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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the period ended
September 30, 1999
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from to .
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Commission File No. 0-28218
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AFFYMETRIX, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C>
DELAWARE 77-0319159
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3380 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (408)731-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
COMMON SHARES OUTSTANDING ON OCTOBER 31, 1999: 25,918,968
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AFFYMETRIX, INC.
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1999
and December 31, 1998..................................... 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1999 and 1998... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998.................. 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 31
Item 6. Exhibits and Reports on Form 8-K............................ 34
SIGNATURES........................................................... 35
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2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AFFYMETRIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
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<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED) (NOTE)
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ASSETS
Current assets:
Cash and cash equivalents................................. $ 39,702 $ 1,301
Short-term investments.................................... 190,091 79,267
Accounts receivable....................................... 16,708 8,919
Inventories............................................... 7,262 3,276
Other current assets...................................... 2,085 2,184
-------- --------
Total current assets.................................... 255,848 94,947
Net property and equipment.................................. 35,874 30,865
Acquired technology rights.................................. 9,130 9,625
Other assets................................................ 7,885 991
-------- --------
$308,737 $136,428
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 15,068 $ 12,791
Deferred revenue.......................................... 5,603 1,517
Current portion of capital lease obligation............... 258 252
-------- --------
Total current liabilities............................... 20,929 14,560
Obligation to Beckman Coulter, Inc.......................... 5,000 5,000
Other liabilities........................................... 69 261
Convertible subordinated notes.............................. 150,000 --
Convertible Redeemable Preferred Stock...................... -- 49,857
Stockholders' equity:
Common stock.............................................. 260 230
Additional paid-in-capital................................ 245,666 159,147
Accumulated deficit....................................... (112,820) (92,720)
Other..................................................... (367) 93
-------- --------
Total stockholders' equity.............................. 132,739 66,750
-------- --------
$308,737 $136,428
======== ========
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
3
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AFFYMETRIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
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Revenue:
Product.............................................. $22,845 $10,602 $ 57,380 $ 24,896
Research............................................. 2,394 4,259 6,637 10,413
License fees and royalties........................... 962 161 1,698 536
------- ------- -------- --------
Total revenue...................................... 26,201 15,022 65,715 35,845
------- ------- -------- --------
Costs and expenses:
Cost of product revenue.............................. 9,695 3,496 23,682 9,421
Research and development............................. 9,711 9,702 29,453 26,154
Selling, general and administrative.................. 12,675 8,290 34,031 20,933
------- ------- -------- --------
Total costs and expenses........................... 32,081 21,488 87,166 56,508
------- ------- -------- --------
Loss from operations................................... (5,880) (6,466) (21,451) (20,663)
Interest income, net................................... 1,078 1,561 3,406 3,932
------- ------- -------- --------
Net loss............................................... (4,802) (4,905) (18,045) (16,731)
Preferred Stock dividends.............................. (429) (813) (2,055) (1,508)
------- ------- -------- --------
Net loss attributable to common stockholders........... $(5,231) $(5,718) $(20,100) $(18,239)
======= ======= ======== ========
Basic and diluted net loss per common share............ $ (0.21) $ (0.25) $ (0.83) $ (0.80)
======= ======= ======== ========
Shares used to calculate basic and diluted net loss per
common share......................................... 24,995 22,949 24,166 22,889
======= ======= ======== ========
</TABLE>
Note: Certain prior year balances have been reclassified to conform with the
current year presentations.
See accompanying notes.
4
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AFFYMETRIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(UNAUDITED)
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NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
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Cash flows from operating activities:
Net loss.................................................. $(18,045) $(16,731)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 5,270 3,921
Change in operating assets and liabilities:
Accounts receivable................................. (7,789) (2,284)
Inventories......................................... (3,986) (1,540)
Other current assets................................ 99 (583)
Other assets........................................ (6,894) (73)
Accounts payable and other accrued liabilities...... 2,277 (268)
Deferred revenue.................................... 4,086 1,157
-------- --------
Net cash used in operating activities............. (24,982) (16,401)
Cash flows from investing activities:
Capital expenditures...................................... (9,600) (9,758)
Payment for acquisition of technology..................... -- (5,900)
Proceeds from the sale of short-term investments.......... 61,152 107,157
Purchases of short-term investments....................... (172,620) (127,987)
-------- --------
Net cash used in investing activities............. (121,068) (36,488)
Cash flows from financing activities:
Issuance of common stock.................................. 36,692 348
Issuance of Series AA Convertible Redeemable Preferred
Stock, net of costs................................... -- 49,857
Preferred Stock dividends paid............................ (2,055) (695)
Issuance of convertible subordinated debt................. 150,000 --
Principal payments on capital lease obligations........... (186) (168)
-------- --------
Net cash provided by financing activities......... 184,451 49,342
Net increase / (decrease) in cash and cash equivalents...... 38,401 (3,547)
Cash and cash equivalents at beginning of period............ 1,301 4,779
-------- --------
Cash and cash equivalents at end of period.................. $ 39,702 $ 1,232
======== ========
Non cash financing activities:
Obligation related to acquisition of technology............. $ -- $ 5,000
======== ========
Conversion of Series AA Convertible Redeemable Preferred
Stock, net of costs....................................... $ 49,857 $ --
======== ========
</TABLE>
See accompanying notes.
5
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AFFYMETRIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The consolidated financial statements include
accounts of Affymetrix, Inc. ("Affymetrix" or the "Company") and Affymetrix,
UK Ltd., a wholly owned subsidiary functioning as a sales and technical support
arm for the European market. All material intercompany accounts and transactions
have been eliminated in consolidation. In the opinion of management, all
adjustments (consisting of normal recurring entries) considered necessary for a
fair presentation have been included. Operating results for the three and nine
month periods ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. For further
information, refer to the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
Certain amounts in 1998 have been reclassified to conform to 1999 presentation.
REVENUE RECOGNITION
Product revenues include sales of GeneChip-Registered Trademark-
instrumentation, software and probe arrays as well as the associated
subscription fees earned under EasyAccess-TM- supply agreements. Instrumentation
and probe array revenues are recognized when earned, which is generally upon
shipment. Reserves are provided for anticipated returns and warranty expenses at
the time the associated revenue is recognized. Revenue from subscription fees
earned under EasyAccess supply agreements is recorded ratably over the term of
the agreement subject to adjustments for anticipated reductions provided for in
certain agreements for late delivery of probe arrays. Payments received in
advance under these arrangements are recorded as deferred revenue until earned.
Research revenue includes amounts earned, including milestones, from
services performed pursuant to commercial collaboration and supply agreements as
well as under government grants. Research revenue is recorded in the period in
which the costs are incurred or in which the revenue is earned as defined in the
related agreement. Direct costs associated with these contracts and grants are
reported as research and development expense.
License and royalty revenues include amounts earned from third parties
licensed under the Company's intellectual property and are recognized when
earned under the terms of the related agreements.
NOTE 2--CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
As of September 30, 1999, debt securities held by the Company are comprised
of U.S. Government obligations and U.S. corporate debt securities. They are
classified as available-for-sale and are carried at fair value with unrealized
gains and losses reported in stockholders' equity.
6
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AFFYMETRIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 3--INVENTORIES
Inventories consist of the following (in thousands):
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SEPTEMBER 30, DECEMBER 31,
1999 1998
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Raw materials............................................... $2,995 $1,775
Work in process............................................. 205 70
Finished goods.............................................. 4,062 1,431
------ ------
Total..................................................... $7,262 $3,276
====== ======
</TABLE>
NOTE 4--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in
thousands):
<TABLE>
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SEPTEMBER 30, DECEMBER 31,
1999 1998
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Accounts payable............................................ $ 2,986 $ 7,334
Accrued compensation and related liabilities................ 2,461 1,213
Accrued warranty............................................ 853 937
Accrued legal............................................... 4,016 2,707
Other....................................................... 4,752 600
------- -------
Total..................................................... $15,068 $12,791
======= =======
</TABLE>
NOTE 5--COMPREHENSIVE LOSS
The components of comprehensive loss for the three and nine months ended
September 30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders........... $(5,231) $(5,718) $(20,100) $(18,239)
Unrealized gain (loss) on securities................... (57) 918 (646) 951
------- ------- -------- --------
Comprehensive loss..................................... $(5,588) $(4,800) $(20,746) $(17,288)
======= ======= ======== ========
</TABLE>
NOTE 6--FOREIGN CURRENCY TRANSLATION
The financial statements of Affymetrix, UK Ltd. are measured using the U.S.
dollar as the functional currency. Assets and liabilities of this subsidiary are
translated at the rates of exchange at the balance sheet date. Income and
expense items are translated at average quarterly rates of exchange. The
resultant translation adjustments are included in the consolidated statements of
operations.
7
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AFFYMETRIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 7--CONVERTIBLE SUBORDINATED NOTES
On September 22, 1999, the Company completed the private placement of
$150 million principal amount of 5% convertible subordinated notes due 2006 (the
"Notes"). The Notes are convertible, subject to adjustment in certain
circumstances, into Affymetrix common stock at a price equal to $123.00 per
share. Accrued interest on the Notes is payable semi-annually. Affymetrix may
redeem the Notes at any time on or after October 7, 2002. The Company agreed to
file a registration statement for resale of the Notes and the shares of common
stock issuable upon conversion of the Notes within 90 days of the completion of
the private placement.
NOTE 8--MERGER AGREEMENT TO ACQURE GENETIC MICROSYSTEMS, INC. ("GMS")
On September 10, 1999, Affymetrix signed a merger agreement with GMS, a
privately-held instrumentation company specializing in DNA array technology.
Under the terms of the merger agreement, Affymetrix will issue up to 1,070,000
shares of common stock for all of the outstanding capital of GMS and will assume
all GMS stock options and warrants outstanding on the date the merger closes
(applying the exchange ratio in the merger). The transaction is expected to
close in late 1999 or early 2000 and is intended to be accounted for as a
pooling of interest.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations as of September 30, 1999 and for the three month periods ended
September 30, 1999 and 1998 should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 and for Registration Statement Form S-4 filed on October 14,
1999, as amended.
All statements in this discussion that are not historical are
forward-looking statements. Such statements are subject to risks and
uncertainties, including those discussed under the Risk Factors section herein;
that could cause actual results to differ materially for Affymetrix from those
projected, including, but not limited to, uncertainties relating to
technological approaches, product development, manufacturing and market
acceptance, uncertainties related to cost and pricing of Affymetrix' products,
dependence on collaborative partners, uncertainties relating to sole source
suppliers, uncertainties relating to FDA and other regulatory approvals,
competition, risks relating to intellectual property of others and the
uncertainties of patent protection. Affymetrix expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in Affymetrix'
expectations with regard thereto or any change in events, conditions, or
circumstances on which any such statements are based.
OVERVIEW
Affymetrix, Inc. has developed and intends to establish its
GeneChip-Registered Trademark- 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,
reagents for use with the probe arrays, a scanner and other instruments to
process the probe arrays and software to analyze and manage genetic information.
In March 1999, the Company sold 1,000,000 shares of common stock to a third
party in a private placement. On August 2, 1999, Glaxo sold 1,000,000 shares of
Affymetrix common stock pursuant to Rule 144, as promulgated under the
Securities Act of 1933. In September 1999, each share of Series AA Preferred
Stock to Glaxo was converted into approximately 0.77 shares of common stock.
Glaxo's beneficial ownership of Affymetrix was approximately 31%.
In September 1999, Affymetrix signed a definitive agreement to acquire
Genetic Microsystems, Inc. ("GMS"), a privately-held instrumentation company
specializing in DNA array technology. Under the terms of the merger agreement,
Affymetrix will issue up to 1,070,000 shares of common stock for all of the
outstanding capital of GMS and will assume all GMS stock options and warrants
outstanding on the date the merger closes (applying the exchange ratio in the
merger). The transaction is expected to close in late 1999 or early 2000 and is
intended to be accounted for as a pooling of interest.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Product revenue was $22.8 million and $57.4 million for the three and nine
months ended September 30, 1999, respectively, compared to $10.6 million and
$24.9 million for the three and nine months ended September 30, 1998. The
increase in product sales during the three and nine months ended September 30,
1999 compared to the same periods in 1998, resulted from the growth in sales of
GeneChip probe arrays and related products and subscription fees. Research
revenue was $2.4 million and $6.6 million for the three and nine months ended
September 30, 1999, respectively, compared to $4.3 million and $10.4 million for
the three and nine months ended September 30, 1998, respectively.
9
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The decreases were principally due to lower custom array design fees resulting
from customer trends to purchase more standard array products and from the
timing of milestone payments.
Cost of product revenue was $9.7 million and $23.7 million for the three and
nine months ended September 30, 1999, respectively, compared to $3.5 million and
$9.4 million for the three and nine months ended September 30, 1998,
respectively. Gross margin on product revenue was approximately 58% and 59% for
the three months and nine months ended September 30, 1999, respectively,
compared to 67% and 62% for the three and nine months ended September 30, 1998,
respectively. The decline in gross margin for the quarter and nine months ended
September 30, 1999 compared to the same period in 1998 is primarily a result of
costs associated with the build out of the Company's new West Sacramento
manufacturing facility, which began shipments in September 1999, and the
shipment of a larger proportion of commercial arrays to EasyAccess-TM- customers
which have negotiated chip price discounts for volume commitments. Margins have
fluctuated, and will continue to fluctuate significantly, as a result of
variations in manufacturing yields, changes in the mix of customers and products
sold and anticipated expenses associated with expanding manufacturing capacity.
The Company has experienced, and continues to experience, significant variations
in the manufacturing yield of its GeneChip products which has impacted, is
impacting, and will continue to impact the Company's ability to meet its
commitments to deliver product to its customers in a timely manner. Prolonged
difficulties in providing timely delivery of products adversely affects the
Company's relationships with its customers and its business, its financial
condition and results of operations.
Research and development expenses were $9.7 million and $29.5 million for
the three and nine months ended September 30, 1999, respectively, compared to
$9.7 million and $26.2 million for the three and nine months ended
September 30, 1998, respectively. The increase in research and development
expenses in the nine months ended September 30, 1999 compared to the same period
in 1998, was attributable primarily to the hiring of additional research and
development personnel and associated purchases of research supplies. The Company
expects research and development spending to increase over the next several
years as product development and core research efforts continue to expand.
Selling, general and administrative expenses were $12.7 million and
$34.0 million for the three and nine months ended September 30, 1999,
respectively, compared to $8.3 million and $20.9 million the three and nine
months ended September 30, 1998, respectively. The increase in selling, general
and administrative expenses resulted primarily from the Company's expansion of
commercial activities including an increase in the Company's sales force, as
well as increased litigation expenses incurred with respect to the Company's
ongoing lawsuits. Selling, general and administrative expenses are expected to
continue to increase as the Company expands sales and marketing, prosecutes and
defends its intellectual property position and defends against claims made by
third parties, and adds management and support staff.
Net interest income was $1.0 million and $3.4 million for the three and nine
months ended September 30, 1999, respectively, compared to $1.6 million and
$3.9 million the three and nine months ended September 30, 1998, respectively.
The fluctuations in net interest income result principally from variation in the
Company's short-term investment balances.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company's cash, cash equivalents, and
short-term investments were $229.8 million compared to $80.6 million at
December 31, 1998. The increase is primarily attributable to the proceeds of
$32.5 million from issuance of 1,000,000 shares of common stock to Growth Fund
of America, Inc. in March 1999 and the issuance of $150 million of convertible
subordinated notes issued in September 1999, offset by cash used to fund the
Company's operating loss and capital expenditures, principally for the expansion
of manufacturing facilities.
10
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Net cash used in operating activities was $25.0 million for the nine months
ended September 30, 1999, as compared to $16.4 million for the nine months ended
September 30, 1998. The increase in net cash used in operating activities
resulted primarily from increases in the Company's net loss, working capital
requirement and bond issuance costs.
The Company's investing activities, other than purchases, sales and
maturities of available-for-sale securities, consisted of capital expenditures,
which totaled $9.6 million for the the nine months ended September 30, 1999, as
compared to $9.8 million for the nine months ended September 30, 1998. Capital
expenditures during the nine months ended September 30, 1999 primarily included
facilities and production equipment for the new manufacturing facility in West
Sacramento, California. The Company expects to increase its capital expenditures
during the remainder of 1999 to further expand and complete the West Sacramento
manufacturing facility.
Financing activities for the nine months ended September 30, 1999, include
net proceeds of $32.5 million from the private placement of 1,000,000 shares of
common stock in March 1999 and of $150 million from the private placement of 5%
convertible subordinated notes (the "Notes") in September 1999. The Notes are
convertible, subject to adjustment in certain circumstances, into Affymetrix
common stock at a price equal to $123.00 per share. Accrued interest on the
Notes is payable semi-annually. Affymetrix may redeem the Notes at any time on
or after October 7, 2002.
The Company anticipates that its existing capital resources will enable it
to maintain currently planned operations and planned capital expenditures
through at least 2001. However, this expectation is based on the Company's
current operating plan and capital expenditure plan, which could change, and
therefore the Company could require additional funding sooner than anticipated.
In addition, the Company expects its capital requirements to increase over the
next few years as it expands its facilities and acquires scientific equipment to
support expanded manufacturing, research and development and sales and marketing
efforts.
IMPACT OF YEAR 2000
The Company is assessing the potential impact of the Year 2000 computer
problem on its products (including GeneChip systems and software), internal
information systems, embedded systems (including computers used in its
manufacturing process) and on the ability of certain third parties to supply
critical materials and services as well as the readiness of certain customers.
The Company has completed the assessment of its products, identified certain
software code that needs to be revised and is in the process of updating this
code for existing and future products. The Company believes that with this
update, its products will be Year 2000 ready. The Company has completed an
assessment of its computer systems, embedded systems, certain third party
suppliers and major customers, and expects to take necessary remediative action
by the end of 1999. Expenditures to date have not been material and have
consisted solely of the limited use of outside consultants and the time of
certain company personnel. Based on the progress made to September 30, 1999, the
Company does not currently expect the future costs of completing the assessment,
modifying its products, making system modifications, purchasing replacement
computer systems and assessing the Year 2000 readiness of material third party
suppliers and major customers to be material. In addition, the Company has made
contingency plans (for example the stockpile of critical raw materials in late
1999), to protect itself from the failure of certain key systems. Furthermore,
the Company's sales in the last quarter of 1999 may be adversely affected if
customers defer purchases due to Year 2000 concerns. While the Company does not
anticipate a material business interruption to result from the Year 2000
problem, the Company gives no assurances that its products or systems will be
Year 2000 ready and the Company cannot guarantee the Year 2000 readiness of key
third party suppliers and service providers, collaborators and major customers.
If any of the Company's products or information systems, embedded systems, key
third party suppliers and services providers and major customers are not Year
2000 ready, the Company may
11
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experience a business interruption and be subject to certain litigation which
would have a material adverse impact on the Company's business, results of
operations and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's reported risk since
December 31, 1998.
RISK FACTORS
AFFYMETRIX IS IN THE EARLY STAGES OF DEVELOPMENT AND COMMERCIALIZATION OF
AFFYMETRIX TECHNOLOGY.
For the most part, Affymetrix' technologies are still in the early stages of
development and Affymetrix has just begun to incorporate its technologies into
commercialized products. Affymetrix' GeneChip-Registered Trademark- system has
thus far been sold solely for research use, and the majority of these sales have
been for Affymetrix' expression-monitoring application. In order to further
develop and commercialize the expression-monitoring, genotyping and disease
management applications of Affymetrix' GeneChip system and other potential
products, Affymetrix will need to make significant additional investments,
including funding manufacturing scale-up, efforts in bioinformatics, new
product, software and instrument design, and quality testing to ensure
Affymetrix' products perform correctly and are cost-effective. In addition,
while Affymetrix' initial research product sales have either not required
regulatory approval or have been regulated only as analyte-specific reagents,
Affymetrix expects that Affymetrix and its collaborators will need to obtain
additional regulatory approvals in the future. Obtaining such approvals could be
costly and time-consuming and Affymetrix cannot be sure it will be able to
obtain all necessary approvals. Even if Affymetrix develops its products for
commercial use and obtains all necessary regulatory approval, it may not be able
to develop products that:
- are accepted by the research, diagnostic or other marketplaces;
- are accurate and effective;
- meet applicable regulatory standards in a timely manner;
- are protected from competition by others;
- do not infringe the intellectual proprietary rights of others;
- can be manufactured in sufficient quantities or at a reasonable cost; or
- can be marketed successfully.
Any failure to develop these products could have a material adverse effect
on Affymetrix' business, financial condition and results of operations.
AFFYMETRIX HAS A HISTORY OF OPERATING LOSSES, AND EXPECTS TO INCUR FUTURE LOSSES
AND CANNOT BE CERTAIN THAT IT WILL BECOME A PROFITABLE COMPANY.
Affymetrix has experienced significant operating losses each year since its
inception and expects these losses to continue. For example, Affymetrix
experienced net losses of approximately $12.2 million in 1996, $22.5 million in
1997, $23.1 million in 1998 and approximately $16.7 million for the nine months
ended September 30, 1999. Affymetrix had an accumulated deficit of approximately
$92.7 million as of December 31, 1998, and approximately $112.8 million as of
September 30, 1999. Affymetrix' losses have resulted principally from costs
incurred in research and development and from sales and marketing and other
general and administrative costs associated with its operations. These costs
have exceeded Affymetrix' revenues and interest income, which, to date, have
been generated principally from product sales and technology access fees,
collaborative research and development agreements, government research grants
and from cash and investment balances. Affymetrix expects to incur substantial
additional operating losses as a result of increases in expenses for
manufacturing,
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marketing and sales capabilities, research and product development and general
and administrative costs. Affymetrix may never achieve profitability. Among
other things, Affymetrix' ability to manage the transition to a commercially
successful company will depend upon its ability to:
- develop products that are accepted by the marketplace;
- create a product mix that is appealing to pharmaceutical and biotechnology
companies, academic research centers and clinical reference laboratories;
- enter into supply agreements with customers desiring to use Affymetrix'
products;
- establish and scale up its commercial manufacturing capability for probe
arrays and consistently achieve acceptable yields from those facilities;
- cost-effectively manufacture components of the GeneChip system;
- avoid infringing on the intellectual property rights of others;
- enforce Affymetrix' intellectual property rights against others;
- establish sales and distribution capabilities cost-effectively;
- develop its marketing capabilities cost-effectively;
- obtain necessary regulatory approvals; and
- hire and retain qualified key personnel.
In addition, any delays in receipt of any necessary regulatory approvals,
delays in shipment of products from suppliers or any adverse developments with
respect to Affymetrix' ability to enforce its intellectual property relative to
its competitors could seriously harm the successful commercialization of
Affymetrix' technologies and could have a material adverse effect on Affymetrix'
business, financial condition and results of operations.
AFFYMETRIX' QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND THESE
FLUCTUATIONS MAY CAUSE AFFYMETRIX' STOCK PRICE TO FALL.
Affymetrix' quarterly operating results depend upon:
- the volume and timing of orders for GeneChip products;
- the timing of probe array, instrument and software shipments and
installations;
- Affymetrix' manufacturing capabilities;
- variations in product yields and gross margins;
- variations in revenue recognized under Affymetrix' supply and
collaborative agreements, including license fees, product sales, design
fees, milestones, royalties and other contract revenues;
- Affymetrix' mix of products sold;
- the timing of new product introductions by Affymetrix; and
- variations in expenses incurred in connection with the operations of
Affymetrix' business, including legal fees, manufacturing facility
start-up costs and capital expenditures.
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Affymetrix' quarterly operating results may also fluctuate significantly
depending on factors out of our control, including:
- the introduction of new products by Affymetrix' competitors;
- the cost and availability of licenses to third party intellectual property
associated with Affymetrix' products;
- market acceptance of the GeneChip system and other potential products;
- the cost, quality and availability of reagents and components required to
manufacture or use Affymetrix' products;
- the price and terms under which Affymetrix is able to license its
intellectual property to others;
- changes in commercial and government funding of research using Affymetrix'
products;
- regulatory actions; and
- third-party reimbursement policies.
Because Affymetrix' revenues and operating results are volatile and
difficult to predict, Affymetrix believes that period-to-period comparisons of
Affymetrix' results of operations are not a good indication of Affymetrix'
future performance. It is likely that in some future quarter or quarters,
Affymetrix' operating results will be below the expectations of public market
analysts or investors. In such event, the market price of Affymetrix common
stock may fall significantly.
AFFYMETRIX CURRENTLY HAS LIMITED MANUFACTURING CAPACITY AND CONTINUES TO
EXPERIENCE SIGNIFICANT VARIABILITY IN MANUFACTURING YIELDS.
Affymetrix is currently manufacturing limited quantities of probe arrays for
internal and collaborative purposes and for sale to the research market.
Affymetrix currently has two manufacturing facilities, one located in Sunnyvale,
California and the other in West Sacramento, California. The actual number of
probe arrays Affymetrix is able to sell or use depends on the utilization of the
capacity at these facilities, the yield of probe arrays that pass quality
control testing and the number of probe arrays manufactured on each wafer.
Furthermore, portions of Affymetrix' production capacity are limited to certain
types of probe arrays. Affymetrix has experienced, is experiencing and continues
to expect to experience significant variability in the manufacturing yield of
its GeneChip products which has adversely impacted, is adversely impacting, and
is expected to continue to adversely impact, its gross margins and business and
the Company's ability to meet its commitments to deliver product to its
customers in a timely manner. Prolonged difficulties in providing timely
delivery of products adversely affects the Company's relationships with its
customers and its business, its financial condition and results of operations.
CIRCUMSTANCES BEYOND AFFYMETRIX' CONTROL MAY RESULT IN MANUFACTURING
INTERRUPTIONS WHICH COULD CAUSE ITS BUSINESS TO SUFFER.
Affymetrix' manufacturing equipment requires significant capital investment.
Affymetrix presently relies on two manufacturing facilities for our probe
arrays. These manufacturing facilities are subject to circumstances beyond our
control such as fires, earthquakes, floods, power failures, unauthorized
intrusions into its facilities and similar events. Earthquakes are of particular
significance since the Sunnyvale, California manufacturing facility is located
in an earthquake-prone area. Although Affymetrix has built a second
manufacturing facility in West Sacramento, California, which Affymetrix expects
will mitigate earthquake risks when it becomes fully operational and capacity is
increased at that facility, in the event that Affymetrix' existing manufacturing
facilities are affected by circumstances beyond its control, Affymetrix could be
unable to manufacture products for sale or its capacity could be
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significantly decreased until the facilities are replaced or restored to
operation. If manufacturing operations were curtailed or ceased, such
curtailment or cessation would have a material adverse effect on Affymetrix'
business, financial condition and results of operations.
AFFYMETRIX HAS A LIMITED HISTORY IN MANUFACTURING ITS PRODUCTS, AND IT MAY
ENCOUNTER PROBLEMS AS IT INCREASES ITS MANUFACTURING EFFORTS.
There are certain aspects of Affymetrix' manufacturing processes that are
not fully understood and that may not be readily scalable to allow for
production of probe arrays in larger volumes. As a result, manufacturing and
quality control problems have arisen and are expected to continue to arise as
Affymetrix attempts to scale-up its manufacturing facilities. Affymetrix may not
be able to scale-up these facilities in a timely and cost-effective manner or at
commercially reasonable cost. If Affymetrix is unable to consistently
manufacture probe arrays on a timely basis because of these or other factors,
its business, financial condition and results of operations could be materially
and adversely affected.
AFFYMETRIX' QUALITY CONTROL PROCEDURES MAY NOT BE SUFFICIENT TO ENSURE PROPER
PERFORMANCE OF ITS PRODUCTS.
The GeneChip system is a complex set of products, which are produced in an
innovative and complicated manufacturing process. As part of this manufacturing
process, Affymetrix tests only selected probe arrays from each wafer and only
selected probes on these probe arrays against a number of performance criteria.
Affymetrix therefore relies on limited internal quality control procedures to
verify the correct completion of the manufacturing process. In addition,
Affymetrix and its customers rely on the accuracy of genetic sequence
information contained in databases upon which its products are based. It is
therefore possible that probe arrays that do not meet all of Affymetrix'
performance specifications may not be identified before they are shipped.
Further, after the probe arrays are shipped, a customer may test only selected
probes. Due to the complexity and limited operating history of these products,
Affymetrix has experienced technical problems and anticipates that additional
technical problems will occur and be discovered as more GeneChip systems are
placed into operation. If Affymetrix is unable to deliver products consistently
to its customers that meet their performance expectations, demand for
Affymetrix' products will decline and its business, financial condition and
results of operations will be materially and adversely affected.
AFFYMETRIX MAY HAVE TO RELY ON LICENSES FROM THIRD PARTIES FOR CERTAIN
TECHNOLOGY.
Affymetrix' commercial success also depends in part on it neither infringing
patents or proprietary rights of third parties nor breaching any licenses that
may relate to its technologies and products. For example, Affymetrix or its
collaborators and customers may need to acquire licenses for amplification
technologies to use the GeneChip system in certain applications. Such licenses
may not be available on commercially reasonable terms. Furthermore, Affymetrix
is aware of third-party patents that may relate to its technology and Affymetrix
has received and may in the future receive notices claiming that it infringes
third party rights as well as invitations to take licenses under third party
patents. Affymetrix cannot guarantee that it will not be determined to infringe
on patents or proprietary rights of third parties or that Affymetrix, its
collaborative partners or its customers would be able to obtain a license to
such patents or proprietary rights on commercially acceptable terms, if at all.
Affymetrix has various option, supply and license agreements with third
parties that give it rights to use certain technologies. If Affymetrix fails to
maintain rights to these types of technology this failure could have a material
adverse effect on its business, financial condition and results of operations.
For example, Affymetrix' inability to exercise an option for University of
California technology relating to miniaturized polymerase chain reaction devices
or other option agreements under reasonable terms, or at all, could seriously
harm its ability to sell integrated device products.
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AFFYMETRIX' BUSINESS MAY BE HARMED BY SIGNIFICANT OUTSTANDING LITIGATION
ASSERTING THAT OUR PRODUCTS INFRINGE THIRD PARTY INTELLECTUAL PROPERTY RIGHTS.
Affymetrix is a party to significant litigation, which has and will continue
to consume substantial financial and managerial resources and which could
adversely affect our business, financial condition and results of operations.
Further, because of the substantial amount of discovery required in connection
with any such litigation, there is a risk that confidential information could be
compromised by disclosure.
On March 3, 1997, Hyseq filed a lawsuit in United States District Court for
the Northern District of California (San Jose Division) alleging that
Affymetrix' products infringe United States Patents 5,202,231 and 5,525,464. In
addition, in December 1997, Hyseq filed a second action claiming that
Affymetrix' products infringe a related patent, United States Patent 5,695,940.
On August 18, 1998, Affymetrix filed a lawsuit in United States District Court
for the Northern District of California (San Francisco Division) against Hyseq
alleging infringement of U.S. Patent Nos. 5,795,716, or '716, and 5,744,305, or
'305. On September 1, 1998, Affymetrix added its U.S. Patent No. 5,800,992, or
'992, to the complaint of infringement against Hyseq. On October 26, 1999, Hyseq
filed a third action in United States District Court for the Northern District
of California (San Francisco Division) claiming that Affymetrix' products
infringe a related patent, United States Patent 5,972,619, or '619. The action
also requested a declaration that the '716 Patent is invalid based on the '619
Patent.
On June 4, 1999, Oxford Gene Technology filed suit against Affymetrix in the
United States District Court for the District of Delaware and in the United
Kingdom alleging infringement of United States Patent 5,700,637 and European
Patent 0-373-203, respectively. On June 5, 1999, an asset transfer agreement
with Beckman Coulter became effective, giving Affymetrix access to various
assets, including licenses to United States Patent 5,700,637 and European Patent
0-373-203. On June 17, 1999, Affymetrix filed a complaint in the United States
District Court for the Northern District of California asking for, among other
things, a declaration that Affymetrix has a valid license to use the patents and
that, in light of this license, Affymetrix is not infringing on these patents.
This case has been consolidated with the Delaware action. Affymetrix has
counterclaimed for revocation of this patent and Oxford Gene Technology Limited
has applied to amend the patent. The patent infringement issues have been stayed
pending resolution of whether Affymetrix and Affymetrix UK Limited have a
license under the patent via Beckman Coulter.
The Hyseq and the Oxford Gene Technology actions seek damages based on the
sale of Affymetrix' products and processes and seek to enjoin commercial
activities relating to those products and processes. In addition to subjecting
Affymetrix to potential liability for damages, these actions, and any other
similar legal actions against Affymetrix or its customers or collaborative
partners, could require Affymetrix or its collaborative partners to obtain a
license in order to continue to manufacture, market or use the affected products
and processes. While Affymetrix believes that the Hyseq and Oxford Gene
Technology complaints are without merit, Affymetrix may not prevail in these
actions and Affymetrix or its collaborative partners may not prevail in any
other related action. Moreover, in the event Affymetrix does not prevail in the
Hyseq and Oxford Gene Technology actions and Affymetrix, its partners or its
customers are required to obtain a license to continue to manufacture, market or
use the affected products and processes, Affymetrix, its partners or its
customers may not be able to obtain such a license on commercially acceptable
terms, if at all. Furthermore, Affymetrix has expended and is likely to continue
to expend substantial financial and managerial resources in defending against
the claims filed by Hyseq and Oxford Gene Technology.
AFFYMETRIX' INTELLECTUAL PROPERTY IS THE SUBJECT OF SIGNIFICANT LITIGATION.
On January 6, 1998, Affymetrix filed a patent infringement action in the
United States District Court for the District of Delaware (No. 98-6) alleging
that certain products of Incyte Pharmaceuticals,
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Inc.'s and Synteni, Inc.'s infringe United States Patent 5,445,934, or '934. On
September 1, 1998, Affymetrix filed a complaint against Incyte and Synteni in
Federal District Court in Delaware alleging infringement of the '305 Patent and
the '992 Patent. These actions were transferred to the United States District
Court for the Northern District of California on November 18, 1998, as case
numbers C98-4507 and C98-4508, respectively. The actions seek to enjoin
commercial activities of Incyte and Synteni relating to Affymetrix' patents and,
in regard to the '992 Patent, sought a preliminary injunction. Incyte and
Synteni moved for summary judgment that certain claims of the '992 Patent were
invalid. On May 4, 1999, the Court denied Affymetrix' motion for preliminary
injunction and denied Incyte/Synteni's motion for summary judgment.
On August 18, 1998, Affymetrix filed a lawsuit in United States District
Court for the Northern District of California (San Francisco Division) against
Hyseq alleging infringement of U.S. Patent Nos. 5,795,716, or '716, and
5,744,305, or '305. On September 1, 1998, Affymetrix added its U.S. Patent
No. 5,800,992, or '992, to the complaint of infringement against Hyseq.
In the United Kingdom High Court of Justice, Chancery Division, Patents
Court, Oxford Gene Therapy Limited has applied in the United Kingdom to revoke
Affymetrix's EP (UK) 0-619-321 Patent (related to certain DNA arrays). This
revocation action also includes an application to revoke Affymetrix's related
United Kingdom Patent GB 2248840.
Affymetrix may not prevail in asserting its patent rights against Hyseq,
Incyte, Synteni or others and may not succeed in having its patents found valid
in the United Kingdom revocation action or elsewhere. Affymetrix has expended
and is likely to continue to expend substantial financial and managerial
resources in asserting and defending its patent rights against Hyseq, Incyte,
Synteni and others. Affymetrix' failure to successfully enforce its patent
rights or the loss of these patent rights or others would remove a legal
obstacle to competitors in designing probe array systems with similar
competitive advantages to Affymetrix' GeneChip technology. The removal of such
barriers could have a material adverse effect on Affymetrix' business, financial
condition and results of operations.
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AFFYMETRIX' LITIGATION AGAINST OTHERS GENERATES SIGNIFICANT COUNTERCLAIMS.
On April 17, 1998, Incyte filed a response and counterclaim to case number
C98-4507, asserting that the '934 Patent is invalid and not infringed. On
April 17, 1998, Incyte also filed a counterclaim alleging that a patent license
agreement Affymetrix entered into in December 1997 with Molecular Dynamics
interfered with an agreement between Incyte and Molecular Dynamics. In the
counterclaim, Incyte alleges that the terms of Affymetrix' patent license to
Molecular Dynamics prevented Molecular Dynamics from meeting its obligations to
Incyte. Incyte seeks damages from Affymetrix. On September 21, 1998, Incyte and
Synteni filed an answer asserting various defenses to the lawsuits in relation
to the '992 Patent and the '305 Patent, and asserted several counterclaims,
including:
- a request for declaration of non-infringement and invalidity;
- an assertion of unfair competition;
- a request for a declaration that Synteni and Dari Shalon (a one-time
employee of Synteni) have not misappropriated any of Affymetrix' trade
secrets;
- a claim of tortious interference with Incyte's and Synteni's economic
advantage; and
- a claim of slander of title of a patent and a claim of trade libel.
Affymetrix believes that the counterclaims are without merit. However,
Affymetrix has expended and is likely to continue to expend significant
financial and managerial resources defending against these and any other
counterclaims filed by Incyte and Synteni and others. Affymetrix' failure to
successfully enforce its patent rights or defend against counterclaims of
Incyte, Synteni, or others could result in a material adverse effect on
Affymetrix' business, financial condition and results of operations.
AFFYMETRIX' INTELLECTUAL PROPERTY IS THE SUBJECT OF SIGNIFICANT ADMINISTRATIVE
ACTIONS.
The United States Patent and Trademark Office, or USPTO, notified Affymetrix
that Stanford University presented claims that relate to substantially the same
subject matter as certain claims from the '992 Patent and all of the claims of
the '305 Patent. The Stanford application is alleged to be exclusively licensed
to Incyte. The USPTO notified Affymetrix on April 2, 1999 that it had declared
an interference proceeding relating to these patents and claims of patents. The
USPTO conducted proceedings to determine the priority of these claims and
determined that Incyte/Synteni did not meet the burden of proof required to
establish a case that the claims should be further evaluated in a full
interference proceeding. Incyte/Synteni has appealed this decision in the United
States District Court for the Northern District of California (case
number C99-2111). Affymetrix has expended, and expects in the future to continue
to expend, substantial financial and managerial resources as a result of these
proceedings. Moreover, Affymetrix may not prevail in such proceedings or in
similar proceedings relating to those or other patents.
In Europe, Oxford Gene Technology Limited, Incyte Pharmaceuticals, Inc.,
Multilyte Ltd. and ProtoGene Laboratories, Inc. have filed oppositions against
Affymetrix's EP 0-619-321 patent in the European Patent Office. This procedure
will result in the patent being either upheld in its entirety, allowed to grant
in amended form in designated European countries, or revoked.
Affymetrix may not prevail in the appeal of the Incyte/Synteni interference
or the opposition proceedings in Europe or elsewhere. A failure to prevail could
result in Affymetrix' inability to commercialize its products and also would
enable others to copy aspects of Affymetrix' products. Affymetrix expects in the
future to expend substantial financial and managerial resources as a result of
these proceedings.
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THE MARKETS IN WHICH AFFYMETRIX COMPETES ARE RAPIDLY CHANGING, AND AFFYMETRIX
MUST DEVELOP AND INTRODUCE NEW PRODUCTS AND TECHNOLOGIES TO REMAIN COMPETITIVE.
Expression monitoring, polymorphism analysis and disease management
technologies have undergone and are expected to continue to undergo rapid and
significant change. Affymetrix' future success will depend in large part on its
ability to maintain a competitive position with respect to these and future
technologies. Rapid technological development by Affymetrix or others may result
in Affymetrix' products or technologies becoming obsolete. In addition, products
offered by Affymetrix could 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 the information Affymetrix' products generate.
Moreover, Affymetrix' efforts to develop research and disease management
products based on its technologies will be subject to the risks of failure
inherent in the development of products based on new technologies. These risks
include:
- the potential discovery that these technologies will be found to be
ineffective, unreliable or unsafe;
- difficulties in manufacturing Affymetrix' products cost effectively;
- difficulties in marketing Affymetrix' products on a large scale;
- the existence of third party proprietary rights precluding Affymetrix or
its collaborative partners from manufacturing, using or selling products;
- the development of superior products by third parties; or
- the failure to receive necessary regulatory clearances.
If Affymetrix is unable to develop the enhancements to its technology
necessary to compete successfully with newly emerging technologies, or if
Affymetrix is unable to develop products based on these technologies, its
business, financial condition and results of operations will be materially and
adversely affected.
AFFYMETRIX' BUSINESS SUBSTANTIALLY DEPENDS UPON THE SUCCESS OF ITS PRODUCTS AS
AN ALTERNATIVE TO CURRENT TECHNOLOGIES.
The commercial success of Affymetrix' GeneChip system will depend upon
market acceptance by pharmaceutical and biotechnology companies, academic
research centers and clinical reference laboratories. Market acceptance will
depend on many factors, including:
- convincing researchers that the GeneChip system is an attractive
alternative to other technologies for the acquisition, analysis and
management of genetic information;
- Affymetrix' ability to manufacture products with acceptable variations in
quality or performance;
- Affymetrix' ability to provide its customers with software that enables
the integration and analysis of large volumes of genetic and other
experimental data;
- the cost of Affymetrix' GeneChip system and access to probe arrays, which
may deter certain potential customers of its products;
- any failure by Affymetrix in placing and servicing sufficient quantities
of the GeneChip system;
- limitations in funding for commercial and academic research organizations
that are the potential customers for the GeneChip system;
- the receipt of regulatory clearances in the United States, Europe, Japan
and elsewhere;
- the availability of genetic content including proprietary markers that may
be important for incorporation into Affymetrix' probe arrays;
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- ethical concerns, which may limit the use of the GeneChip system for
certain disease management applications or the analysis of genetic
information;
- the ability of laboratories to license other technologies, such as
amplification technologies that may be required to use the GeneChip system
for certain applications; and
- the inability of potential customers to employ skilled laboratory
technicians necessary to operate the GeneChip system.
Because of these and other factors, Affymetrix' products may not gain market
acceptance.
THE MARKETS IN WHICH AFFYMETRIX OPERATES ARE HIGHLY COMPETITIVE, AND IT MAY BE
UNABLE TO COMPETE SUCCESSFULLY AGAINST NEW ENTRANTS AND ESTABLISHED COMPANIES
WITH GREATER RESOURCES.
Affymetrix competes in markets that are new, intensely competitive, highly
fragmented and rapidly changing. Affymetrix has experienced and expects to
continue to experience increased competition from current and potential
competitors, many of which have significantly greater financial, technical,
marketing and other resources.
Currently, Affymetrix' principal competition comes from existing
technologies and other DNA array technologies that are used to perform many of
the same functions for which Affymetrix markets its GeneChip systems. In order
to compete against existing and newly developed technologies and maintain
pricing and gross margins, Affymetrix will need to be successful in asserting
Affymetrix patents in the DNA array field and in demonstrating to potential
customers that the GeneChip system provides improved performance and
capabilities.
In the expression monitoring and polymorphism analysis fields, existing
competitive technologies include gel-based sequencing performed using
instruments provided by companies such as the Applied Biosystems division of
Perkin-Elmer and Amersham Pharmacia Biotech. A large number of publicly traded
and privately held companies including CuraGen, Gene Logic, General
Scanning, Inc., Corning, Genome Solutions, Hewlett Packard, Hitachi,
Incyte/Synteni, Lynx and Motorola also are developing or have developed DNA
probe based assays or other products and services, some of which may be
competitive with Affymetrix'.
Affymetrix' competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements than Affymetrix can.
In addition, current and potential competitors may have greater name
recognition, more extensive customer bases and access to proprietary content.
THE LOSS OF A KEY CUSTOMER COULD ADVERSELY AFFECT AFFYMETRIX' REVENUES AND BE
PERCEIVED AS A LOSS OF MOMENTUM IN ITS BUSINESS.
Affymetrix' customers are concentrated in a small number of pharmaceutical
and biotechnology companies, academic research centers and clinical reference
laboratories. For example, in 1998, two of Affymetrix' customers accounted for
20% and 16% of total revenues, respectively. Affymetrix expects that a small
number of customers will continue to account for a substantial portion of
revenues for the foreseeable future. As a result, if Affymetrix loses a major
customer, its business, financial condition and results of operations may be
adversely affected.
Consolidation in the pharmaceutical and biotechnology industries is likely
to continue to occur. Planned or future consolidation among Affymetrix' current
and potential customers could decrease or slow aggregate sales of its technology
and shrink the research market of our products target. Such consolidation could
have a material adverse effect on Affymetrix' business, financial condition and
results of operations.
In addition, Affymetrix believes that the sales cycle for the GeneChip
system will be lengthy due to the need to educate potential customers about its
characteristics. Affymetrix' failure to gain additional
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customers, failure to renew customers, the loss of any customer or a significant
reduction in the level of sales to any customer could have a material adverse
effect on its business, financial condition and results of operations.
Furthermore, there are two major reference laboratories in the United
States, one of which is associated with a large pharmaceutical company. A
decision by these reference laboratories not to purchase Affymetrix' GeneChip
technology could adversely affect its business, results of operations and
financial condition. In addition, Affymetrix' dependence on sales to a few
customers may strengthen the negotiating position of its potential customers,
which, in turn, could reduce the sales price of the GeneChip system and have a
material adverse effect on Affymetrix' business, financial condition and results
of operations.
AFFYMETRIX' EFFORTS TO INCREASE ITS PRESENCE IN MARKETS OUTSIDE OF THE UNITED
STATES MAY BE UNSUCCESSFUL AND COULD RESULT IN LOSSES.
Affymetrix intends to expand its international presence in order to increase
its export sales. Export sales to international customers entail a number of
risks, each of which could have a material adverse effect on Affymetrix'
business, financial condition and results of operations. These risks include:
- unexpected changes in, or impositions of, legislative or regulatory
requirements;
- delays resulting from difficulty in obtaining export licenses for certain
technology, tariffs, quotas and other trade barriers and restrictions;
- longer payment cycles and greater difficulty in accounts receivable
collection;
- potentially adverse taxes;
- currency exchange fluctuations;
- the burdens of complying with a variety of foreign laws; and
- other factors beyond Affymetrix' control.
Affymetrix is also subject to general geopolitical risks in connection with
international operations, such as political, social and economic instability,
potential hostilities and changes in diplomatic and trade relationships.
Although Affymetrix has not to date experienced any negative impact on its
operations as a result of such regulatory, geopolitical and other factors, such
factors could have a material adverse effect on its business, financial
condition and results of operations in the future or require it to modify its
current business practices.
AFFYMETRIX' EXISTING PRODUCTS MAY NOT BE COMMERCIALLY VIABLE.
Because Affymetrix' products and systems have been in operation for a
limited period of time, their accuracy and effectiveness have not been fully
established. Accordingly, any of the following events may occur, each of which
would have a material adverse effect on Affymetrix's business, financial
condition and results of operations:
- the accuracy of the probe arrays in providing genetic information may not
be equal to or better than current technologies, such as gel-based
sequencing techniques;
- the probe arrays may not provide commercially useful information;
- the probe arrays or the GeneChip system may experience operational
difficulties;
- Affymetrix may experience manufacturing problems or marketing difficulties
selling the probe arrays to pharmaceutical and biotechnology companies,
academic research centers and clinical reference laboratories;
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- cost containment pressures for biomedical research and patient management
may limit the price Affymetrix may be able to charge potential customers
for its probe arrays;
- newly identified genetic information or incorrect genetic information
deposited in the sequence databases upon which Affymetrix and its
customers rely may require Affymetrix to redesign its current probe arrays
or develop new probe arrays;
- technicians may not have adequate training to use the GeneChip system or
interpret the results generated from the system; or
- the probe arrays and associated reagents may not gain regulatory approval
for clinical use.
IF AFFYMETRIX IS UNABLE TO MAINTAIN ITS RELATIONSHIPS WITH COLLABORATIVE
PARTNERS, AFFYMETRIX MAY HAVE DIFFICULTY SELLING ITS PRODUCTS AND SERVICES.
Affymetrix believes that its success in penetrating its target markets
depends in part on Affymetrix' ability to develop and maintain collaborative
relationships with key pharmaceutical, diagnostic, biotechnology,
bioinformatics, analytical instrument and reagent companies as well as with
academic researchers, all in an effort to help develop, test, manufacture, sell
and service our GeneChip technology. Affymetrix has significant relationships
with Hewlett Packard, bioMerieux, Amersham Pharmacia Biotech KK and Roche
Molecular Systems and Affymetrix has entered into a consortium with the
Whitehead Institute, Millennium Pharmaceuticals and Bristol-Myers Squibb.
Affymetrix has received a material portion of its revenue since inception from
these and other collaborative partners. Affymetrix also intends to enter into
collaborative arrangements with other companies to expand Affymetrix'
operations, apply its technology, and commercialize potential future products.
Affymetrix' present or future collaborative partners may not be able to perform
their obligations as expected or devote sufficient resources to the development,
clinical testing, supply or marketing of Affymetrix' potential products
developed under these collaborations. Moreover, any of the following
developments could have a material adverse effect on Affymetrix' business,
financial condition and results of operations:
- one of Affymetrix' partners develops technologies or components
competitive with Affymetrix' GeneChip system;
- Affymetrix' existing collaborations preclude it from entering into
additional arrangements;
- failure of Affymetrix' partners to obtain timely regulatory approvals;
- premature termination of an agreement;
- one of Affymetrix' partners' failure to devote sufficient resources to the
development and commercialization of its products; or
- inability of one of Affymetrix' partners to supply products to it.
In addition, Affymetrix' agreements with its collaborators may have
provisions that allow for termination or give rise to disputes regarding the
rights and obligations of the parties. These and other possible disagreements
could lead to termination of the agreement or delays in collaborative research,
development, supply or commercialization of certain products, or could require
or result in litigation or arbitration. Any such delay, litigation or
arbitration could have a material adverse effect on Affymetrix' business,
financial condition and results of operations. Any of Affymetrix' collaborations
may prove to be unsuccessful. Likewise, Affymetrix may not be able to negotiate
future collaborative arrangements on acceptable terms, if at all.
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AFFYMETRIX' FAILURE TO PROTECT ITS INTELLECTUAL PROPERTY RIGHTS COULD ADVERSELY
AFFECT ITS ABILITY TO COMPETE.
Affymetrix' competitive position in the future will depend in large part on
its ability to do the following:
- strengthen and defend its patent position;
- preserve its copyrights and trade secrets;
- operate without infringing the proprietary rights of third parties; and
- acquire licenses related to enabling technology or products used with its
GeneChip technology.
Affymetrix' failure to successfully do any of these things will have a
material adverse effect on its business, financial condition and results of
operations.
Moreover, the patent positions of pharmaceutical and biotechnology companies
are generally uncertain and involve complex legal and factual questions.
Affymetrix believes that there will continue to be significant litigation in the
industry regarding patent and other intellectual property rights. As a result,
Affymetrix cannot guarantee:
- that any of Affymetrix' pending patent applications will result in issued
patents;
- that Affymetrix will develop additional technologies that are patentable;
- that any patents issued to Affymetrix or its strategic partners will
provide a basis for commercially viable products;
- that any patents issued to Affymetrix or its strategic partners will
provide it with any competitive advantages;
- that any patents issued to Affymetrix or its strategic partners will not
be challenged by third parties; or
- that the patents of others will not have a negative impact on Affymetrix'
ability to do business.
In addition, patent law relating to the scope of claims in the technology
fields in which Affymetrix operates is still evolving and the extent of future
protection for Affymetrix' proprietary rights is uncertain.
Others may independently develop similar or alternative technologies,
duplicate any of Affymetrix' technologies, or design around or invalidate
Affymetrix' patented technologies. In addition, Affymetrix has and expects to
continue to incur substantial costs in litigation to defend against the patent
suits brought by third parties and when Affymetrix initiates such suits. In
addition, administrative proceedings, such as interferences, in the United
States Patent and Trademark Office could substantially impact the scope of
Affymetrix' patent protection as well as result in the expenditure of
substantial funds in legal fees.
AFFYMETRIX DEPENDS ON A LIMITED NUMBER OF SUPPLIERS, AND AFFYMETRIX MAY NOT BE
ABLE TO SHIP PRODUCTS ON TIME IF IT IS UNABLE TO OBTAIN AN ADEQUATE SUPPLY OF
MANUFACTURING EQUIPMENT, RAW MATERIALS AND PRODUCT COMPONENTS ON A TIMELY BASIS.
Affymetrix relies on Hewlett-Packard to manufacture, install and service its
scanners and on Enzo to manufacture certain reagents used with probe arrays.
Affymetrix' scanner, introduced in April 1997, is obtained from Hewlett-Packard
under a supply agreement that expires in 2003. Affymetrix is dependent on
Hewlett-Packard for quality testing, installation and service of this
instrument. Certain labeling kits needed to process samples on GeneChip probe
arrays are supplied to Affymetrix by Enzo under a supply agreement that expires
in 2001. Affymetrix is obligated to purchase certain labeling kits from Enzo or
compensate Enzo for any lost sales of these reagents.
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Certain key parts of the GeneChip system, such as the scanner, certain
reagents kits and lithographic masks as well as certain equipment and raw
materials used in the synthesis of probe arrays, are currently available only
from a single source or a limited number of sources. In addition, components of
Affymetrix' manufacturing equipment are available from one of only a few
suppliers. No assurance can be given that manufacturing equipment, scanners,
reagents, lithographic masks or other components of the GeneChip system will be
available in a timely fashion and in commercial quantities under acceptable
terms. Even if alternative sources of supply are available, it could be time
consuming and expensive for Affymetrix to qualify new vendors. In addition,
Affymetrix 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 vendors were delayed or
interrupted for any reason, Affymetrix could be delayed in its ability to
develop and deliver products to its customers. Any such delay could have a
material adverse effect on Affymetrix' business, financial condition and results
of operations.
AFFYMETRIX MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE.
Affymetrix anticipates that its existing capital resources will enable it to
maintain currently planned operations. However, this expectation is based on
Affymetrix' current operating plan, which is expected to change as a result of
many factors, and it may need additional funding sooner than anticipated. In
addition, Affymetrix may choose to raise additional capital due to market
conditions or strategic considerations even if it believes it has sufficient
funds for its current or future operating plans. To the extent that additional
capital is raised through the sale of other securities convertible into equity,
the issuance of such securities could result in dilution to Affymetrix'
stockholders.
Affymetrix has no credit facility or other committed sources of capital. To
the extent operating and capital resources are insufficient to meet future
requirements, Affymetrix will have to raise additional funds to continue the
development and commercialization of its technologies. Moreover, such funds may
not be available on favorable terms, or at all. If adequate funds are not
available on reasonable terms, Affymetrix may be required to curtail operations
significantly or to obtain funds by entering into financing, supply or
collaboration agreements on unattractive terms. Affymetrix' inability to raise
capital could have a material adverse effect on its business, financial
condition and results of operations.
AFFYMETRIX MAY NOT BE ABLE TO DEVELOP OR ACCESS NEW TECHNOLOGIES NECESSARY TO
STAY COMPETITIVE.
As Affymetrix' technologies evolve, new manufacturing techniques and systems
will be required. For example, it is anticipated that additional automated
processing systems will be needed to meet Affymetrix' future probe array demand.
Further, as products requiring increased density are developed, miniaturization
of the features on the arrays will be necessary. This will require new or
modified manufacturing equipment and processes. Affymetrix cannot be sure that
it will be able to develop or access new manufacturing technologies. The failure
to develop or access new technologies would have a material adverse effect on
Affymetrix' business, financial condition and results of operations.
AFFYMETRIX HAS LIMITED SALES, MARKETING AND TECHNICAL SUPPORT EXPERIENCE, WHICH
MAY HURT ITS EFFORTS AT SELLING ITS PRODUCTS.
Affymetrix currently has a limited direct sales, marketing and technical
support organization and it has entered into a non-exclusive distribution
agreement with Amersham Pharmacia Biotech KK covering Japan and a service
agreement with Hewlett-Packard for its GeneArray scanner. Affymetrix' existing
organization and relationships may not be sufficient and Affymetrix may be
required to expand
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its organization and enter into additional collaboration or distribution
arrangements to commercialize its products both inside and outside the United
States. Affymetrix cannot assure you that:
- Affymetrix will be able to establish a sufficiently sized sales, marketing
or technical support organization;
- Amersham Pharmacia Biotech KK will be successful in distributing
Affymetrix' products;
- Amersham Pharmacia Biotech KK will not sell competitive products in Japan;
- Hewlett-Packard will be successful in servicing Affymetrix' instruments
and not become its competitor; or
- Affymetrix will be able to establish additional collaborative or
distribution arrangements to sell, market and service its products.
The failure to develop Affymetrix' sales, market and technical support
capabilities, or the development of competing products by its collaborators,
would have a material adverse effect on its business, financial condition and
results of operations.
CHANGES IN GOVERNMENT FUNDING OF RESEARCH INSTITUTIONS COULD ADVERSELY AFFECT
AFFYMETRIX' BUSINESS.
A significant portion of Affymetrix' products for research use is sold to
universities, government research laboratories, private foundations and other
institutions whose funding is dependent upon grants from government agencies,
such as the National Institute of Health. Research funding by the government,
however, may be significantly reduced in the future. Any such reduction may have
a negative impact on the ability of Affymetrix' existing and prospective
research customers to purchase Affymetrix' products for research use.
AFFYMETRIX' BUSINESS MAY BE THREATENED BY SERIOUS ETHICAL, LEGAL AND SOCIAL
IMPLICATIONS OF GENETIC TESTING.
Affymetrix' success will depend in part upon its ability to develop tests
for specific genetic information discovered by Affymetrix and others. These
genetic tests have given rise to some difficult issues, including:
- once available, these tests may be subject to ethical concerns or
reluctance to administer or pay for tests for conditions that are not
treatable; and
- the possibility that specific gene-based diagnostic tests marketed by
other companies could encounter public resistance, thereby resulting in
societal and governmental concerns regarding genetic testing in general.
The prospect of broadly available genetic predisposition testing has raised
issues regarding the appropriate utilization and the confidentiality of
information provided by this testing.
Governmental authorities could limit the use of genetic testing or prohibit
testing for genetic predisposition to certain conditions which could adversely
affect the use of Affymetrix' products. As a result, ethical concerns about
genetic testing may seriously affect market acceptance of Affymetrix' GeneChip
system or give rise to legislative restrictions in some countries adversely
affecting markets, thereby having a material adverse effect on Affymetrix'
business, financial condition and results of operations.
AFFYMETRIX MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL IT NEEDS TO
SUCCEED.
Affymetrix 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
negative impact on Affymetrix' product development and commercialization
efforts. In addition, research, product development and commercialization will
require additional skilled personnel in areas such as bioinformatics, organic
chemistry, information services, regulatory affairs, manufacturing, sales,
marketing and technical support.
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There is a shortage of skilled personnel, which is likely to continue for
some time. As a result, competition for these people, particularly for employees
with technical expertise, is intense and the turnover rate for these people is
high. If Affymetrix is unable to hire, train and retain a sufficient number of
qualified employees, its business, financial condition and results of operations
could be materially and adversely affected. This inability could also hinder the
planned expansion of its business.
In addition, Affymetrix relies on its scientific advisors and consultants to
assist it in formulating its research, development and commercialization
strategy. All of the scientific advisors and consultants are engaged by
employers other than Affymetrix and have commitments to other entities that may
limit their availability to Affymetrix. Some of Affymetrix' scientific advisors
and consultants also consult for companies that may be its competitors. If
Affymetrix is unable to retain its scientific advisors and consultants, its
business, financial condition and results of operations could be materially and
adversely affected.
AFFYMETRIX MAY BE EXPOSED TO LIABILITY DUE TO PRODUCT DEFECTS.
Affymetrix' business exposes it to potential product liability claims that
are inherent in the testing, manufacturing, marketing and sale of human
diagnostic and therapeutic products. Affymetrix intends to acquire additional
insurance, should it be desirable, for clinical liability risks. Affymetrix may
not be able to obtain this insurance or general product liability insurance on
acceptable terms or at reasonable costs. In addition, this insurance may not be
in sufficient amounts to provide it with adequate coverage against potential
liabilities. A product liability claim or recall could have a material adverse
effect on Affymetrix' business, financial condition and results of operations.
GLAXO OWNS A SUBSTANTIAL PORTION OF AFFYMETRIX' OUTSTANDING CAPITAL STOCK.
Glaxo Wellcome, plc and its affiliates currently beneficially own
approximately 31% of the outstanding Affymetrix common stock. On August 2, 1999,
Glaxo sold 1,000,000 shares of Affymetrix' common stock. On August 5, 1999,
Glaxo Wellcome Americas, a wholly owned subsidiary of Glaxo, elected to convert
all of the shares of Affymetrix' Series AA preferred stock that it held into
1,257,229 shares of Affymetrix' common stock at a conversion price of
approximately $40 per share. Following the completion of these transactions,
Glaxo's beneficial ownership of Affymetrix' capital stock fell from
approximately 32% to approximately 31%. Although Affymetrix has executed a
governance agreement with Glaxo, Glaxo nevertheless may be able to influence the
outcome of shareholder votes, including votes concerning the election of
directors, adoption of amendments to Affymetrix' certificate of incorporation
and bylaws and approval of mergers and other significant corporate transactions.
In addition, future sales by Glaxo may have an adverse effect on the price of
Affymetrix common stock.
AFFYMETRIX HAS VARIOUS MECHANISMS IN PLACE TO DISCOURAGE TAKEOVER ATTEMPTS.
In October 1998, Affymetrix adopted a stockholder rights plan and change of
control policy. The purpose of the stockholder rights plan is to allow
Affymetrix and its board of directors an opportunity to deal responsibly with
parties that attempt to gain a control position in Affymetrix without the
approval of the board of directors. The purpose of the change of control policy
is to ensure that Affymetrix' employees are treated fairly in the event of a
change of control. Affymetrix' stockholder rights plan and change of control
policy may discourage, delay or prevent a change in control of Affymetrix that a
stockholder may consider favorable.
In addition, certain provisions of Affymetrix' certificate of incorporation
and bylaws may discourage, delay or prevent a change in control of it that a
stockholder may consider favorable. These provisions include:
- authorizing the issuance of "blank check" preferred stock;
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- prohibiting cumulative voting in the election of directors;
- requiring super-majority voting to effect certain amendments to
Affymetrix' certificate of incorporation and bylaws;
- limiting the persons who may call special meetings of stockholders;
- prohibiting stockholder action by written consent; and
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings.
In addition, relevant provisions of Delaware law and Affymetrix' stock
incentive plans may discourage, delay or prevent a change in control.
AFFYMETRIX IS AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO STOCK PRICE
VOLATILITY.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. Due to the potential volatility of its stock price, Affymetrix may
be the target of this type of litigation in the future. Securities litigation
could result in substantial costs and divert management's attention and
resources, which could have a material adverse effect on Affymetrix' business,
financial condition and results of operations.
IF AFFYMETRIX' PRODUCTS OR THE PRODUCTS UPON WHICH IT DEPENDS MALFUNCTION
BECAUSE OF YEAR 2000 PROBLEMS, AFFYMETRIX' BUSINESS COULD BE ADVERSELY AFFECTED.
The Company is assessing the potential impact of the Year 2000 computer
problem on its products (including GeneChip systems and software), internal
information systems, embedded systems (including computers used in its
manufacturing process) and on the ability of certain third parties to supply
critical materials and services as well as the readiness of certain customers.
The Company has completed the assessment of its products, identified certain
software code that needs to be revised and is in the process of updating this
code for existing and future products. The Company believes that with this
update, its products will be Year 2000 ready. The Company has completed an
assessment of its computer systems, embedded systems, certain third party
suppliers and major customers, and expects to take necessary remediative action
by the end of 1999. Expenditures to date have not been material and have
consisted solely of the limited use of outside consultants and the time of
certain company personnel. Based on the progress made to September 30, 1999, the
Company does not currently expect the future costs of completing the assessment,
modifying its products, making system modifications, purchasing replacement
computer systems and assessing the Year 2000 readiness of material third party
suppliers and major customers to be material. In addition, the Company has made
contingency plans (for example the stockpile of critical raw materials in late
1999), to protect itself from the failure of certain key systems. Furthermore,
the Company's sales in the last quarter of 1999 may be adversely affected if
customers defer purchases due to Year 2000 concerns. While the Company does not
anticipate a material business interruption to result from the Year 2000
problem, the Company gives no assurances that its products or systems will be
Year 2000 ready and the Company cannot guarantee the Year 2000 readiness of key
third party suppliers and service providers, collaborators and major customers.
If any of the Company's products or information systems, embedded systems, key
third party suppliers and services providers and major customers are not Year
2000 ready, the Company may experience a business interruption and be subject to
certain litigation which would have a material adverse impact on the Company's
business, results of operations and financial condition.
COMPLIANCE WITH GOVERNMENT REGULATION IS CRITICAL TO AFFYMETRIX' BUSINESS.
Affymetrix must comply with the United States Food and Drug Administration's
("FDA") regulations for sale of analyte-specific reagents, or ASRs, in the
United States, ISO standards for sale
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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 Affymetrix has filed an application for the registration of its
manufacturing sites for its arrays as ASRs, Affymetrix cannot guarantee that it
will be able to comply with the regulations at reasonable costs.
In addition, many of Affymetrix' products, including its diagnostic
products, will be regulated as medical devices and therefore be subject to
approval by the FDA. Unless exempted by government regulation, there are two
primary methods for securing FDA approval.
First, the FDA determines that the proposed medical device can be marketed
in the United States because it is substantially equivalent to an existing
medical device already in the United States market and issues what is known as a
510(k) pre-market notification clearance. Second, the FDA may require that the
new device satisfy a more in depth approval process, known as pre-market
approval, or PMA. Both the 510(k) clearance and the PMA processes may require
the presentation of a substantial volume of clinical data, as well as a
substantial review, thereby delaying the introduction of the new device into the
market. Moreover, the PMA process requires extensive clinical studies,
manufacturing information (including demonstration of compliance with quality
systems requirements) and likely review by a panel of experts outside the FDA.
FDA review of a PMA application could take significantly longer than that for a
510(k) application, thereby further delaying the introduction of the new medical
device into the market. Finally, even if the FDA approves the new device, it may
impose restrictions on Affymetrix' ability to market the device.
Affymetrix cannot assure you that it will or its collaborators will be able
to meet the FDA's requirements or receive FDA clearance for Affymetrix'
products. Moreover, even if Affymetrix is exempt from approval or even if
Affymetrix receives clearance, the FDA may impose restrictions on Affymetrix'
marketing efforts. Finally, delays in the approval process may cause Affymetrix
to introduce its products into the market later than anticipated. Any failure to
obtain regulatory approval, restrictions on Affymetrix' ability to market its
products, or delay in the introduction of Affymetrix' products to the market
could have a material adverse effect on its business, financial condition and
results of operations.
Moreover, medical device manufacturers are subject to periodic inspections
by the FDA and state agencies. If the FDA believes that a company is not in
compliance with applicable laws or regulations, it can take any of the following
actions:
- issue a warning or other letter notifying the particular manufacturer of
improper conduct;
- impose civil penalties;
- detain or seize products;
- issue a recall;
- ask a court to seize products;
- enjoin future violations;
- withdraw clearances or approvals; or
- assess civil and criminal penalties against Affymetrix, its officers or
its employees.
If Affymetrix fails to comply with the FDA's requirements and is subject to
any of the actions mentioned above, its business, financial condition or results
of operations would be materially and adversely affected.
Medical device laws and regulations are also in effect in many of the
countries in which Affymetrix may do business outside the United States. These
laws and regulations range from comprehensive device approval requirements for
some or all of Affymetrix' medical device products to requests for
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product data or certifications. The number and scope of these requirements are
increasing. Affymetrix may not be able to obtain regulatory approvals in these
countries and it may be required to incur significant costs in obtaining or
maintaining its foreign regulatory approvals. In addition, the export of certain
of Affymetrix' products which have not yet been cleared for domestic commercial
distribution may be subject to FDA export restrictions. Any failure to obtain
product approvals in a timely fashion or to comply with state or foreign medical
device laws and regulations may seriously harm Affymetrix' business, financial
condition or results of operations.
Affymetrix is also subject to numerous environmental and safety laws and
regulations, including those governing the use, storage and disposal of
hazardous and biological materials, and construction of new facilities.
Affymetrix may not be able to obtain the necessary permits to operate new
facilities. Any violation of, and the cost of compliance with, these regulations
or permit requirements could have a material adverse effect on Affymetrix'
business, financial condition and results of operations.
AFFYMETRIX' SUCCESS DEPENDS ON ITS ABILITY TO EXPAND ITS SALES AND SUPPORT
ORGANIZATIONS.
Affymetrix has expanded the distribution of its products in recent years.
This expansion has placed new and increased demands on its direct sales force
and technical and sales support staff, including accounting controls.
Affymetrix' ability to achieve revenue growth in the future will depend, in
part, on its success in recruiting and training sufficient direct sales,
technical and support personnel. Although Affymetrix invests significant
resources to expand its direct sales force and its technical and support staff,
there is only a limited number of qualified personnel in these areas. Therefore,
Affymetrix may not be able to expand its direct sales force and technical
support staff as necessary to support its growing operations. In addition, such
expansion may not result in increased revenues. Any failure to expand
Affymetrix' direct sales force or technical and support staff or to expand its
distribution channels could materially and adversely affect its business,
operating results and financial condition.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT
AFFYMETRIX' CASH FLOW.
Affymetrix has substantial amounts of outstanding indebtedness. There is the
possibility that Affymetrix may be unable to generate cash sufficient to pay the
principal of, interest on and other amounts due in respect to its indebtedness
when due. Affymetrix also expects to add additional equipment loans and lease
lines to finance capital expenditures and may obtain additional long term debt,
working capital lines of credit and lease lines. There can be no assurance that
any financing arrangements will be available.
Affymetrix' substantial leverage could have significant negative
consequences, including:
- increasing its vulnerability to general adverse economic and industry
conditions;
- limiting its ability to obtain additional financing;
- requiring the dedication of a substantial portion of its expected cash
flow from operations to service its indebtedness, thereby reducing the
amount of its expected cash flow available for other purposes, including
working capital and capital expenditures;
- limiting its flexibility in planning for, or reacting to, changes in its
business and the industry in which it competes; or
- placing Affymetrix at a possible competitive disadvantage compared to less
leveraged competitors and competitors that have better access to capital
resources.
AFFYMETRIX MAY DEPEND ON REIMBURSEMENT BY HEALTH CARE ORGANIZATIONS.
Affymetrix' ability to commercialize certain products and services
successfully may depend on the extent to which Affymetrix is able to secure
reimbursement from government authorities, such as
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Medicare and Medicaid, private health insurers, and other organizations, such as
health maintenance organizations. These third-party payors are increasingly
likely to challenge the prices charged for health care products and services.
The cumulative effect of the trend towards managed health care in the United
States, legislative proposals to reform health care or reduce government
insurance programs, and the concurrent growth of organizations such as HMOs,
which could control or significantly influence the purchase of health care
products and services, may result in lower prices for health care products and
services commercialized by Affymetrix, Affymetrix' customers and its
collaborative partners. This reduction in turn could reduce the amount of
Affymetrix' future revenues or royalty payments that may be due to it. The lower
prices could also harm Affymetrix' profits and the profits of its customers and
collaborative partners. As a result, pharmaceutical, diagnostic and
biotechnology companies may choose to reduce or eliminate certain research and
development programs that utilize Affymetrix' products. Any such reduction of
Affymetrix' revenues or royalty payments or the reduction or cancellation of
research programs that utilize Affymetrix' products could seriously harm its
business, financial condition and results of operations.
AFFYMETRIX' COMMON STOCK HAS EXPERIENCED AND WILL CONTINUE TO EXPERIENCE
FLUCTUATIONS IN PRICE WHICH COULD AFFECT THE VALUE OF THE SHARES WHICH MAY BE
ISSUED TO GENETIC MICROSYSTEMS STOCKHOLDERS.
Recently, the market price for Affymetrix' common stock has experienced
significant price fluctuations. This volatility has been caused and will in the
future continue to be caused by, among other things, the following factors, some
of which are beyond Affymetrix' control:
- Quarterly variations in Affymetrix' operating results;
- Announcements of new commercial products and initiatives either by
Affymetrix or its collaborative partners or competitors;
- Developments in litigation initiated against Affymetrix or by Affymetrix;
and
- Developments concerning proprietary rights;
- Technological innovations by Affymetrix and its competitors;
- New collaborative agreements;
- Announcements of Affymetrix' results of research activities;
- Changes in patent laws;
- Changes in government regulation or new regulatory actions; or
- Fluctuations in the stock market price and volume of traded shares
generally, especially fluctuations in the traditionally volatile
technology and biotechnology sectors.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Affymetrix is a party to significant litigation, which has and will consume
substantial financial and managerial resources and which could adversely affect
our business, financial condition and results of operations. Further, because of
the substantial amount of discovery required in connection with any such
litigation, there is a risk that confidential information could be compromised
by disclosure.
On March 3, 1997, Hyseq filed a lawsuit in United States District Court for
the Northern District of California (San Jose Division) alleging that
Affymetrix' products infringe United States Patents 5,202,231, or '231, and
5,525,464 or '464. In addition, in December 1997, Hyseq filed a second action
claiming that Affymetrix' products infringe a related patent, United States
Patent 5,695,940, '940. On August 18, 1998, Affymetrix filed a lawsuit in United
States District Court for the Northern District of California (San Francisco
Division) against Hyseq alleging infringement of U.S. Patent Nos. 5,795,716, or
'716, and 5,744,305, or '305. On September 1, 1998, Affymetrix added its U.S.
Patent No. 5,800,992, or '992, to the complaint of infringement against Hyseq.
On October 26, 1999, Hyseq filed a third action in United States District Court
for the Northern District of California (San Francisco Division) claiming that
Affymetrix' products infringe a related patent, United States Patent 5,972,619,
or '619. The action also requests a declaration that the '716 Patent is invalid
based on the '619 Patent. On October 26, 1999, the United States District Court
for the Northern District of California issued a Claims Construction Order
interpreting various terms of the '231, '464, and '940.
On June 4, 1999, Oxford Gene Technology filed suit against Affymetrix in the
United States District Court for the District of Delaware and in the United
Kingdom alleging infringement of United States Patent 5,700,637 and European
Patent 0-373-203, respectively. On June 5, 1999, an asset transfer agreement
with Beckman Coulter became effective, giving Affymetrix access to various
assets, including licenses to United States Patent 5,700,637 and European Patent
0-373-203. On June 17, 1999, Affymetrix filed a complaint in the United States
District Court for the Northern District of California asking for, among other
things, a declaration that Affymetrix has a valid license to use the patents and
that, in light of this license, Affymetrix is not infringing on these patents.
This case has been consolidated with the Delaware action. Affymetrix has
counterclaimed for revocation of this patent and Oxford Gene Technology Limited
has applied to amend the patent. The patent infringement issues have been stayed
pending resolution of whether Affymetrix and Affymetrix UK Limited have a
license under the patent via Beckman Coulter.
The Hyseq and the Oxford Gene Technology actions seek damages based on the
sale of Affymetrix' products and processes and seek to enjoin commercial
activities relating to those products and processes. In addition to subjecting
Affymetrix to potential liability for damages, these actions, and any other
similar legal actions against Affymetrix or its customers or collaborative
partners, could require Affymetrix or its collaborative partners to obtain a
license in order to continue to manufacture, market or use the affected products
and processes. While Affymetrix believes that the Hyseq and Oxford Gene
Technology complaints are without merit, Affymetrix may not prevail in these
actions and Affymetrix or its collaborative partners may not prevail in any
other related action. Moreover, in the event Affymetrix does not prevail in the
Hyseq and Oxford Gene Technology actions and Affymetrix, its partners or its
customers are required to obtain a license to continue to manufacture, market or
use the affected products and processes, Affymetrix, its partners or its
customers may not be able to obtain such a license on commercially acceptable
terms, if at all. Furthermore, Affymetrix has expended and is likely to continue
to expend substantial financial and managerial resources in defending against
the claims filed by Hyseq and Oxford Gene Technology.
On January 6, 1998, Affymetrix filed a patent infringement action in the
United States District Court for the District of Delaware (No. 98-6) alleging
that certain products of Incyte Pharmaceuticals, Inc.'s and Synteni, Inc.'s
infringe United States Patent 5,445,934, or '934. On September 1, 1998,
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Affymetrix filed a complaint against Incyte and Synteni in Federal District
Court in Delaware alleging infringement of the '305 Patent and the '992 Patent.
These actions were transferred to the United States District Court for the
Northern District of California on November 18, 1998, as case numbers C98-4507
and C98-4508, respectively. The actions seek to enjoin commercial activities of
Incyte and Synteni relating to Affymetrix' patents and, in regard to the '992
Patent, sought a preliminary injunction. Incyte and Synteni moved for summary
judgment that certain claims of the '992 Patent were invalid. On May 4, 1999,
the Court denied Affymetrix' motion for preliminary injunction and denied
Incyte/Synteni's motion for summary judgment.
On August 18, 1998, Affymetrix filed a lawsuit in United States District
Court for the Northern District of California (San Francisco Division) against
Hyseq alleging infringement of U.S. Patent Nos. 5,795,716, or '716, and
5,744,305, or '305. On September 1, 1998, Affymetrix added its U.S. Patent
No. 5,800,992, or '992, to the complaint of infringement against Hyseq.
In the United Kingdom High Court of Justice, Chancery Division, Patents
Court, Oxford Gene Therapy Limited has applied in the United Kingdom to revoke
Affymetrix's EP (UK) 0-619-321 Patent (related to certain DNA arrays). This
revocation action also includes an application to revoke Affymetrix's related
United Kingdom Patent GB 2248840.
Affymetrix may not prevail in asserting its patent rights against Hyseq,
Incyte, Synteni or others and may not succeed in having its patents found valid
in the United Kingdom revocation action or elsewhere. Affymetrix has expended
and is likely to continue to expend substantial financial and managerial
resources in asserting and defending its patent rights against Hyseq, Incyte,
Synteni and others. Affymetrix' failure to successfully enforce its patent
rights or the loss of these patent rights or others would remove a legal
obstacle to competitors in designing probe array systems with similar
competitive advantages to Affymetrix' GeneChip technology. The removal of such
barriers could have a material adverse effect on Affymetrix' business, financial
condition and results of operations.
On April 17, 1998, Incyte filed a response and counterclaim to case number
C98-4507, asserting that the '934 Patent is invalid and not infringed. On
April 17, 1998, Incyte also filed a counterclaim alleging that a patent license
agreement Affymetrix entered into in December 1997 with Molecular Dynamics
interfered with an agreement between Incyte and Molecular Dynamics. In the
counterclaim, Incyte alleges that the terms of Affymetrix' patent license to
Molecular Dynamics prevented Molecular Dynamics from meeting its obligations to
Incyte. Incyte seeks damages from Affymetrix. On September 21, 1998, Incyte and
Synteni filed an answer asserting various defenses to the lawsuits in relation
to the '992 Patent and the '305 Patent, and asserted several counterclaims,
including:
- a request for declaration of non-infringement and invalidity;
- an assertion of unfair competition;
- a request for a declaration that Synteni and Dari Shalon (a one-time
employee of Synteni) have not misappropriated any of Affymetrix' trade
secrets;
- a claim of tortious interference with Incyte's and Synteni's economic
advantage; and
- a claim of slander of title of a patent and a claim of trade libel.
Affymetrix believes that the counterclaims are without merit. However,
Affymetrix has expended and is likely to continue to expend significant
financial and managerial resources defending against these and any other
counterclaims filed by Incyte and Synteni and others. Affymetrix' failure to
successfully enforce its patent rights or defend against counterclaims of
Incyte, Synteni, or others could result in a material adverse effect on
Affymetrix' business, financial condition and results of operations.
The United States Patent and Trademark Office, or USPTO, notified Affymetrix
that Stanford University presented claims that relate to substantially the same
subject matter as certain claims from
32
<PAGE>
the '992 Patent and all of the claims of the '305 Patent. The Stanford
application is alleged to be exclusively licensed to Incyte. The USPTO notified
Affymetrix on April 2, 1999 that it had declared an interference proceeding
relating to these patents and claims of patents. The USPTO conducted proceedings
to determine the priority of these claims and determined that Incyte/Synteni did
not meet the burden of proof required to establish a case that the claims should
be further evaluated in a full interference proceeding. Incyte/Synteni has
appealed this decision in United States District Court for the Northern District
of California (case number C99-2111). Affymetrix has expended, and expects in
the future to continue to expend, substantial financial and managerial resources
as a result of these proceedings. Moreover, Affymetrix may not prevail in such
proceedings or in similar proceedings relating to those or other patents.
In Europe, Oxford Gene Technology Limited, Incyte Pharmaceuticals, Inc.,
Multilyte Ltd. and ProtoGene Laboratories, Inc. have filed oppositions against
Affymetrix's EP 0-619-321 patent in the European Patent Office. This procedure
will result in the patent being either upheld in its entirety, allowed to grant
in amended form in designated European countries, or revoked.
Affymetrix may not prevail in the appeal of the Incyte/Synteni interference
or the opposition proceedings in Europe or elsewhere. A failure to prevail could
result in Affymetrix' inability to commercialize its products and also would
enable others to copy aspects of Affymetrix' products. Affymetrix expects in the
future to expend substantial financial and managerial resources as a result of
these proceedings.
33
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
(1) 2.1 Agreement and Plan of Merger, dated as of September 10,
1999, among Affymetrix, Inc., GMS Acquisition, Inc. and
certain shareholders.
(2) 3.1 Amended and Restated Certificate of Incorporation.
(3) 3.2 Bylaws.
(4) 4.1 Rights of Agreement dated October 15, 1998 between
Affymetrix, Inc. and American Stock Transfer & Trust
Company, as Rights Agent.
(5) 4.2 Indenture dated as of September 22, 1999, between
Affymetrix, Inc. and The Bank of New York, as Trustee.
27 Financial data schedule.
</TABLE>
- ------------------------
(1) Incorporated by reference to the Registrant's registration statement on
Form S-4 as filed on October 14, 1999 (File No. 333-88987).
(2) Incorporated by reference to the same number exhibit filed with the
Registrant's registration statement on Form S-3 as filed on July 12, 1999
(File No. 333-82685).
(3) Incorporated by reference to the same number exhibit filed with Registrant's
Form 8-K as filed on September 28, 1998 (File No. 000-28218).
(4) Incorporated by reference to Exhibit 1 of the Registrant's Form 8-A as filed
on October 16, 1998 (File No. 000-28218).
(5) Incorporated by reference to the Registrant's registration statement on
Form S-4 as filed on October 14, 1999 (File No. 333-88987).
(b) Reports on Form 8-K.
On September 28, 1999, the Company filed a Report on Form 8-K announcing the
private placement of 5% convertible subordinated notes due 2006.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
AFFYMETRIX, INC.
November 12, 1999 By: /s/ EDWARD M. HURWITZ
-----------------------------------------
Edward M. Hurwitz
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
35
<PAGE>
AFFYMETRIX, INC.
EXHIBIT INDEX
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
<S> <C>
(1) 2.1 Agreement and Plan of Merger, dated as of September 10,
1999, among Affymetrix, Inc., GMS Acquisition, Inc. and
certain shareholders.
(2) 3.1 Amended and Restated Certificate of Incorporation.
(3) 3.2 Bylaws.
(4) 4.1 Rights of Agreement dated October 15, 1998 between
Affymetrix, Inc. and American Stock Transfer & Trust
Company, as Rights Agent.
(5) 4.2 Indenture dated as of September 22, 1999, between
Affymetrix, Inc. and The Bank of New York, as Trustee.
27 Financial data schedule.
</TABLE>
- ------------------------
(1) Incorporated by reference to the Registrant's registration statement on
Form S-4 as filed on October 14, 1999 (File No. 333-88987).
(2) Incorporated by reference to the same number exhibit filed with the
Registrant's registration statement on Form S-3 as filed on July 12, 1999
(File No. 333-82685).
(3) Incorporated by reference to the same number exhibit filed with Registrant's
Form 8-K as filed on September 28, 1998 (File No. 000-28218).
(4) Incorporated by reference to Exhibit 1 of the Registrant's Form 8-A as filed
on October 16, 1998 (File No. 000-28218).
(5) Incorporated by reference to the Registrant's registration statement on
Form S-4 as filed on October 14, 1999 (File No. 333-88987).
36
<TABLE> <S> <C>
<PAGE>
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<S> <C>
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<ALLOWANCES> (676)
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<DEPRECIATION> (14522)
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