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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 1-13768
ONCORMED, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 52-1842781
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(State of Incorporation) (I.R.S. Employer Identification No.)
205 PERRY PARKWAY
GAITHERSBURG, MARYLAND 20877
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(Address of principal executive offices)
(Zip code)
(301) 208-1888
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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Common Stock, par value $.01
Warrants to Purchase Common Stock
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X
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At March 3, 1997, OncorMed, Inc. had 7,814,022 shares of Common Stock, par
value $.01, outstanding.
While it is difficult to determine the number of shares owned by nonaffiliates,
the registrant estimates that the aggregate market value of its Common Stock on
March 3, 1997 (based upon the closing price of these shares on the American
Stock Exchange) held by nonaffiliates was approximately $30,983,000.
Documents Incorporated By Reference
Items 10, 11, 12 and 13 of Part III are incorporated by reference from a
portion of the registrant's definitive proxy statement to be furnished to
stockholders in connection with the 1997 Annual Meeting of Stockholders.
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PART I
Item 1 Business
This report contains certain statements of a forward-looking nature
relating to future events or the future financial results of the
Company. Investors are cautioned that such statements are only
predictions and that actual events or results may differ materially.
In evaluating such statements, investors should specifically consider
the various factors identified in this Report which could cause actual
events or results to differ materially from those indicated by such
forward-looking statements, including the matters set forth in
"Business - Risk Factors".
OncorMed, Inc. (the "Company") was incorporated on July 12, 1993 in
the State of Delaware. OncorMed develops and provides gene-based
cancer diagnostic and information services for physicians, hospitals,
clinical laboratories and pharmaceutical companies. The Company's
services include molecular profiling and staging of tumors, laboratory
confirmation of predisposition to certain cancers, and hereditary
cancer risk assessment. OncorMed collaborates globally with genomic,
biotechnology and pharmaceutical companies to translate new genetic
discoveries into clinically-useful testing services.
CANCER
The Company's initial efforts have been primarily focused on the
development of medical services utilizing recent genetic discoveries
for the early detection and management of cancer. As a result of
genetic discoveries made over the last several years, it is now widely
accepted by the medical community that essentially all cancer is the
result of inherited or developed genetic mutations. Genetic mutations
cause malfunctions in the cell's normal development, resulting in the
uncontrolled growth of cells that characterizes most cancers. The
presence of genetic mutations provides information on increased
susceptibility, or predisposition, the development of certain cancers,
the presence of certain cancers and the prognosis associated with
certain cancers. It is widely accepted by the medical community that
approximately 5% to 10% of all cancer cases are hereditary.
CANCER MANAGEMENT THROUGH GENETICS
Recent advances in human genome research, including the Human Genome
Project, have increased the rate at which genes are being discovered.
The Company believes that services based on these recent genetic
discoveries will become one of the principal means used by health care
professionals for the risk assessment and early detection of certain
cancers and will provide information that will improve the management
of cancer. Set forth below is a brief description of how genetic
testing and information services may be useful throughout the cycle of
cancer management.
- Risk Assessment. Through the careful assessment of an individual's
family history, it is possible to determine whether an inherited or
familial pattern of cancer exists. Patients identified as being
susceptible or at risk for hereditary cancer through the risk
assessment process may elect to take preventive measures, including
medication, prophylactic surgery, behavioral and environmental
modification, increased targeted monitoring and genetic
predisposition testing.
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Item 1 Business: (Continued)
- Predisposition Testing. The presence of specific genetic mutations
has been shown to indicate an increased susceptibility, or
predisposition, to the development of certain cancers. Individuals
identified through hereditary risk assessment as being likely to
develop certain hereditary cancers can be tested for the presence
or absence of specific genetic mutations associated with such
cancers as the genetic mutations are discovered. Predisposition
testing can help physicians determine the proper preventive
measures and monitoring for each individual and can reduce the
likelihood that unnecessary and costly medical procedures will be
carried out on individuals who are at risk for hereditary cancer
based on family history, but who do not have the genetic mutation.
- Early Detection. The ability to identify certain genetic mutations
that are indicative of the presence of cancer should allow for the
detection of cancer at an earlier stage than is possible using
conventional techniques, which can only detect tumor masses or the
presence of large numbers of cancer cells. The Company believes
that early detection of cancer will reduce the need for invasive
and costly treatments, improve the efficacy of available therapies
and increase the likelihood of patient survival.
- Prognostic Testing. There are subtypes within specific types of
cancer, and each subtype may progress differently and have a
varying response to treatment. The detection of genetic
differences between cancer subtypes provides important information
for establishing the prognosis associated with a particular cancer
and for treatment selection. In addition, ascertaining if a cancer
has spread beyond its tumor margins into the surrounding tissue and
lymph nodes is also important in accurately determining the
prognosis of an individual and in treatment selection. Genetic
analysis of tumor margins also can help physicians evaluate the
effectiveness of the selected course of treatment and identify a
relapse at an early stage, when additional treatment is more likely
to be effective. Studies have found that in over 20% of head and
neck and colon cancer cases in which conventional microscopic
analysis by a pathologist indicated that the surrounding tissue and
lymph nodes were normal and cancer free, molecular analysis
detected the presence of cancer cells.
ONCORMED'S GENETIC TESTING AND INFORMATION SERVICES
The Company, through its developed and licensed proprietary
technologies, has translated recent genetic discoveries into genetic
testing and information services for the management of cancer. The
Company currently offers or has under development genetic testing and
information services that are designed to: (i) assess an individual's
risk of developing an inherited form of cancer; (ii) detect genetic
mutations associated with an individual's predisposition to certain
cancers; (iii) enable the early detection of certain cancers at the
molecular level; and (iv) identify genetic mutations associated with
the spread or recurrence of various cancers. The Company also makes
available contract sequencing services and a genomic repository. The
following table describes the Company's services:
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Item 1 Business: (Continued)
ONCORMED'S TESTING AND INFORMATION SERVICES
<TABLE>
<S> <C> <C>
RISK ASSESSMENT
SERVICE DISEASE DEVELOPMENT STATUS
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Hereditary Cancer Consulting Service All forms of inherited cancer Introduced
PREDISPOSITION TESTING
DISEASE GENE TARGETS DEVELOPMENT STATUS
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Hereditary Breast/Ovarian Cancer BRCA1, BRCA2 Introduced
Heritage Panel (Ashkenazi Jewish Descent) BRCA1, BRCA2(1) Introduced
Hereditary Nonpolyposis Colon Cancer MLH1, MSH2 Introduced
Familial Adenomatous Polyposis APC Expected Introduction
(to be determined)
Familial Melanoma p16 Introduced
Medullary Thyroid Cancer RET Introduced
Li-Fraumeni Syndrome p53 Introduced
EARLY DETECTION
DISEASE GENETIC TARGETS DEVELOPMENT STATUS
------- --------------- ------------------
Bladder Cancer Various genetic markers Expected Introduction
(early/mid 1998)(2)
Lung and Colon Cancers Various genetic markers Expected Introduction
(to be determined)
PROGNOSTIC TESTING
SERVICE DISEASE DEVELOPMENT STATUS
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TumorCheck/Molecular Staging Solid tumor cancers Introduced
Replication Error Rate Solid tumor cancers Introduced
Molecular Profiling, p53 Mutations, K-ras (3) Solid tumor cancers Introduced
</TABLE>
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Item 1 Business: (Continued)
ONCORMED'S TESTING AND INFORMATION SERVICES (CONTINUED)
<TABLE>
<S> <C> <C>
CONTRACT SEQUENCING
SERVICE DISEASE DEVELOPMENT STATUS
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Single Pass Sequencing -- Introduced
Double Pass Sequencing -- Introduced
Primer Walking -- Introduced
GENOMIC REPOSITORY
SERVICE DISEASE DEVELOPMENT STATUS
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Database and DNA Library Various cancers Available
</TABLE>
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(1) Heritage Panel includes 2 BRCA1 mutations and 1 BRCA2 mutation.
(2) The status of certain of the services have been updated.
The Company believes that it has a reasonable basis upon which it has
projected the expected introduction date of this service. There can
be no assurance, however, that this service will be introduced by such
date, if at all.
(3) K-ras for research purposes only.
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Item 1 Business: (Continued)
Hereditary Cancer Risk Assessment Service
Through the careful assessment of a patient's family history by a
properly trained health care professional, it is possible to determine
whether an inherited or familial pattern of cancer exists. In May
1994, in conjunction with the Hereditary Cancer Institute ("HCI"), the
Company introduced its risk assessment service, the Hereditary Cancer
Consulting Service ("HCCS"), which is currently provided at 24 sites.
HCCS is a clinical advisory service used to assess an individual's
risk of developing inherited cancer and to provide guidance concerning
appropriate cancer surveillance, testing and genetic counseling based
on such assessment.
Initial screening of the patient is done through a personal interview
conducted by a physician, nurse or genetic counselor trained in cancer
risk counseling by the Company. Based on the family history obtained,
the Company's proprietary software creates a family tree, or
"pedigree," detailing the occurrence of cancer throughout the
patient's family. Accurate evaluation of a complicated pedigree to
determine a patient's risk of developing inherited cancer requires a
level of expertise in cancer genetics that exceeds the usual training
of most health care professionals. Any pedigree that suggests a
pattern of familial or inherited cancer is reviewed and interpreted by
trained physicians, geneticists or consultants.
Through its relationship with HCI, the Company has worldwide exclusive
licensing rights to HCI's family cancer database. Over the past three
decades, HCI has evaluated over 300,000 individuals and built its
database using data from individuals identified as being at risk to
develop familial or hereditary cancer. The HCI database is used to
help identify the presence of a pattern of inherited or familial
cancer, which is then confirmed by a physician, geneticist or
consultant review. Based on the results, recommendations for
appropriate testing and surveillance services are provided. The
Company believes that the individuals identified as being at risk for
developing hereditary cancer will be potential customers for the
Company's genetic predisposition and other services. See "Business -
Licensing and Collaborative Relationships - The Hereditary Cancer
Institute."
Predisposition Testing Services
The Company offers predisposition testing services for the detection
of genetic mutations associated with certain cancers. These services,
which the Company believes are safe, reliable and accurate, are
designed to identify individuals at high risk for developing a
particular type of cancer. The Company believes that the information
provided by its predisposition testing services will lead to the
earlier detection of cancer and improved treatment outcomes by
enabling high risk individuals to make proactive medical and lifestyle
decisions designed to delay or prevent the onset of cancer. The
following is a brief description of the Company's predisposition
testing services:
Hereditary Breast/Ovarian Cancer. Breast cancer is one of the most
common diseases in women with an estimated 181,600 new cases of breast
cancer expected to be diagnosed during 1997. The lifetime risk for
women in the United States to develop breast cancer is one in eight.
Approximately 5% to 10% of all breast cancer is believed to be due to
inherited genetic mutations, of which mutations approximately 80% are
attributable to mutations in the BRCA1 and BRCA2 genes. In
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Item 1 Business: (Continued)
October 1994, BRCA1, the first gene indicating an increased risk for
the development of hereditary breast and ovarian cancer, was reported
to have been discovered. In late 1995, BRCA2 was discovered. The
lifetime risk for developing breast cancer from an inherited mutation
in either BRCA1 or BRCA2 is approximately 85% and the risk for ovarian
cancer can be as high as 60%. The five-year survival rate for breast
cancer is greater than 90% when detected early, and less than 20% when
detected at an advanced stage. The Company's BRCA1/BRCA2 testing
service can help identify women at particularly high risk for
inherited breast and ovarian cancer, for whom earlier and more
intensive surveillance is recommended. Some women undergo
prophylactic surgery (mastectomy and/or removal of ovaries) based
primarily on family history. The Company's service can help rule out
individuals who, because they do not carry the family mutation, may
not require the intensive surveillance or prophylactic interventions
recommended for individuals with inherited mutations.
Heritage Panel. Depending on the prevalence of breast and ovarian
cancer within a family, inherited mutations in BRCA1 or BRCA2 may
account for 25%-90% of hereditary breast and/or ovarian cancers in
families of Ashkenazi (Eastern European) Jewish descent. At least 2%
of Ashkenazi Jewish individuals are believed to carry one of three
specific BRCA1/BRCA2 mutations. In cases where women with breast
cancer have such a mutation, for example, such women have up to a 65%
lifetime risk for a second primary breast cancer and up to a 60%
lifetime risk for ovarian cancer. For women without cancer, with a
specific mutation, an 85% lifetime risk for breast cancer exists with
up to a 60% lifetime risk for ovarian cancer. Introduced in November
1996, this test is designed to detect three specific mutations:
185delAG, 5382insC (both in the BRCA1 gene) and 6174delT (in the BRCA2
gene). Current treatment recommendations for women with one of these
mutations include earlier and increased surveillance, with more
frequent breast and pelvic examinations, and more frequent mammograms.
Prophylactic bilateral oophorectomy, at the time of menopause or when
childbearing is completed, and prophylactic bilateral mastectomy are
additional options for these women.
Hereditary Nonpolyposis Colon Cancer ("HNPCC"). Colon cancer ranks
second as the cause of cancer deaths in the United States. During
1997, it is estimated that there will be approximately 134,600 new
cases of colon cancer. A family history of colon cancer increases an
individual's risk of developing the disease. It is estimated that up
to 10% of colon cancer cases are HNPCC. HNPCC is one of the most
common cancer predisposition syndromes, affecting as many as one in
200 individuals. In 1993, the first HNPCC-related gene (MSH2) was
reported to have been discovered, with the second HNPCC-related gene
(MLH1) reported to have been discovered shortly thereafter in 1994.
Mutations in MSH2 and MLH1 are believed to account for approximately
80% of HNPCC. Two additional HNPCC genes (PMS1 and PMS2) were reported
to have been discovered in 1994. The identification of mutations in
any of these genes allows for the accurate diagnosis of HNPCC. The
lifetime risk for colon cancer in individuals who inherit a genetic
mutation associated with HNPCC exceeds 90% compared to approximately
6% in the general population. The five-year survival rate is
substantially higher for colon cancer patients when the cancer is
localized as compared to colon cancer that has spread to the lymph
nodes. The Company's HNPCC testing service may help identify
individuals at particularly high risk for colon cancer, for whom
earlier and more intensive surveillance is recommended. This service
also rules out individuals who have been
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Item 1 Business: (Continued)
identified through genetic risk assessment as being at risk to develop
colon cancer but who do not carry the family genetic mutation and,
therefore, do not require as intensive surveillance as is recommended
for individuals with inherited genetic mutations.
Familial Adenomatous Polyposis ("FAP"). FAP is another inherited form
of colon cancer, which is estimated to affect one in 8,000 people. FAP
is characterized by the development of hundreds to thousands of
polyps, some of which inevitably develop into cancer. In 1991,
mutations in the APC gene were reported to be associated with the
development of FAP. The Company believes that an APC testing service
should allow for the accurate identification of individuals at high
risk for FAP who require early and aggressive surveillance.
Familial Melanoma. Melanoma is a malignant form of skin cancer, which
will affect an estimated 40,300 new patients during 1997.
Approximately 5% to 10% of melanoma is believed to be due to an
inherited genetic mutation. In 1994, mutations in the p16 gene were
found to be associated with familial melanoma. Mutations in the p16
gene are believed to account for about half of all inherited melanoma.
The lifetime risk for melanoma in an individual who has inherited a
mutation in p16 has not yet been documented. The Company's p16 gene
mutation testing service can identify individuals in need of increased
surveillance for the onset of melanoma.
Medullary Thyroid Cancer ("MTC"). During 1997, an estimated 16,100
new cases of thyroid cancer will be diagnosed. MTC accounts for
approximately 10% of all thyroid cancer cases. Approximately 20% of
MTC occurs as part of one of two hereditary syndromes: multiple
endocrine neoplasia-type 2 ("MEN-2") and familial medullary thyroid
carcinoma ("FMTC"). Mutations in the RET gene associated with MEN-2
and FMTC were first described in 1993. Studies indicate that
virtually everyone who inherits a mutation in the RET gene develops
MTC. Approximately 50% of MTC patients have metastasis at the time of
diagnosis using conventional methods. Overall survival is dependent
on how invasive the tumor has become. The historical 10-year survival
rate is approximately 50%. RET testing allows for the identification
of individuals for whom MTC is believed to be a virtual certainty
before they develop the disease, which can be prevented by a
prophylactic total thyroidectomy. The conventional method of
identifying MTC involves biochemical screening methods, such as
pentagastrin stimulation testing, which is uncomfortable, costly and
can fail to detect MTC at an early stage. Unlike RET testing, which
need only be performed one time on an at risk individual, biochemical
screening must be performed annually from about age five to age 40.
The Company believes that testing for RET mutations has replaced
annual biochemical screening methods as the standard of care for the
identification of MTC.
Li-Fraumeni Syndrome. Li-Fraumeni is a relatively rare hereditary
cancer syndrome characterized by a clustering of different cancer
types within a family, including brain cancer, breast cancer,
leukemias, lymphomas and soft tissue sarcomas. p53 mutations have
been found to be associated with Li-Fraumeni syndrome. The Company's
p53 testing service helps to identify individuals in need of increased
surveillance for the various cancers that comprise Li-Fraumeni
syndrome.
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Predisposition Testing Guidelines
To help ensure that the highest ethical and medical standards are
followed when its genetic predisposition testing services are offered
to patients, the Company employs institutional review board
("IRB")-approved protocols and clinical testing guidelines. IRBs,
whose role is to ensure the protection of patients, are typically
comprised of research and clinical physicians, a medical ethicist, a
consumer or patient advocate and other health care professionals.
Physicians ordering the Company's predisposition testing services may
do so under a protocol approved by their own institution's IRB or
under OncorMed's clinical testing guidelines which have been approved
by the Company's IRB. By defining who can be tested, protocols and
guidelines help to ensure that the Company is performing its services
only on individuals and families who are at risk for having inherited
the particular cancer for which they are being tested. The protocols
and guidelines also help to ensure that patients are informed about
the risks and the benefits associated with the testing service and
that they receive appropriate genetic counseling.
Early Detection Services
In 1997, it is estimated that there will be 54,000 new cases of
bladder cancer; 178,100 new cases of lung cancer and 134,600 new cases
of colon cancer. The five-year survival rate for each of these cancer
types is substantially higher when the cancer is localized as compared
to when the cancer has spread to the lymph nodes or other organs. For
example, when detected at an early stage, the five-year survival rate
for bladder cancer is approximately 92%, compared with approximately
48% when there is regional lymph node involvement and approximately 8%
when the cancer has spread to other organs. Age and gender-based
population screening is recommended for colon cancer (digital rectal
exam, proctosigmoidoscopy and stool blood test) and lung cancer (chest
x-ray, analysis of types of cells contained in sputum, and fiber optic
examination of the bronchial passages assist diagnosis) by the
American Cancer Society and other medical organizations.
The Company is developing testing services to detect bladder cancer at
the molecular level before there are any physical symptoms of disease
detectable using conventional methods. These services are designed to
provide accurate and cost-effective methods of detecting cancer at an
early stage. The ability to detect molecular changes in certain
bodily fluids and tissues that are indicative of the presence of
cancer before there are any physical manifestations of the disease
will allow for the detection of cancer at an earlier stage than is
currently possible using conventional screening methods. A current
clinical trial uses molecular methods to test the recurrence of cancer
for bladder cancer patients. Additional studies are expected for lung
and colon cancer. The Company believes that the earlier detection of
cancer can reduce the need for invasive and costly treatments, improve
the efficacy of available therapies and increase the likelihood of
survival.
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Prognostic Testing Services
TumorCheck/Molecular Staging. Conventional techniques of determining
whether cancer surgery has been successful rely on a pathologist using
a microscope to make certain evaluations, which are often based on
subjective criteria. Recent studies have found that in more than 20%
of head and neck and colon cancer patients in which conventional
microscopic analysis by a pathologist indicated that the surrounding
tissue and lymph nodes were normal and cancer free, molecular analysis
detected the presence of cancer cells. Additional studies, including
grant work, are being conducted by the Company. In February 1995,
OncorMed began offering its TumorCheck service to surgeons and
pathologists to help them detect cancer cells present at the margins
of resected tumors and lymph nodes. There has been limited market
acceptance of this service to date due to, among other factors, price,
turnaround time and lack of third-party reimbursement. The Company's
TumorCheck service can detect one cancer cell in 10,000 normal cells.
The Company believes that this service assists oncologists and other
physicians in determining whether or not additional treatment after
surgery is warranted and will have a beneficial impact on the
treatment, follow-up and long-term survival prospects of cancer
patients undergoing surgery.
Replication Error Rate ("RER"). The presence of DNA replication
errors in certain tumors, such as gastric and colon cancer, are
believed to be predictive of patient survival. The Company provides a
service to detect the RER in surgically removed tumors. This service
is designed to provide physicians with information about prognosis and
assist in treatment selection.
Molecular Profiling, p53 and K-ras. Recent clinical research has
indicated that mutations in the p53 and K-ras genes can be predictive
of both patient survival and response to therapy. Mutations in the
p53 tumor suppressor gene are found in tumors such as head and neck,
breast, and colon. K-ras oncogene mutations can be found in lung,
colon, and pancreatic tumors. Using its automated DNA sequencing
technology, the Company provides physicians with vital information on
the mutational status of surgically removed tumors. This "molecular
profiling" service is designed to provide physicians with additional
information about prognosis and to assist in treatment selection.
Contract Sequencing. The Company currently provides contract
sequencing services including single and double pass sequencing and
primer walking. In addition, the Company designs and provides primers
for single or double strand walking projects.
Genomic Repository. As a result of its exclusive license with HCI,
the Company is currently exploring opportunities to license the HCI
database and DNA library to genomics companies and other entities.
The HCI database and library have been involved in many cancer gene
discoveries. The Company believes that the HCI database and library
may accelerate new cancer gene discovery, expedite therapeutic
developments and correlate gene mutations with cancer expression,
prognosis and treatment effectiveness.
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TECHNOLOGY
OncorMed has developed and licensed from third parties proprietary
technologies that form the basis for its comprehensive portfolio of
services. Through an agreement with Oncor, Inc. ("Oncor Agreement"),
the Company has acquired sublicenses, exclusive in certain fields of
use, for many proprietary technologies, including a functional gene
assay and microsatellite instability technology. In addition, the
Company currently uses conventional gene sequencing to detect gene
mutations. The Company intends to utilize protein truncation methods,
various amplification technologies, various gel electrophoresis
screening methods, gene chip technology and automation to detect
genetic mutations. The Company believes that its developed and
licensed proprietary technologies and collaborative arrangements
provide it with significant competitive advantages over its potential
competitors. Set forth below are brief descriptions of the Company's
core proprietary technologies.
Functional Gene Assay. A difficulty confronting the use of various
genetic mutation detection technologies in the clinical setting is
determining whether a specific mutation is biologically significant.
Some mutations do not affect the function of the proteins produced by
the gene and thus have no known biological or clinical relevance.
Genetic mutations that affect function can cause disease. Certain
technologies, such as denaturing gradient gel electrophoresis ("DGGE")
and single strand confirmational polymorphism ("SSCP"), are only able
to analyze mutations over a very limited region of a particular gene.
Alternatively, gene sequencing can be performed. However, gene
sequencing is expensive and time consuming. In addition, DNA
analytical techniques such as DGGE, SSCP and gene sequencing are not,
by themselves, sufficient to determine if the mutation actually will
affect the protein produced by that gene and whether it has biological
significance.
The Company, through the Oncor Agreement, has acquired a worldwide
sublicense, exclusive in certain fields of use, from the Massachusetts
General Hospital to use the functional gene assay and is currently
applying this technology to the detection of certain genetic
mutations. The functional gene assay allows for a simple
determination of whether a genetic mutation is biologically
significant and is able also to detect mutations faster and more
cost-effectively than gene sequencing.
The Company utilizes the functional gene assay technology in its
genetic predisposition testing service for Li-Fraumeni syndrome and as
part of its p53 mutation prognostic testing service. For its other
genetic predisposition tests, the Company currently utilizes gene
sequencing and other mutation detection methods. OncorMed intends to
continue to develop other functional gene assays for use in its
existing predisposition testing services and to form the basis for
additional services.
Microsatellite Instability Analysis. While all cancer cells have some
type of genetic mutation, only certain mutations cause a genetic
instability to occur. Genetic instability is recognized by abnormal
expansions or deletions of normally present short, repetitive
sequences in the DNA. These expansions or deletions, or
microsatellite alterations, are present in tumor DNA but not in normal
DNA and are often indicative of the presence of cancer. The Company
believes the detection of the genetic instability associated with
these alterations will provide a fast, reliable and sensitive method
for the early detection of certain cancers.
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The Company, through the Oncor Agreement, has sublicensed, exclusive
in certain fields of use, technology from The Johns Hopkins University
to detect the microsatellite alterations associated with genetic
instability. Using an optimized set of DNA markers and reagents, the
Company is developing the analytical capabilities to detect the
genetic instabilities associated with bladder, lung and colon
cancers.
Rare Cell Detection. Utilizing a proprietary process sublicensed,
exclusive in certain fields of use, from The Johns Hopkins University
through the Oncor Agreement, which combines DNA amplification, gene
sequencing and specific probe hybridization, the Company is able to
detect one cancer cell in 10,000 normal cells in the tissue
surrounding surgically removed tumors or lymph nodes. The Company
isolates and sequences the gene from tumor DNA to identify mutations
and to create a tumor-specific DNA probe. The Company also isolates
DNA from the tumor margins and lymph nodes. The Company then
amplifies and clones that DNA, transfers it to a membrane and
hybridizes it with the tumor-specific DNA probe to detect the presence
of the tumor DNA in the tissue surrounding surgically removed tumors
and lymph nodes. This process forms the basis of the Company's
TumorCheck service.
DNA Amplification Technology. The Company currently is examining
various DNA amplification technologies including Oncor's proprietary
technology known as Tri-Amp and ZENECA Diagnostics proprietary ARMS
technology. These technologies and other future technologies may
reduce costs and increase efficiencies in the Company's laboratory.
DNA GeneChip Technology. In September 1996, the Company entered into
an agreement with Affymetrix, Inc. ("Affymetrix") to collaborate in
the development and clinical validation of genetic testing services
using the Affymetrix GeneChip system for analysis of genes associated
with cancer. The GeneChip system is designed to provide rapid genetic
analysis using miniaturized, high-density arrays of DNA probes, or
"chips," and proprietary software to analyze and manage genetic
information. The Company and Affymetrix have chosen to initiate the
collaboration by developing a GeneChip assay for p53 which will be
designed to help cancer physicians evaluate the aggressiveness of
tumors and the appropriateness of therapies, thereby leading to better
treatment and management of cancer. Over 50% of all major human
cancers contain mutations, or defects, in the p53 gene.
Hereditary Cancer Risk Assessment Software and Database. The Company
utilizes proprietary software to facilitate familial or inherited
cancer risk assessment. The Company continually upgrades its software
to add features and functionality. Through its exclusive license with
HCI, OncorMed utilizes HCI's familial cancer database. HCI has
evaluated over 300,000 individuals and built its database using data
from individuals identified as being at high risk to develop familial
or hereditary cancer. This database is believed to be one of the
largest of its type in the United States.
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LICENSING AND COLLABORATIVE RELATIONSHIPS
Incyte Pharmaceuticals, Inc.
Pursuant to a License, Services and Marketing Agreement (the "Incyte
Agreement"), dated February 25, 1997, the Company and Incyte
Pharmaceuticals, Inc., a Delaware corporation ("Incyte"), have formed
a broad-based collaboration in clinical genomics designed to create an
integrated genomics and sequence-based mutation analysis capability
for the two companies. The term of the Incyte Agreement expires on
February 25, 2000 (the "Initial Term") unless extended by mutual
agreement or earlier terminated in accordance with its terms.
The Company has agreed to perform certain specified clinical genomic
services relating to the creation of a tissue repository and the
performance of a gene functional studies program (the "Collaborative
Services"). Incyte has agreed to purchase a specified minimum of
Collaborative Services during each year of the Initial Term. In
addition, under the terms of the Incyte Agreement, the Company has
obtained a non-exclusive, royalty-bearing license (without the right
to sublicense) to use Incyte's high-throughput sequencing technology
for use in the Company's clinical diagnostic services for a period
ending five (5) years following termination of the Incyte Agreement,
subject to certain limitations. In consideration for the grant of the
license, the Company has issued to Incyte (i) Four Hundred One
Thousand Thirty Three (401,033) shares of the Company's Common Stock
(the "Definite Technology Shares"), and (ii) a warrant to purchase up
to an aggregate of ten percent (10%) of the Company's Common Stock
issued and outstanding on the date of such warrant's exercise (the
"Warrant Shares"). The warrant is exercisable until February 25, 2000
at an exercise price per share equal to the greater of one hundred-ten
percent (110%) of the fair market value per share of Common Stock on
the trading day prior to the date of exercise or (i) Eight Dollars
($8.00) per share (if the warrant is exercised on or prior to February
25, 1998), (ii) Nine Dollars ($9.00) per share (if the warrant is
exercised after February 25, 1998, but on or prior to February 25,
1999), or (iii) Thirteen Dollars and Fifty Cents ($13.50) per share
(if the warrant is exercised after February 25, 1999, but on or prior
to February 25, 2000). Notwithstanding the foregoing sentence, Incyte
has the option to fix the exercise price per share during each of
aforementioned periods; provided, however, that in no event shall the
exercise price per share during each of the aforementioned periods be
less than Eight Dollars ($8.00), Nine Dollars ($9.00) or Thirteen
Dollars and Fifty Cents ($13.50) per share, respectively.
Furthermore, pursuant to a Securities Purchase Agreement between the
Company and Incyte, Incyte purchased Three Hundred Seventy Two
Thousand Five Hundred Fifty Five (372,555) shares of Common Stock from
the Company for Three Million Dollars ($3,000,000) (the "Cash Purchase
Shares") or the equivalent of Eight Dollars and Five Cents ($8.05) per
share. In addition, under the terms of the Securities Purchase
Agreement the Company has agreed to issue to Incyte, under certain
circumstances, up to an aggregate of One Hundred Thirty Thousand Seven
Hundred Twenty Six (130,726) shares of the Company's Common Stock (the
"Additional Shares"). Pursuant to the terms of an Investor's Rights
Agreement between the Company and Incyte, Incyte was granted certain
registration and other stockholder rights with respect to the Definite
Technology Shares, Warrant Shares, the Cash Purchase Shares and the
Additional Shares.
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Item 1 Business: (Continued)
Oncor, Inc.
The Company and Oncor recently agreed to certain changes to the
Restated Technology License Agreement, dated June 6, 1994. Pursuant
to the Oncor Agreement, Oncor is providing the Company with an
exclusive worldwide license to certain of Oncor's existing human
genome technologies that are useful for the purposes of development
and commercialization of certain of the Company's services, including:
(i) testing, detection and/or analysis of genes; (ii) genetic
assessment of risk of an individual to develop cancer; and (iii)
testing and analysis for the purposes of cancer management. In
addition, Oncor is providing the Company with a non-exclusive
worldwide license to certain of Oncor's existing human genome
technologies, and any future improvements thereto, to be used by the
Company in the provision of services directly to third parties other
than services that are provided pursuant to the exclusive license.
The Company does not have the right to sublicense any Oncor
technologies licensed to it by Oncor without Oncor's prior written
consent. Technologies sublicensed to the Company by Oncor include
technologies covered by the collaborative licensing and research
agreements between Oncor and each of The Johns Hopkins University and
the Massachusetts General Hospital. The term of the agreement shall
expire in June 2004 unless earlier terminated in accordance with its
terms.
Under the terms of the agreement, the Company is obligated to make
payments on a quarterly basis to Oncor equal to a range of four
percent (4%) to two percent (2%) of the Company's annual net sales.
During the first year of the agreement, the Company is obligated to
pay Oncor a minimum amount equal to $50,000 per quarter. During the
second year of the agreement, the Company is obligated to pay Oncor a
minimum amount equal to $25,000 per quarter. Thereafter, there shall
be no minimum payment required to be made by the Company to Oncor in
connection with the agreement.
In addition, subject to certain third-party contractual limitations,
prior to the license or disposition (whether by assignment, transfer
or license) to a third party by the Company or Oncor of their
respective technologies, the non-offering party shall have a thirty
(30) day right of first offer with respect to such technologies. If
the non-offering party accepts the offer, the Company and Oncor shall
negotiate in good faith the terms and conditions of any such license
or acquisition agreement.
Oncor has the primary right and obligation to obtain, maintain and
enforce proprietary rights in relation to all its own technologies and
any improvements to such technologies assigned to Oncor by the
Company. The Company has the primary right and obligation to obtain,
maintain and enforce proprietary rights in relation to all its own
technologies.
The Hereditary Cancer Institute
HCI, located at the Creighton University School of Medicine, Omaha,
Nebraska, and headed by Henry T. Lynch, M.D., is a world-renowned
research institute specializing in the study of familial and inherited
cancer. The Company, HCI and Creighton University are parties to an
agreement pursuant to which the Company has exclusive worldwide
commercialization rights to HCI's DNA library and its familial cancer
database, which are expected to be used for services provided by the
Company to researchers and genetic-technology companies. Under the
agreement, Dr. Lynch and
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Item 1 Business: (Continued)
his HCI colleagues provide consultation services and reviews of cancer
family histories for the Company's risk assessment services. The
Company intends to use expert systems, neural networks and data mining
methodologies in an effort to identify new patterns of hereditary
cancer in the HCI familial cancer database.
Under its license agreement with HCI and Creighton University, the
Company is obligated to pay an annual sponsorship fee of $250,000, in
quarterly installments, that is offset by a percentage of the amounts
paid under a related services agreement. In addition, under the
license agreement, the Company is required to pay a royalty on net
sales of products and services which make use of the HCI database,
other than the Company's risk assessment service, and on license
income derived from sublicenses to third parties of the Company's
rights to the HCI database. As part of its relationship with HCI, the
Company also will share with HCI any revenues from the
commercialization of products or services based upon samples contained
in the HCI DNA library. The DNA library, which houses DNA samples
collected from families at high risk of inherited cancer, provides a
reservoir of biological material which is potentially important for
new gene discoveries. The HCI license agreement terminates in
December 2000, subject to earlier termination upon one years' notice,
and is automatically renewable for additional two-year periods.
Affymetrix, Inc.
In September 1996, the Company entered into an agreement with
Affymetrix to collaborate in the development and clinical validation
of genetic testing services using the Affymetrix GeneChip system for
analysis of genes associated with cancer. The GeneChip system is
designed to provide rapid genetic analysis using miniaturized,
high-density arrays of DNA probes, or "chips," and propriety software
to analyze and manage genetic information. The Company and Affymetrix
have chosen to initiate the collaboration by developing a GeneChip
assay for p53 which will be designed to help cancer physicians
evaluate the aggressiveness of tumors and the appropriateness of
therapies, thereby leading to better treatment and management of
cancer.
The Regents of the University of California
The Company entered into a license agreement, effective August 8,
1996, with the Regents of the University of California for the use of
certain genetic markers for breast and ovarian cancer. Under the
agreement, the Company is obligated to pay royalties for the use of
the technology as clinical laboratory services are performed. Royalty
payments are payable quarterly, 60 days after the end of each quarter.
ZENECA Diagnostics
During August 1996, the Company and ZENECA Limited acting through
ZENECA Diagnostics, entered into a five year Collaboration Agreement
under which ZENECA Diagnostics will supply OncorMed with proprietary
cancer reagents based on the patented ZENECA ARMS technology for use
by the Company's advanced cancer genetic testing laboratory in the
U.S. The agreement automatically renews for successive twelve month
periods unless terminated by either party. Use of ZENECA Diagnostics
reagents will enable the Company to develop and provide enhanced
diagnostic testing in the cancer field.
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Item 1 Business: (Continued)
Other Licensing and Collaborative Arrangements
The Company currently is supporting clinical correlation studies at MD
Anderson Cancer Center, Memorial Sloan-Kettering Cancer Center, The
Cleveland Clinic, Dana-Farber Cancer Institute and The Johns Hopkins
University. These studies help to validate the clinical utility of
specific genetic tests and determine how the results of these tests
should be interpreted by physicians. These clinical correlation
studies are typically conducted under the center's or institution's
guidelines and protocols, which are designed to, among other things,
limit the potential for undue influence by, or conflicts of interest
with, the sponsor of such studies and ensure that ethical and medical
standards are maintained. Through the Oncor Agreement, the Company
has certain rights to inventions relating to specific genes and
genetic technologies at leading academic and research institutions,
including The Johns Hopkins University and the Massachusetts General
Hospital. The Company also has entered into a license agreement for
the use of certain genes and genetic mutations associated with HNPCC
with the Dana-Farber Cancer Institute, the State of Oregon, the
University of Vermont and Yale University.
RESEARCH AND DEVELOPMENT
The Company's principal research and development programs are targeted
at improving the efficiency and utility of its existing services,
developing new services and enhancing its informatics capabilities.
Existing and planned research and development projects include the
development of novel DNA amplification applications, mutation
detection array methods, functional gene assay development, gene chip
technology, automation of specimen analysis and the development of
gene mutation screening systems. Additional genetic predisposition
tests for certain hereditary cancers based on newly discovered
cancer-related genes are under development. Development of early
detection tests for bladder, lung and colon cancers is also ongoing.
Informatics development projects in progress include result reporting,
mutation tracking, database interfacing and patient tracking systems.
The Company has sponsored research programs at leading research and
academic institutions in the past and intends to sponsor additional
research programs in the future related to specific genetic diseases
and genetic mutation detection technologies.
The Company's research and development activities also include
optimizing and standardizing procedures, creating quality control and
quality assurance programs, and ensuring that the results obtained
through its services are reproducible, accurate and precise. Each of
the Company's genetic testing services undergoes an extensive
development and testing process prior to its introduction into the
market. This process includes: (i) the verification and validation of
the service utilizing previously analyzed and characterized samples;
(ii) extensive clinical correlation studies in conjunction with major
academic institutions to determine how the tests underlying the
Company's services should be interpreted by physicians and genetic
counselors; (iii) review of the clinical correlation study results by
the Company's medical directors and scientific advisors; and (iv)
establishing final written protocols and guidelines.
SALES AND MARKETING
The Company believes that the customers for its services primarily
consist of physicians, hospitals, cancer centers , clinical
laboratories and pharmaceutical companies and that the services
provided
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Item 1 Business: (Continued)
by the Company will be used for a broad range of patients. The
Company also believes that its services will be attractive to managed
care organizations, including health maintenance organizations,
preferred provider organizations and cancer disease management
companies.
The Company recognizes that the genetic testing and information
services it provides for the early detection and management of cancer
represent new medical services for which the market is evolving.
While most cancer patients in the United States are treated outside of
academic medical centers, research facilities and cancer centers, it
is these institutions and their affiliated physicians who drive the
introduction of new medical technologies and services used for cancer
patients. Consumer demand also can influence the rate at which new
medical tests and services are introduced into the health care system.
The Company has developed a sales and marketing approach to address
each type of target customer. Programs aimed at generating support
for the Company's services among academic medical centers and research
institutions include retaining renowned scientists as consultants,
working with leading oncologists at MD Anderson Cancer Center and the
Memorial Sloan-Kettering Cancer Center on clinical correlation studies
to generate peer reviewed publications and offering pricing discounts
to academic medical centers and research institutions. Among the
non-academic medical providers, education is a critical aspect of
market creation. The Company has fielded a sales force to promote the
Company's services to physicians and hospitals across the country. In
addition to face-to-face sales calls, approaches employed by the
Company to educate broader groups of providers include direct mailings
to targeted groups of physicians, participation in medical trade
shows, advertising in leading medical journals and sponsorship of
educational forums for clinicians.
The Company primarily markets its risk assessment service to cancer
centers, managed care organizations, hospitals and large physician
practices. The Company is marketing its genetic predisposition
testing services to specialists in the fields relating to the service.
The Company markets all of its predisposition testing services to
oncologists, its colon cancer services to gastroenterologists, its
breast/ovarian cancer testing services to gynecologists, its thyroid
cancer testing service to endocrinologists and its melanoma testing
service to dermatologists. To facilitate the use of its
predisposition testing services by physicians, the Company provides
clinical guidelines reviewed by its IRB for use by physicians. For
its TumorCheck and other prognostic testing services, the Company
targets surgeons and pathologists.
The Company charges a licensing fee for its Hereditary Cancer
Consulting Service, which generally includes the interpretation of a
certain number of family trees or pedigrees. Additional pedigree
interpretations are paid for on a fee-for-service basis.
Predisposition testing services range in price from several hundred
dollars per test to more than two thousand dollars per test, depending
on whether the person being tested is the proband (the family member
with the disease) or a relative, how many genes have to be analyzed
and the technology utilized for mutation detection. The Company's
prognostic testing services also vary in price, from approximately one
hundred dollars to more than two thousand dollars, according to the
amount of tissue that must be analyzed and the technology employed for
mutation detection.
Under the Incyte Agreement, Incyte may market various collaborative
services developed by Incyte and the Company to third parties.
Separately, the Company currently markets contract sequencing
17
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Item 1 Business: (Continued)
services to the NIH/NCI and other entities. In addition, the Company
is exploring licensing opportunities to the HCI database and DNA
library. The Company has ongoing business development efforts to sell
various services including clinical trial work to pharmaceutical
companies.
During July 1996, the Company signed a one-year renewable agreement
with NTP, Inc., a Minneapolis-based corporation specializing in
genetic, oncologic and neurologic services in South America to
distribute the Company's cancer genetic testing services in Argentina,
Brazil, Chile, Paraguay and Uruguay. Testing will be provided out of
the Company's laboratory.
During September 1996, the Company signed a two-year agreement with
Endocrine Sciences, Inc. to distribute domestically the Company's RET
gene test for familial medullary thyroid carcinoma. Endocrine
Sciences employs a national field sales organization with an exclusive
focus on selling diagnostic testing services to endocrinologists, the
primary market for the Company's RET test.
COMPETITION
The Company is engaged in the biotechnology and medical services
industries which are characterized by extensive research and
development efforts, rapid technological progress and intense
competition. There are many public and private companies, including
well-known pharmaceutical companies, biotechnology companies and
academic institutions, engaged in developing medical services and the
technology underlying such services. Although there are relatively
few direct competitors of the Company, it is anticipated that the
number of direct competitors will increase significantly in the
future. Many of the Company's current and potential competitors have
substantially greater financial and technological resources, sales and
marketing capabilities and experience, and research and development
experience than the Company. Accordingly, the Company's competitors
may succeed in developing services and the underlying technology more
rapidly than the Company and in developing services that are more
accurate and useful and less costly than any of the Company's
services. The Company's competitors also may be more successful than
the Company in marketing and selling such services. In addition,
other technologies are, or in the future may become, the basis for
competitive products and services. Oncor may develop technologies
under the Oncor Agreement into products which Oncor will sell to third
parties. These third parties may then use these products to provide
services that compete directly with the Company's services, which
could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company relies on certain technologies that are not patentable or
proprietary and consequently may be available to the Company's
competitors. Competition may increase further as a result of the
potential advances in the technology underlying the services developed
by the Company. The Company also is aware that other companies have
developed or may be developing genetic testing and information
technologies, services and products for diagnostic purposes that are
or may be competitive with the Company's services. There can be no
assurance that the Company's competitors will not succeed in
developing technologies, services and products that are more accurate
and useful than any being developed by the Company or that would
render the Company's technology and services obsolete or
noncompetitive.
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Item 1 Business: (Continued)
Given the early stage of the market for the Company's services, the
important competitive factors are availability, accuracy and utility.
The Company anticipates that other competitive factors, such as price,
availability of third-party reimbursement and response time, will
become important as the market matures.
PATENTS AND PROPRIETARY RIGHTS
The Company relies on a combination of trade secret and copyright laws
and confidentiality agreements to protect its proprietary technology,
rights and know-how. The Company's success will depend in part on its
ability or the ability of its licensors or sublicensors to obtain
patents, defend patents, maintain trade secrets, defend copyrights and
operate without infringing upon the proprietary rights of others, both
in the United States and in foreign countries. The patent position of
companies relying upon biotechnology is highly uncertain in general
and involves complex legal and factual issues, and no consistent
policy has emerged regarding the breadth of claims allowed in
biotechnology patents. To date, none of the Company, its licensors or
its sublicensors has been granted any patents related to the
technology or genetic discoveries underlying the Company's current
services. Although the Company and certain of the Company's licensors
and sublicensors have patent applications pending relating to such
technologies and discoveries, there can be no assurance that patents
will be issued as a result of such patent applications or that, if
issued, such patents will be sufficiently broad to afford protection
against competitors with similar technologies or discoveries. There
can also be no assurance that patents, if any, issued to the Company,
or for which the Company has license or sublicense rights, will not be
challenged, invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company. The
commercial success of the Company also will depend upon avoiding the
infringement of patents issued to third parties, obtaining licenses to
third parties' technologies and genetic discoveries and maintaining
licenses upon which certain of the Company's services are, or might
be, based. In particular, third parties, including potential
competitors, have already filed patent applications relating to
certain genes and genetic mutations, including the BRCA1, BRCA2 and
p16 genes and related mutations, underlying certain of the Company's
services, and may in the future file additional patent applications
relating to genes and genetic mutations. In the event that any such
patents are issued to such parties, such patents may preclude the
Company, its licensors and sublicensors from obtaining patent
protection for their technologies and discoveries, may hinder or
prevent the Company from providing related genetic testing services
and could require the Company to enter into licenses with such parties
or cease such activities. There can be no assurance that any required
licenses would be available on acceptable terms, or at all.
Litigation, which could result in substantial cost to the Company, may
be necessary to determine the scope and validity of others'
proprietary rights or to enforce the Company's patent, copyright,
trade secret and license and sublicense rights. The failure by the
Company to obtain any such licenses, if required, and the Company's
involvement in such litigation, could have a material adverse effect
on the Company's business, financial condition and results of
operations.
Oncor has the primary right and obligation to obtain, maintain and
enforce proprietary rights in relation to all its own technologies and
any improvements to such technologies assigned to Oncor by the
Company. The Company has the primary right and obligation to obtain,
maintain and enforce proprietary rights in relation to all its own
technologies.
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Item 1 Business: (Continued)
The Company also relies on certain technologies, trade secrets and
know-how that are not patentable or proprietary and are available to
the Company's competitors. Although the Company has taken steps to
protect its unpatented technologies, trade secrets and know-how, in
part through the use of confidentiality agreements with its employees,
consultants and certain of its contractors, there can be no assurance
that these agreements will not be breached, that the Company would
have adequate remedies for any breach or that the Company's trade
secrets will not otherwise become known or be independently developed
or discovered by competitors.
GOVERNMENT REGULATION
The Clinical Laboratory Improvement Act ("CLIA"), as amended in 1988,
provides for regulation of clinical laboratories by the United States
Department of Health and Human Services ("HHS"). These regulations
mandate that all clinical laboratories be certified to perform testing
on human specimens and provide specific conditions for certification.
These regulations also contain guidelines for the qualifications,
responsibilities, training, working conditions and oversight of
clinical laboratory employees. In addition, specific standards are
imposed for each type of test that is performed in a laboratory. The
Company's laboratory is certified under these regulations and the
Company believes that it is in substantial compliance with these
guidelines. CLIA and the regulations promulgated thereunder are
enforced through continuous quality inspections of test methods,
equipment, instrumentation, materials and supplies on a bi-annual and
"spot" basis. In addition, while the United States Food and Drug
Administration (the "FDA") does not currently regulate the genetic
tests underlying the Company's services if they are performed in the
Company's CLIA certified clinical laboratory, there can be no
assurance that the FDA will not seek to regulate such tests in the
future. If, in the future, the FDA should determine that the tests
underlying the Company's services should receive FDA approval prior to
their provision in the Company's laboratory, there can be no assurance
that such approval would be received on a timely basis or at all. Any
change in CLIA or related regulations, or in the interpretation
thereof, or in the FDA's position on regulating the tests underlying
the Company's services, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's laboratory is licensed and regulated by the State of
Maryland, in which it is located. The Company's laboratory is also
regulated by certain other states from which the Company may accept
specimens. The Company has received approval for a license from the
State of New York and intends to seek approval from other states as
required. No assurance can be given that the Company will be able to
obtain such approvals on a timely basis or at all. The loss of, or
the failure to obtain, any required state license could have a
material adverse effect on the Company's business, financial condition
and results of operations.
The Company is subject to extensive federal, state and local
regulation, including regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act and other
laws, rules and regulations governing health care, clinical laboratory
activities, waste disposal, handling of toxic, dangerous or
radioactive materials and other matters. Although the Company's
services are currently considered screening services under Medicare
and are therefore excluded from coverage under Medicare, in the
future, the Company's services may be subject to laws, rules and
regulations governing reimbursement and fraud and abuse, and
prohibiting the filing of false claims. These laws, rules and
regulations include "anti-kickback" and "Stark" laws, which contain
extremely broad proscriptions,
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Item 1 Business: (Continued)
the violation of which may result in exclusion from Medicare and
Medicaid and criminal and civil penalties. In addition, the Company
is subject to state laws, rules and regulations limiting certain
financial relationships between health care providers and physicians
and other referral sources. Although the Company believes that it is
in substantial compliance with all applicable laws, rules and
regulations, there can be no assurance that the Company will remain in
compliance with applicable laws, rules and regulations or that changes
in, or new interpretations of, existing laws, rules and regulations
would not have a material adverse effect on the Company's business,
financial condition and results of operations.
The availability of genetic predisposition testing has raised certain
ethical, legal and social issues regarding the appropriate utilization
and confidentiality of information provided by such testing. The
medical information obtained or determined about an individual from
the Company's services is of an extremely sensitive nature. In
providing its services, the Company is subject to certain statutory,
regulatory and common law requirements regarding the confidentiality
of such medical information. The Company maintains an internal
regulatory compliance review program to monitor compliance with
applicable confidentiality requirements, and believes that it is in
substantial compliance with such requirements. Failure to comply with
such confidentiality requirements could result in material liability
to the Company.
HUMAN RESOURCES
The Company had 59 employees at December 31, 1996, including 12
employees in sales and marketing, 25 in laboratory operations and
genetic services, 14 employees in administration and 8 employees in
research and development. None of the Company's employees is
represented by a labor union. The Company has experienced no work
stoppages and believes that its relations with its employees are good.
RISK FACTORS
Development Stage Company; History of Operating Losses; Uncertainty of
Future Profitability
The Company commenced operations in July 1993, has a limited operating
history and is a development stage company. Since its inception, the
Company has been engaged in research and development activities,
organizational efforts and sales and marketing activities, including
the development of its services, the hiring of its scientific and
marketing staff and its initial sales and marketing efforts. The
Company has incurred operating losses since its inception. As of
December 31, 1996, the Company's accumulated deficit was approximately
$18.8 million. The Company's losses have resulted principally from
selling, general and administrative expenses, laboratory operations
and research and development expenses. The Company has yet to
generate any significant revenues and the Company cannot anticipate
when, or if, it will be able to generate significant revenues in the
future. The Company expects its operating losses to continue as its
sales and marketing efforts, research and development programs and
laboratory operations continue and increase. The Company's ability to
achieve profitability depends on its ability to successfully market
and sell its services. There can be no assurance when, or if, the
Company will become profitable. See "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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Item 1 Business: (Continued)
Relationship with Oncor
The Company and Oncor recently agreed to certain changes to the
Restated Technology License Agreement, dated June 6, 1994. Pursuant
to the Oncor Agreement, Oncor is providing the Company with an
exclusive worldwide license to certain of Oncor's existing human
genome technologies that are useful for the purposes of development
and commercialization of certain of the Company's services, including:
(i) testing, detection and/or analysis of genes; (ii) genetic
assessment of risk of an individual to develop cancer; and (iii)
testing and analysis for the purposes of cancer management. In
addition, Oncor is providing the Company with a non-exclusive
worldwide license to certain of Oncor's existing human genome
technologies, and any future improvements thereto, to be used by the
Company in the provision of services direct to third parties other
than services that are provided pursuant to the exclusive license.
The Company does not have the right to sublicense any Oncor
technologies licensed to it by Oncor without Oncor's prior written
consent. Technologies sublicensed to the Company by Oncor include
technologies covered by the collaborative licensing and research
agreements between Oncor and each of The Johns Hopkins University and
the Massachusetts General Hospital. The term of the agreement shall
expire in June 2004 unless earlier terminated in accordance with its
terms.
The Company is reliant on the technologies licensed directly from
Oncor and from third parties through Oncor which form the basis for
some of the Company's services. The Company's rights under the Oncor
Agreement are subject to certain rights retained by Oncor, which
include Oncor's right to use the licensed technologies for internal,
non-commercial research and development purposes and for development
and commercialization of Oncor's products. Oncor intends to develop
its technologies into diagnostic products for sale to third parties.
These third parties may then use these products to provide services
that compete directly with the Company's services, which could have a
material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the Oncor
Agreement will be renewed at the end of its initial term or that it
will not be terminated earlier pursuant to its terms. There also can
be no assurance that conflicts of interest between Oncor and the
Company will not arise with respect to the Oncor Agreement, any
services that might be provided by Oncor to the Company in the future
or other aspects of the Company's relationship with Oncor.
The Company's rights to technologies licensed to the Company from
third parties through Oncor are subject to various provisions in the
license agreements between such third parties and Oncor. No assurance
can be given that Oncor will perform its obligations under such
agreements, that such agreements will not be terminated or that such
agreements can be renewed upon termination or expiration. If Oncor
breaches such agreements or otherwise fails to comply with such
agreements, or if such agreements are terminated or otherwise expire,
the development or commercialization of certain of the Company's
services may be delayed or terminated, or the Company would have to
expend substantial additional resources on development and
commercialization, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
Giving effect to the equity transaction with Incyte, Oncor owns
approximately 25.6% of the Company's outstanding common stock.
Accordingly, Oncor may be able to effectively control or influence
certain actions such as the election of directors and the
authorization of certain transactions that require stockholder
approval and be able to otherwise effectively control the Company's
policies without concurrence of the Company's other stockholders. In
addition, Stephen Turner, Chief
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Item 1 Business: (Continued)
Executive Officer and Chairman of the Board of Directors of Oncor, is
a director of the Company, and Timothy J. Triche, M.D., Ph.D., a
director of Oncor, is the Chief Executive Officer and Chairman of the
Board of Directors of the Company. See "Business -- Licensing and
Collaborative Relationships."
Limited Patient Populations For Certain Services
Certain of the Company's services currently address subtypes of
broader types of cancers. Patients with such subtypes typically
represent only a small percentage of those patients who are under
treatment or have a history of the broader types of cancer.
Accordingly, the market for such services may be limited and such
services may not generate significant revenues.
New and Uncertain Business; Uncertainty of Clinical Utility
The Company's genetic testing and information services represent a new
approach to cancer management for which there is little precedent and
for which the market is evolving. The Company's business is to
commercialize recent genetic discoveries and mutation detection
technologies for the early detection and management of cancer. The
Company's ability to successfully develop its business is unproven and
is dependent on its ability to establish its services as the standard
of care in cancer management and obtain third party reimbursement for
its services; expand the distribution of its services both
domestically and internationally; develop strategic alliances and
collaborations with academic medical centers, research institutions,
managed care organizations, clinical laboratories, pharmaceutical
companies, health care providers and corporate partners; identify,
license and develop emerging genetic discoveries and mutation
detection technologies; and continue to expand its portfolio of
services. The Company's ability to succeed is also dependent upon the
acceptance by potential customers and patients of the Company's
services as effective tools for cancer management. There can be no
assurance that the market for the Company's services will continue to
evolve or that the Company's business strategy will be successful.
The discoveries and technologies which form the basis for the
Company's services have not been widely adopted by the medical
community. Accordingly, the Company is pursuing clinical correlation
studies at academic medical centers and research institutions that are
designed to determine the clinical utility, reliability and accuracy
of the Company's services. There can be no assurance that these
studies will confirm the clinical utility, reliability and accuracy of
the Company's services. The failure of these studies to do so could
have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business - Sales and
Marketing."
Uncertain Availability of Health Care Reimbursement and Market
Acceptance of Services
The successful commercialization of genetic testing and information
services depends in part on the ability of its customers to obtain
adequate reimbursement for such services and related treatments from
governmental agencies, private health care insurers and other third
party payors. Government and private third party payors are
increasingly attempting to contain health care costs by limiting both
the extent of coverage and the reimbursement rate for new diagnostic
and therapeutic products and services. Medicare has determined that
the Company's services are screening services and therefore are
excluded from coverage under Medicare. The Company is seeking
reimbursement
23
<PAGE> 24
Item 1 Business: (Continued)
approval for its services from various third party payors. There can
be no assurance that third party reimbursement for the Company's
services will be available to its customers or that any such
reimbursement will be adequate. Disapproval of, or limitations in,
coverage by third party payors could materially and adversely affect
market acceptance of the Company's services which would have a
material adverse effect on the Company's business, financial condition
and results of operations.
Dependence on Collaborations and Licenses with Others
The Company's strategy for the research, development and
commercialization of certain of its services is to rely in part on
various collaborative and license arrangements with academic medical
centers, research institutions and commercial entities. Accordingly,
the Company is dependent in part upon such third parties performing
their obligations. The Company has entered into certain collaborative
and license arrangements, including arrangements with HCI, Affymetrix,
ZENECA Diagnostics, and Incyte, and is continually seeking to enter
into additional arrangements with other collaborators and licensors.
There can be no assurance that the Company will be able to enter into
acceptable collaborative and license arrangements in the future or
that the parties with which the Company has established or will
establish arrangements will perform their obligations under such
arrangements. There also can be no assurance that its current
arrangements or any future arrangements will lead to the development
of additional services with commercial potential, that the Company
will be able to obtain or license proprietary rights with respect to
any technology developed in connection with these arrangements and
that the Company will be able to ensure the confidentiality of any
proprietary rights and information developed in such arrangements or
prevent the public disclosure thereof. In general, the Company's
collaborative and license arrangements provide that they may be
terminated under certain circumstances. There can be no assurance
that such arrangements will not be terminated or that the Company will
be able to extend any of its collaborative and license arrangements
upon their expiration. The Company currently has certain licenses
from third parties, either directly or indirectly through the Oncor
Agreement, and in the future may require additional licenses from
these or other parties to develop and market commercially viable
services. There can be no assurance that such licenses will be
obtainable on commercially reasonable terms, if at all, or renewable,
that the patents underlying such licenses, if any, will be valid and
enforceable or that the nature of the technology underlying such
licenses will remain proprietary.
The Company's rights to technologies licensed to the Company from
third parties through the Oncor Agreement are subject to the license
agreements between such third parties and Oncor. No assurance can be
given that the third parties to these agreements will perform their
obligations under such agreements on a timely basis or at all. If
such third parties breach or terminate their agreements with Oncor or
otherwise fail to, or are unable to, comply with the provisions of
their agreements with Oncor for whatever reason, the Company would
have no direct recourse and would be dependent on Oncor to enforce
such agreements. The agreements between Oncor and the third parties
expire at various times. There can be no assurance that these
agreements will be renewed at the end of their initial terms or that
such agreements will not be terminated or cancelled prior to their
expiration. The Company has no rights under these third party
agreements and is reliant upon Oncor to negotiate renewals of such
agreements and resolve disputes under such agreements. If the third
parties to the agreements that the Company licenses from Oncor through
the Oncor Agreement
24
<PAGE> 25
Item 1 Business: (Continued)
breach such agreements or otherwise fail to comply with such
agreements, or such agreements are terminated or otherwise expire, the
development or commercialization of certain of the Company's services
may be delayed or terminated, or the Company would have to expend
substantial additional resources on development and commercialization,
which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business --
Licensing and Collaborative Relationships."
Competition
The Company is engaged in the biotechnology and medical services
industries which are characterized by extensive research and
development efforts, rapid technological progress and intense
competition. There are many public and private companies, including
well-known pharmaceutical companies, biotechnology companies and
academic institutions, engaged in developing medical services and the
technology underlying such services. Although there are relatively
few direct competitors of the Company, it is anticipated that the
number of direct competitors will increase significantly in the
future. Many of the Company's current and potential competitors have
substantially greater financial and technological resources, sales and
marketing capabilities and experience, and research and development
experience than the Company. Accordingly, the Company's competitors
may succeed in developing services and the underlying technology more
rapidly than the Company and in developing services that are more
accurate and useful and less costly than any of the Company's
services. The Company's competitors also may be more successful than
the Company in marketing and selling such services. In addition,
other technologies are, or in the future may become, the basis for
competitive products and services. Oncor may develop technologies
under the Oncor Agreement into products that Oncor will sell to third
parties. These third parties may then use these products to provide
services that compete directly with the Company's services, which
could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company relies on certain technologies that are not patentable or
proprietary and consequently may be available to the Company's
competitors. Competition may increase further as a result of the
potential advances in the technology underlying the services developed
by the Company. The Company also is aware that other companies have
developed or may be developing genetic testing and information
technologies, services and products that are and may be competitive
with the Company's services. There can be no assurance that the
Company's competitors will not succeed in developing technologies,
services and products that are more accurate and useful than any being
developed by the Company or that would render the Company's technology
and services obsolete or noncompetitive.
The Company requires all employees and consultants (including certain
scientific advisors) to enter into confidentiality agreements that
prohibit the disclosure of confidential information to anyone outside
the Company and require disclosure and assignment to the Company of
their ideas, developments, discoveries or inventions developed during
the course of their service to the Company. However, no assurance can
be given that competitors of the Company will not gain access to trade
secrets and other proprietary information developed by the Company and
disclosed to employees, consultants and/or scientific advisors.
25
<PAGE> 26
Item 1 Business: (Continued)
Given the early stage of the market for the Company's services, the
important competitive factors are availability, accuracy and utility.
The Company anticipates that other competitive factors, such as price,
availability of third-party reimbursement and response time, will
become important as the market matures.
Patents and Proprietary Rights
The Company relies on a combination of trade secret and copyright laws
and confidentiality agreements to protect its proprietary technology,
rights and know-how. The Company's success will depend in part on its
ability or the ability of its licensors or sublicensors to obtain
patents, defend patents, maintain trade secrets, defend copyrights and
operate without infringing upon the proprietary rights of others, both
in the United States and in foreign countries. The patent position of
companies relying upon biotechnology is highly uncertain in general
and involves complex legal and factual issues, and no consistent
policy has emerged regarding the breadth of claims allowed in
biotechnology patents. To date, none of the Company, its licensors or
its sublicensors has been granted any patents related to the
technology or genetic discoveries underlying the Company's current
services. Although the Company and certain of the Company's licensors
and sublicensors have patent applications pending relating to such
technologies and discoveries, there can be no assurance that patents
will be issued as a result of such patent applications or that, if
issued, such patents will be sufficiently broad to afford protection
against competitors with similar technologies or discoveries. There
can also be no assurance that patents, if any, issued to the Company,
or for which the Company has license or sublicense rights, will not be
challenged, invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company. The
commercial success of the Company also will depend upon avoiding the
infringement of patents issued to third parties, obtaining licenses to
third parties' technologies and genetic discoveries and maintaining
licenses upon which certain of the Company's services are, or might
be, based. In particular, third parties, including potential
competitors, have filed patent applications relating to certain genes
and genetic mutations, including the BRCA1, BRCA2 and p16 genes and
related mutations, underlying certain of the Company's services, and
may in the future file additional patent applications relating to
genes and genetic mutations. In the event that any such patents are
issued to such parties, such patents may preclude the Company, its
licensors and sublicensors from obtaining patent protection for their
technologies and discoveries, may hinder or prevent the Company from
providing related genetic testing services and could require the
Company to enter into licenses with such parties or cease such
activities. There can be no assurance that any required licenses
would be available on acceptable terms, or at all. Litigation, which
could result in substantial cost to the Company, may be necessary to
determine the scope and validity of others' proprietary rights or to
enforce the Company's patent, copyright, trade secret and license and
sublicense rights. The failure by the Company to obtain any such
licenses, if required, and the Company's involvement in such
litigation, could have a material adverse effect on the Company's
business, financial condition and results of operations.
Oncor has the primary right and obligation to obtain, maintain and
enforce proprietary rights in relation to its own technologies and any
improvements to such technologies assigned to Oncor by the Company.
The amount and timing of resources devoted to such activities are
beyond the Company's control. There can be no assurance that Oncor
will perform such obligations on a timely basis or at all, or that it
will expend sufficient resources on such activities. The Company has
the
26
<PAGE> 27
Item 1 Business: (Continued)
primary right and obligation to obtain, maintain and enforce
proprietary rights in relation all its own technologies.
The Company relies on certain technologies, trade secrets and know-how
that are not patentable or proprietary and are available to the
Company's competitors. Although the Company has taken steps to
protect its unpatented technologies, trade secrets and know-how, in
part through the use of confidentiality agreements with its employees,
consultants and certain of its contractors, there can be no assurance
that these agreements will not be breached, that the Company would
have adequate remedies for any breach or that the Company's trade
secrets will not otherwise become known or be independently developed
or discovered by competitors. See "Business -- Patents and
Proprietary Rights."
Government Regulation
CLIA, as amended in 1988, provides for regulation of clinical
laboratories by HHS. These regulations mandate that all clinical
laboratories be certified to perform testing on human specimens and
provide specific conditions for certification. These regulations also
contain guidelines for the qualifications, responsibilities, training,
working conditions and oversight of clinical laboratory employees. In
addition, specific standards are imposed for each type of test that is
performed in a laboratory. The Company's laboratory is certified
under these regulations and the Company believes that it is in
substantial compliance with these guidelines. CLIA and the
regulations promulgated thereunder are enforced through continuous
quality inspections of test methods, equipment, instrumentation,
materials and supplies on a bi-annual and "spot" basis. While the FDA
does not currently regulate the genetic tests underlying the Company's
services if they are performed in the Company's CLIA certified
clinical laboratory, there can be no assurance that the FDA will not
seek to regulate such tests in the future. If, in the future, the FDA
should determine that the tests underlying the Company's services
should receive FDA approval prior to their provision in the Company's
laboratory, there can be no assurance that such approval would be
received on a timely basis or at all. Any change in CLIA or related
regulations, or in the interpretation thereof, or in the FDA's
position on regulating the tests underlying the Company's services,
could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's
laboratory is licensed and regulated by the State of Maryland, in
which it is located. The Company's laboratory is also regulated by
certain other states from which the Company may accept specimens. The
Company has received approval for a license from the State of New York
and intends to seek approval from other states as required. No
assurance can be given that the Company will be able to obtain such
approvals on a timely basis or at all. The loss of, or the failure to
obtain, any required state license could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company is subject to extensive federal, state and local
regulation, including regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act and other
laws, rules and regulations governing health care, clinical laboratory
activities, waste disposal, handling of toxic, dangerous or
radioactive materials and other matters. Although the Company's
services are currently considered screening services under Medicare
and are therefore excluded from coverage under Medicare, in the
future, the Company's services may be subject to laws, rules and
regulations governing
27
<PAGE> 28
Item 1 Business: (Continued)
reimbursement and fraud and abuses and prohibiting the filing of false
claims. These laws, rules and regulations include "anti-kickback" and
"Stark" laws, which contain extremely broad proscriptions, the
violation of which may result in exclusion from Medicare and Medicaid
and criminal and civil penalties. In addition, the Company is subject
to state laws, rules and regulations limiting certain financial
relationships between health care service providers and physicians and
other referral sources. Although the Company believes that it is in
substantial compliance with all applicable laws, rules and
regulations, there can be no assurance that the Company will remain in
compliance with applicable laws, rules and regulations or that changes
in, or new interpretations of, existing laws, rules and regulations
would not have a material adverse effect on the Company's business,
financial condition and results of operations.
Risk of Discrimination Against Customers; Potential Adverse Impact on
Insurability; Confidentiality
The availability of genetic predisposition testing has raised certain
ethical, legal and social issues regarding the appropriate utilization
and confidentiality of information provided by such testing. The
medical information obtained or determined about an individual from
the Company's services is of an extremely sensitive nature. In
providing its services, the Company is subject to certain statutory,
regulatory and common law requirements regarding the confidentiality
of such medical information. The Company maintains an internal
regulatory compliance review program to monitor compliance with
applicable confidentiality requirements, and believes that it is in
substantial compliance with such requirements. Failure to comply with
such confidentiality requirements could result in material liability
to the Company. It is possible that discrimination by insurance
companies could occur through the raising of premiums by insurers to
prohibitive levels, the cancellation of insurance or the unwillingness
to provide coverage to patients shown to have a genetic predisposition
to a particular disease. The Company could experience a delay in
market acceptance or a reduction in the size of its potential
serviceable market if insurance discrimination were to become a
significant factor, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
Similarly, governmental authorities could, for social or other
purposes, limit the use of or prohibit genetic predisposition testing.
If efforts by the Company and others to mitigate potential
discrimination are not successful or if the use of genetic testing is
limited, the Company could experience a delay or reduction in market
acceptance of its services, which would have a material adverse effect
on the Company's business, financial condition and results of
operations. See "Business -- Government Regulation."
Additional Financing Requirements; Access to Capital
The Company has incurred negative cash flows from operations since its
inception. The Company has expended, and will continue to expend,
substantial funds to continue its sales and marketing efforts,
research and development programs and laboratory operations. At
February 28, 1997, the Company had cash, cash equivalents and
short-term investments of approximately $8.6 million. The Company
plans to fund its operations and capital expenditures from its current
cash and future revenues as well as from other sources. The Company's
cash requirements, however, may vary materially from those now planned
because of variations in either the amount or timing of anticipated
revenues or anticipated expenses, relations with strategic partners,
changes in the focus and direction of the Company's research and
development programs, the extent of its sales and marketing efforts
and laboratory operations, the size and timing of any acquisitions,
competitive and
28
<PAGE> 29
Item 1 Business: (Continued)
technological advances and other factors. To the extent that funds
generated from the Company's operations, together with its existing
capital resources, are insufficient to meet the Company's operating
requirements, it is likely that the Company will seek to obtain
additional funds through equity or debt financing and collaborative or
other arrangements with corporate partners and others. The terms and
prices of any such financings may be significantly more favorable to
investors than to the Company's existing stockholders. No assurance
can be given that any required additional financing will be available
when needed or on terms acceptable to the Company. If adequate
additional funds are not available, the Company may be required to
delay, scale back or eliminate certain of its research and development
programs, its sales and marketing efforts or certain other aspects of
its business or to license to third parties the rights to
commercialize services or technologies that the Company would
otherwise undertake itself. The unavailability of adequate funds in
the future would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Limited Sales and Marketing Capacity
The Company has limited experience in selling and marketing genetic
testing and information services and will have to further develop its
sales force and/or rely on collaborators, licensees or others to
provide for the sales and marketing of its services. There can be no
assurance that the Company will be able to establish adequate sales
and marketing capacity or make arrangements with collaborators,
licensees or others to perform such activities on acceptable terms or
at all. See "Business -- Sales and Marketing."
Risk of Liability; Adequacy of Insurance Coverage
The marketing and sale of genetic testing and information services
could expose the Company to the risk of certain types of litigation,
including medical malpractice or negligence claims or contract
disputes. The Company currently maintains $10.0 million in medical
malpractice insurance coverage. There can be no assurance, however,
that this coverage will be adequate to protect the Company against
future claims or that insurance will be available to the Company in
the future on acceptable terms, if at all. A medical malpractice or
other claim for which the Company was not adequately insured could
have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Key Management and Qualified Personnel
The Company is highly dependent upon the efforts of its senior
management, scientific advisory board and consultants. The loss of
the services of one or more members of senior management could have a
material adverse effect on the Company's business, financial condition
and results of operations. In addition, the loss of the services of
certain members of the Company's scientific advisory board and certain
consultants could materially and adversely affect the Company to the
extent that the Company is pursuing research and development in areas
of such scientific advisors' or consultants' expertise. Although the
Company is the beneficiary of $1 million key-man life insurance
policies on each of its Chief Executive Officer, Timothy J. Triche,
M.D., Ph.D., and its President and Chief Operating Officer, Douglas
Dolginow, M.D., the Company does not believe
29
<PAGE> 30
Item 1 Business: (Continued)
such amounts would be adequate to compensate for the loss of either
executive. Due to the specialized scientific nature of the Company's
business, the Company is also highly dependent upon its ability to
attract and retain qualified scientific, technical and key management
personnel. There is intense competition for qualified personnel in
the areas of the Company's activities and there can be no assurance
that the Company will be able to continue to attract and retain the
qualified personnel necessary for the development of its existing
business and its expansion into areas and activities requiring
additional expertise. The loss of, or failure to recruit, scientific,
technical, sales and marketing and managerial personnel could have a
material adverse effect on the Company's business, financial condition
and results of operations.
The Company's scientific advisors and consultants may be employed by
or have consulting agreements with entities other than the Company,
some of which may compete with the Company. To the extent that members
of the Company's scientific advisory board or consultants have
consulting arrangements with or become employed by any competitor of
the Company, the Company could be materially and adversely affected.
Any inventions or processes independently discovered by the scientific
advisors or the consultants will not, unless otherwise agreed, become
the property of the Company and will remain the property of such
persons or their full-time employers. In addition, the institutions
with which the scientific advisors and consultants are affiliated may
make available the research services of their scientific and other
skilled personnel, including the scientific advisors and consultants,
to competitors of the Company pursuant to sponsored research
agreements. Under such sponsored research agreements, such
institutions may be obligated to assign or license to a competitor of
the Company patents and other proprietary information that may result
from research sponsored by an entity other than the Company, including
research performed by a scientific advisor or consultant for a
competitor of the Company. See "Business -- Human Resources."
Certain Anti-Takeover Provisions
The Company's Certificate of Incorporation grants the Board of
Directors the authority to issue up to 2,000,000 shares of preferred
stock of the Company, par value $0.01 per share (the "Preferred
Stock"), in the future in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend
rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series,
without further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be materially and
adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. Although the Company has no
present plans to issue any shares of Preferred Stock, it may do so in
the future. The issuance of Preferred Stock could have the effect of
discouraging a third party from acquiring a majority of the
outstanding Common Stock of the Company and preventing stockholders
from realizing a premium on their shares. In addition, the Company is
subject to Section 203 of the Delaware General Corporation Law (the
"DGCL"), which prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of
three years unless certain conditions are met.
30
<PAGE> 31
Item 2 Properties
The Company's principal administrative, operational and marketing
facilities consist of approximately 14,500 square feet in
Gaithersburg, Maryland under a lease agreement expiring in November
1998. The Company has leased an additional 1,100 square feet of space
to house administrative and operations facilities in Omaha, Nebraska
under a lease agreement which expires in November 1998. The Company
believes that its facilities are adequate for its current needs and
that suitable additional space will be available as needed.
Item 3 Legal Proceedings
By a complaint filed on June 28, 1996 against the Company, its
directors and certain officers and employees in the United States
District Court for the District of Maryland, Greenbelt Division,
entitled Barbara A. Hird v. OncorMed, Inc., et. al., Civil Action No.
AMD96-2016, a former employee of the Company alleged various claims
arising out of her employment and the termination of her employment
with the Company. During December 1996, the matter was resolved.
Item 4 Submission of Matters to a Vote of Security Holders
None.
31
<PAGE> 32
PART II
Item 5 Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock is listed on the AMEX under the symbol
"ONM." Prior to May 15, 1995, the Company's Common Stock was traded
on the Nasdaq SmallCap Market ("Nasdaq"). The following table sets
forth, for the calendar periods indicated, the range of high and low
sale prices for the Common Stock as reported by the AMEX or Nasdaq.
<TABLE>
<CAPTION>
High Low
---- ---
Stock Price
-----------
<S> <C> <C>
CALENDAR YEAR 1995:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1/4 8
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 6 7/8
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7/8 7 1/8
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1/8 5 1/2
CALENDAR YEAR 1996:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1/8 6 1/8
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1/2 5 7/8
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2 3/4
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3 1/4
CALENDAR YEAR 1997:
First Quarter (through February 28, 1997) . . . . . . . . . . . . . . . . . . . 7 15/16 4 3/4
</TABLE>
As of March 3, 1997, the approximate number of holders of the Common
Stock was 930.
Dividend Policy
The Company has never declared or paid cash dividends on its capital
stock. The Company currently anticipates that it will retain and
reinvest all available funds for use in the operation of its business,
and therefore does not anticipate paying any cash dividends in the
foreseeable future.
32
<PAGE> 33
Item 6 Selected Financial Data
Set forth below is selected financial data with respect to the Company
for the years ended December 31, 1996, 1995 and 1994 and the period
from inception (July 12, 1993) through December 31, 1993 and as of
December 31, 1996, 1995, 1994 and 1993 which has been derived from the
audited financial statements of the Company. The financial
statements of the Company as of December 31, 1996, and 1995 and for
the years ended December 31, 1996, 1995, 1994 and the period from
inception (July 12, 1993) through December 31, 1996, together with the
notes thereto and the related report of Arthur Andersen LLP,
independent public accountants, are included elsewhere in this report.
The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" set forth below and the audited
financial statements of the Company included elsewhere in this report.
<TABLE>
<CAPTION>
For the period
from Inception
For year ended For year ended For year ended (July 12, 1993)
December 31, December 31, December 31, through
Statement of Operations Data: 1996 1995 1994 December 31, 1993
-------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Net Revenues $ 627,390 $ 311,387 $ 34,303 $ --
Net Loss 7,455,973 6,510,547 3,981,373 838,352
Net Loss Per Common Share (1.10) (1.32) (0.90) (0.20)
<CAPTION>
As of December 31, As of December 31, As of December 31, As of December 31,
Balance Sheet Data: 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Cash, Cash Equivalents and
Short-term Investments $7,498,680 $ 718,844 $7,262,010 $3,848,621
Total Assets 9,113,975 2,451,874 8,372,183 4,046,366
Total Debt 715,751 715,751 715,751 664,069
Total Stockholders' Equity 6,949,879 393,807 6,840,026 3,332,087
</TABLE>
33
<PAGE> 34
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations:
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. The
discussion should be read in conjunction with the audited financial
statements of the Company and notes thereto. This report contains
certain statements of a forward-looking nature relating to future
events or the future financial performance of the Company. Investors
are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such
statements, investors should carefully consider the various factors
identified in this Report which could cause actual results to differ
materially from those indicated by such forward-looking statements,
including the matters set forth in "Business - Risk Factors."
OVERVIEW
The Company commenced operations in July 1993, has a limited operating
history and is a development stage company. Since its inception, the
Company has been engaged in research and development activities,
organizational efforts and sales and marketing activities, including
the development of its services, the hiring of its scientific and
marketing staff and its initial marketing efforts. The Company has
incurred operating losses since its inception. As of December 31,
1996, the Company's accumulated deficit was approximately $18.8
million. The Company's losses have resulted principally from selling,
general and administrative expenses, laboratory operations and
research and development expenses. Revenues are principally derived
from providing genetic testing and information services and, to a
lesser extent, software licensing associated with its risk assessment
service. Revenues from the Company's services, other than its risk
assessment service, are recognized as they are provided. Revenues
from its risk assessment service are recognized over the license
period. The Company has yet to generate any significant revenues and
the Company cannot anticipate when, or if, it will be able to generate
significant revenues in the future. The Company expects its operating
losses to continue as its sales and marketing efforts, research and
development programs and laboratory operations continue and increase.
The Company's ability to achieve profitability depends on its ability
to successfully market and sell its services. There can be no
assurance when, or if, the Company will become profitable.
34
<PAGE> 35
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues for the year ended December 31, 1996 were approximately
$627,000, compared with approximately $311,000 for the year ended
December 31, 1995. The increase was primarily attributable to a 2
fold increase in predisposition testing services, and a 1.7 fold
increase in fees received for a Company-sponsored educational
conference. There was also an increase in revenues associated with
grants and risk assessment services. The Company received $6,000 in
revenues for certain experiments performed for Oncor for the year
ended December 31, 1996, compared with $42,000 for the same period in
1995. The Company's net accounts receivable at December 31, 1996 was
approximately $129,000, compared to $86,000 at year ended December 31,
1995. At December 31, 1996, approximately $8,000 of accounts
receivable was related to billings made prior to the actual provision
of the related services and recognition of related revenue. As of
December 31, 1996, all amounts billed pursuant to such arrangements
have been included in deferred revenue. Revenues received from Oncor
were not necessarily indicative of the revenues from Oncor which may
be recognized in future periods. The Company is in the development
stage and cannot anticipate when, or if, it will generate any
significant revenues.
Cost of sales-direct was approximately $283,000 for the year ended
December 31, 1996, compared to approximately $168,000 for the year
ended December 31, 1995. Cost of sales-direct includes costs for
supplies, direct labor, shipping, royalties (other than those under
the license with Oncor) for testing services, computer hardware costs
associated with the Company's risk assessment service and costs
associated with its educational conference. The increase in cost of
sales-direct reflected the corresponding increase in the Company's
revenues.
Laboratory operations expenses were approximately $2,760,000 for the
year ended December 31, 1996, compared with approximately $2,259,000
for the year ended December 31, 1995. The increase was primarily
attributable to the hiring of additional personnel in the laboratory
for operations and to the initiation of certain of the Company's
genetic predisposition and prognostic testing services. Related party
expenses incurred during these periods consisted of technology license
fees paid to Oncor and the rental of laboratory equipment from Codon
Pharmaceuticals, Inc., a 41% owned affiliate of Oncor. These related
party expenses are expected to decrease as a percentage of total
laboratory operations expenses in the future. As sales of the
Company's services increase, a greater portion of the expenses
associated with laboratory operations will be included in cost of
sales-direct.
Selling, general and administrative expenses were approximately
$4,791,000 for the year ended December 31, 1996, compared with
approximately $4,119,000 for the year ended December 31, 1995.
General and administrative expenses were approximately $3,563,000 for
the year ended December 31, 1996, compared with approximately
$2,884,000 for the year ended December 31, 1995. The increase in
general and administrative expenses was due to increased professional
fees, specifically in legal fees associated with patent, trademark and
personnel issues, increased depreciation and amortization costs, and
the addition of personnel and related costs. Selling
35
<PAGE> 36
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
expenses were approximately $1,228,000 for the year ended December 31,
1996, compared with approximately $1,235,000 for the year ended
December 31, 1995. Selling expenses remained constant between the
periods. For the year ended December 31, 1996, related party selling,
general and administrative expenses decreased to approximately $4,000
as compared to approximately $247,000 for the corresponding period in
1995. As the Company completed its initial public offering in late
1994, various functions and services previously performed by Oncor
were assumed by the Company during late 1994 and early 1995. It is
anticipated that related party selling, general and administrative
expenses will continue to be nominal in the future. The Company
anticipates that its selling, general and administrative expenses will
increase as it continues to market and sell its portfolio of services.
Research and development expenses were approximately $709,000 for the
year ended December 31, 1996, compared with approximately $452,000 for
the year ended December 31, 1995. The increase in research and
development expenses was primarily attributable to the hiring of
additional personnel to work on new research and development projects.
Interest income was approximately $514,000 for the year ended December
31, 1996, compared with approximately $228,000 for the year ended
December 31, 1995. The increase in interest income was due to the
increased amounts available for investment from the Company's
follow-on offering completed in the first quarter of 1996. Interest
expense was approximately $54,000 for the year ended December 31,
1996, compared with $53,000 for the year ended December 31, 1995.
For the reasons set forth above, net operating losses were
approximately $7,456,000 for the year ended December 31, 1996,
compared with approximately $6,511,000 for the year ended December 31,
1995.
December 31, 1995 Compared to Year Ended December 31, 1994
Total revenues for the year ended December 31, 1995 were approximately
$311,000, compared with $34,000 for the year ended December 31, 1994.
The increase was primarily attributable to an increase in revenues
from its risk assessment service, the commercial launch of certain
predisposition testing services, $42,000 in revenues for certain
experiments performed for Oncor and fees received for a
Company-sponsored educational conference. The Company's net accounts
receivable balance at December 31, 1995 was approximately $86,000,
compared to $2,000 at year ended December 31, 1994. At December 31,
1995, approximately $27,000 of accounts receivable was related to
billings made prior to the actual provision of the related services.
As of December 31, 1995, no revenues had been recognized on such
billings. As of December 31, 1995, all amounts billed pursuant to
such arrangements had been included in deferred revenue.
Cost of sales-direct was approximately $168,000 for the year ended
December 31, 1995, compared to $11,000 for the year ended December 31,
1994. Cost of sales-direct includes costs for supplies, direct labor,
shipping, royalties (other than those under the Oncor License) for
testing services, computer hardware costs associated with the
Company's risk assessment service and costs associated with its
educational conference. The increase in cost of sales-direct
reflected the corresponding increase in the Company's revenues.
36
<PAGE> 37
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
Laboratory operations expenses were approximately $2,259,000 for the
year ended December 31, 1995, compared with $1,126,000 for the year
ended December 31, 1994. The increase was primarily attributable to
the hiring of additional personnel to prepare the laboratory for
operations and to the initiation of certain of the Company's genetic
predisposition and prognostic testing services. Related party
expenses incurred during these periods consisted of technology license
fees paid to Oncor.
Selling, general and administrative expenses were approximately
$4,119,000 for the year ended December 31, 1995, compared with
$2,471,000 for the year ended December 31, 1994. General and
administrative expenses were approximately $2,884,000 for the year
ended December 31, 1995, compared with $1,965,000 for the year ended
December 31, 1994. The increase in general and administrative
expenses was due to the addition of personnel and related costs, and
increased professional fees, depreciation expense and occupancy costs.
Selling expenses were approximately $1,235,000 for the year ended
December 31, 1995, compared with $506,000 for the year ended December
31, 1994. The increase in selling expenses was primarily attributable
to the formation of the Company's sales and marketing organization,
including hiring a direct sales force, producing marketing literature,
attending industry trade shows and conducting market research. For
the year ended December 31, 1995, related party selling, general and
administrative expenses decreased to $247,000 as compared to $378,000
for the corresponding period in 1994. As the Company completed its
initial public offering in 1994, various functions and services
previously performed by Oncor were assumed by the Company.
Research and development expenses were approximately $452,000 for the
year ended December 31, 1995, compared with $524,000 for the year
ended December 31, 1994. The decrease in research and development
expenses was due to the Company's reduced obligations to fund various
clinical correlation studies.
Interest income was approximately $228,000 for the year ended December
31, 1995, compared with $145,000 for the year ended December 31, 1994.
The increase in interest income was due to the increased amounts
available for investment from the Company's initial public offering
completed in the fourth quarter of 1994. Interest expense was
approximately $53,000 for the year ended December 31, 1995, compared
with $28,000 for the year ended December 31, 1994. Interest expense
increased as a result of interest payments due on a convertible note
(the "Convertible Note") issued to Oncor in June 1994.
For the reasons set forth above, net operating losses were
approximately $6,511,000 for the year ended December 31, 1995,
compared with $3,981,000 for the year ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash expenditures have exceeded revenues since the Company's
inception. The Company's operations have been funded through a $1.0
million capital infusion by Oncor, a $3.0 million private placement of
equity securities, approximately $716,000 in advances from Oncor,
approximately $7.4 million of net proceeds from the Company's initial
public offering, and approximately $13.9 million of net proceeds from
the Company's follow-on offering completed in February 1996. Also, in
February 1997, the Company completed a $3.0 million private placement
of equity securities. See "Business - Licensing and Collaborative
Relationships - Incyte Pharmaceuticals, Inc." As of
37
<PAGE> 38
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
February 28, 1997, cash, cash equivalents and investments totaled
approximately $8.6 million. The Company expects its operating losses
to continue as its sales and marketing efforts, research and
development programs and laboratory operations continue and increase.
The Company also intends to make additional laboratory equipment
purchases and other capital expenditures in the future, although
currently it has no specific material commitments to do so.
Cash used in operating activities was $7.0 million for the year ended
December 31, 1996 compared with $5.6 million for the year ended
December 31, 1995. The increase was attributable to expanded
laboratory operations to perform certain testing services, additional
general and administrative costs including personnel, occupancy and
professional expenses, and increased research and development
activities.
The Company and Oncor recently agreed to certain changes to the
Restated Technology License Agreement, dated June 6, 1994. Pursuant
to the Oncor Agreement, Oncor is providing the Company with an
exclusive worldwide license to certain of Oncor's existing human
genome technologies that are useful for the purposes of development
and commercialization of certain of the Company's services, including:
(i) testing, detection and/or analysis of cancer-predisposing genes:
(ii) genetic assessment of risk of an individual to develop cancer;
and (iii) testing and analysis for the purposes of cancer management.
In addition, Oncor is providing the Company with a non-exclusive
worldwide license to certain of Oncor's existing human genome
technologies, and any future improvements thereto, to be used by the
Company in the provision of services directly to third parties other
than services that are provided pursuant to the exclusive license.
The Company does not have the right to sublicense any Oncor
technologies licensed to it by Oncor without Oncor's prior written
consent. Technologies sublicensed to the Company by Oncor include
technologies covered by the collaborative licensing and research
agreements between Oncor and each of The Johns Hopkins University and
the Massachusetts General Hospital. The term of the agreement shall
expire in June 2004 unless earlier terminated in accordance with its
terms.
Under the terms of the agreement, the Company is obligated to make
payments on a quarterly basis to Oncor equal to a range of four
percent (4%) to two percent (2%) of the Company's annual net sales.
During the first year of the agreement, the Company is obligated to
pay Oncor a minimum amount equal to $50,000 per quarter. During the
second year of the agreement, the Company is obligated to pay Oncor a
minimum amount equal to $25,000 per quarter. Thereafter, there shall
be no minimum payment required to be made by the Company to Oncor in
connection with the agreement.
In addition, subject to certain third-party contractual limitations,
prior to the license or disposition (whether by assignment, transfer
or license) to a third party by the Company or Oncor of their
respective technologies, the non-offering party shall have a thirty
(30) day right of first offer with respect to such technologies. If
the non-offering party accepts the offer, the Company and Oncor shall
negotiate in good faith the terms and conditions of any such license
or acquisition agreement.
Oncor has the primary right and obligation to obtain, maintain and
enforce proprietary rights in relation to all its own technologies and
any improvements to such technologies assigned to Oncor by the
Company. The Company has the primary right and obligation to obtain,
maintain and enforce proprietary rights in relation to all its own
technologies.
38
<PAGE> 39
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
In June 1994, the Company and Oncor converted certain amounts payable
to Oncor under the Oncor Agreement and a management services agreement
and certain amounts repayable to Oncor which Oncor advanced to the
Company aggregating $715,751 into the Convertible Note. The
Convertible Note has a principal amount of $715,751, bears interest at
an annual rate of 7% and is convertible into Common Stock at the
option of the holder at a conversion price of $20 per share. Under the
terms of the Convertible Note, the Company is obligated to pay
interest on a quarterly basis and to pay the entire principal amount
at maturity in June 1999. The quarterly interest payments are
approximately $12,700. During the fourth quarter of 1994, Oncor
assigned the Convertible Note to its wholly-owned subsidiary, Oncor
Finance, Inc.
Under its license agreement with HCI and Creighton University, the
Company is obligated to pay an annual sponsorship fee of $250,000, in
quarterly installments, which is reduced by a percentage of the
amounts paid under a related services agreement.
Cash used in investing activities was $476,000 for the year ended
December 31, 1996 compared to $676,000 for the year ended December 31,
1995. The decrease was due to a reduction in the amount of
laboratory and computer equipment purchased during 1996 compared to
1995.
Cash provided by financing activities was $14.3 million for the year
ended December 31, 1996 compared with cash used in financing
activities of $297,000 for the year ended December 31, 1995. The
change was attributable to the follow-on offering completed in
February 1996.
Minimum payments due under lease commitments and various research,
license and consulting agreements, excluding the license with Oncor,
will be approximately $700,000 during 1997.
Pursuant to the Incyte Agreement, the Company and Incyte have formed a
broad-based collaboration in clinical genomics designed to create an
integrated genomics and sequence-based mutation analysis capability
for the two companies.
The Company has agreed to perform certain specified clinical genomic
services relating to the creation of a tissue repository and the
performance of a gene functional studies program (the "Collaborative
Services"). Incyte has agreed to purchase certain Collaborative
Services during each year of the Initial Term. In addition, under the
terms of the Incyte Agreement, the Company has obtained a
non-exclusive, royalty-bearing license (without the right to
sublicense) to use Incyte's high-throughput sequencing technology for
use in the Company's clinical diagnostic services for a period ending
five (5) years following termination of the Incyte Agreement, subject
to certain limitations. In consideration for the grant of the
license, the Company has issued to Incyte (i) Four Hundred One
Thousand Thirty Three (401,033) shares of the Company's Common Stock
(the "Definite Technology Shares"), and (ii) a warrant to purchase up
to an aggregate of ten percent (10%) of the Company's Common Stock
issued and outstanding on the date of such warrant's exercise (the
"Warrant Shares"). The warrant is exercisable until February 25, 2000
at an exercise price per share equal to the greater of one hundred-ten
percent (110%) of the fair market value per share of Common Stock on
the trading day prior to the date of exercise or (i) Eight Dollars
($8.00) per share (if the warrant is exercised on or prior to February
25, 1998), (ii) Nine Dollars ($9.00) per share (if the warrant is
exercised after February 25, 1998, but on or prior to February 25,
1999), or (iii) Thirteen Dollars and Fifty Cents ($13.50) per share
(if the warrant is exercised after February
39
<PAGE> 40
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
25, 1999, but on or prior to February 25, 2000). Notwithstanding the
foregoing sentence, Incyte has the option to fix the exercise price
per share during each of aforementioned periods; provided, however,
that in no event shall the exercise price per share during each of
the aforementioned periods be less than Eight Dollars ($8.00), Nine
Dollars ($9.00) or Thirteen Dollars and Fifty Cents ($13.50) per
share, respectively.
Furthermore, pursuant to a Securities Purchase Agreement between the
Company and Incyte, Incyte purchased Three Hundred Seventy Two
Thousand Five Hundred Fifty Five (372,555) shares of Common Stock from
the Company for Three Million Dollars ($3,000,000) (the "Cash Purchase
Shares") or the equivalent of Eight Dollars and Five Cents ($8.05) per
share. In addition, under the terms of the Securities Purchase
Agreement the Company has agreed to issue to Incyte, under certain
circumstances, up to an aggregate of One Hundred Thirty Thousand Seven
Hundred Twenty Six (130,726) shares of the Company's Common Stock (the
"Additional Shares"). Pursuant to the terms of an Investor's Rights
Agreement between the Company and Incyte, Incyte was granted certain
registration and other stockholder rights with respect to the Definite
Technology Shares, Warrant Shares, the Cash Purchase Shares and the
Additional Shares.
The Company has incurred negative cash flows from operations since its
inception. The Company has expended, and will continue to expend,
substantial funds to continue its sales and marketing efforts,
research and development programs and laboratory operations. At
February 28, 1997, the Company had cash, cash equivalents and
investments of approximately $8.6 million. The Company plans to fund
its operations and capital expenditures from its current cash and
future revenues as well as from other sources. The Company's cash
requirements, however, may vary materially from those now planned
because of variations in either the amount or timing of anticipated
revenues or anticipated expenses, relations with strategic partners,
changes in the focus and direction of the Company's research and
development programs, the extent of its sales and marketing efforts
and laboratory operations, the size and timing of any acquisitions,
competitive and technological advances and other factors. To the
extent that funds generated from the Company's operations, together
with its existing capital resources, are insufficient to meet the
Company's operating requirements, it is likely that the Company will
seek to obtain additional funds through equity or debt financing and
collaborative or other arrangements with corporate partners and
others. The terms and prices of any such financings may be
significantly more favorable to investors than to the Company's
existing stockholders. No assurance can be given that any required
additional financing will be available when needed or on terms
acceptable to the Company. If adequate additional funds are not
available, the Company may be required to delay, scale back or
eliminate certain of its research and development programs, its sales
and marketing efforts or certain other aspects of its business or to
license to third parties the rights to commercialize services or
technologies that the Company would otherwise undertake itself. The
unavailability of adequate funds in the future would have a material
adverse effect on the Company's business, financial condition and
results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
Statement 128 requires dual presentation of basic and diluted earnings
per share on the face of the income statement for all periods
presented. Basic earnings per share excludes dilution and is computed
by dividing income available to common stockholders by the
weighted-average number
40
<PAGE> 41
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations: (Continued)
of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted earnings per share
is computed similarly to fully diluted earnings per share pursuant to
Accounting Principles Bulletin No. 15. Statement 128 is effective for
fiscal years ending after December 15, 1997, and when adopted, it will
require restatement of prior years' earnings per share.
Since the effect of outstanding options is antidilutive, they have
been excluded from the Company's computation of net loss per share.
Accordingly, management does not believe that Statement 128 will have
an impact upon historical net loss per share as reported.
Item 8 Financial Statements and Supplementary Data
The information required by the item is incorporated herein by
reference to the financial statements listed in Item 14 below.
Item 9 Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
41
<PAGE> 42
PART III
Item 10 Directors and Executive Officers of the Registrant
The Company incorporates herein by reference the information
concerning directors and executive officers in its Notice of Annual
Stockholders' Meeting and Proxy Statement to be filed within 120
days after the end of the Company's fiscal year (the "1997 Proxy
Statement").
Item 11 Executive Compensation
The Company incorporates herein by reference the information
concerning executive compensation contained in the 1997 Proxy
Statement.
Item 12 Security Ownership of Certain Beneficial Owners and Management
The Company incorporates herein by reference the information
concerning security ownership of certain beneficial owners and
management contained in the 1997 Proxy Statement.
Item 13 Certain Relationship and Related Transactions
The Company incorporates herein by reference the information
concerning certain relationships and related transactions contained
in the 1997 Proxy Statement.
42
<PAGE> 43
PART IV
<TABLE>
<CAPTION>
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
Page Number
-----------
<S> <C>
(a) Index to Financial Statements
Index F-1
Report of Independent Public Accountants F-2
Balance Sheets as of December 31, 1996 and 1995 F-3
Statements of Operations for the years ended December 31, 1996, F-4
1995 and 1994; and for the period from Inception (July 12, 1993)
through December 31, 1996
Statements of Stockholders' Equity for the period from Inception F-5
(July 12, 1993) through December 31, 1993 and for the years
ended December 31, 1994, 1995 and 1996
Statements of Cash Flows for the years ended December 31, 1996, F-6
1995 and 1994; and for the period from Inception (July 12, 1993)
through December 31, 1996
Notes to Financial Statements F-7
(b) Financial Statement Schedules
Report of Independent Public Accountants S-1
Schedule II - Valuation and Qualifying Accounts S-2
</TABLE>
(c) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the period
from October 1, 1996 through December 31, 1996. In a report filed
on Form 8-K dated March 6, 1997, the Company announced a
collaboration with Incyte Pharmaceuticals, Inc.
(d) Exhibits
3.1 Certificate of Incorporation of the Company.
3.2* Bylaws of the Company, as amended.
4.1** Specimen certificate for shares of the Company's Common
Stock.
43
<PAGE> 44
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K:
(Continued)
4.2 See Exhibit 3.1(a) and 3.2 for provisions of the
Certificate of Incorporation and Bylaws of the Company
defining rights of holders of Common Stock of the
Company.
4.3** Form of Underwriter's Warrant Certificate.
10.1** Sublease, dated June 1994, between the Company and Oncor.
10.2** Lease, dated December 1, 1993, between Scoular
Properties, Inc., and the Company, as amended.
10.3** Asset Purchase Agreement and Plan of Reorganization,
dated September 1, 1993, among the Company, Genetic
Systems Management, Inc., Henry T. Lynch, Ralph
Rosenberg, Steven Evans, and Jerome Block.
10.4** Form of Subscription Agreement, with a schedule of
substantially identical documents.
10.5** Form of Registration Rights Agreement, with a schedule of
substantially identical documents.
10.6** License Agreement, dated September 1, 1993, among
Creighton University, The Hereditary Cancer Institute and
the Company.
10.7** Services Agreement, dated September 1, 1993, between the
Company and The Hereditary Cancer Institute.
10.8** Stock Purchase Agreement, dated September 15, 1993,
between the Company and Morgan Guarantee Trust Company of
New York and Socrates G. Pappajohn, as Trustees.
10.9** Technology License Agreement, dated as of July 12, 1993,
between Oncor and the Company.
10.10** Restated Technology License Agreement, dated as of June
6, 1994, between Oncor and the Company.
10.11** Consulting Agreement, dated March 1, 1994, with David
Sidransky.
10.12* Restated 1993 Stock Option Plan.
10.13** Note, dated June 6, 1994, issued by the Company to Oncor.
10.14** Clinical Study Agreement, dated May 31, 1994, between
the Company and The University of Texas, MD Anderson
Cancer Center.
44
<PAGE> 45
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K:
(Continued)
10.15** Research and License Agreement, dated February 1, 1994,
between Oncor and The General Hospital Corporation.
10.16** License Agreement, dated March 9, 1994, between The Johns
Hopkins University and the Company.
10.17** License Agreement, dated October 27, 1993, between Oncor
and The Johns Hopkins University.
10.18** License Agreement, dated November 1, 1993, among Oncor,
Institut Suisse De Recherches Experimentales Sur Le
Cancer and The General Hospital Corporation.
10.19** Collaborative Research Agreement, dated October 20, 1992,
between Oncor and The Johns Hopkins University.
10.20** Agreement between Roche Molecular Systems, Inc. and the
Company.
10.21** Licensing Agreement and related correspondence between
Genetic Systems Management and Hoag Cancer Center.
10.22** Licensing Agreement and related correspondence between
Genetic Systems Management and Harris Methodist
Northwest.
10.23** Clinical Study Agreement, dated August 1, 1994, between
the Company and Sloan-Kettering Institute of Cancer
Research.
10.24** License Agreement, dated June 1, 1994, among the Company,
the Dana-Farber Cancer Institute, Inc., The State of
Oregon, the University of Vermont and Yale University.
10.25* Stock Option Agreement, dated February 6, 1995, between
the Company and Leslie Alexandre.
10.26* Services Agreement, dated February 16, 1995, between the
Company and Preferred Oncology Networks of America, Inc.
10.27* Lease, dated December 2, 1994, between Saul Holdings
Limited Partnership and Oncor.
10.28* Assignment of Lease, dated March 15, 1995, between Oncor,
the Company and Saul Holdings Limited Partnership.
45
<PAGE> 46
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K:
(Continued)
10.29*** Sponsored Research and License Agreement among the
Company, the Hereditary Cancer Institute and Creighton
University.
10.30*** Services Agreement among the Company, the Hereditary
Cancer Institute and Creighton University.
10.31*** Services Agreement between the Company and Oncor.
10.32**** Correspondence, dated September 26, 1995, from the
Company to Memorial Sloan-Kettering Cancer Center.
10.33**** Correspondence, dated September 7, 1995, from the
Registrant to UT MD Anderson Cancer Center.
11.1 Statement re: Computation of Per Share Earnings.
23 Consent of Arthur Andersen LLP.
- -------------------------
*Incorporated by reference to the Exhibits filed with the Company's Form
10-K for the year ended December 31, 1994.
**Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1, File No.33-80758.
***Incorporated by reference to the Exhibits filed with the Company's Form
10-Q for the period ended June 30, 1995.
****Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1, File No.33-98826.
46
<PAGE> 47
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.
ONCORMED, INC.
By: /s / DR. TIMOTHY J. TRICHE
--------------------------------------
Dr. Timothy J. Triche,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
Date: March 27, 1997 /s/ DR. TIMOTHY J. TRICHE
-----------------------------------------------------------
Dr. Timothy J. Triche, Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: March 27, 1997 /s/ DR. DOUGLAS DOLGINOW
-----------------------------------------------------------
Dr. Douglas Dolginow, President and Chief Operating Officer
Date: March 27, 1997 /s/ L. ROBERT JOHNSTON, JR.
-----------------------------------------------------------
L. Robert Johnston, Jr., Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
Date: March 27, 1997 /s/ JOHN PAPPAJOHN
-----------------------------------------------------------
John Pappajohn, Director
Date: March 27, 1997 /s/ JOHN W. COLLOTON
-----------------------------------------------------------
John W. Colloton, Director
Date: March 27, 1997 /s/ STEPHEN TURNER
-----------------------------------------------------------
Stephen Turner, Director
Date: March 27, 1997 /s/ DR. WAYNE PATTERSON
-----------------------------------------------------------
Dr. Wayne Patterson, Director
</TABLE>
47
<PAGE> 48
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Report of Independent Public Accountants F-2
Balance Sheets as of December 31, 1996 and 1995 F-3
Statements of Operations for the years ended December 31, 1996, 1995 and 1994; F-4
and for the period from Inception (July 12, 1993) through December 31, 1996
Statements of Stockholders' Equity for the period from Inception (July 12, 1993) F-5
through December 31, 1993, and for the years ended December 31, 1994, 1995 and 1996
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994; F-6
and for the period from Inception (July 12, 1993) through December 31, 1996
Notes to Financial Statements F-7
</TABLE>
F-1
<PAGE> 49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To OncorMed, Inc.:
We have audited the accompanying balance sheets of OncorMed, Inc. (a Delaware
corporation in the development stage) as of December 31, 1996 and 1995, and the
related statements of operations, stockholders' equity and cash flows for the
years ended December 31, 1996, 1995 and 1994 and for the period from inception
(July 12, 1993) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of OncorMed, Inc. as of December
31, 1996 and 1995, and the results of its operations and its cash flows for the
years ended December 31, 1996, 1995 and 1994 and for the period from inception
to December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 26, 1997
F-2
<PAGE> 50
ONCORMED, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
As of As of
December 31, December 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,031,809 $ 718,844
Short term investments 1,466,871 ---
Accounts receivable, net of allowance for doubtful accounts
of $32,000 and $7,000 at 12/31/96 and 12/31/95,
respectively 129,366 86,154
Other current assets 306,078 126,124
------------- ------------
Total current assets 7,934,124 931,122
------------- ------------
Non-current assets:
Property and equipment, net 1,179,851 1,220,937
Deferred offering costs --- 299,815
------------- ------------
Total non-current assets 1,179,851 1,520,752
------------- ------------
TOTAL ASSETS $ 9,113,975 $ 2,451,874
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 680,575 $ 123,443
Accrued expenses and other liabilities 593,037 889,052
Payable to Oncor, Inc. 124,730 137,909
Deferred revenue 46,420 181,402
------------- ------------
Total current liabilities 1,444,762 1,331,806
------------- ------------
Non-current liabilities:
Note payable to Oncor Finance, Inc. 715,751 715,751
Deferred revenue 3,583 10,510
------------- ------------
Total non-current liabilities 719,334 726,261
------------- ------------
TOTAL LIABILITIES 2,164,096 2,058,067
------------- ------------
Commitments And Contingencies (Notes 1 and 6)
Stockholders' Equity:
Preferred stock, $.01 par value, 2,000,000 shares
authorized, none outstanding --- ---
Common stock, $.01 par value, 40,000,000 shares
authorized, 6,991,108, and 4,950,050 shares issued
and outstanding as of 12/31/96 and 12/31/95, respectively 69,911 49,501
Additional paid-in capital 25,741,842 11,782,817
Deferred compensation (75,629) (108,239)
Deficit accumulated during the development stage (18,786,245) (11,330,272)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 6,949,879 393,807
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,113,975 $ 2,451,874
============= ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 51
ONCORMED, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Inception
(July 12, 1993)
For the Year Ended December 31, Through
------------------------------------------ December 31,
1996 1995 1994 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 627,390 $ 311,387 $ 34,303 $ 973,080
OPERATING EXPENSES:
Cost of sales - direct 283,082 167,568 11,154 461,804
Laboratory operations 2,759,656 2,259,136 1,126,240 6,362,032
Selling, general and administrative 4,791,029 4,119,221 2,471,220 11,729,972
Research and development 709,340 451,596 523,860 1,960,008
----------- ----------- ------------ ------------
Total expenses 8,543,107 6,997,521 4,132,474 20,513,816
----------- ----------- ------------ ------------
OPERATING LOSS (7,915,717) (6,686,134) (4,098,171) (19,540,736)
Interest income 514,205 228,470 145,177 890,214
Interest expense (54,461) (52,883) (28,379) (135,723)
----------- ----------- ------------ ------------
NET LOSS $(7,455,973) $(6,510,547) $ (3,981,373) $(18,786,245)
=========== =========== ============ ============
NET LOSS PER SHARE $ (1.10) $ (1.32) $ (0.90) $ (3.59)
=========== =========== ============ ============
SHARES USED IN COMPUTING
NET LOSS PER SHARE 6,805,083 4,947,991 4,404,622 5,232,052
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 52
ONCORMED, INC.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A
Convertible
Preferred Stock Common Stock Stock
--------------------- ------------------------ Subscription
Shares Amount Shares Amount Receivable
------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C>
INCEPTION, July 12, 1993 ----- $----- ----- $----- $-----
Sale of Common Stock at $0.50
per share, July & September,
1993 ----- ----- 2,250,000 22,500 (125,000)
Issuance of Common Stock in
exchange for software and technology,
recorded at fair value of $0.50 per share,
September 1993 ----- ----- 110,000 1,100 -----
Exercise of stock options for
cash at $0.50 per share,
November 1993 ----- ----- 50,000 500 -----
Cash received in payment of
stock subscriptions,
November and December 1993 ----- ----- ----- ----- 100,000
Sale of Series A Convertible
Preferred Stock to investors
for cash at $3.00 per share,
December 1993 (net of stock
issuance costs of $9,561) 1,000,000 2,990,439 ----- ----- ----
Net loss ----- ----- ----- ----- -----
---------- ---------- --------- ------- --------
BALANCE, December 31, 1993 1,000,000 $2,990,439 2,410,000 $24,100 $(25,000)
Cash received in payment of stock
subscription, February 1994 ----- ----- ----- ----- 25,000
Sale of Common Stock from initial
public offering on October 5, 1994,
at $6.00 per share, net of expenses ----- ----- 1,335,000 13,350 ------
Issuance of Common Stock
Warrants in connection with initial
public offering on October 5, 1994
exercisable at $6.00 per share ----- ----- ----- ----- -----
Conversion of Series A Convertible
Preferred Stock to Common Stock
due to initial public offering (1,000,000) (2,990,439) 1,000,000 10,000 -----
Sale of Common Stock from initial
public offering -- Over-allotment,
on November 4, 1994 at $6.00
per share, net of expenses ----- ----- 200,250 2,003 -----
Compensation element of stock
option grants ----- ----- ----- ----- -----
Amortization of deferred
compensation ----- ----- ----- ----- -----
Net loss ----- ----- ----- ----- -----
---------- ---------- --------- ------- --------
BALANCE, December 31, 1994 ----- $ ----- 4,945,250 $49,453 $ -----
Exercise of stock options for cash
at $0.50 per share ----- ----- 4,800 48 -----
Amortization of deferred compensation ----- ----- ----- ----- -----
Net Loss ----- ----- ----- ----- -----
---------- ---------- --------- ------- --------
BALANCE, December 31, 1995 ----- $ ----- 4,950,050 $49,501 $ -----
Sale of Common Stock from public
offering on February 2, 1996, net
of expenses ----- ----- 2,000,000 20,000 -----
Exercise of stock options for cash
at a range of $0.50-$6.00 per share ----- ----- 41,058 410 -----
Compensation element of non-employee
stock option grants ----- ----- ----- ----- -----
Amortization of non-employee stock
option grants ----- ----- ----- ----- -----
Amortization of deferred compensation ----- ----- ----- ----- -----
Net Loss ----- ----- ----- ----- -----
---------- ---------- --------- ------- --------
BALANCE, December 31, 1996 ----- $ ----- 6,991,108 $69,911 $ -----
========== ========== ========= ======= ========
<CAPTION>
Deficit
Accumulated
Common Additional During the
Stock Paid-in Deferred Development
Warrants Capital Compensation Stage Total
-------- ---------- ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
INCEPTION, July 12, 1993 ----- $----- $----- $----- $-----
Sale of Common Stock at $0.50
per share, July & September,
1993 ----- 1,102,500 ----- ----- 1,000,000
Issuance of Common Stock in
exchange for software and technology,
recorded at fair value of $0.50 per share,
September 1993 ----- 53,900 ----- ----- 55,000
Exercise of stock options for
cash at $0.50 per share,
November 1993 ----- 24,500 ----- ----- 25,000
Cash received in payment of
stock subscriptions,
November and December 1993 ----- ----- ----- ----- 100,000
Sale of Series A Convertible
Preferred Stock to investors
for cash at $3.00 per share,
December 1993 (net of stock
issuance costs of $9,561) ----- ----- ----- ----- 2,990,439
Net loss ----- ----- ----- (838,352) (838,352)
--------- ---------- --------- --------- ----------
BALANCE, December 31, 1993 ----- $1,180,900 $ ----- $(838,352) $3,332,087
Cash received in payment of stock
subscription, February 1994 ----- ----- ----- ----- 25,000
Sale of Common Stock from initial
public offering on October 5, 1994,
at $6.00 per share, net of expenses ----- 6,317,903 ----- ----- 6,331,253
Issuance of Common Stock
Warrants in connection with initial
public offering on October 5, 1994
exercisable at $6.00 per share 133,500 100 ----- ----- 100
Conversion of Series A Convertible
Preferred Stock to Common Stock
due to initial public offering ----- 2,980,439 ----- ----- -----
Sale of Common Stock from initial
public offering -- Over-allotment,
on November 4, 1994 at $6.00
per share, net of expenses ----- 1,049,309 ----- ----- 1,051,312
Compensation element of stock
option grants ----- 256,500 (256,500) ----- -----
Amortization of deferred
compensation ----- (4,686) 86,333 ----- 81,647
Net loss ----- ----- ----- (3,981,373) (3,981,373)
-------- ----------- ---------- ------------ ------------
BALANCE, December 31, 1994 133,500 $11,780,465 $(170,167) $(4,819,725) $6,840,026
Exercise of stock options for cash
at $0.50 per share ----- 2,352 ----- ----- 2,400
Amortization of deferred compensation ----- ----- 61,928 ----- 61,928
Net Loss ----- ----- ----- (6,510,547) (6,510,547)
-------- ----------- ---------- ------------ -------------
BALANCE, December 31, 1995 133,500 $11,782,817 $(108,239) $(11,330,272) $393,807
Sale of Common Stock from public
offering on February 2, 1996, net
of expenses ----- 13,892,825 ----- ----- 13,912,825
Exercise of stock options for cash
at a range of $0.50-$6.00 per share ----- 38,369 ----- ----- 38,779
Compensation element of non-employee
stock option grants ----- 27,831 (27,831) ----- -----
Amortization of non-employee stock
option grants ----- ----- 6,404 ----- 6,404
Amortization of deferred compensation ----- ----- 54,037 ----- 54,037
Net Loss ----- ----- ----- (7,455,973) (7,455,973)
-------- ----------- ---------- ------------ ------------
BALANCE, December 31, 1996 133,500 $25,741,842 $(75,629) $(18,786,245) $ 6,949,879
======== =========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 53
ONCORMED, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Inception
For the Year Ended December 31, (July 12, 1993)
------------------------------------------- Through
1996 1995 1994 December 31, 1996
----------- ------------ ----------- -----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,455,973) $(6,510,547) $(3,981,373) $(18,786,245)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization 517,435 365,080 151,701 1,043,447
Amortization of deferred compensation
and non-employee stock option grants 60,441 61,928 81,647 204,016
Changes in operating assets and liabilities:
Accounts receivable (43,212) (83,979) (2,175) (129,366)
Other assets (179,954) 71,853 (196,955) (306,078)
Accounts payable 557,132 52,336 60,751 680,575
Accrued expenses and other liabilities (296,015) 322,449 526,749 593,037
Deferred revenue (141,909) 158,193 33,719 50,003
Payable to Oncor, Inc. (13,179) (7,068) 144,977 124,730
----------- ------------ ----------- ------------
Net cash used in operating activities (6,995,234) (5,569,755) (3,180,959) (16,525,881)
----------- ------------ ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (476,350) (675,996) (864,999) (2,168,299)
----------- ------------ ----------- -------------
Net cash used in investing activities (476,350) (675,996) (864,999) (2,168,299)
----------- ------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 13,912,825 -- 7,407,665 22,420,490
Net proceeds from sale of preferred stock -- -- -- 2,990,439
Net proceeds from exercise of stock options 38,780 2,400 -- 66,180
Net proceeds from Note payable to Oncor Finance, Inc. -- -- 51,682 715,751
Deferred offering costs 299,815 (299,815) -- --
----------- ------------ ----------- ------------
Net cash provided by (used in) financing activities 14,251,420 (297,415) 7,459,347 26,192,860
----------- ------------ ----------- ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS 6,779,836 (6,543,166) 3,413,389 7,498,680
CASH AND CASH EQUIVALENTS, beginning of period 718,844 7,262,010 3,848,621 --
----------- ------------ ---------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 7,498,680 $ 718,844 $ 7,262,010 $ 7,498,680
=========== ============ =========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in exchange for software
and technology $ -- $ -- $ -- $ 55,000
=========== ============ =========== ============
Issuance of common stock in exchange for stock
subscription receivable $ -- $ -- $ -- $ 25,000
=========== ============ =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 54,461 $ 52,883 $ 28,379 $ 135,723
=========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 54
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1996, 1995 and 1994,
and for the period from Inception (July 12, 1993) through December 31, 1996
1. BUSINESS DESCRIPTION:
OncorMed, Inc. (the "Company"), was incorporated on July 12, 1993, in the
State of Delaware as a subsidiary of Oncor, Inc. ("Oncor"). As of
December 31, 1996, Oncor's ownership of the Company's outstanding common
stock was approximately 29 percent. Giving effect to the equity
transaction with Incyte Pharmaceuticals, Inc. in February 1997, Oncor's
ownership of the Company's outstanding common stock was reduced to
approximately 25.6%. The Company was formed to develop and provide
gene-based cancer diagnostic testing and information services for
physicians, hospitals, clinical laboratories and pharmaceutical companies.
The Company is in the development stage and has a limited operating
history, has incurred operating losses since its inception and expects
losses to continue and increase. Since its inception, the Company has been
engaged in research and development programs and organizational efforts,
including the development of its initial services, recruiting its
scientific and management personnel, establishing marketing capabilities,
engaging its Scientific Advisory Board and raising capital. The Company's
services are currently offered principally in the United States. There can
be no assurance that the Company will be successful in the development or
commercialization of its services or that any required additional financing
will be available when needed or on terms acceptable to the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of these financial statements required the use of certain
estimates by management in determining the entity's assets, liabilities,
revenue and expenses. Actual results may vary from these estimates.
Cash Equivalents and Short Term Investments
All highly liquid investments with a maturity of three months or less at
the date of purchase are considered to be cash equivalents; investments
with maturities between three and twelve months are considered to be short
term investments. The Company invests its excess funds in commercial paper
with high quality banks, money market instruments in U.S. treasury and
investment grade securities, and overnight reverse repurchase agreements
collateralized by U.S. treasury and investment grade securities. Short
term investments are stated at cost, which approximates market.
Impairment of Long-Lived Assets
The Company complies with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of. The Company
reviews its long-lived assets, principally property, plant and equipment,
for impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be fully recoverable. To
determine recoverability of its
F-7
<PAGE> 55
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
long-lived assets, the Company evaluates the probability that future
undiscounted net cash flows will be less than the carrying amount of the
assets. Impairment is measured at fair value.
Other Current Assets
Included in other current assets as of December 31, 1996 is approximately
$188,000 for prepaid insurance.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
expense is calculated using the straight-line method over estimated useful
lives of three to five years. Leasehold improvements are amortized over
the shorter of the lease terms or useful lives.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
As of December 31,
------------------
1996 1995
---------- ----------
<S> <C> <C>
Laboratory equipment $ 756,495 $ 627,838
Computer equipment 409,560 319,938
Computer software 335,160 165,340
Furniture/office equipment 428,716 366,033
Leasehold improvements 293,368 267,800
---------- ----------
2,223,299 1,746,949
Less-accumulated depreciation and amortization (1,043,448) (526,012)
---------- ----------
Property and equipment, net $1,179,851 $1,220,937
========== ==========
</TABLE>
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
As of December 31,
------------------
1996 1995
--------- --------
<S> <C> <C>
Payroll and related expenses $ 318,408 $342,154
Insurance 130,406 ----
Professional/legal fees 58,868 223,624
Marketing/operations costs 48,385 46,190
Deferred offering costs ---- 250,000
Other 36,969 27,084
--------- --------
Total accrued expenses and other liabilities $ 593,036 $889,052
========= ========
</TABLE>
F-8
<PAGE> 56
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
No.109"). The Company has incurred losses for both financial and income
tax reporting purposes since inception. Accordingly, no provision or
benefit for income taxes has been recorded in the accompanying financial
statements.
The components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
As of December 31,
------------------
1996 1995
------------- --------------
<S> <C> <C>
Net operating loss and credit carryforwards $ 7,330,000 $ 4,250,000
Total other 181,000 250,000
----------- -----------
Total deferred tax assets 7,511,000 4,500,000
Less - total deferred tax liabilities (112,000) (42,000)
----------- -----------
Net deferred tax asset 7,339,000 4,458,000
Less - valuation reserve (7,339,000) (4,458,000)
----------- -----------
Deferred tax asset, net of valuation reserve $ ----- $ -----
=========== ===========
</TABLE>
SFAS No. 109 requires that the benefit of deferred tax assets be recorded
to the extent that management assesses the realization of such deferred tax
assets to be "more likely than not." As of December 31, 1996 and 1995, a
valuation reserve was recorded against the Company's entire deferred tax
asset due to the uncertainty of realization.
At December 31, 1996, the Company had net operating loss ("NOL")
carry-forwards of approximately $18.8 million available to offset future
taxable income. The Company also has research and development tax credits
of approximately $75,000 available to reduce future Federal income tax. A
portion of the NOL carry-forwards and research and development tax credit
carry-forwards are subject to a limitation due to the change in ownership
which occurred on the date of the Company's initial public offering. Due
to the ownership change which occurred, the amount of the net operating
loss carry-forward and research and development tax credit carry-forward
which can be utilized on an annual basis will be subject to limitations;
however, the Company believes the entire net operating loss carry-forward
will be available to be utilized during the carry-forward period. The tax
NOL and research and development tax credits may be used through 2011, but
begin to expire in 2008. Despite the NOL and research and development
credit carry-forwards, the Company may have an income tax liability in
future years due to the application of the alternative minimum tax rules.
The utilization of these tax NOL and research and development credit
carry-forwards is subject to statutory limitation regarding subsequent
changes in ownership.
F-9
<PAGE> 57
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Revenue Recognition
Revenues are derived from providing genetic testing and information
services and, in certain circumstances, software licensing associated with
its risk assessment service. Revenues are also derived from
Company-sponsored educational conferences. Revenues from the Company's
services are recognized as those services are provided. Revenues from its
risk assessment service are recognized over the license period.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Net Loss Per Share
Net loss per share is based on the weighted-average number of shares
outstanding during the periods presented. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, all shares
(including common shares issuable upon conversion of convertible preferred
stock) and options to purchase shares were treated as if they were
outstanding for all periods prior to the initial public offering. In the
periods after the initial public offering, the effects of options,
warrants, and the outstanding convertible note have not been considered,
since the effect would be antidilutive.
Reclassification
Certain 1994 and 1995 balances have been reclassified to conform with 1996
financial statement presentation.
3. RELATED-PARTY TRANSACTIONS:
License Agreement
Previously, under the license agreement with Oncor (the "Oncor Agreement"),
the Company was obligated to pay royalties on a semi-annual basis to Oncor
for Oncor technologies existing as of the date of the Oncor Agreement,
equal to the greater of (i) six percent of the Company's net sales revenues
resulting from services based on Oncor's technologies, subject to certain
adjustments, or (ii) $100,000. Fees payable to Oncor under the Oncor
Agreement of approximately $200,000, $200,000, $200,000 and $692,000 are
included in laboratory operations expense for the years ended December 31,
1996, 1995 and 1994, and the period from inception (July 12, 1993) to
December 31, 1996, respectively. The Company and Oncor recently agreed to
certain changes to the Oncor Agreement, dated June 6, 1994. Pursuant to
the agreement, Oncor is providing the Company with an exclusive worldwide
license to certain of Oncor's existing human genome technologies that are
useful for the purposes of development
F-10
<PAGE> 58
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. RELATED-PARTY TRANSACTIONS: (Continued)
and commercialization of certain of the Company's services, including: (i)
testing, detection and/or analysis of cancer-predisposing genes; (ii)
genetic assessment of risk of an individual to develop cancer; and (iii)
testing and analysis for the purposes of cancer management. In addition,
Oncor is providing the Company with a non-exclusive worldwide license to
certain of Oncor's existing human genome technologies, and any future
improvements thereto, to be used by the Company in the provision of
services direct to third parties other than those to whom services are
provided pursuant to the exclusive license. The Company does not have the
right to sublicense any Oncor technologies licensed to it by Oncor without
Oncor's prior written consent. Technologies sublicensed to the Company by
Oncor include technologies covered by the collaborative licensing and
research agreements between Oncor and each of The Johns Hopkins University
and the Massachusetts General Hospital. The term of the agreement shall
expire in June 2004 unless earlier terminated in accordance with its terms.
Under the terms of the agreement, the Company is obligated to make payments
on a quarterly basis to Oncor equal to a range of four percent (4%) to two
percent (2%) of the Company's annual net sales. During the first year of
the agreement, the Company is obligated to pay Oncor a minimum amount equal
to $50,000 per quarter. During the second year of the agreement, the
Company is obligated to pay Oncor a minimum amount equal to $25,000 per
quarter. Thereafter, there shall be no minimum payment required to be made
by the Company to Oncor in connection with the agreement.
In addition, subject to certain third-party contractual limitations, prior
to the license or disposition (whether by assignment, transfer or license)
to a third party by the Company or Oncor of their respective technologies,
the non-offering party shall have a thirty (30) day right of first offer
with respect to such technologies. If the non-offering party accepts the
offer, the Company and Oncor shall negotiate in good faith the terms and
conditions of any such license or acquisition agreement.
Oncor has the primary right and obligation to obtain, maintain and enforce
proprietary rights in relation to all its own technologies and any
improvements to such technologies assigned to Oncor by the Company. The
Company has the primary right and obligation to obtain, maintain and
enforce proprietary rights in relation to all its own technologies.
Services Agreements with Oncor, Inc. and Affiliate
In July, 1993, the Company and Oncor entered into a management services
agreement whereby Oncor furnished the Company administrative and
bookkeeping services and office space ("Management Services Agreement").
The Management Services Agreement was terminated on June 1, 1994.
During the second quarter of 1995, the Company finalized a services
agreement with Oncor and Codon Pharmaceuticals, Inc. ("Codon", a 41.6
percent owned affiliate of Oncor), whereby the Company agreed to pay for
laboratory supplies and equipment provided by Oncor and Codon ("Services
Agreement"). The Services Agreement also provides that the Company will
perform certain experiments for Oncor and Codon at specified rates.
F-11
<PAGE> 59
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. RELATED-PARTY TRANSACTIONS: (Continued)
Related party revenues and expenses are as follows:
<TABLE>
<CAPTION>
Period from
Inception
(July 12, 1993)
For the Year Ended December 31, Through
------------------------------------------ December 31,
1996 1995 1994 1996
-------- -------- -------- ---------------
<S> <C> <C> <C> <C>
Sales to related party $ 5,700 $ 42,180 $ --- $ 47,880
Operating Expenses to related party:
Laboratory operations 272,610 200,000 200,000 764,610
Selling, general and administrative 4,394 247,000 378,000 977,896
Research and development 71,784 --- --- 170,282
</TABLE>
All of the related party revenues for the year ended December 31, 1996 were
for testing services performed for Oncor. Of the related party expenses
for the year ended December 31, 1996, $72,000 in laboratory operations was
for equipment rental from Codon. All other related party expenses were for
services received from Oncor. As of December 31, 1996, the total amount
owed to Oncor and Codon by the Company under the above agreements and for
other services excluding the Oncor License was approximately $19,000 and
$6,000, respectively.
Promissory Note with Oncor, Inc. and Affiliate
In June 1994, the Company converted $715,751 owed to Oncor for license fees
previously incurred and for prior services rendered into a Convertible
Subordinated Promissory Note (the "Convertible Note"), which principal is
due in June 1999. The Convertible Note bears interest at seven percent and
is convertible into common stock at the holder's option at a conversion
price of $20 per share of common stock. During the fourth quarter of 1994,
Oncor assigned the Convertible Note to its wholly-owned subsidiary Oncor
Finance, Inc. Interest expense recorded by the Company relating to the
Convertible Note was $50,938 for the year ended December 31, 1996. The
fair value of the Convertible Note is not materially different from the
carrying value.
4. DEFERRED REVENUES:
Deferred revenues totaling approximately $50,000 and $181,000 as of
December 31, 1996 and 1995, respectively consisted of prepaid fees related
to various risk assessment service agreements as well as laboratory
testing.
F-12
<PAGE> 60
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. STOCKHOLDERS' EQUITY:
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of preferred
stock. In December 1993, the Company completed a private placement of
1,000,000 shares of Series A Convertible Preferred Stock for $3,000,000.
Concurrent with the initial public offering, each share of Series A
Convertible Preferred Stock was converted into common stock on a one for
one basis.
Common Stock
On October 25, 1995, the Board approved and on November 27, 1995, the
stockholders approved an increase in authorized common stock from
10,000,000 shares to 40,000,000 shares.
On February 2, 1996, the Company completed the sale of 2,000,000 shares of
common stock in a public offering ("Offering") resulting in gross proceeds
to the Company of approximately $15.5 million. Net proceeds to the Company
for the Offering, after transaction costs, were approximately $13.9
million. As a result of the Offering, Oncor's ownership of the Company's
outstanding common stock was reduced from approximately 40 percent to
approximately 29 percent.
On February 25, 1997, the Company completed the sale of 372,555 shares of
common stock resulting in gross proceeds to the Company of approximately
$3.0 million. Also, in consideration for licensed technology, the Company
issued 401,033 shares of common stock and a warrant for an additional 10%
of common stock. See Footnote 9-Subsequent Event.
Warrants
Concurrent with the initial public offering, the Company issued warrants
to the underwriter to purchase an aggregate of 133,500 shares of common
stock at $6.90 per share. The warrants are exercisable from September 27,
1996 to September 26, 1999. See Footnote 9-Subsequent Event for additional
warrants.
Stock Purchase Plan
On April 19, 1996, the Board approved and on June 12, 1996, the
stockholders approved the adoption of the Company's Employee Stock Purchase
Plan to provide all eligible employees, who have completed ninety days of
service, an opportunity to purchase shares of its common stock through
payroll deductions. Each purchase period has a duration of six (6) months.
Purchase periods run from the first business day in August to the last
business day in January and from the first business day in February to the
last business day in July. The purchase price is the lower of 85% of the
fair market value of the stock on the first or last day of the purchase
period. The aggregate number of shares purchased by an employee may not
exceed 750 shares per purchase period (subject to periodic
F-13
<PAGE> 61
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. STOCKHOLDERS' EQUITY: (Continued)
adjustments and limitations imposed by the Internal Revenue Code). A total
of 200,000 shares are available for purchase under the plan. There were no
shares issued under the plan during fiscal 1996. On January 31, 1997,
approximately 8,000 shares of common stock were issued under the plan.
Stock Option Plan
The Board of Directors of the Company approved a restated stock option
plan, under which 1,500,000 shares of the Company's common stock were
originally reserved for issuance. On October 25, 1995, the Board approved
and on November 27, 1995, the stockholders approved the increase of shares
authorized for issuance from 1,500,000 shares to 2,250,000 shares. The
Company's options generally vest over three to five years and terminate in
ten years after the date of grant. The Company adopted the disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation,
effective for the Company's December 31, 1996 financial statements. The
Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plan. Accordingly, compensation cost has been
recognized for its stock plans based on the intrinsic value of the stock
option at date of grant (i.e. the difference between the exercise price and
the fair market value of the Company's common stock). Had compensation
expense been recorded for the Company's stock-based compensation plan based
on the fair market value of the Company's Common Stock at the grant dates
for stock option awards under the plan consistent with the method of SFAS
No. 123, the Company's net loss and earnings per share would have been
increased to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Net loss, as reported $(6,510,547) $(7,455,973)
Net loss, pro forma $(6,548,304) $(7,604,319)
Earnings per share, as reported $ (1.32) $ (1.10)
Earnings per share, pro forma $ (1.32) $ (1.12)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1995 and 1996: no dividend yield, expected volatility of 30%,
risk-free interest rate of 6.04% and 6.12%, respectively, turnover of 3.6%
and 30.7%, respectively, and expected life of five years. Because the SFAS
No. 123 method of accounting has not been applied to options granted prior
to January 1, 1995, per the rules, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
F-14
<PAGE> 62
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. STOCKHOLDERS' EQUITY: (Continued)
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Number of Wtd Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Options outstanding at December 31, 1993 405,000 $ .50
Granted 909,500 $2.87
Exercised ---- ---
Canceled (14,500) $1.83
--------- ---------
Options outstanding at December 31, 1994 1,300,000 $2.14
Granted 158,500 $8.11
Exercised (4,800) $ .50
Canceled (14,200) $5.72
--------- ---------
Options outstanding at December 31, 1995 1,439,500 $2.77
Granted 283,000 $5.29
Exercised (41,058) $ .94
Canceled (139,200) $6.75
--------- ---------
Options outstanding at December 31, 1996 1,542,242 $2.92
========= =========
</TABLE>
The number of options exercisable as of December 31, 1996, 1995 and 1994
was 1,001,193, 641,306, and 263,493, respectively, with weighted average
exercise prices of $2.36, $2.07 and $1.41, respectively.
The options exercisable at December 31, 1996 have exercise prices between
$0.50 and $10.125 with a weighted average exercise price of $2.46 and a
weighted average remaining contractual life of 8 years. The remaining
outstanding options at December 31, 1996 have exercise prices between $0.50
and $10.125 with a weighted average exercise price of $3.91 and a weighted
average remaining contractual life of 8.8 years.
Included in the grants described above for the year ended December 31,
1996, are options to purchase 18,000 shares granted to non-employees.
Pursuant to SFAS No. 123, the Company accounts for these options using a
fair value method, with the fair value of these options determined at the
date of issuance. For these options, the Company recorded $6,400 in
expenses and $21,400 in deferred compensation for the year ending December
31, 1996.
Compensation expense for employees is recognized for the difference between
the exercise price of the options granted and the fair market value of the
Company's common stock. Total deferred compensation of $256,500 was
recorded in 1994. This amount was adjusted by $4,686 due to the
cancellation of options. Compensation expense of $54,037, $61,928 and
$81,647 has been recognized for the years ended December 31, 1996, 1995 and
1994, respectively.
F-15
<PAGE> 63
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. COMMITMENTS:
Lease Commitments and Rental Expense
The Company leases office space under operating lease agreements which
expire at various dates through 1998. The Company expects to renew its
leases in 1998. Minimum future annual lease payments under these lease
agreements as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
For the Year Ending
December 31, Amount
------------------- ----------
<S> <C>
1997 $ 182,000
1998 188,000
---------
Total $ 370,000
=========
</TABLE>
Total rent expense approximated $177,000, $180,000, $102,000, and $463,000
for the years ended December 31, 1996, 1995 and 1994 and the period from
inception (July 12, 1993) to December 31, 1996, respectively.
Licensing and Research Agreements
In addition to the Oncor License discussed in Note 3 and the Incyte
Agreement discussed in Note 9, the Company has entered into several
licensing, consulting and clinical study agreements. The terms of
significant agreements are as follows:
MD Anderson Cancer Center--The Company is funding clinical correlation
studies at The University of Texas, MD Anderson Cancer Center. The
agreement was executed on May 31, 1994 and was extended in September 1995.
The Company is obligated to provide funding in the aggregate of
approximately $262,000 for such studies. As of December 31, 1996, $262,000
had been expended.
Hereditary Cancer Institute--In September, 1993, the Company entered into a
licensing and marketing agreement with The Hereditary Cancer Institute
("HCI") and the Creighton University School of Medicine, which included
access to HCI's familial cancer database, software and physician consulting
services. In July 1995, the Company extended for five years the license
agreement, expanded the scope of the license agreement to include
commercialization rights to HCI's DNA library, and entered into a services
agreement for the provision by HCI of genetic history reports. Under the
extended license agreement, the Company continues to pay an annual
sponsorship fee of $250,000, in quarterly installments which is offset by a
percentage of the amounts paid under the services agreement. In addition,
under the extended license agreement, the Company is required to pay a
royalty on net sales of products and services which make use of the HCI
database, other than genetic history reports, and on license income derived
from sublicenses to third parties of the Company's rights to the HCI
database.
F-16
<PAGE> 64
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. COMMITMENTS: (Continued)
Roche Molecular Systems--The Company entered into a license agreement for
the use of certain polymerase chain reaction technology in the performance
of human in vitro clinical laboratory services with Roche Molecular
Systems, Inc. Under the agreement, the Company is obligated to pay
royalties for the use of the technology as clinical laboratory services are
performed. Royalty payments are payable semi-annually, 60 days after the
end of each six month period.
Dana-Farber Cancer Institute--The Company entered into a license agreement
for the use of certain genes and genetic mutations associated with
Hereditary Nonpolyposis Colon Cancer with the Dana-Farber Cancer Institute,
Inc., the State of Oregon, the University of Vermont, and Yale University
in June 1994. Royalty payments on sales of services using technology or
patents covered by the agreement are payable quarterly with an alternative
minimum payment of $7,500 due on January 1 of each year.
Sloan-Kettering Institute for Cancer Research--The Company entered into an
agreement, effective August 1, 1994, with the Sloan-Kettering Institute for
Cancer Research and its affiliate, Memorial Hospital for Cancer and Allied
Disease pursuant to which the Company is obligated to fund clinical
correlative studies. The amount of funding which the Company is obligated
to provide is $183,500 in the aggregate which is payable quarterly. In
September 1995, the parties agreed to extend the study at no additional
cost to the Company. As of December 31, 1996, $183,500 had been expended.
The Regents of the University of California--The Company entered into a
license agreement, effective August 8, 1996, with the Regents of the
University of California for the use of certain genetic markers for breast
and ovarian cancer. Under the agreement, the Company is obligated to pay
royalties for the use of the technology as clinical laboratory services are
performed. Royalty payments are payable quarterly, 60 days after the end
of each quarter.
Minimum payments due under these and other agreements, excluding the Oncor
License, as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
For the Year Ending December 31, Amount
-------------------------------- ----------
<S> <C>
1997 $ 515,934
1998 266,456
1999 257,500
2000 132,500
2001 7,500
----------
$1,179,890
==========
</TABLE>
F-17
<PAGE> 65
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. AGREEMENTS:
In February, 1995, the Company and Preferred Oncology Networks of America,
Inc. ("PONA") entered into a service agreement. The agreement provides for
the Company to render services to PONA, as requested, at agreed upon prices
quoted in the contract. Upon signing of the agreement, PONA made an
advance payment of $100,000. In December, 1996, the Company and PONA
mutually agreed to resolve the outstanding nonrefundable $100,000 advance
payment. As of December 31, 1996, PONA has not and does not intend to use
the Company's services. In accordance with the amendment to the agreement,
the Company recognized $62,500 of the advance payment as revenue and
rebated $37,500 to PONA.
8. RETIREMENT PLAN:
The Company sponsors a 401(k) defined contribution plan ("401(k) Plan") in
which all regular employees who have attained age 21 may participate.
Because the 401(k) Plan does not currently provide for Company
contributions, no related expense has been recorded since inception.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards Nos. 106 and 112, Employers Accounting for
Post-Retirement Benefits Other than Pensions and Employers Accounting for
Post-Employment Benefits. These standards do not have a significant effect
on the Company's reported financial position or future results of
operations because the Company does not offer post-retirement and
post-employment benefits.
9. SUBSEQUENT EVENT:
Pursuant to a License, Services and Marketing Agreement (the "Incyte
Agreement"), dated February 25, 1997, the Company and Incyte
Pharmaceuticals, Inc., a Delaware corporation ("Incyte"), have formed a
broad-based collaboration in clinical genomics designed to create an
integrated genomics and sequence-based mutation analysis capability for the
two companies. The term of the Incyte Agreement expires on February 25,
2000 (the "Initial Term") unless extended by mutual agreement or earlier
terminated in accordance with its terms.
The Company has agreed to perform certain specified clinical genomic
services relating to the creation of a tissue repository and the
performance of a gene functional studies program (the "Collaborative
Services"). Incyte has agreed to purchase a specified minimum of
Collaborative Services during each year of the Initial Term. In addition,
under the terms of the Incyte Agreement, the Company has obtained a
non-exclusive, royalty-bearing license (without the right to sublicense) to
use Incyte's high-throughput sequencing technology for use in the Company's
clinical diagnostic services for a period ending five (5) years following
termination of the Incyte Agreement, subject to certain limitations. In
consideration for the grant of the license, the Company has issued to
Incyte (i) 401,033 shares of the Company's Common Stock (the "Definite
Technology Shares"), and (ii) a warrant to purchase up to an aggregate of
10% of the Company's Common Stock issued and outstanding on the date of
such
F-18
<PAGE> 66
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. SUBSEQUENT EVENT: (Continued)
warrant's exercise (the "Warrant Shares"). The warrant is exercisable
until February 25, 2000 at an exercise price per share equal to the greater
of 110% of the fair market value per share of Common Stock on the trading
day prior to the date of exercise or (i) $8.00 per share (if the warrant is
exercised on or prior to February 25, 1998), (ii) $9.00 per share (if the
warrant is exercised after February 25, 1998, but on or prior to February
25, 1999), or (iii) $13.50 per share (if the warrant is exercised after
February 25, 1999, but on or prior to February 25, 2000). Notwithstanding
the foregoing sentence, Incyte has the option to fix the exercise price per
share during each of aforementioned periods; provided, however, that in no
event shall the exercise price per share during each of the aforementioned
periods be less than $8.00, $9.00 or $13.50 per share, respectively.
Furthermore, pursuant to a Securities Purchase Agreement between the
Company and Incyte, Incyte purchased 372,555 shares of Common Stock from
the Company for $3,000,000 (the "Cash Purchase Shares") or the equivalent
of $8.05 per share. In addition, under the terms of the Securities
Purchase Agreement the Company has agreed to issue to Incyte, under certain
circumstances, up to an aggregate of 130,726 shares of the Company's Common
Stock (the "Additional Shares"). Pursuant to the terms of an Investor's
Rights Agreement between the Company and Incyte, Incyte was granted certain
registration and other stockholder rights with respect to the Definite
Technology Shares, Warrant Shares, the Cash Purchase Shares and the
Additional Shares.
The Company is in the process of valuing the consideration issued in this
transaction and allocating that value to the various assets acquired. The
Company, based on its preliminary analysis, believes that substantially all
of the purchase price in excess of cash received will be allocated to
research & development projects in process and expensed in the first
quarter of 1997.
F-19
<PAGE> 67
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To OncorMed, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
financial statements of OncorMed, Inc. (a Delaware corporation in the
development stage), included in this Form 10-K and have issued our report
thereon dated February 26, 1997. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule listed in the index to the financial statements is the responsibility
of the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required
to be set forth therein, in relation to the basic financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 26, 1997
S-1
<PAGE> 68
OncorMed, Inc.
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged Balance
beginning to costs at end
Description of period and expenses Write-off of period
- ----------- ---------- ------------ --------- -----------
<S> <C> <C> <C> <C>
December 31, 1993
- -----------------
Allowance for doubtful accounts $ --- $ --- $ --- $ ---
December 31, 1994
- -----------------
Allowance for doubtful accounts --- --- --- ---
December 31, 1995
- -----------------
Allowance for doubtful accounts --- 7,000 --- 7,000
December 31, 1996
- -----------------
Allowance for doubtful accounts 7,000 28,000 3,000 32,000
</TABLE>
S-2
<PAGE> 1
Exhibit 11.1
ONCORMED, INC.
EARNINGS PER SHARE
CALCULATION OF SHARES USED IN COMPUTING
NET LOSS PER SHARE
<TABLE>
<CAPTION>
Period from
Inception
(July 12, 1993)
For the Year Ended December 31, Through
----------------------------------------- December 31,
1996 1995 1994 1996
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Common Stock 6,805,083 4,947,991 3,775,457 4,937,199
Convertible Series A Preferred Stock --- --- --- ---
Treasury Stock effect to acquire Common
Stock granted in the twelve months prior
to the Company's initial public offering --- --- 629,165 294,853
--------- --------- --------- ---------
Shares used in computing net loss per share 6,805,083 4,947,991 4,404,622 5,232,052
========= ========= ========= =========
</TABLE>
S-3
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTS
As independent public accounts, we hereby consent to the incorporation of our
reports included in this Form 10-K, into OncorMed, Inc.'s previously filed
Registration Statements File No. 33-80613 and File No. 33-86066.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 26, 1997
S-4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet and the Statement of Operations filed as part of the annual report on Form
10-K and is qualified in its entirety by reference to such annual report on Form
10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,031,809
<SECURITIES> 1,466,871
<RECEIVABLES> 161,434
<ALLOWANCES> 32,068
<INVENTORY> 0
<CURRENT-ASSETS> 7,934,124
<PP&E> 2,223,299
<DEPRECIATION> 1,043,448
<TOTAL-ASSETS> 9,113,975
<CURRENT-LIABILITIES> 1,444,762
<BONDS> 0
0
0
<COMMON> 69,911
<OTHER-SE> 25,666,213
<TOTAL-LIABILITY-AND-EQUITY> 9,113,975
<SALES> 627,390
<TOTAL-REVENUES> 627,390
<CGS> 283,082
<TOTAL-COSTS> 8,543,107
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,461
<INCOME-PRETAX> (7,455,973)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,455,973)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,455,973)
<EPS-PRIMARY> (1.10)
<EPS-DILUTED> 0
</TABLE>
