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<SEC-DOCUMENT>0001125282-02-002791.txt : 20020927
<SEC-HEADER>0001125282-02-002791.hdr.sgml : 20020927
<ACCEPTANCE-DATETIME>20020927155958
ACCESSION NUMBER: 0001125282-02-002791
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 12
CONFORMED PERIOD OF REPORT: 20020630
FILED AS OF DATE: 20020927
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: APPLERA CORP
CENTRAL INDEX KEY: 0000077551
STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826]
IRS NUMBER: 061534213
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-04389
FILM NUMBER: 02774836
BUSINESS ADDRESS:
STREET 1: 301 MERRITT 7
CITY: NORWALK
STATE: CT
ZIP: 06851
BUSINESS PHONE: 2038402000
MAIL ADDRESS:
STREET 1: 301 MERRITT 7
CITY: NORWALK
STATE: CT
ZIP: 06851
FORMER COMPANY:
FORMER CONFORMED NAME: PERKIN ELMER CORP
DATE OF NAME CHANGE: 19930601
FORMER COMPANY:
FORMER CONFORMED NAME: PE CORP
DATE OF NAME CHANGE: 19990129
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>b320198_10k.txt
<DESCRIPTION>ANNUAL REPORT
<TEXT>
<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-K
[ X ] Annual Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act Of 1934
For the Fiscal Year Ended June 30, 2002
OR
[ ] Transition Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act Of 1934
For the transition period from _________to __________
Commission File Number 1-4389
--------------------
Applera Corporation
(Exact name of registrant as specified in its charter)
DELAWARE 06-1534213
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 Merritt 7, Norwalk, Connecticut 06851-1070
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 203-840-2000
--------------------
Securities registered pursuant to Section 12 (b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Class on Which Registered
- ------------------------------------------------- --------------------------------------------
<S> <C>
Applera Corporation - Applied Biosystems New York Stock Exchange
Group Common Stock (par value $0.01 per share) Pacific Exchange
Rights to Purchase Series A Participating New York Stock Exchange
Junior Preferred Stock (par value $0.01 per share) Pacific Exchange
Applera Corporation - Celera Genomics Group New York Stock Exchange
Common Stock (par value $0.01 per share) Pacific Exchange
Rights to Purchase Series B Participating New York Stock Exchange
Junior Preferred Stock (par value $0.01 per share) Pacific Exchange
</TABLE>
Securities registered pursuant to Section 12 (g) of the Act:
Title of Class
--------------------
Class G Warrants
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of September 4, 2002, 208,797,987 shares of Applera Corporation -
Applied Biosystems Group Common Stock were outstanding, and the aggregate market
value of such shares (based upon the average of the high and low price) held by
non-affiliates was $3,778,158,063. As of September 4, 2002, 71,290,854
shares of Applera Corporation - Celera Genomics Group Common Stock were
outstanding, and the aggregate market value of such shares (based upon the
average of the high and low price) held by non-affiliates was $638,363,165.
- -------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Stockholders for Fiscal Year ended June 30, 2002 -
Parts I, II, and IV. Proxy Statement for Annual Meeting of
Stockholders dated September 4, 2002 - Part III.
===============================================================================
<PAGE>
PART I
Item 1. BUSINESS
General Development of Business
Applera Corporation (hereinafter referred to as the "Company") was
incorporated in 1998 under the laws of the State of Delaware. The Company
conducts its business through two groups: the Applied Biosystems Group ("Applied
Biosystems") and the Celera Genomics Group ("Celera Genomics"). In April 2001,
Applied Biosystems and Celera Genomics formed a joint venture in the field of
diagnostics ("Celera Diagnostics"). The Company maintains a corporate staff to
provide accounting, tax, treasury, legal, information technology, human
resources, and other internal services for Applied Biosystems, Celera Genomics,
and Celera Diagnostics.
The Company is the successor to PE Corporation (NY), formerly "The
Perkin-Elmer Corporation," which became a wholly owned subsidiary of the Company
as a result of a recapitalization of PE Corporation (NY) completed in May 1999.
As part of the recapitalization, the Company established two classes of common
stock that were intended to reflect separately the performance of the businesses
of each of Applied Biosystems and Celera Genomics (i.e., Applera Corporation -
Applied Biosystems Group Common Stock and Applera Corporation - Celera Genomics
Group Common Stock). Effective November 30, 2000, the Company, which was named
"PE Corporation" at the time of the recapitalization, was renamed "Applera
Corporation," and Applied Biosystems, which was named the "PE Biosystems Group"
at the time of the recapitalization, was renamed the "Applied Biosystems Group."
Applied Biosystems is engaged principally in the development,
manufacture, sale, and service of instrument-based systems, reagents, and
software, and the provision of contract services, for life science and related
applications. Its products are used in various applications including synthesis,
amplification, purification, isolation, analysis, and sequencing of nucleic
acids, proteins, and other biological molecules. The markets for Applied
Biosystems' products span the spectrum of the life sciences industry and
research community, including: basic human disease research; genetic analysis;
pharmaceutical drug discovery, development, and manufacturing; human
identification; agriculture; and food and environmental testing. Universities,
government agencies, and other non-profit organizations engaged in research
activities also use Applied Biosystems' products.
During the 2001 fiscal year, Applied Biosystems implemented an
organizational realignment away from a business unit structure organized
according to specific technologies to a more integrated marketing and product
development structure. During the 2002 fiscal year, Applied Biosystems
implemented further organizational changes intended to improve upon its new
marketing and product development structure. As part of these additional
organizational changes, in April 2002 Applied Biosystems announced the formation
of its new Knowledge Business for the purpose of developing and marketing
products and services designed to meet the needs of life science researchers in
performing specific biological analysis applications. Products and services
under development or expected to be developed by the Knowledge Business include
genomic assays and related information, as well as other information-rich
products, services, and analytical tools. Also in April 2002, Applied Biosystems
and Celera Genomics entered into a marketing and distribution agreement pursuant
to which Applied
<PAGE>
Biosystems has become the exclusive marketer of Celera Genomics' Celera
Discovery System(TM) and related information assets as part of the Knowledge
Business.
Celera Genomics is engaged principally in integrating advanced
technologies to discover and develop new therapeutics. Celera Genomics intends
to leverage its capabilities in proteomics, bioinformatics, and genomics to
identify and validate drug targets and diagnostic marker candidates, and to
discover and develop novel therapeutic candidates. Celera Genomics was
originally formed for the purpose of generating and commercializing information
to accelerate the understanding of biological processes and to assist the
research endeavors of pharmaceutical, biotechnology, and life science research
entities. Celera Genomics' original business strategy was the development and
sale of its Celera Discovery System, an online information and discovery system
through which users can access Celera Genomics' genomic and related biological
and medical information. During the 2001 fiscal year, Celera Genomics announced
that it was expanding its operations to include a therapeutics discovery and
development business. During the 2002 fiscal year, Celera Genomics completed a
number of steps, including the following, to further develop its therapeutics
business and establish that business as its primary focus:
o In November 2001, Celera Genomics completed its acquisition of
Axys Pharmaceuticals, Inc. ("Axys"), a small molecule drug
discovery and development company. Celera Genomics believes
that Axys' medicinal and structural chemistry and biology
capabilities and preclinical programs will accelerate the
development of its therapeutics business.
o Celera Genomics announced a number of important management
changes. In January 2002, Celera Genomics announced the
resignation of J. Craig Venter as its President, and in April
2002, Celera Genomics announced the appointment of Kathy
Ordonez, who is also President of Celera Diagnostics, as his
replacement. Also in January 2002, Celera Genomics announced
the appointment of David Block as the Chief Operating Officer
of its therapeutics business. In July 2002, Celera Genomics
announced the appointment of Robert Booth as its Senior Vice
President of Research and Development to lead its therapeutics
research and development efforts.
o In April 2002, Celera Genomics and Applied Biosystems entered
into a marketing and distribution agreement pursuant to which
Applied Biosystems has become the exclusive marketer of Celera
Genomics' Celera Discovery System and related information
assets as part of Applied Biosystems' new Knowledge Business.
The agreement is expected to enable Celera Genomics' executive
team to focus on therapeutics discovery and development.
o Celera Genomics substantially increased the number of research
and development employees assigned to its therapeutics
programs. In addition, in June 2002, Celera Genomics announced
the implementation of a restructuring of its organization
intended to focus the group's resources on therapeutic
discovery and development. The restructuring also involved the
reduction of infrastructure, including personnel and
positions, previously built to support the group's sequencing
activities and online/information business.
Celera Diagnostics is focused on the discovery, development, and
commercialization of novel diagnostic products. In June 2002, Celera Diagnostics
announced the formation of a long-
-2-
<PAGE>
term strategic alliance with Abbott Laboratories to develop, manufacture, and
market a broad range of in vitro molecular diagnostic products for disease
detection, disease progression monitoring, and therapy selection.
In July 2001, the Company announced the Applera Genomics Initiative, a
collaboration among Celera Genomics, Applied Biosystems, and Celera Diagnostics
for commercializing products derived from information obtained through analysis
of variations in the human genome. The Company expects that these products will
be based on the identification of variations in the sequence and expression of
genes, and their association with disease and therapy. As part of this program,
Celera Genomics has prioritized and is resequencing approximately 25,000 genes
from 39 individuals and a chimpanzee, which the Company believes will reveal a
larger number of single nucleotide polymorphisms ("SNPs") with health related
implications than is currently available. SNPs are naturally occurring genetic
variations within a genome that scientists believe can be correlated with
susceptibility to disease, disease prognosis, therapeutic efficiency, and
therapeutic toxicity. Celera Genomics has identified over 100,000 SNPs to date,
a majority of which the Company believes have not been previously identified by
other researchers. In addition, Applied Biosystems has begun the process of
validating the SNPs identified by Celera Genomics to enable their use in
internal research and development and incorporation into commercial products and
services. Celera Genomics intends to use this SNP data in its internal discovery
efforts to improve the prediction of the efficacy and toxicity of drug
candidates. Applied Biosystems intends to use this information to develop new
assays for the study of SNPs and other polymorphisms, and gene expression and
other genomic products. Applied Biosystems' Knowledge Business may also
incorporate this data into its database offerings. Celera Diagnostics expects to
use this information in genotyping and gene expression studies ultimately aimed
at identifying new diagnostic markers. In July 2002, Applied Biosystems'
Knowledge Business announced the launch of its Assays-on-Demand(TM) products, a
collection of ready-to-use assays for gene expression and genotyping.
Assays-on-Demand products represent the first commercial products resulting from
the Applera Genomics Initiative, and the Company believes that Assays-on-Demand
is also the first commercial product line to incorporate genomic data from both
the public and private sector human genome sequencing projects.
Financial Information About Industry Segments
A summary of net revenues from external customers and operating income
(loss) attributable to each of the Company's industry segments for the fiscal
years ended June 30, 2000, 2001, and 2002, and total assets attributable to each
of the Company's industry segments for the fiscal years ended June 30, 2001 and
2002, is incorporated herein by reference to Note 14 on pages 71-83 of the
Company's Annual Report to Stockholders for the fiscal year ended June 30, 2002.
Total assets for the fiscal year ended June 30, 2000, were $1,698.2 million for
Applied Biosystems, $1,413.3 million for Celera Genomics, and $3,083.3 million
for the Company after the effects of ($28.2) million related to intercompany
eliminations. Celera Diagnostics has been presented as a segment during fiscal
2002, and fiscal 2001 amounts have been restated accordingly.
-3-
<PAGE>
Narrative Description of Business
Applied Biosystems Group
Overview. Applied Biosystems is engaged principally in the development,
manufacture, sale, and service of instrument-based systems, reagents, and
software, and the provision of contract services, for life science and related
applications. Its products are used in various applications including the
synthesis, amplification, purification, isolation, analysis, and sequencing of
nucleic acids, proteins, and other biological molecules. The markets for Applied
Biosystems' products span the spectrum of the life sciences industry and
research community, including: basic human disease research; genetic analysis;
pharmaceutical drug discovery, development, and manufacturing; human
identification; agriculture; and food and environmental testing. Universities,
government agencies, and other non-profit organizations engaged in research
activities also use Applied Biosystems' products. For information on revenues
from instruments and consumables for fiscal years 2000 through 2002, refer to
pages 22-24 of Management's Discussion and Analysis in the Company's Annual
Report to Stockholders for the fiscal year ended June 30, 2002, which pages are
incorporated herein by reference.
During the 2001 fiscal year, Applied Biosystems implemented an
organizational realignment away from a business unit structure organized
according to specific technologies to a more integrated marketing and product
development structure. During the 2002 fiscal year, Applied Biosystems
implemented further organizational changes intended to improve upon its new
marketing and product development structure. Under this structure, Applied
Biosystems' business operations are divided among several principal operating
units organized primarily according to their business function. These units are
responsible for various aspects of product and service discovery, development,
marketing, manufacturing, sales, and service. The operating activities of these
units are supported by a shared service organization responsible for the human
resources, finance, communications, legal, intellectual property, and advanced
research functions.
Scientific Background. All living organisms contain four basic
biological molecules: nucleic acids, which include DNA and RNA; proteins;
carbohydrates; and lipids. Biological molecules are typically much larger and
more complex than common molecules. These structural differences make the
analysis of biological molecules significantly more complex than the analysis of
smaller compounds. Although all of these biological molecules are critical for a
cell to function normally, key advances in therapeutics have historically come
from an understanding of either proteins or DNA.
DNA molecules provide instructions that ultimately control the
synthesis of proteins within a cell, a process referred to as gene expression.
DNA molecules consist of long chains of chemical subunits, called nucleotides.
There are four nucleotides - adenine, cytosine, guanine, and thymine - often
abbreviated with their first letters A, C, G, and T. DNA molecules consist of
two long chains of nucleotides bound together to form a double helix. Genes are
individual segments of these DNA molecules that carry the specific information
necessary to construct particular proteins. Genes may contain from several dozen
to tens of thousands of nucleotides. The entire collection of DNA in an
organism, called the genome, may contain a wide range of nucleotides, including
as few as 4 million nucleotides in the case of simple bacteria and 3.1 billion
base pairs of nucleotides in the case of human beings.
-4-
<PAGE>
RNA molecules are similar to DNA in structure and facilitate
intracellular function. There are different types of RNA molecules, each of
which has a different function. For example, messenger RNA, the most common form
of RNA, acts as an intermediary between DNA and protein, transcribing the
genetic code from DNA into protein.
Principally driven by the "biotechnology revolution," and the
increasing focus on DNA, researchers are developing a better understanding of
DNA's role in human disease. An increased appreciation of how DNA ultimately
determines the functions of living organisms has generated a worldwide effort to
identify and sequence genes of many organisms, including the genes that make up
the human genome. The Company believes the best scientific evidence to date
indicates that the number of genes in the human genome that code for proteins is
between 25,000 and 35,000, which is significantly less than had been previously
thought.
Individual research efforts in genetics generally fall into three broad
categories: sequencing, genotyping, and gene expression. In sequencing
procedures, the goal is to determine the exact order of the individual
nucleotides in a DNA strand so that this information can be related to the
genetic activity influenced by that piece of DNA. In genotyping, the goal is to
determine a particular sequence variant of a gene and its particular association
with an individual's DNA. Genotyping is not performed to determine the complete
structure of the gene, but rather is performed to determine if the particular
variant can be associated with a particular disease susceptibility or drug
response. In gene expression studies, the goal is to determine whether a
particular gene is expressed in a relevant biological tissue.
As researchers learn more about DNA and genes, they are also developing
a better understanding of the role of proteins in human disease through efforts
in the field of proteomics, the study of proteins expressed, or encoded, by
genes. Proteins are the products of genes and, after gene expression and
modification, are believed to be the key drivers and mediators of cellular
function and biological system activity. The understanding and treatment of
disease today involves the study of genes and the proteins they code for, and
frequently involves the measurement of a drug's ability to bind to specific
proteins in the body.
The Company believes that gene and protein research will increase as
companies in the pharmaceutical and biotechnology industries seek to accelerate
their drug discovery and development efforts. The Company also believes that
ongoing drug discovery and development efforts will increase research of cells
as researchers seek to further understand how drugs work in the body. These
efforts are expected to create a demand for increased automation and efficiency
in pharmaceutical and biotechnology laboratories. Applied Biosystems' products
are designed to address this demand by combining the detection capabilities of
analytical instruments with advances in automation and laboratory work-flow
design.
Knowledge Business; Online Marketing and Distribution Agreement with
Celera Genomics. In April 2002, Applied Biosystems announced the formation of
its new Knowledge Business for the purpose of developing and marketing products
and services designed to meet the needs of life science researchers in
performing specific biological analysis applications. Products and services
under development or expected to be developed by the Knowledge Business include:
genomic assays and related information, such as DNA sequence information and
annotations linking researchers to relevant databases; products for human
identification; products for agriculture, food, and environmental testing;
products for functional proteomics, the study of protein function; cellular
assays; as well as other information-rich products, services, and analytical
tools. The Knowledge Business is focused on generating value to life science
-5-
<PAGE>
customers through products and services with high information content that
support improved experimental work-flows.
Concurrently with Applied Biosystems' formation of the new Knowledge
Business in April 2002, Celera Genomics and Applied Biosystems entered into a
marketing and distribution agreement pursuant to which Applied Biosystems has
become the exclusive marketer of Celera Genomics' Celera Discovery System and
related information assets. Applied Biosystems is expected to integrate the
Celera Discovery System and other genomic and biological information into the
Knowledge Business.
In exchange for marketing and distribution rights to the Celera
Discovery System and other genomic and biological information and access to the
Celera Discovery System and related information, Applied Biosystems will provide
Celera Genomics with royalty payments on revenues generated by sales of certain
products of the Knowledge Business from July 1, 2002, through the end of fiscal
2012. The royalty rate is progressive, up to a maximum of 5%, with the level of
sales through fiscal 2008. The royalty rate becomes a fixed percentage of sales
starting in fiscal 2009, and the rate declines each succeeding fiscal year
through fiscal 2012. Assays-on-Demand, Assays-by-Design(SM), certain reagents
for arrays, and new database subscriptions sold by the Knowledge Business are
the products subject to royalties. Arrays are consumable devices used to perform
analysis that are designed for, and ready for introduction into, an analytical
instrument.
Under the terms of the marketing and distribution agreement, Celera
Genomics will receive all revenues under, and be responsible for all costs and
expenses associated with, Celera Discovery System and related information
contracts that were in effect on April 1, 2002, the effective date of the
agreement, or which were entered into during a three-month transition period
ended June 30, 2002 (as well as renewals of these contracts, if any). In
addition, Applied Biosystems has agreed to reimburse Celera Genomics for any
shortfall in earnings before interest, taxes, depreciation, and amortization
from these contracts below $62.5 million (as well as renewals, if any) during
the four fiscal years ending with the 2006 fiscal year if the shortfall is due
to changes made to Celera Discovery System products by or at the request of
Applied Biosystems, provided Celera Genomics otherwise continues to perform
under these contracts. During the term of the marketing and distribution
agreement (other than the transition period), Celera Genomics will not be
marketing Celera Discovery System products and services to, and will not be
contracting with, new customers.
Products for the Genomics Market. Customers in the genomics market use
systems for the analysis of nucleic acids for: basic research; pharmaceutical
and diagnostic discovery and development; food and environmental testing;
analysis of infectious diseases; and human identification and forensic analysis.
Applied Biosystems has developed technologies and products to support key
applications in sequencing, genotyping, and gene expression studies. The
following is a description of Applied Biosystems' products for the genomics
market:
o PCR Products. Polymerase chain reaction ("PCR") is a process
in which a short strand of DNA is copied multiple times, or
"amplified," so that it can be more readily detected and
analyzed. Applied Biosystems' PCR product line includes
amplification instruments, known as thermal cyclers, several
combination thermal cyclers and PCR detection systems, and
reagents and software necessary for the PCR amplification and
detection process.
-6-
<PAGE>
Applied Biosystems' model 9700 dual 384-well sample thermal
cycler is the highest capacity thermal cycler it offers. This
instrument supports all key applications in genetic analysis
and fills a significant market need for laboratories
conducting high volume genomic research. This instrument is
referred to as a "dual 384-well" instrument because it can
simultaneously amplify samples on two plastic cards, referred
to by researchers as microtiter plates, each having wells to
hold 384 samples. Applied Biosystems also offers 60 and 96
sample thermal cyclers.
Applied Biosystems is currently adapting its model 9700 dual
384-well thermal cycler to support a new proprietary
microfluidic card system, rather than microtiter plates, for
PCR-based assays, or analyses, such as TaqMan(R) assays
described below. The microfluidic card system is being jointly
developed with 3M Company. Applied Biosystems expects to
complete development and commence sales of the modified model
9700 and the microfluidic cards in the 2003 fiscal year.
Microfluidic cards are consumable laminated plastic sheets
containing microscopic fluid channels and wells. This
consumable, microscopic fluid channel design offers several
advantages:
o it requires less reagent for PCR amplification and
analysis;
o it enables researchers to introduce the initial
sample to a single main fluid channel, which
automatically routs the sample to the assay wells.
Scientists using microtiter plates must either
deposit samples into wells by hand, which is labor
intensive and time consuming, or using robotics,
which is expensive and complex; and
o assay reagents can be deposited on the microfluidic
cards before shipment to researchers, which
eliminates a time consuming step in experiment setup.
During the 2002 fiscal year, Applied Biosystems introduced new
PCR reagent products for high-fidelity, or high accuracy,
amplification of long DNA segments. These are useful in the
determination of haplotypes, which are correlated patterns of
inherited DNA mutations. Haplotypes are just beginning to be
understood by scientists and be used in complex disease-gene
association studies.
Applied Biosystems' Sequence Detection Systems(TM) product
line includes products both for sample preparation and for
analysis. Applied Biosystems' sample preparation products take
whole cells provided by a customer and extract DNA and/or RNA
from them. This DNA or RNA, largely separated from the other
molecules found in cells, can then be analyzed in instruments
largely without interference from those other molecules, such
as proteins. The Applied Biosystems model 6700 Automated
Nucleic Acid Workstation automates this phase of preparation
as well as the two other key phases, depositing the DNA and/or
RNA samples on assay plates and sealing those plates to avoid
contamination prior to analysis. The model 6700 is designed to
substantially decrease the labor and cost involved in
preparing DNA and RNA for analysis. During the 2002 fiscal
year, Applied Biosystems introduced the ABI PRISM(R) 6100
Nucleic Acid PrepStation. This instrument shares some features
of the model 6700, but is less automated and is designed for
researchers seeking an economical alternative to higher
performance, higher priced instruments.
-7-
<PAGE>
Applied Biosystems offers two Sequence Detection System
instruments for analysis of nucleic acids. The ABI PRISM
7900HT Sequence Detection System provides high throughput
analysis of DNA for gene expression and genotyping studies.
This is an automated analyzer that can process more than
250,000 samples in 24 hours for genotyping. Applied Biosystems
is currently developing an optional module for the model 7900,
allowing it to run assays implemented in the new proprietary
microfluidic card format. Applied Biosystems expects to
complete development and commence sales of the optional module
for the model 7900 and the microfluidic cards in the 2003
fiscal year. Also, during the 2002 fiscal year, Applied
Biosystems introduced the ABI PRISM 7000 Sequence Detection
System. This instrument offers many of the same specifications
as the model 7900, but in a less automated and lower
throughput system designed for researchers seeking an
economical alternative to higher performance and higher priced
instruments.
The Sequence Detection Systems product line uses TaqMan
chemistry, a unique PCR technology designed by the Roche Group
and developed by Applied Biosystems. TaqMan chemistry can be
used both for measurement of RNA gene expression and for DNA
genotyping. TaqMan chemistry detects the product of PCR
amplification and quantifies the initial sample during the
amplification process. This technique is referred to as
quantitative real-time PCR. The Sequence Detection Systems
instruments analyze a sample by measuring fluorescence
resulting from the reaction of the TaqMan chemistry and the
sample. This product line has been widely accepted in the
pharmaceutical discovery research market.
o Genetic Analysis Products. Genetic analysis uses
electrophoresis to separate DNA molecules based on their
differing lengths and the resulting differences in the speeds
at which they will pass through a separation medium. Applied
Biosystems' genetic analysis products, referred to as DNA
sequencers or genetic analyzers, can be used to perform both
DNA sequencing and fragment analysis.
DNA sequencing is used to determine the exact order of
nucleotides in a strand of DNA. Typically, fluorescent tags
are used to generate labeled products, with each of the four
different nucleotides labeled with a different color. The
labeled fragments are run through an electrophoresis
separation medium and detected. DNA fragment analysis is used
to determine the size, quantity, or pattern of DNA fragments.
DNA sequencing instruments have been used extensively to
obtain the DNA sequence of the human genome and of other
species. DNA sequencing instruments are also being used to
help interpret genomes that have been sequenced. For example,
as part of the Applera Genomics Initiative, Celera Genomics is
in the process of resequencing approximately 25,000 genes from
39 individuals and a chimpanzee to find the differences
between them. The Company believes this will reveal a larger
number of SNPs with health related implications than are
currently available.
All of Applied Biosystems' genetic analysis instruments now
use capillaries, which are tubes through which a DNA sample
moves during electrophoresis. Capillary systems have higher
throughput and greater automation than those based on
slab-gels, an older and less efficient technology. During the
2002 fiscal year, Applied Biosystems introduced three new DNA
sequencing instruments: the model 3730xl DNA Analyzer, a
sequencer with 96 capillaries; the model 3730 DNA Analyzer, a
sequencer with 48 capillaries; and the model 3100-Avant
Genetic Analyzer, a
-8-
<PAGE>
sequencer with 4 capillaries. In addition, Applied Biosystems
offers the model 3100 Genetic Analyzer, a 16 capillary
sequencer, and the model 310 Genetic Analyzer, a one capillary
sequencer, as well as sequencing reagents and analysis
software. Applied Biosystems has discontinued its model 377
DNA Sequencer, the last of its instruments to use slab-gel
technology.
The model 3730xl DNA Analyzer has superseded the 96 capillary
model 3700 DNA Analyzer. Applied Biosystems expects to
continue to offer the model 3700 only for a limited time
during the remainder of 2002. At the time of its introduction
in 1999, the model 3700 DNA Analyzer represented a significant
advance in DNA sequencing technology because it could perform
high throughput analysis of samples in unattended operation.
The model 3700 DNA Analyzer was the principal instrument used
by Celera Genomics for sequencing, and the Company believes
the model 3700 DNA Analyzer is also the principal instrument
used by the Human Genome Project for its sequencing projects.
The model 3730xl DNA Analyzer offers significant increases in
data quality, throughput, and cost effectiveness over the
model 3700 DNA Analyzer. Because of these advances, the model
3730xl DNA Analyzer is able to read longer DNA fragments than
its predecessor. For a given sequencing project, this means
that customers will need to process fewer samples, lowering
their preparation costs. Also, by incorporating a more
sensitive optical design, the model 3730xl is able to complete
the same analysis with lower reagent consumption per sample.
The 48-capillary model 3730 DNA Analyzer, which incorporates
the same technological advances as the model 3730xl, can be
upgraded to become a 96-capillary model 3730xl.
The 16-capillary model 3100 Genetic Analyzer was introduced in
the 2000 fiscal year. It was designed for use by academic
programs and commercial laboratories. It was the technological
precursor of the model 3730 DNA Analyzer and incorporates many
of the same features, though it has lower throughput and is
less expensive. The 4-capillary model 3100-Avant Genetic
Analyzer is a reduced capacity instrument derived from the
model 3100 Genetic Analyzer, which has a lower cost than the
model 3100. A model 3100-Avant Genetic Analyzer can be
upgraded to a model 3100.
Applied Biosystems offers several sequencing chemistries
optimized for various customer requirements. Samples prepared
using these chemistries are then analyzed on Applied
Biosystems sequencer instruments.
o DNA Synthesis. DNA synthesizers produce synthetic polymers of
DNA, called oligonucleotides, for genetic analysis. The
synthetic DNA is an essential reagent for PCR and DNA
sequencing and is also used in drug discovery applications.
DNA synthesis is used both by companies performing high
throughput synthesis as a service as well as individual
laboratories that synthesize DNA for their own use. Applied
Biosystems offers several models of synthesizers and
supporting reagents for the needs of its different customers.
Applied Biosystems also provides custom synthesis, in which
oligonucleotides are made to order and shipped to customers.
o PNA. Applied Biosystems has a license, which is exclusive for
certain applications, to manufacture and sell peptide nucleic
acid ("PNA") for molecular biology research, diagnostic, and
certain other applications. PNA resembles DNA in its chemical
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structure except that it has a neutral peptide-like
"backbone," whereas DNA has a negatively charged sugar
phosphate backbone. The unique chemical structure of PNA
enhances its affinity and specificity as a DNA or RNA probe,
which is used to search for DNA and RNA sequences, which are
complementary to the probe. PNA may be used in many areas,
including basic research, pharmaceutical discovery, diagnostic
development, and food and environmental testing. During the
2002 fiscal year, Applied Biosystems acquired additional
rights to PNA technology, particularly exclusive rights in the
field of diagnostics, through its acquisition of Boston
Probes, Inc. and a party related to Boston Probes.
o Genomic Assays. Through its Knowledge Business, Applied
Biosystems offers its Assays-on-Demand product lines and its
Assays-by-Design service. Assays are chemical tests used to
measure a particular biochemical quantity. A genomic assay
combines a set of pre-selected oligonucleotides, or synthetic
polymers of DNA, with other analytical reagents that allow a
researcher to measure differences between samples of genetic
material. For example, a gene expression assay is a chemical
test to measure how much RNA is being produced from a specific
gene in the cells of a tissue sample. A genotyping assay is a
chemical test to measure the presence or absence of a specific
genetic sequence variation or mutation among DNA samples from
different populations that can be used to correlate genetic
traits with physical traits such as disease susceptibility or
drug response.
In July 2002, the Knowledge Business announced the launch of
its Assays-on-Demand product line, a collection of assays for
gene expression and genotyping that incorporates genome data
into a tool that is ready to use for experimentation.
Assays-on-Demand is the first commercial product resulting
from the Applera Genomics Initiative, and Applied Biosystems
believes that Assays-on-Demand is also the first commercial
product line to incorporate genomic data from both the public
and private sector human genome sequencing projects. The
Knowledge Business also offers the Assays-by-Design service
for the manufacture of custom-made assays. Researchers using
the Assays-by-Design service supply the desired target and
Applied Biosystems designs and manufactures an assay for that
target using Applied Biosystems' proprietary software
algorithms.
Researchers traditionally have used "home brew" assays, which
are assays that researchers both design and prepare themselves
in their laboratories, a process that is relatively time
consuming and expensive. Applied Biosystems believes that its
Assays-on-Demand product line offers significant advantages to
researchers compared with home brew assay design. These
advantages include:
o facilitation of experiments with many genes in
parallel;
o substantial reduction in experiment setup time;
o decreased assay cost; and
o creation of a set of standard and validated assays
that enable comparisons of data between laboratories.
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Applied Biosystems' current Assays-on-Demand and
Assays-by-Design offerings are designed to be used with
Applied Biosystems' Sequence Detection Systems PCR
instruments.
Products for the Proteomics Market. Genes code for proteins in
biological organisms, and proteins are the key biological molecules that
function in all aspects of living things such as growth, development, and
reproduction. Differences in the types or amounts of specific proteins in
biological systems are thought to be the primary differences between healthy and
diseased systems or organs. A majority of drugs to treat human disease bind to
and affect proteins. Proteins are large biological molecules made up of
peptides, and peptides are made up of amino acids chemically linked together in
long chains. Customers in the proteomics research market need systems for the
analysis of proteins and peptides for the purpose of discovery of drug targets,
protein therapeutics, and diagnostics. Applied Biosystems has developed products
for the identification, characterization, and measurement of expression of
proteins and peptides. The following is a description of Applied Biosystems'
products for the proteomics market:
o Mass Spectrometry. Mass spectrometry has become very useful
for the analysis of large molecules of biological importance
such as proteins. Analysis of proteins and other molecules by
mass spectrometry involves the very accurate measurement of
the mass, or size, of components in a sample, such as the
measurement of the multiple different peptides that make up a
defective protein. The technique involves the measurement of
these molecules in instruments utilizing very high vacuum and
sensitive electronics capable of measuring extremely fine
differences in very small quantities of complex samples with
multiple components. The technique of mass spectrometry
requires three key elements be incorporated into the
instrument:
o a unique sample preparation process call ionization
to charge the molecules for analysis;
o mass analysis, which involves the separation of
molecules based on their mass; and
o detection, which is the electronic measurement of the
mass and the relative amounts of molecule present.
The market for mass spectrometry is served by a wide range of
instrument types based on a variety of technologies for both
ionization and mass analysis and combined together in
different combinations in different instruments. The different
instrument types, technologies, and combinations result in
differing performance characteristics and price levels, and
the suitability of any particular system for any researcher or
research laboratory will depend on the nature of the work
being performed and the capital budget of the researcher or
research laboratory.
Applied Biosystems sells instruments with ionization by either
a laser based system called MALDI, which refers to matrix
assisted laser desorption ionization, or a high voltage
electric system called ESI, which refers to electrospray
ionization. Applied Biosystems also has a variety of mass
analysis technologies which separate and measure the mass of
molecules in a sample. These include TOF, which refers to time
of flight, which measures mass based on flight time in an
electric field under vacuum; and quad, which refers to
quadrupole, and ion trap, both of which measure
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mass using radio frequencies and electric charges though using
distinctly different technologies. Applied Biosystems and
Applied Biosystems/MDS SCIEX Instruments, a joint venture
between Applied Biosystems and MDS Inc. of Canada, supply a
broad family of mass spectrometry products for the proteomics
market that involve different combinations of these
technologies. Customers select from this range of product
types based on their workflows, sample types, preferences, and
experience.
Mass spectrometry products are often referred to or named
based on their sample preparation and mass analysis
technologies. For example, a "MALDI TOF" instrument is an
instrument that uses MALDI to charge molecules for analysis
and TOF for mass analysis. Also, mass spectrometry instruments
are often referred to or named based on whether they are
connected to liquid chromatography separation devices, which
devices are used for sample preparation prior to analysis
using mass spectrometry. An "LC/MS" system is a liquid
chromatography device connected directly to a mass
spectrometry instrument, and an "LC/MS/MS" system is a liquid
chromatography device coupled with tandem mass spectrometry
instruments. Tandem mass spectrometry enables a more detailed
and accurate analysis of the components of the molecules being
studied.
The Applied Biosystems MALDI TOF product line includes the
Voyager(TM) DE STR and DE PRO instruments and the Voyager
based Proteomics Solution 1(TM) systems for automated protein
identification. During the 2002 fiscal year, Applied
Biosystems introduced the 4700 Proteomics Analyzer with
TOF/TOF(TM) optics, which was designed to address the needs of
proteomic researchers for increased speed and throughput as
well as enhanced data quality and molecular information. This
instrument incorporates a new high speed MALDI system with a
tandem TOF mass analyzer, and Applied Biosystems believes it
is the only instrument currently available that offers this
combination of these advanced features.
The ESI based product line from Applied Biosystems/MDS SCIEX
Instruments includes the API QSTAR(R) Pulsar LC/MS/MS system
which is a hybrid quadrupole - time of flight instrument
(often referred to as a Qq-TOF instrument). The API QSTAR
Pulsar LC/MS/MS system offers a choice of sample introduction
technologies and therefore is a highly flexible life science
mass spectrometer and proteomics instrument. During the 2002
fiscal year, Applied Biosystems/MDS SCIEX Instruments
introduced the Q TRAP(TM) LC/MS/MS system, which uses ESI
ionization. Applied Biosystems believes that this new mass
spectrometer, which can be used for both protein and small
molecule analysis, has performance advantages over
competitively priced mass spectrometry instruments. Under the
terms of the joint venture agreement with MDS Inc., Applied
Biosystems has the exclusive worldwide distribution rights to
the LC/MS systems manufactured for the joint venture by the
MDS SCIEX Division of MDS Inc. for the analytical instruments
market.
In addition to the range of mass spectrometry instruments and
software, Applied Biosystems has developed and commercialized
the ICAT(TM) reagent technology of Dr. Ruedi Aebersold and
others at the University of Washington. This chemistry
technology, when utilized with various mass spectrometry
systems, enables the quantitation and identification of
proteins in experiments that compare normal and
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diseased cells or samples. The ICAT reagent approach now
offers laboratories a new way of running protein experiments
using mass spectrometry and is the foundation of an expanding
family of Applied Biosystems consumables, software, and
systems for proteomics.
o Biochromatography. Researchers studying complex protein
samples through mass spectrometry must first prepare these
samples and separate them into the components to be analyzed.
A common and important technique for the separation, and in
some cases purification, of biological molecules is generally
referred to as biochromatography, a process by which molecules
are separated according to one or more of their physical
properties such as their size, shape, charge, or affinity to
other molecules.
Applied Biosystems' biochromatography products use liquid
chromatography. Liquid chromatography is a process that
separates molecules by passing them, in a liquid, across a
stationary or solid medium such as chemically modified plastic
beads specially designed for this process. Separation occurs
because different molecules, which have different affinities
to the beads, will migrate, or pass, across the beads at
different rates. Instruments that perform liquid
chromatography under high pressure are referred to as high
pressure liquid chromatography, or HPLC, instruments.
Applied Biosystems believes that its biochromatography
products can be incorporated readily into the proteomics
discovery process and the development and manufacturing
process of protein based pharmaceutical products. Applied
Biosystems also believes its biochromatography products offer
productivity advantages, enabled by high speed separation
combined with high capacity and resolution, over competitive
product offerings.
Applied Biosystems' patented Perfusion Chromatography(R)
technology uses proprietary flow-through POROS(R) beads and
BioCad(R) Chromatography workstations to reduce the time
necessary for the purification and analysis of biological
molecules. Applied Biosystems' Vision(TM) Workstation is a
robotic-equipped chromatography instrument marketed to life
science researchers that allows for the separation of proteins
followed by analysis of the fractions collected in an
unattended operation. Together, the automated platform and
flow-through beads are designed to increase throughput and
efficiency for the separation and purification of biological
molecules.
o Protein Sequencing and Synthesis. Proteins are large
biological molecules and are made of peptides, and peptides
are made of amino acids chemically linked together in long
chains. Protein sequencers provide information about the
sequence of amino acids that make up a given protein by
chemically disassembling the protein and analyzing the amino
acids. The Procise(R) Protein Sequencing system uses a protein
sequencing chemistry known as Edman chemistry to sequence a
peptide, one amino acid at a time, and in turn to identify or
characterize the protein that contains the peptide.
Synthetically produced peptides are used in understanding
antibody reactions and as potential drugs or drug analogs.
Applied Biosystems' 433A Peptide Synthesis system is designed
for the quality synthesis of peptides, peptide analogs, and
small
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proteins. Applied Biosystems also manufactures and sells
proprietary synthesis reagents and fine chemicals for use with
this and other products.
Products for the Drug Metabolism and Pharmacokinetics Market. Applied
Biosystems has a number of mass spectrometry products that life science
researchers use to analyze small molecules. Small molecules studied in life
science research are typically smaller than peptides and include, for example:
o drugs;
o metabolites, the compounds resulting from the body's acting
upon a drug, and present in bodily fluids such as blood or
urine; and
o other small biological molecules found naturally in the human
body such as hormones, which affect physiological activity by
sending signals to cells and organs, and cholesterol, which
the body uses, for example, to build cells and produce
hormones.
Mass spectrometry instruments are especially important for
pharmaceutical researchers studying pharmacokinetics, the measurement of the
bodily absorption, distribution, metabolism, and excretion of drugs.
Pharmacokinetic information is required by the United States Food and Drug
Administration and other regulatory agencies for the approval of drugs. This
application requires instruments which have a high resolution, or the ability to
distinguish among different molecules with similar masses, and high sensitivity,
or the ability to identify very small quantities of molecules, because the
amounts of the drugs and their metabolites are very low and the mixtures are
very complex. Researchers can perform the required pharmacokinetic analysis with
LC/MS/MS systems that have been developed and refined by Applied Biosystems/MDS
SCIEX Instruments.
Applied Biosystems/MDS SCIEX Instruments offers a broad product line
for small molecule and pharmacokinetics researchers. This product line includes
the API 2000(TM), API 3000(TM), and API 4000(TM) systems, all of which are
triple quadrupole LC/MS/MS instruments. These instruments offer a range of
sensitivity at varying costs, the API 4000 system being the most sensitive. The
API product line has been widely accepted by pharmaceutical researchers, and the
Company believes the API 4000 system is the most sensitive mass spectrometry
instrument available to this research market. Applied Biosystems/MDS SCIEX
Instruments also offers API QSTAR Pulsar LC/MS/MS system, which is a quadrupole
- - time of flight instrument (often referred to as a Qq-TOF instrument). This
instrument offers higher resolution and mass accuracy, or the ability to
accurately determine the mass of a molecule, than the API 2000, 3000, and 4000
systems, which is particularly useful to researchers seeking to identify unknown
molecules such as metabolites.
In the 2002 fiscal year, Applied Biosystems/MDS SCIEX Instruments
introduced the Q TRAP(TM) LC/MS/MS system, which uses ESI ionization. Applied
Biosystems believes that this new mass spectrometer, which can be used for both
protein and small molecule analysis, has advantages over competitively priced
mass spectrometry instruments.
Cell Biology and Functional Proteomics Products. Within the Knowledge
Business, a new product group has been formed to develop products for early
phase drug discovery and development. This group is focused on products that
reveal gene and protein function. This
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group also intends to develop products that reveal the biological reactions that
take place in cells, which researchers refer to as biological pathways. Some
scientists believe that a better understanding of this information may enable
structure based drug design, which refers to the design of drugs based on the
molecular structure of the intended drug target. This method can be contrasted
with the traditional approach to drug development, whereby researchers seek to
determine whether chemicals may work as drugs through trial-and-error
experimentation. The following is a description of the existing products of this
group as well as certain products in development:
o Cell Based Detection Systems. Through its strategic alliance
with Becton, Dickinson and Company, Applied Biosystems has
co-developed a fluorometric microvolume assay technology
system, referred to as an FMAT system. This instrument system
uses proprietary scanning technology to rapidly detect and
measure fluorescence associated with objects as small as a
single cell. This system was designed for pharmaceutical
researchers needing a high throughput screening system for the
analysis of cells.
o Chemiluminescence Products. Applied Biosystems' high
throughput screening products include reagents and
chemiluminescent plate readers that measure light emitted by a
sample. Chemiluminescence is the conversion of chemical energy
stored within a molecule into light. Chemiluminescent
substrates are substances that emit light in the presence of
another target substance that is tagged, or chemically linked,
with an enzyme. Chemiluminescent technology is used in life
science research and commercial applications including drug
discovery and development, clinical diagnostics, gene function
study, molecular biology, and immunology research. Applied
Biosystems also licenses its technology to companies selling
bioanalytical and clinical diagnostic tests.
o Functional Proteomics Products. During the 2002 fiscal year,
Applied Biosystems entered into licensing, supply, and
collaboration agreements with HTS Biosystems, Inc. to jointly
develop and commercialize a functional proteomics system based
on HTS Biosystems' high throughput affinity screening
technology. This technology enables functional proteomics
research, or the study of protein function, by analyzing
proteins based on the way they bind to each other. Under these
agreements, Applied Biosystems and HTS Biosystems also plan to
jointly further develop and commercialize HTS Biosystems'
existing surface plasmon resonance technology, referred to as
SPR technology. SPR technology, used in functional genomics
research, or the study of gene function, enables the high
throughput study of protein interactions in a more
cost-effective and efficient manner than other existing
technologies. The study of protein interactions is an
important part of functional genomics research because genes
contain the code for proteins.
Applied Genetic Analysis Products. Applied Biosystems has developed,
and expects to continue to develop, products and services specially designed for
specific markets, with a focus in the areas of human identification, and
environmental and food testing.
For example, Applied Biosystems develops systems that are used by crime
laboratories and other agencies to identify individuals based on their DNA.
Applied Biosystems believes these systems are most often used in cases of
violent crime where DNA found at the crime scene is matched with DNA from
suspects. The use of DNA in some criminal investigations may help
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solve the crimes and may reduce the cost of the investigation, and the Company
believes there is a growing recognition of the validity of the use of DNA
testing and DNA databases for this purpose. The systems are also used in the
identification of human remains at disaster sites.
Also, Applied Biosystems is developing technologies for bacterial and
fungal detection, characterization, and identification. It has developed the
MicroSeq 16S rDNA Bacterial Sequencing Kit to accurately identify
microorganisms. TaqMan Pathogen Detection Kits relying on Sequence Detection
Systems instrument platforms are under development. These kits are being
developed to rapidly detect bacterial contamination and to detect and analyze
genetically modified organisms in foods.
Information Products. The Knowledge Business currently offers, and
intends to further develop, products that offer information content designed to
assist research and development efforts. The information products currently
offered by the Knowledge Business include the Celera Discovery System database,
as well as software, for use in combination with the Knowledge Business assay
products, designed to facilitate and make more efficient experiment design and
biological data analysis.
Informatics Products and Services. The Knowledge Business develops,
markets, and distributes informatics software and services used to integrate and
automate life sciences research, development, and manufacturing laboratories.
The science of informatics seeks to blend biology and computing to transform
massive amounts of data into useful information. Informatics technology that is
specifically designed for biological information is commonly referred to as
bioinformatics technology.
Users of Knowledge Business informatics products and services are
typically involved in gene mapping, drug discovery, drug development, and drug
manufacturing. The Knowledge Business offers various software products for
laboratory information management. These products are designed to facilitate
sample tracking, data collection, data analysis, and data mining. The Knowledge
Business also offers informatics consulting services through its Rapid
Integration Solutions Program. These system integration services are designed
for laboratories seeking greater automation and integration of lab processes.
Knowledge Business consultants assist customers in selecting and integrating
technologies to streamline and accelerate their genomics, proteomics, and high
throughput screening activities.
Marketing and Distribution. The markets for Applied Biosystems'
products and services span the spectrum of the life sciences industry,
including: basic human disease research; genetic analysis; pharmaceutical drug
discovery, development, and manufacturing; human identification; agriculture;
and food and environmental testing. Universities, government agencies, and other
non-profit organizations engaged in research activities also use Applied
Biosystems' products. Each of these markets has unique requirements and
expectations that Applied Biosystems seeks to address in its product offerings.
Applied Biosystems' customers are continually searching for processes and
systems that can perform tests faster, more efficiently, and at lower costs.
Applied Biosystems believes that its focus on automated and high throughput
systems enables it to respond to these needs.
The size and growth of Applied Biosystems' markets are influenced by a
number of factors, including:
o technological innovation in methods for analyzing biological
data;
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o government funding for basic and disease-related research,
such as in heart disease, AIDS, and cancer;
o application of biotechnology to basic agricultural processes;
o increased awareness of biological contamination in food and
the environment; and
o research and development spending by biotechnology and
pharmaceutical companies.
In the United States, Applied Biosystems markets the largest portion of
its products directly through its own sales and distribution organizations,
although certain products are marketed through independent distributors and
sales representatives. Sales to major markets outside of the United States are
generally made by Applied Biosystems' foreign-based sales and service staff, but
are also made directly from the United States to foreign customers in some
cases. In some foreign countries, sales are made through various representative
and distributorship arrangements. Applied Biosystems owns or leases sales and
service offices in the United States and in foreign countries through its
foreign sales subsidiaries and distribution operations. None of Applied
Biosystems' products are distributed through retail outlets.
Raw Materials. There are no specialized raw materials that are
particularly essential to the operation of Applied Biosystems' business. Applied
Biosystems' manufacturing operations require a wide variety of raw materials,
electronic and mechanical components, chemical and biochemical materials, and
other supplies, some of which are occasionally found to be in short supply.
Applied Biosystems has multiple commercial sources for most components and
supplies, but it is dependent on single sources for a limited number of such
items, in which case Applied Biosystems normally secures long-term supply
contracts. In some cases, if a supplier discontinues a product, it could
temporarily interrupt the business of Applied Biosystems.
Patents, Licenses, and Franchises. Applied Biosystems' products are
based on complex, rapidly developing technologies. Some of these technologies
are covered by patents owned by Applied Biosystems, and others are owned by
third parties and used by Applied Biosystems under license. Applied Biosystems
has pursued a policy of seeking patent protection in the United States and other
countries for developments, improvements, and inventions originating within its
organization that are incorporated into Applied Biosystems' products or that
fall within its fields of interest. Applied Biosystems' business depends on its
ability to continue developing new technologies which can be patented, or
licensing new technologies from third parties that own patents in such
technologies. The rights that Applied Biosystems considers important to its
current business include the following:
o Applied Biosystems has rights to PCR technology under a series
of agreements with the Roche Group, which owns the patents
covering the PCR process. The first of these patents expires
in 2005 in the United States, and in 2006 in Europe and
certain other jurisdictions. In July 2000, Applied Biosystems
and the Roche Group agreed to expand the markets each company
serves with products incorporating PCR. This arrangement will
allow both companies to develop and market products for all
potential uses of PCR. Additionally, Applied Biosystems
continues to distribute products the Roche Group manufactures
for research and non-diagnostic applications.
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o Applied Biosystems also licenses rights under certain patents
assigned to the California Institute of Technology relating to
DNA sequencing. These patents expire between 2009 and 2018 in
the United States, and in 2005 in Europe and certain other
jurisdictions.
o Applied Biosystems also licenses rights under certain patents
assigned to the University of Colorado relating to
oligonucleotide synthesis. The last of these patents in the
United States will expire in 2007. The corresponding foreign
patents have expired except for certain patents in Canada and
Mexico, which expire in 2003.
From time to time, Applied Biosystems has asserted that various
competitors and others are infringing its patents; and similarly, from time to
time, others have asserted that Applied Biosystems was or is infringing patents
owned by them. These claims are sometimes settled by mutual agreement on a
satisfactory basis and result in the granting of licenses by or to Applied
Biosystems. However, the Company cannot make any assurances as to the outcome of
any pending or future claims.
Applied Biosystems has established a licensing program that provides
industry access to certain of its intellectual property.
Backlog. Applied Biosystems' total recorded backlog at June 30, 2001,
was $202.3 million, which included $5.0 million of orders from Celera Genomics.
Applied Biosystems' total recorded backlog at June 30, 2002 was $235.8 million,
which included $4.6 million of orders from Celera Genomics and $3.0 million of
orders from Celera Diagnostics. It is Applied Biosystems' general policy to
include in backlog only purchase orders or production releases that have firm
delivery dates within one year. Recorded backlog may not result in sales because
of cancellation or other factors. It is anticipated that all orders included in
the current backlog will be delivered before the close of fiscal year 2003.
Competition. The markets in which Applied Biosystems operates are
highly competitive and are characterized by the application of advanced
technology. A number of Applied Biosystems' competitors are well known
manufacturers with a high degree of technical proficiency. In addition,
competition is intensified by the ever-changing nature of the technologies in
the industries in which Applied Biosystems is engaged.
Applied Biosystems' principal competition comes from specialized
manufacturers that have strengths in narrow segments of the life science
markets. Applied Biosystems competes principally in terms of the breadth and
quality of its product offerings, and its service and distribution capabilities.
While the absence of reliable statistics makes it difficult to determine Applied
Biosystems' relative market position in its industry segment, Applied Biosystems
believes it is one of the principal suppliers in its fields, marketing a broad
line of instruments and life science systems.
Research, Development, and Engineering. Applied Biosystems is actively
engaged in basic and applied research, development, and engineering programs
designed to develop new products and to improve existing products. Research,
development, and engineering expenses for Applied Biosystems totaled $141.2
million in fiscal 2000, $184.5 million in fiscal 2001, and $219.6 million in
fiscal 2002. The Company expensed $255.6 million in fiscal 2000, $323.4
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million in fiscal 2001, and $381.9 million in fiscal 2002 for Company-sponsored
research, development, and engineering activities.
Applied Biosystems' new products generally originate from four sources:
internal research and development programs; external collaborative efforts with
technology companies and individuals in academic institutions; devices or
techniques that are generated in customers' laboratories; and business and
technology acquisitions.
Research and development projects at Applied Biosystems include: the
development of improved electrophoresis techniques for DNA analysis; real-time
PCR for nucleic acid quantification; innovative approaches to cellular analysis;
sample preparation; information technologies; and mass spectrometry.
Environmental Matters. Applied Biosystems is subject to federal, state,
and local laws and regulations regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment, in
those jurisdictions where Applied Biosystems operates or maintains facilities.
Applied Biosystems does not believe that any liability arising under, or
compliance with, environmental laws or regulations will have a material effect
on its business, and no material capital expenditures are expected for
environmental control.
Celera Genomics Group
Overview. Celera Genomics is engaged principally in integrating
advanced technologies to discover and develop new therapeutics. Celera Genomics
intends to leverage its capabilities in proteomics, bioinformatics, and genomics
to identify and validate drug targets and diagnostic marker candidates, and to
discover and develop novel therapeutic candidates. Celera Genomics expects to
use these capabilities with its molecular and cell biology, medicinal and
computational chemistry, pharmacology, and other drug development technologies
to optimize the potency, selectivity, and physical properties of new drug
candidates. Currently, Celera Genomics has collaborations with large
pharmaceutical companies and internal programs for discovering therapeutics for
inflammatory diseases, including asthma, osteoporosis, and rheumatoid arthritis.
Celera Genomics also has internal programs for discovering therapeutics for the
treatment of thrombosis and various types of cancer, including pancreatic and
lung cancer.
Celera Genomics was originally formed for the purpose of generating and
commercializing information to accelerate the understanding of biological
processes and to assist the research endeavors of pharmaceutical, biotechnology,
and life science research entities. A key component of Celera Genomics' original
business strategy was the development and sale of its Celera Discovery System,
an online information and discovery system through which users can access Celera
Genomics' genomic and related biological and medical information.
Development of Therapeutics Business. During its 2001 fiscal year,
Celera Genomics announced that it was expanding its operations to include
therapeutics discovery and development in addition to its online database
business. During the 2002 fiscal year, Celera Genomics completed a number of
steps, including the following, to further develop its therapeutics business and
establish that business as its primary focus:
o In November 2001, Celera Genomics completed the acquisition of
Axys, a small molecule drug discovery and development company.
Celera Genomics believes that
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Axys' medicinal and structural chemistry and biology
capabilities and preclinical programs will accelerate the
development of its therapeutics business.
o Celera Genomics announced a number of important management
changes. In January 2002, Celera Genomics announced the
resignation of J. Craig Venter, Ph.D. as its President, and in
April 2002, Celera Genomics announced the appointment of Kathy
Ordonez, who is also President of Celera Diagnostics, as his
replacement. Before her affiliation with the Company, Ms.
Ordonez served as the President and Chief Executive Officer of
Roche Molecular Systems for nine years. Also in January 2002,
Celera Genomics announced the appointment of David Block,
M.D., as the Chief Operating Officer of its therapeutics
business. Prior to his employment by the Company, Dr. Block
was employed by DuPont Pharmaceuticals in various capacities
for approximately 12 years, including Vice President for
International Operations. In July 2002, Celera Genomics
announced the appointment of Robert Booth, Ph.D., as its
Senior Vice President of Research and Development to lead its
therapeutics research and development efforts. Prior to his
appointment by the Company, Dr. Booth was employed by
Hoffmann-La Roche in various capacities for approximately 13
years, including as Senior Vice President responsible for all
research and early development of inflammatory, viral,
respiratory, and bone disease products.
o In April 2002, Celera Genomics and Applied Biosystems entered
into a marketing and distribution agreement pursuant to which
Applied Biosystems has become the exclusive marketer of Celera
Genomics' Celera Discovery System and related information
assets as part of Applied Biosystems' new Knowledge Business.
The agreement is expected to enable Celera Genomics' executive
team to focus on therapeutic discovery and development.
o Celera Genomics substantially increased the number of research
and development employees assigned to therapeutic programs.
Also, in June 2002, Celera Genomics announced the
implementation of a restructuring of its organization intended
to focus the group's resources on therapeutic discovery and
development. The restructuring also involved the reduction of
infrastructure, including personnel and positions, previously
built to support the group's sequencing activities and
online/information business.
Celera Genomics may pursue both small molecule and antibody
therapeutics. Small molecule therapeutics are low molecular weight synthetic
pharmaceuticals, whereas antibody therapeutics are generally large molecular
weight protein-based biological compounds. Celera Genomics plans to
commercialize discoveries, either at the target or therapeutic level, through
internal product development, collaborations, or licensing of intellectual
property.
Scientific Approach to Discovery. Celera Genomics expects its
scientific approach in therapeutic discovery to be as follows:
o Proteomics. Celera Genomics expects that its discovery program
will use high throughput proteomics to identify proteins which
are associated with the onset or progression of disease, and
which may therefore be potential targets for therapeutic
intervention or markers for disease detection or progression.
In the 2002 fiscal year,
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Celera Genomics completed the construction of its proteomics
facility. Celera Genomics is currently scaling up the
operations of the proteomics facility, which is expected to
become fully operational during the Company's 2003 fiscal
year. Using its proteomics technology, Celera Genomics plans
to generate and identify proteins as therapeutic targets in
the areas of pancreatic and lung cancer. Celera Genomics also
intends to initiate a proteomics program for an additional
disease during the 2003 fiscal year.
Celera Genomics plans to evaluate differential protein
patterns in biological samples from both healthy and diseased
individuals. Celera Genomics expects to evaluate sera samples,
which are readily available, as well as tissue samples, which
are less readily available. Celera Genomics has designed
advanced methods to separate cellular and subcellular
components of biological samples and to capture from these
components proteins belonging to druggable target classes.
Druggable target classes are related proteins which in the
past have been successfully used in the pharmaceutical
industry as points of therapeutic intervention. Celera
Genomics intends to use advanced chromatography and mass
spectrometer systems that are amenable to high throughput
quantitation and identification of proteins. Celera Genomics
expects to use its assembled human and mouse genomes and
proprietary software and algorithms to identify proteins
associated with diseases.
Celera Genomics expects to use a variety of methodologies to
validate targets and markers. Validation refers to the process
whereby the biological relevance of a particular target or
marker, and, therefore, its potential therapeutic or
diagnostic relevance, is confirmed. Celera Genomics intends to
use immunohistochemistry, or the identification of proteins in
tissues and cells using antibody reagents, to refine its
understanding of therapeutic targets and diagnostic markers of
interest and, for example, to identify expression profiles
that would support or preclude meaningful progression of the
drug targets. For targets and markers of interest, Celera
Genomics intends to perform tests to determine their relevance
across a broad range of tissues and diseases. Celera Genomics
has obtained and expects to continue accessing further
validation capabilities through collaborations. For example,
in 2001, Celera Genomics entered into a collaboration with
SomaLogic, Inc. to access its aptamer technology, which is
used to identify protein expression and function.
o Bioinformatics. Celera Genomics believes that its
bioinformatics infrastructure will accelerate the discovery
process of identifying targets and markers. For example,
Celera Genomics expects to develop the capability to perform
simulated, computer-based experimentation, which Celera
Genomics believes would minimize or eliminate the need to
perform more labor intensive experiments in the laboratory.
Also, Celera Genomics believes that it can develop proprietary
algorithms for use in its large scale computing infrastructure
for the extraction of data from proteomics experiments and the
integration of this data with genome, gene expression, and
protein characterization information, scientific literature,
and the patent status of possible targets or markers. Celera
Genomics believes the application of these algorithms to this
data could be used to facilitate the identification of targets
and markers. However, Celera Genomics' ability to develop
these capabilities is unproven, and, if developed, their
utility in the therapeutics discovery and development process
is uncertain.
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o Genomics. As a complementary approach to the proteomics
methods described above, Celera Genomics expects to use
genomics to identify therapeutic targets. Celera Genomics
intends to further characterize novel genes, including those
for which the Company has been granted patents or for which it
has filed patent applications, by conducting in vitro cell
studies and in vivo animal studies. In vitro refers to testing
or other activities performed outside the living body, and in
vivo refers to testing or other activities performed in the
living body. Celera Genomics expects to incorporate its
bioinformatics capabilities into this process. After the
functions of genes are determined, Celera Genomics intends to
establish the priorities of these genes or their gene products
as targets based on the families of proteins they encode, the
association of the expression of these genes with specific
diseases, and the functional importance of the genes products
to cells. In 2001, Celera Genomics entered into a
collaboration with Isis Pharmaceuticals, Inc. to add to its
capabilities in this area. The collaboration provides Celera
Genomics with access to Isis Pharmaceuticals' antisense
technology, which is used to characterize the function of
selected genes.
Although Celera Genomics intends to use scientific methods that may
result in diagnostic discoveries, Celera Genomics has not yet determined how it
would seek to commercialize those discoveries, if any. They could be
commercialized through Celera Diagnostics or through other arrangements.
Axys Acquisition. In November 2001, Celera Genomics completed the
acquisition of Axys, a small molecule drug discovery and development company.
Celera Genomics believes that Axys' medicinal and structural chemistry and
biology capabilities and preclinical programs will accelerate the development of
its therapeutic discovery business for the following reasons:
o Axys' medicinal chemistry and biology capabilities are
expected to provide additional capabilities for in vivo and in
vitro target validation, as well as chemistry based validation
through hit-based functionation, which is the identification
of function through interaction with molecules of known
biological activity.
o Celera Genomics expects to benefit from Axys' expertise in the
fields of small molecule structure based drug design,
medicinal and combinatorial chemistry, and pharmacokinetic and
safety evaluation. Axys has developed a general expertise in
proteases, a known druggable class of proteins. Proteases are
enzymes that break down certain chemical bonds in proteins and
are essential to the body's physiological processes such as
inflammation. Proteases are generally classified by how they
break down a protein's chemical bonds. Cysteine and serine
proteases are two classes of these enzymes.
o Axys has existing drug discovery partnerships in the area of
inflammatory diseases, including (1) a collaboration with
Merck & Co. to develop small molecule inhibitors of cathepsin
K, a cysteine protease, for the treatment of osteoporosis, (2)
a collaboration with Aventis Pharmaceuticals to develop
inhibitors of cathepsin S, another type of cysteine protease,
for the treatment of rheumatoid arthritis, chronic obstructive
pulmonary disease, atherosclerosis, allergic rhinitis, and
asthma, and (3) a collaboration with Bayer AG to develop
inhibitors of tryptase, a serine protease, for the treatment
of asthma.
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o Axys also has non-partnered preclinical programs, including a
program to develop inhibitors of Factor VIIa, a serine
protease, for the treatment of deep vein thrombosis and
cathepsin F, a cysteine protease, for the treatment of asthma
and other inflammatory diseases.
Scientific Progress Relating to Sequencing Efforts. In June 2000,
Celera Genomics and the Human Genome Project each announced the "first assembly"
of the human genome, and in April 2001, Celera Genomics announced the assembly
of the mouse genome. Assembly is the process by which individual fragments of
DNA, the molecule that forms the basis of the genetic material in virtually all
living organisms, are pieced together into their appropriate order and placed or
positioned on each chromosome within the genome. Celera Genomics' first assembly
of the human genome covered approximately 95% of that genome, and its assembly
of the mouse genome covered approximately 99% of that genome. Celera Genomics
released a detailed ordered consensus human genome assembly in the journal
Science in February 2001. Celera Genomics intends to continue updating the
assembly of the human and mouse genomes as it continues to annotate these
genomes, and to incorporate this information into its Celera Discovery System
database. Annotation is the process of assigning features or characteristics to
each chromosome. Each gene on each chromosome is given a name, its structural
features are described, and proteins encoded by genes are classified into
possible or known function.
In sequencing and assembling the human and mouse genomes, Celera
Genomics used an advanced strategy known as "shotgun sequencing." This technique
uses a combination of Applied Biosystems' high throughput sequencing equipment
to sequence DNA fragments and powerful computers and proprietary software
algorithms to assemble them. Celera Genomics believes that its shotgun
sequencing strategy has accelerated the generation of genomic information and
the discovery of new genes. This information includes rarely expressed genes,
predicted proteins, and other factors, such as regulatory regions, that control
gene expression. This data forms the basis of Celera Genomics' human genome
database. Information from this database is available through the Celera
Discovery System, which is currently being marketed by the Applied Biosystems
Knowledge Business.
As part of the Applera Genomics Initiative, Celera Genomics has
prioritized and is resequencing approximately 25,000 genes from 39 individuals
and a chimpanzee, which the Company believes will reveal a larger number of SNPs
with health related implications than are currently available. SNPs are
naturally occurring genetic variations within a genome that scientists believe
can be correlated with susceptibility to disease, disease prognosis, therapeutic
efficiency, and therapeutic toxicity. Celera Genomics has identified over
100,000 SNPs to date, a majority of which Celera Genomics believes have not been
previously identified by other researchers. Celera Genomics intends to use this
SNP data in its internal discovery efforts to improve the prediction of the
efficacy and toxicity of drug candidates.
Online Marketing and Distribution Agreement with Applied Biosystems;
Celera Discovery System. In April 2002, Celera Genomics and Applied Biosystems
entered into a marketing and distribution agreement pursuant to which Applied
Biosystems has become the exclusive marketer of Celera Genomics' Celera
Discovery System and related information assets. Applied Biosystems is expected
to integrate the Celera Discovery System and other genomic and biological
information into its new Knowledge Business. The agreement is expected to enable
Celera Genomics' executive team to focus on therapeutics discovery and
development.
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In exchange for marketing and distribution rights to the Celera
Discovery System and other genomic and biological information and access to the
Celera Discovery System and related information, Applied Biosystems will provide
Celera Genomics with royalty payments on revenues generated by sales of certain
products of the Knowledge Business from July 1, 2002, through the end of fiscal
2012. The royalty rate is progressive, up to a maximum of 5%, with the level of
sales through fiscal 2008. The royalty rate becomes a fixed percentage of sales
starting in fiscal 2009, and the rate declines each succeeding fiscal year
through fiscal 2012. Assays-on-Demand, Assays-by-Design, certain reagents for
arrays, and new database subscriptions sold by the Knowledge Business are the
products subject to royalties.
Whether Celera Genomics actually receives any royalties from Applied
Biosystems under this agreement, and the amount of these royalties, depends on
Applied Biosystems' ability to successfully commercialize Knowledge Business
products subject to the royalty. The Knowledge Business is an emerging business,
and Applied Biosystems has not proven its ability to successfully commercialize
these products. Celera Genomics believes that in order for the Knowledge
Business to be successful, Applied Biosystems may have to devote significant
resources to researching, developing, marketing, and distributing Knowledge
Business products and services. However, Celera Genomics has no control over the
amount and timing of Applied Biosystems' use of its resources, including for
products subject to Celera Genomics' royalty. In addition, the market for these
products is intensely competitive, and there can be no assurance that there will
be market acceptance of the utility and value of the product offerings of the
Knowledge Business.
Under the terms of the marketing and distribution agreement, Celera
Genomics will receive all revenues under, and be responsible for all costs and
expenses associated with, Celera Discovery System and related information
contracts that were in effect on April 1, 2002, the effective date of the
agreement, or which were entered into during a three-month transition period
ended June 30, 2002 (as well as renewals of these contracts, if any). The
revenue anticipated by Celera Genomics under these contracts could be adversely
impacted as a result of changes made to Celera Discovery System products by or
at the request of Applied Biosystems pursuant to the marketing and distribution
agreement. However, Applied Biosystems has agreed to reimburse Celera Genomics
for any shortfall in earnings before interest, taxes, depreciation, and
amortization from these contracts below $62.5 million (as well as renewals, if
any) during the four fiscal years ending with the 2006 fiscal year if the
shortfall is due to changes made to Celera Discovery System products by or at
the request of Applied Biosystems, provided Celera Genomics otherwise continues
to perform under these contracts. During the term of the marketing and
distribution agreement (other than the transition period), Celera Genomics will
not be marketing Celera Discovery System products and services to, and will not
be contracting with, new customers. Accordingly, except for the anticipated
revenue under Celera Discovery System contracts in effect on June 30, 2002 and
renewals of these contracts, if any, and Applied Biosystems' corresponding
reimbursement obligation, Celera Genomics does not expect any revenues from
Celera Discovery System and related products and services other than the
potential royalty payments from Applied Biosystems under the marketing and
distribution agreement. Although under certain contracts with existing Celera
Discovery System customers, Celera Genomics is entitled to milestone payments or
future royalties based on products developed by its customers, Celera Genomics
believes these arrangements are unlikely to produce any significant revenue for
the group.
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Celera Genomics will continue to have access to all data, which may
include formats not available to third parties, and other intellectual property
associated with the Celera Discovery System for its therapeutic programs. Celera
Genomics expects that such data and intellectual property will have a
significant role in its product research and development.
Raw Materials. Celera Genomics' operations require a variety of raw
materials, such as chemical and biochemical materials and other supplies, some
of which are occasionally found to be in short supply. Any interruption in the
availability of these materials could adversely affect Celera Genomics'
operations.
In particular, Celera Genomics needs access to human and other tissue
samples from diseased and healthy individuals, other biological materials, and
related clinical and other information, which may be in limited supply. Celera
Genomics may not be able to obtain or maintain access to these materials and
information on acceptable terms. In addition, government regulation in the
United States and foreign countries could result in restricted access to, or use
of, human and other tissue samples. If Celera Genomics loses access to
sufficient numbers or sources of tissue samples, or if tighter restrictions are
imposed on its use of the information generated from tissue samples, its
business may be harmed.
Patents, Licenses, Franchises and other Intellectual Property. Through
its internal research programs and collaborative programs, Celera Genomics
anticipates that it will develop an increasing portfolio of intellectual
property. Celera Genomics may use this intellectual property in its internal
development programs or may license such intellectual property to third party
collaborators or customers for some combination of license fees, milestone
payments, and royalty payments.
Celera Genomics' business and competitive position are dependent, in
part, on its ability to protect its database information, its software
technology, its novel DNA sequence discoveries, its SNP discoveries, its protein
discoveries, its therapeutic discoveries, and its diagnostic discoveries using a
variety of intellectual property mechanisms. In addition to seeking patent
protection, Celera Genomics may rely on copyright and trade secret laws to
protect its discoveries. Celera Genomics recognizes that many of the
intellectual property laws are directly suitable for application to such
discoveries while other protections may not be available or extend to cover
genomic and/or proteomic-based discoveries.
Celera Genomics has sought and expects to continue seeking patent
protection for inventions relating to its DNA sequence, SNP, protein,
therapeutic, and diagnostic discoveries. Celera Genomics' current plan is to
apply for patent protection for novel DNA sequences, SNPs, proteins, and novel
uses for these DNA sequences, SNPs and proteins, as well as therapeutic and
diagnostic agents it discovers or develops. Although obtaining patent protection
based on DNA sequences, SNPs, and proteins might enhance Celera Genomics'
business, Celera Genomics does not believe that its commercial success will be
materially dependent on its ability to do so. However, Celera Genomics' failure
to receive patents for its therapeutic and diagnostic discoveries could
adversely affect the commercial value of such discoveries. Currently, Celera
Genomics has patent applications claiming its DNA sequence, SNP, protein,
therapeutic, and diagnostic discoveries that are pending in the United States
and in foreign jurisdictions and currently owns 55 United States patents.
The issuance of patents is uncertain worldwide. Furthermore, laws
relating to the patenting of novel DNA sequences and proteins are currently
under review and revision in many
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countries. Moreover, publication of information concerning partial DNA sequences
prior to the time that Celera Genomics applies for patent protection may affect
Celera Genomics' ability to obtain patent protection. In addition, patent claims
to a partial sequence may not cover a full-length sequence inclusive of that
partial sequence. Currently, the United States Patent and Trademark Office
requires disclosure in the patent application of a specific and substantial and
credible utility in order to support the patentability of a DNA sequence or
protein.
In January 1997, TIGR, in collaboration with the National Center for
Biological Information, disclosed full-length DNA sequences assembled from
expressed sequence tags available in publicly accessible databases or sequenced
at TIGR. The National Human Genome Research Institute also plans to release
sequence information to the public. These disclosures might limit the scope of
Celera Genomics' claims or make subsequent discoveries related to certain DNA
sequences and proteins unpatentable. While Celera Genomics believes that the
publication of sequence data will not preclude it or others in all instances
from obtaining patent protection on certain DNA sequences and proteins, there
can be no assurances that these publications will not affect the ability to
obtain patent protection.
In February 2001, Celera Genomics disclosed an assembly of the human
genome and gene/protein annotations in a publicly accessible database at Celera
Genomics. The federally funded Human Genome Project also released a human genome
sequence assembly to the public on this date, and has announced that a finished
version of its human genome sequence will be completed in 2003. These
disclosures might limit the scope of Celera Genomics' claims or make subsequent
discoveries related to certain DNA sequences and proteins unpatentable. While
Celera Genomics believes that the publication of sequence data will not preclude
it or others in all instances from obtaining patent protection on certain DNA
sequences and proteins, there can be no assurances that these publications will
not affect the ability to obtain patent protection.
Celera Genomics also cannot ensure that any changes to, or
interpretations of, the patent laws will not adversely affect its patent
position. Celera Genomics anticipates that there may be significant litigation
regarding genomic patent and other intellectual property rights. If Celera
Genomics becomes involved in such litigation, it could consume a substantial
portion of Celera Genomics' resources, and Celera Genomics may not ultimately
prevail. If Celera Genomics does not prevail in a patent litigation dispute, it
may be required to pay damages or royalties or to take measures to avoid any
future infringement, or Celera Genomics may not be able to stop a competitor
from making, using, or selling similar products or technology.
Celera Genomics also intends to rely on trade secret protection for its
confidential and proprietary information. Celera Genomics believes it has
developed proprietary procedures for sequencing and analyzing genes and for
assembling the genes in their naturally occurring order. In addition, Celera
Genomics believes it has developed novel methods for searching and identifying
particularly important regions of genetic information or whole genes of
interest. Celera Genomics currently protects these methods and procedures as
trade secrets and has sought patent protection for some of the proprietary
methods although no such patents have yet been issued.
Celera Genomics has sought and plans to continue seeking intellectual
property protection, including copyright protection, for the Celera Discovery
System, including its content, and the software and methods it creates to
manage, store, analyze, and search novel information. Celera Genomics has taken
security measures to protect its databases, including entering into
confidentiality agreements with employees and academic collaborators who are
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provided or have access to confidential or proprietary information. Celera
Genomics continues to explore ways to further enhance the security for its data,
including copyright protection for its databases.
Backlog. Celera Genomics' total recorded backlog at June 30, 2001 was
$66.1 million. Celera Genomics' total recorded backlog at June 30, 2002 was
$81.5 million. It is Celera Genomics' general policy to include in backlog only
purchase orders that have firm delivery dates within one year. Recorded backlog
may not result in sales because of cancellation or other factors. It is
anticipated that all orders included in the current backlog will be delivered
before the close of fiscal year 2003.
Competition. The pharmaceutical industry is competitive and evolving.
There is intense competition among pharmaceutical and biotechnology companies
attempting to discover candidates for potential new therapeutic products. These
companies may:
o develop new therapeutic products in advance of Celera
Genomics;
o develop therapeutic products which are more effective or more
cost-effective than those developed by Celera Genomics;
o obtain regulatory approvals of their therapeutic products more
rapidly than Celera Genomics; or
o obtain patent protection or other intellectual property rights
that would limit Celera Genomics' ability to develop and
commercialize therapeutic products.
Research and Development. Celera Genomics is actively engaged in basic
and applied research and development programs designed to develop new
therapeutic products and support the commitments of existing online/information
contracts. Research and development expenses for Celera Genomics totaled $148.6
million in fiscal 2000, $164.7 million in fiscal 2001, and $132.7 million in
fiscal 2002. The Company expensed $255.6 million in fiscal 2000, $323.4 million
in fiscal 2001, and $381.9 million in fiscal 2002 for Company-sponsored
research, development, and engineering activities.
Celera Genomics' new products are expected to originate from three
sources: internal research and development programs, external collaborative
efforts or alliances, and business and technology acquisitions.
Environmental Matters. Celera Genomics is subject to federal, state,
and local laws and regulations regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment, in
those jurisdictions where Celera Genomics operates or maintains facilities.
Celera Genomics does not believe that any liability arising under, or compliance
with, environmental laws or regulations will have a material effect on its
business, and no material capital expenditures are expected for environmental
control.
Celera Diagnostics, a Joint Venture between Applied Biosystems and
Celera Genomics
Overview. Celera Diagnostics is engaged principally in the discovery,
development, and commercialization of novel human diagnostic products. These
products are expected to provide genetic information which may lead to earlier
and more effective treatment of disease. Celera
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Diagnostics expects that the primary users of its products will be reference
laboratories, hospitals, and medical clinics worldwide that perform diagnostic
testing for human health care.
During the 2001 fiscal year, Celera Diagnostics was formed and moved
into its principal facilities in Alameda, California. During the 2002 fiscal
year, its first full fiscal year of operations, it took a number of steps,
including the following, to develop its business:
o it assembled an experienced management team;
o it integrated the pre-existing molecular diagnostics business
contributed by Applied Biosystems in connection with the
formation of Celera Diagnostics;
o it substantially increased its staff in the area of discovery
research, product development, manufacturing, quality,
regulatory affairs, and marketing;
o it completed construction of its high-volume discovery
laboratories for conducting genotyping and gene expression
research;
o it initiated its first gene-disease association study, which
is being conducted to identify genetic markers that correlate
with Alzheimer's disease;
o it entered into a strategic alliance with Abbott Laboratories
to develop, manufacture, and market a broad range of in vitro
molecular diagnostic products, or molecular diagnostic
products that are used for testing outside of the living body,
for disease detection, disease progression monitoring, and
therapy selection; and
o it submitted its first regulatory filing to the United States
Food and Drug Administration for an HIV diagnostic product.
Summary of Joint Venture Agreement. Celera Diagnostics was formed
during the 2001 fiscal year as a joint venture between Applied Biosystems and
Celera Genomics. In connection with the formation of Celera Diagnostics, Applied
Biosystems contributed, among other things, its then-existing molecular
diagnostics business to Celera Diagnostics, and Celera Genomics contributed,
among other things, access to its genome databases. Also, Celera Genomics agreed
to fund all of the cash operating losses of Celera Diagnostics up to a maximum
of $300 million ("initial losses"), after which, operating losses, if any, will
be shared equally by Applied Biosystems and Celera Genomics. Celera Diagnostics'
profits, if any, will be shared in the ratio of 65 percent to Celera Genomics
and 35 percent to Applied Biosystems until the cumulative profits of Celera
Diagnostics equal the initial losses. Subsequently, profits and losses and cash
flows would be shared equally between the groups. Capital expenditures and
working capital requirements of Celera Diagnostics will be funded equally by the
groups. Applied Biosystems will reimburse Celera Genomics for all tax benefits
generated by Celera Diagnostics to the extent such tax benefits are utilized by
Applied Biosystems. In the event of liquidation of the assets attributable to
Celera Diagnostics, including sale of these assets, the proceeds upon
liquidation would be distributed to Applied Biosystems and Celera Genomics based
on a proportion similar to their relative investment accounts. If the proceeds
upon liquidation are in excess of the groups' combined investment accounts, the
excess liquidation proceeds would be shared in the ratio of 65 percent to Celera
Genomics and 35 percent to Applied Biosystems until the cumulative amount of the
distributed excess proceeds equals the initial losses funded by Celera
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Genomics. Any additional liquidation proceeds would be allocated equally to
Celera Genomics and Applied Biosystems.
Research and Development; Abbott Laboratories Strategic Alliance.
During the 2002 fiscal year, Celera Diagnostics first focused its activities on
staffing and completing its high-volume discovery laboratories, and then began
research and development of products that detect infectious diseases and human
genetic disorders. Celera Diagnostics expects to expand these research and
development efforts, and in particular, it intends to leverage its genotyping
and gene expression capabilities, and the SNP data from the Applera Genomics
Initiative, to perform large-scale gene-disease association studies to identify
new diagnostic markers. Celera Diagnostics' first gene-disease association
study, involving Alzheimer's disease, is currently underway, and several
additional studies in cancer, cardiovascular disease, and inflammatory diseases
are planned for the current fiscal year. If these studies are successful, Celera
Diagnostics expects to develop and market reagents that detect the newly
discovered genetic markers.
In June 2002, Celera Diagnostics announced a strategic alliance with
Abbott Laboratories, one of the world's largest diagnostics companies, to
discover, develop and commercialize a broad range of in vitro diagnostic
products for disease detection, disease progression monitoring, and therapy
selection. The agreement with Abbott Laboratories is limited to diagnostic
products that detect nucleic acids, for example DNA or RNA. Diagnostics based on
the detection of proteins, rather than nucleic acids, is another potential
business area for Celera Diagnostics but is not a part of the agreement with
Abbott Laboratories and is not a current focus of Celera Diagnostics. Under the
Abbott Laboratories agreement, Celera Diagnostics and Abbott Laboratories will
jointly fund research and development. Celera Diagnostics believes that Abbott
Laboratories' expertise in the diagnostics industry will enhance Celera
Diagnostics' research and development efforts, and expedite its ability to bring
products to market.
Celera Diagnostics expects to rely substantially on its alliance with
Abbott Laboratories for the success of its business strategy for the foreseeable
future. The Abbott Laboratories agreement may be terminated by a non-breaching
party in the event of a material breach and, under certain circumstances, by
either party in the event of a change in control of the other party. Also,
Celera Diagnostics cannot ensure that Abbott Laboratories will perform its
obligations as expected. If Abbott Laboratories terminates the alliance or
otherwise fails to conduct its collaborative activities in a timely manner, the
development or commercialization of diagnostics products may be delayed or
otherwise adversely affected.
Research and development expenses for Celera Diagnostics totaled $4.5
million in fiscal 2001 and $39.0 million in fiscal 2002. The Company expensed
$255.6 million in fiscal 2000, $323.4 million in fiscal 2001, and $381.9 million
in fiscal 2002 for Company-sponsored research, development, and engineering
activities.
Celera Diagnostics Products. Celera Diagnostics plans to develop
products that provide useful genetic information to facilitate disease
detection, prediction of disease predisposition, disease progression, disease
severity, and responsiveness to treatment regimens. Such products are expected
to include primarily in vitro diagnostic test kits, which may be labeled for use
in diagnosing specific diseases or other conditions, as well as products
referred to as "analyte specific reagents," which may be used for clinical
testing but which may not be labeled for use in diagnosing any specific disease
or condition.
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While the sale of in vitro diagnostic test kits requires clearance or
approval by the United States Food and Drug Administration, analyte specific
reagents are a class of products defined by the agency's regulations which may
be sold without any regulatory submission, so long as they are manufactured and
marketed in compliance with the requirements of the agency's Quality System
regulations, such as Good Manufacturing Practices. Because analyte specific
reagents are not subject to United States Food and Drug Administration clearance
or approval, Celera Diagnostics believes they can generally be commercialized
sooner than diagnostic test kits, though the labeling restrictions would likely
affect market acceptance of the products.
Celera Diagnostics is currently marketing three products, all of which
were contributed by Applied Biosystems in connection with the formation of
Celera Diagnostics in different stages of development. Following is a
description of these products:
o ViroSeq(TM) HIV-1 Genotyping System. The genome of human
immunodeficiency virus, commonly known as HIV, undergoes
mutations in an infected patient, especially in response to
anti-viral drug treatment. Some of the mutations have been
shown to render the virus resistant to the action of these
drugs, thereby diminishing the effectiveness of the treatment.
Therefore, the detection of mutations in HIV that correlate
with drug resistance provides useful information to physicians
in monitoring the course of treatment and selecting the most
effective regimen for each individual HIV-infected patient.
During the 2002 fiscal year, Celera Diagnostics submitted a
510(k) filing to the United States Food and Drug
Administration for the ViroSeq(TM) HIV-1 Genotyping System. A
510(k) filing is a pre-market notification to the United
States Food and Drug Administration that Celera Diagnostics
intends to market this product as an in vitro diagnostic test
kit. This product is for use in testing human blood samples
for identifying drug-resistant mutations in the HIV-1 genome.
HIV-1 is one of the most prevalent strains of HIV. Celera
Diagnostics' filing is currently under review by the agency,
which must provide clearance before Celera Diagnostics can
market the product in the United States. Regulatory approval
was granted in France for this product during the 2002 fiscal
year, and the product is currently being marketed in that
country.
o Cystic Fibrosis Assay. Cystic fibrosis is an inherited genetic
disorder that affects children and young adults. It is caused
by a number of mutations in the cystic fibrosis gene.
Detection of these mutations should allow for testing of women
during pregnancy, as currently recommended by the American
College of Obstetricians and Gynecologists, as well as for
early monitoring of the disease and prescription of
appropriate treatment. Celera Diagnostics sells analyte
specific reagents that identify mutations in the cystic
fibrosis gene.
o HLA Sequencing-Based Typing Kits. Transplantation of tissues
and organs between genetically-unrelated individuals usually
results in rejection of the donor graft, or tissue, by the
recipient. Such rejection is due to differences in certain
genes between a donor and a recipient. These genes have been
mappe