10-K 1 b400552_10-k.htm ANNUAL REPORT Prepared and filed by St Ives Burrups

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 Or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended June 30, 2004

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 incorporation or organization) (I.R.S. Employer 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:

               Title of Class   Name of Each Exchange on Which Registered
 
      Applera Corporation-Applied Biosystems Group   New York Stock Exchange
         Common Stock (par value $0.01 per share)   Pacific Exchange
     
      Rights to Purchase Series A Participating Junior   New York Stock Exchange
         Preferred Stock (par value $0.01 per share)   Pacific Exchange
     
   Applera Corporation-Celera Genomics Group Common   New York Stock Exchange
            Stock (par value $0.01 per share)   Pacific Exchange
     
      Rights to Purchase Series B Participating Junior   New York Stock Exchange
         Preferred Stock (par value $0.01 per share)   Pacific Exchange

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           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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes           No  

As of December 31, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of Applera Corporation-Applied Biosystems Group Common Stock (based upon the average of the high and low price) held by non-affiliates was $4,273,700,698, and the aggregate market value of Applera Corporation-Celera Genomics Group Common Stock (based upon the average of the high and low price) held by non-affiliates was $1,021,199,248. As of September 3, 2004, 195,710,205 shares of Applera Corporation-Applied Biosystems Group Common Stock and 73,031,206 shares of Applera Corporation-Celera Genomics Group Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Stockholders for Fiscal Year ended June 30, 2004 - Parts I, II, and IV.
Proxy Statement for 2004 Annual Meeting of Stockholders - Part III.

TABLE OF CONTENTS

    Page
   
PART I 1
Item 1. Business 1
Company Overview 1
Scientific Background 4
Applied Biosystems Group Business 6
Celera Genomics Group Business 26
Celera Diagnostics, a 50/50 Joint Venture between Applied Biosystems and Celera Genomics 37
Applera Genomics Initiative 49
Employees 50
Financial Information About Industry Segments 50
Financial Information About Geographic Areas 50
Executive Officers of the Registrant 51
Item 2. Properties 51
Item 3. Legal Proceedings 53
Item 4. Submission of Matters to a Vote of Security Holders 59
     
PART II 59
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 59
Information about our Common Stock and its Holders 59
Forward Looking Statements and Risk Factors 61
Item 6. Selected Financial Data 92
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 93
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 93
Item 8. Financial Statements and Supplementary Data 93
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 93
Item 9A. Controls and Procedures 93
Item 9B. Other Information 93
     
PART III 94
Item 10. Directors and Executive Officers of the Registrant 94
Item 11. Executive Compensation 97
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 97
Item 13. Certain Relationships and Related Transactions 97
Item 14. Principal Accountant Fees and Services 98
     
PART IV 98
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 98
     
SIGNATURES 103
     
EXHIBITS, INCLUDING CERTIFICATIONS  

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PART I

Item 1.   Business

Company Overview

Business Segments

Applera Corporation conducts business through three business segments, which are described below. Throughout this report, terms such as “Applera,” “we,” “us,” or “our” may be used to refer to Applera Corporation.

Applied Biosystems Group. Our Applied Biosystems Group, which we refer to as “Applied Biosystems” throughout this report, serves the life science industry and research community by developing and marketing instrument-based systems, consumables, software, and services. Its customers use these tools to analyze nucleic acids (DNA and RNA), small molecules, and proteins to make scientific discoveries, develop new pharmaceuticals, and conduct standardized testing. A description of this business segment and developments during our 2004 fiscal year is set forth below in this Item 1 under the heading “Applied Biosystems Group Business.”

Celera Genomics Group. Our Celera Genomics Group, which we refer to as “Celera Genomics” throughout this report, is engaged principally in the discovery and development of targeted therapeutics for cancer, autoimmune, and inflammatory diseases. Celera Genomics is leveraging its proteomic, bioinformatic, and genomic capabilities to identify and validate drug targets, and to discover and develop small molecule therapeutics. It is also seeking to advance therapeutic antibody and selected small molecule drug programs in collaboration with global technology and market leaders. A description of this business segment and developments during our 2004 fiscal year is set forth below in this Item 1 under the heading “Celera Genomics Group Business.”

Celera Diagnostics, a 50/50 Joint Venture between Applied Biosystems and Celera Genomics. Celera Diagnostics, a joint venture formed by Applied Biosystems and Celera Genomics in April 2001, is focused on the discovery, development, and commercialization of diagnostic products. A description of this business segment and developments during our 2004 fiscal year is set forth below in this Item 1 under the heading “Celera Diagnostics, a 50/50 Joint Venture between Applied Biosystems and Celera Genomics.”

Information about the risk factors associated with our business segments is set forth below in Item 5 of Part II of this report under the headings “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Forward Looking Statements and Risk Factors.”

We maintain 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.

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Corporate History and Structure; Two Classes of Stock

Applera was incorporated in 1998 under the laws of the State of Delaware. Applera is the successor to “The Perkin-Elmer Corporation,” a corporation originally formed in 1939, as a result of a recapitalization completed in May 1999. As part of the 1999 recapitalization, Applera established the following two classes of common stock that were intended to reflect separately the relative performance of the businesses of Applied Biosystems and Celera Genomics, which are business units of Applera and are not separate legal entities:

  • Applera Corporation-Applied Biosystems Group Common Stock, which we refer to in this report as “Applera-Applied Biosystems stock;” and
     
  • Applera Corporation-Celera Genomics Group Common Stock, which we refer to in this report as “Applera-Celera stock.”

More information about Applera-Applied Biosystems stock and Applera-Celera stock is set forth below in Item 5 of Part II of this report under the headings “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Information about our Common Stock and its Holders.” Also, information about the risk factors associated with our capital structure and our two classes of stock is set forth below in Item 5 of Part II of this report under the headings “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Forward Looking Statements and Risk Factors.”

Available Information

Websites. We maintain Internet websites for Applera, Applied Biosystems, Celera Genomics, and Celera Diagnostics. All interested persons can access the following information on these websites, free of charge:

  • our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed with or furnished to the Securities and Exchange Commission;
     
  • Section 16 “insider transaction” reports, which include Forms 3, 4, and 5, filed by our officers and directors with the SEC; and
     
  • information relating to our corporate governance, including: our Corporate Governance Guidelines; our Code of Business Conduct and Ethics, which is applicable to our officers, directors, and employees; the charters for the Audit/Finance Committee, the Management Resources Committee, and the Nominating/Corporate Governance Committee of our Board of Directors; information on how to communicate with our Board of Directors, including our non-management directors; and information on how to report valid complaints to the Company regarding accounting and related matters.

We make our SEC reports and the insider transaction reports available on our websites as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC.

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The following table indicates how to access the documents described above on our websites:

               “Insider   Corporate  
    Transaction” Governance  
     Website Address SEC Filings Reports Information  
 
 
 
 
 
Applera www.applera.com   Click on the link to   Click on the link to   Click on the link to  
    “SEC Filings” in the   “SEC Filings” in the   “Corporate  
    “Investors & Media”   “Investors & Media”   Governance” in the  
      section of the   section of the website,   “Corporate” section  
    website, and then   and then click again   of the website  
    click again on the   on the link to “SEC      
    link to “SEC Filings”   Insider Filings”      
                 
Applied Biosystems www.appliedbiosystems.com   Click on the link to   Click on the link to   Click on the link to  
    “SEC Filings” in the   “SEC Filings” in the   “Corporate  
    “Investors” section of   “Investors” section of   Governance” in the  
    the website, and then   the website, and then   “Investors” section  
      click again on the   click again on the link   of the website  
    link to “SEC Filings”   to “SEC Insider      
        Filings      
                 
Celera Genomics www.celera.com   Click on the link to   Click on the link to   Click on the link to  
    “SEC Filings” in the   “SEC Filings” in the   “Corporate  
    “Investors & Media”   “Investors & Media”   Governance” in the  
        section of the   section of the website,   “Investors & Media”  
    website, and then   and then click again   section of the  
    click again on the   on the link to “SEC   website  
    link to “SEC Filings”   Insider Filings”      
                 

In addition, you can obtain copies of these materials by calling our corporate Secretary at 203-840-2000 or by making a request in writing mailed to: Attention: Secretary, Applera Corporation, 301 Merritt 7, P.O. Box 5435, Norwalk, CT 06856-5435.

Except for the documents on our websites that are expressly incorporated by reference into this report, the information contained on our websites is not incorporated by reference into this report and should not be considered to be a part of this report. This includes the websites referred to in the table above, as well as other websites that we refer to elsewhere in this report. All of these website addresses are included in this document as inactive textual references only.

Information Incorporated by Reference. The SEC allows us to “incorporate by reference” some information from parts of other documents filed with the SEC, including:

  • our Annual Report to Stockholders for our 2004 fiscal year, which we refer to in this report as our “2004 Annual Report;” and
     
  • our Proxy Statement relating to our Annual Meeting of Stockholders to be held on October 21, 2004, which we refer to in this report as our “2004 Proxy Statement.”

When we “incorporate by reference,” that means that we are referring you to important information in other documents that have been filed with the SEC rather than repeating that information in this report. We recommend that you refer to the information that we indicate is contained in the other documents and which is incorporated by reference into this report. The portions of our 2004 Annual Report that are incorporated by reference into this report are included as Exhibit 13 to this report.

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Scientific Background

All living organisms contain biological molecules. The most numerous are in the categories of: nucleic acids, which include DNA and RNA; proteins; carbohydrates; and lipids. Biological molecules are typically much larger and more complex than common molecules, and there is a wide diversity in the types of biological molecules present in living organisms. These characteristics make the analysis of biological molecules significantly more complex than the analysis of smaller compounds. Key advances in therapeutics have historically often 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 chemical subunits, called “nucleotides,” bound in two long strands formed by a chemical “backbone” made up of sugar and phosphate molecules. There are four nucleotides – adenine, cytosine, guanine, and thymine – often abbreviated with their first letters A, C, G, and T and often referred to as “bases.” In a DNA molecule, the nucleotides in the two strands are bound together in pairs to form a structure that resembles a twisted ladder, which is often referred to as a “double helix.” The bound pairs of nucleotides, which form the rungs of the “ladder,” are often referred to as “base pairs.”

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.

RNA molecules are similar to DNA in structure and are essential for biological function through a number of biochemical activities within the human body. 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. We believe 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. The study of genes and other genetic material of organisms is now commonly referred to as “genomics.”

The field of genomics research generally includes three broad categories of analysis, consisting of sequencing, genotyping, and gene expression studies:

  • Sequencing is performed to determine the exact order of the individual nucleotides in a DNA strand. Sequencing was used to identify the nucleotides in the entire human genome and other species. It has also been used to identify naturally occurring genetic variations in the human genome, which are referred to as “single nucleotide polymorphisms” or “SNPs.” Scientists believe that SNPs can be correlated with, for
     

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    example, susceptibility to disease, disease prognosis, therapeutic efficacy, and therapeutic toxicity, and therefore may have diagnostic or therapeutic utility.
     
  • Genotyping is performed 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 DNA sequence variant, typically a SNP, can be associated with, for example, susceptibility to a particular disease or response to a particular drug.
     
  • Gene expression is performed to determine whether a particular gene is expressed, or present, and in some cases at what levels, in a relevant biological material. This analysis can be used, for example, to measure and compare gene activity in various biological samples, such as samples from populations of healthy and diseased individuals, or from populations at different stages of disease development. These types of studies may be useful in the development of diagnostic tests and therapeutic treatments.

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 coded, by genes. Proteins are the products of genes and, along with gene expression and modification, are believed to be 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.

Although DNA contains the code for proteins, scientists have discovered that the body may modify proteins after they have been made in cells. These modifications, referred to as “post-translational modifications,” can alter a protein’s function, leading to changes in the biological reactions that take place in cells, which researchers refer to as “biological pathways.” These post-translational modifications complicate the study of proteins, because scientists studying proteins and seeking to understand their role in health and disease need a more thorough characterization of proteins than simply knowing their genetic, or DNA, code.

We believe that gene and protein research will increase as companies in the pharmaceutical and biotechnology industries seek to improve their drug discovery and development efforts. We also believe that ongoing drug discovery and development efforts will increase research of cells as researchers seek to further understand how drugs work in the body.

The growth in DNA, protein, and other research has created the need for systems that facilitate the collection, organization, and analysis of the large amounts of data generated by this research. This demand has led to the development of the science of “bioinformatics.” The science of bioinformatics seeks to blend biology and computing to transform massive amounts of data into useful information.

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Applied Biosystems Group Business

Overview

Applied Biosystems serves the life science industry and research community by developing and marketing instrument-based systems, consumables, software, and services. Its customers use these tools to analyze nucleic acids (DNA and RNA), small molecules, and proteins to make scientific discoveries, develop new pharmaceuticals, and conduct standardized testing. Applied Biosystems’ products are designed to address the demand for increased automation and efficiency in pharmaceutical and biotechnology laboratories by combining the detection capabilities of analytical instruments with advances in automation and laboratory work-flow design. The markets for Applied Biosystems’ products span the spectrum of the life sciences industry and research community, including: basic human disease research and genetic analysis performed by universities, government agencies, and other non-profit organizations; pharmaceutical drug discovery, development, and manufacturing; human identification; agriculture; biosecurity, which refers to products needed in response to the threat of terrorism; and food and environmental testing.

Applied Biosystems expects its ongoing research and development efforts will increasingly focus on integrated science solutions, which we refer to as “iScience,” to expedite our customers’ research and commercial goals. Scientists are increasingly adopting approaches that link technology, computer science, and traditional laboratory research to enable the study of complex biological systems and disease. This trend is evidenced by a growing number of high-profile initiatives and institutions worldwide dedicated to systems biology, which refers generally to the coordinated, integrated, and interdisciplinary study of the various parts of a biological system rather than just the focused study of individual parts such as genes, proteins, or cells. Applied Biosystems believes that the increasing availability of high-quality biological data and advances in technology are transforming the study of complex biological systems, but that the overwhelming amount of available biological information creates economic and practical challenges for this study. Consequently, Applied Biosystems is seeking to develop iScience products and services that help customers more easily and cost effectively leverage recent biological information and technological advances.

During our 2004 fiscal year, Applied Biosystems engaged a leading strategy consulting firm to assist management in an in-depth review of the group’s entire product portfolio. The purpose of this review is to identify opportunities for growth, increased profitability, and shareholder value creation. The first two phases of the project, which have been completed, included: a rigorous fact-based analysis of Applied Biosystems’ current product portfolio; an evaluation of research and development investments in an attempt to achieve optimum alignment with future growth opportunities; and an examination of Applied Biosystems’ business processes with a goal to improving operational efficiency and productivity. A third phase of this review is ongoing, during which Applied Biosystems is seeking to identify and analyze additional internal and external growth opportunities. As part of this business review, Applied Biosystems has been evaluating portfolio decisions, and this process has led to changes in, and may in the future result in further changes in, Applied Biosystems’ product and business mix.

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In July 2004, subsequent to the end of our 2004 fiscal year, Applied Biosystems announced a new organization structure which resulted from the strategic review described in the preceding paragraph. The new structure, which is expected to be substantially phased in by the end of September 2004, will create the following four business divisions, each led by a division President: Molecular Biology; Proteomics and Small Molecules; Applied Markets; and Service. Applied Biosystems intends to create integrated and fully-functioning divisions with the resources necessary to execute their business plans, including strategic planning, research and development, marketing, and sales professionals. The four new business divisions will be supported by several cross divisional functions, including units focused on Applied Biosystems’ strategic planning and business development, investigation of advanced technologies, and incubation of new businesses in new or underserved markets. Also, these operating activities will continue to be supported by a shared service organization responsible for functions such as human resources, finance, communications, legal, and intellectual property.

Also, in August 2004, subsequent to the end of our 2004 fiscal year, Applied Biosystems announced the retirement of Michael W. Hunkapiller, Ph.D., Senior Vice President and President, Applied Biosystems Group. At the same time, Applied Biosystems announced the promotion of Catherine M. Burzik, formerly a Vice President of Applera and Executive Vice President and Chief Operating Officer of Applied Biosystems, to the position left by Dr. Hunkapiller.

For information on revenues from instruments and consumables for our 2002, 2003 and 2004 fiscal years, refer to pages 31 and 33 of Management’s Discussion and Analysis in our 2004 Annual Report, which pages are incorporated herein by reference.

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; biosecurity; 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 genomics research such as sequencing, genotyping, and gene expression studies. Applied Biosystems’ products for the genomics market are described in the following paragraphs.

PCR Instruments, including Thermal Cyclers and Real-Time PCR Systems, and Related Consumables.   Polymerase chain reaction, commonly referred to as “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.

The Dual 384-Well GeneAmp® PCR System 9700 thermal cycler is the highest capacity thermal cycler offered by Applied Biosystems. This instrument supports all key applications in genetic analysis and fills a significant market need for laboratories conducting high-volume genomics research. This instrument is referred to as a “dual 384-well” instrument because it can simultaneously amplify samples in two plastic trays, referred to by researchers as “microtiter plates,” each having wells to hold 384 samples. Applied Biosystems also offers 60- and 96-well thermal cyclers and a dual 96-well thermal cycler. Applied Biosystems’ PCR product line also includes reagents for high-fidelity, or high-accuracy, amplification of long DNA segments.

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These are useful in the determination of “haplotypes,” which are correlated patterns of inherited DNA mutations. Scientists are just beginning to understand haplotypes and use them in complex disease-gene association studies.

Applied Biosystems’ real-time PCR systems product line, which it previously referred to as its “Sequence Detection Systems” product line, includes its ABI PRISM™ 6100 Nucleic Acid PrepStation for sample preparation and its real-time PCR instruments for analysis. The ABI PRISM 6100 Nucleic Acid PrepStation extracts DNA and/or RNA from whole cells, blood, and other samples. 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 ABI PRISM 6100 Nucleic Acid PrepStation was designed to decrease the labor and cost involved in preparing DNA and RNA for analysis by automating some aspects of this key phase in the sample preparation process. Applied Biosystems had previously marketed the ABI PRISM 6700 Automated Nucleic Acid Workstation, which fully automated several key steps in sample preparation, including the extraction process described above. However, Applied Biosystems discontinued this higher-priced instrument as of the end of our 2004 fiscal year, though it continues to provide servicing and support for this instrument.

Applied Biosystems offers four real-time PCR instrument systems for the detection and quantitation of nucleic acids: The ABI PRISM® 7900HT Sequence Detection System, the ABI PRISM 7000 Sequence Detection System, the Applied Biosystems 7300 Real-Time PCR System, and the Applied Biosystems 7500 Real-Time PCR System. The model 7900HT system is a flexible, automated analyzer that can be used with 96-well and 384-well plates as well as Applied Biosystems’ TaqMan® Low Density Array, which is described below. In its highest throughput configuration, using 384-well plates and robotics, this system can be used for large-scale gene expression and genotyping studies. Applied Biosystems began marketing the model 7300 and 7500 systems during our 2004 fiscal year. These instruments are designed to provide smaller laboratories with a more economical, yet versatile system for a broad range of applications, with the model 7500 system offering additional features and capabilities in comparison to the model 7300 system. These are next generation systems that have been designed with technological improvements that enhance performance and flexibility, though they are less automated than the model 7900HT system and do not have the same throughput capability because they use only 96-well plates. The model 7000 system is an older instrument that was also designed for the needs of smaller laboratories, and was the precursor to the model 7300 and 7500 systems. Limited demand for this product is expected to continue because some research and applied markets applications require the use of a system such as the model 7000 system that has been previously validated, or demonstrated acceptable, by users for those applications.

All of the real-time PCR Systems are modified versions of Applied Biosystems’ thermal cyclers, which are described above, and use 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 gene expression and for 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 real-time PCR systems 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. Applied Biosystems’ TaqMan Gene Expression Assays and SNP Genotyping Assays are TaqMan chemistry-based assays designed for use on Applied Biosystems’ real-time PCR systems. These products are described below in Item 1 of this report

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under the headings “Applied Biosystems Group Business – Products for the Genomics Market – Genomic Assays.”

Applied Biosystems offers a proprietary TaqMan Low Density Array (which it formerly referred to as its “Micro Fluidic Card” system), which was jointly developed with 3M Company, and a modified version of its model 7900HT system to support the Low Density Arrays for gene expression analysis. The Low Density Arrays are consumable laminated plastic sheets containing 384 microscopic fluid channels and wells. They are designed for use instead of microtiter plates, which are used in many types of laboratory analyses, including gene expression or genotyping studies on Applied Biosystems’ instruments. The microscopic fluid channel design of the Low Density Arrays enables researchers to automatically route a sample to the reaction wells rather than doing this by hand or using expensive and complex robotics as is required when using microtiter plates. Applied Biosystems is currently offering the Low Density Arrays pre-loaded with its human, mouse, and rat TaqMan Gene Expression Assays, which are described below in Item 1 of this report under the headings “Applied Biosystems Group Business – Products for the Genomics Market – Genomic Assays.” Using an on-line ordering system, customers can customize the cards by selecting the assays that are pre-loaded onto the Low Density Arrays.

Genetic Analysis Instruments; Genotyping and Resequencing Systems. Applied Biosystems’ genetic analysis instruments, referred to as DNA 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. DNA fragment analysis is used to determine the size, quantity, or pattern of DNA in a strand of DNA. DNA sequencing instruments have been used extensively to obtain the DNA sequence of the human genome and the genomes of other species and to identify SNPs and other genetic mutations.

Applied Biosystems’ genetic analysis instruments use “electrophoresis” to analyze molecules. During electrophoresis, the molecules being analyzed are placed in a separation medium, usually a gel, and then subjected to an electric charge. The molecules will pass through the gel at different speeds because the molecules have different lengths and electrical charges. Typically, the molecules being analyzed are labeled, or chemically linked, with fluorescent “tags” before being subjected to the electrophoresis, with each of the four different nucleotides – A, C, G, and T – being labeled with a different color tag. During electrophoresis, the genetic analysis instrument can analyze the molecules by using an optical device that can “read” the fluorescent tags. Applied Biosystems offers several sequencing chemistries optimized for various customer requirements. Samples prepared using these chemistries are then analyzed on Applied Biosystems genetic analysis instruments.

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. Applied Biosystems offers the following genetic analysis instruments:

Instrument Description
Applied Biosystems 3730xl DNA Analyzer 96 capillary sequencer
Applied Biosystems 3730 DNA Analyzer 48 capillary sequencer
ABI PRISM® 3100 Genetic Analyzer 16 capillary sequencer
ABI PRISM® 3100-Avant Genetic Analyzer 4 capillary sequencer
ABI PRISM® 310 Genetic Analyzer 1 capillary sequencer

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Applied Biosystems provides servicing and customer support for these instruments.

The model 3730xl DNA Analyzer has superseded the 96 capillary model 3700 DNA Analyzer, which is no longer offered for sale by Applied Biosystems although Applied Biosystems continues to provide servicing and support for this instrument. At the time of its introduction in 1999, the model 3700 instrument represented a significant advance in DNA sequencing technology because it could perform high-throughput analysis of samples in unattended operation. The model 3700 instrument was the principal instrument used by Celera Genomics for sequencing human and other genomes, and we believe the model 3700 instrument is also the principal instrument used by the Human Genome Project for its sequencing projects. The model 3730xl instrument offers significant advances in data quality, throughput, and cost effectiveness over the model 3700 instrument. Because of these advances, the model 3730xl instrument is able to read longer DNA fragments than its predecessor. For a given sequencing project, this means that customers using the model 3730xl instrument will need to process fewer samples, lowering their preparation costs. Also, by incorporating a more sensitive optical design, the model 3730xl instrument is able to complete the same analysis with lower reagent consumption per sample. The 48-capillary model 3730 instrument, which incorporates the same technological advances as the model 3730xl instrument, can be upgraded to become a 96-capillary model 3730xl instrument.

The 16-capillary model 3100 Genetic Analyzer 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 and has a lower cost than the model 3100 instrument. A model 3100-Avant Genetic Analyzer can be upgraded to a model 3100 Genetic Analyzer. Applied Biosystems has discontinued sales of its ABI PRISM 377 DNA Sequencer, the last of its instruments to use slab-gel technology, although Applied Biosystems continues to provide servicing and support for this instrument.

In January 2004, Applied Biosystems began marketing the SNPlex™ Genotyping System. The SNPlex system uses “multiplexing,” a scientific term that refers to multiple reactions in a single tube or well, to rapidly identify large numbers of target SNPs in a single biological sample. Using this system, customers can perform studies based on Applied Biosystems’ proprietary SNP reference library or their own customized set of reference SNPs. The system consists of reagents and software for use on the Applied Biosystems 3730 and 3730xl DNA Analyzers. The high-throughput genotyping capabilities of this new system complement the PCR-based genotyping that can be performed by the Applied Biosystems’ real-time PCR instrument systems. Applied Biosystems expects that researchers seeking to perform genotyping will choose between these alternative technologies based on a variety of factors, including the type of studies they are performing, the scientific requirements of these studies, their access to the needed instrumentation, and their budgets.

In February 2004, Applied Biosystems began marketing the VariantSEQr™ Reseqencing System. This system is a comprehensive solution for researchers seeking to perform resequencing, which refers to a method by which the DNA sequence information of one or multiple DNA samples is compared to a known reference sequence to determine whether any genetic variations are present. Scientists may use this information to, for example, better understand the causes and prevention of disease, facilitate the development of better and more

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targeted therapies and diagnostics, and understand individual response to treatment. Applied Biosystems believes that the VariantSEQr system will enable scientists to perform resequencing studies that were previously impractical and too expensive to perform because of the amount of time, labor, and expertise needed for experiment setup. The VarianSEQr system integrates reagents and software for use on the Applied Biosystems 3730 and 3730xl DNA Analyzers and 3100 and 3100-Avant Genetic Analyzers. Using this system, researchers can perform resequencing of more than four thousand human genes. Applied Biosystems intends to introduce additional resequencing sets for this system that will enable the resequencing of more human genes as well as DNA of non-human genes such as pathogens.

Genomic Assays. Our genomic assays are chemical tests used to measure a DNA or RNA target. A genomic assay combines a set of pre-selected “oligonucleotides” or “oligos,” which are synthetic single-stranded pieces 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. Applied Biosystems’ genomic assays include several products and services for both gene expression and genotyping, which are described in the following table.

Gene Expression Assays   Description
 
TaqMan Gene® Expression Assays   Ready-made gene expression assays that can be ordered from Applied Biosystems’ inventory
     
TaqMan® Pre-Designed Gene Expression Assays   Pre-designed gene expression assays that can be made to order
     
Custom TaqMan® Gene Expression Assays   Service for the manufacture of custom TaqMan chemistry-based gene expression assays based on targets supplied by researchers
     
SNP Genotyping Assays   Description
 
TaqMan® SNP Genotyping Assays   Ready-made SNP genotyping assays that can be ordered from Applied Biosystems’ inventory
     
TaqMan® Pre-Designed SNP Genotyping Assays   Pre-designed SNP genotyping assays that can be made to order
     
TaqMan® Coding SNP Genotyping Assays   Ready-made SNP genotyping assays within protein coding regions of genes that can be ordered from Applied Biosystems’ inventory
     
Custom TaqMan® SNP Genotyping Assays   Service for the manufacture of custom TaqMan chemistry-based SNP genotyping assays based on targets supplied by researchers

Since the initial launch of its genomic assays in our 2002 fiscal year, Applied Biosystems has continued to increase the number of assays available and currently offers a large library of ready-made and pre-designed SNP genotyping and gene expression assays. This library includes over 1.5 million human SNP genotyping assays, and over 300,000 gene expression assays including assays for the human, mouse, and rat genomes. The ability to study the mouse and rat genomes is important to researchers involved in, for example, therapeutic research and development because mice and rats have genes that are believed to correspond to human genes and the results of disease research or safety, toxicology, or other studies on mice or rats may therefore be correlated to humans with corresponding genetic characteristics. Applied Biosystems originally launched its genomic assay product and service lines under the names “Assays-on-Demand,” which included its ready-made assays, and “Assays-by-Design,” which

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included its service for the manufacture of custom assays. During our 2004 fiscal year, Applied Biosystems renamed these product lines and expanded them to include the pre-designed assays described above.

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 ready-made and pre-designed genomic assays offer significant advantages to researchers compared with home brew assay design. These advantages include:

  • facilitation of experiments with many genes in parallel;
     
  • substantial reduction in experiment setup time;
     
  • decreased assay cost; and
     
  • creation of a set of standard and validated assays that enable comparisons of data between laboratories.

Applied Biosystems’ SNP genotyping and gene expression assays are designed to be used with Applied Biosystems’ real-time PCR systems.

Microarrays. Applied Biosystems offers the Applied Biosystems Expression Array System for gene expression analysis. This system combines “microarray” technology and a proprietary “chemiluminescence” technology and was designed to detect the expression of a greater number of genes, with higher sensitivity and specificity, while using less biological sample, than existing commercially-available microarray technologies. This system is highly sensitive because it can detect low levels of gene expression, and highly specific because of its accuracy in identifying the presence of expressed genes without falsely “reading” the presence of expression from other genes. Applied Biosystems commenced sales of this product in April 2004.

Microarray technology involves the miniaturization of reactions on a single consumable product to enable a large number of simultaneous reactions or analyses. Applied Biosystems’ microarrays are small, porous nylon plates that can be used to analyze in parallel the expression of approximately 28,000 human genes in a sample. The microarrays are used in combination with the 1700 Chemiluminescent Microarray Analyzer, an instrument that measures gene expression by detecting chemiluminescence, which is the conversion of chemical energy stored within a molecule into light. DNA “probes,” which are single-stranded pieces of DNA, are chemically attached to the microarray and designed to cause a chemiluminescent reaction in the presence of expression targets. The DNA probes used for this application are approximately 60 bases long. Applied Biosystems believes the use of chemiluminescence rather than fluorescence, and the use of longer probes, results in higher sensitivity and specificity compared to existing commercially-available microarray systems.

Applied Biosystems designed this system to complement the gene expression capabilities of its TaqMan chemistry-based real-time PCR System products. Researchers performing whole genome expression studies using the Expression Array System can validate their results and perform further analysis on Applied Biosystems’ real-time PCR systems.

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In May 2004, Applied Biosystems commenced commercial sales of whole genome expression arrays for the mouse genome, and plans to introduce a whole genome expression array for the rat genome in the future. The ability to study mouse and rat genomes is important to researchers involved in therapeutic research and development because mice and rats have genes that are believed to correspond to human genes and the results of disease research or safety, toxicology, or other studies on mice or rats may therefore be correlated to humans with corresponding genetic characteristics.

DNA Synthesis. DNA synthesizers produce synthetic single-stranded pieces of DNA for genetic analysis. These molecules, referred to as “oligonucleotides” or “oligos,” are an essential reagent for PCR and DNA sequencing and are 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.

PNA. Applied Biosystems has a license, which is exclusive for some applications, to manufacture and sell peptide nucleic acid within various markets including the molecular biology research market. Peptide nucleic acid, which is often referred to as “PNA,” resembles DNA in its chemical 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.” Probes are used in various types of analysis, and are used to “search” for DNA and RNA sequences in a sample by binding to those sequences if they are present. PNA may be used in many areas, including basic research, pharmaceutical discovery, diagnostic development, and food and environmental testing. During our 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. During the fourth quarter of our 2004 fiscal year, Applied Biosystems recorded pre-tax charges of $14.9 million relating to Boston Probes. These charges are described in Note 2 to our fiscal 2004 Consolidated Financial Statements, which are incorporated by reference into Item 8 of this report.

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. The body may also modify proteins after they are made in cells, and such modifications, referred to as “post-translation modifications,” often alter the function of the modified protein. These post-translational modifications are not encoded in the protein’s genetic, or DNA, code.

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 and frequently modified by the addition of chemical units such as “sugar chains” or “phosphate groups.” 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,

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and measurement of expression of proteins and peptides. Applied Biosystems’ products for the proteomics market are described in the following paragraphs.

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 using 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 that the following key elements be incorporated into the instrument:

  • A unique sample preparation process called “ionization” to charge the molecules for analysis. 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.”
     
  • Mass analysis and detection, which involves the separation and electronic measurement of the mass of molecules and the measurement of the relative amounts present. Applied Biosystems 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 “quadrupole” or “quad,” and “linear ion trap,” both of which measure mass using radio frequencies and electric charges though using related but different technologies.

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 are used for sample preparation prior to analysis using mass spectrometry. For example, 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 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 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

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technologies. Customers select from this range of product types based on their budgets, workflows, sample types, preferences, and experience. 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.

The following table summarizes the mass spectrometry instruments offered by Applied Biosystems, including those manufactured through its MDS SCIEX Instruments joint venture, for the proteomics market:

Instrument Name   Ionization   Mass Analyzer
 
 
Voyager™-DE PRO Biospectrometry Workstation   MALDI   TOF
Voyager™-DE STR Biospectrometry Workstation   MALDI   TOF
4700 Proteomics Discovery System   MALDI   TOF/TOF™ Optics
QSTAR® XL Hybrid LC/MS/MS System   ESI or MALDI   Hybrid quad/TOF (often referred to as a Qq-TOF)
Q TRAP® LC/MS/MS System   ESI   Hybrid quad/linear ion trap
4000 Q TRAP® LC/MS/MS System   ESI or MALDI   Hybrid quad/linear ion trap

The 4700 Proteomics Discovery System and the 4000 Q TRAP LC/MS/MS System, both introduced in our 2003 fiscal year, are the most recent additions to this product line. The 4700 Proteomics Discovery System was designed to address the needs of proteomic researchers for increased speed and throughput as well as enhanced data quality and molecular information. The 4700 Proteomics Discovery System incorporates a high speed MALDI system with a tandem TOF mass analyzer. Applied Biosystems/MDS SCIEX Instruments introduced the 4000 Q TRAP LC/MS/MS System to complement the Q TRAP system. The 4000 Q TRAP system is based on the same linear ion trap technology introduced with the Q TRAP system but the 4000 Q TRAP system, a higher-priced instrument, has enhanced qualitative and quantitative analysis capabilities. Applied Biosystems believes these enhancements will enable researchers to combine experiments in a single, automated system that previously required multiple mass spectrometry instruments or were not practical to perform at all. This instrument became commercially available during our 2003 fiscal year and Applied Biosystems/MDS SCIEX Instruments achieved full production capacity in January 2004.

The 4700 Proteomics system, QSTAR system, Q TRAP system, and 4000 Q TRAP system all incorporate mass spectrometry instrumentation with an online link to relevant biological information available by subscription from Applied Biosystems, including annotated protein and genome information, and bioinformatics analysis tools. Applied Biosystems believes that these system enhancements, part of its iScience strategy, will facilitate researchers’ efforts to characterize proteins and their functions in biological systems, including the human body.

In September 2004, subsequent to the end of our 2004 fiscal year, Applied Biosystems announced the signing of a definitive agreement with MDS Inc. to expand the scope of their Applied Biosystems/MDS SCIEX Instruments joint venture. Under the terms of the agreement, MDS has agreed to pay U.S. $40 million for a 50 percent interest in intellectual property assets related to current Applied Biosystems MALDI TOF mass spectrometry systems and next-generation products under development, together with a 100 percent interest in some MALDI TOF product-related manufacturing and research and development assets. The parties will each contribute the MALDI TOF and related intellectual property to the joint venture. Applied Biosystems, as part of its responsibilities to the joint venture, will continue to market, sell,

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service, support, and provide research support for MALDI TOF products. Following a transition period, MDS Inc., through its MDS Sciex Division, as part of its responsibilities to the joint venture, will assume primary research and development as well as full manufacturing responsibility for MALDI TOF product lines. The existing products covered by this agreement include the Voyager instruments and the 4700 Proteomics Discovery System referred to in the table above. The other products referred to in the table are already included within the joint venture. The transaction is subject to customary closing conditions, including approval by regulatory authorities in the U.S. and Canada, and is expected to close in or before the fourth calendar quarter of 2004.

In addition to the range of mass spectrometry instruments and software used to operate those instruments, Applied Biosystems has developed and commercialized reagents for quantifying, or measuring, levels of molecules in one or more samples, including reagents using ICAT® reagent technology created by Dr. Ruedi Aebersold and others while at the University of Washington. The ICAT chemistry “tags” or affixes a chemical marker to a peptide containing a specific type of amino acid known as “cysteine.” This process, when used with various mass spectrometry systems, enables the quantitation and identification of proteins in experiments that compare normal and diseased cells or samples. In our 2004 fiscal year, Applied Biosystems expanded its family of quantitiation chemistries for molecular identification with the development and commercialization of iTRAQ™ reagents. Using the iTRAQ™ reagents, researchers can affix chemical markers to all types of peptides within a protein-rich mixture, enabling the quantitation of a greater number of proteins, including the ability to detect post-translational modifications, and enabling the comparison of expression patterns within up to four samples in the same experiment. Applied Biosystems believes these new reagents complement the ICAT reagents because they enable experimentation that in many cases cannot be accomplished with the ICAT reagents. The ICAT and iTRAQ™ reagents offer laboratories a way of running protein experiments using mass spectrometry and are the foundation of an expanding family of Applied Biosystems consumables, software, and systems for proteomics.

Biochromatography. Biochromatography is an important step in both research applications and manufacturing of “biopharmaceuticals,” which refers to protein-based pharmaceutical products. 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 media products are used in “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.

Applied Biosystems’ biochromatography media products such as its POROS® beads are used in the proteomics discovery process and in the development and manufacturing of biopharmaceuticals. Applied Biosystems believes its biochromatography products offer productivity advantages, enabled by high speed separation combined with high capacity and resolution, over competitive product offerings.

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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® 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. The Applied Biosystems 433A Peptide Synthesis system is designed for the quality synthesis of peptides, peptide analogs, and small proteins. Applied Biosystems also manufactures and sells proprietary synthesis reagents and chemicals for use with this and other products.

Products for the Small Molecule Analysis 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:

  • some drugs;
     
  • metabolites, the compounds resulting from the body’s acting upon a drug, and present in bodily fluids such as blood or urine;
     
  • 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; and
     
  • various trace contaminants in food, beverage, or environmental applications.

Mass spectrometry instruments are especially important for pharmaceutical researchers studying “pharmacokinetics,” the measurement of the bodily absorption, distribution, metabolism, and excretion, or elimination, of drugs. The U.S. Food and Drug Administration and other regulatory agencies require pharmacokinetic information 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.

Mass spectrometry instruments are growing in importance in food, beverage, and environmental applications. Various regulatory bodies worldwide monitor quality of food, beverages, and water. For these applications, we believe that speed of data acquisition, increased sensitivity, and high resolution together with ease of use are critical to satisfying customer needs.

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Applied Biosystems/MDS SCIEX Instruments offers a broad product line of mass spectrometry instruments for small molecule and pharmacokinetics researchers:

Instrument Name   Ionization   Mass Analyzer
 
 
API 2000™ LC/MS/MS System   ESI or MALDI   Triple quad
API 3000™ LC/MS/MS System   ESI   Triple quad
API 4000™ LC/MS/MS System   ESI   Triple quad
QSTAR® XL Hybrid LC/MS/MS System   ESI or MALDI   Hybrid quad/TOF (often referred to as a Qq-TOF)
Q TRAP® LC/MS/MS System   ESI   Hybrid quad/linear ion trap
4000 Q TRAP® LC/MS/MS System   ESI or MALDI   Hybrid quad/linear ion trap

The API product line instruments offer a range of sensitivity at varying costs, the API 4000 system being the most sensitive. This product line has been widely accepted by pharmaceutical researchers, and we believe the API 4000 system is the most sensitive triple quad mass spectrometry instrument available to this research market. The 4000 Q TRAP System has the same triple quad sensitivity but is a more versatile instrument because of its hybrid mass analyzer. The QSTAR XL Hybrid LC/MS/MS System offers higher resolution and mass accuracy, or the ability to accurately determine the mass of a molecule, than the API 2000, API 3000, API 4000, and Q TRAP systems, which is particularly useful to researchers seeking to identify unknown molecules such as metabolites. General information about mass spectrometry instruments and the technologies they incorporate, and also additional information about some of the instruments referred to in the table above, is set forth above in Item 1 of this report under the headings “Applied Biosystems Group Business – Products for the Proteomics Market – Mass Spectrometry.”

In our 2004 fiscal year, the Applied Biosystems/MDS SCIEX Instruments joint venture announced a novel “Tissue Imaging” technology for the QSTAR XL H