UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

Commission file number: 000-31745

 

 

 

 

THIRD WAVE TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

 

 

(888) 898-2357

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

None

 

Securities registered pursuant to Section 12(g) of the Exchange Act:

 

Common stock, $.001 par value per share

preferred stock purchase rights

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

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 þ     No o

 

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 the 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.  Yes o     No þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate), computed by reference to the last sale price of the common stock of the registrant on June 30, 2005, as reported by the Nasdaq Stock Market, was $153,941,523.

 

As of the close of business on March 1, 2006, the registrant had 41,516,877 shares of common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K: Certain information required in Part III of this Annual Report on Form 10-K is incorporated from the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on June 13, 2006.

 

 

THIRD WAVE TECHNOLOGIES

 

FORM 10-K

FOR THE Year Ended December 31, 2005

 

TABLE OF CONTENTS

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. When used in this Form 10-K, the words “believe,” “anticipates,” “intends,” “plans,” “estimates,” and similar expressions are forward-looking statements. Such forward-looking statements contained in this Form 10-K are based on management’s current expectations. Forward-looking statements may address the following subjects: results of operations; customer growth and retention; development of technologies; losses or earnings; operating expenses, including, without limitation, marketing expense and technology and development expense; and revenue growth. We caution investors that there can be no assurance that actual results, outcomes or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, among others, our limited operating history, unpredictability of future revenues and operating results, competitive pressures and also the potential risks and uncertainties set forth in the “Overview” section of Item 7 hereof and in the “Risk Factors” section of Item 1A hereof.

 

You should also carefully consider the factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update any forward-looking statements.

 

In this Form 10-K, we refer to information regarding our potential markets and other industry data. We believe that all such information has been obtained from reliable sources that are customarily relied upon by companies in our industry. However, we have not independently verified any such information.

 

In this Form 10-K, the terms “we,” “us,” “our,” “Company” and “Third Wave” each refer to Third Wave Technologies, Inc. and its subsidiaries, unless the context requires otherwise.

 

In the United States, our registered trademarks are Third Wave^®, Cleavase^®, Invader^®, InvaderCreator^®. Cleavase and Invader are registered in Japan, Germany, the UK and France. Trademark applications are pending in the United States for Invader^® Plus^tm, InPlex^tm, and Inrange^tm.

 

OVERVIEW

 

Third Wave Technologies, Inc. develops and markets molecular diagnostics for a variety of DNA and RNA analysis applications, providing our clinical, research and agricultural customers with superior molecular solutions. Third Wave’s products are based on our proprietary Invader^® chemistry. It is a novel, molecular chemistry that we believe is easier to use, more accurate and cost-effective, and enables higher throughput compared to other methods of DNA and RNA analysis. Third Wave was incorporated in California in 1993 and reincorporated in Delaware in 2000.

 

We believe the market of greatest application and commercial opportunity for Third Wave’s Invader chemistry is clinical molecular diagnostics. We estimate that this market is approximately $1.4 billion worldwide today and will be growing to $2.4 billion worldwide by 2008. Within this market, there are a number of diverse segments for which the Company’s chemistry is well suited, including genetics and pharmacogenetics, women’s health, infectious disease and oncology. In addition to the molecular diagnostics market, the utility of the Invader chemistry extends to research, agricultural and other applications.

 

THIRD WAVE MISSION AND CORPORATE STRATEGY

 

Third Wave’s mission is to be a leading provider of superior molecular solutions. The Company seeks to achieve its mission by continuing to convert its proprietary Invader^® molecular chemistry into valuable molecular diagnostic products.

We have implemented a strategy to:

 

 

TECHNOLOGY

 

Invader Chemistry

 

Invader chemistry is a simple and scalable DNA and RNA analysis solution designed to provide results more quickly, increase throughput, and lower costs. It is an isothermal, DNA-probe-based reaction that detects specific genomic sequences or variations.

 

The performance and flexibility of Invader chemistry can be coupled with the sensitivity of a rudimentary form of polymerase chain reaction whose patents have expired. The Company calls this combination Invader Plus and believes that it will bring the advantages of both chemistries to its customers, enabling them to perform molecular testing more easily and more rapidly.

 

Third Wave has developed, and will to continue to develop, a line of clinical molecular diagnostic products based on its Invader chemistry. Clinical applications of the Invader chemistry include detecting genetic variation associated with inherited conditions such as cystic fibrosis, hemostasis and cardiovascular risk factors, and those associated with drug efficacy and adverse drug reactions. They also include confirming diagnosis, quantifying viral load and genotyping for infectious diseases such as hepatitis B and C, and for detecting human papilloma virus (HPV) strains. We have received in vitro diagnostic device clearance from the U.S. Food and Drug Administration for our Invader UGT1A1 Molecular Assay. The Invader UGT1A1 molecular assay is cleared for use to identify patients who may be at increased risk of adverse reaction to the chemotherapy drug Camptosar^® (irinotecan) by detecting and identifying specific mutations in the UGT1A1 gene that have been associated with that risk. Camptosar, marketed in the United States by Pfizer, Inc., is used to treat colorectal cancer and was relabeled recently to include dosing recommendations based on a patient’s genetic profile.

 

In addition to the Company’s growing menu of clinical products, there are a number of other Invader chemistry applications, including research, agriculture, and other potential industrial applications, including food and water testing.

 

INDUSTRY BACKGROUND

 

Prior to the late 1990s, many diagnostic testing methods had limited accuracy and served primarily as guides to analysis. This is changing with the emergence of nucleic acid testing, also referred to as NAT or molecular diagnostic testing.

 

Nucleic acid testing is the direct analysis of DNA or RNA. It is accomplished through genotyping, determining whether a variation or series of variations are present in an individual, or gene expression analysis, determining the level of activity of a specific gene by quantitating the messenger RNA, or mRNA, it is producing. The advantage of this testing method is that it directly detects DNA or RNA rather than monitoring antigens or antibodies. NAT was initially used primarily for HIV and blood screening, but it is rapidly displacing conventional testing methods as the industry standard for a variety of applications. For example, the need to perform accurate and high-throughput blood screening and tests for infectious diseases/viral loads has resulted in NAT replacing immunotechnology (immunoassays) as the solution of choice among many clinical labs.

 

Ongoing scientific research has helped determine that a majority of human diseases have genetic components. The monumental mapping and sequencing of the entire human genome, through the Human Genome Project and subsequent research initiatives, are being translated into precise clinical applications to diagnose and treat disease. As a result, hundreds of molecular diagnostic tests based on NAT technology are now being used to identify

variations in DNA sequence to detect disease or highlight genetic predispositions. Furthermore, researchers’ continuing progress in understanding disease and definitively linking particular diseases to an individual’s DNA and RNA have caused key medical thought leaders to introduce new screening guidelines that incorporate NAT.

 

The availability of the human genome sequence, combined with an ever-growing list of known variations in DNA sequence and advances in our understanding of the cause and progression of disease, will likely result in the emergence of additional NAT applications. As a result, we believe that a significant increase in demand for gene-based tests will occur in the coming years.

 

LIMITATIONS OF CONVENTIONAL METHODS VERSUS THE THIRD WAVE SOLUTION

 

A limited number of chemistry platforms are presently capable of performing NAT, including the following:

 

 

Many of today’s methods for analyzing nucleic acids are based on hybridization in combination with polymerase chain reaction (“PCR”).

 

We believe the Invader and Invader Plus chemistries offer competitive advantages compared to the other forms of NAT, including:

 

 

PRODUCTS AND PRODUCT CANDIDATES

 

Third Wave has applied its proprietary Invader^® chemistry to a number of molecular diagnostic, research and other applications. The Company has a pipeline of new products under development, which it anticipates releasing during 2006 and beyond, and is assessing the technical feasibility and commercial viability of a number of other applications.

 

Molecular Diagnostics

 

PRODUCTS ON THE MARKET — UNITED STATES

 

InVitro Diagnostic (IVD) Devices

 

 

Analyte Specific Reagents (ASRs)

 

 

 

PRODUCTS ON THE MARKET — EUROPEAN ECONOMIC AREA (EEA)

 

InVitro Diagnostic Devices — CE Mark

 

 

PRODUCTS IN DEVELOPMENT OR BEING ASSESSED FOR TECHNICAL FEASIBILITY AND COMMERCIAL VIABILITY

 

 

The Company also has developed a number of DNA and RNA analysis products for the research and agricultural biotechnology markets.

 

MANUFACTURING

 

We currently manufacture products at our facility in Madison, Wisconsin. We have scalable manufacturing systems, and we possess the expertise necessary to manufacture our current products. We currently have sufficient manufacturing capacity to meet our customer requirements. However, key components of our products may be sourced from a single supplier or a limited number of suppliers. Specifically, oligonucleotides for many of our

research use only products are sourced from a single supplier. In addition, some of the components incorporated into our products may be proprietary and unavailable from secondary sources. See Part I, Item 1A — Risk Factors.

 

We have registered the facility used for manufacturing our clinical products with the U.S. Food and Drug Administration, or FDA, as a Device Manufacturer and we believe we are in substantial compliance with the FDA’s quality system requirements or QSRs. We have also achieved ISO 13485:2003 Certification, a stringent, globally-recognized standard of quality management for medical device manufacturers.

 

We also outsource the manufacture of select components for the microfluidics card format and components of certain assays intended for research applications. We work closely with the vendors of these components to optimize the manufacturing process, monitor quality control and ensure compliance with our product specifications.

 

MARKETING AND SALES

 

We currently market and sell our products in the United States through a combination of direct sales personnel who are focused primarily on the clinical market, and through collaborative relationships. Our clinical sales force is comprised of 33 direct sales representatives and technical support personnel. We plan to increase our sales force as market demand requires. The clinical sales force targets high-volume clinical and reference laboratories that meet the criteria for highly-complex CLIA laboratories.

 

We have more than 130 clinical testing customers in the United States and we serve most major clinical laboratories that perform molecular testing. During 2005, the majority of our product sales were to domestic clinical laboratories.

 

Our products for the research market are sold primarily through collaborative relationships with research institutions and pharmaceutical companies focused on the life sciences in humans, plants and animals. We also appear at industry trade shows in connection with our marketing efforts.

 

Third Wave has established a strong and direct presence in Japan. In 2002, we established a wholly-owned subsidiary for the purpose of working more directly with our customers, collaborators and distributors in the Japanese market. We have two employees based in Japan.

 

Our customer base is dominated by a small number of large clinical-testing laboratories (Quest Diagnostics, Inc., Specialty Laboratories, Inc., Mayo Medical Laboratories, Kaiser Permanente, and Berkeley Heart Laboratories,) and research customers (University of Tokyo/RIKEN and Pioneer Hi-Bred International, Inc.). If we are unable to maintain current pricing levels and/or volumes with these customers, our revenues and business may suffer materially. See Part I, Item 1A — Risk Factors.

 

We intend to continue to pursue domestic and international market opportunities through a combination of direct sales, distribution arrangements and collaborative relationships. In 2004, Third Wave entered into a limited-term distribution arrangement for a limited number of its products in the European market with Innogenetics, N.V.

 

For a description of our industry segment and our product revenues by geographic area, see Note 12 of the Notes to the Consolidated Financial Statements included under Item 8 of this Form 10-K. As described in this Note, in 2005 we derived approximately 27% of our product revenues from sales to international end-users. The majority of our international sales were to a major Japanese research institute for use by several end-users. Our international sales are subject to customary risks associated with international transactions. See Part I, Item 1A — Risk Factors.

 

Our business is generally not seasonal.

 

COLLABORATIVE RELATIONSHIPS

 

Our business involves collaborations with clinical laboratory companies, instrument companies, pharmaceutical companies and academic institutions. We have entered into a number of collaboration agreements and continue to assess additional relationships for the supply, distribution and development of our products. The following is a summary of our principal collaborative relationships.

BML

 

In December 2000, Third Wave entered into a development and commercialization agreement with BML, Inc., (“BML”), one of the two largest clinical reference laboratories in Japan. Through this agreement, the companies are collaborating to develop and commercialize molecular diagnostics for infectious disease, genetic testing and pharmacogenomics. Under the agreement, Third Wave develops mutually agreed upon clinical assays, and BML reimburses development expenses and purchases final product. As provided by the terms of the agreement, Third Wave develops and supplies BML with clinical reagents at preferential prices. Third Wave has certain rights to commercialize the developed assays worldwide; however, such commercialization rights are limited in Japan depending on BML’s intellectual property surrounding the specific assay. Further, BML has the right to negotiate the terms and conditions under which BML would have the right to use the developed assays for providing clinical testing services in Japan. The term of the agreement is until December 31, 2009.

 

MONOGRAM BIOSCIENCES (formerly ACLARA BIOSCIENCES, INC.)

 

In October 2002, Third Wave entered into limited license and supply agreements with ACLARA BioSciences, Inc., which was acquired by Monogram Biosciences (formerly Virologics, Inc.) in December 2004. Under this agreement, Monogram has nonexclusive rights to incorporate our proprietary Invader^® chemistry and Cleavase^® enzyme with Monogram’s eTag^tm technology platform for multiplexed gene expression applications for the research market.

 

In exchange for the license, Monogram made up-front payments and will continue to make royalty payments based on sales of the Monogram product. The license, supply and Invader Creator software access agreements supercede the research, development and collaboration agreement between the parties that was announced and executed in October 2001.

 

UNIVERSITY OF TOKYO/RIKEN

 

In 2003, Third Wave entered into a collaboration with the University of Tokyo to support the genetic research efforts directed by Dr. Yusuke Nakamura, group director of the Research Group for Personalized Medicine at RIKEN and director of the Genome Center at the University of Tokyo. Dr. Nakamura is widely regarded as one of the world’s leading genetic researchers and he was the leader of the Japanese portion of the International Haplotype Map (HapMap) Project as well as other large-scale genotyping projects.

 

The HapMap Project, which concluded in early 2005, was a worldwide initiative to create a map of common patterns of single nucleotide polymorphisms, or SNPs. SNPs are single-base variations scattered throughout the human genome and are believed to be the cause of most genetic variations from hair color to disease susceptibility. Researchers believe that mapping SNPs will assist in the understanding and analysis of human disease and drug response. Third Wave concluded its ongoing support of HapMap-related research in Japan in 2005, but the Company will continue to support Dr. Nakamura for other research projects.

 

INTELLECTUAL PROPERTY

 

We have implemented a patent strategy designed to provide us with freedom to operate and facilitate commercialization of our current and future products. We currently own 38 issued U.S. patents, and hold exclusive licenses to two issued patents in the United States, own seven issued patents in Australia, two issued patents in Canada, one issued patent in Japan, and one issued European Cooperative patent. We have received notices of allowance for seven additional U.S. patent applications. We have 68 additional U.S. patent applications pending, including 61 non-provisional applications. In addition, we have licensed rights to patents and patent applications pending in the United States, Japan and other major industrialized nations, covering genetic variations associated with drug metabolism. We have licensed rights to patents and/or patent applications covering genetic variations associated with certain diseases for which we have designed clinical diagnostic products. In 2005, we obtained a nonexclusive license from the Mayo Foundation for a suite of patents related to detection of genetic polymorphisms in the human UGT1A1 gene. We also have licensed rights to patents and/or patent applications covering various nucleic acid amplification or detection platforms, detection methodologies, and the like. In 2005, we obtained a nonexclusive license from Abbott Molecular Diagnostics for a patent related to multiplex PCR amplification in

diagnostic applications. Reflecting our international business strategy, we have foreign filings in major industrialized nations corresponding to each major technology area represented in our U.S. patent and application claims. Currently, we have 68 pending applications in foreign jurisdictions, and 5 international (PCT) applications for which foreign filing designations have not yet been made.

 

Our issued, allowed and pending patents distinguish us from competitors by claiming proprietary methods and compositions for analysis of DNA and RNA, either genomic or amplified, using structure-specific cleavage processes and compositions. Issued and pending claims are included for assay design methods and compositions, as well as for use of the technology in various read-out formats such as fluorescence resonance energy transfer, mass spectrometry or in conjunction with solid supports such as micro latex beads or chips. We also have issued and pending claims covering oligonucleotide design production systems and methods. These methods also allow multiplexing or analysis of more than one sample in a single reaction, enabling the system to be easily amenable to a wide range of automated and non-automated detection methods.

 

The Company’s issued U.S. patents will expire between 2012 and 2021. Our success depends, to a significant degree, on our ability to develop proprietary products and technologies. We intend to continue to file patent applications, and to license rights to patents and patent applications, as we develop new products, technologies and patentable enhancements. Prosecution practices have been implemented to avoid any applicant delays that could compromise the guaranteed minimum patent term. There can be no guarantee, however, that such procedures will prevent the loss of a potential patent term.

 

Complex legal and factual determinations and evolving laws make patent protection and freedom to operate uncertain. As a result, we cannot be certain that patents will be issued from any of our pending patent applications or from applications licensed to us or that any issued patents will have sufficient breadth to offer meaningful protection. In addition, our issued patents or patents licensed to us may be successfully challenged, invalidated, circumvented or found unenforceable so that our patent rights would not create an effective competitive barrier. Moreover, the laws of some foreign countries may not protect our proprietary rights to the same extent as U.S. patent laws.

 

In addition to patent protection, we rely on copyright and trade secret protection of our intellectual property. We attempt to protect our trade secrets by entering into confidentiality agreements with third parties, employees and consultants. Our employees and consultants are required to sign agreements to assign to us their interests in discoveries, inventions, patents and copyrights arising from their work for us. They are also required to maintain the confidentiality of our intellectual property, and refrain from unfair competition with us during their employment and for a period of time after their employment with us, including solicitation of our employees and customers. We cannot be certain that these agreements will not be breached or invalidated. In addition, we cannot assure you that third parties will not independently discover or invent competing technologies or reverse engineer our trade secrets or other technologies.

 

See Part I, Item 1A — Risk Factors.

 

COMPETITION

 

The markets for our technologies and products are very competitive, and we expect the intensity of competition to increase. We compete with organizations that develop and manufacture products and provide services for the analysis of genetic information for research and/or clinical applications. These organizations include (1) diagnostic, biotechnology, pharmaceutical, healthcare, chemical and other companies, (2) academic and scientific institutions, (3) governmental agencies, and (4) public and private research organizations. Many of our competitors have greater financial, operational, sales and marketing resources and more experience in research and development than we have. Moreover, competitors may have greater name recognition than we do and may offer discounts as a competitive tactic. These competitors and other companies may have developed or could in the future develop new technologies that compete with our products or render our products obsolete.

 

We compete with many companies in the United States and abroad engaged in the development, commercialization and distribution of similar products intended for clinical molecular diagnostic applications. These companies may have or develop products competitive with the products offered by us. Clinical laboratories also

may offer testing services that are competitive with our products. Clinical laboratories may use reagents purchased from us or others to develop their own diagnostic tests. Such laboratory-developed tests may not be subject to the same requirements for clinical trials and FDA submission requirements that may apply to our products.

 

In the clinical market, we compete with several companies offering alternative technologies to the Invader^® chemistry. These companies include, among others: Abbott Laboratories; Bayer Corporation; Becton, Dickinson and Company; BioRad Laboratories, Inc.; Digene Corporation; Roche Diagnostics Corporation; Gen-Probe; Applera Corporation companies including Applied Biosystems and Celera; Innogenetics, Inc.; TM Bioscience Corporation; and Ventana Medical Systems Inc.

 

In the research market, we compete with several companies offering alternative; technologies to the Invader^® chemistry. These companies include, among others: Affymetrix, Inc.; Perlegen Sciences, Inc.; Illumina, Inc.; and Applied Biosystems.

 

We believe the primary competitive factors in our markets are performance and reliability, ease of use, standardization, cost, proprietary position, market share, access to distribution channels, regulatory approvals, clinical validation and availability of reimbursement.

 

See Part I, Item 1A — Risk Factors.

 

GOVERNMENT REGULATION

 

We are subject to regulation by the FDA under the Federal Food, Drug and Cosmetic Act and other laws. The Food, Drug and Cosmetic Act requires that medical devices introduced to the U.S. market, unless otherwise exempted, be the subject of either a premarket notification clearance, known as a 510(k), or a premarket approval, known as a PMA. Some of our clinical products may require a PMA, others may require a 510(k). Other products, like analyte specific reagents, or ASRs, may be exempt from regulatory clearance or approval, but still subject to restrictions by FDA.

 

With respect to products reviewed through the 510(k) process, we may not market a product until an order is issued by the FDA finding our product to be substantially equivalent to a legally marketed product known as a predicate device. A 510(k) submission may involve the presentation of a substantial volume of data, including clinical data, and may require a substantial review. The FDA may agree that the product is substantially equivalent to a predicate device and allow the product to be marketed in the United States. The FDA, however, may determine that the device is not substantially equivalent and require a PMA, or require further information, such as additional test data, including data from clinical studies, before it is able to make a determination regarding substantial equivalence. If, after reviewing the 510(k), the FDA determines there is no predicate device, we may request that the FDA use the process known as de novo classification and then clear the device through that means, rather than a PMA. De novo classification is intended to be used for lower-risk products. By requesting additional information, the FDA can further delay market introduction of our products.

 

If the FDA indicates that a PMA is required for any of our clinical products, the application will require extensive clinical studies, manufacturing information and likely review by a panel of experts outside the FDA. Clinical studies to support either a 510(k) submission or a PMA application would need to be conducted in accordance with FDA requirements. Failure to comply with FDA requirements could result in the FDA’s refusal to accept the data or the imposition of regulatory sanctions. There can be no assurance that we will be able to meet the FDA’s requirements or receive any necessary approval or clearance.

 

Once granted, a 510(k) clearance or PMA approval may place substantial restrictions on how our device is marketed or to whom it may be sold. Even in the case of devices like ASRs, most of which are exempt from 510(k) clearance or PMA approval requirements, the FDA imposes restrictions on marketing. Additionally, our ASR products may be sold only to clinical laboratories certified under CLIA to perform high complexity testing. The FDA is currently in the process of drafting guidelines for ASRs and these guidelines may result in FDA seeking to limit the types of products that can be sold as ASRs. In addition to requiring approval or clearance for new products, the FDA may require approval or clearance prior to marketing products that are modifications of existing products. We cannot be assured that any necessary 510(k) clearance or PMA approval will be granted on a timely basis, or at all. Delays in receipt of or failure to receive any necessary 510(k) clearance or PMA approval or the imposition of

stringent restrictions on the labeling and sales of our products could have a material adverse effect on us. We do not anticipate that our products that will be labeled for research use only, or RUO, (i.e., products used in drug discovery or genomics research) will be subject to additional government regulation of significance. Our products labeled as ASRs or labeled for in-vitro diagnostic use will be regulated as medical devices by the FDA and in certain other countries. We believe most of our products currently marketed pursuant to FDA regulations as ASRs, as well as many products we intend to market in the future as ASRs, are exempt from the 510(k) premarket notification and premarket approval requirements. However, the FDA may require that we obtain, or we may choose to obtain, regulatory clearances or approvals for certain of our products or their applications, as was done for our Invader^® UGT1A1 Molecular Assay. We expect that we will apply for FDA clearances or approvals for some of our current and future products.

 

As a medical device manufacturer, we are also required to register our facility and list our products with the FDA. In addition, we are required to comply with the FDA’s quality systems regulations, or QSRs, which require that our devices be manufactured and records be maintained in a prescribed manner with respect to manufacturing, testing and control activities. Further, we are required to comply with FDA requirements for labeling and promotion. For example, the FDA prohibits cleared or approved devices from being promoted for uncleared or unapproved uses. In addition, the medical device reporting regulation requires that we provide information to the FDA whenever there is evidence to reasonably suggest that one of our devices may have caused or contributed to a death or serious injury or that there has occurred a malfunction that would be likely to cause or contribute to a death or serious injury if the malfunction were to recur. Under FDA regulatory requirements, we may not make claims about the performance, intended clinical use or efficacy of ASR products. There are also restrictions on the concurrent marketing of components that can be used to develop an assay.

 

Our manufacturing facility is subject to periodic and unannounced inspections by the FDA for compliance with quality system regulations. Additionally, the FDA often will conduct a preapproval inspection for PMA devices. Although we believe we are in compliance with the FDA’s quality system regulations, we have never been inspected by the FDA and cannot assure that we will be able to maintain compliance in the future. If the FDA believes that we are not in compliance with applicable laws or regulations, it can issue a warning letter, detain or seize our products, issue a recall notice or request that a recall be initiated, seek to enjoin future violations and assess civil and criminal penalties against us. In addition, approvals or clearances could be withdrawn under certain circumstances. Failure to comply with regulatory requirements or any adverse regulatory action could have a material adverse effect on us.

 

Any customers using our products for clinical use in the U.S. will be regulated under CLIA. CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific standards in the areas of personnel qualifications, administration, participation in proficiency testing, patient test management, quality control, quality assurance and inspections. The regulations promulgated under CLIA establish three levels of diagnostic tests, namely, waived, moderately complex and highly complex, and the standards applicable to a clinical laboratory depend on the level of the tests it performs. We cannot assure you that the CLIA regulations and future administrative interpretations of CLIA will not have a material adverse impact on us by limiting the potential market for our products.

 

Medical device laws and regulations are also in effect in many of the countries in which we may do business outside the United States. These range from comprehensive device approval requirements for some or all of our medical device products, to requests for product data or certifications. The number and scope of these requirements are increasing. Medical device laws and regulations are also in effect in some states in which we do business. There can be no assurance that we will obtain regulatory approvals in such countries or that we will not incur significant costs in obtaining or maintaining foreign regulatory approvals. In addition, export of certain of our products that have not yet been cleared or approved for domestic commercial distribution may be subject to FDA export restrictions.

 

We are also subject to numerous environmental and safety laws and regulations, including those governing the use and disposal of hazardous materials. Any violation of and the cost of compliance with these regulations could have a material adverse effect on our business.

 

See Part I, Item 1A — Risk Factors.

RESEARCH AND DEVELOPMENT

 

Research and development costs associated with our products and technologies, as well as facilities costs, personnel costs, marketing programs and overhead account for a substantial portion of our operating expenses. Research and development expenses for the years ended December 31, 2005, 2004, and 2003 were $8.4 million, $11.6 million, and $12.0 million, respectively.

 

EMPLOYEES

 

As of December 31, 2005, we employed 154 persons, of whom 29 hold doctorate degrees and 105 hold other advanced degrees. Approximately 37 employees are engaged in research and development, 53 in business development, sales and marketing, 27 in operations and manufacturing and 37 in intellectual property, finance and other administrative functions. Our success will depend in large part on our ability to attract and retain qualified employees. We face competition in this regard from other companies, research and academic institutions, government entities and other organizations. We believe that we maintain good relations with our employees.

 

AVAILABLE INFORMATION

 

The Company makes available financial information, news releases and other information on its web site at www.twt.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, its Code of Business Conduct (which governs all officers, executives, directors and employees of the Company), and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on its Web site as soon as reasonably practicable after the Company files such reports and amendments with, or furnishes them to, the Securities and Exchange Commission.

 

RISKS RELATED TO OUR BUSINESS

 

WE HAD AN ACCUMULATED DEFICIT OF $158.1 MILLION AT DECEMBER 31, 2005, AND EXPECT TO CONTINUE TO INCUR SUBSTANTIAL OPERATING LOSSES FOR THE FORESEEABLE FUTURE.

 

We have had substantial operating losses since our inception in 1993, and we expect our operating losses to continue over the foreseeable future. We experienced net losses of $22.3 million in 2005, $1.9 million in 2004, and $8.1 million in 2003. In order to further develop our products and technologies, including development of new products for the clinical market, we will need to incur significant expenses in connection with our internal research and development and commercialization programs. As a result, we expect to incur annual operating losses for the foreseeable future. In addition, there is no assurance that we will ever become profitable or that we will sustain profitability if we do become profitable. Should we experience protracted or unforeseen operating losses, our capital requirements would increase and our stock price would likely decline.

 

FLUCTUATIONS IN OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY NEGATIVELY IMPACT OUR STOCK PRICE.

 

Our revenues and results of operations have fluctuated significantly in the past and we expect significant fluctuations to continue in the future due to a variety of factors, many of which are outside of our control. These factors include:

 

 

 

Research and development costs associated with our products and technologies, as well as facilities costs, personnel costs, marketing programs and overhead account for a substantial portion of our operating expenses. Research and development expenses for the years ended December 31, 2005, 2004, and 2003 were $8.4 million, $11.6 million, and $12.0 million, respectively. We cannot reduce these expenses quickly in the short term. If our revenues decline or do not grow as anticipated, we may not be able to reduce our operating expenses accordingly. Failure to achieve anticipated levels of revenues could significantly harm our operating results for one or more fiscal periods. Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. In addition, our operating results in a future fiscal quarter may not meet the expectations of stock market analysts and investors. In that case, our stock price would likely decline and investors would experience a decline in the value of their investment.

 

OUR TECHNOLOGIES AND COMMERCIAL PRODUCTS MAY NOT BE COMMERCIALLY VIABLE OR SUCCESSFUL, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.

 

We are currently developing and commercializing a limited number of products based on our technologies. We plan to develop additional products. We cannot assure you that we will be able to complete development of our products that are currently under development or that we will be able to develop additional new products. In addition, for our genetic and pharmacogenetic products, some of the genetic variations for which we develop our products may not be useful or cost effective in assisting therapeutic selection, patient monitoring or diagnostic applications. In this event, our sales of products for these genetic variations would diminish significantly or cease, and we would not be able to recoup our investment in developing these products. Accordingly, if we fail to successfully develop our products and technologies or if our technologies are not useful in the development of commercially successful products, we may not achieve a competitive position in the market. If we fail to do so, our revenues will be seriously harmed and it is unlikely that we will ever achieve profitability. Market acceptance of our products will depend on widespread acceptance of such products by doctors and clinicians. The use of products to assess genetic variation, gene expression or identify infectious diseases is relatively new and remains