<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------------------- ----------------------
Commission File Number 1-13768
ONCORMED, INC.
--------------
(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
----------------------------
(Address of principal executive offices)
(Zip code)
(301) 208-1888
--------------
(Registrant's telephone number, including area code)
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 / /
At May 5, 1998, there were 7,882,833 shares of Common Stock outstanding at a par
value of $.01.
<PAGE> 2
ONCORMED, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements 3
Balance Sheets as of March 31, 1998 and December 31, 1997 4
Statements of Operations for the Three Months Ended 5 March 31,
1998 and 1997 and for the Period from Inception (July 12, 1993)
Through March 31, 1998 5
Statements of Cash Flow for the Three Months Ended 6 March 31,
1998 and 1997 and for the Period from Inception (July 12, 1993)
Through March 31, 1998 6
Notes to Financial Statements 7
ITEM 2 Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 28
ITEM 2 Changes in Securities 28
ITEM 3 Defaults Upon Senior Securities 28
ITEM 4 Submission of Matters To a Vote of Security Holders 28
ITEM 5 Other Information 28
ITEM 6 Exhibits and Reports on Form 8-K 29
Signatures 30
Exhibit Index 31
Calculation of Shares Used in Computing Earnings Per Share 32
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
The balance sheet as of March 31, 1998 and the statements of operations
for the three months ended March 31, 1998 and 1997 and for the period from
inception (July 12, 1993) through March 31, 1998 and the statements of
cash flow for the three months ended March 31, 1998 and 1997 and for the
period from inception (July 12, 1993) through March 31, 1998, have been
prepared by the Company without audit. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash
flows for all periods presented have been made. The results for the
quarter ended March 31, 1998 presented in the accompanying financial
statements, are not necessarily indicative of the results for the entire
year or any other period. The balance sheet at December 31, 1997 has been
taken from the audited financial statements.
The unaudited financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. While the Company
believes that the disclosures made are adequate to make the information
presented therein not misleading, these financial statements should be
read in conjunction with the audited financial statements and related
notes included in the Company's Annual Report for the year ended December
31, 1997 on Form 10-K filed with the Securities and Exchange Commission.
3
<PAGE> 4
ONCORMED, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,166,788 $ 439,618
Short term investments -- 1,038,933
Accounts receivable, net allowance for doubtful
accounts of $43,000 and $42,000 143,625 298,538
Other current assets 190,422 275,274
------------ ------------
Total current assets 3,500,835 2,052,363
------------ ------------
Non-current assets:
Property and equipment, net 984,840 1,067,303
Deferred offering costs -- 56,949
------------ ------------
Total non-current assets 984,840 1,124,252
------------ ------------
TOTAL ASSETS $ 4,485,675 $ 3,176,615
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 851,524 $ 761,169
Accrued expenses and other liabilities 995,461 859,390
Payable to Oncor, Inc. 152,961 82,552
Deferred revenue 1,116,114 72,347
------------ ------------
Total current liabilities 3,116,060 1,775,458
------------ ------------
Non-current liabilities:
Note payable to Oncor Finance, Inc. 715,751 715,751
Deferred revenue 5,900 8,596
------------ ------------
Total non-current liabilities 721,651 724,347
------------ ------------
TOTAL LIABILITIES 3,837,711 2,499,805
------------ ------------
Commitments And Contingencies (Notes 1 and 6)
Stockholders' Equity:
Series A preferred stock, $.01 par value, 2,000,000 shares
authorized, 333 and 0 shares issued and outstanding 2,873,990 --
Common stock, $.01 par value, 40,000,000 shares,
authorized, 7,882,833 and 7,876,423 shares issued
and outstanding 78,828 78,764
Additional paid-in capital 30,490,589 30,234,082
Deferred compensation (89,338) (103,462)
Deficit accumulated during the development stage (32,706,105) (29,532,574)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 647,964 676,810
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 4,485,675 $ 3,176,615
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE> 5
ONCORMED, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Period From
Inception
(July 12, 1993)
Through
Three Months Ended March 31, March 31,
1998 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
REVENUES $ 264,396 $ 115,279 $ 2,197,121
OPERATING EXPENSES:
Cost of sales - direct 196,845 53,966 1,132,821
Laboratory operations 807,140 706,805 10,595,265
Selling, general and administrative 1,986,012 1,324,821 19,495,858
Research and development 172,973 225,616 2,905,427
Acquired in-process research
and development projects -- 1,481,148 1,481,148
----------- ----------- ------------
Total expenses 3,162,970 3,792,356 35,610,519
----------- ----------- ------------
OPERATING LOSS (2,898,574) (3,677,077) (33,413,398)
Interest income 21,257 94,600 1,195,539
Interest expense (14,275) (14,598) (206,307)
----------- ----------- ------------
NET LOSS $(2,891,592) $(3,597,075) $(32,424,166)
----------- ----------- ------------
Dividend and accretion embedded in
conversion of Series A Convertible
Preferred Stock (281,939) -- (281,939)
----------- ----------- ------------
Net loss per share applicable to
common stock $(3,173,531) $(3,597,075) $(32,706,105)
=========== =========== ============
BASIC AND DILUTED
NET LOSS PER SHARE
(unaudited) $ (0.40) $ (0.49) $ (5.55)
=========== =========== ============
SHARES USED IN COMPUTING
NET LOSS PER SHARE
(unaudited) 7,881,519 7,320,698 5,897,303
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
ONCORMED, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
Period From
Inception
Three Months Ended (July 12, 1993)
March 31, Through
1998 1997 March 31, 1998
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,891,592) $(3,597,075) $(32,424,166)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization 136,494 138,277 1,742,552
Amortization of deferred compensation 11,712 9,213 331,250
Acquired in-process research and
development costs -- 1,481,148 1,481,148
Changes in operating assets and liabilities:
Accounts receivable 154,913 68,568 (143,625)
Other assets 84,852 112,930 (190,422)
Accounts payable 90,355 (453,590) 851,524
Accrued expenses and other liabilities 136,071 217,527 995,461
Deferred revenue 1,041,071 16,000 1,122,014
Payable to Oncor, Inc. 70,409 (31,973) 152,961
----------- ----------- ------------
Net cash used in operating activities (1,165,715) (2,038,975) (26,081,303)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (54,031) (75,879) (2,672,393)
Redemptions of short-term investments 1,038,933 1,151,941 6,784,528
Purchases of short-term investments -- (2,819,549) (6,784,528)
----------- ----------- ------------
Net cash provided by (used in) investing activities 984,902 (1,743,487) (2,672,393)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 16,464 2,762,436 25,216,131
Net proceeds from sale of preferred stock 2,828,883 -- 5,819,322
Net proceeds from exercise of stock options 5,687 68,000 169,280
Net proceeds from Note payable to Oncor Finance, Inc. -- -- 715,751
Decrease in deferred offering costs 56,949 -- --
----------- ----------- ------------
Net cash provided by financing activities 2,907,983 2,830,436 31,920,484
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,727,170 (952,026) 3,166,788
CASH AND CASH EQUIVALENTS, beginning of period 439,618 6,031,809 --
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 3,166,788 $ 5,079,783 $ 3,166,788
=========== =========== ============
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
=========== =========== ============
Issuance of common stock and warrants in exchange
for research and development projects in-process$ $ -- $ 1,481,148 $ 1,481,148
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 14,275 $ 14,598 $ 206,307
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
As of March 31, 1998
(Unaudited)
1. BUSINESS DESCRIPTION:
Oncormed, Inc. (the "Company"), was incorporated on July 12, 1993, in the
State of Delaware. The Company is a genomics services company that
characterizes newly discovered genes to establish their medical relevance
and provides molecular profiling of patients for pharmacogenomic and
therapeutic purposes. 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 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'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.
The Company has incurred cumulative losses since its inception and, as of
March 31, 1998, had an accumulated deficit of approximately $32.7 million.
The Company has yet to generate any significant revenues and cannot
anticipate when, or if, it will be able to generate significant revenues in
the future. The Company expects that its operating losses will continue as
its sales and marketing efforts, research and development programs and
laboratory operations continue and increase. At April 28, 1998, the Company
had cash, cash equivalents and short-term investments of approximately $2.0
million. Currently, the Company expends from $800,000 to $1,000,000 per
month. The Company will need to raise additional funds by the end of the
second quarter of 1998 to continue the Company's operations, which raises
substantial doubt about whether the Company can continue as a going
concern. The Company is currently actively pursuing potential sources of
financing including private financings or a collaborative agreement or
other arrangements with corporate partners. There can be no assurance that
any additional financing will be available or, if available, will be on
terms acceptable to the Company. 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 and raises substantial doubt
about whether the Company can continue as a going concern. The financial
statements do not include any adjustments that might result if the Company
is unable to continue as a going concern.
2. 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,
revenues and expenses. Actual results could differ from those estimates.
7
<PAGE> 8
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Cash and Cash Equivalents
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
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.
Revenue Recognition
Revenues are principally derived from providing genetic testing and
information services, technology licensing fees and royalties associated
with its proprietary information and software licensing associated with its
risk assessment service. Revenues are also derived from grant contract work.
Revenues from the Company's genetic testing and information services and
grant work are recognized as they are provided. Revenues from technology
licensing fees are recognized when the licensing agreement has been
executed. Revenues from technology licensing royalties are recognized when
earned. Revenues from its risk assessment service are recognized over the
license period.
Net Loss Per Common Share
In March 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share." SFAS No. 128 is effective for the financial
statements issued for period ending after December 15, 1997. The Company
implemented SFAS No. 128 in 1997. SFAS No. 128 requires dual presentation of
basic and diluted earnings per share. Basic loss per share includes no
dilution and is computed by dividing net loss available to common
stockholders by weighted average number of common shares outstanding for the
period. Diluted loss per share includes the potential dilution that could
occur if securities or other contracts to issue common stock were exercised
or converted into common stock. Options and convertible securities that were
outstanding at March 31, 1998, were not included in the computation of
diluted loss per share as their effect would be anti-dilutive. As a result,
the basic and diluted loss per share amounts are identical.
In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 98 on computations of earnings per share.
SAB 98 replaces SAB 83 which previously required that all issuances of
common stock, options and warrants issued within one year of an initial
public offering be included in the calculation of earnings per share as if
outstanding for all periods presented. Under SAB 98, only issuances of
common stock, options and warrants issued for nominal consideration in
periods preceding an initial public offering are required to be included in
the calculation of earnings per share as if they were outstanding for all
periods presented. In the periods preceding the Company's initial public
offering the Company had no issuances of common stock, options or warrants
for nominal consideration.
8
<PAGE> 9
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Earnings per share for the inception to date period presented which includes
the periods preceding the Company's initial public offering has been
restated to comply with SAB 98.
Reclassification
Certain 1997 balances have been reclassified to conform with 1998 financial
statement presentation.
3. RELATED-PARTY TRANSACTIONS:
As of March 31, 1998, Oncor Inc.'s ("Oncor") ownership of the Company's
outstanding common stock was approximately 25.4 percent (23.2% assuming the
conversion of the Series A convertible preferred stock.)
License Agreement
In February 1997, the Company and Oncor agreed to certain changes to an
agreement with Oncor regarding sublicenses for certain proprietary
technology (the "Oncor Agreement"). 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 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 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, starting April
1, 1998, 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
9
<PAGE> 10
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. RELATED-PARTY TRANSACTIONS: (Continued)
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. Further, in the event of a
change of control of Oncor, the acquiring party shall have the option to
either maintain the Oncor Agreement or to terminate the Oncor Agreement. In
the event that the acquirer terminates the Oncor Agreement, both the
exclusive license and the non-exclusive license shall remain in full force
and effect under rates to be determined.
Services Agreements with Oncor, Inc. and Affiliates
As of March 31, 1998, the Company owed Oncor and Codon Pharmaceuticals, Inc.
("Codon", a subsidiary of Oncor) $152,961 for charges which include fees
payable under the Oncor License, consulting and equipment. In addition, 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 "Note"), which principal is due in June
1999. The Note bears interest at 7 percent and is convertible into common
stock at Oncor's option at a conversion price of $20 per share of common
stock. During the fourth quarter of 1994, Oncor assigned the Note to its
wholly-owned subsidiary Oncor Finance, Inc. Interest expense recorded by the
Company relating to the Note was $12,526 for the three months ended March
31, 1998.
Related party revenues and expenses are as follows:
<TABLE>
<CAPTION>
Period from
Inception
(July 12, 1993)
Through
Three Months Ended March 31, March 31,
1998 1997 1998
------- ------ ----------
<S> <C> <C> <C>
Sales to related party $ -- $ -- $ 51,821
Operating expenses to related party:
Laboratory operations 65,886 68,000 1,102,496
Selling, general and administrative 3,583 -- 981,479
Research and development -- -- 173,085
</TABLE>
Of the related party expenses for the three months ended March 31, 1998,
laboratory operations consisted of approximately $16,000 for equipment rental
from Codon and $50,000 associated with the Oncor Agreement and selling,
general and administrative was for occupancy costs. The related party
expenses associated with laboratory operations will decrease beginning in
the second quarter of 1998.
4. DEFERRED REVENUES:
Deferred revenues consist of a prepaid amount of $1 million related to the
Incyte collaboration, prepaid amounts related to laboratory testing and
prepaid fees related to various risk assessment service agreements.
10
<PAGE> 11
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. STOCKHOLDERS' EQUITY:
Stock Option Plan
As of March 31, 1998, 2,250,000 shares of the Company's common stock had been
reserved for issuance, of which options to purchase 2,030,500 shares had been
granted. After giving effect to the cancelation of stock options, shares
available for issuance were 463,650 as of March 31, 1998. 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. Compensation expense of $8,175, $9,213, and $242,639 has been
recognized for the three months ended March 31, 1998 and 1997 and for the
period from inception (July 12, 1993) to March 31, 1998, respectively.
Series A Convertible Preferred Stock
On February 27, 1998, the Company entered into a Convertible Preferred Stock
Purchase Agreement (the "Stock Purchase Agreement") with certain unaffiliated
investors (collectively, the "Investors") and Incyte Pharmaceuticals, Inc.
("Incyte"). Pursuant to the Stock Purchase Agreement, the Investors purchased
a total of Three Hundred (300) shares of the Company's 6% Series A
Convertible Preferred Stock (the "Series A Stock") from the Company for
$3,000,000 and Incyte exercised its pro rata share and purchased a total of
Thirty Three (33) shares of the Company's 6% Series A Convertible Preferred
Stock (the "Series A Stock") from the Company for $330,000. The net proceeds
from this transaction were approximately $2.8 million.
The holders of Series A Stock may convert their shares at any time into
shares of the Company's common stock, $0.01 par value per share (the "Common
Stock"), at a conversion price per share equal to the lesser of (i) $7.5625
or (ii) a percentage (ranging from 97% to 85% depending upon the timing of
such conversion) of the average of five (5) closing bid prices of the Common
Stock over a thirty (30) trading day period immediately preceding the time of
such conversion. In addition, at any time on or after February 27, 2000, the
Company may require that the Series A Stock be converted into Common Stock if
the closing bid prices of the Common Stock for at least twenty (20)
consecutive trading days immediately preceding such conversion shall have
been at least $11.34375 per share. Further, in certain limited circumstances,
the holders of the Series A Stock can require that the Company redeem their
respective shares of Series A Stock. The Company recognizes the difference
between the conversion price and the quoted market price as a dividend which
is being recorded over the expected conversion period. Approximately $118,000
was recorded in the first quarter of 1998.
Dividends in the amount of six percent (6%) per annum will be due quarterly
on the shares of Series A Stock. The Company may pay such dividends either in
cash or through the issuance of shares of Common Stock. Dividends of $16,820
were recorded in the first quarter of 1998.
Pursuant to the Stock Purchase Agreement, the Investors also received
warrants (the "Investor Warrants") to purchase an aggregate of 166,666 shares
of the Company's Common Stock at an exercise price of $8.54 per share (the
"Series A Warrants"). The Series A Warrants expire on February 27, 2001.
Approximately $237,000 of the net proceeds have been allocated to the value
of the warrants.
11
<PAGE> 12
ONCORMED, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. STOCKHOLDERS' EQUITY: (Continued)
The difference between the carrying amount of the preferred stock and the
redemption amount is being accreted over the period from issuance to expected
conversion.
Subject to the satisfaction of certain closing conditions, the Company and
the Investors have the right to increase the aggregate amount of the equity
financing through the sale by the Company to the Investors of 333 shares of
the Company's 6% Series B Convertible Preferred Stock (the "Series B Stock")
for $3,330,000. The closing conditions for the purchase of the Series B Stock
include, without limitation: (i) that the average per share market price for
the Common Stock for the thirty (30) trading days immediately preceding the
closing of the Series B Stock (the "Series B Closing") shall have been at
least $8.00 per share, (ii) that the average trading volume of the Common
Stock for the thirty (30) trading days immediately preceding the Series B
Closing shall have been at least 25,000 shares per day, and (iii) that the
Series B Closing shall have occurred within sixty (60) days following ninety
(90) days after the date on which the Series A Stock Registration Statement
(as defined below) was declared effective by the Securities and Exchange
Commission. The closing conditions may be waived by the Investors. There can
be no assurance that the Series B closing shall occur.
In connection with the purchase of the Series A Stock, the Company and the
Investors entered into a Registration Rights Agreement. Pursuant to the
Registration Rights Agreement, the Company has filed with the Securities and
Exchange Commission a Registration Statement on Form S-3 covering the resale
by the Investors of (i) 200% times the maximum number of shares of Common
Stock into which the Series A Preferred Stock is convertible, (ii) the number
of shares of Common Stock issuable upon exercise of the Series A Warrants,
and (iii) the number of shares of Common Stock issuable upon payment of
dividends on the Series A Preferred Stock, assuming each share of Series A
Preferred Stock is outstanding for two years. Such registration statement was
declared effective on April 23, 1998. In addition, in the event of the Series
B Closing, the Company has agreed to use its commercially reasonable efforts
to file an additional Registration Statement on Form S-3 covering the resale
by the Investors of shares of Common Stock issuable (i) upon conversion of
the Series B Stock, (ii) upon exercise of the Series B Warrants, and (iii) as
dividends on the Series B Stock.
6. AGREEMENTS:
In January 1998, the Company and Children's Hospital Los Angeles ("CHLA")
entered into an agreement (the "CHLA Agreement") whereby CHLA agreed to
provide resources and personnel to act as a biorepository site for the
Company's library of tissue samples. The CHLA Agreement expires on January
29, 2001, unless modified by written amendment, renewal or extension or
earlier terminated in accordance with its terms. The Company has agreed to
pay for CHLA's costs incurred in the performance of the scope of work, as
described in the CHLA Agreement. In March 1998, the Company and CHLA agreed
to certain amendments to the CHLA Agreement. Dr. Triche, the Company's CEO
and Chairman of the Board of Directors, is the Pathologist-in-Chief for CHLA.
12
<PAGE> 13
Item 2 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, included in the Company's Annual Report for the year ended December 31,
1997 on Form 10-K filed with the Securities and Exchange Commission. 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 under Certain
Factors Affecting Operations and Market Price of Securities.
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 March 31, 1998,
the Company's accumulated deficit was approximately $32.7 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,
technology licensing associated with its proprietary information and software
licensing associated with its risk assessment service. Revenues are also derived
from grant contract work. Revenues from the Company's genetic testing and
information services and grant work are recognized as they are provided.
Revenues from technology licensing fees are recognized when the licensing
agreement has been executed. Revenues from technology licensing royalties are
recognized when earned. Revenues from its risk assessment service are recognized
over the license period. The Company has yet to generate any significant
revenues and cannot anticipate when, or if, it will be able to generate
significant revenues in the future. 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. At April 28, 1998, the Company had cash, cash equivalents and
short-term investments of approximately $2.0 million. Currently, the Company
expends from $800,000 to $1,000,000 per month. The Company will need to raise
additional funds by the end of the second quarter of 1998 to continue the
Company's operations, which raises substantial doubt about whether the Company
can continue as a going concern. The Company is actively seeking additional
capital to fund its operations through private financings or a collaborative
licensing or other arrangements with corporate partners. There can be no
assurance, however, that additional financing will be available, or if
available, will be available on acceptable terms. If additional funds are
raised by issuing equity securities, further dilution to existing stockholders
will result and future investors may be granted rights superior to those of
existing stockholders. 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 and raises substantial doubt about whether the
Company can continue as a going concern. (See Note 1 to the Financial
Statements.)
RESULTS OF OPERATIONS
Revenues for the three months ended March 31, 1998 were $264,396 compared to
$115,279 for the same
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period in 1997. The increase in revenues is primarily due to an
increase in genetic testing services including pharmacogenomic services and
revenues associated with grant contract work. The Company is in the development
stage and cannot anticipate when, or if, it will be able to generate any
significant revenues.
Cost of sales - direct was $196,845 and $53,966 for the three months ended March
31, 1998 and 1997, respectively. Cost of sales - direct includes costs for
supplies, direct labor, shipping, reference laboratory work, and royalties
(other than those under the Oncor License) for testing services and computer
hardware costs associated with the Company's risk assessment services. The
increase in cost of sales - direct reflected the corresponding increase in the
Company's revenues.
Laboratory operations expenses were $807,140 and $706,805 for the three months
ended March 31, 1998 and 1997, respectively. The increase in laboratory
operations expenses was primarily due to increased product licensing-related
fees and the hiring of additional personnel to perform genetic testing services.
Related party expenses incurred during these periods consisted of technology
license fees paid to Oncor and laboratory equipment rental paid to Codon.
Selling, general and administrative expenses were $1,986,012 and $1,324,821 for
the three months ended March 31, 1998 and 1997, respectively. General and
administrative expenses were $1,718,049 for the three months ended March 31,
1998, compared with $997,519 for the three months ended March 31, 1997. The
increase in general and administrative expenses was due to increased
professional fees specifically in legal fees associated with patent issues and
related litigation, and the addition of personnel and related costs. Selling
expenses were $267,963 for the three months ended March 31, 1998, compared with
$327,302 for the three months ended March 31, 1997. The decrease in selling
expenses was due to a decrease in marketing costs, specifically in literature
and direct mail. Related party selling, general and administrative expenses were
$3,583 for the three months ended March 31, 1998. There were no related party
selling, general and administrative expenses for the three months ended March
31, 1997.
Research and development expenses were $172,973 and $225,616 for the three
months ended March 31, 1998 and 1997, respectively. The decrease in research and
development expenses was primarily due to the reduced need for outside
consultants on various projects. There were no related party expenses for the
three months ended March 31, 1998 or 1997.
There were no acquired in-process research and development projects for the
three months ended March 31, 1998. Acquired in-process research and development
projects for the three months ended March 31, 1997 consisted of a one-time write
off of approximately $1.5 million associated with licensing of technology under
a License, Services and Marketing Agreement with Incyte Pharmaceuticals, Inc.
(the "Incyte Agreement").
Related party expenses, other than the Oncor License, will continue to decrease
and remain nominal in the future.
Interest income was $21,257 and $94,600 for the three months ended March 31,
1998 and 1997, respectively. The decrease in interest income during the first
quarter of 1998 was due to the decreased amounts available for investment.
Interest expense was $14,275 and $14,598 for the three months ended March 31,
1998 and 1997, respectively.
For the reasons set forth above, net operating losses were $2,891,592 and
$3,597,075 for the three months ended March 31, 1998 and 1997, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
Cash expenditures have exceeded revenues since the Company's inception. The
Company has incurred cumulative losses since its inception and, as of March 31,
1998, had an accumulated deficit of approximately $32.7 million. The Company has
yet to generate any significant revenues and cannot anticipate when, or if, it
will be able to generate significant revenues in the future. The Company's
operations have historically been funded primarily through private placements
and public offerings of equity securities. In February 1998, the Company
completed a $3.3 million private placement of equity securities (the "Stock
Purchase Agreement"), resulting in net proceeds of approximately $2.8 million to
the Company. In addition, pursuant to the terms of the Stock Purchase Agreement,
the Company may, subject to certain conditions, issue 333 shares of 6% series B
convertible preferred stock. However, there can be no assurance that the
additional sale of securities through the private placement will occur. At
April 28, 1998, the Company had cash, cash equivalents and short-term
investments of approximately $2.0 million. Currently, the Company expends from
$800,000 to $1,000,000 per month. The Company will need to raise additional
funds by the end of the second quarter of 1998 to continue the Company's
operations, which raises substantial doubt about whether the Company can
continue as a going concern. The Company is currently pursuing potential
sources of financing including private financings or a collaborative agreement
or other arrangements with corporate partners. There can be no assurance that
any additional financing will be available or, if available, will be on terms
acceptable to the Company. 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 and raises substantial doubt about whether
the Company can continue as a going concern. 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. 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.
Cash used in operating activities was approximately $1.2 million for the three
months ended March 31, 1998 compared with approximately $2.0 million for the
same period in 1997. The decrease was primarily attributable to the prepayment
received from Incyte Pharmaceuticals, Inc. during the first quarter of 1998.
Cash provided by investing activities was $984,902 for the three months ended
March 31, 1998 compared to cash used in investing activities of $1,743,487 for
the same period in 1997. The increase in cash provided was due to the reduction
in purchases of short-term investments during the three months ended March 31,
1998 as compared to the same period in 1997.
Cash provided by financing activities was approximately $2.9 million for the
three months ended March 31, 1998 compared with approximately $2.8 million for
the same period in 1997. In the first quarter of 1998, the Company entered into
a convertible preferred stock purchase agreement with certain unaffiliated
investors and Incyte Pharmaceuticals, Inc. ("Incyte"). In the first quarter of
1997, the Company entered into a License, Services and Marketing Agreement with
Incyte.
Minimum payments due under lease commitments and various research, license and
consulting agreements, excluding the Oncor License, will be approximately
$467,000 through 1998.
In January 1998, the Company and Children's Hospital Los Angeles ("CHLA")
entered into an agreement (the "CHLA Agreement") whereby CHLA agreed to provide
resources and personnel to act as a biorepository site for the Company's library
of tissue samples. The CHLA Agreement expires on January
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29, 2001, unless modified by written amendment, renewal or extension or earlier
terminated in accordance with its terms. The Company has agreed to pay for
CHLA's costs incurred in the performance of the scope of work, as described in
the CHLA Agreement. In March 1998, the Company and CHLA agreed to certain
amendments to the CHLA Agreement. Dr. Triche, the Company's CEO and Chairman of
the Board of Directors, is the Pathologist-in-Chief for CHLA.
The Company has incurred cumulative losses since its inception and, as of March
31, 1998, had an accumulated deficit of approximately $32.7 million. 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. The Company has yet to generate any significant revenues and cannot
anticipate when, or if, it will be able to generate significant revenues in the
future. 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. At April 28, 1998, the Company had
cash, cash equivalents and short-term investments of approximately $2.0
million. Currently, the Company expends from $800,000 to $1,000,000 per month.
The Company will need to raise additional funds by the end of the second
quarter of 1998 to continue the Company's operations, which raises substantial
doubt about whether the Company can continue as a going concern. The Company is
actively seeking additional capital to fund its operations through private
financings or a collaborative licensing or other arrangements with corporate
partners. There can be no assurance, however, that additional financing will be
available, or if available, will be available on acceptable terms. If
additional funds are raised by issuing equity securities, further dilution to
existing stockholders will result and future investors may be granted rights
superior to those of existing stockholders. 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 and raises substantial
doubt about whether the Company can continue as a going concern.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 established standards for the reporting and
display of comprehensive income and its components in the financial statements.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company has adopted SFAS No. 130 and
has concluded that there was no impact.
Also in June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
established standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for the Company's 1998 year-end financial
statements. Financial statement disclosures for prior periods are required to be
restated. Management is in the process of determining the financial statement
impact of the application of SFAS No. 131.
CERTAIN FACTORS AFFECTING OPERATIONS AND MARKET PRICE OF SECURITIES
The Company's future business, financial condition, and results of operations,
and the market price for its securities are dependent on the Company's ability
to successfully manage the following business considerations. No assurance can
be given that the Company will be able to manage such considerations
successfully. The failure to manage such considerations could have a material
adverse effect on the
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Company's business, financial conditions, and results of operations, and on the
market price of its securities.
Additional Financing Requirements; Going Concern; Access to Capital
The Company has incurred cumulative losses since its inception and, as of March
31, 1998, had an accumulated deficit of approximately $32.7 million. 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. The Company has yet to generate any significant revenues and cannot
anticipate when, or if, it will be able to generate significant revenues in the
future. 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. At April 28, 1998, the Company had
cash, cash equivalents and short-term investments of approximately $2.0
million. Currently, the Company expends from $800,000 to $1,000,000 per month.
The Company will need to raise additional funds by the end of the second
quarter of 1998 to continue the Company's operations, which raises substantial
doubt about whether the Company can continue as a going concern. The Company is
actively seeking additional capital to fund its operations through private
financings or a collaborative licensing or other arrangements with corporate
partners. There can be no assurance, however, that additional financing will be
available, or if available, will be available on acceptable terms. If
additional funds are raised by issuing equity securities, further dilution to
existing stockholders will result and future investors may be granted rights
superior to those of existing stockholders. 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 and raises substantial
doubt about whether the Company can continue as a going concern.
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
March 31, 1998, the Company's accumulated deficit was approximately $32.7
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 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. 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.
Dependence on Proprietary Rights
The Company relies on a combination of patent, 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
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emerged regarding the breadth of claims allowed in biotechnology patents. Except
for a patent issued to the Company in early July 1997 for a pattern recognition
methodology and in early August 1997 related to the BRCA1 gene, to date, none of
the Company, its licensors or its sublicensors has been granted any patents
related to the technology or genetic discovery underlying the Company's
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 competitors such as Myriad and other potential
competitors, have been issued patents relating to certain genes and genetic
mutations including BRCA1 and related mutations, underlying certain of the
Company's services, and have filed and may in the future file additional patent
applications relating to genes and genetic mutations including BRCA2, p16 and
related mutations. On November 19, 1996, the Company filed suit in the U.S.
District Court for the District of Columbia, against the National Institutes of
Health challenging the grant of an exclusive license to the University of Utah
in BRCA1. On November 17, 1997, the Company filed suit in U.S. District Court
for the District of Columbia against Myriad. The suit claims infringement of the
Company's BRCA1 gene patent issued to the Company on August 5, 1997 (U.S. Patent
No. 5,654,155). On December 2, 1997, Myriad filed suit in U.S. District Court
for the District of Utah against the Company. The suit claims infringement of
Myriad's patent issued on December 2, 1997 (U.S. Patent No. 5,693,473). On
January 20, 1998, the Company and Steven A. Narod filed suit in the U.S.
District Court for the District of Columbia, against Myriad. The suit is an
action to correct inventorship regarding Dr. Narod on U.S. Patents No. 5,693,473
and 5,709,999 issued to Myriad, and requests that the Court order the
Commissioner of Patents and Trademarks include Dr. Narod as an inventor. On
January 20, 1998, Myriad filed suit in the U.S. District Court for the District
of Utah, against the Company. The suit claims infringement of Myriad's patent
issued on January 20, 1998. (U.S. Patent No. 5,709,999). The two Myriad
infringement suits in Utah have been consolidated into a single suit. There can
be no assurance that the Company will prevail in such litigation or be
successful in defending its BRCA1-related proprietary rights. In addition, such
litigation could subject the Company to significant liability for damages and
could result in invalidation of the Company's proprietary rights and, even if
not meritorious, could be time-consuming and expensive to defend, and could
result in the diversion of management time and attention, any of which could
have a material adverse effect on the Company's business, results of operations
and financial condition. Further, if unsuccessful, such litigation may hinder
or prevent the Company from providing related certain genetic services and
could require the Company to enter into licenses with Myriad or cease such
activities. There can be no assurance that any required licenses would be
available on acceptable terms, or at all. The failure of the Company to
successfully defend its intellectual property rights, or the failure by the
Company to obtain any licenses related to such rights, if required, would 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 primary right and obligation to obtain, maintain and enforce proprietary
rights in relation to all its own technologies.
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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.
Government Regulation
CLIA provides for regulation of clinical laboratories by the United States
Department of Health and Human Services ("HHS"). These regulations mandate that
virtually all clinical laboratories be certified to perform testing on human
specimens and provide specific conditions for certification. These regulations
also contain requirements 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 them. 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 United States Food and Drug
Administration (the "FDA") minimally regulates 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
further 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, or impose other
requirements, there can be no assurance that such requirement would be met on a
timely basis or at all. Any change in CLIA or related regulations, or in the
interpretation thereof, or in the Company's certification under CLIA, 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
the State of Florida 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 or other required approval, could have a material adverse effect
on the Company's business, financial condition and results of operations.
The use of human tissue in medical research and the operation of human tissue
repositories to collect, store and distribute human tissue materials for
research purposes are regulated under federal regulations. These regulations
mandate that IRBs are the mechanism by which research protocols are reviewed and
approved to assure the protection of human rights. The Health and Human Services
Office for the Protection from Research Risks oversees this process and issues
guidelines for IRBs to use when evaluating research protocols to assure informed
consent and that privacy is protected and confidentiality is maintained. Some
states have requirements that are similar to the foregoing guidelines. The
Company believes that it is in compliance with federal and state regulations in
the establishment and operation of a human tissue repository for use in genomic
research. The Company operates its repository under an IRB-approved protocol and
requires that all institutions and pathologists supplying tissue have an
IRB-approved protocol to assure patient informed consent, privacy and
confidentiality. The Company does not have access to patient identifiers. The
use of human tissue, especially for genetic research, is continuously examined
by a number of agencies. There are no assurances that federal or state
regulations will not be passed in the future that would materially affect the
Company's ability to operate a human tissue repository.
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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, the Company's services may
still 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, 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 as well as state Medicaid requirements. 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.
Relationship with Oncor
In February 1997, the Company and Oncor agreed to certain changes to the Oncor
Agreement. 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 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 Oncor Agreement shall expire in June 2004 unless earlier terminated in
accordance with its terms. Further, in the event of a change of control of
Oncor, the acquiring party shall have the option to either maintain the Oncor
Agreement or to terminate the Oncor Agreement. In the event that the acquirer
terminates the Oncor Agreement, both the exclusive license and the non-exclusive
license shall remain in full force and effect under rates to be determined.
Certain of the Company's services are 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.
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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. Oncor currently owns approximately 25.4 percent
(excluding the conversion of the Series A convertible preferred stock) 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 may be able to otherwise effectively control the Company's policies
without concurrence of the Company's other stockholders. In addition, Stephen
Turner, Chief Executive Officer of Codon Pharmaceuticals, Inc., a subsidiary 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. Mr. Turner is not a nominee for re-election at the
Company's 1998 annual stockholders' meeting.
Reliance on Pharmaceutical Industry
The Company expects that a significant portion of its revenues in the
foreseeable future will be derived from services provided to the genomics,
pharmaceutical and biotechnology industries. Accordingly, the Company's success
in the foreseeable future will be directly dependent upon the success of the
companies within those industries and their continued demand for the Company's
services. The Company's operations may in the future be subject to substantial
period-to-period fluctuations as a consequence of reductions and delays in
research and development expenditures by companies in such industries resulting
from factors such as changes in economic conditions, pricing pressures,
market-driven pressures on companies to consolidate and reduce costs, and other
factors affecting research and development spending.
Lengthy Sales Cycle
The ability of the Company to obtain collaborators and subscribers for its
services depends in significant part upon the perception that such services can
help accelerate the translation of cancer-related genetic discoveries into
clinically-useful products. The sales cycle for the Company's services is
typically lengthy due to the education effort that is required as well as the
need to effectively sell the benefits of the Company's services to a variety of
constituencies within potential collaborators and subscribers, including
research and development personnel and key management. In addition, each
subscription and collaboration will involve the negotiation of agreements
containing terms that may be unique to each subscriber or collaborator. The
Company may expend substantial funds and management effort with no assurance
that a collaboration or subscription will result.
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.
Unproven Commercial Strategy
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The Company's success will depend upon its ability to assemble a portfolio of
identified disease-related genes and regulatory regions which have potential
therapeutic value and to select appropriate commercialization strategies for
drug discovery and development. While the Company anticipates that it will
select appropriate commercialization strategies, depending on the service, with
several different strategic partners, failure to allocate its resources to those
services with the most commercial potential and to the appropriate strategic
partner could have a material adverse effect on the Company's business,
financial condition and results of operations. Even if the Company is successful
in identifying disease-related genes, relatively few products based on genes
have been developed and commercialized to date, and there can be no assurance
that the Company or other entities working in collaboration with the Company
will be able to discover drugs and develop commercial products based upon its
gene discoveries. In addition, the development and commercialization of drugs
based on genes discovered by the Company will be subject to the risks inherent
in any new drug. These risks include the possibilities that any or all of the
products will be found to be ineffective or toxic, or otherwise fail to receive
necessary regulatory clearances; that the products, if safe and effective, will
be difficult to manufacture on a large scale or uneconomical to market; that
proprietary rights of third parties will preclude the Company or its strategic
partners from marketing products; or that third parties will market superior or
equivalent products. As a result, the Company's commercial strategy is unproven.
The Company's clinical genomics 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 help accelerate the translation of
genetic discoveries into clinically useful cancer therapeutics and diagnostics.
The Company's ability to successfully develop its business is unproven and is
dependent on its ability to translate genetic discoveries into clinically useful
cancer therapeutics and diagnostics; expand the distribution of its services
both domestically and internationally; develop strategic alliances and
collaborations with pharmaceutical, genomics and biotechnology partners;
identify, license and develop emerging genetic discoveries and mutation
detection technologies; and continue to expand its portfolio of services. 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 clinical
services have not been widely adopted by the medical community and there can be
no assurance that adoption of these technologies and services will occur.
Uncertain Availability of Health Care Reimbursement and Market Acceptance of
Services
The successful commercialization of the Company's 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 genetic testing and information
services are screening services and therefore are excluded from coverage under
Medicare. Although, various third party payors have begun to reimburse some of
the Company's services, there can be no assurance that third party reimbursement
for the Company's services will be consistently 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 Strategic Collaborations and Licenses with Others
The Company's strategy for the research, development and commercialization of
certain of its services is to
22
<PAGE> 23
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,
Incyte and CRCT/Duke, 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
canceled 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
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.
Competition
The Company is engaged in the genomics, biotechnology and pharmaceutical
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
23
<PAGE> 24
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 genomics
discovery, development 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 that all employees and consultants (including certain
scientific advisors) 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.
Confidentiality; Risk of Discrimination Against Customers; Potential Adverse
Impact on Insurability
The availability of genetic predisposition testing and human tissue usage for
research purposes 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 and human tissue usage for research purposes. 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.
Limited Sales and Marketing Experience
The Company has limited experience in selling and marketing its services and
will have to further develop
24
<PAGE> 25
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.
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 medical malpractice insurance coverage. There can be no assurance,
however, that such 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 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.
Certain Anti-Takeover Provisions
25
<PAGE> 26
The Company's Certificate of Incorporation grants the Board of Directors the
authority to issue up to 2,000,000 shares of Preferred Stock 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. Pursuant to the terms of the
Convertible Preferred Stock Purchase Agreement, dated February 27, 1998 (the
"Stock Purchase Agreement"), the Company has issued an aggregate of 333 shares
of 6% Series A Convertible Preferred Stock (the "Series A Stock") to certain
investors. In addition, pursuant to the terms of the Stock Purchase Agreement,
the Company may, subject to certain conditions, issue 333 shares of 6% Series B
Convertible Stock (the "Series B Stock"). 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 the Series A Stock, the Series B Stock or any Preferred
Stock that may be issued in the future. The issuance of the Series A Stock, the
Series B Stock or any additional shares 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. Further, the Company is subject to Section 203 of the Delaware
General Corporation Law, 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.
Dividend Policy
The Company is obligated to pay dividends of 6% per annum on the Series A Stock,
payable by the Company on a quarterly basis either in cash or through the
issuance of shares of Common Stock. The Company has never declared or paid any
cash dividends on its Common Stock. The Company currently anticipates that it
will retain all its earnings for use in the operation of its business and,
therefore, does not anticipate that it will pay any cash dividends on its Common
Stock in the foreseeable future.
Possible Volatility of Stock Price
The price of the Company's Common Stock has fluctuated substantially since its
initial public offering on September 27, 1994. The market price of the shares of
the Common Stock, like that of the common stock of many other biotechnology
companies, is likely to continue to be highly volatile. Factors such as
fluctuations in the Company's operating results, additional financing
requirements and access to capital, governmental regulation, healthcare
legislation, developments in patent or other proprietary rights of the Company
or its competitors, including litigation, and market conditions for
biotechnology stocks and life science stocks in general, could have a
significant impact on the future price of the Common Stock. In addition, the
number of shares of Common Stock issuable upon conversion of the Series A Stock
or the Series B Stock, if issued, and the subsequent sale of such shares could
have a significant impact on the future price of the Common Stock. Further, the
failure of the Company to maintain compliance with the listing requirements of
the American Stock Exchange may result in the delisting of the Company's Common
Stock from the American Stock Exchange.
Control by Existing Stockholders
As of December 31, 1997, officers and directors of the Company and stockholders
owning more than five percent of the Common Stock, together with their
affiliates, beneficially owned approximately 59.0% of the outstanding Common
Stock. Oncor, Inc. currently holds approximately 25.4 percent (excluding the
conversion of the Series A convertible preferred stock) of the Company's
outstanding Common Stock. Such shares were acquired by Oncor in a transaction
not involving a public offering and are therefore "restricted securities" under
the Securities Act and may only be sold (i) in accordance with Rule 144
promulgated
26
<PAGE> 27
thereunder or (ii) pursuant to an effective registration statement under the
Securities Act. However, Oncor has no rights with respect to the registration of
such shares of Common Stock under the Securities Act. Furthermore, Oncor is
considered an "affiliate" of the Company and is therefore subject to the volume
and other limitations of Rule 144 promulgated under the Securities Act. As a
result, these stockholders, if acting together, would be able to significantly
influence all matters requiring approval by the stockholders of the Company,
including the election of directors and the approval of mergers and
consolidations, sales of all or substantially all of the assets of the Company
or other business combination transactions.
27
<PAGE> 28
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
On November 19, 1996, the Company filed suit in the U.S. District Court
for the District of Columbia, against the National Institutes of Health
challenging the grant of an exclusive license to the University of Utah
in BRCA1. On November 17, 1997, the Company filed suit in U.S. District
Court for the District of Columbia against Myriad. The suit claims
infringement of the Company's BRCA1 gene patent issued to the Company on
August 5, 1997 (U.S. Patent No. 5,654,155). On December 2, 1997, Myriad
filed suit in U.S. District Court for the District of Utah against the
Company. The suit claims infringement of Myriad's patent issued on
December 2, 1997 (U.S. Patent No. 5,693,473). On January 20, 1998, the
Company and Steven A. Narod filed suit in the U.S. District Court for
the District of Columbia, against Myriad. The suit is an action to
correct inventorship regarding Dr. Narod on U.S. Patents No. 5,693,473
and 5,709,999 issued to Myriad, and requests that the Court order the
Commissioner of Patents and Trademarks include Dr. Narod as an inventor.
On January 20, 1998, Myriad filed suit in the U.S. District Court for
the District of Utah, against the Company. The suit claims infringement
of Myriad's patent issued on January 20, 1998. (U.S. Patent No.
5,709,999). The two Myriad infringement suits in Utah have been
consolidated into a single suit.
Item 2 Changes in Securities
On February 27, 1998, the Company entered into a Convertible Preferred
Stock Purchase Agreement (the "Stock Purchase Agreement") with certain
unaffiliated investors (collectively, the "Investors") and Incyte
Pharmaceuticals, Inc. ("Incyte"). Pursuant to the Stock Purchase
Agreement, the Investors purchased a total of Three Hundred (300) shares
of the Company's 6% Series A Convertible Preferred Stock (the "Series A
Stock") from the Company for $3,000,000 and Incyte exercised its pro rata
share and purchased a total of Thirty Three (33) shares of the Company's
6% Series A Convertible Preferred Stock (the "Series A Stock") from the
Company for $330,000.
The rights, preferences and limitations of the Series A Stock are set
forth in the Company's Certificate of Incorporation, as amended to date.
The Series A Stock has been granted certain rights and preferences which
are senior to the rights and preferences of the Company's Common Stock.
Such rights and preferences include dividend preferences and liquidation
preferences. In particular, in the event of any liquidation, dissolution,
winding-up or certain change of control transactions, the holders of
Series A Stock would be entitled to receive payments from the Company
prior to the distribution of any remaining proceeds to the holders of the
Common Stock.
Item 3 Defaults Upon Senior Securities
None.
Item 4 Submission of Matters to a Vote of Security Holders
None.
Item 5 Other Information
None.
28
<PAGE> 29
Item 6 Exhibits and Reports on Form 8-K
(a)Exhibits filed as part of this Form 10-Q
10.39* Agreement related to Term Sheet dated February 24, 1997,
between the Company and Oncor.
10.40* Agreement, dated January 29, 1998, between the Company and
Childrens' Hospital Los Angeles, including the amendment dated
March 30, 1998.
(b)Reports on Form 8-K
In a report filed on Form 8-K dated March 5, 1998, the Company
announced the completion of a $3 million equity financing through a
private placement of 6% Series A convertible preferred stock to
certain investors.
* Confidential treatment requested.
29
<PAGE> 30
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.
Date: May 14, 1998 /s/ DR. TIMOTHY J. TRICHE
------------------------------
Dr. Timothy J. Triche,
Chairman and Chief Executive Officer
Date: May 14, 1998 /s/ DR. DOUGLAS DOLGINOW
----------------------------
Dr. Douglas Dolginow,
President and Chief Operating Officer
Date: May 14, 1998 /s/ L. ROBERT JOHNSTON, JR.
-------------------------------
L. Robert Johnston, Jr.,
Sr. Vice President and Chief Financial Officer
30
<PAGE> 31
ONCORMED, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
EX-11 Calculation of Earnings Per Share
EX-27 Financial Data Schedule
(in EDGAR transmission only)
10.39 Agreement related to Term Sheet dated February 24, 1997, between the
Company and Oncor.
10.40 Agreement, dated January 29, 1998, between the Company and Childrens'
Hospital Los Angeles.
</TABLE>
31
<PAGE> 1
Exhibit 10.39
AMENDED AND RESTATED TECHNOLOGY AGREEMENT
THIS AMENDED AND RESTATED TECHNOLOGY AGREEMENT, dated as of February
24, 1997, by and between ONCOR, INC., a Maryland corporation ("Oncor"), with its
principal business address at 209 Perry Parkway, Gaithersburg, Maryland 20877
and ONCORMED, INC., a Delaware corporation ("OncorMed"), with its principal
business address at 205 Perry Parkway, Gaithersburg, Maryland 20877.
WHEREAS, Oncor and OncorMed are the parties to that certain Restated
Technology License Agreement dated June 6, 1994 (the "Existing License
Agreement");
WHEREAS, OncorMed desires to expand its business into new fields not
accommodated by the Existing License Agreement and desires that the Existing
License Agreement be amended and restated to accommodate these new fields;
WHEREAS, OncorMed desires that it obtain sole ownership with
exceptions as set forth herein to the technologies it has discovered, invented,
developed or acquired and will discover, invent, develop or acquire in the
future, instead of automatically assigning such technologies to Oncor and
receiving the exclusive license within prescribed fields set forth in the
Existing License Agreement; and
WHEREAS, in consideration of certain revised financial arrangements,
ownership of Improvements (as defined herein) to certain Oncor technologies
discovered, invented, developed or acquired by Oncormed and certain rights of
first offer in respect of technologies discovered, invented, developed or
acquired by OncorMed, Oncor is willing to amend and restate the Existing License
Agreement to expand the scope of the licenses granted to OncorMed and to give
OncorMed ownership rights with exceptions as
<PAGE> 2
set forth herein in the technologies OncorMed has discovered, invented,
developed or acquired and will discover, invent, develop or acquire.
NOW THEREFORE, for good and valuable consideration, receipt and
sufficiency of which are hereby acknowledged, the parties agree that the
Existing License Agreement shall be replaced, amended and restated as follows:
1. Definitions.
(a) "Acquiring Party" shall mean either (i) Oncor or OncorMed
after a Change in Control where more than fifty percent (50%) of the total
combined voting power of the outstanding securities of such corporation are
transferred to a Person or Persons different from the Persons holding such
securities immediately prior to such transaction or (ii) the Person or Persons
who have acquired all or substantially all of the assets of Oncor or OncorMed as
a result of a Change in Control resulting from a sale of all or substantially
all of the assets of Oncor or OncorMed.
(b) "Additional Oncor Technology" shall mean any and all
Inventions, Know-How or Improvements which during the Term of this Agreement are
either acquired or developed by Oncor or licensed to Oncor by a third party with
an express right to sublicense, which can or could be used in relation to the
Exclusive OncorMed Field.
(c) "BRCA2 License" shall mean that certain license agreement
by and between OncorMed, Cancer Research Campaign Technology Limited and Duke
University, pursuant to which OncorMed is granted a license to the inventions
related to inherited susceptibility to breast cancer associated with the
<PAGE> 3
gene that is encoded in whole or in part with the nucleotide
sequence set out in [****].
(d) "[****] Technology" shall mean the inventions claimed in
the patent applications set forth on Schedule 1 attached hereto.
(e) "BRCA 2 Technology" shall mean the Inventions and Know-How
related to inherited susceptibility to breast cancer associated with the gene
that is encoded in whole or in part with the nucleotide sequence set out in
[****], to the extent the foregoing is licensed to OncorMed under the BRCA2
License.
(f) "Change in Control" shall mean either: (i) a stockholder
approved merger or consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of the outstanding securities
of either Oncor or OncorMed, as the case may be, are transferred to a Person or
Persons different from the Persons holding such securities immediately prior to
such transaction, or (ii) a stockholder approved sale, transfer or other
disposition of all or substantially all of the assets of Oncor or OncorMed,
including complete liquidation or dissolution of Oncor or OncorMed.
(g) "Controlled Affiliate" shall mean an organization which is
directly or indirectly controlled by a party, but only for so long as such
control continues. For the purposes of this definition, control shall consist of
the ownership of more than fifty percent (50%) of the combined voting power of
an organization or the legal power to direct or cause the direction of the
general management and policies of the organization.
(h) "Effective Date" shall mean February 24, 1997.
**** Denotes language for which the Company has requested confidential
treatment pursuant to the rules and regulations of the Securities
Exchange Act of 1934, as amended.
<PAGE> 4
(i) "Exclusive OncorMed Field" shall mean and is limited to
the provision by OncorMed of the following specific services, direct to third
party health care providers, in relation to cancer: (i) testing, detection
and/or analysis of cancer-predisposing genes, (ii) genetic assessment of risk of
an individual to cancer, and (iii) testing and analysis for the purposes of
cancer management. The Exclusive OncorMed Field excludes, inter alia, the
provision by OncorMed of any services direct to patients, direct to health care
providers who are patients or employees of OncorMed, to any affiliate or
subsidiary of OncorMed, or to any persons other than health care providers who
are not patients.
(j) "Grant Revenues" shall mean any revenues received under a
formal grant for a research proposal from a Federal or a State government body
or agency, provided such grant is, in all material aspects, to recover only the
actual cost or estimated cost of providing the services and/or products.
(k) "Improvements" shall mean any modification or alteration
to any existing Invention or Know-How which improves that Invention or Know-How.
Examples of what does and does not represent an Improvement are set forth on
Exhibit A attached hereto.
(l) "Invention(s)" shall mean any new and useful discovery or
invention (whether or not patentable).
(m) "Know-How" shall mean all discoveries, works of
authorship, trade secrets, information, experience, data (including without
limitation preclinical and clinical test data), formulas, algorithms, computer
programs, technology, know-how, protocols, techniques, expertise, designs,
drawings, methods, procedures, and results.
<PAGE> 5
(n) "Net Sales" shall mean (i) gross revenues and fees due to
OncorMed and its Controlled Affiliates from the sale of any service by OncorMed
or its Controlled Affiliates (as reported in OncorMed's and its Controlled
Affiliates' quarterly and annual reports filed from time to time with the
Securities and Exchange Commission or, if such reports are not prepared, such
alternative reports as may be most appropriate), less any allowances actually
made and taken for returns, refunds or recalls; trade discounts actually allowed
in amounts and for purposes customary in the trade; an allowance for actual bad
debts, not to exceed six percent (6%) of gross revenues and fees; sales, use,
value-added and similar taxes and duties and similar governmental assessments;
transportation, packing and shipping insurance actually paid; and the direct
costs (as determined in accordance with generally accepted accounting
principles) to OncorMed and its Controlled Affiliates of any reagents,
chemicals, supplies and materials used in providing the service and (ii) the
payments actually received by OncorMed from sublicensees other than its
Controlled Affiliates (which have been approved by Oncor) for sales by the
sublicensees of any service which is based in whole or in part on Oncor
Technology or an Oncor Technology Improvement sublicensed to the sublicensees by
OncorMed.
(o) "Non-Exclusive OncorMed Field" shall mean the provision by
OncorMed of any services direct to third parties other than the services that
are included in the Exclusive OncorMed Field.
(p) "Oncor Technology" shall mean the Inventions, Know-How and
Improvements set forth on Schedule 2.
(q) "Oncor Technology Improvements" shall mean any and all (i)
Improvements to the Oncor Technology which are discovered, invented, developed
or acquired by OncorMed during the Term of this Agreement and (ii) Improvements
to Additional Oncor Technology which OncorMed has licensed from Oncor pursuant
<PAGE> 6
to Section 6 hereof, which Improvements are discovered, invented, developed or
acquired by OncorMed after the license to the subject Additional Oncor
Technology has been executed by OncorMed. To the extent an Improvement referred
to in (i) and (ii) also improves upon or relates to any other Invention or
Know-How, the application of such Improvement to those other Invention(s) or
Know-How shall not be deemed to be an Oncor Technology Improvement. Improvements
to the Oncor Technology made prior to the Effective Date are set forth on
Schedule 2, Category II and are included in the definition of Oncor Technology.
(r) "OncorMed Technology" shall mean any and all Inventions,
Know-How and Improvements, except for any that are Oncor Technology
Improvements, which prior to or after the Effective Date are either (i)
discovered, invented, developed or acquired by OncorMed or (ii) licensed to
OncorMed. As of the Effective Date of this Agreement, OncorMed Technology
includes, to OncorMed's best knowledge, the Inventions, Know-How and
Improvements set forth on Schedule 3. Inventions, Know-How and Improvements
which are not set forth on Schedule 3, but which would otherwise constitute
OncorMed Technology, shall only be excluded from OncorMed Technology if they
were actually known to OncorMed prior to the Effective Date and were
intentionally omitted from Schedule 3.
(s) "Option OncorMed Technology" shall mean only OncorMed
Technology which can or could be used in relation to (i) genetic test systems
and related products for cancer and other genetic diseases or (ii) any aspect of
cancer or other genetic disease management, but excluding BRCA1 Technology and
BRCA2 Technology.
(t) "Patents" shall mean all United States and foreign patent
applications, including any addition, continuation, continuation-in-part or
division thereof or any substitute application therefor; any patent issued with
respect to such patent applications, any reexaminations, reissue or
<PAGE> 7
extension of such patent and any confirmation patent or registration patent or
inventor's certificate.
(u) "Person" shall mean an individual, a corporation,
partnership or any other legal entity.
(v) "Product" shall mean any genetic test systems and related
products for cancer and other genetic diseases made commercially available by
Oncor (including for research purposes only), including but not limited to
probes, probe kits and reagents.
(w) "Proprietary Rights" shall mean any and all Patents,
copyrights, trade secret rights and similar rights owned by or licensed to a
party.
(x) "Tangible Manifestations" shall mean and include
documents, drawings, specifications, scientific notebooks, processes,
formulations, protocols and devices.
(y) "Termination Payments" shall mean quarterly payments, for
the remaining Term of this Agreement, in an amount equal to the higher of (i)
[****] and (ii) [****].
(z) "Transferable Technology" shall mean any of the following:
(i) any rights to Oncor Technology that have not already been granted to
OncorMed pursuant to Section 3 hereof, (ii) Additional Oncor Technology, or
(iii) Option OncorMed
Technology.
**** Denotes language for which the Company has requested confidential
treatment pursuant to the rules and regulations of the Securities
Exchange Act of 1934, as amended.
<PAGE> 8
2. Assignments and Ownership Rights.
(a) In consideration of the payment of [****] and the various
covenants of OncorMed herein, Oncor hereby assigns to OncorMed all of Oncor's
right, title and interest throughout the world in and to the OncorMed
Technology that exists as of the Effective Date of this Agreement, including,
but not limited to, all Proprietary Rights to such OncorMed Technology,
including, but not limited to, the Patents set forth on Schedule 3. Oncor
further agrees that the foregoing shall be deemed a full legal and formal
equivalent of any assignment, consent to file or like document which may be
required in any country or jurisdiction for any purpose regarding the subject
matter hereof, as well as constituting proof of the right of OncorMed to apply
for Patents or other proper protection for the OncorMed Technology existing as
of the Effective Date and to claim the benefits of the right of priority
provided by the International Convention for the Protection of Industrial
Property, as amended, or by any convention which may henceforth be substituted
for it. Oncor agrees that it will (i) promptly execute, verify, acknowledge and
deliver all such further papers, including patent applications and instruments
of transfer, as reasonably requested by OncorMed to record or confirm the
foregoing assignment in relation to the OncorMed Technology existing as of the
Effective Date and at OncorMed's expense, and (ii) promptly perform such other
acts as reasonably requested by OncorMed and at OncorMed's expense to obtain,
maintain, vest title in OncorMed to, defend or enforce Proprietary Rights for
the OncorMed Technology existing as of the Effective Date in any and all
countries and jurisdictions.
(b) In consideration of the payment of [****] and the various
licenses and covenants of Oncor herein, OncorMed hereby assigns and hereby
agrees to assign to Oncor all of OncorMed's right, title and interest
throughout the world in and to (A) the Improvements made by OncorMed set forth
**** Denotes language for which the Company has requested confidential
treatment pursuant to the rules and regulations of the Securities
Exchange Act of 1934, as amended.
<PAGE> 9
in Category II of Schedule 2 hereto, and (B) the Oncor Technology Improvements,
including, but not limited to, all Proprietary Rights to the Improvements
referred to in (A) above and Oncor Technology Improvements. OncorMed further
agrees that the foregoing shall be deemed a full legal and formal equivalent of
any assignment, consent to file or like document which may be required in any
country or jurisdiction for any purpose regarding the subject matter hereof, as
well as constituting proof of the right of Oncor to apply for Patents or other
proper protection for the Improvements referred to in (A) above and the Oncor
Technology Improvements and to claim the benefits of the right of priority
provided by the International Convention for the Protection of Industrial
Property, as amended, or by any convention which may henceforth be substituted
for it. OncorMed agrees that it will (i) promptly execute, verify, acknowledge
and deliver all such further papers, including patent applications and
instruments of transfer, as reasonably requested by Oncor to record or confirm
the foregoing assignment in relation to the Improvements referred to in (A)
above and the Oncor Technology Improvements and at Oncor's expense, and (ii)
promptly perform such other acts as reasonably requested by Oncor and at Oncor's
expense to obtain, maintain, vest title in Oncor to, defend or enforce
Proprietary Rights for the Improvements referred to in (A) above and the Oncor
Technology Improvements in any and all countries and jurisdictions.
(c) As between themselves, the parties hereby agree and
confirm that, except for the licenses granted in Section 3 below and the right
of first offer granted in Section 6 below, Oncor owns all right, title and
interest, including but not limited to all Proprietary Rights, to all the Oncor
Technology and Oncor Technology Improvements and that Oncor alone shall have a
direct license with the licensor of those parts of the Oncor Technology which
are licensed to Oncor by third parties.
<PAGE> 10
(d) As between themselves, the parties hereby agree and
confirm that, except for the right of first offer granted in Section 6 below,
OncorMed owns all right, title and interest, including, but not limited to, all
Proprietary Rights, to all the OncorMed Technology and that OncorMed alone shall
have a direct license with the licensor of those parts of the OncorMed
Technology which are licensed to OncorMed by third parties.
3. Grant of License to OncorMed.
(a) Subject to all of the terms and conditions of this
Agreement, Oncor hereby grants to OncorMed, including under any and all of
Oncor's current and future Proprietary Rights, a sole and exclusive, worldwide
license to use the Oncor Technology and Oncor Technology Improvements within the
Exclusive OncorMed Field to develop, make, have made, use, market, offer to
sell, sell and otherwise commercialize any of the services within the Exclusive
OncorMed Field. The parties hereby agree that while OncorMed's exclusive license
is to the exclusion of all other Persons (including, but not limited to, Oncor),
the following shall still be allowed:
(i) Oncor's continuing right to use the Oncor Technology
and Oncor Technology Improvements for internal, non-commercial
research and development purposes within or outside the Exclusive
OncorMed
Field;
(ii) Oncor's continuing right to use the Oncor
Technology and Oncor Technology Improvements to develop, make, have
made, use, market, offer to sell, sell and otherwise commercialize
Products, regardless of whether or not such Products are provided or
used by Oncor's customers as part of a service which comes within
the Exclusive OncorMed Field and regardless of whether or not the
purchaser of such Products is a competitor or customer of OncorMed.
<PAGE> 11
(b) Subject to all of the terms and conditions of this
Agreement, Oncor also hereby grants to OncorMed, including under any and all of
Oncor's current and future Proprietary Rights, a non-exclusive, worldwide
license to use Oncor Technology and Oncor Technology Improvements, within the
NonExclusive OncorMed Field to develop, make, have made, use, market, offer to
sell, sell and otherwise commercialize any of the services within the
Non-Exclusive OncorMed Field.
(c) Oncor retains all rights in relation to the Oncor
Technology, the Additional Oncor Technology and the Oncor Technology
Improvements other than those rights granted to OncorMed in this Section 3 and
in Section 6 below, including but not limited to, all rights to commercialize
the Oncor Technology, the Additional Oncor Technology and the Oncor Technology
Improvements in the field of genetic test systems and related products.
4. Rights to Sublicense
OncorMed shall not have the right to grant sublicenses of any
of the rights licensed to it by Oncor pursuant to this Agreement, except with
the prior written approval of Oncor, which approval:
(a) in the case of sublicenses within the Exclusive OncorMed
Field, shall not be unreasonably withheld; and
(b) in the case of sublicenses within the NonExclusive
OncorMed Field, may be withheld at Oncor's sole discretion.
5. Payments
(a) In consideration of the assignments and licenses to
OncorMed set forth above, and commencing as of April 1, 1997, OncorMed hereby
agrees to make quarterly payments to
<PAGE> 12
Oncor that are equal to the applicable percentage set forth in Section 5(b)
below of (i) all OncorMed's Net Sales in the quarterly period in question less
(ii) any Grant Revenues and any other payments that the parties mutually agree
to exclude from such calculation (the amounts set forth in (i) less the amounts
set forth in (ii) for an applicable period shall be referred to collectively as
the "Base Revenues").
(b) The payments due shall be calculated as follows: (i) for
aggregate annual Base Revenues of up to [****], the payment due shall be [****]
of such Base Revenues; (ii) for aggregate annual Base Revenues of [****], the
payment due shall be equal to [****] of such Base Revenues; and (iii) for
aggregate annual Base Revenues in excess of [****], the payment due shall be
equal to [****] of such Base Revenues. The payments due shall be calculated on
an accumulating annual basis, with each annual period commencing on April 1 and
ending on March 31st of the following year. The payments shall be made quarterly
in arrears within forty-five (45) days of the end of the previous quarter. By
way of example only, if in the first two quarters of a given annual period,
OncorMed's Base Revenues are [****] for the first quarter and [****] for the
second quarter (making aggregate Base Revenues of [****] for the first two
quarters) the payments to be made by OncorMed to Oncor would be as follows:
(iii) Within forty-five days of the end of the
first quarter:
[****]
(iv) Within forty-five days of the end of the second
quarter:
[****]
**** Denotes language for which the Company has requested confidential
treatment pursuant to the rules and regulations of the Securities Exchange
Act of 1934, as amended.
<PAGE> 13
and
[****]
Making an aggregate payment due of
[****]
(c) During the twelve month payment period beginning on
[****], OncorMed shall be obligated to pay a minimum payment equal to [****] per
quarter. The payment shall be made within sixty (60) days of the end of each
quarter. During the second twelve month payment period of this Agreement,
beginning April 1, 1998 and ending March 31, 1999, OncorMed shall be obligated
to pay a minimum payment equal to [****] per quarter. The payment shall be made
within sixty (60) days of the end of each quarter. After [****], OncorMed shall
not be obligated to pay Oncor any further minimum payments. To the extent that
any minimum payment exceeds the payment otherwise due for a given quarter
pursuant to this Section 5, the excess shall be fully creditable against any
other payments due to Oncor for the next quarterly period.
6. Right of First Offer.
(a) Subject to certain contractual provisions in which third
parties limit the transferability of licensed, assigned or otherwise transferred
Inventions, Know-How or Improvements, prior to the license or disposition
(whether by assignment or license) to a third party of Transferable Technology,
the offering party shall offer to the other party in writing terms for a license
or assignment, and the other party shall have a thirty (30) day period from the
date of delivery of
**** Denotes language for which the Company has requested confidential
treatment pursuant to the rules and regulations of the Securities Exchange
Act of 1934, as amended.
<PAGE> 14
the written offer in which to agree to license or acquire the Transferable
Technology on the offered terms. If the offer is declined or is not accepted
during such thirty (30) day period, the offering party may license or otherwise
dispose of (whether by assignment, transfer or license) the Transferable
Technology to a third party on terms no more favorable to the third party than
the terms offered in writing by such offering party to the other party. If the
offer from the offering party to the other party in respect of Transferable
Technology is accepted in writing and delivered within said thirty (30) day
period, the parties agree to negotiate in good faith the terms and conditions of
any such license or acquisition agreement; provided, however, that if the
parties are unable to agree upon the terms and conditions of any such license or
acquisition agreement within thirty (30) days of delivery of the written
acceptance of the offer, the offering party may license or dispose of (whether
by assignment, transfer or license) the Transferable Technology to a third party
on terms no more favorable to the third party than the terms offered by such
offering party to the other party. In determining whether the terms offered to a
third party are more favorable than those received or accepted by the other
party, all terms and conditions of the respective offers shall be considered,
including, but not limited to, monetary terms, scope of rights granted,
warranties and indemnities.
7. [Reserved]
8. Technology Transfer.
(a) In the event that Oncor does not have all the information
necessary to exercise its rights to any Improvement made by OncorMed or Oncor
Technology Improvement that is assigned to Oncor by OncorMed under Section 2
above, OncorMed shall, to the extent that agreements with third parties allow,
disclose and make available to Oncor such information as is held by OncorMed
that will enable Oncor to exercise its rights to such Improvement
<PAGE> 15
or Oncor Technology Improvement, including providing to Oncor all
Tangible Manifestations of such Improvement or Oncor Technology
Improvement held by OncorMed.
(b) In the event OncorMed does not have all the information
necessary to exercise its rights to Oncor Technology licensed to OncorMed by
Oncor hereunder, Oncor shall, to the extent that agreements with third parties
allow, disclose and make available to OncorMed such information as is held by
Oncor that will enable OncorMed to exercise its rights to such Oncor Technology,
including providing to OncorMed all Tangible Manifestations of such Oncor
Technology held by Oncor.
9. Proprietary Rights.
(a) Oncor will retain the sole right and discretion to apply
for, prosecute, maintain, enforce and defend all Proprietary Rights in Oncor
Technology and Oncor Technology Improvements, at its expense; provided that,
OncorMed shall give reasonable assistance to Oncor as requested by Oncor, at
Oncor's sole expense, concerning the preparation, filing, prosecution,
maintenance and defense thereof.
(b) OncorMed will retain the sole right and discretion to
apply for, prosecute, maintain, enforce and defend all Proprietary Rights in
OncorMed Technology, at its expense; provided that, Oncor shall give reasonable
assistance to OncorMed as requested by OncorMed, at OncorMed's sole expense,
concerning the preparation, filing prosecution, maintenance and defense of the
OncorMed Technologies set forth on Schedule 3.
10. Enforcement.
(a) OncorMed will notify Oncor promptly in writing if it
discovers any infringement by a third party of any of the Proprietary Rights to
either the Oncor Technology or the Oncor Technology Improvements.
<PAGE> 16
(b) Oncor shall have the sole right and discretion to enforce
any Proprietary Right to either the Oncor Technology or the Oncor Technology
Improvements against any infringer or alleged infringer thereof, but shall at
all times keep OncorMed informed as to the status thereof. Oncor may, in its
sole judgement and at its own expense, institute suit against any such infringer
or alleged infringer and control, settle, and defend such suit in a manner
consistent with the terms and provisions hereof and recover, for its account,
any damages, awards or settlements resulting therefrom. OncorMed shall
reasonably cooperate with such litigation at Oncor's sole expense.
(c) If Oncor elects not to enforce any Proprietary Right it
holds in relation to either the Oncor Technology or the Oncor Technology
Improvements, it shall so notify OncorMed in writing within sixty (60) days of
receiving notice that an infringement exists, and OncorMed may, in its sole
judgement and at its own expense, do so and control, settle, and defend such
suit in a manner consistent with the terms and provisions hereof, and recover,
for its own account, any damages, awards or settlements resulting therefrom.
Oncor shall reasonably cooperate with such litigation at OncorMed's sole
expense.
(d) OncorMed shall have the sole right and discretion to
enforce any Proprietary Right to the OncorMed Technology against any infringer
or alleged infringer thereof. OncorMed may, in its sole judgement and at its own
expense, institute suit against any such infringer or alleged infringer and
control, settle, and defend such suit in a manner consistent with the terms and
provisions hereof and recover, for its account, any damages, awards or
settlements resulting therefrom. Oncor shall reasonably cooperate with such
litigation at OncorMed's sole expense.
<PAGE> 17
11. Publications.
(a) OncorMed shall not make any publication, public
announcement, press release or other disclosure which incorporates material
information relating to the Oncor Technology or any Oncor Technology
Improvements, either directly or indirectly, except as may be legally required,
without first obtaining the approval of Oncor for the nature and text of such
announcement or disclosure, which approval shall not be unreasonably withheld.
This restriction does not apply to the dissemination of information that has
previously been approved and released by Oncor. OncorMed shall use its best
efforts to inform Oncor of any proposed announcement or disclosure in sufficient
time prior to public release, and shall use its best efforts to provide Oncor
with a written copy thereof, in order to allow Oncor to comment upon such
announcement or disclosure.
(b) OncorMed may not submit to a publisher any manuscript or
abstract containing information relating to Oncor Technology or any Oncor
Technology Improvements for the purposes of publication, without first obtaining
the written consent of Oncor, which consent shall not be unreasonably withheld.
If Oncor consents to such submission, then simultaneously with submission to the
publisher, copies of the manuscript or abstract shall also be sent to Oncor.
(c) OncorMed shall be entitled at its sole discretion to make
any publication, public announcement, press release or other disclosure which
incorporates or makes reference to OncorMed Technology. OncorMed shall have no
obligation to inform Oncor of any such publication, public announcement, press
release or other disclosure.
12. Confidentiality.
(a) Oncor and OncorMed each agree that all Inventions,
Know-How, Improvements, as well as other business,
<PAGE> 18
marketing and financial information of the other party which is not generally
known to the public and which the other party treats as confidential (the
"Proprietary Information") are the confidential property of the disclosing
party. The Oncor Technology, Additional Oncor Technology and Oncor Technology
Improvements are all Proprietary Information of Oncor. The OncorMed Technology,
including, but not limited to, the BRAC1 Technology and BRCA2 Technology, are
Proprietary Information of OncorMed. Except as expressly and unambiguously
authorized hereunder, each party shall hold in confidence and not disclose or
use any Proprietary Information received from the other party and shall
similarly require its employees and contractors to sign written agreements with
confidentiality and non-use provisions substantially similar to this Section 12.
The receiving party shall not be obligated under this Section 12 with respect to
information the receiving party can document by written records:
(v) is or has become published or otherwise readily
available to the public without restriction through no fault of the receiving
party or its employees or agents; or
(vi) is received without restriction from a third party
lawfully in possession of such information and lawfully empowered to disclose
such information; or
(vii) was rightfully in the possession of the receiving
party without restriction prior to its disclosure by the disclosing party; or
(viii) is independently developed by the receiving party
by employees without access to the other party's similar Proprietary
Information.
(b) The four above exceptions to the confidentiality
provisions of this Agreement do not, and should not be interpreted to, confer
any license or other rights to the receiving party in any of the information
referred to in said
<PAGE> 19
four exceptions. Nothing herein shall permit the receiving party to disclose or
use, except as explicitly permitted elsewhere in this Agreement, Proprietary
Information of the disclosing party and then only on an "as-needed" basis for
purposes of this Agreement. Each party shall notify the other party promptly
upon discovery of any unauthorized use of disclosure of the other's Proprietary
Information. The obligations of this Section 12 shall survive any termination or
expiration of the Agreement for a period of five (5) years.
(c) Upon any termination of this Agreement, each party will
promptly return or destroy any Proprietary Information of the other and any
copies, extracts and derivatives thereof, except as otherwise set forth in this
Agreement; provided, however, that each party shall be entitled to retain one
copy of such Proprietary Information for its corporate files solely for use in
any litigation or dispute involving such Proprietary Information.
(d) Each party acknowledges that its breach of this Section 12
would cause irreparable injury to the other for which monetary damages are not
an adequate remedy. Accordingly, a party will be entitled to seek injunctions
and other equitable remedies in the event of such a breach by the other.
(e) In the event that either of the parties receives a request
or demand to disclose all or any part of the Proprietary Information or the
existence of this Agreement under the terms of a subpoena or order issued by a
court of competent jurisdiction or otherwise, the recipient party agrees to (i)
immediately notify the other party of the existence, terms and circumstances
surrounding such a request so that the other party may seek a protective order
or other appropriate relief or remedy or waive compliance with this Section 12,
(ii) consult with the other party on the advisability of taking steps to resist
or narrow such request, and (iii) if disclosure is required, disclose such
information and, subject to reimbursement by the
<PAGE> 20
other party of reasonable expenses, exercise best efforts to obtain an order or
other reliable assurance that confidential treatment will be accorded to such
disclosed information.
13. Representations, Warranties and Covenants of Oncor.
Oncor hereby represents, warrants and covenants to OncorMed as
follows:
(a) Except to the extent that Oncor has licensed Oncor
Technology from third parties, Oncor is the legal and equitable owner of the
Oncor Technology as of the Effective Date of this Agreement.
(b) As of the Effective Date of this Agreement, all licenses
from third parties to Oncor in respect of parts of the Oncor Technology are in
full force and effect and Oncor is in compliance in all material respects with
all of its material obligations thereunder; Oncor has heretofore delivered to
OncorMed a true and complete copy of each of such licenses and there have been
no amendments or modifications thereof, otherwise than has been disclosed to
OncorMed.
(c) Oncor has the full legal right and title to assign the
OncorMed Technology that exists as of the Effective Date in accordance with the
terms of this Agreement.
(d) Oncor has no knowledge, without independent investigation,
as of the Effective Date of this Agreement (i) of any material information, not
heretofore disclosed to OncorMed, relating to the potential safety or efficacy
of the Oncor Technology, or (ii) that the actual and proposed use of the Oncor
Technology licensed or sublicensed to OncorMed hereunder, will infringe upon any
rights of any third party.
(e) During the Term of this Agreement Oncor shall promptly
disclose to OncorMed any material information, not
<PAGE> 21
previously disclosed to OncorMed, relating to the potential safety or efficacy
of the Oncor Technology.
(f) Oncor has the corporate power and authority to execute and
deliver this Agreement and perform its obligations hereunder, and the execution,
delivery and performance of this Agreement have been duly and validly authorized
and upon execution and delivery by Oncor will constitute a valid and binding
agreement of Oncor enforceable against it in accordance with its terms.
14. Representations, Warranties and Covenants of OncorMed.
OncorMed hereby represents, warrants and covenants to Oncor as
follows:
(a) OncorMed has the full legal right and title to assign to
Oncor the Improvements to Oncor Technology made by OncorMed set forth in
Category II of Schedule 2 attached hereto.
(b) The legal right and title, if any, which OncorMed may hold
in relation to Oncor Technology Improvements, shall be assigned to Oncor
pursuant to Section 2(b) hereof.
(c) To OncorMed's best knowledge, the list of OncorMed
Technology set forth on Schedule 3 is true and complete.
(d) OncorMed shall promptly disclose to Oncor any material
information, not previously disclosed to Oncor, relating to the potential safety
or efficacy of the Oncor Technology and the Oncor Technology Improvements.
(e) OncorMed has the corporate power and authority to execute
and deliver this Agreement and perform its obligations hereunder, and the
execution, delivery and performance of this Agreement have been duly and validly
authorized and upon execution and delivery by OncorMed will
<PAGE> 22
constitute a valid and binding agreement of OncorMed enforceable against it in
accordance with its terms.
15. Regulatory matters Each party agrees that its conduct in
performing its obligations under this Agreement shall conform in all material
respects to all applicable laws and regulations of the United States of America
and foreign governments (and political subdivisions thereof).
16. Term and Termination.
(a) The term of this Agreement shall be from the Effective
Date of this Agreement until June 4, 2004 (the "Initial Term"). The Initial Term
of this Agreement is automatically renewable for additional one (1) year periods
unless either party hereto notifies the other party of its desire to terminate
this Agreement at least thirty (30) days prior to the expiration of the Initial
Term of this Agreement or any extension thereof (the Initial Term and any
extensions thereof collectively, the "Term").
(b) Upon any breach or default of any of the representations,
warranties or covenants set forth in this Agreement, the breaching or defaulting
party shall be given notice of such breach or default in writing and a period of
ninety (90) days after receipt of such notice to correct the breach or default.
If the default or breach (i) is material to this Agreement and (ii) is not
corrected within said ninety (90) day period and the breaching or defaulting
party has not taken reasonable steps to cure the same, the party not in breach
or default shall have the right to terminate this Agreement; provided, however,
that no such termination shall effect: (A) the assignments of OncorMed
Technology and Improvements pursuant to Sections 2(a) and 2(b) above; or (B) the
assignments by OncorMed to Oncor of Oncor Technology Improvements discovered,
invented, developed or acquired by OncorMed prior to the effective date of
termination pursuant to Section 2(b) above.
<PAGE> 23
(c) Upon a Change in Control of OncorMed, the Acquiring Party
shall have the option, exercisable at any time during the One Hundred and Eighty
(180) days following the closing of the Change of Control, of either: (i)
maintaining this Agreement and assuming OncorMed's rights and obligations
hereunder or (ii) terminating this Agreement. In the event the Acquiring Party
elects to terminate this Agreement, it shall notify Oncor in writing and shall
pay the Termination Payments. At the election of the Acquiring Party, the
Termination Payments may be made either (i) quarterly in arrears within
forty-five (45) days of the end of each quarter following the Change of Control
until June 4, 2004 (prorated for any partial quarters as appropriate) or (ii) in
one lump sum payment of the then net present value of the future Termination
Payments as determined by mutual agreement between Oncor and the Acquiring
Party.
(d) Upon a Change in Control of OncorMed and in the event that
the Acquiring Party terminates this Agreement, the Acquiring Party shall, in
addition to paying the Termination Payments under Section 16(c) above, have an
option, exercisable for a period of One Hundred and Eighty (180) days from the
effective date of termination of this Agreement, of retaining the licenses
granted under Section 3 in exchange for a six percent (6%) royalty on Net Sales
derived from services that utilize the Oncor Technology and/or Oncor Technology
Improvements that are subject to such licenses. Oncor and the Acquiring party
shall determine the other terms and conditions for such license as they mutually
agree.
(e) Upon a Change in Control of Oncor the Acquiring Party
shall have the option exercisable at any time during the One Hundred and Eighty
(180) days following the closing of the Change of Control, to either: (i)
maintain this Agreement or (ii) terminate this Agreement, provided that the
licenses granted by Oncor under Section 3 shall survive on a royalty-free basis
and shall remain in full force and effect notwithstanding such termination.
<PAGE> 24
(f) The licenses or sublicenses that may be negotiated in the
future between the parties pursuant to Sections 6 and 7 hereof shall not be
subject to the above Change in Control provisions, unless expressly provided for
therein.
(g) In the event of a termination of this Agreement for any
reason whatsoever, in addition to the other provisions of this Agreement which
are by their terms to survive, Sections 9, 10, 12 and 17 shall survive
termination, as will any accrued rights of payment or causes of action
hereunder.
17. Arbitration.
In the event of any dispute arising in relation to any aspect of
this Agreement, then the determination of such dispute shall first be submitted
to the Chief Executive Officers of both parties for resolution. In the event
that the Chief Executive Officers fail to reach agreement, then such dispute
shall be submitted to The American Arbitration Association in Washington, D.C.
for final and binding resolution of such dispute. The arbitration shall be
conducted in accordance with the then prevailing commercial arbitration rules of
The American Arbitration Association. The parties agree to abide by all
decisions and any award rendered in such proceedings. Such decisions and awards
rendered by the arbitrator shall be final and conclusive and may be entered in
any court having competent jurisdiction as a basis of judgment and of orders for
enforcement thereof. All such controversies, claims or disputes in connection
with this Agreement shall be settled in this manner in lieu of any action at law
or equity. The parties shall keep confidential the existence and determination
of any claim, controversy or dispute between them in connection with this
Agreement, unless otherwise required by law.
18. Miscellaneous.
<PAGE> 25
(a) Notices under this Agreement shall be effective upon
delivery in writing and shall be sufficient only if personally delivered,
delivered by a major commercial rapid delivery courier service, mailed by
certified or registered mail, return receipt requested, postage prepaid, or such
other address as is provided by the other party in accordance with this Section.
If to Oncor:
Oncor, Inc.
209 Perry Parkway
Gaithersburg, MD 20877
For the attention of: John Coker
With a copy to:
Burns, Doane Swecker Mathis
699 Prince Street
Alexandria, VA 22314
For the attention of: Robert S. Swecker, Esq.
If to OncorMed:
205 Perry Parkway
Gaithersburg, MD 20877
For the attention of: Douglas Dolginow
With a copy to:
Brobeck, Phleger & Harrison LLP
1633 Broadway
New York, New York 10019
For the attention of: Alexander D. Lynch, Esq.
(b) This Agreement is executed with the understanding that it
embodies the entire agreement with respect to the subject matter hereof between
the parties, that this Agreement supersedes and replaces all previous agreements
and arrangements with respect to the subject matter hereof, including, but not
limited to, the Existing License Agreement dated June 6, 1994 and that certain
Term Sheet between Oncor and OncorMed dated February 24, 1997, and that there
are no prior
<PAGE> 26
representations, warranties or agreements relating thereto. This Agreement may
be modified only by a duly executed writing executed on behalf of the parties
hereto.
(c) A delay or failure to exercise any right shall not be
deemed to be a waiver. No waiver of any right under a provision of this
Agreement shall constitute a waiver of any prior, concurrent or subsequent right
under the same or any other provisions hereof, and no waiver shall be effective
unless made in writing and signed by an authorized representative of the waiving
party.
(d) This Agreement does not create any agency relationship
between either of the parties and neither party shall hold itself out as being
an agent for the other.
(e) Neither party shall be liable for failures and delays in
performance due to matters and circumstances beyond its reasonable control.
(f) If any provision of this Agreement is held by a court of
competent jurisdiction to be invalid, illegal or unenforceable, that provision
shall be limited or eliminated to the minimum extent necessary so that this
Agreement shall otherwise remain in full force and effect and enforceable.
(g) This Agreement shall be governed and construed in
accordance with the laws of the State of Maryland and the United States without
regard to the conflicts of laws provisions thereof.
(h) This Agreement may be executed simultaneously in one or
more counterparts, each of which will be deemed an original.
(i) This Agreement and the rights hereunder may not be
assigned except as otherwise provided herein without the
<PAGE> 27
prior written consent of each party and shall be binding upon and inure to the
benefit of and be enforceable by any permitted successors and assigns of the
parties hereto.
<PAGE> 28
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement as of the date set first set forth
above.
ONCOR, INC.,
a Maryland corporation
By: /s/ Stephen Turner
-----------------------------
Name: Stephen Turner
----------------------------
Title: CEO
----------------------------
ONCORMED, INC.,
a Delaware corporation
By: /s/ Doug Dolginow
-----------------------------
Name: Doug Dolginow
----------------------------
Title: President
---------------------------
<PAGE> 29
SCHEDULE 1
[****]
**** Denotes language for which the Company has requested confidential
treatment pursuant to the rules and regulations of the Securities Exchange
Act of 1934, as amended.
<PAGE> 30
SCHEDULE 2
[****]
**** Denotes language for which the Company has requested confidential
treatment pursuant to the rules and regulations of the Securities Exchange
Act of 1934, as amended.
<PAGE> 31
SCHEDULE 3
[****]
**** Denotes language for which the Company has requested confidential
treatment pursuant to the rules and regulations of the Securities Exchange
Act of 1934, as amended.
<PAGE> 32
EXHIBIT A
[****]
**** Denotes language for which the Company has requested confidential
treatment pursuant to the rules and regulations of the Securities Exchange
Act of 1934, as amended.
<PAGE> 1
Exhibit 10.40
BIOREPOSITORY AGREEMENT
This AGREEMENT (the "AGREEMENT") made by and between CHILDRENS HOSPITAL LOS
ANGELES (herein called "CHLA") and ONCORMED (herein called "ONCORMED") as of the
date of the last signature below (the "EFFECTIVE DATE").
WHEREAS, ONCORMED and its affiliates perform genetic cancer research
and require certain storage facilities and services for its library of TISSUE
SAMPLES;
WHEREAS, CHLA has the resources and personnel to act as a
biorepository site for TISSUE SAMPLES;
WHEREAS, CHLA and ONCORMED desire to work together such that CHLA
provides certain facilities and services for the maintenance of ONCORMED's
library of TISSUE SAMPLES, and ONCORMED provides certain funding for the
project;
NOW, THEREFORE, in consideration of the mutual convenants and
conditions herein and intending to be legally bound, CHLA and ONCORMED agree as
follows:
1.0 Scope of Work:
CHLA will act as a biorepository for ONCORMED and its other
collection sites (listed in Appendix A) and upon ONCORMED's request will ship
tissue samples (the "TISSUE SAMPLES") to ONCORMED and its collaborators (listed
in Appendix B). CHLA agrees to be responsible for coordinating the accrual,
processing, and storage requirements of a new tissue repository network (the
"WORK"). Appendix C outlines the activities and requirements of same, which the
parties may mutually agree to update and change from time to time (hereinafter
the "SCOPE OF WORK").
2.0 Personnel
The work shall be under the direction of Dr. Deborah Schofield
the "BIOREPOSITORY COORDINATOR", and shall be carried out by other personnel of
CHLA as reasonably assigned by the BIOREPOSITORY COORDINATOR. If during the term
of this Agreement, Dr. Schofield for any reason ceases to act as BIOREPOSITORY
COORDINATOR, CHLA will consult with ONCORMED with regard to selection of another
person as BIOREPOSITORY COORDINATOR. ONCORMED shall have the right to veto the
selection of a BIOREPOSITORY COORDINATOR with which it reasonably disagrees and
terminate this AGREEMENT upon forty-five (45) days advance written notice.
<PAGE> 2
3.0 Period of Performance
The AGREEMENT shall extend from the date of execution
for three (3) years unless modified by written amendment,
renewal, or extension and shall thereafter be renewed on a
month to month basis unless and until either party notifies
the other, not less than thirty (30) days prior to the
expiration of the then current term or renewal thereof, of
such party's election to terminate this AGREEMENT effective
upon expiration of such term or renewal (the "TERM").
4.0 Duties of CHLA
CHLA agrees to furnish such available laboratory facilities,
equipment and utilities, as it shall deem necessary for the SCOPE OF WORK to be
done including but not limited to the equipment in Appendix D attached hereto.
CHLA agrees to maintain all necessary data and financial
records and agrees to make such records available to ONCORMED upon ONCORMED's
request and expense at any reasonable time during regular working hours, and
copies of all or any part of the records shall be made available within ten (10)
days upon request.
CHLA agrees to assign qualified and competent personnel to the
project. CHLA shall be responsible for the full performance of the AGREEMENT and
agrees that the description of the SCOPE OF WORK in Appendix C is accurate.
CHLA represents and warrants that is has the full authority
and power to enter into this Agreement and that no act or omission performed by
CHLA under this AGREEMENT will be in violation of any state or federal law or
any contractual obligation of CHLA to any third party.
CHLA warrants that it will perform its work to the best of its
ability, making use of its skill and experience within its area of expertise,
according to the highest standard of care and competence used in medical and
scientific inquiry.
5.0 Duties of ONCORMED
ONCORMED warrants that all participating accrual sites have an
Investigational Review Board ("IRB") approved protocol under which TISSUE
SAMPLES are collected. Accrual sites may have their own internal IRB approved
protocols, or their protocols will be reviewed and approved by ONCORMED's IRB.
Additionally, ONCORMED represents that in each agreement it executes, will
<PAGE> 3
execute or has executed with accrual sites, that each accrual site is obligated
to follow IRB approved protocols that require the accrual sites to obtain
consent from all donors of TISSUE SAMPLES.
ONCORMED agrees to provide copies of all current IRB approved
protocols used at each accrual site which covers tissue acquisition and an
example of the consent forms being utilized by the accrual sites hereafter
referred to as Appendix E and incorporated by reference. ONCORMED agrees to
provide CHLA with any updates or modifications to the IRB's or consent forms
within a reasonable time after receiving notice of said updates or
modifications.
ONCORMED agrees to provide certain supervision and consulting
services to CHLA personnel, as shall be mutually agreed, at no cost to CHLA
during the term of this AGREEMENT.
6.0 Costs and Payments
The estimated total cost to ONCORMED for the first year to
perform the SCOPE OF WORK as detailed in Appendix C is [****] (Appendix D),
which includes certain set-up costs, some of which may be paid directly by
ONCORMED.
CHLA's costs shall include all costs, direct and indirect,
incurred in the performance of the SCOPE OF WORK or reasonably incidental to
such performance. Such costs shall be subject to audit by ONCORMED at ONCORMED's
expense.
ONCORMED agrees to make twelve equal monthly payments to CHLA,
in the amount of [****]. The first payment shall be made within thirty (30) days
of execution of this AGREEMENT.
ONCORMED agrees to also reimburse CHLA within thirty (30) days
of receiving an invoice from CHLA for the purchase of equipment listed in
Appendix D.
ONCORMED agrees to pay or provide, at its option, insurance
and maintenance contracts for the equipment listed in Appendix D.
CHLA shall prepare an annual budget for approval by ONCORMED.
CHLA shall provide the budget to ONCORMED at least thirty (30) days prior to the
expiration of the current budget for review.
**** Denotes language for which the Company has requested confidential
treatment pursuant to the rules and regulations of the Securities and
Exchange Act of 1934, as amended.
<PAGE> 4
7.0 Right to Inspect and Audit
Both parties agree to maintain written records of all work
performed and data developed under this AGREEMENT for a period of at least three
(3) years from the termination of this AGREEMENT. An authorized representative
of each party shall make all records available to the other party for inspection
at any reasonable time during regular working hours, and copies of all or any
part of the records shall be made available within thirty (30) days upon
request.
8.0 Intellectual Property Rights
A. Ownership:
During the TERM, and in connection with its
performance under the AGREEMENT each party may make certain
discoveries or inventions in combination with each other, or
independently of one another (the "INVENTIONS") to which
certain INTELLECTUAL PROPERTY RIGHTS (as hereinafter defined)
may apply. The parties acknowledge the following situations
may arise in the course of CHLA providing the WORK to
ONCORMED, and agree as to the outcomes stated for each
situation. The parties also agree that promptly upon the
making of any INVENTION the party having made the INVENTION
will make a full and complete disclosure of the INVENTION to
the other, subject to all of the confidentiality, license, and
ownership provisions of this AGREEMENT (the "DISCLOSURE").
1. Each party enters this AGREEMENT owning certain
patents, trademarks, trade secrets, and copyrights (the
"INTELLECTUAL PROPERTY RIGHTS"). The INTELLECTUAL PROPERTY
RIGHTS belonging to each party prior to the EFEFCTIVE DATE,
and those vesting in either party during the TERM by virtue of
acts entirely outside the scope of this AGREEMENT remain
entirely with that party, and nothing in this AGREEMENT shall
be deemed to grant the other any right, title, interest or
license thereto.
2. Those inventions or discoveries made by ONCORMED
independent of CHLA, and the INTELLECTUAL PROPERTY RIGHTS
thereto, even if ONCORMED subsequently discusses and discloses
said inventions to CHLA, remain solely the property of
ONCORMED, and nothing in this AGREEMENT shall be deemed to
grant CHLA any right, title, interest, or license thereto.
Those inventions or discoveries made by CHLA independent of
ONCORMED and without the request of ONCORMED to make the
invention, and the INTELLECTUAL PROPERTY RIGHTS thereto,
remain solely the property of CHLA, and nothing in this
<PAGE> 5
AGREEMENT shall be deemed to grant ONCORMED any right, title,
interest, or license thereto.
3. During the TERM, and in connection with its
performance under this AGREEMENT, ONCORMED may request that
CHLA make, devise, improve or invent INVENTIONS within the
SCOPE OF WORK, including, but not limited to: (i) make
specific modifications to protocols used in performing the
WORK or (ii) within the SCOPE OF WORK, devise improvements to,
or entirely new protocols to be used in performing the WORK.
INVENTIONS made pursuant to this Section 8.A.3, and the
INTELLECTUAL PROPERTY RIGHTS thereto, shall be solely the
property of ONCORMED, and nothing in this AGREEMENT shall be
deemed to grant CHLA any right, title interest, or license
thereto, except as specified in Section 8.B.3. CHLA hereby
makes any assignment necessary to achieve the foregoing
ownership position.
4. During the TERM, and in connection with the WORK
performed under this AGREEMENT, ONCORMED may request that CHLA
develop, invent, or test INVENTIONS outside the SCOPE OF WORK.
Such requests shall be made in writing and shall include a
description of the tasks to be performed, the goals for the
outcomes of the tasks, and the fees to be paid to CHLA for the
performance of the tasks (the "WORK ORDER"). Any INVENTIONS
made pursuant to this Section 8.A.4, and the INTELLECTUAL
PROPERTY RIGHTS shall be solely the property of CHLA, and
LICENSED (as hereinafter defined) to ONCORMED on the terms
provided in Section 8.B.3 hereof.
5. During the TERM, CHLA may make certain inventions
or discoveries that are directly applicable to the WORK but
were not made in the course of the WORK (the "CHLA
DEVELOPMENTS"). The CHLA DEVELOPMENTS and any INTELLECTUAL
PROPERTY RIGHTS thereto shall remain the property of CHLA, but
shall be DISCLOSED to ONCORMED, provided that to do so would
not violate any existing contractual obligations of CHLA. CHLA
DEVELOPMENTS are subject to the terms of Section 8.E.
hereof.
B. License Grants:
1. CHLA hereby grants to ONCORMED, and ONCORMED
hereby accepts a limited, royalty-free, non-exclusive,
irrevocable license to use internally the INVENTIONS made by
CHLA and described in Section 8.A.4 hereof.
2. ONCORMED hereby grants to CHLA, and CHLA
hereby accepts a limited, royalty-free, non-exclusive,
irrevocable license to use internally for non-
<PAGE> 6
commercial purposes the INVENTIONS made by ONCORMED described
in Section 8.A.3 and 8.A.4 hereof.
3. Subject to the ABONDONMENT provisions of Section
8.C.1 and the royalty provisions of Section 8.D. hereof, CHLA
hereby grants to ONCORMED an exclusive, worldwide, irrevocable
license to make, have made, use or sell the INVENTIONS arising
out of the WORK ORDER, under all the INTELLECTUAL PROPERTY
RIGHTS thereto. Except in any event, both parties retain the
right to use INVENTIONS covered by this Section 8.B.3 for
their own internal purposes, which in the case of CHLA, shall
be only non-commercial internal purposes.
C. Patent Prosecution, Abandonment, and Costs:
1. Once ONCORMED has received a DISCLOSURE from CHLA
regarding any INVENTION that arose from a WORK ORDER, ONCORMED
will review the DISCLOSURE and determine, in its sole
discretion, whether it will abandon said INVENTION
("ABANDONMENT"). If ONCORMED ABANDONS the INVENTION, it will
notify CHLA in writing of its decision to ABANDON within
ninety (90) days of receiving the DISCLOSURE. ABANDONMENT will
relieve ONCORMED of any responsibilities under Sections 8.C.2
and 8.C.3 hereof, and will preclude or extinguish the
exclusive license granted under Section 8.B.3 hereof with
respect to that certain INVENTION, and therefore all right to
the specific INVENTION ABANDONDED will remain with CHLA.
2. ONCORMED will diligently file, prosecute and
maintain, or cause to be filed, prosecuted and maintained any
patent applications and patents covering INVENTIONS that arise
from the WORK ORDER, except for any INVENTIONS it has
ABANDONDED, for which it will have no responsibility whatever.
3. ONCORMED will bear all of the expenses associated
with the filing, prosecuting and maintaining of patent
applications and patents covered under Section 8.C.2 hereof.
D. Royalties:
ONCORMED will, on a quarterly basis, report to CHLA
the full extent of any gross income actually received by
ONCORMED arising from the sale, license or other
commercialization of the INVENTIONS licensed under Section
8.B.3 hereof (the "REVENUES"). ONCORMED will pay to CHLA a
royalty that has been in good faith negotiated and is stated
in the WORK ORDER. The ROYALTIES will be paid by ONCORMED to
CHLA until the expiration of the patent rights, on a country
by
<PAGE> 7
country basis, and after expiration, ONCORMED shall have a
fully paid-up license.
E. CHLA DEVELOPMENTS:
Provided that to do so would not violate any existing
contractual obligations of CHLA, CHLA shall offer to ONCORMED
an exclusive license to make, have made, use and sell the CHLA
DEVELOPMENTS, including the right to sublicense, under CHLA's
INTELLECTUAL PROPERTY RIGHTS therein. The parties shall in
good faith negotiate the terms of the license, although
ONCORMED shall be under no obligation to accept such license
or any additional obligations described in Section 8.C.
F. Further Assurances:
Each of the parties hereby agrees to cooperate fully
in making all assignments, and executing any and all documents
pursuant to the reasonable requests of the other to affirm or
effectuate the terms of this AGREEMENT.
9.0 Confidential Information
CONFIDENTIAL INFORMATION controlled by this AGREEMENT shall
mean information which is confidential and/or proprietary and includes, but
without limitation, IRB approved protocols, consent forms, data, know-how,
formulae, processes, designs, sketches, photographs, plans, drawings,
specifications, samples, reports, customer lists, pricing, information, studies,
findings, inventions and ideas including but not limited to INVENTIONS (the
"CONFIDENTIAL INFORMATION"). The fact and terms of this AGREEMENT shall also be
deemed and treated as CONFIDENTIAL INFORMATION.
To the extent practical, CONFIDENTIAL INFORMATION shall be
disclosed in documentary or tangible form marked "Confidential" or
"Proprietary". In the case of oral disclosures, the disclosing party shall have
the obligation to at the time of the disclosure, state that the disclosure is
confidential and thereafter confirm in writing the fact and general nature of
the disclosure within thirty (30) days after it is made.
A recipient of a disclosure of CONFIDENTIAL INFORMATION shall
not be under any obligation under this AGREEMENT five (5) years from the
expiration or termination of this AGREEMENT by the parties.
The recipient of CONFIDENTIAL INFORMATION shall use such
CONFIDENTIAL INFORMATION for the purposes contemplated in this AGREEMENT, and
shall exercise the same degree of care as it exercises to protect its own
CONFIDENTIAL INFORMATION, but in no
<PAGE> 8
event less than reasonable care to prevent its disclosure to any third party.
The recipient of CONFIDENTIAL INFORMATION shall also limit internal
dissemination of CONFIDENTIAL INFORMATION to individuals whose duties justify
the need to know such CONFIDENTIAL INFORMATION, and then only provided that
there is a clear understanding by such individuals of their obligations to
maintain the proprietary and/or confidential status of such information and to
restrict its use solely to the purposes specified herein.
The recipient of CONFIDENTIAL INFORMATION shall be under no
obligation with respect to any information: (a) which is, at the time of the
disclosure, available to the general public or later becomes available through
no fault of the recipient; (b) which recipient can demonstrate was in its
possession before receipt; (c) which is disclosed to recipient without
restriction on disclosure by a third party who has the lawful right to disclose
such information; (d) is independently developed by recipient without any
reference to the CONFIDENTIAL INFORMATION and recipient can demonstrate such
independent development by written record; (e) which is required to be disclosed
by the recipient pursuant to order of a court or law; and (f) ONCORMED shall be
entitled to disclose this AGREEMENT to lenders, investors, and their counsel in
connection with financing.
10.0 Equipment
The title and ownership to all equipment that is purchased by
CHLA or ONCORMED during the performance of this AGREEMENT (the "EQUIPMENT"),
including by not limited to the EQUIPMENT itemized in Appendix D shall vest at
the time of purchase in ONCORMED. All of the EQUIPMENT will be used exclusively
for storing, analyzing, and processing the TISSUE SAMPLES from ONCORMED and its
other collection sites and other purposes in connection with the providing of
the SCOPE OF WORK.
11.0 Use of Names
Each party agrees not to use the name of the other party,
subject to the exception in Section 9.0, without written permission of the other
party.
12.0 Assignment and Subcontracting
Neither this AGREEMENT, nor the SCOPE OF WORK defined
hereunder, shall be assigned or subcontracted, in whole or in party, to any
third party without prior written consent of the other party; provided, however,
that either party may assign this AGREEMENT without the other party's consent in
connection with the sale of controlling interest in or substantially all of the
assets, business or stock of such party to a third party.
<PAGE> 9
13.0 Relationship of the Parties
In the performance of this AGREEMENT and the SCOPE OF WORK
described herein, CHLA is and shall be an independent contractor. Neither CHLA
nor any of its subcontractors shall be deemed to be the servant, agent or
employee of ONCORMED. CHLA remains responsible for the organization,
supervision, and direction of the SCOPE OF WORK described herein. CHLA shall
furnish all necessary management, technical, and other personnel necessary for
timely completion of the SCOPE OF WORK.
14.0 Insurance
Each of the parties shall, at its sole cost and expense,
maintain a policy or policies of comprehensive general liability insurance,
including coverage against malpractice, with per occurrence liability coverage
of at least [****], and annual aggregate liability coverage of at least [****],
written by an insurance company or companies lawfully doing business in
California with an A. M. Best rating of B plus or better. If a party is
self-insured for more than [****] of liability, such self-insurance shall meet
the requirement of this AGREEMENT only if approved in writing by the other
party. Each party shall give the other party at least 30 days prior written
notice of any proposed reduction or cancellation of such insurance coverage, and
shall provide to the other party evidence of the above-described insurance
policy or policies upon reasonable request.
Each of the parties shall, at its sole cost and expense,
maintain a program or programs of workers' compensation insurance in an amount
and form to meet all applicable legal requirements to which such party is
subject.
15.0 Indemnification
ONCORMED shall indemnify, defend, and hold harmless CHLA, as
well as CHLA's agents and employees from any loss, damage, liability, cost, suit
charge, expenses, or cause of action (including reasonable attorney's fees)
arising out of any damage or injury to CHLA's property and property of third
parties, including real, personal and environmental damages, or persons,
including injuries resulting in death, directly caused by or arising our of or
in connection with this AGREEMENT and can be attributed in whole or in part to
negligent acts, omissions, fault, or willful misconduct of ONCORMED.
**** Denotes language for which the Company has requested confidential
treatment pursuant to the rules and regulations of the Securities and
Exchange Act of 1934, as amended.
<PAGE> 10
CHLA shall indemnify, defend, and hold harmless ONCORMED, as
well as ONCORMED's agents and employees from any loss, damage, liability, cost,
suit charge, expenses, or cause of action (including reasonable attorney's fees)
arising out of any damage or injury to ONCORMED's property and property of third
parties, including real, personal and environmental damages, or persons,
including injuries resulting in death, directly caused by or arising our of or
in connection with this AGREEMENT and can be attributed in whole or in part to
negligent acts, omissions, fault, or willful misconduct of CHLA.
The indemnities set forth in this Section 15.0 are subject to
the following limitations: (i) that the party seeking indemnification (the
"INDEMNIFIED PARTY") gives prompt written notice of any claim under Section 15.0
hereof, to the other party (the "INDEMNIFYING PARTY"); (ii) that the
INDEMNIFYING PARTY is given the option of assuming sole control over the claim;
and (iii) that neither party shall be liable to the other for consequential,
incidental, indirect, punitive or special damages, from all causes of action of
any kind, including contract, tort or otherwise, even if advised of the
likelihood of such damages occurring.
The Indemnified Party shall also provide the Indemnifying
Party with all reasonable cooperation in connection with such a claim. The
Indemnifying Party shall not be liable for any settlement it does not approve in
writing.
16.0 Disclaimer of Warranties
EXCEPT FOR WARRANTIES SET FORTH EXPLICITLY IN THIS AGREEMENT,
NEITHER PARTY MAKES ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED,
AND, WITHOUT LIMITATION OF THE FOREGOING, BOTH PARTIES DISCLAIM THE IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
17.0 Notices
Each party shall designate in writing a representative to
receive any and all notices required under this AGREEMENT or any amendments or
modifications hereto. Notices shall be in writing and shall be given to the
representative designated to receive the same, either by personal delivery or by
U.S. mail, telegraph, telex, telecopier, or any similar means, properly
addressed or upon such later date following receipt as is set forth in the
notice. Any party, by written notice to the other parties may change the
representative or the address to whom or to which such notices are to be sent.
<PAGE> 11
TO CHLA: TO ONCORMED:
Margaret Mary Kozik Richardson Joan Scott
Director of Corporate Relation 205 Perry Parkway
And Technology Transfer Gaithersburg, MD 20877
4650 Sunset Blvd., Mailstop # 84
Los Angeles, CA 90027
With a copy to: With a copy to:
Thomas C. Armitage Alexander D. Lynch
Vice President and General Counsel Brobeck, Phleger & Harrison
4650 Sunset Blvd., Mailstop #5 1633 Broadway, 47th Floor
Los Angeles, CA 90027 New York, NY 10019
18.0 Termination
This AGREEMENT may be terminated by either party, except as
provided below, by giving the other party written notice of a breach and
allowing thirty (30) days to cure. The non-breaching party must provide a full
description of the event or occurrence constituting a breach of this AGREEMENT.
The party receiving the notice will have thirty (30) days to cure that breach
upon receipt of written notice. If the breach is not cured within that time, the
termination will be effective immediately. Upon termination initiated by CHLA
for a material breach by ONCORMED, CHLA shall be entitled to full payment of
costs already incurred and all non-cancelable obligations.
Either party may immediately terminate this AGREEMENT for
fraud, willful misconduct, or illegal conduct of the other party upon written
notice of same to the other party.
In the event an order for relief is entered against either
party under the Federal Bankruptcy Code, or an order appointing a receiver for
substantially all assets is entered by a court of competent jurisdiction, or
either party makes an assignment for the benefit of creditors, or a levy of
execution is made upon substantially all of the assets of either party and such
levy is not quashed or dismissed within thirty (30) days, this AGREEMENT shall
automatically terminate effective on the date of such order or assignment or, in
the case of such levy, the expiration of such thirty day period; provided,
however, that such termination shall not impair or prejudice any right of remedy
that either party might have under this AGREEMENT.
This AGREEMENT shall terminate within thirty (30) days if the
parties are unable to mutually agree upon an annual budget subsequent to
presentation by CHLA to ONCORMED and ONCORMED's thirty (30) day review.
<PAGE> 12
In the event of termination or expiration of this Agreement,
ONCORMED shall, within a reasonable time, make arrangements to have the TISSUE
SAMPLES and EQUIPMENT removed from the premises of CHLA. However, until such
time, CHLA shall use its best efforts to preserve the TISSUE SAMPLES and the
EQUIPMENT in at least as good condition as the TISSUE SAMPLES and EQUIPMENT were
in during the TERM of the AGREEMENT. ONCORMED will, within thirty (30) days of
receiving an invoice from CHLA, itemizing all reasonable expenses associated
with its obligations under this paragraph, reimburse CHLA for all such
reasonable expenses.
19.0 Arbitration
Any disagreements or disputes between the parties shall be
resolved through binding arbitration rather than through lawsuits and the
courts. Accordingly, the following procedures for arbitration shall apply.
In the event that any dispute arises between the parties,
including but not limited to disputes relating to this AGREEMENT or its alleged
breach, the parties shall first try to resolve any such dispute in good faith on
an informal basis. Any dispute that the parties are unable to resolve on an
informal basis within thirty (30) days from the date written notice of the
dispute is delivered shall be settled by arbitration, as provided below.
The arbitration of any dispute which the parties cannot
resolve informally as provided in subparagraph a. above shall be conducted by a
single arbitrator in accordance with California Civil Procedure Code Sections
1282-1284.2. If possible, the arbitrator shall be selected by mutual agreement
of the parties. If the parties cannot agree on an arbitrator, the arbitrator
shall be selected by striking from a list of arbitrators supplied by
JAMS-Endispute, or other arbitration organization agreed to by the parties. The
arbitration shall be held in the City of Chicago, Illinois or other mutually
agreed neutral venue. The arbitration decision shall be final and binding on all
parties. Judgment on any award rendered by the arbitrator may be entered in any
court having jurisdiction over the parties and the subject matter of the
controversy. The prevailing party in any such arbitration shall be entitled to
recover from the other party as part of the arbitration award, in addition to
all other relief, reasonable attorneys' fees. The nonprevailing party shall be
responsible for all costs of the arbitration, including but not limited to, the
arbitration fees, court reporter fees, room charges, etc.
If a party institutes any legal action or pursues any claim or
controversy between the parties by any method other than arbitration, the
responding party shall be entitled to recover from the other party all damages,
costs, expenses, and attorneys' fees incurred as a result of such action.
<PAGE> 13
20.0 Severability
Should any term of this AGREEMENT, for any reason, be held to
be illegal or unenforceable, the remaining terms of this AGREEMENT will continue
in full force and effect, and the offending term will be limited or deleted to
the extent necessary to make it enforceable. The parties agree to negotiate in
good faith and agree upon a modified term, which reflects the original intent of
the parties.
21.0 Governing Law
This AGREEMENT shall be governed and construed in accordance
with the laws of the State of Delaware.
22.0 Entire Agreement
This AGREEMENT is binding upon and shall inure to the benefit
of the parties hereto, their representatives, successors, and assigns. No
failure or successive failures on the part of either party, its successors, or
assigns, to enforce any covenant or agreement, and no waiver or successive
waivers on their part of any condition of this AGREEMENT, shall operate as a
discharge of such covenant, agreement, or condition or render the same invalid,
or impair the right of either party, its successors and assigns, to enforce the
same in the event of any subsequent breach or breaches by the other party, its
successors or assigns.
This AGREEMENT constitutes the entire agreement between the
parties and supersedes all previous agreements and understandings related to the
work. The AGREEMENT may not be altered, amended, or modified except by a written
instrument signed by the duly authorized representatives of both parties.
IN WITNESS WHEREOF, the parties hereto have caused this AGREEMENT to be
executed by their duly authorized representatives as of the last date and year
written below.
CHILDRENS HOSPITAL OF LOS ANGELES
/s/ Yves DeClerk
- -------------------------------------
By: Yves De Clerck
------------------------------
Date: 1/26/98
------------------------------
Title: Research Institute Director
Vice President of Research
------------------------------
<PAGE> 14
ONCORMED
/s/ Doug Dolginow, MD
- -------------------------------------
By: Doug Dolginow, MD
------------------------------
Date: 1/29/98
------------------------------
Title: President & COO
------------------------------
<PAGE> 15
APPENDIX A: Collection Sites
[****]
**** Denotes language for which the Company has requested confidential
treatment pursuant to the rules and regulations of the Securities
and Exchange Act of 1934, as amended.
<PAGE> 16
APPENDIX B: Oncormed Biorepository Collaborations
1. Incyte Pharmaceuticals, Inc.
3174 Porter Drive
Palo Alto, CA 94304
<PAGE> 17
Appendix C: Scope of Work, Oncormed Biorepository
CHLA will establish, maintain and coordinate Oncormed's biorepository. CHLA will
be responsible for receiving, processing, and storing tissues received from
accrual sites and for processing and shipping requested tissue to Oncormed's
clients. CHLA will also be responsible for the administrative functions of the
biorepository including coordinating tissues and data received from accrual
sites and for maintaining communication with accrual sites, Oncormed and
Oncormed clients.
[****]
**** Denotes language for which the Company has requested confidential
treatment pursuant to the rules and regulations of the Securities
and Exchange Act of 1934, as amended.
<PAGE> 18
APPENDIX D:
[****]
**** Denotes language for which the Company has requested confidential
treatment pursuant to the rules and regulations of the Securities
and Exchange Act of 1934, as amended.
<PAGE> 19
APPENDIX E:
[****]
**** Denotes language for which the Company has requested confidential
treatment pursuant to the rules and regulations of the Securities
and Exchange Act of 1934, as amended.
<PAGE> 20
March 23, 1998
Margaret Mary Kozik Richardson
Director of Corporate Relations and
Technology Transfer
Childrens Hospital Los Angeles
Mailstop #84
Los Angeles, CA 90027
Dear Margaret:
By this letter agreement, Oncormed, Inc. (Oncormed) and Childrens Hospital Los
Angeles (CHLA) acknowledge entering into that certain agreement dated January
29, 1998 (the Agreement), and now desire to make certain amendments to the
Agreement by entering into this first amendment to the Agreement (the First
Amendment). And now, in consideration of our respective promises set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. The parties hereby delete in its entirety the third
paragraph under Section 6.0 on page three of the
Agreement and replace said paragraph with the following:
ONCORMED agrees to make twelve equal monthly payments to
CHLA (the Payments), in the amount of [****]. The first
payment shall be made within sixty (60) days of the
execution of this Agreement. The parties agree to
increase the amount of the Payments to the extent, and
when the parties mutually agree that additional personnel
should be hired in response to increased volume of tissue
sample intake and processing.
2. The parties hereby delete in its entirety Exhibit D to the
Agreement, and replace said exhibit with Exhibit D attached
hereto.
3. The changes set forth in paragraphs 1 and 2 above shall be deemed
effective as of the effective date of the Agreement, as if such
changes had been in the original Agreement.
4. Except for the two changes effected by the foregoing,
each and every term and condition of the Agreement shall
remain in effect without any change whatsoever.
**** Denotes language for which the Company has requested confidential
treatment pursuant to the rules and regulations of the Securities
and Exchange Act of 1934, as amended.
<PAGE> 21
Please acknowledge acceptance of this First Amendment and all of its terms by
signing below and returning a copy to me. I look forward to continuing our
mutually beneficial relationship. Thank you for your cooperation in this matter.
Yours sincerely,
Doug Dolginow
President
Oncormed, Inc.
cc: Deborah Schofield, M.D.
AGREED AND ACCEPTED:
Childrens Hospital Los Angeles
/s/ Dr. Yves DeClerck
- ------------------------------
Signed
Dr. Yves DeClerck
- ------------------------------
Name
Vice President of Research
Director, Research Institute
- ------------------------------
Title
3/30/98
- ------------------------------
Date
<PAGE> 1
Exhibit 11
ONCORMED, INC.
EARNINGS PER SHARE
CALCULATION OF SHARES USED IN COMPUTING
NET LOSS PER SHARE
<TABLE>
<CAPTION>
Period From
Inception
Three Months Ended (July 12, 1993)
March 31, Through
1998 1997 March 31, 1998
---- ---- --------------
<S> <C> <C> <C>
Common Stock 7,881,519 7,320,698 5,897,303
--------- --------- ---------
Shares used in computing net loss per share 7,881,519 7,320,698 5,897,303
========= ========= =========
</TABLE>
<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
10Q and is qualified in its entirety by reference to such annual report on Form
10Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,166,788
<SECURITIES> 0
<RECEIVABLES> 186,191
<ALLOWANCES> 42,566
<INVENTORY> 0
<CURRENT-ASSETS> 3,500,835
<PP&E> 2,727,392
<DEPRECIATION> 1,742,552
<TOTAL-ASSETS> 4,485,675
<CURRENT-LIABILITIES> 3,116,060
<BONDS> 0
78,828
2,873,990
<COMMON> 0
<OTHER-SE> (2,304,854)
<TOTAL-LIABILITY-AND-EQUITY> 4,485,675
<SALES> 264,396
<TOTAL-REVENUES> 264,396
<CGS> 196,845
<TOTAL-COSTS> 3,162,970
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,275
<INCOME-PRETAX> (3,173,531)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,173,531)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,173,531)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> 0
</TABLE>
