| THIRD WAVE TECHNOLOGIES INC /WI ITEM 1A RISK FACTORS RISKS RELATED TO OUR BUSINESS WE HAD AN ACCUMULATED DEFICIT OF dlra158dtta1 MILLION AT DECEMBER 31, 2005, AND EXPECT TO CONTINUE TO INCUR SUBSTANTIAL OPERATING LOSSES FOR THE FORESEEABLE FUTURE We have had substantial operating losses since our inception in 1993, and we expect our operating losses to continue over the foreseeable future |
| In order to further develop our products and technologies, including development of new products for the clinical market, we will need to incur significant expenses in connection with our internal research and development and commercialization programs |
| As a result, we expect to incur annual operating losses for the foreseeable future |
| In addition, there is no assurance that we will ever become profitable or that we will sustain profitability if we do become profitable |
| Should we experience protracted or unforeseen operating losses, our capital requirements would increase and our stock price would likely decline |
| FLUCTUATIONS IN OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY NEGATIVELY IMPACT OUR STOCK PRICE Our revenues and results of operations have fluctuated significantly in the past and we expect significant fluctuations to continue in the future due to a variety of factors, many of which are outside of our control |
| These factors include: • the volume and timing of orders for our products; • changes in the mix of our products offered; • the timing of payments we receive under collaborative agreements, as well as our ability to recognize these payments as revenues; • the number, timing and significance of new products and technologies introduced by our competitors; 12 _________________________________________________________________ [69]Table of Contents • third-party intellectual property, which may require significant investments in licensing or royalties, or which may materially impede our ability to sell products; • our ability to develop, obtain regulatory clearance, market and introduce new and enhanced products on a timely basis; • changes in the cost, quality and availability of equipment, reagents and components required to manufacture or use our products; • availability of commercial and government funding to researchers who use our products and services, including our single-largest research customer in Japan; and • availability of third-party reimbursement to users of our clinical products |
| Research and development costs associated with our products and technologies, as well as facilities costs, personnel costs, marketing programs and overhead account for a substantial portion of our operating expenses |
| Research and development expenses for the years ended December 31, 2005, 2004, and 2003 were dlra8dtta4 million, dlra11dtta6 million, and dlra12dtta0 million, respectively |
| We cannot reduce these expenses quickly in the short term |
| If our revenues decline or do not grow as anticipated, we may not be able to reduce our operating expenses accordingly |
| Failure to achieve anticipated levels of revenues could significantly harm our operating results for one or more fiscal periods |
| Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance |
| In addition, our operating results in a future fiscal quarter may not meet the expectations of stock market analysts and investors |
| In that case, our stock price would likely decline and investors would experience a decline in the value of their investment |
| OUR TECHNOLOGIES AND COMMERCIAL PRODUCTS MAY NOT BE COMMERCIALLY VIABLE OR SUCCESSFUL, WHICH COULD ADVERSELY AFFECT OUR BUSINESS We are currently developing and commercializing a limited number of products based on our technologies |
| We plan to develop additional products |
| We cannot assure you that we will be able to complete development of our products that are currently under development or that we will be able to develop additional new products |
| In addition, for our genetic and pharmacogenetic products, some of the genetic variations for which we develop our products may not be useful or cost effective in assisting therapeutic selection, patient monitoring or diagnostic applications |
| In this event, our sales of products for these genetic variations would diminish significantly or cease, and we would not be able to recoup our investment in developing these products |
| Accordingly, if we fail to successfully develop our products and technologies or if our technologies are not useful in the development of commercially successful products, we may not achieve a competitive position in the market |
| If we fail to do so, our revenues will be seriously harmed and it is unlikely that we will ever achieve profitability |
| Market acceptance of our products will depend on widespread acceptance of such products by doctors and clinicians |
| The use of products to assess genetic variation, gene expression or identify infectious diseases is relatively new and remains uncertain |
| If clinicians and doctors do not adopt our products, our business, financial condition and results of operation could be adversely affected |
| In these events, our stock price would likely decline |
| WE HAVE LIMITED MANUFACTURING EXPERIENCE AND MAY NEED TO MODIFY, EXPAND OR ESTABLISH NEW MANUFACTURING FACILITIES AS WE COMMERCIALIZE OUR PRODUCTS We have limited experience manufacturing our products and have limited experience manufacturing our products in the volumes that will be necessary for us to achieve significant commercial sales |
| We may need to establish new manufacturing processes or facilities, modify existing facilities and processes, or outsource product component manufacturing |
| Facilities expansion and development, process improvements, and outsourcing manufacturing can be delayed by unforeseen circumstances, including inability to obtain needed manufacturing equipment on a timely basis, difficulties with facility construction and completion of improvements and difficulties incorporating new processes and vendor supply issues associated with component outsourcing |
| If we fail to meet our manufacturing needs, we may not be able to provide our customers with the quantity of products they require, which would damage customer relations and result in reduced revenues |
| Additionally, some of our products must be 13 _________________________________________________________________ [70]Table of Contents manufactured in accordance with the FDA’s QSRs |
| We have limited experience in manufacturing our products in compliance with QSRs and cannot guarantee that our manufacturing and production systems are in compliance with the QSRs |
| Key components of our products may be sourced from a single supplier or a limited number of suppliers |
| Specifically, oligonucleotides for many of our research use only products are sourced from a single supplier as are certain components of our InPlex microfluidic card format |
| In addition, some of the components incorporated into our products may be proprietary and unavailable from secondary sources |
| Finally, to comply with QSRs, we must verify that our suppliers of key components are in compliance with all applicable FDA regulations and meet our standards for quality |
| If we lose a source of supply due to any of the above reasons or otherwise we may not be able to arrange for alternative supply sources |
| If our suppliers are unable or unwilling to supply us on commercially acceptable terms with these components, we may be unable to satisfy demand for our product on reasonable terms, if at all, which may have an adverse effect on our business, financial condition and results of operations |
| OUR LIMITED SALES AND MARKETING EXPERIENCE AND CAPACITY MAY ADVERSELY AFFECT OUR ABILITY TO GROW AND TO COMPETE SUCCESSFULLY IN COMMERCIALIZING OUR POTENTIAL PRODUCTS Our sales force consists of 18 individuals focused on direct sales and 15 individuals focused on service and support in the clinical market |
| We may need to increase the size of our sales force as we further commercialize our products, and we may not be able to recruit, hire and train a sufficient number of sales personnel in a short time frame |
| We may also market our products through collaborations and distribution agreements with diagnostic, biopharmaceutical and life science companies |
| We cannot guarantee that we will be able to establish a successful sales force or to establish collaboration or distribution arrangements to market our products |
| If we are unable to implement an effective marketing and sales strategy, we will be unable to grow our revenues and execute our business plan |
| This would have an adverse effect on our business, financial condition and results of operations |
| We have limited experience with sales of our clinical molecular diagnostics products outside of the US We cannot guarantee that we will successfully develop sales, distribution, product and customer support capabilities internationally that will enable us to generate significant revenue from sales outside the United States |
| In addition, sales made outside the US are subject to foreign regulations typical to the sale and marketing of our products that may pose an additional risk for us |
| If we fail to increase our revenues from sales outside of the United States, this would have an adverse effect on our business, financial condition and results of operations |
| Our customer base is dominated by a small number of large clinical testing laboratories (Quest Diagnostics, Inc, Specialty Laboratories, Inc, Mayo Medical Laboratories, Kaiser Permanente, and Berkeley Heart Laboratories) and research customers (University of Tokyo/RIKEN and Pioneer Hi-Bred International, Inc |
| We regularly experience pricing and other competitive pressures in these accounts |
| Many of our contracts with key customers are short-term contracts and/or subject to early termination |
| Our customers are not obligated to renew contracts after they expire |
| If, for any reason, we are unable to maintain or renew our contracts, particularly our contracts with key customers, or if, for any reason, we are unable to maintain current pricing levels and/or volumes with our customers, our revenues and business may suffer materially |
| THE EARLY TERMINATION OF ANY OF OUR STRATEGIC COLLABORATION OR CUSTOMER SUPPLY AGREEMENTS COULD SERIOUSLY HARM OUR BUSINESS AND FINANCIAL CONDITION Certain of our strategic, research collaboration, and customer supply agreements may be terminated with little or no notice |
| In particular, the supply of products to Japanese customers may be terminated upon specified notice at any time |
| These customers will likely account for a material portion of our revenues for 2006 |
| Accordingly, early termination of these relationships and supply agreements would seriously harm our revenues, and in turn, our business, and financial condition |
| 14 _________________________________________________________________ [71]Table of Contents WE MAY REQUIRE ADDITIONAL FINANCING FOR OUR FUTURE OPERATING PLANS FINANCING MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL We may need to raise additional capital in the future |
| We have expended significant resources and expect to continue to expend significant resources in our research and product development and commercialization activities and to improve production processes, litigate intellectual property disputes, and seek FDA clearance or approvals |
| The amount of additional capital we will need to raise will depend on many factors, including: • our progress with our research and development programs; • the needs we may have to pursue FDA clearances or approvals of our products; • our level of success in selling our products and technologies; • our ability to establish and maintain successful collaborations; • the costs we incur in securing intellectual property rights, whether through patents, licenses or otherwise; • the costs we incur in enforcing and defending our patent claims and other intellectual property rights; • the timing of purchases of additional capital; • the need to respond to competitive pressures; and • the possible acquisition of complementary products, businesses or technologies |
| If we raise additional funds through the sale of equity, convertible debt or other equity-linked securities, our shareholders’ percentage ownership in the Company will be reduced |
| In addition, these transactions may dilute the value of our outstanding stock |
| We may issue securities that have rights, preferences and privileges senior to our common stock |
| If we raise additional funds through collaborations or licensing arrangements, we may relinquish rights to certain of our technologies or products, or grant licenses to third parties on terms that are unfavorable to us |
| If future financing is not available to us or is not available on terms acceptable to us, we may not be able to fund our future needs that would have an adverse effect on our business, financial condition and results of operations |
| FAILURE TO MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND STOCK PRICE If we fail to maintain adequacy of our internal controls in accordance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act |
| Failure to achieve and maintain an effective internal control environment could have a material adverse effect on our stock price |
| COMMERCIALIZATION OF OUR TECHNOLOGIES MAY DEPEND ON STRATEGIC PARTNERSHIPS AND COLLABORATIONS WITH OTHER COMPANIES, AND IF OUR CURRENT OR FUTURE PARTNERSHIPS AND COLLABORATIONS ARE NOT SUCCESSFUL, WE MAY EXPERIENCE DIFFICULTY COMMERCIALIZING OUR TECHNOLOGIES AND PRODUCTS In order to augment our internal sales and marketing efforts and to reach additional product and geographic markets, we have entered into or may enter into strategic partnerships and collaborations for the development, marketing, sales or distribution of our products |
| These agreements provide us, in some instances, with distribution of our products, access to products and technologies that are complementary to ours and funding for development of our products |
| We may also be dependent on collaborators for regulatory approvals and clearances, and manufacturing in particular geographic and product markets |
| If our strategic partnerships and collaborations are not successful, we may not be able to develop or successfully commercialize the products that are the subject of the collaborations on a timely basis, if at all, or effectively distribute our products |
| In addition, if we do not enter into additional partnership agreements, or if these agreements are not successful, our ability to develop, commercialize and distribute products will be negatively affected which will harm our future operating results |
| 15 _________________________________________________________________ [72]Table of Contents We have no control over the resources that any partner or collaborator may devote to our products |
| Any of our present or future partners or collaborators may not perform their obligations as expected |
| These partners or collaborators may breach or terminate their agreements with us or otherwise fail to meet their obligations or perform their collaborative activities successfully and in a timely manner |
| Further, any of our partners or collaborators may elect not to develop products arising out of our partnerships or collaborations or devote sufficient resources to the development, manufacture, commercialization or distribution of these products |
| If any of these events occur, we may not be able to develop our products and technologies and our ability to generate revenues will decrease |
| WE ARE IN A HIGHLY COMPETITIVE INDUSTRY AND MARKETPLACE COMPETITIVE DEVELOPMENTS, INCLUDING NEW TECHNOLOGIES THAT RENDER OURS LESS COMPETITIVE OR OBSOLETE, COULD SERIOUSLY HARM OUR BUSINESS The biotechnology and life sciences industries generally and the genetic analysis and molecular diagnostics markets specifically are highly competitive, and we expect the intensity of competition to increase |
| We compete with organizations in the United States and abroad that develop and manufacture products and provide services for the analysis of genetic information for research and/or clinical applications |
| These organizations include: • diagnostic, biotechnology, pharmaceutical, healthcare, chemical and other companies; • academic and scientific institutions; • governmental agencies; • public and private research organizations; and • clinical labs |
| Many of our competitors have greater financial, technical, research, marketing, sales, distribution, service and other resources than we do |
| Moreover, our competitors may offer broader product lines and have greater name recognition than we do, and may offer discounts as a competitive tactic |
| In addition, several development stage companies are currently making or developing technologies, products or services that compete with or are being designed to compete with our technologies and products |
| Our competitors may develop or market technologies, products or services that are more effective or commercially attractive than our current or future products, or that may render our technologies or products less competitive or obsolete |
| Competitors may make rapid technological developments which may result in our technologies and products becoming obsolete before we recover the expenses incurred to develop them or before they generate significant revenue or market acceptance |
| Competitors may also obtain regulatory advances or approvals of their diagnostic products more rapidly than we do |
| Accordingly, if competitors introduce superior technologies or products or obtain regulatory approvals or clearances quicker than we do, and we cannot make enhancements to our technologies and products necessary for them to remain competitive, our competitive position, and in turn our business, revenues and financial condition, will be seriously harmed |
| Our existing and potential competitors may be in the process of seeking FDA or foreign regulatory approval for their respective products or may also enjoy substantial advantages over us in terms of research and development expertise, clinical trial expertise, experience in submission of products to regulatory authorities and the marketing or commercialization of FDA approved or cleared products |
| In addition, many of our competitors may have or will establish third-party reimbursement for their products |
| We may not be able to compete effectively against competitors that hold such an advantage which may have a material adverse effect on our business, financial condition and results of operations |
| WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY METHODS AND TECHNOLOGIES AND MAY BE SUBJECT TO CLAIMS OF INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS Our commercial success will depend, to a significant degree, on our ability to obtain patent protection on many aspects of our business, including the products, methods and services we develop |
| Patents issued to us may not 16 _________________________________________________________________ [73]Table of Contents provide us with substantial protection or be commercially beneficial to us |
| The issuance of a patent is not conclusive as to its validity or its enforceability |
| In addition, our patent applications or those we have licensed, may not result in issued patents |
| If our patent applications do not result in issued patents, our competitors may obtain rights to commercialize our discoveries which would harm our competitive position |
| We also may apply for patent protection on novel genetic variations in known genes and their uses, as well as novel uses for previously identified genetic variations discovered by third parties |
| In the latter cases or in the area of new product development, we may need licenses from the holders of patents with respect to such genetic variations in order to make, use or sell any related products |
| We may not be able to acquire such licenses on terms acceptable to us, if at all |
| Certain parties are attempting to rapidly identify and characterize genes and genetic variations through the use of sequencing and other technologies |
| To the extent any patents are issued to other parties on such partial or full-length genes or genetic variations or uses for such genes or genetic variations, the risk increases that the sale of products developed by us or our collaborators may give rise to claims of patent infringement against us |
| Others may have filed and, in the future, are likely to file patent applications covering many genetic variations and their uses |
| Others may file and, in the future, may file, patent applications covering improvements to our technologies |
| Any such patent application may have priority over our patent applications and could further restrict our ability to market our products |
| We cannot assure you that any license that we may require under any such patent will be made available to us on commercially acceptable terms, if at all |
| While we believe our technology does not infringe any third party rights, we have in the past been party to and are currently party to litigation involving patents and intellectual property rights |