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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0001032210-02-000501.txt : 20020415
<SEC-HEADER>0001032210-02-000501.hdr.sgml : 20020415
ACCESSION NUMBER: 0001032210-02-000501
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020328
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ZYMOGENETICS INC
CENTRAL INDEX KEY: 0001129425
STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836]
IRS NUMBER: 911144498
STATE OF INCORPORATION: WA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-33489
FILM NUMBER: 02591195
BUSINESS ADDRESS:
STREET 1: 1201 EASTLAKE AVENUE E
CITY: SEATTLE
STATE: WA
ZIP: 98102
BUSINESS PHONE: 206-442-6600
MAIL ADDRESS:
STREET 1: 1201 EASTLAKE AVENUE E
CITY: SEATTLE
STATE: WA
ZIP: 98102
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>d10k405.txt
<DESCRIPTION>FORM 10-K405 FOR FISCAL YEAR ENDED 12/31/2001
<TEXT>
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-33489
ZYMOGENETICS, INC.
(exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Washington 91-1144498
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
1201 Eastlake Avenue East, Seattle, WA 98102
(Address of principal executive offices)
Registrant's telephone number, including area code (206) 442-6600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
-----------------
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 [X]
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
amendments to this Form 10-K. [X]
The approximate aggregate market value of the voting stock held by
nonaffiliates of the registrant as of March 15, 2002 was: $152,901,963.
Common stock outstanding at March 15, 2002: 36,668,237 shares.
Non-voting common stock outstanding at March 15, 2002: 9,100,800 shares
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Company's definitive Proxy Statement for the annual meeting
of shareholders to be held on June 21, 2002 are incorporated by reference
in Part III.
================================================================================
<PAGE>
ZYMOGENETICS, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2001
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<C> <S> <C>
PART I
Item 1. Business....................................................................... 3
Item 2. Properties..................................................................... 32
Item 3. Legal Proceedings.............................................................. 33
Item 4. Submission of Matters to a Vote of Securities Holders.......................... 33
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.......... 34
Item 6. Selected Financial Data........................................................ 35
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 35
Item 7A. Qualitative and Quantitative Disclosures About Market Risk..................... 43
Item 8. Financial Statements and Supplementary Data.................................... 43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..................................................................... 63
PART III
Item 10. Directors and Executive Officers of the Registrant............................. 63
Item 11. Executive Compensation......................................................... 63
Item 12. Security Ownership of Beneficial Owners and Management......................... 63
Item 13. Relationships and Related Transactions......................................... 63
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 64
Signatures..................................................................... 67
</TABLE>
2
<PAGE>
PART I
Item 1. Business
This Annual Report on Form 10-K contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
Our actual results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Important Factors That May Affect Our
Business, Our Results of Operations and Our Stock Price" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as those discussed elsewhere in this Annual Report on Form 10-K.
Overview
We are focused on the discovery, development and commercialization of
therapeutic proteins for the treatment of human disease. We have been active in
the area of therapeutic proteins for over 20 years, including 12 years as a
wholly owned subsidiary of Novo Nordisk A/S, one of the world's largest
producers of therapeutic proteins. We were incorporated in the state of
Washington in 1981. In 1988, Novo Nordisk acquired our outstanding capital
stock and we became a wholly owned subsidiary. From 1988 to 2000, we were the
protein discovery operation for Novo Nordisk in North America. In November
2000, Novo Nordisk effected a significant restructuring. As part of this
restructuring, we became an independent company in a transaction that included
a $150 million private placement and the reduction of Novo Nordisk's ownership
to approximately 62% of our outstanding capital stock and less than 50% of our
outstanding voting stock.
We have contributed to the discovery or development of five marketed
recombinant protein products with aggregate sales in 2000 of over $2 billion,
which represented approximately 9% of the $23 billion market for therapeutic
protein-based products. These products are Novolin(R) and NovoRapid(R)
(insulin), NovoSeven(R) (Factor VIIa) and GlucaGen(R) (glucagon), marketed by
Novo Nordisk, Regranex(R) (platelet-derived growth factor), marketed by
Ortho-McNeil Pharmaceuticals, Inc., a Johnson & Johnson company, and
Cleactor(TM) (tPA analog), marketed by Eisai Co., Ltd.
Early in our history, we built a core focus on protein chemistry and
molecular and cellular biology. More recently, we developed an advanced
bioinformatics program that now represents the foundation of our discovery
efforts. We were early to recognize the opportunity of genomics and were a
pioneer in the use of bioinformatics tools to mine genomic databases. We focus
our bioinformatics-based discovery efforts on the relatively small subset of
genes that we believe have the highest probability of coding for proteins with
therapeutic potential. Specifically, we focus on key protein categories that
have known members with proven therapeutic value or potent biological activity.
We believe this approach maximizes our chances of commercial success.
Our expertise in biology and protein chemistry strengthens our ability to
determine the biological function and potential therapeutic utility of our
protein candidates early in the discovery process. Determining biological
function and therapeutic utility at an early stage improves our prospects of
establishing patent priority by enabling us to file detailed patent
applications covering both composition of matter and method of use claims. We
currently have more than 200 issued or allowed United States patents and over
350 United States patent applications pending.
We have a growing pipeline of potential products that we expect to develop
on our own or in collaboration with partners. Our two most advanced internal
product candidates, rh Factor XIII and rh Thrombin, are being developed to
replace currently marketed plasma-derived products. rh Factor XIII is a
blood-clotting agent for the treatment of bleeding complications following
cardiopulmonary bypass surgery, and rh Thrombin is a hemostatic agent for the
control of bleeding during surgical procedures. We expect to file an
investigational new drug application for rh Factor XIII by the end of 2002 and
for rh Thrombin by the first quarter of 2003.
3
<PAGE>
Our earlier-stage product candidates have resulted from our bioinformatics
efforts. Using bioinformatics, we have been successful at identifying novel
genes and, in combination with our biology expertise, demonstrating their
potential medical relevance. Our most advanced bioinformatics-derived product
candidates are TACI-Ig, IL-21 and Zsig37. TACI-Ig is a soluble receptor with
potential applications for the treatment of autoimmune diseases, which we have
agreed to develop jointly with Serono S.A., a leading global biotechnology
company. IL-21 is a protein with potential applications for the treatment of
cancer, and Zsig37 is a protein with potential applications for the treatment
of cardiovascular diseases. We anticipate that an investigational new drug
application will be filed for at least one of these product candidates in 2003.
Business Strategy
Our principal objective is to become a fully integrated biopharmaceutical
company that commercializes novel therapeutic proteins and other protein-based
products derived from our proprietary portfolio of protein candidates. To
achieve this objective, we plan to pursue the following key strategies:
. Continue our focused approach to the discovery of therapeutic
proteins. We pursue a focused bioinformatics strategy to identify the
relatively small subset of genes that we believe have the highest
probability of coding for proteins with therapeutic potential.
Specifically, we focus on key protein categories that have members with
demonstrated therapeutic potential or medically relevant biological
activity. Once we have identified a protein candidate with relevant
biological activity, we seek to develop a therapeutic protein directly,
or, where appropriate, develop a monoclonal antibody or soluble receptor
that targets the protein.
. Pursue comprehensive intellectual property protection. We seek to
establish patent priority for our gene and protein discoveries at the
earliest possible time. We use data generated from bioinformatics and
exploratory biology to enhance our patent applications. Our research
teams work closely with our intellectual property department to prepare
detailed patent applications on full-length genes and their corresponding
proteins at an early stage in the discovery process. We augment initial
filings with supporting data as it becomes available.
. Leverage biology expertise. We utilize a large number of biological
assays and experimental systems to identify the biological functions of
the genes and proteins we discover. Our comprehensive approach allows us
to determine the medical relevance of proteins in a wider range of
therapeutic areas. We believe companies that use a less thorough approach
greatly limit their chances of discovering medically relevant biological
activities associated with the genes and proteins they research.
. Focus initially on lower-risk product candidates. We intend to mitigate
the risk of drug development by concentrating our initial product
development efforts on product candidates that have a higher likelihood
of commercial success. Our two most advanced internal product development
candidates are rh Factor XIII and rh Thrombin, recombinant versions of
proteins intended to replace currently marketed plasma-derived proteins.
. Pursue a diversified commercialization strategy. Because we expect to
generate more product candidates than we have the capacity to develop on
our own in the near term, we are pursuing a three-pronged
commercialization strategy. We intend to internally develop and
commercialize some product candidates where we believe the clinical
trials and sales force requirements are manageable. We intend to partner
with other companies to co-develop and co-promote product candidates in
cases where we do not have access to the infrastructure required for
development and commercialization. Finally, we intend to out-license
other product candidates and intellectual property that do not fit within
our future commercial focus.
. Establish manufacturing capabilities. We intend to develop our own
manufacturing capabilities and to use third-party manufacturers when
appropriate. We have initiated the design phase for a pilot manufacturing
plant, which we intend to use as a source of clinical product supply. We
plan to subsequently develop larger-scale commercial manufacturing
facilities as our product candidates progress through clinical
development.
4
<PAGE>
Products and Product Pipeline
Our track record in the field of therapeutic proteins includes contributions
to the discovery or development of five recombinant protein products currently
being marketed by Novo Nordisk or other companies. We also have out-licensed
two product candidates, and we are developing a pipeline of internal product
candidates. The following table summarizes the marketed products and
out-licensed product candidates, as well as our most advanced product
candidates for internal development or co-development. Any clinical trials
involving our product candidates may reveal that those candidates are
ineffective or have unacceptable side effects. In addition, the results of
preliminary studies are not necessarily indicative of clinical success, and
larger and later-stage clinical trials may not produce the same results as
earlier-stage trials or studies.
<TABLE>
<CAPTION>
Stage of
Product/Product Candidate Indication or Intended Use Status Development
- ------------------------- -------------------------- ------ -----------
<S> <C> <C> <C>
Novolin(R) and NovoRapid(R) Diabetes Out-licensed to Novo Marketed
(Insulin) Nordisk
NovoSeven(R) (Factor VIIa) Hemophilia Out-licensed to Novo Marketed
Nordisk
Regranex(R) (Platelet-derived Wound healing Out-licensed to Johnson & Marketed
Growth Factor) Johnson
GlucaGen(R) (Glucagon) Hypoglycemia; Out-licensed to Novo Marketed
Gastrointestinal motility Nordisk
inhibition
Cleactor(TM) (tPA Analog) Myocardial infarction Out-licensed to Eisai Co., Marketed
Ltd.
Platelet-derived Growth Cancer Out-licensed to Celltech Phase I
Factor Receptor Antibody Group plc
Platelet-derived Growth Periodontal disease Out-licensed to BioMimetic Pre-IND
Factor Pharmaceuticals, Inc.
rh Factor XIII Major cardiac surgery; Internal development Pre-IND
Congenital Factor XIII
deficiency
rh Thrombin Critical care hemostat Internal development Pre-IND
TACI-Ig Systemic lupus Co-development with Pre-IND
erythematosus; Other Serono S.A.
autoimmune diseases
IL-21 Cancer Internal development in Pre-development
North America; to be out-
licensed to Novo Nordisk
outside North America
Zsig37 Cardiovascular diseases Internal development Pre-development
</TABLE>
In the table above, Phase I refers to clinical trials designed primarily to
determine safety and toxicology in humans; pre-IND refers to the stage in which
we have completed pre-development activities, have generated a commercial
hypothesis for the product candidate and have begun the process leading to the
filing of an investigational new drug application and the initiation of Phase I
clinical trials; and pre-development refers to the stage in which confirmatory
animal studies of the product candidate are being conducted in support of a
medical hypothesis and protein manufacturing processes are being evaluated and
developed.
5
<PAGE>
Currently Marketed Products
We have participated in the discovery or development of five recombinant
protein products marketed by other companies. These products had aggregate
sales in 2000 in excess of $2 billion.
. Novolin(R) and NovoRapid(R) (insulin), recombinant human insulin products
marketed by Novo Nordisk worldwide for the treatment of diabetes. In
collaboration with Novo Nordisk, we developed a process for the
production of recombinant human insulin in yeast that is currently used
by Novo Nordisk in the manufacture of these products.
. NovoSeven(R) (Factor VIIa), a protein involved in the generation of blood
clots, marketed worldwide by Novo Nordisk for the treatment of hemophilia
patients. We cloned the gene that codes for human Factor VII and
developed a process for the production of activated recombinant human
Factor VII, or Factor VIIa, which led to the establishment of the
manufacturing process that Novo Nordisk currently uses to produce this
protein.
. Regranex(R) (platelet-derived growth factor), a potent growth factor
marketed by Ortho-McNeil Pharmaceuticals, Inc., a Johnson & Johnson
company, for the treatment of non-healing diabetic ulcers. We cloned the
gene that codes for platelet-derived growth factor and demonstrated the
importance of this protein in stimulating wound healing.
. GlucaGen(R) (glucagon), a protein marketed by Novo Nordisk, Bedford
Laboratories and Eisai Co., Ltd. for use as an aid for gastrointestinal
motility inhibition and for the treatment of severe hypoglycemia in
diabetic patients treated with insulin. In collaboration with Novo
Nordisk, we developed a process for the production of this protein that
is currently used by Novo Nordisk in the manufacture of GlucaGen.
. Cleactor(TM) (tPA analog), a modified form of the protein tissue
plasminogen activator, marketed in Japan by Eisai for the treatment of
myocardial infarction, or heart attacks. In collaboration with Eisai, we
developed this modified protein, which has enhanced properties that allow
it to be given as a single injection.
We derive royalties on all of these products except for NovoSeven and
NovoRapid, for which we received a one-time payment to satisfy future royalty
obligations.
Out-licensed Product Candidates
We have contributed to the discovery and development of two product
candidates that we have out-licensed to third parties in return for milestone
payments and royalties.
. Platelet-derived growth factor receptor antibody, an antibody that blocks
the binding of platelet-derived growth factor to its beta receptor, which
we have out-licensed to Celltech Group plc. Celltech has designated the
product candidate CDP 860, and anticipates initiating Phase II clinical
trials of CDP 860 in 2002 for the treatment of cancer.
. Platelet-derived growth factor, a potent growth factor that stimulates
the growth of a variety of cell types. We have out-licensed this growth
factor to BioMimetic Pharmaceuticals, Inc. for the treatment of
periodontal disease and bone defects of the head and face.
Internal Product Candidates
We are developing several product candidates to treat a variety of serious
diseases and medical conditions. These product candidates target several
markets, including critical care, cardiovascular, autoimmune disease and
cancer. We intend to develop and commercialize these product candidates on our
own or in collaboration with other biotechnology or pharmaceutical companies.
rh Factor XIII. Factor XIII is the last enzyme to act in the blood clotting
process. It functions by crosslinking fibrin molecules to each other and to
other proteins in a newly formed blood clot, adding significant stability to
the clot and protecting it from degradation by other proteins in circulation.
Congenital Factor XIII
6
<PAGE>
deficiency, an inherited disorder, is a rare condition afflicting only a few
hundred patients worldwide. These patients have a tendency to experience severe
spontaneous bleeding and problems with wound healing. Acquired Factor XIII
deficiency, a transient drop in Factor XIII levels, is much more common, having
been reported in several diseases, such as chronic liver disease and
inflammatory bowel disease. Acquired Factor XIII deficiency is also thought to
be a major cause of bleeding and failure to heal after surgeries and clinical
procedures of many types, including cardiopulmonary bypass surgery.
Human plasma-derived Factor XIII is produced by Aventis Behring and is
marketed as Fibrogammin(R) P in Japan, South Africa and a few European
countries. However, Fibrogammin(R) P is not approved for use in the United
States and many European countries. Clinical studies have shown that normal
levels of Factor XIII activity can be restored in patients with a congenital or
acquired deficiency by intravenous administration of plasma-derived Factor
XIII. Our market research indicates that physicians in some countries are
currently using plasma-derived Factor XIII for the treatment of congenital
Factor XIII deficiency and several medical conditions associated with acquired
Factor XIII deficiency. According to industry statistics and our own analysis,
current annual worldwide sales of plasma-derived Factor XIII are estimated at
$35 million. Japan is by far the largest single market for Factor XIII.
In patients undergoing cardiopulmonary bypass surgery, there is significant
illness and death associated with post-operative bleeding. Multiple
transfusions with plasma and other blood products are often used to compensate
for blood loss, but there are adverse health risks associated with these
transfusions. Studies have indicated that levels of Factor XIII activity
significantly decrease after cardiopulmonary bypass surgery. Published studies
involving a small number of patients demonstrated that administration of human
plasma-derived Factor XIII after cardiopulmonary bypass surgery led to a 35%
decrease in chest tube drain volume compared to a control group, suggesting
that Factor XIII treatment may reduce the need for blood transfusions in these
patients.
We believe that there are several important advantages to a recombinant
human form of Factor XIII. Such a product would alleviate concerns over viral
contamination associated with plasma-derived products and decrease or eliminate
the immune reactions associated with plasma-derived products, while helping to
ensure a continuous and cost-effective product supply. A recombinant human form
of Factor XIII could also reduce or eliminate the need for transfusions of
plasma or other blood products in the treatment of Factor XIII deficiency.
We believe that rh Factor XIII represents not only an effective replacement
product for the existing plasma-derived product, but also an opportunity for
addressing a potentially significant untapped market. Although sales of
plasma-derived Factor XIII have been relatively low to date, approval of a
recombinant human form of Factor XIII in existing markets, as well as the
introduction of a recombinant product in the United States and major European
countries, could facilitate significant expansion of the market and sales of
Factor XIII. Recombinant protein replacement products have been successfully
developed for Factor VIII and Factor IX, which are other blood-clotting factors.
Cardiopulmonary bypass surgery will be the first major indication pursued in
our rh Factor XIII clinical development program. There are an estimated one
million major cardiac surgical procedures performed annually involving
cardiopulmonary bypass surgery. We have identified a number of other potential
clinical indications for rh Factor XIII development, including replacement
therapy for congenital Factor XIII deficiency and treatment of acquired Factor
XIII deficiency such as in inflammatory bowel disease. We believe that we can
benefit from the information currently available regarding the dosing and
efficacy of plasma-derived Factor XIII in the design of our clinical
development program. The use of this information may result in lower product
development risks for rh Factor XIII than with other recombinant human protein
products that are not being developed as replacement products.
We have developed a process for manufacturing rh Factor XIII in yeast. We
have transferred the process to Avecia Limited, which has optimized and scaled
up the process. Our initial investigational new drug application for rh Factor
XIII was placed on hold in 1993 by the FDA, which cited insufficient
information to assess the risks
7
<PAGE>
of rh Factor XIII to subjects. Additional toxicology studies for rh Factor XIII
began in early 2002 to support our planned submission of a new investigational
new drug application. We anticipate that clinical grade product will be
available by the middle of 2002, and we plan to complete toxicology studies,
develop Phase I clinical trial protocols and file the investigational new drug
application with the FDA by the end of 2002.
rh Thrombin. Thrombin is a specific blood clotting enzyme that converts
fibrinogen to fibrin. Fibrin is the primary protein contained in newly formed
blood clots. Thrombin also promotes clot formation by activating Factor XIII,
which crosslinks the fibrin molecules and strengthens the newly forming clot.
In addition, thrombin stimulates platelet aggregation and acts as a potent cell
activator.
Excessive bleeding is a serious complication of major surgeries. Surgeons
try to limit bleeding during surgery to control blood loss and maintain
visibility in the operating field. Thrombin is widely used as a stand-alone
hemostat to stop diffuse bleeding occurring during major surgical procedures or
as a component of other hemostats, such as tissue sealants. All currently
marketed thrombin products are derived from pooled human or bovine plasma.
Plasma-derived thrombin products available today are provided in spray
formulation for topical application directly on wounds, and as a freeze-dried
powder, which is dissolved and absorbed onto a gel sponge for application to
wounds. Plasma-derived thrombin is also being used as a hemostatic component in
new vascular sealing devices, wound dressings and fibrin sealants.
We believe that there are several important advantages to a recombinant
human form of thrombin. As with Factor XIII, a recombinant human form of
thrombin would alleviate concerns of viral contamination. A recombinant human
form of thrombin also would alleviate concerns associated with products of
bovine origin, including the risk of contamination with the pathogen that
causes the human form of "mad cow" disease. In addition, there is a risk of
allergic reaction in patients sensitive to products of bovine origin. Some
patients develop antibodies to bovine plasma-derived thrombin or to Factor V, a
contaminant of the bovine plasma-derived product. Anti-Factor V antibodies are
particularly difficult to manage and are potentially fatal in patients who
develop severe bleeding conditions. Use of bovine plasma-derived thrombin in
patients with antibodies to bovine clotting factors may result in abnormal
clotting time, post-operative complications, clotting disorders and the
resulting higher treatment costs.
We intend to develop rh Thrombin as a replacement product for the currently
marketed human and bovine plasma-derived thrombin products. Current worldwide
sales of plasma-derived thrombin as a stand-alone product are estimated at $100
million annually. It is estimated that plasma-derived thrombin is used in more
than one million surgical procedures annually worldwide, with the United States
accounting for approximately 40% of these procedures. As with plasma-derived
thrombin, rh Thrombin would be used in the clinical setting to control
bleeding. Primary applications would include major surgeries, trauma and burn
injuries. We believe the market for rh Thrombin could be further expanded by
providing it to other companies for inclusion in topical hemostats, fibrin
sealants and vascular sealing devices.
We have developed a patent-protected process that we believe will enable us
to cost-effectively manufacture rh Thrombin in mammalian cells. We have made
arrangements with third-party manufacturers for the optimization and scale up
of the manufacturing process. We expect to have product available to begin
toxicology studies by the third quarter of 2002. We anticipate that clinical
grade product will be available by early 2003. We expect to complete toxicology
studies, develop Phase I clinical trial protocols and file an investigational
new drug application by the first quarter of 2003 for the use of rh Thrombin as
a general surgical hemostat.
TACI-Ig. TACI is a member of the tumor necrosis factor receptor family of
proteins. TACI-Ig is a soluble form of the TACI receptor that binds to two
ligands, BLyS and APRIL, that are implicated in mounting B-cell mediated immune
responses. When over-produced in transgenic animals, BLyS has been shown to
lead to the development of autoimmune disease with symptoms resembling systemic
lupus erythematosus. The aim of treatment with TACI-Ig is to neutralize the
overactivity of these immune-stimulating ligands to prevent the activation of B
cells and thus the production of harmful autoantibodies, which are antibodies
to one's own cells.
8
<PAGE>
We believe that TACI-Ig could represent a less toxic and more specific
immunosuppressive agent than current therapies for the treatment of autoimmune
diseases and other diseases for which the suppression of B-cell function and a
decrease in autoantibody levels could have therapeutic benefit. Such diseases
include systemic lupus erythematosus, rheumatoid arthritis, myasthenia gravis,
multiple sclerosis and asthma. In an animal model of systemic lupus
erythematosus, TACI-Ig has been shown to specifically inhibit the development
of mature B cells and the development of antigen-induced antibody production.
It has also been shown to inhibit the development of proteinuria, an indicator
of kidney malfunction, and to prolong survival of the animals. In a
collagen-induced model of rheumatoid arthritis, TACI-Ig has been shown to
inhibit the incidence of disease. Taken together, these data indicate that
TACI-Ig acts by inhibiting the production of mature B cells and decreasing
autoantibody levels.
Systemic lupus erythematosus is a probable clinical indication for TACI-Ig.
The cause of this disease remains unknown, but there is substantial evidence
suggesting that B-cell hyperactivity resulting in the secretion of
autoantibodies is fundamental to its development. There are over one million
cases of systemic lupus erythematosus in the United States, a disease which
primarily affects women. It is estimated that one in five patients has a severe
form of the disease requiring treatment with immunosuppressive agents. No new
FDA-approved treatments for systemic lupus erythematosus have been introduced
in the last 40 years. Current therapies, including immunosuppressives and
corticosteroids, are not very effective and may have severe side effects. We
believe that patients with severe systemic lupus erythematosus would be
candidates for treatment with TACI-Ig.
Rheumatoid arthritis appears to be a promising clinical indication for
TACI-Ig. Rheumatoid arthritis is one of the most prevalent chronic inflammatory
diseases, afflicting an estimated 1% of the world population, including over
five million patients in North America, Europe and Japan. Although the
underlying cause of rheumatoid arthritis is unknown, considerable data indicate
a major role of B cells in this disease. Rheumatoid arthritis has been an
attractive therapeutic area for drug development because of its large market
size. As a consequence, a very large number of drugs are currently being
developed. However, we believe that few of these product candidates target B
cells specifically. Thus, TACI-Ig represents a novel mode of treatment that
could alleviate the symptoms of rheumatoid arthritis associated with pathogenic
B cells. Moreover, the specificity and mode of action of TACI-Ig strengthens
its potential as an add-on therapy to existing drugs.
In August 2001, we entered into a collaborative development and marketing
agreement with Serono relating to TACI-Ig. Under our agreement, we will develop
TACI-Ig jointly with Serono pursuant to a worldwide development plan. We expect
that Serono will begin manufacturing clinical grade materials in the first half
of 2002 and that toxicology and pharmacology studies in appropriate animal
species will begin in the second half of 2002. We expect that an
investigational new drug application will be filed in 2003.
IL-21. We discovered IL-21 and its receptor through our bioinformatics
efforts. IL-21 is a protein belonging to a family of cytokines that modify the
function of cells in the immune system. We have shown IL-21 to regulate the
proliferation and functional activity of two populations of immune cells, B
cells which produce antibodies and natural killer cells which are thought to be
critical in defending the body against cancer cells. Specifically, we have
shown IL-21 in cell culture experiments to inhibit the growth of some B-cell
cancer lines, to stimulate the production of natural killer cells from bone
marrow and to increase the ability of natural killer cells to destroy infected
or cancerous cells. These activities suggest a possible therapeutic role for
IL-21 in the treatment of diseases characterized by B-cell tumors.
We expect to pursue B-cell-derived Non-Hodgkin's lymphoma as an initial
clinical indication for IL-21. Non-Hodgkin's lymphoma is a cancer of the
lymphatic system resulting from overproduction of tumor cells derived from
B-cell and T-cell lineages. Non-Hodgkin's lymphoma is the second fastest
growing type of cancer in the United States, and an estimated 800,000 patients
suffer from this disease in the United States, Europe and Japan. In animal
models of Non-Hodgkin's lymphoma, IL-21 has been shown to prevent B-cell
lymphoma tumor growth and significantly reduce animal death.
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We are currently conducting studies to determine the breadth of IL-21's
ability to treat B-cell lymphoma in cell lines and primary tumors thought to be
most representative of human disease. We are also conducting studies to
determine the possible role of natural killer cell activation in the anti-tumor
effect of IL-21. In addition, we are testing the ability of IL-21 to
reconstitute natural killer cells and lymphocytes in various conditions of
compromised immunity. Novo Nordisk has exercised its option to license rights
to IL-21 outside of North America pursuant to our option agreement with Novo
Nordisk.
Zsig37. Zsig37 is a protein discovered through our bioinformatics efforts.
The Zsig37 gene is expressed in many tissues, including heart, aorta, adrenal,
thyroid, adipose and placenta. In laboratory experiments, Zsig37 has been shown
to bind to many types of collagen and has been found to inhibit
collagen-induced platelet activation. In a rabbit model that mimics the
generation of blood clots in human arteries following acute injury to a blood
vessel, Zsig37 was shown to prevent clot formation in a dose-dependent manner.
We believe Zsig37 may provide potential benefits in the treatment of
cardiovascular diseases. There is a significant unmet need and a substantial
market opportunity for new classes of anti-clotting drugs for use in connection
with surgical procedures treating cardiovascular diseases. The use of
anticoagulant and anti-platelet drugs in these procedures helps limit the
extent of clot formation. In some cases, however, currently marketed drugs are
ineffective in preventing the clotting process or have adverse side effects. As
a result, there is a need for new anti-clotting agents that block platelet
activation without inducing a systemic effect on the coagulation system. Zsig37
has been shown to bind to collagen exposed at sites of vascular injury,
enabling it to inhibit clotting at the site of injury directly without
generating a systemic impact on blood clotting. We believe that this quality
may allow Zsig37 to be of clinical use in a variety of surgical procedures for
the treatment of cardiovascular diseases.
We have generated a significant body of preclinical data in animal models
demonstrating the potential of Zsig37 to provide therapeutic benefit. We are
currently evaluating several therapeutic indications with the intent of
choosing a lead indication for clinical development. We are also in the process
of developing a manufacturing process capable of efficiently producing
quantities of Zsig37 product for preclinical and clinical testing.
Discovery and Development Process
We have developed a fully integrated therapeutic protein discovery and
development program that draws upon a broad range of skills and technologies,
including high-throughput DNA sequencing, bioinformatics, molecular and
cellular biology, animal biology, protein chemistry, intellectual property
protection, pharmacology, medical and regulatory affairs, drug formulation,
manufacturing and strategic market research. We believe that this comprehensive
program gives us a competitive advantage over many other genomics and
early-stage biotechnology companies. While many of these companies were founded
on the use of high-throughput DNA sequencing and bioinformatics to identify
gene sequences of interest, we built our bioinformatics capabilities on top of
our pre-existing strengths in molecular biology, protein chemistry and animal
biology. As a result, we have been successful in characterizing important
biological properties of our lead product candidates.
Bioinformatics
We have focused our discovery efforts on identifying the relatively small
subset of genes that we believe have the highest probability of coding for
proteins with therapeutic potential. We have defined what we consider to be the
key protein categories according to structural similarity, sequence similarity
and functional activity. These categories have known members with demonstrated
therapeutic potential or potent biological activity, and most recombinant human
proteins currently marketed as drugs are members of these categories. We
believe that newly discovered proteins within these categories are likely to
have important novel biological activity, and therefore may have potential as
therapeutic products.
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The foundation of our bioinformatics platform is our internal gene sequence
database of approximately 13 million EST sequence entries and billions of
nucleotide sequences derived from genomic sequences. In 1995, we became the
first subscriber to gain direct in-house access to and analyze Incyte Genomics'
LifeSeq database of ESTs. Since that time, we have built our internal sequence
database from a number of sources, including:
. private databases, including Incyte Genomics' LifeSeq database;
. public EST and DNA sequences;
. our own proprietary EST sequences, where we have eliminated transcripts
of highly expressed genes to concentrate on rare gene sequences; and
. genomic sequences published daily by the Human Genome Project.
Any use of bioinformatics to discover novel gene sequences in sequence
databases must address the high degree of redundancy present in the genomic and
EST sequence information currently available. We have developed a software
program called ASIDE to address this problem. ASIDE reduces the amount of
redundant sequence information present in the genomic sequence data we analyze
and thereby enriches our database by emphasizing unique sequences that are used
in our discovery efforts. During peak times of publication of sequence
information by the Human Genome Project, we frequently downloaded highly
redundant raw sequences containing approximately 10 billion nucleotides. ASIDE,
which is much faster than current publicly available tools, allows us to
computationally process such a download on a daily basis. We believe ASIDE
improves our chances of being the first to discover novel therapeutic proteins
and establish patent priority by rapidly analyzing the continuous flow of
genomic data as it becomes available.
To discover novel gene sequences within the sequence databases, we have
developed sensitive proprietary search algorithms based on protein motifs,
which can include sequence homologies and predicted protein structure
similarities. We have developed sophisticated threading algorithms that allow
us to use distant and apparently unrelated elements in sequences to identify
pre-defined three-dimensional structures contained within certain key protein
categories. These algorithms are tailored to the specific category of proteins
under consideration, as the optimal search strategy for novel gene sequences
depends on characteristics unique to each protein category.
Our bioinformatics tools allow us to mine both genomic sequence data and EST
data to discover novel proteins. Using ESTs alone, it is difficult to identify
the full-length gene from which an EST was derived. However, the use of EST
data in combination with genomic sequence data is a powerful gene discovery
tool. By using the EST data as a probe to look into genomic sequence databases,
we can often extend the amount of sequence data associated with a particular
EST, thus enhancing our ability to analyze the potential of the gene to code
for a therapeutic protein. In addition, the use of EST data together with
genomic sequence data affords us the opportunity to identify those rare genes
that otherwise might go undetected using only EST databases. Genes that are
expressed only at low levels are typically underrepresented in or absent from
EST databases. It is these rarely expressed genes that often have potent
biological activities with clinical utility. Analysis of genomic sequence data,
either alone or in combination with EST sequence data, is critical for
identifying these rarely expressed genes, as genomic sequence data is not
biased toward highly expressed genes.
Exploratory Biology
We use a diverse set of tools to identify the biological functions of the
genes and proteins we discover. Throughout our exploratory biology effort, we
use a variety of in-house approaches, including physiological screens of mice
in which the gene of interest has either been genetically over-expressed from
birth, otherwise known as transgenic mice, or temporarily over-expressed in
adult mice using an adenovirus containing the gene. We also conduct screens of
mice in which the gene of interest has been eliminated from birth, otherwise
known as knockout mice. In addition, we conduct analyses of disease models
using a variety of laboratory tests, or assays, to detect changes in behavior,
physiology and biochemistry. We also use hundreds of in-house assays to
investigate biological activities of our novel proteins. To obtain additional
information, our scientists either adapt
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or create in vivo laboratory models that mimic human diseases to determine the
cause of disease and response to treatment. For certain ligands, we can also
apply laboratory techniques to clone the receptors for the ligand present in a
tissue or cell. In addition to providing a marker for tissues that should
respond to the protein, the receptors themselves can have therapeutic
potential. We also rely on an external network of collaborators to investigate
biology and conduct additional tests that we do not perform in-house.
Within our exploratory biology operation, there are several stages of
activity through which we identify a protein's function, determine whether the
protein plays a role in disease and determine whether it has commercial
potential. A protein begins in the exploratory stage, in which experiments are
performed to support the development of a biological hypothesis as to the
protein's function. Once a biological hypothesis is developed, the protein
moves to the validation stage, in which more extensive experiments are
performed to confirm the biological hypothesis for the protein and to establish
a medical hypothesis. A medical hypothesis involves the identification of
specific diseases or conditions for which we believe the protein would have
therapeutic importance. In cases where a protein demonstrates beneficial
biological effects, it becomes a product candidate. Where a protein has been
found to have detrimental effects, we attempt to generate a monoclonal antibody
or soluble receptor to inhibit the activity of the protein. In those cases, a
resulting monoclonal antibody or soluble receptor becomes the product
candidate. Once a product candidate is identified, it moves to the
pre-development stage, at which time it is tested in specific animal models of
diseases. At the pre-development stage, we not only learn which diseases or
conditions show promise for treatment, but also obtain information about dosing
and systemic effects of the product candidate. Assuming positive results, both
in terms of efficacy and toxicology, we may develop a commercial hypothesis for
the product candidate. A commercial hypothesis requires the identification of a
market opportunity and a preliminary determination that it will be economically
feasible to manufacture the product candidate and administer it to patients.
Collaborative Relationships
Novo Nordisk Option Agreement
As part of our separation from Novo Nordisk, we granted Novo Nordisk options
to license certain rights to potential therapeutic proteins pursuant to an
option agreement. Under this agreement, we retain exclusive rights to these
proteins in North America, and Novo Nordisk may obtain exclusive rights in the
rest of the world. However, Novo Nordisk would receive exclusive worldwide
rights to any licensed protein that acts to generate, expand or prevent the
death of insulin-producing beta cells, which are involved in diabetes, a core
business focus of Novo Nordisk. The option agreement also provides that:
. over a four-year period beginning November 10, 2000, Novo Nordisk will
pay us a fee of $7.5 million per year for the option rights under the
agreement;
. during this four-year period, Novo Nordisk may, for specified license
payments, license up to the greater of eight proteins or 25% of all
proteins discovered by us after August 25, 1995 and for which a
hypothesis as to medical utility is generated, except for
beta-cell-related proteins, of which Novo Nordisk may license an
unlimited number; and
. Novo Nordisk may extend the option agreement for two years, during which
time it is required to pay us a fee of $7.5 million per year for the
right to license four additional proteins.
Under the option agreement, we must promptly disclose to Novo Nordisk each
protein for which we develop a hypothesis as to medical utility, together with
information known to us about the protein, such as gene sequence and
similarity, exploratory data and relevant patent filings. Novo Nordisk then has
60 days to decide on three possible courses of action:
. exercise one of its options to license the protein;
. decline to exercise one of its options, thereby forgoing any and all
future rights to the protein; or
. extend its option on the particular protein by paying a $500,000
extension fee and agreeing to pay half of our research and development
costs to advance the protein to the status of a preclinical lead.
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Upon the exercise of an option by Novo Nordisk, we will negotiate an
exclusive license agreement to commercialize the protein containing certain
predetermined terms, including up-front payments, milestone payments and
royalty terms. The option agreement provides that up-front and milestone
payments for each non-beta-cell-related protein licensed may total up to
approximately $20 million, regardless of the point at which the protein is
licensed. Up-front and milestone payments for beta-cell proteins licensed may
total up to approximately $28 million. Royalty rates will be lowest if an
option to license a protein is exercised at the medical utility hypothesis
stage and will increase substantially each time the option is extended. Royalty
obligations end on the expiration date of the last-to-expire patent on the
licensed protein or, if the product is not based on a patented protein, 12
years from the date of the first sale of the product. Royalty obligations may
be reduced if Novo Nordisk is required to license third-party patented
technology to utilize the licensed protein or if a generic product that is
identical to a patented product achieves certain levels of market share.
If Novo Nordisk extends its option on a protein, then when the protein
reaches the status of a preclinical lead meeting certain criteria, Novo Nordisk
may exercise the option, extend the option or decline to exercise the option,
in which case it forgoes any and all future rights to the protein. If Novo
Nordisk elects to extend the option at the preclinical lead stage, it must pay
us a $1.0 million extension fee and agree to pay two-thirds of our research and
development costs to advance the protein through the completion of Phase II
clinical trials. Upon completion of Phase II clinical trials, Novo Nordisk has
one final opportunity to license the protein.
If, at any of Novo Nordisk's decision points, we decide that we do not wish
to move forward in the development of a particular protein, then we have the
right to terminate our participation in the development of the protein. In that
case Novo Nordisk has the right to continue the research and development on its
own, and maintains its right to license the protein under the option agreement.
To date, Novo Nordisk has exercised options to license IL-21, IL-20 and
IL-20 receptor pursuant to this agreement.
Serono S.A.
In August 2001, we entered into a collaborative development and marketing
agreement with Ares Trading S.A., a wholly owned subsidiary of Serono S.A.,
focused on two preclinical product candidates derived from our discovery
research. These two candidates are based on cellular receptors, designated TACI
and BCMA, that are involved in the regulation of the human immune system.
During the term of the agreement, we and Serono will work together exclusively
to develop biopharmaceutical products based on the two receptors for the
treatment of autoimmune diseases such as systemic lupus erythematosus and
rheumatoid arthritis.
We will share research and development expenses worldwide with the exception
of Japan, where Serono will cover all expenses. The research and development
activities will be governed by a steering committee made up of representatives
of both companies. Serono will be responsible for manufacturing all products
for both clinical trials and commercial sale. We retain an option to co-promote
the sale of products with Serono in North America, which we can exercise
provided that we fund our share of the research and development expenses and
meet certain sales force and marketing requirements. If we exercise the
co-promotion option, we will share commercialization expenses and profits in
North America equally with Serono and Serono will have exclusive rights to
market and sell products in the rest of the world, for which we will be
entitled to receive royalties. In the event of certain changes in control of
our company, we could lose our right to co-promote products in North America.
Either company may terminate its co-funding and co-development obligations
upon 90 days notice until the start of Phase II clinical trials, after which
time 180 days notice is required. If we were to terminate our co-development
and co-funding obligations, Serono would take control of all research and
development, we would forgo our co-promotion rights in North America, we would
be entitled to receive royalties on any product sales in North America in lieu
of sharing in the profits from the sale of products and Serono would continue
to be
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obligated to make any milestone payments. If Serono were to terminate its
co-development and co-funding obligations, all rights in any products would
revert to us, and we could take control and fund all costs of the research and
development, subject to negotiation of commercially reasonable financial
consideration to be paid to Serono. Furthermore, if clinical trials had begun
prior to Serono's termination, Serono would be obligated to manufacture product
for use in clinical testing for up to one year from the termination date.
We granted Serono an exclusive license to our intellectual property relating
to TACI, BCMA and certain other related technologies to make, use, have made,
sell, offer to sell and import products based on TACI and BCMA. Serono is
required to pay royalties on sales, which may vary based on annual sales volume
and the degree of patent protection provided by the licensed intellectual
property. Royalty payments may be reduced if Serono is required to license
additional intellectual property from one or more third parties in order to
commercialize a product or, in certain circumstances, if a product suffers from
competition. Royalty obligations under the agreement continue on a
country-by-country basis until the date on which no valid patent claims
relating to a product exist or, if the product is not covered by a valid patent
claim, 15 years from the date of first sale of the product.
The term of the agreement began on August 30, 2001 and will continue for so
long as a TACI or BCMA product is the subject of an active development project
or there is an obligation to pay royalties under the agreement. The agreement
provides for an initial fee and milestone payments to be paid by Serono in
connection with the development and approval of products, up to an aggregate of
$52.5 million.
Other Collaborations
We recognize external collaborations as an important aspect of our success
in analyzing and characterizing protein function. Where possible, we establish
collaborations with experts in the field who have a depth of knowledge on a
select protein, protein category or disease state that is related to the
understanding of our gene and protein discoveries. These collaborations serve
to accelerate the rate at which we can assess the biological functions of
proteins and confirm medical hypotheses. In addition, throughout our history,
we have collaborated actively with the University of Washington, a leading
biomedical research institution, to explore the biological function of
proteins. The University's significant resources and expertise, together with
its geographic proximity to us, have made it a valuable partner on a number of
our projects.
Manufacturing
Currently, we have internal capabilities to manufacture products for
preclinical use at up to 100-liter scale using various production systems,
including yeast, E. coli and mammalian cells. Accordingly, we believe that we
can manufacture adequate product for preclinical studies for our research and
development programs. To supply product for toxicology studies and clinical
trials over the next several years, we intend to utilize third-party contract
manufacturers or to rely on co-development partners for the manufacture of
clinical-grade product in accordance with current Good Manufacturing Practices
regulations. In addition, we have begun the planning process for construction
of our own pilot manufacturing plant, and we have acquired land adjacent to our
existing facilities on which to build it. It will likely take a total of at
least three years to plan, design, construct and validate this facility. When
completed, this plant would be available for the manufacture of clinical-grade
product, from both mammalian-cell and microbial processes.
For rh Factor XIII, which is made in yeast, large-scale manufacturing of
preclinical and clinical grade product will be carried out by Avecia Limited.
We have made arrangements with third parties for the manufacture of rh
Thrombin, which is made in mammalian cells. Serono will manufacture TACI-Ig,
which is made in mammalian cells, under the terms of our collaborative
development and marketing agreement.
Some of the inventions licensed to us were initially developed at
universities or other not-for-profit institutions with funding support from an
agency of the United States government. In accordance with federal law, we or
our licensees may be required to manufacture products covered by patents in
those inventions in the United States, unless we can obtain a waiver from the
government on the basis that such domestic manufacture is not commercially
feasible.
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Commercialization
We have developed the following three-pronged strategy for the development
and commercialization of our product candidates:
Internal development. We intend to independently develop products for
North America that we believe can be successfully developed with our current
infrastructure, as well as additions made to our infrastructure over the
next few years. To qualify for internal development, product candidates must
satisfy a number of criteria. Formulation, development and manufacturing of
these products must initially be feasible through the use of contract
providers. The anticipated clinical trials must be of a reasonable size and
with fairly well-defined endpoints and guidelines. Finally, the clinical
indication and target market must be accessible with a relatively small
sales force. We believe that certain of our product candidates, including
rh Factor XIII, rh Thrombin and IL-21, meet these criteria.
Co-development. We intend to develop certain product candidates jointly
with other companies. In these arrangements, we would expect to pay a share
of the research and development costs, retain rights to co-promote or
co-market the potential products, and share in the profits from selling the
potential products. Our criteria for selecting product candidates for
co-development include our level of internal expertise related to the field,
manufacturing requirements, clinical trial size and complexity, target
market size and investment considerations. If we determine that it is
worthwhile to invest our capital in a development program for a product
candidate, but we do not believe that we can internally meet the development
requirements, we will seek a co-development partner. TACI-Ig meets the
criteria for co-development, and we have entered into a collaborative
development and marketing agreement with Serono to co-develop this product
candidate.
Out-licensing. We intend to derive value from other product candidates
through out-licensing to other biotechnology or pharmaceutical companies.
From out-licensing transactions, we would expect to earn up-front license
fees, milestone payments and royalties on sales. We would expect no ongoing
participation, financial or otherwise, in development activities of these
licensed products. We expect to out-license product candidates that do not
fit within our future commercial focus, and to out-license rights to
non-therapeutic applications of our discoveries, such as diagnostics.
Patents and Proprietary Rights
We intend to seek appropriate patent protection for our proprietary
technologies by filing patent applications in the United States. We have more
than 200 issued or allowed United States patents, and over 350 pending United
States patent applications. When appropriate, we also seek foreign patent
protection and to date have more than 500 issued or allowed foreign patents.
Our success will depend in large part on our ability to:
. obtain patent and other proprietary protection for the genes and proteins
we discover;
. enforce and defend patents once obtained;
. operate without infringing the patents and proprietary rights of third
parties; and
. preserve our trade secrets.
Our patents and patent applications are directed to composition of matter,
methods of use and enabling technologies. Although we believe our patents and
patent applications provide a competitive advantage, the patent protection
available for genes and therapeutic protein-based products is highly uncertain
and involves complex legal and factual questions. No clear policy has emerged
regarding the breadth of patents in this area. There have been, and continue to
be, intensive discussions concerning the scope of patent protection for partial
gene sequences, full-length genes and their corresponding proteins. Also, there
is substantial uncertainty regarding patent protection for genes without known
function or correlation with specific diseases. Social and political opposition
to patents on genes may lead to narrower patent protection for genes and their
corresponding
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proteins. Patent protection relating to genes and therapeutic protein-based
products is also subject to a great deal of uncertainty outside the United
States, and patent laws are currently undergoing review and revision in many
countries. Changes in, or different interpretations of, patent laws in the
United States and other countries may result in our inability to obtain patents
covering the genes or proteins we discover or to enforce patents that have been
issued to us, and may allow others to use our discoveries to develop and
commercialize therapeutic protein-based products.
We apply for patents covering our discoveries and technologies as we deem
appropriate. However, we may fail to apply for patents on important discoveries
or technologies in a timely fashion or at all. Also, our pending patent
applications may not result in the issuance of any patents. These applications
may not be sufficient to meet the statutory requirements for patentability, and
therefore we may be unable to obtain enforceable patents covering the related
discoveries or technologies we may want to commercialize. In addition, because
patent applications in the United States historically have been maintained in
secrecy until a patent issues, other parties may have filed patent applications
on genes or their corresponding proteins before we filed applications covering
the same genes or proteins, and we may not be the first to discover these genes
or proteins. Any patent applications filed by third parties may prevail over
our patent applications or may result in patents that issue alongside patents
issued to us, leading to uncertainty over the scope of the patents or the
freedom to practice the claimed inventions.
Although we have a number of issued patents, the discoveries or technologies
covered by these patents may not have any therapeutic or commercial value.
Also, issued patents may not provide commercially meaningful protection against
competitors. Other parties may be able to design around our issued patents or
independently develop products having effects similar or identical to our
patented product candidates. Some companies are currently attempting to develop
therapeutic protein-based products substantially equivalent to products
patented by other parties by altering the amino acid sequence within the
therapeutic protein-based product and declaring the altered product a new
product. It may be easier to develop substantially equivalent versions of
therapeutic protein-based products such as monoclonal antibodies and soluble
receptors than it is to develop substantially equivalent versions of the
proteins with which they interact because there is often more than one antibody
or receptor that has the same therapeutic effect. Consequently, any existing or
future patents we have that cover monoclonal antibodies or soluble receptors
may not provide any meaningful protection against competitors. In addition, the
scope of our patents is subject to considerable uncertainty and competitors or
other parties may obtain similar patents of uncertain scope. For example, other
parties may discover uses for genes or proteins different from the uses covered
in our patents, and these other uses may be separately patentable. If another
party holds a patent on the use of a gene or protein, then even if we hold the
patent covering the composition of matter of the gene or protein itself, that
other party could prevent us from selling any product directed to such use.
Also, other parties may have patents covering the composition of matter of
genes or proteins for which we have patents covering only methods of use of
these genes or proteins. Furthermore, the patents we hold relating to
recombinant human proteins, such as our patents covering rh Factor XIII or rh
Thrombin, may not prevent competitors from developing, manufacturing or selling
other versions of these proteins. Moreover, although we hold patents relating
to the manufacture of recombinant human thrombin, we have no composition of
matter patent protection covering thrombin. Accordingly, we may not be able to
prevent other parties from commercializing competing forms of recombinant human
thrombin.
Third parties may infringe our patents or may initiate proceedings
challenging the validity or enforceability of our patents. The issuance of a
patent is not conclusive as to its validity or enforceability. Challenges
raised in patent infringement litigation we initiate or in proceedings
initiated by third parties may result in determinations that our patents have
not been infringed or that they are invalid, unenforceable or otherwise subject
to limitations. In the event of any such determinations, third parties may be
able to use the discoveries or technologies claimed in our patents without
paying licensing fees or royalties to us, which could significantly diminish
the value of these discoveries or technologies. Also, as a result of such
determinations we may be enjoined from pursuing research, development or
commercialization of potential products or may be required to obtain licenses,
if available, to the third-party patents or to develop or obtain alternative
technology. Responding to challenges
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initiated by third parties may require significant expenditures and divert the
attention of our management and key personnel from other business concerns. In
addition, enforcing our patents against third parties may require significant
expenditures regardless of the outcome of such efforts. For example, we
recently filed a patent infringement lawsuit against Immunex Corporation
claiming infringement of certain of our patents related to dimeric fusion
proteins. This lawsuit, and any others that may arise relating to our patents,
may require significant expenditures, regardless of the outcome.
In addition, third parties may independently develop intellectual property
similar to our patented intellectual property, which could result in, among
other things, interference proceedings in the United States Patent and
Trademark Office to determine priority of invention. An interference proceeding
is an administrative proceeding to determine which party was first to invent
the contested subject matter. Our product candidate rh Factor XIII is currently
the subject of an interference proceeding with Aventis Behring, and other
product candidates may in the future be the subject of similar proceedings.
Although we have entered into a cross-licensing agreement with Aventis Behring
with respect to rh Factor XIII, the interference proceeding could result in the
loss of or significant limitations on our patent protection for this product
candidate. Furthermore, under the cross-licensing agreement, Aventis Behring
retains the ability to market recombinant products that may compete with rh
Factor XIII.
Third parties may claim that our potential products or related technologies
infringe their patents. Patent litigation is very common in the
biopharmaceutical industry, and the risk of infringement claims is likely to
increase as the industry expands and as other companies obtain more patents and
increase their efforts to discover genes through automated means and to develop
proteins. Any patent infringement claims that might be brought against us may
cause us to incur significant expenses, divert the attention of our management
and key personnel from other business concerns and, if successfully asserted
against us, require us to pay substantial damages. In addition, as a result of
a patent infringement suit, we may be forced to stop or delay developing,
manufacturing or selling potential products that are claimed to infringe a
patent covering a third party's intellectual property unless that party grants
us rights to use its intellectual property. We may be unable to obtain these
rights on terms acceptable to us, if at all. Even if we are able to obtain
rights to a third party's patented intellectual property, these rights may be
nonexclusive, thereby giving our competitors access to the same intellectual
property. Ultimately, we may be unable to commercialize our potential products
or may have to cease some of our business operations as a result of patent
infringement claims.
In addition to our patented intellectual property, we also rely on
unpatented technology, trade secrets and confidential information, including
our ASIDE software program, our genetic sequence database and our
bioinformatics algorithms. Our policy is to require our employees, consultants
and advisors to execute a confidentiality and proprietary information agreement
before beginning their employment, consulting or advisory relationship with us.
These agreements generally provide that the individual must keep confidential
and not disclose to other parties any confidential information developed or
learned by the individual during the course of the individual's relationship
with us except in limited circumstances. These agreements also generally
provide that we shall own all inventions conceived by the individual in the
course of rendering services to us. The agreements may not provide effective
protection of our technology or confidential information or, in the event of
unauthorized use or disclosure, may not provide adequate remedies.
As part of our business strategy, we work with third parties in our research
and development activities. Accordingly, disputes may arise about inventorship
and corresponding rights to know-how and inventions resulting from the joint
creation or use of intellectual property by us and our corporate partners,
licensors, scientific collaborators and consultants. In addition, other parties
may circumvent any proprietary protection we do have. These parties may
independently develop equivalent technologies or independently gain access to
and disclose substantially equivalent information, and confidentiality
agreements and material transfer agreements we have entered into with them may
not provide us with effective protection.
Government Regulation
Regulation by government authorities in the United States, Europe, Japan and
other countries is a significant consideration in our ongoing research and
product development activities and in the manufacture and marketing
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of our potential products. The FDA and comparable regulatory bodies in other
countries currently regulate therapeutic proteins and related pharmaceutical
products as biologics. Biologics are subject to extensive pre- and post-market
regulation by the FDA, including regulations that govern the collection,
testing, manufacture, safety, efficacy, potency, labeling, storage, record
keeping, advertising, promotion, sale and distribution of the products. The
time required for completing testing and obtaining approvals of our product
candidates is uncertain but will take several years. Any delay in testing may
hinder product development. In addition, we may encounter delays in product
development or rejections of product applications due to changes in FDA or
foreign regulatory policies during the period of product development and
testing. Failure to comply with regulatory requirements may subject us to,
among other things, civil penalties and criminal prosecution; restrictions on
product development and production; suspension, delay or withdrawal of
approvals; and the seizure or recall of products. The lengthy process of
obtaining regulatory approvals and ensuring compliance with appropriate
statutes and regulations requires the expenditure of substantial resources. Any
delay or failure by us or our corporate partners to obtain regulatory approvals
could adversely affect our ability to commercialize product candidates, receive
royalty payments and generate sales revenue.
The nature and extent of the governmental pre-market review process for our
potential products will vary, depending on the regulatory categorization of
particular products. The necessary steps before a new biological product may be
marketed in the United States ordinarily include:
. preclinical laboratory and animal tests;
. compliance with product manufacturing requirements including, but not
limited to, current Good Manufacturing Practices regulations;
. submission to the FDA of an investigational new drug application, which
must become effective before clinical trials may commence;
. completion of adequate and well-controlled human clinical trials to
establish the safety and efficacy of the proposed drug for its intended
use;
. submission to the FDA of a biologics license application; and
. FDA review and approval of the biologics license application prior to any
commercial sale or shipment of the product.
Preclinical tests include laboratory evaluation of the product, as well as
animal studies to assess the potential safety concerns and efficacy of the
product. Preclinical tests must be conducted by laboratories that comply with
current Good Laboratory Practices regulations. The results of preclinical
tests, together with extensive manufacturing information, analytical data and
proposed clinical trial protocols, are submitted to the FDA as part of an
investigational new drug application, which must become effective before the
initiation of clinical trials. The investigational new drug application will
automatically become effective 30 days after receipt by the FDA unless the FDA
indicates prior to the end of such 30-day period that the proposed protocol
raises concerns that must be resolved to the satisfaction of the FDA before the
trials may proceed. If the FDA raises any concerns regarding a proposed
protocol, it is possible that these concerns will not be resolved in a timely
fashion, if at all. In addition, the FDA may impose a clinical hold on a
proposed or ongoing clinical trial if, for example, safety concerns arise, in
which case the trial cannot commence or recommence without FDA authorization
under terms sanctioned by the agency.
Clinical trials involve the administration of the product to healthy
volunteers or to patients under the supervision of a qualified principal
investigator. Clinical trials are conducted in accordance with current Good
Clinical Practices regulations under protocols that detail the objectives of
the trial, inclusion and exclusion criteria, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated. Protocols for each
phase of the clinical trials are submitted to the FDA as part of the
investigational new drug application. Further, each clinical trial must be
reviewed and approved by an independent institutional review board at each
institution. The institutional review board will consider, among other things,
ethical factors, the safety of human
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subjects and the possibility of liability of the institution conducting the
trial. An institutional review board may require changes in a protocol, and the
submission of an investigational new drug application does not guarantee that a
trial will be initiated or completed.
Clinical trials generally are conducted in three sequential phases that may
overlap. In Phase I, the initial product is administered to healthy human
subjects or patients, or both, to assess safety, metabolism, pharmacokinetics
and pharmacological actions associated with increasing doses. Phase II usually
involves trials
in a limited patient population to evaluate the efficacy of the potential
product for specific, targeted indications, to determine dosage tolerance and
optimum dosage, and to further identify possible adverse reactions and safety
risks. If a compound appears to be effective and to have an acceptable safety
profile in Phase II evaluations, Phase III trials are undertaken to evaluate
further clinical efficacy in comparison to standard therapies, generally within
a broader patient population at geographically dispersed clinical sites. Phase
III protocols are reviewed with the FDA to establish endpoints and data
handling parameters. Phase I, Phase II or Phase III testing may not be
completed successfully within any specific period of time, if at all, with
respect to any of our potential products. Furthermore, we, an institutional
review board, the FDA or other regulatory bodies may suspend a clinical trial
at any time for various reasons, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.
The results of pharmaceutical development, preclinical trials and clinical
trials are submitted to the FDA in the form of a biologics license application
for approval of the manufacture, marketing and commercial shipment of the
biological product. The biologics license application also must contain
extensive manufacturing information, and each manufacturing facility must be
inspected and approved by the FDA before the biologics license application will
be approved. The testing and approval process is likely to require substantial
time, effort and resources, and necessary approvals may not be granted on a
timely basis, if at all. The FDA may deny a biologics license application if
applicable regulatory criteria are not satisfied. The FDA may also require
additional testing or information, or require post-market testing and
surveillance to monitor the safety or efficacy of the product. In addition,
after marketing approval is granted, the FDA may require post-marketing
clinical trials, which typically entail extensive patient monitoring and may
result in restricted marketing of an approved product for an extended period of
time.
Some of our product candidates may qualify as orphan drugs under the Orphan
Drug Act of 1983. This act generally provides incentives to manufacturers to
undertake development and marketing of products to treat relatively rare
diseases or those diseases that affect fewer than 200,000 persons annually in
the United States. A drug that receives orphan drug designation by the FDA and
is the first product to receive FDA marketing approval for its product claim is
entitled to various advantages, including a seven-year exclusive marketing
period in the United States for that product claim. However, any drug that is
considered by the FDA to be different from or clinically superior to a
particular orphan drug, including any orphan drug of ours that has been so
designated by the FDA, will not be precluded from sale in the United States
during the seven-year exclusive marketing period. It is possible that none of
our product candidates will be designated as an orphan drug by the FDA or, if
so designated, will have a positive effect on our revenues.
To manufacture our potential products, a domestic or foreign drug
manufacturing facility must be registered with the FDA as a manufacturing
establishment, must submit to periodic inspection by the FDA and must comply
with current Good Manufacturing Practices regulations. In addition, the FDA
imposes a number of complex regulations on entities that advertise and promote
biologics, including, among others, standards and regulations for
direct-to-consumer advertising, off-label promotions, industry-sponsored
scientific and educational activities, and promotional activities involving the
Internet. The FDA has very broad enforcement authority under the Federal Food,
Drug and Cosmetic Act, and failure to abide by these regulations can result in
penalties, including the issuance of a warning letter directing us to correct
deviations from FDA standards, a requirement that future advertising and
promotional materials be pre-cleared by the FDA, and civil and criminal
penalties.
Whether or not FDA approval has been obtained, approval of a product by
comparable foreign regulatory authorities is necessary prior to the
commencement of marketing of a product in those countries. The approval
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procedures vary among countries and can involve additional testing. The time
required to obtain approval may differ from that required for FDA approval.
Although there are some centralized procedures for filings in the European
Union countries, in general each country has its own procedures and
requirements, and compliance with these procedures and requirements may be
expensive and time-consuming. Accordingly, there may be substantial delays in
obtaining required approvals from foreign regulatory authorities after the
relevant applications are filed, if we ultimately receive any approvals at all.
We are also subject to various federal, state and local laws, regulations
and recommendations relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals, and the use and
disposal of hazardous or potentially hazardous substances, including
radioactive compounds and infectious disease agents, used in connection with
our work. Government regulations that might result from future legislation or
administrative action, including additions or changes to environmental laws,
may materially affect our business operations and revenues.
Competition
We are in a race to identify, establish uses for and patent as many genes
and their corresponding proteins as possible and to commercialize the products
we develop from these genes and proteins. We face competition from other
entities using high-speed gene sequencers and other sophisticated
bioinformatics technologies to discover genes, including Celera Genomics
Corporation, Curagen, Inc., Genentech, Inc., Human Genome Sciences, Inc.,
Incyte Genomics, Inc. and Millennium Pharmaceuticals, Inc. We also face
competition from entities using more traditional methods to discover genes
related to particular diseases, including other large biotechnology and
pharmaceutical companies. We expect that competition in our field will continue
to be intense.
Research to identify genes is also being conducted by various institutes and
government-financed entities in the United States and in foreign countries,
including France, Germany, Japan and the United Kingdom, as well as by numerous
smaller laboratories associated with universities or other not-for-profit
entities. In addition, a number of pharmaceutical and biotechnology companies
and government-financed programs are engaged or have announced their intention
to engage in areas of human genome research similar to or competitive with our
focus on gene discovery, and other entities are likely to enter the field.
We believe the principal competitive factors affecting our markets are
rights to develop and commercialize therapeutic protein-based products,
including appropriate patent and proprietary rights; safety and effectiveness
of therapeutic protein-based products; the timing and scope of regulatory
approvals; the cost and availability of these products; the availability of
appropriate third-party reimbursement programs; and the availability of
alternative therapeutic products or treatments. Although we believe that we are
well-positioned to compete adequately with respect to these factors in the
future, our future success is currently difficult to predict because we are an
early stage company; all of our internal product candidates are still in
various stages of preclinical development and have yet to undergo clinical
trials. Also, although we believe that our bioinformatics technologies and
exploratory biology capabilities provide us with a competitive advantage, any
of the companies or other entities we compete with may discover and establish a
patent position in one or more genes or proteins that we have identified and
designated or considered designating as a product candidate. In addition, any
potential products based on genes or proteins we identify will face competition
both from companies developing gene- or protein-based products and from
companies developing other forms of treatment for diseases that may be caused
by, or related to, the genes or proteins we identify. Furthermore, our
potential products, if approved and commercialized, may compete against
well-established existing therapeutic protein-based products, many of which may
be currently reimbursed by government health administration authorities,
private health insurers and health maintenance organizations. Also, health care
professionals and consumers may prefer existing or newly developed products to
any product we develop.
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Employees
As of December 31, 2001, we had 309 full-time employees, 58 of whom hold
degrees at the doctoral level. Currently, we have approximately 240 employees
dedicated to research and development. Each of our employees has signed a
confidentiality agreement, and no employees are covered by a collective
bargaining agreement. We have never experienced employment-related work
stoppages and consider our employee relations to be good.
Important Factors That May Affect Our Business, Our Results of Operations and
Our Stock Price
Our bioinformatics-based discovery strategy is unproven, and we do not know
whether we will be able to discover any genes or proteins of commercial value.
We do not know whether we can successfully implement our
bioinformatics-based therapeutic protein discovery strategy because we are in
the early stages of development. For most of our corporate existence, we relied
on exploratory biology to study particular diseases and medical conditions and
to find potential treatments. We shifted our emphasis to bioinformatics-based
discovery relatively recently. Bioinformatics is the use of high-powered
computers, software and analytical tools to interpret DNA sequence data and to
assist in identifying those genes and proteins that are likely to play a
meaningful role in human health. We use bioinformatics to discover genes and
their corresponding proteins in genomic databases, with the goal of developing
therapeutic protein-based products based on these discoveries. We have not
begun clinical trials of any product candidates discovered through our
bioinformatics-based efforts, and we are not aware of any other company that
has successfully commercialized products derived from bioinformatics-based
research. Our bioinformatics-based strategy may not result in the development
or commercialization of any products.
We depend heavily on bioinformatics technology, which may prove to be
ineffective in the discovery of therapeutic proteins.
Our bioinformatics capabilities may prove ineffective in discovering genes
and proteins and may not be adequate to handle the daily flow of DNA sequence
data. Other technologies for analyzing genomic data and discovering genes may
enable other parties to discover novel genes or proteins that our technologies
fail to identify or may enable other parties to discover them before we do. Any
inadequacies of our bioinformatics technologies may prevent us from discovering
genes or proteins with therapeutic potential or from obtaining patent priority
relating to these genes or proteins.
The availability of novel genomic data may decrease in the future, which may
adversely affect our ability to discover novel therapeutic proteins.
We rely on the continuing availability of existing genomic data and the
continuous generation of new genomic data for the discovery of genes and
proteins. Because many companies and government or public agencies are
analyzing the genomic data that is currently publicly available, it has become
increasingly difficult for us to be the first to discover novel genes through
the analysis of this data. Companies and government or public agencies have
already mapped and made available significant portions of the human genome, and
the flow of novel genetic sequence data will likely decrease significantly in
the future. This expected decrease in the rate of generation of novel sequence
data could impair our ability to discover novel therapeutic proteins.
We may not be able to develop commercially viable products from the key
protein categories on which we focus.
We may not be able to discover any new therapeutic proteins of commercial
value in the key therapeutic protein categories we target in our discovery and
development efforts. Prior successes of other companies in commercializing
protein-based products derived from these categories provide no indication that
we will be able
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to discover any therapeutic proteins within these categories beyond those that
we have already discovered. Also, we may not be able to successfully
commercialize any novel therapeutic proteins we have discovered or may discover
in the future. In addition, some of the protein categories we concentrate on
have not yielded any successful therapeutic protein products or late-stage
clinical trial candidates. Discovery and development efforts we expend on these
categories may prove ineffective and may detract from our efforts to discover
and develop therapeutic proteins within those categories that have shown more
promise. Also, by focusing on specific categories of proteins, we may overlook
other therapeutic proteins not contained in these categories that ultimately
will be successfully commercialized by others. In addition, other classes of
drugs may prove to have superior therapeutic benefits or be easier and more
cost-effective to produce than therapeutic proteins.
Our patent applications may not result in issued patents, and our competitors
may commercialize the discoveries we attempt to patent.
Our pending patent applications covering genes and their corresponding
proteins may not result in the issuance of any patents. These applications may
not be sufficient to meet the statutory requirements for patentability, and
therefore we may be unable to obtain enforceable patents covering the related
therapeutic protein-based product candidates we may want to commercialize. In
addition, other parties have filed or may file patent applications that cover
genes, proteins or related discoveries or technologies similar or identical to
those covered in our patent applications. Because patent applications in the
United States historically have been maintained in secrecy until a patent
issues, other parties may have filed patent applications on genes or their
corresponding proteins before we filed applications covering the same genes or
proteins, and we may not be the first to discover these genes or proteins. Any
patent applications filed by third parties may prevail over our patent
applications or may result in patents that issue alongside patents issued to
us, leading to uncertainty over the scope of the patents or the freedom to
practice the claimed inventions.
Third parties may infringe our patents or challenge their validity or
enforceability.
Third parties may infringe our patents or may initiate proceedings
challenging the validity or enforceability of our patents. The issuance of a
patent is not conclusive as to its validity or enforceability. Challenges
raised in patent infringement litigation we initiate or in proceedings
initiated by third parties may result in determinations that our patents have
not been infringed or that they are invalid, unenforceable or otherwise subject
to limitations. In the event of any such determinations, third parties may be
able to use the discoveries or technologies claimed in our patents without
paying licensing fees or royalties to us, which could significantly diminish
the value of our intellectual property. Also, as a result of such
determinations, we may be enjoined from commercializing potential products or
may be required to obtain licenses, if available, to third-party patents or
develop or obtain alternative technology. In addition, enforcing our patents
against third parties may require significant expenditures regardless of the
outcome of such efforts. For example, we recently filed a patent infringement
lawsuit against Immunex Corporation claiming infringement of certain of our
patents related to dimeric fusion proteins. This lawsuit, and any others that
may arise relating to our patents, may require significant expenditures,
regardless of the outcome.
Furthermore, third parties may independently develop intellectual property
similar to our patented intellectual property, which could result in, among
other things, interference proceedings in the United States Patent and
Trademark Office to determine priority of discovery or invention. Interference
proceedings could result in the loss of or significant limitations on patent
protection for our discoveries or technologies. Responding to interference
proceedings or other challenges initiated by third parties may require
significant expenditures and divert the attention of our management and key
personnel from other business concerns.
We may be subject to patent infringement claims, which could result in
substantial costs and liability and prevent us from commercializing our
potential products.
Third parties may claim that our potential products or related technologies
infringe their patents. Patent litigation is very common in the
biopharmaceutical industry, and the risk of infringement claims is likely to
increase as the industry expands and as other companies obtain more patents and
increase their efforts to discover
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genes through automated means and to develop proteins. Any patent infringement
claims or similar legal impediments that might be brought against us may cause
us to incur significant expenses, divert the attention of our management and
key personnel from other business concerns and, if successfully asserted
against us, require us to pay substantial damages. In addition, as a result of
a patent infringement suit, we may be forced to stop or delay developing,
manufacturing or selling potential products that are claimed to infringe a
patent covering a third party's intellectual property unless that party grants
us rights to use its intellectual property. We may be unable to obtain these
rights on terms acceptable to us, if at all. Even if we are able to obtain
rights to a third party's patented intellectual property, these rights may be
non-exclusive, and therefore our competitors may obtain access to the same
intellectual property. Ultimately, we may be unable to commercialize our
potential products or may have to cease some of our business operations as a
result of patent infringement claims, which could severely harm our business.
Issued patents may not provide us with any competitive advantage or provide
meaningful protection against competitors.
Issued patents may not provide us with any competitive advantage. Although
we have a number of issued patents, the discoveries or technologies covered by
these patents may not have any value. In addition, issued patents may not
provide commercially meaningful protection against competitors. Other parties
may be able to design around our issued patents or independently develop
products having effects similar or identical to our patented product
candidates. Some companies are currently attempting to develop therapeutic
protein-based products substantially equivalent to products patented by other
parties by altering the amino acid sequence within the therapeutic
protein-based product and declaring the altered product a new product. It may
be easier to develop substantially equivalent versions of therapeutic
protein-based products such as monoclonal antibodies and soluble receptors than
it is to develop substantially equivalent versions of the proteins with which
they interact because there is often more than one antibody or receptor that
has the same therapeutic effect. Consequently, any existing or future patents
we have that cover monoclonal antibodies or soluble receptors may not provide
any meaningful protection against competitors. In addition, the scope of our
patents is subject to considerable uncertainty and competitors or other parties
may obtain similar patents of uncertain scope. For example, other parties may
discover uses for genes or proteins different from the uses covered in our
patents, and these other uses may be separately patentable. If another party
holds a patent on the use of a gene or protein, then even if we hold the patent
covering the composition of matter of the gene or protein itself, that other
party could prevent us from selling any product directed to such use. Also,
other parties may have patents covering the composition of matter of genes or
proteins for which we have patents covering only methods of use of these genes
or proteins. Furthermore, the patents we hold relating to recombinant human
proteins, such as our patents covering rh Factor XIII or rh Thrombin, may not
prevent competitors from developing, manufacturing or selling other versions of
these proteins. Moreover, although we hold patents relating to the manufacture
of recombinant human thrombin, we have no composition of matter patent
protection covering thrombin. Accordingly, we may not be able to prevent other
parties from commercializing competing forms of recombinant human thrombin.
If other parties publish information about the genes or proteins we discover
before we apply for patent protection, we may be unable to obtain patent
protection.
Public disclosures of genetic sequence information may limit the scope of
our patent claims or result in the denial of subsequent patent applications
that we file on genes and their corresponding proteins. Washington University
has identified genes through partial sequencing funded by Merck & Co., Inc. and
has deposited these partial sequences in a public database. Also, in January
1997, The Institute for Genomic Research disclosed more
than 35,000 full-length DNA sequences that were assembled from partial gene
sequences available in publicly accessible databases or sequenced at the
Institute. In addition, the Human Genome Project and Celera Genomics
Corporation completed an initial sequencing of the human genome and published
papers on this sequencing in February 2001. We may be unable to obtain patent
protection for sequences published in these disclosures if they represent prior
art.
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The patent field relating to therapeutic protein-based products is subject to
a great deal of uncertainty, and if patent laws or the interpretation of
patent laws change, our competitors may be able to develop and commercialize
products based on proteins that we discovered.
The patent protection available for genes and therapeutic protein-based
products is highly uncertain and involves complex legal and factual questions
that determine who has the right to develop a particular product. No clear
policy has emerged regarding the breadth of patents in this area. There have
been, and continue to be, intensive discussions concerning the scope of patent
protection for partial gene sequences, full-length genes and their
corresponding proteins. Social and political opposition to patents on genes may
lead to narrower patent protection for genes and their corresponding proteins.
Patent protection relating to genes and therapeutic protein-based products is
also subject to a great deal of uncertainty outside the United States, and
patent laws are currently undergoing review and revision in many countries.
Changes in, or different interpretations of, patent laws in the United States
and other countries may result in our inability to obtain patents covering the
genes or proteins we discover or to enforce patents that have been issued to
us, and may allow others to use our discoveries to develop and commercialize
therapeutic protein-based products.
We expect to incur significant expenses in applying for patent protection and
prosecuting our patent applications.
We may fail to secure meaningful patent protection relating to any of our
existing or future product candidates, discoveries or technologies despite the
expenditure of considerable resources. Our success depends significantly on the
establishment of patent protection for the genes, proteins and related
technologies we discover or invent. Consequently, we intend to continue our
substantial efforts in applying for patent protection and prosecuting pending
and future patent applications. These efforts have historically required the
expenditure of considerable time and money, and we expect that they will
continue to require significant expenditures. If future changes in United
States or foreign patent laws complicate or hinder our efforts to obtain patent
protection, the costs associated with patent prosecution may increase
significantly.
We may be unable to protect our proprietary technology and information.
In addition to our patented intellectual property, we also rely on
unpatented technology, trade secrets and confidential information, including
our ASIDE software program, our genetic sequence database and our
bioinformatics algorithms. We may not be able to effectively protect our rights
to this technology or information. Other parties may independently develop
equivalent technologies or independently gain access to and disclose
substantially equivalent information. Disputes may arise about inventorship and
corresponding rights to know-how and inventions resulting from the joint
creation or use of intellectual property by us and our corporate partners,
licensees, scientific and academic collaborators and consultants. In addition,
confidentiality agreements and material transfer agreements we have entered
into with these parties and with employees and advisors may not provide
effective protection of our technology or information or, in the event of
unauthorized use or disclosure, may not provide adequate remedies.
We have limited experience in developing products.
We have not yet developed or commercialized any products on our own. Our
contributions to the discovery or development of certain therapeutic proteins
currently on the market do not indicate that we will be able to successfully
develop products alone. Our work relating to these marketed products did not
include clinical trials, manufacturing, marketing or other late-stage
development or commercialization activities. We have limited experience with
product development activities and may not be successful in developing or
commercializing any products.
Any failure or delay in commencing or completing clinical trials for product
candidates could severely harm our business.
The successful commercialization of any product candidates will depend on
regulatory approval in each market in which we, our collaborators or our
licensees intend to market the product candidates. Each of our product
candidates must undergo extensive preclinical studies and clinical trials as a
condition to regulatory
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approval. Preclinical studies and clinical trials are time-consuming and
expensive and together take several years to complete, and to date we have not
completed any clinical trials on our own. The commencement and completion of
clinical trials for our product candidates may be delayed by many factors,
including:
. our inability or the inability of our collaborators or licensees to
manufacture or obtain from third parties materials sufficient for use in
preclinical studies and clinical trials;
. delays in patient enrollment and variability in the number and types of
patients available for clinical trials;
. difficulty in maintaining contact with patients after treatment,
resulting in incomplete data;
. poor effectiveness of product candidates during the clinical trials;
. unforeseen safety issues or side effects; and
. governmental or regulatory delays.
It is possible that none of our product candidates, whether developed on our
own, with collaborators or by licensees, will enter or complete clinical trials
in any of the markets in which we, our collaborators or licensees intend to
sell those product candidates. Accordingly, we, our collaborators or licensees
may not receive the regulatory approvals needed to market our product
candidates in any markets. Any failure or delay in commencing or completing
clinical trials or obtaining regulatory approvals for our product candidates
could severely harm our business.
Clinical trials may fail to demonstrate the safety and effectiveness of our
product candidates, which could prevent or significantly delay their
regulatory approval.
Clinical trials involving our product candidates may reveal that those
candidates are ineffective, are unacceptably toxic or have other unacceptable
side effects. In addition, data obtained from tests are susceptible to varying
interpretations, which may delay, limit or prevent regulatory approval.
Likewise, the results of preliminary studies do not predict clinical success,
and larger and later-stage clinical trials may not produce the same results as
earlier-stage trials. Frequently, product candidates that have shown promising
results in early clinical trials have subsequently suffered significant
setbacks in later clinical trials. For example, in 1998, Amgen Inc. halted
Phase III clinical trials in the United States relating to our product
candidate Thrombopoietin in the treatment of chemotherapy-induced
thrombocytopenia after reports of the development of neutralizing antibodies in
both cancer patients and volunteer donors in platelet donation trials. In
addition, clinical trials of potential products often reveal that it is not
practical or feasible to continue development efforts for these product
candidates. For example, in 2001, Celltech Group plc discontinued development
of platelet-derived growth factor receptor antibody, a product candidate that
Celltech licensed from us and designated as CDP 860, for the treatment of
restenosis. Celltech concluded that the Phase II clinical trial results did not
justify further development of CDP 860 as a restenosis therapy.
We may be unable to satisfy the rigorous government regulations relating to
the development and commercialization of our product candidates.
Any failure to receive the regulatory approvals necessary to commercialize
our product candidates could severely harm our business. Our product candidates
are subject to extensive and rigorous government regulation. The United States
Food and Drug Administration, or FDA, regulates, among other things, the
collection, testing, manufacturing, safety, efficacy, potency, labeling,
storage, record keeping, advertising, promotion, sale and distribution of
therapeutic products. If our potential products are marketed abroad, they will
also be subject to extensive regulation by foreign governments. None of our
product candidates has been approved for sale in the United States or any
foreign market, and we have only limited experience in filing and pursuing
applications necessary to gain regulatory approvals.
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The regulatory review and approval process, which includes preclinical
studies and clinical trials of each product candidate, is lengthy, expensive
and uncertain. Securing FDA approval requires the submission of extensive
preclinical and clinical data and supporting information to the FDA for each
indication to establish the product candidate's safety and effectiveness. The
approval process typically takes many years to complete and may involve ongoing
requirements for post-marketing studies. Any FDA or other regulatory approval
of our product candidates, once obtained, may be withdrawn. In addition,
government regulation may result in:
. prohibitions or significant delays in the marketing of potential products;
. discontinuation of marketing of potential products; and
. limitations of the indicated uses for which potential products may be
marketed.
If we fail to comply with the laws and regulations pertaining to our
business, we may be subject to sanctions, including the temporary or permanent
suspension of operations, product recalls, marketing restrictions and civil and
criminal penalties.
We may encounter difficulties developing or commercializing our product
candidate rh Factor XIII.
We may encounter difficulties developing or commercializing our product
candidate rh Factor XIII due to regulatory impediments and intellectual
property challenges. The FDA placed our initial investigational new drug
application for rh Factor XIII on hold in 1993, citing insufficient information
to assess its risks to subjects. Although we intend to submit a new
investigational new drug application for rh Factor XIII to the FDA, the FDA may
raise additional questions or require additional data, which could delay or
prevent the initiation of clinical trials. In addition, rh Factor XIII is
currently the subject of a patent interference proceeding with Aventis Behring
L.L.C. Although we have entered into a cross-licensing agreement with Aventis
Behring with respect to rh Factor XIII, the interference proceeding could
result in the loss of or significant limitations on our patent protection for
this product candidate. Furthermore, under the cross-licensing agreement,
Aventis Behring retains the ability to market recombinant products that may
compete with rh Factor XIII.
Our plan to use collaborations to leverage our capabilities may not be
successful.
As part of our business strategy, we have entered into collaboration
arrangements with strategic partners to develop product candidates and will
continue to evaluate similar opportunities. For our collaboration efforts to be
successful, we must identify partners whose competencies complement ours. We
must also successfully enter into collaboration agreements with them on terms
attractive to us and integrate and coordinate their resources and capabilities
with our own. We may be unsuccessful in entering into collaboration agreements
with acceptable partners or negotiating favorable terms in these agreements.
Also, we may be unsuccessful in integrating the resources or capabilities of
these collaborators. In addition, our collaborators may prove difficult to work
with or less skilled than we originally expected. If we are unsuccessful in our
collaborative efforts, our ability to develop and market product candidates
could be severely limited.
We may not be able to generate any revenue from product candidates developed
by collaborators or licensees if they are unable to successfully develop
those candidates.
We may be unable to derive any value from product candidates developed by
collaborators or licensees. Our ability to generate revenues from existing or
future collaborations and license arrangements is subject to numerous risks,
including:
. the possibility that our collaborators or licensees lack sufficient
financial, technical or other capabilities to develop these product
candidates;
. the length of time that it takes for our collaborators or licensees to
achieve various clinical development and regulatory approval milestones;
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. the inability of collaborators or licensees to successfully address any
regulatory or technical challenges they may encounter; and
. the possibility that these product candidates may not be effective or may
prove to have undesirable side effects, unacceptable toxicities or other
characteristics that preclude regulatory approval or prevent or limit
commercial use.
Novo Nordisk has substantial rights to license proteins we discover, which
may limit our ability to pursue other collaboration or licensing arrangements
or benefit from our discoveries.
As part of our separation from Novo Nordisk, we granted Novo Nordisk options
to license certain rights to several of our potential therapeutic proteins
under an option agreement. Although we generally retain North American rights
to the proteins licensed by Novo Nordisk pursuant to this agreement, Novo
Nordisk has rights to these proteins in the rest of the world. In addition,
under this agreement Novo Nordisk has worldwide rights, including rights in
North America, to any licensed proteins that act to generate, expand or prevent
the death of insulin-producing beta cells. Novo Nordisk has already exercised
options to license three proteins, and it may license other proteins in the
future pursuant to this agreement. Our agreement with Novo Nordisk may:
. preclude or delay opportunities to seek other collaborators for our
product candidates, due to the fact that we cannot explore other
collaboration opportunities relating to proteins subject to the agreement
until after Novo Nordisk has decided not to exercise an option with
respect to the protein, which decision Novo Nordisk may withhold until
well into the product development cycle;
. limit the financial benefits we may derive from product candidates by
allowing Novo Nordisk to license proteins in exchange for predetermined
payments and royalties and with predetermined cost-sharing arrangements,
which payments and royalty rates may be less than, and which cost-sharing
arrangements may be less favorable to us than, terms we might otherwise
obtain in collaborative or licensing arrangements with other parties;
. result in Novo Nordisk licensing proteins with the most therapeutic and
commercial potential, leaving us with fewer or less desirable product
candidates to develop on our own or with other potential collaborators;
and
. prevent us from collaborating with or licensing a product candidate to
another company that, by virtue of its particular skills and
capabilities, may be a more desirable collaborator or licensing partner
for that particular product candidate than Novo Nordisk.
Because we currently do not have the capability to manufacture materials for
clinical trials or for commercial sale, we will have to rely on third parties
to manufacture our potential products, and we may be unable to obtain
required quantities in a timely manner or on acceptable terms, if at all.
We currently do not have the manufacturing facilities necessary to produce
materials for clinical trials or commercial sale, and we have only limited
capabilities to produce materials for preclinical studies. We intend to rely on
collaborators and third-party contract manufacturers to produce the quantities
of drug materials needed for preclinical studies, clinical trials and
commercialization of our potential products. We will have to rely on these
manufacturers to deliver materials on a timely basis and to comply with
regulatory requirements, including current Good Manufacturing Practices
regulations enforced by the FDA through its facilities inspection program.
These manufacturers may not be able to meet our needs with respect to timing,
quantity or quality of materials, and may fail to satisfy applicable regulatory
requirements with respect to the manufacturing of these materials. If we are
unable to contract for a sufficient supply of needed materials on acceptable
terms, or if we encounter delays in the delivery of materials from, or
difficulties in our relationships with, manufacturers, our preclinical studies
and clinical trials may be delayed. Delays in preclinical studies could
postpone the filing of investigational new drug applications or the initiation
of clinical trials, and delays in clinical trials could postpone the subsequent
submission of product candidates for regulatory approval and market
introduction.
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We may not be successful in developing internal manufacturing capabilities or
complying with applicable manufacturing regulations.
We may be unable to establish the internal manufacturing capabilities
necessary to develop our potential products. Therapeutic proteins are often
more difficult and expensive to manufacture than other classes of drugs, and
the manufacture of therapeutic proteins may not be commercially feasible. Also,
we will be required to adhere to rigorous Good Manufacturing Practices
regulations in the manufacture of therapeutic proteins. Although we intend to
develop limited manufacturing facilities internally, construction of an initial
pilot manufacturing plant will take at least three years and require
substantial expenditures. In addition, we will need to hire and train employees
to staff this facility if we are able to complete construction. We do not
anticipate that this initial pilot manufacturing plant will provide us with the
capability to produce drug materials for commercial sale. To develop this
capability we would need to further expand our manufacturing facilities. If any
of our future facilities cannot pass a pre-approval plant inspection, the FDA
pre-market approval of our product candidates may not be granted. In complying
with these regulations and any applicable foreign regulatory requirements, we
will be obligated to expend time, money and effort in production, record
keeping and quality control to assure that our potential products meet
applicable specifications and other requirements. Any failure to comply with
these requirements may subject us to regulatory sanctions and delay or
interrupt our development and commercialization efforts.
In addition, some of the inventions licensed to us were initially developed
at universities or other not-for-profit institutions with funding support from
an agency of the United States government. In accordance with federal law, we
or our licensees may be required to manufacture products covered by patents in
those inventions in the United States, unless we can obtain a waiver from the
government on the basis that such domestic manufacture is not commercially
feasible. We have not attempted to secure any such waivers from the government,
and do not know if they would be available if sought. If we are not able to
obtain such waivers on a timely basis, we might be forced to seek manufacturing
arrangements at higher prices, or on otherwise less favorable terms, than might
be available to us in the absence of this domestic manufacturing requirement.
Because we will depend on third parties to conduct laboratory tests and
clinical trials, we may encounter delays in or lose some control over our
efforts to develop product candidates.
We will rely on third parties to design and conduct laboratory tests and
clinical trials for us. If we are unable to obtain these services on acceptable
terms, we may not be able to complete our product development efforts in a
timely manner. Also, because we will rely on third parties for laboratory tests
and clinical trials, we may lose some control over these activities or be
unable to manage them appropriately, or may become too dependent on these
parties. These third parties may not complete the tests or trials on schedule
or when we request, and the tests or trials may be methodologically flawed or
otherwise defective. Any delays or difficulties associated with third-party
laboratory tests or clinical trials may delay the development of our product
candidates.
Because we currently have no sales or marketing capabilities, we may be
unable to successfully commercialize our potential products.
We currently have no direct sales capabilities or marketing capabilities. We
expect that in the future we will rely on collaborators or other third parties
to market products that we may develop. These third parties may not be
successful in marketing our potential products, and we will have little or no
control over their marketing efforts. In addition, we may co-promote our
potential products or retain marketing rights in North America to these
products. If we decide to market products directly, we will need to incur
significant additional expenses and commit significant additional management
resources to develop effective sales and marketing capabilities. We may not be
able to establish these capabilities despite these additional expenditures. In
addition, co-promotion or other marketing arrangements with third parties to
commercialize potential products could significantly limit the revenues we
derive from these products.
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Environmental and health and safety laws may result in liabilities, expenses
and restrictions on our operations.
State and federal laws regarding environmental protection, hazardous
substances and human health and safety may adversely affect our business. The
use of hazardous substances in our operations exposes us to the risk of
accidental releases. If our operations result in contamination of the
environment or expose individuals to hazardous substances, we could be liable
for damages and fines. Future changes to environmental and health and safety
laws could cause us to incur additional expenses or restrict our operations. In
addition, the site where our principal headquarters and facilities are located
has been listed as a contaminated property by the State of Washington due to
its previous use by the City of Seattle as an electricity generating plant. We
purchased this property from the City of Seattle. The City of Seattle has
agreed to defend us against and indemnify us for any claims that arise from
this pre-existing contamination, except to the extent that we caused the claim
through our negligence or intentional fault, or to the extent that we
contributed to the contamination that is the subject of the claim, caused an
increase in the clean-up costs or failed to comply with our obligations under
our agreement with the City of Seattle. This indemnity may be insufficient and
we may be subject to environmental liabilities or be prohibited from using or
occupying some or all of the property as a result of environmental claims.
We anticipate incurring additional losses and may not achieve profitability.
As of December 31, 2001, we had an accumulated deficit of $111.1 million. We
expect to continue to incur increasing losses over the next several years, and
we may never become profitable. We are in the early stages of development as an
independent company, and it will be a number of years, if ever, before we
generate any revenues from our own product sales. Our revenues from existing
collaborative and licensing arrangements are insufficient to cover our
operating expenses, and we may never generate revenues from these or any future
arrangements sufficient to cover these expenses. In addition, we will continue
to incur substantial expenses relating to our discovery and development
efforts. We anticipate that these expenses will increase as we focus on the
laboratory tests and clinical trials required to obtain the regulatory
approvals necessary for the sale of any products. The development of our
product candidates will require significant further research, development,
testing and regulatory approvals. We may not be able to complete such
development or succeed in developing products that will generate revenues in
excess of the costs of development.
Our operating results are subject to fluctuations that may cause our stock
price to decline.
Our operating results have fluctuated in the past and are likely to continue
to do so in the future. Our revenues are unpredictable and may fluctuate due to
the timing of licensing fees or the achievement of milestones under new or
existing licensing and collaborative arrangements, including our option
agreement with Novo Nordisk. In addition, our expenses may fluctuate from
quarter to quarter due to the timing of expenses, including payments owed by us
under collaborative or licensing arrangements. We believe that period-to-period
comparisons of our past operating results are not good indicators of our future
performance and should not be relied on to predict our future operating
results. For example, for periods prior to 2000, most of our revenues
represented payments received from Novo Nordisk for research and development
activities we conducted on their behalf. This arrangement terminated in 2000 in
connection with our separation from Novo Nordisk. It is possible that in the
future our operating results in a particular quarter or quarters will not meet
the expectations of securities analysts or investors, causing the market price
of our common stock to decline.
If we do not obtain substantial additional funding on acceptable terms, we
may not be able to continue to grow our business or generate enough revenue
to recover our investment in research and development.
Our business does not currently generate the cash needed to finance our
operations. We anticipate that we will continue to expend substantial funds on
our discovery and development programs. We expect that these expenditures will
increase significantly over the next several years as we hire additional
employees, expand our preclinical development activities and begin internal
clinical trials. We will need to seek additional funding
29
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through public or private financings, including equity financings, and through
other arrangements, including collaborative and licensing arrangements. Poor
financial results, unanticipated expenses or unanticipated opportunities that
require financial commitments could give rise to additional financing
requirements sooner than we expect. However, financing may be unavailable when
we need it or may not be available on acceptable terms. If we raise additional
funds by issuing equity or convertible debt securities, the percentage
ownership of our existing shareholders will be diluted, and these securities
may have rights superior to those of our common stock. If we are unable to
raise additional funds when we need them, we may be required to delay, scale
back or eliminate expenditures for some of our discovery or development
programs. We may also be required to grant rights to third parties to develop
and market product candidates that we would prefer to develop and market
internally, and such rights may be granted on terms that are not favorable to
us. If we are required to grant such rights, the ultimate value of these
product candidates to us would be reduced.
Negative public opinion and increased regulatory scrutiny of genetic and
clinical research may limit our ability to conduct our business.
Ethical, social and legal concerns about genetic and clinical research could
result in additional regulations restricting or prohibiting some of our
activities or the activities of our suppliers and collaborators. In recent
years, federal and state agencies, congressional committees and foreign
governments have expressed interest in further regulating the biotechnology
industry. More restrictive regulations could delay preclinical studies or
future clinical trials, or prevent us from obtaining regulatory approvals or
commercializing any products. In addition, animal rights activists may protest
our use of animals in research and development and may attempt to disrupt our
operations, which could cause us to incur significant expenses and distract our
management's attention from other business concerns.
Many of our competitors have substantially greater capabilities and resources
than we do and may be able to develop and commercialize products before we do.
We may be unable to compete successfully against our current or future
competitors. We expect that competition in our field will continue to be
intense. We face competition from other entities using high-speed gene
sequencers and other sophisticated bioinformatics technologies to discover
genes, including Celera Genomics Corporation, Curagen, Inc., Genentech, Inc.,
Human Genome Sciences, Inc., Incyte Genomics, Inc. and Millennium
Pharmaceuticals, Inc. We also face competition from entities using more
traditional methods to discover genes related to particular diseases, including
other large biotechnology and pharmaceutical companies. In addition, we face
competition from other parties that conduct research to identify genes and
conduct human genome research similar to or competing with our focus on gene
discovery, including biotechnology and pharmaceutical companies; privately or
publicly financed research institutes or programs, such as those sponsored by
the United States government and the governments of France, Germany, Japan and
the United Kingdom; and laboratories associated with universities or other
not-for-profit organizations. Furthermore, our potential products, if approved
and commercialized, may compete against well-established existing therapeutic
protein-based products, many of which may be currently reimbursed by government
health administration authorities, private health insurers and health
maintenance organizations. Also, health care professionals and consumers may
prefer existing or newly developed products to any product we develop.
Many of our existing and potential competitors have substantially greater
research and product development capabilities and financial, scientific,
marketing and human resources than we do. As a result, these competitors may:
. succeed in identifying genes or proteins, or developing therapeutic
protein-based products, earlier than we do;
. obtain approvals for products from the FDA or other regulatory agencies
more rapidly than we do;
. obtain patents that block or otherwise inhibit our ability to develop and
commercialize our product candidates;
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. develop treatments or cures that are safer or more effective than those
we propose to develop;
. devote greater resources to marketing or selling their products;
. introduce or adapt more quickly to new technologies or scientific
advances, which could render our bioinformatics technologies obsolete;
. introduce products that make the continued development of our potential
products uneconomical;
. withstand price competition more successfully than we can;
. more effectively negotiate third-party collaborative or licensing
arrangements; and
. take advantage of acquisition or other opportunities more readily than we
can.
The failure to attract or retain key management or other personnel could
decrease our ability to discover, develop and commercialize potential
products.
We depend on our senior executive officers as well as key scientific and
other personnel. Only a few of our key personnel are bound by employment
agreements, and those with employment agreements are bound only for a limited
period of time. Further, we have not purchased key-person life insurance
policies for any of our executive officers or key personnel. Competition for
scientists and other qualified employees is intense among pharmaceutical and
biotechnology companies, and the loss of qualified employees, or an inability
to attract, retain and motivate the additional highly skilled employees
required for the expansion of our activities, could hinder our ability to
discover, develop and commercialize potential products.
If the health care system or reimbursement policies change, the prices of our
potential products may fall or our potential sales may decline.
In recent years, officials have made numerous proposals to change the health
care system in the United States. These proposals include measures that would
limit or prohibit payments for certain medical procedures and treatments or
subject the pricing of pharmaceuticals to government control. Government and
other third-party payors increasingly have attempted to contain health care
costs by limiting both coverage and the level of reimbursement of newly
approved health care products. They may also refuse to provide any coverage of
uses of approved products for medical indications other than those for which
the FDA has granted marketing approval. Governments may adopt future
legislative proposals and federal, state or private payors for health care
goods and services may take further action to limit payments for health care
products and services. In addition, in certain foreign countries, particularly
the countries of the European Union, the pricing of prescription
pharmaceuticals is subject to governmental control. Any of these factors could
limit our ability to successfully commercialize our potential products.
We may be required to defend lawsuits or pay damages in connection with the
alleged or actual harm caused by our product candidates.
We face an inherent business risk of exposure to product liability claims in
the event that the use of our product candidates is alleged to have resulted in
harm to others. This risk exists in clinical trials as well as in commercial
distribution. In addition, the pharmaceutical and biotechnology industries in
general have been subject to significant medical malpractice litigation. We may
incur significant expenses if product liability or malpractice lawsuits against
us are successful. Although we may obtain product liability insurance, any
coverage we obtain may not be adequate to cover such claims.
Our stock price may be volatile.
The market price of our common stock may fluctuate significantly in response
to many factors beyond our control, including:
. changes in the recommendations of securities analysts or changes in their
financial estimates of our operating results;
. failures in meeting performance expectations of securities analysts or
investors;
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. fluctuations in the valuations of companies perceived by securities
analysts or investors to be comparable to us; and
. share price and volume fluctuations attributable to inconsistent trading
volume levels of our shares.
Furthermore, the stock markets have experienced extreme price and volume
fluctuations that have affected and continue to affect the market prices of
equity securities of many companies. In particular, there have been high levels
of volatility in the market prices of securities of biotechnology companies.
These fluctuations often have been unrelated or disproportionate to the
operating performance of those companies. These market and industry
fluctuations, as well as general economic, political and market conditions such
as recessions, interest rate changes or international currency fluctuations,
may negatively impact the market price of our common stock. In the past,
companies that have experienced volatility in the market price of their stock
have been subject to securities class action litigation. We may be the target
of this type of litigation in the future. Securities litigation against us
could result in substantial costs and divert our management's attention from
other business concerns, which could seriously harm our business.
Our existing shareholders have significant control of our management and
affairs, which they could exercise against your best interests.
Novo Nordisk, together with Warburg, Pincus Equity Partners, L.P. and
entities affiliated with Patricof & Co. Ventures, Inc., beneficially own an
aggregate of approximately 62% of our outstanding voting common stock. Novo
Nordisk beneficially owns 100% of our outstanding non-voting common stock. In
addition, Novo Nordisk and Warburg, Pincus Equity Partners have rights to
designate director nominees to our board of directors. These shareholders,
acting together, have the ability to control our management and affairs and
matters requiring shareholder approval, including the election of directors and
approval of significant corporate transactions, such as mergers, consolidations
or the sale of substantially all of our assets. Consequently, these
shareholders, acting together, have the ability to cause a change in control,
as well as to delay or prevent a change in control. They may also discourage a
potential acquirer from making a tender offer or otherwise attempting to effect
a change in control, even if such a change in control would benefit our other
shareholders.
Provisions in our charter documents could prevent or frustrate any attempts
to replace our current management by shareholders.
Our articles of incorporation and bylaws contain provisions, such as
undesignated preferred stock and prohibitions on cumulative voting in the
election of directors, which could make it more difficult for a third party to
acquire us without the consent of our board of directors. Also, our articles of
incorporation provide for a staggered board, removal of directors only for
cause and certain requirements for calling special shareholder meetings. In
addition, our bylaws require advance notice of shareholder proposals and
nominations and impose restrictions on the persons who may call special
shareholder meetings. These provisions may have the effect of preventing or
hindering any attempts by our shareholders to replace our current management.
Item 2. Properties
We are headquartered in Seattle, Washington, where we own two buildings
containing approximately 160,000 square feet. We also own a parcel of land
contiguous to one of the buildings on which we believe we could expand by
adding 20,000 to 40,000 additional square feet of laboratory and office space.
Recently we purchased land adjacent to our existing facilities on which we
intend to construct a pilot manufacturing plant. In addition, we have leased
approximately 15,000 square feet of space in a nearby office building. We
believe that our existing facilities, together with available or planned
expansion space, will be adequate to fulfill our needs for the next several
years. However, within that time frame, we may be required to locate
alternative or additional facilities depending on the extent of our growth.
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Item 3. Legal Proceedings
From time to time, we may become involved in litigation relating to claims
arising from the ordinary course of our business, including actions relating to
intellectual property rights.
On March 7, 2002, we filed a patent infringement lawsuit against Immunex
Corporation in the United States District Court for the Western District of
Washington in Seattle. The lawsuit charges Immunex with directly and willfully
infringing United States Patent Numbers 5,843,725, 6,018,026, 6,291,212 B1,
6,291,646 B1, 6,300,099 B1 and 6,323,323 B1 through the manufacture,
importation and sale of Enbrel(R), a dimeric fusion protein. While it is
impossible to predict accurately or to determine the eventual outcome of this
matter, we believe that the outcome will not have a material adverse effect on
our financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our shareholders during the fourth
quarter of our fiscal year ended December 31, 2001.
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PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Our common stock began trading on the Nasdaq Stock Market under the symbol
ZGEN on February 1, 2002. At March 15, 2002, we had 67 shareholders of record.
We have never paid cash dividends and do not anticipate paying them in the
foreseeable future.
In fiscal year 2001, we granted stock options to purchase 3,629,066 shares
of common stock, with exercise prices ranging from $2.78 to $4.72 per share,
under our Amended and Restated 2000 Stock Incentive Plan. To date, options for
361,894 shares have been canceled without being exercised and options for
271,080 shares have been exercised. There were 7,307,092 total options
outstanding as of December 31, 2001. The sales and issuances of these
securities were exempt from registration under the Securities Act pursuant to
Rule 701 promulgated thereunder on the basis that these options were offered
and sold either pursuant to a written compensatory benefit plan or pursuant to
written contracts relating to consideration, as provided by Rule 701, or
pursuant to Section 4(2) thereof, on the basis that the transactions did not
involve a public offering.
On January 31, 2002, the U.S. Securities and Exchange Commission (the
Commission) declared effective our Registration Statement on Form S-1
(Registration No. 333-69190) as filed with the Commission in connection with
our initial public offering of common stock. The offering was managed by Lehman
Brothers Inc., Merrill Lynch & Co., Bear, Stearns & Co. Inc. and Pacific Growth
Equities, Inc. The date of commencement of the initial public offering was
February 1, 2002. Pursuant to the registration statement, we registered and
sold an aggregate of 10,000,000 shares of common stock for a gross aggregate
offering price of $120.0 million. In connection with the offering, we incurred
total expenses of approximately $10.0 million, including underwriting discounts
and commissions of approximately $8.4 million and other expenses of
approximately $1.6 million. All of these expenses were direct or indirect
payments to others and not payments to our directors or officers (or their
associates) or to our affiliates or 10% shareholders. Net proceeds of
approximately $110.0 million have been invested in short-term,
investment-grade, interest bearing instruments.
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Item 6. Selected Financial Data
The following table shows selected financial data for the five years ended
December 31:
<TABLE>
<CAPTION>
2001 2000 1999 1998 1997
-------- -------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................................. $ 17,828 $ 32,464 $69,675 $66,744 $67,679
Operating expenses:..................................
Research and development(1)....................... 48,052 49,337 48,415 49,886 50,428
General and administrative(2)..................... 10,475 12,069 9,550 9,339 12,308
Noncash stock-based compensation expense.......... 3,507 -- -- -- --
-------- -------- ------- ------- -------
Total operating expenses...................... 62,034 61,406 57,965 59,225 62,736
-------- -------- ------- ------- -------
Income (loss) from operations........................ (44,206) (28,942) 11,710 7,519 4,943
Other income (expense):
Interest income................................... 7,152 5,417 274 29 285
Interest expense.................................. (13) (848) (56) (485) (207)
Other, net........................................ 98 (111) (52) (72) 134
-------- -------- ------- ------- -------
Income (loss) before provision for income taxes...... (36,969) (24,484) 11,876 6,991 5,155
Benefit (provision) for income taxes................. 90 (5,893) (2,454) (1,273) (895)
-------- -------- ------- ------- -------
Net income (loss).................................... (36,879) (30,377) 9,422 5,718 4,260
Preferred stock dividend and accretion............... (20,610) (2,903) -- -- --
-------- -------- ------- ------- -------
Net income (loss) attributable to common shareholders $(57,489) $(33,280) $ 9,422 $ 5,718 $ 4,260
======== ======== ======= ======= =======
Basic net income (loss) per share.................... $ (4.85) $ (3.38) $ 1.11 $ 0.68 $ 0.50
======== ======== ======= ======= =======
Diluted net income (loss) per share.................. $ (4.85) $ (3.38) $ 0.80 $ 0.48 $ 0.36
======== ======== ======= ======= =======
Weighted-average shares used in computing basic net
income (loss) per share............................ 11,846 9,846 8,455 8,455 8,455
======== ======== ======= ======= =======
Weighted-average shares used in computing diluted net
income (loss) per share............................ 11,846 9,846 11,793 11,793 11,793
======== ======== ======= ======= =======
Balance Sheet Data:
Cash, cash equivalents and short-term investments.... $147,077 $172,976 $19,648 $ 5,738 $ 4,194
Working capital...................................... 138,493 166,245 19,504 12,566 13,509
Total assets......................................... 205,435 228,637 91,914 83,473 88,929
Mandatorily redeemable convertible preferred stock... 260,540 239,930 -- -- --
Total shareholders' equity (deficit)................. (79,402) (27,269) 77,687 68,265 62,547
</TABLE>
- --------
(1) The year ended December 31, 2001 excludes noncash stock-based compensation
expense of $2,109.
(2) The year ended December 31, 2001 excludes noncash stock-based compensation
expense of $1,398.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
We are a biopharmaceutical company focused on the discovery, development and
commercialization of therapeutic protein-based products for the treatment of
human disease. We have been involved in the discovery and development of
therapeutic protein-based products for over 20 years, including 12 years as a
wholly owned subsidiary of Novo Nordisk, a Danish pharmaceutical company.
During this time, we contributed to the discovery or development of five
products currently marketed by other companies. In August 1988, we were
acquired by and became a wholly owned subsidiary of Novo Nordisk. From the date
of our acquisition through
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December 31, 1999, we earned the majority of our revenues by conducting
research and development activities for Novo Nordisk. We were paid at a rate of
110% of our research and development costs incurred in connection with all
projects performed on behalf of Novo Nordisk pursuant to a funding agreement.
We had net income of $4.3 million in 1997, $5.7 million in 1998 and $9.4
million in 1999.
In anticipation of our separation from Novo Nordisk pursuant to a planned
restructuring by Novo Nordisk, the funding agreement was terminated effective
January 1, 2000. Also effective January 1, 2000, Novo Nordisk contributed to us
the rights inside the United States to certain intellectual property, including
patents on products on which we currently generate royalty revenues.
Concurrently, we purchased the rights outside the United States to this
intellectual property from Novo Nordisk, paying them $35.7 million in October
2000. In addition, in September 2000, we assigned to Novo Nordisk patents and
other rights relating to Factor VII, including NovoSeven, and insulin
analogues, including NovoRapid, for a one-time payment of $90.1 million, which
was recorded as a capital contribution. As a result of this transaction,
effective September 2000 we no longer receive royalties on sales of Factor VII
and insulin analogues.
In November 2000, Novo Nordisk effected the restructuring. As part of the
restructuring, we became an independent company in a transaction that included
a $150.0 million private placement of our Series B preferred stock and the
reduction of Novo Nordisk's ownership to approximately 62% of our outstanding
capital stock and less than 50% of our outstanding voting stock. At the same
time, we granted Novo Nordisk an option to license certain rights to potential
therapeutic proteins pursuant to an option agreement, including rights to a
defined number of proteins outside of North America over a period of four years
in return for option fees of $7.5 million per year. Novo Nordisk may elect to
extend the option agreement for an additional two years in return for
continuing option fees of $7.5 million per year. For each exercise of an option
by Novo Nordisk, we would receive a license fee, the amount of which depends on
the development stage of the protein licensed. We are entitled to additional
amounts upon the achievement of predefined milestones. In addition, we would
earn royalties on sales of any resulting products. To date, Novo Nordisk has
exercised options to license three proteins pursuant to this agreement.
We incurred net losses of $36.9 million and $30.4 million for the years
ended December 31, 2001 and December 31, 2000. As of December 31, 2001, we had
an accumulated deficit of $111.1 million. The accumulated deficit resulted from
net losses and certain capital transactions with Novo Nordisk. The net losses
resulted from the termination of the funding agreement and are expected to
increase in the future as we continue to expand our research, development and
clinical trial activities and to build additional infrastructure.
Our current revenue sources are limited, and we do not generate any direct
revenues from product sales. We earn royalties on sales of products by several
licensees, including Novo Nordisk. For the year ended December 31, 2001,
revenues from royalties were $9.1 million. In the near term, we expect our
revenues to consist primarily of product royalties, the option fees from Novo
Nordisk and revenues generated under existing collaborative agreements.
Additionally, we may generate revenues from the establishment of new
collaborative research and development arrangements and license agreements.
Ultimately, we intend to derive revenues from commercial product sales. Because
a substantial portion of our revenues for the foreseeable future will depend on
achieving research, development and clinical milestones, our results of
operations may vary substantially from year to year.
We recognized revenues from our funding agreement with Novo Nordisk when
costs were incurred on Novo Nordisk-related projects. We recognize revenues
from royalties when amounts are due and considered collectible. We recognize
revenues from license fees, option fees and up-front payments in connection
with other rights or services that represent continuing obligations
systematically over the period that the fees or payments are earned. We will
recognize revenues from milestone payments representing completion of separate
and substantive earnings processes when the milestone is achieved and amounts
are due and payable. These amounts are dependent on the completion of research,
development or clinical milestones, which may not be achieved.
36
<PAGE>
Operating expenses consist of research and development expenses, general and
administrative expenses and noncash stock-based compensation expense. Research
and development expenses have been our most significant expenses to date and
consist primarily of salaries and benefit expenses, consumable expenses,
facility costs, professional fees and external collaboration costs. General and
administrative expenses consist primarily of salaries and benefit expenses,
professional fees and other corporate costs. We expect our research and
development and general and administrative expenses to increase in the
foreseeable future as we continue to grow. We expect that a large percentage of
our research and development expenses will be incurred in support of our
internal product development programs for rh Factor XIII, rh Thrombin, TACI-Ig,
IL-2l and Zsig37. None of these product candidates are expected to enter
clinical trials before late 2002. It is not unusual for the clinical
development of these types of products to take five years or more, and to cost
well over $100 million. The time and cost of completing the clinical
development of these product candidates will depend on a number of factors,
including the disease or medical condition to be treated, clinical trial design
and endpoints, availability of patients to participate in trials and the
relative efficacy of the product versus treatments already approved. Due to
these many uncertainties, we are unable to estimate the length of time or the
costs that will be required to complete the development of these product
candidates.
Under our Amended and Restated 2000 Stock Incentive Plan, stock options
granted for the year ended December 31, 2000 were granted with exercise prices
equal to the estimated fair value of the common stock at the date of grant.
Noncash stock-based compensation expense for the year ended December 31, 2001
resulted from stock options granted to employees and directors within the year
at exercise prices below the estimated fair value of the common stock on the
date of grant. We recorded total deferred stock-based compensation of $28.7
million as of December 31, 2001. Deferred stock-based compensation is being
amortized to expense over the vesting periods of the underlying options,
generally four years, using the straight-line method. For the deferred
stock-based compensation recorded as of December 31, 2001, we amortized noncash
stock-based compensation expense of $3.5 million in 2001, and expect to
amortize $7.2 million in 2002, $7.2 million in 2003, $7.2 million in 2004 and
$3.6 million in 2005. The amount of noncash stock-based compensation expense
expected to be recorded in future periods may decrease if unvested options for
which deferred stock-based compensation has been recorded are subsequently
cancelled or may increase if future option grants are made with exercise prices
below the estimated fair value of the common stock on the date of the grant.
Other income (expense) consists primarily of interest income and interest
expense. Interest income is generated primarily from investment of our cash
reserves. In addition, we earned $2.3 million in interest from Novo Nordisk on
a royalty payment received in March 2000. Interest expense relates generally to
periodic short-term borrowings from Novo Nordisk, all of which occurred and
were repaid in full prior to our separation from Novo Nordisk in November 2000.
Benefit (provision) for income taxes consists of income taxes computed at
federal statutory rates less applicable credits. Subsequent to November 10,
2000, we have provided full valuation allowances for net deferred tax assets.
As of December 31, 2001, we had net operating loss carryforwards of
approximately $43.7 million, research and development tax credit carryforwards
of $12.9 million, a rehabilitation tax credit carryforward of $1.5 million, and
alternative minimum tax credit carryforwards of $1.2 million. These credits
will expire during the period from 2008 through 2021. Due to the uncertainty
regarding the ultimate utilization of these tax benefits, a valuation allowance
has been recorded for the entire amount of the related net deferred tax assets.
On October 20, 2000, we entered into a tax sharing agreement related to our
separation from Novo Nordisk. This agreement requires that all research and
development credit carryforwards generated prior to November 10, 2000 that we
use to generate a tax benefit in future periods be reimbursed to Novo Nordisk,
provided that the total reimbursement will not exceed $12.0 million.
Due to the evolving nature of our business, and as a result of our
separation from Novo Nordisk in November 2000, we believe that period-to-period
comparisons of our operating results are not necessarily meaningful and should
not be relied on as an indication of future performance.
37
<PAGE>
Results of Operations
Years Ended December 31, 2001 and 2000
Revenues. Revenues decreased by $14.7 million, from $32.5 million in 2000
to $17.8 million in 2001. This difference was due primarily to a one-time
royalty payment of $15.2 million from Novo Nordisk received in March 2000,
which was recorded as revenue in the first quarter of 2000 when the amount was
determined and collectability was probable. Additionally, $5.0 million of
NovoSeven royalties were earned in 2000 prior to the assignment of our related
rights to Novo Nordisk. These decreases were partially offset by an increase in
the amount of option fee revenues earned under our agreement with Novo Nordisk.
Research and development expenses. Research and development expenses,
exclusive of noncash stock-based compensation expense of $2.1 million in 2001,
decreased by $1.2 million, from $49.3 million in 2000 to $48.1 million in 2001.
This decrease was due primarily to reduced expenses related to discovery
research collaborations and database subscriptions. We also introduced cost
awareness programs related to consumables, resulting in decreases in spending.
The decrease was partially offset by an increase in costs associated with
patenting activities and the addition of employees in research and development.
We anticipate that research and development expenses will increase in the
forseeable future as we continue to support our internal product development
programs.
General and administrative expenses. General and administrative expenses,
exclusive of noncash stock-based compensation expense of $1.4 million in 2001,
decreased by $1.6 million from $12.1 million in 2000 to $10.5 million in 2001.
This decrease was due primarily to changes in the value of outstanding Novo
Nordisk stock appreciation rights previously granted to administrative
personnel, which resulted in a decrease in compensation expense of $1.1
million. As of December 31, 2000, all of these rights had been exercised and
none remained outstanding. The decrease was also due to the termination of fees
associated with administrative services provided by Novo Nordisk and a
reduction in state and city taxes. We anticipate that general and
administrative expenses will increase in the foreseeable future as we incur
additional costs relating to our operation as a public company.
Noncash stock-based compensation expense. Noncash stock-based compensation
expense was $3.5 million in 2001 and $0 in 2000. The 2001 expense resulted from
the granting of stock options in 2001 with estimated fair values exceeding the
exercise prices of the options.
Other income (expense). Other income (expense) increased by $2.8 million
from $4.4 million in 2000 to $7.2 million in 2001. This increase was due
primarily to an increase in interest income from $5.4 million in 2000 to $7.2
million in 2001. The increase in interest income resulted from higher average
balances of cash and cash equivalents and short-term investments in 2001,
reflecting the net proceeds of $142.5 million from a private equity financing
completed in November 2000. The increase in other income was also due to a
decrease in interest expense of $0.8 million. During 2000, we entered into
various loans with Novo Nordisk, which were fully repaid by the end of the year.
Benefit (provision) for income taxes. The income tax provision in 2000 was
$5.9 million, which reflects a valuation allowance for our cumulative net
deferred tax assets partially offset by the benefit from our net operating loss
for the period from January 1, 2000 through November 9, 2000, the date of
separation from Novo Nordisk. The income tax benefit in 2001 of $0.1 million
represents the final payment according to the tax sharing agreement we entered
into with Novo Nordisk prior to our separation. No additional income tax
benefit was recognized in 2001 because the benefit from our net losses was
uncertain.
Years Ended December 31, 2000 and 1999
Revenues. Revenues decreased by $37.2 million from $69.7 million in 1999 to
$32.5 million in 2000. Revenues in 1999 consisted primarily of research and
development funding of $63.7 million from Novo Nordisk pursuant to our funding
agreement with Novo Nordisk. This agreement terminated effective January 1,
2000. Revenues in 2000 consisted of a one-time royalty payment of $15.2 million
from Novo Nordisk in March 2000,
38
<PAGE>
royalties of $5.0 million earned through September 2000 from sales of
NovoSeven, royalties of $11.3 million from sales of other products and
recognition of $1.0 million of the option fee received from Novo Nordisk.
Effective September 2000, we no longer receive royalties on sales of NovoSeven.
Research and development expenses. Research and development expenses
increased by $0.9 million from $48.4 million in 1999 to $49.3 million in 2000.
This increase was due primarily to increases in salary and benefit costs as a
result of an increase in research and development personnel in 2000. The
increase was also due to increased spending for patent filings in 2000. The
increase was partially offset by decreases in our external research
collaboration costs and decreases in spending for consumables.
General and administrative expenses. General and administrative expenses
increased by $2.5 million from $9.6 million in 1999 to $12.1 million in 2000.
This increase was primarily due to changes in the value of outstanding Novo
Nordisk stock appreciation rights previously granted to administrative
personnel, which resulted in an increase in compensation expense of $1.3
million. As of December 31, 2000, all of these rights had been exercised and
none remained outstanding. The increase was also due to a $0.9 million increase
in state and local business and occupation taxes. For the year ended December
31, 1999, we were entitled to certain state business and occupation tax
benefits as a result of our funding agreement with Novo Nordisk. The
termination of the funding agreement effective January 2000 resulted in
diminished tax benefits available to us for the year ended December 31, 2000.
In addition, we incurred real estate transfer tax expense of $0.6 million in
2000 related to our separation from Novo Nordisk.
Other income (expense). Other income (expense) increased by $4.3 million
from $0.2 million in 1999 to $4.5 million in 2000. This increase was due
primarily to an increase in interest income from $0.3 million in 1999 to $5.4
million in 2000. The increase in interest income was due to higher average
balances of cash, cash equivalents and short-term investments in 2000, due
primarily to the net proceeds from the private equity financing completed in
November 2000, and to the receipt of $2.3 million in interest from Novo Nordisk
on a one-time royalty payment of $15.2 million from Novo Nordisk in March 2000.
Interest expense increased from $0.1 million in 1999 to $0.8 million in 2000.
This increase was due to loans from Novo Nordisk, which were fully repaid in
2000.
Benefit (provision) for income taxes. The income tax provision in 1999 was
$2.5 million or an effective rate of 21%. The low effective rate resulted from
the utilization of research and development tax credits. The income tax
provision in 2000 was $5.9 million. The provision reflects a valuation
allowance for our cumulative net deferred tax assets partially offset by the
benefit from our net operating loss for the period from January 1, 2000 through
November 9, 2000.
Liquidity and Capital Resources
From August 1988, when we were acquired by Novo Nordisk, through December
31, 1999, our operations were funded primarily by research and development
revenues earned under our funding agreement with Novo Nordisk. The total amount
of research and development revenue from Novo Nordisk during this period was
$425.0 million. The funding agreement was terminated effective January 1, 2000.
From January 1, 2000 through December 31, 2001, our operations were funded by
proceeds of $90.1 million from the assignment to Novo Nordisk of patents and
other rights relating to NovoSeven and NovoRapid, net proceeds of $142.5
million from our November 2000 private equity financing, the option fees
received from Novo Nordisk, revenues under other royalty-bearing agreements and
investment income. As of December 31, 2000, we had cash, cash equivalents and
short-term investments of $173.0 million, which decreased to $147.1 million as
of December 31, 2001. In February 2002, we completed our initial public
offering, raising net proceeds of approximately $110 million. Our cash reserves
are held in a variety of investment-grade, fixed-income securities, including
corporate bonds, commercial paper and money market instruments.
39
<PAGE>
Net cash used in operating activities was $38 million in 2000 and $18.9
million in 2001. In 2001, cash used in operating activities was less than our
net loss of $36.9 million due to non-cash items, such as depreciation and
amortization and stock-based compensation expense, and revenues received but
deferred to future periods. Net cash used in operating activities in 2000 was
higher than our net loss of $30.4 million due to an income tax payment of $31.5
million to Novo Nordisk partially offset by non-cash reconciling items related
to a deferred tax valuation allowance, depreciation and amortization expense,
and changes in operating assets and liabilities. In 1999, $21.0 million of cash
was provided by our operating activities due to payments received from Novo
Nordisk pursuant to a funding agreement. We expect to continue the trend of
using cash to fund our operating activities in the future. This use of cash is
expected to increase over time as we expand our research and development
activities and move product candidates into clinical trials.
Net cash used in investing activities was $5.6 million in 2000 and $117.7
million in 2001. Net cash used in investing activities in 2000 consisted
primarily of capital expenditures. Net cash used in investing activities in
2001 included $109.6 million for purchases of short-term investments, net of
proceeds from sales and maturities, and $8.1 million for capital expenditures,
including $1.5 million for the purchase of land to be used for the construction
of a pilot manufacturing plant. We anticipate that our capital expenditures
will increase in the future, particularly with respect to construction of the
pilot manufacturing plant and a possible expansion of our existing research and
development facilities.
Cash provided by financing activities was $196.9 million in 2000 and $28,000
in 2001. Financing activities in 2000 included the receipt of net proceeds of
$142.5 million from the private equity financing completed in November 2000 and
the receipt of $90.1 million for the assignment to Novo Nordisk of patents and
other rights relating to Factor VII and insulin analogues, offset by a payment
of $35.7 million to Novo Nordisk to purchase rights to certain intellectual
property.
We expect to incur substantial costs as we continue to expand our research
and development activities, particularly as we move product candidates into
clinical trials, and expect that these expenditures will increase significantly
over the next several years. Our plans include the internal development of
selected product candidates and the co-development of product candidates with
collaborators where we would assume a percentage of the overall product
development costs. We believe that our existing cash resources, together with
the net proceeds of our recent initial public offering, will provide sufficient
funding for these development programs for at least the next three years. If,
at any time, our prospects for internally financing these programs decline, we
may decide to reduce our ongoing investment in our development programs. We
could reduce our investment by discontinuing our funding under existing
co-development arrangements, establishing new co-development arrangements for
other product candidates to provide additional funding sources or out-licensing
product candidates that we might otherwise develop internally. Additionally, we
could consider delaying or discontinuing development of product candidates to
reduce the level of our related expenditures.
We may need to expand our current facilities to meet the demands for our
anticipated growth. If an expansion project is pursued, we expect the project
to be completed by the end of 2004 and cost approximately $20 million. To date,
we have made no material financial commitments related to the facility
expansion. We are in the process of purchasing land for and designing a pilot
manufacturing plant to be completed by the end of 2004. The cost of the pilot
manufacturing plant is currently expected to be approximately $50 million. We
intend to explore alternatives for financing these projects, including the
mortgage or leasing of new or existing properties. To the extent we are unable
to obtain such financing, we intend to use our working capital to pay for the
projects.
Our long-term capital requirements and the adequacy of our available funds
will depend on several factors, many of which may not be in our control,
including:
. the costs involved in filing, prosecuting, enforcing and defending patent
claims;
. the continuation of research and development programs;
40
<PAGE>
. cash flows under existing and potential future arrangements with
licensees, collaborators and other parties; and
. the costs associated with the expansion of our facilities.
Over the next several years we will need to seek additional funding through
public or private financings, including equity financings, and through other
arrangements, including collaborative arrangements. Poor financial results,
unanticipated expenses or unanticipated opportunities that require financial
commitments could give rise to additional financing requirements sooner than we
expect. However, financing may be unavailable when we need it or may not be
available on acceptable terms. If we raise additional funds by issuing equity
or convertible debt securities, the percentage ownership of our existing
shareholders will be reduced, and these securities may have rights superior to
those of our common stock. If we are unable to raise additional funds when we
need them, we may be required to delay, scale back or eliminate expenditures
for some of our development programs or expansion plans, or grant rights to
third parties to develop and market product candidates that we would prefer to
develop and market internally, with license terms that are not favorable to us.
Critical Accounting Policies
Our critical accounting policies are as follows:
Revenue Recognition
We derive our revenue primarily from three different sources: option fees,
product royalties and license fees.
Option fees--Novo Nordisk has been granted an option to obtain an
exclusive license to an unlimited number of proteins discovered after August
1995 that modulate insulin producing beta cells and for up to the greater of
eight or 25% of our protein candidates other than those related to beta
cells over a period of four years beginning November 10, 2000. In return, we
are entitled to receive four annual payments of $7.5 million, the first of
which was received in November 2000. Novo Nordisk may elect to extend the
agreement for a period of two additional years, with the right to license up
to four more protein candidates in return for continuing the $7.5 million
annual payments to us. Upon exercise of an option by Novo Nordisk, we will
receive an up-front license fee, the amount of which is dependent on the
stage of the product candidate licensed. Additionally, Novo Nordisk will be
obligated to make payments upon the achievement of predefined development
milestones and to pay royalties on sales of resulting products. Each of the
$7.5 million option payments is being recognized ratably over the twelve
months following receipt.
Product royalties--We earn royalties on several products marketed and
sold by Novo Nordisk and other companies. Royalty reports are received
within 30 to 60 days after the end of each quarter. We record estimates at
the end of each quarter based on historical sales information. Adjustments
are made in the following quarter reflecting the difference between our
estimate and actual reported royalties.
License and milestone fees--We enter into various licensing agreements
that generate up-front payments with subsequent milestone payments earned
based on the completion of development milestones. We exercise our best
judgment in determining the period over which we have continuing commitments
to perform under the agreements. Revenue is recognized on a straight-line
basis over this period, which has ranged in duration from one to ten years.
Revenue from milestone payments is recognized when the milestone is achieved
and amounts are due and payable.
Stock-based Compensation
As permitted by the provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based Compensation (SFAS 123), we have
elected to follow Accounting Principles Board No. 25, Accounting for Stock
Issued to Employees (APB 25), in accounting for employee stock option grants
and apply
41
<PAGE>
the disclosure-only provisions of SFAS 123 to account for our stock option
plans. Under APB 25, compensation expense is based on the excess, if any, of
the estimated fair value of our stock at the date of grant over the exercise
price of the option. Management has exercised its judgment in determining the
fair value of our stock with share prices varying from $9.09 to $15.11 in 2001.
Deferred compensation is amortized over the vesting period of the individual
options, using the straight-line method.
Recent Accounting Pronouncements
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Financial
Instruments and for Hedging Activities (SFAS 133), which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and did not have an impact on our results of
operations or financial condition when adopted as we hold no derivative
financial instruments and do not currently engage in hedging activities.
In 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, Revenue Recognition (SAB 101), which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. SAB 101 became effective and was
implemented for the year ended December 31, 2000. The adoption of SAB 101 had
no material effect on our financial position or results of operations.
In 2001, the FASB issued Statement of Financial Accounting Standards No.
141, Business Combinations (SFAS 141), which provides a comprehensive standard
of accounting for business combinations. SFAS 141 is effective for all business
combinations after June 30, 2001.
In 2001, the FASB issued Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets (SFAS 142), which requires a change
in accounting for goodwill and certain other intangible assets. SFAS 142 is
effective for fiscal years beginning after December 15, 2001 and is not
anticipated to have an impact on our results of operations or financial
condition when adopted, as we have no goodwill or other intangible assets.
In 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement
Obligations (SFAS 143), which establishes requirements for the financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard is effective for fiscal years beginning after June 15, 2002, with
earlier application encouraged. We are currently assessing the impact of SFAS
143 on our financial statements.
In 2001, the FASB issued Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets to be Disposed of (SFAS 144). The provisions of
this Statement shall be effective for financial statements issued for fiscal
years beginning after December 31, 2001, and interim periods within those
fiscal years. SFAS 144 is not anticipated to have an impact on our results of
operations or financial condition when adopted.
42
<PAGE>
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
Our exposure to market risk is limited to interest income sensitivity, which
is affected by changes in the general level of United States interest rates,
particularly because the majority of our investments are in short-term debt
securities. The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive without
significantly increasing risk. To minimize risk, we maintain our portfolio of
cash, cash equivalents and short-term and restricted investments in a variety
of interest-bearing instruments, including United States government and agency
securities, high-grade United States corporate bonds, asset-backed securities,
commercial paper and money market funds. Due to the nature of our short-term
investments, we believe that we are not subject to any material market risk
exposure. We do not have any foreign currency exposure, nor do we hold
derivative financial instruments.
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Page in
Form 10-K
---------
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent Accountants............. 44
Balance Sheets at December 31, 2001 and 2000.............................. 45
Statements of Operations for the years ended December 31, 2001, 2000
and 1999................................................................ 46
Statement of Changes in Mandatorily Redeemable Convertible Preferred Stock
and Shareholders' Equity for the years ended December 31, 2001, 2000
and 1999................................................................ 47
Statements of Cash Flows for the years ended December 31, 2001, 2000
and 1999................................................................ 48
Notes to Financial Statements............................................. 49-62
</TABLE>
43
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
ZymoGenetics, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in mandatorily redeemable convertible preferred stock
and shareholders' equity (deficit) and of cash flows present fairly, in all
material respects, the financial position of ZymoGenetics, Inc. at December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
ZymoGenetics, Inc. is related to a group of affiliated companies and, as
disclosed in the financial statements, has extensive transactions and
relationships with members of the group.
PRICEWATERHOUSECOOPERS LLP
Seattle, Washington
February 6, 2002, except for the third paragraph
of Note 15, as to which the date is
March 7, 2002
44
<PAGE>
ZYMOGENETICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
2001 2000
------------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents..................................................... $ 36,393,551 $172,976,483
Short-term investments........................................................ 110,683,392 --
Receivables
Related party............................................................. 449,314 3,406,503
Other..................................................................... 3,606,421 1,029,820
Prepaid expenses and other assets............................................. 2,291,270 1,675,673
------------- ------------
Total current assets................................................... 153,423,948 179,088,479
Property and equipment, net...................................................... 49,128,094 46,416,094
Other assets..................................................................... 2,882,522 3,132,368
------------- ------------
Total assets........................................................... $ 205,434,564 $228,636,941
============= ============
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.............................................................. $ 4,109,382 $ 1,960,556
Related party payable......................................................... -- 278,975
Accrued liabilities........................................................... 3,150,220 4,145,766
Deferred revenue.............................................................. 7,671,521 6,458,333
------------- ------------
Total current liabilities.............................................. 14,931,123 12,843,630
Other noncurrent liabilities..................................................... 2,882,522 3,132,368
Deferred revenue................................................................. 6,482,416 --
------------- ------------
Total liabilities...................................................... 24,296,061 15,975,998
------------- ------------
Commitments
Mandatorily redeemable convertible preferred stock, no par value, 30,000,000
shares authorized
Series A, 2,528,000 shares authorized, issued and outstanding; aggregate
liquidation preference of $103,148,879 and $95,587,126 at December
31, 2001 and 2000, respectively............................................. 103,148,879 95,587,126
Series B, 4,011,768 shares authorized, issued and outstanding; aggregate
liquidation preference of $163,690,417 and $151,690,417 at December
31, 2001 and 2000, respectively............................................. 157,391,508 144,343,045
Shareholders' deficit
Common stock, no par value, 130,000,000 shares authorized, 12,063,600
and 11,792,520 issued and outstanding at December 31, 2001 and 2000,
respectively................................................................ 55,855,870 46,971,022
Non-voting common stock, no par value, 30,000,000 shares authorized and
no shares issued and outstanding............................................ -- --
Notes receivable from shareholders............................................ (725,000) --
Deferred stock compensation................................................... (25,234,712) --
Accumulated deficit........................................................... (111,119,557) (74,240,250)
Accumulated other comprehensive income........................................ 1,821,515 --
------------- ------------
Total shareholders' deficit............................................ (79,401,884) (27,269,228)
------------- ------------
Total liabilities, mandatorily redeemable convertible preferred
stock and shareholders' deficit...................................... $ 205,434,564 $228,636,941
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
ZYMOGENETICS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
2001 2000 1999
------------ ------------ -----------
<S> <C> <C> <C>
Revenues
Royalties
Related parties......................................... $ 5,151,347 $ 29,310,940 $ 5,733,561
Other................................................... 3,962,881 2,111,640 271,358
Option fee from related party............................... 7,500,000 1,041,667 --
License fees................................................ 1,213,870 -- --
Research and development agreements with related parties.... -- -- 63,670,390
------------ ------------ -----------
Total revenues.......................................... 17,828,098 32,464,247 69,675,309
------------ ------------ -----------
Operating expenses
Research and development (excludes noncash stock-based
compensation expense of $2,109,246 in 2001)............... 48,051,455 49,336,648 48,415,034
General and administrative (excludes noncash stock-based
compensation expense of $1,398,106 in 2001)............... 10,474,904 12,069,226 9,550,001
Noncash stock-based compensation expense.................... 3,507,352 -- --
------------ ------------ -----------
Total operating expenses................................ 62,033,711 61,405,874 57,965,035
------------ ------------ -----------
Income (loss) from operations.................................. (44,205,613) (28,941,627) 11,710,274
Other income (expense)
Interest income............................................. 7,152,351 5,417,089 273,990
Interest expense............................................ (13,489) (848,040) (56,302)
Other, net.................................................. 97,838 (111,080) (52,085)
------------ ------------ -----------
Income (loss) before provision for income taxes................ (36,968,913) (24,483,658) 11,875,877
Benefit (provision) for income taxes........................... 89,606 (5,893,402) (2,453,514)
------------ ------------ -----------
Net income (loss).............................................. (36,879,307) (30,377,060) 9,422,363
Preferred stock dividend and accretion......................... (20,610,216) (2,903,535) --
------------ ------------ -----------
Net income (loss) attributable to common shareholders.......... $(57,489,523) $(33,280,595) $ 9,422,363
============ ============ ===========
Net income (loss) per share--basic............................. $ (4.85) $ (3.38) $ 1.11
============ ============ ===========
Net income (loss) per share--diluted........................... $ (4.85) $ (3.38) $ 0.80
============ ============ ===========
Weighted-average number of shares used in computing basic net
income (loss) per share...................................... 11,846,093 9,845,870 8,455,406
============ ============ ===========
Weighted-average number of shares used in computing diluted net
income (loss) per share...................................... 11,846,093 9,845,870 11,792,520
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
46
<PAGE>
ZYMOGENETICS, INC.
STATEMENT OF CHANGES IN MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
-------------------------------------------
Mandatorily
redeemable convertible Convertible
preferred stock preferred stock Common stock
---------------------- ----------------- -----------------------
Shares Amount Shares Amount Shares Amount
--------- ------------ -------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999..................... -- $ -- 926,976 $ 9,270 8,455,406 $ 84,554
Net income and comprehensive income............ -- -- -- -- -- --
--------- ------------ -------- ------- ---------- ------------
Balance at December 31, 1999................... -- -- 926,976 9,270 8,455,406 84,554
Conversion from $.01 par value to no par
value common stock............................ -- -- -- -- -- 49,780,733
Conversion of Class A and Class B convertible
preferred stock to common stock............... -- -- (926,976) (9,270) 3,337,114 9,270
Issuance of dividend in form of Series A
mandatorily redeemable convertible
preferred stock............................... 2,528,000 94,521,920 -- -- -- --
Issuance of Series B mandatorily redeemable
convertible preferred stock (net of offering
costs of $7,495,290).......................... 4,011,768 142,504,716 -- -- -- --
Intellectual property purchased from related
party (net of deferred taxes of $11,245,499).. -- -- -- -- -- --
Payments received for future royalties from
related party (net of income taxes of
$31,524,691).................................. -- -- -- -- -- --
Accretion on mandatorily redeemable
convertible preferred stock................... -- 147,918 -- -- -- (147,918)
Dividends accrued on mandatorily redeemable
convertible preferred stock................... -- 2,755,617 -- -- -- (2,755,617)
Valuation allowance to reflect realizability of
tax benefits related to purchase of
intellectual property from related party...... -- -- -- -- -- --
Net loss and comprehensive loss................ -- -- -- -- -- --
--------- ------------ -------- ------- ---------- ------------
Balance at December 31, 2000................... 6,539,768 239,930,171 -- -- 11,792,520 46,971,022
Common stock issued in connection with
stock option exercises........................ -- -- -- -- 10,080 28,000
Common stock issued in connection with
stock option exercises for notes receivable... -- -- -- -- 261,000 725,000
Deferred stock compensation related to grants
of stock options.............................. -- -- -- -- -- 28,742,064
Amortization of deferred stock compensation.... -- -- -- -- -- --
Accretion on mandatorily redeemable
convertible preferred stock................... -- 1,048,462 -- -- -- (1,048,462)
Dividends accrued on mandatorily redeemable
convertible preferred stock................... -- 19,561,754 -- -- -- (19,561,754)
--------- ------------ -------- ------- ---------- ------------
6,539,768 260,540,387 -- -- 12,063,600 55,855,870
--------- ------------ -------- ------- ---------- ------------
Net loss....................................... -- -- -- -- -- --
Other comprehensive income
Unrealized gain on short-term investments... -- -- -- -- -- --
--------- ------------ -------- ------- ---------- ------------
Comprehensive loss............................. -- -- -- -- -- --
--------- ------------ -------- ------- ---------- ------------
Balance at December 31, 2001................... 6,539,768 $260,540,387 -- $ -- 12,063,600 $ 55,855,870
========= ============ ======== ======= ========== ============
</TABLE>
<TABLE>
<CAPTION>
Notes Accumulated
Additional receivable Deferred Accumulated other
paid-in from stock earnings comprehensive
capital shareholders compensation (deficit) income
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999..................... $ 49,780,733 $ -- $ -- $ 18,390,512 $ --
Net income and comprehensive income............ -- -- -- 9,422,363 --
------------ --------- ------------ ------------- ----------
Balance at December 31, 1999................... 49,780,733 -- -- 27,812,875 --
Conversion from $.01 par value to no par
value common stock............................ (49,780,733) -- -- -- --
Conversion of Class A and Class B convertible
preferred stock to common stock............... -- -- -- -- --
Issuance of dividend in form of Series A
mandatorily redeemable convertible
preferred stock............................... -- -- -- (94,521,920) --
Issuance of Series B mandatorily redeemable
convertible preferred stock (net of offering
costs of $7,495,290).......................... -- -- -- -- --
Intellectual property purchased from related
party (net of deferred taxes of $11,245,499).. -- -- -- (24,454,501) --
Payments received for future royalties from
related party (net of income taxes of
$31,524,691).................................. -- -- -- 58,545,855 --
Accretion on mandatorily redeemable
convertible preferred stock................... -- -- -- -- --
Dividends accrued on mandatorily redeemable
convertible preferred stock................... -- -- -- -- --
Valuation allowance to reflect realizability of
tax benefits related to purchase of
intellectual property from related party...... -- -- -- (11,245,499) --
Net loss and comprehensive loss................ -- -- -- (30,377,060) --
------------ --------- ------------ ------------- ----------
Balance at December 31, 2000................... -- -- -- (74,240,250) --
Common stock issued in connection with
stock option exercises........................ -- -- -- -- --
Common stock issued in connection with
stock option exercises for notes receivable... -- (725,000) -- -- --
Deferred stock compensation related to grants
of stock options.............................. -- -- (28,742,064) -- --
Amortization of deferred stock compensation.... -- -- 3,507,352 -- --
Accretion on mandatorily redeemable
convertible preferred stock................... -- -- -- -- --
Dividends accrued on mandatorily redeemable
convertible preferred stock................... -- -- -- -- --
------------ --------- ------------ ------------- ----------
-- (725,000) (25,234,712) (74,240,250) --
------------ --------- ------------ ------------- ----------
Net loss....................................... -- -- -- (36,879,307) --
Other comprehensive income
Unrealized gain on short-term investments... -- -- -- -- 1,821,515
------------ --------- ------------ ------------- ----------
Comprehensive loss............................. -- -- -- (36,879,307) 1,821,515
------------ --------- ------------ ------------- ----------
Balance at December 31, 2001................... $ -- $(725,000) $(25,234,712) $(111,119,557) $1,821,515
============ ========= ============ ============= ==========
</TABLE>
<TABLE>
<CAPTION>
Total
------------
<S> <C>
Balance at January 1, 1999..................... $ 68,265,069
Net income and comprehensive income............ 9,422,363
------------
Balance at December 31, 1999................... 77,687,432
Conversion from $.01 par value to no par
value common stock............................ --
Conversion of Class A and Class B convertible
preferred stock to common stock............... --
Issuance of dividend in form of Series A
mandatorily redeemable convertible
preferred stock............................... (94,521,920)
Issuance of Series B mandatorily redeemable
convertible preferred stock (net of offering
costs of $7,495,290).......................... --
Intellectual property purchased from related
party (net of deferred taxes of $11,245,499).. (24,454,501)
Payments received for future royalties from
related party (net of income taxes of
$31,524,691).................................. 58,545,855
Accretion on mandatorily redeemable
convertible preferred stock................... (147,918)
Dividends accrued on mandatorily redeemable
convertible preferred stock................... (2,755,617)
Valuation allowance to reflect realizability of
tax benefits related to purchase of
intellectual property from related party...... (11,245,499)
Net loss and comprehensive loss................ (30,377,060)
------------
Balance at December 31, 2000................... (27,269,228)
Common stock issued in connection with
stock option exercises........................ 28,000
Common stock issued in connection with
stock option exercises for notes receivable... --
Deferred stock compensation related to grants
of stock options.............................. --
Amortization of deferred stock compensation.... 3,507,352
Accretion on mandatorily redeemable
convertible preferred stock................... (1,048,462)
Dividends accrued on mandatorily redeemable
convertible preferred stock................... (19,561,754)
------------
(44,344,092)
------------
Net loss....................................... (36,879,307)
Other comprehensive income
Unrealized gain on short-term investments... 1,821,515
------------
Comprehensive loss............................. (35,057,792)
------------
Balance at December 31, 2001................... $(79,401,884)
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
47
<PAGE>
ZYMOGENETICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
2001 2000 1999
------------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................................... $ (36,879,307) $(30,377,060) $ 9,422,363
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities
Depreciation and amortization........................................... 5,404,635 5,689,451 6,090,347
Net loss on disposition of property and equipment....................... 77 111,080 52,085
Provision for deferred income taxes..................................... -- 13,731,405 (1,742,762)
Income taxes on future royalty payments from related party.............. -- (31,524,691) --
Noncash stock-based compensation........................................ 3,507,352 -- --
Net realized gain on sale of short-term investments..................... (94,748) -- --
Amortization of premium on short-term investments....................... 786,834 -- --
Changes in
Receivables.......................................................... 380,588 2,850,238 10,023,529
Prepaid expenses and other assets.................................... (365,751) (220,556) (1,816,364)
Accounts payable..................................................... 2,148,826 521,860 (835,748)
Related party payables............................................... (278,975) (4,281,414) 672,677
Accrued liabilities.................................................. (995,546) 1,731,110 (1,333,053)
Stock appreciation plan liability, net of cash distributions......... -- (3,712,369) (424,702)
Deferred revenue..................................................... 7,695,604 6,458,333 --
Other noncurrent liabilities......................................... (249,846) 1,032,166 939,600
------------- ------------ -----------
Net cash provided by (used in) operating activities............... (18,940,257) (37,990,447) 21,047,972
------------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.......................................... (8,181,492) (5,617,038) (7,353,698)
Purchase of short-term investments.......................................... (207,700,172) -- --
Proceeds from sale of property and equipment................................ 64,780 60,789 216,051
Proceeds from sale and maturity of short-term investments................... 98,146,209 -- --
------------- ------------ -----------
Net cash used in investing activities............................. (117,670,675) (5,556,249) (7,137,647)
------------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of Series B mandatorily redeemable convertible
preferred stock (net of offering costs of $7,495,290)...................... -- 142,504,716 --
Proceeds from issuance of common stock...................................... 28,000 -- --
Purchase of intellectual property from related party........................ -- (35,700,000) --
Proceeds from assignment of patents and other rights to related party....... -- 90,070,546 --
------------- ------------ -----------
Net cash provided by financing activities......................... 28,000 196,875,262 --
------------- ------------ -----------
Net increase (decrease) in cash and cash equivalents........................ (136,582,932) 153,328,566 13,910,325
Cash and cash equivalents at beginning of period............................ 172,976,483 19,647,917 5,737,592
------------- ------------ -----------
Cash and cash equivalents at end of period.................................. $ 36,393,551 $172,976,483 $19,647,917
------------- ------------ -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid to related party during the period for interest................... $ -- $ 844,629 $ --
============= ============ ===========
Cash paid during the period for interest.................................... $ 13,489 $ 3,411 $ 56,302
============= ============ ===========
Cash paid during the period for income taxes................................ $ -- $ 29,196,276 $ 2,307,363
============= ============ ===========
Noncash financing activities
Accretion on Series B mandatorily redeemable convertible preferred
stock.................................................................. $ 1,048,462 $ 147,918 $ --
============= ============ ===========
Conversion of Class A and Class B convertible preferred stock to
common stock........................................................... $ -- $ 9,270 $ --
============= ============ ===========
Issuance of dividend in form of Series A mandatorily redeemable
convertible preferred stock............................................ $ -- $ 94,521,920 $ --
============= ============ ===========
Dividends accrued on Series A and Series B mandatorily redeemable
convertible preferred stock............................................ $ 19,561,754 $ 2,755,617 $ --
============= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
48
<PAGE>
ZYMOGENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and summary of significant accounting policies
Nature of operations
ZymoGenetics, Inc. (the Company) was incorporated in the state of Washington
in June 1981 and operated independently until it was acquired in August 1988 by
Novo Nordisk North America, a wholly owned subsidiary of Novo Nordisk A/S (Novo
Nordisk). Effective November 9, 2000, the Company became an independent
corporate entity with the completion of a private placement of Series B
mandatorily redeemable convertible preferred stock with an investor consortium.
As of December 31, 2001, Novo Nordisk's ownership percentage is 61.11% and its
voting percentage is 47.76%. As described in Note 15, in February 2002, the
Company completed its initial public offering, which further reduced Novo
Nordisk's ownership stake in the Company.
As an independent biopharmaceutical company, the Company is focused on the
discovery and development of protein therapeutics for the prevention or
treatment of significant human diseases. The Company has generated a broad
pipeline of proprietary product candidates and intends to commercialize them
through internal development, collaborations with biopharmaceutical partners or
out-licensing of patents.
Over the next several years the Company will need to seek additional funding
through public or private financings, including equity financings, and through
other arrangements, including collaborative arrangements. Poor financial
results, unanticipated expenses or unanticipated opportunities that require
financial commitments could give rise to additional financing requirements.
However, financing may be unavailable when required or may not be available on
acceptable terms.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash and cash equivalents.
Short-term investments
Marketable securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses reported as a separate component of shareholders' equity
(deficit). The amortized cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization is
included in interest income. Realized gains and losses are included in other
income. The cost of securities sold is based on the specific identification
method. Interest on securities classified as available-for-sale are included in
interest income.
Fair value of financial instruments
The carrying values of cash, accounts receivable and payable, and accrued
liabilities in the financial statements approximate fair value because of the
short-term nature of these instruments.
Property and equipment
Property and equipment are stated at cost. Additions, betterments and
improvements are capitalized and depreciated. When assets are retired or
otherwise disposed of, the cost of the assets and related depreciation is
eliminated from the accounts and any resulting gain or loss is reflected in the
results of operations. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets, which includes five years for
furniture and lab equipment, ten years for pilot plant equipment and leasehold
improvements and 40 years for the buildings. Expenditures for repairs and
maintenance are charged to expense as incurred.
Leasehold improvements are amortized evenly over either their estimated
useful lives or the term of the lease, whichever is shorter.
49
<PAGE>
Impairment of long-lived assets
In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (SFAS 121), the Company reviews long-lived
assets, including intangible assets and property and equipment, for impairment
whenever events or changes in business circumstances indicate that the carrying
amounts of the assets may not be fully recoverable. An impairment loss will be
recognized when estimated undiscounted future cash flows expected to result
from the use of an asset and its eventual disposition are less than its
carrying amount. In that event, a loss is recognized based on the amount by
which the carrying value exceeds the fair value of the long-lived asset. While
the Company's current operating and cash flow losses are indicators of
impairment, the Company believes the future cash flows to be received from the
long-lived assets will exceed the assets' carrying value, and accordingly, the
Company has not recognized any impairment losses through December 31, 2001.
Patents and licensing agreements
It is the Company's practice to seek patent protection on processes and
products in various countries. Patent application costs are expensed as
incurred, as recoverability of such expenditures is uncertain.
Revenue recognition
During the year ended December 31, 1999, the Company earned revenues by
conducting contract research for Novo Nordisk and related entities. The
Company's revenues were based on an agreement with Novo Nordisk whereby the
Company was paid 110% of its research and development costs incurred in
connection with approved projects. The Company recognized revenues related to
this agreement as expenses were incurred. This agreement was terminated
effective January 1, 2000.
Revenues from royalties are received from related and third parties for
sales of products that include technology developed by the Company. Revenues
are recognized when due and amounts are considered collectible.
Revenues from license fees, option fees and up-front payments, which are
received in connection with other rights or services that represent continuing
obligations of the Company, are recognized systematically over the period that
the fees or payments are earned. Revenues from milestone payments representing
completion of separate and substantive earnings processes will be recognized
when the milestone is achieved and amounts are due and payable.
Research and development costs
Research and development costs, including personnel costs, supplies,
depreciation, amortization and other indirect costs, are charged to expenses as
incurred.
Income taxes
The Company records a provision for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes (SFAS 109), which utilizes the liability method of accounting for income
taxes. Deferred tax assets or liabilities are recorded for all temporary
differences between financial and tax reporting. Deferred tax expense (benefit)
results from the net change during the period of the deferred tax assets and
liabilities. A valuation allowance is recorded when it is more likely than not
that the deferred tax asset will not be recovered.
Through November 9, 2000, the Company was included in the consolidated
federal income tax return of Novo Nordisk. A provision for income taxes was
made in accordance with a tax sharing agreement between the Company and Novo
Nordisk that requires a "separate company" basis, allocating taxes to each
party as if it were a separate taxpayer. Subsequent to November 9, 2000, the
Company files its income tax return as a stand-alone taxpayer.
50
<PAGE>
Stock-based compensation
As permitted by the provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based Compensation (SFAS 123), the
Company has elected to follow Accounting Principles Board No. 25, Accounting
for Stock Issued to Employees (APB 25), in accounting for its employee stock
option grants and apply the disclosure-only provisions of SFAS 123 to account
for its stock option plan. Under APB 25, compensation expense is based on the
excess, if any, of the estimated fair value of the Company's stock at the date
of grant over the exercise price of the option. Deferred compensation is being
amortized over the vesting period of the individual options, using the
straight-line method.
Other comprehensive income (loss)
Comprehensive income (loss) is comprised of net income (loss) and unrealized
gains and losses on short-term investments. For all periods through December
31, 2000, net income (loss) equaled the comprehensive income (loss). For the
year ended December 31, 2001, comprehensive loss was $35.1 million.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities;
disclosure of contingent assets and liabilities at the date of the financial
statements; and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings (loss) per share
Basic net income (loss) per share has been computed based on net income
(loss) available to common shareholders and the weighted-average number of
common shares outstanding during the applicable period. For periods in which
the Company has experienced net losses available to common shareholders, common
stock equivalents are excluded from the computation of diluted net loss per
share because they are antidilutive. For periods for which the Company
experienced net income available to common shareholders, common stock
equivalents are included in the denominator on a weighted-average basis for
computing diluted net income per share. The Company first issued stock options
in 2000. Common stock equivalents in 1999 consisted solely of shares of
convertible preferred stock. Shares subject to repurchase have been excluded
from the denominator for both the basic and diluted computations.
The following table presents the calculation of basic and diluted net income
(loss) per share for years ended December 31:
<TABLE>
<CAPTION>
2001 2000 1999
------------ ------------ -----------
<S> <C> <C> <C>
Net income (loss) attributable to common shareholders........ $(57,489,523) $(33,280,595) $ 9,422,363
============ ============ ===========
Weighted-average shares used in computing basic net income
(loss) per share........................................... 11,846,093 9,845,870 8,455,406
Convertible preferred stock.................................. -- -- 3,337,114
------------ ------------ -----------
Weighted-average shares used in computing diluted net income
(loss) per share........................................... 11,846,093 9,845,870 11,792,520
============ ============ ===========
Net income (loss) per share--basic........................... $ (4.85) $ (3.38) $ 1.11
============ ============ ===========
Net income (loss) per share--diluted......................... $ (4.85) $ (3.38) $ 0.80
============ ============ ===========
Antidilutive securities not included in net loss per share
calculation
Mandatorily redeemable convertible preferred stock (as if
converted).............................................. 23,543,159 23,543,159 --
Options to purchase common stock.......................... 7,307,092 4,311,000 --
Shares subject to repurchase.............................. 87,750 -- --
------------ ------------ -----------
30,938,001 27,854,159 --
============ ============ ===========
</TABLE>
51
<PAGE>
Recent accounting pronouncements
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Financial
Instruments and for Hedging Activities (SFAS 133), which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and did not have an impact on the Company's
results of operations or financial condition when adopted as the Company holds
no derivative financial instruments and does not currently engage in hedging
activities.
In 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, Revenue Recognition (SAB 101), which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. SAB 101 became effective and was
implemented for the year ended December 31, 2000. The adoption of SAB 101 had
no material effect on the financial position or results of operations of the
Company.
In 2001, the FASB issued Statement of Financial Accounting Standards No.
141, Business Combinations (SFAS 141), which provides a comprehensive standard
of accounting for business combinations. SFAS 141 is effective for all business
combinations after June 30, 2001.
In 2001, the FASB issued Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets (SFAS 142), which requires a change
in accounting for goodwill and certain other intangible assets. SFAS 142 is
effective for fiscal years beginning after December 15, 2001 and is not
anticipated to have an impact on the Company's results of operations or
financial condition when adopted, as the Company has no goodwill or other
intangible assets.
In 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement
Obligations (SFAS 143), which establishes requirements for the financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard is effective for fiscal years beginning after June 15, 2002, with
earlier application encouraged. The Company is currently assessing the impact
of SFAS 143 on its financial statements.
In 2001, the FASB issued Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets to be Disposed of (SFAS 144). The provisions of
this Statement shall be effective for financial statements issued for fiscal
years beginning after December 31, 2001, and interim periods within those
fiscal years. SFAS 144 is not anticipated to have an impact on the Company's
results of operations or financial condition when adopted.
2. Short-term investments
Short-term investments consisted of the following at December 31, 2001:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Type of security:
Commercial paper and money market..... $ 1,473,989 $ -- $ -- $ 1,473,989
Corporate debt securities............. 48,647,341 953,566 (11,597) 49,589,310
Asset-backed securities............... 24,810,834 288,079 (5,772) 25,093,141
U.S. government and agency securities. 33,929,713 625,743 (28,504) 34,526,952
------------ ---------- -------- ------------
$108,861,877 $1,867,388 $(45,873) $110,683,392
============ ========== ======== ============
</TABLE>
52
<PAGE>
The following table summarizes contractual maturity information for the
securities at December 31, 2001:
<TABLE>
<CAPTION>
Estimated Amortized
Fair Value Cost
---------- ---------
<S> <C> <C>
Maturity date:
Less than one year. $ 22,040,421 $ 21,808,678
Due in 1-5 years... 88,642,971 87,053,199
------------ ------------
$110,683,392 $108,861,877
============ ============
</TABLE>
Realized gains and losses for the year ended December 31, 2001 were
approximately $132,000 and $37,000, respectively.
3. Property and equipment
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
2001 2000
---- ----
<S> <C> <C>
Land and building.............................. $ 49,344,651 $ 44,690,770
Leasehold improvements......................... 5,737,412 5,737,412
Furniture and equipment........................ 36,830,103 34,344,331
Construction in progress....................... 710,248 286,160
------------ ------------
92,622,414 85,058,673
Less: Accumulated depreciation and amortization (43,494,320) (38,642,579)
------------ ------------
$ 49,128,094 $ 46,416,094
============ ============
</TABLE>
4. Accrued liabilities
Accrued liabilities consisted of the following at December 31:
<TABLE>
<CAPTION>
2001 2000
---- ----
<S> <C> <C>
Accrued vacation pay.......... $ 1,737,960 $ 1,419,946
Accrued incentive compensation 134,668 1,272,073
Accrued contract research..... 744,573 576,387
Accrued city and state taxes.. 25,280 434,070
Accrued severance payments.... 179,167 193,246
Other......................... 328,572 250,044
------------ ------------
$ 3,150,220 $ 4,145,766
============ ============
</TABLE>
5. Transactions and accounts with related parties
Novo Nordisk has been granted an option to obtain an exclusive license to an
unlimited number of proteins discovered after August 1995 that modulate insulin
producing beta cells and for up to the greater of eight or 25% of the Company's
protein candidates other than those related to beta cells over a period of four
years beginning November 10, 2000. In return, the Company is entitled to
receive four annual payments of $7.5 million, the first of which was received
in November 2000. The option payments are being recognized ratably over the
term of the agreement. Novo Nordisk may elect to extend the agreement for a
period of two additional years, with the right to license up to four more
protein candidates in return for continuing the $7.5 million annual payments to
the Company. Upon exercise of an option by Novo Nordisk, the Company will
receive an up-front license fee, the amount of which is dependent on the stage
of the product candidate licensed. Additionally, Novo Nordisk will be obligated
to make payments upon the achievement of predefined development milestones and
to pay royalties on sales of resulting products.
During 1999, the Company performed significant portions of its research and
development for its former parent, Novo Nordisk, and affiliated companies. The
Company had an agreement with Novo Nordisk effective as of January 1, 1991
whereby the Company was reimbursed for 110% of its research and development
costs and an
53
<PAGE>
appropriate allocation of general and administrative expenses incurred in
connection with approved projects. The agreement was terminated effective
January 1, 2000, and accordingly, no research and development contract revenues
were recorded in 2000 or 2001. Revenue related to the agreement was
approximately $63.7 million for the year ended December 31, 1999.
During 2000, Novo Nordisk paid approximately $90.1 million to the Company,
$76.4 million of which was in return for assignment of all rights and
obligations with respect to NovoSeven (Factor VII) and $13.7 million for the
grant of a perpetual license to the technology relating to analogues of human
insulin, including the technology underlying Novo Nordisk's product, NovoRapid.
Also, the Company paid $35.7 million to Novo Nordisk to purchase its rights
outside the United States to the Company's portfolio of patents, patent
applications and related intellectual property that had been developed pursuant
to the research and development agreement described above. Concurrently, Novo
Nordisk contributed to the Company the rights to this intellectual property in
the United States. Because these transactions were consummated when the Company
was controlled by Novo Nordisk, they were recorded as capital transactions. On
August 4, 2000, the Company entered into a loan in the amount of $35.7 million
with Novo Nordisk to fund the purchase of the intellectual property described
above. The loan accrued interest of 6.94% per annum and, together with the
principal, was paid in full on October 13, 2000. Various other loans were
arranged with Novo Nordisk with annual interest rates ranging from 6.82% to
6.87% and with full repayment occurring within seven days of origination. There
were no loan obligations due to Novo Nordisk as of December 31, 2000 or 2001.
The Company earns royalties on several products marketed and sold by Novo
Nordisk, including Novolin (recombinant insulin) and GlucaGen (recombinant
glucagon). Royalties are based on contracts predating the Company's acquisition
by Novo Nordisk. Minimum royalties were collected through 1999; however, an
analysis completed in 2000 showed additional royalties due the Company for
Novolin and GlucaGen of approximately $12.1 million and $3.1 million,
respectively. These amounts plus an interest charge of approximately
$2.3 million were recorded in 2000 when collectability was assured, and the
amounts were fixed and determinable. Including the aforementioned royalty
amounts, the Company earned total royalties from Novo Nordisk of approximately
$5.2 million, $29.3 million and $5.7 million for the years ended December 31,
2001, 2000 and 1999, respectively.
During 2000, the Company entered into a cross-license agreement with Novo
Nordisk which provides non-exclusive licenses to each party to conduct research
using the other party's intellectual property relating to Kunitz domains and
Kunitz proteins. In addition, the Company has entered into other
cross-licensing agreements with Novo Nordisk relating to certain other
technologies.
During 1999, the Company entered into an agreement with Novo Nordisk (China)
Investment Company Ltd. (NNIC), which was at that time a wholly owned
subsidiary of Novo Nordisk, whereby NNIC would perform research for the
Company. Payments totaling $150,000 were made to NNIC during 1999.
Pursuant to the private placement of Series B mandatorily redeemable
convertible preferred stock, and subject to certain conditions, Novo Nordisk
agreed to invest up to $100 million in the Company in any qualified private
placement of shares completed during the four-year period ending November 10,
2006. The amount of Novo Nordisk's investment will be limited to the amount
invested by the holders of Series B mandatorily redeemable preferred stock in
such private placement. Any such purchase will be structured to ensure that
Novo Nordisk owns no more than 49% of the Company's outstanding shares of
voting securities. As described in Note 15, in February 2002, the Company
completed its initial public offering, which terminated this agreement.
All amounts related to research and development contracts and royalty
agreements have been processed through intercompany accounts that are settled
quarterly. Amounts receivable from Novo Nordisk and related entities were
approximately $449,000 and $3.4 million at December 31, 2001 and 2000,
respectively. Amounts payable to Novo Nordisk and related entities were $0 and
approximately $279,000 at December 31, 2001 and 2000, respectively.
54
<PAGE>
6. Novo Nordisk stock appreciation rights
In 1988, the Company adopted a plan providing that officers and other key
employees be granted rights to the appreciation in the market value of a stated
number of shares of common stock of Novo Nordisk listed on the New York Stock
Exchange. The rights became exercisable over three- and five-year periods and
had a life of ten years. The exercise price of the rights ranged from 85% to
90% of Novo Nordisk's common stock price on the date of the grant. Expenses
were charged or credited for the aggregate appreciation or depreciation of the
rights during each reporting period. Changes in the value of outstanding rights
resulted in compensation expense of approximately $1.5 million for the year
ended December 31, 2000 and a reduction in compensation expense of
approximately $208,000 for the year ended December 31, 1999. As of December 31,
2000, all such rights had been exercised and none remained outstanding.
7. Novo Nordisk Share Offering Plan
During 1999, Novo Nordisk implemented the Novo Nordisk 1999 Share Offering
Plan (the NSOP). The NSOP provided all eligible employees a one-time grant of
options to purchase shares of common stock of Novo Nordisk for $11.05 per share
based on their years of service with the Company. The options were fully vested
when granted on March 23, 1999 and all options expired on April 5, 1999. A
total of 8,920 shares were granted, of which, 100 were forfeited and 8,820 were
exercised in 1999. The market value of the stock at the date of grant was
approximately $106 per share.
The Company was required to pay Novo Nordisk for the difference between the
exercise price and the market value of the options at the date of grant.
Accordingly, the Company recognized compensation expense of approximately
$821,000 for the year ended December 31, 1999.
The Company applied APB 25 in accounting for the NSOP. Accordingly,
compensation cost has been recognized using the intrinsic value based model.
Had compensation for the NSOP been determined based on the fair value at the
grant date of the award consistent with the fair value method of SFAS 123, the
Company's net income would not have been significantly different.
8. Employee incentive plan
The Company adopted a Key Employee Incentive Plan (KEIP) to promote the
achievement of its short-and long-term objectives. Participation in the KEIP
was limited to employees approved by the Company's management committee. The
plan period for the KEIP was January 1, 1999 through December 31, 2000. The
KEIP awards for the 1999 plan year were based on the number of protein lead
product candidates and investigational new drug applications achieved. The
awards for the 2000 plan year were based on determining therapeutic utility and
initiating preclinical efficacy studies for proteins. The Company accrued and
expensed approximately $572,000 and $486,000 for the years ended December 31,
2000 and 1999, respectively. The accrued bonuses as of December 31, 2000 were
paid in full during 2001. The KEIP plan was terminated effective January 1,
2001.
9. Retirement plans
Defined contribution
The Company has established a 401(k) retirement plan covering substantially
all of its employees. The plan provides for matching and discretionary
contributions by the Company. Such contributions were approximately $1.7
million, $1.6 million and $1.3 million for the years ended December 31, 2001,
2000 and 1999, respectively.
Deferred compensation plan
The Company has a Deferred Compensation Plan (the DCP) for key employees.
Eligible plan participants are designated by the Company's board of directors.
The DCP allows participants to defer up to 15% of their annual compensation and
up to 100% of any bonus. The DCP provides for discretionary contributions by
the Company; such contributions were approximately $0, $96,000 and $108,000 for
the years ended December 31, 2001, 2000 and 1999, respectively. At December 31,
2001 and 2000, approximately $2.9 million and $3.1 million, respectively, was
deferred under the DCP and was recorded as other noncurrent liabilities.
55
<PAGE>
10. Income taxes
At December 31, 2001, the Company had net operating loss carryforwards of
approximately $43.7 million, a research and development tax credit carryforward
of $12.9 million, a rehabilitation tax credit carryforward of $1.5 million and
alternative minimum tax credit carryforwards of $1.2 million. The carryforwards
are available to offset future tax liabilities. The net operating losses,
research and development tax credit and rehabilitation tax credit will expire
in the years 2008 to 2021. The alternative minimum tax credit will carry
forward indefinitely. The Company has provided a valuation allowance at
December 31, 2001 and 2000 to offset the excess of deferred tax assets over the
deferred tax liabilities, due to the Company's status as a stand-alone taxpayer
and the uncertainty of realizing the benefits of the net deferred tax asset. No
valuation allowance was provided at December 31, 1999, as the Company filed its
tax returns with Novo Nordisk's and realization of deferred tax assets was
certain. The Company completed an initial public offering on February 1, 2002
and pursuant to the provisions of Internal Revenue Code Section 382 the
offering may qualify as a change in ownership. Accordingly, a portion of the
net operating loss carryforwards may be limited.
Components of the income tax expense (benefit) were as follows for the years
ended December 31:
<TABLE>
<CAPTION>
2001 2000 1999
-------- ----------- -----------
<S> <C> <C> <C>
Current. $(89,606) $(7,838,003) $ 4,196,276
Deferred -- 13,731,405 (1,742,762)
-------- ----------- -----------
$(89,606) $ 5,893,402 $ 2,453,514
======== =========== ===========
</TABLE>
Deferred tax assets and liabilities, which arise from temporary differences,
were as follows for the years ended December 31:
<TABLE>
<CAPTION>
2001 2000
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $ 15,305,000 $ 2,071,000
Research and development tax credit carryforwards. 12,868,000 10,691,000
Alternative minimum tax credit carryforwards...... 1,242,000 1,242,000
Rehabilitation tax credit carryforwards........... 1,507,000 1,507,000
Intellectual property purchased from Novo Nordisk. 9,996,000 11,246,000
Other............................................. 3,343,000 2,493,000
------------ ------------
44,261,000 29,250,000
Deferred tax liabilities:
Deferred revenue.................................. (2,625,000) (2,260,000)
------------ ------------
41,636,000 26,990,000
Less: Valuation allowance............................ (41,636,000) (26,990,000)
------------ ------------
Net deferred tax asset............................... $ -- $ --
============ ============
</TABLE>
On October 20, 2000, the Company entered into a tax sharing agreement with
Novo Nordisk. The agreement states that all research and development tax credit
carryforwards generated by the Company prior to November 9, 2000 used by the
Company to generate a tax benefit in future periods shall be reimbursed to Novo
Nordisk. The total amount paid shall not exceed $12 million. As of December 31,
2001, the Company has research and development tax credit carryforwards of
$12.9 million which begin to expire in 2008.
Realization of the deferred tax asset associated with intellectual property
purchased from Novo Nordisk will be reflected as increases in shareholders'
equity and will not be reflected as tax benefits in the statement of operations.
56
<PAGE>
The reconciliation between the Company's effective tax rate and the income
tax rate is as follows for the years ended December 31:
<TABLE>
<CAPTION>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate............. (35)% (35)% 35 %
Research and development tax credits (6) -- (14)
Nondeductible expenses.............. -- -- (1)
Valuation allowance................. 39 62 --
Other............................... 2 (3) 1
--- --- ---
Effective tax rate.................. 0 % 24 % 21 %
=== === ===
</TABLE>
11. Commitments
The Company leases certain office and laboratory space, some of which has
been subleased to a third party.
On November 9, 2001, the Company entered into a lease agreement for
additional office space. The lease commences on the earlier of February 1, 2002
or the date of occupancy. The lease term is 10 years with options to renew for
up to two additional terms, each of sixty months. The lease also provides the
Company a First Right of Refusal to lease additional space within the next few
years.
Future minimum rental payments under noncancelable operating leases with
initial or remaining terms in excess of one year are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2002........................... $ 2,337,379
2003........................... 652,122
2004........................... 532,332
2005........................... 550,179
2006........................... 555,731
Thereafter..................... 3,084,161
-----------
7,711,904
Less: Future sublease income...... (2,077,511)
-----------
Net future minimum rental payments $ 5,634,393
===========
</TABLE>
In addition to the above, the Company may be obligated to lease additional
office space. In such a case, the minimum rental payments under that lease
could range from approximately $444,000 to $630,000 per year beginning February
2004 and ending January 2012.
Gross rental expense for the years ended December 31, 2001, 2000, and 1999
was approximately $1.9 million, $1.8 million and $2.3 million respectively.
Cash received under the sublease agreements for the subleased office space was
approximately $2.0 million, $1.8 million and $856,000 for the years ended
December 31, 2001, 2000, and 1999 respectively.
The Company maintains a severance plan, which provides salary and health
insurance for up to 40 weeks from notice of termination. In addition, certain
key employees have employment agreements with the Company providing certain
additional severance benefits. As of December 31, 2001 and 2000, approximately
$179,000 and $193,000 respectively, was payable under the plan and employment
agreements.
57
<PAGE>
12. Mandatorily redeemable convertible preferred stock
In November 2000, the Company issued 4,011,768 shares of Series B
mandatorily redeemable convertible preferred stock to a group of investors at a
price per share of $37.39, which provided proceeds to the Company of
approximately $142.5 million, net of offering costs of approximately $7.5
million. The Company will accrete the net proceeds, using the effective
interest method, to the liquidation value on the earliest mandatory redemption
date of November 10, 2007.
In November 2000, the Company declared a dividend on the outstanding common
stock owned by Novo Nordisk, issuing 2,528,000 shares of Series A mandatorily
redeemable convertible preferred stock. The dividend was computed at $37.39 per
share of Series A mandatorily redeemable convertible preferred stock.
Mandatorily redeemable convertible preferred stock at December 31, 2001
consisted of the following:
<TABLE>
<CAPTION>
Shares
---------------------- Amount, net of
Issued and Liquidation Unamortized
Designated Outstanding Preference Issuance Cost
---------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Series A 2,528,000 2,528,000 $103,148,879 $103,148,879
Series B 4,011,768 4,011,768 163,690,417 157,391,508
--------- --------- ------------ ------------
6,539,768 6,539,768 $266,839,296 $260,540,387
========= ========= ============ ============
</TABLE>
Conversion
Each share of Preferred Stock is convertible into 3.6 shares of common stock
at any time at the option of the holder. Series B preferred shares convert into
voting common stock. Series A preferred shares convert into non-voting common
stock. As described in Note 15, subsequent to December 31, 2001, the
outstanding shares of mandatorily redeemable convertible preferred stock were
converted to common stock.
Liquidation
Upon any liquidation, dissolution or winding up of the Company, the holders
of Preferred Stock shall be entitled to be paid out of any assets of the
Company legally available an amount equal to the greater of $37.39 per share
plus all accrued and unpaid dividends (the Liquidation Value) or the pro rata
portion of the assets of the Company available for distribution that the
holders of Preferred Stock would be entitled to receive on an as-converted
basis together with the holders of common stock. If the assets of the Company
are insufficient to permit payment in full, the assets of the Company available
for distribution will be distributed ratably among the holders of Preferred
Stock in proportion to the full amount to which they would otherwise be
entitled.
Mandatory redemption
On November 10, 2007 or a later date consented to in writing by the holders
of a majority of the shares of Series B mandatorily redeemable convertible
preferred stock, the Company must redeem, from any source of funds legally
available, all outstanding shares of Series A and B preferred stock. Redemption
is to be effected through payment of cash in the amount of the Liquidation
Value in exchange for each outstanding share of Preferred Stock.
Dividends
Subject to the rights of other holders of preferred stock that may be issued
with dividend rights equal or superior to the rights of Series A or B holders,
the holders of Series A and B mandatorily redeemable convertible preferred
stock (Preferred Stock) are entitled to receive a cumulative dividend of 8% per
annum on the then
58
<PAGE>
current liquidation value. Dividends accrue on a quarterly basis effective
November 10, 2000 and are payable only when and if declared by the Company's
board of directors. No dividends can be paid to holders of common stock unless
all accrued but unpaid dividends are first paid to the holders of Preferred
Stock.
Voting rights
Each holder of Series B mandatorily redeemable convertible preferred stock
is entitled to the number of votes equal to the number of shares of common
stock into which such holder's shares are convertible. The Series A mandatorily
redeemable convertible preferred stock is non-voting. However, the holders of
Series A preferred stock have the right to appoint two of the Company's nine
directors.
13. Serono S.A. Agreement
In August 2001, the Company entered into a collaborative development and
marketing agreement with Ares Trading S.A. (Serono), a wholly owned subsidiary
of Serono S.A. Under the agreement, the Company will collaborate with Serono to
develop biopharmaceutical products based on two receptors, TACI and BCMA.
Additionally, the Company could receive license fee and milestone payments of
up to an aggregate of $52.5 million in connection with the development and
approval of products. The Company will share research and development expenses
worldwide, with the exception of Japan, where Serono will cover all expenses.
The Company retains an option to co-promote products with Serono in North
America while Serono will have exclusive rights to market products in the
remainder of the world, for which the Company will receive royalties. The
Company will have the option of discontinuing funding of research and
development and commercialization costs, and forgoing its right to co-promote
products in North America. If the Company chooses to discontinue funding,
Serono would have exclusive marketing rights in North America, and the Company
would receive a royalty on any sales in North America in lieu of sharing in the
net sales, commercialization expenses and profits from the products. Serono
will be responsible for manufacturing all products for both clinical trials and
commercial sale. The Company has received a $7.5 million payment from Serono
which is being amortized over the estimated term of the development program,
approximately nine years.
14. Shareholders' equity (deficit)
The Company's authorized capital stock consists of 130,000,000 shares of no
par value voting common stock, 30,000,000 no par value non-voting common stock
and 30,000,000 shares of no par value preferred stock. Prior to the filing of
amended articles of incorporation in November 2000, the common stock had a par
value of $0.01 per share. As described in Note 15, subsequent to December 31,
2001, the Company approved an increase of 20,000,000 shares of authorized no
par value voting common stock.
Common stock
In August 2000, Novo Nordisk converted 420,000 shares of Class A convertible
preferred stock and 506,976 shares of Class B convertible preferred stock to
3,337,114 shares of common stock. At December 31, 2001, 23,543,159 shares of
authorized common stock were reserved for issuance upon conversion of preferred
stock.
Stock options
In March 2000, the Company adopted the 2000 Stock Incentive Plan (the Plan).
The Plan provides for the issuance of incentive stock options and nonqualified
stock options to employees, directors, consultants and other independent
contractors who provide services to the Company. The Company has reserved a
total of 8,820,000 shares of common stock for issuance under the Plan, of which
1,241,828 are available for future grant at December 31, 2001. The Company's
board of directors is responsible for administration of the Plan and determines
the term of each option, exercise price and the vesting terms. Options
generally vest over a four-year period and expire ten years from the date of
grant. Options to purchase 144,000 shares that are immediately
59
<PAGE>
exercisable have been granted to certain board members. Upon completion of the
Company's initial public offering, described in Note 15, the 2000 Stock
Incentive Plan was suspended and the 2001 Stock Incentive Plan (the 2001 Plan)
became effective. The 2001 Plan provides for an annual increase effective the
first day of each year equal to the least of (i) 2,700,000 shares; (ii) 5% of
the outstanding common stock as of the end of the Company's preceding fiscal
year; and (iii) a lesser amount as determined by the Board of Directors. The
first annual increase under the 2001 Plan occurred upon completion of the
Company's initial public offering. Any shares from the 2000 Stock Incentive
Plan that are not actually issued shall continue to be available for issuance
under the 2001 Plan. As of the effective date of the initial public offering,
9,423,180 shares of common stock are authorized for issuance under the 2001
Plan and the 2000 Stock Incentive Plan.
A summary of stock option activity under the Plan is presented below:
<TABLE>
<CAPTION>
Weighted-Average
Weighted-Average Fair Value at
Options Exercise Price Grant Date
--------- ---------------- ----------------
<S> <C> <C> <C>
Balance, January 1, 2000.. -- $ --
Granted................... 4,331,520 2.78 $ 2.78
Exercised................. -- --
Canceled.................. (20,520) 2.78
---------
Balance, December 31, 2000 4,311,000 $2.78
Granted................... 3,629,066 3.94 $11.72
Exercised................. (271,080) 2.78
Canceled.................. (361,894) 3.03
---------
Balance, December 31, 2001 7,307,092 $3.35
=========
</TABLE>
The exercise price of options granted in 2000 was equal to the estimated
fair value of the Company's shares at the date of grant. The exercise price of
options granted in 2001 was less than the fair value of the Company's shares at
the date of grant.
The following table summarizes information about options outstanding at
December 31, 2001:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------- --------------------------
Weighted-average
remaining
Weighted-average Number of contractual life Number of Weighted-average
Exercise Price exercise prices options (in years) options exercise prices
- -------------- --------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$2.78 $2.78 4,897,471 8.7 2,458,545 $2.78
3.89 3.89 226,890 9.5 36,000 3.89
4.44 4.44 1,213,974 9.6 -- --
4.72 4.72 968,757 9.9 -- --
--------- ---------
$3.35 7,307,092 9.1 2,494,545 $2.79
========= =========
</TABLE>
The following table presents net loss and per share amounts for the years
ended December 31, 2001 and 2000 as if the Company had accounted for its stock
options granted to employees under the fair value method prescribed by
Statement 123.
<TABLE>
<CAPTION>
2001 2000
------------ ------------
<S> <C> <C>
Net loss attributable to common shareholders, as reported $(57,489,523) $(33,280,595)
============ ============
Net loss attributable to common shareholders, pro forma.. $(55,072,543) $(34,070,766)
============ ============
Basic net loss per share, as reported.................... $ (4.85) $ (3.38)
============ ============
Basic net loss per share, pro forma...................... $ (4.65) $ (3.46)
============ ============
</TABLE>
60
<PAGE>
Net income and per share amounts for the year ended December 31, 1999 are
excluded from the above table as stock options were first granted during the
year ended December 31, 2000.
For options granted prior to September 10, 2001, the fair value of each
option is estimated on the date of grant using the minimum value method
allowable for nonpublic companies with the weighted-average assumptions below
for the years ended December 31, 2001 and 2000. For options granted subsequent
to September 10, 2001, the same assumptions were utilized except that
volatility was assumed to be 70%.
<TABLE>
<CAPTION>
2001 2000
------- -------
<S> <C> <C>
Expected dividend yield........ 0% 0%
Expected stock price volatility 0% 0%
Risk-free interest rate........ 4.48% 5.58%
Expected life of options....... 5 years 5 years
</TABLE>
On September 14, 2001, the Company made loans of $400,000 to Bruce L.A.
Carter, our President, Chief Executive Officer and a director, $150,000 to
James A. Johnson, our Senior Vice President, Chief Financial Officer and
Treasurer and $175,000 to Patrick J. O'Hara, our Vice President of Biomolecular
Informatics, pursuant to promissory notes in connection with the purchase of
shares of common stock upon the exercise of non-qualified stock options by Dr.
Carter, Mr. Johnson and Dr. O'Hara. The loans bear interest at a rate equal to
the applicable federal rate. This interest is nonrefundable and nonprepayable.
All outstanding principal on the notes is payable on the three-year anniversary
of the notes, with accrued interest payable annually on each anniversary of the
notes. Each of these loans is collateralized by a pledge of the shares of
common stock issued in connection with the extension of the loan. Each of the
executives' personal liability is limited to 50% of the original principal
amount of the note and 100% of the accrued interest and costs, including
attorney's fees, due under the note.
15. Subsequent events
On January 9, 2002, the Company effected a 3.6-for-1 stock split of its
common stock in the form of a stock dividend. All common stock share and per
share amounts in the financial statements have been adjusted retroactively to
reflect the stock split. Also in January, the Company's shareholders approved a
20,000,000 share increase in authorized no par voting common stock and the
adoption of the 2001 Stock Incentive Plan.
On February 1, 2002, the Company sold 10,000,000 shares of common stock in
an initial public offering. Upon the completion of the initial public offering
the 4,011,768 shares of Series B mandatorily redeemable convertible preferred
stock converted to 14,442,359 shares of voting common stock, and the 2,528,000
shares of Series A mandatorily redeemable convertible preferred stock converted
to 9,100,800 shares of non-voting common stock. Upon completion of the initial
public offering, the increase in authorized shares of common stock and the 2001
Stock Incentive Plan became effective. Net proceeds from the initial offering
amounted to approximately $110 million.
On March 7, 2002, the Company filed a patent infringement lawsuit against
Immunex Corporation in the United States District Court for the Western
District of Washington in Seattle. The lawsuit charges Immunex of directly and
willfully infringing United States Patent Numbers 5,843,725, 6,018,026,
6,291,212 B1, 6,291,646 B1, 6,300,099 B1 and 6,323,323 B1 through the
manufacture, importation and sale of Enbrel(R), a dimeric fusion protein. While
it is impossible to predict accurately or to determine the eventual outcome of
this matter, the Company believes that the outcome will not have a material
adverse effect on its financial position or results of operations.
61
<PAGE>
16. Quarterly Financial Results (unaudited)
Operating results for each quarter of 2001 and 2000 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Q1 Q2 Q3 Q4
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 2001:
Revenue............................................... $ 5,092 $ 3,458 $ 4,346 $ 4,932
Net loss.............................................. $ (6,230) $ (9,666) $ (9,726) $(11,257)
Net loss attributable to common shareholders.......... $(11,382) $(14,818) $(14,879) $(16,410)
Net loss per common share:
Basic............................................. $ (0.97) $ (1.26) $ (1.26) $ (1.37)
Diluted........................................... $ (0.97) $ (1.26) $ (1.26) $ (1.37)
Year ended December 31, 2000:
Revenue............................................... $ 17,085 $ 1,825 $ 2,068 $ 11,486
Net income (loss)..................................... $ 4,764 $ (9,233) $ (7,745) $(18,163)
Net income (loss) attributable to common shareholders. $ 4,764 $ (9,233) $ (7,745) $(21,067)
Net income (loss) per common share:
Basic............................................. $ 0.56 $ (1.09) $ (0.73) $ (1.79)
Diluted........................................... $ 0.40 $ (1.09) $ (0.73) $ (1.79)
</TABLE>
62
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) The information required by this item with respect to our directors is
incorporated by reference to the section captioned "Proposal 1: Election of
Directors" and the section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance" in the proxy statement for our annual meeting of
shareholders to be held on June 21, 2002. We will file the proxy statement
within 120 days of December 31, 2001, our fiscal year end.
(b) The information required by this item with respect to our executive
officers is incorporated by reference to the section captioned "Executive
Officers" and the section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance" in the proxy statement for our annual meeting of
shareholders to be held on June 21, 2002.
Item 11. Executive Compensation
The information required by this item with respect to executive compensation
is incorporated by reference to the section captioned "Executive Compensation"
and the section captioned "Employment Contracts, Termination of Employment and
Change-in-Control Arrangements" in the proxy statement for our annual meeting
of shareholders to be held on June 21, 2002.
Item 12. Security Ownership of Beneficial Owners and Management
The information required by this item with respect to beneficial ownership
is incorporated by reference from the section captioned "Security Ownership of
Certain Beneficial Owners and Management" in the proxy statement for our annual
meeting of shareholders to be held on June 21, 2002.
Item 13. Relationships and Related Transactions
The information required by this item is incorporated by reference from the
section labeled "Certain Transactions" in the proxy statement for our annual
meeting of shareholders to be held on June 21, 2002.
63
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements. The following financial statements are contained in
Item 8 of this report:
<TABLE>
<CAPTION>
Page in
Form 10-K
---------
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent Accountants................. 44
Balance Sheets at December 31, 2001 and 2000.................................. 45
Statements of Operations for the years ended December 31, 2001, 2000, and 1999 46
Statement of Changes in Mandatorily Redeemable Convertible Preferred Stock and
Shareholders' Equity for the period from January 1, 1999 through
December 31, 2001........................................................... 47
Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999. 48
Notes to Financial Statements................................................. 49-62
</TABLE>
2. Financial Statement Schedules
All financial statement schedules have been omitted because the required
information is either included in the financial statements or the notes thereto
or is not applicable.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
--- -----------
<C> <S> <C>
3.1 Amended and Restated Articles of Incorporation of ZymoGenetics, Inc. (Exhibit 3.1) (A)
3.2 Amended and Restated Bylaws. (Exhibit 3.2) (A)
9.1 Voting Agreement, dated October 20, 2000, by and between Warburg, Pincus Equity Partners,
L.P. and Ernesto Bertarelli. (Exhibit 9.1) (A)
9.2 Agreement and Waiver of Co-Sale Rights, dated July 16, 2001, by and among ZymoGenetics,
Inc., the holders of Series B Preferred Stock listed on the signature pages thereto and
Serono B.V. (Exhibit 9.2) (A)
9.3 Share Transfer and Voting Agreement, dated January 2, 2001, by and between Warburg,
Pincus Equity Partners, L.P. and Mount Everest Advisors, L.L.C. and acknowledged by
ZymoGenetics, Inc. (Exhibit 9.3) (A)
10.1 Employment Agreement, dated November 9, 2000, between ZymoGenetics, Inc. and Bruce
L.A. Carter. (Exhibit 10.1) (A)
10.2 Employment Agreement, dated March 21, 2001, between ZymoGenetics, Inc. and Jan K.
Ohrstrom. (Exhibit 10.4) (A)
10.3 Employment Agreement, dated March 23, 2001, between ZymoGenetics, Inc. and Patrick J.
O'Hara. (Exhibit 10.3) (A)
10.4 Employment Agreement, dated April 23, 2001, between ZymoGenetics, Inc. and Frank D.
Collins. (Exhibit 10.2) (A)
10.5 Employment Agreement, dated April 30, 2001, between ZymoGenetics, Inc. and James A.
Johnson. (Exhibit 10.5) (A)
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
--- ----------- -
<C> <S> <C>
10.6 Employment Agreement, dated January 2, 2002, between ZymoGenetics, Inc. and Mark D.
Young. (Exhibit 10.35) (A)
10.7 Employment Agreement, dated January 28, 2002, between ZymoGenetics, Inc. and Robert S.
Whitehead.
10.8 Employment Agreement, dated February 12, 2002, between ZymoGenetics, Inc. and Suzanne
Shema.
10.9 Amended and Restated 2000 Stock Incentive Plan. (Exhibit 10.11) (A)
10.10 2001 Stock Incentive Plan. (Exhibit 10.29) (A)
10.11 Stock Option Grant Program for Nonemployee Directors under the ZymoGenetics 2001 Stock
Incentive Plan. (Exhibit 10.30) (A)
10.12 Incentive Compensation Plan Summary. (Exhibit 10.12) (A)
10.13 Deferred Compensation Plan for Key Employees. (Exhibit 10.14) (A)
10.14 Form of Promissory Note, dated September 14, 2001, between ZymoGenetics, Inc. and the
executive officers listed on Schedule A thereto. (Exhibit 10.31) (A)
10.15 Form of Pledge and Security Agreement, dated September 14, 2001, between ZymoGenetics,
Inc. and the executive officers listed on Schedule A thereto. (Exhibit 10.32) (A)
10.16 Pledge and Security Agreement, dated September 14, 2001, between ZymoGenetics, Inc. and
Bruce L.A Carter. (Exhibit 10.33) (A)
10.17* Insulin Agreement, dated August 6, 1982, between ZymoGenetics, Inc. and Novo Industri A/
S. (Exhibit 10.18) (A)
10.18* Letter Agreement, dated March 13, 1987, between ZymoGenetics, Inc. and Novo Industri A/S.
(Exhibit 10.19) (A)
10.19* Amended and Restated Human Glucagon, Analogues of Human Glucagon, Analogues of
Human Insulin Letter Agreement, dated September 28, 2000, between ZymoGenetics, Inc.
and Novo Nordisk A/S. (Exhibit 10.20) (A)
10.20* License Agreement for Analogues of Human Insulin, dated September 28, 2000, between the
registrant and Novo Nordisk Health Care AG. (Exhibit 10.21) (A)
10.21* License Agreement, dated February 23, 1989, between ZymoGenetics, Inc. and the University
of Washington. (Exhibit 10.16) (A)
10.22* License Agreement, dated January 18, 1994, including Amendment No. 1, dated January 1,
1997, and Amendment No. 2, dated June 5, 2000, between and among ZymoGenetics, Inc.,
Novo Nordisk A/S, Johnson & Johnson and Chiron Corporation. (Exhibit 10.17) (A)
10.23 Royalty Agreement pertaining to the January 18, 1994 Agreement Relating to Platelet Derived
Growth Factor, dated January 1, 2000, between ZymoGenetics, Inc. and Novo Nordisk.
(Exhibit 10.27) (A)
10.24* License Agreement, dated December 31, 1998, as amended on February 4, 1999 and October
23, 2000, between ZymoGenetics, Inc. and St. Jude Children's Research Hospital. (Exhibit
10.15) (A)
10.25* Option and License Agreement, effective November 10, 2000, as amended effective as of June
16, 2000 and October 20, 2000, between ZymoGenetics, Inc. and Novo Nordisk A/S.
(Exhibit 10.22) (A)
10.26* Cross-License Agreement, effective November 10, 2000, between ZymoGenetics, Inc. and
Novo Nordisk A/S, Enzyme Business. (Exhibit 10.24) (A)
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
--- ----------- -
<C> <S> <C>
10.27* Cross-License Agreement, effective November 10, 2000, between ZymoGenetics, Inc. and
Novo Nordisk A/S. (Exhibit 10.25) (A)
10.28* Kunitz Protein Agreement, effective November 10, 2000, between ZymoGenetics, Inc. and
Novo Nordisk A/S. (Exhibit 10.26) (A)
10.29* Collaborative Development and Marketing Agreement, effective August 30, 2001, by and
between ZymoGenetics, Inc. and Ares Trading S.A. (Exhibit 10.28) (A)
10.30 Series B Preferred Stock Purchase Agreement, dated October 20, 2000, by and among
ZymoGenetics, Inc., Novo Nordisk A/S and the other investors listed on Exhibit A thereto.
(Exhibit 10.7) (A)
10.31 Series B Co-Sale Agreement by and among ZymoGenetics, Inc. and the persons listed on
Schedule A thereto, entered into and effective as of November 10, 2000. (Exhibit 10.8) (A)
10.32 Shareholders' Agreement by and among ZymoGenetics, Inc., Novo Nordisk A/S, Novo
Nordisk Pharmaceuticals, Inc. and the investors listed on Schedule A thereto, effective as of
November 10, 2000. (Exhibit 10.9) (A)
10.33 Investors' Rights Agreement by and among ZymoGenetics, Inc., Novo Nordisk
Pharmaceuticals, Inc. and the persons listed on Schedule A thereto, effective as of
November 10, 2000. (Exhibit 10.10) (A)
10.34 Tax Sharing Agreement, effective October 20, 2000, between ZymoGenetics, Inc. and Novo
Nordisk of North America, Inc. (Exhibit 10.23) (A)
10.35 Office Lease Agreement, dated November 9, 2001, between ZymoGenetics, Inc. and 1144
Eastlake LLC. (Exhibit 10.34) (A)
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
</TABLE>
- --------
* Portions of these exhibits have been omitted based on a grant of
confidential treatment from the Securities and Exchange Commission. The
omitted portions of these exhibits have been filed separately with the SEC.
(A) Incorporated by reference to designated exhibit included with ZymoGenetics'
Registration Statement on Form S-1 (No. 333-69190) filed on September 10,
2001, as amended.
(b) Reports on Form 8-K
None.
66
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ZYMOGENETICS, INC.
By /s/ BRUCE L.A. CARTER
------------------------------------
Bruce L.A. Carter,
President and Chief Executive
Officer
Date: March 26, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ BRUCE L.A. CARTER, PH.D. President, Chief Executive March 26, 2002
- ------------------------------ Officer and Director
Bruce L.A. Carter, Ph.D. (Principal Executive
Officer)
/s/ JAMES A. JOHNSON Senior Vice President, Chief March 26, 2002
- ------------------------------ Financial Officer and
James A. Johnson Treasurer (Principal
Accounting and Financial
Officer)
/s/ GEORGE B. RATHMANN, PH.D. Chairman of the Board of March 26, 2002
- ------------------------------ Directors
George B. Rathmann, Ph.D.
/s/ DAVID I. HIRSH, PH.D. Director March 26, 2002
- ------------------------------
David I. Hirsh, Ph.D.
/s/ JONATHAN S. LEFF Director March 26, 2002
- ------------------------------
Jonathan S. Leff
/s/ KURT ANKER NIELSEN Director March 26, 2002
- ------------------------------
Kurt Anker Nielsen
/s/ EDWARD E. PENHOET, PH.D. Director March 26, 2002
- ------------------------------
Edward E. Penhoet, Ph.D.
/s/ LORI F. RAFIELD, PH.D. Director March 26, 2002
- ------------------------------
Lori F. Rafield, Ph.D.
/s/ LARS REBIEN SORENSEN Director March 26, 2002
- ------------------------------
Lars Rebien Sorensen
67
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ----------- -
<C> <S> <C>
3.1 Amended and Restated Articles of Incorporation of ZymoGenetics, Inc. (Exhibit 3.1) (A)
3.2 Amended and Restated Bylaws. (Exhibit 3.2) (A)
9.1 Voting Agreement, dated October 20, 2000, by and between Warburg, Pincus Equity Partners,
L.P. and Ernesto Bertarelli. (Exhibit 9.1) (A)
9.2 Agreement and Waiver of Co-Sale Rights, dated July 16, 2001, by and among ZymoGenetics,
Inc., the holders of Series B Preferred Stock listed on the signature pages thereto and
Serono B.V. (Exhibit 9.2) (A)
9.3 Share Transfer and Voting Agreement, dated January 2, 2001, by and between Warburg,
Pincus Equity Partners, L.P. and Mount Everest Advisors, L.L.C. and acknowledged by
ZymoGenetics, Inc. (Exhibit 9.3) (A)
10.1 Employment Agreement, dated November 9, 2000, between ZymoGenetics, Inc. and Bruce
L.A. Carter. (Exhibit 10.1) (A)
10.2 Employment Agreement, dated March 21, 2001, between ZymoGenetics, Inc. and Jan K.
Ohrstrom. (Exhibit 10.4) (A)
10.3 Employment Agreement, dated March 23, 2001, between ZymoGenetics, Inc. and Patrick J.
O'Hara. (Exhibit 10.3) (A)
10.4 Employment Agreement, dated April 23, 2001, between ZymoGenetics, Inc. and Frank D.
Collins. (Exhibit 10.2) (A)
10.5 Employment Agreement, dated April 30, 2001, between ZymoGenetics, Inc. and James A.
Johnson. (Exhibit 10.5) (A)
10.6 Employment Agreement, dated January 2, 2002, between ZymoGenetics, Inc. and Mark D.
Young. (Exhibit 10.35) (A)
10.7 Employment Agreement, dated January 28, 2002, between ZymoGenetics, Inc. and Robert S.
Whitehead.
10.8 Employment Agreement, dated February 12, 2002, between ZymoGenetics, Inc. and Suzanne
Shema.
10.9 Amended and Restated 2000 Stock Incentive Plan. (Exhibit 10.11) (A)
10.10 2001 Stock Incentive Plan. (Exhibit 10.29) (A)
10.11 Stock Option Grant Program for Nonemployee Directors under the ZymoGenetics 2001 Stock
Incentive Plan. (Exhibit 10.30) (A)
10.12 Incentive Compensation Plan Summary. (Exhibit 10.12) (A)
10.13 Deferred Compensation Plan for Key Employees. (Exhibit 10.14) (A)
10.14 Form of Promissory Note, dated September 14, 2001, between ZymoGenetics, Inc. and the
executive officers listed on Schedule A thereto. (Exhibit 10.31) (A)
10.15 Form of Pledge and Security Agreement, dated September 14, 2001, between ZymoGenetics,
Inc. and the executive officers listed on Schedule A thereto. (Exhibit 10.32) (A)
10.16 Pledge and Security Agreement, dated September 14, 2001, between ZymoGenetics, Inc. and
Bruce L.A Carter. (Exhibit 10.33) (A)
10.17* Insulin Agreement, dated August 6, 1982, between ZymoGenetics, Inc. and Novo Industri A/
S. (Exhibit 10.18) (A)
10.18* Letter Agreement, dated March 13, 1987, between ZymoGenetics, Inc. and Novo Industri A/S.
(Exhibit 10.19) (A)
10.19* Amended and Restated Human Glucagon, Analogues of Human Glucagon, Analogues of
Human Insulin Letter Agreement, dated September 28, 2000, between ZymoGenetics, Inc.
and Novo Nordisk A/S. (Exhibit 10.20) (A)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ----------- -
<C> <S> <C>
10.20* License Agreement for Analogues of Human Insulin, dated September 28, 2000, between the
registrant and Novo Nordisk Health Care AG. (Exhibit 10.21) (A)
10.21* License Agreement, dated February 23, 1989, between ZymoGenetics, Inc. and the University
of Washington. (Exhibit 10.16) (A)
10.22* License Agreement, dated January 18, 1994, including Amendment No. 1, dated January 1,
1997, and Amendment No. 2, dated June 5, 2000, between and among ZymoGenetics, Inc.,
Novo Nordisk A/S, Johnson & Johnson and Chiron Corporation. (Exhibit 10.17) (A)
10.23 Royalty Agreement pertaining to the January 18, 1994 Agreement Relating to Platelet Derived
Growth Factor, dated January 1, 2000, between ZymoGenetics, Inc. and Novo Nordisk.
(Exhibit 10.27) (A)
10.24* License Agreement, dated December 31, 1998, as amended on February 4, 1999 and October
23, 2000, between ZymoGenetics, Inc. and St. Jude Children's Research Hospital. (Exhibit
10.15) (A)
10.25* Option and License Agreement, effective November 10, 2000, as amended effective as of June
16, 2000 and October 20, 2000, between ZymoGenetics, Inc. and Novo Nordisk A/S.
(Exhibit 10.22) (A)
10.26* Cross-License Agreement, effective November 10, 2000, between ZymoGenetics, Inc. and
Novo Nordisk A/S, Enzyme Business. (Exhibit 10.24) (A)
10.27* Cross-License Agreement, effective November 10, 2000, between ZymoGenetics, Inc. and
Novo Nordisk A/S. (Exhibit 10.25) (A)
10.28* Kunitz Protein Agreement, effective November 10, 2000, between ZymoGenetics, Inc. and
Novo Nordisk A/S. (Exhibit 10.26) (A)
10.29* Collaborative Development and Marketing Agreement, effective August 30, 2001, by and
between ZymoGenetics, Inc. and Ares Trading S.A. (Exhibit 10.28) (A)
10.30 Series B Preferred Stock Purchase Agreement, dated October 20, 2000, by and among
ZymoGenetics, Inc., Novo Nordisk A/S and the other investors listed on Exhibit A thereto.
(Exhibit 10.7) (A)
10.31 Series B Co-Sale Agreement by and among ZymoGenetics, Inc. and the persons listed on
Schedule A thereto, entered into and effective as of November 10, 2000. (Exhibit 10.8) (A)
10.32 Shareholders' Agreement by and among ZymoGenetics, Inc., Novo Nordisk A/S, Novo
Nordisk Pharmaceuticals, Inc. and the investors listed on Schedule A thereto, effective as of
November 10, 2000. (Exhibit 10.9) (A)
10.33 Investors' Rights Agreement by and among ZymoGenetics, Inc., Novo Nordisk
Pharmaceuticals, Inc. and the persons listed on Schedule A thereto, effective as of
November 10, 2000. (Exhibit 10.10) (A)
10.34 Tax Sharing Agreement, effective October 20, 2000, between ZymoGenetics, Inc. and Novo
Nordisk of North America, Inc. (Exhibit 10.23) (A)
10.35 Office Lease Agreement, dated November 9, 2001, between ZymoGenetics, Inc. and 1144
Eastlake LLC. (Exhibit 10.34) (A)
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
</TABLE>
- --------
* Portions of these exhibits have been omitted based on a grant of
confidential treatment from the Securities and Exchange Commission. The
omitted portions of these exhibits have been filed separately with the SEC.
(A) Incorporated by reference to designated exhibit included with ZymoGenetics'
Registration Statement on Form S-1 (No. 333-69190) filed on September 10,
2001, as amended.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.7
<SEQUENCE>3
<FILENAME>dex107.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT WITH ROBERT WHITEHEAD
<TEXT>
<PAGE>
Exhibit 10.7
EMPLOYMENT AGREEMENT
This AGREEMENT, dated January 28, 2002, is between ZymoGenetics, Inc., a
Washington corporation ("Company") and Robert S. Whitehead ("Executive").
------- ---------
1. Employment. Company will employ Executive and Executive will accept
----------
employment as Sr. Vice President, Chief Business Officer, of the Company.
Executive accepts employment upon the terms and conditions contained in this
Agreement and for the period (hereinafter called the "Term of Employment")
------------------
specified in Section 3 below.
2. Duties. Executive shall, during the Term of Employment, serve the
-------
Company under the direction of the President of the Company. Executive shall
perform the duties of his position faithfully, diligently and competently and to
the best of his ability, and shall devote his full business time to his
employment. Executive shall perform such other duties as are assigned to him by
the President or the Board of Directors of the Company. Executive shall not
engage in any other business activity (except the management of personal
investments which in the aggregate do not interfere with the performance of
Executive's duties) without first obtaining the written consent of Company, such
consent not to be unreasonably withheld.
3. Term of Employment; Termination.
-------------------------------
Executive's Term of Employment shall be two years from the date of this
Agreement, unless extended or earlier terminated as provided below.
(a) Termination or Extension of Term of Employment By Company.
The Company shall employ Executive, for a period commencing on the date
hereof and terminating as follows:
(i) Two years from the date hereof, if at least thirty (30)
days prior to such date either the Company or Executive has, at its election,
notified the other in writing that this Agreement shall terminate on such date.
If notice of termination is not given, this Agreement shall be deemed to extend
from year to year. It can then be terminated by written notice at least thirty
(30) days prior to the annual renewal date.
(ii) With or without "Cause" (as defined below), Company may
terminate the employment of Executive at any time upon giving "Notice of
Termination" (as defined below).
<PAGE>
(b) By Executive
Executive may terminate his employment at any time, for any reason, upon
giving Notice of Termination.
(c) Automatic Termination
This Agreement and Executive's employment hereunder shall terminate
automatically upon the death or total disability of Executive. The term "total
-----
disability" as used herein shall mean Executive's inability to perform the
- ----------
duties set forth in paragraph 1 hereof for a period or periods aggregating
ninety (90) calendar days in any 12-month period as a result of physical or
mental illness, loss of legal capacity or any other cause beyond Executive's
control, unless Executive is granted a leave of absence by the Board of
Directors of Company. Executive and Company hereby acknowledge that Executive's
ability to perform the duties specified in paragraph 2 hereof is of the essence
of this Agreement. Termination hereunder shall be deemed to be effective (a) at
the end of the calendar month in which Executive's death occurs or (b)
immediately upon a determination by the Board of Directors of Company of
Executive's total disability, as defined herein.
(d) Notice
The term "Notice of Termination" shall mean at least thirty (30) days'
---------------------
written notice of termination, by either party, of Executive's employment,
during which period Executive's employment and performance of services will
continue; provided, however, that Company may, upon notice to Executive and
without reducing Executive's compensation during such period, excuse Executive
from any or all of his duties during such period. Such a reduction in duties
shall not constitute "good reason" for voluntary termination so as to trigger
termination payments in accordance with subparagraph 4.2. The effective date of
the termination (the "Termination Date") of Executive's employment hereunder
----------------
shall be the date on which such 30-day period expires.
4. Termination Payments
--------------------
In the event of termination of the employment of Executive, all compensation and
benefits set forth in this Agreement shall terminate except as specifically
provided in this paragraph 4:
-2-
<PAGE>
4.1 Termination by Company
(a) Upon termination by Company, Company shall pay Executive any unpaid
annual base salary which has accrued for services already performed as of the
Termination Date.
(b) If Company terminates Executive's employment without Cause, as defined
below, Executive shall be entitled to receive termination payments equal to
twelve (12) months annual base salary. The termination payments shall be
calculated according to Executive's base salary as of the date of Notice of
Termination and the termination payments will be paid semi-monthly in equal
parts in accordance with the same time schedule that Company or a "Successor
---------
Company" (as defined in the Stock Option Agreement and incorporated
- ------- by reference herein) makes its customary payroll. Company or a
Successor Company may deduct customary withholdings including social security,
federal and state income taxes, and state disability insurance from these
severance payments; however, any and all such obligations shall be Executive's
responsibility. Company will issue and file appropriate Form 1099 or similar tax
documents in connection with any termination payments. The termination payments
described in this paragraph are expressly contingent upon Executive's full
compliance with the terms of his Employee Inventions and Proprietary Information
Agreement with Company (the "Inventions Agreement"), a copy of which is attached
--------------------
hereto. In the event Executive were to materially breach this Inventions
Agreement, his right to any termination payments under this paragraph shall be
extinguished, Company (and any Successor Company) shall cease payments, and
Executive shall immediately return to Company or to any Successor Company any
severance payments already made. If Executive is terminated by either Company or
any Successor Company for Cause, Executive shall not be entitled to receive any
of the foregoing benefits, other than those set forth in clause (a) above.
4.2 Termination by Executive
In the case of the termination of Executive's employment by Executive for
"good reason," as defined below, Executive shall be entitled to the termination
payments as set forth in clauses 4.1(a) and (b). In the case of termination of
Executive's employment by Executive for any other reason, Executive shall not be
entitled to any termination payments or accelerated vesting benefit, other than
as set forth in clause 4.1(a), above.
-3-
<PAGE>
4.3 Termination as a Result of Death or Total Disability
In the event of termination of Executive's employment pursuant to
subparagraph 3(c), Executive or his estate shall be paid the compensation set
forth in clause 4.1(a) and shall not be entitled to any of the benefits under
clauses 4.1(b).
4.4 "Good Reason"
"Good reason" shall mean the occurrence of any of the following events,
-----------
without the consent of the Executive:
a) a demotion or other material reduction in the nature or status of
Executive's responsibilities; provided, however, that a change in the
person or office to which Executive reports, without a corresponding
reduction in duties, status and responsibilities, shall not constitute
"good reason;"
b) a non-voluntary reduction in the Executive's annual base salary;
c) requirement by a Successor Company that the Executive relocate his
principal place of employment to a location that is more than 50 miles
from the principal place of employment where Executive was employed; or
d) the failure of Company to obtain a satisfactory agreement from any
Successor Company to assume and perform the obligations under this
Agreement.
4.5 Cause
Wherever reference is made in this Agreement to termination being with or
without Cause, "Cause" shall include, without limitation, the occurrence of one
-----
or more of the following events:
a) willful misconduct, insubordination, or dishonesty in the performance
of Executive's duties or other knowing and material violation of
Company's or a Successor Company's policies and procedures in effect
from time to time which results in a material adverse effect on Company
or a Successor Company;
b) willful actions (or intentional failures to act) in bad faith by
Executive with respect to Company or a Successor Company that
materially impair Company's or a Successor Company's business, goodwill
or reputation;
-4-
<PAGE>
c) conviction of Executive of a felony involving an act of dishonesty,
moral turpitude, deceit or fraud, or the commission of acts that could
reasonably be expected to result in such a conviction; or
d) any material violation by Executive of Executive's Inventions Agreement
with Company.
5. Compensation and Fringe Benefits.
--------------------------------
(a) The Company shall, during the Term of Employment, pay to the Executive
as compensation for the performance of his duties and obligations a salary of
$300,000 per annum. This compensation is subject to annual review and
adjustment, as appropriate in the judgment of the Company. The compensation
payable pursuant to this Section 5(a) shall be payable in equal semi-monthly
installments on the last day of each such pay period.
(b) The Executive shall be enrolled and participate in any retirement,
group insurance and other fringe benefit plans and arrangements which are
applicable to the similarly situated personnel of the Company and in effect from
time to time, if the Executive is eligible therefor, in each case in accordance
with and subject to the provisions thereof.
(c) Stock Options
(i) Executive has been granted a ten-year stock option under
the Company's Amended and Restated 2000 Stock Incentive Plan, dated August 23,
2000, which allows Executive to purchase 80,000 shares of the Company's common
stock.
(ii) Executive shall be eligible to receive future grants of
stock options pursuant to the Company's stock-based bonus program; and
(iii) Executive shall be eligible to receive future periodic
(i.e., non bonus-related) grants under the Company's stock incentive programs.
(d) Executive will also receive the following executive perquisites for the
duration of this contract:
(i) Company-paid term life insurance policy in the amount of
$200,000; and
(ii) Company-paid use of either a laptop computer or personal
computer, to be upgraded bi-annually at the time this contract is renewed; and
-5-
<PAGE>
(iii) Company-paid annual executive health physical, to be
administered by a physician selected by the Company; and
(iv) Company-paid expenses for a residential phone and
cellular phone.
6. Expenses. All travel and other reasonable expenses incident to the
--------
rendering of service by the Executive hereunder will be paid by the Company. If
such expenses are paid in the first instance by the Executive, the Company will
reimburse him upon presentation of proper expense accounts. Reimbursement
requests, along with supporting documentation, should be submitted within sixty
(60) days of incurring the expense.
7. Non-competition.
---------------
(a) Upon termination of Executive's employment with the Company for any
reason, and for a period of twelve (12) consecutive months after leaving his
employment with the Company, Executive will not directly or indirectly work or
otherwise engage in research, manufacture, sale or distribution of any product,
method or matter:
(i) For any business, whose commercial efforts are in
competition with the products manufactured or marketed by the Company during
Executive's employment with the Company or under research or development by the
Company during Executive's employment with the Company (and on which the Company
has expended at least $500,000); or
(ii) For any research institution whose research efforts
pertain to the same products manufactured or marketed by the Company during
Executive's employment with the Company or under research or development by the
Company during Executive's employment with the Company (and on which the Company
has expended at least $500,000), unless the Executive is not involved in any
manner in the design, conduct or supervision of such research efforts, or unless
such research is being conducted solely for scientific and not for commercial
purposes. The executive shall be deemed to be connected with a business if such
business is carried on by partnership in which he is a general or limited
partner, consultant or employee, or a corporation or association of which he is
a shareholder, officer, director, employee, member, consultant or agent;
provided, that nothing herein shall prevent the purchase or ownership by the
Executive of shares of less than 1% of the outstanding shares in a publicly or
privately held corporation.
-6-
<PAGE>
Said twelve (12) months' period shall commence on the day on which the
Executive actually leaves his employment with the Company, even if this date is
prior to the expiration of any given notice of termination.
(b) The Company's Board of Directors may, at its own discretion, by
express or written consent, release the Executive from the restriction in
paragraph 6(a).
(c) For a period of one (1) year after the employment of the Executive
is terminated for any reason, Executive will not directly or indirectly, either
for Executive's account or as representative or agent for any other person,
firm, corporation or entity, solicit the services of, or entice away, any
Executive of the Company, or the Executive of any company affiliated with the
Company.
(d) In the event that Executive during said period described in
paragraph 6(a) violates any of the Executive's obligations towards the Company,
including but not limited to the Executive accepting a position with a competing
enterprise or Executive violating terms of paragraph 6(c), payment of Severance
or Salary Continuation shall cease automatically without notice, regardless of
whether the Company takes legal action or otherwise tries to enforce its rights.
The Company reserves all rights it may have under contract or law to relief or
damages in addition to termination of the above-described payments.
8. Binding Effect. This Agreement shall be binding upon and inure to
--------------
the benefit of the Company and the Executive and their respective heirs, legal
or personal representatives, successors and assigns.
9. Rights of Assignment or Delegation. This Agreement is personal to
----------------------------------
the Executive and shall not be assignable. Company may assign its rights
hereunder to (a) any corporation resulting from any merger, consolidation, or
other reorganization to which Company is a party or (b) any corporation,
partnership, association, or other person to which Company may transfer all or
substantially all of the assets in business of Company existing at such time.
All the terms and provisions of this Agreement shall be binding upon and shall
inure to the benefit and be enforceable by the parties hereto and their
respective successors and permitted assigns.
10. Waiver. No delay or failure by any party in exercising, protecting
------
or enforcing any of its rights, titles, interests, or remedies hereunder and no
course of dealing or performance with respect thereto, shall constitute a
waiver. The express waiver by a party of any right, title, interest, or remedy
in a particular instance or circumstance shall not constitute a waiver in any
other instance or circumstance. All rights and remedies shall be cumulative and
not exclusive or any rights or remedies.
-7-
<PAGE>
11. Arbitration. Any controversies or claims arising out of or relating
-----------
to this Agreement shall be finally and fully settled by arbitration of the City
of Seattle, Washington in accordance with the Employment Arbitration Rules of
the American Arbitration Association then in effect (the "AAA Rules"), conducted
by one arbitrator, mutually agreed upon by Company and Executive or chosen in
accordance with the AAA Rules, except the parties thereto shall have any right
to discovery would be permitted by the Federal Rules of Civil Procedure for a
period of 90 days following the commencement of such arbitration and the
arbitrator shall resolve any dispute which arises in connection with such
discovery. The prevailing parties shall be entitled to costs, expenses,
reasonable attorneys' fees, and judgment upon the award rendered by the
arbitrator. The award may be entered in any court having jurisdiction.
12. Amendments in Writing. No amendment, modification, waiver,
---------------------
termination or discharge of any provision of this Agreement, nor consent to any
departure by either party, shall in any event be effective unless the same shall
be in writing, specifically identifying this Agreement and the provision
intended to be amended, modified, waived, terminated, or discharged and assigned
by Company and Executive. Each such amendment, modification, waiver,
termination, or discharge shall be effective only in the specific instance and
for the specific purpose for which given. No provision of this Agreement shall
be varied, contradicted, or explained by any oral agreement, course of dealing
or performance or any other matter not set forth in agreement in writing and
signed by Company and Executive.
13. Notices. Any notice required or desired to be given hereunder shall
-------
be in writing and shall be deemed sufficiently given when delivered or
when mailed by first class certified or registered mail, postage prepaid, to the
party for whom intended at the following address:
To the Company:
Dr. Bruce L. A. Carter
CEO and President
ZymoGenetics, Inc.
1201 Eastlake Avenue East
Seattle, WA 98102
To the Executive:
Robert S. Whitehead
Sr. Vice President, Chief Business Officer
3709 W. Fulton
Seattle, WA 98199
-8-
<PAGE>
or to such other address, as to either party, as such party shall from time to
time designate by like notice to the other.
14. Entire Agreement. This Agreement will, upon the commencement of the
----------------
Term of Employment, supersede all prior agreements between the Executive and the
Company, except the Employee Inventions and Proprietary Information Agreement
dated October 31, 2001, and any such prior agreements and the terms and
conditions thereof shall hereafter be null, void and of no effect.
15. Governing Law. This Agreement is made under and shall be governed by
-------------
and construed in accordance with the internal laws of the State of Washington.
16. Severability. If any provision of this Agreement shall be held invalid,
------------
illegal or unenforceable in any jurisdiction, for any reason, including without
limitation, the duration of such provision, it's geographical scope or the
extent of the activities prohibited or required by it, then, to the full extent
permitted by law (a) all other provisions hereof shall remain in full force and
effect and such jurisdiction shall be liberally construed in order to carry out
the intent of the parties as nearly as may be possible, (b) such invalidity,
illegality, or unenforcability shall not effect the validity, legality or
enforceability of any other provision, and (c) any court or arbitrator having
jurisdiction there over shall have the power to reform such provision to the
extent necessary for such provision to be enforceable under applicable law.
17. Multiple Copies. This Agreement may be executed in two or more
---------------
counterparts of like tenor and effect, each of which shall be deemed an original
but all of which together shall constitute one and the same instrument.
ZYMOGENETICS, INC.
By: /s/ Bruce L.A.Carter
---------------------
Dr. Bruce L. A. Carter, President and CEO
EXECUTIVE:
/s/ Robert S. Whitehead
--------------------------
Robert S. Whitehead
-9-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.8
<SEQUENCE>4
<FILENAME>dex108.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT WITH SUZANNE SHEMA
<TEXT>
<PAGE>
Exhibit 10.8
EMPLOYMENT AGREEMENT
This AGREEMENT, dated /s/ February 12, 2002, is between ZymoGenetics, Inc.,
---------------
a Washington corporation ("Company") and Suzanne Shema ("Executive").
------- ---------
1. Employment. Company will employ Executive and Executive will accept
----------
employment as Vice President, Intellectual Property and Legal, of the Company.
Executive accepts employment upon the terms and conditions contained in this
Agreement and for the period (hereinafter called the "Term of Employment")
------------------
specified in Section 3 below.
2. Duties. Executive shall, during the Term of Employment, serve the
------
Company under the direction of the President of the Company. Executive shall
perform the duties of her position faithfully, diligently and competently and to
the best of her ability, and shall devote her full business time to her
employment. Executive shall perform such other duties as are assigned to her by
the President or the Board of Directors of the Company. Executive shall not
engage in any other business activity (except the management of personal
investments which in the aggregate do not interfere with the performance of
Executive's duties) without first obtaining the written consent of Company, such
consent not to be unreasonably withheld.
3. Term of Employment; Termination.
-------------------------------
Executive's Term of Employment shall be two years from the date of this
Agreement, unless extended or earlier terminated as provided below.
(a) Termination or Extension of Term of Employment By Company
The Company shall employ Executive, for a period commencing on the date
hereof and terminating as follows:
(i) Two years from the date hereof, if at least thirty (30)
days prior to such date either the Company or Executive has, at its election,
notified the other in writing that this Agreement shall terminate on such date.
If notice of termination is not given, this Agreement shall be deemed to extend
from year to year. It can then be terminated by written notice at least thirty
(30) days prior to the annual renewal date.
(ii) With or without "Cause" (as defined below), Company may
terminate the employment of Executive at any time upon giving "Notice of
Termination" (as defined below).
<PAGE>
(b) By Executive
Executive may terminate her employment at any time, for any reason, upon
giving Notice of Termination.
(c) Automatic Termination
This Agreement and Executive's employment hereunder shall terminate
automatically upon the death or total disability of Executive. The term "total
-----
disability" as used herein shall mean Executive's inability to perform the
- ----------
duties set forth in paragraph 1 hereof for a period or periods aggregating
ninety (90) calendar days in any 12-month period as a result of physical or
mental illness, loss of legal capacity or any other cause beyond Executive's
control, unless Executive is granted a leave of absence by the Board of
Directors of Company. Executive and Company hereby acknowledge that Executive's
ability to perform the duties specified in paragraph 2 hereof is of the essence
of this Agreement. Termination hereunder shall be deemed to be effective (a) at
the end of the calendar month in which Executive's death occurs or (b)
immediately upon a determination by the Board of Directors of Company of
Executive's total disability, as defined herein.
(d) Notice
The term "Notice of Termination" shall mean at least thirty (30) days'
---------------------
written notice of termination, by either party, of Executive's employment,
during which period Executive's employment and performance of services will
continue; provided, however, that Company may, upon notice to Executive and
without reducing Executive's compensation during such period, excuse Executive
from any or all of her duties during such period. Such a reduction in duties
shall not constitute "good reason" for voluntary termination so as to trigger
termination payments in accordance with subparagraph 4.2. The effective date of
the termination (the "Termination Date") of Executive's employment hereunder
----------------
shall be the date on which such 30-day period expires.
4. Termination Payments
--------------------
In the event of termination of the employment of Executive, all
compensation and benefits set forth in this Agreement shall terminate except as
specifically provided in this paragraph 4:
-2-
<PAGE>
4.1 Termination by Company
(a) Upon termination by Company, Company shall pay Executive any unpaid
annual base salary which has accrued for services already performed as of the
Termination Date.
(b) If Company terminates Executive's employment without Cause, as defined
below, Executive shall be entitled to receive termination payments equal to
twelve (12) months annual base salary. The termination payments shall be
calculated according to Executive's base salary as of the date of Notice of
Termination and the termination payments will be paid semi-monthly in equal
parts in accordance with the same time schedule that Company or a "Successor
---------
Company" (as defined in the Stock Option Agreement and incorporated by reference
- -------
herein) makes its customary payroll. Company or a Successor Company may deduct
customary withholdings including social security, federal and state income
taxes, and state disability insurance from these severance payments; however,
any and all such obligations shall be Executive's responsibility. Company will
issue and file appropriate Form 1099 or similar tax documents in connection with
any termination payments. The termination payments described in this paragraph
are expressly contingent upon Executive's full compliance with the terms of his
Employee Inventions and Proprietary Information Agreement with Company (the
"Inventions Agreement"), a copy of which is attached hereto. In the event
--------------------
Executive were to materially breach this Inventions Agreement, his right to any
termination payments under this paragraph shall be extinguished, Company (and
any Successor Company) shall cease payments, and Executive shall immediately
return to Company or to any Successor Company any severance payments already
made. If Executive is terminated by either Company or any Successor Company for
Cause, Executive shall not be entitled to receive any of the foregoing benefits,
other than those set forth in clause (a) above.
4.2 Termination by Executive
In the case of the termination of Executive's employment by Executive for
"good reason," as defined below, Executive shall be entitled to the termination
payments as set forth in clauses 4.1(a) and (b). In the case of termination of
Executive's employment by Executive for any other reason, Executive shall not be
entitled to any termination payments or accelerated vesting benefit, other than
as set forth in clause 4.1(a), above.
-3-
<PAGE>
4.3 Termination as a Result of Death or Total Disability.
In the event of termination of Executive's employment pursuant to
subparagraph 3(c), Executive or his estate shall be paid the compensation set
forth in clause 4.1(a) and shall not be entitled to any of the benefits under
clauses 4.1(b).
4.4 "Good Reason"
"Good reason" shall mean the occurrence of any of the following events,
-----------
without the consent of the Executive:
a) a demotion or other material reduction in the nature or status of
Executive's responsibilities; provided, however, that a change in the
person or office to which Executive reports, without a corresponding
reduction in duties, status and responsibilities, shall not constitute
"good reason;"
b) a non-voluntary reduction in the Executive's annual base salary;
c) requirement by a Successor Company that the Executive relocate her
principal place of employment to a location that is more than 50 miles
from the principal place of employment where Executive was employed; or
d) the failure of Company to obtain a satisfactory agreement from any
Successor Company to assume and perform the obligations under this
Agreement.
4.5 Cause
Wherever reference is made in this Agreement to termination being with or
without Cause, "Cause" shall include, without limitation, the occurrence of one
-----
or more of the following events:
a) willful misconduct, insubordination, or dishonesty in the performance
of Executive's duties or other knowing and material violation of
Company's or a Successor Company's policies and procedures in effect
from time to time which results in a material adverse effect on Company
or a Successor Company;
b) willful actions (or intentional failures to act) in bad faith by
Executive with respect to Company or a Successor Company that
materially impair Company's or a Successor Company's business, goodwill
or reputation;
-4-
<PAGE>
c) conviction of Executive of a felony involving an act of dishonesty,
moral turpitude, deceit or fraud, or the commission of acts that could
reasonably be expected to result in such a conviction; or
d) any material violation by Executive of Executive's Inventions Agreement
with Company.
5. Compensation and Fringe Benefits.
--------------------------------
(a) The Company shall, during the Term of Employment, pay to the Executive
as compensation for the performance of her duties and obligations a salary of
$190,000 per annum. This compensation is subject to annual review and
adjustment, as appropriate in the judgment of the Company. The compensation
payable pursuant to this Section 5(a) shall be payable in equal semi-monthly
installments on the last day of each such pay period.
(b) The Executive shall be enrolled and participate in any retirement,
group insurance and other fringe benefit plans and arrangements which are
applicable to the similarly situated personnel of the Company and in effect from
time to time, if the Executive is eligible therefor, in each case in accordance
with and subject to the provisions thereof.
(c) Stock Options
(i) Executive has been granted a ten-year stock option under
the Company's Amended and Restated 2000 Stock Incentive Plan, which allows
Executive to purchase 50,000 shares of the Company's common stock.
(ii) Executive shall be eligible to receive future grants of
stock options pursuant to the Company's stock-based bonus program; and
(iii) Executive shall be eligible to receive future periodic
(i.e., non bonus-related) grants under the Company's stock incentive programs.
(d) Executive will also receive the following executive perquisites for the
duration of this contract:
(i) Company-paid term life insurance policy in the amount of
$200,000; and
(ii) Company-paid use of either a laptop computer or personal
computer, to be upgraded bi-annually at the time this contract is renewed; and
-5-
<PAGE>
(iii) Company-paid annual executive health physical, to be
administered by a physician selected by the Company; and
(iv) Company-paid expenses for a residential phone and
cellular phone.
6. Expenses. All travel and other reasonable expenses incident to the
--------
rendering of service by the Executive hereunder will be paid by the Company. If
such expenses are paid in the first instance by the Executive, the Company will
reimburse her upon presentation of proper expense accounts. Reimbursement
requests, along with supporting documentation, should be submitted within sixty
(60) days of incurring the expense.
7. Non-competition.
---------------
(a) Upon termination of Executive's employment with the Company for any
reason, and for a period of twelve (12) consecutive months after leaving her
employment with the Company, Executive will not directly or indirectly work or
otherwise engage in research, manufacture, sale or distribution of any product,
method or matter:
(i) For any business, whose commercial efforts are in
competition with the products manufactured or marketed by the Company during
Executive's employment with the Company or under research or development by the
Company during Executive's employment with the Company (and on which the Company
has expended at least $500,000); or
(ii) For any research institution whose research efforts
pertain to the same products manufactured or marketed by the Company during
Executive's employment with the Company or under research or development by the
Company during Executive's employment with the Company (and on which the Company
has expended at least $500,000), unless the Executive is not involved in any
manner in the design, conduct or supervision of such research efforts, or unless
such research is being conducted solely for scientific and not for commercial
purposes. The executive shall be deemed to be connected with a business if such
business is carried on by partnership in which she is a general or limited
partner, consultant or employee, or a corporation or association of which she is
a shareholder, officer, director, employee, member, consultant or agent;
provided, that nothing herein shall prevent the purchase or ownership by the
Executive of shares of less than 1% of the outstanding shares in a publicly or
privately held corporation.
-6-
<PAGE>
Said twelve (12) months' period shall commence on the day on which the
Executive actually leaves her employment with the Company, even if this date is
prior to the expiration of any given notice of termination.
(b) The Company's Board of Directors may, at its own discretion, by
express or written consent, release the Executive from the restriction in
paragraph 6(a).
(c) For a period of one (1) year after the employment of the Executive
is terminated for any reason, Executive will not directly or indirectly, either
for Executive's account or as representative or agent for any other person,
firm, corporation or entity, solicit the services of, or entice away, any
Executive of the Company, or the Executive of any company affiliated with the
Company.
(d) In the event that Executive during said period described in
paragraph 6(a) violates any of the Executive's obligations towards the Company,
including but not limited to the Executive accepting a position with a competing
enterprise or Executive violating terms of paragraph 6(c), payment of Severance
or Salary Continuation shall cease automatically without notice, regardless of
whether the Company takes legal action or otherwise tries to enforce its rights.
The Company reserves all rights it may have under contract or law to relief or
damages in addition to termination of the above-described payments.
8. Binding Effect. This Agreement shall be binding upon and inure to
--------------
the benefit of the Company and the Executive and their respective heirs, legal
or personal representatives, successors and assigns.
9. Rights of Assignment or Delegation. This Agreement is personal to
----------------------------------
the Executive and shall not be assignable. Company may assign its rights
hereunder to (a) any corporation resulting from any merger, consolidation, or
other reorganization to which Company is a party or (b) any corporation,
partnership, association, or other person to which Company may transfer all or
substantially all of the assets in business of Company existing at such time.
All the terms and provisions of this Agreement shall be binding upon and shall
inure to the benefit and be enforceable by the parties hereto and their
respective successors and permitted assigns.
10. Waiver. No delay or failure by any party in exercising, protecting
------
or enforcing any of its rights, titles, interests, or remedies hereunder and no
course of dealing or performance with respect thereto, shall constitute a
waiver. The express waiver by a party of any right, title, interest, or remedy
in a particular instance or circumstance shall not constitute a waiver in any
other instance or circumstance. All rights and remedies shall be cumulative and
not exclusive or any rights or remedies.
-7-
<PAGE>
11. Arbitration. Any controversies or claims arising out of or relating
-----------
to this Agreement shall be finally and fully settled by arbitration of the City
of Seattle, Washington in accordance with the Employment Arbitration Rules of
the American Arbitration Association then in effect (the "AAA Rules"), conducted
by one arbitrator, mutually agreed upon by Company and Executive or chosen in
accordance with the AAA Rules, except the parties thereto shall have any right
to discovery would be permitted by the Federal Rules of Civil Procedure for a
period of 90 days following the commencement of such arbitration and the
arbitrator shall resolve any dispute which arises in connection with such
discovery. The prevailing parties shall be entitled to costs, expenses,
reasonable attorneys' fees, and judgment upon the award rendered by the
arbitrator. The award may be entered in any court having jurisdiction.
12. Amendments in Writing. No amendment, modification, waiver,
---------------------
termination or discharge of any provision of this Agreement, nor consent to any
departure by either party, shall in any event be effective unless the same shall
be in writing, specifically identifying this Agreement and the provision
intended to be amended, modified, waived, terminated, or discharged and assigned
by Company and Executive. Each such amendment, modification, waiver,
termination, or discharge shall be effective only in the specific instance and
for the specific purpose for which given. No provision of this Agreement shall
be varied, contradicted, or explained by any oral agreement, course of dealing
or performance or any other matter not set forth in agreement in writing and
signed by Company and Executive.
13. Notices. Any notice required or desired to be given hereunder shall
-------
be in writing and shall be deemed sufficiently given when delivered or when
mailed by first class certified or registered mail, postage prepaid, to the
party for whom intended at the following address:
To the Company:
Dr. Bruce L. A. Carter
CEO and President
ZymoGenetics, Inc.
1201 Eastlake Avenue East
Seattle, WA 98102
To the Executive:
Suzanne Shema
Vice President, Intellectual Property and Legal
2734 SW 167th Street
Burien, WA 98166
-8-
<PAGE>
or to such other address, as to either party, as such party shall from time to
time designate by like notice to the other.
14. Entire Agreement. This Agreement will, upon the commencement of the
----------------
Term of Employment, supersede all prior agreements between the Executive and the
Company, except the Employee Inventions and Proprietary Information Agreement
dated June 7, 2001, and any such prior agreements and the terms and conditions
thereof shall hereafter be null, void and of no effect.
15. Governing Law. This Agreement is made under and shall be governed
-------------
by and construed in accordance with the internal laws of the State of
Washington.
16. Severability. If any provision of this Agreement shall be held
------------
invalid, illegal or unenforceable in any jurisdiction, for any reason, including
without limitation, the duration of such provision, it's geographical scope or
the extent of the activities prohibited or required by it, then, to the full
extent permitted by law (a) all other provisions hereof shall remain in full
force and effect and such jurisdiction shall be liberally construed in order to
carry out the intent of the parties as nearly as may be possible, (b) such
invalidity, illegality, or unenforcability shall not effect the validity,
legality or enforceability of any other provision, and (c) any court or
arbitrator having jurisdiction there over shall have the power to reform such
provision to the extent necessary for such provision to be enforceable under
applicable law.
17. Multiple Copies. This Agreement may be executed in two or more
---------------
counterparts of like tenor and effect, each of which shall be deemed an original
but all of which together shall constitute one and the same instrument.
ZYMOGENETICS, INC.
By: /s/ Bruce L. A. Carter
-------------------------------------
Dr. Bruce L. A. Carter, President and CEO
EXECUTIVE:
/s/ Suzanne Shema
-----------------------------------------
Suzanne Shema
-9-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>5
<FILENAME>dex231.txt
<DESCRIPTION>CONSENT OF PRICEWATERHOUSECOOPERS, LLP
<TEXT>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-82012) of ZymoGenetics, Inc. of our report dated
February 6, 2002, except for the third paragraph of Note 15, as to which the
date is March 7, 2002, relating to the financial statements, which appears in
this Form 10-K.
PricewaterhouseCoopers LLP
Seattle, Washington
March 27, 2002
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----