| Investors should carefully consider the following factors, among others, relating to Clinical Data: Risk factors relating to our business and operations We do not have sufficient cash resources available to fund our current level of activities through the end of the third quarter of fiscal 2007 and beyond, including our Phase III clinical trial program for our lead product candidate, vilazodone |
| Over the near-term, we will need to satisfy substantial capital requirements to pursue our development and commercialization strategies and to further optimize operations |
| At currently projected rates of expenditure, we believe that additional funding will be required to operate the Company and its new subsidiaries through the end of the third quarter of fiscal 2007, including the funding of Phase III clinical trials for our lead drug candidate, vilazodone |
| Although we completed a private placement of our common stock of approximately dlra17dtta0 million in June 2006, there can be no assurance that any future equity or other fundraising would be successful |
| A general lack of market interest in providing further financing to life sciences companies could have a material adverse effect on our ability to raise funds |
| If we do secure additional capital through a public or private equity offering, dilution to our then existing shareholders may result |
| If we are unable to secure additional funds when we need them, we may be required to delay, reduce or eliminate some or all of our programs |
| We may also be forced to license compounds or technology to others that we would prefer to develop internally until a later, and potentially more lucrative, stage |
| If we are required to raise additional funds through collaborations and other licensing arrangements, we may have to relinquish our rights to some of our technologies or grant licenses on unfavorable terms |
| Over the near-term, our future capital requirements to continue the development and enhancement of our technologies, capture market share, in license and develop genetic tests and to seek to complete the commercialization of our drug candidates will be substantial and will be influenced by many factors |
| Such factors include the amount of milestone payments which we may receive under collaboration, licensing or other agreements, the progress and cost of research and development projects, especially the Phase III program for vilazodone, our lead product candidate, and expenses which may be required for the filing, defense and enforcement of patent rights |
| If we are unable to secure adequate financing over the near-term, we will not be able to pursue our product development and commercialization strategies as currently planned |
| -30- _________________________________________________________________ [65]Table of Contents We are currently seeking a partner with which to design and conduct a Phase III clinical program for vilazodone, as we have neither the experience necessary nor sufficient cash to complete such a clinical program |
| We have limited experience in designing and conducting clinical trials, especially Phase III clinical trials |
| We also do not have sufficient cash with which to complete Phase III clinical trails for vilazodone |
| As a result, with respect to our Phase III program for our lead product candidate, vilazodone, we are currently seeking a partner with which to design, fund and conduct clinical trials |
| We may not be successful in finding a collaboration partner or in designing, funding and conducting the clinical trials |
| Any delay or failure on our or our partner’s part could have a material adverse effect on our prospects for completing the trial and eventually developing a commercial product and, accordingly, on our prospects generally |
| Our biopharmaceutical or diagnostic product candidates must undergo rigorous clinical trials and regulatory approvals, which could substantially delay or prevent their development or marketing |
| Any biopharmaceutical and some of our diagnostic products that we develop will be subject to rigorous clinical trials and an extensive regulatory approval process implemented by the FDA and analogous foreign regulatory agencies |
| This approval process is typically lengthy and expensive, and approval is never certain |
| Positive results from pre-clinical studies and clinical trials do not ensure positive results in late stage clinical trials designed to permit application for regulatory approval |
| We do not know when, or if, our current clinical trials for vilazodone will be completed |
| Many factors affect patient enrollment, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, alternative therapies, competing clinical trials and new drugs approved for the conditions we are investigating |
| Such delays may increase our costs and slow down our product development and the regulatory approval process |
| Our product development costs will also increase if we need to perform more or larger clinical trials than planned |
| The occurrence of any of these events will delay our ability to generate revenue from product sales and impair our ability to become profitable, which may cause us to have insufficient capital resources to support our operations |
| Because of the risks and uncertainties in biopharmaceutical development, products that we or our collaborators develop could take a significantly longer time to gain regulatory approval than we expect or may never gain approval |
| If we or our collaborators do not receive these necessary approvals, we will not be able to generate substantial product or royalty revenues and may not become profitable |
| We and our collaborators may encounter significant delays or excessive costs in our efforts to secure regulatory approvals |
| Factors that raise uncertainty in obtaining these regulatory approvals include the following: • we must demonstrate through clinical trials that the proposed product is safe and effective for its intended use; • we have limited experience in conducting the clinical trials necessary to obtain regulatory approval; and • data obtained from pre-clinical and clinical activities are susceptible to varying interpretations, which could delay, limit or prevent regulatory approvals |
| Regulatory authorities may delay, suspend or terminate clinical trials at any time if they believe that the patients participating in trials are being exposed to unacceptable health risks or if they find deficiencies in the clinical trial procedures |
| In addition, our or our collaborators’ failure to comply with applicable regulatory requirements may result in criminal prosecution, civil penalties and other actions that could impair our ability to conduct our business |
| We initiated a pivotal Phase III clinical trial of vilazodone for the treatment of depression in February 2006 |
| We will need to complete this Phase III trial before filing an NDA for marketing approval of this product in this indication; we believe the NDA could be filed by the first half of calendar 2009 |
| This clinical trial may be delayed for any of the reasons described above, and may take longer than anticipated to initiate and/or to complete |
| -31- _________________________________________________________________ [66]Table of Contents We recently acquired both Genaissance Pharmaceuticals, Inc |
| and Icoria, Inc, each of which has historically incurred significant net losses, and we expect to incur net losses for some time |
| On December 20, 2005, we completed the acquisition of Icoria, which has a history of incurring net losses, and had an accumulated deficit of approximately dlra106dtta3 million as of December 20, 2005 |
| Genaissance, which we acquired on October 6, 2005, had an accumulated deficit of approximately dlra244dtta0 million as of October 6, 2005 |
| We expect that as a result of combining our operations with those of our recently acquired subsidiaries, we will continue to incur net losses, that it is possible that we may never generate sufficient revenue to become profitable and that we may not sustain profitability if we do become profitable |
| We are entering into new business areas and may not have the expertise, experience and resources to pursue all of our businesses at once |
| Individually, each of Clinical Data, Genaissance, Genome Express and Icoria has had experience in their respective areas of expertise, but we have never pursued all of the facets of these businesses at once |
| As a result, we may not have the experience, the appropriate expertise, or the resources to pursue all businesses in our combined company and we may discover that some of the new facets of the combined business are not what we previously believed and are not financially viable |
| Due to recent merger activity, it may be more difficult to obtain additional financing at favorable terms, if at all |
| Because we have not been tested as an integrated enterprise, and as a combined company we have a significant history of losses, it may be more difficult to encourage investment in our company through public and additional private stock offerings, arrangements with corporate partners, credit facilities or from other sources |
| We may never realize enhanced liquidity in the public markets because the overhang in the public markets as a result of recent merger transactions may dissuade new investors |
| We may be unable to integrate successfully the businesses of Genaissance, Genome Express and Icoria with our own business |
| During fiscal year 2006, we consummated mergers with Genaissance, Genome Express and Icoria |
| This integration of all these businesses with our own will require significant efforts from each company, including the coordination of product development, sales and marketing efforts and administrative operations |
| We may find it difficult to integrate simultaneously the operations of Genaissance, Genome Express and Icoria |
| We have employees widely dispersed across our operations in Massachusetts, Rhode Island, Connecticut, California, Texas, North Carolina, Pennsylvania and other domestic and foreign locations, which will increase the difficulty of integrating operations |
| Genaissance, Genome Express and Icoria personnel may leave their respective companies or our combined company because of the acquisitions |
| Genaissance, Genome Express and Icoria customers, distributors or suppliers may delay or defer purchasing decisions, terminate their arrangements with the respective company or our combined company -32- _________________________________________________________________ [67]Table of Contents or demand amended terms to these arrangements |
| Any of these actions by customers, distributors or suppliers could adversely affect our business |
| The challenges involved in this integration include, but are not limited to, the following: • retaining existing customers and strategic partners of each company; • retaining and integrating management and other key employees; • coordinating research and development activities to enhance introduction of new products and technologies, especially in light of rapidly evolving markets for those products and technologies; • preserving the value of various research and development, collaboration, distribution, manufacturing and other important relationships; • coordinating the headquarter operations of Genome Express in France, as well as its research and development facilities in France, which are geographically distant from the operations of our corporate headquarters and most of our subsidiaries in the United States; • effectively managing the diversion of management attention from business matters to integration issues; • combining product offerings and incorporating acquired technology and rights into product offerings effectively and quickly; • integrating sales efforts so that customers can do business easily with us; • coordinating and combining international operations, relationships and facilities, which may be subject to additional constraints imposed by local laws and regulations; • persuading employees that the business cultures of Clinical Data, Genaissance, Genome Express and Icoria are compatible; • effectively offering products of Clinical Data, Genaissance, Genome Express and Icoria to each other’s customers; • anticipating the market needs and achieving market acceptance of Clinical Data, Genaissance, Genome Express and Icoria products; • bringing together the companies’ marketing efforts so that the industry receives useful information about the acquisitions and customers perceive value in our products; and • developing and maintaining uniform standards, controls, procedures, and policies |
| Our acquisition of Genome Express, and our mergers with Genaissance and Icoria may fail to achieve expected beneficial synergies |
| Clinical Data acquired Genome Express with the expectation that the acquisition will result in beneficial synergies, such as cost reductions and a broader suite of products and services to offer to our current and targeted customers |
| We also expect to achieve similar beneficial synergies in our recently completed mergers with Genaissance and Icoria |
| Achieving these anticipated synergies and the potential benefits underlying our reasons for entering into the acquisitions will depend on the success of integrating all four companies’ businesses |
| It is not certain that we can successfully integrate Genaissance, Genome Express and Icoria in a timely manner or at all, or that any of the anticipated benefits will be realized |
| Risks from unsuccessful integration of all the companies include: • the potential disruption of ongoing business and distraction of our management; • the risk that it may be more difficult to retain key management, marketing, and technical personnel after the acquisitions; • the risk that costs and expenditures for retaining personnel, eliminating unnecessary resources and integrating the businesses are greater than anticipated; • the risk that we cannot increase sales of our products; and • the risk that integrating and changing our businesses will impair our relationships with our existing customers and business partners |
| -33- _________________________________________________________________ [68]Table of Contents Even if we are able to integrate operations, there can be no assurance that the synergies we hope for will be achieved or that integration of Genaissance, Genome Express or Icoria will not disrupt or eliminate such synergies |
| The failure to achieve such synergies could adversely affect our business and results of operations, including use of cash in operations |
| Because a significant portion of our total assets will be represented by goodwill and other intangible assets that are subject to mandatory annual impairment evaluations, we could be required to write-off some or all of this goodwill and other intangibles, which may adversely affect our financial condition and results of operations |
| We accounted for the acquisitions of Genaissance, Genome Express and Icoria using the purchase method of accounting |
| The purchase prices for these businesses were allocated to identifiable tangible and intangible assets and assumed liabilities based on estimated fair values at the date of consummation of the respective mergers |
| The unallocated portions of the purchase prices were allocated to goodwill |
| Approximately 47dtta9prca of our total assets at March 31, 2006 are goodwill and other intangibles, of which approximately dlra27dtta5 million are goodwill |
| In accordance with SFAS Nodtta 142, goodwill is not amortized but is reviewed annually or more frequently if impairment indicators arise |
| The unamortized values of other intangibles are reviewed if certain conditions exist |
| When we perform future impairment tests, it is possible that the carrying value of goodwill or other intangible assets could exceed their implied fair value and therefore would require adjustment |
| Such adjustment would result in a charge to operating income in that period |
| Once adjusted, there can be no assurance that there will not be further adjustments for impairment in future periods |
| The uncertainty of patent and proprietary technology protection may adversely affect us |
| Our success will depend in part on obtaining and maintaining meaningful patent protection on our inventions, technologies and discoveries |
| Although a substantial majority of our POL and Clinics and Small Hospitals revenues are attributable to products without patent protection, our Genaissance and Icoria businesses and related technologies are more heavily reliant on such patent protection and we will have to address such issues |
| Our ability to compete effectively will depend on our ability to develop and maintain proprietary aspects of our technology, and to operate without infringing the proprietary rights of others, or to obtain rights from third parties, if necessary |
| Our pending patent applications may not result in the issuance of patents |
| Our patent applications may not have priority over others’ applications, and even if issued, our patents may not offer protection against competitors with similar technologies |
| Any patents issued to us may be challenged, invalidated or circumvented, and the rights created thereunder may not afford us a competitive advantage |
| We also rely upon trade secrets, technical know-how and continuing inventions to develop and maintain our competitive position |
| Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose our technology and we may not be able to protect meaningfully our trade secrets, or be capable of protecting our rights to our trade secrets |
| We seek to protect our technology and patents, in part, by confidentiality agreements with our employees and contractors |
| Our employees may breach their confidentiality agreements and these agreements may not protect our intellectual property |
| If we are unable to protect effectively our intellectual property, we may not be able to operate our business and third parties may use our technology, both of which would impair our ability to compete in our markets |
| Our success will depend in significant part on our ability to obtain and maintain meaningful patent protection for certain of our technologies and products throughout the world |
| Patent law relating to the scope of claims in the technology fields in which we will operate is still evolving |
| The degree of future protection for our proprietary rights is uncertain |
| We will rely on patents to protect a significant part of our intellectual property and to enhance our competitive position |
| However, our presently pending or future patent applications may not issue as patents, and any patent previously issued to us or our subsidiaries may be challenged, invalidated, held unenforceable or -34- _________________________________________________________________ [69]Table of Contents circumvented |
| Furthermore, the claims in patents which have been issued to us or our subsidiaries or which may be issued to us in the future may not be sufficiently broad to prevent third parties from producing competing products similar to our products |
| In addition, the laws of various foreign countries in which we plan to compete may not protect our intellectual property to the same extent as do the laws of the United States |
| If we fail to obtain adequate patent protection for our proprietary technology, our ability to be commercially competitive will be materially impaired |
| The patent positions of life science companies are generally uncertain and involve complex legal and factual questions |
| Our business could be hurt by any of the following: • our pending patent applications may not result in issued patents; • the claims of any issued patents may not provide meaningful protection; • we may be unsuccessful in developing additional proprietary technologies that are patentable; • our patents may not provide a basis for commercially viable products or provide us with any competitive advantages and may be challenged by third parties; and • others may have patents that relate to our technology or business |
| Third parties have filed, and in the future are likely to file, patent applications covering biomarkers and related methods that our Icoria subsidiary has developed or may develop or technology upon which our technology platform depends |
| If patent offices issue patents on these patent applications and we wish to use the biomarkers or technology, we would need to obtain licenses from third parties |
| However, we might not be able to obtain any such license on commercially favorable terms, if at all, and if we do not obtain these licenses, we might be prevented from using certain technologies or taking certain products to market |
| In addition to patent protection, we will also rely on protection of trade secrets, know-how and confidential and proprietary information |
| To maintain the confidentiality of trade-secrets and proprietary information, we generally seek to enter into confidentiality agreements with our employees, consultants and strategic partners upon the commencement of a relationship |
| However, we may not obtain these agreements in all circumstances |
| In the event of unauthorized use or disclosure of this information, these agreements, even if obtained, may not provide meaningful protection for our trade secrets or other confidential information |
| In addition, adequate remedies may not exist in the event of unauthorized use or disclosure of this information |
| The loss or exposure of our trade secrets and other proprietary information would impair its competitive advantages and could have a material adverse effect on our operating results, financial condition and future growth prospects |
| If third parties make or file claims of intellectual property infringement against us, or otherwise seek to establish their intellectual property rights, we may have to spend time and money in response and cease some of our operations |
| Third parties may claim that we are employing their proprietary technology without authorization or that we are infringing on their patents |
| We could incur substantial costs and diversion of management and technical personnel in defending against any of these claims |
| Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief which could effectively block our ability to further develop, commercialize and sell products |
| In the event of a successful claim of infringement, courts may order us to pay damages and obtain one or more licenses from third parties |
| We may not be able to obtain these licenses at a reasonable cost, if at all |
| If we were sued for product liability, we could face substantial liabilities that may exceed our resources |
| We may be held liable if any product we develop, or any product which is made using our technologies, causes injury or is found unsuitable during product testing, manufacturing, marketing, sale or use |
| These risks are inherent in the development of chemical, agricultural, pharmaceutical, and other such healthcare products and related -35- _________________________________________________________________ [70]Table of Contents methodologies |
| If we choose to obtain product liability insurance but cannot obtain sufficient insurance coverage at an acceptable cost or otherwise protect against potential product liability claims, the commercialization of products that we or our commercial partners develop may be prevented or inhibited |
| If we are sued for any injury caused by our products, such liability could have a material adverse effect on our business and results of operations |
| Any product that we, or our commercial partners may develop using the gene function, metabolomics, or biomarker information we provide, may be subject to a lengthy and uncertain government regulatory process that may not result in the necessary approvals, may delay the commercialization of these products or may be costly, any of which could seriously reduce our revenues or exceed our financial ability to meet such obligations |
| Many of our new products that we or our commercial partners develop will likely undergo an extensive regulatory review process in the United States by the Food and Drug Administration or USDA, and by regulators in other countries before it can be marketed or sold |
| For example, the FDA must approve any drug, diagnostic or biologic product before it can be marketed in the United States |
| Genetic tests offered by the company may not be subject to this review |
| This review process can take many years and require substantial expense |
| In the future, we and our commercial partners may also be required to submit pre-market information to the FDA about food developed through biotechnology |
| Adverse publicity could lead to greater regulation and trade restrictions on imports and exports of genetically modified products |
| Changes in the policies of US and foreign regulatory bodies could increase the time required to obtain regulatory approval for each new product |
| Our efforts to date have been primarily limited to identifying targets |
| If regulators approve any products that we or our commercial partners develop, the approval may impose limitations on the uses for which a product may be marketed |
| Regulators may require the submission of post-market launch information about a product after approving it, and may impose restrictions, including banning the continued sale of the product, if they discover problems with the product or its manufacturer |
| If we are unable to develop new and enhanced products that achieve widespread market acceptance, we may be unable to recoup product development costs, and our revenues and earnings may decline |
| Our future success depends on our ability to broadly market existing technologies, products, and services, and to develop and introduce new product and service offerings and grow our business in each of the POLs, blood analysis instrumentation, diagnostic assays DNA-based diagnostic and therapeutic products, and human biomarkers and agriculture genomics markets |
| We expect to commit substantial resources to developing new products and services, as well as to continue marketing the existing products and services |
| If the market for these products and services does not develop as anticipated, or demand for our current product and service offerings does not grow or grows more slowly than we expect, we will have expended substantial resources and capital without realizing sufficient revenue, and our business and operating results could be adversely affected |
| We operate in a very competitive environment |
| We expect to encounter intense competition from a number of companies that offer products in our targeted application areas |
| We anticipate that our competitors in these areas will include: • health care and other companies that manufacture laboratory-based tests and analyzers; • diagnostic and pharmaceutical companies; • molecular services business; • companies developing drug discovery technologies; • companies developing molecular diagnostic and genetic tests; and • companies developing point-of-care diagnostic and genetic tests |
| -36- _________________________________________________________________ [71]Table of Contents If we are successful in developing products in these areas, we will face competition from established companies and numerous development-stage companies that continually enter these markets |
| In many instances, competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than us |
| Moreover, these competitors may offer broader product lines and have greater name recognition than us and may offer discounts as a competitive tactic |
| In addition, several development-stage companies are currently making or developing products that compete with or will compete with our potential products |
| Competitors may succeed in developing, obtaining approval from the FDA, or marketing technologies or products that are more effective or commercially attractive than our current or potential products or that render our technologies and current or potential products obsolete |
| Competitors may also develop proprietary positions that may prevent us from successfully commercializing products |
| We may not be able to successfully integrate companies that we acquire in the future |
| Our success will depend in part on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures |
| From time to time we may pursue acquisitions of businesses that complement or expand our existing business, including acquisitions that could be material in size and scope |
| Any future acquisitions involve various risks, including: • difficulties in integrating the operations, technologies and products of the acquired company; • the risk of diverting management’s attention from normal daily operations of the business; • potential difficulties in completing projects associated with in-process research and development; • risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions; • initial dependence on unfamiliar supply chains or relatively small supply partners; • insufficient revenues to offset increased expenses associated with the acquisition; and • the potential loss of key employees of the acquired company |
| Our ownership is concentrated among a small number of stockholders |
| Our ownership is concentrated among a small number of stockholders, including Randal J Kirk, our Chairman, Mr |
| Kirk’s affiliates, and Israel M Stein, MD, our Executive Vice Chairman and Acting Chief Financial Officer |
| Together with Dr |
| Kirk’s affiliates hold approximately 43dtta7prca of our outstanding common stock as of June 16, 2006, after giving effect to the recently completed private equity placement transaction |
| Kirk’s affiliates have a controlling block of our outstanding stock and are able to exert substantial control over various corporate matters |
| Notwithstanding such control, Mr |
| Kirk and Dr |
| Stein, as directors of Clinical Data, have fiduciary duties under Delaware law to all our stockholders |
| Delaware law also imposes certain additional fiduciary duties on Dr |
| Stein by virtue of his status as an officer of Clinical Data |
| -37- _________________________________________________________________ [72]Table of Contents We will continue to shift our Icoria subsidiary’s traditional business model away from agriculture-based research and areas of historical revenue |
| Icoria recently shifted towards the healthcare industry and the therapeutic fields of obesity, liver disease and diabetes, which is a fundamental shift away from known and historical areas of revenue generation |
| There has not been sufficient time to discover whether Icoria has been or will be successful in this effort |
| Our Icoria subsidiary’s belief that the potential market for healthcare products and services is better for its long-term business prospects, rather than the strategy of using agriculture-based contracts to generate revenues, may be based on data and assumptions that are flawed, we may not have the financial ability or expertise to effectuate this shift, and the costs of the transition may be prohibitive |
| Our belief that it can obtain material revenues from any healthcare partnerships, agreements, discoveries or contracts may be incorrect |
| Our Icoria business exposes us to risks of environmental liabilities |
| Our Icoria subsidiary’s research and development activities involve the controlled use of hazardous materials, chemicals and toxic compounds which could expose us to risks of accidental contamination, events of non-compliance with environmental laws, regulatory enforcement and claims related to personal injury and property damage |
| If an accident occurred or if we were to discover contamination caused by prior operations, we could be liable for cleanup obligations, damages or fines, and any liability could exceed our resources |
| The environmental laws of many jurisdictions impose actual and potential obligations on us to remediate contaminated sites |
| These environmental remediation obligations could exceed our resources |
| Stricter environmental, safety and health laws and enforcement policies also could result in substantial costs and liabilities to us, and could subject our handling, manufacture, use, reuse or disposal of substances or pollutants to more rigorous scrutiny than is currently the case |
| Consequently, ongoing compliance with these laws could result in significant capital expenditures, as well as other costs and liabilities, which could materially adversely affect our Company |
| If we choose to acquire new and complementary businesses, products or technologies, we may be unable to complete such acquisition(s) or to integrate an acquired business or technology in a cost-effective manner |
| Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures |
| To this end, instead of developing them, from time to time we have acquired and may yet acquire additional complementary businesses, products, or technologies or may enter into cooperative ventures |
| We do not know if we will be able to complete such acquisitions, or whether we will be able to successfully integrate an acquired business, operate it profitably, or retain its key employees |
| Integrating any acquired business, product or technology, or any venture into which we may enter, could be expensive and time-consuming and could disrupt our ongoing business, distract our management and materially and adversely affect our cash flows and results of operations |
| If we are required to seek financing for an acquisition or other venture, or to enhance our working capital, we may not be able to obtain such additional financing on acceptable terms |
| In order to finance any acquisitions or other ventures, or to enhance our working capital, we may need to raise additional funds through public or private equity or debt financings |
| In that event, we could be required to obtain financing on terms that are unfavorable to us and, in the case of equity or equity-linked financing, on terms that may result in dilution to our existing stockholders |
| If we cannot sell our securities or obtain additional financing on acceptable terms, we may not be able to: -38- _________________________________________________________________ [73]Table of Contents • expand our product line and service offerings; • hire and train new staff ; • increase our sales and marketing presence in existing and new markets; or • respond to competitive pressures or unanticipated requirements |
| Our failure to do any of these things could seriously harm our financial condition by preventing us from being able to effectively grow our business or to take advantage of new business opportunities |
| We are dependent upon an asset-based line of credit for certain of our working capital |
| That loan imposes conditions that could adversely affect us |
| We used an asset-based line of credit to finance a portion of the assets we purchased from Elan |
| As of March 31, 2006, we had outstanding borrowings of dlra4dtta0 million under that line |
| This debt may adversely affect our future operations in several important ways, including the following: • our ability to obtain additional financing may be impaired; • if we do not satisfy the financial covenants in the loan agreement, we would be in default under our loan agreement and be required to immediately repay outstanding loan balances; and • because we do not have a fixed rate of interest for our loans, rising interest rates will increase our interest costs and reduce our earnings |
| Our international operations and sales expose us to foreign currency exchange rate fluctuation risks |
| The costs of importation of instruments and other products are subject to foreign currency fluctuations |
| In fiscal 2006, sales to customers outside the United States accounted for approximately 49dtta2prca of our revenues |
| We anticipate that international sales will continue to account for a significant portion of our revenues |
| Most of our sales to international distributors are denominated in Euros |
| To the extent that our sales and operating expenses are denominated in foreign currencies, our operating results may be affected by changes in exchange rates |
| We cannot predict whether such gains and losses will be material, nor can we predict the effect of exchange rate fluctuations on our future operating results |
| We sometimes engage in limited, transaction specific, foreign currency hedging transactions to reduce our risk, but we cannot assure you that any such hedging transaction will allow us to avoid any currency exchange rate fluctuation risks |
| Our international operations and sales expose us to political and economic risks |
| Our international operations and reliance on international sales expose us to foreign political and economic risks, including: • regulatory approvals; • import and export license requirements and restrictions; • disruptions in international transport or delivery; • difficulties in collecting receivables; and • potentially adverse tax consequences |
| If any of these risks materializes, our international sales could decrease and our foreign operations could suffer |
| We are dependent upon certain key personnel |
| We are highly dependent upon the principal members of our management, engineering and scientific staff, including Andrew J Fromkin, our President and Chief Executive Officer, and Israel M Stein, MD, our Executive Vice -39- _________________________________________________________________ [74]Table of Contents Chairman and Acting Chief Financial Officer |
| The loss of the service of any of these persons could seriously harm our product development and commercialization efforts |
| Our products require government approval to be marketed |
| We have obtained or are in the process of obtaining all necessary government approvals to market our current products in the United States and the European Union |
| However, we will likely need to obtain approval of certain European regulatory bodies and the FDA to market many of the new products that we may develop or obtain the rights to distribute |
| Domestically, certain of our products are classified as medical devices under the Food, Drug and Cosmetics Act |
| As such, if and when these products are offered for sale in the United States, these products will be subject to continuing regulation and oversight by the FDA The cost of obtaining such approvals may be high and the process lengthy, with no assurance that such approvals will be obtained |
| To date, neither the FDA nor the European medical regulatory bodies have developed industry-wide performance standards with respect to the safety and effectiveness of the products that we presently market |
| Although we intend to use reasonable efforts to comply with international standards, when and if developed, there can be no assurance that our products as currently configured will be in compliance |
| Any failure to receive and maintain approvals for our products, or noncompliance with any international performance standards promulgated in the future, could have a material adverse effect on our business |
| Furthermore, any material change in the existing rules and regulations or the adoption of any new regulations could adversely affect us |
| Physician’s office laboratories must comply with government regulations |
| Clinical laboratories, including POLs, are subject to significant governmental regulation at the Federal, state and sometimes local levels |
| These regulations govern licensure and operation of clinical laboratories, payment for laboratory services, health care fraud and abuse, security and confidentiality of health information, and environmental and occupational safety |
| CLIA extended Federal oversight to virtually all clinical laboratories by requiring that they be certified by the Federal government or by a Federally-approved accreditation agency |
| Pursuant to CLIA, clinical laboratories must meet quality assurance, quality control and personnel standards |
| Laboratories also must undergo proficiency testing and are subject to inspections |
| Standards for testing under CLIA are based on the complexity of the tests performed by the laboratory, with all tests classified as either high complexity, moderate complexity, or waived |
| We specialize in providing moderate complexity test products and consulting services for such testing, and POLs which purchase such products and services also require CLIA certificates to perform such testing |
| Any material change in the existing rules and regulations or the adoption of any new regulations could adversely affect us by making our customers less willing or able to remain in the business |
| The sanction for failure to comply with CLIA requirements may be suspension, revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, as well as significant fines and/or criminal penalties |
| The loss or suspension of a license, imposition of a fine or other penalties, or future changes in the CLIA law or regulations (or interpretation of the law or regulations) related to smaller labs could have a material adverse effect on our business |
| We are further regulated by the HIPAA, as amended |
| HIPAA includes standards of practice for the protection of the privacy of individually identifiable health information |
| Failure to comply with HIPAA could result in significant fines and criminal liability |
| In addition, future changes in Federal, state or local regulations or policies (or in the interpretation of current regulations) could adversely affect our ability to sell products and services to POLs |
| Physician’s office laboratories are dependent on third-party payers |
| -40- _________________________________________________________________ [75]Table of Contents Future changes in Federal, state and local regulations (or in the interpretation of current regulations) affecting government payment for clinical laboratory testing could have a material adverse effect on the profitability of POLs and would adversely affect the sale of our products and services |
| We are unable to predict what type of legislation, if any, will be enacted into law |
| In addition, changes in rates of reimbursement made by private insurers and other third-party payers may have a similar detrimental effect on our business |
| Manufacturing problems or delays could result in lost revenue |
| We manufacture most of our instruments in Dieren, The Netherlands and most of our reagents in Brea, California |
| Other products are manufactured in Italy and France on an OEM basis |
| These manufacturing processes are complex and, as a result, any prolonged disruption in our manufacturing operations or the manufacturing operations of our third party manufacturers could seriously harm our ability to satisfy our customer order deadlines |
| If we cannot deliver our systems in a timely manner, our revenues will likely suffer |
| As we develop new products, we must transition the manufacture of each new product from the development stage to commercial production |
| We cannot predict whether we will be able to complete such transitions on a timely basis and with commercially reasonable costs |
| We also cannot assure that manufacturing or quality control problems will not arise as we attempt to scale-up our production for any future new products or that we can scale-up manufacturing and quality control in a timely manner or at commercially reasonable costs |
| If we are unable to consistently manufacture our products on a timely basis due to these or other factors, our product sales will decline |
| Intense competition could reduce our market share or limit our ability to increase market share, which could harm our financial performance |
| The medical products industry is rapidly evolving and developments are expected to continue at a rapid pace |
| Competition in this industry, which includes our medical instrumentation, reagent and consulting services businesses, is intense and expected to increase as new products, technologies and services become available and new competitors enter the market |
| Our competitors in the United States, Europe and Pacific-Asia are numerous and include, among others, large, multi-national diagnostic testing and medical products companies |
| Our future success depends upon maintaining a competitive position in the development of products, technologies and services in our areas of focus in POLs and smaller clinical laboratories |
| Our competitors may: • develop technologies, products and services that are more effective than our products or services, or that render our technologies, products or services obsolete or noncompetitive; • obtain patent protection or other intellectual property rights that would prevent us from developing our potential products; or • obtain regulatory approval for the commercialization of their products more rapidly or effectively than we do |
| Also, the possibility of intellectual property rights disputes with competitors holding domestic and foreign patent and other intellectual property rights may limit or delay expansion possibilities for our businesses |
| In addition, many of our existing or potential competitors have or may have substantially greater financial and managerial resources, research and development capabilities, and clinical, manufacturing, regulatory and marketing experience |
| We rely on distributors for product sales and support |
| Our sales are primarily made through distributors |
| We often rely upon distributors to provide customer support to the ultimate end users of our products |
| As a result, our success depends on the continued sales and customer support efforts of our network of distributors |
| The use of distributors involves certain risks, including risks that distributors will not effectively sell or support our products, or will be unable to satisfy financial obligations to us and cease their operations |
| Any reduction, delay or loss of orders from our significant distributors could harm our business |
| There -41- _________________________________________________________________ [76]Table of Contents can be no assurance that we will continue to engage qualified distributors, and the failure to do so could have a material adverse effect on our business, financial condition and results of operations |
| Our distributor agreements provide for the distributor to purchase products from us at standard prices that are updated periodically |
| We have no obligations to the distributors after the product is shipped |
| We occasionally offer distributors special pricing on selected products to promote sales |
| Such discounts and special pricing provisions are recognized as reductions of revenue as we ship our product to the distributor |
| We occasionally offer incentive programs directly to our distributors’ salespeople |
| Our results of operations will be adversely affected if we fail to realize the full value of our intangible assets |
| As of March 31, 2006, our total assets included approximately dlra51dtta8 million of net intangible assets |
| Net intangible assets consist principally of (i) goodwill associated with acquisitions; (ii) costs associated with capitalized software; and (iii) purchased intangibles consisting of customer relationships, net of accumulated amortization |
| Goodwill is not being amortized while the purchased intangibles are being amortized over their estimated useful lives |
| Amortization of capitalized software is provided over the estimated useful life of the product, which is generally four years |
| Goodwill is tested, at a minimum, on an annual basis using December 31^st as the annual measurement date for potential impairment by comparing the carrying value to the fair market value of the reporting unit to which the goodwill is assigned; as of March 31, 2006, approximately dlra6dtta3 million of the goodwill is assigned to the POL segment, dlra1dtta2 million to the clinics and small hospitals segment and the remainder is assigned to the molecular services segment |
| Amortizable intangibles, including capitalized software, are subject to impairment reviews when there are indications of impairment |
| The fair value of our recorded intangibles can be impacted by economic conditions, market risks, and the volatility in the markets in which Clinical Data and its customers operate |
| Changes in fair value could result in future impairment charges if the fair value of the reporting units or asset groups to which these long-lived assets are associated are determined to be less than the carrying value of such assets |
| The annual assessment of goodwill or the periodic impairment testing considerations may result in impairment charges or additional intangible asset write-offs, respectively, which could adversely affect our results of operations |
| As of December 31, 2005, the most recent evaluation date, there was no impairment of goodwill |
| Additionally, there were no indicators of impairment that would require an assessment of the impairment of our other intangible assets |
| Risk factors relating to Clinical Data’s common stock The price of our common stock is volatile and could cause investors to lose a substantial part of their investment |
| The stock market in general and the stock prices of technology companies in particular, experience volatility, which has often been unrelated to the operating performance of any particular company or companies |
| Our common stock is lightly traded and its price could decline regardless of our company’s actual operating performance |
| Investors also could lose a substantial part of their investment as a result of industry or market-based fluctuations |
| If a more active public market for our common stock is not created, it may be difficult for stockholders to resell their shares |
| A number of additional factors also could cause the prevailing market prices of our common stock to fluctuate significantly and could adversely impact such prices and the ability of our company to raise additional equity capital |
| Such factors include but are not limited to the following: • the timing of our announcements or of our competitors’ announcements regarding significant products, contracts or acquisitions; • variations in results of operations; • changes in earnings estimates by securities analysts; • general economic and market conditions; and -42- _________________________________________________________________ [77]Table of Contents • sales of substantial amounts of our common stock into the public market, or the perception that such sales might occur |
| If the average closing price of our common stock were to decline significantly, we may be required to issue in excess of 20prca of our outstanding capital stock upon conversion of the Series A Preferred Stock we issued to the preferred stockholder of Genaissance in our recent merger with that company |
| In our recent merger with Genaissance, we issued 484cmam070 shares of our Series A Preferred Stock to the holder of all of the preferred stock of Genaissance |
| As of March 31, 2006, the holder of our Series A Preferred Stock has converted 250cmam000 shares of our Series A Preferred Stock into shares of our common stock, leaving 234cmam070 shares of our Series A Preferred Stock outstanding |
| Our outstanding preferred stock is initially convertible into 234cmam070 shares of our common stock, or approximately 2dtta7prca of our outstanding capital stock as of March 31, 2006 |
| However, if our preferred stock remains outstanding until October 6, 2008, then and thereafter, the conversion price of the preferred stock will begin to float based on the public market price of our common stock, subject to a minimum conversion factor of one share of preferred stock for one share of common stock |
| According to the terms of our Series A Preferred Stock, after the third anniversary of the closing date of the Genaissance merger, on any given date of conversion, the conversion price will be equal to the average closing bid price of our common stock for the 10 consecutive trading days prior to such date of conversion |
| As a result, if the average closing bid price of the our common stock were to decline, the number of shares of our common stock into which our Series A Preferred Stock is then convertible would increase |
| If the average closing bid price of our common stock declines enough, it is possible that we would have to issue a number of shares of our common stock upon conversion of our series A preferred stock that would be greater than 20prca of our then-outstanding capital stock |
| Such an event does not require additional stockholder approval, would have the effect of diluting your ownership of the Company and could result in the preferred stockholder exercising control over certain corporate decisions of the Company, which it previously did not have the ability to control or influence |