 1 Subordinated Convertible Preferred and Series 2 Subordinated
Convertible
59
<PAGE>
Preferred Stock, issuable upon exercise of warrants). If such demand is made
after the time the Company is, or normally would have been, eligible to register
securities on Form S-3, the Company will pay certain expenses incurred by Glaxo
in exercising these demand rights. Glaxo has this demand right with respect to
up to four registrations of the Company's securities on Form S-1 and an
unlimited number of registrations on Form S-3. In addition, pursuant to the
Governance Agreement, Glaxo has piggyback rights similar to those held by
holders of the Registrable Securities.
WARRANTS
Pursuant to the terms of an agreement between Affymetrix and Affymax dated
December 29, 1994, whereby Affymax agreed to guarantee Affymetrix' lease
obligations to a third party, Affymetrix has issued to Affymax a warrant to
purchase 103,382 shares of Series 2 Subordinated Convertible Preferred Stock.
The warrants have an exercise price of $5.50 and expire in December 1999.
Pursuant to the terms of a note agreement, Affymetrix has issued to Affymax
warrants to purchase 202,441 shares of Series 2 Subordinated Convertible
Preferred Stock for certain interest payments otherwise due on the note through
August 1995, at which time the note was converted into Preferred Stock. These
warrants have an exercise price of $5.50 and expire from March to July 2000.
After the offering, as a result of automatic conversion of the Preferred Stock
upon the closing of this offering and the 2-for-3 reverse stock split, these
warrants will be exercisable for a total of 203,881 shares of Common Stock at an
exercise price of $8.25 per share. See "Certain Transactions."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is American
Stock Transfer & Trust Company.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
22,239,231 shares of Common Stock. Of these shares, the 6,000,000 shares sold in
this offering (plus any shares issued upon exercise of the Underwriters'
over-allotment option) will be freely tradeable without restriction under the
Securities Act, unless purchased or held by "affiliates" of the Company as that
term is defined in Rule 144 under the Securities Act and the regulations
promulgated thereunder.
The remaining 16,239,231 shares of Common Stock outstanding (or any
securities exercisable for or convertible into the Company's Common Stock) held
by officers, directors, employees, consultants and certain shareholders, are
"restricted securities" within the meaning of Rule 144 under the Securities Act
("Restricted Shares"). Restricted Shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act, which are summarized
below. Sales of the Restricted Shares in the public market, or the availability
of such shares for sale, could adversely affect the market price of the Common
Stock. None of the Restricted Shares will be available for sale upon the
Effective Date. Approximately 50,100 of these shares of Common Stock will be
eligible for sale in the public market 90 days after the Effective Date subject
to the provisions of Rule 701. In addition, an additional 186,140 shares subject
to vested options will be available for sale 90 days after the Effective Date
subject to compliance with Rule 701.
The officers, directors, certain employees and shareholders of the Company
have entered into contractual "lock-up" agreements generally providing that they
will not offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of the shares of Common Stock of the Company or any securities
exercisable for or convertible into the Company's Common Stock owned by them for
a period of 180 days after the Effective Date without the prior written consent
of Robertson, Stephens & Company. Pursuant to the Stock Plan, all shares of
Common Stock issued upon exercise of options are also subject to a lock-up
arrangement for a period of 180 days after the date of this prospectus.
Robertson, Stephens & Company may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements.
As a result of these contractual restrictions, notwithstanding possible
earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701,
shares subject to lock-up agreements will not be saleable until such agreements
expire or are waived by Robertson, Stephens & Company. Beginning 180 days after
the Effective Date, approximately 10,411,408 additional Restricted Shares will
become eligible for sale subject to the provisions of Rule 144 or Rule 701 upon
the expiration of the lock-up agreements not to sell such shares. In addition,
beginning 180 days after the Effective Date, an additional 183,366 shares
subject to vested options will be available for sale subject to compliance with
Rule 701 upon the expiration of lock-up agreements not to sell such shares.
Robertson, Stephens & Company may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements.
In general, under Rule 144, as currently in effect, beginning 90 days after
the Effective Date, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least two years would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 222,392 shares immediately after
this offering); or (ii) the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed to
have been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned the shares proposed to be sold for at least
three years, is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule 144.
Beginning 90 days after the Effective Date, certain shares issued upon
exercise of options granted by the Company prior to the date of this Prospectus
will also be available for sale in the public market pursuant to Rule 701 under
the Securities Act. Any employee, officer or director of or consultant to the
Company who purchased his or her shares pursuant to a written compensatory plan
or contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits affiliates to sell their Rule 701 shares under Rule 144 without
61
<PAGE>
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the public information, volume limitation or
notice provisions of Rule 144. In both cases, a holder of Rule 701 shares is
required to wait until 90 days after the date of this Prospectus before selling
such shares.
The Company intends to file registration statements under the Securities Act
180 days after the Effective Date to register shares of Common Stock reserved
for issuance under the Stock Plan and the Directors Plan, thus permitting the
resale of such shares by non-affiliates in the public market without restriction
under the Securities Act. Such registration statements will become immediately
upon filing.
As of April 30, 1996, the holders of approximately 15,834,537 shares are
entitled to certain registration rights with respect to such shares. If a large
number of such shares were registered and sold in the public market, such sales
could have an adverse effect on the market price for the Company's Common Stock.
If the Company were required to include in a Company-initiated registration the
shares held by such holders pursuant to the exercise of their registration
rights, such sales may have an adverse effect on the Company's ability to raise
needed capital. See "Description of Capital Stock -- Registration Rights of
Certain Shareholders."
Prior to this offering, there has been no public market for the Common Stock
of the Company and no predictions can be made as to the effect, if any, that
market sales of shares of Common Stock prevailing from time to time may have on
the market price of the Common Stock. Nevertheless, sales of significant numbers
of shares of the Common Stock in the public market may adversely affect the
market price of the Common Stock offered hereby and could impair the Company's
future ability to raise capital through an offering of its equity securities.
62
<PAGE>
UNDERWRITING
The Underwriters named below acting through their representatives,
Robertson, Stephens & Company LLC, CS First Boston Corporation and Montgomery
Securities (the "Representatives"), have severally agreed, subject to the terms
and conditions of the Underwriting Agreement to purchase from the Company the
number of shares of Common Stock set forth opposite their respective names
below. The Underwriters are committed to purchase and pay for all of such shares
if any are purchased:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- -------------------------------------------------------------------------------------------- ----------
<S> <C>
Robertson, Stephens & Company LLC...........................................................
CS First Boston Corporation.................................................................
Montgomery Securities.......................................................................
----------
Total................................................................................... 6,000,000
----------
----------
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price, less a concession of not more than $ per share, of which
$ may be reallowed to other dealers. After the initial public offering, the
public offering price, concession and reallowances to dealers may be reduced by
the Representatives.
The Underwriters may offer up to $3 million worth of the Common Stock to
Alejandro C. Zaffaroni, a founder and director of the Company, at the initial
public offering price set forth on the cover page of this Prospectus. The
Underwriters would not receive an underwriting discount or commission on the
sale of any of these shares of Common Stock to Dr. Zaffaroni.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
additional 900,000 shares of Common Stock at the same price per share as the
Company receives for the 6,000,000 shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
6,000,000 shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 6,000,000
shares are being sold. The Company will be obligated, pursuant to the option, to
sell shares to the Underwriters to the extent the option is exercised. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of shares of Common Stock offered hereby.
The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended, and liability arising
from breaches of representations and warranties contained in the Underwriting
Agreement.
Each officer, director and certain shareholders together holding
approximately 12,643,742 shares of Common Stock have agreed with the
Representatives that, until 180 days from the Effective Date, subject to certain
limited exceptions, they will not, directly or indirectly, sell, offer contract
to sell, pledge, grant any option to purchase or otherwise dispose of any shares
of Common Stock or any securities convertible into, or exchangeable for, or any
rights to purchase or acquire, shares of Common Stock, owned directly by such
holders or with respect to which they have the power of disposition, without the
prior written consent of Robertson, Stephens & Company LLC. Approximately
10,411,408 of such shares will be eligible for immediate public sale following
expiration of the lock-up period pursuant to Rule 144. Robertson, Stephens &
Company LLC may, in its sole discretion and at any time without notice, release
all or any portion of the securities subject to lock-up agreements. In addition,
the Company has agreed that, until 180 days from the Effective Date, the Company
will not, without the prior written consent of Robertson, Stephens & Company
LLC, subject to certain limited exceptions, sell or otherwise dispose of, any
shares of Common Stock, any options or warrants to purchase any
63
<PAGE>
shares of Common Stock or any securities convertible into, exercisable for or
exchangeable for shares of Common Stock other than the Company's sale of shares
in this offering, the issuance of Common Stock upon the exercise of the
outstanding warrants or options, or the Company's grant of options and issuance
of stock under existing employee stock option or stock purchase plans. See
"Shares Eligible for Future Sale."
The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock was determined through negotiations between the Company and the
Representatives. The material factors considered in such negotiations were
prevailing market conditions, certain financial information of the Company in
recent periods, market valuations of other companies that the Company and the
Representatives believed to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and the Company's management.
A managing director of CS First Boston Corporation, one of the
Representatives, is the beneficial owner of 7,407 shares of Common Stock.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Heller Ehrman White & McAuliffe, Palo Alto, California. Julian N.
Stern, the beneficial owner of 26,980 shares of Common Stock, is the sole
shareholder and employee of a professional corporation that is a partner of
Heller Ehrman White & McAuliffe. Certain legal matters relating to the offering
will be passed upon for the Underwriters by Wilson, Sonsini, Goodrich & Rosati,
Palo Alto, California.
EXPERTS
The financial statements of Affymetrix at December 31, 1994 and 1995, and
for the years ended December 31, 1993, 1994 and 1995, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The statements in this Prospectus as set forth under the captions "Risk
Factors -- Dependence on Proprietary Technology and Unpredictability of Patent
Protection" and "Business -- Intellectual Property" have been passed upon by
Townsend and Townsend and Crew LLP, Palo Alto, California, patent counsel to the
Company, as experts on such matters, and are included herein in reliance upon
that review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement, of which this Prospectus constitutes a
part, under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus omits certain information contained in the
Registration Statement, and reference is made to the Registration Statement and
the exhibits and schedules thereto for further information with respect to the
Company and the Common Stock offered hereby. Statements contained in this
Prospectus as to the provisions of any referenced contracts or other documents
summarize the material elements of such contracts or documents. Such statements,
however, are not necessarily complete, and in each instance reference is made to
the copy of such document filed as an exhibit to the Registration Statement.
Each such statement is qualified in its entirety by such reference. The
Registration Statement, including exhibits and schedules filed therewith, may be
inspected without charge at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may be obtained from the Public Reference Section of the Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its public
reference facilities in New York, New York and Chicago, Illinois, at prescribed
rates.
64
<PAGE>
GLOSSARY
<TABLE>
<S> <C>
Amplification..................... An increase in the number of copies of specific DNA or
RNA fragments.
Base.............................. The nucleotides that comprise DNA.
Chromosomes....................... The self-replicating genetic structures in cells
containing the cellular DNA that bears in its nucleotide
sequence the linear array of genes.
Complementary sequence............ Nucleic acid base sequences that can form a
double-stranded structure by matching base pairs; the
complementary sequence to GTAC is CATG.
DNA (deoxyribonucleic acid)....... The molecule that encodes genetic information. DNA is a
double-stranded molecule held together by weak bonds
between base pairs. The four nucleotides in DNA contain
the bases adenine (A), guanine (G), cytosine (C) and
thymine (T). In nature, base pairs form only between A
and T and between G and C; thus, the base sequence of
each single strand can be deduced from that of its
complementary sequence.
DNA sequence...................... The relative order of base pairs, whether in a fragment
of DNA, a gene, a chromosome, or an entire genome.
DNA synthesis..................... The process of building strands of nucleotide bases
through controlled chemical reactions.
Feature........................... A discrete section of a probe array containing millions
of copies of the same DNA probe. Each probe array
contains from 16,000 to more than 100,000 individual
features.
Fluorescent label................. A compound that may be attached to another molecule and
that is capable of emitting light. The emitted light may
be detected to determine the presence or location of
the molecule.
Gel-based sequencing.............. Determination of the order of nucleotides (base
sequences) in a DNA molecule using a matrix of a
polymeric molecule to form a gel, which separates
pieces of DNA in an electric field based upon their
sizes.
Gene.............................. The fundamental physical and functional unit of
heredity. A gene is an ordered sequence of nucleotides
located in a particular position on a particular
chromosome that encodes a specific functional product.
Gene expression................... The process by which a gene's coded information creates
the structures present and operating in the cell.
Expressed genes include those that are transcribed into
mRNA and then translated into protein and those that
are transcribed into RNA but not translated into
protein.
Gene expression monitoring........ The process of correlating the level and timing of gene
expression with abnormal cellular behavior and disease.
Genetic code...................... The sequence of nucleotides, coded in triplets along the
mRNA, that determines the sequence of amino acids in
protein synthesis. The DNA sequence of a gene can be
used to predict the mRNA sequence, and the genetic code
can in turn be used to predict the amino acid sequence.
</TABLE>
65
<PAGE>
<TABLE>
<S> <C>
Genetic mapping................... Determining the relative positions of genes on a DNA
molecule and the distance between them.
Genetic marker.................... An identifiable physical location on a chromosome, whose
inheritance can be monitored.
Genome............................ All the genetic material in the chromosomes of a
particular organism. Genome size is generally given as
its total number of base pairs.
Genomics.......................... The study of genes and their function.
High-throughput sequencing........ The process of identifying and sequencing small
stretches of genes expressed in a certain cell type
using gel-based sequencing techniques.
HIV............................... Human Immunodeficiency Virus, the virus responsible for
HIV disease and its end-stage, AIDS (Acquired
Immunodeficiency Syndrome).
Human Genome Project.............. Collective name for several projects begun in 1986 by
United States Department of Energy to map and sequence
the human genome and develop new techniques and
instruments for detecting and analyzing DNA.
Hybridization..................... The process of joining two complementary strands of DNA
or one each of DNA and RNA to form a double-stranded
molecule.
Immunoassay....................... A diagnostic test that uses a protein produced by the
immune system, called an antibody, to detect specific
proteins that may be used to aid in the identification
or treatment of disease.
In vitro.......................... Studies or phenomena that take place outside the body
(for instance, in test tubes).
Linkage analysis.................. Locating of genes on chromosomes by determining the
inheritance patterns of genetic markers that are close
to one another.
mRNA (messenger RNA).............. RNA that serves as a template for protein synthesis. See
"Genetic code."
Mutation.......................... A transmissible change in the genetic material of an
organism, usually in a single gene.
Nucleic acid...................... A large molecule composed of nucleotide subunits.
Nucleotide........................ A subunit of DNA or RNA consisting of a nitrogenous base
(adenine, guanine, thymine, or cytosine in DNA;
adenine, guanine, uracil, or cytosine in RNA), a
phosphate molecule and a sugar molecule (deoxyribose in
DNA, ribose in RNA). Thousands of nucleotides are
linked to form a DNA or RNA molecule.
Nucleotide pair................... Two nitrogenous bases (adenine and thymine or guanine
and cytosine) held together by weak bonds. Two strands
of DNA are held together in the shape of a double helix
by the bonds between base pairs.
Polymorphism...................... Difference in DNA sequence among individuals.
Polymorphism Screening............ The process of correlating genetic variations with
disease or traits.
Photolithography.................. A technique that uses light to induce chemical reactions
that create exposure patterns on a surface.
</TABLE>
66
<PAGE>
<TABLE>
<S> <C>
Probe............................. Short sequence of DNA used to identify longer stretches
of complementary DNA or RNA sequence.
Probe array....................... Small, disposable chip consisting of densely packed DNA
sequences (probes), where the identity and position of
each probe is known on the chip surface.
Protein........................... A large molecule composed of one or more chains of amino
acids in a specific order; the order is determined by
the base sequence of nucleotides in the gene or genes
coding for the protein. Proteins are required for the
structure, function and regulation of the body's cells,
tissues, and organs, and each protein has unique
functions. Examples of proteins are hormones, enzymes,
and antibodies.
RNA (Ribonucleic acid)............ A chemical found in the nucleus and cytoplasm of cells;
it plays an important role in protein synthesis and
other chemical activities of the cell. The structure of
RNA is similar to that of DNA. There are several
classes of RNA molecules, including messenger RNA,
transfer RNA, ribosomal RNA, and other small RNAs, each
serving a different purpose.
Solid-phase DNA synthesis......... DNA synthesis in which the chains of bases are anchored
to a solid substrate, such as glass, as opposed to being
synthesized in solution.
Virus............................. A noncellular biological entity that can reproduce only
within a host cell. Viruses consist of nucleic acid
covered by protein. Some animal viruses are also
surrounded by membrane. Once inside the infected cell,
the virus uses the synthetic capability of the host to
produce progeny virus.
Wafer............................. Pieces of glass on which multiple probe arrays are
simultaneously manufactured. The wafers are subsequently
diced to yield individual probe arrays.
</TABLE>
67
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2
Financial Statements:
Balance Sheets........................................................................................... F-3
Statements of Operations................................................................................. F-4
Statement of Shareholders' Equity........................................................................ F-5
Statements of Cash Flows................................................................................. F-7
Notes to Financial Statements............................................................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Affymetrix, Inc.
We have audited the accompanying balance sheets of Affymetrix, Inc. (a
development stage company) at December 31, 1994 and 1995, and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995 and for the period from
inception (January 1, 1991) to December 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Affymetrix, Inc. (a
development stage company) at December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 and for the period from inception (January 1, 1991) to
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 9, 1996,
except for the first paragraph of Note 9 as to which the date is
May 20, 1996
F-2
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31, PRO FORMA
----------- SHAREHOLDERS'
1996 EQUITY AT
----------- MARCH 31,
-------------
(UNAUDITED) 1996
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 6,659 $ 2,481 $ 308
Short-term investments....................................... 11,146 36,402 34,529
Contract and grant receivables............................... 90 1,342 636
Inventories.................................................. -- 670 1,469
Other current assets......................................... 88 260 422
--------- --------- -----------
Total current assets....................................... 17,983 41,155 37,364
Property and equipment, at cost:
Equipment and furniture...................................... 2,554 4,254 4,955
Leasehold improvements....................................... 356 586 587
--------- --------- -----------
2,910 4,840 5,542
Less accumulated depreciation and amortization............... (1,047) (1,583) (1,863)
--------- --------- -----------
Net property and equipment................................. 1,863 3,257 3,679
Other assets................................................... 15 140 142
--------- --------- -----------
$ 19,861 $ 44,552 $ 41,185
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities............... $ 1,046 $ 2,469 $ 3,278
Payable to Affymax........................................... 254 89 12
Deferred revenue............................................. 837 2,340 2,153
Current portion of capital lease obligation.................. 169 187 192
--------- --------- -----------
Total current liabilities.................................. 2,306 5,085 5,635
Convertible note payable to Affymax............................ 6,000 -- --
Noncurrent portion of capital lease obligation................. 1,135 948 898
Advance from collaborative partner............................. 1,250 -- --
Commitments.................................................... --
Shareholders' equity:
Convertible preferred stock, no par value; 27,500,000 shares
authorized; 14,500,000 issued and outstanding at December
31, 1994, 23,166,666 at December 31, 1995 and March 31, 1996
(none pro forma); aggregate liquidation preference of
$70,625 at December 31, 1995 and March 31, 1996............. 31,283 70,439 70,439 $ --
Common stock, no par value; 50,000,000 shares authorized;
408,198 shares issued and outstanding at December 31, 1994,
536,267 at December 31, 1995 and 609,240 at March 31, 1996
(16,239,231 pro forma)...................................... 122 2,717 3,089 73,528
Notes receivable from officers............................... (84) (42) (41) (41)
Unrealized gain(loss) on available-for-sale securities....... (382) 281 1 1
Deferred compensation........................................ -- (2,360) (2,399) (2,399)
Deficit accumulated during development stage................. (21,769) (32,516) (36,437) (36,437)
--------- --------- ----------- -------------
Total shareholders' equity................................. 9,170 38,519 34,652 $ 34,652
--------- --------- ----------- -------------
-------------
$ 19,861 $ 44,552 $ 41,185
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- --------- THREE MONTHS PERIOD FROM
ENDED MARCH 31, INCEPTION
------------------------ (JANUARY 1,
1995 1996 1991)
----------- ----------- THROUGH
MARCH 31, 1996
(UNAUDITED) (UNAUDITED) ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Contract and grant revenue.......... $ 1,413 $ 1,574 $ 4,625 $ 854 $ 1,416 $ 9,071
Operating expenses:
Research and development.......... 6,566 9,483 12,420 2,274 4,177 38,328
General and administrative........ 577 2,303 3,833 777 1,649 9,205
--------- --------- --------- ----------- ----------- -------
Total operating expenses
(includes related-party expense
of $1,147, $1,647, $1,432,
$428, $364 and $4,590,
respectively).................. 7,143 11,786 16,253 3,051 5,826 47,533
--------- --------- --------- ----------- ----------- -------
Loss from operations................ (5,730) (10,212) (11,628) (2,197) (4,410) (38,462)
Interest income................... 211 575 1,301 183 517 2,607
Interest expense (includes
related-party expense of $320 in
1995 and $128 in the three months
ended March 31, 1995)............ (73) (43) (420) (160) (28) (582)
--------- --------- --------- ----------- ----------- -------
Net loss............................ $ (5,592) $ (9,680) $ (10,747) $ (2,174) $ (3,921) $ (36,437)
--------- --------- --------- ----------- ----------- -------
--------- --------- --------- ----------- ----------- -------
Pro forma net loss per share........ $ (0.61) $ (0.12) $ (0.22)
--------- ----------- -----------
--------- ----------- -----------
Shares used in computing pro forma
net loss per share................. 17,664 17,663 17,664
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1991) TO MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONTRI-
CONVERTIBLE NOTES BUTIONS
PREFERRED COMMON RECEIVABLE FROM UNREALIZED DEFERRED
STOCK STOCK FROM OFFICERS AFFYMAX GAIN (LOSS) COMPENSATION
----------- ----------- ------------- --------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 666 shares of common stock
for cash in March 1992 at $0.15 per
share................................ $ -- $ -- $ -- $ -- $ -- $ --
Contributions from Affymax (1991 and
1992)................................ -- -- -- 6,316 -- --
Net loss (1991 and 1992).............. -- -- -- -- -- --
----------- ----------- --- --------- ----- ------
Balance at December 31, 1992.......... -- -- -- 6,316 -- --
Contributions from Affymax through
September 1993....................... -- -- -- 4,309 -- --
Issuance of 6,000,000 shares of Series
A Senior convertible preferred stock
for cash in September 1993, at $3.50
per share, net of issuance costs of
$342................................. 20,658 -- -- -- -- --
Conversion of all contributions from
Affymax into 8,500,000 shares of
Series 1 Subordinated convertible
preferred stock in September 1993 at
$1.25 per share...................... 10,625 -- -- (10,625) -- --
Issuance of 66,666 shares of common
stock for cash upon exercise of stock
options in December 1993 at $0.30 per
share................................ -- 20 -- -- -- --
Issuance of 266,666 shares of common
stock for notes receivable upon
exercise of options in December 1993
at $0.30 per share................... -- 80 (80) -- -- --
Net loss.............................. -- -- -- -- -- --
----------- ----------- --- --------- ----- ------
Balance at December 31, 1993.......... 31,283 100 (80) -- -- --
Issuance of 74,200 shares of common
stock for cash upon exercise of stock
options at $0.30 per share........... -- 22 -- -- -- --
Interest accrued on notes receivable
from officers........................ -- -- (4) -- -- --
Unrealized loss on available-for-sale
securities........................... -- -- -- -- (382) --
Net loss.............................. -- -- -- -- -- --
----------- ----------- --- --------- ----- ------
Balance at December 31, 1994.......... 31,283 122 (84) -- (382) --
Issuance of 7,333,333 shares of Series
B Senior convertible preferred stock
for cash in August 1995, at $4.50 per
share, net of issuance costs of
$164................................. 32,836 -- -- -- -- --
Conversion of $6,000 note payable into
1,333,333 shares of Series B Senior
convertible preferred stock in August
1995, at $4.50 per share............. 6,000 -- -- -- -- --
Issuance of 62,749 shares of common
stock for cash upon exercise of stock
options at $0.30 to $0.675 per
share................................ -- 23 -- -- -- --
Issuance of 65,320 shares of common
stock for financing commissions in
August 1995 at $0.675 per share...... -- 44 -- -- -- --
<CAPTION>
DEFICIT TOTAL
ACCUMULATED SHAREHOLDERS'
DURING EQUITY (NET
DEVELOPMENT CAPITAL
STAGE DEFICIENCY)
------------- -------------
<S> <C> <C>
Issuance of 666 shares of common stock
for cash in March 1992 at $0.15 per
share................................ $ -- $ --
Contributions from Affymax (1991 and
1992)................................ -- 6,316
Net loss (1991 and 1992).............. (6,497) (6,497)
------------- -------------
Balance at December 31, 1992.......... (6,497) (181)
Contributions from Affymax through
September 1993....................... -- 4,309
Issuance of 6,000,000 shares of Series
A Senior convertible preferred stock
for cash in September 1993, at $3.50
per share, net of issuance costs of
$342................................. -- 20,658
Conversion of all contributions from
Affymax into 8,500,000 shares of
Series 1 Subordinated convertible
preferred stock in September 1993 at
$1.25 per share...................... -- --
Issuance of 66,666 shares of common
stock for cash upon exercise of stock
options in December 1993 at $0.30 per
share................................ -- 20
Issuance of 266,666 shares of common
stock for notes receivable upon
exercise of options in December 1993
at $0.30 per share................... -- --
Net loss.............................. (5,592) (5,592)
------------- -------------
Balance at December 31, 1993.......... (12,089) 19,214
Issuance of 74,200 shares of common
stock for cash upon exercise of stock
options at $0.30 per share........... -- 22
Interest accrued on notes receivable
from officers........................ -- (4)
Unrealized loss on available-for-sale
securities........................... -- (382)
Net loss.............................. (9,680) (9,680)
------------- -------------
Balance at December 31, 1994.......... (21,769) 9,170
Issuance of 7,333,333 shares of Series
B Senior convertible preferred stock
for cash in August 1995, at $4.50 per
share, net of issuance costs of
$164................................. -- 32,836
Conversion of $6,000 note payable into
1,333,333 shares of Series B Senior
convertible preferred stock in August
1995, at $4.50 per share............. -- 6,000
Issuance of 62,749 shares of common
stock for cash upon exercise of stock
options at $0.30 to $0.675 per
share................................ -- 23
Issuance of 65,320 shares of common
stock for financing commissions in
August 1995 at $0.675 per share...... -- 44
</TABLE>
F-5
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY (CONTINUED)
FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1991) TO MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONTRI-
CONVERTIBLE NOTES BUTIONS
PREFERRED COMMON RECEIVABLE FROM UNREALIZED DEFERRED
STOCK STOCK FROM OFFICERS AFFYMAX GAIN (LOSS) COMPENSATION
----------- ----------- ------------- --------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of warrants in June, July,
and October 1995 for 202,441 of
Series 2 Subordinated convertible
preferred stock at $1.58 per share in
exchange for interest................ 320 -- -- -- -- --
Interest received on notes receivable
from officers........................ -- -- 2 -- -- --
Reclassification of notes receivable
from officers to other assets........ -- -- 40 -- -- --
Compensation from accelerated
options.............................. -- 40 -- -- -- --
Deferred compensation related to grant
of stock options..................... -- 2,488 -- -- -- (2,488)
Amortization of deferred
compensation......................... -- -- -- -- -- 128
Unrealized gain on available-for-sale
securities........................... -- -- -- -- 663 --
Net loss.............................. -- -- -- -- -- --
----------- ----------- --- --------- ----- ------
Balance at December 31, 1995.......... 70,439 2,717 (42) -- 281 (2,360)
Issuance of 72,973 shares of common
stock for cash upon exercise of stock
options at $0.30 to $0.675 per share
(Unaudited).......................... -- 46 -- -- -- --
Interest received on notes receivable
from officers (Unaudited)............ -- -- 1 -- -- --
Deferred compensation related to grant
of stock options (Unaudited)......... -- 326 -- -- -- (326)
Amortization of deferred compensation
(Unaudited).......................... -- -- -- -- -- 287
Unrealized loss on available-for-sale
securities (Unaudited)............... -- -- -- -- (280) --
Net loss (Unaudited).................. -- -- -- -- -- --
----------- ----------- --- --------- ----- ------
Balance at March 31, 1996
(Unaudited).......................... $ 70,439 $ 3,089 $ (41) $ -- $ 1 $ (2,399)
----------- ----------- --- --------- ----- ------
----------- ----------- --- --------- ----- ------
<CAPTION>
DEFICIT TOTAL
ACCUMULATED SHAREHOLDERS'
DURING EQUITY (NET
DEVELOPMENT CAPITAL
STAGE DEFICIENCY)
------------- -------------
<S> <C> <C>
Issuance of warrants in June, July,
and October 1995 for 202,441 of
Series 2 Subordinated convertible
preferred stock at $1.58 per share in
exchange for interest................ -- 320
Interest received on notes receivable
from officers........................ -- 2
Reclassification of notes receivable
from officers to other assets........ -- 40
Compensation from accelerated
options.............................. -- 40
Deferred compensation related to grant
of stock options..................... -- --
Amortization of deferred
compensation......................... -- 128
Unrealized gain on available-for-sale
securities........................... -- 663
Net loss.............................. (10,747) (10,747)
------------- -------------
Balance at December 31, 1995.......... (32,516) 38,519
Issuance of 72,973 shares of common
stock for cash upon exercise of stock
options at $0.30 to $0.675 per share
(Unaudited).......................... -- 46
Interest received on notes receivable
from officers (Unaudited)............ -- 1
Deferred compensation related to grant
of stock options (Unaudited)......... -- --
Amortization of deferred compensation
(Unaudited).......................... -- 287
Unrealized loss on available-for-sale
securities (Unaudited)............... -- (280)
Net loss (Unaudited).................. (3,921) (3,921)
------------- -------------
Balance at March 31, 1996
(Unaudited).......................... $ (36,437) $ 34,652
------------- -------------
------------- -------------
</TABLE>
See accompanyng notes.
F-6
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH
------------------------------- 31,
1993 1994 1995 ------------------------
--------- --------- --------- 1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................... $ (5,592) $ (9,680) $ (10,747) $ (2,174) $ (3,921)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.............................. 465 689 701 150 279
Amortization of investment premiums and discounts, net..... -- 148 (191) 165 (24)
Loss on disposal of equipment.............................. -- 417 188 -- --
Compensation due to accelerated vesting.................... -- -- 40 -- --
Amortization of deferred compensation...................... -- -- 128 -- 287
Interest payable exchanged for warrants.................... -- -- 320 -- --
Changes in operating assets and liabilities:
Contract and grant receivables........................... -- (90) (1,252) (675) 706
Inventories.............................................. -- -- (670) -- (799)
Other current assets..................................... (649) 575 (172) (19) (162)
Other assets............................................. 14 (15) (80) -- (2)
Accounts payable and other accrued liabilities........... 570 295 1,423 (196) 809
Payable to Affymax....................................... 1,574 (1,320) (165) (1) (77)
Deferred revenue......................................... 460 377 253 (150) (187)
Advance from collaborative partner....................... -- 1,250 -- -- --
--------- --------- --------- ----------- -----------
Net cash used in operating activities.................. (3,158) (7,354) (10,224) (2,900) (3,091)
--------- --------- --------- ----------- -----------
Cash flows from investing activities:
Capital expenditures....................................... (1,537) (1,207) (2,283) (580) (701)
Proceeds from the sale of available-for-sale securities.... -- 5,308 8,538 -- 1,466
Proceeds from maturities of available-for-sale
securities................................................ -- -- 5,485 -- 2,156
Purchases of available-for-sale securities................. (13,997) (2,990) (38,428) (2,007) (2,004)
--------- --------- --------- ----------- -----------
Net cash provided by/(used in) investing activities.... (15,534) 1,111 (26,688) (2,587) 917
--------- --------- --------- ----------- -----------
Cash flows from financing activities:
Contributions from Affymax................................... 4,309 -- -- -- --
Issuances of common stock.................................... 20 22 23 -- 46
Issuances of preferred stock, net............................ 20,658 -- 32,880 -- --
Proceeds from capital lease obligation....................... -- 1,307 -- -- --
Principal payments on capital lease obligation............... -- (3) (169) (41) (45)
Issuance of convertible note payable to Affymax.............. -- 6,000 -- -- --
Issuance of notes payable.................................... 333 -- -- -- --
Principal payments on notes payable.......................... (327) (819) -- -- --
--------- --------- --------- ----------- -----------
Net cash provided by (used in) financing activities.... 24,993 6,507 32,734 (41) 1
--------- --------- --------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........... 6,301 264 (4,178) (5,528) (2,173)
Cash and cash equivalents at beginning of period............... 94 6,395 6,659 6,659 2,481
--------- --------- --------- ----------- -----------
Cash and cash equivalents at end of period..................... $ 6,395 $ 6,659 $ 2,481 $ 1,131 $ 308
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Supplemental disclosure of noncash financing activities:
Issuance of common stock for note receivable from officers... $ 80 $ -- $ -- $ -- $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Conversion of note payable and contributions from
Affymax to preferred stock.................................. $ 10,625 $ -- $ 6,000 $ -- $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Assets under capital lease obligation........................ -- $ 1,297 $ -- $ -- $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Issuance of common stock for financing commissions........... $ -- $ -- $ 44 $ -- $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Issuance of warrants in exchange for interest payable........ $ -- $ -- $ 320 $ -- $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Supplemental disclosure of cash flow information:
Interest paid................................................ $ 73 $ 20 $ 122 $ 32 $ 28
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
<CAPTION>
PERIOD FROM
(JANUARY 1,
1991)
THROUGH MARCH
31, 1996
<S> <C>
Cash flows from operating activities:
Net loss..................................................... $ (36,437)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.............................. 2,210
Amortization of investment premiums and discounts, net..... (67)
Loss on disposal of equipment.............................. 605
Compensation due to accelerated vesting.................... 40
Amortization of deferred compensation...................... 415
Interest payable exchanged for warrants.................... 320
Changes in operating assets and liabilities:
Contract and grant receivables........................... (636)
Inventories.............................................. (1,469)
Other current assets..................................... (422)
Other assets............................................. (98)
Accounts payable and other accrued liabilities........... 3,278
Payable to Affymax....................................... 12
Deferred revenue......................................... 903
Advance from collaborative partner....................... 1,250
--------------
Net cash used in operating activities.................. (30,096)
--------------
Cash flows from investing activities:
Capital expenditures....................................... (6,494)
Proceeds from the sale of available-for-sale securities.... 15,312
Proceeds from maturities of available-for-sale
securities................................................ 7,641
Purchases of available-for-sale securities................. (57,419)
--------------
Net cash provided by/(used in) investing activities.... (40,960)
--------------
Cash flows from financing activities:
Contributions from Affymax................................... 10,625
Issuances of common stock.................................... 111
Issuances of preferred stock, net............................ 53,538
Proceeds from capital lease obligation....................... 1,307
Principal payments on capital lease obligation............... (217)
Issuance of convertible note payable to Affymax.............. 6,000
Issuance of notes payable.................................... 1,146
Principal payments on notes payable.......................... (1,146)
--------------
Net cash provided by (used in) financing activities.... 71,364
--------------
Net increase (decrease) in cash and cash equivalents........... 308
Cash and cash equivalents at beginning of period............... --
--------------
Cash and cash equivalents at end of period..................... $ 308
--------------
--------------
Supplemental disclosure of noncash financing activities:
Issuance of common stock for note receivable from officers... $ 80
--------------
--------------
Conversion of note payable and contributions from
Affymax to preferred stock.................................. $ 16,625
--------------
--------------
Assets under capital lease obligation........................ $ 1,297
--------------
--------------
Issuance of common stock for financing commissions........... $ 44
--------------
--------------
Issuance of warrants in exchange for interest payable........ $ 320
--------------
--------------
Supplemental disclosure of cash flow information:
Interest paid................................................ $ 262
--------------
--------------
</TABLE>
See accompanying notes.
F-7
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, OWNERSHIP, AND BUSINESS
Affymetrix, Inc. ("Affymetrix") is a development stage company focused on
developing GeneChip-TM- based products and related technology for the
acquisition, analysis, and management of complex genetic data. The business and
operations of Affymetrix commenced in 1991 by Affymax N.V. and subsidiaries
("Affymax") and were initially conducted within Affymax. In March 1992,
Affymetrix was incorporated as a California corporation and became a wholly
owned subsidiary of Affymax. Beginning in September 1993, Affymetrix issued
equity securities which diluted Affymax' shareholding in Affymetrix. Affymax
owns approximately 46% of Affymetrix at December 31, 1995. In March 1995, Glaxo
plc, now Glaxo Wellcome plc ("Glaxo"), purchased Affymax, including its then 65%
interest in Affymetrix. The accompanying financial statements include the
operations of Affymetrix from inception (January 1, 1991). The advances from
Affymax through September 1993 were recorded as capital contributions and
converted to convertible preferred shares in September 1993. Since September
1993, the financial statements reflect the operations of Affymetrix on a
stand-alone basis.
Affymetrix' success will depend in part on its ability to obtain and
maintain patent protection in the United States and other countries for its
technologies and products. The commercial success of Affymetrix also depends in
part on neither infringing patents or proprietary rights of third parties nor
breaching any licenses that may relate to Affymetrix' technologies and products.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The financial information at March 31, 1996 and for the three-month periods
ended March 31, 1995 and 1996 is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) which Affymetrix considers
necessary for a fair presentation of the financial position at such date and the
operating results and cash flows for those periods. Results for the March 31,
1996 period are not necessarily indicative of the results for the entire year.
REVENUE RECOGNITION
Contract and grant revenue is recorded as earned as defined within the
specific agreements. Payments received in advance under these arrangements are
recorded as deferred revenue until earned. Direct costs associated with these
contracts and grants are reported as research and development expense. Revenue
for the beta shipments are recorded as contract revenue pursuant to the
development agreements.
Revenue from customers representing 10% or more of total contract and grant
revenue during fiscal 1993, 1994, and 1995 is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Customer:
A -- -- 25%
B -- -- 23%
C -- -- 22%
D 49% 54% 17%
E 38% 29% --
</TABLE>
F-8
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenses consist of costs incurred for internal,
contract and grant-sponsored research and development. These costs include
direct and research-related overhead expenses.
NET LOSS PER SHARE
Except as noted below, historical net loss per share is computed using the
weighted average number of common shares outstanding. Common equivalent shares
are excluded from the computation as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting
Bulletins, common and common equivalent shares (stock options, convertible notes
payable, convertible preferred stock, and warrants) issued during the 12 months
prior to the initial filing of the proposed offering at prices below the assumed
public offering price have been included in the calculation as if they were
outstanding for all periods presented (using the treasury stock method for stock
options and warrants and the if-converted method for convertible preferred
stock).
Historical net loss per share information is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net loss per share...... $ (0.75) $ (1.24) $ (1.38) $ (0.28) $ (0.50)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Shares used in computing
net loss per share..... 7,422,000 7,801,000 7,812,000 7,811,000 7,812,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of convertible preferred shares not included
above that will automatically convert upon completion of Affymetrix' initial
public offering (using the if-converted method) from the original date of
issuance.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Effective January 1, 1994, Affymetrix adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The effect of adopting Statement 115 at January 1, 1994 was
immaterial.
Cash equivalents and short-term investments consist of debt securities.
Management determines the appropriate classification of debt securities at the
time of purchase. As of December 31, 1995, Affymetrix' debt securities are
classified as available-for-sale and are carried at fair value with unrealized
gains and losses reported in shareholders' equity. Affymetrix reports all liquid
securities with maturities at date of purchase of three months or less that are
readily convertible into cash and have insignificant interest rate risk as cash
equivalents. All other available-for-sale securities are recorded as short-term
investments. The cost of debt securities is adjusted for amortization of
premiums and discounts to maturity. This amortization is included in interest
income. Realized gains and losses on available-for-sale securities are included
in interest income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income. The fair values of
securities are based on quoted market prices.
F-9
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost, as determined by the first-in,
first-out method, or market and consist entirely of finished goods at December
31, 1995, and $256,000 of raw material and $1,213,000 of finished goods at March
31, 1996.
DEPRECIATION AND AMORTIZATION
The costs of property and equipment are depreciated for financial reporting
purposes using the straight-line method over the estimated useful lives of the
assets ranging from two to five years. Leasehold improvements are amortized over
the useful lives of the assets or the lease-term, whichever is shorter.
Expenditures for maintenance and repairs are expensed as incurred.
ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
Accounts payable and other accrued liabilities include the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- -----------
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Accounts payable......................................... $ 587 $ 1,088 $ 963
Accrued compensation..................................... 262 576 617
Collaborative research refund............................ -- 360 448
Accrued research......................................... 132 115 533
Legal.................................................... -- 222 351
Other.................................................... 65 108 366
--------- --------- -----------
$ 1,046 $ 2,469 $ 3,278
--------- --------- -----------
--------- --------- -----------
</TABLE>
STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued "Accounting
for Stock-Based Compensation" ("Statement No. 123") which is effective for
fiscal 1996. Under Statement No. 123, stock-based compensation expense is
measured using either the intrinsic-value method as prescribed in APB Opinion
No. 25 or the fair value method described in Statement No. 123. Affymetrix
intends to adopt the disclosure only alternative under Statement No. 123 and,
accordingly, Affymetrix will be required to disclose the pro forma net income or
loss and per share amounts in the notes to the financial statements using the
fair value based method. Affymetrix has not yet determined the impact of these
pro forma adjustments.
CONCENTRATIONS OF CREDIT RISK
Cash equivalents and investments are financial instruments which potentially
subject Affymetrix to concentrations of risk. Corporate policy restricts the
amount of credit exposure to any one issuer and to any one type of investment,
other than securities issued by the United States Government.
NOTE 2. COLLABORATIVE AGREEMENTS AND GRANTS
Affymetrix expects to collaborate with various partners to successfully
commercialize its technology. Total costs incurred under contract and grant
arrangements are approximately $1,412,000 in 1993, $1,499,000 in 1994,
$5,237,000 in 1995, $602,000 for the three months ended March 31, 1995,
$1,759,000 for the three months ended March 31, 1996 and $9,952,000 for the
period from inception through March 31, 1996.
F-10
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 2. COLLABORATIVE AGREEMENTS AND GRANTS (CONTINUED)
Affymetrix began its collaboration with Genetics Institute ("GI") in
November 1994 to develop applications of the GeneChip system to the
identification of new genes and new uses of genes using expression monitoring.
Under this agreement, GI funded Affymetrix' research to determine the
feasibility of this application of GeneChip technology and agreed to make
milestone and royalty payments. Under certain circumstances, Affymetrix may pay
royalty payments to GI. If Affymetrix enters into similar agreements for gene
expression with third parties, Affymetrix may be required to refund a portion of
the development funding received from GI and future funding may be
proportionately reduced (see Note 9).
In December 1995, Affymetrix and GI expanded their relationship by entering
into a supply agreement in the field of genomics under which Affymetrix will
manufacture and supply additional custom probe arrays based on specific genes
identified and selected by GI. Unlike the 1994 agreement with GI, this agreement
does not provide research funding to Affymetrix. Pursuant to the agreement, GI
is obligated to purchase and Affymetrix is obligated to supply certain minimum
quantities of custom probe arrays developed for GI until the later of 2001 or
four years after development of specified probe arrays. Affymetrix will receive
fees for the design and delivery of the custom probe arrays, and may receive
milestone payments and royalties on therapeutic compounds if developed by GI
using these probe arrays. GI has exclusive rights to specific probe arrays
supplied by Affymetrix.
In October 1995, Affymetrix entered into a collaborative research and
development agreement with Roche Molecular Systems, Inc. ("Roche"). Under this
agreement, Roche agreed to fund certain research efforts for approximately one
year aimed at developing GeneChip based products designed to detect certain
genetic mutations. Roche is required to make additional payments if certain
milestones are reached. Under certain circumstances, Affymetrix may pay
royalties to Roche.
In August 1995, Affymetrix received a three-year grant from the National
Institutes of Health ("NIH") National Center for Human Genome Research for
approximately $6,000,000. Affymetrix has been awarded approximately $2,000,000
for the first year of the grant, and the remaining amounts are subject to yearly
appropriations by the NIH.
Affymetrix entered into a collaboration with Hewlett-Packard Company ("HP")
in November 1994 for HP to manufacture and supply a more advanced scanner for
the use with Affymetrix' GeneChip probe arrays and for Affymetrix to develop,
manufacture and supply certain probe arrays to HP for sale in certain markets.
In exchange for certain rights, Affymetrix received and will receive certain
payments, including milestones, as defined research and development objectives
are achieved. In addition, HP will fund certain research work at Affymetrix. The
collaborative agreement is for an initial five-year term and shall be extended
thereafter for consecutive three-year terms, unless either party terminates the
agreement upon six months notice. In November 1994, Affymetrix received a
license payment from HP that is classified as deferred revenue and as an advance
from collaborative partner in 1995 and 1994, respectively. The agreement
contains terms, expiring in November 1996, that allow the payment to be applied
towards the purchase of an equity position in Affymetrix upon agreement of both
parties. Affymetrix is required to pay royalties to HP on HP and Company
sponsored probe arrays sold by the Company pursuant to the agreement.
In October 1994, Affymetrix and Molecular Dynamics, Inc. were awarded a
five-year matching grant for a total of $31,500,000 under the Advanced
Technology Program within the National Institute of Standards and Technology to
develop a miniaturized DNA diagnostic device, of which approximately $10,700,000
will be available to Molecular Dynamics. The contract provides that Affymetrix
will receive funding for approximately
F-11
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 2. COLLABORATIVE AGREEMENTS AND GRANTS (CONTINUED)
50% of its costs up to $20,800,000, some of which will be used to fund
activities at collaborating academic institutions. The award is subject to
yearly congressional authorization, which is uncertain. Affymetrix expects to
receive payments monthly based on costs incurred.
Affymetrix recognized revenues of approximately $1,412,000 in 1993,
$1,499,000 in 1994, $1,034,000 in 1995, and $212,000 and $51,000 for the three
months ended March 31, 1995 and 1996, respectively, pursuant to other contracts
and grants.
NOTE 3. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities as of December
31, 1994 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. Government obligations.................... $ 16,503 $ -- $ 382 $ 16,121
--------- --- --- -----------
--------- --- --- -----------
Amounts included in:
cash equivalents........................... $ 4,975 $ -- $ -- $ 4,975
short-term investments..................... 11,528 -- 382 11,146
--------- --- --- -----------
Total securities........................... $ 16,503 $ -- $ 382 $ 16,121
--------- --- --- -----------
--------- --- --- -----------
</TABLE>
The following is a summary of available-for-sale securities as of December
31, 1995 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. Government obligations.................... $ 38,115 $ 309 $ 27 $ 38,397
--------- --- --- -----------
--------- --- --- -----------
Amounts included in:
cash equivalents........................... $ 1,995 $ -- $ -- $ 1,995
short-term investments..................... 36,120 309 27 36,402
--------- --- --- -----------
Total securities........................... $ 38,115 $ 309 $ 27 $ 38,397
--------- --- --- -----------
--------- --- --- -----------
</TABLE>
The gross realized gains and gross realized losses on sales of
available-for-sale securities were immaterial for the years ended December 31,
1994 and 1995.
The following is a summary of the amortized cost and estimated fair value of
available-for-sale securities at December 31, 1995, by contractual maturity (in
thousands):
<TABLE>
<CAPTION>
ESTIMATED FAIR
AMORTIZED COST VALUE
-------------- ------------------
<S> <C> <C>
Mature in one year or less................................ $ 14,184 $ 14,184
Mature after one year through three years................. 23,931 24,213
------- -------
Total................................................... $ 38,115 $ 38,397
------- -------
------- -------
</TABLE>
NOTE 4. RELATED PARTY TRANSACTIONS
In December 1994, Affymetrix issued a $6,000,000 subordinated convertible
promissory note to Affymax. In August of 1995, the note was converted into
1,333,333 shares of Series B Senior convertible preferred stock
F-12
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 4. RELATED PARTY TRANSACTIONS (CONTINUED)
issued at $4.50 per share. Affymetrix also exercised an option to satisfy
interest due on the note through July 1995, amounting to $319,856, by issuing
Affymax five-year warrants to purchase 202,441 shares of Series 2 Subordinated
convertible preferred stock at $5.50 per share.
In December 1994, in connection with a lease agreement between Affymetrix
and a third party, Affymax, with approval of the third party lessor, agreed to
release Affymetrix of certain financial covenants to the third party. In
exchange for this release, Affymetrix issued a five-year warrant to Affymax to
purchase 103,382 shares of Series 2 Subordinated convertible preferred stock at
$5.50 per share.
Effective January 1, 1993, Affymetrix entered into a Technology License
Agreement with Affymax whereby Affymetrix was granted an exclusive worldwide
royalty-free license from Affymax, with the right to sublicense, to certain
technology and to certain future inventions for use in the diagnostic and
research supply markets including uses of DNA probe arrays. In exchange for the
Technology License Agreement and prior Affymax contributions, Affymetrix issued
Affymax 8,500,000 shares of Series 1 Subordinated convertible preferred stock
using a share price of $1.25, and agreed to share certain costs of developing
certain technology.
Two directors of Affymetrix are employees of a subsidiary of Glaxo.
Pursuant to a service agreement, Affymax provided certain general
administrative and legal services to Affymetrix from October 1, 1993 until
December 31, 1994. As of January 1, 1995, the agreement was amended to limit
those services. Amounts expensed by Affymetrix under this agreement are
approximately $787,000 in 1993, $806,000 in 1994, $291,000 in 1995, $150,000 for
the three months ended March 31, 1995, $37,000 for the three months ended March
31, 1996 and $1,921,000 for the period from inception through March 31, 1996.
General administrative and legal services were allocated to Affymetrix based on
time spent by Affymax employees exclusively on Affymetrix activities, at a rate
based on the salaries of the employees involved plus an overhead rate. Such
allocation was reasonable in the opinion of Affymetrix management.
Since January 1, 1993, Affymetrix has been occupying a research facility in
Santa Clara, California subleased from Affymax (See Note 7). Amounts expensed
under this agreement are approximately $275,000 in 1993, $472,000 in 1994,
$529,000 in 1995, $134,000 for the three months ended March 31, 1995, $134,000
for the three months ended March 31, 1996 and $1,410,000 for the period from
inception through March 31, 1996.
Affymetrix received legal services from Townsend and Townsend and Crew LLP
("Townsend") related to the intellectual property rights of Affymetrix. A
partner of Townsend was also an employee on a part time basis of Affymetrix.
Legal expenses related to services performed by Townsend are approximately
$85,000 in 1993, $369,000 in 1994, $612,000 in 1995, $144,000 for the three
months ended March 31, 1995, $193,000 for the three months ended March 31, 1996
and $1,259,000 for the period from inception through March 31, 1996.
In June 1993, the Board approved the issuance of secured loans to certain
officers for a total of $80,000 at an interest rate of 5.07% per year and
payable in full at the earlier of July 1, 1998 or upon termination of
employment. The loans were originally recorded as "notes receivable from
officers" in shareholders' equity. In June 1995, one loan for $40,000 was
reclassified to "other assets". In November 1994, the Board agreed to authorize
$117,000 as collateral to a bank for an officer's loan. In August 1995, the
Board approved the issuance of a five-year secured loan to an employee for a
total of $50,000 at an interest rate of 8% per year and payable in full at the
earlier of October 2, 2000 or upon termination of employment.
F-13
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 5. NOTES PAYABLE AND CREDIT ARRANGEMENTS
NOTES PAYABLE
In December 1994, Affymetrix issued a $6,000,000 subordinated convertible
promissory note to Affymax maturing on December 1, 1997, which was subsequently
converted into 1,333,333 shares of Series B Senior convertible preferred stock
in August 1995 at a conversion rate of $4.50 per share (See Note 4).
CREDIT ARRANGEMENTS
In December 1994, Affymetrix entered into a financing arrangement with a
leasing company for existing equipment. Under the terms of the lease, Affymetrix
received a single minimum aggregate lease payment of $1,307,000 at the inception
of the lease. The leaseback contract includes a five-year term expiring January
2, 2000, with an option to purchase the equipment at the greater of the residual
value or fair market value. Under certain provisions, the lease may be extended
for an additional year. The amount included in property and equipment related to
the lease is $1,761,000 with accumulated depreciation of $464,000 and $818,000
at December 31, 1994 and December 31, 1995, respectively. Amortization of this
property and equipment is included in depreciation expense. Future minimum lease
payments under the capital lease obligation at December 31, 1995 are as follows
(in thousands):
<TABLE>
<S> <C>
1996........................................................ $ 292
1997........................................................ 292
1998........................................................ 292
1999........................................................ 291
2000........................................................ 280
---------
Total minimum lease payments................................ 1,447
Less amount representing interest........................... (312)
---------
Present value of minimum lease payments..................... 1,135
Less current portion........................................ (187)
---------
Noncurrent obligation under capital lease................... $ 948
---------
---------
</TABLE>
NOTE 6. SHAREHOLDERS' EQUITY
PREFERRED SHARES
Affymetrix is authorized to issue 27,500,000 shares of preferred stock,
designated as follows: 6,000,000 for Series A Senior convertible preferred
stock; 8,666,666 for Series B Senior convertible preferred stock; 8,500,000 for
Series 1 Subordinated convertible preferred stock; 1,000,000 for Series 2
Subordinated preferred stock and 3,333,334 shares undesignated.
The following table describes information with respect to the various series
of convertible preferred stock outstanding as of December 31, 1994:
<TABLE>
<CAPTION>
TOTAL
SHARES ISSUED ISSUANCE PRICE LIQUIDATION
AND OUTSTANDING PER SHARE PREFERENCE
--------------- --------------- -------------
<S> <C> <C> <C>
Series A...................................... 6,000,000 $ 3.50 $ 21,000,000
Series 1...................................... 8,500,000 1.25 10,625,000
--------------- -------------
14,500,000 $ 31,625,000
--------------- -------------
--------------- -------------
</TABLE>
F-14
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 6. SHAREHOLDERS' EQUITY (CONTINUED)
The following table describes information with respect to the various series
of convertible preferred stock outstanding as of December 31, 1995 and March 31,
1996:
<TABLE>
<CAPTION>
TOTAL
SHARES ISSUED ISSUANCE PRICE LIQUIDATION
AND OUTSTANDING PER SHARE PREFERENCE
--------------- --------------- -------------
<S> <C> <C> <C>
Series A...................................... 6,000,000 $ 3.50 $ 21,000,000
Series B...................................... 8,666,666 4.50 39,000,000
Series 1...................................... 8,500,000 1.25 10,625,000
--------------- -------------
23,166,666 $ 70,625,000
--------------- -------------
--------------- -------------
</TABLE>
The Series A and Series B Senior and Series 1 and Series 2 Subordinated
convertible shares represent convertible noncumulative preferred shares.
Dividends for Series A and B are payable at $.28 and $.36 per share,
respectively, in preference to payment of any dividends on the Series 1
Subordinated preferred shares, Series 2 Subordinated preferred shares and common
stock, when and if declared by the Board. Dividends for Series 1 and 2 are
payable at $.10 and $.44 per share, respectively. In the event of liquidation,
dissolution, or winding up of Affymetrix, the Series A and Series B Senior
preferred shares will have a liquidation preference over the Series 1
Subordinated preferred shares, Series 2 Subordinated preferred shares and common
stock. Each share of preferred stock is entitled to the number of votes equal to
the number of shares of common stock into which such share of preferred stock
could be converted. Each share of preferred stock is convertible, at the
holder's option, into 0.6667 share of common stock subject to anti-dilution
adjustment upon the issuance of additional shares of common stock as defined in
Affymetrix' Articles of Incorporation (See Note 9).
The Series A Senior preferred shares, Series B Senior preferred shares,
Series 1 Subordinated preferred shares and Series 2 Subordinated preferred
shares will be automatically converted (i) upon the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
common stock to the public at an aggregate offering price of at least
$7,500,000; (ii) immediately upon receipt by Affymetrix of a written request for
conversion of at least 60% of the then outstanding shares of that series; or
(iii) upon the conversion of at least 60% of the shares of that series ever
outstanding.
STOCK WARRANTS
At December 31, 1995, the following warrants to purchase Affymetrix'
preferred stock were outstanding:
<TABLE>
<CAPTION>
EXERCISE NUMBER OF EXPIRATION
PRICE SHARES ISSUE DATE DATE
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Series 2 Subordinated convertible preferred.............. $ 5.50 103,382 1994 1999
Series 2 Subordinated convertible preferred.............. $ 5.50 202,441 1995 2000
</TABLE>
STOCK OPTION AND BENEFIT PLANS
In 1993, the Board adopted the Affymetrix 1993 Stock Plan (the "Stock Plan")
under which incentive stock options, nonqualified stock options and purchase
rights may be granted to employees and outside consultants.
Options granted under the Stock Plan expire no later than ten years from the
date of grant. The option price shall be at least 100% of the fair value on the
date of grant (110% in certain circumstances), as determined by the Board of
Directors. Options may be granted with different vesting terms from time to time
but not to exceed five years from the date of grant.
F-15
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 6. SHAREHOLDERS' EQUITY (CONTINUED)
Activity under the Stock Plan through March 31, 1996 is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------------
NUMBER OF PRICE PER AGGREGATE
SHARES SHARE PRICE
---------- ------------ ------------
<S> <C> <C> <C>
Options granted............................................... 714,081 $ 0.30 $ 214,224
Options exercised............................................. (333,332) 0.30 (100,000)
---------- ------------ ------------
Balance at December 31, 1993................................ 380,749 0.30 114,224
Options granted............................................... 634,238 0.30-0.675 331,547
Options exercised............................................. (74,200) 0.30 (22,260)
Options canceled.............................................. (38,799) 0.30 (11,640)
---------- ------------ ------------
Balance at December 31, 1994................................ 901,988 0.30-0.675 411,871
Options granted............................................... 1,423,917 0.675 961,144
Options exercised............................................. (62,749) 0.30-0.675 (22,524)
Options canceled.............................................. (104,032) 0.30-0.675 (56,597)
---------- ------------ ------------
Balance at December 31, 1995................................ 2,159,124 0.30-0.675 1,293,894
Options granted............................................... 107,500 0.675-4.80 173,281
Options exercised............................................. (72,973) 0.30-0.675 (45,627)
Options cancelled............................................. (2,133) 0.30-0.675 (690)
---------- ------------ ------------
Balance at March 31, 1996................................... 2,191,518 $ 0.30-4.80 $ 1,420,858
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
At December 31, 1995 and March 31, 1996, options for the purchase of 219,446
and 158,490 shares were exercisable, respectively, and 148,889 shares were
subject to repurchase.
For options granted through December 31, 1995, Affymetrix recognized an
aggregate of $2,488,000 as deferred compensation for the excess of the deemed
fair value for financial statement presentation purposes of the common stock
issuable on exercise of such options over the exercise price. Deferred
compensation related to options granted during the three months ended March 31,
1996 was $326,000. The deferred compensation expense is being recognized over
the vesting period of the options.
Affymetrix employees have participated in the Affymax stock option and
benefit plan. The Affymax stock option plan, employees stock purchase plan, and
investment savings plan have had no impact on the financial statements of
Affymetrix.
NOTE 7. OPERATING LEASE COMMITMENTS
Since January 1, 1993, Affymetrix has been occupying a research facility in
Santa Clara, California leased by Affymax. In February 1994, Affymetrix entered
into a noncancelable operating sublease agreement with Affymax for a 21 month
period. Affymetrix obtained an extension through October 1996. The underlying
lease contains an option to renew the lease for an additional term of 82 months.
In December 1994, Affymetrix entered into a noncancelable five-year lease
for the rental of a manufacturing facility in Sunnyvale, California. Affymetrix
has options to renew the lease for two additional three-year terms.
F-16
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 7. OPERATING LEASE COMMITMENTS (CONTINUED)
In October 1995, Affymetrix entered into a four-year lease, and a
noncancelable 17 month sublease, for the rental of a research and development
facility in Sunnyvale, California.
Future minimum rental payments under noncancelable operating leases at
December 31, 1995 are as follows (in thousands):
<TABLE>
<S> <C>
1996........................................................ $ 1,102
1997........................................................ 1,042
1998........................................................ 1,039
1999........................................................ 1,099
2000........................................................ 688
Thereafter.................................................. 1,664
---------
Total minimum rental payments............................... $ 6,634
---------
---------
</TABLE>
Rent expense related to operating leases was approximately $275,000 in 1993,
$472,000 in 1994, $664,000 in 1995 and $2,005,000 for the period from inception
through December 31, 1995.
Affymetrix entered into certain noncancelable obligations for the purchase
of GeneChip equipment and supplies. The maximum commitment under the contracts
at December 31, 1995 is $1,735,000, which will be paid as units are received in
1996.
NOTE 8. INCOME TAXES
As of December 31, 1995, Affymetrix has net operating loss carryforwards of
approximately $22,000,000, which will expire at various dates beginning on 2008
through 2010, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
Significant components of Affymetrix deferred tax assets as of December 31
are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Net operating loss carryforwards.............................. $ 1,733 $ 4,284 $ 8,063
Research credits.............................................. 346 708 1,167
Deferred revenue.............................................. 156 710 1,041
Other-net..................................................... 7 209 532
--------- --------- ---------
Total deferred tax assets..................................... 2,242 5,911 10,803
Valuation allowance for deferred tax assets................... (2,242) (5,911) (10,803)
--------- --------- ---------
Net deferred tax assets....................................... $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
The valuation allowance increased by $2,163,000, $3,669,000, and $4,892,000
during 1993, 1994, and 1995, respectively.
NOTE 9. OTHER EVENTS SUBSEQUENT TO DECEMBER 31, 1995
On March 7, 1996, the Board of Directors approved a two-for-three reverse
stock split of its common stock through an amendment to its Articles of
Incorporation. The reverse stock split was effective on May 20, 1996. All
F-17
<PAGE>
AFFYMETRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM INCEPTION TO MARCH 31, 1996 IS UNAUDITED)
NOTE 9. OTHER EVENTS SUBSEQUENT TO DECEMBER 31, 1995 (CONTINUED)
common share and per share amounts have been retroactively adjusted to reflect
this event. The conversion rates for the various issues of preferred stock have
also been retroactively adjusted to reflect the reverse stock split as well as
the anti-dilution adjustment. As of the effective date of the offering it is
estimated that each share of Series A, Series B and Series 1 preferred stock
will convert into approximately 0.6823, 0.6667, and 0.6775 shares of common
stock, respectively.
In addition, on March 7, 1996, the Board authorized the filing of a
registration statement with the Securities and Exchange Commission permitting
Affymetix to sell shares of its common stock to the public. If the offering is
consummated under the terms presently anticipated, all of the currently
outstanding preferred stock will automatically convert into 15,629,991 shares of
common stock and the warrants will be exercisable for 203,881 shares of common
stock at $8.25 per share. Unaudited pro forma shareholders' equity, as adjusted
for the conversion of the preferred stock, is set forth in the accompanying
balance sheets.
In April 1996, Affymetrix entered into an agreement with Incyte
Pharmaceuticals, Inc. to explore potential uses of DNA probe arrays in the area
of gene expression. As a result of this agreement, Affymetrix is required to
refund 30% of the development funding received from GI, and future funding from
GI will be proportionally reduced. The Company has recorded an accrued liability
for this refund. (See Notes 1 and 2).
In May 1996, Affymetrix entered into an agreement with Glaxo to design, test
and supply probe arrays to demonstrate use of the arrays in detecting
polymorphisms in specific genes. Glaxo and Affymetrix will design and test a
probe array containing genes specified by Glaxo. If successfully developed,
Affymetrix will supply Glaxo's requirements of such probe arrays for research
purposes.
F-18
<PAGE>
Affymetrix GeneChip Probe Array Manufacturing
- -----------------------------------
<TABLE>
<S> <C>
Combinationatorial [PICTURE]
Synthesis
Affymetrix is able to
synthesize tens of
thousands of different
DNA probes in parallel. A
robotic arm is shown
transporting a wafer on a
synthesizer.
[PICTURE] Photolithography
Affymetrix manufactures wafers of
GeneChip probe arrays using a high
resolution photolithographic
fabrication process adapted from the
semiconductor industry. A wafer is
shown being exposed to ultraviolet
light through a lithographic mask.
Wafer-Scale Production [PICTURE]
Affymetrix achieves manufacturing
efficiencies by simultaneously
synthesizing many probe arrays on a
single wafer. A wafer, diced into
individual probe arrays, is shown being
packaged into cartridges.
</TABLE>
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the Common Stock being registered. All amounts are estimated
except the SEC Registration Fee, the NASD Filing Fee and the Nasdaq National
Market Application Fee.
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 30,932
NASD Filing Fee................................................... 9,470
Nasdaq National Market Application Fee............................ 50,000
Blue Sky Qualification Fees and Expenses.......................... 10,000
Accounting Fees and Expenses...................................... 150,000
Legal Fees and Expenses (including Blue Sky)...................... 300,000
Transfer Agent and Registrar Fees................................. 5,000
Printing and Engraving............................................ 150,000
Miscellaneous..................................................... 94,598
---------
Total......................................................... $ 800,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to Section 204(a) and 317 of the California Corporations Code, as
amended, the registrant has included in its articles of incorporation and
by-laws provisions regarding the indemnification of officers and directors of
the registrant. Article Four of registrant's Restated Articles of Incorporation,
as amended, provides as follows:
"The liability of the directors of this corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law. This
corporation is also authorized, to the fullest extent permissible under
California law, to indemnify its agents (as defined in Section 317 of the
California Corporations Code), whether by by-law, agreement or otherwise, in
excess of the indemnification expressly permitted by Section 317 and to advance
defense expenses to its agents in connection with such matters as they are
incurred, subject to the limits on such excess indemnification set forth in
Section 204 of the California Corporations Code. If, after the effective date of
this Article, California law is amended in a manner which permits a corporation
to limit the monetary or other liability of its directors or to authorize
indemnification of, or advancement of such defense expense to, its directors or
other persons, in any such case to a greater extent than is permitted on such
effective date, the references in this Article to "California law" shall to that
extent be deemed to refer to California law as so amended."
Section 29 of the registrant's By-Laws, as amended, provides as follows:
"29. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(A) INDEMNIFICATION. To the fullest extent permissible under California
law, the corporation shall indemnify its directors and officers against all
expenses, judgment, fines settlement and other amounts actually and reasonably
incurred by them in connection with any proceeding, including an action by or in
the right of the corporation, by reason of the fact that such person is or was a
director or officer of the corporation, or is or was serving at the request of
the corporation as a director, officer, trustee, employee or agent of another
corporation, or of a partnership, joint venture, trust or other enterprise
(including service with respect to employee benefit plans). To the fullest
extent permissible under California law, expenses incurred by a director or
officer seeking indemnification under this By-law in defending any proceeding
shall be advanced by the corporation as they are incurred upon receipt by the
corporation of an undertaking by or on behalf of the director or officer to
repay such amount if it shall ultimately be determined that the director or
officer is not entitled to be indemnified by the corporation for those expenses.
If, after the effective date of this By-law, California law is amended in a
manner which permits the corporation to authorize indemnification of or
advancement of expenses to its
II-1
<PAGE>
directors or officers, in any such case to a greater extent than is permitted on
such effective date, the references in this By-law to "California law" shall to
that extent be deemed to refer to California law as so amended. The rights
granted by this By-law are contractual in nature and, as such, may not be
altered with respect to any present or former director or officer without the
written consent of that person.
(b) PROCEDURE. Upon written request to the Board of Directors by a person
seeking indemnification under this By-law, the Board shall promptly determine in
accordance with Section 317(e) of the California Corporations Code whether the
applicable standard of conduct has been met and, if so, the Board shall
authorize indemnification. If the Board cannot authorize indemnification because
the number of directors who are parties to the proceeding with respect to which
indemnification is sought prevents the formation of a quorum of directors who
are not parties to the proceeding, then, upon written request by the person
seeking indemnification, independent legal counsel (by means of a written
opinion obtained at the corporation's expense) or the corporation's shareholders
shall determine whether the applicable standard of conduct has been met and, if
so, shall authorize indemnification.
(c) DEFINITIONS. The term "proceeding" means any threatened, pending or
completed action or proceeding, whether civil, criminal, administrative or
investigative. The term "expenses" includes, without limitation, attorney's fees
and any expenses of establishing a right to indemnification."
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the registrant has issued the securities set
forth below which were not registered under the Securities Act of 1933, as
amended (the "Act"). The share amounts (and purchase and option exercise prices)
set forth below have been adjusted to give effect to the two-for-three reverse
stock split of the Common Stock effected in May 1996 but do not give effect to
the conversion of Preferred Stock into Common Stock upon the closing of this
offering.
(1) COMMON STOCK. In August 1993, the registrant issued to Affymax N.V.
("Affymax"), an accredited investor, 667 shares of Common Stock at $0.15 per
share. The issuance was a private placement without general advertising or
solicitation to an "accredited investor" within the meaning of Rule 501(a) under
the Act and was exempt from registration under Section 4(2) of the Act. From
December 1993 to April 30, 1996, the registrant issued 552,169 shares of Common
Stock at prices ranging between $0.30 per share and $0.675 per share to
directors, employees and consultants in connection with the exercise by such
directors, employees and consultants of stock options held by them. All
issuances made pursuant to the exercise of options were made under the
registrant's 1993 Stock Plan, as amended. In August 1995, the registrant issued
65,320 shares of Common Stock for financing commissions. All of the foregoing
issuances and exercises of options were exempt from registration pursuant to
Section 3(b) of the Act and Rule 701 promulgated thereunder.
(2) SERIES A SENIOR CONVERTIBLE PREFERRED STOCK. In September 1993, the
registrant sold an aggregate of 6,000,000 shares of Series A Convertible Senior
Preferred Stock for $3.50 per share to approximately 48 accredited investors.
The sales were private placements without general advertising or solicitation to
"accredited investors" within the meaning of Rule 501(a) under the Act and were
exempt from registration under Section 4(2) of the Act.
(3) SERIES B SENIOR CONVERTIBLE PREFERRED STOCK. In August 1995, the
registrant sold 8,666,666 shares of Series B Senior Convertible Preferred Stock
at a price of $4.50 per share to approximately 100 accredited investors. The
sales were private placements without general advertising or solicitation to
"accredited investors" within the meaning of Rule 501(a) under the Act and were
exempt from registration under Section 4(2) of the Act.
(4) SERIES 1 SUBORDINATED CONVERTIBLE PREFERRED STOCK. In September 1993
the registrant issued to Affymax 8,500,000 shares of Series 1 Subordinated
Preferred Stock at a price of $1.25 per share. The sale was a private placement
without general advertising or solicitation to an "accredited investor" within
the meaning of Rule 501(a) under the Act and was exempt from registration under
Section 4(2) of the Act.
(5) WARRANTS TO PURCHASE SERIES 2 SUBORDINATED CONVERTIBLE PREFERRED
STOCK. In December 1994, the registrant issued a five-year warrant to purchase
an aggregate of 103,382 shares of Series 2 Subordinated
II-2
<PAGE>
Convertible Preferred Stock exercisable at $5.50 per share to Affymax in
consideration for relieving the Company of certain financial covenants and to
guarantee its obligation to a third party. In 1995, the registrant issued
five-year warrants to purchase an aggregate of 202,441 shares of Series 2
Subordinated Convertible Preferred Stock exercisable at $5.50 per share to
Affymax in consideration for certain interest payments otherwise due on a note
agreement. Affymax is an "accredited investor" within the meaning of Rule 501(a)
under the Act. The sales were private placements without general advertising or
solicitation and was exempt from registration under Section 4(2) of the Act.
(6) OPTION ISSUANCES TO DIRECTORS, OFFICERS, EMPLOYEES AND
CONSULTANTS. From July 1993 to April 30, 1996, the registrant has issued
options to purchase a total of 2,885,400 shares of Common Stock at an exercise
price ranging between $0.30 and $4.80 per share to directors, officers,
employees and consultants. As of the date of this registration statement,
552,169 options have been exercised. All of such issuances were made under the
registrant's 1993 Stock Plan, as amended. No consideration was paid to the
registrant by any recipient of any of the foregoing options for the grant of any
such options. All of the foregoing issuances and exercises were exempt from
registration pursuant to Section 3(b) of the Act and Rule 701 promulgated
thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
**1.1 Form of Underwriting Agreement
**3.1 Amended and Restated Articles of Incorporation
**3.2 Form of Amended and Restated Articles, to be effective upon closing
**3.3 Bylaws
**3.4 Form of Certificate of Amendment of Amended and Restated Articles of
Incorporation
**4.1 Specimen Common Stock Certificate
**5.1 Opinion of Heller Ehrman White & McAuliffe
**10.1 1993 Stock Plan, as amended
**10.2 1996 Nonemployee Directors Stock Option Plan
+10.3 Collaboration Agreement by and between Hewlett-Packard Company and Affymetrix,
Inc. dated November 11, 1994
+10.4 Development and Supply Agreement between Affymetrix, Inc. and Genetics
Institute, Inc. dated November 15, 1994
+10.5 Supply Agreement with Genetics Institute, Inc. dated December 8, 1995
**+10.6 Technology License Agreement among Affymax N.V., Affymax Technologies, N.V.,
the Affymax Research Institute, and Affymetrix, Inc. dated January 1, 1993
**10.7 Severance Agreement and Release between Affymetrix, Inc. and David B. Singer
dated June 15, 1995
**10.8 Loan and Pledge Agreement between David B. Singer and Affymetrix, Inc.
effective December 7, 1993.
**+10.9 ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics,
Inc. dated January 12, 1995 pursuant to the National Institute of Standards
and Technology's Advanced Technology Program.
**10.10 Amendment 1 to the ATP Participation Agreement between Affymetrix, Inc. and
Molecular Dynamics, Inc. effective January 13, 1996.
**+10.11 Governance Agreement between Affymetrix, Inc. and Glaxo Wellcome plc dated
July 6, 1995.
**10.12 Services Agreement between Affymax Research Institute and Affymetrix, Inc.
effective October 1, 1993.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
**10.13 Loan Agreement between Affymax Technologies N.V. and Affymetrix, Inc. dated
December 1, 1994.
**10.14 Lease between Solar Oakmead Joint Venture and Affymetrix, Inc. dated October
20, 1995.
**10.15 Sublease between Salutar, Inc. and Affymetrix, Inc. dated October 20, 1995.
**10.16 Sublease between Affymax Research Institute and Affymetrix, Inc. dated
February 1, 1994.
**+10.17 Manufacturing and Supply Agreement between Affymetrix, Inc. and RELA, Inc.
dated November 27, 1995.
**10.18 Loan and Pledge Agreement between Stephen P.A. Fodor and Affymetrix, Inc.
effective December 7, 1993.
**10.19 Agreement between Stephen P.A. Fodor and Affymetrix, Inc. dated November 1,
1994.
**10.20 Form of Director and Officer Indemnification Agreement
**+10.21 Demonstration Agreement between Affymetrix, Inc. and Glaxo Wellcome, Inc.
dated May 1, 1996
**10.22 Lease between Harry Locklin and Affymetrix, Inc. dated December 5, 1994.
**11.1 Statement of computation of net loss per share
23.1 Consent of Ernst & Young LLP, independent auditors
**23.2 Consent of Heller Ehrman White & McAuliffe
23.3 Consent of Townsend and Townsend and Crew LLP
**24.1 Power of Attorney (included on page II-5)
**24.2 Power of Attorney of Alejandro C. Zaffaroni
**24.3 Power of Attorney of Barry C. Ross
</TABLE>
- ------------
** Previously filed.
+ Confidential treatment requested.
ITEM 17. UNDERTAKINGS
A. The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
B. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the provisions described in Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
C. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-4
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, Affymetrix, Inc.
has duly caused this Amendment No. 3 to Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in Santa
Clara, California on June 3, 1996.
AFFYMETRIX, INC.
By *
------------------------------------
JOHN D. DIEKMAN, Ph.D.
CHIEF EXECUTIVE OFFICER AND CHAIRMAN
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ----------------------------------------------------- ----------------------------------------- ---------------
<C> <S> <C>
* Director, and Chief Executive
------------------------------------------ Officer (Principal Executive Officer) June 3, 1996
John D. Diekman, Ph.D.
*
------------------------------------------ Director and President June 3, 1996
Stephen P.A. Fodor, Ph.D.
*
------------------------------------------ Director June 3, 1996
Paul Berg, Ph.D.
*
------------------------------------------ Director June 3, 1996
Douglas M. Hurt
*
------------------------------------------ Director June 3, 1996
Vernon R. Loucks, Jr.
*
------------------------------------------ Director June 3, 1996
Barry C. Ross, Ph.D.
*
------------------------------------------ Director June 3, 1996
David B. Singer
*
------------------------------------------ Director June 3, 1996
John A. Young
*
------------------------------------------ Director June 3, 1996
Alejandro C. Zaffaroni Ph.D.
/s/ KENNETH J. NUSSBACHER Chief Financial Officer
------------------------------------------ (Principal Financial and June 3, 1996
Kenneth J. Nussbacher Accounting Officer)
*By: /s/ KENNETH J. NUSSBACHER
------------------------------------- June 3, 1996
Kenneth J. Nussbacher
(ATTORNEY-IN-FACT)
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
- ---------- ---------
<C> <S> <C>
**1.1 Form of Underwriting Agreement........................................................
**3.1 Amended and Restated Articles of Incorporation........................................
**3.2 Amended and Restated Articles, to be effective upon closing...........................
**3.3 Bylaws................................................................................
**3.4 Form of Certificate of Amendment of Amended and Restated Articles of Incorporation....
**4.1 Specimen Common Stock Certificate.....................................................
**5.1 Opinion of Heller Ehrman White & McAuliffe............................................
**10.1 1993 Stock Plan, as amended...........................................................
**10.2 1996 Nonemployee Directors Stock Option Plan..........................................
+10.3 Collaboration Agreement by and between Hewlett-Packard Company and Affymetrix, Inc.
dated November 11, 1994...............................................................
+10.4 Development and Supply Agreement between Affymetrix, Inc. and Genetics Institute, Inc.
dated November 15, 1994...............................................................
+10.5 Supply Agreement with Genetics Institute, Inc. dated December 8, 1995.................
**+10.6 Technology License Agreement among Affymax N.V., Affymax Technologies, N.V., the
Affymax Research Institute, and Affymetrix, Inc. dated January 1, 1993................
**10.7 Severance Agreement and Release between Affymetrix, Inc. and David B. Singer dated
June 15, 1995.........................................................................
**10.8 Loan and Pledge Agreement between David B. Singer and Affymetrix, Inc. effective
December 7, 1993......................................................................
**+10.9 ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc.
dated January 12, 1995 pursuant to the National Institute of Standards and
Technology's Advanced Technology Program..............................................
**10.10 Amendment 1 to the ATP Participation Agreement between Affymetrix, Inc. and Molecular
Dynamics, Inc. effective January 13, 1996.............................................
**+10.11 Governance Agreement between Affymetrix, Inc. and Glaxo Wellcome plc dated July 6,
1995..................................................................................
**10.12 Services Agreement between Affymax Research Institute and Affymetrix, Inc. effective
October 1, 1993.......................................................................
**10.13 Loan Agreement between Affymax Technologies N.V. and Affymetrix, Inc. dated December
1, 1994...............................................................................
**10.14 Lease between Solar Oakmead Joint Venture and Affymetrix, Inc. dated October 20,
1995..................................................................................
**10.15 Sublease between Salutar, Inc. and Affymetrix, Inc. dated October 20, 1995............
**10.16 Sublease between Affymax Research Institute and Affymetrix, Inc. dated February 1,
1994..................................................................................
**+10.17 Manufacturing and Supply Agreement between Affymetrix, Inc. and RELA, Inc. dated
November 27, 1995.....................................................................
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
**10.18 Loan and Pledge Agreement between Stephen P.A. Fodor and Affymetrix, Inc. effective
December 7, 1993......................................................................
**10.19 Agreement between Stephen P.A. Fodor and Affymetrix, Inc. dated November 1, 1994......
**10.20 Form of Director and Officer Indemnification Agreement................................
**+10.21 Demonstration Agreement between Affymetrix, Inc. and Glaxo Wellcome, Inc. dated May 1,
1996..................................................................................
**10.22 Lease between Harry Locklin and Affymetrix, Inc. dated December 5, 1994...............
**11.1 Statement of computation of loss per share............................................
23.1 Consent of Ernst & Young LLP, independent auditors....................................
**23.2 Consent of Heller Ehrman White & McAuliffe............................................
23.3 Consent of Townsend and Townsend and Crew LLP.........................................
**24.1 Power of Attorney (included on page II-5).............................................
**24.2 Power of Attorney of Alejandro C. Zaffaroni...........................................
**24.3 Power of Attorney of Barry C. Ross....................................................
</TABLE>
- ------------
** Previously filed.
+ Confidential treatment requested.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AFFYMETRIX, INC.
VOLUME I
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- ---------------------------------------------------------
- ---------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AFFYMETRIX, INC.
VOLUME II
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY AFFYMETRIX, INC.
COLLABORATION AGREEMENT
BY AND BETWEEN
HEWLETT-PACKARD COMPANY
AND
AFFYMETRIX, INC.
DATED NOVEMBER 11, 1994
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
TABLE OF CONTENTS
1. BASIC PRINCIPLES OF THE COLLABORATION. . . . . . . . . . . . . . . . . . 1
1.1. INTENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2. MUTUALLY PROFITABLE. . . . . . . . . . . . . . . . . . . . . . . . 1
1.3. ADJUSTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.4. PRE-EXISTING IP. . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.5. NEW PRODUCTS AND NEW USES. . . . . . . . . . . . . . . . . . . . . 1
1.6. EXPERIENCES OF MTX . . . . . . . . . . . . . . . . . . . . . . . . 2
1.7. EXPERIENCES OF HP. . . . . . . . . . . . . . . . . . . . . . . . . 2
1.8. HP MARKET. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.9. MTX MARKET . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.10. EFFORTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.11. FUNDING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.12. SUPPLY PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.1. "AFFILIATE". . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2. "ARRAY READER" . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.3. "BACKGROUND IPR" . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4. "BETA MODEL" . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.5. [ * ] CHIPS . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.6. "DNA CHIP" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.7. "EMERGING COMPANIES" . . . . . . . . . . . . . . . . . . . . . . . 3
2.8. "HP CHIP". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.9. "HP SOFTWARE". . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.10. "HP SYSTEM". . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.11. "INTELLECTUAL PROPERTY RIGHTS" ("IPR") . . . . . . . . . . . . . . 3
2.12. "INVENTION". . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.13. "MATERIAL BREACH". . . . . . . . . . . . . . . . . . . . . . . . . 3
2.14. "MTX CHIP" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.15. "MTX SOFTWARE" . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.16. "MTX SPONSORED CHIP" . . . . . . . . . . . . . . . . . . . . . . . 4
2.17. "NECESSARY REAGENTS" . . . . . . . . . . . . . . . . . . . . . . . 4
2.18. "NET SALES". . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.19. "PATENT APPLICATION" . . . . . . . . . . . . . . . . . . . . . . . 4
2.20. "PROSECUTE". . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.21. "PRODUCTION MODEL" . . . . . . . . . . . . . . . . . . . . . . . . 4
2.22. "PRODUCTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.23. "RESIDUAL KNOWLEDGE" . . . . . . . . . . . . . . . . . . . . . . . 4
2.24. "TYPE OF CHIP" . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.25. "WORKPLAN" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3. MARKET SEGMENT DEFINITIONS--NON-CLINICAL MARKET. . . . . . . . . . . . . 5
3.1. BIOANALYTICAL MARKET . . . . . . . . . . . . . . . . . . . . . . . 5
<PAGE>
3.2. BIOMEDICAL RESEARCH MARKET . . . . . . . . . . . . . . . . . . . . 5
3.3. DUAL-NATURE ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . 5
3.3.1. DEFINITION . . . . . . . . . . . . . . . . . . . . . . . . 5
3.3.2. ESTABLISHING ACCOUNTS. . . . . . . . . . . . . . . . . . . 5
3.3.3. APPORTIONMENT OF REVENUES. . . . . . . . . . . . . . . . . 5
4. COLLABORATIVE RESEARCH AND DEVELOPMENT AND COMMERCIALIZATION PROGRAM--
NON-CLINICAL MARKET. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.1. RESEARCH AND DEVELOPMENT . . . . . . . . . . . . . . . . . . . . . 6
4.1.1. GOAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.1.2. RESEARCH SITES . . . . . . . . . . . . . . . . . . . . . . 6
4.2. THE COMMITMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.2.1. RESEARCH MANAGEMENT COMMITTEE. . . . . . . . . . . . . . . 6
4.2.2. PRODUCT MANAGEMENT COMMITTEE . . . . . . . . . . . . . . . 6
4.2.3. HP COMMITMENTS . . . . . . . . . . . . . . . . . . . . . . 7
4.2.4. MTX COMMITMENTS. . . . . . . . . . . . . . . . . . . . . . 7
4.2.5. OTHER MTX SOFTWARE . . . . . . . . . . . . . . . . . . . . 7
4.3. TERM AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . 7
4.3.1. ORIGINAL TERM. . . . . . . . . . . . . . . . . . . . . . . 7
4.3.2. MATERIAL BREACH. . . . . . . . . . . . . . . . . . . . . . 8
4.3.3. TRANSFER OF OWNERSHIP BY MTX . . . . . . . . . . . . . . . 8
4.3.4. MTX DISSOLUTION. . . . . . . . . . . . . . . . . . . . . . 8
4.3.5. LIABILITIES AT TERMINATION . . . . . . . . . . . . . . . . 8
4.3.6. CONTINUED EXCLUSIVE RIGHT. . . . . . . . . . . . . . . . . 9
4.3.7. CONTINUED AGREEMENTS . . . . . . . . . . . . . . . . . . . 9
4.3.8. CESSATION OF SUPPLY. . . . . . . . . . . . . . . . . . . . 9
4.4. COLLABORATION INTELLECTUAL PROPERTY RIGHTS . . . . . . . . . . . . 9
4.4.1. HP INVENTIONS. . . . . . . . . . . . . . . . . . . . . . . 9
4.4.2. MTX INVENTIONS . . . . . . . . . . . . . . . . . . . . . . 10
4.4.3. JOINT INVENTIONS . . . . . . . . . . . . . . . . . . . . . 10
4.4.4. [Intentional Blank] . . . . . . . . . . . . . . . . . . . 10
4.4.5. OWNERSHIP OF BACKGROUND AND OTHER INTELLECTUAL PROPERTY
RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.4.6. MTX LICENSE OF BACKGROUND IPR TO HP. . . . . . . . . . . . 11
4.4.7. HP LICENSE OF BACKGROUND IPR TO MTX. . . . . . . . . . . . 11
4.4.8. PATENT PROSECUTION . . . . . . . . . . . . . . . . . . . . 11
4.4.9. CONFIDENTIAL INFORMATION . . . . . . . . . . . . . . . . . 13
5. COMMERCIALIZATION PHASE. . . . . . . . . . . . . . . . . . . . . . . . . 15
5.1. COMMENCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.2. RESPECTIVE MARKETS OF THE PARTIES. . . . . . . . . . . . . . . . . 15
5.2.1. BIOANALYTICAL MARKET . . . . . . . . . . . . . . . . . . . 15
5.2.2. BIOMEDICAL RESEARCH MARKET . . . . . . . . . . . . . . . . 17
5.2.3. DUAL NATURE ACCOUNTS . . . . . . . . . . . . . . . . . . . 18
5.2.4. GENOMICS . . . . . . . . . . . . . . . . . . . . . . . . . 18
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
6. REVENUES AND ROYALTIES . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.1. HP SYSTEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.1.1. FORMULA SYSTEM PRICE . . . . . . . . . . . . . . . . . . . 19
6.1.2. HP SYSTEM ROYALTIES. . . . . . . . . . . . . . . . . . . . 19
6.2. COMPUTER HARDWARE AND PERIPHERALS. . . . . . . . . . . . . . . . . 20
6.3. CUSTOM APPLICATIONS SOFTWARE . . . . . . . . . . . . . . . . . . . 20
6.4. MTX AND HP CHIPS . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.4.1. MTX SALES OF HP CHIPS. . . . . . . . . . . . . . . . . . . 20
6.4.2. MTX SALES OF MTX SPONSORED CHIPS . . . . . . . . . . . . . 20
6.4.3. HP SALES OF MTX SPONSORED CHIPS. . . . . . . . . . . . . . 20
6.4.4. HP SALES OF HP CHIPS . . . . . . . . . . . . . . . . . . . 20
6.5. MARKETING AND PROMOTION. . . . . . . . . . . . . . . . . . . . . . 21
6.6. PRESALES PRODUCT SUPPORT . . . . . . . . . . . . . . . . . . . . . 21
6.7. ROYALTY TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7. HP CHIPS AND [ * ] CHIPS . . . . . . . . . . . . . . . . . . 21
7.1. COMMISSIONED HP CHIPS. . . . . . . . . . . . . . . . . . . . . . . 21
7.1.1. DEVELOPMENT PROGRAM. . . . . . . . . . . . . . . . . . . . 21
7.1.2. PRIORITY TO DEVELOPMENT. . . . . . . . . . . . . . . . . . 22
7.2. DEVELOPMENT AND SUPPLY AGREEMENT . . . . . . . . . . . . . . . . . 22
7.3. WARRANTIES AND LICENSES. . . . . . . . . . . . . . . . . . . . . . 22
7.3.1. PROPRIETARY GENETIC SEQUENCES. . . . . . . . . . . . . . . 22
7.3.2. LICENSE TO BACKGROUND IPR. . . . . . . . . . . . . . . . . 22
7.3.3. EXCLUSIVE RIGHTS TO HP CHIPS . . . . . . . . . . . . . . . 22
7.4. DUE DILIGENCE. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.4.1. DEVELOPMENT OF HP CHIPS. . . . . . . . . . . . . . . . . . 23
7.4.2. GRANT OF LICENSE UPON BREACH . . . . . . . . . . . . . . . 23
7.5. REGULATORY FILINGS . . . . . . . . . . . . . . . . . . . . . . . . 23
8. OPTION TO HP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8.1. OPTION FEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8.2. HP CLINICAL MARKET INSTRUMENT OPTION . . . . . . . . . . . . . . . 23
8.3. [ * ] OPTION . . . . . . . . . . . . . . . . . . 24
8.4. EXERCISE OF PARTS OF OPTION. . . . . . . . . . . . . . . . . . . . 24
8.5. ROYALTY STRUCTURE AND LICENSING FEES . . . . . . . . . . . . . . . 24
9. LICENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
10. COLLABORATION MONIES AND LICENSE FEE. . . . . . . . . . . . . . . . . . 24
11. PAYMENTS APPLIED TO PURCHASE OF EQUITY POSITION . . . . . . . . . . . . 26
12. PAYMENTS; BOOKS AND RECORDS . . . . . . . . . . . . . . . . . . . . . . 26
12.1. ROYALTY REPORTS AND PAYMENTS . . . . . . . . . . . . . . . . . . 26
12.2. PAYMENT METHOD . . . . . . . . . . . . . . . . . . . . . . . . . 26
12.3. CURRENCY CONVERSION. . . . . . . . . . . . . . . . . . . . . . . 26
<PAGE>
12.4. INSPECTION OF RECORDS. . . . . . . . . . . . . . . . . . . . . . 26
12.5. TAX MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
13. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . 27
13.1. WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
13.2. REPRESENTATIONS. . . . . . . . . . . . . . . . . . . . . . . . . 27
13.3. MTX REPRESENTATION AND WARRANTY. . . . . . . . . . . . . . . . . 27
13.4. NON-ASSERTION AND ASSERTION OF CLAIMS BY THE PARTIES . . . . . . 28
13.4.1. NON-ASSERTION OF INFRINGEMENT CLAIMS. . . . . . . . . . 28
13.4.2. ASSERTION BY HP AFTER MATERIAL BREACH . . . . . . . . . 28
13.4.3. ASSERTION BY MTX AFTER MATERIAL BREACH. . . . . . . . . 28
13.5. RESIDUAL KNOWLEDGE OF EMPLOYEES AND FREEDOM TO RE-ASSIGN . . . . 28
14. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
14.1. MTX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
14.2. HP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
14.3. PROCEDURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
15. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
15.1. GOVERNING LAWS . . . . . . . . . . . . . . . . . . . . . . . . . 29
15.2. WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
15.3. ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
15.4. INDEPENDENT CONTRACTORS. . . . . . . . . . . . . . . . . . . . . 29
15.5. COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . . 30
15.6. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
15.7. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . 30
15.8. FORCE MAJEURE. . . . . . . . . . . . . . . . . . . . . . . . . . 30
15.9. COMPLETE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . 30
15.10. DISPUTE RESOLUTION. . . . . . . . . . . . . . . . . . . . . . . 31
15.11. HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
15.12. SURVIVAL OF CLAUSES . . . . . . . . . . . . . . . . . . . . . . 31
15.13. COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . 31
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CONFIDENTIAL
TREATMENT
REQUESTED
COLLABORATION AGREEMENT
THIS AGREEMENT, having an effective date of November 11, 1994, is made by
and between Hewlett-Packard Company (including its Affiliates) (hereinafter
collectively "HP"), a California corporation with a principal place of business
at 3000 Hanover Street, Palo Alto, California 94304, and Affymetrix (hereinafter
"MTX"), a California corporation with a principal place of business at 3380
Central Expressway, Santa Clara, California 95051.
1. BASIC PRINCIPLES OF THE COLLABORATION
1.1. INTENT. HP and MTX (collectively the "Parties") intend that the result of
this collaboration ("Collaboration") will be a type of Array Reader (as defined
herein in Section 2) for use with MTX GeneChip-TM- products, which is brought to
market more quickly than either acting alone could accomplish, with more
effective technology than either alone could produce in the shortened time frame
and, along with other components necessary for a complete system (including both
instrument and application software) priced competitively for the targeted
markets.
1.2. MUTUALLY PROFITABLE. Both Parties intend the Collaboration to be mutually
profitable, and, as far as is possible when dealing with technology in such a
rapidly emerging area, have crafted terms which are born of the intention that
both Parties share fairly in the profits. Specifically, MTX grants HP the
right-of-first refusal during the Collaboration to exploit new advances in
reader technology developed by or available to MTX during the Collaboration.
1.3. ADJUSTMENT. Both Parties recognize, too, that to the extent the actual
market conditions materialize differently than anticipated, adjustments may be
agreed to from time to time in order that the intent of the Collaboration may be
fulfilled.
1.4. PRE-EXISTING IP. Both Parties recognize that each has rights to
pre-existing intellectual properties which may directly or indirectly contribute
to the HP System. It is understood that in the process of reaching a
Collaboration Agreement, both Parties will reveal to each other relevant
Background IP under appropriate confidentiality and nondisclosure provisions,
irrespective of whether the Background IP is an issued patent, a pending patent
application, a trade secret, know-how or otherwise.
1.5. NEW PRODUCTS AND NEW USES. To the extent that the Collaboration may
produce (i) new gene discoveries and applications and (ii) products with new
uses, both Parties will work towards terms which foster mutual success and
equitable apportionment of revenue therefrom. Nothing in this Agreement is
intended to prohibit either Party from pursuing opportunities outside this
Collaboration so long as the Party does so without breaching any of the terms of
this Agreement.
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1.6. EXPERIENCES OF MTX. MTX has experience in the making of MTX Chips by
photolithographic methods and other methods currently under development; MTX
will focus resources toward the design and manufacture of array chips based on
MTX Chip technology, along with application specific software. MTX represents
that it has developed technology that may be useful in developing a reader
instrument for MTX Chips.
1.7. EXPERIENCES OF HP. HP has experience as an instrument manufacturer with a
broad technological base; HP will focus resources toward the design and
manufacture of a reader instrument system, including software, capable of
reading MTX Chips.
1.8. HP MARKET. HP will evaluate and directly market Products in the "applied"
or Bioanalytical Market worldwide.
1.9. MTX MARKET. MTX will evaluate and directly market Products in the
"research" or Biomedical Research Market worldwide.
1.10. EFFORTS. Both Parties will use commercially feasible efforts to sell the
Products in their respective markets.
1.11. FUNDING. Within the scope of the Collaboration, MTX will fully fund, or
arrange to fund, development of MTX Chips and, to the extent MTX may legally do
so, will give HP sufficient notice of the nature of the intended product so that
marketing of Products can be effective; HP will fully fund development of the HP
System performed at HP and will fund reasonable development performed by
employees assigned to such development, excluding chip-related costs, at MTX as
described in the Workplan.
1.12. SUPPLY PRICE. HP agrees to supply the HP System to MTX for sale into the
Biomedical Research and clinical markets at the Formula System Price described
below.
2. DEFINITIONS
2.1. "AFFILIATE" shall mean collectively, all persons directly or indirectly
controlling, controlled by or under common control of a Party. The term
"control" means the ownership, directly or indirectly, of at least fifty percent
(50%) of the voting stock of the controlled company in the case of a corporation
and at least fifty percent (50%) of the interest in net profits in the case of
an entity other than a corporation.
2.2. "ARRAY READER" shall mean a fluorescent-based reader which reads MTX
Chips.
2.3. "BACKGROUND IPR" shall mean IPR existing prior to the commencement of the
Collaboration.
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2.4. "BETA MODEL" shall mean an HP System meeting the agreed functionality
specifications set forth in the Workplan but not fully documented.
2.5. "[ * ] CHIPS" shall mean MTX Chips that are commissioned by HP
pursuant to the [ * ] Option.
2.6. "DNA CHIP" shall mean a solid support where the support includes a
plurality of single or double stranded DNA, RNA, or analog materials (or
combinations thereof) synthesized photolithographically on a surface of the
support at spatial locations that are known or may be determined.
2.7. "EMERGING COMPANIES" shall mean a company whose first proprietary product
has not yet been offered for sale on a commercial basis in its major market.
2.8. "HP CHIP" shall mean an MTX Chip commissioned and sponsored by HP.
2.9. "HP SOFTWARE" shall mean software HP generates, as described in the
Workplan, for running the HP System.
2.10. "HP SYSTEM" shall mean the Array Reader as described by the
specifications in the Workplan, with an output of pixel intensity versus
position data and shall include HP Software which runs the HP System, but shall
exclude computers, which are required to run the HP System.
2.11. "INTELLECTUAL PROPERTY RIGHTS" ("IPR") shall mean rights to protected
Intellectual Properties ("IP"), which shall mean patents, copyrights,
trademarks, trade secrets and maskworks. (IPR may be subject to limitations
and/or obligations in any license from a third party.)
2.12. "INVENTION" shall mean intellectual property amenable to patent
protection.
2.13. "MATERIAL BREACH" shall mean failure to pay monies, whether license or
royalties, due within thirty (30) days of their due date and absent a reasonable
dispute about the amount therefor for which the dispute resolution mechanism has
been initiated as provided for herein; failure of either Party to exercise
reasonable diligence in the development of their respective areas of
responsibility (the HP System from HP and the MTX Chips, including HP Chips and
[ * ] Chips, from MTX); and inability or unwillingness of a Party to
meet the production or delivery schedules of its development and supply
agreement.
2.14. "MTX CHIP" shall mean a DNA Chip made by or for MTX using in whole or in
part MTX IPR.
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2.15. "MTX SOFTWARE" shall mean MTX-generated software for transforming pixel
intensity versus position information into gene sequence(s) that a given MTX
Chip is designed to identify.
2.16. "MTX SPONSORED CHIP" shall mean an MTX Chip developed by MTX
independently of HP sponsorship.
2.17. "NECESSARY REAGENTS" shall mean reagents, including probes, proprietary
to MTX, required for the use of MTX Chips for the use or uses for which any
given MTX Chip is intended and designed.
2.18. "NET SALES" shall mean the [
*
] provided that where the Products are supplied by a Party or
its respective Affiliate, licensee or sublicensee free of charge or sold at a
price below the price at which it normally sells the Products to third parties
on a stand-alone basis, the Products shall be [
*
] Any transfer of Products for
evaluation or internal use purposes is deemed to have a net sales amount of
zero.
2.19. "PATENT APPLICATION" shall mean any U.S. application, continuation,
continuation-in-part, reissue, reexamination, division or patent term extension
application or any foreign equivalent of the foregoing.
2.20. "PROSECUTE" shall mean, in the context of prosecuting pending patent
applications, taking necessary actions, including conducting oppositions and
interferences, to perfect the patent rights to an invention.
2.21. "PRODUCTION MODEL" shall mean an HP System which is manufactured by
standard HP manufacturing procedures.
2.22. "PRODUCTS" shall mean the HP System, HP Software, MTX Chips, MTX Software
and Necessary Reagents.
2.23. "RESIDUAL KNOWLEDGE" shall mean all Collaboration information in
nontangible form which is gained and retained in the mind in the normal course
of work by those employees (i) performing under this Agreement and (ii) having
access to Collaboration information, whether confidential or not, that is in
tangible or intangible form and that is not a protected IP.
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2.24. "TYPE OF CHIP" shall mean chips of a particular part number characterized
by a common set of specifications.
2.25. "WORKPLAN" shall have the meaning described in Section 4.1.1.
3. MARKET SEGMENT DEFINITIONS--NON-CLINICAL MARKET
3.1. BIOANALYTICAL MARKET. The Bioanalytical Market consists of [
*
] HP will take the lead in sales and marketing in the Bioanalytical Market.
3.2. BIOMEDICAL RESEARCH MARKET. The Biomedical Research Market consists of [
*
] MTX will take the lead in sales
and marketing in the Biomedical Market.
3.3. DUAL-NATURE ACCOUNTS.
3.3.1. DEFINITION. Certain accounts may be classified as being either in the
Bioanalytical Market or the Biomedical Research Market. The Parties will
mutually agree on account assignment and commit to actively introduce and market
the Products. HP will be assigned accounts where HP has an active base of
analytical and measurement instruments business and agrees to make a concrete
commitment to introduce and actively market Products. MTX will be assigned
accounts where MTX's expertise in molecular biology and DNA sequencing will give
MTX the lead. Where it is to their mutual advantage, the Parties may also agree
to co-market dual nature accounts. Co-market herein shall include initiating
pre-market and post-introduction development activities.
3.3.2. ESTABLISHING ACCOUNTS. The Parties agree (i) within six months after
the effective date of the Collaboration Agreement, to establish lists of target
accounts; (ii) within six (6) months prior to the launch of the Production
Model, to assign sales representatives to those accounts; and (iii) to revise
such accounts and assignments immediately prior to the introduction of the
Production Model and from time-to-time thereafter as appropriate. The Parties
agree to negotiate terms to provide incentives to their sales forces to develop
their respective customer bases.
3.3.3. APPORTIONMENT OF REVENUES. To the extent that the Collaboration may
produce products with new uses, both Parties will work towards terms which
foster success and
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REQUESTED
equitable apportionment of revenue to reflect respective interests and
contributions of the Parties.
4. COLLABORATIVE RESEARCH AND DEVELOPMENT AND COMMERCIALIZATION PROGRAM--
NON-CLINICAL MARKET
4.1. RESEARCH AND DEVELOPMENT.
4.1.1. GOAL. The Research and Development Phase of Collaboration will have a
goal of developing an HP System capable of reading MTX Chips for both the
Bioanalytical and Biomedical Research Markets. As goals, a Beta Model is to be
completed by [ * ] and a Production Model to follow by [ * ]
under a comprehensive Workplan for the HP System developed by HP and MTX
technical teams (the "Workplan Committee") and attached as Exhibit A hereto.
4.1.2. RESEARCH SITES. All commercially feasible efforts will be made by both
Parties to meet the Beta Model and Production Model goals stated in the
Workplan. Both HP and MTX will perform research to develop the HP System,
including research on chemistry (primarily at MTX) as well as on the reader
instrument system (primarily at HP); manufacture of the developed HP System will
be the responsibility of HP.
4.2. THE COMMITMENT.
4.2.1. RESEARCH MANAGEMENT COMMITTEE. The Parties agree that the mechanism for
managing the research staff under the Workplan and approving expenditures during
execution of the Workplan shall be the review and approval of a Research
Management Committee (RMC). The RMC shall be composed of an equal number of
members of both Parties' technology staffs. All actions of the RMC will be by
unanimous consent. In the absence of unanimous consent on a matter, it shall be
forwarded to the senior management of both Parties for final resolution.
4.2.2. PRODUCT MANAGEMENT COMMITTEE. The Parties agree that the responsibility
for managing the product development staff under the Workplan and reviewing
progress, and that the mechanism for approving changes to the HP System product
specification and requesting specific product orientated research of the RMC
during execution of the Workplan shall be through a Product Management Committee
(PMC). The PMC may recommend to senior management to toll any date in this
Agreement if it finds that any Party, through that Party's actions or inactions,
has caused unavoidable delays in the performance of the other Party. The PMC
shall be composed of an equal number of members of both Parties' personnel. All
actions of the PMC will be by unanimous consent. In the absence of unanimous
consent on a matter, it shall be forwarded to the senior management of both
Parties for final resolution.
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4.2.3. HP COMMITMENTS. HP shall commit monies and other resources sufficient
to realize the development of the HP System as delineated in the Workplan. HP
agrees to pay reasonable "burden cost" (fully loaded cost) for MTX employees
assigned to and performing services in the development of the HP System as
described in the Workplan.
4.2.4. MTX COMMITMENTS. MTX will commit research, development and
manufacturing resources at MTX necessary to achieve the program goals of
manufacturing a minimum number of specific MTX Chips in quantities previously
agreed to and with performance characteristics previously agreed to to meet
market demand for such Chips. The majority of MTX personnel assigned to perform
services and research as defined in the Workplan shall have substantial MTX
experience.
4.2.5. OTHER MTX SOFTWARE.
4.2.5.1. OVERALL SYSTEM. HP will take the lead for development and
implementation of the overall system software architecture and will be
responsible for all software for the HP System, including output of the pixel
fluorescence intensities versus position on a chip, with the exception that MTX
will specify and implement image processing and data analysis software,
including transformation of the pixel fluorescence intensities versus position
on a chip, to identify the chip-specific bases in the target nucleic acid.
Funding for the MTX-developed image processing and data analysis module will
either be provided by HP, but in such case HP will have no rights to such work
other than those specified in this Section 4.2.5.1, or by MTX, in which case MTX
may charge a fee, not to exceed [ * ] (said fee will
include cost of API software if supplied by MTX) per HP System, and supply the
module to HP directly. If funded by HP, HP shall have a royalty-free license to
reproduce, use, and sell such module for HP Systems. The approach will be based
on the optimization of resources to implement the Workplan with a recommendation
made by the RMC and subject to approval of HP and MTX management.
4.2.5.2. SOFTWARE API. Definition of specifications and plan for
implementation of a software API for experimental protocols will be determined
by the PMC during the initial stages of the Workplan. A graphical user
interface (GUI) will be specified and developed jointly by HP and MTX.
4.3. TERM AND TERMINATION.
4.3.1. ORIGINAL TERM. This Agreement, if not terminated earlier for cause,
that is, for a Material Breach which remains uncured sixty (60) days after
written notice, shall remain in effect until the end of the fifth (5th) full
calendar year from the date of the commencement of the Collaboration (the
"Original Term") and shall be extended thereafter for consecutive three-(3-)year
terms, unless either Party shall, upon six (6) months' written notice prior to
the termination of the current term to the other Party, state that it does not
wish to extend this Agreement. Notwithstanding the foregoing,
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REQUESTED
either Party may, after the Original Term, terminate this Agreement for any
reason upon six (6) months' prior written notice to the other Party. In the
event this Agreement is not extended beyond the Original Term or is terminated
other than for an uncured Material Breach after an extension, all licenses
granted herein which have not already been so converted shall convert to non-
exclusive licenses with the same terms, rights and obligations; HP shall
continue to supply to MTX the HP Systems being supplied by HP to MTX at the time
of such termination of this Agreement and MTX shall continue to supply to HP the
MTX Chips being supplied by MTX to HP at the time of such termination of this
Agreement on terms consistent with those of the Collaboration or supply
agreements entered into by the Parties prior to such termination.
4.3.2. MATERIAL BREACH. Notwithstanding the foregoing, upon a Material Breach
under this Agreement by either Party, the non-breaching Party may terminate this
Agreement by sixty (60) days' prior written notice to the other Party; said
notice shall become effective at the end of such sixty-day (60 day) period,
unless the breaching Party shall remedy such Material Breach during such sixty-
day (60 day) period. In such event, the breaching Party shall not be entitled
to any license under Section 4.3.1 and shall be obligated to continue to supply
MTX Chips, HP Chips and [ * ] in accordance with the terms
hereof, if MTX is the breaching Party and HP Systems, in accordance with the
terms hereof, if HP is the breaching Party.
4.3.3. TRANSFER OF OWNERSHIP BY MTX. Should majority ownership of MTX be
transferred to others than those presently holding ownership without the prior
written consent of HP, HP may at its option terminate this Agreement forthwith
by written notice to MTX within sixty (60) days of notice from MTX of any such
change of ownership. MTX shall promptly give such notice of change of ownership
to HP.
4.3.4. MTX DISSOLUTION. Should a liquidation or dissolution of MTX occur;
should MTX effect or attempt an unauthorized transfer or assignment of this
Agreement; should MTX become insolvent; should MTX make a voluntary or
involuntary general assignment of its assets for the benefit of creditors;
should any petition in bankruptcy be filed by or against MTX; should a receiver
or trustee be appointed for all or any part of MTX's property, HP may at its
option terminate this Agreement forthwith by written notice to MTX within sixty
(60) days of HP's knowledge of such event.
4.3.5. LIABILITIES AT TERMINATION. The termination of this Agreement shall not
relieve either Party of any liability from any obligations which have accrued
hereunder prior to such termination, including duties of confidentiality or, in
the case of a Party whose Material Breach is the cause of termination, duties to
supply Products under the terms of the Collaboration or under any supply
agreement consistent with the terms of the Collaboration or the HP Option
entered into by the Parties.
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4.3.6. CONTINUED EXCLUSIVE RIGHT. Notwithstanding any termination provision in
this Agreement, if termination is not the result of a Material Breach by HP, HP
shall, by virtue of the license fee paid upon commencement of the Collaboration
Agreement, remain in possession of the exclusive right to make or have made,
sell and use the HP System and to sell Products in the Bioanalytical Market and
to such dual accounts as the Parties assign to HP for the entire exclusive
period under this Agreement.
4.3.7. CONTINUED AGREEMENTS. Termination of the Collaboration Agreement, other
than upon a Material Breach by HP, will not affect the term of any development
or supply agreement entered into by the Parties pursuant to the HP Option then
in force and affect, except as may be provided in such agreement itself.
4.3.8. CESSATION OF SUPPLY.
4.3.8.1. HP SYSTEMS. If HP ceases to supply the HP System, and MTX has been
selling HP Systems exclusively and continuously to read MTX Chips for the most
recent two (2) years or from the date when HP Systems are first available,
whichever is shorter, (on a country-by-country basis) in the Biomedical Research
Market, HP agrees to negotiate in good faith with MTX for a license for each
such country at a reasonable royalty rate to MTX to make, have made, use and
sell the HP System and for a supply agreement to provide MTX with HP proprietary
components for the HP System at a reasonable price for a reasonably limited
period.
4.3.8.2. MTX CHIPS. MTX hereby grants to HP, effective if MTX ceases to supply
MTX Chips and if HP has been selling such MTX Chips, including HP Chips,
continuously (on a country-by-country basis) in its markets, a license for each
such country at the existing royalty rates to make or have made and sell such
MTX Chips, including Necessary Reagents and HP Chips, [ * ] Chips and
such other then available MTX Chips that are suitable by the types of accounts
HP is serving in its markets at the time MTX ceases to supply.
4.3.8.3. GRANT OF LICENSE. In either case, the Party ceasing to supply its
Product agrees to transfer to the other Party, as part of its grant of a
license, all know-how and technical data necessary to manufacture such Product.
4.4. COLLABORATION INTELLECTUAL PROPERTY RIGHTS. The Collaboration is intended
to facilitate invention by both Parties. IPR relating to the work performed
under and as described in the Workplan shall be treated as follows:
4.4.1. HP INVENTIONS. Inventions made solely by HP employees within the scope
of the Workplan and during the term of the Collaboration ("HP Inventions") are
the property of HP. HP Inventions will be cross-licensed royalty-free, without
the right to sublicense others, to MTX. In the case of HP Inventions which are
applicable to array readers, such license for such use is for internal non-
commercial use only.
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4.4.2. MTX INVENTIONS. Inventions made solely by MTX employees within the
scope of the Workplan and during the term of the Collaboration ("MTX
Inventions") are the property of MTX. MTX hereby grants HP an irrevocable,
royalty-free license, with sublicensing rights, to all such MTX Inventions. MTX
shall not commercialize or license others to commercialize in whole or in part
any such MTX Inventions that are applicable to Array Readers for such use in the
Bioanalytical and Biomedical Markets without the written permission of HP while
HP is meeting its obligations to supply Array Readers to MTX for those markets.
If MTX commercializes such MTX Inventions outside the Bioanalytical Market or
Biomedical Market, MTX shall (i) promptly pay HP [ * ] of the funding HP has
provided for the research resulting in such MTX Invention ("Funding") and (ii)
thereafter pay HP a reasonable royalty on such commercialization until an
additional [ * ] of the Funding has been paid to HP. MTX
shall in no event pay more than [ * ] of the Funding to HP for such
commercialization of such MTX Inventions.
4.4.3. JOINT INVENTIONS.
4.4.3.1. DEFINITIONS. Inventions made jointly by employees of HP and MTX
within the scope of the Workplan and during the term of the Collaboration
("Joint Inventions") will be jointly owned. Neither Party may sublicense a
Joint Invention without prior written permission of the other Party, which
permission shall not be unreasonably withheld. Any Invention resulting from
work performed under this Collaboration not promptly and fully disclosed in
writing upon conception, but in any event not later than ten (10) days after a
written Invention Disclosure is prepared, to the other Party as a sole HP
Invention or MTX Invention, as the case may be, shall be deemed a Joint
Invention upon dispute between the Parties.
4.4.3.2. CROSS-LICENSEES. Notwithstanding the foregoing, no prior written
permission is required for licenses to cross-licensees of either Party existing
as of the effective date of this Agreement. Each Party hereby warrants that
none of the companies listed for that Party in Exhibit B is an existing cross-
licensee of the Party as of the effective date of this Agreement. HP represents
to the best of its knowledge that the licenses with the cross-licensees listed
in Exhibit D are not germane to the technology applicable to Array Readers.
4.4.4. [Intentional Blank]
4.4.5. OWNERSHIP OF BACKGROUND AND OTHER INTELLECTUAL PROPERTY RIGHTS. Nothing
in the Collaboration Agreement is intended to alter or affect the ownership of
the Background IPR of the Parties or IPR developed after the term of the
Collaboration or outside the scope of the Workplan. Each Party agrees to
promptly notify the other Party if any Background IPR or other IPR must be
acquired for the Collaboration; or, alternatively, notify the other Party
promptly on discovery if, to its knowledge, payment or a license to Background
IPR is required under Background IPR to or from a third party.
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4.4.6. MTX LICENSE OF BACKGROUND IPR TO HP. MTX grants HP a royalty-free
license to MTX Background IPR to make, have made, use or sell the HP System to
read MTX Chips. However, this license to MTX Background IPR specifically shall
not constitute a license to HP to manufacture MTX Chips.
4.4.7. HP LICENSE OF BACKGROUND IPR TO MTX. HP grants MTX a royalty-free
license to HP Background IPR to make, have made, use or sell MTX Chips,
including HP Chips and [ * ] Chips, and Necessary Reagents for
operation with HP Systems during the period that such Products are available for
sale by HP ("Available Period") and during the [ * ] of unavailability
for sale by HP immediately preceding such Available Period (the "Unavailable
Years") if the Unavailable Years are solely a result of an exclusive license
with a third party.
4.4.8. PATENT PROSECUTION.
4.4.8.1. BACKGROUND IPR. Subject to the terms of any other agreements with
third parties relating to Background IPR, each Party shall, at its option and
expense, be responsible for Patent Applications and patents relating to its
Background IPR.
4.4.8.2. SOLELY-OWNED INVENTIONS. The inventing Party shall, at its option and
expense, be responsible for Patent Applications and patents relating to
Inventions solely made by such Party.
4.4.8.3. JOINT INVENTIONS.
4.4.8.3.1. RESPONSIBILITY. HP shall, at its option, be responsible to prepare,
file, Prosecute and maintain in such countries it deems appropriate, Patent
Applications and patents relating to Joint Inventions. HP and MTX shall equally
share the cost of all such activities. MTX at any time may decline to share
prospective costs by serving HP with written notice to that effect. In the
event MTX declines to share or, having shared, to continue to share the cost of
such activities in any country, MTX shall cease to be joint owner and shall
promptly assign to HP its joint ownership of such Joint Inventions and/or
patents issuing thereon to HP for such country, reserving for itself an
irrevocable, non-exclusive, royalty-free, license to all such patents, including
those issuing from any such Patent Application. In the case of Joint Inventions
which are applicable to array readers, such license for such use shall be for
internal use only.
4.4.8.3.2. DECLINING FURTHER PATENTING EFFORT. In the event HP declines to
file or having filed fails to further prosecute or maintain any such Patent
Applications or patents in any countries and MTX remains a joint owner of the
invention in such Patent Applications or patents in such countries, HP shall so
inform MTX at least sixty (60) days before the next action or filing is
required, and MTX shall have the right at its sole expense to prepare, file,
prosecute and maintain such Patent Applications and patents in such countries it
deems appropriate. HP shall promptly assign to MTX its joint ownership in such
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countries of (i) any patents issuing from such Patent Applications prosecuted or
maintained by MTX and (ii) any such patents being maintained by MTX, reserving
for itself and its cross-licensees existing at the time of the Agreement an
irrevocable, non-exclusive, royalty-free license to all such patents, including
those issuing from such Patent Applications. In the case of Joint Inventions
which are applicable for the manufacture of DNA Chips, such license for such
use, except for cross-licensees existing at the time of the Agreement, shall be
for internal use only.
4.4.8.3.3. FULL OWNERSHIP WITH ASSIGNMENT. After assignment by a Party of any
Joint Invention to the other Party, the other Party hereto shall have full
ownership rights to the assigned Joint Inventions and patents issuing thereon,
if any, including the right to sublicense without accounting to the first Party.
4.4.8.4. PROSECUTION BY NON-OWNER OTHER PARTY. In the event that HP or MTX, as
the case may be (the "Owner"), declines to file or, having filed, declines to
further Prosecute and maintain any solely-owned Patent Applications or patents
claiming inventions made during the Collaboration, the other Party shall have
the right to take such actions, at its own expense, in the name of the Owner in
any country, in which event the Owner shall provide, at the other Party's
request and expense, all reasonable assistance. If the Owner declines or fails
to take any such actions, such Owner shall notify the other Party hereto at
least sixty (60) days prior to the date the next action or filing is due to be
taken with respect to the subject Patent Application or patent. Owner shall
assign such patents or patents issuing from such Patent Applications to the
other Party, reserving for itself and, in the case of HP, its cross-licensees an
irrevocable, royalty-free license to make, have made, use or sell products or
use processes covered by such patents.
4.4.8.5. COOPERATION. Each Party shall keep the other Party reasonably
informed as to the status of patent matters relating to the Collaboration on
request, comment on any documents which will be filed in any patent office, and
provide to the other Party copies of any material documents that such Party
receives from a patent office, including notice of all interferences, reissues,
reexaminations, oppositions or requests for patent term extensions. Each Party
shall cooperate with and reasonably assist the other Party in such activities,
each Party bearing its own expenses, upon the other Party's request.
4.4.8.6. ENFORCEMENT AND DEFENSE.
4.4.8.6.1. ENFORCEMENT.
4.4.8.6.1.1. SOLELY OWNED IPR. If any IPR solely-owned by a Party (the "Owning
Party") which is necessary for the manufacture, use or sale of a Product is
infringed or misappropriated by a third party in any country in which the other
Party has rights to market such Product, the Owning Party shall upon discovery
promptly notify the other Party thereof. The Owning Party shall have the
initial right (but not the obligation) to enforce, or defend any declaratory
judgment action against, or settle with the consent,
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which shall not be unreasonably withheld, of the other Party any claims against
such IPR at its own expense. If the Owning Party fails to initiate a suit or
negotiation to enforce such IPR against a commercially significant infringement
by the third party within one (1) year of a request by the other Party and
actively pursue such suit or negotiation thereafter, the other Party shall no
longer be responsible for any royalty payments due the Owning Party on such
Product in that country of infringement after the one (1) year period so long as
such commercially significant infringement remains unabated, and all such
royalty payments due shall be forgiven. The other Party may, at its own
expense, initiate such suit in the name of the Owning Party. The other Party
shall keep the Owning Party hereto reasonably informed of the progress of any
such claim, suit or proceeding. The other Party initiating the suit shall be
entitled to any recovery received as a result of any such claim, suit or
proceeding. The other Party shall resume royalty payments to the Party upon a
successful action against the third-party infringer such (i) that the third-
party infringer is either enjoined from using the IP or required to pay the
Party a comparable royalty on a license to the IP or (ii) that the commercially
significant infringement has ceased.
4.4.8.6.1.2. JOINT INVENTION. Notwithstanding Section 4.4.8.6.1.1. above, in
the event that any Joint Invention is infringed or misappropriated by a third
party, HP and MTX shall mutually agree upon whether, and, if so, how, to enforce
such Joint Invention or defend such Joint Invention in a declaratory judgment or
similar proceeding.
4.4.8.6.1.3. INFRINGEMENT CLAIMS.
4.4.8.6.1.3.1. If the manufacture, sale or use of any Product pursuant to this
Agreement results in any claim, suit or proceeding alleging patent infringement
against HP or MTX, such Party shall promptly notify the other Party hereto in
writing setting forth the facts of such claim in reasonable detail. The Party
subject to such claim shall have the exclusive right to defend and control the
defense of any such claim, suit or proceeding, at its own expense, using counsel
of its own choice; provided, however, it shall not enter into any settlement
which admits or concedes that any IP solely owned by or licensed from the other
Party hereto is invalid or unenforceable without the prior written consent of
such other Party. The Party subject to the claim shall keep the other Party
hereto reasonably informed of all material developments in connection with any
such claim, suit or proceeding. If the claim is based on the practice or use of
IP of the other Party, the other Party, at its own expense, shall have the right
to join the Party in the defense of the claim, suit or proceeding.
4.4.8.6.1.3.2. If an infringement claim is brought against MTX for its
manufacture of MTX Chips, and MTX is required to make license payments therefor,
such license payments shall be the sole responsibility of MTX.
4.4.9. CONFIDENTIAL INFORMATION. Except as expressly provided herein, the
Parties agree that, for the term of this Agreement and for five (5) years
thereafter, the receiving Party
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shall not disclose to any third party any information furnished to it in written
form or, if furnished orally, reduced within thirty (30) days to written form,
and marked and identified as confidential information or trade secret by the
disclosing Party hereto pursuant to this Agreement except to the extent that it
can be established by the receiving Party by competent proof that such
information:
(a) was already known to the receiving Party, other than under an
obligation of confidentiality, at the time of disclosure;
(b) was generally available to the public or otherwise part of the public
domain at the time of its disclosure to the receiving Party;
(c) became generally available to the public or otherwise part of the
public domain after its disclosure and other than through any act or
omission of the receiving Party in breach of this Agreement;
(d) was independently developed by the receiving Party as demonstrated by
documented evidence prepared contemporaneously with such independent
development; or
(e) was subsequently lawfully disclosed to the receiving Party by a person
other than the other Party.
4.4.9.1. RESIDUALS. Notwithstanding the foregoing section, employees and
consultants of a Party who perform services under this Agreement and have access
to Collaboration information shall not be prohibited from using the Residual
Knowledge relating to their participation in the Collaboration in future work
performed on behalf of such Party.
4.4.9.2. NONDISCLOSURE OF TERMS. Each Party agrees not to disclose except as
required by law, such as, but not limited to, filings with the U.S. Securities
Exchange Commission, the terms of this Agreement to any third party, other than
to such Party's attorneys, advisors, consultants and others on a need-to-know
basis under circumstances that ensure the confidentiality thereof, without the
prior written consent of the other Party. Notwithstanding the foregoing, the
Parties shall agree upon a press release to announce the execution of this
Agreement, together with a corresponding question and answer ("Q&A") outline for
use in responding to inquiries about the Agreement; thereafter MTX and HP may
each disclose to third parties the information contained in such press release
and Q&A without the need for further approval by the other. In addition, either
Party or both may make public statements regarding the progress of the
Collaboration and development and commercialization of Products including
announcement of the achievement of milestones and fees with respect thereto,
following consultation with the other Party.
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4.4.9.3. PUBLICATION. The contents of any proposed publication or public
disclosure ("Publication") by an employee of or consultant to HP or MTX (the
"Disclosing Party") describing the scientific results of the Collaboration shall
be subject to the prior review of the RMC at least thirty (30) days prior to
submission for such Publication by the Disclosing Party. The members of the
other Party in the RMC shall be responsible for forwarding the contents of such
Publication to their respective company (the "Receiving Party"). The Receiving
Party shall notify the Disclosing Party in writing within such thirty (30) day
period whether the Receiving Party desires a Patent Application be filed on any
Invention disclosed in such Publication. In the event that the Receiving Party
desires a Patent Application be filed, the Disclosing Party shall withhold such
Publication until the earlier that (i) a Patent Application is filed thereon, or
(ii) the Parties determine after consultation that no patentable invention
exists, or (iii) sixty (60) days after receipt by the Disclosing Party of the
Receiving Party's written notice of the Receiving Party's desire that such
Patent Application be filed. Further, if such Publication contains information
of the Receiving Party that is subject to confidentiality and nondisclosure
restrictions under Section 4.4.9 the Disclosing Party agrees to remove such
information from the proposed Publication.
5. COMMERCIALIZATION PHASE
5.1. COMMENCEMENT. The Commercialization Phase will begin when the Products
are available for sale and installation to customers on a commercial, but not a
test-market, basis.
5.2. RESPECTIVE MARKETS OF THE PARTIES. As noted above, HP will market
Products to the Bioanalytical Market and MTX to the Biomedical Research Market
and, subject to the HP Option, to the clinical diagnostic market. Dual nature
accounts will be assigned to either HP or MTX or will be co-marketed.
5.2.1. BIOANALYTICAL MARKET.
5.2.1.1. PRODUCTS. HP will market Products to the Bioanalytical Market.
5.2.1.2. EARLY INFORMATION. In order to allow HP to maximally penetrate the
Bioanalytical Market, MTX will provide HP information on the nature and
availability of MTX Chips, including third-party sponsored chips, as soon as the
commitment to develop or manufacture is made, whichever is earlier, or, in the
event that there are restrictions on the disclosure of information on third-
party sponsored MTX Chips, as soon as such restrictions terminate; provided that
such disclosure shall be subject to any obligation of confidentiality by MTX to
a third party, which obligation MTX will use commercially feasible efforts to
limit so as to permit MTX to supply such information under an obligation of
confidentiality to the third party. MTX will use commercially feasible efforts
to ensure that all such third-party sponsored MTX Chips will be compatible with
and available for HP Systems.
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5.2.1.3. HP PURCHASE OF CHIPS AND REAGENTS. MTX will supply and HP will
purchase MTX Chips, including HP Chips, and Necessary Reagents exclusively from
MTX for use with the HP System at a formula price equal to [
* ] for said chips and reagents, but not
less than [ * ]. If the MTX [ * ] is greater than [ * ]
per chip, then the formula price will be based on a linear pricing scale from [
* ].
Above the [ * ] price to HP, the price to HP will be [ * ]. In
the event that HP should promote MTX Chips as reusable items and should set its
pricing accordingly, the Parties will renegotiate in good faith the transfer
pricing provision of MTX Chips to HP.
5.2.1.4. ROLLING FORECASTS FOR MTX CHIPS.
5.2.1.4.1. Within thirty (30) days after HP has provided MTX with a Beta Model,
HP will provide MTX with a list of MTX Chips by type of chip and quantity it
anticipates purchasing for the coming calendar year ("List"). Within thirty
(30) days of receipt of the List, MTX will then provide HP with a price/volume
schedule ("P/V Schedule") for the year. HP, within thirty (30) days after
receipt of the P/V Schedule from MTX, will provide MTX with a committed forecast
of its anticipated purchases of MTX Chips for the following [ *
]. Thereafter, at least three (3) months prior to each calendar year HP
will provide MTX with a List for such calendar year, and, within thirty (30)
days of receipt of the List, MTX will provide HP with a P/V Schedule for that
calendar year. Further, at least thirty (30) days prior to each calendar
quarter, HP will provide MTX a rolling forecast for the [ *
]. HP shall purchase at least [*] of the MTX Chips forecasted for [
* ], at least [*] for the next quarter and at least [*] for the [ *
].
5.2.1.4.2. If HP's firm orders for shipment in any quarter exceeds [ * ] of its
forecast for such quarter or [ * ] of the total of its orders for shipment
during the preceding quarter, MTX shall not be obligated to supply such excess
over [ * ]. Chips will be shipped FOB at place of manufacture if manufactured
in the U.S. or at U.S. port of entry if manufactured abroad. In no event will
the prices charged to HP be more than the lowest price charged to any third
party for a comparable chip for a comparable use.
5.2.1.5. SUPPORT.
5.2.1.5.1. MTX will provide reasonable application support to HP, through
training or otherwise, for the initial Product introduction to customers in the
Bioanalytical Market as HP staffs up its sales efforts. If this support
involves the formal training of HP personnel, such training shall be held in a
single convenient location and HP shall be responsible for the travel and living
expenses of HP personnel during such training.
5.2.1.5.2. In addition, on-going support of HP customer support relating to
pre-categorized chemistry problems associated with Products will be the
responsibility of
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MTX. However, where the problem is "combinatorial," related to the combination
of the chemistry and the measurement system, then the application problem will
be the responsibility of both Parties.
5.2.1.6. SEEDING THE BIOANALYTICAL MARKET. HP recognizes the benefit of
efforts by MTX to seed the Bioanalytical Market as a significant component of
HP's market development. HP agrees to cooperate with MTX in these efforts prior
to the availability of the Production Model.
5.2.1.7. EXCLUSIVITY.
5.2.1.7.1. From the commencement of the Collaboration until [ * ],
except as provided in Section 5.2.1.6, MTX will not sell or otherwise distribute
to or agree that any other party may sell or distribute to any other party, or
license any other party therefor, any Array Reader whatsoever into the
Bioanalytical Market without the prior written consent of HP.
5.2.1.7.2. HP will not sell or promote or permit any distributor to sell or
promote based on the capability of reading non-MTX Chips an Array Reader which
incorporates protected MTX IP without prior written permission from MTX.
5.2.2. BIOMEDICAL RESEARCH MARKET.
5.2.2.1. PRODUCTS. MTX will market the Products to the Biomedical Research
Market. HP shall supply and MTX shall purchase HP Systems and system components
for the Biomedical Research Market exclusively from HP at the Formula System
Price set forth in Section 6 below.
5.2.2.2. LIMITATION AND REPLACEMENT OF NON-HP READERS. From the date HP makes
the Production Model available to MTX, MTX will not accept new orders for or
otherwise place any Array Readers other than HP Systems in the Biomedical
Research Market until December 1, 2001. MTX agrees to introduce or permit to be
introduced no more than [ * ] non-HP Array Readers (the "Maximum
Number") manufactured by or for MTX into the Biomedical Research Market before [
* ]. If HP fails to make available the Production Model to MTX by [
* ], then the Maximum Number is waived. MTX will market the HP System
exclusively in the Biomedical Research Market for a period beginning when the
Production Model is available and ending on December 1, 2001. When the
Production Model becomes available and non-HP Array Readers have been ordered to
customers but are yet undelivered ("back orders"), MTX will use commercially
feasible efforts to cover such back orders of non-HP Array Readers with HP
Systems. Further, once the Production Model is available, MTX agrees, at HP's
request, to use commercially feasible efforts to "swap-out" at least [ *
] of the non-HP Array Readers introduced into the Biomedical Research
Market but not more than a total of [ * ] Array Readers.
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HP and MTX will share equally the cost of the "swap-out". HP and MTX will work
together to offer customers the opportunity to "swap out." If the Production
Model is not ready for commercial sale before January 1, 1998, MTX will have no
obligation to "swap out."
5.2.2.3. ELECTION TO TERMINATE EXCLUSIVITY. After December 1, 1999, MTX may
elect to terminate the period of exclusivity before the entire period of
exclusivity has elapsed if MTX gives HP six (6) months written prior notice of
such election and gives a reasonable quid pro quo to which HP agrees.
5.2.2.4. ROLLING FORECASTS FOR HP SYSTEMS. Within thirty (30) days after HP
has provided MTX a Beta Model, MTX will provide HP an estimate of the number of
HP Systems it anticipates purchasing: (i) additional Beta Models, if any, for
the coming HP [ * ] and (ii) Production Models for the four [
* ] thereafter. Within thirty (30) days of receipt of this volume
estimate, HP will then provide MTX with a price/volume schedule ("P/V Schedule")
for this period. MTX, within thirty (30) days of receipt of the P/V Schedule
from HP, will provide HP with a committed forecast of its anticipated purchases
of HP Systems for the following [ * ]. Thereafter, at
least thirty (30) days prior to each [ * ], MTX will provide HP a
rolling forecast for the [ * ]. MTX shall
purchase at least [*] of the HP Systems forecasted for the current quarter, at
least [*] for the next quarter and at least [*] for the last quarter.
5.2.2.5. SERVICE CONTRACTS. Where MTX sells HP service contracts with the
initial sale of an HP System, HP will have the obligation to perform such
service contracts commensurate with its obligations and quality standards when
it directly sells or includes a service contract together with sale of an HP
System. All paid service contracts will be subject to HP's acceptance, which
shall not be unreasonably withheld. If HP determines not to accept contracts in
a particular geographic location, HP will make available at a reasonable fee to
MTX or its designee service training, service manuals and component parts
reasonably to permit MTX or its designee to provide required services in such
location.
5.2.3. DUAL NATURE ACCOUNTS. Once a dual nature account has been assigned to
either HP or MTX, the terms of this Agreement shall be applied as if it were in
the Bioanalytical or Biomedical Research Market, respectively.
5.2.4. GENOMICS.
5.2.4.1. RIGHT TO ENTER INTO THIRD-PARTY COLLABORATIONS. MTX reserves the
right to enter into collaborations with third parties for the development of MTX
technology (including, but not limited to, MTX Chips) for measuring the presence
and level of nucleic acid sequences or genes and applying MTX technology to
those companies' development projects.
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5.2.4.2. RIGHT TO DISTRIBUTE THIRD-PARTY MTX CHIPS. MTX will use commercially
feasible efforts to secure rights to distribution of any such collaborator's MTX
Chips broadly in the Bioanalytical Market for HP as soon as MTX has the right to
sell such chips other than to the third-party collaborator. HP acknowledges
that these MTX Chips may have a royalty obligation to the third party
collaborator as a result of such third party's funding of the MTX Chip
development and/or as compensation for rights to sell MTX Chips based on
proprietary gene sequence information. Notwithstanding the foregoing,
commercial sale of MTX Chips to either the collaborator or other third parties
(other than to the collaborator for purposes of research and development) shall
remain subject to HP's rights hereunder in the Bioanalytical Market.
6. REVENUES AND ROYALTIES
6.1. HP SYSTEM.
6.1.1. FORMULA SYSTEM PRICE. HP pricing of HP System sales to MTX shall be
HP's [
*
] FOB at place of
manufacture if manufactured in the U.S. or at U.S. port of entry if manufactured
abroad. In no event shall HP charge MTX for HP Systems at prices higher than
the lowest price charged to any third party for comparable HP Systems sold under
comparable terms and conditions.
6.1.2. HP SYSTEM ROYALTIES.
6.1.2.1. ROYALTY RATES. If HP has incorporated protected MTX IP into the HP
System or any component thereof, the HP System that HP sells to customers other
than MTX shall be subject to royalties. Royalties on the HP System, if any,
will be paid to MTX according to the following table and further conditional
that HP has sold at least [ * ] in Net Sales of the HP System to customers
other than MTX:
The greater of:
(a) $[ * ]; or
(b) [*] of Net Sales of the HP System if the Gross Margin is less
than [*] and [*] if the Gross Margin is greater than or equal to [*].
6.1.2.2. DEFINITIONS. HP gross margin ("Gross Margin") on the HP Systems is
defined as [ * ] using
generally accepted accounting principles. Royalties shall be calculated as a
percentage of the Net Sales and shall be paid in accordance with Section 12.
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6.2. COMPUTER HARDWARE AND PERIPHERALS. MTX will purchase computer hardware
and peripherals for HP Systems directly from vendors, or, at MTX's option,
through HP's Bioscience Products at a price to be negotiated at that time. No
price for computer hardware and peripherals is established in this Agreement.
HP agrees to transfer available HP computers for HP Systems to MTX at HP's
Bioscience Products Group's internal cost, plus reasonable handling and shipping
costs, at MTX' discretion.
6.3. CUSTOM APPLICATIONS SOFTWARE. During the term of this Collaboration
Agreement, both HP and MTX may develop custom applications software for use with
the HP System. Such applications software shall not be considered part of the
"HP System", "HP Software" or "MTX Software" as previously defined. Such
applications software are special applications offered as options to end users
of the HP Systems. Either Party shall sell such custom applications software it
produces to the other Party at list price at the time the order is placed less
[ * ].
6.4. MTX AND HP CHIPS.
6.4.1. MTX SALES OF HP CHIPS. MTX shall pay HP a royalty of [ * ]
of Net Sales of HP Chips MTX sells into the Biomedical Research Market or, if to
an assigned dual account, also into the Bioanalytical Market.
6.4.2. MTX SALES OF MTX SPONSORED CHIPS. MTX shall pay HP a royalty of [ *
] of Net Sales of MTX Sponsored Chips MTX sells into the Biomedical
Research Market or, if to an assigned dual account, into the Bioanalytical
Market until MTX sells [ * ] HP Systems, and thereafter [ *
] of the Net Sales of MTX Sponsored Chips MTX sells into the Biomedical
Research Market until MTX sells [ * ] HP Systems, whereupon MTX
shall no longer be obligated to pay HP a royalty on MTX Sponsored Chips it sells
into the Biomedical Research Market; provided, however, that MTX shall pay HP a
royalty of at least [ * ] of the Net Sales of MTX Sponsored Chips MTX
sells into the Biomedical Research Market until December 31, 2001.
6.4.3. HP SALES OF MTX SPONSORED CHIPS. HP shall pay MTX a royalty of [ *
] of Net Sales of MTX Sponsored Chips HP sells into the Bioanalytical
Market or, if to an assigned dual account, also into the Biomedical Research
Market.
6.4.4. HP SALES OF HP CHIPS. HP shall pay MTX a royalty of [ * ]
of Net Sales of HP Chips HP sells into the Bioanalytical Market. For Net Sales
of any one type of HP Chip exceeding [ * ] in any
one year, HP shall pay MTX a royalty of [ * ] of Net Sales in
excess of [ * ] of that type of HP Chip HP sells
into the Bioanalytical Market.
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6.5. MARKETING AND PROMOTION. HP and MTX will fund their marketing and
promotion activities for new Products in their respective markets commensurate
with similar new product introductions by HP's Analytical Products Group. These
activities typically include advertising, product literature, seminars, field
application specialists, and technical articles. The Parties will work
cooperatively to develop applicable materials. HP agrees that an "Affymetrix"
and/or "GeneChip-TM-" nonpeelable, descriptive label (in compliance with the
"Value Added Business Design Standards of HP", and consistent with HP product
design labeling standards and guidelines, but no less prominent than HP's
"IntelTM Inside" labels) supplied by MTX will be affixed to each HP System. MTX
will provide adequate prior trademark clearances, at its own expense, on any
label it provides to HP for such use, and will indemnify and hold HP harmless
for any liability resulting from HP's use of such MTX-provided label. All uses
of a Party's trademarks will be approved by the Party owning such trademarks
prior to such uses.
6.6. PRESALES PRODUCT SUPPORT. HP recognizes the benefit of involvement of
experienced MTX scientific and marketing personnel in the development and
execution of seminars, training and other market development activities for the
Bioanalytical Market. HP intends to utilize such MTX resources and agrees to
reasonably compensate MTX for their involvement in such activities.
6.7. ROYALTY TERM. The royalty obligations under this Agreement shall remain
in force, on a country-by-country and Product-by-Product basis, until the
expiration date of the last patent containing a valid claim covering such
Product in such country. Upon expiration of such period with respect to any
Product in any country as provided in this Section, the licensed Party shall
have a fully paid-up license to make, have made, use and sell such Product in
such country. Notwithstanding the foregoing, if a Product shall not at any time
have been covered by a valid patent in a particular country, but shall be
covered by or developed utilizing a Party's protected IP, the royalty
obligations hereunder shall nevertheless remain in force in such country for a
period of five years from the first commercial sale on a Product-by-Product
basis in such country, unless such Product is produced and sold in such country
by a third party without any royalty obligations to the licensing Party, in
which case the licensed Party will have no further royalty obligations for such
Product in such country.
7. HP CHIPS AND [ * ] CHIPS
7.1. COMMISSIONED HP CHIPS.
7.1.1. DEVELOPMENT PROGRAM. MTX agrees to develop and manufacture HP Chips
that (i) are identified and commissioned by HP and approved by MTX and (ii), if
HP exercises the [ * ] Option, include [ * ] Chips,
pursuant in each instance to a mutually agreed-to development program. HP shall
bear the cost of development of such HP Chips as scheduled and agreed to in the
development program. The payment of such development costs will be referred to
as "sponsorship,"
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i.e., HP, as payor of said costs, will be deemed to have "sponsored" such chips.
(Chips paid for by MTX or third parties collaborating with MTX will be deemed
"MTX Sponsored Chips").
7.1.2. PRIORITY TO DEVELOPMENT. In accordance with the preceding paragraph,
MTX shall enter, at HP's request, a chip development program and shall give
priority to the development for HP of up to a total of [ * ] HP Chips,
including [ * ] Chips if HP exercises the [ * ]
Option, at any one time.
7.2. DEVELOPMENT AND SUPPLY AGREEMENT. Upon the commissioning of an HP Chip,
including a [ * ], MTX and HP will enter into a development and
supply agreement for such chip.
7.3. WARRANTIES AND LICENSES.
7.3.1. PROPRIETARY GENETIC SEQUENCES. Upon the commissioning of an HP Chip
including a [ * ] Chip, HP will warrant and represent to MTX that it
owns or controls the proprietary gene sequences necessary to make, use and sell
any such HP Chip. Further HP will cross-license MTX to make, use and sell each
such HP Chip during the term of this Agreement for the Biomedical Market,
subject to any restrictions agreed upon in the development and supply agreement
negotiated upon commissioning said HP Chip.
7.3.2. LICENSE TO BACKGROUND IPR. Nothing in the Collaboration is intended to
alter ownership of Background IPR. MTX grants a license to HP for any MTX
Background IPR for making, using or selling the HP System to read MTX Chips. HP
grants a license to MTX for any HP Background IPR to make, use or sell HP Chips,
including [ * ] Chips, and Necessary Reagents during the period when
such Products are available for sale by HP. Except as to the aforementioned
grants, no other rights in protected Background IPR are deemed to be granted
through the Collaboration Agreement. However, both parties agree to negotiate
in good faith for rights to use a Party's protected Background IPR where and to
the extent necessary to practice inventions of the other Party arising out of
the Workplan and necessary to commercialize HP Systems by HP and MTX Chips by
MTX.
7.3.3. EXCLUSIVE RIGHTS TO HP CHIPS. All rights in HP Chips shall be exclusive
to HP in the Bioanalytical Market for no less than [ * ] from first
commercial sale, or such longer period provided by MTX to any third party in the
first major agreement entered into by MTX with such third party for development
by MTX on behalf of such third party of functionally specific MTX Chips.
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7.4. DUE DILIGENCE.
7.4.1. DEVELOPMENT OF HP CHIPS. MTX shall use commercially feasible efforts to
conduct as expeditiously as practicable the development of HP Chips, including
[ * ] Chips if HP exercises the [ * ] Option. MTX
will fairly allocate resources reasonably necessary to develop HP Chips,
including [ * ] Chips, and supply them to HP.
7.4.2. GRANT OF LICENSE UPON BREACH. In the event MTX does not meet its due
diligence obligations in developing a commissioned HP Chip, including a [
* ] Chip, and after sixty (60) days of notice from HP is unable or unwilling
to cure such default, MTX hereby grants HP a license at reasonable royalty rates
to make or have made such HP Chip immediately effective upon such event. Such
license from MTX to HP shall be at existing royalty rates to make or have made
such chip.
7.5. REGULATORY FILINGS. HP shall diligently pursue necessary regulatory
filings to market [ * ] Chips and HP System on a country-by-country
basis. If HP rights with respect to any [ * ] Chips and HP System
shall terminate because of a Material Breach by HP, HP shall promptly provide
MTX with access to regulatory filings, if any, made by HP with respect to such
[ * ] Chip and HP System together with the underlying preclinical and
clinical data, with respect to such [ * ] Chip and HP System, and
cooperate with MTX, at MTX's expense, in obtaining all regulatory approvals
necessary to market such [ * ] Chip and HP System. MTX may use and
incorporate such filings and data in support of applications for approval of
such HP System and [ * ] Chip worldwide at its own risk. MTX will
indemnify and hold HP harmless from any liability resulting from its use of any
such filings and data.
8. OPTION TO HP
8.1. OPTION FEES. MTX grants HP a one (1) year option, renewable for two (2)
consecutive one (1) year periods, for a total of three (3) years ("HP Option")
upon payment of an annual fee of [ * ] by HP.
The HP Option has two parts, each of which may be exercised independently of, or
in conjunction with, the other. At the end of the third anniversary of the HP
Option, the HP Option may be renewed for two (2) additional one (1) year
periods, with Part 2 converting to a right-of-first opportunity, to be exercised
within a sixty-day (60-day) period after notice, to the same exclusive license,
upon payment of an annual fee of [ * ] by HP.
8.2. HP CLINICAL MARKET INSTRUMENT OPTION. Part 1 of the HP Option ("HP
Clinical Market Instrument Option") gives HP the non-exclusive right to sell,
distribute or otherwise dispose of the HP System into the hospital clinical
market (the "HP Clinical
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Market") and such other segments of the clinical diagnostic market as the
Parties in their discretion may agree.
8.3. [ * ] OPTION. Part 2 of the HP Option ([ *
] Option") gives HP the right to commission the development by MTX of [
* ] Chips using gene sequences available to HP for use by [ *
* ]
and an exclusive right to market and sell each [ * ] Chip in the HP
Clinical Market for no less than three (3) years from first commercial sale of
such [ * ] Chip, or such longer period provided by MTX to any third
party for development by MTX on behalf of such third party of functionally
specific MTX Chips.
8.4. EXERCISE OF PARTS OF OPTION. Each of the two parts of the HP Option is
deemed to be equal in value and cost. Any part of the HP Option may be
exercised in conjunction with or independently of any other part of the option.
The HP Option, or either part of the HP Option, is deemed to be exercised when a
writing to that effect has been sent to the MTX representative identified in
Section 15.6 for the receipt of notice. After the HP Option, or either part
thereof, has been exercised, a development and supply agreement shall be
negotiated in good faith by the Parties.
8.5. ROYALTY STRUCTURE AND LICENSING FEES. The royalty structure for HP sales
in the HP Clinical Market shall be the same as that adopted by the Parties for
the non-clinical market (see Section 6 above). The licensing fees for
exclusivity shall not exceed [ * ] for each
year during the period prior to regulatory approval of the Products of such HP
sales and during the period of exclusivity, which commences upon regulatory
approval of such Products. HP will use due diligence to pursue market
opportunities pursuant to the license received upon exercise of the HP Option.
After the period of exclusivity ends, no licensing fee apart from per chip
royalty on MTX Chips sold by HP shall be due MTX from HP.
9. LICENSES
When any exclusive license granted under this Agreement expires or terminates
other than for an uncured Material Breach, such license shall automatically
convert to a non-exclusive license under the same terms and conditions as the
expired or terminated exclusive license and shall be revocable only upon an
uncured Material Breach.
10. COLLABORATION MONIES AND LICENSE FEE
The Collaboration depends on a commitment of resources on the part of both
Parties. These commitments have been set forth in greater detail above. In
recognition of the need of MTX to have capital early in the commercialization
stage, HP agrees to pay monies to MTX under the Collaboration Agreement for
licenses described hereinabove as follows:
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$[ * ] paid within fifteen (15) days after the signing of this
Agreement, as a nonrefundable consideration for an
irrevocable five (5) year exclusive license and access to
MTX Background IP.
$[ * ] first milestone payment payable when the PMC deems that the
first milestone, as defined and interpreted by the PMC, has
been met, but in no case later than [ *
] after the signing of this Agreement.
$[ * ] second milestone payment payable no later than [ *
], tied to delivery to MTX of a Beta Model of the HP
System. This payment is reduced to $[ * ] if HP delivers
[ * ] Beta Models to MTX by [ * ], and is
eliminated in its entirety if HP delivers Production Models
to MTX by [ * ].
$[ * ] third milestone payment payable upon demonstrated capacity
of MTX to manufacture MTX Chips in sufficient quantity to
satisfy the minimum order level for HP's first annual
forecasted volume.
$[ * ] initial prepayment for HP sponsorship of HP Chips (pre-assay
and assay optimization, where HP is billed by MTX at
fully-loaded costs), of which $[ * ] is payable within
thirty (30) days of execution of this Agreement and $[ * ]
is payable within 135 days of execution of this Agreement.
$[ * ] $[ * ] for each of the first [ * ] years of the HP
Option, payable within fifteen (15) days after the signing
of this Agreement and at each of the next two anniversaries
thereof thereafter.
$[ * ] $[ * ] for each of the last [ * ] years of the HP Option,
in which Part 2 is a right-of-first-opportunity, payable on
the third and fourth anniversary dates of the signing of
this Agreement.
In addition to the collaboration and license fee payments described above, HP
agrees to pay reasonable "fully-loaded" cost for MTX employees assigned to the
development of the HP System, or assigned to collaborative research on Chemical
Issues and Hybridization towards possible future generation readers, as
described in the Workplan and for such duration as the RMC has deemed necessary,
but in no event less than two (2) years.
MTX will bill HP monthly for "fully-loaded" costs for MTX employees performing
services in development of the HP System, including payroll, taxes and benefits,
laboratory and supplies expenses, and reasonable occupancy and other overhead
charges. In no case shall the charge to HP for assigned MTX people exceed an
annualized charge
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of $[ * ] per person. If HP should dispute the reasonableness of these
charges, the appropriate management committee will either resolve by unanimous
agreement or recommend a negotiated resolution to HP and MTX senior management.
11. PAYMENTS APPLIED TO PURCHASE OF EQUITY POSITION
If HP purchases an equity position in MTX from MTX within twenty-four (24)
months of the effective date of this Agreement, MTX agrees to apply the $[ * ]
license fee paid pursuant to Section 10 toward the purchase of any such
equity. Notwithstanding the foregoing, HP has no obligation to purchase, and
MTX has no obligation to sell, MTX capital stock hereunder.
12. PAYMENTS; BOOKS AND RECORDS
12.1. ROYALTY REPORTS AND PAYMENTS. After the first commercial sale of a
Product on which royalties are required, HP or MTX, as the case may be, shall
make semi-annual written reports to the other Party within sixty (60) days after
the end of each reporting period, stating in each such report the aggregate Net
Sales of each Product sold during the period upon which a royalty is payable
under Section 6 above. Concurrently with the making of such reports each Party
shall pay to the other Party royalties at the rates specified in Section 6
above. HP's reporting period for the purpose of this section shall be each HP
fiscal half year, or the six (6) month period ending each April 30th and October
31st.
12.2. PAYMENT METHOD. All payments due under this Agreement shall be made by
bank wire transfer in immediately available funds to an account designated by
MTX or HP, as the case may be. All payments hereunder shall be made in U.S.
Dollars. Any payment more than thirty (30) days late shall bear interest to the
extent permitted by applicable law at the prime rate as reported by the Chase
Manhattan Bank. New York, New York, on the date such payment is due, plus an
additional [ * ] calculated on the number of days such payments is
delinquent. This Section 12.2 shall in no way limit any other remedies that a
Party may have.
12.3. CURRENCY CONVERSION. If any currency conversion shall be required in
connection with the calculation of royalties hereunder, such conversion shall be
made using the selling exchange rate for conversion of the foreign currency into
U.S. Dollars, quoted for current transactions reported in the Western U.S.
edition of THE WALL STREET JOURNAL for the last business day of the reporting
period to which such payment pertains.
12.4. INSPECTION OF RECORDS. HP and MTX shall keep complete and accurate books
of account and records for the purpose of determining the royalty amounts
payable under this Agreement. Such books and records shall be kept at the
principal place of business of such Party, as the case may be, for at least
three (3) years following the end of the reporting period to which they pertain.
Such records will be open for inspection during
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such three-year (3-year) period by a representative or agent of MTX or HP for
the purpose of verifying royalty statements hereunder. Such inspections may be
made no more than once each calendar year, at reasonable times and on reasonable
notice. Inspections conducted under this Section 12.4 shall be at the expense
of the inspecting Party, unless a variation of error producing an increase
exceeding [ * ] of the amount stated for any period covered by the
inspection is established in the course of any such inspection, whereupon all
costs relating to the inspection for such period and any unpaid amounts that are
discovered will be paid promptly by the Party being inspected.
12.5. TAX MATTERS. Each Party receiving royalty payments shall be solely
responsible for any assessment of taxes thereon. If a Party has made payment of
taxes to a governmental agency on behalf of the other Party and has deducted
such payment from the royalties due the other Party, the Party shall provide
supporting documentation evidencing such tax payment made with its royalty
payment.
13. REPRESENTATIONS AND WARRANTIES
13.1. WARRANTIES. Each party warrants and represents to the other that it has
the legal rights and power to extend the rights granted herein to the other in
this Agreement, that each has the full right to enter into this Agreement and to
fully perform its obligations hereunder, and that neither has made nor will make
any commitments to third parties in conflict with or in derogation of such
rights or this Agreement.
13.2. REPRESENTATIONS. As of the effective date of this Collaboration, HP, to
the best of its knowledge, does not own or control any issued patents or Patent
Application which would act to preclude MTX from making or supplying MTX Chips.
This representation is based on and limited by the fact that the commercial form
of MTX Chips is not presently known and it is not possible at this time for HP
to know completely its pending Patent Applications and issued patents.
13.3. MTX REPRESENTATION AND WARRANTY. MTX represents and warrants that, as of
the effective date of this Agreement:
(i) it has made accessible for review to HP all material documentations
relevant to all MTX IPR relating to the Array Reader and the
chemistry and hybridization research under the Workplan, including
the patents and Patent Applications in Exhibit C, which are all the
relevant MTX Inventions relating to the HP System;
(ii) to its knowledge, no third party is infringing any such IPR, and
MTX's use of such IPR is not infringing or violating, and has not
been alleged to infringe or violate, the IPR of any third party;
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(iii) to its knowledge, no proceedings have been instituted or are
pending that challenge the validity of the IPR; and
(iv) it has fully disclosed to HP any third-party patent rights or other
proprietary rights that, to its knowledge, might yield a claim
against MTX, or those claiming by, through or under MTX (including HP
under this Agreement) for use of such patent and proprietary rights,
and such full disclosure includes but is not limited to all legal
opinions MTX has obtained on such third-party rights.
13.4. NON-ASSERTION AND ASSERTION OF CLAIMS BY THE PARTIES.
13.4.1. NON-ASSERTION OF INFRINGEMENT CLAIMS. HP and MTX agree that neither
Party will assert against the other Party, or its vendees, mediate or immediate,
any claims for patent infringement based on the manufacture, use or sale of MTX
Chips by MTX and HP Systems by HP. This agreement of non-assertion shall apply,
however, only to patents and to claims of patents which are directed
specifically to such Products and only for the term of the Collaboration
Agreement or while the licenses granted herein to the respective Parties are in
effect.
13.4.2. ASSERTION BY HP AFTER MATERIAL BREACH. If HP terminates the
Collaboration because of a Material Breach by MTX, HP is not precluded from
asserting a patent claim after the termination of the Collaboration.
13.4.3. ASSERTION BY MTX AFTER MATERIAL BREACH. If MTX terminates the
Collaboration because of a Material Breach by HP, HP shall not assert a claim
against any patent identified in Exhibit C and issued to MTX prior to such
termination.
13.5. RESIDUAL KNOWLEDGE OF EMPLOYEES AND FREEDOM TO RE-ASSIGN. It is
understood and agreed between the Parties (i) that both Parties have the right
to assign and reassign employees and to use employees as the employer Party, in
its sole discretion, deems appropriate and (ii) that such employees may use
Residual Knowledge in the performance of services for the employer Party as set
forth in this Agreement.
14. INDEMNIFICATION
14.1. MTX. [
*
]
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[ *
]
14.2. HP. [
*
].
14.3. PROCEDURE. In the event that either Party intends to claim
indemnification (the "Indemnitee") under this Section 14, the Party shall
promptly notify the other Party in writing of such Liability. The indemnifying
Party shall have the right to control the defense thereof with counsel mutually
satisfactory to the Parties; provided, however, that any Indemnitee shall have
the right to retain its own counsel, with the fees and expenses to be paid by
the indemnifying Party, if representation of any Indemnitee by the counsel
retained by the indemnifying Party would be inappropriate due to actual or
potential differing interests between such Indemnitee and the other Party
represented by such counsel in such proceeding. The Indemnitee shall cooperate
with the indemnifying Party and its legal representatives in the investigation
of any action, claim or liability covered by this Section 14.
15. MISCELLANEOUS
15.1. GOVERNING LAWS. This Agreement and any dispute arising from the
performance or breach hereof shall be governed by and construed and enforced in
accordance with, the laws of the state of California, without reference to
conflicts of laws principles.
15.2. WAIVER. It is agreed that no waiver by any Party hereto of any breach of
default of any of the covenants or agreements herein set forth shall be deemed a
waiver as to any subsequent and/or similar breach or default.
15.3. ASSIGNMENT. This Agreement shall not be assignable by either Party to
any third party hereto without the written consent of the other Party herein;
except either Party may assign this Agreement, without such consent, to an
entity that acquires substantially all of the business or assets of such Party
to which this Agreement pertains, whether by merger, reorganization,
acquisition, sale, or otherwise.
15.4. INDEPENDENT CONTRACTORS. The relationship of the Parties hereto is that
of independent contractors. Each Party hereto is not deemed to be an agent,
partner or
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joint venturer of the other Party for any purpose as a result of this Agreement
or the transactions contemplated thereby.
15.5. COMPLIANCE WITH LAWS. In exercising its rights under this Agreement,
each Party shall fully comply with the requirements of any and all applicable
laws, regulations, rules and orders of any governmental body having jurisdiction
over the exercise of rights under this Agreement.
15.6. NOTICES. All notices, requests and other communications hereunder by a
Party shall be in writing and shall be personally delivered or sent by telecopy
or other electronic facsimile transmission or by registered or certified mail,
return receipt requested, postage prepaid, in each case to the respective
address specified below, or such other address as may be specified in writing to
the other Party hereto:
MTX: _____________________________
President, Affymetrix
3380 Central Expressway
Santa Clara, California 95051
HP:_____________________________ ____________________________________
James W. Serum, Ph.D. Stephen P. Fox, Associate General Counsel
Gen Manager - BioScience Products Director, Intellectual Property
HP Corporate Legal HP Corporate Legal
3000 Hanover Street 3000 Hanover Street
Palo Alto, California 94304-1185 Palo Alto, California 94304-1185
15.7. SEVERABILITY. In the event that any nonmaterial provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision.
15.8. FORCE MAJEURE. Nonperformance of either Party (except for payment
obligations) shall be excused to the extent that performance is rendered
impossible by strike, fire, earthquake, flood, governmental acts or orders of
restrictions, failure of suppliers, or any other reason where failure to perform
is beyond the reasonable control and not caused by the negligence, intentional
conduct or misconduct of the nonperforming Party.
15.9. COMPLETE AGREEMENT. This Agreement with its Exhibits constitutes the
entire agreement, both written and oral, between the Parties with respect to the
subject matter hereof, and that all prior agreements respecting the subject
matter hereof, either written or oral, expressed or implied, shall be null and
void. No amendment hereto shall be effective unless it is reduced and agreed to
writing and executed by the respective duly authorized representatives of HP and
MTX.
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15.10. DISPUTE RESOLUTION. Any dispute arising from or under this Agreement
which is not settled by mutual consent shall be finally settled by binding
arbitration, conducted in accordance with the Commercial Arbitration Rules of
the American Arbitration Association by three (3) arbitrators appointed in
accordance with said rules. The arbitration shall be held in Palo Alto,
California. In the event of any dispute arising regarding the achievement of
the milestones in Section 10 above, the arbitrators shall be independent experts
in pharmaceutical and diagnostic product development (including clinical
development and regulatory affairs) in the U.S. The costs of the arbitration,
including administrative and arbitrators' fees, shall be shared equally by the
parties. Each Party shall bear its own costs and attorneys' and witness fees.
A disputed performance or suspended performances pending the resolution of the
arbitration must be completed within thirty (30) days following the final
decision of the arbitrators or such other reasonable period as the arbitrators
may determine in a written opinion. Any arbitration subject to this
Section 15.10 shall be completed within one (1) year from the filing of notice
of a request for such arbitration.
15.11. HEADINGS. The captions to the several sections hereof are not a part of
this Agreement, but are included merely for convenience of reference only and
shall not affect its meaning or interpretation.
15.12. SURVIVAL OF CLAUSES. The following sections (including their
subsections) of this Agreement shall survive any termination of the agreement:
4.3.5-4.3.8, 4.4, 6, 7.5, 9, 12, 13, 14, 15.1, 15.2, 15.4, 15.10 and 15.12.
15.13. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original and both together shall be deemed to be
one and the same agreement.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
duly executed by their authorized representatives and delivered in duplicate
originals as of the effective date.
HEWLETT-PACKARD COMPANY AFFYMETRIX, INC.
<TABLE>
<S> <C> <C> <C>
By: /s/ Douglas K. Carnahan Dated: 11/11/94 By: /s/ David B. Singer Dated: 11/11/94
----------------------- -------- ------------------- -------
Douglas K. Carnahan David B. Singer
Vice President and President and Chief
General Manager Executive Officer
Measurement Systems Organization
By: /s/ Stephen P.A. Fodor Dated: 11 Nov 94
---------------------- ---------
Stephen P.A. Fodor
President and Chief
Technical Officer
</TABLE>
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EXHIBIT A
WORKPLAN FOR AFFYMETRIX/HEWLETT-PACKARD COLLABORATION
FOR RESEARCH AND DEVELOPMENT OF GENECHIP-TM- READERS
CONTEXT
This Workplan describes the technical research and product development
objectives, plans, and organization for the collaboration between Affymetrix
("MTX") and Hewlett-Packard ("HP"). It is set in the context of being Exhibit A
of the MTX-HP Collaboration Agreement which describes the business and marketing
aspects of the collaboration.
If any provision of this Workplan conflicts with the terms and conditions of the
Collaboration Agreement, the terms and conditions of the Collaboration Agreement
shall control. Capitalized terms used but not defined herein have the meanings
specified in Section 2 of the Collaboration Agreement.
OBJECTIVES
To describe the development of a high performance nucleic acid chip reader
system (The HP System) as required by the planned evolution of MTX GeneChip
technology and an understanding of customer requirements. A working
specification appears later in this document.
To describe collaborative research with the objective of establishing a
technology base for use in the initial product offering if results are available
in a timely fashion, and for use in possible subsequent generations of the HP
System.
PRODUCTS: THE HP SYSTEM
The product to be offered will be a high performance instrument reader system,
referred to as the 'HP System.' As per accepted industry practice, the HP
System will be built in two stages: A functional prototype, referred to as the
'Beta Model,' to be built in small quantities primarily for internal use and
testing only; and a fully tested product, referred to as the 'Production Model.'
The Beta Model and the Production Model will be based upon the following
specification. This specification is recognized by both MTX and HP to not
define a complete product, but rather to specify important goals upon which to
base the initial product offering and may be subject to modification by the PMC.
[
*
]
COMPANY CONFIDENTIAL
1
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[
*
]
COMPANY CONFIDENTIAL
2
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CONFIDENTIAL
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[
*
]
COMPANY CONFIDENTIAL
3
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[
*
]
COMPANY CONFIDENTIAL
4
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REQUESTED
[
*
]
BETA MODEL
The objectives of the Beta Model are to demonstrate that the basic functionality
of the product design meets the above specifications, and to provide readers for
MTX and HP internal use for other studies as early as possible. Definition of
Beta Model completion and quantities are described in the Collaboration
Agreement.
PRODUCTION MODEL
The objective of the Production Model is to provide HP and MTX with a high
performance low cost reader system that is tailored for both the bioanalytical
and the biomedical research markets. The Production Model will be based upon
technologies that the product development team feel present the lowest risk
means for meeting the product specification, as well as technologies from
research as specified by the RMC, and also any additional technology that either
HP or MTX has developed independently that each believes would be an appropriate
contribution.
The product development team will be able to obtain the services of the research
team to work on specific problems in order to meet product goals.
COMMITTEES
RESEARCH MANAGEMENT COMMITTEE
The RMC will be responsible for specifying and reviewing the collaborative
research required to provide technology for the Production Model and possible
subsequent generations of the HP System. [ *
]
COMPANY CONFIDENTIAL
5
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CONFIDENTIAL
TREATMENT
REQUESTED
[ *
]
PRODUCT MANAGEMENT COMMITTEE
The PMC will be responsible for overseeing the specification and development of
the HP System and planning for possible subsequent generations of the HP System.
[ * ]
COMPANY CONFIDENTIAL
6
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
AREAS OF WORK
The overall collaborative work is addressed in two parts: underlying technology
research and development, and product development. The work can be further
partitioned into research and development on the instrument, the chip, and the
chemistries at the chip/instrument interface. For this collaboration, HP will
have responsibility for the product development and research for the instrument
[ * ].
MTX will have responsibility for product development and research on the chip
and the algorithms necessary to transform the intensity data to identify the
chip specific bases in the target nucleic acid. There will be collaboration
in the areas of the interface chemistries and the system user interface
involving both personnel from both MTX and HP. A plan for implementation of an
API for experimental protocols will be the responsibility of the PMC.
The resources described below are believed by both parties to be that which is
necessary to staff and complete the work. If it is shown that further resources
are required to successfully meet the collaboration's goals, HP will make every
effort to provide those resources.
RESEARCH
CHEMISTRY AND HYBRIDIZATION
[ * ]
COMPANY CONFIDENTIAL
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CONFIDENTIAL
TREATMENT
REQUESTED
HP will have a supporting staff of engineers and technicians to assist in
construction and execution of experiments.
INSTRUMENTATION
[ * ]
CHIP SUPPLY FOR THE DEVELOPMENT PROGRAM
[ * ]
PRODUCT DEVELOPMENT
The HP System will consist of an HP designed instrument with both onboard and
remote software. It will be compatible with MTX designed image analysis
software, and a commercially available Intel based personal computer. [ * ]
[ * ]
A product development team will be staffed to define the product specification
and execute the product. HP will staff a product development team as is typical
for this type and complexity of instrument. [ * ]
MANUFACTURING
[ * ]
COMPANY CONFIDENTIAL
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CONFIDENTIAL
TREATMENT
REQUESTED
[ * ]
STAFFING
As described above, the total staff for the MTX/HP collaboration would be
approximately as follows:
[
*
]
Payment for MTX staff by HP, and makeup of staff will be per the terms in the
collaboration agreement.
SCHEDULE
In order to proceed in a timely fashion, the RMC and PMC will meet within 2
weeks after the date when Collaboration Agreement is signed to develop schedules
for execution of the first set of tasks for each committee.
COMPANY CONFIDENTIAL
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CONFIDENTIAL
TREATMENT
REQUESTED
EXHIBIT B
The following list is for both Parties:
[ * ]
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
EXHIBIT D
List of Cross-Licensees:
[ * ]
<PAGE>
DEVELOPMENT AND SUPPLY AGREEMENT
between
AFFYMETRIX, INC.
and
GENETICS INSTITUTE, INC.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
TABLE OF CONTENTS
Page
----
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I. DEFINITIONS
1.1 Additional Gene Sequences . . . . . . . . . . . 2
1.2 Affiliate. . . . . . . . . . . . . . . . . . . . 2
1.3 Chip Patent Rights . . . . . . . . . . . . . . . 2
1.4 Confidential Information . . . . . . . . . . . . 3
1.5 Copyrights . . . . . . . . . . . . . . . . . . . 3
1.6 Contract Year. . . . . . . . . . . . . . . . . . 3
1.7 [ * ] . . . . . . . . . . . . . . . . . 3
1.8 [ * ] . . . . . . . . . . . . . . . . . 3
1.9 DNA Chips. . . . . . . . . . . . . . . . . . . . 4
1.10 Distributor. . . . . . . . . . . . . . . . . . . 4
1.11 DNA Chip Products. . . . . . . . . . . . . . . . 4
1.12 DNA Chip Technology. . . . . . . . . . . . . . . 4
1.13 Exclusivity Period . . . . . . . . . . . . . . . 4
1.14 Full-Time Equivalent . . . . . . . . . . . . . . 4
1.15 Fully-Loaded Manufacturing Cost. . . . . . . . . 5
1.16 Gene Expression Screening. . . . . . . . . . . . 5
1.17 Gene Fields. . . . . . . . . . . . . . . . . . . 6
1.18 Gene Patent Rights . . . . . . . . . . . . . . . 6
1.19 GI Novel Gene Discovery Field. . . . . . . . . . 6
1.20 GI Technology. . . . . . . . . . . . . . . . . . 6
1.21 Joint Technology . . . . . . . . . . . . . . . . 6
1.22 Know-How . . . . . . . . . . . . . . . . . . . . 6
1.23 Milestone. . . . . . . . . . . . . . . . . . . . 6
1.24 MTX Technology . . . . . . . . . . . . . . . . . 7
1.25 Net Sales. . . . . . . . . . . . . . . . . . . . 7
1.26 Novel Compounds. . . . . . . . . . . . . . . . . 9
1.27 Novel Gene List. . . . . . . . . . . . . . . . . 9
1.28 Novel Human Therapeutic Compounds. . . . . . . . 9
1.29 Other DNA Chip Products. . . . . . . . . . . . . 10
1.30 Party. . . . . . . . . . . . . . . . . . . . . . 10
1.31 Patent Rights. . . . . . . . . . . . . . . . . . 10
1.32 Performance Bonus. . . . . . . . . . . . . . . . 11
1.33 Probes . . . . . . . . . . . . . . . . . . . . . 11
1.34 Products . . . . . . . . . . . . . . . . . . . . 11
1.35 Projects . . . . . . . . . . . . . . . . . . . . 11
1.36 Project Director . . . . . . . . . . . . . . . . 11
1.37 Research Management Committee. . . . . . . . . . 11
1.38 Sublicensee. . . . . . . . . . . . . . . . . . . 11
1.39 [ * ]. . . . . . . . . . . . . . . . . . 12
1.40 [ * ]. . . . . . . . . . . . . . . . . . 12
1.41 Valid Claim. . . . . . . . . . . . . . . . . . . 12
1.42 Workplan . . . . . . . . . . . . . . . . . . . . 12
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CONFIDENTIAL TREATMENT REQUESTED
ARTICLE II. THE PROJECT
2.1 Purpose. . . . . . . . . . . . . . . . . . . . . 12
2.2 Gene Fields. . . . . . . . . . . . . . . . . . . 13
2.3 Term . . . . . . . . . . . . . . . . . . . . . . 16
2.4 Staffing . . . . . . . . . . . . . . . . . . . . 17
2.5 Research Management Committee. . . . . . . . . . 17
2.6 Facilities . . . . . . . . . . . . . . . . . . . 18
2.7 Inspection . . . . . . . . . . . . . . . . . . . 18
2.8 Patent and Confidential Information Agreements . 18
2.9 Reports. . . . . . . . . . . . . . . . . . . . . 18
ARTICLE III. PROJECT FUNDING
3.1 Development Efforts of MTX . . . . . . . . . . . 19
3.2 Funding of Full-Time Equivalents . . . . . . . . 19
3.3 Capital Funding for Equipment. . . . . . . . . . 20
3.4 Other Expenditures . . . . . . . . . . . . . . . 21
3.5 Performance Bonuses. . . . . . . . . . . . . . . 21
3.6 Records. . . . . . . . . . . . . . . . . . . . . 22
ARTICLE IV. OWNERSHIP AND USE OF TECHNOLOGY
4.1 Ownership of Developments. . . . . . . . . . . . 22
4.2 Licenses . . . . . . . . . . . . . . . . . . . . 23
4.3 Rights of MTX to Joint Technology outside the
Project. . . . . . . . . . . . . . . . . . . . 24
4.4 Rights of GI to Joint Technology outside the
Project. . . . . . . . . . . . . . . . . . . . 25
ARTICLE V. EXCLUSIVITY
5.1 General Rights . . . . . . . . . . . . . . . . . 25
5.2 Use of Proprietary Gene Sequences. . . . . . . . 25
5.3 Use of Probes. . . . . . . . . . . . . . . . . . 26
5.4 GI Exclusivity on Collaborations Involving
the [ * ] . . . . . . . . . . .. . . . 26
5.5 GI Exclusivity on Collaboration Involving the
[ * ] . . . . . . . . . . . . . . . . 27
5.6 GI Exclusivity on collaborations Involving the
GI Novel Gene Discovery Field. . . . . . . . . 27
5.7 Limitations on Product Sales Involving the
Gene Fields. . . . . . . . . . . . . . . . . . 29
5.8 Project Refund and Payment Adjustment. . . . . . 29
5.9 Bilateral Communication. . . . . . . . . . . . . 29
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<PAGE>
ARTICLE VI. BENCHMARKS AND ROYALTIES
6.1 Royalties to GI. . . . . . . . . . . . . . . . . 30
6.2 Benchmarks to MTX for Novel Human Therapeutic
Compounds. . . . . . . . . . . . . . . . . . . 32
6.3 Royalties to MTX for Novel Human Therapeutic
Compounds. . . . . . . . . . . . . . . . . . . 33
6.4 Reports and Payment. . . . . . . . . . . . . . . 37
6.5 Foreign Royalties. . . . . . . . . . . . . . . . 38
6.6 Taxes. . . . . . . . . . . . . . . . . . . . . . 38
6.7 Records. . . . . . . . . . . . . . . . . . . . . 39
ARTICLE VII. SUPPLY
7.1 Supply of DNA Chip Products. . . . . . . . . . . 39
7.2 Supply Price for DNA Chip Products . . . . . . . 40
7.3 Forecasts and Adequate Supply of DNA Chip
Products . . . . . . . . . . . . . . . . . . . 40
7.4 Supply of Other DNA Chip Products. . . . . . . . 41
7.5 Records. . . . . . . . . . . . . . . . . . . . . 41
ARTICLE VIII. PATENT PROSECUTION AND INFRINGEMENT RIGHTS
8.1 Responsibility for Patenting of Technology . . . 42
8.2 Infringement . . . . . . . . . . . . . . . . . . 43
8.3 Claimed Infringement . . . . . . . . . . . . . . 47
ARTICLE IX. CONFIDENTIAL INFORMATION
9.1 Treatment of Confidential Information. . . . . . 48
9.2 Release from Restrictions. . . . . . . . . . . . 48
9.3 Publications . . . . . . . . . . . . . . . . . . 49
ARTICLE X. TERMINATION
10.1 Term . . . . . . . . . . . . . . . . . . . . . . 50
10.2 Termination Due to Lack of Feasibility . . . . . 50
10.3 Termination Due to Lack of Progress. . . . . . . 52
10.4 Termination Due to an Impasse. . . . . . . . . . 52
10.5 Termination of Agreement for Breach. . . . . . . 54
10.6 Survival of Obligations; Return of Confidential
Information. . . . . . . . . . . . . . . . . . 54
ARTICLE XI. INDEMNIFICATION AND LIABILITY LIMITATIONS
11.1 Product Liability Indemnification. . . . . . . . 55
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CONFIDENTIAL TREATMENT REQUESTED
11.2 Liability. . . . . . . . . . . . . . . . . . . . 57
ARTICLE XII. EXPORT
12.1 Acknowledgement. . . . . . . . . . . . . . . . . 58
12.2 Written Assurance. . . . . . . . . . . . . . . . 58
ARTICLE XIII. MISCELLANEOUS
13.1 Representations and Warranties of MTX . . . . . 59
13.2 Publicity. . . . . . . . . . . . . . . . . . . . 60
13.3 Assignment . . . . . . . . . . . . . . . . . . . 60
13.4 Governing Law. . . . . . . . . . . . . . . . . . 60
13.5 Force Majeure. . . . . . . . . . . . . . . . . . 60
13.6 Waiver . . . . . . . . . . . . . . . . . . . . . 61
13.7 Notices. . . . . . . . . . . . . . . . . . . . . 61
13.8 No Agency. . . . . . . . . . . . . . . . . . . . 62
13.9 Entire Agreement . . . . . . . . . . . . . . . . 62
13.10 Headings . . . . . . . . . . . . . . . . . . . . 62
13.11 Severability . . . . . . . . . . . . . . . . . . 63
13.12 Successors and Assigns . . . . . . . . . . . . . 63
13.13 Third Parties. . . . . . . . . . . . . . . . . . 63
13.14 Counterparts . . . . . . . . . . . . . . . . . . 63
SCHEDULES
Schedule A - Workplan, Milestones and Performance Bonuses
Schedule B - [ * ]
Schedule C - Contract Year l Budget
iv
<PAGE>
DEVELOPMENT AND SUPPLY AGREEMENT
AGREEMENT effective as of November 15, 1994 between AFFYMETRIX, INC., a
California corporation having its principal place of business at 3380 Central
Expressway, Santa Clara, California 95051 (hereinafter referred to as "MTX")
and GENETICS INSTITUTE, INC., a Delaware corporation, having its principal
place of business at 87 CambridgePark Drive, Cambridge, Massachusetts 02140
(hereinafter referred to as "GI").
INTRODUCTION
1. MTX has research and development facilities and experienced
scientists, engineers, technical associates and assistants and other
personnel and has rights to and has developed certain DNA chip based
technology.
2. GI has research and development facilities and experienced
scientists, clinicians, engineers, technical associates and assistants and
other personnel which enable it to conduct research and development
activities in the area of biotechnology and the application thereof to the
development, production and manufacture, registration and marketing of
biotechnology based pharmaceutical products.
3. MTX and GI desire to enter into a collaboration for the purpose
of developing DNA chip based products that will assist GI in the discovery of
novel human therapeutic compounds and novel uses of human therapeutic
compounds.
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4. MTX and GI are willing, for the consideration and on the terms
set forth herein, to enter into such a collaboration.
In consideration of the mutual covenants and promises contained
in this Agreement and other good and valuable consideration, MTX and GI agree as
follows:
ARTICLE I. DEFINITIONS
As used in this Agreement, the following terms, whether used in
the singular or plural, shall have the following meanings:
1.1. "ADDITIONAL GENE SEQUENCES" is defined in Section 2.2 of
this Agreement.
1.2. "AFFILIATE" means any corporation, company, partnership,
joint venture and/or firm which controls, is controlled by or is under common
control with a Party. For purposes of this Section 1.2, "control" shall mean
direct or indirect ownership of at least 50% of the equity of an entity.
1.3. "CHIP PATENT RIGHTS" means any and all patents and patent
applications of a Party (whether solely or jointly owned) which specifically
relate to the design, engineering, manufacture or use of DNA Chips and are
reasonably useful or necessary or required to develop, use, manufacture,
distribute and/or sell DNA Chips. The Parties acknowledge that it is not
anticipated that GI will develop any Chip Patent Rights. Notwithstanding the
foregoing, for purposes of clarification, but without limitation, the Parties
further acknowledge that any and all chip assays and Probes developed by the
Parties in or for use in the Project shall not constitute Chip Patent Rights.
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CONFIDENTIAL TREATMENT REQUESTED
1.4. "CONFIDENTIAL INFORMATION" means (a) all proprietary
information and materials, patentable or otherwise, of a Party which is
disclosed by or on behalf of such Party to the other Party, including, but not
limited to, DNA sequences, vectors, cells, substances, formulations, techniques,
methodology, equipment, data, reports, know-how, preclinical and clinical trials
and the results thereof, sources of supply, patent positioning and business
plans, including any negative developments, which do not fall within any of the
exceptions set forth in Sections 9.2(a), (b) and (c) of this Agreement and (b)
any other information designated by the disclosing Party to the other Party as
confidential or proprietary, whether or not related to the Project, which does
not fall within any of the exceptions set forth in Sections 9.2(a), (b) or (c)
of this Agreement.
1.5. "COPYRIGHTS" means all copyrights of a Party (whether solely
or jointly owned) which (a) relate to technology used or developed in the
Project and (b) are reasonably useful or necessary or are required to
develop, use, manufacture, distribute and/or sell DNA Chip Products.
1.6. "CONTRACT YEAR" means any year commencing on November 15 and
ending on November 14.
[ * ]
3
<PAGE>
1.9. "DNA CHIPS" means any and all DNA chips developed in the
Project, the use, making or selling of which (a) is covered by a Valid Claim of
any of the Patent Rights, (b) is covered by any of the Copyrights and/or (c)
embodies any Know-How.
1.10. "DISTRIBUTOR" means a third party which is not an Affiliate
or Sublicensee of a Party and which is a distributor, wholesaler or other
entity purchasing Products from a Party or an Affiliate or Sublicensee for
resale.
1.11. "DNA CHIP PRODUCTS" means DNA Chips, hybridization platforms
developed in the Project, DNA chip readers developed in the Project, software
developed in the Project and/or any and all other products developed in the
Project, the use, making or selling of which (a) is covered by a Valid Claim
of any of the Patent Rights, (b) is covered by any of the Copyrights and/or
(c) embodies any Know-How.
1.12. "DNA CHIP TECHNOLOGY" means the Copyrights, Know-How
and/or Patent Rights.
1.13. "EXCLUSIVITY PERIOD" means the period commencing on the
date of this Agreement and ending on the fifth anniversary of the date of this
Agreement.
1.14. "FULL-TIME EQUIVALENT" means the equivalent of a full-time
technical employee's work time over a 12-month period (including normal
vacations and holidays); the portion of a Full-Time Equivalent year devoted by a
technical employee to the Project shall be determined by dividing the number of
days during any 12-month period devoted by such employee to the Project by the
total
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<PAGE>
number of working days during the 12-month period. As used in this Section
1.14, a "technical employee" shall include any scientist, engineer, technical
associate or assistant and/or other personnel (whether an employee or
consultant) assigned to the Project.
1.15. "FULLY-LOADED MANUFACTURING COST" means (a) costs directly
attributable to manufacturing, quality assurance and quality control related to
a unit of product (i.e., those costs which vary with production), including, but
not limited to, direct labor and benefit expenses for manufacturing, and
consumable bulk and other production materials, as determined in accordance with
United States generally accepted cost accounting practices, plus (b) fixed
manufacturing overhead costs allocable to the product based on the actual
utilization of the manufacturing facility, including but not limited to, direct
benefit and labor expenses for technical services and support services,
depreciation, maintenance and repairs and insurance costs associated with such
utilization of the manufacturing facility, as determined in accordance with
United States generally accepted cost accounting practices, and less (c) costs
otherwise paid for by GI pursuant to Sections 3.2 and 3.3 of this Agreement.
1.16. "GENE EXPRESSION SCREENING" means the use of DNA chip
based technology as a research tool to measure the presence and/or levels of
nucleic acid sequences for the purpose of discovering novel human therapeutic
compounds and novel uses of human therapeutic compounds which, in each case, are
encoded by or regulated by the genes (or their interspecies homologues) probed
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CONFIDENTIAL TREATMENT REQUESTED
for on the DNA chip or are gene products identified by the elimination of
proteins encoded by the nucleic acid sequences on the DNA chip.
1.17. "GENE FIELDS" means the [ * ]
1.18. "GENE PATENT RIGHTS" means all patents and patent
applications of a Party (whether solely or jointly owned) which relate to Novel
Compounds or the genes related thereto and are reasonably useful or necessary or
are required to develop, use, manufacture, distribute and/or sell Novel
Compounds. The Parties acknowledge that it is not anticipated that MTX will
develop any Gene Patent Rights.
1.19. "GI NOVEL GENE DISCOVERY FIELD" is defined in Section 2.2 of
this Agreement.
1.20. "GI TECHNOLOGY" is defined in Section 4.1 of this Agreement.
1.21. "JOINT TECHNOLOGY" is defined in Section 4.1 of this
Agreement.
1.22. "KNOW-HOW" means all information, patentable or otherwise, of
a Party (whether solely or jointly owned) which (a) is used or developed in
the Project and (b) is reasonably useful or necessary or is required to
develop, use, manufacture, distribute and/or sell DNA Chip Products.
1.23. "MILESTONE" means any of the milestones set forth in SCHEDULE
A to this Agreement.
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CONFIDENTIAL TREATMENT REQUESTED
1.24. "MTX TECHNOLOGY" is defined in Section 4.1 of this Agreement.
1.25. "NET SALES" means the aggregate United States Dollar
equivalent of [ * ] less (a) [ * ]. Net Sales shall not
include [ * ]. If a Party or an Affiliate or Sublicensee sells
Products to a Distributor, Net Sales shall be deemed to be [ * ]. In
the event that a Party or any of its Affiliates or Sublicensees shall make
any transfer of Products to third parties for other than monetary value in
whole or in part, such transfer shall be considered a sale hereunder for
accounting and royalty purposes.
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CONFIDENTIAL TREATMENT REQUESTED
Net Sales for any such transfers shall be determined on a country-by-country
basis and shall be [ * ]. Notwithstanding the foregoing, no transfer
of Products for test or developmental purposes or as samples shall be
considered a sale hereunder for accounting and royalty purposes unless such
transfer is for monetary value. If Products are sold as part of a system,
package or combination product, Net Sales shall be [ * ]. If such
Product is not sold separately, [ * ]. Without limiting the
generality of the foregoing, [ * ].
8
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
1.26. "NOVEL COMPOUNDS" means proteins (or any peptides or domain
deleted, modified (i.e., by chemical or enzymatic cleavage or otherwise),
variant or mutant forms thereof) derived from novel genes discovered by GI or
its designated Affiliates through the use of DNA Chip Products or proteins
(or any peptides or domain deleted, modified (i.e., by chemical or enzymatic
cleavage or otherwise), variant or mutant forms thereof) for which novel uses
are discovered by GI or its designated Affiliates through the use of DNA Chip
Products. For purposes of this definition, if a DNA Chip Product was useful
to GI or its designated Affiliates in the discovery of the novel gene or
novel use, the related protein (or peptide or domain deleted, modified (i.e.,
by chemical or enzymatic cleavage or otherwise), variant or mutant form
thereof) shall be deemed to have been discovered through the use of DNA Chip
Products. Novel Compounds shall not include [ * ] for which novel
uses are discovered by GI or its designated Affiliates through the use of DNA
Chip Products.
1.27. "NOVEL GENE LIST" is defined in Section 2.2 of this Agreement.
1.28. "NOVEL HUMAN THERAPEUTIC COMPOUNDS" means human
therapeutic proteins (or any peptides or domain deleted, modified (i.e., by
chemical or enzymatic cleavage or otherwise), variant or mutant forms
thereof) derived from novel genes discovered by GI or its designated
Affiliates through the use of DNA Chip Products or proteins (or any peptides
or domain deleted, modified (i.e., by
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CONFIDENTIAL TREATMENT REQUESTED
chemical or enzymatic cleavage or otherwise), variant or mutant forms
thereof) for which novel human therapeutic uses are discovered by GI or its
designated Affiliates through the use of DNA Chip Products. For purposes of
this definition, if a DNA Chip Product was useful to GI or its designated
Affiliates in the discovery of the novel gene or novel use, the related
protein (or peptide or domain deleted, modified (i.e., by chemical or
enzymatic cleavage or otherwise), variant or mutant form thereof) shall be
deemed to have been discovered through the use of DNA Chip Products. Novel
Human Therapeutic Compounds shall not include [ * ] for which novel
human therapeutic uses are discovered by GI or its designated Affiliates
through the use of DNA Chip Products.
1.29. "OTHER DNA CHIP PRODUCTS" means DNA chips developed
outside the Project, hybridization platforms developed outside the Project, DNA
chip readers developed outside the Project, software developed outside the
Project and/or any and all other products developed outside the Project, the
use, making or selling of which (a) is covered by a Valid Claim of any of the
Patent Rights, (b) is covered by any of the Copyrights and/or (c) embodies any
Know-How.
1.30. "PARTY" means MTX or GI; "PARTIES" means MTX and GI.
1.31. "PATENT RIGHTS" means all patents and patent applications
of a Party (whether solely or jointly owned) which (a) relate to technology used
or developed in the Project and (b) are
10
<PAGE>
reasonably useful or necessary or are required to develop, use, manufacture,
distribute and/or sell DNA Chip Products.
1.32. "PERFORMANCE BONUS" means any of the performance bonuses set
forth in SCHEDULE A to this Agreement.
1.33. "PROBES" means the oligos selected for use in the DNA Chips.
1.34. "PRODUCTS" means either (a) DNA Chip Products, (b) Novel
Human Therapeutic Compounds or (c) Other DNA Chip Products.
1.35. "PROJECT" means the research and development program jointly
conceived, planned, organized, controlled and performed by MTX and GI
pursuant to the Workplan and this Agreement.
1.36. "PROJECT DIRECTOR" means either of the senior scientists for
the Project designated from time to time by MTX or GI.
1.37. "RESEARCH MANAGEMENT COMMITTEE" means the committee
consisting of two members from each of MTX and GI, as designated by MTX and GI
from time to time, which committee shall be responsible for planning and
overseeing the Project.
1.38. "SUBLICENSEE" means, with respect to MTX, a third party
which is not an Affiliate of MTX and to whom MTX has granted a license or
sublicense to develop, use, manufacture, distribute and/or sell DNA Chip
Products and/or Other DNA Chip Products and, with respect to GI, a third party
which is not an Affiliate of GI and to whom GI has granted a license or
sublicense to develop, use, manufacture, distribute and/or sell Novel Human
Therapeutic Compounds discovered by GI or its designated Affiliates. A third
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CONFIDENTIAL TREATMENT REQUESTED
party which is not an Affiliate of GI and which purchases Novel Human
Therapeutic Compounds in bulk form from GI shall be deemed to be a Sublicensee
of GI and not a Distributor of GI.
[ * ]
1.41. "VALID CLAIM" means a claim of an unexpired patent which
shall not have been withdrawn, canceled or disclaimed, nor held invalid or
unenforceable by a court of competent jurisdiction in an unappealed or
unappealable decision, or the claim of a patent application which has not
been on file for more than five years.
1.42. "WORKPLAN" means the workplan set forth in SCHEDULE A to this
Agreement.
ARTICLE II. THE PROJECT
2.1. PURPOSE. The purpose of the Project shall be to collaborate
on the further development and application of MTX's existing DNA Chip Technology
to Gene Expression Screening in the Gene Fields. With respect to each Gene
Field, MTX and GI shall develop one or more DNA Chips and related DNA Chip
Technology. Each of the Parties agrees to undertake the Project on a best
efforts basis with the objective of completing the Milestones in accordance with
the Workplan and by the third anniversary of the date
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CONFIDENTIAL TREATMENT REQUESTED
of this Agreement. The
Parties acknowledge that it may be necessary to make changes to the Milestones
and the Workplan during the course of the Project. All material changes to the
Milestones and the Workplan shall require the written consent of both Parties.
2.2. GENE FIELDS.
(a) During the initial term of the Project, GI shall furnish MTX
with a list (the "[ * ] List") of up to [ * ] full-length
and/or partial gene sequences representing [ * ] genes and genes
[ * ]. In the case of partial gene sequences, GI shall reasonably
believe that such gene sequences uniquely define specific genes. As part of
the Project, the Parties shall identify and select Probes directed to these
gene sequences for inclusion in one or more DNA Chips. With respect to each
such gene sequence, until such time as the Parties commence the
identification and selection of the Probes for such gene sequence, GI shall
have the right to substitute a full-length and/or partial gene sequence
representing a [ * ]gene or gene [ * ] for such gene
sequence, provided that the number of gene sequences on the [ * ]
never exceeds [ * ]. Thereafter, GI shall have the right to make
substitutions only with the consent of the Research Management Committee and
only so long as the number of gene sequences on the [ * ] List never
exceeds [ * ]. The gene sequences appearing on the [ * ]
List are referred to in this Agreement as the "[ * ] Field."
Notwithstanding the foregoing, in the event that, prior to the completion of
the DNA Chips for the [ * ]
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CONFIDENTIAL TREATMENT REQUESTED
Field, MTX is in the process of
negotiating a collaboration with a third party other than GI which could
involve the [ * ]
Field, MTX, at its option, may notify GI in writing and GI shall finalize the
[ * ] List within forty-five (45) days of such notification.
(b) During the initial term of the Project, GI shall furnish MTX
with a list (the "[ * ] List") of approximately [ * ]
full-length and/or partial gene sequences representing genes in the
[ * ]. In the case of partial gene sequences, GI shall reasonably
believe that such gene sequences uniquely define specific genes. As part of
the Project, the Parties shall identify and select Probes directed to these
gene sequences for inclusion in one or more DNA Chips. Further, as part of
the Project, the Parties shall identify and select [ * ] representing
[ * ] within the [ * ] for inclusion in one or more DNA
Chips. The Research Management Committee shall determine the appropriate
number of [ * ] taking into account the desires of GI, the technical
feasibility of including the number desired by GI and the funding constraints
on the Parties. With respect to each gene sequence on the [ * ] List,
until such time as the Parties commence the identification and selection of
the Probes for such gene sequence, GI shall have the right to substitute a
full-length and/or partial gene sequence representing a gene in the
[ * ] for such gene sequence. Thereafter, GI shall have the right to
make substitutions only with the consent of the Research Management
Committee. To the extent that GI discovers full-length and/or
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CONFIDENTIAL TREATMENT REQUESTED
partial gene
sequences representing genes in the [ * ] subsequent to the
commencement of the identification and selection of the Probes for the DNA
Chips for the [ * ], GI shall have the right to identify and have
such full-length and/or partial gene sequences included in the [ * ]
List. MTX shall have no obligation, however, to develop DNA Chips relating to
these subsequently identified gene sequences.
(c) During the initial term of the Project, GI shall furnish MTX
with a list (the "Novel Gene List") of up to [ * ] full-length and/or
partial gene sequences representing genes identified as part of GI's factor
discovery program. In the case of partial gene sequences, GI shall
reasonably believe that such gene sequences uniquely define specific genes.
As part of the Project, the Parties shall identify and select Probes directed
to these gene sequences for inclusion in one or more DNA Chips. With respect
to each such gene sequence, until such time as the Parties commence the
identification and selection of the Probes for such gene sequence, GI shall
have the right to substitute a full-length and/or partial gene sequence
representing a gene identified as part of GI's factor discovery program for
such gene sequence, provided that the number of gene sequences on the Novel
Gene List never exceeds [ * ]. Thereafter, GI shall have the right
to make substitutions only with the consent of the Research Management
Committee and only so long as the number of gene sequences on the Novel Gene
List never exceeds [ * ]. The gene sequences appearing on the Novel
Gene List are referred to in this
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Agreement as the "GI Novel Gene Discovery Field." Notwithstanding the
foregoing, in the event that, prior to the completion of the DNA Chips for
the GI Novel Gene Discovery Field, MTX is in the process of negotiating a
collaboration with a third party other than GI which could involve the GI
Novel Gene Discovery Field, MTX, at its option, may notify GI in writing and
GI shall finalize the Novel Gene List within forty-five (45) days of such
notification.
(d) During the term of the Project and as part of the Project, GI
shall have the right to propose the production of DNA Chips for gene
sequences in addition to those included in the Gene Fields subject to the
technical feasibility of producing such DNA Chips and the negotiation of
mutually acceptable terms. The additional gene sequences included in any
such DNA Chips shall be referred to in this Agreement as the "Additional Gene
Sequences."
(e) During the term of the Project, MTX and GI may agree on other
gene fields to be pursued as part of the Project. Any such expansion of the
Project shall include terms mutually acceptable to MTX and GI. MTX agrees to
consider in good faith any proposals relating to other gene fields made by
GI.
2.3. TERM. The Project will be for an initial term of up to three
years and may be extended by mutual agreement of MTX and GI. In the event
that the Milestones are achieved prior to the expiration of three years, MTX
and GI will determine at such time whether continued meaningful research and
development can be conducted for the remainder of the three years. If MTX
and GI determine that continued meaningful research and development can be
16
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conducted, they shall use best efforts to agree on additional milestones for
the remainder of the three years. The initial term of the Project shall
expire on the earlier of (a) the third anniversary of the date of this
Agreement or (b) the achievement of the Milestones.
2.4. STAFFING. Each Party shall, as soon as practicable, assemble
a team of scientists, engineers, technical associates and/or assistants and
shall designate a Project Director to conduct the activities allocated to
such Party under the Workplan.
2.5. RESEARCH MANAGEMENT COMMITTEE. The Project will be managed by
a Research Management Committee which committee shall be responsible for
planning and overseeing the Project. The Research Management Committee shall
be composed of two representatives from each of MTX and GI. The Research
Management Committee shall be responsible for refining the Workplan,
allocating efforts between MTX and GI, and establishing and approving annual
budgets for the Workplan (within the limits of Article III of this Agreement)
for the second and third Contract Years. The annual budget for the first
Contract Year is set forth in SCHEDULE C to this Agreement. The Research
Management Committee shall meet a minimum of twice per Contract Year during
the term of the Project. The site of such meetings shall alternate between
the offices of MTX and GI (or any other site mutually agreed upon by the
Parties). With respect to all matters to be decided by the Research
Management Committee, the decision of a majority of all of the members of the
Research Management Committee shall be
17
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determinative. All meetings of the Research Management Committee shall be
summarized in writing and sent to both Parties.
2.6. FACILITIES. The Project shall be conducted at and/or
coordinated from the facilities of each Party under the supervision and
direction of its Project Director. Each Party shall be responsible for the
administrative management and fiscal control of the activities for the
Project conducted from its facilities.
2.7. INSPECTION. Each Party shall have the right to arrange for
its employees and consultants involved in the Project to visit the other
Party's facilities and to discuss the Workplan and its results in detail with
the technical personnel of the other Party, provided that visits shall be on
mutually convenient dates and during mutually convenient business hours and
shall not unreasonably interrupt the operations of the other Party.
2.8. PATENT AND CONFIDENTIAL INFORMATION AGREEMENTS. Each Party
shall require each of its employees and consultants assigned to the Project
to execute an agreement for the assignment of inventions and for the
protection of Confidential Information in such reasonable form as may from
time to time be used by such Party and approved by the other Party.
2.9. REPORTS. MTX and GI shall each provide the Research
Management Committee and the other Party with written progress reports
summarizing the technical progress of the Project on a semi-annual basis
within thirty (30) days after the end of each May 15 and November 15 until
the expiration of the term of the Project. Each Party shall also provide the
Research Management Committee and
18
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the other Party with additional oral progress reports as requested from time
to time by the Research Management Committee or the other Party.
ARTICLE III. PROJECT FUNDING
3.1. DEVELOPMENT EFFORTS OF MTX. MTX and GI shall provide the
technical support of the following numbers of Full-Time Equivalents during
the initial three years of the Project:
Contract
Year MTX GI
-------- --- --
1 [ * ][ * ]
2 [ * ][ * ]
3 [ * ][ * ]
With respect to GI, the Parties acknowledge the fact that the technical
support of [ * ] Full-time Equivalents may not be required of GI
during the first Contract Year. GI shall provide such technical support as
is actually required up to [ * ]Full-Time Equivalents. The exact
commitment of MTX for the second and third Contract Years shall be determined
by the Research Management Committee and included in the annual budgets for
such years.
3.2. FUNDING OF FULL-TIME EQUIVALENTS. GI shall fund the technical
support development efforts at MTX at a rate equal to [ * ] per
Full-Time Equivalent per Contract Year as follows:
Contract Minimum Maximum
Year Funding Funding
-------- ------- -------
1 [ * ] [ * ]
2 [ * ] [ * ]
3 [ * ] [ * ]
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Such [ * ] is intended to represent the fully loaded costs of MTX.
An advance of [ * ] against payments due the first Contract Year and
an advance of [ * ] against payments due the second Contract Year
shall be paid to MTX within ten (10) days of the execution of this Agreement.
The balance due for the first Contract Year shall be paid to MTX in four
equal quarterly installments on the first day of each contract quarter during
such Contract Year and the balance due for the second Contract Year shall be
paid to MTX in four equal quarterly installments on the first day of each
contract quarter during such Contract Year. The funding for the third
Contract Year shall be paid to MTX in four equal quarterly installments on
the first day of each contract quarter during such Contract Year. MTX shall
present GI with an invoice for all amounts due and GI shall make payments
against such invoices. GI shall also fund the technical support development
efforts at GI.
3.3. CAPITAL FUNDING FOR EQUIPMENT. To the extent that such
amounts are not covered in the payments made by GI to MTX pursuant to Section
3.2 of this Agreement, GI shall fund a mutually agreeable allocation of the
investment in equipment as is used by MTX in fulfilling its development
efforts during the initial three years of the Project. The Parties
acknowledge that the estimated funding for the first Contract Year is zero.
The estimated capital funding for each of the second and third Contract Years
shall be determined by the Research Management Committee (taking into account
the need to ensure adequate supply to GI) and included in
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the annual budgets for such years. Any increases in excess of the estimated
capital funding for any Contract Year shall be approved by the Research
Management Committee. Capital funding, whether part of the fully loaded
costs set forth in Section 3.2 of this Agreement or the payments to be made
pursuant to this Section 3.3, shall include capital expenditures for that
portion of such purchased equipment as is used by MTX in the Project and that
portion of the depreciation (based on a useful life of five years from the
date of purchase of the equipment) on such existing equipment as is used by
MTX in the Project. The funding for each Contract Year shall be based on
actual utilization and shall be paid to MTX in four equal quarterly
installments within fifteen (15) days of the last day of each contract
quarter during such Contract Year. MTX shall present GI with an invoice for
all amounts due and GI shall make payments against such invoices. Any
investment in equipment required to be made by GI to fulfill its development
responsibilities shall be included in the annual budgets and shall be funded
by GI.
3.4. OTHER EXPENDITURES. Any and all other costs required to be
incurred by each of MTX and GI in excess of the amounts set forth in Sections
3.2 and 3.3 of this Agreement in order to fulfill its responsibilities under
the Workplan and this Agreement, such as travel expenditures, shall be borne
by the Party required to incur such costs.
3.5. PERFORMANCE BONUSES. Within 30 days of the achievement of
each Milestone (as satisfactorily evidenced to GI by MTX or by
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GI itself), GI shall pay to MTX the Performance Bonus for such Milestone set
forth in SCHEDULE A.
3.6. RECORDS. MTX shall keep true and accurate records to
substantiate the expenditure of all funds paid to MTX by GI pursuant to
Sections 3.2 and 3.3 of this Agreement. Upon request from GI, MTX shall
permit GI or its authorized representative to inspect such records in
confidence in order to verify the expenditure of funds charged to GI.
ARTICLE IV. OWNERSHIP AND USE OF TECHNOLOGY
4.1. OWNERSHIP OF DEVELOPMENTS. MTX shall own all patent rights,
copyrights and know-how developed solely by employees or consultants of MTX
which do not incorporate Confidential Information belonging to GI even though
use of GI's Confidential Information may have been incidental in such
development (the "MTX Technology"). GI shall own all patent rights,
copyrights and know-how developed solely by employees or consultants of GI
which do not incorporate Confidential Information belonging to MTX even
though use of MTX's Confidential Information may have been incidental in such
development (the "GI Technology"). MTX and GI shall own jointly all patent
rights, copyrights and know-how developed jointly by employees or consultants
of MTX and GI (the "Joint Technology"). In the event that any solely
developed technology of a Party includes Confidential Information of the
other Party, the developing Party shall assign a one-half undivided interest
in such technology to the other Party and such technology shall also
22
<PAGE>
constitute Joint Technology. In addition, in the event that GI solely
develops a chip assay for use on a hybridization platform, GI shall assign a
one-half undivided interest in such technology to MTX and such technology
shall also constitute Joint Technology. Anything to the contrary
notwithstanding, (a) MTX shall own all Chip Patent Rights used or developed
in the Project and GI shall assign to MTX any interest GI may have in any
Chip Patent Rights used or developed in the Project and any related know-how
and (b) GI shall own all Gene Patent Rights arising out of or discovered
through the use of the DNA Chip Products and MTX shall assign to GI any
interest MTX may have in any Gene Patent Rights arising out of its
involvement in the development of the DNA Chip Products or its involvement in
the Project and any related know-how. MTX shall have the right at all times
to use the MTX Technology and the Chip Patent Rights and GI shall have the
right at all times to use the GI Technology and the Gene Patent Rights.
4.2. LICENSES.
(a) During the term of the Project, MTX shall grant and does hereby
grant to GI and its designated Affiliates a royalty-free, worldwide,
non-exclusive license under its Patent Rights and Copyrights and to use its
Know-How, in each case, for the sole and exclusive purpose of GI's fulfilling
its responsibilities under the Workplan and this Agreement.
(b) MTX shall grant and does hereby grant to GI and its designated
Affiliates a royalty-free, worldwide, non-exclusive license under those Chip
Patent Rights that are assigned to MTX by
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GI and to use the related know-how that is assigned to MTX by GI, in each
case, for the purpose of conducting discovery research, including discovery
research carried out on behalf of a third party. Further, MTX shall and does
hereby grant to GI and its designated Affiliates and Sublicensees a
royalty-free, worldwide, non-exclusive license under those Chip Patent Rights
that are assigned to MTX by GI and to use the related know-how that is
assigned to MTX by GI for the purpose of conducting product development,
process development and manufacturing. The foregoing licenses shall be
perpetual and shall survive any termination of this Agreement. Except as
expressly set forth in this Section 4.2, there are no implied licenses from
MTX to GI.
4.3. RIGHTS OF MTX TO JOINT TECHNOLOGY OUTSIDE THE PROJECT. Subject
to the provisions set forth in Sections 5.2-5.7 of this Agreement, MTX and
its Affiliates shall have the right at all times to use the Joint Technology
that does not encompass Gene Patent Rights in any and all of its other
projects, provided that any DNA chip based technology which is developed in
such other projects and which is reasonably useful or necessary or is
required to develop, use, manufacture, distribute and/or sell DNA Chip
Products is made available to GI under the terms of this Agreement. Subject
to the provisions set forth in Sections 5.2-5.7 of this Agreement and the
royalty payment provisions set forth in Section 6.1 of this Agreement, MTX
and its Affiliates shall have the right at all times to use the Joint
Technology that does not encompass Gene Patent Rights in products sold to
third parties other than GI.
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4.4. RIGHTS OF GI TO JOINT TECHNOLOGY OUTSIDE THE PROJECT. GI and
its designated Affiliates shall have the right at all times to use the Joint
Technology that does not encompass Chip Patent Rights (except for the limited
right provided for in Section 4.2(b) of this Agreement) for discovery
research, including discovery research carried out on behalf of a third
party. Further, GI and its designated Affiliates and Sublicensees shall have
the right at all times to use the Joint Technology that does not encompass
Chip Patent Rights (except for the limited right provided for in Section
4.2(b) of this Agreement) for product development, process development and
manufacturing purposes.
ARTICLE V. EXCLUSIVITY
5.1. GENERAL RIGHTS. Except as otherwise set forth in this Article
V, MTX shall have the right to enter into collaborations with third parties
other than GI (including, without limitation, Affiliates of MTX) and to sell
products to third parties other than GI (including, without limitation,
Affiliates of MTX).
5.2. USE OF PROPRIETARY GENE SEQUENCES. During the Exclusivity
Period, MTX agrees to comply with the provisions of Sections 5.3-5.7 of this
Agreement. In addition, both during and subsequent to the Exclusivity Period,
MTX agrees not to (x) collaborate with a third party other than GI (including,
without limitation, Affiliates of MTX) on gene sequences that are Confidential
Information of GI or (y) supply a third party other than GI (including, without
limitation, Affiliates of MTX) with
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CONFIDENTIAL TREATMENT REQUESTED
products containing Probes for gene sequences that are Confidential
Information of GI unless the other third party independently furnishes MTX
with the gene sequences or the gene sequences become published or generally
known to the public through no fault or omission on the part of MTX and its
Affiliates. Anything to the contrary notwithstanding, MTX shall have the
right, at any time, to collaborate with a third party other than GI
(including, without limitation, Affiliates of MTX) on Additional Gene
Sequences that are Confidential Information of GI where the third party
independently furnishes MTX with the Additional Gene Sequences.
5.3. USE OF PROBES. MTX shall have the right at all times to
use the Probes in other projects and products, provided that the Probes are
selected and developed independent of the Project and MTX complies with the
provisions of Sections 5.2 and 5.4-5.7 of this Agreement.
5.4. GI EXCLUSIVITY ON COLLABORATIONS INVOLVING THE [ * ]
FIELD. During the Exclusivity Period, MTX agrees not to enter into a
collaboration with a third party other than GI (including, without
limitation, Affiliates of MTX) for the purpose of developing and applying
MTX's DNA Chip Technology to Gene Expression Screening in the [ * ]
Field unless all of the following conditions are met.
(a) The other third party independently furnishes MTX with the
gene sequences.
(b) The collaboration with the other third party involves gene
sequences accounting for [ * ] or less of the
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CONFIDENTIAL TREATMENT REQUESTED
gene sequences
furnished by GI to MTX for the [ * ]Field pursuant to Section 2.2 of
this Agreement.
(c) The collaboration with the other third party involves Probes
accounting for [ * ] or less of the Probes contained in the DNA
Chips developed for the [ * ]Field.
5.5. GI EXCLUSIVITY ON COLLABORATIONS INVOLVING THE [ * ].
During the Exclusivity Period, MTX agrees not to enter into a collaboration
with a third party other than GI (including, without limitation, Affiliates
of MTX) for the purpose of developing and applying MTX's DNA Chip Technology
to Gene Expression Screening involving the [ * ] unless all of the
following conditions are met.
(a) The other third party independently furnishes MTX with the
gene sequences.
(b) The collaboration with the other third party involves a
gene sequence that is not publicly available and has not been furnished or
identified by GI as part of the [ * ] pursuant to Section 2.2 of this
Agreement.
(c) MTX shall have used good faith efforts to effect a three-way
collaboration among MTX, GI and the other third party involving the gene
sequence prior to entering into the collaboration with the other third party.
5.6 GI EXCLUSIVITY ON COLLABORATIONS INVOLVING THE GI NOVEL GENE
DISCOVERY FIELD. During the Exclusivity Period, MTX agrees not to enter into
a collaboration with a third party other than GI (including, without
limitation, Affiliates of MTX) for the purpose
27
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CONFIDENTIAL TREATMENT REQUESTED
of developing and applying MTX's DNA Chip Technology to Gene Expression
Screening in the GI Novel Gene Discovery Field unless all of the following
conditions are met.
(a) The other third party independently furnishes MTX with the gene
sequences.
(b) The collaboration with the other third party involves a partial
gene sequence that the other third party has identified as representative of
a family of genes.
(c) MTX shall have identified such partial gene sequence to GI and
GI shall have been given a [ * ] period (triggered by written
notification to GI from MTX of the identification of the GI partial gene
sequence and the fact that it is representative of a family of genes) to
identify specific genes encompassing such partial gene sequence.
(d) Any specific genes encompassing such partial gene sequence that
are identified by GI during such [ * ] period are excluded from the
collaboration with the other third party.
(e) To the extent that GI is unable to identify specific genes
encompassing such partial gene sequence within such thirty (30)-day period,
GI shall have been afforded an additional fifteen (15)-day period to make a
proposal to MTX with respect to a collaboration to identify such genes and
MTX shall have considered in good faith any such proposal prior to entering
into the collaboration with the other third party.
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CONFIDENTIAL TREATMENT REQUESTED
5.7. LIMITATIONS ON PRODUCT SALES INVOLVING THE GENE FIELDS. During
the Exclusivity Period, MTX agrees not to sell products (or any combination
of products) that, despite whether or not such products are labelled for such
purposes, could reasonably be anticipated to be used by third parties in a
manner which would undermine the exclusivity provisions of Sections 5.4-5.6
of this Agreement, whether such products are developed by MTX and/or its
Affiliates or by MTX and/or its Affiliates in collaboration with a third
party other than GI.
5.8. PROJECT REFUND AND PAYMENT ADJUSTMENT. In the event that MTX
enters into a collaboration with a third party other than GI (including,
without limitation, Affiliates of MTX) for the purpose of developing and
applying MTX's DNA Chip Technology to Gene Expression Screening for any gene
sequences or in any gene field (as permitted hereunder) prior to the
expiration of the initial term of the Project, MTX shall refund to GI that
percentage as is set forth below of all amounts previously paid by GI to MTX,
as of such date, pursuant to Section 3.2 of this Agreement. Further, GI's
future payment obligations under Section 3.2 of this Agreement shall be
reduced by that percentage as is set forth below.
Contract Year in Which Percentage Percentage
Collaboration Occurs Refund Reduction
---------------------- ---------- ----------
1 [ * ] [ * ]
2 [ * ] [ * ]
3 [ * ] [ * ]
5.9. BILATERAL COMMUNICATION. GI acknowledges that in order to
effect the terms of Sections 5.4-5.6 of this Agreement, MTX may
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CONFIDENTIAL TREATMENT REQUESTED
be required to inform a third party other than GI (including, without
limitation, Affiliates of MTX) of its inability to collaborate on certain
common gene sequences because of its contractual obligations to GI. MTX
agrees that whenever it is required to make such a disclosure to another
third party (including, without limitation, Affiliates of MTX), it shall make
the most limited disclosure possible (i.e., it shall identify the common gene
sequence but shall not furnish any information regarding the gene sequence
itself and shall not identify GI as the other contractual party). Further,
MTX agrees to inform GI of the fact that it has been approached by another
third party (but not the identity of the third party) (including, without
limitation, Affiliates of MTX) and agrees to identify to GI the common gene
sequences involved (but not any information regarding the gene sequence
itself).
ARTICLE VI. BENCHMARKS AND ROYALTIES
6.1 ROYALTIES TO GI. Until such time as GI shall have been paid
an amount equal [ * ] the difference between (a) the amount paid by
GI to MTX pursuant to Section 3.2 of this Agreement and (b) the amount, if
any, refunded by MTX to GI pursuant to Section 5.8 of this Agreement, MTX
shall pay to GI earned royalties at a rate equal to [ * ] on all Net
Sales by MTX, its Affiliates and Sublicensees of DNA Chip Products and Other
DNA Chip Products which fall within the definition of DNA Chip Products or
Other DNA Chip Products by virtue of involving (i) a Valid Claim under the
Patent
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CONFIDENTIAL TREATMENT REQUESTED
Rights constituting Joint Technology, (ii) Copyrights constituting Joint
Technology and/or (iii) Know-How constituting Joint Technology.
Notwithstanding the foregoing, royalties shall be paid on hybridization
platforms and DNA chip readers solely if such products fall within the
definition of DNA Chip Products or Other DNA Chip Products by virtue of
involving a Valid Claim under the Patent Rights constituting Joint
Technology. Subject to the foregoing limitations, royalties on DNA Chip
Products and Other DNA Chip Products involving (i) a Valid Claim under the
Patent Rights constituting Joint Technology shall be payable on a
country-by-country basis with respect to Net Sales for any country where the
DNA Chip Products or Other DNA Chip Products are distributed or sold in which
there is a Valid Claim under Patent Rights constituting Joint Technology and
(ii) solely Copyrights constituting Joint Technology and/or Know-How
constituting Joint Technology shall be payable on a country-by-country basis
for a period of [ * ] after the first sale in each such country of
the relevant DNA Chip Product or Other DNA Chip Products. At the request of
MTX, GI agrees to consider in good faith a reduction in the foregoing
[ * ] earned royalty rate in exchange for a commensurate increase in
the total amount of royalties to be paid GI pursuant to this Section 6.1
which is reflective of the time value of money.
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CONFIDENTIAL TREATMENT REQUESTED
6.2. BENCHMARKS TO MTX FOR NOVEL HUMAN THERAPEUTIC COMPOUNDS.
(a) GI shall pay to MTX the following benchmark payments for each
Novel Human Therapeutic Compound.
Benchmark Payment per Compound
--------- --------------------
1. [ * ] in one of the [ * ]
European Community, Japan or
the United States
2. [ * ] in one of the [ * ]
European Community, Japan or
the United States
3. Upon the first of CPMP approval [ * ]
or recommendation for approval
in the European Community,
Japanese approval or FDA
approval
Anything to the contrary notwithstanding, in the case of Novel Human
Therapeutic Compounds discovered through the use of the DNA Chips developed
for the Gene Fields, the foregoing benchmarks shall be payable solely with
respect to novel genes and novel uses that are discovered during the
Exclusivity Period. Anything to the contrary notwithstanding, in the case of
Novel Human Therapeutic Compounds discovered through the use of a DNA Chip
developed for the Additional Gene Sequences, the foregoing benchmarks shall
be payable (i) solely with respect to novel genes and novel uses that are
discovered within [ * ] of the delivery of the relevant DNA Chip to
GI and (ii) solely if, prior to the time of the discovery, MTX has not made,
for comparable quantities and terms, the DNA Chips for the Additional Gene
Sequences (if permitted hereunder) or Other DNA Chip Products generally
available to third party commercial entities other than GI for the purpose of
Gene
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CONFIDENTIAL TREATMENT REQUESTED
Expression Screening in exchange for lower (or no) benchmark payments.
In the latter case, the lowest (or no) benchmark payments shall apply in lieu
of those set forth in this Section 6.2.
(b) Until such time as GI shall no longer have any information to
report to MTX, GI shall provide MTX with written reports summarizing the
status of its use of the DNA Chip Products for discovery research on an
annual basis on or before February 15 of each calendar year. Such reports
shall specify the number of potential Novel Human Therapeutic Compounds
discovered by GI through such annual period and the development stage of such
potential Novel Human Therapeutic Compounds at the end of such annual period.
Anything to the contrary notwithstanding, the foregoing reports shall apply
solely to those Novel Human Therapeutic Compounds subject to the benchmark
payment obligations set forth in this Section 6.2 and/or the royalty payment
obligations set forth in Section 6.3 of this Agreement.
6.3. ROYALTIES TO MTX FOR NOVEL HUMAN THERAPEUTIC COMPOUNDS.
(a) GI shall pay to MTX earned royalties at a rate equal to
[ * ] on all Net Sales by GI, its Affiliates and Sublicensees of each
Novel Human Therapeutic Compound. Anything to the contrary notwithstanding,
in the case of Novel Human Therapeutic Compounds that are discovered through
the use of the DNA Chips developed for the Gene Fields, the foregoing earned
royalties shall be payable solely with respect to novel genes and novel uses
that are discovered during the Exclusivity Period. Anything to the contrary
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notwithstanding, in the case of Novel Human Therapeutic Compounds discovered
through the use of a DNA Chip developed for the Additional Gene Sequences,
the foregoing earned royalties shall be payable (i) solely with respect to
novel genes and novel uses that are discovered within [ * ] of the
delivery of the relevant DNA Chip to GI and (ii) solely if, prior to the time
of the discovery, MTX has not made, for comparable quantities and terms, the
DNA Chips for the Additional Gene Sequences (if permitted hereunder) or Other
DNA Chip Products generally available to third party commercial entities
other than GI for the purpose of Gene Expression Screening in exchange for
lower (or no) royalty payments. In the latter case, the lowest (or no)
royalty payments shall apply in lieu of the royalties set forth in this
Section 6.3. Royalties on Novel Human Therapeutic Compounds involving a
Valid Claim under the Gene Patent Rights shall be payable on a
country-by-country basis with respect to Net Sales for any country where the
Novel Human Therapeutic Compounds are distributed or sold in which there is a
Valid Claim under the Gene Patent Rights. Royalties on Novel Human
Therapeutic Compounds not involving a Valid Claim under the Gene Patent
Rights shall be payable on a country-by-country basis for a period of
[ * ] after the first sale in each country of the relevant Novel
Human Therapeutic Compound.
(b) In the event that GI believes that it, or any of its designated
Affiliates or Sublicensees, must make payments (including, without
limitation, royalties, option fees or license
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CONFIDENTIAL TREATMENT REQUESTED
fees) to one or more third parties to obtain a license or similar right in
the absence of which the MTX Technology could not be legally used in
connection with the research, development, use, manufacture, distribution
and/or sale of Novel Human Therapeutic Compounds, it shall so notify MTX.
MTX shall then have the following two options up until the time GI reasonably
anticipates that the first such Novel Human Therapeutic Compound will
[ * ]or the equivalent thereof in any country. First, MTX may permit
GI and its designated Affiliates and Sublicensees to make such payments and
to deduct from royalties payable to MTX on Net Sales of such Novel Human
Therapeutic Compounds an amount equal to up to [ * ] of such third
party payments, provided that the total royalties otherwise due to MTX on Net
Sales of such Novel Human Therapeutic Compounds in any calendar year shall
not be reduced by more than [ * ] as a result of such deduction. To
the extent that such third party payments exceed the deduction permitted
under this paragraph (b), GI shall be permitted to carry such amount forward
to subsequent calendar years. The foregoing royalty deduction shall be
calculated independent of the royalty deduction permitted under paragraph (c)
below, provided that in no event shall the total royalties due to MTX on Net
Sales of all Novel Human Therapeutic Compounds in any calendar year be
reduced by more than [ * ] as a result of deductions taken under this
paragraph (b) and paragraph (c) below. Alternatively, MTX shall have the
right to prohibit GI and its designated Affiliates and
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CONFIDENTIAL TREATMENT REQUESTED
Sublicensees from making such payments, provided that MTX agrees to defend GI
and its designated Affiliates and Sublicensees, their agents, directors,
officers and employees, at MTX's cost and expense, and to indemnify and hold
harmless GI and its designated Affiliates and Sublicensees and, their agents,
directors, officers and employees, from and against any and all losses,
costs, damages, fees or expenses arising out of or in connection with claims
brought by the foregoing third parties relating to the failure of GI and/or
its Affiliates and Sublicensees to make such payments to such third parties.
In the event that MTX desires to defend, indemnify and hold harmless GI and
its designated Affiliates and Sublicensees, MTX shall be required to furnish
GI with reasonable evidence of its financial ability to absorb such liability
exposure. If, at such time as GI shall reasonably anticipate that the first
such Novel Human Therapeutic Compound will [ * ] or the equivalent in
any country, MTX shall not have reached a resolution with such third parties
that is satisfactory to GI, GI shall have the right to make such payments and
to take the foregoing deductions from royalties.
(c) If GI, or its designated Affiliates or Sublicensees, must
make payments (including, without limitation, royalties, option fees or license
fees) to one or more third parties to obtain a license or similar right for any
country where a Novel Human Therapeutic Compound is distributed or sold in which
there is not a Valid Claim under the Gene Patent Rights in the absence of which
GI or its designated Affiliates or Sublicensees could not legally
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CONFIDENTIAL TREATMENT REQUESTED
develop, use, manufacture, distribute and/or sell such Novel Human
Therapeutic Compound, GI shall have the right to deduct from royalties
payable to MTX on Net Sales of all such Novel Human Therapeutic Compounds an
amount equal to up to [ * ] of such third party payments, provided
that the total royalties otherwise due to MTX on Net Sales of all such Novel
Human Therapeutic Compounds in any calendar year shall not be reduced by more
than [ * ] as a result of such deduction. To the extent that such
third party payments exceed the deduction permitted under this paragraph (c),
GI shall be permitted to carry such amount forward to subsequent calendar
years. The foregoing royalty deduction shall be calculated independent of
the royalty deduction permitted under paragraph (b) above, provided that in
no event shall the total royalties due to MTX on Net Sales of all Novel Human
Therapeutic Compounds in any calendar year be reduced by more than
[ * ] as a result of deductions taken under paragraph (b) above and
this paragraph (c).
6.4. REPORTS AND PAYMENT. Each Party shall deliver to the other
Party within sixty (60) days after the end of each calendar quarter a written
report showing its computation of royalties due under this Agreement upon Net
Sales by such Party, its Affiliates and Sublicensees during such calendar
quarter. All Net Sales shall be segmented in each such report according to
sales by such Party, each Affiliate and each Sublicensee, as well as on a
country-by-country basis, including the rates of exchange used to convert
such royalties to United States Dollars from the currency
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in which such sales were made. For the purposes hereof, the rates of
exchange to be used for converting royalties hereunder to United States
Dollars shall be those published for the purchase of United States Dollars in
the East Coast Edition of the WALL STREET JOURNAL for the last business day
of the calendar quarter for which payment is due. Subject to the provisions
of Sections 6.5 and 6.6 of this Agreement, simultaneously with the delivery
of each such report, the paying Party shall tender payment in United States
Dollars of all royalties shown to be due therein.
6.5. FOREIGN ROYALTIES. Where royalties are due hereunder for
sales of Products in a country where, by reason of currency regulations or
taxes of any kind, it is impossible or illegal for such Party, any Affiliate
or Sublicensee to transfer royalty payments to the other Party for Net Sales
in that country, such royalties shall be deposited in whatever currency is
allowable by the person or entity not able to make the transfer for the
benefit or credit of the other Party in an accredited bank in that country
that is reasonably acceptable to the other Party.
6.6. TAXES. Any and all income or similar taxes imposed or levied
on account of the receipt of royalties payable under this Agreement which are
required to be withheld by a Party shall be paid by such Party, its
Affiliates or Sublicensees on behalf of the other Party and shall be paid to
the proper taxing authority. Proof of payment shall be secured and sent to
the other Party by such Party, its Affiliates or Sublicensees as evidence of
such payment in such form as required by the tax authorities having
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CONFIDENTIAL TREATMENT REQUESTED
jurisdiction over such Party, its Affiliates or Sublicensees. Such taxes
shall be deducted from the royalty that would otherwise be remittable by the
Party, its Affiliates or Sublicensees.
6.7. RECORDS. Each Party shall keep, and shall require all
Affiliates and Sublicensees to keep, for a period of at least two years,
full, true and accurate books of accounts and other records containing all
information and data which may be necessary to ascertain and verify the
royalties payable hereunder. During the term of this Agreement and for a
period of two years following its termination, each Party shall have the
right from time to time (not to exceed once during each calendar year) to
inspect in confidence, or have an agent, accountant or other representative
inspect in confidence, such books, records and supporting data.
ARTICLE VII. SUPPLY
7.1. SUPPLY OF DNA CHIP PRODUCTS. Until the fifth anniversary of
the expiration of the term of the Project, MTX shall supply GI, its
designated Affiliates and Sublicensees with one hundred percent (100%) of
their requirements of DNA Chip Products. GI and its designated Affiliates
shall have the right to use the DNA Chip Products for [ * ],
including [ * ] carried out on behalf of third parties. Further, GI
and its designated Affiliates and Sublicensees shall have the right to use
the DNA Chip Products for [ * ]. Except for transfers
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CONFIDENTIAL TREATMENT REQUESTED
contemplated by the foregoing sentence, GI shall have no right to resell the
DNA Chip Products.
7.2. SUPPLY PRICE FOR DNA CHIP PRODUCTS. Until such time as MTX is
generally offering to third party commercial entities the right to purchase
DNA Chip Products (if permitted hereunder) or Other DNA Chip Products for the
purpose of Gene Expression Screening, the supply price to GI for its
requirements of DNA Chip Products shall be as follows. In the event that MTX
contracts for the manufacture of the DNA Chip Products, the price to GI shall
not exceed [ * ]. In the event that MTX itself
manufactures the DNA Chip Products, the price to GI for DNA Chip Products
purchased shall not exceed [ * ]. At such time as MTX is generally
offering to third party commercial entities the right to purchase DNA Chip
Products (if permitted hereunder) or Other DNA Chip Products for the purpose
of Gene Expression Screening, MTX shall supply GI with its requirements of
DNA Chip Products at the lowest price charged for comparable quantities and
terms by MTX to its other third party commercial end-users of DNA Chip
Products (if permitted hereunder) or Other DNA Chip Products; provided,
however, that the favored supply price provided for in this sentence shall
not be available for purchases of DNA chip readers on behalf of GI's
Affiliates that are not controlled by GI or on behalf of GI's Sublicensees.
7.3. FORECASTS AND ADEQUATE SUPPLY OF DNA CHIP PRODUCTS. Commencing
with the first full contract quarter subsequent to the
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delivery by MTX to GI of the first DNA chip reader, during the term of this
Agreement, GI shall provide MTX with forecasts of its requirements of DNA
Chip Products at least [ * ] prior to each contract quarter or at
such other intervals or upon such other advance notice as is determined by
the Research Management Committee. Further, in order to ensure an adequate
supply of DNA Chip Products to GI, GI shall have the right to contract with
MTX for dedicated equipment and manpower as is necessary to meet GI's supply
needs on terms mutually agreed upon by the Parties.
7.4. SUPPLY OF OTHER DNA CHIP PRODUCTS. If, at any time prior to
the [ * ] of the expiration of the term of the Project, MTX is
generally offering to third party commercial entities the right to purchase
Other DNA Chip Products for the purpose of Gene Expression Screening and GI
desires to purchase such Other DNA Chip Products for the purpose of Gene
Expression Screening, MTX shall sell such Other DNA Chip Products to GI at
the lowest price charged for comparable quantities and terms by MTX to its
other third party commercial end-users of such Other DNA Chip Products.
7.5. RECORDS. MTX shall keep true and accurate records to
substantiate the supply price charged to GI pursuant to this Article VII.
Upon request from GI, MTX shall permit GI or its authorized representative to
inspect such records in confidence in order to verify the supply price
charged to GI.
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ARTICLE VIII. PATENT PROSECUTION AND INFRINGEMENT RIGHTS
8.1. RESPONSIBILITY FOR PATENTING OF TECHNOLOGY.
(a) Except as otherwise provided in this Agreement, MTX shall have
the right to seek or continue to seek or maintain patent protection on any
MTX Technology, Joint Technology that does not encompass Gene Patent Rights
and Chip Patent Rights in any country. If MTX elects not to seek or continue
to seek or maintain patent protection on any such Joint Technology in any
country, GI shall have the right, at its expense, to file, procure and
maintain in such countries patents on such Joint Technology that does not
encompass Chip Patent Rights. MTX agrees to advise GI of all decisions taken
this paragraph in a timely manner in order to allow GI to protect its rights
under this paragraph. Except as otherwise provided in this Agreement, GI
shall have the right to seek or continue to seek or maintain patent
protection on any GI Technology and Gene Patent Rights in any country. Each
Party shall bear all costs incurred by it in exercising the foregoing rights.
(b) Each Party shall provide the other Party with copies of all
substantive communications from all patent offices regarding applications or
patents on any Joint Technology promptly after the receipt thereof. Each
Party shall provide the other Party with copies of all proposed substantive
communications to such patent offices regarding applications or patents on
any Joint Technology in sufficient time before the due date in order to
enable the other Party an opportunity to comment on the content thereof.
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(c) Each Party shall make available to the other Party or its
authorized attorneys, agents or representatives, such of its employees whom
the other Party in its reasonable judgment deems necessary in order to assist
it in obtaining patent protection for the Joint Technology. Each Party shall
sign or use its best efforts to have signed all legal documents necessary to
file and prosecute patent applications or to obtain or maintain patents at no
cost to the other Party.
8.2. INFRINGEMENT.
(a) Each Party shall promptly report in writing to the other Party
during the term of this Agreement any (i) known infringement or suspected
infringement of any of the Patent Rights, (ii) known infringement or
suspected infringement of any of the Copyrights, or (iii) unauthorized use or
misappropriation of Know-How or Confidential Information by a third party of
which it becomes aware, and shall provide the other Party with all available
evidence supporting said infringement, suspected infringement or unauthorized
use or misappropriation.
(b) Each Party shall have the right to initiate an infringement or
other appropriate suit against any third party who at any time has infringed,
or is suspected of infringing, any of such Party's solely owned Patent Rights
or Copyrights or of using without proper authorization all or any portion of
such Party's solely owned Know-How. Except as provided in paragraph (d)
below, MTX shall have the first right to initiate an infringement or other
appropriate suit against any third party who at any time has
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infringed, or is suspected of infringing, any of the Patent Rights
constituting Joint Technology that does not encompass Gene Patent Rights or
Copyrights constituting Joint Technology or of using without proper
authorization all or any portion of the Know-How constituting Joint
Technology. With respect to any suit involving such Joint Technology, MTX
shall give GI sufficient advance notice of its intent to file said suit and
the reasons therefor, and shall provide GI with an opportunity to make
suggestions and comments regarding such suit. MTX shall keep GI promptly
informed, and shall from time to time consult with GI regarding the status of
any such suit and shall provide GI with copies of all documents filed in, and
all written communications relating to, such suit. MTX shall have the right
to initiate an infringement or other appropriate suit against any third party
who at any time has infringed, or is suspected of infringing, any of the Chip
Patent Rights and GI shall have the right to initiate an infringement or
other appropriate suit against any third party who at any time has infringed,
or is suspected of infringing, any of the Gene Patent Rights.
(c) MTX shall have the sole and exclusive right to select counsel
for any suit involving the Joint Technology that does not encompass Gene
Patent Rights referred to in paragraph (b) above and shall, except as
provided below, pay all expenses of the suit, including without limitation
attorneys' fees and court costs. GI, in its sole discretion, may elect,
within sixty (60) days after the commencement of such litigation, to
contribute a fixed percentage
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CONFIDENTIAL TREATMENT REQUESTED
of up to [ * ] of the costs incurred by MTX in connection with such
litigation, including, without limitation, reimbursement of MTX's expenses
hereunder. If it so elects, any damages, royalties, settlement fees or other
consideration received by MTX or any of its Affiliates for past infringement
or misappropriation as a result of such litigation shall be shared by the
Parties pro-rata based on their respective sharing of the costs of such
litigation. In the event that GI elects not to contribute to the costs of
such litigation, MTX and/or its Affiliates shall be entitled to retain any
damages, royalties, settlement fees or other consideration for past
infringement or misappropriation resulting therefrom. If necessary or
desirable, GI shall join as a party to the suit but shall be under no
obligation to participate except to the extent that such participation is
required as the result of being a named party to the suit. GI shall offer
reasonable assistance to MTX in connection therewith at no charge to MTX
except for reimbursement of reasonable out-of-pocket expenses, including
salaries of GI's personnel, incurred in rendering such assistance. GI shall
have the right to participate and be represented in any such suit by its own
counsel at its own expense. If MTX requires GI to join in such suit and GI
has not elected to contribute to the costs of such suit, MTX shall indemnify
and defend GI against any claims or damages arising out of the initiation of
such suits or any claims for injunctive relief against such third party
infringers. MTX shall not settle any such
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suit involving rights of GI without obtaining the prior written consent of
GI, which consent shall not be unreasonably withheld.
(d) In the event that MTX elects not to initiate an infringement
or other appropriate suit involving the Joint Technology pursuant to paragraph
(b) above, MTX shall promptly advise GI of its intent not to initiate such suit,
and GI shall have the right, at its expense, of initiating an infringement or
other appropriate suit against any third party who at any time has infringed, or
is suspected of infringing, any of the Patent Rights constituting Joint
Technology that does not encompass Chip Patent Rights or Copyrights constituting
Joint Technology or of using without proper authorization all or any portion of
the Know-How constituting Joint Technology. In exercising its rights pursuant
to this paragraph (d), GI shall have the sole and exclusive right to select
counsel and shall, except as provided below, pay all expenses of the suit
including without limitation attorneys' fees and court costs. MTX in its sole
discretion, may elect, within sixty (60) days after the commencement of such
litigation, to contribute a fixed percentage of up to [ * ] of the
costs incurred by GI in connection with such litigation, including, without
limitation, reimbursement of GI's expenses hereunder. If it so elects, any
damages, royalties, settlement fees or other consideration received by GI or any
of its Affiliates for past infringement or misappropriation as a result of such
litigation shall be shared by the Parties pro-rata based on their respective
sharing of the costs of such litigation. In the event that MTX
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elects not to contribute to the costs of such litigation, GI and/or its
Affiliates shall be entitled to retain any damages, royalties, settlement
fees or other consideration for past infringement or misappropriation
resulting therefrom. If necessary or desirable, MTX shall join as a party to
the suit but shall be under no obligation to participate except to the extent
that such participation is required as a result of being a named party to the
suit. At GI's request, MTX shall offer reasonable assistance to GI in
connection therewith at no charge to GI except for reimbursement of
reasonable out-of-pocket expenses, including salaries of MTX's personnel,
incurred in rendering such assistance. If GI requires MTX to join in such
suit and MTX has not elected to contribute to the costs of such suit, GI
shall indemnify and defend MTX against any claims or damages arising out of
the initiation of such suits or any claims for injunctive relief against such
third party infringers. MTX shall have the right to participate and be
represented in any such suit by its own counsel at its own expense.
8.3. CLAIMED INFRINGEMENT.
(a) In the event that a third party at any time provides written
notice of a claim to, or brings an action, suit or proceeding against, either
Party or any of their respective Affiliates or Sublicensees, claiming
infringement of its patent rights or copyrights or unauthorized use or
misappropriation of its know-how, based upon an assertion or claim arising
out of the development, use, manufacture, distribution and/or sale of DNA
Chip Products or Other DNA Chip Products, such Party shall promptly
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notify the other Party of the claim or the commencement of such action, suit
or proceeding, enclosing a copy of the claim and/or all papers served. Each
Party agrees to make available to the other Party its advice and counsel
regarding the technical merits of any such claim at no cost to the other
Party.
(b) EXCEPT AS SET FORTH IN SECTION 6.3 OF THIS AGREEMENT, THE
FOREGOING STATES THE ENTIRE RESPONSIBILITY OF THE PARTIES IN THE CASE OF ANY
CLAIMED INFRINGEMENT OR VIOLATION OF ANY THIRD PARTY'S PATENT RIGHTS OR
COPYRIGHTS OR UNAUTHORIZED USE OR MISAPPROPRIATION OF ANY THIRD PARTY'S
KNOW-HOW.
ARTICLE IX. CONFIDENTIAL INFORMATION
9.1. TREATMENT OF CONFIDENTIAL INFORMATION. Each Party hereto
shall maintain the Confidential Information of the other Party in confidence,
and shall not disclose, divulge or otherwise communicate such Confidential
Information to others, or use it for any purpose, except as permitted or
contemplated by this Agreement or pursuant to, and in order to carry out, the
terms and objectives of this Agreement, and hereby agrees to exercise every
reasonable precaution to prevent and restrain the unauthorized disclosure of
such Confidential Information by any of its directors, officers, employees,
consultants, subcontractors, agents, Affiliates or Sublicensees.
9.2. RELEASE FROM RESTRICTIONS. The provisions of Section 9.1
shall not apply to any Confidential Information disclosed hereunder which:
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(a) was known or used by the receiving Party or its Affiliates
prior to its date of disclosure to the receiving Party, as evidenced by the
prior written records of the receiving Party or its Affiliates; or
(b) either before or after the date of the disclosure to the
receiving Party is lawfully disclosed without restriction on disclosure to
the receiving Party or its Affiliates by an independent, unaffiliated third
party rightfully in possession of the Confidential Information; or
(c) either before or after the date of the disclosure to the
receiving Party becomes published or generally known to the public through no
fault or omission on the part of the receiving Party or its Affiliates; or
(d) is required to be disclosed by the receiving Party to comply
with applicable laws, to defend or prosecute litigation or to comply with
governmental regulations, provided that the receiving Party provides prior
written notice of such disclosure to the other Party and takes reasonable and
lawful actions to avoid and/or minimize the degree of such disclosure.
9.3. PUBLICATIONS. The following restrictions shall apply with
respect to the disclosure in scientific journals or publications by any Party or
any of its Affiliates or any employee or consultant of any Party or any of its
Affiliates of Confidential Information of the other Party relating to the
Project:
(a) a Party (the "publishing Party") shall provide the other Party
with an advance copy of any proposed publication (which may
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be in draft form) and such other Party shall have a reasonable opportunity to
recommend any changes it reasonably believes are necessary to preserve patent
rights, copyrights or know-how belonging in whole or in part to MTX or GI,
and the incorporation of such recommended changes shall not be unreasonably
refused; and
(b) if such other Party informs the publishing Party, within thirty
(30) days of receipt of an advance copy of a proposed publication, that such
publication in its reasonable judgment could be expected to have a material
adverse effect on any patent rights, copyrights or know-how belonging in
whole or in part to MTX or GI, the publishing Party shall, to the extent
permitted by its agreements with its employees and consultants, delay or
prevent such publication as proposed. In the case of inventions, the delay
shall be sufficiently long to permit the timely preparation and filing of a
patent application(s) or application(s) for a certificate of invention on the
information involved.
ARTICLE X. TERMINATION
10.1. TERM. Unless earlier terminated in accordance with the
provisions of this Article X, this Agreement shall remain in effect until the
later of (a) the expiration of the royalty payment obligations set forth in
Article VI of this Agreement or (b) the supply obligations set forth in
Article VII of this Agreement.
10.2. TERMINATION DUE TO LACK OF FEASIBILITY.
(a) In the event that the Parties mutually determine that the
Project is not feasible, this Agreement shall be terminated
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immediately. In any such event, MTX shall return to GI the portion of the
[ * ] advance provided for in Section 3.2 of this Agreement which
would not otherwise have been paid to MTX were it not an advance and each
Party shall retain ownership of its technology.
(b) In the event that MTX determines that the Project is not
feasible but GI disagrees, MTX shall have the right to terminate this
Agreement on thirty (30) days prior written notice to GI. In any such event,
MTX shall return to GI the portion of the [ * ] advance provided for
in Section 3.2 of this Agreement which would not otherwise have been paid to
MTX were it not an advance and each Party shall retain ownership of its
technology. Furthermore, in the event that, prior to the second anniversary
of such termination, MTX shall desire to enter into a collaboration relating
to the development and application of MTX's DNA Chip Technology to Gene
Expression Screening with a third party other than GI (including, without
limitation, Affiliates of MTX) possessing technology or know-how that would
render the Project technologically feasible, MTX shall use good faith efforts
to effect a three-way collaboration among MTX, GI and the other third party
to complete the Project. In the event that MTX is unable to effect a
three-way collaboration but enters into the collaboration with the other
third party, MTX shall refund to GI that percentage as is set forth below of
all amounts previously paid by GI to MTX pursuant to Section 3.2 of this
Agreement.
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CONFIDENTIAL TREATMENT REQUESTED
Contract Year
In Which Percentage
Termination Occurs Refund
------------------ ----------
1 [ * ]
2 [ * ]
3 [ * ]
The foregoing refund shall not be paid if GI shall have previously received a
refund pursuant to Section 5.8 of this Agreement.
(c) In the event that GI determines that the Project is not
feasible but MTX disagrees, GI shall have the right to terminate this
Agreement on thirty (30) days prior written notice to MTX. In any such
event, MTX shall be entitled to retain the [ * ] advance provided for
in Section 3.2 of this Agreement and each Party shall retain ownership of its
technology.
10.3. TERMINATION DUE TO LACK OF PROGRESS. In the event that Goals
A and B set forth in SCHEDULE A are not achieved by the end of the first
Contract Year, GI shall have the right to terminate this Agreement on thirty
(30) days prior written notice to MTX. In any such event, MTX shall return
to GI the portion of the [ * ] advance provided for in Section 3.2 of
this Agreement which would not have otherwise been paid to MTX were it not an
advance and each Party shall retain ownership of its technology.
10.4. TERMINATION DUE TO AN IMPASSE. In the event that the
Research Management Committee is unable to reach a decision by majority vote
with respect to any matter and such inability continues for a period of sixty
(60) days after the date on which the matter is first submitted to the Research
Management Committee, each Party shall have the right to refer the matter to the
chief
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operating officers of MTX and GI for resolution. Except for an impasse
relating to the feasibility of the Project (which shall be dealt with as
specified in Section 10.2 of this Agreement), in the event of an impasse that
(a) occurs prior to a commercially useful stage of development of the Project
and (b) cannot be resolved by the chief operating officers of MTX and GI
within thirty (30) days after the date on which the matter is first referred
to them, each of MTX and GI shall have the right to terminate this Agreement
on thirty (30) days prior written notice to the other Party. In any such
event, each Party shall retain ownership of its technology. In the event
that MTX is the terminating Party, it shall return to GI that portion of the
[ * ] advance provided for in Section 3.2 of this Agreement which
would not otherwise have been paid to MTX were it not an advance.
Furthermore, in the event that, prior to the second anniversary of such
termination, MTX shall enter into a collaboration relating to the development
and application of MTX's DNA Chip Technology to Gene Expression Screening
with a third party other than GI (including, without limitation, Affiliates
of MTX other than Affymax N.V., Affymax Technologies N.V. and Affymax
Research Institute), MTX shall refund to GI that percentage as is set forth
below of all amounts previously paid by GI to MTX pursuant to Section 3.2 of
this Agreement.
Contract Year
In Which Percentage
Termination Occurs Refund
------------------ ----------
1 [ * ]
2 [ * ]
3 [ * ]
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The foregoing refund shall not be paid if GI shall have previously received a
refund pursuant to Section 5.8 of this Agreement. In the event of an impasse
that (a) occurs subsequent to a commercially useful stage of development of
the Project and (b) cannot be resolved by the chief operating officers of MTX
and GI within thirty (30) days after the date on which the matter is first
referred to them, each of MTX and GI shall have the right to terminate the
continuing work being conducted pursuant to the Project but not this
Agreement. In any such event, each Party shall retain ownership of its
technology.
10.5. TERMINATION OF AGREEMENT FOR BREACH. Each Party shall be
entitled (but not required) to terminate this Agreement and the licenses granted
hereunder to the other Party by written notice to the other Party in the event
that the other Party shall be in default of any of its material obligations
hereunder, and shall fail to remedy any such default within sixty (60) days
after notice thereof by the non-breaching Party. Any such notice shall
specifically state that the non-breaching Party intends to terminate this
Agreement in the event that the breaching Party shall fail to remedy the
default.
10.6. SURVIVAL OF OBLIGATIONS; RETURN OF CONFIDENTIAL
INFORMATION. Upon any termination of this Agreement, neither Party shall be
relieved of any obligations incurred prior to such termination. Upon any
termination of this Agreement pursuant to Sections 10.2, 10.3 or 10.4 of this
Agreement, (a) the provisions of Sections 6.1, 6.4, 6.5, 6.6 and 6.7 of this
Agreement shall
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CONFIDENTIAL TREATMENT REQUESTED
survive with respect to any Joint Technology that may have reached a
commercially useful stage of development except that any refund made in
accordance with either Section 10.2 or 10.4 shall be included in the amount
deducted pursuant to Section 6.1(b) of this Agreement and (b) the provisions
of Sections 6.2, 6.3, 6.4, 6.5, 6.6, 6.7, 7.1 and 7.2 shall survive with
respect to any DNA Chip Products that may have been developed in the Project.
Upon any termination of this Agreement, the rights of GI to use the DNA Chip
Products set forth in Section 7.1 of this Agreement shall survive with
respect to those DNA Chip Products purchased by GI prior to such termination,
subject to the continuing obligation to pay benchmarks and royalties to MTX
pursuant to Sections 6.2, 6.3, 6.4, 6.5, 6.6 and 6.7 of this Agreement.
Notwithstanding any termination of this Agreement, the obligations of the
Parties under Article IX and Sections 6.3(b), 8.3 and 11.1, as well as under
any other provisions which by their nature are intended to survive any such
termination, shall survive and continue to be enforceable. Upon any
termination of this Agreement, each Party shall promptly return to the other
Party all written Confidential Information, and all copies thereof, of the
other Party which is not covered by a license surviving such termination.
ARTICLE XI. INDEMNIFICATION AND LIABILITY LIMITATIONS
11.1. PRODUCT LIABILITY INDEMNIFICATION
[ * ]
55
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CONFIDENTIAL TREATMENT REQUESTED
[ * ]
56
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
[ * ]
11.2. LIABILITY. [ * ]
57
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ARTICLE XII. EXPORT
12.1. ACKNOWLEDGMENT. The Parties acknowledge that the export of
technical data, materials or products is subject to the exporting Party
receiving the necessary export licenses and that the Parties cannot be
responsible for any delays attributable to export controls which are beyond
the reasonable control of either Party. The Parties agree that regardless of
any disclosure made by the Party receiving an export of an ultimate
destination of any technical data, materials or products, the receiving Party
will not reexport either directly or indirectly, any technical data, material
or products without first obtaining the applicable validated or general
license from the United States Department of Commerce, United States Food and
Drug Administration and/or any other agency or department of the United
States Government, as required. The receiving Party shall provide the
exporting Party with any information, materials, certifications or other
documents which may be reasonably required in connection with such exports
under the Export Administration Act of 1979, as amended, its rules and
regulations, the Federal Food, Drug and Cosmetic Act and other applicable
export laws.
12.2. WRITTEN ASSURANCE. Without limitation of the foregoing, and
in support of maintaining a general license for the export of technical data
under this Agreement, a Party receiving an export agrees to not knowingly
export or reexport any technical data or materials furnished to such Party
under this Agreement, any part thereof or any direct product thereof,
directly or indirectly,
58
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without first obtaining permission to do so from the United States Department
of Commerce, the United States Food and Drug Administration and/or other
appropriate United States governmental agencies, into Afghanistan, the
People's Republic of China, South Africa, Namibia or any of those countries
listed from time to time in supplements to Part 370 to Title 15 of the Code
of Federal Regulations in Country Groups Q, S, Y or Z, which, as of the date
of this Agreement, are as follows: Group Q (Romania), Group S (Libya), Group
Y (Albania, Armenia, Azerbijan, Belarus, Bulgaria, Cambodia, Estonia,
Georgia, Kazakhstan, Kyrgyzstan, Laos, Latvia, Lithuania, Mongolia, Russia,
Tajikistan, Turkmenistan, Ukraine, Uzbekistan and Vietnam) and Group Z (Cuba
and North Korea).
ARTICLE XIII. MISCELLANEOUS
13.1. REPRESENTATIONS AND WARRANTIES OF MTX. MTX represents and
warrants to GI that (1) it has the full right and authority to enter into and
perform this Agreement, (2) it has the right or has obtained the necessary
consents, waivers, approvals or other authorizations to make the assignments
provided for in Section 4.1 of this Agreement and to grant the licenses and
rights set forth in Sections 4.2, 7.1, 8.1 and 8.2 of this Agreement and (3)
it has obtained from Affymax N.V. and its affiliated entities (the "Affymax
Entities") any and all consents, waivers, approvals or other authorizations
necessary to enter into and perform this Agreement without violating the
terms of its agreements with the Affymax Entities. MTX hereby agrees to
indemnify, defend, protect
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and hold harmless GI and its Affiliates and Sublicensees against any and all
losses, costs, damages, expenses, fees and/or liabilities directly or
indirectly resulting from any claims, lawsuits and/or judgments ("Claims") to
the extent that such Claims are based on allegations predicated on the
foregoing representations and warranties being false.
13.2. PUBLICITY. Neither Party, nor any of its Affiliates, shall
originate any publicity, news release or other public announcement, written
or oral, relating to this Agreement or the existence of an arrangement
between the Parties, without the prior written approval of the other Party,
which approval shall not be unreasonably withheld, except as otherwise
required by law.
13.3. ASSIGNMENT. Except as otherwise provided in this Agreement,
neither this Agreement nor any of the rights or obligations hereunder may be
assigned by either Party without the prior written consent of the other
Party, except to a party who acquires all or substantially all of the
business of the assigning Party by merger, sale of assets or otherwise.
13.4. GOVERNING LAW. This Agreement shall be governed by and
interpreted in accordance with the laws of the Commonwealth of Massachusetts.
13.5. FORCE MAJEURE. In the event that either Party is prevented
from performing or is unable to perform any of its obligations under this
Agreement due to any act of God; fire; casualty; flood; war; strike; lockout;
failure of public utilities; injunction or any act, exercise, assertion or
requirement of
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governmental authority; epidemic; destruction of production facilities;
riots; insurrection; inability to procure or use materials, labor, equipment,
transportation or energy; or any other cause beyond the reasonable control of
the Party invoking this Section 13.5 if such Party shall have used its best
efforts to avoid such occurrence, such Party shall give notice to the other
Party in writing promptly, and thereupon the affected Party's performance
shall be excused and the time for performance shall be extended for the
period of delay or inability to perform due to such occurrence.
13.6. WAIVER. The waiver by either Party of a breach or a default
of any provision of this Agreement by the other Party shall not be construed
as a waiver of any succeeding breach of the same or any other provision, nor
shall any delay or omission on the part of either Party to exercise or avail
itself of any right, power or privilege that it has or may have hereunder
operate as a waiver of any right, power or privilege by such Party.
13.7. NOTICES. Any notice or other communication in connection
with this Agreement must be in writing and if by mail, by certified mail,
return receipt requested, and shall be effective when delivered to the
addressee at the address listed below or such other address as the addressee
shall have specified in a notice actually received by the addressor.
If to MTX:
Affymetrix, Inc.
3380 Central Expressway
Santa Clara, California 95051
Attention: President
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If to GI:
Genetics Institute, Inc.
87 CambridgePark Drive
Cambridge, Massachusetts 02140
Attention: President
13.8. NO AGENCY. Nothing herein shall be deemed to constitute
either Party as the agent or representative of the other Party, or both
Parties as joint venturers or partners for any purpose. Each Party shall be
an independent contractor, not an employee or partner of the other Party, and
the manner in which a Party renders its services under this Agreement shall
be within such Party's sole discretion. Neither Party shall be responsible
for the acts or omissions of the other Party, and neither Party will have
authority to speak for, represent or obligate the other Party in any way
without prior written authority from the other Party.
13.9. ENTIRE AGREEMENT. This Agreement and the Schedules hereto
(which Schedules are deemed to be a part of this Agreement for all purposes)
contain the full understanding of the Parties with respect to the subject
matter hereof and supersede all prior understandings and writings relating
thereto. No waiver, alteration or modification of any of the provisions
hereof shall be binding unless made in writing and signed by the Parties by
their respective officers thereunto duly authorized.
13.10. HEADINGS. The headings contained in this Agreement are for
convenience of reference only and shall not be considered in construing this
Agreement.
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13.11. SEVERABILITY. In the event that any provision of this
Agreement is held by a court of competent jurisdiction to be unenforceable
because it is invalid or in conflict with any law of any relevant
jurisdiction, the validity of the remaining provisions shall not be affected,
and the rights and obligations of the Parties shall be construed and enforced
as if the Agreement did not contain the particular provisions held to be
unenforceable.
13.12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the Parties hereto and their successors and
permitted assigns.
13.13. THIRD PARTIES. None of the provisions of this Agreement
shall be for the benefit of or enforceable by any third party.
13.14. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to
be executed as a sealed instrument in their names by
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their properly and duly authorized officers or representatives as of the date
first above written.
AFFYMETRIX, INC.
By: /s/ Stephen P. A. Fodor
------------------------
Stephen P. A. Fodor,
President and Chief
Technical Officer
By: /s/ David B. Singer
------------------------
David B. Singer,
President and Chief Executive
Officer
GENETICS INSTITUTE, INC.
By: /s/
------------------------
Vice President, Corporate
Development
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CONFIDENTIAL TREATMENT REQUESTED
SCHEDULE A
GOALS FOR YEAR 01 OF THE COLLABORATION:
[ * ]
WORKPLAN FOR YEAR 01 OF THE COLLABORATION:
[ * ]
WORKPLAN YEAR 01:
[ * ]
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
[ * ]
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
[ * ]
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
[ * ]
MILESTONES (These are to be completed during the course of the entire
collaboration)
[ * ]
MILESTONE: PERFORMANCE BONUS
1. TECHNICAL ACHIEVEMENTS:
[ * ]
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
[ * ]
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
SCHEDULE B
[ * ]
Members of the [ * ] are those containing the following
[ * ] which reflects the [ * ]:
[ * ]
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
SCHEDULE C
CONTRACT YEAR L BUDGET
GI Funding of [ * ] FTEs $[ * ]
GI Capital Equipment Funding $[ * ]
-------------
TOTAL $[ * ]
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY AFFYMETRIX, INC.
SUPPLY AGREEMENT
Affymetrix, Inc.
and
Genetics Institute, Inc.
<PAGE>
SUPPLY AGREEMENT
Contents
Page
----
1. Introduction 3
2. Definitions 3
3. Probe Array Supply 8
4. Exclusivity 13
5. Consulting 14
6. Compensation 14
7. Fees and Royalties 16
8. Intellectual Property 18
9. Confidentiality 19
10. Warranty 20
11. Indemnity 21
12. Term and Termination 22
13. Miscellaneous 22
2
<PAGE>
This supply agreement ("Agreement") is effective as of December 8, 1995
("Effective Date") between Affymetrix, Inc. ("AMTX") a California corporation
having its principal place of business at 3380 Central Expressway, Santa Clara,
California 95051, and Genetics Institute, Inc. ("GI") a Delaware corporation
having its principal place of business at 87 CambridgePark Drive, Cambridge,
Massachusetts 02140.
1 INTRODUCTION
1.1 AMTX has research, development, and manufacturing capabilities and
facilities, and has developed certain rights relevant to DNA probe array
based technology.
1.2 GI has research and development capabilities, and facilities to conduct
research and development activities in the area of biotechnology and the
application thereof to the development, production, and manufacture,
registration, and marketing of biotechnolgy based pharmaceutical products.
1.3 AMTX and GI have entered into a Development and Supply Agreement effective
November 15, 1994 (the "Collaboration Agreement") for the collaborative
development of DNA probe array based technology.
1.4 AMTX and GI desire to enter into an agreement whereby AMTX will supply GI
with DNA probe arrays for research and development activities to support
additional activities to measure gene expression in order to discover novel
therapeutic compounds.
In consideration of the mutual covenants and promises contained in this
Agreement, AMTX and GI agree as follows:
2 DEFINITIONS
2.1 "Affiliate" shall mean any corporation, company, partnership, joint venture
and/or firm which controls, is controlled by, or is under common control
with a Party. For purposes of this Section, "control" shall mean, in the
case of corporations (or foreign equivalents of corporations), direct or
indirect ownership of at least 50% of the
3
<PAGE>
stock having the right to vote for directors of such corporation or, in the
case of partnerships, at least 50% of the ownership interest in such
partnership. Except for Article 9 of this Agreement, for purposes of this
definition, Affiliates of GI shall not include American Home Products
Corporation, a Delaware corporation.
2.2 "AMTX Confirmation" shall have the meaning in Section 3.3 below.
2.3 "Collaborators" shall mean the third party(ies) that participate with GI in
a GI Collaboration.
2.4 "Confidential Information" shall mean all information and materials,
patentable or otherwise, of a Party which are disclosed and designated as
confidential by or on behalf of such Party to the other Party and which
derive value to a Party from not being generally known, including, but not
limited to DNA sequences, vectors, cells, substances, formulations,
techniques, methodologies, equipment, data, reports, know-how, preclinical
and clinical trials and the results thereof, sources of supply, patent
positioning, business plans, and the terms of this Agreement, including any
negative developments. For purposes of clarification, in the event that
all of a Target Sequence becomes publicly known, but a scientific rationale
for the selection of a particular combination of genes identified by GI is
not publicly known, such particular combination of genes shall still be
considered Confidential Information of GI. Confidential Information shall
also include the scientific rationale for GI's selection of a particular
combination of genes and GI's intended application of the Probe Arrays
directed to a particular combination of genes.
2.5 "Custom Chip Project" shall refer to the design and manufacture of at least
one Lot of Probe Arrays for a particular Target Sequence, as specified by
GI pursuant to this Agreement.
2.6 "Fabrication Verification Criteria" shall mean the fabrication verification
criteria set forth in Exhibit B.
2.7 "GI's Area Of Interest" shall mean the use of Probe Arrays as a research
tool to measure the presence and/or levels of expressed nucleic acid
sequences for the purpose of discovering Novel Therapeutic Compounds which,
in each case, are encoded by or regulated by the genes (or their
interspecies homologues) probed for on a Probe Array or are gene products
identified by the elimination of proteins encoded by the nucleic acid
sequences on a Probe Array. GI's Area Of Interest shall expressly exclude
the use of Probe Arrays (but not Novel Therapeutic Compounds) in clinical
diagnosis of disease or forensic applications, human or
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CONFIDENTIAL TREATMENT REQUESTED
otherwise.
2.8 "GI Collaboration" shall mean a bona fide scientific collaboration in GI's
Area Of Interest, between GI or any of its Affiliates and a third party, in
which such third party receives the biological materials and/or proprietary
information of GI and/or its Affiliates, or in which GI and/or its
Affiliates obtains the biological materials and/or proprietary information
of a third party. GI Collaboration shall not include business
relationships based, in significant part, on a contract in which GI
provides contract services for a third party involving use of the Probe
Arrays on a fee-for-service or similar basis.
2.9 "High Complexity Probe Arrays" shall mean Probe Arrays containing more than
[ * ] probes and no more than [ * ] probes of varying lengths, such
probes encoding sequences representing no more than [ * ]
different genes.
2.10 "High Complexity Trigger Date" shall mean the date on which AMTX
demonstrates the performance of High Complexity Probe Arrays in accordance
with the criteria established by the Parties pursuant to this Agreement.
2.11 "Lot" shall refer to [*] Probe Arrays directed to a particular Target
Sequence.
2.12 "Low Complexity Probe Arrays" shall mean Probe Arrays containing no more
than [ * ] probes of varying lengths, such probes encoding sequences
representing no more than [*] different genes.
2.13 "Low Complexity Trigger Date" shall mean the date on which AMTX
demonstrates the performance of Low Complexity Probe Arrays in accordance
with the conditions in Exhibit A.
2.14 "Net Sales" shall mean the aggregate United States Dollar equivalent of
[
*
] less a)[
*
]
5
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
[
*
] Net Sales shall not include [ *
] If GI, an
Affiliate, Collaborator, licensee, or sublicensee sells Novel Therapeutic
Compounds to or through a distributor (which is not an Affiliate, Collaborator,
licensee, or sublicensee of GI), Net Sales shall be [
*
] In the event
that GI or any of its Affiliates, Collaborators, licensees, or sublicensees
shall make any transfer of Novel Therapeutic Compounds to third parties for
other than monetary value in whole or in part, such transfer shall be considered
a sale hereunder for accounting and royalty purposes. Net Sales for any such
transfers shall be determined on a country-by-country basis and shall be [
*
]
Notwithstanding the foregoing, no transfer of Novel Therapeutic Compounds for
test or developmental purposes or as samples shall be considered a sale
hereunder for accounting and royalty purposes unless such transfer is for
monetary value. If Novel Therapeutic Compounds are sold as part of a system,
package, or combination product, Net Sales shall be [
*
]. If the Novel Therapeutic
Compound is not sold separately, [
*
].
2.15 "Novel Therapeutic Compound" shall mean a compound that is, or is derived
from, a Novel Gene Therapeutic or a Novel Use Therapeutic. For purposes of
the definition, if a Probe
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
Array was useful to GI, or its Affiliates or Collaborators in the
discovery of the Novel Gene Therapeutic or Novel Use Therapeutic, the
Novel Gene Therapeutic or Novel Use Therapeutic shall be deemed to have
been discovered through the use of Probe Arrays. Novel Therapeutic
Compounds shall not include [ *
] using genes which are discovered, or
genes for which uses are discovered, by GI, its Collaborators or
Affiliates through use of Probe Arrays. Novel Therapeutic Compounds
shall include such [ *
] utilizes Probe Arrays.
2.16 "Novel Gene Therapeutics" shall mean a therapeutic protein (or any peptide
or domain deleted, modified (e.g., by chemical or enzymatic cleavage or
otherwise), variant, or mutant form thereof) expressed by a gene discovered
by GI, or its Affiliates or Collaborators, through the use of Probe
Arrays.
2.17 "Novel Use Therapeutics" shall mean a therapeutic protein (or any peptide
or domain deleted, modified (e.g., by chemical or enzymatic cleavage or
otherwise), variant, or mutant form thereof) whose use is discovered by GI,
or its Affiliates or Collaborators through the use of Probe Arrays.
2.18 "Optimization Probe Arrays" shall mean a sample set of [ * ] Probe
Arrays to be produced by AMTX after Sample Delivery for a Target Sequence
in the event that GI requests that a probe set be revised after Sample
Delivery for a particular Custom Chip Project.
2.19 "Party" shall mean AMTX or GI. "Parties" shall mean AMTX and GI.
2.20 "Probe Arrays" shall mean a solid support having an array of
oligonucleotides with known location and sequence fabricated pursuant to
this Agreement.
2.21 "Project Term" shall mean the period commencing on the Low Complexity
Trigger Date and ending on the first anniversary of the High Complexity
Trigger Date, but in no event shall be a period of less than two (2) years.
In the event that the High Complexity Trigger Date does not occur before
[ * ], the Project Term shall end on January 1, 1999. The
Project Term may be extended upon mutual written consent of the Parties.
2.22 "Reserved Production Capacity" shall mean the ability of AMTX to fabricate
[ * ] Probe Arrays pursuant to this Agreement in [ * ] business days.
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CONFIDENTIAL TREATMENT REQUESTED
2.23 "Resupply Term" shall mean, for a particular Custom Chip Project, eighteen
(18) months from the date GI last orders a Lot of Probe Arrays for such
particular Custom Chip Project, but in no event later than the later of (1)
January 1, 2001, or (2) four (4) years from the High Complexity Trigger
Date. The Resupply Term may be extended upon mutual written agreement of
the Parties.
2.24 "Sample Delivery" shall have the meaning in Section 3.3.1 below.
2.25 "Target Sequence" shall mean the set of sequences specified by GI to AMTX
for which GI desires to have AMTX perform a particular Custom Chip Project.
2.26 "Patent Claim" shall mean a claim of an unexpired patent owned or
controlled by GI or its Collaborators or Affiliates which shall not have
been withdrawn, canceled or disclaimed, nor held invalid or unenforceable
by a court of competent jurisdiction in an unappealed or unappealable
decision, or the claim of a patent application which has not been on file
for more than five (5) years.
3 PROBE ARRAY SUPPLY
3.1 During the Project Term, GI will identify at least [ * ] but no more
than [ * ] different Custom Chip Projects. No fewer than [ * ]
Custom Chip Projects will be identified by GI in the twelve (12) month
period beginning on the Low Complexity Trigger Date and no fewer than [ *
] Custom Chip Projects will be identified by GI in the twelve (12) month
period beginning on the High Complexity Trigger Date. Of such Custom Chip
Projects, no more than [ * ] will be for Low Complexity Probe Arrays.
AMTX will not be obligated to provide GI with High Complexity Probe Arrays
until [ * ], but if the manufacture of such High Complexity Probe
Arrays is considered, in AMTX' reasonable opinion, to be technically and
commercially feasible, GI may request AMTX to manufacture and AMTX may
agree to manufacture High Complexity Probe Arrays before [ * ].
AMTX will be obligated to produce and supply to GI Probe Arrays for all
Target Sequences identified to AMTX before the end of the Project Term.
3.1.1 GI will supply the necessary genes for testing probe arrays according
to Exhibit A by December 11, 1995. AMTX will perform experiments to
demonstrate the performance of
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CONFIDENTIAL TREATMENT REQUESTED
Low Complexity Probe Arrays pursuant to Exhibit A. Upon such
demonstration of the performance of the Low Complexity Probe
Arrays, AMTX will provide notice in writing to GI, along with a
description of the experiments performed to demonstrate such
performance. In the event that AMTX has not demonstrated, to GI's
reasonable satisfaction, the performance of Low Complexity Probe
Arrays, pursuant to Exhibit A by [ * ], GI may, at its
option, terminate this Agreement or agree to extend the foregoing
deadline by an agreed upon amount of time needed to demonstrate
performance of the Low Complexity Probe Arrays pursuant to
Exhibit A.
3.1.2 AMTX will perform experiments to demonstrate the performance of High
Complexity Probe Arrays by [ * ]. The Parties shall
mutually determine and agree upon performance criteria for High
Complexity Probe Arrays, based upon the performance criteria in
Exhibit A. Upon such demonstration of the performance of the High
Complexity Probe Arrays, AMTX will provide notice in writing to GI,
along with a description of the experiments performed to demonstrate
such performance. In the event that AMTX has not demonstrated, to
GI's reasonable satisfaction, the performance of High Complexity Probe
Arrays by [ * ], GI may, at its option, elect not to
identify any additional Custom Chip Projects, or agree to extend the
foregoing deadline by an agreed upon amount of time. In the event
that GI elects not to identify any additional Custom Chip Projects,
the minimum order requirements set forth in the first sentence of
Section 3.1 shall be waived. In the event that GI agrees to extend
the foregoing deadline, the limit on the number of Low Complexity
Probe Arrays set forth in Section 3.1 shall be waived, it being
understood that GI shall be permitted, but not obligated, to identify
additional Custom Chip Projects that are Low Complexity Probe Arrays
(i.e., in addition to the minimum requirement of [ * ]) prior to two
(2) years from the Low Complexity Trigger Date, to a maximum of [ *
] such Custom Chip Projects. In addition to the foregoing
alternatives, GI shall have the right to continue to identify Custom
Chip Projects, with the understanding that the High Complexity Trigger
Date is not scientifically attainable. In such circumstance, the
limit on the number of Low Complexity Probe Arrays set forth in
Section 3.1 shall be increased to up to [ * ], and the limit on
the number of genes set forth in Section 2.12 shall be increased to up
to, if
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CONFIDENTIAL TREATMENT REQUESTED
technically feasible, [ * ]. In the event that the
sequences representing more than [ * ] genes are placed on Low
Complexity Probe Arrays pursuant to this Section, the price of
Custom Chip Projects for such Low Complexity Probe Arrays set forth
in Section 6.1 (but not the maximums set forth in Section 7.1)
shall be increased in proportion to the number of genes represented
on such Probe Arrays, up to the price of Custom Chip Projects for
High Complexity Probe Arrays set forth in Section 6.1.
3.2 GI will identify the Target Sequence for a Custom Chip Project to AMTX by
delivering to AMTX: 1) a diskette identifying the Target Sequence in a
format mutually agreed upon by the Parties, and 2) an identification of the
expected number of probes to be formed on a Probe Array directed to the
Target Sequence, and 3) an identification of the probe lengths and number
of probes in a Probe Array desired by GI for the particular sequences
comprising the Target Sequence (not to exceed [ * ] base probes
without the consent of AMTX), and 4) a good faith estimate of the number of
Lots of Probe Arrays needed by GI for the Target Sequence and the expected
timing for production of such Lots, and 5) if GI then desires to place its
initial firm order for Lot(s) of Probe Arrays directed to the Target
Sequence, a firm order for the number of Lots desired by GI, it being
understood that GI shall have the right to place its initial firm order for
Lot(s) of Probe Arrays at any time prior to its advising AMTX pursuant to
the last sentence of Section 3.3.3, and 6) the shipping location of the
Probe Arrays, and 7) if GI desires for AMTX to store unpackaged Probe
Arrays, GI's desired schedule for delivery of packaged Probe Arrays. The
foregoing good faith estimate of the number of Lots of Probe Arrays to be
manufactured will not constitute a commitment on the part of GI to purchase
more than one Lot of Probe Arrays for the particular Target Sequence, but
will only be intended to aid AMTX in overall production planning processes.
GI may request that the Probe Arrays meet specifications suggested by GI
and not required herein, in which case AMTX will respond in good faith as
to whether such additional specifications can reasonably be met and, if
applicable, any cost increase to meet such additional specifications.
3.3 AMTX will promptly confirm receipt of the Target Sequence and provide a
preliminary schedule for fabrication of Probe Arrays for the Target
Sequence. If the information received
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CONFIDENTIAL TREATMENT REQUESTED
by AMTX does not include the information required in paragraph 3.2 above,
AMTX will advise GI of any additional needed information. Upon AMTX
confirming receipt of complete Target Sequence information ("AMTX
Confirmation"), AMTX will proceed to design, lay out, produce masks,
and manufacture Probe Arrays for the Target Sequence as follows:
3.3.1 AMTX will cooperate with GI to review GI's selection of probe lengths
and probe redundancy for the Target Sequence identified by GI. AMTX
will promptly deliver to GI a design description of the Probe Arrays
to be fabricated for the particular Target Sequence. Such design
description will identify the oligonucleotide probes and layout of the
probes, and will point out any suggested differences in probe lengths
and probe redundancy that differ from that requested by GI. AMTX will
promptly produce prototype masks, produce and deliver a [ * ] unit
sample of Probe Arrays for design verification by GI ("Sample
Delivery"). Sample Delivery will be accompanied by a certification by
AMTX that the Probe Arrays delivered to GI meet the Fabrication
Verification Criteria.
3.3.2 If GI requests AMTX to revise the probe set (but not the Target
Sequence) for a particular Probe Array design, AMTX will promptly
provide GI with Optimization Probe Arrays. Optimization Probe Arrays
will be accompanied by a certification by AMTX that the Optimization
Probe Arrays meet the Fabrication Verification Criteria.
3.3.3 GI may, within [ * ] business days of Sample Delivery or delivery
of Optimization Probe Arrays, evaluate any Probe Arrays delivered by
AMTX to ensure that the Fabrication Verification Criteria are met. If
GI reasonably demonstrates that AMTX' certification is in error and
that the Fabrication Verification Criteria are not met, AMTX will
promptly fabricate an additional sample lot or set of Optimization
Probe Arrays at no cost to GI. Provided that the sample Probe Arrays
or Optimization Probe Arrays meet the Fabrication Verification
Criteria, GI will advise AMTX if it desires to have AMTX fabricate
additional Optimization Probe Arrays, or full Lot(s) of Probe Arrays,
within [ * ] business days of delivery of the applicable
Sample Delivery or delivery of the last Optimization Probe Arrays. At
the same time that GI advises AMTX that it desires full Lot(s) of
Probe Arrays, it shall place its initial firm order for the number of
Lots desired.
3.3.4 Provided that production of Probe Arrays for other Custom Chip
Projects does not require
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
production of Probe Arrays in excess of the Reserved Production
Capacity, within [ * ] business days of GI's advising
that it desires to have full Lots of Probe Arrays for a Custom
Chip Project, AMTX will deliver to GI the Lot(s) of Probe Arrays
for that Custom Chip Project. If production of Probe Arrays for a
Custom Chip Project would result in production rates for GI Probe
Arrays above the Reserved Production Capacity, AMTX will schedule
the production of a Lot of Probe Arrays for the earliest date
reasonably consistent with AMTX' production schedule, but no later
than the next available time period when the Reserved Production
Capacity would not be exceeded for any other Custom Chip Project,
and will deliver such initial Lot(s) of Probe Arrays within
[ * ] business days of the time when the Reserved
Production Capacity will not be exceeded. AMTX will promptly
advise GI if the Reserved Production Capacity would be exceeded.
3.3.5 At any time following GI's initial placement of a firm order for
Lot(s) of Probe Arrays for a particular Custom Chip Project, but
before the end of the Resupply Term, GI may order additional Lots of
Probe Arrays for a particular Custom Chip Project. If the Reserved
Production Capacity would not be exceeded, AMTX will deliver such
additional Lots within [ * ] business days of receipt of a
written order for such additional Lots. To the extent that orders of
additional Lots of Probe Arrays would require AMTX to exceed the
Reserved Production Capacity for GI, AMTX will schedule the production
of such additional Lot(s) of Probe Arrays for the earliest date
reasonably consistent with AMTX' production schedule, but no later
than the next available time period when the Reserved Production
Capacity for any other Custom Chip Project would not be exceeded, and
will deliver such additional Lots of Probe Arrays (or a portion
thereof) within [ * ] business days of the first time when
the Reserved Production Capacity will not be exceeded. The Parties
agree that this paragraph shall not obligate AMTX to store masks
beyond the Resupply Term, provided that prior to destroying any masks,
AMTX shall notify GI in writing and all such masks for GI Custom Chip
Projects will, upon request of GI, be given to GI.
3.4 Probe Arrays will be packed in AMTX' standard shipping packages to the
address specified by GI. Deliveries will be F.O.B. AMTX' facility. AMTX
will ship via a carrier selected by GI or, if none is specified by GI, AMTX
will select the carrier. Title and risk of loss of
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<PAGE>
damage for deliveries will pass to GI upon AMTX' actual delivery of the
Probe Arrays to the carrier for shipment to GI. GI will pay all
shipping costs. GI will advise AMTX if insurance is desired on any
shipments of Probe Arrays, and will reimburse AMTX for all such
insurance charges.
3.5 During the Resupply Term for Custom Chip Projects pursuant to this
Agreement, GI may request an increase in the Reserved Production Capacity.
GI will compensate AMTX for such increased Reserved Production Capacity
pursuant to Section 6.4 below.
3.6 GI may not 1) transfer the Probe Arrays provided by AMTX pursuant to this
Agreement to any third party, other than to Affiliates and Collaborators
during the course of and for the sole purpose of a GI Collaboration, or 2)
provide services to any third party, other than to Affiliates and
Collaborators, using the Probe Arrays provided by AMTX pursuant to the
Agreement, or 3) allow any third party, other than Affiliates and
Collborators during the course of a GI Collaboration, to use the Probe
Arrays provided by AMTX under this Agreement, or 4) use the Probe Arrays
delivered hereunder outside of GI's Area of Interest. In the event that GI
Collaborations result in a Novel Therapeutic Compound, such Novel
Therapeutic Compound shall subject GI to the obligations to pay royalties
and fees pursuant to Section 7. Sample lots of Probe Arrays will be used
only for evaluation of the performance of Probe Arrays and not for
discovery of Novel Therapeutic Compounds.
3.7 During the Resupply Term, GI and its Affiliates and Collaborators may
purchase hybridization stations and readers from AMTX or AMTX' suppliers in
order to fully utilize the Probe Arrays purchased hereunder.
4 EXCLUSIVITY
4.1 During and after any termination of this Agreement, AMTX will not 1) sell
Probe Arrays designed for any of the Custom Chip Projects to any third
party that incorporate any of the Confidential Information of GI or 2) use
any computer files, or any other design information specific to the work
conducted for GI, generated in the design of Probe Arrays fabricated
pursuant to this Agreement to design probe arrays for any third party,
provided that AMTX will be able to sell probe arrays directed to a Target
Sequence, or any portion thereof, if such
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
Target Sequence, or any portion thereof, is a) provided to AMTX by a
third party that did not develop the Target Sequence with the
Confidential Information of GI or b) independently developed by AMTX
without the Confidential Information of GI, and further provided that
the foregoing shall not confer on AMTX or any third party any rights
under the patent rights of GI.
4.2 During the Resupply Term, GI will not buy Probe Arrays directed to a Target
Sequence from a third party (when such third party infringes or would
infringe the patent, copyright, or trade secret rights of AMTX or its
Affiliates). This paragraph shall not, during or after the Resupply
Period, confer on GI or any third party any rights under the patent rights
of AMTX.
4.3 AMTX may make, have made, and use Probe Arrays designed for a Custom Chip
Project for the purposes of improving its technology for manufacturing and
using DNA probe arrays and for no other purposes.
4.4 In the event that AMTX is not able to supply Probe Arrays in amounts
equaling GI's Reserved Production Capacity during the Resupply Term, GI may
fabricate or have fabricated Probe Arrays to meet the Reserved Production
Capacity. Nothing in this paragraph, however, shall confer on GI or any
third party any patent rights or other intellectual property rights from
AMTX.
5 CONSULTING
5.1 The Parties do not anticipate that AMTX will be required to provide
consulting services to GI under the terms of this Agreement during the term
of the Collaboration Agreement. After the term of the Collaboration
Agreement, AMTX will provide GI with reasonable consulting services, if any
are needed, in the design and development of assays and related technology
needed to utilize the Probe Arrays delivered to GI hereunder according to
the fee schedule in Section 6.5.
6 COMPENSATION
6.1 GI will pay to AMTX a flat fee of [ * ] for each Custom Chip Project
requiring Low Complexity Probe Arrays, and [ * ] for each Custom Chip
Project requiring High
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
Complexity Probe Arrays. Such payments will be payable in installments as
follows:
6.1.1 [ * ] upon AMTX Confirmation for each Custom Chip
Project.
6.1.2 [ * ] within thirty (30) days of Sample Delivery which
meets or, if Optimization Probe Arrays are produced, Optimization
Probe Arrays which meet the Fabrication Verification Criteria.
6.1.3 [ * ] upon shipment of the first Lot for each Custom
Chip Project.
6.2 For each sample of Optimization Probe Arrays shipped to GI, GI will pay to
AMTX a flat fee of [ * ] for the first [ * ] of Optimization Probe
Arrays, [ * ] for the next [ * ] of Optimization Probe Arrays,
[ * ] for the next [ * ] of Optimization Probe Arrays, and [ * ] for
each set of Optimization Probe Arrays thereafter.
6.3 For each Lot of Probe Arrays for a Custom Chip Project (after the first Lot
of Probe Arrays for a particular Custom Chip Project), GI will pay to AMTX:
6.3.1 [ * ] upon shipment to GI of each Lot, when such order is made as
part of GI's initial placement of a firm order for Lot(s) of Probe
Arrays for a particular Custom Chip Project.
6.3.2 For each Lot ordered after GI's initial placement of a firm order for
Lot(s) of Probe Arrays for a particular Custom Chip Project, GI will
pay [ * ] per Lot for each of the first [ * ] Lots shipped to GI,
[ * ] per Lot for each of the next [ * ] Lots shipped to GI, and
all subsequent Lots shipped to GI pursuant to this Agreement shall be
[ * ] per Lot. For purposes of clarification, all additional Lots
of Probe Arrays ordered by GI after GI's initial placement of a firm
order for Lot(s) of Probe Arrays for a particular Custom Chip Project
shall be counted towards such [ * ] Lot totals, regardless of
whether such Lots are for the same Custom Chip Project.
6.3.3 When ordering a Lot of Probe Arrays, GI may specify that all or a
portion of such Lot shall not be packaged and that AMTX will store
such unpackaged Probe Arrays. AMTX will store such Probe Arrays for
up to [ * ], provided that such Probe Arrays will be deemed
delivered to GI when they are ready for packaging, for purposes of the
payments due hereunder, but not for purposes of the warranty
provisions hereunder. GI may request, at any time, delivery of groups
of [ * ] or more stored Probe Arrays that are then currently in
storage by AMTX at no additional cost.
15
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
6.3.4 In the event that GI wishes to order an odd Lot (i.e., an amount other
than a multiple of [ * ]) of Probe Arrays (after the first Lot), AMTX
will quote pricing for such odd Lots upon request of GI.
6.4 If GI desires additional Reserved Production Capacity, AMTX will provide a
quote for the cost of such additional Reserved Production Capacity. If GI
desires to obtain such additional Reserved Production Capacity at the
quoted cost, AMTX will proceed to use reasonable efforts to provide such
additional Reserved Production Capacity.
6.5 Consulting services shall be invoiced at the rate of [ * ] per day plus
expenses when AMTX is provided [ * ] or fewer days of notice, or [ * ]
per day plus expenses when more than [ * ] days of notice is provided.
6.6 All amounts referred to in this Section will be invoiced by AMTX when due.
All payments will be made to AMTX thirty (30) days from the date of
invoicing by AMTX. AMTX shall promptly provide GI with written notice of
any late payments. Late payments shall bear interest at the rate of [ * ]
per month.
6.7 In the event that GI desires to have Probe Arrays manufactured that utilize
probes of more than [ * ], AMTX will determine if its current
design and manufacturing capabilities permit the reliable manufacture of
Probe Arrays with more than [ * ]. If AMTX concludes that it
can reliably manufacture such Probe Arrays, AMTX will provide revised
pricing for such Probe Arrays.
6.8 Hybridization stations and readers may be purchased by GI and its
Affiliates and Collaborators at the lower of 1) the cost calculated
pursuant to the Collaboration Agreement, and 2) the price for which such
hybridization stations and readers are generally sold by AMTX to third
parties.
7 FEES AND ROYALTIES
7.1 GI shall pay AMTX fees as follows for each Novel Therapeutic Compound
resulting from a Custom Chip Project, up to a maximum of [ * ] for each
Custom Chip Project involving Low Complexity Probe Arrays and [ * ]
for each Custom Chip Project involving High Complexity Probe Arrays.
16
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
7.1.1 In the event that GI or any of its Affiliates or Collaborators
discovers a therapeutic use for a protein through the use of Probe
Arrays and files either (1) a patent application covering such
therapeutic use, or (2) a declaration in support of a patent
application previously filed by GI or any of its Affiliates or
Collaborators covering the gene from which the protein is expressed
and/or the protein itself where such declaration includes the
biological activity data relating to such therapeutic use, GI
shall pay AMTX a fee of [ * ] upon the first such filing made for
each such protein and a fee of [ * ] upon the issuance of the
first patent claiming the therapeutic use for each such protein.
7.1.2 In the event that GI or any of its Affiliates or Collaborators
discovers a gene encoding for a protein having a therapeutic use
through the use of Probe Arrays and files a patent application
covering the gene from which the protein is expressed and/or the
protein itself, GI shall pay AMTX a fee of [ * ] upon the first
such patent filing made for each such protein and a fee of [ * ]
upon the issuance of the first patent claiming the gene and/or the
protein itself for each such protein.
7.1.3 For the first IND filing directed to a Novel Therapeutic Compound, GI
shall pay to AMTX a fee of [ * ].
7.1.4 Payments made pursuant to Sections 7.1.1, 7.1.2 and 7.1.3 shall be
subject to the maximums set forth in Section 7.1.
7.2 GI shall pay AMTX a running royalty of [ * ] of Net Sales by GI, its
Affiliates, Collaborators, licensees, and sublicensees for each Novel
Therapeutic Compound having a label referring to a Novel Use Therapeutic
and [ * ] of Net Sales by GI, its Affiliates, Collaborators, licensees, and
sublicensees for each Novel Gene Therapeutic. Such royalties shall only be
payable on Novel Therapeutic Compounds where the Novel Use Therapeutic or
Novel Gene Therapeutic that is discovered through use of the Probe Arrays
is covered by a Patent Claim. In no event shall GI be required to pay a
royalty of more than [ * ] of Net Sales.
7.3 GI shall deliver to AMTX, within sixty (60) days after the end of each
calendar quarter, a written report showing its computation of payments due
under this Agreement, including any Net Sales by GI, its Affiliates,
Collaborators, licensees, and sublicensees during such calendar
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
quarter. All Net Sales shall be segmented in each such report according
to sales by GI, each Affiliate, Collaborator, licensee, and sublicensee,
as well as on a country by country basis, including the rates of
exchange used to convert such royalties to U.S. Dollars from the
currency in which the sales were made. For the purposes of this
Agreement, the rates of exchange to be used for converting royalties to
U.S. Dollars shall be those published for the purchase of U.S. Dollars
in the East Coast Edition of the Wall Street Journal for the last
business day of the calendar quarter for which payment is due.
Simultaneously with the delivery of each such report, GI shall tender
payment in U.S. Dollars of all royalties shown to be due therein. Where
royalties are due for sales of products in a country where, by reason of
currency regulations it is impossible or illegal for GI, its Affiliates,
Collaborators, licensees or sublicenses to transfer royalty payments to
AMTX, such royalties shall be deposited in whatever currency is
allowable in an accredited bank in that country that is reasonably
acceptable to AMTX. Any and all income or similar taxes imposed or
levied on account of the receipt of royalties payable under this
Agreement which are required to be withheld by GI shall be paid by GI on
behalf of AMTX and shall be paid to the proper taxing authority. Proof
of payment shall be secured and sent to AMTX as evidence of such payment
in such form as required by the tax authorities having jurisdiction over
GI or its Affiliates, Collaborators, licensees, or sublicensees. Such
taxes shall be deducted from the royalty that would otherwise be
remitted by GI or its Affiliates, Collaborators, licensees, or
sublicensees. Late payments shall bear interest at the rate of [ * ]
per month.
8 INTELLECTUAL PROPERTY
8.1 Any inventions conceived or first reduced to practice during performance of
this Agreement and arising from performance of this Agreement (Project
Inventions) shall be assigned according to inventorship of such inventions.
While not anticipated, in the event that AMTX is deemed to be the joint or
sole inventor of a Project Invention directed to Novel Therapeutic
Compounds or genes related thereto, AMTX shall assign such Project
Invention to GI. GI grants to AMTX and its Affiliates a royalty free,
nonexclusive, nonsublicensable, worldwide perpetual license under all GI
Project Inventions relating to the development, use,
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<PAGE>
manufacture, distribution, and/or sale of Probe Arrays, except as to
those GI Project Inventions relating to Novel Therapeutic Compounds and
genes related thereto. Each Party shall bear all cost incurred by it in
acquiring patent rights for Project Inventions.
8.2 Except as specifically provided herein, no implied license rights under any
patents, copyrights, or trade secrets are conveyed by one Party to another
Party pursuant to this Agreement by implication or otherwise.
9 CONFIDENTIALITY
9.1 Each Party shall maintain the Confidential Information of the other Party
in confidence, and shall not disclose, divulge, or otherwise communicate
such Confidential Information of the other, or use it for any purpose,
except as permitted or contemplated by this Agreement, and in order to
carry out the terms and objectives of this Agreement. The Parties will use
reasonable precautions to prevent and restrain the unauthorized disclosure
of such Confidential Information of the other Party. The provisions of
this paragraph shall not apply to Confidential Information which:
9.1.1 was known or used by the receiving Party or its Affiliates prior to
its date of disclosure to the receiving Party, as evidenced by the
prior written records of the receiving Party or its Affiliates; or
9.1.2 either before or after the date of the disclosure to the receiving
Party is lawfully disclosed without restriction on disclosure to the
receiving Party or its Affiliates by an independent, unaffiliated
third party rightfully in possession of the Confidential Information;
9.1.3 either before or after the date of the disclosure to the receiving
Party becomes published or generally known to the public through no
fault or omission on the party of the receiving Party or its
Affiliates; or
9.1.4 is required to be disclosed by the receiving Party or its Affiliates
to comply with applicable laws, to comply with a court order, or to
comply with governmental regulations, provided that the receiving
Party provides prior written notice of such disclosure to the other
Party and takes reasonable and lawful actions to avoid and/or minimize
the degree of such disclosure.
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CONFIDENTIAL TREATMENT REQUESTED
10 WARRANTY
10.1 GI represents and warrants to AMTX that it has the full right and
authority to enter into and perform this Agreement.
10.2 AMTX represents and warrants to GI that (1) it has the full right and
authority to enter into and perform this Agreement, (2) it has the right or
has obtained the necessary consents, waivers, approvals or other
authorizations to make the assignments provided for in Section 8.1 of this
Agreement, and (3) it has obtained from Glaxo Wellcome plc and its
affiliated entities (the "Glaxo Entities") any and all consents, waivers,
approvals or other authorizations necessary to enter into and perform this
Agreement without violating the terms of its agreements with the Glaxo
Entities. AMTX hereby agrees to indemnify, defend, protect and hold
harmless GI and its Affiliates and its Collaborators against any and all
losses, costs, damages, expenses, fees and/or liabilities directly or
indirectly resulting from any claims, lawsuits and/or judgments ("Claims")
to the extent that such Claims are based on allegations predicated on the
foregoing representations and warranties being false.
10.3 AMTX warrants that the Probe Arrays will meet the Fabrication Verification
Criteria at the time they are delivered to GI. AMTX warrants that the
Probe Arrays delivered hereunder do not incorporate the trade secret or
copyright rights of a third party. AMTX DISCLAIMS ALL OTHER
REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT
LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. [
*
].
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CONFIDENTIAL TREATMENT REQUESTED
10.4 If GI believes that AMTX is in breach of the warranty provisions herein as
to delivery of full Lots of Probe Arrays, GI will notify AMTX in writing
within [ * ] business days of receipt of any nonconformity of the
Probe Arrays. In the absence of such notice all Probe Arrays shall be
conclusively deemed accepted and GI may not revoke its acceptance.
11 INDEMNITY
11.1 [
*
].
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12 TERM AND TERMINATION
12.1 This Agreement shall extend until the end of the Resupply Term, unless
extended by written agreement of both Parties.
12.2 Upon breach, the nonbreaching Party shall be entitled (but not required) to
terminate this Agreement. To terminate this Agreement, the nonbreaching
Party shall provide written notice to the other Party. Such notice
shall specifically state that the nonbreaching Party intends to
terminate this Agreement. In the event that the other Party remains in
breach sixty (60) days after such written notice by the nonbreaching
Party, this Agreement shall be terminated.
12.3 In the event that GI reasonably determines that it is necessary for it to
obtain a license or similar right from a third party in the absence of
which it could not legally use the Probe Arrays in GI's Area of Interest
without infringing such third party's intellectual property rights, GI
shall have the right to terminate this Agreement upon written notice to
AMTX, provided that (1) GI shall have used diligent efforts to secure
such license or similar right and (2) the third party shall have failed
to make a license or similar right available to GI on commercially
reasonable terms, and (3) the failure to obtain such license or similar
right shall leave GI with no meaningful way to utilize the Probe Arrays
contemplated to be designed and purchased hereunder.
12.4 Upon termination of this Agreement, the following provisions will survive:
4.1, 7, 8, 9, 11 and 13.
13 MISCELLANEOUS
13.1 GI shall keep, and shall cause its Affiliates, Collaborators, licensees,
and sublicensees to keep, for a period of at least two (2) years full,
accurate, and true books of accounts and other records containing all
information and data which may be necessary to ascertain and verify the
royalties and fees payable hereunder. During the term of this Agreement
and for a period of two (2) years following the time at which the
relevant fee or payment is due, AMTX shall have the right from time to
time (not to exceed once during a calender year) to inspect in
confidence, or have an agent, accountant, or representative inspect in
confidence such books, records, and supporting data.
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13.2 GI UNDERSTANDS THAT THE PROBE ARRAYS DELIVERED HEREUNDER ARE NOT FDA
APPROVED. GI AGREES NOT TO USE THE PROBE ARRAYS DELIVERED HEREUNDER IN
ANY CLINICAL OR OTHER SETTING REQUIRING FDA APPROVAL.
13.3 Neither Party nor any of its Affiliates shall originate any publicity, news
release, or other public announcement, written or oral, relating to this
Agreement or the existence of an arrangement between the Parties without
the prior written approval of the other Party, which approval shall not
be unreasonably withheld, except as otherwise required by law.
13.4 Neither Party shall assign any rights or obligations of this Agreement,
except to a party who acquires all or substantially all of the relevant
assets of the assigning Party by merger or sale, of assets or otherwise.
13.5 This Agreement shall be construed according to the laws of California
without regard to conflict of law provisions.
13.6 The waiver by either Party of a breach or a default of any provision of
this Agreement by the other Party shall not be construed as a waiver of
any succeeding breach of the same or any other provision, nor shall any
delay or omission on the part of either Party to exercise or avail
itself of any right power or privilege that it has or may have hereunder
operate as a waiver of any right, power or privilege by such Party.
13.7 This Agreement and the documents referred to herein are the full
understanding of the Parties with respect to the subject matter hereof
and supersede all prior understandings and writings relating to the
subject matter herein. No waiver alteration or modification of any of
the provisions herein shall be binding unless in writing and signed by
the Parties by their respective officers.
13.8 The headings in this Agreement are for convenience only and shall not be
considered in construing this Agreement.
13.9 In the event that any provision of this Agreement is held by a court of
competent jurisdiction to be unenforceable because it is invalid or in
conflict with any law of any relevant jurisdiction, the validity of the
remaining provisions shall not be affected, and the rights and
obligations of the Parties shall be construed and enforced as if the
Agreement did not contain the
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particular provision(s) held to be unenforceable.
13.10 This Agreement shall be binding on and inure to the benefit of the
Parties and their successors and permitted assigns.
13.11 None of the provisions of this Agreement shall be for the benefit of
or enforceable by any third party.
13.12 Any notice required under this Agreement shall be made by overnight
mail or courier to the addresses below:
If to GI:
Genetics Institute, Inc.
87 CambridgePark Drive
Cambridge, Massachusetts 02140
Attn: General Counsel
If to AMTX:
Affymetrix, Inc.
3380 Central Expressway
Santa Clara, California 95051
Attn: President
cc: General Counsel
13.13 The Parties shall not be liable or delay or nonperformance if
performance is rendered impracticable by the occurrence of any
condition beyond the reasonable control of a Party, if such Party
has used reasonable efforts to avoid such occurrence. Such Party
shall give notice to the other Party in writing promptly, and
thereupon the affected Party's performance shall be excused and the
time for performance shall be extended for the period of delay or
inability to perform due to the occurrence.
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13.14 IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to
be executed by their properly and duly authorized officers or
representatives as set forth below.
Affymetrix, Inc.
/s/ STEPHEN P.A. FODOR
- --------------------------
By: Stephen P.A. Fodor
President
----------------------
Date: December 8, 1995
--------------------
Genetics Institute, Inc.
/s/ JACK MORGAN
- --------------------------
By: Jack Morgan
----------------------
Date: December 13, 1995
--------------------
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CONFIDENTIAL
TREATMENT
REQEUESTED
EXHIBIT A
EXPRESSION CHIPS: [
*
].
26
<PAGE>
CONFIDENTIAL
TREATMENT
REQEUESTED
EXHIBIT B
FABRICATION VERIFICATION CRITERIA
[
*
].
27
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated February 9,
1996 (except for the first paragraph of Note 9, as to which the date is May 20,
1996), in Amendment No. 3 to the Registration Statement (Form S-1 No. 333-3648)
and related Prospectus of Affymetrix, Inc. for the registration of 6,900,000
shares of its common stock.
ERNST & YOUNG LLP
Palo Alto, California
June 3, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF TOWNSEND AND TOWNSEND AND CREW LLP
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 3, dated June 3, 1996, of the Registration Statement on Form S-1
and related Prospectus of Affymetrix, Inc. for the registraion of 6,900,000
shares of its common stock.
TOWNSEND AND TOWNSEND AND CREW LLP
By: /s/ Paul C. Haughey
------------------------------------
Paul C. Haughey
Partner
Palo Alto, California
June 3, 1996
