| INCYTE CORP Item 1A Risk Factors RISKS RELATING TO OUR BUSINESS We are at the early stage of our drug discovery and development efforts and we may be unsuccessful in our efforts |
| We are in the early stage of building our drug discovery and development operations |
| Our ability to discover, develop, and commercialize pharmaceutical products will depend on our ability to: · hire and retain key scientific employees; · identify high quality therapeutic targets; · identify potential drug candidates; · develop products internally or license drug candidates from others; · identify and enroll suitable human subjects, either in the United States or abroad, for our clinical trials; · complete laboratory testing and clinical trials on humans; · obtain and maintain necessary intellectual property rights to our products; · obtain and maintain necessary regulatory approvals for our products, both in the United States and abroad; · enter into arrangements with third parties to provide services or to manufacture our products on our behalf, or develop efficient production facilities meeting all regulatory requirements; · deploy sales and marketing resources effectively or enter into arrangements with third parties to provide these functions; · lease facilities at reasonable rates to support our growth; and · enter into arrangements with third parties to license and commercialize our products |
| Of the compounds that we identify as potential drug products or that we in-license from other companies, only a few, at most, are statistically likely to lead to successful drug development programs |
| Significant research and development efforts will be necessary |
| We have limited experience with these activities and may not be successful in discovering, developing, or commercializing drug products |
| If we choose to outsource some of these activities, we may be unable to enter into outsourcing or licensing agreements on commercially reasonable terms, if at all |
| In addition, if we elect to manufacture our products in our own manufacturing facilities, we will require substantial additional capital resources to lease or build and maintain those facilities, including attracting and retaining qualified personnel to lease or build and operate our facilities |
| Our efforts to discover and develop potential drug candidates may not lead to the discovery, development, commercialization or marketing of drug products |
| We are currently engaged in a number of different approaches to discover and develop novel drug candidates |
| At the present time, we have three drug candidates, DFC, our lead CCR2 antagonist licensed to Pfizer, and our lead sheddase inhibitor in Phase IIb, Phase IIa, and Phase Ib/IIa clinical trials, respectively |
| Our other internal drug discovery programs are focused on compounds with potential for applications in HIV, diabetes and cancer |
| Discovery and development of potential drug candidates are expensive and time-consuming, and we do not know if our efforts will lead to discovery of any drug candidates that can be successfully developed and marketed |
| If our efforts do not lead to the discovery of a 15 ______________________________________________________________________ suitable drug candidate, we may be unable to grow our clinical pipeline or we may be unable to enter into agreements with collaborators who are willing to develop our drug candidates |
| The success of our drug discovery and development efforts may depend on our ability to find suitable collaborators to fully exploit our capabilities |
| If we are unable to establish collaborations or if these future collaborations are unsuccessful, our research and development efforts may be unsuccessful, which could adversely affect our results of operations and financial condition |
| An important element of our business strategy will be to enter into collaborative or license arrangements with other parties, such as our collaboration with Pfizer, under which we license our drug candidates to those parties for development and commercialization |
| We expect that while we may initially seek to conduct initial clinical trials on our drug candidates, we will need to seek collaborators for a number of our drug candidates, such as our chemokine receptor antagonists, because of the expense, effort and expertise required to continue additional clinical trials and further develop those drug candidates |
| Because collaboration arrangements are complex to negotiate, we may not be successful in our attempts to establish these arrangements |
| Also, we may not have drug compounds that are desirable to other parties, or we may be unwilling to license a drug compound because the party interested in it is a competitor |
| The terms of any such arrangements that we establish may not be favorable to us |
| Alternatively, potential collaborators may decide against entering into an agreement with us because of our financial, regulatory or intellectual property position or for scientific, commercial or other reasons |
| If we are not able to establish collaborative agreements, we may not be able to develop and commercialize a drug product, which would adversely affect our business and our revenues |
| In order for any of these collaboration or license arrangements to be successful, we must first identify potential collaborators or licensees whose capabilities complement and integrate well with ours |
| We may rely on these arrangements for not only financial resources, but also for expertise or economies of scale that we expect to need in the future relating to clinical trials, manufacturing, sales and marketing, and for licenses to technology rights |
| However, it is likely that we will not be able to control the amount and timing of resources that our collaborators or licensees devote to our programs or potential products |
| If our collaborators or licensees prove difficult to work with, are less skilled than we originally expected or do not devote adequate resources to the program, the relationship will not be successful |
| If a business combination involving a collaborator or licensees and a third party were to occur, the effect could be to diminish, terminate or cause delays in development of a potential product |
| We face significant competition for our drug discovery and development efforts, and if we do not compete effectively, our commercial opportunities will be reduced or eliminated |
| The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change |
| Our drug discovery and development efforts may target diseases and conditions that are already subject to existing therapies or that are being developed by our competitors, many of which have substantially greater resources, larger research and development staffs and facilities, more experience in completing preclinical testing and clinical trials in order to obtain regulatory approvals and formulation, marketing and manufacturing capabilities |
| As a result of these resources, our competitors may develop drug products that render our products obsolete or noncompetitive by developing more effective drugs or by developing their products more efficiently |
| Our ability to develop competitive products would be limited if our competitors succeeded in obtaining regulatory approvals for drug candidates more rapidly than we were able to or in obtaining patent protection or other intellectual property rights that limited our drug development efforts |
| Any drugs resulting from our research and development efforts, or from our joint efforts with collaborators or licensees, might not be able to compete successfully with our competitors’ existing and future products, or obtain regulatory approval in the United States or elsewhere |
| 16 ______________________________________________________________________ Our ability to develop and commercialize DFC may be adversely affected if a dispute arose with Pharmasset or between Pharmasset and its licensor Emory University |
| We are developing DFC under a collaborative licensing agreement with Pharmasset entered into in September 2003 under which Pharmasset exclusively sublicensed to us certain rights in DFC, including certain of its analogs and derivatives that were developed by Pharmasset or that were in-licensed by Pharmasset from Emory |
| If a dispute arose with Pharmasset over the terms of the collaborative license agreement or a dispute arose between Pharmasset and Emory over the terms of the license agreement between them, including the alleged breach of any provision, our development, commercialization and marketing of DFC may be adversely affected |
| Pharmasset has the right to terminate the agreement if we do not use commercially reasonable efforts to develop or commercialize DFC in our territories |
| If Pharmasset terminates the agreement for cause, or if we terminate the agreement without cause, all licenses to us under the agreement terminate |
| We depend on our collaboration with Pfizer for the development and commercialization of CCR2 antagonist compounds |
| Under our collaborative research and license agreement with Pfizer, Pfizer gained worldwide development and commercialization rights to our portfolio of CCR2 antagonist compounds |
| Pfizer’s rights extend to the full scope of potential indications, with the exception of multiple sclerosis and one other undisclosed indication |
| Although Pfizer is required to use commercially reasonable efforts to develop and commercialize CCR2 antagonists for the indications for which they are responsible, we cannot control the amount and timing of resources Pfizer may devote to the development of CCR2 antagonists |
| Any failure of Pfizer to perform its obligations under our agreement could negatively impact the development of CCR2 antagonists, lead to our loss of potential revenues from product sales and milestones and delay our achievement, if any, of profitability |
| Pfizer has certain rights to terminate the license agreement, including the right to terminate upon 90 days’ notice for any reason |
| Pfizer also has the right to terminate its rights and obligations with respect to certain indications |
| If Pfizer terminates the license agreement or its rights with respect to certain indications, we may not be able to find a new collaborator to replace Pfizer, and our business could be adversely affected |
| If conflicts arise between our collaborators including Pharmasset and Pfizer, licensees, or advisors and us, our collaborators, licensees, or advisors may act in their self-interest, which may adversely affect our business |
| If conflicts arise between us and our collaborators or licensees, including Pharmasset and Pfizer, or our scientific advisors, the other party may act in its self-interest and not in the interest of our stockholders |
| Conflicts may arise with our collaborators or licensees if they pursue alternative technologies or develop alternative products either on their own or in collaboration with others as a means for developing treatments for the diseases that we have targeted |
| Competing products, either developed by these future collaborators or licensees or to which these future collaborators or licensees have rights, may result in their withdrawal of support for our product candidates |
| Additionally, conflicts may arise if there is a dispute about the achievement and payment of a milestone amount or the ownership of intellectual property that is developed during the course of the relationship |
| Similarly, the parties to a collaboration or license agreement may disagree as to which party owns newly developed products |
| Should an agreement be terminated as a result of a dispute and before we have realized the benefits of the collaboration or license, our reputation could be harmed and we may not obtain revenues that we anticipated receiving |
| 17 ______________________________________________________________________ If we fail to enter into additional licensing agreements or if these arrangements are unsuccessful, our business and operations might be adversely affected |
| In addition to establishing collaborative or license arrangements under which other parties license our drug candidates for development and commercialization, we intend to continue to explore opportunities to develop our clinical pipeline by in-licensing drug compounds that fit within our expertise and research and development capabilities |
| We may be unable to enter into any additional in-licensing agreements because suitable product candidates that are within our expertise may not be available to us on terms that are acceptable to us or because competitors with greater resources seek to in-license the same product candidates |
| Product candidates that we would like to develop may not be available to us because they are controlled by competitors who are unwilling to license the rights to the drug compound or candidate to us |
| We may also need to license drug delivery or other technology in order to continue to develop our drug candidate pipeline |
| If we are unable to enter into additional agreements to license drug candidates, drug delivery technology or other technology or if these arrangements are unsuccessful, our research and development efforts could be adversely affected |
| We have limited expertise with and capacity to conduct preclinical testing and clinical trials, and our resulting dependence on other parties could result in delays in and additional costs for our drug development efforts |
| We have only limited experience with clinical trials, formulation, manufacturing and commercialization of drug products |
| We also have limited internal resources and capacity to perform preclinical testing and clinical trials |
| As a result, we intend to hire Clinical Research Organizations (“CROs”) to perform preclinical testing and clinical trials for drug candidates |
| If the CROs that we hire to perform our preclinical testing and clinical trials or our collaborators or licensees do not meet deadlines, do not follow proper procedures, or a conflict arises between us and our CROs, our preclinical testing and clinical trials may take longer than expected, may be delayed or may be terminated |
| If we were forced to find a replacement entity to perform any of our preclinical testing or clinical trials, we may not be able to find a suitable entity on favorable terms, or at all |
| Even if we were able to find another company to perform a preclinical test or clinical trial, the delay in the test or trial may result in significant expenditures |
| Events such as these may result in delays in our obtaining regulatory approval for our drug candidates or our ability to commercialize our products and could result in increased expenditures that would adversely affect our operating results |
| In addition, for some of our drug candidates, we plan to contract with collaborators or licensees to advance those candidates through later-stage, more expensive clinical trials, rather than invest our own resources to perform these clinical trials |
| Depending on the terms of our agreements with these collaborators or licensees, we may not have any control over the conduct of these clinical trials, and in any event we would be subject to the risks associated with depending on collaborators or licensees to develop these drug candidates |
| If we are unable to obtain regulatory approval to develop and market products in the United States and foreign jurisdictions, we will not be permitted to manufacture or commercialize products resulting from our research |
| In order to manufacture and commercialize drug products in the United States, our drug candidates will have to obtain regulatory approval from the Food and Drug Administration, or the FDA Satisfaction of regulatory requirements typically takes many years |
| To obtain regulatory approval, we must first show that our drug products are safe and effective for target indications through preclinical testing (animal testing) and clinical trials (human testing) |
| Preclinical testing and clinical development are long, expensive and uncertain processes, and we do not know whether the FDA will allow us to undertake clinical trials of any potential drug products in addition to our compounds currently in clinical trials |
| 18 ______________________________________________________________________ Completion of clinical trials may take several years and failure may occur at any stage of testing |
| The length of time required varies substantially according to the type, complexity, novelty and intended use of the product candidate |
| Interim results of a preclinical test or clinical trial do not necessarily predict final results, and acceptable results in early clinical trials may not be repeated in later clinical trials |
| For example, a drug candidate that is successful at the preclinical level may cause harmful or dangerous side effects when tested at the clinical level |
| Our rate of commencement and completion of clinical trials may be delayed by many factors, including: · the high degree of risk associated with drug development; · our inability to formulate or manufacture sufficient quantities of materials for use in clinical trials; · variability in the number and types of patients available for each study; · difficulty in maintaining contact with patients after treatment, resulting in incomplete data; · unforeseen safety issues or side effects; · poor or unanticipated effectiveness of products during the clinical trials; or · government or regulatory delays |
| Data obtained from the clinical trials are susceptible to varying interpretation, which may delay, limit or prevent regulatory approval |
| A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after achieving promising results in earlier clinical trials |
| In addition, regulatory authorities may refuse or delay approval as a result of other factors, such as changes in regulatory policy during the period of product development and regulatory agency review |
| In September 2005, the FDA requested that we conduct another Phase IIb clinical trial for DFC to support the efficacy and safety demonstrated in the original Phase IIb clinical trial |
| Due, in part, to the early stage of our drug candidate research and development process, we cannot predict whether regulatory approval will be obtained for any product we develop |
| At the present time, we have three drug candidates, DFC, our lead CCR2 antagonist licensed to Pfizer, and our lead sheddase inhibitor in Phase IIb, Phase IIa, and Phase Ib/IIa clinical trials, respectively |
| Our other drug candidates are still undergoing preclinical testing |
| Compounds developed by us, alone or with other parties, may not prove to be safe and effective in clinical trials and may not meet all of the applicable regulatory requirements needed to receive marketing approval |
| If regulatory approval of a product is granted, this approval will be limited to those disease states and conditions for which the product is demonstrated through clinical trials to be safe and effective |
| Failure to obtain regulatory approval would delay or prevent us from commercializing products |
| Outside the United States, our ability to market a product is contingent upon receiving a marketing authorization from the appropriate regulatory authorities |
| This foreign regulatory approval process typically includes all of the risks associated with the FDA approval process described above and may also include additional risks |
| Our reliance on other parties to manufacture our drug candidates could result in a short supply of the drugs, delays in development, increased costs and withdrawal or denial of the regulatory authority’s approval |
| The FDA requires that drug products be manufactured according to its current Good Manufacturing Practices, or cGMP, regulations and a limited number of manufacturers comply with these requirements |
| If the other parties that we choose to manufacture our drug products are not compliant with cGMP, the FDA may not approve our application to manufacture our drug products |
| We may not be able to arrange for our products to be manufactured by one of these parties on reasonable terms, if at all |
| Failure to comply with 19 ______________________________________________________________________ cGMP in the manufacture of our products could result in the FDA withdrawing or denying regulatory approval of our drug product or other enforcement actions |
| We may not be able to obtain sufficient quantities of our new drug products if the manufacturers do not have the capacity or capability to manufacture our products according to our schedule and specifications |
| Also, raw materials that may be required to manufacture any products we develop may only be available from a limited number of suppliers |
| If we have promised delivery of a new product and are unable to meet the delivery requirement due to manufacturing difficulties, our development programs would be delayed, and we may have to expend additional sums in order to ensure that manufacturing capacity is available when we need it even if we do not use all of the manufacturing capacity |
| This expense would adversely affect our operating results |
| Manufacturers of pharmaceutical products often encounter difficulties in production, especially in scaling up initial production |
| These problems include difficulties with production costs and yields, quality control and assurance and shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations |
| The manufacturers we choose may not perform as agreed or may terminate their agreements with us |
| Foreign manufacturing approval processes typically include all of the risks associated with the FDA approval process for manufacturing and may also include additional risks |
| We may incur additional expense in order to market our drug products |
| We do not have experience marketing drug products |
| If the FDA approves one of our drug products to go to market, we would have to employ additional personnel or engage another party to market our drug products, which would be an additional expense to us |
| We might not be able to commercialize our drug candidates successfully, and we may spend significant time and money attempting to do so |
| DFC, our lead CCR2 antagonist licensed to Pfizer, and our lead sheddase inhibitor are our only three drug candidates in clinical trials |
| We, or our collaborators or licensees, may decide to discontinue development of any or all of our drug candidates at any time for commercial, scientific or other reasons |
| If a product is developed, but is not marketed, we may have spent significant amounts of time and money on it, which would adversely affect our operating results and financial condition |
| Even if DFC, or another drug candidate that we develop, receives regulatory approval, we may decide not to commercialize it if we determine that commercialization of that product would require more money and time than we are willing to invest |
| For example, drugs that receive approval are subject to post-regulatory surveillance and may have to be withdrawn from the market if previously unknown side effects occur |
| At this point, the regulatory agencies may require additional clinical trials or testing |
| Once a drug is marketed, if it causes side effects, the drug product may be recalled or may be subject to reformulation, additional studies, changes in labeling, warnings to the public and negative publicity |
| As a result, we may not continue to commercialize a product even though it has obtained regulatory approval |
| Further, we may decide not to continue to commercialize a product if the market does not accept the product because it is too expensive and third parties such as insurance companies or Medicare have not approved it for substantial reimbursement |
| Actions of governmental authorities and other groups could result in lower prices for certain drugs, including drugs that address HIV infection |
| In addition, we may decide not to continue to commercialize a product if another product comes on the market that is as effective but has fewer side effects |
| There is also a risk that competitors may develop similar or superior products or have proprietary rights that preclude us from ultimately marketing our products |
| 20 ______________________________________________________________________ Our ability to generate revenues will be diminished if we are unable to obtain acceptable prices or an adequate level of reimbursement from payors of healthcare costs |
| The continuing efforts of government and insurance companies, health maintenance organizations, or HMOs, and other payors of healthcare costs to contain or reduce costs of health care may affect our future revenues and profitability, and the future revenues and profitability of our potential customers, suppliers and collaborative or license partners and the availability of capital |
| For example, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control |
| In the United States, given recent federal and state government initiatives directed at lowering the total cost of health care, the US Congress and state legislatures will likely continue to focus on health care reform, the cost of prescription pharmaceuticals and on the reform of the Medicare and Medicaid systems |
| While we cannot predict whether any such legislative or regulatory proposals will be adopted, the announcement or adoption of these proposals could reduce the price that we or any of our collaborators or licensees receive for any products in the future |
| Our ability to commercialize our products successfully will depend in part on the extent to which appropriate reimbursement levels for the cost of our products and related treatment are obtained by governmental authorities, private health insurers and other organizations, such as HMOs |
| Third-party payors are increasingly challenging the prices charged for medical products and services |
| Also, the trend toward managed health care in the United States and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices for or rejection of our products |
| The cost containment measures that health care payors and providers are instituting and the effect of any health care reform could materially and adversely affect our ability to generate revenues |
| As our drug discovery and development operations are conducted at our headquarters in Wilmington, Delaware, the loss of access to this facility would negatively impact our business |
| Our facility in Wilmington, Delaware is our headquarters and is also where we conduct all of our drug discovery operations and research and development activities |
| Our lease contains provisions that provide for its early termination upon the occurrence of certain events of default or upon a change of control |
| Further, our headquarters facility is located in a large research and development complex that may be temporarily or permanently shutdown if certain environmental or other hazardous conditions were to occur within the complex |
| In addition, actions of activists opposed to aspects of pharmaceutical research may disrupt our experiments or our ability to access or use our facilities |
| The loss of access to or use of our Wilmington, Delaware, facility, either on a temporary or permanent basis, or early termination of our lease would result in an interruption of our business and, consequently, would adversely affect the advancement of our drug discovery and development programs and our overall business |
| We depend on key employees in a competitive market for skilled personnel, and the loss of the services of any of our key employees would affect our ability to expand our drug discovery and development programs and achieve our objectives |
| We are highly dependent on the principal members of our management, operations and scientific staff |
| We experience intense competition for qualified personnel |
| Our future success also depends in part on the continued service of our executive management team, key scientific and management personnel and our ability to recruit, train and retain essential scientific personnel for our drug discovery and development programs, including those who will be responsible for overseeing our preclinical testing and clinical trials as well as for the establishment of collaborations with other companies |
| If we lose the services of any of these people, our research and product development goals, including the identification and establishment of key 21 ______________________________________________________________________ collaborations, operations and marketing efforts could be delayed or curtailed |
| We do not maintain “key person” insurance on any of our employees |
| We may encounter difficulties in integrating companies we acquire, which may harm our operations and financial results |
| As part of our business strategy, we have in the past and may in the future acquire assets, technologies, compounds and businesses |
| Our past acquisitions, such as the acquisition of Maxia have involved, and our future acquisitions may involve, risks such as the following: · we may be exposed to unknown liabilities of acquired companies; · our acquisition and integration costs may be higher than we anticipated and may cause our quarterly and annual operating results to fluctuate; · we may experience difficulty and expense in assimilating the operations and personnel of the acquired businesses, disrupting our business and diverting our management’s time and attention; · we may be unable to integrate or complete the development and application of acquired technology, compounds or drug candidates; · we may experience difficulties in establishing and maintaining uniform standards, controls, procedures and policies; · our relationships with key customers, suppliers, or collaborative or license partners of acquired businesses may be impaired, due to changes in management and ownership of the acquired businesses; · we may be unable to retain key employees of the acquired businesses; · we may incur amortization or impairment expenses if an acquisition results in significant goodwill or other intangible assets; or · our stockholders may be diluted if we pay for the acquisition with equity securities |
| In addition, if we acquire additional businesses that are not located near our new headquarters, we may experience more difficulty integrating and managing the acquired businesses’ operations |
| If product liability lawsuits are brought against us, we could face substantial liabilities and may be required to limit commercialization of our products and our results of operations could be harmed |
| The clinical trials and marketing of medical products that are intended for human use entails an inherent risk of product liability |
| If any product that we or any of our collaborators or licensees develops causes or is alleged to cause injury or is found to be unsuitable during clinical trials, manufacturing or sale, we may be held liable |
| If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities, including substantial damages to be paid to the plaintiffs and legal costs, or we may be required to limit commercialization of our products |
| Although we currently carry a product liability insurance policy that provides coverage for liabilities arising from our clinical trials, it may not fully cover our potential liabilities |
| In addition, we may determine that we should increase our coverage upon the undertaking of new clinical trials, and this insurance may be prohibitively expensive to us or our collaborators or licensees and may not fully cover our potential liabilities |
| Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of pharmaceutical products we develop, alone or with our collaborators |
| Additionally, any product liability lawsuit could cause injury to our reputation, recall of products, participants to withdraw from clinical trials, and potential collaborators or licensees to seek other partners, any of which could impact our results of operations |
| 22 ______________________________________________________________________ Because our activities involve the use of hazardous materials, we may be subject to claims relating to improper handling, storage or disposal of these materials that could be time consuming and costly |
| We are subject to various environmental, health and safety laws and regulations governing, among other things, the use, handling, storage and disposal of regulated substances and the health and safety of our employees |
| Our research and development processes involve the controlled use of hazardous and radioactive materials and biological waste resulting in the production of hazardous waste products |
| We cannot completely eliminate the risk of accidental contamination or discharge and any resultant injury from these materials |
| If any injury or contamination results from our use or the use by our collaborators or licensees of these materials, we may be sued and our liability may exceed our insurance coverage and our total assets |
| Further, we may be required to indemnify our collaborators or licensees against all damages and other liabilities arising out of our development activities or products produced in connection with these collaborations or licenses |
| Compliance with the applicable environmental and workplace laws and regulations is expensive |
| Future changes to environmental, health, workplace and safety laws could cause us to incur additional expense or may restrict our operations or impair our research, development and production efforts |
| 23 ______________________________________________________________________ RISKS RELATING TO OUR FINANCIAL RESULTS We expect to incur losses in the future and we may not achieve or maintain profitability in the future |
| We had net losses from inception in 1991 through 1996 and in 1999 through 2005 |
| Because of those losses, we had an accumulated deficit of dlra839dtta3 million as of December 31, 2005 |
| We will continue to spend significant amounts on our efforts to discover and develop drugs |
| As a result, we expect to continue to incur losses in 2006 and in future periods as well |
| We anticipate that our drug discovery and development efforts will increase as we focus on the studies, including preclinical tests and clinical trials prior to seeking regulatory approval, that are required before we can sell a drug product |
| The development of drug products will require us to spend significant funds on research, development, testing, obtaining regulatory approvals, manufacturing and marketing |
| To date, we do not have any drug products that have generated revenues and we cannot assure you that we will generate revenues from the drug candidates that we license or develop for several years, if ever |
| We cannot be certain whether or when we will achieve profitability because of the significant uncertainties relating to our ability to generate commercially successful drug products |
| Even if we were successful in obtaining regulatory approvals for manufacturing and commercializing DFC, our leading drug candidate, or another drug, we expect that we will continue to incur losses if our drug products do not generate significant revenues |
| If we achieve profitability we may not be able to sustain or increase profitability |
| We will need additional capital in the future |
| The capital markets may not permit us to raise additional capital at the time that we require it, which could result in limitations on our research and development or commercialization efforts or the loss of certain of our rights in our technologies or drug candidates |
| Our future funding requirements will depend on many factors and we anticipate that we will need to raise additional capital to fund our business plan and research and development efforts on a going-forward basis |
| Additional factors that may affect our future funding requirements include: · any changes in the breadth of our research and development programs; · the results of research and development, preclinical testing and clinical trials conducted by us or our future collaborative partners or licensees, if any; · the acquisition or licensing of businesses, technologies or compounds, if any; · our ability to maintain and establish new corporate relationships and research collaborations; · competing technological and market developments; · the amount of revenues generated from our business activities, if any; · the time and costs involved in filing, prosecuting, defending and enforcing patent and intellectual property claims; · the receipt of contingent licensing or milestone fees or royalties on product sales from our current or future collaborative and license arrangements, if established; and · the timing of regulatory approvals, if any |
| If we require additional capital at a time when investment in companies such as ours, or in the marketplace generally, is limited due to the then prevailing market or other conditions, we may have to scale back our operations, eliminate one or more of our research or development programs, or attempt to obtain funds by entering into an agreement with a collaborative partner that would result in terms that are not favorable to us or relinquishing our rights in certain of our proprietary technologies or drug candidates |
| 24 ______________________________________________________________________ If we are unable to raise funds at the time that we desire or at any time thereafter on acceptable terms, we may not be able to continue to develop our potential drug products |
| The sale of equity or additional convertible debt securities in the future would be dilutive to our stockholders, and debt financing arrangements may require us to pledge certain assets or enter into covenants that could restrict our operations or our ability to incur further indebtedness |
| Future milestone and royalty payments from our gene and genomics-related intellectual property may not contribute significantly to revenues for several years, and may never result in revenues |
| Part of our strategy was to license to our database customers and to other pharmaceutical and biotechnology companies our know-how and patent rights associated with the information we have generated in the creation of our proprietary databases, for use in the discovery and development of potential pharmaceutical, diagnostic or other products |
| Any potential product that is the subject of such a license will require several years of further development, clinical trials and regulatory approval before commercialization, all of which is beyond our control, and possibly beyond the control of our licensee |
| These licensees may not develop the potential product if they do not devote the necessary resources or decide that they do not want to expend the resources to do the clinical trials necessary to obtain the necessary regulatory approvals |
| Therefore, milestone or royalty payments from these licenses may not contribute to our revenues for several years, if at all |
| We have decided to discontinue some of our gene and genomics-related patent prosecution and maintenance, and may in the future decide to discontinue additional gene and genomics-related patent prosecution and maintenance, which could limit our ability to receive license-based revenues from our gene and genomics-related patent portfolio |
| Our investments may decline in value and our losses may increase |
| We have made and may in the future make investments in entities that complement our business |
| These investments may: · often be made in securities lacking a public trading market or subject to trading restrictions, either of which increases our risk and reduces the liquidity of our investment; · require us to record losses and expenses related to our ownership interest; · require us to record acquisition-related charges, such as in-process research and development; · require us to record charges related to the impairment in the value of the securities underlying our investment; and · require us to invest greater amounts than anticipated or to devote substantial management time to the management of research and development relationships or other relationships |
| The market values of many of these investments can fluctuate significantly |
| We evaluate our long-term investments for impairment of their value on a quarterly basis |
| The value of our investments in private companies can fluctuate significantly |
| In past periods, market conditions have caused us to write-down the value of our private company investments, sometimes substantially, and market conditions may cause us to write down additional amounts |
| In addition, we have in the past written down the value of our debt investments in companies experiencing financial difficulties |
| Impairment could result in future charges to our earnings |
| Decreases in the value of our strategic investments may cause our losses to increase |
| We have a large amount of debt and our debt service obligations may prevent us from taking actions that we would otherwise consider to be in our best interests |
| As of December 31, 2005, we had total consolidated debt of dlra341dtta9 million and stockholders’ deficit of dlra19dtta4 million |
| The indentures pursuant to which our outstanding convertible subordinated notes were 25 ______________________________________________________________________ issued do not limit the issuance of additional indebtedness |
| Our substantial leverage could have significant negative consequences for our future operations, including: · increasing our vulnerability to general adverse economic and industry conditions; · limiting our ability to obtain additional financing for working capital, capital and research and development expenditures, and general corporate purposes; · requiring the dedication of a substantial portion of our expected cash flow or our existing cash to service our indebtedness, thereby reducing the amount of our cash available for other purposes, including working capital, capital expenditures and research and development expenditures; · limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; or · placing us at a possible competitive disadvantage compared to less leveraged competitors and competitors that have better access to capital resources |
| In the past five years, we have had negative cash flow from operations |
| We likely will not generate sufficient cash flow from our operations in the future to enable us to meet our anticipated fixed charges, including our debt service requirements with respect to our outstanding convertible subordinated notes |
| As of December 31, 2005, dlra91dtta6 million aggregate principal amount of our 5dtta5prca convertible subordinated notes due 2007 were outstanding |
| Our annual interest payments for the 5dtta5prca notes through 2006, assuming none of these notes are converted, redeemed, repurchased or exchanged, are dlra5dtta0 million, and an additional dlra2dtta5 million in interest is payable in 2007 |
| As of December 31, 2005, dlra250 million aggregate principal amount of our 31¤2prca convertible subordinated notes due 2011 were outstanding |
| Our annual interest payments for the 31¤2prca notes through 2010, assuming none of these notes are converted, redeemed, repurchased or exchanged, are dlra8dtta8 million, and an additional dlra4dtta4 million in interest is payable in 2011 |
| We intend to fulfill our debt service obligations from our existing cash and marketable securities |
| If we are unable to generate cash from our operations or raise additional cash through financings sufficient to meet these obligations, we will need to use existing cash or liquidate marketable securities in order to fund these obligations, which may delay or curtail our research, development and commercialization programs |
| RISKS RELATING TO INTELLECTUAL PROPERTY AND LEGAL MATTERS We are involved in patent litigation, which, if not resolved favorably, could require us to pay damages |
| In October 2001, Invitrogen Corporation filed an action against us in federal district court for the District of Delaware, alleging infringement of three patents |
| The complaint seeks unspecified money damages and injunctive relief |
| In November 2001, we filed our answer to Invitrogen’s patent infringement claims, and asserted seven counterclaims against Invitrogen, seeking declaratory relief with respect to the patents at issue, implied license, estoppel, laches and patent misuse |
| We are also seeking our fees, costs and expenses |
| Invitrogen filed its answer to our counterclaims in January 2002 |
| In February 2003, we added a counterclaim for unfair business practices |
| Our defenses against the suit brought by Invitrogen may be unsuccessful |
| At this time, we cannot reasonably estimate the possible range of any loss or damages resulting from this suit due to uncertainty regarding the ultimate outcome |
| If the case goes forward, we expect that the Invitrogen litigation will result in future legal and other costs to us, regardless of the outcome, which could be substantial |
| 26 ______________________________________________________________________ If we are subject to additional arbitration, litigation and infringement claims, they could be costly and disrupt our drug discovery and development efforts |
| The technology that we use to make and develop our drug products, the technology that we incorporate in our products, and the products we are developing may be subject to claims that they infringe the patents or proprietary rights of others |
| The success of our drug discovery and development efforts will also depend on our ability to develop new compounds, drugs and technologies without infringing or misappropriating the proprietary rights of others |
| We are aware of patents and patent applications filed in certain countries claiming certain intellectual property relating to CCR5 |
| While the validity of issued patents, patentability of pending patent applications and applicability of any of them to our programs are uncertain, if any of these patents are asserted against us, our ability to commercialize our products could be harmed |
| From time to time we may receive notices from third parties alleging patent, trademark, or copyright infringement, claims regarding trade secrets or other contract claims |
| Receipt of these notices could result in significant costs as a result of the diversion of the attention of management from our drug discovery and development efforts |
| Except for Invitrogen, no third party has a current filed patent lawsuit or arbitration against us |
| If a successful claim were brought against us, we would have to attempt to license the technology from the claimant or to spend time and money to design around the technology |
| Any such license of the technology may not be available at reasonable terms, or at all |
| We may, however, be involved in future lawsuits or other legal proceedings alleging patent infringement or other intellectual property rights or contract violations |
| In addition, litigation or other legal proceedings may be necessary to: · assert claims of infringement; · enforce our patents or trademarks; · protect our trade secrets or know-how; or · determine the enforceability, scope and validity of the proprietary rights of others |
| We may be unsuccessful in defending or pursuing these lawsuits or claims |
| Regardless of the outcome, litigation can be very costly and can divert management’s efforts |
| An adverse determination may subject us to significant liabilities or require us or our collaborators or licensees to seek licenses to other parties’ patents or proprietary rights |
| We or our collaborators or licensees may also be restricted or prevented from manufacturing or selling a drug product that we develop |
| Further, we or our future collaborators or licensees may not be able to obtain any necessary licenses on acceptable terms, if at all |
| We may be unable to adequately protect or enforce our proprietary information, which may result in its unauthorized use, a loss of revenue under a collaboration agreement or loss of sales to generic versions of our products or otherwise reduce our ability to compete |
| Our business and competitive position depend in part upon our ability to protect our proprietary technology, including any drug products that we create |
| Despite our efforts to protect this information, unauthorized parties may attempt to obtain and use information that we regard as proprietary |
| For example, one of our collaborators may disclose proprietary information pertaining to our drug discovery efforts |
| Any patents issued in connection with our drug discovery efforts may not be broad enough to protect all of the potential uses of the product |
| Additionally, when we do not control the prosecution, maintenance and enforcement of certain important intellectual property, such as a drug compound in-licensed to us, the protection of the intellectual property rights may not be in our hands |
| In the case of DFC, we do not control the intellectual property rights in-licensed to us with respect to the compound and therefore may be unable to protect 27 ______________________________________________________________________ those rights |
| If the entity that controls the intellectual property rights related to DFC does not adequately protect those rights, our rights may be impaired, which may impact our ability to develop, market and commercialize DFC For DFC, a composition of matter patent is not available because the compound is in the public domain |
| Therefore, only patents covering the “use” and the method of “making” of the product are available |
| In general, patents covering a new use for a known compound and methods of making a known compound can be more difficult to enforce against infringers |
| Our means of protecting our proprietary rights may not be adequate, and our competitors may: · independently develop substantially equivalent proprietary information, products and techniques; · otherwise gain access to our proprietary information; or · design around patents issued to us or our other intellectual property |
| We pursue a policy of having our employees, consultants and advisors execute proprietary information and invention agreements when they begin working for us |
| However, these agreements may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure |
| If we fail to maintain trade secret and patent protection, our potential, future revenues may be decreased |
| If the effective term of our patents is decreased due to changes in the United States patent laws or if we need to refile some of our patent applications, the value of our patent portfolio and the revenues we derive from it may be decreased |
| The value of our patents depends in part on their duration |
| A shorter period of patent protection could lessen the value of our rights under any patents that we obtain and may decrease the revenues we derive from our patents |
| The United States patent laws were amended in 1995 to change the term of patent protection from 17 years from patent issuance to 20 years from the earliest effective filing date of the application |
| Because the time from filing to issuance of biotechnology applications may be more than three years depending on the subject matter, a 20-year patent term from the filing date may result in substantially shorter patent protection |
| Also, we may need to refile some of our applications filed before 1995 that claim large numbers of genes or other additional subject matter and, in these situations, the patent term will be measured from the date of the earliest priority application |
| This would shorten our period of patent exclusivity and may decrease the revenues that we might derive from the patents |
| International patent protection is particularly uncertain and costly, and if we are involved in opposition proceedings in foreign countries, we may have to expend substantial sums and management resources |
| Biotechnology and pharmaceutical patent law outside the United States is even more uncertain and costly than in the United States and is currently undergoing review and revision in many countries |
| Further, the laws of some foreign countries may not protect our intellectual property rights to the same extent as United States laws |
| For example, certain countries do not grant patent claims that are directed to the treatment of humans |
| We may participate in opposition proceedings to determine the validity of our foreign patents or our competitors’ foreign patents, which could result in substantial costs and diversion of our efforts |