| GENE LOGIC INC ITEM 1A RISK FACTORS We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control |
| Set forth below are risks and uncertainties we have identified as material that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Form 10-K and that could have material adverse effects on our business, results of operations, financial condition and cash flows |
| Risks Related to Our Genomics Division To generate revenue growth and sustain profitability, we must retain existing and obtain additional customers for our Genomics Division and develop new and improved services |
| Our strategy depends, in part, on continued growth in revenue from our Genomics Division |
| To achieve such growth, we must extend existing subscriptions and expand the scope and revenue potential of agreements with existing customers and develop new customers |
| Each of the subscription agreements that we have with our Genomics Division customers is for a specific term |
| These agreements may be terminated by either party in the event of breach or bankruptcy |
| If subscription agreements with major customers are terminated or expire and are not extended, or existing customers fail to buy additional services, or if we fail to enter into subscription agreements with new customers, our business could suffer |
| In 2006, subscription agreements with five customers will expire by their terms and two agreements may terminate at the customer’s election |
| We received notice from one such customer of its election to terminate its agreement in 2006 and the other customer did not elect to exercise its right to terminate its agreement early |
| These agreements accounted for 20prca of our total 2005 revenue and 28prca of our 2005 Genomics Division revenue |
| There is no assurance that the remaining agreements scheduled to expire will be extended or that any agreements resulting from our discussions with such customers will be on terms comparable to, or as favorable to us as, the existing subscription agreements |
| Our future growth is also dependent upon continuing to expand our services offering and potential customer base through developing new and improving existing services and growing sales of our toxicogenomics services, software tools, microarray data generation and analysis and other professional services and solutions (eg, ASCENTA System and ToxShield) |
| If we fail to achieve any of these goals, our Genomics Division segment could experience financial losses and our entire business could suffer |
| Our genomics and toxicogenomics databases require continual upgrading and expansion, which may be difficult or expensive |
| To continue to build our Genomics Division, we require timely access to normal and diseased human and animal tissue samples, other biological materials and related clinical and other information |
| Specific tissue and blood samples that we believe will enhance the content of our databases may be difficult to obtain or may not be available on terms acceptable to us |
| In addition, government regulation in the United States and foreign countries could restrict access to, or use of, human and other tissue samples and related data |
| If we lose access to sufficient numbers or sources of tissue samples or if tighter restrictions are imposed on our use of the information generated from tissue samples and related data, our Genomics Division may suffer |
| Approximately every two to three years, certain changes in the microarray platforms that we use from Affymetrix may be necessary and require us to upgrade the content of our databases, which is time-consuming and requires significant expense |
| Future upgrades could be more frequent, costly or difficult or some customers may want the databases to be reproduced on a different technology platform, which would be costly to implement |
| In 2005, we completed the upgrade of our BioExpress System database using the latest human GeneChip microarrays from Affymetrix |
| In 2006, we expect to upgrade our ToxExpress System database using GeneChip microarrays from Affymetrix |
| The genomics industry is competitive and evolving rapidly, and our Genomics Division may become obsolete or fail to be sufficiently useful |
| Competition exists among entities attempting to identify genes associated with specific diseases, conduct toxicity testing of compounds and develop products and services based on these discoveries |
| Our Genomics Division directly competes in these areas with pharmaceutical and biotechnology companies and other companies providing services to these industries, academic and non-profit institutions and government or other publicly funded agencies, both in the United States and abroad |
| We are aware that these entities are using a variety of gene expression analysis methodologies, including the use of microarrays, to attempt to identify disease-related genes and to develop and make available databases of gene expression and toxicogenomics data |
| In some cases, such databases and other genomic data may be publicly available, but to our knowledge none of such databases are comparable in scope or utility to ours |
| In addition, certain pharmaceutical companies are developing in-house genomic research programs |
| To compete against existing and future technologies, we will need to continue to be able to demonstrate to potential and existing customers that the technologies and capabilities supporting our Genomics Division and, specifically, the BioExpress System and ToxExpress System databases, are superior to competing technologies and/or other gene expression-based resources |
| 19 _________________________________________________________________ Our Genomics Division could become less competitive if we are not able to make the enhancements to our technology necessary to compete successfully with newly emerging technologies |
| The roles of genes in human biology and pathology are still being discovered |
| Few therapeutic products based on gene discoveries have been commercialized to date |
| If our customers no longer find genomics and/or toxicogenomics information useful or such information becomes obsolete as a viable drug discovery and development resource, our existing and potential customers may lose confidence in our Genomics Division and our business may suffer |
| The sales cycle for our Genomics Division is lengthy; we may spend considerable resources on unsuccessful sales efforts or may not be able to complete deals on the schedule we anticipate |
| The sales cycle for multi-year subscriptions to our BioExpress and ToxExpress System databases is estimated at nine to 15 months, and in certain circumstances could be longer |
| The sales cycle for our other services, including toxicogenomics reports, microarray data generation and analysis and other professional services and solutions, may not be as long but is still a matter of at least several months |
| The lengthy sales cycle is caused by a number of factors, including our need to educate our existing and potential customers and sell the benefits of the services of our Genomics Division to a variety of groups within such companies |
| In addition, each agreement may involve the negotiation of unique terms |
| We may expend substantial effort with no assurance that a new or extended subscription or other agreement will result |
| Actual and proposed consolidations of pharmaceutical and biotechnology companies have affected, and may in the future affect, the timing and progress of our Genomics Division sales efforts |
| Accordingly, our results will fluctuate because it is not always possible to effectively time the initiation of new subscription agreements or extensions of existing subscription agreements, or predict the timing of any potential resulting revenue from such agreements |
| We rely on microarrays and other products supplied by Affymetrix to build the underlying genomics and toxicogenomics data of our databases and to provide our microarray data generation and analysis services |
| Our continuing ability to build and update the gene expression data that are the foundation of our databases depends in part on the ability of Affymetrix to supply us with adequate quantities of high quality microarrays and other products and to make available licenses of technologies to use such products |
| We also rely on Affymetrix microarrays to provide our microarray data generation and analysis services and on a new line of SNP-based microarrays to provide our recently launched SNP genotyping services |
| Affymetrix provides us with microarrays, reagents, instrumentation and software under an agreement that expires December 31, 2006 |
| There is no assurance that we can renew that agreement on terms comparable to, or as favorable to us as, the current agreement |
| That agreement is also terminable if we breach the agreement and fail to cure any breach within the applicable cure period |
| If Affymetrix is unable or unwilling to supply us with the products and licenses we require on acceptable terms or if the microarrays are unavailable or defective or otherwise unreliable, we may incur additional database production costs and we may need to obtain alternative technologies |
| Alternative technologies may not be available to us, or may only be available to us on unfavorable terms |
| Restricted or curtailed access to such products could cause our Genomics Division to suffer by preventing or delaying our ability to provide our services or increasing the cost to generate additional content for our databases, as well as causing us to be delayed or unable to meet content update obligations under existing Genomics Division subscription agreements |
| Risks Related to our Preclinical Division The results of operations of our Preclinical Division will be adversely affected if we cannot obtain additional contracts to generate greater revenue from existing and new customers |
| To reduce losses and achieve profitability in our Preclinical Division, we must obtain contracts to perform studies in order to generate greater revenue from existing and new customers and we must obtain the types of studies that can allow us to optimally use the capacity of our study facilities |
| Factors that could prevent us from obtaining adequate numbers, or appropriate types, of contracts for studies on a timely basis include the factors set forth in “Risks Related to our Preclinical Division” and whether we can provide competitive pricing vis-a-vis our competitors whose fixed cost structures are lower because of higher order volume and higher and better utilization of capacity, and whether the FDA Letter will continue to have a negative impact on our reputation for quality studies |
| In addition, demand by biotechnology and pharmaceutical companies for in-life animal studies to test the safety of their candidate compounds can fluctuate based on internal development pipeline issues, including whether they have candidates ready for such pre-IND studies and internal choices regarding resource allocation |
| 20 _________________________________________________________________ Failure to grow our Preclinical Division or the absence of viable strategic alternatives for this business could result in continuing material losses |
| Our goal for our Preclinical Division is to improve its financial and operational performance |
| If we continue to experience suboptimal demand for our services, to experience underutilization of our capacity and to realize ongoing losses for this division and if we are unable to identify and implement acceptable strategic alternatives for the business, the Preclinical Division could cause us to continue to experience material losses |
| Failure to provide quality studies could result in a loss of or inability to obtain additional business for our Preclinical Division |
| If we fail to provide services with a level of quality acceptable to our customers (eg, in compliance with agreed study protocols, operating procedures, regulatory requirements, industry standards and customer expectations), we may be required to repeat the study at our expense, or refund amounts paid to us for the study, and we may experience an adverse effect on our reputation and lose business |
| Failure to comply with existing regulations could result in a loss of revenue or increased costs from our Preclinical Division |
| Our Preclinical Division is subject to extensive regulation and we are subject to periodic audit for compliance by regulatory authorities, including the FDA and the DEA Any failure on our part to comply with applicable regulations could result in the termination of ongoing studies or the disqualification of data for submission to regulatory authorities or other regulatory action |
| If this were to happen, we could incur additional compliance costs or be subject to additional regulatory restrictions, we could be contractually required to repeat a study at no further cost to our customer or refund the cost of the study and customers might choose not to enter into or to renew contracts for our Preclinical Division in the future |
| We are also accredited by an industry approval group named The Association for Assessment and Accreditation of Laboratory Animal Care International, commonly referred to as “AAALAC” |
| AAALAC is a private nonprofit organization that promotes the humane treatment of animals in science through a voluntary accreditation program |
| Generally, our customers insist that their vendors be AAALAC accredited and, if we were to fail an inspection or lose our accreditation, our Preclinical Division would be severely impacted |
| In addition, our use of animals for our Preclinical Division is also regulated by the United States Department of Agriculture |
| Our Preclinical Division is subject to periodic inspection by the FDA As a result of an inspection in October 2003, we received an FDA Warning Letter (the “FDA Letter”) in February 2005 |
| The FDA Letter focused on issues related to two preclinical studies conducted in 2001 and 2002 by TherImmune Research Corporation, prior to its acquisition by us in 2003 |
| The issues related to how the studies were conducted and to certain recordkeeping procedures |
| We worked cooperatively with the product sponsors for the two studies to address the issues raised by the FDA Letter |
| We submitted our response to the FDA, addressing each of the violations cited in the FDA Letter and identifying corrective actions we have taken, for further consideration by the FDA Although we do not believe any further action by the FDA with regard to this report is likely, there can be no assurance that the FDA will not take further action |
| While the Company is unable to quantify the impact of the FDA Letter, based on discussions with current and prospective customers, the FDA Letter has had a negative effect on the Company’s customers’ perception regarding the Company’s ability to provide preclinical contract research services |
| The FDA is required to inspect our facilities every two years |
| In August 2005, the FDA conducted a new inspection |
| At the conclusion of the inspection, they noted four observations, three of which also related to studies done prior to the acquisition of TherImmune by us and one of which related to services provided by a third party subcontractor |
| The inspection did not note any continuation or recurrence of discrepancies identified in the FDA Letter |
| We have responded to the FDA indicating how we were going to respond to those observations and improve our processes to make sure those issues relating to the noted observations did not recur and subsequently reported that we had taken corrective actions and implemented changes to prevent any recurrence of the noted observations |
| Although we do not believe any further action by the FDA with regard to this report is likely, there is no assurance that the FDA will not take further action |
| 21 _________________________________________________________________ Continuing negative performance of our Preclinical Division could affect the value of goodwill and creates risk to our results of operations |
| In 2003, we recorded goodwill of dlra43dtta0 million as a result of the acquisition of TherImmune |
| (now Gene Logic Laboratories Inc, our Preclinical Division) |
| Under Statement of Financial Accounting Standards Nodtta 142, “Goodwill and Other Intangible Assets”, we are required to perform an annual impairment test of our goodwill and are required to test for impairment whenever we have an indication that impairment may exist |
| During September 2005, we determined that the carrying value of the goodwill associated with our Preclinical Division was likely impaired, due to lower than expected performance, including lower than anticipated revenue and declining gross margins and, in the fourth quarter of 2005, we recorded a non-cash expense of dlra32dtta8 million representing the implied impairment of goodwill |
| Our estimates for future periods of the net cash flows may change as market conditions and circumstances dictate |
| Future impairment tests of our goodwill may result in additional impairment charges based on these changing estimates, which could have a material adverse effect on our results of operations |
| Our results of operations may suffer if studies conducted by our Preclinical Division are delayed or reduced in scope, performed improperly or terminated or if contracts are not priced properly |
| Our contracts for our Preclinical Division provide that services may be delayed, reduced in scope or terminated upon written notice |
| Terminations, delays or reductions may occur for a variety of reasons, including the failure of products to satisfy safety requirements, unfavorable interim test results of the study services, lack of availability of test material, the customerapstas decision to terminate the development of a test compound or to end a particular study, and our failure to perform properly our duties under the study services contract |
| Any delay, reduction in scope or termination could cause us to be unable to recover our costs or to realize profit on the affected contract and could have a material adverse effect on our business |
| If a study is improperly performed, we may have to repeat the study at our expense, refund the customer for the cost of the study and/or provide other remedies |
| Under fixed price contracts, there is the risk that we will improperly price one or more such contracts, which could result in our not recovering our anticipated costs or profit from such contracts |
| Under cost plus contracts with United States Government agencies, there is the risk of disallowance by such agencies of certain costs as a result of specific regulations and audits |
| Although our Preclinical Division contracts may entitle us to receive costs through the date of termination and, in some instances, a portion of our profit or a cancellation fee, it may be difficult to collect such amounts from a customer who has decided to terminate a study |
| We rely on third parties to supply us with animals |
| For our Preclinical Division, we purchase the animals used for our studies from a number of different suppliers, two of which are our major competitors |
| We don’t generally have problems with an adequate supply of these animals, although from time to time there can be temporary shortages for a particular species due to unanticipated demand, vendor-related events, health issues and other factors, which could lead to delays in commencing studies or possible cancellation of studies |
| Certain large animals, which are necessary to conduct certain studies and are only available abroad, may be more difficult to obtain |
| The supply of these animals can be affected by factors beyond our control, including but not limited to, export and import regulations and practices, natural disasters, political unrest, disease outbreaks, competition for supply and the limited number of potential suppliers and sources |
| Such shortages could be of lengthy duration and could result in delays or cancellations of higher value studies |
| Preclinical research services may expose us to liability and related risks |
| To the extent that our customers develop or use products based on our studies, if studies are not properly performed, we may be exposed to liability |
| Contractual indemnifications generally do not protect us against liability arising from certain of our own actions, such as negligence or misconduct |
| We could be materially and adversely affected if we were required to pay damages or bear the costs of defending any claim which is not covered by a contractual indemnification provision and is outside of or exceeds our insurance coverage or in the event that a party who must indemnify us does not fulfill its indemnification obligations |
| While we currently maintain professional liability insurance, our insurance coverage may not be adequate to protect us against future claims |
| Furthermore, our customers may not indemnify us against these types of claims or may not themselves be adequately insured or, in the case of smaller companies, have a net worth sufficient to satisfy any liability claims |
| Actions of animal rights extremists may affect our business |
| Our Preclinical Division requires the use of animals in our testing studies of the safety and efficacy of candidate compounds |
| Acts of vandalism and other wrongful acts by animal rights extremists who object to the use of animals in drug development could have a material adverse effect on our business |
| While we have taken certain security measures to protect our Preclinical Division employees and facilities, we cannot prevent all actions that may be taken by animal rights extremists |
| 22 _________________________________________________________________ Risks Related to Our Drug Repositioning Division The development of the repositioning technologies for our Drug Repositioning Division creates risks and uncertainties |
| The technologies that form the foundation of our Drug Repositioning Division require further development and such development could take longer or cost more than we anticipate |
| The development of the technologies could prove to be less effective than we need in order to offer these services effectively |
| Moreover, the mere development of these technologies does not assure that they will, in turn, enable us to be successful in determining potential alternative therapeutic uses for our partners’ drug candidates or that we will be able to utilize these technologies at capacity levels that will enable us to achieve our business objectives |
| In addition, these technologies may rely on inventions to which third parties have obtained or are obtaining patent or other rights and we may need to in-license rights to use such inventions |
| We may not be able to obtain or retain license rights needed for one or more of these technologies on terms acceptable to us |
| In particular, we license certain technology in connection with certain products purchased from Xenogen Corporation and we also purchase and license the right to use Luciferase from Promega Corporation |
| The Xenogen license is for a term ending in 2008 with an option to renew for an additional three years |
| The Promega license is for a period ending on the expiration or abandonment of the last of the valid claims of the licensed patent rights |
| Each of these licenses is terminable if we breach the agreement and fail to cure such breach within the applicable cure period |
| In addition, the Promega license includes a sublicense to rights owned by an academic institution and the license from Promega would terminate if the license to Promega from the academic institution terminated |
| If either of these agreements were to terminate while the relevant patent claims were enforceable and if we were not able to obtain new licenses, we would have to abandon or substantially revise one of the key technologies used in our drug repositioning process |
| Even if we successfully develop the repositioning technologies for our Drug Repositioning Division, these technologies may be quickly replaced, thereby making our current approach obsolete, or others may acquire or develop the same or similar technologies which could create competition for our services and, ultimately, could cause material risk of financial losses |
| Pharmaceutical companies and other companies and research organizations are developing individual technologies for better understanding the complex biological processes affected by compounds and selecting, purposing and repurposing compounds |
| Such other parties may elect to use such technologies internally, in lieu of using our services, or may successfully offer such services based on their technologies in competition against us |
| While we have license rights related to certain of the technologies that comprise the technology platform for our Drug Repositioning Division, we do not currently have issued patents to any of the technologies and our license rights are generally non-exclusive |
| We will seek patents or other protection on other elements of the technologies we use to reposition drug compounds |
| We may not be able to obtain such protection or the technology may become obsolete |
| We may be required to invest significant resources in identifying alternative uses for our partners’ compounds and we may not realize significant revenue from successfully repositioned drug candidates based on our work |
| Our Drug Repositioning Division agreements provide revenue primarily from success-based milestones and royalties based on the successful repositioning and commercial sales of drug candidates |
| Typically, we have agreed to perform our Drug Repositioning Division assessments without up-front payments |
| Accordingly, we may need to invest significant resources in seeking alternative uses for one or more partners’ drug candidates using our repositioning technologies, and we may find no new or alternative uses for these compounds |
| If we identify new or alternative uses for a given compound, we may not be able to realize any value from the identification of such alternative use until our partner determines, if ever, that the use makes the compound sufficiently desirable to warrant further development and commercialization |
| We do not control when, on what schedule or whether a partner will accept a drug candidate for redevelopment or at what pace, if at all, the partner will conduct further development effort of such repositioned drug candidate |
| Such decisions may be affected by internal policies and organization and other factors of which we may not be aware and over which we will have no influence |
| 23 _________________________________________________________________ In the event that a partner declined to develop a compound for an indication we had found, we could acquire rights to develop that compound for particular indications and, if we were to elect to pursue development of any such compound, any such development would require that we promptly find a partner and/or that we invest substantial financial and other resources to develop the product to a stage where we could license it out to a third-party for final development and commercialization |
| We have not engaged in compound development to date and there can be no assurance that we would be successful in conducting such development or in identifying a licensing partner to continue such development on terms that would be profitable to us |
| These factors may limit our ability to earn significant revenue under any of our agreements |
| Our approach to drug repositioning may not yield sufficient new indications and thus measurable successes to gain wide-spread market acceptance |
| We may not succeed in achieving significant commercial market acceptance of any of our technologies used in drug repositioning activities because the technologies we use and our approach to drug repositioning may fail to generate sufficient new indications and thus measurable success for our pharmaceutical partners |
| This outcome would have a material adverse effect on our business, financial condition, results of operations and market valuation |
| The sales cycle for our Drug Repositioning Division is lengthy; we may spend considerable resources on unsuccessful sales efforts or may not be able to complete deals on the schedule we anticipate |
| Our Drug Repositioning Division strategy depends upon our ability to establish collaborative arrangements with pharmaceutical partners to repurpose current clinical failures in their pipelines |
| If our Drug Repositioning Division is unable to establish partnerships with sufficient additional pharmaceutical companies, we may not be able to obtain enough compounds for repurposing and, ultimately, to recoup the investment we will have made in the development of this business |
| Our ability to obtain new customers depends upon our ability to convince them that our drug repositioning approach and technology platform can increase productivity for their drug development efforts |
| The sales cycle for our Drug Repositioning Division partnerships can take up to 12 months, and in certain circumstances longer, to complete |
| The lengthy sales cycle is caused by a number of factors, including our need to educate potential customers on the benefits of our approach to drug repositioning and the technologies we use |
| In addition, each agreement may involve the negotiation of terms in a context not familiar to our partners |
| We may expend substantial effort with no assurance that a new agreement will result |
| Actual and proposed consolidations of pharmaceutical and biotechnology companies could affect the timing and progress of our Drug Repositioning Division sales efforts |
| Furthermore, we may not be able to convince other customers to enter into agreements for services or on terms that are acceptable to us |
| We have incurred operating losses in each year since our inception, including losses of dlra48dtta3 million in 2005, dlra28dtta5 million in 2004 and dlra24dtta8 million in 2003 |
| At December 31, 2005, we had an accumulated deficit of dlra261dtta0 million |
| Our losses have resulted principally from costs incurred in the development, marketing and sale of services from our Genomics and Preclinical Divisions, development of the Drug Repositioning Division, the impairment of goodwill described herein, and acquisitions of research and development |
| These costs have exceeded our revenue and we expect to incur additional losses in the future, including substantial losses relating to the ongoing development costs of our Drug Repositioning Division |
| Our revenue is derived primarily from, and is subject to risks faced by, the pharmaceutical and biotechnology industries in the United States, Japan, Europe and other foreign countries; our revenue is also subject to foreign currency risk |
| 24 _________________________________________________________________ We expect that our revenue will continue to be derived primarily from agreements with pharmaceutical and biotechnology companies, as well as United States Government agencies |
| As a consequence, our results of operations may fluctuate substantially due to fluctuations or delays in our customers’ research and development expenditures and other factors affecting their purchasing decisions |
| These factors include: · fluctuations in current or potential customers’ research and development budgets; · changes in national or international economic conditions; · access to capital markets by current or potential biotechnology customers; · market-driven pressures on current or potential customers to improve productivity efficiencies through consolidation, cost reduction and overall research and development effectiveness; · decisions by current or potential customers to purchase new, improved and/or alternative technologies; · pressure to limit government spending in sectors relevant to our business or changes in government procurement practices, including the process for determining reimbursement rates related to United States Government contracts; · mergers and acquisitions within the pharmaceutical and biotechnology industry resulting in fewer potential customers for our services and solutions; · new or more stringent application of FDA and other laws and regulations in the drug approval process; and · regulatory reviews by the FDA or other regulatory bodies that could delay or increase costs associated with drug development |
| In addition, beginning in 2005, contracts with our Japanese customers are payable in Japanese Yen and are subject to fluctuations due to changes in currency exchange rates |
| Certain investments made by the Company may fluctuate in value and may create an adverse impact on our financial performance; the value of certain of our intangibles and long-term investments creates risk to our financial performance |
| We’ve previously recorded value for goodwill and other intangible assets, including licenses to technologies or data, patent costs and software development and database upgrade costs which, at December 31, 2005, had an aggregate value of dlra26dtta3 million |
| Whether or not these intangible assets are impaired involves significant judgment, including the following: (i) whether our licenses and internally developed intellectual property may not provide valid and economical competitive advantage; and (ii) whether our services we provide may become obsolete before we recover the costs incurred in connection with their development |
| Under Statement of Financial Accounting Standards Nodtta 142, “Goodwill and Other Intangible Assets”, we are required to perform periodic reviews of our intangible assets and we may be required to reduce the value of these assets if circumstances change |
| In addition, we have an investment in MetriGenix, Inc |
| with a book value as of December 31, 2005 of dlra3dtta2 million |
| This investment is subject to periodic evaluation for impairment |
| Since MetriGenix is an independent company in which we are a minority stockholder, the factors affecting an impairment analysis, which include potential revenue, cost of capital and fair market value of the entity, is not within our control |
| In the future, this investment may require an impairment charge in the future |
| We may not be able to obtain adequate patent protection for new technologies and methods required for achieving our business objectives |
| Our success will depend in part on our ability to protect confidential information and to obtain intellectual property rights and licenses sufficient to provide adequate exclusivity and to preserve our freedom to operate |
| We rely on confidentiality agreements and other trade secret protective measures to protect our interests in proprietary know-how and technology that are not patentable or for which patents are difficult to enforce |
| We have taken security measures to protect our proprietary know-how and confidential data and continue to explore further methods of protection |
| While we require all employees, consultants and customers with access to our trade secrets to enter into confidentiality agreements, we cannot be certain that we will be able to protect our trade secrets |
| We also rely on confidentiality procedures to prevent public disclosure of patentable proprietary technology prior to filing patents |
| Any material leak of confidential information into the public domain, or to third parties, could cause our business, financial condition and results of operations to suffer adverse consequences, including possible loss of patent rights |
| Our patent position involves complex legal and factual questions |
| Legal standards relating to the validity and scope of claims in the genomics technology field are still evolving |
| Therefore, the degree of exclusivity that future patent protection may provide for our proprietary technologies in this field is uncertain |
| Likewise, legal standards relating to validity of claims to new methods of using known drugs are still evolving |
| Hence, the likelihood of patenting potential new therapeutic uses of drug repositioning candidates also is uncertain |
| 25 _________________________________________________________________ Specific risks and uncertainties that we face in the area of patent exclusivity include: · the pending patent applications we have filed, or to which we have licensed rights, may not result in issued patents or may take longer than we expect to result in issued patents; · the claims of any patents which are issued on our pending applications may not provide commercially meaningful protection or value; · the patents licensed or issued to us may not provide adequate exclusivity for all aspects of our proprietary genomics technology; · other companies may challenge patents issued or licensed to us; and · we may not be able to obtain adequate patent protection for commercialization of a potential new use of a successfully repositioned drug candidate |
| We may need to initiate patent enforcement litigation or be subject to future infringement claims |
| In addition, other organizations, including companies, academic and non-profit institutions and governmental organizations are developing technologies in the genomics and drug repositioning fields |
| Many of these technologies are subject to the same evolving legal standards and related uncertainties about patent protection as our proprietary technologies |
| Therefore, it may be necessary for us to initiate litigation to protect and enforce our intellectual property rights |
| We also face risks that patents issued to other organizations may restrict our ability to do business, and that we may be unable to obtain or maintain licenses providing freedom to operate on acceptable terms |
| Thus, the technologies that we use to develop our services, and those that we incorporate in our services, may be subject to claims that they infringe the patents or proprietary rights of others |
| In particular, we are aware of a number of patents and patent applications owned by others relating to genetic markers and to the analysis of gene expression or the manufacture and use of microarrays and related materials |
| Therefore, we could be sued by parties alleging patent infringement |
| The risk of involvement in patent litigation may increase as the genomics, biotechnology and software industries and drug repositioning businesses expand, more patents are issued and other organizations engage in our business fields |
| We could incur substantial litigation costs to defend ourselves in patent infringement suits brought by other parties or to initiate such suits |
| In addition, patent litigation could cause disruption in our business activities and divert management’s time and attention from the operation of our business |
| In that regard, we have in the past purchased reagents from Affymetrix made by Enzo, and we also purchased such reagents directly from Enzo |
| In late 2003, Enzo terminated the agreement under which Affymetrix distributed that reagent and filed suit against Affymetrix |
| Affymetrix subsequently filed a counter suit and the two suits were consolidated |
| In those suits, Enzo alleges, among other things, rights to certain Affymetrix technologies and that Affymetrix had agreements with Gene Logic and other named customers to supply the reagent for use in potential violation of their rights |
| Affymetrix has denied Enzo’s claims and made its own counterclaims |
| We have not been made a party to that suit; we cannot predict the outcome of this litigation, its effect on us or the potential, if any, for claims being made against us |
| We have commenced using a new Affymetrix reagent kit |
| Although we have had discussions with Enzo to attempt to resolve any claims Enzo believes it may have with respect to our use of Enzo’s reagent, we have not reached any agreement as of the date of this Form 10-K Our activities involve hazardous materials and may subject us to environmental liability |
| Certain activities of our businesses involve the controlled use of limited quantities of hazardous and radioactive materials and may generate biological waste |
| We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and certain waste products |
| Although we believe that our safety procedures for handling and disposing of these materials comply with prescribed standards, we cannot completely eliminate the risk of accidental contamination or injury from these materials |
| In the event of an accident or we otherwise fail to comply with applicable regulations, we could lose our permits and/or approvals or be held liable for damages or penalized with fines |
| We believe that we comply in all material respects with currently applicable environmental laws and regulations and do not expect near term material additional capital expenditures for environmental control facilities |
| However, we may have to incur significant costs in the future to comply with environmental laws and regulations |
| Our stock price could be volatile and could decline |
| The market prices for securities of biotechnology and other technology companies serving the healthcare industry have been volatile |
| This volatility has significantly affected the market prices for these securities for reasons frequently unrelated to the operating performance of the specific companies |
| These broad market fluctuations may adversely affect the market price of our Common Stock |
| Events or factors that may have a significant impact on our business and on the market price of our Common Stock include those in the Risk Factors set forth in this section and the following: · slowing of revenue growth in our base business; · quarterly and annual financial and operating results; · failure to meet estimates or expectations of securities analysts or our projections; · sales and/or purchases of our Common Stock by members of our senior management and Board of Directors; · announcements by us or others of technological innovations or new products or announcements regarding our services and solutions; · developments in patent or other proprietary rights; · the loss of significant licenses or supply agreements; · future sales of substantial amounts of our Common Stock by our existing stockholders; · changing market perception regarding investments in the pharmaceutical and biotechnology industries; · results of clinical trials of potential repurposed drug candidates resulting from our Drug Repositioning Division; and · general market conditions |
| These and other external factors may cause the market price and demand for our Common Stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of Common Stock and may otherwise negatively affect the liquidity of our Common Stock |