| SENOMYX INC Item 1A Risk Factors You should consider carefully the following information about the risks described below, together with the other information contained in this annual report on Form 10-K and in our other public filings, in evaluating our business |
| If any of the following risks actually occurs, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected |
| In these circumstances, the market price of our common stock would likely decline |
| Risks Related To Our Business We are dependent on our product discovery and development collaborators for all of our revenue and we are dependent on our current and any future product discovery and development collaborators to develop and commercialize any flavors, flavor enhancers or taste modulators we may discover |
| A key element of our strategy is to commercialize our flavors, flavor enhancers and taste modulators through product discovery and development collaborations |
| To date, all of our revenue has been derived solely from research and development payments and milestone payments received under collaboration agreements with Cadbury Schweppes, Campbell Soup, Coca-Cola, Kraft Foods and Nestle |
| Substantially all of our revenue in the foreseeable future will result from these types of payments from these collaborations, unless we successfully commercialize a product candidate through these or other collaborators and earn royalties on future sales of consumer products incorporating our flavors, flavor enhancers or taste modulators |
| Our agreement, as amended, with Campbell Soup provides for research and development funding until March 2009 and gives Campbell Soup the right to terminate the agreement earlier without cause, provided that it pay a specified termination fee if it terminates the agreement prior to March 28, 2009 |
| Our agreement with Coca-Cola provides for research and development funding until April 2008, and gives Coca-Cola the right to conclude the collaborative program earlier for any reason upon payment to us of a termination fee, provided that Coca-Cola may terminate the collaborative period without payment of an early conclusion fee in the event that we fail to achieve a specified research and development goal by April 22, 2006, subject to payment of research funding through July 22, 2006 |
| Our agreement with Kraft Foods provides for research and development funding until December 2008, and gives Kraft Foods the right to conclude the agreement earlier for any reason upon payment to us of a termination fee |
| Our initial agreement with Nestle (as amended in April 2005) provides for research and development funding through April 2008 and gives Nestle the right to terminate the agreement earlier without cause on or after April 18, 2006, provided that it pay additional specified research funding if it terminates the agreement after April 18, 2006 but prior to April 18, 2008 |
| Our most recent agreement with Nestle provides for research and development funding through October 2009 and gives Nestle the right to terminate the agreement earlier without cause on or after October 26, 2006, provided that it pay additional specified research funding if it terminates the agreement after October 26, 2006 but prior to October 26, 2009 |
| Our agreement with Cadbury Schweppes provides for research and development funding through July 2007, and gives Cadbury Schweppes the right to terminate the agreement earlier without cause on or after April 15, 2006 upon 90 days’ written notice |
| If any or all of our material agreements with our collaborators expire or are terminated, our revenue would significantly decline and if all of our agreements expire or are terminated, our revenue would be substantially eliminated, which would have a material adverse effect on our business, financial condition and results of operations |
| Our collaborators may not renew their agreements with us or, if they do, they may not be on terms that are as favorable to us as our current agreements |
| Our current collaboration agreements provide that we will receive royalties of up to 4prca on our collaborators’ sales of products containing our flavors, flavor enhancers or taste modulators |
| The actual royalties payable vary by agreement and depend on a number of factors including, for example, the product field, cost of goods savings, degree of flavor enhancement and sales volume of collaborator products incorporating our flavor ingredients |
| It is possible that our collaborators will not incorporate our flavors, flavor enhancers and taste modulators into any or all of their products within their exclusive product fields |
| 24 ______________________________________________________________________ We do not currently have a commercialized product and cannot assure you we will have a commercialized product in the foreseeable future, or at all |
| We will be dependent on our current and any other possible future collaborators to commercialize any flavors, flavor enhancers or taste modulators that we successfully develop and to provide the sales, marketing and distribution capabilities required for the success of our business |
| We have limited or no control over the amount and timing of resources that our current or any future collaborators may devote to our programs or potential products |
| Our collaborators may decide not to devote the necessary resources to the commercialization of our flavors, flavor enhancers or taste modulators, or may pursue a competitor’s product if our flavors, flavor enhancers or taste modulators do not have the characteristics desired by the collaborator |
| These characteristics include, among other things, enhancement properties, temperature stability, solubility, taste and cost |
| If these collaborators fail to conduct their commercialization, sales and marketing or distribution activities successfully and in a timely manner, we will earn little or no royalty revenues from our flavors, flavor enhancers and taste modulators and we will not be able to achieve our objectives or build a sustainable or profitable business |
| Our present and any future product discovery and development collaboration opportunities could be harmed if: • our existing or any future collaborators terminate their collaboration agreements with us prior to the expiration of the agreements; • we do not achieve our research and development objectives under our collaboration agreements prior to the termination of the collaboration periods; • we disagree with our collaborators as to the parties’ respective licensing rights to our flavors, flavor enhancers and taste modulators, methods or other intellectual property we develop; • we are unable to manage multiple simultaneous collaborations; • potential collaborators fail to spend their resources on research and development or commercialization of our flavors, flavor enhancers and taste modulators due to general market conditions or for any other reason; or • consolidation in our target markets limits the number of potential collaborators |
| We may not be able to negotiate additional collaboration agreements having terms satisfactory to us or at all |
| We may not be able to enter into additional product discovery and development collaborations due to the exclusive nature of our current product discovery and development collaborations |
| Each of our current collaboration agreements provides that we will conduct research and development on flavors, flavor enhancers and taste modulators for use within one or more defined packaged food and beverage product fields on an exclusive basis for the respective collaborator during the collaborative period specified in the agreement |
| Because each of these agreements is exclusive or co-exclusive, we will not be able to enter into a collaboration agreement with any other food and beverage company covering the same product field during the applicable collaborative period |
| In addition, our collaborators’ competitors may not wish to do business with us at all due to our relationship with our collaborators |
| If we are unable to enter into additional product discovery and development collaborations, our ability to sustain or expand our business will be significantly diminished |
| We may not be successful in developing flavors, flavor enhancers or taste modulators useful for formulation into products |
| We may not succeed in developing flavors, flavor enhancers or taste modulators with the appropriate attributes required for use in successful commercial products |
| Successful flavors, flavor enhancers and taste modulators require, among other things, appropriate biological activity, including the correct flavor or flavor enhancer property for the product application, an acceptable safety profile, including lack of toxicity or allergenicity, and appropriate physical or chemical properties, including relative levels of stability, volatility and resistance to heat |
| Successful flavors, flavor enhancers and taste modulators must also be cost-efficient for our collaborators |
| We may not be able to develop flavors, flavor enhancers or taste modulators that meet these criteria |
| 25 ______________________________________________________________________ If we or our collaborators are unable to obtain and maintain the GRAS determination or regulatory approval required before any flavors, flavor enhancers or taste modulators can be incorporated into products that are sold, we would be unable to commercialize our flavors, flavor enhancers and taste modulators and our business would be adversely affected |
| In March 2005, we obtained a GRAS determination for four of our savory product candidates |
| Apart from these product candidates, we do not have GRAS determination or regulatory approval for any other product candidate at this time |
| In the United States, the development, sale and incorporation of our flavors, flavor enhancers or taste modulators into products are subject to regulation by FDA and in some instances other government bodies |
| Obtaining and maintaining a GRAS determination or regulatory approval can be costly and take many years |
| Depending on the amount or intended use of a particular flavor, flavor enhancer or taste modulator added to a product and the number of product categories in which the flavor, flavor enhancer or taste modulator will be incorporated, specific safety assessment protocols and regulatory processes must be satisfied before we or our collaborators can commercially market and sell products containing any flavors, flavor enhancers or taste modulators that we may discover |
| A key element of our strategy is to develop flavors, flavor enhancers and taste modulators that will be subject to review under the FEMA GRAS process, which, based on our experience with the savory program, we expect will take approximately 12 months and is less expensive than the alternative of filing a food additive petition with the FDA, approval of which can take eight years or more |
| The FEMA GRAS review process may take longer than 12 months and cost more than dlra1 million depending on the properties of the flavor, flavor enhancer or taste modulator, and if additional safety studies are requested by the FEMA Expert Panel or are necessary to explain unexpected safety study findings |
| There is a risk that one or more of our product candidates may not qualify for a FEMA GRAS determination |
| This may occur for a variety of reasons, including the flavor, flavor enhancer or taste modulator’s intended use, the amount of the flavor, flavor enhancer or taste modulator intended to be added to packaged foods and beverages, the number of product categories in which the flavor, flavor enhancer or taste modulator will be incorporated, whether the flavor, flavor enhancer or taste modulator imparts sweetness, the safety profile of the flavor, flavor enhancer or taste modulator and the FEMA Expert Panel’s interpretation of the safety data |
| Even if we obtain a GRAS determination with respect to a flavor, flavor enhancer or taste modulator, the FDA has the ability to challenge such determination, which could materially adversely affect our ability to market products on schedule or at all |
| In the event that a particular flavor, flavor enhancer or taste modulator does not qualify for FEMA GRAS determination, we will be required to pursue a lengthy FDA approval process or dedicate our development efforts to alternative compounds, which would further delay commercialization |
| In addition, laws, regulations or FDA practice governing the regulatory approval process, the availability of the GRAS determination process or the manufacture or labeling of such products, may change in a manner that could adversely affect our ability to commercialize products on schedule or at all |
| Sales of our flavors, flavor enhancers or taste modulators outside of the United States will be subject to foreign regulatory requirements |
| In most cases, whether or not a GRAS determination or FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must still be obtained prior to manufacturing or marketing the product in those countries |
| A GRAS determination or FDA approval in the United States or in any other jurisdiction does not ensure approval in other jurisdictions because the requirements from jurisdiction to jurisdiction may vary widely |
| Obtaining foreign approvals could result in significant delays, difficulties and costs for us and require additional safety studies and additional expenses |
| If we fail to comply with these regulatory requirements or to obtain and maintain required approvals, our ability to generate revenue will be diminished |
| We and our collaborators may not be successful in overcoming these regulatory hurdles, which could result in product launch delays, unanticipated expenses, termination of collaborations, and flavors, flavor enhancers and taste modulators not being approved for incorporation into consumer products |
| These consequences would have a material adverse effect on our business financial condition and results of operations |
| 26 ______________________________________________________________________ Even if we or our collaborators receive a GRAS determination or regulatory approval and incorporate our flavors, flavor enhancers or taste modulators into products, those products may never be commercially successful |
| Even if we discover and develop flavors, flavor enhancers and taste modulators that obtain the necessary GRAS determination or regulatory approval, our success depends to a significant degree upon the commercial success of packaged food and beverage products incorporating those flavors, flavor enhancers or taste modulators |
| If these products fail to achieve or subsequently maintain market acceptance or commercial viability, our business would be significantly harmed because our royalty revenue is dependent upon consumer sales of these products |
| In addition, we could be unable to maintain our existing collaborations or attract new product discovery and development collaborators |
| Many factors may affect the market acceptance and commercial success of any potential products incorporating flavors, flavor enhancers or taste modulators that we may discover, including: • health concerns, whether actual or perceived, or unfavorable publicity regarding our flavors, flavor enhancers and taste modulators or those of our competitors; • the timing of market entry as compared to competitive products; • the rate of adoption of products by our collaborators and other companies in the flavor industry; and • any product labeling that may be required by the FDA or other United States or foreign regulatory agencies for products incorporating our flavors, flavor enhancers and taste modulators |
| We have a history of operating losses and we may not achieve or maintain profitability |
| We have not been profitable and have generated substantial operating losses since we were incorporated in September 1998 |
| We incurred net losses of approximately dlra19dtta8 million for the year ended December 31, 2005 |
| As of December 31, 2005, we had an accumulated deficit of approximately dlra104dtta2 million |
| We expect to incur additional losses for at least the next two years |
| The extent of our future losses will depend, in part, on the rate of increase in our operating expenses and the rate of growth, if any, in our revenue from our five existing and any future product discovery and development collaborations as well as from other sources that may become available to us in the future and on the level of our expenses |
| To date, our revenue has come solely from research and development funding, upfront fees, cost reimbursement and milestone payments under our product discovery and development collaboration agreements with Cadbury Schweppes, Campbell Soup, Coca-Cola, Kraft Foods and Nestle |
| In order for us to generate royalty revenue and become profitable, we must retain our existing product discovery and development collaborations and our collaborators must commercialize products incorporating one or more of our flavors, flavor enhancers or taste modulators, from which we can derive royalty revenues |
| Our ability to generate royalty revenue is uncertain and will depend upon our ability to meet particular research, development and commercialization objectives |
| We expect that our results of operations will fluctuate from period to period, and this fluctuation could cause our stock price to decline, causing investor losses |
| Our operating results have fluctuated in the past and are likely to vary significantly in the future based upon a number of factors, many of which we have little or no control over |
| We operate in a highly dynamic industry and future results could be subject to significant fluctuations |
| These fluctuations could cause us to fail to meet or exceed financial expectations of securities analysts or investors, which could cause our stock price to decline rapidly and significantly |
| Revenue and expenses in future periods may be greater or less than revenue and expenses in the immediately preceding period or in the comparable period of the prior year |
| Therefore, period-to-period comparisons of our operating results are not necessarily a good indication of our future performance |
| Some of the factors that could cause our operating results to fluctuate include: • termination of any of our product discovery and development collaboration agreements; 27 ______________________________________________________________________ • our ability to discover and develop flavors, flavor enhancers and taste modulators or the ability of our product discovery and development collaborators to incorporate them into packaged food and beverage products; • our receipt of milestone payments in any particular period; • the ability and willingness of collaborators to commercialize products incorporating our flavors, flavor enhancers and taste modulators on expected timelines, or at all; • our ability to enter into new product discovery and development collaborations and technology collaborations or to extend the terms of our existing collaboration agreements and our payment obligations, expected revenue and other terms of any other agreements of this type; • our ability, or our collaborators’ ability, to successfully satisfy all pertinent regulatory requirements; • the demand for our collaborators’ products containing our flavors, flavor enhancers and taste modulators; and • general and industry specific economic conditions, which may affect our collaborators’ research and development expenditures |
| Changes in financial accounting standards related to stock option expenses are expected to have a significant effect on our reported results |
| The FASB recently issued a revised standard that requires that we record compensation expense in the statement of operations for employee stock options using the fair value method |
| The adoption of the new standard is expected to have a significant effect on our reported earnings, although it will not affect our cash flows, and could adversely impact our ability to provide accurate guidance on our projected future financial results due to the variability of the factors used to establish the value of stock options |
| As a result, the adoption of the new standard in the first quarter of fiscal 2006 could negatively affect our stock price and our stock price volatility |
| Compliance with regulation of corporate governance and public disclosure may result in additional expenses |
| Laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, SEC regulations and Nasdaq National Market rules, is costly |
| Our efforts to comply with these laws, regulations and standards, as they become applicable to us, have resulted in, and are likely to continue to result in, general and administrative expense and management time related to compliance activities |
| In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors’ audit of that assessment requires the commitment of significant financial and managerial resources |
| If our efforts to comply with laws, regulations and standards differ from the activities intended by regulatory or governing bodies, our reputation may be harmed and we might be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission |
| Any such action could adversely affect our financial results and the market price of our common stock |
| We may need to obtain additional capital to fund our operations |
| If we are unable to successfully commercialize our flavors, flavor enhancers and taste modulators, we may need to obtain additional capital or change our strategy to continue our operations |
| In addition, our business and operations may change in a manner that would consume available resources at a greater rate than anticipated |
| In such event, we may need to raise substantial additional capital to, among other things: • fund new research, discovery or development programs; • advance additional product candidates into and through the regulatory approval process; and • acquire rights to products or product candidates, technologies or businesses |
| 28 ______________________________________________________________________ If we require additional capital to continue our operations, we cannot assure you that additional financing will be available on terms acceptable to us, or at all |
| If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, take advantage of opportunities, identify and develop flavors, flavor enhancers and taste modulators, develop technologies or otherwise respond to competitive pressures could be significantly limited |
| In addition, if financing is not available, we may need to alter our strategy or cease operations |
| In addition, issuances of debt or additional equity could impact the rights of the holders of our common stock, may dilute our stockholders’ ownership and may impose restrictions on our operations |
| These restrictions could include limitations on additional borrowing, specific restrictions on the use of our assets as well as prohibitions on our ability to create liens, pay dividends, redeem our stock or make investments |
| If we lose our key personnel or are unable to attract and retain qualified personnel, it could adversely affect our business |
| Our success depends to a significant degree upon the continued contributions of our executive officers, management and scientific staff |
| If we lose the services of one or more of these people and, in particular, Kent Snyder, our President and Chief Executive Officer, or Mark Zoller, Ph |
| D, our Executive Vice President of Discovery & Development and Chief Scientific Officer, the relationships we have with our collaborators would likely be negatively impacted and we may be delayed or unable to develop new product candidates, commercialize our existing product candidates or achieve our other business objectives, any of which could cause our stock price to decline |
| We have entered into employment letter agreements with the following executive officers: Kent Snyder, Mark Zoller, Ph |
| D, our Vice President, Discovery |
| All of our employees are at-will employees, which means that either we or the employee may terminate their employment at any time |
| In addition, our discovery and development programs depend on our ability to attract and retain highly skilled scientists, including molecular biologists, biochemists, chemists and engineers |
| We may not be able to attract or retain qualified employees in the future due to the intense competition for qualified personnel among technology-based businesses, particularly in the San Diego area |
| We also face competition from universities and public and private research institutions in recruiting and retaining highly qualified scientific and management personnel |
| If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to meet the demands of our current or any future product discovery and development collaborators in a timely fashion or to support our independent discovery and development programs |
| We may encounter difficulties managing our growth, which could adversely affect our business |
| Our strategy includes entering into and working on simultaneous flavor and flavor enhancer discovery and development programs across multiple markets |
| We increased the number of our full-time employees from seven on December 31, 1999 to 90 on December 31, 2005 and we expect to continue to grow to meet our strategic objectives |
| If our growth continues, it will continue to place a strain on us, our management and our resources |
| Our ability to effectively manage our operations, growth and various projects requires us to continue to improve our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees |
| We may not be able to successfully implement these tasks on a larger scale and, accordingly, we may not achieve our research, development and commercialization goals |
| If we fail to improve our operational, financial and management information systems, or fail to effectively monitor or manage our new and future employees or our growth, our business would suffer significantly |
| In addition, no assurance can be made that we will be able to secure adequate facilities to house our staff, conduct our research or achieve our business objectives |
| 29 ______________________________________________________________________ We will rely on third parties to manufacture our flavors, flavor enhancers and taste modulators on a commercial scale |
| We do not have experience in manufacturing, nor do we have the resources or facilities to manufacture, flavors, flavor enhancers and taste modulators on a commercial scale |
| Therefore, the commercialization of our flavors, flavor enhancers and taste modulators will depend in part on our or our collaborators’ ability to contract with third-party manufacturers of our flavors, flavor enhancers and taste modulators on a large scale, at a competitive cost, with the specified quality and in accordance with relevant food and beverage regulatory requirements |
| Any such third-party manufacturers may encounter manufacturing difficulties at any time that could result in delays in the commercialization of potential flavors, flavor enhancers and taste modulators |
| Our inability to find capable third-party manufacturers or to enter into agreements on acceptable terms with third-party manufacturers could delay commercialization of any products we may develop and may harm our relationships with our existing and any future product discovery and development collaborators and our customers |
| Moreover, if we are required to change from one third-party manufacturer to another for any reason, the commercialization of our products may be delayed further |
| In addition, if third-party manufacturers fail to comply with the FDA’s good manufacturing practice regulations or similar regulations in other countries, then we may be subject to adverse regulatory action including product recalls, warning letters and withdrawal of our products, or our collaborators’ or customers’ products, from the market |
| Further, because our flavors, flavor enhancers and taste modulators are regulated as food products under the Federal Food, Drug and Cosmetic Act, we and the third parties with which we collaborate or contract to manufacture, process, pack, import or otherwise handle our products or our product ingredients, may be required to comply with certain registration, prior notice submission, recordkeeping and other regulatory requirements |
| Failure of any party in the chain of distribution to comply with any applicable requirements under the Federal Food, Drug and Cosmetic Act or the FDA’s implementing regulations, or similar regulations in other countries, may adversely affect the manufacture and/or distribution of our products in commerce |
| If we acquire products, technologies or other businesses, we will incur a variety of costs, may have integration difficulties and may experience numerous other risks that could adversely affect our business |
| If appropriate opportunities become available, we may consider acquiring businesses, technologies or products that we believe are a strategic fit with our business |
| We currently have no commitments or agreements with respect to, and are not actively seeking, any material acquisitions |
| We have limited experience in identifying acquisition targets, successfully acquiring them and integrating them into our current infrastructure |
| We may not be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future without a significant expenditure of operating, financial and management resources, if at all |
| In addition, future acquisitions might be funded by issuances of additional debt or equity, which could impact your rights as a holder of our common stock and may dilute your ownership percentage |
| Any of the foregoing could have a significant adverse effect on our business, financial condition and results of operations |
| Risks Related To Our Industry Our ability to compete in the flavor and flavor enhancer market may decline if we do not adequately protect our proprietary technologies |
| Our success depends in part on our ability to obtain and maintain intellectual property that protects our technologies and flavors, flavor enhancers and taste modulators |
| Patent positions may be highly uncertain and may involve complex legal and factual questions, including the ability to establish patentability of sequences relating to taste receptors, proteins, chemical synthesis techniques, compounds and methods for using them to modulate taste for which we seek patent protection |
| No consistent standard regarding the allowability or enforceability of claims in many of our pending patent applications has 30 ______________________________________________________________________ emerged to date |
| As a result, we cannot predict the breadth of claims that will ultimately be allowed in our patent applications, if any, including those we have in-licensed or the extent to which we may enforce these claims against our competitors |
| The degree of future protection for our proprietary rights is therefore highly uncertain and we cannot assure you that: • we were the first to file patent applications or to invent the subject matter claimed in patent applications relating to the technologies upon which we rely; • others will not independently develop similar or alternative technologies or duplicate any of our technologies; • others did not publicly disclose our claimed technology before we conceived the subject matter included in any of our patent applications; • any of our patent applications will result in issued patents; • any of our patent applications will not result in interferences or disputes with third parties regarding priority of invention; • any patents that have issued or may be issued to us, our collaborators or our licensors will provide a basis for commercially viable products or will provide us with any competitive advantages or will not be challenged by third parties; • we will develop additional proprietary technologies that are patentable; • the patents of others will not have an adverse effect on our ability to do business; or • new proprietary technologies from third parties, including existing licensors, will be available for licensing to us on reasonable commercial terms, if at all |
| In addition, patent law outside the United States is uncertain and in many countries intellectual property laws are undergoing review and revision |
| The laws of some countries do not protect intellectual property rights to the same extent as domestic laws |
| It may be necessary or useful for us to participate in opposition proceedings to determine the validity of our competitors’ patents or to defend the validity of any of our or our licensor’s future patents, which could result in substantial costs and would divert our efforts and attention from other aspects of our business |
| Technologies licensed to us by others, or in-licensed technologies, are important to our business |
| In particular, we depend on high-throughput screening technologies that we licensed from Aurora Biosciences, technology related to certain taste receptor sequences that we license from the University of California and others and technology related to compound libraries that we license from third parties |
| In addition, we may in the future acquire rights to additional technologies by licensing such rights from existing licensors or from third parties |
| Also, we generally do not control the patent prosecution, maintenance or enforcement of in-licensed technologies |
| Accordingly, we are unable to exercise the same degree of control over this intellectual property as we do over our internally developed technologies |
| Moreover, some of our academic institution licensors, collaborators and scientific advisors have rights to publish data and information to which we have rights |
| If we cannot maintain the confidentiality of our technologies and other confidential information in connection with our collaborations, our ability to protect our proprietary information or obtain patent protection in the future may be impaired, which could have a significant adverse effect on our business, financial condition and results of operations |
| Many of the patent applications we and our licensors have filed have not yet been substantively examined and may not result in patents being issued |
| Many of the patent applications filed by us and our licensors were filed recently with the United States Patent and Trademark Office and most have not been substantively examined and may not result in patents being issued |
| Some of these patent applications claim sequences that were identified from different publicly available sequence information sources such as the High-Throughput Genomic Sequences division of GenBank |
| It is difficult to predict whether any of our or our licensors’ applications will ultimately be found to be patentable or, if so, to predict the scope of any allowed claims |
| In addition, the disclosure in our or our licensors’ patent applications, particularly in respect of the utility of our claimed inventions, may not be sufficient to meet the statutory requirements for patentability in all cases |
| As a result, it is difficult to predict whether any of our or our licensors’ applications will be allowed, or, if so, to predict the scope of 31 ______________________________________________________________________ any allowed claims or the enforceability of the patents |
| Even if enforceable, others may be able to design around any patents or develop similar technologies that are not within the scope of such patents |
| Our and our licensors’ patent applications may not issue as patents that will provide us with any protection or competitive advantage |
| Disputes concerning the infringement or misappropriation of our proprietary rights or the proprietary rights of others could be time consuming and extremely costly and could delay our research and development efforts |
| Our commercial success, if any, will be significantly harmed if we infringe the patent rights of third parties or if we breach any license or other agreements that we have entered into with regard to our technology or business |
| We are aware of other companies and academic institutions that have been performing research in the areas of taste modulation and flavors, flavor enhancers and taste modulators |
| In particular, other companies and academic institutions have announced that they have conducted taste-receptor research and have published data on taste receptor sequence information and taste receptors or filed patent applications or obtained patent protection on taste modulation or taste receptors and their uses, including Linguagen Corp, Mount Sinai School of Medicine, The Scripps Research Institute, the University of California, Monell Chemical Senses Corp, Pfizer, Inc, Virginia Commonwealth University and the German Institute of Human Nutrition |
| To the extent any of these companies or academic institutions currently have, or obtain in the future, broad patent claims, such patents could block our ability to use various aspects of our discovery and development process and might prevent us from developing or commercializing newly discovered flavors, flavor enhancers and taste modulators or otherwise conducting our business |
| The University of California, for example, claims certain patent rights relating to the coexpression of T1R receptors that may not have been licensed to us |
| While our technology is focused on the use of human T1R receptors, we cannot assure you that it does not infringe such patent rights |
| In such event, if we are not able to amend our license with the University of California to include such patent rights and our technology is found to interfere with or infringe such patent rights, our business, financial condition and results of operations could suffer a significant adverse effect |
| In addition, it is possible that some of the flavors, flavor enhancers or taste modulators that are discovered using our technology may not be patentable or may be covered by intellectual property of third parties |
| We are not currently a party to any litigation, interference, opposition, protest, reexamination, reissue or any other potentially adverse governmental, ex parte or inter-party proceeding with regard to our patent or trademark positions |
| However, the life sciences and other technology industries are characterized by extensive litigation regarding patents and other intellectual property rights |
| Many life sciences and other technology companies have employed intellectual property litigation as a way to gain a competitive advantage |
| If we become involved in litigation, interference proceedings, oppositions, reexamination, protest or other potentially adverse intellectual property proceedings as a result of alleged infringement by us of the rights of others or as a result of priority of invention disputes with third parties, we might have to spend significant amounts of money, time and effort defending our position and we may not be successful |
| In addition, any claims relating to the infringement of third-party proprietary rights or proprietary determinations, even if not meritorious, could result in costly litigation, lengthy governmental proceedings, divert management’s attention and resources, or require us to enter into royalty or license agreements that are not advantageous to us |
| Should any person have filed patent applications or obtained patents that claim inventions also claimed by us, we may have to participate in an interference proceeding declared by the relevant patent regulatory agency to determine priority of invention and, thus, the right to a patent for these inventions in the United States |
| Even if successful on priority grounds, an interference action may result in loss of claims based on patentability grounds raised in the interference action |
| Litigation, interference proceedings or other proceedings could divert management’s time and efforts |
| Even unsuccessful claims could result in significant legal fees and other expenses, diversion of management’s time and disruption in our business |
| Uncertainties resulting from initiation and continuation of any patent proceeding or related litigation could 32 ______________________________________________________________________ harm our ability to compete and could have a significant adverse effect on our business, financial condition and results of operations |
| An adverse ruling arising out of any intellectual property dispute, including an adverse decision as to the priority of our inventions, could undercut or invalidate our intellectual property position |
| An adverse ruling could also subject us to significant liability for damages, including possible treble damages, prevent us from using technologies or developing products, or require us to negotiate licenses to disputed rights from third parties |
| Although patent and intellectual property disputes in the technology area are often settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and could include license fees and ongoing royalties |
| Furthermore, necessary licenses may not be available to us on satisfactory terms, if at all |
| Failure to obtain a license in such a case could have a significant adverse effect on our business, financial condition and results of operations |
| If we are unable to protect our trade secrets and other proprietary information, we could lose any competitive advantage we may have, which could adversely affect our business |
| We rely in part on trade secret protection for our confidential and proprietary information, know how and processes |
| Our policy is to execute proprietary information and invention agreements with our employees and consultants upon the commencement of an employment or consulting relationship |
| These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not be disclosed to third parties |
| These agreements also generally provide that inventions conceived by the individual in the course of their employment shall be our exclusive property |
| There can be no assurance that we will be able to effectively enforce these agreements or that proprietary information is our exclusive property |
| There can be no assurance that the subject proprietary information will not be disclosed, that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or that we can meaningfully protect our trade secrets |
| Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position |
| Many potential competitors, including those who have greater resources and experience than we do, may develop products or technologies that make ours obsolete or noncompetitive |
| The life sciences and other technology industries are characterized by rapid technological change, and the area of sensory or taste receptor research is a rapidly evolving field |
| Our future success will depend on our ability to maintain a competitive position with respect to technological advances |
| Technological developments by others may result in our flavors, flavor enhancers or taste modulators and technologies becoming obsolete |
| In particular, we face substantial competition from companies pursuing the commercialization of products and services relevant to taste using more traditional methods for the discovery of flavors, flavor enhancers and taste modulators, or for the reduction of salt, sugar, MSG or bitter taste |
| These competitors include leading flavor companies, such as International Flavors & Fragrances Inc, Givaudan SA, Symrise, Quest International and Firmenich |
| We currently compete and will continue to compete in the future with these companies in collaborating with and selling flavor products and technologies to manufacturers of packaged food and beverage products |
| Many of these companies have substantially greater capital resources, research and development resources and experience, manufacturing capabilities, regulatory expertise, sales and marketing resources, established relationships with consumer products companies and production facilities |
| Savory flavor enhancers, particularly inosine monophosphate, or IMP, are commercially available, and we will compete with the companies that produce these flavors |
| IMP is widely available and is a generally accepted food additive by the packaged food and beverage industry |
| As a result, our existing and future collaborators may choose to incorporate IMP or similar savory flavor enhancers into their packaged food and beverage products instead of our savory flavors, flavor enhancers and taste modulators |
| In 33 ______________________________________________________________________ addition, we may compete with bitter masking or bitter blocking compounds, such as adenosine 5’ monophosphate, or AMP We may in the future face competition from life sciences and other technology companies and other commercial enterprises |
| These entities engage as we do in biotechnology, biology or chemistry and could apply this technology to the discovery and development of flavors, flavor enhancers and taste modulators |
| We are aware of one other company, Linguagen Corp, a privately-held company that we believe is involved in research on sweetness potentiators, salt substitutes and bitter blockers, specifically AMP, and has announced research and development collaborations with several companies |
| We cannot guarantee that products developed as a result of our competitors’ existing or future collaborations will not compete with our flavors, flavor enhancers and taste modulators |
| Universities and public and private research institutions are also potential competitors |
| While these organizations primarily have educational objectives, they may develop proprietary technologies related to the sense of taste or secure patent protection that we may need for the development of our technologies and products |
| We may attempt to license these proprietary technologies, but these licenses may not be available to us on acceptable terms, if at all |
| Our competitors, either alone or with their collaborative partners, may succeed in developing technologies or discovering flavors, flavor enhancers or taste modulators that are more effective, safer, more affordable or more easily commercialized than ours, and our competitors may obtain intellectual property protection or commercialize products sooner than we do |
| Developments by others may render our product candidates or our technologies obsolete |
| In addition, our current product discovery and development collaborators are not prohibited from entering into research and development collaboration agreements with third parties in any product field |
| Our failure to compete effectively would have a significant adverse effect on our business, financial condition and results of operations |
| We may be sued for product liability, which could adversely affect our business |
| Because our business strategy involves the development and sale by our collaborators of commercial products incorporating our flavors, flavor enhancers and taste modulators, we may be sued for product liability |
| We may be held liable if any product we develop and commercialize, or any product our collaborators commercialize that incorporates any of our flavors, flavor enhancers or taste modulators, causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or consumer use |
| In addition, the safety studies we must perform and the FEMA GRAS determination we must obtain prior to incorporating our flavors, flavor enhancers and taste modulators into a commercial product will not protect us from any such liability |
| If we and our collaborators commence sale of commercial products we will need to obtain product liability insurance, and this insurance may be prohibitively expensive, or may not fully cover our potential liabilities |
| Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of products developed by us or our product discovery and development collaborators |
| We may be obligated to indemnify our product discovery and development collaborators for product liability or other losses they incur as a result of our flavors, flavor enhancers and taste modulators |
| Any indemnification we receive from such collaborators for product liability that does not arise from our flavors, flavor enhancers and taste modulators may not be sufficient to satisfy our liability to injured parties |
| If we are sued for any injury caused by our flavors, flavor enhancers and taste modulators or products incorporating our flavors, flavor enhancers and taste modulators, our liability could exceed our total assets |
| We use hazardous materials |
| Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly |
| Our discovery and development process requires our employees to routinely handle hazardous chemical, radioactive and biological materials |
| Our operations also produce hazardous waste products |
| Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials |
| As a result of the increase in size of our operations, we were recently re-classified from a 34 ______________________________________________________________________ small quantity to a large quantity generator of hazardous waste |
| This reclassification may result in increased scrutiny of our operations by the Environmental Protection Agency |
| Compliance with applicable environmental laws and regulations may be expensive, and current or future environmental regulations may impair our discovery and development efforts |
| In addition, we cannot entirely eliminate the risk of accidental contamination or discharge and any resultant injury from these materials |
| Our property and casualty policy has very limited coverage for damages or cleanup costs related to radioactive contamination and pollutants and our general liability insurance policy excludes coverage for damages and fines arising from biological or hazardous waste disposal or contamination |
| We do not carry specific biological or hazardous waste insurance |
| We may be forced to curtail operations or be sued for any injury or contamination that results from our use or the use by others of these materials, and our liability may exceed our total assets |
| Risks Related To Our Common Stock The price of our common stock is volatile |
| The market prices for securities of biotechnology companies historically have been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies |
| Since our initial public offering in June 2004, the price of our common stock has ranged from approximately dlra5 per share to approximately dlra23 per share |
| The market price of our common stock may fluctuate in response to many factors, including: • developments related to the FEMA GRAS determination and international regulatory approval of our products; • developments concerning our collaborative agreements; • announcements of technological innovations by us or others; • developments in patent or other proprietary rights; • results of safety evaluation of our flavors, flavor enhancers and taste modulators; • results of consumer acceptance testing of our flavors, flavor enhancers and taste modulators by our collaborators; • delays in commercialization of our flavors, flavor enhancers and taste modulators; • future sales of our common stock by existing stockholders; • comments by securities analysts; • general market conditions; • fluctuations in our operating results; • government regulation; • failure of any of our flavors, flavor enhancers or taste modulators, if approved, to achieve commercial success; and • public concern as to the safety of our flavors, flavor enhancers, and taste modulators |
| Anti-takeover provisions in our charter documents and under Delaware law may make an acquisition of us more complicated and the removal and replacement of our directors and management more difficult |
| Provisions of our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders |
| These provisions may also make it difficult for stockholders to remove and replace our board of directors and management |
| These provisions: • authorize the issuance of “blank check” preferred stock by our board of directors, without stockholder approval, which could increase the number of outstanding shares and prevent or delay a takeover attempt; • limit who may call a special meeting of stockholders; • prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and 35 ______________________________________________________________________ • establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings |
| In addition, the requirements of Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a third party from acquiring us |
| Our shareholder rights plan may hinder or prevent change of control transactions |
| Our shareholder rights plans may discourage transactions involving an actual or potential change in our ownership |
| In addition, our board of directors may issue shares of preferred stock without any further action by you |
| Such issuances may have the effect of delaying or preventing a change in our ownership |
| If changes in our ownership are discouraged, delayed or prevented, it would be more difficult for our current board of directors to be removed and replaced, even if you and other stockholders believe such actions are in the best interests of us and our stockholders |
| If our officers, directors and largest stockholders choose to act together, they may be able to control our management and operations, acting in their best interests and not necessarily the interests of other stockholders |
| As of February 28, 2006, our executive officers, directors and stockholders with at least 5prca of our stock together beneficially owned approximately 27prca of our common stock |
| If these officers, directors and principal stockholders act together, they will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of mergers or other business combination transactions |
| The interests of this concentration of ownership may not always coincide with our interests or the interests of investors in this offering or other stockholders |
| For instance, officers, directors and principal stockholders, acting together, could cause us to enter into transactions or agreements that we would not otherwise consider |
| Similarly, this concentration of ownership may have the effect of delaying or preventing a change in control of our company otherwise favored by our other stockholders |
| This concentration of ownership could depress our stock price |
| We have never paid cash dividends on our capital stock and we do not anticipate paying dividends in the foreseeable future |
| We have paid no cash dividends on any of our classes of capital stock to date, and we currently intend to retain our future earnings, if any, to fund the development and growth of our business |
| In addition, the terms of any future debt or credit facility may preclude us from paying any dividends |
| As a result, capital appreciation, if any, of our common stock will be your sole source of potential gain for the foreseeable future |