December 31, 2005
Management's Discussion and Analysis
of Financial Conditions and Results of Operations
INFORMATION
REGARDING FORWARD-LOOKING STATEMENTS*
The audited full-year 2005 consolidated balance sheet for the Company
has been posted on the Company's website. Although adjustments to the financial
results for 2005 have been made, the Company has not updated and does not intend
to update Management's Discussion & Analysis and Risk Factors for 2005. Adjustments to the
2005 and first quarter 2006 financial results are discussed in Notes to the
Financial Statements for the second quarter of 2006, which will be posted on
the Company's website.
This report contains forward-looking statements. These statements involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from any future results,
performances or achievements expressed or implied by the forward-looking
statements. Forward-looking statements include, but are not limited to,
statements about:
. the marketing
and sales of our products and services;
. our ability to
sustain licensing and other contract-based revenues;
. the benefits of knockout mice programs and, in particular,
our technologies and products, to the pharmaceutical industry;
. the increasing competition we face
in the field of knockout mice from both commercial and government organizations;
. the impact of our
recent NIH Contract on future business;
. the requirements
of pharmaceutical and biotechnology companies;
. our future
revenues and profitability;
. limitations or failures in the drug discovery, development
and approval processes by our partners and collaborators;
.
our patent
applications and licensed technologies;
. our ability to
attract customers and establish licensing and other agreements;
. our ability to successfully execute our business plan and
to meet contractual obligations, in view of the Company's limited staff; and
.
liquidity and
capital resources.
In some cases, you can identify
forward-looking statements by terms such as "may," "will," "should," "could,"
"would," "expects," "plans," "anticipates," "believes," "estimates,"
"projects," "predicts," "potential" and similar expressions intended to
identify forward-looking statements. These statements reflect our current views
with respect to future events and are based on assumptions and subject to risks
and uncertainties. Given these uncertainties, you should not place undue
reliance on these forward-looking statements.
These forward-looking statements represent our estimates and assumptions
only as of the date of this report.
You should read this report completely
and with the understanding that our actual future results may be materially
different from what we expect. We qualify all of our forward-looking statements
by these cautionary statements.
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN
CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE NOTES ACCOMPANYING THE
FINANCIAL STATEMENTS.
1. History and Business of
the Company
a. Business Overview and Major Pre-Petition
Events
At its inception, Deltagen's goal was to become
a leader in providing in vivo derived mammalian gene function
information to the pharmaceutical industry to help define the function and
disease relevance of mammalian genes for the purposes of discovering and
validating novel drug targets. To that end, the Company embarked on an effort to establish
a high-throughput knockout ("KO") mouse production and analysis operation, in
which mice have had a single gene targeted for deletion (i.e., knocked
out) and have been studied to determine phenotypic changes in the mice
attributable to the gene deletion.
Deltagen built its production "pipeline" upon a
technology known as homologous recombination, in which a specific gene of
interest is selectively knocked out.
This technology is contrasted with random knockout technologies, such as
chemical or other mutagenesis and gene trapping techniques, which have the
advantage of being more rapid, but which lead to random and less reliable
mutations. In
homologous recombination, a targeting construct or vector is created with a
sequence that will lead to functional deletion of the target gene
sequence. The construct is introduced
into a mouse embryonic stem ("ES") cell.
ES cells derived from a successful recombination event are then injected
into a mouse blastocyst, which is then implanted into a pseudopregnant female
mouse. Chimeric progeny containing the
homologously recombined DNA in their germ cells can be used to breed animals in
which all cells of the animal contain the homologously recombined DNA. The KO mouse lines can be maintained as live
mice through successive rounds of breeding, or can be cryopreserved as
embryos. Mice can also be regenerated
from frozen sperm obtained from the KO mice or from the selected ES cells or
embryos that are frozen.
The Company built a
proprietary database called DeltaBase® to store the comprehensive
phenotypic data obtained from analysis and observation of the KO mice. DeltaBase was designed to accommodate data
relating to 250 knockout mouse lines per year, to be released to DeltaBase
subscribers on a quarterly basis at the rate of 62-63 targets per quarter. DeltaBase is accessed and manipulated through
customized software developed by Deltagen referred to as DeltaDiscoveryT.
Deltagen marketed
DeltaBase to the pharmaceutical and biotechnology industries as a means to help
define the role that genes play in biological processes and disease. The genes analyzed in DeltaBase were selected
based upon their relevance and usefulness as drug targets. Phenotypic data were generated by
comprehensively studying knockout mice through a standardized, detailed and
extensive analysis program in order to determine the function and role that a
particular gene plays in the mouse and that gene's suitability as a drug
target. In addition to accessing target
validation data, DeltaBase subscribers have had access to the knockout mice
used to generate the data contained in DeltaBase. Deltagen started commercializing DeltaBase in
September 2000.
In Spring 2000, after receiving three initial
rounds of private financing, Deltagen prepared to go public. Prior to Deltagen's planned initial public
offering, Deltagen's principal competitor, Lexicon Genetics Incorporated
("Lexicon"), based in The Woodlands, Texas,
instituted a patent infringement suit against Deltagen. Deltagen's initial public offering occurred
in August 2000, when Deltagen's stock began trading on the Nasdaq stock
exchange.
As part of its initial
public offering, Deltagen raised about $120 million on the issuance of 15
million shares. Since that time,
Deltagen has issued additional shares under its equity incentive plans, through
private equity placements and in connection with acquisitions of several
companies. At present, there are
approximately 39 million outstanding shares of Deltagen stock.
In its litigation against Deltagen, Lexicon alleged that Deltagen had
infringed U.S. Patent 5,789,215 (the "'215 Patent"), a patent directed to the
use of so-called "isogenic DNA" in homologous recombination. Deltagen believed that the '215 patent was
invalid and unenforceable. Deltagen
asserted antitrust and business tort counterclaims against Lexicon.
Deltagen's disputes
with Lexicon were settled in September 2001.
The settlement resolved the patent infringement action over the '215
patent and another patent infringement suit against Deltagen on patents
referred to as the Capecchi patents, which involved positive-negative selection
methods. As part of the settlement, all
litigation was withdrawn and Deltagen and Lexicon entered into a Sublicense
Agreement, which provided for cross-licensing of the patents of each
company, and a DeltaBase Collaboration Agreement, which authorized Lexicon to
gain access to DeltaBase and Deltagen's knockout mouse materials.
Deltagen had three primary subscribers to
DeltaBase: (1) Glaxo Group Limited and
GlaxoSmithKline Research and Development Limited (together, "GSK"); (2) Pfizer
Inc ("Pfizer"); and (3) Merck & Co., Inc. ("Merck"). The DeltaBase agreements provided each of
these companies with the right to access DeltaBase information on gene function
and validated gene targets for a specified subscription term and, if elected,
extended access periods. Deltagen
delivered the first quarterly release of DeltaBase to GSK and Pfizer in
September 2000. Deltagen entered into a
DeltaBase agreement with Merck in February 2002.
Beginning February 2001, Deltagen commenced operations of a European
subsidiary, Deltagen Europe S.A. ("Deltagen Europe"), based in Strasbourg, France. In connection with this European subsidiary,
Deltagen loaned approximately $2 million to a development group called ALSABAIL
for the purchase of a parcel of land and the design and development of
facilities on that parcel. The land was
purchased and the facilities were designed, but there was no construction.
In July 2001, Deltagen
acquired Arcaris, Inc. ("Arcaris"), which was renamed Deltagen Proteomics
Inc. Located in Salt Lake City, Utah,
Arcaris had developed technologies consisting of genetic, proteomic and
cell-biological systems for the identification and validation of drug targets
and the creation of small molecule screens.
Deltagen intended to use the information generated through these
technologies to advance the discovery of new disease targets by defining the
role of novel non-traditional targets within intracellular pathways with
particular relevance to oncology, viral and infectious diseases. Additionally, the technologies developed by
Arcaris were intended to facilitate the rapid development of small molecule
screens against identified targets.
In August 2001, Deltagen entered into a secreted
protein agreement with Eli Lilly and Company ("Lilly") to evaluate, and
potentially develop and commercialize, therapeutic secreted proteins. Under the terms of the agreement, Lilly was
to provide potential targets from its secreted protein pipeline for which
Deltagen would further evaluate the therapeutic potential in mammalian
models. Approximately 40 targets were
involved in the collaboration. Among
those secreted proteins with potential therapeutic value, each company had the
right to select proteins for commercial development, with each company
receiving royalties based on sales of therapeutic products. The agreement provided Lilly with certain
acquisition, co-promotion, co-marketing and profit-sharing options with respect
to therapeutic products developed and commercialized by Deltagen. The agreement also provided Deltagen with
certain co-promotion, co-development and profit-sharing opportunities. Deltagen's efforts to generate and study KO
mice under this collaboration ceased as a result of Deltagen's bankruptcy
filing. Deltagen's rights under this
collaboration were transferred to Lilly during the Chapter 11 Case, subject to
certain royalty obligations to Deltagen.
In October 2001,
Deltagen entered into a collaboration agreement with Hyseq Inc., now called
Nuvelo, Inc. ("Nuvelo"), to research, develop and commercialize
biopharmaceutical products based on secreted proteins. Under the terms of the agreement, Nuvelo was
to provide Deltagen with gene sequences encoding secreted proteins and Deltagen
would utilize its proprietary in vivo mammalian gene knockout technology
to discover and validate potential commercially relevant biopharmaceutical drug
targets. Approximately 160 targets were
involved in the collaboration. Deltagen
and Nuvelo were to each have certain joint development and commercialization
rights around potential biopharmaceutical drug targets discovered through the
collaboration. Deltagen's efforts to
generate and study KO mice under this collaboration ceased as a result of
Deltagen's bankruptcy filing. Deltagen
and Nuvelo reached a voluntary settlement and termination of this collaboration
during the Chapter 11 Case.
During 2002, Deltagen redirected its business away
from commercializing KO mouse products and toward becoming an integrated target
validation and drug discovery and development biopharmaceutical company.
In February 2002,
Deltagen completed the acquisition of BMSPRL, L.L.C. ("BRMSPRL"), formerly known
as CombiChem, Inc., from Bristol-Myers Squibb Company. BRMSPRL, which was located in San Diego, California,
was renamed Deltagen Research Laboratories, L.L.C. ("DRL"). BMSPRL had no ongoing research and
development projects at the time of the acquisition. Thus, in order to fuel the medicinal
chemistry efforts at DRL, Deltagen instituted advanced phenotyping programs in
the areas of metabolism, with a focus on diabetes and obesity, and
immunology/inflammatory disease. The
phenotypic data in these programs were obtained on the same DeltaBase mouse
lines provided to DeltaBase subscribers, but such advanced data were not
released to subscribers. These programs
are now referred to as Advanced Phenotypic Program in Diabetes and Obesity
("APPIDO") and Advanced Phenotypic Program in Immunology ("APPI").
In March 2002,
Deltagen acquired XenoPharm, Inc. ("Xenopharm"), a San Diego, California-based
private company. XenoPharm has a
proprietary technology platform useful for pharmaceutical, biotechnology,
chemical and agricultural companies to better understand and predict reactions
of foreign substances called "xenobiotics" in human systems.
By late 2002, Deltagen (including its subsidiaries) had grown to more than
500 employees and consisted of facilities and subsidiary operations at ten
sites. Deltagen's multiple lease
obligations stemming from its various acquisitions had greatly increased
Deltagen's expenses. At the same time,
Deltagen's revenues and new customer agreements stagnated. Deltagen obtained an additional round of financing in 2002 totaling approximately $22 million, but this was insufficient to
offset Deltagen's increased expenditures.
In October 2002, Deltagen commenced a cost savings and business realignment
plan to reduce expenses. As part of that
effort, the Company reduced its staff by approximately 130 employees, closed
its San Diego and Salt Lake City facilities, and essentially
ceased operations at DRL, XenoPharm, and DPI.
At the same time, Deltagen introduced its DeltaOneTM product,
which permitted customers to license KO mice and/or related phenotypic data for
specific, individual DeltaBase targets.
In early 2003, when it
appeared that DeltaBase subscribers were unlikely to renew their subscriptions
and Deltagen had not signed new full-term subscribers, Deltagen implemented two
more rounds of staff reductions and ceased operations at Deltagen Europe. Concurrently, Deltagen entered into lease
restructuring negotiations with several of its landlords and vacated facilities
located in Menlo Park and Alameda, California.
In early April 2003,
Deltagen obtained a secured minimum commitment of $10 million in equity capital
from certain existing institutional investors to purchase preferred stock in a
private placement. Deltagen also obtained
a secured bridge loan of $5 million from the same investors. The loan was secured by substantially all of
Deltagen's assets and was payable in full, plus interest at a rate of 10% per
annum, on July 1, 2003. Additional financing was contingent upon the
satisfaction of certain commercial milestones and the successful restructuring
of the Company's leases.
In late April 2003,
Lexicon sent letters (1) asserting that Deltagen had breached the DeltaBase
Collaboration Agreement, and (2) seeking to terminate the Sublicense
Agreement. Both agreements were executed
in September 2001 as part of the global settlement of patent infringement
litigation between the parties. Lexicon
also asserted a claim against Deltagen for $25 million for the alleged breach
of the DeltaBase Collaboration Agreement.
In May 2003, Deltagen commenced an arbitration proceeding against
Lexicon seeking, among other things, a determination that Deltagen had not
breached the DeltaBase Collaboration Agreement and that Lexicon's purported
termination of the Sublicense Agreement was invalid. The arbitration was stayed by virtue of
Deltagen's bankruptcy filing. In
November 2003, Lexicon filed a proof of claim in Deltagen's Chapter 11 Case
against Deltagen's estate asserting a general unsecured claim in the amount of
$25 million, plus costs, fees and other damages.
Although Deltagen was able to
successfully close the $5 million bridge loan, the contemplated preferred stock
investment did not occur. As a result,
in light of the Company's inability to generate sufficient revenues to sustain
operations, Deltagen filed for chapter 11 bankruptcy protection on June 27, 2003 in order to
allow the Company to reorganize its affairs and maximize the value of its
assets.
b. Major
Post-Petition (including 2005) Events
During
the course of its Chapter 11 Case, Deltagen sold its surplus assets, rejected
certain leases, and streamlined its operations to the minimum necessary to
sustain the Company's licensing business and preserve its entitlement to various
royalties and milestones payable by licensees.
Deltagen also continued to enter into "ordinary course" licensing
transactions relating to Deltagen's KO mouse materials and phenotypic data
accessible through DeltaBase, DeltaDiscovery and DeltaOne.
In mid-2004, Deltagen
negotiated an amendment to a license agreement with Cellectis, S.A.
("Cellectis"). Pursuant to the amended
agreement, Deltagen and Cellectis agreed to reduce and restructure the license
fees and royalty payments otherwise payable by Deltagen to Cellectis for
certain patent rights that Deltagen may require in the future. Deltagen was authorized by the Bankruptcy
Court to assume the amended agreement on September 7, 2004.
On
June 15, 2004, the Bankruptcy Court approved a stipulation between Deltagen and
Bristol-Myers Squibb Company ("BMS") to modify the automatic stay to permit the
application (and extinguishment) of a pre-petition credit in the amount of $5
million held by BMS against certain post-petition deliveries of data and materials
owed by Deltagen under the terms of a pre-petition license agreement. Deltagen believes that addressing such credit
by satisfaction in kind, rather than payment in cash, significantly reduced the
cost to the estate of satisfying this claim.
As mentioned above, prior to the bankruptcy, Deltagen and Nuvelo entered
into an agreement to collaborate on the discovery and research of certain genes
encoding secreted proteins that may have potential as commercial drug and
therapeutic products. Secreted proteins
are proteins that are synthesized for export from a cell or to the surface
membrane of a cell where they play a role in the communication between
cells. Insulin is a well-known example
of a secreted protein. Nuvelo is the
owner of certain intellectual property rights (including patents and patent
applications) surrounding the discovery and utility of genes possibly encoding
secreted proteins. Under
the parties' prepetition agreement, Nuvelo would select certain gene targets
that, based on its proprietary bio-informatics research and the priority of its
patent positions, appeared to have promise as potential sources of secreted
proteins. After the parties reached
consensus on the most promising gene sequences, Deltagen would use its
intellectual property and phenotyping expertise to research and study the
targets. Deltagen had developed a
proprietary, high-volume, assembly-line method to generate detailed
physiological, pathological and behavioral data related to gene functions. Under the agreement, Nuvelo would provide
funding to Deltagen to conduct the development project. In March 2003, the
parties designated 161 gene sequences (the "Project Genes") for further
analysis and study under the Collaboration Agreement. Shortly thereafter, however, due to financial
constraints, Deltagen discontinued further development activities under the
agreement and a number of disputes arose between the parties about their
respective obligations under the agreement.
Deltagen and Nuvelo
resolved their disputes pursuant to a settlement agreement that was approved by
the Bankruptcy Court on March
9, 2004. Under the
agreement, the parties released
their respective obligations under the prepetition collaboration agreement and
divided the rights and related technical data that were the subject of the
collaboration effort. Deltagen received
46 of the genes covered by the collaboration and Nuvelo received the remaining
115 genes.
Also, as mentioned above, prior to the bankruptcy, Deltagen and Lilly
entered into a secreted protein agreement to evaluate, and potentially develop
and commercialize, therapeutic secreted proteins. Under the terms of the
agreement, the parties had designated forty (40) project genes for further
analysis and study. As a result of
financial problems, however, Deltagen discontinued its services under the
agreement prior to the Petition Date. During the Chapter 11 Case, Deltagen and Lilly reached an
agreement to resolve their disputes, which was approved by the Bankruptcy Court
on July 2, 2004. Pursuant to the agreement, (1) Deltagen
rejected, and was relieved from, any remaining obligations under the parties'
joint development program; and (2) Lilly elected to retain its rights, pursuant
to section 365(n)(1)(B) of the Bankruptcy Code, in certain of Deltagen's
intellectual property and will be subject to certain royalty obligations.
In
October 2004, Deltagen entered into an arrangement with Mitsubishi Corporation,
under which Mitsubishi Corporation serves as Deltagen's exclusive sales and marketing
representatives in Japan.
On November 1, 2004, the
Bankruptcy Court authorized Deltagen to assume and assign to Rinat Neuroscience
Corp. ("Rinat") a lease of nonresidential real property at 1031 Bing Street, San Carlos,
California, where Deltagen's
headquarters are currently located. By virtue of this transaction, Deltagen was able to (1)
amend its existing lease for these premises to eliminate any liability to the
estate, (2) assign such lease to Rinat which agreed to pay Deltagen
approximately $8,000 per month in compensation through December 31, 2006 (with
an option through the end of 2011), (3) sell certain surplus personal property
at the premises to Rinat for $550,000, and (4) eliminate future rent expense,
while preserving a limited amount of space necessary for Deltagen's continued
operations at no cost to the estate.
On January 18, 2005, the
Bankruptcy Court authorized Deltagen to terminate a license agreement with the
University of Edinburgh, pursuant to which the Debtor had been granted an
exclusive, worldwide license in (and right to sub-license) certain patented
technology involving vectors and the capturing of genes. Deltagen initially moved to terminate the
license agreement in exchange for payment from the University of Edinburgh
in the amount of $102,500, but Lexicon offered $200,000 for an assignment of
the license. The University of Edinburgh
subsequently overbid Lexicon and paid Deltagen the sum of $250,000 to terminate
the license.
In early 2005, Deltagen and Lexicon, as well as
its master licensors (The University of Utah Research Foundation and Medarex,
Inc., as successor in interest to GenPharm International, Inc.), reached a
global settlement of their disputes, which was approved by the Bankruptcy Court
on March 14, 2005. The agreement was encompassed in an amendment
to the parties' prepetition agreements and contained four principal
components. First,
the parties agreed on a settlement amount necessary to cure all defaults under
the prepetition agreements, for which Lexicon had filed a claim for damages in an amount of $25 million.
Deltagen disputed both its liability, and the amount claimed by Lexicon,
for such alleged damages. Under the
settlement, the parties agreed to a full cure of any and all defaults by means of
a $4 million cash payment by Deltagen and certain deferred, contingent royalty
payments based on Deltagen's receipt of net revenues after September 1, 2004,
from the licensing of completed and future knockout mice. In the case of licensing revenues for
completed knockouts, the maximum, aggregate amount of royalty payments due to
Lexicon is $6 million. Deltagen,
however, made no guarantees about any minimum royalty payments that may become
payable to Lexicon. As of December 31, 2005,
Deltagen had made royalty payments to Lexicon in an aggregate amount of
$437,558. For future knockouts, there is
no maximum, aggregate amount of royalties, but the royalty rate for such new
materials and related phenotypic information is lower than the rate for
completed knockouts. Second,
the parties agreed to amend the prepetition agreements to limit the annual
number of new knockout mice that Deltagen may generate and use in the
future. Third, the parties agreed to
amend their DeltaBase Agreement to acknowledge that Deltagen has fully
satisfied all outstanding delivery and performance obligations under the
agreement. Nonetheless, Lexicon remains
obligated under specified conditions to Deltagen for milestone and royalty
payments for drug compounds that are discovered based on the use of Deltagen's
data and materials (payable in the amounts and at the times set forth in the
DeltaBase Agreement). Fourth,
the parties agreed to exchange general releases for all known and unknown
claims related to activities and knockouts generated prior to approval of the
agreement. In connection with the
release, the prepetition arbitration between the parties was dismissed and the
proof of claim filed by Lexicon was withdrawn with prejudice.
In early-to-mid 2005,
Deltagen reached agreements with GSK, Merck and Pfizer regarding assumption of
those parties' respective DeltaBase agreements.
Deltagen's agreements with GSK and Merck were amended, among other
things, in order to (1) restructure the fees payable for extensions of annual
access terms; and (2) modify certain terms governing deliveries of knockout
mice materials by Deltagen. As part of
the assumption of Deltagen's agreement with GSK, GSK agreed to withdraw with
prejudice its duplicate contingent proofs of claim against Deltagen, each
asserting at least $27,844,000 for damages that would arise had Deltagen
rejected its agreements with GSK. Deltagen's agreement with Pfizer was assumed with Pfizer acknowledging that Deltagen had
satisfied all delivery obligations. The
Bankruptcy Court approved the assumption of Deltagen's agreements with Merck
and Pfizer by separate orders dated February 24, 2005, and approved Deltagen's assumption of
its agreement with GSK on July
26, 2005. All terms and
conditions of Deltagen's agreements with GSK and Merck, as amended, and Pfizer
are currently in full force and effect, including GSK's, Merck's and Pfizer's
respective obligations to make milestone payments to Deltagen subject to
certain conditions in the agreements.
In Summer 2005, a sale
of the parcel of land that was intended for development by Deltagen Europe was
consummated. In late 2005, Deltagen
Europe recovered approximately $1.8 million associated with the land sale, and
Deltagen Europe has applied with the French government for tax credits relating
to research expenditures in 2001 and 2002 in the cumulative amount of
approximately $1 million. Deltagen
Europe expects to receive these tax credits in 2006.
In
Spring 2005, Deltagen negotiated a license arrangement with Stem Cell Sciences
Limited ("SCS"), pursuant to which Deltagen received a perpetual, retrospective
and prospective license under SCS' rights to certain technology involving IRES
vectors in exchange for a payment by Deltagen of $200,000 and provision of
certain mouse materials to SCS. Deltagen
will also owe SCS ongoing royalties on licensing revenues collected from
certain contracts executed by Deltagen after September 1, 2004.
In
late September 2005, the United States Government, through the National
Institutes of Health ("NIH"), awarded Deltagen a three-year contract in
response to a proposal submitted by Deltagen in response to a Request for
Proposal issued by the NIH in April 2005 (the "NIH Contract"). Under the NIH Contract, the NIH is eligible
for a period of three years to order for delivery to designated repositories
any of the approximately 750 knockout mouse lines (and related phenotypic data)
that populate the DeltaBase database product.
The NIH is permitted to publish the phenotypic data and make the
knockout mouse materials available for licensing to academic and non-profit
institutions for their research use ("Academics"). Commercial entities are not permitted to
obtain knockout lines under the NIH Contract and cannot engage in contract
research with Academics to access the knockout lines or rights in discoveries
and results obtained by Academics.
Deltagen retained exclusive rights to continue licensing all of its
knockout mouse lines to commercial entities.
The maximum revenue from the NIH Contract is $25 million, if all of the
knockout mouse lines are ordered by the NIH during the term. Under the NIH Contract, 37.5% of the price is
due upon delivery and initial inspection, and the remaining 62.5% of the price
is due upon detailed inspection and acceptance, which process is not to exceed
six months from delivery. The NIH
Contract permits The Wellcome Trust, a non-profit organization based in England,
to order, as a partner to the NIH, knockout lines under the terms of the NIH
Contract. On September 30, 2005, the NIH placed an
initial delivery order for 129 knockout lines, for a total price of $5.16
million. Delivery of the materials and
related phenotypic data specified in the initial delivery order was completed
in November 2005. No other delivery
orders have been submitted, and neither the NIH nor The Wellcome Trust has any
obligation to place any future orders under the NIH Contract.
In
late 2005, the Company entered into an arrangement with Charles River
Laboratories of Wilmington,
Massachusetts ("CRL"). CRL, a global
provider of solutions that advance the drug discovery and development process
for the biopharmaceutical industry, became the exclusive custodian and
worldwide distributor of Deltagen's repository of knockout mouse
materials. Under this arrangement, CRL
agreed to reduce the claim it had filed in Deltagen's Chapter 11 Case from
approximately $985,000 to $250,000.
Deltagen is eligible to receive the benefit of CRL's suite of services
at discounted rates.
Following the bankruptcy filing, Deltagen was delisted from Nasdaq and
deregistered under the Securities Exchange Act of 1934. As a result, Deltagen has no legal obligation
to resume making periodic filings with the Securities and Exchange Commission
or otherwise provide public disclosure with respect to its results of
operations or other matters. Although
Deltagen announced on December
19, 2005 that it intended to announce its 2005 financial results
sometime during the first quarter of 2006 and that it currently intends to
announce quarterly results for 2006, it may change this intent at any time and
stop further disclosure with respect to its results of operations or other
matters.
c. Products and Major Collaborations
Our customers and partners/colaborators
include the world's largest pharmaceutical companies, GlaxoSmithKline plc,
Merck & Co., Inc., Pfizer Inc., Eli Lilly and Company and Schering-Plough
Research Institute, as well as significant biotechnology and biopharmaceutical
companies including Lexicon Genetics Incorporated.
To date, we have generated revenue from
our DeltaBase, DeltaSelectTM and DeltaOne products and programs.
DeltaBase is our proprietary database
that provides information, based on knockout mouse studies, on gene function
and validated gene targets for drug discovery. We created DeltaBase to be
marketed to the pharmaceutical and biotechnology industries to help define the
role that genes play in biological processes and disease. We selected genes for
DeltaBase based upon what we believe to be their potential to become useful
drug targets. We generated information on these genes by comprehensively
analyzing knockout mice made through our proprietary gene knockout methods.
Each knockout mouse underwent a standardized, detailed and extensive analysis
in order to determine the function and role that a particular gene plays in the
mouse and that gene's suitability as a drug target. In addition to accessing
target validation data, DeltaBase collaborators have access to the knockout
mice used to generate this data.
The DeltaSelect program was our initial
program. Customers received target validation information for selected genes on
a fee-for-service basis. This program was provided to validate our proprietary
technology and promote interest in the DeltaBase product that became available
in 2000. We believe that the DeltaSelect program provided validation of our
proprietary platform technology and promoted interest in DeltaBase, however,
the revenues generated from the DeltaSelect program have to date not been
significant and have with time become historically less significant. In 2005, the Company received no revenues
associated with the DeltaSelect program and we anticipate that revenues from
DeltaSelect will continue to be insignificant or zero.
In 2002, we launched a product line
known as DeltaOne that offers access to our portfolio of knockout mice and/or
accompanying phenotypic data, as well as any corresponding intellectual
property, on a gene-by-gene basis. In
2005, revenues from our DeltaOne program were the principal source of contract
revenues for the Company.
We have DeltaBase agreements with
GlaxoSmithKline, Pfizer and Merck (the "DeltaBase Collaborations"). Each of
these agreements provides for payments aggregating approximately $15 million in
exchange for three years' worth of DeltaBase targets. These three-year subscription terms expired
in 2003, with Deltagen's last quarterly delivery of DeltaBase in June
2003. However, Deltagen has received and
may continue to receive additional revenues associated with annual access
extension fees under the DeltaBase Collaborations where such collaborators opt
to continue accessing the DeltaBase database and associated intellectual
property and/or associated knockout mouse materials. In addition, Deltagen may receive milestone
payments under the DeltaBase Collaborations based on issuance of certain
patents to Deltagen and the collaborators' drug development and approval
activities relating to DeltaBase.
2. Critical Accounting
Policies and Estimates
The consolidated financial statements as
of Deltagen for the year ended December
31, 2005 have been prepared in accordance with accounting
principles generally accepted in the United States of America for annual
financial information. These
consolidated financial statements have been prepared so that they present
fairly, in the opinion of management, the Company's financial position and its
results of operations and its cash flows for the period presented.
Under our revenue recognition policy,
revenues are recognized when a definitive agreement with a determinable price
exists, product delivery and/or invoicing (in each case where there is
reasonable assurance of meeting customer-specified criteria) have occurred, and
collectibility is reasonably assured.
3. Results of Operations
for 2005
The company's
consolidated revenues for the year ended December 31, 2005 totaled $6.70 million.
The revenues were primarily attributable to license fees associated with the
provision of knockout mice and related phenotypic data under its DeltaOneTM
program, access extension fees under its DeltaBase®
collaborations and amounts received under Deltagen's contract with the
National Institutes of Health (NIH). The company booked revenues of $1.9
million in 2005 pursuant to the NIH contract.
The company had interest income of $0.31 million for the year ended December 31, 2005.
Total consolidated
expenses for the year ended December
31, 2005 were $7.16 million. The expenses were primarily
attributable to salaries and management costs, and other general and
administrative expenses, license fees and third-party royalty obligations, as
well as legal fees associated with the administration of the company's Chapter
11Case and patent prosecution expenses.
Net loss for the year
ended December 31, 2005
was $0.15 million. Net loss per share for the year ended December 31, 2005 was
$0.0039.
As of December 31, 2005, the
company had $11.56 million in consolidated cash and cash equivalents.
4. Outlook
A
financial forecast for the company for calendar years 2006-2008, based on
continuation of its current business, was presented in the Disclosure Statement
filed in September 2005 as required by applicable bankruptcy laws. This financial forecast included specified
amounts the company expected to receive under the NIH Contract during that
period. At present, the company expects that up to approximately $2.75
million originally forecasted to be received in 2006 pursuant to the NIH
Contract will be received in later years during the term of the NIH
Contract. Due to subsequent events,
investors should not rely on the Disclosure Statement projections or on the
monthly operating reports or other financial documents filed with the
bankruptcy court pursuant to the company's chapter 11 case. The company does not intend to update these
projections or provide new projections in the future.
Risk Factors Affecting Future Operating Results
We have incurred substantial losses since our inception and we may
never achieve profitability, which in turn may harm our future operating
performance and may cause the market price of our stock to decline.
We have had net losses every year since
our inception in 1997. Because continued
revenues are uncertain and difficult to predict, we may continue to be
unprofitable and we may never achieve profitability. If we do not become profitable within the
time frame expected by securities analysts or investors, the market price of
our stock will likely decline. If we do
not achieve profitability, we may not be able to sustain or increase
profitability in the future.
Our revenues are heavily dependent upon one source and if the
revenue from this single source does not substantially meet expectations, the
Company may not have sufficient revenues or financial resources to sustain its
operations.
A significant portion of the company's
revenues for calendar years 2006-2008 is expected to come from the NIH
Contract. However, the NIH has no
obligation to place any further delivery orders under the NIH Contract. If the revenues from the NIH Contract do not
substantially approach or meet such expectations, the Company may not have
sufficient revenues or financial resources to sustain its operations.
We may need to raise additional capital that may not be available,
which if not available, may adversely affect our operations.
Our products and services may not in the
future produce revenues that, together with our existing cash and other
resources, are adequate to meet our anticipated cash needs. We plan to continue
to fund our operations from our existing cash balances and cash flows, but may
need to raise additional funds from the sale of stock, either through private
financing and/or a public offering, or from debt financing. If and when we may need additional funding,
we may be unable to obtain it on favorable terms, or at all. If adequate funds are not available, we may
have to curtail operations significantly or liquidate.
We have only a finite inventory of products and unless we are able
to expand our inventory, we may not be able to achieve or sustain sufficient
revenues to fund our operations.
At present, and for the last two years,
we have had a finite and static product inventory. We have no current research and development
operations or activities. We have
approximately 900 knockout mouse lines at the mouse stage (cryopreserved as
frozen embryos) and approximately 450 knockout lines at the ES cell stage. Because we have a finite and, at present,
static, inventory of products available for licensing to third parties, we will
likely not be able to sustain our business unless we expand our product
inventory. And, even if we desire to
expand our product inventory, it may not be feasible to do so depending on
competition and third party license restrictions.
Almost all of our knockout mouse inventory is stored and managed
by a single third party service provider, and a natural disaster at one or more
of their facilities is possible and could result in a prolonged interruption of
our business or a complete loss of our product inventory.
Almost all of our knockout mouse
inventory is stored and managed by CRL. We and CRL have taken precautions to
safeguard our inventory, including through insurance, storage of materials
off-site at a back-up facility, and the storage of multiple and redundant
embodiments of the knockout mouse inventory to allow for their possible
regeneration. However, a natural disaster, such as an earthquake, fire, power
loss or flood, could cause substantial delays or result in the complete loss of
our product inventory.
There are only a finite number of current and potential
pharmaceutical customers and, therefore, we may not succeed, especially if
there is continued consolidation in the pharmaceutical industry.
We currently have DeltaBase or DeltaOne
relationships with most of the world's largest pharmaceutical companies.
Because of our reliance on revenues generated under our DeltaBase and DeltaOne
agreements, we may not succeed unless we can attract more customers or expand
our relationships with existing customers.
Over the past several years, companies
in the pharmaceutical industry have undergone significant consolidation. As
such companies merge, we will have fewer potential customers for our products.
Also, if two or more of our present or future customers merge, we may not be
able to receive the same fees under agreements with the combined entities that
we were able to receive under agreements with these customers prior to their
merger. Moreover, if one of our customers merges with an entity that is not a
customer, the new combined entity may prematurely terminate our agreement. Any
of these developments could materially harm our business or financial
condition.
We may experience intense competition from other entities, and
this competition could adversely affect our business.
The human and mouse genomes contain a
finite number of genes. The human genome has been mapped and identified. Our
competitors have identified and will continue to identify the sequence of
numerous genes in order to obtain proprietary positions with respect to those
genes. In addition, our competitors may seek to identify and determine the
biological function of numerous genes in order to obtain intellectual property
rights with respect to specific uses of these genes, and they may accomplish
this before we do. We believe that the first company to determine the functions
of commercially relevant genes or the commercially relevant portions of the
genome will have a competitive advantage.
A number of companies, institutions and
government-financed entities are engaged in gene sequencing, gene discovery,
gene expression analysis, gene function determination and other gene-related
service businesses. Many of these companies, institutions and entities have
greater financial and human resources than we do and have been conducting
research longer than we have. Significant competition also arises from entities
using standard target identification approaches, traditional knockout mouse
technology and other functional genomics technologies. These competitors may
have or may acquire intellectual property rights in functional or other data
that are superior to or dominant over our rights. Furthermore, other methods
for conducting functional genomics research may ultimately prove more advanced,
in some or all respects, to the use of knockout mice. In addition, technologies
more advanced than or superior to our gene function identification technology
may be developed, thereby rendering our technologies obsolete. We expect that
competition in our industry will continue to intensify. We also believe that
some pharmaceutical and biotechnology companies are discussing the possibility
of working together to discover the functions of genes and share gene function-related
data among themselves. The formation of this type of consortium could reduce
the prospective customer base for or interest in our gene function-related
business. Moreover, the pharmaceutical industry has undergone significant
mergers and this trend is expected to continue. This concentration of the
industry could further limit our potential customer base and therefore
materially harm our business.
Also, the NIH and other
government entities have announced their intent to create a public inventory of
knockout mice for the entire genome.
Specifically, the NIH has announced its desire and intent to knock out
the entire genome in mice (the Knockout Mouse Project, or KOMP). With respect to the KOMP, attendees at a
Banbury meeting during the fall of 2003 recommended construction of a public
resource comprised of a comprehensive collection of mouse knockout mutations,
i.e., a library composed of a marked null mutation in every gene of the mouse
genome. Since the Banbury meeting, there
has been a significant amount of activity around the world to implement the
recommendations. In March 2005, the NIH
held a workshop to discuss the current status of the field, international
initiatives being planned to produce more knockouts, and the role that NIH should
play to ensure that the envisioned mouse knockout resource is completed. The workshop endorsed the Banbury
recommendations, and added additional recommendations: 1) completion of the
resource by construction of marked nulls in the 10,000 mouse genes in which
nulls have not already been generated; 2) development of C57BL/6 ES cell lines
as a system for generation of knockout mutants in an experimentally tractable
genetic background; 3) "repatriation" (collection into a publicly
accessible repository) of existing ES cells and mice as, otherwise, these
mutants will have to be remade at considerable additional expense. The NIH has
subsequently released a Request for Proposal soliciting proposals from both
commercial and academic institutions with regards to a genome-wide knockout
mouse project. Also at the workshop,
representatives of other international efforts to make knockout mice described
their plans. The most advanced of these,
in terms of implementation, is a European project, known as EUCOMM, which plans
to generate a large resource of conditional mutations in ES cells. Other
conditional knockout programs are planned elsewhere, and the meeting attendees
supported the concept that an NIH-supported collection of null mutations would
be a very important complement to the collection of conditional knockouts. If these NIH or other governmental knockout
efforts materialize, the competition for Deltagen would be very high and
Deltagen may not succeed in competing against these efforts.
We may require substantial amounts of capital to fund our business
and if we do not have sufficient capital we will not be able to sustain our
operations.
Our cash requirements depend on numerous
factors, including:
.
our ability to attract and retain customers for our database and
other products and services;
.
leasing
and possible expansion of facilities;
.
expenses in
connection with the possible expansion of our knockout mouse product inventory
or services; and
.
expenditures in
connection with license agreements and acquisitions of and investments in
complementary technologies and businesses.
We may require substantial amounts of
capital to fund our business operations. The rate at which our capital is
utilized is affected by the operational and developmental costs incurred and
the extent to which our products generate revenue. If we do not have sufficient capital, we will
not be able to sustain our operations.
The value of our stock may be adversely affected by the lack of
liquidity in the market for our stock and if we decide to stop disclosure with
respect to our results of operations or other matters.
Following our bankruptcy filing, we were
delisted from Nasdaq. The limited
liquidity available in the "Pink Sheets" market may adversely affect the value
of our stock. Also following our
bankruptcy, we were deregistered under the Securities Exchange Act of
1934. As a result, Deltagen has no legal
obligation to resume making periodic filings with the Securities and Exchange
Commission or otherwise provide public disclosure with respect to its results
of operations or other matters. Although
Deltagen announced on December
19, 2005 that it intended to announce its 2005 financial results
sometime during the first quarter of 2006 and that it currently intends to
announce quarterly results for 2006, it may change this intent at any time and
stop further disclosure with respect to its results of operations or other
matters. If we decide to stop such
disclosure, the value of our stock may be adversely affected.
There have been very few drugs developed and commercialized using
genomics-based research and, therefore, the future of our products and programs
is uncertain.
Very few of the limited number of drugs
developed to date using genomics-based research have reached the commercial
market. We cannot assure you that genomics-based drug development efforts will
ultimately be commercially successful. We cannot assure you that a particular
gene function in a mouse will have any correlation to a human patient's
response to a particular drug. It is difficult to successfully select those
genes with the most potential for commercial development. Furthermore, we do
not know that any products based on genes that are the subject of our research
can be successfully developed or commercialized. If commercial opportunities
are not realized from genomics-based research, our existing customers could
stop using our products or we could have difficulty attracting or retaining
customers and, in any event, we would not realize any product royalties or
milestone payments.
Our DeltaBase customers will control the development and
commercialization of products, which may mean that our collaborations will
never result in any royalty or milestone payments or third party product sales.
We have full DeltaBase collaborations
with only three customers and we do not expect to enter into any future full
DeltaBase collaborations. Under these
DeltaBase agreements, collaborators are obligated, subject to fulfillment by
Deltagen of certain specified requirements, to make milestone and/or royalty
payments based on the commercial development of therapeutic or diagnostic
compounds derived from access to our mice, database, technology or intellectual
property. However, we have limited or no
control over the resources that any customer may devote to product development
based on its access to our database. These customers may breach or terminate
their agreements with us, and they are not obligated to conduct any product
discovery, development or commercialization activities at all. Further, our
customers may decide not to develop products arising out of our agreements or
may not devote sufficient resources to the development, approval, manufacture,
marketing or sale of these products. If any of these events occurs, our
customers may not develop or commercialize any products based on our gene
function research, technologies or intellectual property, we would not receive
milestone payments or royalties on product sales and the results of our operations
would suffer. Furthermore, our customers may resist sharing revenue derived
from the successful commercialization of a drug through royalty payments or
others may have competing claims to all or a portion of such revenues.
There are a finite number of gene families upon which
pharmaceutical and biotechnology companies focus their research, which limits
our potential revenue and growth.
Our current and potential customers
traditionally focus their research and development efforts on a finite number
of gene families that they view as reliable drug targets. Our ability to
attract and retain customers to our products will depend, in part, on the
willingness of our customers to expand their research and development
activities to other gene families. If our customers do not do this, we may fail
to attract new customers for our products and, as a result, our business and
financial condition may be significantly harmed.
We may fail to meet market expectations, which could cause our
stock price to decline.
The following are among the factors that
could cause our operating results to vary significantly from market
expectations:
.
changes in the
demand for and pricing of our products and services;
.
the nature,
pricing and timing of other products and services provided by us or our
competitors;
.
changes in the
research and development budgets of our customers;
.
acquisition,
licensing and other costs related to our operations;
. the timing of milestone, licensing and other payments under
the terms of our customer agreements and agreements pursuant to which others
license technology to us;
.
our capital
needs and availability of additional capital;
.
expenses related
to, and the results of, patent filings and other proceedings relating to
intellectual property rights, including litigation and similar expenses; and
.
our
unpredictable revenue sources as described below.
Our revenues are and will be unpredictable and this may harm our
financial condition.
The amount and timing of revenues that
we may have from our business will be unpredictable because:
.
the timing of
our DeltaBase, DeltaOne and other agreements are determined largely by our
customers;
.
access
extension fees under our DeltaBase agreements with GlaxoSmithKline, Pfizer and
Merck may be terminated at any time at the sole discretion of these
collaborators;
.
whether any
products are commercialized and generate royalty and/or milestone payments
depends on the efforts, timing and willingness of our customers;
.
we do not expect
to receive any milestone or royalty payment under licenses and other
arrangements for a substantial period of time, if ever; and
.
to date, we have
entered into only four customer agreements for our entire DeltaBase gene
function database and do not expect to enter into any additional agreements
involving the entire DeltaBase product.
As a result, our results may be below
market expectations. If this happens, the price of our common stock may decline.
We may have conflicts with our customers, which will hurt our
business prospects.
Disagreements or other conflicts could
arise with our customers or their partners over rights to our intellectual
property or our rights to share in any of the future revenues of compounds or
therapeutic approaches developed by our customers. These kinds of disagreements
could result in costly and time-consuming litigation and could have a negative
impact on our relationship with existing customers. Any conflict with our
customers could reduce our ability to attract additional customers or enter
into future customer agreements. Some of our customers could also become
competitors in the future. Our customers could develop competing products,
preclude us from entering into agreements with their competitors or terminate
their agreements with us prematurely.
We may engage in future acquisitions or licenses, which could
adversely affect your investment in us as we may never realize any benefits
from such acquisitions or licenses, which also could be expensive and time
consuming.
We may acquire and license additional
products and programs, if we determine that these products or programs
complement our existing technology or augment our existing information
technology platforms. We currently have no firm commitments or agreements with
respect to any material acquisitions. If we do undertake any transactions of
this sort, the process of integrating an acquired business, technology, service
or product may result in operating difficulties and expenditures and may absorb
significant management attention that would otherwise be available for ongoing
development of our business. Moreover, we may never realize the anticipated
benefits of any acquisition or license. Future acquisitions could result in
potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to goodwill and other
intangible assets, which could adversely affect our results of operations and
financial condition.
We depend on key employees, and without the services of our key
employees, we may not achieve profitability or remain viable.
The company currently has only three
full-time employees. The loss of any of
their services could seriously harm our business.
Our future success also will depend in
part on the continued service of our Directors and key consultants. We may be
unable to retain these individuals and other personnel necessary for our
business. Moreover, our business is located in the San Francisco Bay Area of
California, where demand for personnel with the skills we seek is extremely
high and is likely to remain high. Because of this competition, our
compensation costs may increase significantly.
We currently have only thirteen issued or allowed U.S.
patents relating to knockout mice or methods of making knockout mice, and if we
are unable to protect our proprietary information, our business may be
adversely affected.
Our business and competitive position
depends upon our ability to protect and exploit our proprietary techniques,
methods, compositions, inventions, database information and software
technology. However, our strategy of obtaining such proprietary rights around
as many genes as possible is unproven. Unauthorized parties may attempt to
obtain and use information that we regard as proprietary. Although we intend
for our gene function database subscription agreements to require our potential
subscribers to control access to our database and information, policing
unauthorized use of our database information and software may be difficult.
Numerous applications have been filed by
other entities claiming gene sequences. Many patents have already issued and we
expect more will issue in the future. In addition, others may discover uses for
genes or proteins other than uses covered in any patents issued to us, and
these other uses may be separately patentable. We may not be able to obtain
additional issued patents on our patent applications because our patent applications
may not meet the requirements of the U.S. Patent and Trademark Office
("USPTO"). The holder of a patent covering a particular use of a gene or a
protein, isolated gene sequence or deduced amino acid sequence could exclude us
from using that gene, protein or sequence. In addition, a number of entities
make gene information, techniques and methods publicly available, which may
affect our ability to obtain patents.
Some of our patent applications may
claim compositions, methods or uses that may also be claimed in patent
applications filed by others. In some or all of these applications, a
determination of priority of inventorship may need to be decided in an
interference proceeding before the USPTO. Regardless of the outcome, this
process is time-consuming and expensive.
Issued patents may not provide
commercially meaningful protection against competitors. Other companies or
institutions may challenge our or our customers' patents or independently
develop similar products that could result in a legal action. In the event any
researcher or institution infringes upon our or our customers' patent rights,
enforcing these rights may be difficult and can be time-consuming. Others may
be able to design around these patents or develop unique products or technologies
providing effects or results similar to our products or technologies.
Our ability to use our patent rights to
limit competition in the creation and use of knockout mice, as well as our
ability to obtain patent rights, may be more limited in certain markets outside
of the United States
because the protections available in other jurisdictions may not be as
extensive as those available domestically.
We pursue a policy of having our
employees, consultants and advisors execute nondisclosure and nonuse
confidentiality agreements, as well as proprietary information and invention
agreements when they begin working for us. However, these agreements may not be
enforceable or may not provide meaningful protection for our trade secrets or
other proprietary information in the event of unauthorized use or disclosure.
We also cannot prevent others from independently developing technology or
software that might be covered by copyrights issued to us, and trade secret
laws do not prevent independent development.
Because knockout mouse and gene-related patents, even if obtained,
may not be enforceable, our intellectual property may not have any material
value, which would diminish our business prospects.
One of our strategies is to obtain
proprietary rights around as many gene knockouts as possible. Although we have
filed patent applications covering the large majority of knockout mice we have
produced, we currently have only ten issued patents related to knockout mouse
compositions. We rely on a combination of copyright and trademark law, trade
secrets, non-disclosure agreements and contractual provisions in our agreements
with our customers to establish and maintain intellectual property rights.
While the USPTO in the past has issued patents to Deltagen and others covering
knockout mice, we do not know whether the USPTO will continue to do so and
whether or how courts may enforce or interpret those patents, if that becomes
necessary. If a court finds these types of inventions to be unpatentable, or
interprets them narrowly, the benefits of our strategy may not materialize and
our business and financial condition could be significantly harmed.
We may be subject to litigation and infringement claims that may
harm our business or reputation, be costly and divert management's attention.
The technology we use in our business
may subject us to claims that we infringe on the patents or proprietary rights
of others. The risk of this occurring will tend to increase as the genomics,
biotechnology and software industries expand, more patents are issued and other
companies attempt to discover gene function through mouse gene knockouts and
engage in other genomics-related businesses. Furthermore, many of our
competitors and other companies performing research on genes have already
applied for patents covering some of the genes upon which we perform research,
and many patents have already been issued which cover these genes, as well as
genes we may wish to use in the future.
We may be involved in future lawsuits
alleging patent infringement or other intellectual property rights violations.
In addition, litigation may be necessary to:
. assert claims of infringement;
. enforce our patents, if any;
. protect our trade secrets or know-how; and
. determine the enforceability, scope and validity of the
proprietary rights of others.
We may be unsuccessful in defending or
pursuing these lawsuits. Regardless of the outcome, litigation can be very
costly, can divert management's efforts and could materially affect our
business, operating results, financial condition and cash flows. An adverse
determination may subject us to significant liabilities or restrict or prohibit
us from selling our products.
Our rights to the use of technologies licensed to us by third
parties are not within our control, and without these technologies, our
products and programs may not be successful and our business prospects could be
harmed.
We rely, in part, on licenses to use
certain technologies that are material to our business. We do not own the
patents that underlie some of these licenses. Our rights to use these
technologies and employ the inventions claimed in the licensed patents are
subject to our licensors abiding by the terms of those licenses and not terminating
them. In many cases, we do not control the prosecution or filing of the patents
to which we hold licenses. Some of the licenses under which we have rights
provide us with exclusive rights in specified fields, but we cannot assure you
that the scope of our rights under these and other licenses will not be subject
to dispute by our licensors or third parties.
We rely on third-party data sources, and without these sources,
our products and programs would be incomplete and less appealing to customers,
seriously harming our business prospects.
We rely on scientific and other data
supplied by third parties, and all of the gene sequence data for our internal
programs comes from public genomics data. This data could be defective, be
improperly generated or contain errors or other defects, which could corrupt
our gene function database and our other programs and services. In addition, we
cannot guarantee that our sources acquired this data in compliance with legal
requirements. In the event of any such defect, corruption or finding of
noncompliance, our business prospects could be adversely affected.
The future sale
of common stock could negatively affect our stock price.
We had approximately 39 million shares
of common stock outstanding as of December 31, 2005.
If our common stockholders sell
substantial amounts of common stock in the public market, or the market
perceives that such sales may occur, the market price of our common stock could
fall.
Our incorporation documents and Delaware law may inhibit a takeover that
stockholders consider favorable and could also limit the market price of your
stock.
Our restated certificate of
incorporation and bylaws contain provisions that could delay or prevent a
change in control of the Company. Some of these provisions:
. authorize the
issuance of preferred stock which can be created and issued by the board of
directors without prior stockholder approval, commonly referred to as "blank
check" preferred stock, with rights senior to those of common stock;
.
provide for a classified board of
directors; and
.
prohibit stockholder action by written
consent.
In addition, we are governed by the
provisions of Section 203 of Delaware General Corporate Law. These provisions
may prohibit large stockholders, in particular those owning 15% or more of our
outstanding voting stock, from merging or combining with us. These and other
provisions in our amended and restated certificate of incorporation and bylaws
and under Delaware law could reduce the price that investors might be willing
to pay for shares of our common stock in the future and result in the market
price being lower than it would be without these provisions.
