| BIOVERIS CORP Item 1A Risk Factors 25 ITEM 1A RISK FACTORS Forward-Looking Information and Risk Factors That May Affect Future Results Risks Relating to Us and Our Business OUR BUSINESS HAS A HISTORY OF LOSSES AND WE EXPECT TO HAVE FUTURE LOSSES AND NEGATIVE CASH FLOW We incurred net losses of dlra27dtta9 million, dlra77dtta6 million and dlra93dtta3 million for the years ended March 31, 2006, 2005 and 2004, respectively |
| We expect to continue to incur operating losses and negative cash flow as a result of our expenses for manufacturing, marketing and sales capabilities, research and product development, and general and administrative costs |
| While we seek to attain profitability, we cannot be sure that we will ever achieve product or other revenue sufficient for us to attain this objective |
| Our ability to become profitable in the future will depend on, among other things, our ability to: • expand the distribution and increase sales of certain of our products; • upgrade and enhance the M-SERIES family of products; • introduce new products into the market; • develop our marketing, sales and distribution capabilities cost-effectively; and • continue existing collaborations and establish successful new collaborations with corporate partners to develop and market products that incorporate our technologies and provide necessary funding |
| TO ACHIEVE COMMERCIAL SUCCESS, WE MUST COMPLETE THE DEVELOPMENT OF OUR PRODUCTS AND THOSE PRODUCTS MUST GAIN MARKET ACCEPTANCE OR OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED 25 ______________________________________________________________________ Many of our potential products, including certain M-SERIES products, are at an early stage of development and we have not introduced any clinical diagnostics products into the marketplace |
| Products under development require additional research and development efforts, including clinical testing and regulatory approval, prior to commercial use |
| Our potential products are subject to the risks of failure inherent in the development of products based on new technologies |
| These risks include the possibilities that: • our design or approach may not be successful; • our products may not be compatible with existing technology or may rely on technology that has become obsolete; • our products may be found ineffective or fail to meet the applicable regulatory standards or receive necessary regulatory clearances; • our estimates of the market size and potential for our products may prove incorrect; • third parties may market superior or equivalent products; • our products may not be recognized or accepted in the market due to unfamiliar brand names; or • our product development costs may outweigh potential future cash flows associated with those products |
| Our business, business prospects and financial results would be hurt if our products are not accepted as alternatives to other existing or new products and do not gain market acceptance |
| In addition, we have licensed certain PCR technology from Roche that we plan to integrate into certain of our new instrument systems |
| Although we do not currently sell any product based on the PCR technology licensed from Roche, any products that we may develop using PCR technology will be also subject to the risks of failure inherent in the development of products based on new technologies as described above |
| We have recorded a net book value for the PCR licenses of dlra15dtta4 million at March 31, 2006 |
| If we are unable to successfully develop any products using PCR technology because such PCR technology has become obsolete or the future cash flows attributable to products using PCR technology are insufficient to realize the remaining carrying value of the license, we would be required to write-off the remaining net book value or record an impairment of the value of the PCR license |
| Such a write-off or the recording of such an impairment could have a material adverse effect on our future results of operations |
| OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND THESE FLUCTUATIONS MAY CAUSE OUR STOCK PRICE TO BE VOLATILE Our quarterly operating results will depend upon: • the volume and timing of orders and product deliveries for biosecurity products, M-SERIES systems or other products, which are based on our customers’ requirements that may vary over time; • the success of M-SERIES system upgrades and enhancements and customer acceptance of those enhancements and upgrades; • costs incurred related to expansion into the field of vaccines; • the amount of revenues recognized or collectible from royalties and other contract revenues, which revenues are dependent upon the efforts and compliance of our licensees and collaborators, including Roche; • whether our instruments are sold or leased to customers, which will affect the timing of the recognition of revenue from the sale or lease; 26 ______________________________________________________________________ • the timing of our introduction of new products, which could involve increased expenses associated with product development and marketing; • the volume and timing of product returns and warranty claims, which, if products are returned or have warranty claims that are unexpected, may involve increased costs in excess of amounts reserved for returns or claims; • our competitors’ introduction of new products, which may affect the purchase decision of or timing of orders by our customers and prospective customers while the competitors’ product is assessed; • the amount of expenses we incur in connection with the operation of our business, including: • research and development costs, which increase or decrease based on the products in development; and • sales and marketing costs, which are based on product launches or promotions and sales incentives that might be in effect from time to time; • the amount that we may record related to the potential impairment of the license to use PCR technology; • amounts received from MSD or MST as payment for the purchase of our interests in MSD and the related accretion of income on the note receivable from MST; • unexpected termination of government contracts or orders, which could result in decreased sales and increased costs due to excess capacity, inventory, personnel and other expenses; and • additional costs which we may incur as we explore new healthcare opportunities, including costs for acquisitions of technologies, facilities and personnel |
| These factors may cause our quarterly operating results to fluctuate significantly, which in turn, may cause our stock price to be volatile |
| In addition, because our revenues and operating results are expected to be volatile and difficult to predict, we believe that period-to-period comparisons of our results of operations are not a reliable indication of our future performance |
| WE MAY CHANGE THE FOCUS OF OUR BUSINESS OR ENTER INTO NEW HEALTHCARE FIELDS, WHICH COULD RESULT IN THE INCURRENCE OF ADDITIONAL COSTS AND EXPOSURE TO ADDITIONAL OR DIFFERENT BUSINESS RISKS We have broad discretion in determining the future strategy and focus of our business and may enter new healthcare fields in which we have limited or no experience |
| A significant change in the focus of our business could result in a loss of our investment, the incurrence of additional costs, including research and development costs, and exposure to additional or different business risks |
| Incurrence of additional costs and exposure to additional risks could materially adversely affect our business |
| IF WE ARE UNABLE TO ESTABLISH NEW COLLABORATIONS, OR IF ANY COLLABORATIONS WE ESTABLISH DO NOT RESULT IN THE SUCCESSFUL INTRODUCTION OR MARKETING OF NEW PRODUCTS BASED ON OUR TECHNOLOGY, OUR GROWTH MAY BE SLOWED AND OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED One aspect of our strategy is to enter into collaborative relationships with established healthcare and other companies to assist us in developing our technologies or manufacturing or marketing our products for certain markets |
| We may not be able to enter into collaborations on terms that are favorable to us, if at all |
| In addition, we cannot assure that third parties, including our licensees, suppliers or others will not object to possible new collaborations |
| As a result of this strategy, we may have no, or only limited, control over the amount of resources that our 27 ______________________________________________________________________ collaborators will devote to the development or marketing of products based on our technology |
| For instance, our collaborators: • may decide not to, or may fail to successfully, develop, market or sell products based on our technology; • may not devote sufficient resources to the development, marketing or sale of these products based on our technology; or, • may terminate their agreements with us |
| If any of these events occur with respect to one of the companies we are collaborating with, we would not receive the benefits of the collaboration and our growth could be slowed and our business could be materially adversely affected |
| WE MAY NOT BE ABLE TO RAISE SUFFICIENT ADDITIONAL CAPITAL TO SUCCESSFULLY DEVELOP OUR BUSINESS We will need substantial amounts of money to fund our operations on an ongoing basis |
| We expect our available cash to be sufficient to fund our operations for at least one year, but cannot predict how long our available cash will be sufficient to fund our operations thereafter |
| We may need to raise substantial amounts of money to fund a variety of future activities integral to the development of our business, including: • for research and development to successfully develop our technologies, including future payment obligations under license or option agreements; • to obtain regulatory approval for our products; • to file and prosecute patent applications to protect our technology; • to respond to innovations that our competitors develop; • to retain qualified employees, particularly in light of competition for qualified scientists and engineers; • to make new arrangements to market our technology; • to manufacture products ourselves or through a third party; • to provide funding for expanded or new facilities; and • to market different products to different geographic markets, either through expanding our sales and distribution capabilities or relying on a third party |
| The failure to raise sufficient additional capital for us to develop our business would adversely affect our business prospects |
| OUR ACCESS TO FUNDS COULD BE NEGATIVELY IMPACTED BY MANY FACTORS, INCLUDING VOLATILITY IN THE PRICE OF OUR COMMON STOCK, LOSSES FROM OPERATIONS AND CAPITAL MARKET CONDITIONS We may not have access to enough funds on favorable terms, if at all, to successfully operate and develop our business |
| We may try to raise necessary additional capital by issuing additional debt or equity securities |
| Holders of debt securities would have priority over our equity holders with respect to the proceeds from the sale of our assets in the event of liquidation of our business, and any debt financings that we obtain may contain restrictive terms that limit our operating flexibility |
| If we raise additional capital by selling additional common or preferred stock, the holdings of existing stockholders would be diluted |
| 28 ______________________________________________________________________ If we are unable to raise additional capital, we may have to consider pursuing arrangements with other companies that may not be available on terms favorable to us |
| WE MAY EXPERIENCE DESIGN, DEVELOPMENT, IMPLEMENTATION AND OTHER DIFFICULTIES THAT COULD DELAY OR PREVENT OUR INTRODUCTION OF NEW OR ENHANCED PRODUCTS OR AFFECT THE PERFORMANCE OF EXISTING PRODUCTS, WHICH COULD ADVERSELY AFFECT OUR BUSINESS IN ADDITION, IF THE MARKETS FOR OUR PRODUCTS CHANGE OR EVOLVE IN AN UNEXPECTED MANNER, OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED The development of new or enhanced products is a complex and uncertain process that requires the accurate anticipation of technological and market trends, as well as precise technological execution |
| We may experience design, development, implementation and other difficulties that could delay or prevent our introduction of new or enhanced products, or products that we may develop, manufacture or market with third parties or affect the performance of our existing products |
| These difficulties and delays may cause expenses to increase and our product sales to fluctuate |
| In addition, if we experience design, development or implementation difficulties in developing, manufacturing, distributing or marketing these instruments, we would sell fewer of our products and our business prospects would be adversely affected |
| These changes could facilitate the market demand for our new or enhanced products, including the need for products that could be utilized in clinical point-of-care sites and field-testing of environmental samples in the biosecurity market |
| If market demand does not change or evolve as we anticipate or if we are not able to develop products that meet the evolving market demand, our business prospects would be adversely affected |
| In addition, the markets for our products are characterized by evolving industry standards and government regulations, the need for updated and effective technology and new product introductions |
| Our success will depend in part upon our ability to profitably enhance existing products and develop and introduce new products |
| We may not be able to avoid the obsolescence of our products due to technological change and evolving industry standards and government regulations |
| If we experience design, development, implementation or other difficulties that delay or prevent our introduction of new or enhanced products or if the markets change or evolve in an unexpected manner, our business could be materially adversely affected |
| VACCINE DEVELOPMENT IS A LONG, EXPENSIVE AND UNCERTAIN PROCESS, AND DELAY OR FAILURE CAN OCCUR AT ANY STAGE OF THE PROCESS To develop vaccine candidates, we must provide the FDA and foreign regulatory authorities with clinical data that demonstrates adequate safety and immune response |
| Statistically significant effectiveness of our vaccine product candidates cannot be demonstrated in humans, but instead must be demonstrated, in part, by utilizing animal models before they can be approved for commercial sale |
| Vaccine development to show adequate evidence of effectiveness in animal models and safety and immune response in humans is a long, expensive and uncertain process, and delay or failure can occur at any stage of our animal studies or clinical trials |
| Any delay or significant adverse clinical events arising during any of our clinical trials could force us to abandon a vaccine candidate altogether or to conduct additional clinical trials in order to obtain approval from the FDA or foreign regulatory bodies |
| These development efforts and clinical trials are lengthy and expensive and the outcome is uncertain |
| If we are unable to successfully develop our vaccine candidates, our business could suffer |
| WE EXPECT TO RELY ON SALES OF THE M-SERIES PRODUCT FAMILY FOR A SIGNIFICANT PORTION OF OUR REVENUES, AND A DECLINE IN SALES OF THESE PRODUCTS COULD CAUSE ADVERSE FINANCIAL RESULTS AND NEGATIVELY AFFECT OUR BUSINESS PROSPECTS We expect to derive a significant portion of our revenues from sales of M-SERIES products |
| Our current and potential life science customers are from the pharmaceutical and biotechnology industries and are subject to risks faced by those 29 ______________________________________________________________________ industries, including the availability of capital, reduction and delays in research and development expenditures, government regulation and the uncertainty resulting from technological change |
| In addition, the ongoing consolidation of the pharmaceutical and biotechnology industries could reduce the number of potential customers and they may develop their own competing products or in-house capabilities |
| Any factor adversely affecting the pricing or demand of M-SERIES products, including market acceptance of competing products, could cause our revenues to decline, resulting in adverse financial results and negatively affecting our business prospects |
| Additionally, we intend to market M-SERIES products in markets in which we have little or no experience |
| We may not be able to successfully market the M-SERIES family of products in those markets, which could cause an adverse affect on our business prospects |
| THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS FOR FISCAL YEAR 2004 MAY NOT NECESSARILY BE INDICATIVE OF OUR FINANCIAL POSITION, RESULTS OF OPERATIONS OR CASH FLOWS HAD WE OPERATED ON A STAND-ALONE BASIS Until February 13, 2004, our assets and businesses had historically been owned, operated and fully integrated with IGEN Our accompanying consolidated financial statements for fiscal year 2004 have been prepared and are presented as if we had been operating as a separate entity |
| In order to fairly present our operating results, these financial statements reflect the application of certain estimates and allocations |
| Our consolidated statements of operations for fiscal 2004 include all revenues and costs that are directly attributable to our businesses, as well as certain expenses of IGEN that have been allocated to us using various assumptions |
| These expenses include an allocated share of general and administrative salaries as well as certain other shared costs (primarily facility, human resources, legal, accounting and other administrative costs) which were allocated based upon percentage of total revenue or percentage of total headcount, as appropriate |
| While management believes that the allocation methodologies are reasonable and appropriate, different allocation methodologies would result in changes to our operating results for fiscal year 2004 |
| Upon completion of the merger and related transactions between Roche and IGEN, we became an independent, publicly-traded company and operate on a stand-alone basis |
| The financial information in the accompanying consolidated financial statements for fiscal 2004 may not reflect our financial position, results of operations and cash flows in the future or what they would have been had we been operating as a stand-alone entity in the past |
| MST HAS PURCHASED OUR INTERESTS IN MSD BUT THERE IS NO ASSURANCE THAT WE WILL RECEIVE THE FULL PURCHASE PRICE MST purchased our entire interests in MSD and is required to pay us the outstanding purchase price over time, plus simple (cumulated, not compounded) interest at the fixed annual rate of 5dtta5prca |
| The purchase price is payable over time in installments equal to the sum of 5prca of MSD net sales, as determined in accordance with the MSD agreements, and 20prca of the net proceeds realized by MSD from the sale of its debt or equity securities in any third-party financing after the date of the sale of our interests in MSD We received a prepayment credit of dlra2dtta0 million against our payment obligations to MSD in connection with the settlement, and therefore the initial installment payments are being applied against this credit and not paid to us in cash |
| No further cash payments will be payable by MSD to us pursuant to the buyout until the prepayment credit, which has a balance of dlra1dtta2 million at March 31, 2006, is no longer deemed outstanding |
| Because the purchase price is payable only out of a percentage of MSD’s net sales or future financings, our receipt of the purchase price is dependent on MSD’s future performance |
| In the event sufficient future net sales of MSD or third-party financings do not materialize, we will not receive the full purchase price for our interests in MSD We have recorded the net present value of the receivable due to us from the sale of our interests in MSD in the amount of dlra5dtta7 million at March 31, 2006 |
| If we do not receive the full purchase price over time, from the sale of our interests in MSD, we would be required to write off the remaining net present value or record an impairment of the value of the receivable |
| Such a write-off or the recording of such an impairment could have a material adverse effect on our future results of operations |
| 30 ______________________________________________________________________ OUR COMPETITORS AND POTENTIAL COMPETITORS MAY HAVE OR DEVELOP DIAGNOSTIC AND VACCINE PRODUCTS AND TECHNOLOGIES THAT ARE MORE ATTRACTIVE THAN OUR EXISTING OR FUTURE DIAGNOSTIC AND VACCINE PRODUCTS Our business will be subject to intensive competition from established companies, development stage companies and research and academic institutions, and we expect this competition to intensify |
| Many of these companies and institutions have one or more competitive advantages over us, including, among other things: • more money to invest; • more established diagnostic or vaccine products; • longer-standing relationships with customers; • greater expertise and resources in developing, manufacturing, marketing and selling diagnostic or vaccine products; • a larger, more experienced workforce; and • more experience in obtaining regulatory approval for clinical testing or vaccine products |
| As a result, our competitors may develop, manufacture, market or sell diagnostic or vaccine products that are more effective or commercially attractive than our current or future diagnostic or vaccine products |
| In addition, these competitors may offer broader product lines, discounts and may have greater name recognition than us |
| Furthermore, we compete against companies that utilize ECL technology licensed to them by us, including Roche and MSD As a result, we may not be able to compete successfully against our competitors |
| This could have a material adverse effect on our business, financial condition and revenues |
| WE HAVE LIMITED MANUFACTURING EXPERIENCE, WHICH PUTS US AT A COMPETITIVE DISADVANTAGE AND COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND REVENUE We lack experience in large-scale manufacturing and have no experience in the manufacturing of clinical diagnostic or vaccine products, which could hamper our ability to manufacture existing products or new products that we develop |
| We have two options to address this competitive disadvantage |
| First, we could expand our internal ability to manufacture products, which, to date, has only been done in a limited way |
| Second, we could contract with a third party to manufacture products for us based on our technology, which, to date, we have not done |
| If we are unable to expand our own manufacturing capability or find a suitable manufacturer on acceptable terms in a timely manner, we may be unable to meet demand for existing products and could be delayed in introducing new products to the market |
| Failure to meet demand for existing products or delays in introducing new products could put us at a competitive disadvantage and could have a material adverse effect on our business, financial condition and revenue |
| WE HAVE LIMITED MANUFACTURING FACILITIES FOR OUR CURRENT PRODUCTS AND WE MAY NOT FIND ADDITIONAL FACILITIES SUITABLE FOR FUTURE GROWTH, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS AND PROSPECTS We face risks inherent in operating a single facility for the manufacture of our current products |
| We do not have alternative production facilities available should our Gaithersburg, Maryland manufacturing facility cease to function |
| If our facility were not operational for an extended period of time, including due to an unforeseen plant shutdown, then our business and future prospects could be materially adversely affected |
| In addition, we may need to expand and enhance our research, development and production facilities |
| We may also be 31 ______________________________________________________________________ required to make material capital expenditures at a new facility at a time when we have limited capital resources available to us |
| We may also experience difficulties or delays in integrating our operations into new facilities |
| These difficulties might include delays in the availability of a new facility or problems associated with equipment installation |
| In addition, any facility that we obtain for production of vaccines, clinical testing or biosecurity products will be subject, on an ongoing basis, to a variety of regulatory requirements including quality systems regulations, international quality standards and other regulatory standards |
| We may encounter difficulties expanding our manufacturing operations in accordance with these regulations and standards, which could result in manufacturing delays and an inability to meet product demand and our business prospects could be materially adversely affected |
| If we are unable to pay for facility enhancements and improvements to meet our future growth needs, our business would suffer |
| WE HAVE NO EXPERIENCE SELLING, MARKETING OR DISTRIBUTING CLINICAL DIAGNOSTIC OR VACCINE PRODUCTS OUR FAILURE TO ESTABLISH AN EFFECTIVE SALES FORCE OR TO ESTABLISH AN EFFICIENT DISTRIBUTION SYSTEM FOR OUR CLINICAL DIAGNOSTIC OR VACCINE PRODUCTS COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS PROSPECTS AND REVENUES We need to develop selling, marketing and distribution capabilities for our planned clinical diagnostic and vaccine products |
| To market clinical diagnostic or vaccine products directly to customers, and not through a licensee or third party distributor or collaborator, we will need to develop a substantial sales force with technical expertise |
| We will also need to establish a distribution system to support our sales force |
| Alternatively, we could license or contract with another company to provide sales and distribution services for our products |
| We may not be able to develop a sufficient sales and distribution force or find a suitable company to fill that role for us, which could materially adversely affect our business prospects and revenues |
| FAILURE TO MANAGE OUR GROWTH COULD ADVERSELY AFFECT OUR BUSINESS We expect to grow by increasing our presence in existing markets and introducing new products we develop into new potential markets |
| Our growth strategy will place a strain on our management and our operating and financial systems |
| As we grow, our personnel, systems, manufacturing capabilities and resources, procedures and controls may be inadequate to support future operations and we will need to hire, train and retain additional personnel |
| We may also need to improve and expand our financial and management controls, reporting systems and operating systems as well as other aspects of our infrastructure, including research and development or manufacturing facilities |
| We may encounter difficulties integrating additional personnel, as well as improving, expanding and integrating new systems or facilities, which could adversely affect our business |
| THE SUCCESS OF OUR BUSINESS DEPENDS ON PATENTS THAT WILL EXPIRE OVER TIME AND THAT MUST BE ACTIVELY PURSUED, OBTAINED, MAINTAINED AND PROTECTED Our business success or failure will depend, in part, on our ability to pursue, obtain, and maintain adequate patent protection for ECL technology, vaccines and our other technologies |
| Our patents may not adequately protect our technology from being used by our competitors |
| Our business depends heavily on patents that will expire over time and may be challenged or circumvented by competitors |
| Patents allow us, for a time, to prevent others from using our inventions to compete against us |
| Companies may challenge or seek to invalidate patents or circumvent valid claims in patents, all of which could make it necessary for us to defend our patents in litigation |
| Litigation over patents poses the following risks to our business: • litigation costs can be extremely high, which could drain our financial resources; and • litigation over our patents could discourage other companies from working with us to develop and market new 32 ______________________________________________________________________ products based on the technology covered by those disputed patents |
| If we lose some patent protection, our competitive advantage could be eroded, third parties may be able to use our technology without paying us and our financial condition and business prospects would be adversely affected |
| OUR BUSINESS COULD BE HARMED IF WE HAVE FUTURE DISAGREEMENTS WITH ROCHE OVER THE SCOPE OF THE LICENSE AGREEMENT Roche, through one of its affiliates, has been licensed by us to exploit ECL technology, subject to the limitations of the license agreement |
| Although the terms of the license agreement were negotiated in an effort to minimize the areas of potential future disputes, there are no assurances that we and Roche will continue to agree on the scope, permitted use and other material terms of the license agreement |
| Future disputes with Roche, or any licensee, over the scope of the license agreement, such as disputes over the field, the types of products that Roche is permitted to develop and sell, or royalties owed, including payments for out-of-field sales by Roche of licensed products that employ ECL technology and which are outside the licensed field, might lead to lengthy and costly legal proceedings, which could adversely affect our financial condition and future business prospects |
| OUR BUSINESS COULD BE HARMED IF WE INFRINGE, OR OUR LICENSEES ARE ALLEGED TO HAVE INFRINGED, THE INTELLECTUAL PROPERTY OF OTHERS If our products or services were to infringe the intellectual property (including patent rights) of others, we or our licensees could: • be required to alter, or abandon products or processes; • be required to obtain a license from the intellectual property holder; • lose customers that are reluctant to continue using our or our licensees’ products or services; • be forced to abandon development work with respect to these products; and • be required to pay damages that could be substantial |
| If we or our licensees infringe the intellectual property (including patent rights) of others, our business could be damaged if we were unable to make necessary alterations or obtain a necessary license on acceptable terms, if at all |
| In addition, if our products or services were alleged to have infringed the intellectual property (including patent rights) of others, we would be forced to defend ourselves in litigation and might be enjoined from further sale of our products or required to pay monetary damages or amounts in settlement of the suit, which could adversely affect our prospects, drain our financial resources and discourage other companies from working with us |
| WE INTEND TO DEVELOP PRODUCTS THAT ARE BASED ON PATENTS AND TECHNOLOGY THAT WE HAVE LICENSED FROM OTHERS AND THE OWNERS OF THOSE PATENTS AND TECHNOLOGY MIGHT CLAIM THAT PRODUCTS DEVELOPED OR SOLD BY US VIOLATE THOSE LICENSES ADDITIONALLY, A THIRD PARTY MIGHT OBJECT TO A LICENSE THAT WE HOLD OR TO THE SCOPE OF THE LICENSE GRANTED TO US Our success or failure will also depend, in part, on the patent rights and technology of others, including patents and technology being licensed to us from affiliates of Roche |
| We have been licensed by affiliates of Roche to exploit certain improvements from Roche Diagnostics and certain PCR technology, subject to certain limitations |
| Although the terms of the improvements license agreement and the PCR license agreements were negotiated in an effort to minimize the areas of potential future disputes, there are no assurances that we and Roche will continue to agree on the scope, permitted use and other material terms of the improvements license agreement or the PCR license agreements |
| Future disputes with Roche over the scope, permitted use, obligations owed and other material terms of the improvements license agreement or the PCR license agreements, such as disputes over the field, types of products that we are ______________________________________________________________________ 33 permitted to develop and sell, other obligations may lead to lengthy and costly legal proceedings, or could interfere with or preclude us from proceeding with one or more development programs, whether conducted independently or through a collaborative arrangement |
| In addition, third parties may object to the scope, permitted use and other material terms of one or more of the licenses granted to us by certain Roche affiliates |
| We also license technology from other companies and academic institutions |
| Because access to this technology is necessary to operate our business, we must be certain that we comply with these license agreements |
| Our business could be harmed if we breached any of these license agreements and lost the rights to use this patented technology or if we were unable to renew existing licenses on acceptable terms, if at all, or get additional licenses that we may need on acceptable terms, if at all |
| In addition, we may need to litigate the scope and validity of patents held by others and such litigation could be a substantial cost for us |
| WE AND MSD MAY HAVE DIFFERENT VIEWS OF THE SCOPE OF THE EXCLUSIVE LICENSE TO OUR TECHNOLOGY PREVIOUSLY GRANTED TO MSD AND THE SCOPE OF MSD’S RIGHTS UNDER THE FORMER JOINT VENTURE AGREEMENT WITH US, WHICH COULD AFFECT OUR ABILITY TO EXPAND OUR BUSINESS DIRECTLY OR THROUGH COLLABORATIONS We intend to expand our business through internal development programs and through new or expanded collaborative arrangements |
| MSD may view the scope of its exclusive license and other rights under its license agreement and other agreements with us in a way that interferes with or precludes us from proceeding with one or more development programs |
| There are no assurances that MSD will not object to our future business plans, whether conducted independently or through a collaborative arrangement |
| Additionally, MSD may believe that we must obtain MSD’s consent prior to entering into proposed collaborative arrangements |
| The other party to a proposed collaboration with us may also require us to obtain MSD’s consent to avoid any future disputes or disagreements |
| For example, in connection with the merger and related transactions, Roche required IGEN to obtain MSD’s consent to the execution and delivery of the license agreement |
| If we are required to obtain MSD’s consent for any reason, there are no assurances that we will be able to obtain that consent at all or on terms that would not have an adverse effect on our business, financial condition or results of operations |
| In addition, if we choose not to obtain MSD’s consent, MSD may sue us to enforce rights it believes it has |
| Such a lawsuit could materially harm our business and future business prospects |
| WE RELY ON TRADE SECRETS AND OTHER INFORMATION THAT CANNOT BE PROTECTED BY PATENTS, WHICH COULD HARM OUR BUSINESS IF THEY WERE DISCLOSED TO OR INDEPENDENTLY DEVELOPED BY OTHERS In addition to patents, we also rely in our business on trade secrets, know-how and other proprietary information |
| If this information were disclosed to or independently developed by competitors, our business would suffer |
| We seek to protect this information, in part, by entering into confidentiality agreements with licensees, employees and consultants that prohibit these parties from disclosing our confidential information |
| These agreements may not provide adequate protection for our trade secrets, know-how and other proprietary information or ensure that the information we share with others during the course of our business will remain confidential |
| We may not have sufficient legal remedies under the agreements or otherwise to correct or compensate for unauthorized disclosures or sufficient resources to seek redress |
| If we are not able to be adequately redressed for the unauthorized disclosure of our trade secrets, know-how or other proprietary information, our competitive position may be undermined and our business may suffer |
| WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS FOR MATERIALS USED IN THE MANUFACTURING OF OUR PRODUCTS, AND ANY INTERRUPTION IN THE SUPPLY OF THOSE MATERIALS COULD HAMPER OUR ABILITY TO MANUFACTURE PRODUCTS AND MEET CUSTOMER ORDERS We depend on vendors to supply key materials that we use in our products |
| From time to time, suppliers may extend lead time, limit supplies or increase prices due to capacity constraints or other factors |
| In the event of a reduction in, interruption of, or degradation in, the quality of the supply of any of the materials required by us, or an increase in the cost of obtaining those materials, we would be 34 ______________________________________________________________________ forced to locate an alternative source of supply |
| If no alternative source were available or if an alternative source were not available on a timely basis, at a reasonable cost or otherwise on acceptable terms, our ability to manufacture one or more of our products would be delayed or halted |
| Any changes in sources of supply may require additional engineering or technical development to ensure consistent and acceptable performance of our products |
| If any of these events occur, our product costs may increase, we might be unable to deliver products in a timely fashion, we could lose sales as well as customers, and our business would be significantly harmed as a result |
| WE DEPEND ON HIGHLY TRAINED AND SKILLED EMPLOYEES AND MANAGEMENT, AND WE MAY NOT BE ABLE TO ATTRACT AND RETAIN SUFFICIENT PERSONNEL, WHICH COULD ADVERSELY AFFECT OUR BUSINESS We need to hire staff and retain our staff, both of which are difficult in a competitive marketplace |
| Because we are a technology company, we depend heavily on scientists and engineers to develop products and to build a successful business |
| Research and development efforts could suffer if we are not able to hire and retain enough qualified scientists and engineers, which would adversely affect our business |
| We compete with other technology companies and research and academic institutions for experienced scientists |
| Many of these companies and institutions have greater resources than we do and thus may be in a better position to attract desirable candidates |
| In addition to scientists, we also need to hire managers who have regulatory, manufacturing and marketing capabilities |
| If we are not able to hire managers with these skills, or develop expertise in these areas, our business could suffer |
| OUR ABILITY TO DEVELOP PRODUCTS MAY BE NEGATIVELY AFFECTED BY SOCIAL ISSUES RELATING TO ANIMAL TESTING Our research and development activities have involved, and in the future might involve, limited testing in mice and rats |
| In addition, testing in the future may involve other animals |
| Animal rights groups and other organizations and individuals have attempted to stop animal testing activities by pressing for legislation and regulation of such activities and by other means |
| Our ability to develop products may be negatively affected by a ban on animal testing or by action taken by groups or individuals opposed to these tests |
| Risks Relating to Regulation and Government Contracts OUR ABILITY TO OBTAIN AND RETAIN US GOVERNMENT CONTRACTS IS SUBJECT TO UNCERTAINTIES, AND OUR US GOVERNMENT CONTRACTS MAY BE TERMINATED, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR FINANCIAL CONDITION, OPERATING RESULTS, BUSINESS AND PROSPECTS Our ability to secure or retain US government contracts is subject to uncertainties related to the government’s future funding commitments |
| The prospects for our biosecurity business are also highly sensitive to changes in national and international government policies and funding priorities |
| Changes in domestic or foreign government policies or priorities, including funding levels through agency or program budget reductions by the US Congress or executive agencies, could materially adversely affect our ability to retain or obtain US government contracts, and our business prospects could suffer |
| The US government can terminate, suspend or modify any of its contracts with us either for its convenience or if we default by failing to perform under the terms of the applicable contract |
| A termination or suspension for convenience could result in our having excess capacity, inventory, personnel, unreimbursable expenses or charges or other adverse effects on our financial condition |
| A termination arising out of our default could expose us to claims for damages and may have a material adverse effect on our ability to compete for future US government contracts and orders |
| US government contracts may span one or more years and may include multiple renewal options in favor of the US government |
| US government agencies generally have the right not to exercise these option periods for any reason, including lack of funding, or if the agency is not satisfied with the counterparty’s performance of the contract |
| If the US government terminates any of our contracts, our financial condition and operating results could be materially 35 ______________________________________________________________________ adversely affected |
| In addition to unfavorable termination provisions, certain of our US government contracts contain provisions that grant to the US government a non-exclusive, non-transferable, irrevocable, paid-up license to use inventions made by us in the course of performing such contracts, or have such inventions used by or on behalf of the US government, for research or other government purposes |
| New US government contracts we enter into may also include similar provisions |
| WE MUST OBTAIN FDA CLEARANCE OR APPROVAL TO MARKET OUR CLINICAL DIAGNOSTIC AND VACCINE PRODUCTS, WHICH IS OFTEN COSTLY AND TIME CONSUMING IF WE DO NOT OBTAIN THE NECESSARY CLEARANCES OR APPROVALS, OUR BUSINESS PROSPECTS WOULD SUFFER The manufacture, packaging, labeling, advertising, promotion, distribution and sale of clinical diagnostic products and vaccines are subject to governmental regulation by national and local government agencies in the United States and abroad |
| The FDA regulates many of the areas in which we conduct our research and in which we are and expect to be developing, manufacturing and marketing products |
| In particular, we must obtain FDA clearance or approval before we can market clinical diagnostic or vaccine products |
| The process of obtaining necessary clearances or approvals is often costly, time consuming and uncertain |
| Further, clearance or approval may place substantial restrictions on the indications for which the product may be marketed or to whom it may be marketed |
| To obtain permission from the FDA to market clinical diagnostic products in the US, we, or the companies we work with, will need to either obtain Section 510(k) pre-market notification clearance or approval of a pre-market approval application from the FDA To obtain clearance for marketing, we, or the companies we work with, must demonstrate substantial equivalence to a similar legally marketed product by submitting a pre-market notification to the FDA The FDA may require preclinical and clinical data to support a substantial equivalence determination |
| Clinical trials for gathering supporting data can take extended periods of time to complete and there can be no assurance that the FDA will find a device substantially equivalent |
| If we do not successfully demonstrate substantial equivalence, or if we are required to obtain pre-market approval, we would have to conduct extensive clinical testing of these diagnostic products, which could take years to complete |
| Extensive testing could involve substantial additional costs and might delay bringing clinical diagnostic products to market, weakening our competitive position |
| If we fail to obtain FDA clearance or approval for new clinical diagnostic products altogether, we will be unable to market these products at all for clinical use in the US We may begin to distribute reagents specifically for research use under an exemption |
| If the FDA disagrees with our classification of, or the manner in which we market and sell those reagents, it may impose restrictions on our business operations and subject us to sanctions that could adversely affect our business prospects |
| Our vaccine candidates are in pre-clinical stages of development and have not received regulatory approval from the FDA or foreign regulatory authorities to be marketed and sold |
| The FDA or foreign regulatory authorities may refuse to approve an application if they believe that applicable regulatory criteria are not satisfied and they may require additional testing for safety or effectiveness |
| WE ARE SUBJECT TO COMPREHENSIVE GOVERNMENT REGULATION, WHICH MAY INVOLVE SIGNIFICANT COSTS AND MAY RESTRICT OUR ABILITY TO CONDUCT BUSINESS We expect that certain of our future products will be subject to continuing FDA requirements, including compliance with the FDA’s Good Manufacturing Practices and the FDA’s medical device reporting regulations |
| We expect that we may need to spend a substantial amount of money to comply on an ongoing basis with government regulations |
| Government agencies, such as the FDA, Department of Homeland Security, Department of Commerce and the Environmental Protection Agency, or EPA, regulate many of our products as well as products that we plan to develop, manufacture, market and sell, including products for the clinical diagnostics, biosecurity and industrial markets |
| The costs of complying with governmental regulations and any restrictions that government agencies might impose could 36 ______________________________________________________________________ have a significant impact on our business |
| If we increase our manufacturing and expand our product offerings, these costs will increase |
| Whether we directly manufacture products or contract with another company to manufacture products based on our technology, the FDA and other government agencies will continually review and periodically inspect the manufacturing process |
| If any of these agencies were to discover a problem with our products, the manufacturing process or the manufacturing facility, they could place restrictions on these products and on the manufacturer and impose sanctions |
| For example, the FDA could require us to recall, or even totally withdraw, a product from the market or close a manufacturing facility |
| In addition to FDA regulations, the process of manufacturing products is subject to a variety of environmental laws and regulations, including laws and regulations governing the use, management and disposal of hazardous, radioactive and infectious materials and wastes, the discharge of pollutants into the air and water, and the cleanup of contaminated sites |
| We could incur substantial costs, including cleanup costs, fines and penalties, claims for damages, such as personal injury or property damages, and loss of permits required for our operations, if we fail to comply with these laws or regulations |
| Our operations are also subject to various employee health and safety laws and regulations, including those concerning occupational injury and illness and employee exposure to hazardous, radioactive and infectious materials |
| While we have procedures in place to protect employees from exposure to such materials, we cannot assure you that potentially harmful exposure will not occur or that we will not be liable to employees as a result |
| In addition, because of the limited information currently available regarding some of the hazardous, radioactive and infectious materials used in our businesses, there may be unknown risks involved with the use of and exposure to such materials |
| In some circumstances there may be no body of knowledge or standard protocols for dealing with these risks |
| Costs associated with such environmental, health and safety matters could have a material adverse effect on our business and financial condition |
| Our biosecurity products are subject to stringent Federal, state, local and foreign laws, regulations and policies governing their manufacture, storage, sale, distribution and export |
| In addition, the US government has adopted, and is expected to continue to adopt, laws, regulations and rules governing the research, development, procurement and handling of pathogens that may be used in a bioterrorist attack or other agents that may cause a public health emergency and to permit government inspection and oversight of facilities engaged in the research, development, manufacture or sale of select agents |
| Under several statutes recently enacted, the Department of Homeland Security, FDA, Department of Commerce and various other regulatory authorities have been charged with establishing and implementing programs designed to enhance the security of food and water supplies, as well as the environment, from terrorist attacks |
| These legislative initiatives include recordkeeping, registration, notification, import, export, manufacturing and various other compliance measures |
| This is a rapidly evolving regulatory landscape and many of the possible rules and regulations have not yet been proposed or adopted |
| We may be required to incur significant costs to comply with such laws and regulations in the future, and such laws or regulations may have a material adverse effect upon our ability to do business |
| In addition, the DOD or other government agencies may require additional security measures to be implemented at our facility, which could cause us to incur substantial additional costs |
| OUR BUSINESS COULD BE ADVERSELY AFFECTED BY A NEGATIVE AUDIT BY THE US GOVERNMENT US government agencies routinely audit and investigate government contractors |
| These agencies review a contractor’s performance under its contracts |
| If an audit results in a finding of improper activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the US government |
| In addition, we could suffer serious harm to our business reputation if allegations of impropriety were made against us |
| COST OVER-RUNS ON CONTRACTS WITH THE US GOVERNMENT COULD SUBJECT US TO LOSSES OR ADVERSELY AFFECT OUR FUTURE BUSINESS Our US government contracts are fixed-price contracts and therefore we receive a fixed price irrespective of the 37 ______________________________________________________________________ actual costs we incur in connection with the performance of the contracts |
| Consequently, we will be required to absorb any costs in excess of the fixed price that may be set forth in the contract |
| If we are unable to control the costs we incur in performing under these contracts, our financial condition and operating results could be materially adversely affected |
| Cost over-runs also may adversely affect our ability to sustain our performance under the contracts and obtain future US government contract awards |
| RESTRICTIONS ON HEALTHCARE COSTS AND HEALTHCARE AND INSURANCE FINANCING PRACTICES COULD LIMIT DEMAND FOR OUR PRODUCTS, WHICH WOULD HURT OUR BUSINESS AND BUSINESS PROSPECTS In the US and elsewhere, demand for clinical diagnostic testing is dependent, in part, on consumers’ ability to be reimbursed for the cost of the tests by third-party payers, such as government agencies, health maintenance organizations and private insurers |
| Medicaid and other third-party payers are increasingly challenging the prices charged for medical services, including clinical diagnostic tests |
| They are also attempting to contain costs by limiting their coverage of, and the amount they will reimburse for, clinical diagnostic tests and other healthcare products |
| Without adequate coverage and reimbursement, consumer demand for clinical diagnostic tests may decrease |
| Decreased demand would likely cause potential sales of our clinical diagnostic products, and sales by our licensees, to decrease because fewer tests would be performed or prices would be lowered, or both |
| Reduced sales or royalty income would hurt our business and business prospects |
| In many foreign markets, governments directly set the prices that clinical diagnostic companies may charge for their products and services |
| In the US, a number of legislative and regulatory proposals aimed at changing the healthcare system have been proposed in recent years and we expect this to continue |
| Foreign and domestic legislative and regulatory initiatives that limit healthcare coverage may have a material adverse effect on our business and business prospects |
| Risks Relating to the Industry WE ARE EXPOSED TO PRODUCT LIABILITY RISKS THAT, IF NOT ADEQUATELY COVERED BY INSURANCE, MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION Product liability is a major risk in marketing products for vaccines and for the clinical diagnostics, biosecurity and industrial markets |
| We may not be able to insure ourselves adequately against risk of product liability |
| We may face product liability for claims and lawsuits brought by customers |
| Damages awarded in product liability cases can be very large |
| While we have product liability insurance, this coverage is limited |
| We may not have adequate product liability insurance to cover us against our potential liabilities or be able to maintain current levels of product liability insurance on acceptable terms, if at all |
| Claims or losses in excess of our product liability insurance coverage or not covered by our product liability insurance could have a material adverse effect on our financial condition |
| Risks Relating to Our Common Stock OUR EXECUTIVE OFFICERS AND DIRECTORS EXERCISE SIGNIFICANT INFLUENCE OVER US AND MAY HAVE SIGNIFICANT INFLUENCE OVER THE OUTCOME OF PROPOSED CORPORATE ACTIONS SUPPORTED OR OPPOSED BY OTHER STOCKHOLDERS Our executive officers and directors, in the aggregate, own approximately 24prca of the outstanding shares of our common stock |
| Our chairman and chief executive officer owns approximately 19prca of the outstanding shares of our common stock |
| As a result, certain of our executive officers or directors may have significant influence over the election of directors and may be able to significantly influence the outcome of proposed corporate actions supported or opposed by other stockholders |
| In addition, as a result of their stockholdings, certain of our executive officers and directors could have significant influence over the outcome of potential transactions, including any acquisition transactions, that may be supported or opposed by other stockholders |
| 38 ______________________________________________________________________ PROVISIONS IN OUR CHARTER DOCUMENTS MAY DISCOURAGE POTENTIAL ACQUISITIONS OF US, EVEN THOSE WHICH THE HOLDERS OF A MAJORITY OF OUR COMMON STOCK MAY FAVOR, WHICH MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK, REDUCE THE LIKELIHOOD OF OFFERS TO ACQUIRE US AND PREVENT CHANGES IN OUR MANAGEMENT Our certificate of incorporation and by-laws contain provisions that may have the effect of discouraging a third party from acquiring us by means of a tender offer, proxy contest or otherwise |
| Our certificate of incorporation and by-laws: • classify our board of directors into three classes, with directors of each class serving for a staggered three-year period; • provide that our directors may be removed only for cause and only upon the approval of the holders of at least a majority of the voting power of all our shares entitled to vote generally in the election of such directors then outstanding, voting together as a single class; • prohibit our stockholders from calling special meetings and prohibit action by our stockholders by written consent; • require at least 66 2/3prca of the voting power of all our shares entitled to vote generally in the election of directors then outstanding, voting together as a single class, to alter, amend or repeal certain provisions, including the provisions relating to our classified board, the election, appointment and removal of our directors and action by stockholders by written consent described above; • permit our board of directors to fill vacancies and newly created directorships on our board of directors; and • contain advance notice requirements for stockholder proposals |
| In addition, under our certificate of incorporation, our board of directors also has the authority to issue up to 15cmam000cmam000 shares of preferred stock in one or more series |
| Our board of directors can fix the powers, preferences and rights of any such series without stockholder approval |
| Our board of directors could, therefore, issue, without stockholder approval, preferred stock with voting and other rights that could adversely affect the voting power of the holders of our common stock or otherwise make it more difficult for a third party to gain control of us |
| Such provisions would make the removal of incumbent directors more difficult and time-consuming and may have the effect of discouraging a tender offer or other takeover attempt not previously approved by our board of directors |
| In addition, we have adopted a stockholder rights agreement, pursuant to which one right attached to each share of our common stock outstanding |
| These rights will in most cases cause substantial dilution to a person that attempts to acquire or merge with us without the approval of our board of directors by permitting the holders of these rights (other than the person attempting to acquire or merge with us) to, upon the occurrence of specified circumstances, purchase, at a substantial discount, shares of our Series A participating cumulative preferred stock or shares of common stock of the person that attempts to acquire or merge with us |
| Accordingly, the existence of these rights may deter potential acquirers from making a takeover proposal or a tender offer |
| WE DO NOT PLAN TO PAY ANY CASH DIVIDENDS ON OUR COMMON STOCK We have no plans to pay cash dividends on our common stock in the foreseeable future, if at all |
| WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE AND WE MAY GRANT OPTIONS OR OTHER EQUITY-BASED AWARDS TO OUR EXECUTIVE OFFICERS, DIRECTORS, EMPLOYEES AND CONSULTANTS, FROM TIME TO TIME, EITHER OF WHICH WOULD RESULT IN DILUTION TO OUR STOCKHOLDERS Your investment in our common stock could be diluted if we issue additional shares of our common stock or securities convertible into, or exercisable for, shares of our common stock in the future, which we may need to do to raise funds 39 ______________________________________________________________________ for our business |
| Sales of additional shares of our common stock or the conversion of securities into, or the exercise of securities for, shares of our common stock could cause the market price of our common stock to decrease |
| Under the BioVeris 2003 stock incentive plan, our executive officers, directors, employees and consultants are from time to time granted options or other equity-based awards, such as phantom stock or restricted stock, to purchase up to 5dtta3 million shares of our common stock |
| If our executive officers, directors, employees and consultants exercise their options or other equity-based awards, if and when granted and exercisable, and purchase shares of our common stock, your investment in our common stock will be diluted |
| THE EXON-FLORIO ACT MAY INHIBIT POTENTIAL ACQUISITION BIDS, WHICH MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK Section 721 of Title VII of the Defense Production Act of 1950, also known as the Exon-Florio Act, authorizes the President of the US or his designees to initiate an investigation into the potential effects on national security of a business combination of a US corporation and a foreign entity that could result in foreign control of the US corporation |
| Subject to certain exceptions, under the Exon-Florio Act, the president may suspend or prohibit any foreign acquisition, merger or takeover of a US corporation if there is credible evidence that the foreign entity exercising control might take action that threatens national security and there is no provision of law adequate to protect national security |
| Due to our current and potential future involvement in the biodefense industry, the Exon-Florio Act could inhibit potential acquisition bids from foreign entities, which could adversely affect the market price of our common stock |