THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING
OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Filed pursuant to Rule 424 (b)(5)
Registration No. 333-101549
PROSPECTUS SUPPLEMENT (Subject to Completion) Issued July 16, 2003
(To Prospectus dated December 6, 2002)
10,000,000 Shares
(LEXICON GENETICS INCORPORATED LOGO)
Lexicon Genetics Incorporated
COMMON STOCK
------------------------
WE ARE OFFERING 10,000,000 SHARES OF OUR COMMON STOCK.
------------------------
OUR COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL
"LEXG." ON JULY 14, 2003, THE REPORTED LAST SALE PRICE OF OUR COMMON STOCK ON
THE NASDAQ NATIONAL MARKET WAS $7.28 PER SHARE.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE S-7 OF THIS PROSPECTUS SUPPLEMENT.
------------------------
PRICE $ A SHARE
------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS LEXICON GENETICS
------------ ------------- ----------------
Per Share.................................... $ $ $
Total........................................ $ $ $
We have granted the underwriters the right to purchase up to an additional
1,500,000 shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus
supplement or the accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares to purchasers on , 2003.
------------------------
MORGAN STANLEY UBS INVESTMENT BANK
CIBC WORLD MARKETS PUNK, ZIEGEL & COMPANY
, 2003
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT PAGE
--------------------- ----
Summary.............................. S-3
Risk Factors......................... S-7
Special Note Regarding
Forward-Looking Statements......... S-20
Use of Proceeds...................... S-21
Price Range of Common Stock.......... S-21
Dividend Policy...................... S-21
Capitalization....................... S-22
Dilution............................. S-22
Selected Financial Data.............. S-23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... S-24
Business............................. S-32
Management........................... S-47
Principal Stockholders............... S-51
Underwriters......................... S-53
Legal Matters........................ S-55
Experts.............................. S-55
PROSPECTUS PAGE
---------- ----
Lexicon Genetics Incorporated........ 1
Risk Factors......................... 2
Special Note Regarding
Forward-Looking Statements......... 2
Use of Proceeds...................... 2
Plan of Distribution................. 2
Legal Matters........................ 4
Experts.............................. 4
Change in Independent Public
Accountants........................ 4
Where You Can Find More
Information........................ 5
Documents Incorporated by
Reference.......................... 5
---------------------
This prospectus supplement and the accompanying prospectus relate to the
offer and sale by us of up to 10,000,000 shares of our common stock, and up to
an additional 1,500,000 shares if the underwriters exercise their over-allotment
option. You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. Neither
we nor the underwriters have authorized anyone to provide you with information
different from that contained or incorporated by reference in this prospectus
supplement and the accompanying prospectus. We are offering to sell the shares
of common stock, and are seeking offers to buy the shares of common stock, only
in jurisdictions where offers and sales are permitted. The information contained
or incorporated by reference in this prospectus supplement and the accompanying
prospectus is accurate only as of the date of this prospectus supplement, or the
documents incorporated by reference, regardless of the time of delivery of this
prospectus supplement and the accompanying prospectus or any sales of the shares
of common stock.
In this prospectus supplement and the accompanying prospectus, unless
otherwise indicated, "Lexicon," "Lexicon Genetics," "we," "us" and "our" refer
to Lexicon Genetics Incorporated and its subsidiary, Lexicon Pharmaceuticals
(New Jersey), Inc. We own or have rights to trademarks or trade names that we
use in connection with the operation of our business. The Lexicon name and logo,
LexVision(R) and OmniBank(R) are registered trademarks and Genome5000(TM) is a
trademark of Lexicon Genetics Incorporated. This prospectus supplement and the
accompanying prospectus also include trademarks owned by other persons.
S-2
PROSPECTUS SUPPLEMENT SUMMARY
This summary does not contain all of the information that you should
consider before investing in our common stock. You should read this entire
prospectus supplement and the accompanying prospectus carefully, including "Risk
Factors," the financial statements and other information incorporated by
reference in this prospectus supplement and the accompanying prospectus, before
making an investment decision.
LEXICON GENETICS
Lexicon Genetics is a biopharmaceutical company focused on the discovery of
breakthrough treatments for human disease. We use proprietary gene knockout
technology to systematically discover the physiological functions of genes in
mice and to identify which corresponding human genes encode potential targets
for therapeutic intervention, or drug targets. For those targets that we
consider to have high pharmaceutical value, we engage in programs for the
discovery and development of potential small molecule drugs, therapeutic
antibodies and therapeutic proteins. Our physiology-based approach to
understanding gene function and our use of mouse models in our drug discovery
efforts allow us to make highly-informed decisions throughout the drug discovery
and development process, which we believe will increase our likelihood of
success in discovering breakthrough therapeutics.
The scope of our gene knockout technology, combined with the size and
sophistication of our facilities and our evaluative technologies, provides us
with what we believe to be a significant competitive advantage. We have
completed our analysis of over 20% of the 5,000 genes in our Genome5000 program,
and we expect to complete the analysis of the remaining genes by the end of
2007. We focus our discovery efforts in five therapeutic areas--metabolic
disorders, cardiovascular disease, cancer, immune system disorders and
neurological disorders--and we have established significant internal expertise
in each of these areas. To date, we have advanced into drug discovery programs
more than 20 targets, each of which we have validated in living mammals, or in
vivo. We have highlighted 15 of our most advanced programs below.
STAGE OF DEVELOPMENT
-----------------------------------------------------
THERAPEUTIC PRIMARY
AREA/TARGET IN VIVO ADVANCED ASSAYS & HIT LEAD
NAME INDICATION VALIDATION RESEARCH SCREENING SERIES OPTIMIZATION
--------------------------------------------------- -------------------- ---------- -------- --------- ------ ------------
METABOLIC DISORDERS
LG653............................................. Obesity/Diabetes X
LG747............................................. Obesity/Diabetes X
CARDIOVASCULAR DISEASE
LG914............................................. Atherosclerosis X
LG101............................................. Thrombosis X
CANCER
LG152............................................. Solid Tumors X
IMMUNE SYSTEM DISORDERS
LG293............................................. Autoimmune Disease X
LG688............................................. Inflammation X
NEUROLOGICAL DISORDERS
LG617............................................. Cognitive Disorders X
LG726............................................. Depression X
LG487............................................. Depression X
LG324............................................. Depression X
LG317............................................. Parkinson's Disease X
LG915............................................. Anxiety X
LG752............................................. Pain X
LG470............................................. Pain X
The most advanced drug discovery programs in each of our therapeutic areas
include:
Lead Metabolic Program--LG653. Our physiological analysis of LG653 in
knockout mice suggests that LG653 plays a role in the regulation of
metabolism. LG653 knockout mice displayed a 30% to 44% reduction in body
fat, exhibited an increased metabolic rate and on average consumed 19%
more food than normal mice. We have completed high-throughput screening
against LG653 and have identified two series of potential lead
compounds, which we are currently optimizing.
S-3
Lead Cardiovascular Program--LG914. Our physiological analysis of LG914
in knockout mice suggests that LG914 is involved in the regulation of
certain cellular events associated with atherosclerosis and other
coronary artery diseases. LG914 knockout mice exhibited reduced arterial
thickening in response to an inflammatory stimulus compared to normal
mice, and the inhibition of LG914 in mice with a genetic predisposition
to atherosclerotic plaque resulted in a significant decrease in plaque
formation. We are working in collaboration with Abgenix, Inc. to develop
monoclonal antibodies to inhibit LG914.
Lead Cancer Program--LG152. Our physiological analysis of LG152 in
knockout mice suggests that LG152 plays a significant role in the
regulation of cell growth. LG152 knockout mice displayed a reduction in
cell growth and proliferation, while over-expression of LG152 in mouse
cell lines resulted in tumor formation. We have also observed
over-expression of LG152 in human tumor cells isolated from melanomas
and breast, colon, bladder and ovarian tumors. We have completed high-
throughput screening against LG152 and have identified five series of
hits, which we are currently analyzing.
Lead Immunology Program--LG293. Our physiological analysis of LG293 in
knockout mice suggests that LG293 is involved in the regulation of
immune system function and the maturation and proliferation of T and B
cells, which are vital components of the immune system. LG293 knockout
mice exhibited lower levels of circulating T and B cells, resulting in a
reduction in the inflammatory response. Furthermore, LG293 knockout mice
accepted transplanted tissues and mounted a significantly reduced
inflammatory response when challenged. We have completed high-throughput
screening against LG293 and have identified three series of potential
lead compounds, which we are currently optimizing.
Lead Neurology Program--LG617. Our physiological analysis of LG617 in
knockout mice suggests that LG617 plays a role in learning, attention
and memory. LG617 knockout mice exhibited an increased amount of learned
responses when challenged with a conditioned stimulus and demonstrated a
significant increase in olfactory discrimination and exploratory
behavior, each of which are widely accepted tests of learning and
memory. We have completed high-throughput screening against LG617 and
have identified six series of hits, which we are currently analyzing.
We are working both independently and through strategic collaborations and
alliances to commercialize our technology and turn our discoveries into drugs.
We have established multiple collaborations with leading pharmaceutical and
biotechnology companies, as well as research institutes and academic
institutions. We are working with Genentech, Inc. to discover the functions of
secreted proteins and potential antibody targets identified through Genentech's
internal drug discovery research. We are working with Abgenix to discover and
develop therapeutic antibodies for in vivo-validated drug targets identified in
our own research. We are also working with Incyte Corporation to discover and
develop therapeutic proteins. In addition, we have established collaborations
and license agreements with many other leading pharmaceutical and biotechnology
companies under which we receive fees and, in many cases, are eligible to
receive milestone and royalty payments, in return for granting access to some of
our technologies and discoveries for use in such companies' own drug discovery
efforts.
------------------------
We were incorporated in Delaware in July 1995, and we commenced operations
in September 1995. Our principal executive offices are located at 8800
Technology Forest Place, The Woodlands, Texas 77381, and our telephone number is
(281) 863-3000. Our corporate website is located at www.lexicon-genetics.com.
The information found on our website is not incorporated by reference into this
prospectus supplement or the accompanying prospectus, and you should not
consider it to be a part of this document.
S-4
THE OFFERING
Common stock offered.......... 10,000,000 shares
Common stock to be outstanding
after this offering........... 62,533,651 shares
Use of proceeds............... The net proceeds of this offering are estimated
to be approximately $68.0 million. We currently
intend to use the net proceeds for research and
development. We may also use a portion of the
net proceeds to acquire or invest in
complementary products and technologies or for
general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market
symbol........................ LEXG
The foregoing information is based on 52,533,651 shares of our common stock
outstanding as of July 14, 2003 and excludes:
-- 12,850,874 shares of common stock issuable upon the exercise of
outstanding options at a weighted average exercise price per share of
$6.13;
-- 16,483 shares of common stock issuable upon the exercise of
outstanding warrants at a weighted average exercise price per share
of $11.93; and
-- 1,107,444 shares of common stock available for future grant or
issuance under our stock option plans, which will automatically be
increased annually in accordance with the provisions of our stock
option plans, except as may be limited by our board of directors.
Except as otherwise indicated, all information in this prospectus
supplement assumes no exercise of the underwriters' over-allotment option in
this offering.
S-5
SUMMARY FINANCIAL DATA
The statement of operations data for the year ended December 31, 2002 has
been derived from our financial statements that have been audited by Ernst &
Young LLP, independent auditors. The statements of operations data for each of
the four years in the period ended December 31, 2001 have been derived from our
audited financial statements that have been audited by Arthur Andersen LLP,
independent public accountants who have ceased operations. The statements of
operations data for the three months ended March 31, 2002 and 2003, and the
balance sheet data as of March 31, 2003, are unaudited but include, in the
opinion of management, all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of such data. Our historical
results for any prior or interim periods are not necessarily indicative of
results to be expected for any future period.
The data presented below has been prepared in accordance with accounting
principles generally accepted in the United States and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus supplement and
with our financial statements and related notes incorporated by reference in
this prospectus supplement and the accompanying prospectus.
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------- -------------------
1998 1999 2000 2001 2002 2002 2003
------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenues............................... $ 2,242 $ 4,738 $ 14,459 $ 30,577 $ 35,200 $ 7,656 $ 8,106
Operating expenses:
Research and development(1).......... 8,410 14,646 31,647 53,355 74,859 16,864 19,834
General and administrative(2)........ 2,024 2,913 18,289 20,861 23,234 5,969 5,804
------- -------- -------- -------- -------- -------- --------
Total operating expenses............... 10,434 17,559 49,936 74,216 98,093 22,833 25,638
------- -------- -------- -------- -------- -------- --------
Loss from operations................... (8,192) (12,821) (35,477) (43,639) (62,893) (15,177) (17,532)
Interest and other income, net......... 711 346 9,483 8,467 3,223 1,118 387
------- -------- -------- -------- -------- -------- --------
Net loss............................... (7,481) (12,475) (25,994) (35,172) (59,670) (14,059) (17,145)
Accretion on redeemable convertible
preferred stock...................... (357) (536) (134) -- -- -- --
------- -------- -------- -------- -------- -------- --------
Net loss attributable to common
stockholders......................... $(7,838) $(13,011) $(26,128) $(35,172) $(59,670) $(14,059) $(17,145)
======= ======== ======== ======== ======== ======== ========
Net loss per common share, basic and
diluted.............................. $ (0.32) $ (0.53) $ (0.63) $ (0.70) $ (1.14) $ (0.27) $ (0.33)
======= ======== ======== ======== ======== ======== ========
Shares used in computing net loss per
common share, basic and diluted...... 24,445 24,530 41,618 50,213 52,263 52,126 52,371
AS OF MARCH 31, 2003
--------------------------
ACTUAL AS ADJUSTED(4)
--------- --------------
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents, restricted cash and
investments(3).......................................... $ 107,587 $ 175,619
Working capital(3)........................................ 99,197 167,229
Total assets.............................................. 181,967 249,999
Long-term debt, net of current portion.................... 4,000 4,000
Accumulated deficit....................................... (166,890) (166,890)
Stockholders' equity...................................... 155,321 223,353
------------
(1) Includes stock-based compensation of $10,883 in 2000, $5,539 in 2001, $5,155
in 2002, $1,307 for the three months ended March 31, 2002 and $1,270 for the
three months ended March 31, 2003.
(2) Includes stock-based compensation of $9,958 in 2000, $5,231 in 2001, $5,113
in 2002, $1,282 for the three months ended March 31, 2002 and $1,276 for the
three months ended March 31, 2003.
(3) Includes restricted cash and investments of $57,710 as of March 31, 2003.
(4) Reflects the net proceeds from the sale of 10,000,000 shares of common stock
in this offering at an assumed public offering price of $7.28 per share,
which is the reported last sale price of our common stock on July 14, 2003,
after deducting estimated underwriting discounts and commissions and
estimated offering expenses.
S-6
RISK FACTORS
An investment in our common stock involves risks. You should carefully
consider the following risk factors, together with all of the other information
included in, or incorporated by reference into, this prospectus supplement and
the accompanying prospectus in evaluating an investment in our common stock. If
any of the following risks were to occur, our business, financial condition or
results of operations could be materially adversely affected. In that case, the
trading price of our common stock could decline and you could lose all or part
of your investment.
RISKS RELATED TO OUR COMPANY AND BUSINESS
WE HAVE A HISTORY OF NET LOSSES, AND WE EXPECT TO CONTINUE TO INCUR NET LOSSES
AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred net losses since our inception, including net losses of
$59.7 million for the year ended December 31, 2002 and $17.1 million for the
three months ended March 31, 2003. As of March 31, 2003, we had an accumulated
deficit of $166.9 million. We are unsure when we will become profitable, if
ever. The size of our net losses will depend, in part, on the rate of growth, if
any, in our revenues and on the level of our expenses.
We derive substantially all of our revenues from subscriptions to our
LexVision database and our OmniBank library, drug discovery alliances, target
validation collaborations for the development and, in some cases, analysis of
the physiological effects of genes altered in knockout mice and technology
licenses, and will continue to do so for the foreseeable future. Our future
revenues from database subscriptions, alliances and collaborations are uncertain
because our existing agreements have fixed terms or relate to specific projects
of limited duration. Our future revenues from technology licenses are uncertain
because they depend, in part, on securing new agreements. Our ability to secure
future revenue-generating agreements will depend upon our ability to address the
needs of our potential future subscribers, collaborators and licensees, and to
negotiate agreements that we believe are in our long-term best interests. We may
determine that our interests are better served by retaining rights to our
discoveries and advancing our therapeutic programs to a later stage, which could
limit our near-term revenues. Given the early-stage nature of our operations, we
do not currently derive any revenues from sales of pharmaceuticals.
A large portion of our expenses is fixed, including expenses related to
facilities, equipment and personnel. In addition, we expect to spend significant
amounts to fund research and development and to enhance our core technologies.
As a result, we expect that our operating expenses will continue to increase
significantly in the near term and, consequently, we will need to generate
significant additional revenues to achieve profitability. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis.
WE WILL NEED ADDITIONAL CAPITAL IN THE FUTURE AND, IF IT IS NOT AVAILABLE, WE
WILL HAVE TO CURTAIL OR CEASE OPERATIONS.
Our future capital requirements will be substantial and will depend on many
factors, including:
-- our ability to obtain alliance, database subscription, collaboration
and technology license agreements;
-- the amount and timing of payments under such agreements;
-- the level and timing of our research and development expenditures;
-- market acceptance of products that we successfully develop and
commercially launch; and
-- the resources we devote to developing and supporting such products.
Our capital requirements will increase substantially to the extent we
advance potential therapeutics into preclinical and clinical development. Our
capital requirements will also be affected by any expenditures we make in
connection with license agreements and acquisitions of and investments in
complementary products and technologies.
S-7
We anticipate that the net proceeds of this offering, our existing capital
resources and the revenues we expect to derive from drug discovery alliances,
subscriptions to our databases, target validation collaborations and technology
licenses will enable us to fund our currently planned operations for
approximately the next 24 months. However, we may generate less revenues than we
expect, and changes may occur that would consume available capital resources
more rapidly than we expect. If our capital resources are insufficient to meet
future capital requirements, we will have to raise additional funds to continue
the development of our technologies and complete the commercialization of
products, if any, resulting from our technologies. Any sale of additional equity
securities may result in additional dilution to our stockholders, and we cannot
be certain that additional financing, whether debt or equity, will be available
in amounts or on terms acceptable to us, if at all. In addition, any of such
additional equity securities may be senior to our common stock. We may be unable
to raise sufficient additional capital; if so, we will have to curtail or cease
operations.
WE ARE AN EARLY-STAGE COMPANY, AND WE HAVE NOT SUCCESSFULLY DEVELOPED OR
COMMERCIALIZED ANY THERAPEUTICS OR DRUG TARGETS THAT WE HAVE IDENTIFIED.
Our business strategy of using our technology platform and, specifically,
the discovery of the functions of genes using knockout mice to select promising
drug targets and developing and commercializing drugs based on our discoveries,
in significant part through collaborations and alliances, is unproven. Our
success will depend upon our ability to successfully develop potential
therapeutics for drug targets we consider to have pharmaceutical value, whether
on our own or through collaborations, and to select an appropriate
commercialization strategy for each potential therapeutic we choose to pursue.
Biotechnology and pharmaceutical companies have successfully developed and
commercialized only a limited number of genomics-derived pharmaceutical products
to date. We have not proven our ability to develop or commercialize therapeutics
or drug targets that we identify, nor have we advanced any drug candidates to
preclinical or clinical trials. We do not know that any pharmaceutical products
based on our drug target discoveries can be successfully commercialized. In
addition, we may experience unforeseen technical complications in the processes
we use to generate gene knockout mice, conduct in vivo analyses, generate
compound libraries, develop screening assays for drug targets or conduct
screening of compounds against those drug targets. These complications could
materially delay or limit the use of those resources, substantially increase the
anticipated cost of generating them or prevent us from implementing our
processes at appropriate quality and throughput levels. Finally, the information
that we learn from knockout mice may prove not to be useful in identifying
pharmaceutically-important drug targets or safe and effective therapies.
WE FACE SUBSTANTIAL COMPETITION IN THE DISCOVERY OF THE DNA SEQUENCES OF GENES
AND THEIR FUNCTIONS AND IN OUR DRUG DISCOVERY AND PRODUCT DEVELOPMENT EFFORTS.
There are a finite number of genes in the human genome, and we believe that
the majority of such genes have been identified and that virtually all will be
identified within the next few years. We face substantial competition in our
efforts to discover and patent the sequence and other information derived from
such genes from entities using alternative, and in some cases higher volume and
larger scale, approaches for the same purpose.
We also face competition from other companies in our efforts to discover
the functions of genes. A large number of universities and other not-for-profit
institutions, many of which are funded by the United States and foreign
governments, are also conducting research to discover the functions of genes.
Competitors could discover and establish patents on genes or gene products that
we identify as promising drug targets, which might hinder or prevent our ability
to capitalize on such targets.
We may not be able to use our patent rights to prevent competition in the
creation and use of knockout mice to discover the function of genes. Patent
litigation is very expensive and time-consuming, and, therefore, it may not be
cost-effective or otherwise expedient to pursue litigation if another entity
infringes our patent rights relating to the creation and use of knockout mice.
Our patent rights generally do not extend outside of the United States. We
therefore are generally unable to prevent entities outside of the United States
from using our knockout mouse technology or, in certain circumstances, from
importing into the United States
S-8
products developed using this technology. Furthermore, other methods for
conducting target validation research may ultimately prove superior, in some or
all respects, to the use of knockout mice. In addition, technologies more
advanced than or superior to our gene targeting and gene trapping technologies
may be developed, thereby rendering those technologies obsolete.
We face significant competition from other companies, as well as from
universities and other not-for-profit institutions, in our drug discovery and
product development efforts. Many of our competitors have substantially greater
financial, scientific and human resources than we do. As a result, our
competitors may succeed in developing products earlier than we do, obtaining
regulatory approvals faster than we do and developing products that are more
effective or safer than any that we may develop.
WE RELY HEAVILY ON OUR COLLABORATORS TO DEVELOP AND COMMERCIALIZE
PHARMACEUTICAL PRODUCTS BASED ON GENES THAT WE IDENTIFY AS PROMISING CANDIDATES
FOR DEVELOPMENT AS DRUG TARGETS.
Since we do not currently possess the resources necessary to develop,
obtain approvals for or commercialize potential pharmaceutical products based on
all of the genes that we identify as promising candidates for development as
drug targets or therapeutic proteins, we must enter into collaborative
arrangements to develop and commercialize some of these products. We have
limited or no control over the resources that any collaborator may devote to
this effort. Any of our present or future collaborators may not perform their
obligations as expected. These collaborators may breach or terminate their
agreements with us or otherwise fail to conduct product discovery, development
or commercialization activities successfully or in a timely manner. Further, our
collaborators may elect not to develop pharmaceutical products arising out of
our collaborative arrangements or may not devote sufficient resources to the
development, approval, manufacture, marketing or sale of these products. If any
of these events occurs, we may not be able to develop or commercialize potential
pharmaceutical products.
Some of our existing collaboration agreements contain, and collaborations
that we enter into in the future may contain, exclusivity agreements by us or
other limitations on our activities. These agreements may have the effect of
limiting our flexibility and may cause us to forego attractive business
opportunities.
WE RELY ON SEVERAL KEY COLLABORATORS FOR A SIGNIFICANT PORTION OF OUR REVENUES.
Most of our revenues in 2002 and the first quarter of 2003 were derived
from a limited number of collaborators. For the fiscal year ended December 31,
2002, Incyte accounted for approximately 28% of our revenues, Bristol-Myers
Squibb Company accounted for approximately 14% of our revenues and Millennium
Pharmaceuticals, Inc. accounted for approximately 11% of our revenues. For the
three months ended March 31, 2003, Incyte accounted for approximately 31% of our
revenues, Bristol-Myers Squibb accounted for approximately 16% of our revenues
and Genentech accounted for approximately 9% of our revenues. In general, we
cannot predict with certainty which, if any, of our major collaborators will
continue to generate revenues for us. The loss of any of these large
collaborators would likely significantly decrease our revenues and future
prospects, which could materially and adversely affect our business, financial
condition and results of operations.
CANCELLATIONS BY OR CONFLICTS WITH OUR COLLABORATORS COULD HARM OUR BUSINESS.
Our alliance and collaboration agreements may not be renewed and may be
terminated in the event either party fails to fulfill its obligations under
these agreements. Failures to renew or cancellations by collaborators could mean
a significant loss of revenues and could adversely affect our reputation in the
business and scientific communities.
In addition, we may pursue opportunities in fields that could conflict with
those of our collaborators. Moreover, disagreements could arise with our
collaborators over rights to our intellectual property or our rights to share in
any of the future revenues of compounds or therapeutic approaches developed by
our collaborators. These kinds of disagreements could result in costly and
time-consuming litigation. Conflicts with our collaborators could reduce our
ability to obtain future collaboration agreements and could have a negative
impact on our relationship with existing collaborators, adversely affecting our
business and revenues. Some of
S-9
our collaborators are also potential competitors or may become competitors in
the future. Our collaborators could develop competing products, preclude us from
entering into collaborations with their competitors or terminate their
agreements with us prematurely. Any of these events could harm our product
development efforts.
WE HAVE NO EXPERIENCE IN DEVELOPING AND COMMERCIALIZING PHARMACEUTICAL PRODUCTS
ON OUR OWN.
Our ability to develop and commercialize pharmaceutical products on our own
will depend on our ability to internally develop preclinical, clinical,
regulatory and sales and marketing capabilities, or enter into arrangements with
third parties to provide these functions. It will be expensive and will require
significant time for us to develop these capabilities internally. We may not be
successful in developing these capabilities or entering into agreements with
third parties on favorable terms, or at all. Further, our reliance upon third
parties for these capabilities could reduce our control over such activities and
could make us dependent upon these parties. Our inability to develop or contract
for these capabilities would significantly impair our ability to develop and
commercialize pharmaceutical products.
WE LACK THE CAPABILITY TO MANUFACTURE COMPOUNDS FOR PRECLINICAL STUDIES,
CLINICAL TRIALS OR COMMERCIAL SALES AND WILL RELY ON THIRD PARTIES TO
MANUFACTURE OUR POTENTIAL PRODUCTS.
We currently do not have the manufacturing capabilities or experience
necessary to produce materials for preclinical studies, clinical trials or
commercial sales and intend to rely on collaborators and third-party contractors
to produce such materials. We will rely on selected manufacturers to deliver
materials on a timely basis and to comply with applicable regulatory
requirements, including the current Good Manufacturing Practices of the United
States Food and Drug Administration, or FDA, which relate to manufacturing and
quality control activities. These manufacturers may not be able to produce
material on a timely basis or manufacture material at the quality level or in
the quantity required to meet our development timelines and applicable
regulatory requirements. In addition, there are a limited number of
manufacturers that operate under the FDA's current Good Manufacturing Practices
and that are capable of producing such materials, and we may experience
difficulty finding manufacturers with adequate capacity for our needs. If we are
unable to contract for the production of sufficient quantity and quality of
materials on acceptable terms, our product development and commercialization
efforts may be delayed. Moreover, noncompliance with the FDA's current Good
Manufacturing Practices can result in, among other things, fines, injunctions,
civil and criminal penalties, product recalls or seizures, suspension of
production, failure to obtain marketing approval and withdrawal, suspension or
revocation of marketing approvals.
WE MAY ENGAGE IN FUTURE ACQUISITIONS, WHICH MAY BE EXPENSIVE AND TIME CONSUMING
AND FROM WHICH WE MAY NOT REALIZE ANTICIPATED BENEFITS.
We may acquire additional businesses, technologies and products if we
determine that these businesses, technologies and products complement our
existing technology or otherwise serve our strategic goals. We currently have no
commitments or agreements with respect to any acquisitions. If we do undertake
any transactions of this sort, the process of integrating an acquired business,
technology or product may result in operating difficulties and expenditures and
may absorb significant management attention that would otherwise be available
for ongoing development of our business. Moreover, we may never realize the
anticipated benefits of any acquisition. Future acquisitions could result in
potentially dilutive issuances of our equity securities, the incurrence of debt
and contingent liabilities and amortization expenses related to intangible
assets, which could adversely affect our results of operations and financial
condition.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, WE MAY BE UNABLE TO PURSUE COLLABORATIONS OR DEVELOP OUR OWN
PRODUCTS.
We are highly dependent on Arthur T. Sands, M.D., Ph.D., our president and
chief executive officer, as well as other principal members of our management
and scientific staff. The loss of any of these personnel could have a material
adverse effect on our business, financial condition or results of operations and
could inhibit our product development and commercialization efforts. Although we
have entered into employment
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agreements with some of our key personnel, including Dr. Sands, these employment
agreements are all at-will. In addition, not all key personnel have employment
agreements.
Recruiting and retaining qualified scientific personnel to perform future
research and development work will be critical to our success. Competition for
experienced scientists is intense. Failure to recruit and retain scientific
personnel on acceptable terms could prevent us from achieving our business
objectives.
BECAUSE ALL OF OUR TARGET VALIDATION OPERATIONS ARE LOCATED AT A SINGLE
FACILITY, THE OCCURRENCE OF A DISASTER COULD SIGNIFICANTLY DISRUPT OUR
BUSINESS.
Our OmniBank mouse clone library and its backup are stored in liquid
nitrogen freezers located at our facility in The Woodlands, Texas, and our
knockout mouse research operations are carried out entirely at the same
facility. While we have developed redundant and emergency backup systems to
protect these resources and the facilities in which they are stored, they may be
insufficient in the event of a severe fire, flood, hurricane, tornado,
mechanical failure or similar disaster. If such a disaster significantly damages
or destroys the facility in which these resources are maintained, our business
could be disrupted until we could regenerate the affected resources and, as a
result, our stock price could decline. Our business interruption insurance may
not be sufficient to compensate us in the event of a major interruption due to
such a disaster.
OUR QUARTERLY OPERATING RESULTS HAVE BEEN AND LIKELY WILL CONTINUE TO
FLUCTUATE, AND WE BELIEVE THAT QUARTER-TO-QUARTER COMPARISONS OF OUR OPERATING
RESULTS ARE NOT A GOOD INDICATION OF OUR FUTURE PERFORMANCE.
Our operating results and, in particular, our ability to generate
additional revenues are dependent on many factors, including:
-- our ability to establish new database subscriptions, research
collaborations and technology licenses, and the timing of such
arrangements;
-- the expiration or other termination of database subscriptions and
research collaborations with our collaborators, which may not be
renewed or replaced;
-- the success rate of our discovery efforts leading to opportunities
for new research collaborations and licenses, as well as milestone
payments and royalties;
-- the timing and willingness of our collaborators to commercialize
pharmaceutical products that would result in milestone payments and
royalties; and
-- general and industry-specific economic conditions, which may affect
our and our collaborators' research and development expenditures.
Because of these and other factors, including the risks and uncertainties
described in this section, our quarterly operating results have fluctuated in
the past and are likely to do so in the future. Due to the likelihood of
fluctuations in our revenues and expenses, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance.
RISKS RELATED TO OUR INDUSTRY
OUR ABILITY TO PATENT OUR INVENTIONS IS UNCERTAIN BECAUSE PATENT LAWS AND THEIR
INTERPRETATION ARE HIGHLY UNCERTAIN AND SUBJECT TO CHANGE.
The patent positions of biotechnology firms generally are highly uncertain
and involve complex legal and factual questions that will determine who has the
right to develop or use a particular technology or product. No clear policy has
emerged regarding the scope of protection provided in biotechnology patents. The
biotechnology patent situation outside the United States is similarly uncertain.
Changes in, or different interpretations of, patent laws in the United States or
other countries might allow others to use our inventions or to develop and
commercialize any technologies or products that we may develop without any
compensation to us. We anticipate that these uncertainties will continue for a
significant period of time.
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OUR PATENT APPLICATIONS MAY NOT RESULT IN PATENT RIGHTS.
Our disclosures in our patent applications may not be sufficient to meet
the statutory requirements for patentability. Our ability to obtain patent
protection based on genes or gene sequences will depend, in part, upon
identification of a use for the gene or gene sequences sufficient to meet the
statutory requirements that an invention have utility and that a patent
application enable one to make and use the invention. While the United States
Patent and Trademark Office has issued guidelines for the examination of patent
applications claiming gene sequences, their therapeutic uses and novel proteins
encoded by such genes, the impact of these guidelines is uncertain and may delay
or negatively affect our patent position. Furthermore, biologic data in addition
to that obtained by our current technologies may be required for issuance of
patents covering any potential human therapeutic products that we may develop.
If required, obtaining such biologic data could delay, add substantial costs to,
or affect our ability to obtain patent protection for such products. There can
be no assurance that the disclosures in our current or future patent
applications, including those we may file with our collaborators, will be
sufficient to meet these requirements. Even if patents are issued, there may be
current or future uncertainty as to the scope of the coverage or protection
provided by any such patents.
Some court decisions indicate that disclosure of a partial sequence may not
be sufficient to support the patentability of a full-length sequence. These
decisions have been confirmed by recent pronouncements of the United States
Patent and Trademark Office. We believe that these court decisions and the
uncertain position of the United States Patent and Trademark Office present a
significant risk that the United States Patent and Trademark Office will not
issue patents based on patent disclosures limited to partial gene sequences. In
addition, we are uncertain about the scope of the coverage, enforceability and
commercial protection provided by any patents issued primarily on the basis of
gene sequence information.
IF OTHER COMPANIES AND INSTITUTIONS OBTAIN PATENTS RELATING TO OUR DRUG TARGET
OR PRODUCT CANDIDATE DISCOVERIES, WE MAY BE UNABLE TO OBTAIN PATENTS FOR OUR
INVENTIONS BASED UPON THOSE DISCOVERIES AND MAY BE BLOCKED FROM USING OR
DEVELOPING SOME OF OUR TECHNOLOGIES AND PRODUCTS.
Many other entities have filed or may file patent applications on genes or
gene sequences, uses of those genes or genes sequences, gene products and drug
targets, assays for identifying potential therapeutic products, potential
therapeutic products and methods of treatment which are identical or similar to
some of our filings. Some of these applications attempt to assign biologic
function to the genes and proteins based on predictions of function based upon
similarity to other genes and proteins or patterns of gene expression. There is
the significant possibility that patents claiming the functional uses of such
genes and gene products will be issued to our competitors based on such
information. If any such patents are issued to other entities, we will be unable
to obtain patent protection for the same or similar discoveries that we make.
Moreover, we may be blocked from using or developing some of our existing or
proposed technologies and products, or may be required to obtain a license that
may not be available on reasonable terms, if at all.
Alternatively, the United States Patent and Trademark Office could decide
competing patent claims in an interference proceeding. Any such proceeding would
be costly, and we may not prevail. In this event, the prevailing party may
require us or our collaborators to stop using a particular technology or
pursuing a potential product or may require us to negotiate a license
arrangement to do so. We may not be able to obtain a license from the prevailing
party on acceptable terms, or at all.
The Human Genome Project, as well as many companies and institutions, have
identified genes and deposited partial gene sequences in public databases and
are continuing to do so. The entire human genome and the entire mouse genome are
now publicly known. These public disclosures might limit the scope of our claims
or make unpatentable subsequent patent applications on partial or full-length
genes or their uses.
ISSUED OR PENDING PATENTS MAY NOT FULLY PROTECT OUR DISCOVERIES, AND OUR
COMPETITORS MAY BE ABLE TO COMMERCIALIZE TECHNOLOGIES OR PRODUCTS SIMILAR TO
THOSE COVERED BY OUR ISSUED OR PENDING PATENTS.
Pending patent applications do not provide protection against competitors
because they are not enforceable until they issue as patents. Issued patents may
not provide commercially meaningful protection. If anyone infringes upon our or
our collaborators' patent rights, enforcing these rights may be difficult,
costly and
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time-consuming. Others may be able to design around these patents or develop
unique products providing effects similar to any products that we may develop.
Other companies or institutions may challenge our or our collaborators' patents
or independently develop similar products that could result in an interference
proceeding in the United States Patent and Trademark Office or a legal action.
In addition, others may discover uses for genes, drug targets or
therapeutic products other than those covered in our issued or pending patents,
and these other uses may be separately patentable. Even if we have a patent
claim on a particular gene, drug target or therapeutic product, the holder of a
patent covering the use of that gene, drug target or therapeutic product could
exclude us from selling a product that is based on the same use of that product.
WE MAY BE INVOLVED IN PATENT LITIGATION AND OTHER DISPUTES REGARDING
INTELLECTUAL PROPERTY RIGHTS AND MAY REQUIRE LICENSES FROM THIRD PARTIES FOR
OUR DISCOVERY AND DEVELOPMENT AND PLANNED COMMERCIALIZATION ACTIVITIES. WE MAY
NOT PREVAIL IN ANY SUCH LITIGATION OR OTHER DISPUTE OR BE ABLE TO OBTAIN
REQUIRED LICENSES.
Our discovery and development efforts as well as our potential products and
those of our collaborators may give rise to claims that they infringe the
patents of others. This risk will increase as the biotechnology industry expands
and as other companies and institutions obtain more patents covering the
sequences, functions and uses of genes and the drug targets they encode. We are
aware that other companies and institutions have conducted research on many of
the same targets that we have identified. These other companies and institutions
have filed and may in the future file patent applications potentially covering
many of the genes and encoded drug targets that are the focus of our drug
discovery programs, including each of the targets of our most advanced drug
discovery programs. In some cases, patents have issued from these applications.
In addition, many companies and institutions have well-established patent
portfolios directed to common techniques, methods and means of developing,
producing and manufacturing pharmaceutical products. Other companies or
institutions could bring legal actions against us or our collaborators for
damages or to stop us or our collaborators from engaging in certain discovery or
development activities or from manufacturing and marketing any resulting
therapeutic products. If any of these actions are successful, in addition to our
potential liability for damages, these entities would likely require us or our
collaborators to obtain a license in order to continue engaging in the
infringing activities or to manufacture or market the resulting therapeutic
products or may force us to terminate such activities or manufacturing and
marketing efforts. We may also determine to seek licenses from these entities in
order to avoid the cost and expense of litigation.
We may need to pursue litigation against others to enforce our patents and
intellectual property rights and may be the subject of litigation brought by
third parties to enforce their patent and intellectual property rights. In
addition, we may become involved in litigation based on intellectual property
indemnification undertakings that we have given to certain of our collaborators.
Patent litigation is expensive and requires substantial amounts of management
attention. The eventual outcome of any such litigation is uncertain and involves
substantial risks. For example, each time we sue for patent infringement we face
the risk that the patent will be held invalid or unenforceable. Such a
determination is binding on us for all future litigation involving that patent.
We believe that there will continue to be significant litigation in our
industry regarding patent and other intellectual property rights. We have
expended and many of our competitors have expended and are continuing to expend
significant amounts of time, money and management resources on intellectual
property litigation. If we become involved in future intellectual property
litigation, it could consume a substantial portion of our resources and could
negatively affect our results of operations.
In 2000, we filed lawsuits against Deltagen, Inc. relating to infringement
of a number of United States patents licensed to us. In September 2001, we and
Deltagen settled the litigation. Under the terms of the settlement, Deltagen
obtained a sublicense under the patents and we obtained a subscription to
Deltagen's DeltaBase product, including perpetual licenses to approximately
1,250 drug targets in DeltaBase at the time or expected to be added to DeltaBase
over the subsequent four years. In October 2002, we notified Deltagen of its
failure to perform under our agreements related to the settlement, and in April
2003, we asserted certain
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claims against Deltagen under those agreements. In accordance with the dispute
resolution provisions of those agreements, arbitration proceedings have been
initiated to resolve these matters.
In June 2003, Deltagen publicly asserted that we made our claims for
competitive reasons in an attempt to interfere with Deltagen's financing efforts
and with Deltagen's negotiations with current and prospective customers.
Deltagen has also stated that it will hold us fully responsible for the damage
allegedly done to Deltagen by our actions. On June 27, 2003, Deltagen filed for
Chapter 11 bankruptcy protection, and the arbitration proceedings were
automatically stayed. We believe that Deltagen's assertion regarding the reason
for our claims and Deltagen's statements of purported illegal conduct on our
part are without merit.
Furthermore, in light of recent United States Supreme Court precedent, our
ability to enforce our patents against state agencies, including state sponsored
universities and research laboratories, is limited by the Eleventh Amendment to
the United States Constitution. In addition, opposition by academicians and the
government may hamper our ability to enforce our patents against academic or
government research laboratories. Finally, enforcement of our patents may cause
our reputation in the academic community to be injured.
WE USE INTELLECTUAL PROPERTY THAT WE LICENSE FROM THIRD PARTIES. IF WE DO NOT
COMPLY WITH THESE LICENSES, WE COULD LOSE OUR RIGHTS UNDER THEM.
We rely, in part, on licenses to use certain technologies that are
important to our business. We do not own the patents that underlie these
licenses. Our rights to use these technologies and practice the inventions
claimed in the licensed patents are subject to our abiding by the terms of those
licenses and the licensors not terminating them. In many cases, we do not
control the filing, prosecution or maintenance of the patent rights to which we
hold licenses and rely upon our licensors to prosecute infringement of those
rights. The scope of our rights under our licenses may be subject to dispute by
our licensors or third parties.
WE HAVE NOT SOUGHT PATENT PROTECTION OUTSIDE OF THE UNITED STATES FOR SOME OF
OUR INVENTIONS, AND SOME OF OUR LICENSED PATENTS ONLY PROVIDE COVERAGE IN THE
UNITED STATES.
We have decided not to pursue patent protection with respect to some of our
inventions outside the United States, both because we do not believe it is
cost-effective and because of confidentiality concerns. Accordingly, our
international competitors could develop, and receive foreign patent protection
for, genes or gene sequences, uses of those genes or gene sequences, gene
products and drug targets, assays for identifying potential therapeutic
products, potential therapeutic products and methods of treatment for which we
are seeking United States patent protection. In addition, most of our gene
trapping patents and our licensed gene targeting patents cover only the United
States and do not apply to discovery activities conducted outside of the United
States or, in some circumstances, to importing into the United States products
developed using this technology.
WE MAY BE UNABLE TO PROTECT OUR TRADE SECRETS.
Significant aspects of our intellectual property are not protected by
patents. As a result, we seek to protect the proprietary nature of this
intellectual property as trade secrets through proprietary information
agreements and other measures. While we have entered into proprietary
information agreements with all of our employees, consultants, advisers and
collaborators, we may not be able to prevent the disclosure of our trade
secrets. In addition, other companies or institutions may independently develop
substantially equivalent information and techniques.
OUR EFFORTS TO DISCOVER, EVALUATE AND VALIDATE POTENTIAL TARGETS FOR
THERAPEUTIC INTERVENTION AND OUR DRUG DISCOVERY PROGRAMS ARE SUBJECT TO
EVOLVING DATA AND OTHER RISKS INHERENT IN THE DRUG DISCOVERY PROCESS.
We are employing our knockout technology and integrated drug discovery
platform to systematically discover, evaluate and validate potential targets for
therapeutic intervention and to develop drugs to address those targets. The drug
discovery and development process involves significant risks of delay or failure
due, in
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part, to evolving data and the uncertainties involved with the applications of
new technologies. As we refine and advance our efforts, it is likely that the
resulting data will cause us to change our targets from time to time and,
therefore, that the targets that we believe at any time to be promising may
prove not to be so. These developments can occur at any stage of the drug
discovery and development process.
WE ARE SUBJECT TO EXTENSIVE AND UNCERTAIN GOVERNMENT REGULATORY REQUIREMENTS,
WHICH COULD ADVERSELY AFFECT OUR ABILITY TO OBTAIN, IN A TIMELY MANNER OR AT
ALL, GOVERNMENT APPROVAL OF PRODUCTS BASED ON GENES THAT WE IDENTIFY, OR TO
COMMERCIALIZE SUCH PRODUCTS.
We must obtain approval from the FDA in order to conduct clinical trials
and sell our future product candidates in the United States and from foreign
regulatory authorities in order to conduct clinical trials and sell our future
product candidates in other countries. In order to obtain regulatory approvals
for the commercial sale of any products that we may develop, we will be required
to complete extensive clinical trials in humans to demonstrate the safety and
efficacy of our drug candidates. We may not be able to obtain authority from the
FDA or other equivalent foreign regulatory agencies to initiate or complete any
clinical trials. In addition, we have limited internal resources for making
regulatory filings and dealing with regulatory authorities.
The results from preclinical testing of a drug candidate that is under
development may not be predictive of results that will be obtained in human
clinical trials. In addition, the results of early human clinical trials may not
be predictive of results that will be obtained in larger scale, advanced stage
clinical trials. A number of companies in the pharmaceutical industry have
suffered significant setbacks in advanced clinical trials, even after achieving
positive results in earlier trials. Negative or inconclusive results from a
preclinical study or a clinical trial could cause us, one of our collaborators
or the FDA to terminate a preclinical study or clinical trial or require that we
repeat it. Furthermore, we, one of our collaborators or a regulatory agency with
jurisdiction over the trials may suspend clinical trials at any time if the
subjects or patients participating in such trials are being exposed to
unacceptable health risks or for other reasons.
Any preclinical or clinical test may fail to produce results satisfactory
to the FDA or foreign regulatory authorities. Preclinical and clinical data can
be interpreted in different ways, which could delay, limit or prevent regulatory
approval. The FDA or institutional review boards at the medical institutions and
healthcare facilities where we sponsor clinical trials may suspend any trial
indefinitely if they find deficiencies in the conduct of these trials. We must
conduct clinical trials in accordance with the FDA's current Good Clinical
Practices. The FDA and these institutional review boards have authority to
oversee our clinical trials, and the FDA may require large numbers of test
subjects. In addition, we must manufacture, or contract for the manufacture of,
the product candidates that we use in our clinical trials under the FDA's
current Good Manufacturing Practices.
The rate of completion of clinical trials is dependent, in part, upon the
rate of enrollment of patients. Patient accrual is a function of many factors,
including the size of the patient population, the proximity of patients to
clinical sites, the eligibility criteria for the study, the nature of the study,
the existence of competitive clinical trials and the availability of alternative
treatments. Delays in planned patient enrollment may result in increased costs
and prolonged clinical development, which in turn could allow our competitors to
bring products to market before we do and impair our ability to commercialize
our products or potential products.
We may not be able to successfully complete any clinical trial of a
potential product that we may initiate within any specified time period. In some
cases, we may not be able to complete the trial at all. Moreover, clinical
trials may not show our potential products to be both safe and effective. Thus,
the FDA and other regulatory authorities may not approve any products that we
develop for any indication or may limit the approved indications or impose other
conditions.
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IF WE OBTAIN REGULATORY APPROVAL FOR OUR POTENTIAL PRODUCTS, WE WILL REMAIN
SUBJECT TO EXTENSIVE AND RIGOROUS ONGOING REGULATION.
If we obtain initial regulatory approvals from the FDA or foreign
regulatory authorities for any products that we may develop, we will be subject
to extensive and rigorous ongoing domestic and foreign government regulation of,
among other things, the research, development, testing, manufacture, labeling,
promotion, advertising, distribution and marketing of our products and product
candidates. Our failure to comply with these requirements or the identification
of safety problems during commercial marketing could lead to the need for
product marketing restrictions, product withdrawal or recall or other voluntary
or regulatory action, which could delay further marketing until the product is
brought into compliance. Our failure to comply with these requirements may also
subject us to stringent penalties.
Moreover, several of our product development areas involve relatively new
technology and have not been the subject of extensive product testing in humans.
The regulatory requirements governing these products and related clinical
procedures remain uncertain and the products themselves may be subject to
substantial review by foreign governmental regulatory authorities that could
prevent or delay approval in those countries. Regulatory requirements ultimately
imposed on any products that we may develop could limit our ability to test,
manufacture and, ultimately, commercialize such products.
THE UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT MAY DECREASE THE
COMMERCIAL POTENTIAL OF ANY PRODUCTS THAT WE OR OUR COLLABORATORS MAY DEVELOP
AND AFFECT OUR ABILITY TO RAISE CAPITAL.
Our ability and the ability of our collaborators to successfully
commercialize pharmaceutical products will depend, in part, on the extent to
which reimbursement for the cost of such products and related treatment will be
available from government health administration authorities, private health
coverage insurers and other organizations. The pricing, availability of
distribution channels and reimbursement status of newly approved pharmaceutical
products is highly uncertain. As a result, adequate third-party coverage may not
be available for us to maintain price levels sufficient for realization of an
appropriate return on our investment in product discovery and development.
In certain foreign markets, pricing or profitability of healthcare products
is subject to government control. In the United States, there have been, and we
expect that there will continue to be, a number of federal and state proposals
to implement similar governmental control. In addition, an increasing emphasis
on managed care in the United States has increased and will continue to increase
the pressure on pharmaceutical pricing. While we cannot predict the adoption of
any such legislative or regulatory proposals or the effect such proposals or
managed care efforts may have on our business, the announcement of such
proposals or efforts could harm our ability to raise capital, and the adoption
of such proposals or efforts could harm our results of operations. Further, to
the extent that such proposals or efforts harm other pharmaceutical companies
that are our prospective collaborators, our ability to establish corporate
collaborations would be impaired. In addition, third-party payers are
increasingly challenging the prices charged for medical products and services.
We do not know whether consumers, third-party payers and others will consider
any products that we or our collaborators develop to be cost-effective or that
reimbursement to the consumer will be available or will be sufficient to allow
us or our collaborators to sell such products on a profitable basis.
WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR
BUSINESS; ANY DISPUTES RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF
THESE MATERIALS COULD BE TIME CONSUMING AND COSTLY.
Our research and development processes involve the use of hazardous
materials, including chemicals and radioactive and biological materials. Our
operations also produce hazardous waste products. We cannot eliminate the risk
of accidental contamination or discharge or any resultant injury from these
materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of these materials. We could be
subject to civil damages in the event of an improper or unauthorized release of,
or exposure of individuals to, these hazardous materials. In addition, claimants
may sue us for injury or contamination that results from our use or the use by
third parties of these materials, and our liability may
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exceed our total assets. Compliance with environmental laws and regulations may
be expensive, and current or future environmental regulations may impair our
research, development or production efforts.
WE MAY BE SUED FOR PRODUCT LIABILITY.
We or our collaborators may be held liable if any product that we or our
collaborators develop, or any product that is made with the use or incorporation
of any of our technologies, causes injury or is found otherwise unsuitable
during product testing, manufacturing, marketing or sale. Although we currently
have and intend to maintain product liability insurance, this insurance may
become prohibitively expensive or may not fully cover our potential liabilities.
Our inability to obtain sufficient insurance coverage at an acceptable cost or
otherwise to protect against potential product liability claims could prevent or
inhibit the commercialization of products developed by us or our collaborators.
If we are sued for any injury caused by our or our collaborators' products, our
liability could exceed our total assets.
PUBLIC PERCEPTION OF ETHICAL AND SOCIAL ISSUES MAY LIMIT OR DISCOURAGE THE USE
OF OUR TECHNOLOGIES, WHICH COULD REDUCE OUR REVENUES.
Our success will depend, in part, upon our ability to develop products
discovered through our knockout mouse technologies. Governmental authorities
could, for ethical, social or other purposes, limit the use of genetic processes
or prohibit the practice of our knockout mouse technologies. Claims that
genetically engineered products are unsafe for consumption or pose a danger to
the environment may influence public perceptions. The subject of genetically
modified organisms, like knockout mice, has received negative publicity and
aroused public debate in some countries. Ethical and other concerns about our
technologies, particularly the use of genes from nature for commercial purposes
and the products resulting from this use, could adversely affect the market
acceptance of our technologies.
RISKS RELATED TO THIS OFFERING
WE HAVE BROAD DISCRETION IN THE USE OF THE NET PROCEEDS FROM THIS OFFERING AND
MAY NOT USE THEM EFFECTIVELY.
As of the date of this prospectus supplement, we cannot specify with
certainty the particular uses for the net proceeds we will receive from this
offering. Management will have broad discretion in the application of the net
proceeds, including any of the purposes described in "Use of Proceeds." The
failure by our management to apply these funds effectively could have a material
adverse effect on our business.
OUR STOCK PRICE COULD BE EXTREMELY VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL
YOUR SHARES AT OR ABOVE THE PUBLIC OFFERING PRICE.
The stock market has experienced significant price and volume fluctuations,
and the market prices of technology companies, particularly life science
companies such as ours, have been highly volatile. Since January 1, 2001, the
market price of our common stock has ranged from a high of $17.25 on January 2,
2001 to a low of $2.97 on October 7, 2002. In addition, broad market and
industry fluctuations that are not within our control may adversely affect the
trading price of our common stock. As a result, you may not be able to resell
your shares at or above the public offering price.
CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND
CERTAIN OF OUR STOCKHOLDERS ENABLES THEM TO SIGNIFICANTLY INFLUENCE IMPORTANT
CORPORATE DECISIONS.
Following this offering, our directors, our executive officers and certain
of our stockholders will beneficially own, in the aggregate, approximately 26.5%
of our outstanding common stock. These stockholders as a group will be able to
exert significant influence on the election of our directors and officers, the
management and affairs of our company and the outcome of most matters requiring
the approval of our stockholders, including any merger, consolidation or sale of
all or substantially all of our assets and any other significant corporate
transaction. This concentration of ownership may also prevent a change of
control of our
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company at a premium price if these stockholders oppose it. Please read
"Principal Stockholders" for details on our stock ownership.
PROVISIONS CONTAINED IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A
TAKEOVER ATTEMPT, WHICH COULD REDUCE OR ELIMINATE THE LIKELIHOOD OF A CHANGE OF
CONTROL TRANSACTION AND, THEREFORE, THE ABILITY OF OUR STOCKHOLDERS TO SELL
THEIR SHARES FOR A PREMIUM.
Provisions in our corporate charter and bylaws and applicable provisions of
the Delaware General Corporation Law may make it more difficult for a third
party to acquire control of us without the approval of our board of directors.
These provisions include:
-- a classified board of directors;
-- limitations on the removal of directors;
-- limitations on stockholder proposals at meetings of stockholders;
-- the inability of stockholders to act by written consent or to call
special meetings; and
-- the ability of our board of directors to designate the terms of and
issue new series of preferred stock without stockholder approval.
These provisions may discourage transactions that otherwise could involve the
payment of a premium over prevailing market prices of our common stock.
THE AVAILABILITY OF SHARES OF OUR COMMON STOCK FOR FUTURE SALE COULD DEPRESS
OUR STOCK PRICE.
Upon completion of this offering, we will have outstanding an aggregate of
62,533,651 shares of common stock, assuming no exercise of outstanding options
or warrants. Of these shares, 47,470,260 shares are freely tradable. The holders
of the remaining 15,063,391 shares have demand and piggyback registration rights
with respect to such shares. We have received a request for the registration of
an aggregate of 5,000,000 shares, which we will include in a registration
statement to be filed after the expiration of the 90-day lock-up period
described below.
Sales of a substantial number of shares of our common stock in the public
markets following this offering, or the perception that such sales might occur,
could have a material adverse effect on the price of our common stock or could
impair our future ability to obtain capital through offerings of our equity
securities.
Our executive officers, directors and certain of our stockholders have
agreed pursuant to "lock-up" agreements that, for a period of 90 days from the
date of this prospectus supplement, they will not sell any shares of common
stock without the prior written consent of Morgan Stanley & Co. Incorporated.
See "Underwriting."
OUR FORMER INDEPENDENT PUBLIC ACCOUNTANT, ARTHUR ANDERSEN LLP, HAS BEEN FOUND
GUILTY OF A FEDERAL OBSTRUCTION OF JUSTICE CHARGE, AND YOU MAY BE UNABLE TO
EXERCISE EFFECTIVE REMEDIES AGAINST IT IN ANY LEGAL ACTION.
Our former independent public accountant, Arthur Andersen LLP, provided us
with auditing services for prior fiscal periods through December 31, 2001,
including issuing an audit report with respect to our audited consolidated
financial statements as of and for the years ended December 31, 2000 and 2001
included in our Annual Report on Form 10-K for the year ended December 31, 2002
and incorporated by reference in this prospectus supplement and the accompanying
prospectus. On June 15, 2002, a jury in Houston, Texas found Arthur Andersen LLP
guilty of a federal obstruction of justice charge arising from the federal
government's investigation of Enron Corp. On August 31, 2002, Arthur Andersen
LLP ceased practicing before the Securities and Exchange Commission, or the SEC.
We were unable to obtain Arthur Andersen LLP's consent to include its
report with respect to our audited consolidated financial statements as of and
for the years ended December 31, 2000 and 2001 in our Annual Report on Form 10-K
for the year ended December 31, 2002 or to incorporate by reference such report
in this prospectus supplement and the accompanying prospectus. Rule 437a under
the Securities Act of
S-18
1933, or the Securities Act, permits us to dispense with the requirement to file
their consent. As a result, you may not have an effective remedy against Arthur
Andersen LLP in connection with a material misstatement or omission with respect
to our audited consolidated financial statements that are incorporated by
reference in this prospectus supplement or any other filing we may make with the
SEC, including, with respect to this offering or any other offering registered
under the Securities Act, any claim under Section 11 of the Securities Act. In
addition, even if you were able to assert such a claim, as a result of its
conviction and other lawsuits, Arthur Andersen LLP may fail or otherwise have
insufficient assets to satisfy claims made by investors or by us that might
arise under federal securities laws or otherwise relating to any alleged
material misstatement or omission with respect to our audited consolidated
financial statements.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus and the documents
incorporated by reference into this prospectus supplement and the accompanying
prospectus contain certain information regarding our financial projections,
plans and strategies that are forward-looking statements within the meaning of
Section 27A of the Securities Act and 21E of the Securities Exchange Act of
1934. We have attempted to identify forward-looking statements by terminology
including "anticipate," "believe," "can," "continue," "could," "estimate,"
"expect," "intend," "may," "plan," "potential," "predict," "should" or "will" or
the negative of these terms or other comparable terminology. These statements,
which are only predictions and involve known and unknown risks, uncertainties
and other important factors may include, among other things, statements which
address our strategy and operating performance, events or developments that we
expect or anticipate will occur in the future, such as projections of our future
results of operations or of our financial condition, the status of any
collaborative agreements, our research and development efforts and anticipated
trends in our business. Discussions containing forward-looking statements may be
found, among other places, in "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this prospectus
supplement.
We have based these forward-looking statements on our current expectations
and projections about future events. However, there may be events in the future
that we are not able to predict accurately or which we do not fully control that
could cause actual results to differ materially from those expressed or implied
in our forward-looking statements. Many important factors could cause actual
results to differ materially from those expressed or implied by these
forward-looking statements, including those discussed under "Risk Factors" in
this prospectus supplement and other sections of the documents incorporated by
reference into this prospectus supplement and the accompanying prospectus. We
undertake no obligation to publicly release any revisions to the forward-looking
statements or reflect events or circumstances after the date of this prospectus
supplement.
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USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 10,000,000 shares of
common stock that we are offering will be approximately $68.0 million, based on
an assumed public offering price of $7.28 per share, which is the reported last
sale price of our common stock on July 14, 2003, after deducting estimated
underwriting discounts and commissions and estimated offering expenses. If the
underwriters exercise their option to purchase 1,500,000 additional shares in
this offering, we estimate the aggregate net proceeds to us will be
approximately $78.3 million. We currently intend to use the net proceeds from
this offering for research and development, particularly to continue to discover
what we believe to be pharmaceutically attractive drug targets, to screen
compounds against these targets to identify potential therapeutic products and
to advance the most promising of these potential products into preclinical
testing and clinical trials. We may also use a portion of the net proceeds to
acquire or invest in complementary products and technologies or for general
corporate purposes. We have no current plans or commitments as to any such
acquisition or investment.
The amounts that we actually expend for research and development,
acquisitions, investments or general corporate purposes will vary significantly
depending on a number of factors, including our future revenues, the amount of
cash we generate from operations and the progress of our product development
efforts. Accordingly, our management will retain broad discretion in the
allocation of the net proceeds from this offering.
Pending such uses, we intend to invest the net proceeds from this offering
in interest-bearing, investment-grade securities.
PRICE RANGE OF COMMON STOCK
Our common stock is quoted on the Nasdaq National Market under the symbol
"LEXG." The following table sets forth, for the periods indicated, the range of
the high and low sales prices per share for our common stock as reported on the
Nasdaq National Market.
HIGH LOW
------ -----
YEAR ENDED DECEMBER 31, 2001
First Quarter............................................. $17.25 $5.63
Second Quarter............................................ 13.25 5.41
Third Quarter............................................. 12.80 5.45
Fourth Quarter............................................ 12.14 6.96
YEAR ENDED DECEMBER 31, 2002
First Quarter............................................. 13.00 7.94
Second Quarter............................................ 9.10 4.12
Third Quarter............................................. 6.44 3.45
Fourth Quarter............................................ 5.30 2.97
YEAR ENDED DECEMBER 31, 2003
First Quarter............................................. 5.29 3.00
Second Quarter............................................ 7.00 3.98
Third Quarter (through July 14)........................... 7.45 6.41
As of June 30, 2003, there were approximately 253 holders of record of our
common stock. On July 14, 2003, the reported last sale price of our common stock
on the Nasdaq National Market was $7.28 per share.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We anticipate that
we will retain all of our future earnings, if any, for use in the expansion and
operation of our business and do not anticipate paying cash dividends in the
foreseeable future. In addition, our synthetic lease agreement contains
restrictions that may limit our ability to pay dividends.
S-21
CAPITALIZATION
The following table presents our unaudited capitalization and other data as
of March 31, 2003 on an actual basis and as adjusted to give effect to the sale
by us of 10,000,000 shares of common stock in this offering at an assumed public
offering price of $7.28 per share, after deducting estimated underwriting
discounts and commissions and estimated offering expenses. You should read the
following table in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus supplement and the consolidated financial statements and the related
notes incorporated by reference into this prospectus supplement and the
accompanying prospectus.
AS OF MARCH 31, 2003
-----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
Cash, cash equivalents, restricted cash and investments..... $ 107,587 $ 175,619
========= ===========
Long-term debt, net of current portion...................... $ 4,000 $ 4,000
--------- -----------
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized, no shares issued and outstanding........... -- --
Common stock, $0.001 par value; 120,000,000 shares
authorized, 52,374,095 shares issued and outstanding,
actual; 62,374,095 shares issued and outstanding, as
adjusted............................................... 52 62
Additional paid-in capital................................ 330,666 398,688
Deferred stock compensation............................... (8,507) (8,507)
Accumulated deficit....................................... (166,890) (166,890)
--------- -----------
Total stockholders' equity............................. 155,321 223,353
--------- -----------
Total capitalization........................................ $ 159,321 $ 227,353
========= ===========
DILUTION
As of March 31, 2003, our net tangible book value was approximately $125.6
million, or approximately $2.40 per share. Net tangible book value per share
represents the amount of our total tangible assets, excluding goodwill and other
intangible assets, less total liabilities divided by the 52,374,095 shares of
our common stock outstanding as of March 31, 2003. After giving effect to our
sale of 10,000,000 shares of common stock in this offering at the assumed public
offering price of $7.28 per share, after deducting estimated underwriting
discounts and commissions and estimated offering expenses, the net tangible book
value as of March 31, 2003 would have been approximately $193.6 million, or
approximately $3.10 per share. This represents an immediate increase in net
tangible book value of $.70 per share to existing stockholders and an immediate
dilution in net tangible book value of $4.18 per share to new investors
purchasing shares of common stock at the assumed public offering price.
The following table illustrates this dilution on a per share basis:
Assumed public offering price per share..................... $7.28
Net tangible book value per share as of March 31, 2003.... $2.40
Increase in net tangible book value per share attributable
to new investors....................................... .70
-----
Net tangible book value per share as of March 31, 2003 after
giving effect to this offering............................ 3.10
-----
Dilution in net tangible book value per share to new
investors................................................. $4.18
=====
As of March 31, 2003, there were outstanding options to purchase a total of
12,740,214 shares of common stock at a weighted average exercise price of $6.14
per share and outstanding warrants to purchase a total of 266,482 shares of
common stock at a weighted average exercise price of $3.08 per share. To the
extent that any of these options or warrants are exercised, there will be
further dilution to new public investors.
S-22
SELECTED FINANCIAL DATA
The statement of operations data for the year ended December 31, 2002 and
the balance sheet data as of December 31, 2002 have been derived from our
financial statements that have been audited by Ernst & Young LLP, independent
auditors. The statements of operations data for each of the four years in the
period ended December 31, 2001 and the balance sheet data as of December 31,
1998 through 2001 have been derived from our audited financial statements that
have been audited by Arthur Andersen LLP, independent public accountants who
have ceased operations. The statements of operations data for the three months
ended March 31, 2002 and 2003, and the balance sheet data as of March 31, 2003,
are unaudited but include, in the opinion of management, all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of such data. Our historical results for any prior or interim
period are not necessarily indicative of results to be expected for any future
period.
The data presented below has been prepared in accordance with accounting
principles generally accepted in the United States and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus supplement and
with our financial statements and related notes incorporated by reference in
this prospectus supplement and the accompanying prospectus.
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------- -------------------
1998 1999 2000 2001 2002 2002 2003
------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenues................................. $ 2,242 $ 4,738 $ 14,459 $ 30,577 $ 35,200 $ 7,656 $ 8,106
Operating expenses:
Research and development(1)............ 8,410 14,646 31,647 53,355 74,859 16,864 19,834
General and administrative(2).......... 2,024 2,913 18,289 20,861 23,234 5,969 5,804
------- -------- -------- -------- -------- -------- --------
Total operating expenses................. 10,434 17,559 49,936 74,216 98,093 22,833 25,638
------- -------- -------- -------- -------- -------- --------
Loss from operations..................... (8,192) (12,821) (35,477) (43,639) (62,893) (15,177) (17,532)
Interest and other income, net........... 711 346 9,483 8,467 3,223 1,118 387
------- -------- -------- -------- -------- -------- --------
Net loss................................. (7,481) (12,475) (25,994) (35,172) (59,670) (14,059) (17,145)
Accretion on redeemable convertible
preferred stock........................ (357) (536) (134) -- -- -- --
------- -------- -------- -------- -------- -------- --------
Net loss attributable to common
stockholders........................... $(7,838) $(13,011) $(26,128) $(35,172) $(59,670) $(14,059) $(17,145)
======= ======== ======== ======== ======== ======== ========
Net loss per common share, basic and
diluted................................ $ (0.32) $ (0.53) $ (0.63) $ (0.70) $ (1.14) $ (0.27) $ (0.33)
======= ======== ======== ======== ======== ======== ========
Shares used in computing net loss per
common share, basic and diluted........ 24,445 24,530 41,618 50,213 52,263 52,126 52,371
AS OF
AS OF DECEMBER 31, MARCH 31,
---------------------------------------------------- ---------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents, restricted cash and
investments(3)............................... $ 19,422 $ 9,156 $202,680 $166,840 $123,096 $107,587
Working capital(3)............................. 18,102 2,021 194,801 147,663 111,833 99,197
Total assets................................... 28,516 22,295 220,693 239,990 201,772 181,967
Long-term debt, net of current portion......... 5,024 3,577 1,834 -- 4,000 4,000
Redeemable convertible preferred stock......... 29,515 30,050 -- -- -- --
Accumulated deficit............................ (16,434) (28,909) (54,903) (90,075) (149,745) (166,890)
Stockholders' equity (deficit)................. (9,035) (21,937) 207,628 218,372 169,902 155,321
------------
(1) Includes stock-based compensation of $10,883 in 2000, $5,539 in 2001, $5,155
in 2002, $1,307 for the three months ended March 31, 2002 and $1,270 for the
three months ended March 31, 2003.
(2) Includes stock-based compensation of $9,958 in 2000, $5,231 in 2001, $5,113
in 2002, $1,282 for the three months ended March 31, 2002 and $1,276 for the
three months ended March 31, 2003.
(3) Includes restricted cash and investments of $13,879 as of December 31, 2000,
$43,338 as of December 31, 2001, $57,710 as of December 31, 2002 and $57,710
as of March 31, 2003.
S-23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with our
consolidated financial statements, related notes and other financial information
incorporated by reference in this prospectus supplement and the accompanying
prospectus. In addition to historical information, the following discussion and
analysis and other parts of this prospectus supplement and the accompanying
prospectus contain forward-looking information that involves risks and
uncertainties. Our actual results could differ materially from those anticipated
by such forward-looking information due to competitive factors and other factors
discussed under "Special Note Regarding Forward-Looking Statements," "Risk
Factors" and elsewhere in this prospectus supplement and the accompanying
prospectus.
OVERVIEW
We are a biopharmaceutical company focused on the discovery of breakthrough
treatments for human disease. We use proprietary gene knockout technology to
systematically discover the physiological functions of genes in mice and to
identify which corresponding human genes encode potential targets for
therapeutic intervention, or drug targets. The study of mice can be a very
powerful tool for understanding human genetics because of the close similarity
of gene function and physiology in mice and humans. Approximately 99% of all
human genes have a counterpart in the mouse genome. Our patented gene trapping
and gene targeting technologies enable us to rapidly generate these knockout
mice by altering the DNA of genes in a special variety of mouse cells, called
embryonic stem cells, which can be cloned and used to generate mice with the
altered gene. We then employ an integrated platform of advanced medical
technologies to systematically discover and validate, in vivo, the physiological
functions and pharmaceutical utility of the genes we have knocked out and the
drug targets they encode.
We are working both independently and with our drug discovery collaborators
to discover potential small molecule drugs, therapeutic antibodies and
therapeutic proteins for those in vivo-validated drug targets that we consider
to have high pharmaceutical value. We are working with Genentech to discover the
functions of secreted proteins and potential antibody targets identified through
Genentech's internal drug discovery research. We are working with Abgenix to
discover and develop therapeutic antibodies for in vivo-validated drug targets
identified in our own research. We are also working with Incyte to discover and
develop therapeutic proteins. In addition, we have established collaborations
and license agreements with many other leading pharmaceutical and biotechnology
companies under which we receive fees and, in many cases, are eligible to
receive milestone and royalty payments, in return for granting access to some of
our technologies and discoveries for use in such companies' own drug discovery
efforts.
We derive substantially all of our revenues from drug discovery alliances,
subscriptions to our databases, target validation collaborations for the
development and, in some cases, analysis of the physiological effects of genes
altered in knockout mice, and technology licenses. To date, we have generated a
substantial portion of our revenues from a limited number of sources and have
not generated any revenue from sales of pharmaceuticals.
Our operating results and, in particular, our ability to generate
additional revenues are dependent on many factors, including:
-- our ability to establish new database subscriptions, research
collaborations and technology licenses, and the timing of such
arrangements;
-- the expiration or other termination of database subscriptions and
research collaborations with our collaborators, which may not be
renewed or replaced;
-- the success rate of our discovery efforts leading to opportunities
for new research collaborations and licenses, as well as milestone
payments and royalties;
-- the timing and willingness of our collaborators to commercialize
pharmaceutical products that would result in milestone payments and
royalties; and
S-24
-- general and industry-specific economic conditions, which may affect
our and our collaborators' research and development expenditures.
Our future revenues from database subscriptions, collaborations and alliances
are uncertain because our existing agreements have fixed terms or relate to
specific projects of limited duration. Our future revenues from technology
licenses are uncertain because they depend, in part, on securing new agreements.
Our ability to secure future revenue-generating agreements will depend upon our
ability to address the needs of our potential future subscribers, collaborators
and licensees, and to negotiate agreements that we believe are in our long-term
best interests. We may determine that our interests are better served by
retaining rights to our discoveries and advancing our therapeutic programs to a
later stage, which could limit our near-term revenues. Because of these and
other factors, our quarterly operating results have fluctuated in the past and
are likely to do so in the future, and we do not believe that quarter-to-quarter
comparisons of our operating results are a good indication of our future
performance.
Since our inception, we have incurred significant losses and, as of March
31, 2003, we had an accumulated deficit of $166.9 million. Our losses have
resulted principally from costs incurred in research and development, general
and administrative costs associated with our operations, and non-cash
stock-based compensation expenses associated with stock options granted to
employees and consultants prior to our April 2000 initial public offering.
Research and development expenses consist primarily of salaries and related
personnel costs, material costs, facility costs, depreciation on property and
equipment, legal expenses resulting from intellectual property prosecution, and
other expenses related to our drug discovery and LexVision programs, the
development and analysis of knockout mice and our other target validation
research efforts, and the development of compound libraries. General and
administrative expenses consist primarily of salaries and related expenses for
executive, finance and other administrative personnel, professional fees and
other corporate expenses, including business development and general legal
activities. In connection with the expansion of our drug discovery programs and
our target validation research efforts, we expect to incur increasing research
and development and general and administrative costs. As a result, we will need
to generate significantly higher revenues to achieve profitability.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
We recognize revenues when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price is fixed and
determinable, and collectability is reasonably assured. Payments received in
advance under these arrangements are recorded as deferred revenue until earned.
Fees for access to our databases and other target validation resources are
recognized ratably over the subscription or access period. Collaborative
research payments are recognized as revenue as we perform our obligations
related to such research to the extent such fees are non-refundable.
Milestone-based fees are recognized upon completion of specified milestones
according to contract terms. Non-refundable technology license fees are
recognized as revenue upon the grant of the license to third parties, when
performance is complete and there is no continuing involvement.
Revenues recognized from multiple element contracts are allocated to each
element of the arrangement based on the relative fair value of the elements. The
determination of fair value of each element is based on objective evidence. When
revenues for an element are specifically tied to a separate earnings process,
revenue is recognized when the specific performance obligation associated with
the element is completed. When revenues for an element are not specifically tied
to a separate earnings process, they are recognized ratably over the term of the
agreement.
A change in our revenue recognition policy or changes in the terms of
contracts under which we recognize revenues could have an impact on the amount
and timing of our recognition of revenues.
S-25
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist of costs incurred for
company-sponsored as well as collaborative research and development activities.
These costs include direct and research-related overhead expenses and are
expensed as incurred. Patent costs and technology license fees for technologies
that are utilized in research and development and have no alternative future use
are expensed when incurred.
STOCK-BASED COMPENSATION
Deferred stock-based compensation and related amortization represents the
difference between the exercise price of stock options granted and the fair
value of our common stock on the applicable date of grant. Stock-based
compensation is amortized as research and development expense or general and
administrative expense, as appropriate, over the vesting period of the
individual stock options for which it was recorded, generally four years. If
employees and consultants continue to vest in accordance with their individual
stock option agreements subsequent to March 31, 2003, we expect to record
amortization expense for deferred stock-based compensation of $7.6 million
during the last nine months of 2003 and $.9 million during 2004. The amount of
stock-based compensation expense to be recorded in future periods may decrease
if unvested stock options for which deferred stock-based compensation has been
recorded are subsequently canceled or forfeited or may increase if additional
stock options are granted to individuals other than employees or directors.
GOODWILL IMPAIRMENT
Goodwill is not amortized, but is tested at least annually for impairment
at the reporting unit level. Impairment is the condition that exists when the
carrying amount of goodwill exceeds its implied fair value. The first step in
the impairment process is to determine the fair value of the reporting unit and
then compare it to the carrying value, including goodwill. If the fair value
exceeds the carrying value, no further action is required and no impairment loss
is recognized. Additional impairment assessments may be performed on an interim
basis if we encounter events or changes in circumstances that would indicate
that, more likely than not, the carrying value of goodwill has been impaired.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force, or EITF, reached a
consensus on EITF Issue No. 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables." This consensus requires that revenue arrangements with
multiple deliverables be divided into separate units of accounting if the
delivered items have value to the customer on a standalone basis, there is
objective and reliable evidence of fair value of the undelivered items and, if
the arrangement includes a general right of return, performance of the
undelivered item is considered probable and substantially in our control. The
final consensus will be applicable to agreements entered into in fiscal periods
beginning after June 15, 2003, with early adoption permitted.
In December 2002, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure." This statement amends SFAS
123, "Accounting for Stock-Based Compensation," to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based accounting for employee compensation and the effect of the
method used on reported results. We are currently evaluating whether to adopt
the fair value based method.
In January 2003, the FASB issued Interpretation, or FIN, No. 46,
"Consolidation of Variable Interest Entities." FIN 46 requires that
unconsolidated variable interest entities be consolidated by their primary
beneficiaries. A primary beneficiary is the party that absorbs a majority of the
entity's expected losses or residual benefits. FIN 46 applies immediately to
variable interest entities created after January 31, 2003 and to existing
variable interest entities in the periods beginning after June 15, 2003. In
October 2000, we entered into a synthetic lease agreement under which the lessor
purchased our existing laboratory and office buildings
S-26
and animal facility in The Woodlands, Texas and agreed to fund the construction
of an additional laboratory and office building and a second animal facility.
The synthetic lease agreement was subsequently expanded to include funding for
the construction of a central plant facility for the distribution of utilities
and related services among our facilities. As adopted on July 1, 2003, FIN 46
will require us to consolidate the lessor under our synthetic lease.
Accordingly, our balance sheet would reflect as assets additional property and
equipment approximating the $55.0 million funded under the synthetic lease for
property and improvements, less accumulated depreciation, and a similar amount
as a liability. We would be required to depreciate such improvements over their
useful lives. In addition, our income statement will reflect a charge of
approximately $2.3 million for depreciation through June 30, 2003, as a
cumulative effect of an accounting change. We believe that the consolidation of
the lessor would not have a material adverse effect on our financial condition
or results of operations. However, we are currently seeking to replace the
synthetic lease. See "--Liquidity and Capital Resources."
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Revenues. Total revenues increased 6% to $8.1 million in the three months
ended March 31, 2003 from $7.7 million in the corresponding period in 2002. The
increase of $.4 million was primarily the result of revenues recognized under
our drug discovery alliance with Genentech, entered in December 2002, offset, in
part, by reduced revenues under technology license agreements.
During the three months ended March 31, 2003, Incyte, Bristol-Myers Squibb
and Genentech represented 31%, 16% and 9% of revenues, respectively. During the
three months ended March 31, 2002, Incyte, Bristol-Myers Squibb and Immunex
Corporation represented 33%, 16% and 9% of revenues, respectively.
Research and Development Expenses. Research and development expenses
increased 18% to $19.8 million in the three months ended March 31, 2003 from
$16.9 million in the corresponding period in 2002. The increase of $2.9 million
was primarily attributable to increased personnel costs and facilities costs to
support the expansion of our drug discovery programs, the development and
analysis of knockout mice and our other target validation research efforts.
Research and development expenses for each of these three-month periods included
$1.3 million of stock-based compensation primarily relating to option grants
made prior to our April 2000 initial public offering.
General and Administrative Expenses. General and administrative expenses
decreased 3% to $5.8 million in the three months ended March 31, 2003 from $6.0
million in the corresponding period in 2002. General and administrative expenses
for each of these three-month periods included $1.3 million of stock-based
compensation primarily relating to option grants made prior to our April 2000
initial public offering.
Interest and Other Income. Interest and other income decreased 58% to $.5
million in the three months ended March 31, 2003 from $1.1 million in the
corresponding period in 2002. The decrease resulted from lower average cash and
investment balances and lower average interest rates on our investments during
the 2003 period.
Net Loss and Net Loss Per Common Share. Net loss increased 22% to $17.1
million in the three months ended March 31, 2003 from $14.1 million in the
corresponding period in 2002. Net loss per common share increased to $.33 in the
three months ended March 31, 2003 from $.27 in the corresponding period of 2002.
As a complement to reporting net loss and net loss per common share in
accordance with generally accepted accounting principles, or GAAP, we provide
net loss and net loss per common share excluding non-cash, stock-based
compensation. We use these results in establishing budgets and believe it is
useful to investors in measuring the performance of our business. Excluding
stock-based compensation expense of $2.5 million and $2.6 million in the three
months ended March 31, 2003 and 2002, respectively, we would have had a net loss
of $14.6 million and net loss per common share of $.28 in the three months ended
March 31, 2003, as compared to a net loss of $11.5 million and net loss per
common share of $.22 in the corresponding period in 2002.
S-27
Our quarterly operating results have fluctuated in the past and are likely
to do so in the future, and we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance.
YEARS ENDED DECEMBER 31, 2002 AND 2001
Revenues. Total revenues increased 15% to $35.2 million in 2002 from $30.6
million in 2001. The increase of $4.6 million was primarily attributable to a
$5.9 million increase in revenues from target validation collaborations and our
drug discovery alliance with Incyte and a $3.1 million increase in revenues from
database subscription and technology license fees, offset in part by a $4.4
million decrease in compound libraries and other revenue. We did not make our
compound libraries available for purchase in 2002 and, subject to limited
exceptions, do not intend to make our compound libraries available for purchase
in the future.
In 2002, Incyte, Bristol-Myers Squibb and Millennium Pharmaceuticals
represented 28%, 14% and 11% of revenues, respectively. In 2001, Incyte,
Bristol-Myers Squibb and Merck & Co., Inc. represented 16%, 13% and 12% of
revenues, respectively.
Research and Development Expenses. Research and development expenses
increased 40% to $74.9 million in 2002 from $53.4 million in 2001. The increase
of $21.5 million was primarily attributable to increased personnel and facility
costs to support the expansion of our drug discovery programs, including a full
year of medicinal chemistry operations that we obtained in our July 2001
acquisition of Coelacanth Corporation, the development and analysis of knockout
mice and our other target validation research efforts. Research and development
expenses for 2002 and 2001 included $5.2 million and $5.5 million, respectively,
of stock-based compensation primarily relating to option grants made prior to
our April 2000 initial public offering.
General and Administrative Expenses. General and administrative expenses
increased 11% to $23.2 million in 2002 from $20.9 million in 2001. The increase
of $2.3 million was due primarily to additional personnel costs offset by a
reduction in legal costs as a result of the September 2001 settlement of our
patent infringement litigation against Deltagen, Inc. General and administrative
expenses for 2002 and 2001 included $5.1 million and $5.2 million, respectively,
of stock-based compensation primarily relating to option grants made prior to
our April 2000 initial public offering.
Interest and Other Income. Interest and other income decreased 63% to $3.2
million in 2002 from $8.8 million in 2001. This decrease resulted from lower
cash and investment balances and lower average interest rates on our investments
during 2002.
Net Loss and Net Loss Per Common Share. Net loss attributable to common
stockholders increased to $59.7 million in 2002 from $35.2 million in 2001. Net
loss per common share increased to $1.14 in 2002 from $.70 in 2001. Excluding
stock-based compensation expense of $10.3 million and $10.8 million in 2002 and
2001, respectively, we would have had a net loss of $49.4 million and net loss
per common share of $.95 in 2002, as compared to a net loss of $24.4 million and
net loss per common share of $.49 in 2001.
YEARS ENDED DECEMBER 31, 2001 AND 2000
Revenues. Total revenues increased 111% to $30.6 million in 2001 from
$14.5 million in 2000. The increase of $16.1 million was primarily attributable
to a $10.2 million increase in revenues from database subscription and
technology license fees, a $1.7 million increase in revenues from target
validation collaborations and our drug discovery alliance with Incyte and
revenues of $4.5 million from compound library sales, offset in part by a $.3
million decrease in other revenue.
In 2001, Incyte, Bristol-Myers Squibb and Merck represented 16%, 13% and
12% of revenues, respectively. In 2000, the Merck Genome Research Institute and
Millennium Pharmaceuticals represented 35% and 14% of revenues, respectively.
Research and Development Expenses. Research and development expenses
increased 69% to $53.4 million in 2001 from $31.6 million in 2000. The increase
of $21.8 million was attributable to continued growth of
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research and development activities, primarily related to increased personnel
costs to support the expansion of our drug discovery programs, the development
and analysis of knockout mice and our other target validation research efforts,
offset in part by lower stock-based compensation in 2001. Research and
development expenses for 2001 and 2000 included $5.5 million and $10.9 million,
respectively, of stock-based compensation primarily relating to option grants
made prior to our April 2000 initial public offering.
General and Administrative Expenses. General and administrative expenses
increased 14% to $20.9 million in 2001 from $18.3 million in 2000. The increase
of $2.6 million was due primarily to additional personnel costs for business
development and finance and administration, as well as expenses associated with
our patent infringement litigation against Deltagen, offset in part by lower
stock-based compensation in 2001. General and administrative expenses for 2001
and 2000 included $5.2 million and $10.0 million, respectively, of stock-based
compensation primarily relating to option grants made prior to our April 2000
initial public offering.
Interest and Other Income. Interest income decreased 11% to $8.8 million
in 2001 from $9.9 million in 2000. This decrease resulted from lower cash and
investment balances and lower average interest rates on our investments during
2001.
Net Loss and Net Loss Per Common Share. Net loss attributable to common
stockholders increased to $35.2 million in 2001 from $26.1 million in 2000. Net
loss per common share increased to $.70 in 2001 from $.63 in 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations from inception primarily through sales of
common and preferred stock, contract and milestone payments to us under our drug
discovery alliance, database subscription, collaboration and license agreements,
equipment financing arrangements and leasing arrangements. From our inception
through March 31, 2003, we had received net proceeds of $242.7 million from
issuances of common and preferred stock, including $203.2 million of net
proceeds from the initial public offering of our common stock in April 2000. In
addition, from our inception through March 31, 2003, we received $108.1 million
in cash payments from drug discovery alliances, database subscription and
technology license fees, target validation collaborations, sales of compound
libraries and reagents, and government grants, of which $96.6 million had been
recognized as revenues through March 31, 2003.
As of March 31, 2003, we had $107.6 million in cash, cash equivalents and
short-term investments, including $57.7 million of restricted cash and
investments, as compared to $123.1 million as of December 31, 2002. We used cash
of $14.8 million in operations during the three months ended March 31, 2003.
This consisted primarily of the net loss for the period of $17.1 million offset
by non-cash charges of $2.5 million related to stock-based compensation expense,
$2.5 million related to depreciation expense and $300,000 related to
amortization of intangible assets other than goodwill. Investing activities
provided cash of $14.6 million in the three months ended March 31, 2003,
principally as a result of net maturities of short-term investments, offset in
part by an increase in restricted cash.
As of December 31, 2002, we had $123.1 million in cash, cash equivalents
and short-term and long-term investments, including $57.7 million of restricted
cash and investments, as compared to $166.8 million, including $43.3 million of
restricted cash and investments, as of December 31, 2001. We used cash of $28.8
million in operations in 2002. This consisted primarily of the net loss for the
year of $59.7 million offset by non-cash charges of $10.3 million related to
stock-based compensation expense, $9.1 million related to depreciation expense
and $1.2 million related to amortization of intangible assets other than
goodwill, a $5.6 million increase in deferred revenue, and changes in other
operating assets and liabilities of $4.5 million. Investing activities provided
cash of $47.2 million in 2002, principally as a result of net maturities of
short-term investments and the sale of long-term investments, offset by an
increase in restricted cash and purchases of property and equipment. We received
cash of $4.6 million in financing activities in 2002, consisting principally of
proceeds from a $4.0 million loan and stock option exercises.
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In October 2000, we entered into a synthetic lease agreement under which
the lessor purchased our existing laboratory and office buildings and animal
facility in The Woodlands, Texas and agreed to fund the construction of an
additional laboratory and office building and a second animal facility. The
synthetic lease agreement was subsequently expanded to include funding for the
construction of a central plant facility for the distribution of utilities and
related services among our facilities. Including the purchase price for our
existing facilities, the synthetic lease, as amended, provided for funding of up
to $55.0 million in property and improvements. The term of the agreement is six
years, which includes the construction period and a lease period, and may be
extended at our option for up to seven additional one-year terms. Alternatively,
the lease may be terminated at an earlier date if we elect to (1) purchase the
properties for a price equal to the $55.0 million funded under the synthetic
lease for property and improvements plus the amount of any accrued but unpaid
lease payments, (2) arrange for the sale of the properties to a third party or
(3) surrender the properties to the lessor. If we elect to arrange for the sale
of the properties or surrender the properties to the lessor, we have guaranteed
approximately 86% of the total original cost as the residual fair value of the
properties. Lease payments for the new facilities began upon completion of
construction, which occurred at the end of the first quarter of 2002. Lease
payments are subject to fluctuation based on LIBOR rates. Based on a LIBOR rate
of 1.3% at March 31, 2003, our total lease payments would be approximately $.9
million per year. We are required to maintain restricted cash and investments to
collateralize amounts funded under the synthetic lease agreement. In addition,
we have agreed to maintain cash and investments of at least $12.0 million in
excess of our restricted cash and investments. If our cash and investments fall
below that level, we may be required to seek a waiver of that agreement or to
purchase the properties or arrange for their sale to a third party. Because our
cost to purchase the properties would not materially exceed the $55.0 million
funded under the synthetic lease for property and improvements and would likely
be less than the amount of restricted cash and investments we are required to
maintain under the synthetic lease, we believe that any requirement that we do
so would not have a material adverse effect on our financial condition. As of
March 31, 2003 and December 31, 2002, we maintained restricted cash and
investments of $57.2 million to collateralize funding for property and
improvements under the synthetic lease of $55.0 million.
We intend to replace our synthetic lease agreement covering all of our
facilities in The Woodlands, Texas, and we are currently engaged in discussions
to do so. We expect that any such new arrangement would require us to maintain
substantially lower amounts of restricted cash and investments while increasing
our payments with respect to these facilities, as compared to our synthetic
lease agreement.
In May 2002, our subsidiary, Lexicon Pharmaceuticals (New Jersey), Inc.,
signed a ten-year lease for a 76,000 square-foot laboratory and office facility
in Hopewell, New Jersey. Our subsidiary has exercised its option under the lease
to obtain $2.0 million in tenant improvement funds from the landlord. The lease
provides that the expiration of the term of the lease will be extended to June
30, 2013, the tenth anniversary of the date on which the landlord provided the
tenant improvement funds, and that such funds will be amortized over a ten-year
period. Accordingly, we expect that the escalating yearly base rent payment
under the lease will increase to a range of approximately $2.1 million in the
first year following the funding of the tenant improvements on June 30, 2003 to
approximately $2.4 million in the tenth year. We are the guarantor of the
obligations of our subsidiary under the lease.
In December 2002, we borrowed $4.0 million under a convertible promissory
note we issued to Genentech. The proceeds of the loan are to be used to fund
research efforts under our alliance with Genentech for the discovery of
therapeutic proteins and antibody targets. The note matures on or before
December 31, 2005, but we may prepay it at any time. We may repay the note, at
our option, in cash or in shares of our common stock valued at the then-current
market value, or in a combination of cash and shares, subject to certain
limitations. The note accrues interest at an annual rate of 8%, compounded
quarterly.
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Including the lease and debt obligations described above, we had incurred
the following contractual obligations as of March 31, 2003:
PAYMENTS DUE BY PERIOD
-----------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
------------------------------- ----- --------- --------- --------- ---------
(in millions)
Long-term debt................. $4.0 -- $ 4.0 -- --
Capital lease obligations...... -- -- -- -- --
Operating leases............... 27.3 $3.6 6.2 $5.0 $12.5
Other long-term liabilities
reflected on our balance
sheet under GAAP............. 0.3 -- -- 0.3 --
----- ---- ----- ---- -----
Total........................ $31.6 $3.6 $10.2 $5.3 $12.5
===== ==== ===== ==== =====
Our future capital requirements will be substantial and will depend on many
factors, including our ability to obtain database alliance, subscription,
collaboration and technology license agreements, the amount and timing of
payments under such agreements, the level and timing of our research and
development expenditures, market acceptance of products that we may develop and
the resources we devote to developing and supporting such products. Our capital
requirements will also be affected by any expenditures we make in connection
with license agreements and acquisitions of and investments in complementary
products and technologies. We expect to devote substantial capital resources to
continue our research and development efforts, to expand our support and product
development activities, and for other general corporate activities. We
anticipate that the net proceeds of this offering, our existing capital
resources and the revenues we expect to derive from drug discovery alliances,
subscriptions to our databases, target validation collaborations and technology
licenses will enable us to fund our currently planned operations for
approximately the next 24 months. During or after this period, if cash generated
by operations is insufficient to satisfy our liquidity requirements, we will
need to sell additional equity or debt securities or obtain additional credit
arrangements. Additional financing may not be available on terms acceptable to
us or at all. The sale of additional equity or convertible debt securities may
result in additional dilution to our stockholders, and, in the case of debt
securities, could subject us to restrictive covenants.
We currently estimate that our capital expenditures for 2003 will be
approximately $5 million to $7 million and will relate primarily to the
completion of our laboratory and office facilities in Hopewell, New Jersey, as
well as to the purchase of high-throughput screening and other equipment for our
development activities.
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BUSINESS
OVERVIEW
Lexicon Genetics is a biopharmaceutical company focused on the discovery of
breakthrough treatments for human disease. We use proprietary gene knockout
technology to systematically discover the physiological functions of genes in
mice and to identify which corresponding human genes encode potential targets
for therapeutic intervention, or drug targets. For those targets that we
consider to have high pharmaceutical value, we engage in programs for the
discovery and development of potential small molecule drugs, therapeutic
antibodies and therapeutic proteins. Our physiology-based approach to
understanding gene function and our use of mouse models in our drug discovery
efforts allow us to make highly-informed decisions throughout the drug discovery
and development process, which we believe will increase our likelihood of
success in discovering breakthrough therapeutics.
We are using our gene knockout technology to discover the physiological
functions of 5,000 genes from the human genome that belong to gene families that
we consider to be pharmaceutically important. Our state-of-the-art animal
facilities enable us to capitalize on our gene knockout and physiological
analysis technologies by generating knockout mice and analyzing the
physiological function of genes on a large scale. Using this physiological
information, we select targets for our drug discovery programs that, when
knocked out, exhibit favorable therapeutic profiles with potential for
addressing large medical markets. We focus our discovery efforts in five
therapeutic areas--metabolic disorders, cardiovascular disease, cancer, immune
system disorders and neurological disorders--and we have established significant
internal expertise in each of these areas. Our experience suggests that from the
5,000 genes for which we are seeking to discover physiological function, a total
of approximately 100 to 150 will prove to be targets with important
pharmaceutical utility. To date, we have advanced into drug discovery programs
more than 20 targets, each of which we have validated in vivo. Our most advanced
drug discovery programs include LG653 for obesity and diabetes, LG914 for
atherosclerosis, LG152 for cancer, LG293 for inflammation and LG617 for
cognitive disorders.
We are working both independently and through strategic collaborations and
alliances to commercialize our technology and turn our discoveries into drugs.
We have established multiple collaborations with leading pharmaceutical and
biotechnology companies, as well as research institutes and academic
institutions. We are working with Genentech to discover the functions of
secreted proteins and potential antibody targets identified through Genentech's
internal drug discovery research. We are working with Abgenix to discover and
develop therapeutic antibodies for in vivo-validated drug targets identified in
our own research. We are also working with Incyte to discover and develop
therapeutic proteins. In addition, we have established collaborations and
license agreements with many other leading pharmaceutical and biotechnology
companies under which we receive fees and, in many cases, are eligible to
receive milestone and royalty payments, in return for granting access to some of
our technologies and discoveries for use in such companies' own drug discovery
efforts.
OUR DRUG DISCOVERY PROCESS
Our drug discovery process begins with our Genome5000 program, in which we
are using our gene knockout technology to discover the physiological functions
of 5,000 human genes over five years. Our Genome5000 efforts are focused on the
discovery of the functions in mammalian physiology of proteins encoded by gene
families that we consider to be pharmaceutically important, such as G-protein
coupled, or GPCRs, and other receptors, kinases, ion channels, other key enzymes
and secreted proteins. We have already completed our physiology-based analysis
of over 20% of these 5,000 genes, and we expect to complete the analysis of the
remaining genes at a rate of approximately 1,000 genes per year.
S-32
We use knockout mice--mice whose DNA has been altered to disrupt, or "knock
out," the function of the altered gene--to discover gene function. The study of
mice can be a very powerful tool for understanding human genetics because of the
close similarity of gene function and physiology in mice and humans.
Approximately 99% of all human genes have a counterpart in the mouse genome. Our
patented gene trapping and gene targeting technologies enable us to rapidly
generate these knockout mice by altering the DNA of genes in a special variety
of mouse cells, called embryonic stem cells, which can be cloned and used to
generate mice with the altered gene.
We employ an integrated platform of advanced medical technologies to
systematically discover and validate, in vivo, the physiological functions and
pharmaceutical utility of the genes we have knocked out and the drug targets
they encode. These technologies include many of the most sophisticated
diagnostic technologies that might be found in a major medical center, including
CAT-scans, magnetic resonance imaging, or MRI, complete blood cell analysis and
other technologies, all adapted specifically for the analysis of mouse
physiology. We conduct these activities in two state-of-the-art animal
facilities occupying a total of approximately 100,000 square feet. These
facilities, completed in 1999 and 2002, respectively, were custom designed for
the generation and analysis of knockout mice and are accredited by AAALAC
International, or Association for Assessment and Accreditation of Laboratory
Animal Care. The scope of our gene knockout technology, combined with the size
and sophistication of our facilities and our evaluative technologies, provides
us with what we believe to be a significant competitive advantage.
We believe that the power of our technology is demonstrated by a
retrospective analysis that we performed of the 100 best selling drugs of 2001
as modeled by the physiological characteristics of knockout mice. This analysis
was published in the January 2003 issue of Nature Reviews Drug Discovery, a
peer-reviewed scientific journal. In this analysis we concluded that in most
cases there was a direct correlation between the physiological characteristics,
or phenotypes, of knockout mice and the therapeutic effect of the 100
best-selling drugs of 2001. These drugs targeted only 43 host proteins. Of those
targets, 34 had been knocked out and 29, or 85 percent, of the resulting
knockout mice were informative in describing the gene function and
pharmaceutical utility of the target.
We are working to discover potential small molecule drugs, therapeutic
antibodies and therapeutic proteins for those in vivo-validated drug targets
that we consider to have high pharmaceutical value. We have established an
internal small molecule drug discovery program, in which we use our own
sophisticated libraries of drug-like chemical compounds in high-throughput
screening assays to identify "hits," or chemical compounds demonstrating
activity, against these targets. We then employ our industrialized medicinal
chemistry platform to optimize the potency and selectivity of these hits and to
identify lead compounds for potential development. Our compound libraries
include chemical scaffolds and building blocks that we designed based on
analyses of the characteristics of drugs that have proven safe and effective in
the past. When we identify a hit, we can rapidly reassemble these building
blocks to create hundreds or thousands of variations around the structure of the
initial compound, enabling us to accelerate our medicinal chemistry efforts.
In all of our drug discovery programs, we use the same physiological
analysis technology platform that we use in the discovery of gene function to
analyze the in vivo efficacy and safety profiles of drug candidates in mice. We
believe that our approach, by focusing on the physiological functions and
pharmaceutical utility of genes at the outset of the drug discovery process,
will increase our likelihood of success in discovering breakthrough treatments
for human disease.
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OUR DRUG DISCOVERY PIPELINE
We focus our drug discovery programs in five therapeutic areas--metabolic
disorders, cardiovascular disease, cancer, immune system disorders and
neurological disorders--and we have established significant internal expertise
in each of these areas. To date, we have advanced more than 20 in vivo-validated
targets into drug discovery programs. We have highlighted 15 of our most
advanced programs below.
STAGE OF DEVELOPMENT
-----------------------------------------------------
THERAPEUTIC PRIMARY
AREA/TARGET IN VIVO ADVANCED ASSAYS & HIT LEAD
NAME INDICATION VALIDATION RESEARCH SCREENING SERIES OPTIMIZATION
--------------------------------------------------- -------------------- ---------- -------- --------- ------ ------------
METABOLIC DISORDERS
LG653............................................. Obesity/Diabetes X
LG747............................................. Obesity/Diabetes X
CARDIOVASCULAR DISEASE
LG914............................................. Atherosclerosis X
LG101............................................. Thrombosis X
CANCER
LG152............................................. Solid Tumors X
IMMUNE SYSTEM DISORDERS
LG293............................................. Autoimmune Disease X
LG688............................................. Inflammation X
NEUROLOGICAL DISORDERS
LG617............................................. Cognitive Disorders X
LG726............................................. Depression X
LG487............................................. Depression X
LG324............................................. Depression X
LG317............................................. Parkinson's Disease X
LG915............................................. Anxiety X
LG752............................................. Pain X
LG470............................................. Pain X
The status levels of these programs are described below:
-- Primary In Vivo Validation means we have generated knockout mice for
a drug target and preliminarily validated physiological gene function
in vivo by systematically analyzing those knockout mice in our
comprehensive series of diagnostic medical procedures.
-- Advanced Research means we have applied a more focused and in-depth
approach to our physiological analysis of those knockout mice
generated for a drug target that we believe may have significant
pharmaceutical importance.
-- Assays and Screening means we are developing, or have developed and
are continuing to develop, assays and are conducting high-throughput
screening to identify hits against a drug target.
-- Hit Series means we have identified one or more series of potential
hits against a drug target and we are applying our advanced medicinal
chemistry capabilities in our efforts to identify potential lead
compounds.
-- Lead Optimization means we have identified one or more series of
potential lead compounds for a drug target and we are applying our
advanced medicinal chemistry capabilities in our efforts to optimize
those potential leads.
The prioritization and allocation of our internal resources among these
programs are based on our expectations regarding their relative likelihood of
success and the relevant medical market, as well as progress realized in our
drug discovery efforts for the program. We revise our prioritization and
resource allocation among programs as necessary in order to capitalize on new
discoveries and opportunities. As a result, our priorities will continually
shift as new information becomes available to us, and higher priority targets
may replace targets that we had previously emphasized as we progress in the drug
discovery process.
S-34
METABOLIC DISORDERS
Metabolic disorders include the serious and growing problems of obesity and
diabetes and the complications they cause. Obesity rates among American adults
increased by 74% during the period from 1991 to 2001. According to the American
Obesity Association, 60 million American adults are now considered obese.
Obesity is also a contributing factor to over 30 diseases, including diabetes,
heart disease and stroke. According to the International Diabetes Federation, at
least 194 million people worldwide suffer from diabetes. Current pharmaceutical
treatments for obesity have shown only limited effectiveness and have exhibited
unfavorable side effects. Current treatments for diabetes also have significant
limitations. We have identified and validated, in vivo, multiple novel targets
for the development of potential therapeutics for certain metabolic disorders.
To date, we have initiated drug discovery efforts for LG653 and LG747, each of
which is a potential target for the treatment of obesity and diabetes. We are
currently optimizing lead compounds for LG653 and conducting high-throughput
screening of small molecule drug candidates for LG747.
Lead Metabolic Program--LG653. LG653 is an enzyme that we
believe has utility as a target for the development of drugs for
the treatment of obesity, diabetes, heart disease and stroke.
Our physiological analysis of LG653 in knockout mice suggests
that LG653 plays a role in the regulation of metabolism. LG653
knockout mice displayed a 30% to 44% reduction in body fat,
exhibited an increased metabolic rate and on average consumed
19% more food than normal mice. LG653 knockout mice have normal
muscle mass, lean body mass and bone mineral density. We have
not observed in LG653 knockout mice any physiological effects
that would limit the utility of LG653 as a drug target or that
would be considered an undesirable side effect for a drug. We
have completed high-throughput screening against LG653 and have
identified two series of potential lead compounds, which we are
currently optimizing.
CARDIOVASCULAR DISEASE
More than 60 million people in the United States have some form of
cardiovascular disease. The American Heart Association estimates that 1.1
million Americans will suffer a heart attack this year and another 700,000 will
suffer a stroke. We have identified and validated, in vivo, multiple novel
targets for the development of potential therapeutics for certain cardiovascular
diseases. To date, we have initiated drug discovery efforts for two of these
targets: LG914 for atherosclerosis, which is the progressive blockage of
arteries, and LG101 for thrombosis, which is the formation of blood clots within
a vein. We are currently working with Abgenix to develop monoclonal antibodies
for LG914 and conducting high-throughput screening of small molecule drug
candidates for LG101.
Lead Cardiovascular Program--LG914. LG914 is a secreted protein
that we believe has utility as a target for the treatment of
atherosclerosis. Our physiological analysis of LG914 in knockout
mice suggests that LG914 is involved in the regulation of
certain cellular events associated with atherosclerosis and
other coronary artery diseases. LG914 knockout mice exhibited
reduced arterial thickening in response to an inflammatory
stimulus compared to normal mice, and the inhibition of LG914 in
mice with a genetic predisposition to atherosclerotic plaque
resulted in a significant decrease in plaque formation. We have
not observed in LG914 knockout mice any physiological effects
that would limit the utility of LG914 as a drug target or that
would be considered an undesirable side effect for a drug. We
are working in collaboration with Abgenix to develop monoclonal
antibodies to inhibit LG914.
CANCER
This year, according to the American Cancer Society, over 500,000 Americans
are expected to die of cancer and approximately 1.3 million new cancer cases are
expected to be diagnosed in the United States.
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Cancer is the second leading cause of death in the United States, exceeded only
by heart disease. We have identified and validated, in vivo, a novel target,
LG152, for the development of potential cancer therapeutics.
Lead Cancer Program--LG152. LG152 is a kinase that we believe
has utility as a target for the development of drugs for the
treatment of solid tumor cancers. Our physiological analysis of
LG152 in knockout mice suggests that LG152 plays a significant
role in the regulation of cell growth. The breakdown or
malfunction of such regulation is often a key cause of many
cancers. LG152 knockout mice displayed a reduction in cell
growth and proliferation, while over-expression of LG152 in
mouse cell lines resulted in tumor formation. Additional
analysis suggests that reduction of LG152 expression results in
the blockage of human tumor cell growth in vitro. We have also
observed over-expression of LG152 in human tumor cells isolated
from melanomas and breast, colon, bladder and ovarian tumors.
Additionally, although LG152 knockout mice are smaller than
normal mice, we have not observed in LG152 knockout mice any
physiological effects that would limit the utility of LG152 as a
drug target or that would be considered an undesirable side
effect for a drug. We have completed high-throughput screening
against LG152 and have identified five series of hits, which we
are currently analyzing.
IMMUNE SYSTEM DISORDERS
Rheumatoid arthritis, lupus and other disorders of the immune system, as
well as inflammatory disease and organ transplant rejection, affect substantial
numbers of people and represent multiple large medical markets. For example,
according to the Arthritis Foundation, rheumatoid arthritis affects
approximately 2.1 million Americans, and the Lupus Foundation of America, Inc.
estimates that approximately 1.4 million Americans have a form of lupus.
According to the National Institute of Arthritis and Musculoskeletal and Skin
Diseases, an estimated 43 million Americans have arthritis or other rheumatic
conditions. We have identified and validated, in vivo, multiple novel targets
for the development of potential therapeutics for immune system disorders. To
date, we have initiated drug discovery efforts for two of these targets: LG293
for autoimmune diseases and LG688 for inflammation. We are currently optimizing
lead compounds for LG293 and working with Abgenix to develop monoclonal
antibodies for LG688.
Lead Immunology Program--LG293. LG293 is an enzyme that we
believe has utility as a target for the development of drugs for
the treatment of immunosuppression, autoimmune disorders and
inflammatory diseases. Our physiological analysis of LG293 in
knockout mice suggests that LG293 is involved in the regulation
of immune system function and the maturation and proliferation
of T and B cells, which are vital components of the immune
system. LG293 knockout mice exhibited lower levels of
circulating T and B cells, resulting in a reduction in the
inflammatory response. Our analysis suggests that inhibiting
LG293 increases the retention of immune cells in the thymus and
spleen and blocks the deployment of T and B cells into the
peripheral blood supply. Furthermore, LG293 knockout mice
accepted transplanted tissues and mounted a significantly
reduced inflammatory response when challenged. These results
lead us to believe that LG293 inhibition or drugs that target
LG293 could be used to treat autoimmune disorders and chronic
inflammatory conditions. We have completed high-throughput
screening against LG293 and have identified three series of
potential lead compounds, which we are currently optimizing.
NEUROLOGICAL DISORDERS
Central nervous system, or CNS, disorders encompass a broad array of
disease areas, including depression, Alzheimer's disease, Attention Deficit
Hyperactivity Disorder and Parkinson's disease. According to the National
Institute of Mental Health, depression affects approximately 19 million American
adults. The Alzheimer's Disease Education and Referral Center estimates that up
to four million Americans suffer from Alzheimer's disease. The treatments
currently available for neurological diseases are among the most frequently
prescribed drugs in the United States, yet often have limited efficacy or
significant side effects for
S-36
many patients. We have identified and validated, in vivo, multiple novel targets
for the development of potential therapeutics for certain neurological
disorders. To date, we have initiated drug discovery efforts for three of these
targets: LG617 for Alzheimer's disease and other cognitive disorders and LG487
and LG726 for depression. We are currently analyzing hit series for LG617 and
LG487. We are also working with Abgenix to develop monoclonal antibodies for
LG726. We are currently working to develop high-throughput screening assays for
five of our other targets in this therapeutic area: LG324 for depression, LG317
for Parkinson's disease, LG915 for anxiety and LG752 and LG470 for pain.
Lead Neurology Program--LG617. LG617 is a membrane protein that
we believe has utility as a target for the treatment of certain
cognitive disorders. Our physiological analysis of LG617 in
knockout mice suggests that LG617 plays a role in learning,
attention and memory. LG617 knockout mice exhibited an increased
amount of learned responses when challenged with a conditioned
stimulus and demonstrated a significant increase in olfactory
discrimination and exploratory behavior, each of which are
widely accepted tests of learning and memory. We have not
observed in LG617 knockout mice any physiological effects that
would limit the utility of LG617 as a drug target or that would
be considered an undesirable side effect for a drug. We have
completed high-throughput screening against LG617 and have
identified six series of hits, which we are currently analyzing.
OUR TECHNOLOGY
The scope of our gene knockout and evaluative technologies allows us to
create and analyze knockout mice at a rate and on a scale that we believe is
unmatched by our competitors. Combined with our state-of-the-art facilities,
which are among the largest and most sophisticated of their kind in the world,
these technologies provide us with what we believe to be a significant
competitive advantage. We have already completed our analysis of over 20% of the
5,000 genes in our Genome5000 program, and we expect to complete the analysis of
the remaining genes by the end of 2007. The core elements of our technology
platform include our patented technologies for the generation of knockout mice,
our integrated platform of advanced medical technologies for the systematic and
comprehensive biological analysis of in vivo physiology and our industrialized
approach to medicinal chemistry and the generation of high-quality, drug-like
compound libraries.
GENE KNOCKOUT TECHNOLOGIES
Gene Targeting. Our gene targeting technology, which is covered by six
issued patents that we have licensed, enables us to generate highly specific
alterations in targeted genes. The technology uses a vector to replace DNA of a
gene in a mouse embryonic stem cell through a process known as homologous
recombination to disrupt the function of the targeted gene, permitting the
generation of knockout mice. By using this technology in combination with one or
more additional technologies, we are able to generate alterations that
selectively disrupt, or conditionally regulate, the function of the targeted
gene for the analysis of the gene's function in selected tissues, at selected
stages in the animal's development or at selected times in the animal's life. We
can also use this technology to replace the targeted gene with its corresponding
human gene for use for preclinical research in our therapeutic discovery
programs.
Gene Trapping. Our gene trapping technology, which is covered by six
issued patents that we own, is a high-throughput method of generating knockout
mouse clones that we invented. The technology uses genetically engineered
retroviruses that infect mouse embryonic stem cells in vitro, integrate into the
chromosome of the cell and disrupt the function of the gene into which it
integrates, permitting the generation of knockout mice. This process also
stimulates transcription of a portion of the trapped gene, using the cell's own
splicing machinery to extract this transcript from the chromosome for automated
DNA sequencing. This allows us to identify and catalogue each embryonic stem
cell clone by DNA sequence from the trapped gene and to select embryonic stem
cell clones by DNA sequence for the generation of knockout mice.
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PHYSIOLOGICAL ANALYSIS TECHNOLOGIES
We employ an integrated platform of advanced medical examinations to
rapidly and systematically discover and catalogue the functions of the genes we
have knocked out using our gene trapping and gene targeting technologies. These
examinations include many of the most sophisticated diagnostic technologies and
tests currently available, many of which might be found in a major medical
center. These technologies and tests include:
-- CAT-scans;
-- magnetic resonance imaging, or MRI;
-- complete blood cell analysis, including HDL counts and white blood
cell counts;
-- fluorescently activated cell sorting, or FACS, analysis;
-- comprehensive automated behavior analysis; and
-- nuclear magnetic resonance, or NMR, analysis.
Each of these technologies has been adapted specifically for the analysis of
mouse physiology. This state-of-the-art technology platform enables us to assess
the function of the knocked-out gene in a living mammal across a wide variety of
parameters relevant to human disease.
We believe that our medical center approach and the technology platform
that makes it possible provide us with substantial advantages over other
approaches to determine gene function and drug target discovery. In particular,
we believe that the comprehensive nature of this approach allows us to uncover
functions within the context of mammalian physiology that might be missed by
more narrowly focused efforts directed on the basis of hypotheses as to a gene's
likely function, particularly when these hypotheses are based on expression
analyses and other factors that our experience indicates are unreliable
predictors of gene function. We also believe our approach is more likely to
reveal those side effects that may be a direct result of inhibiting or otherwise
modulating the drug target. Such target-related side effects might limit the
utility of potential therapeutics directed at the drug target or prove to be
unacceptable in light of the potential therapeutic benefit. We believe these
advantages will contribute to better target selection and, therefore, to the
success of our drug discovery and development efforts.
We employ the same physiological analysis technology platform that we use
in the discovery of gene function to analyze the in vivo efficacy and safety
profiles of therapeutic candidates in mice. We believe that this approach will
allow us, at an early stage, to identify and optimize therapeutic candidates for
further preclinical and clinical development that demonstrate in vivo efficacy
and to distinguish side effects caused by a specific compound from the
target-related side effects that we defined using the same comprehensive series
of tests.
PRODUCTION AND ANALYSIS INFRASTRUCTURE
Our facilities, which are among the largest and most sophisticated of their
kind in the world, enable us to capitalize on our gene knockout and
physiological analysis technologies by generating knockout mice and analyzing
the physiological function of genes on an expansive scale. We are able to
generate knockout mice for the large number of genes that we believe may be
pharmaceutically important and analyze the physiology of each of those knockout
mice by utilizing our broad range of medical technologies. Our state-of-the-art
animal facilities, occupying a total of approximately 100,000 square feet, allow
us to generate and analyze over 1,000 knockout mice per year. These facilities
also enable us to maintain in-house control over our entire in vivo validation
process, from the generation of embryonic stem cell clones through the
completion of in vivo analysis, in a specific pathogen-free environment. As part
of our Genome5000 program, we have already examined the physiological functions
of over 1,000 genes and expect to complete our analysis of an aggregate of 5,000
genes by the end of 2007. We are not aware of any study approaching either the
magnitude or breadth of our Genome5000 program, and we believe that the
investment of significant resources over a period of
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several years would be required for any competitor to duplicate our gene
knockout and physiological analysis capabilities.
MEDICINAL CHEMISTRY TECHNOLOGY
We use solution-phase chemistry to generate diverse libraries of optically
pure compounds that are targeted against the same pharmaceutically relevant gene
families that we address in our Genome5000 program. These libraries are built
using highly robust and scalable organic reactions that allow us to generate
compound collections of great diversity and to specially tailor the compound
collections to address various therapeutic target families. We design these
libraries by analyzing the chemical structures of drugs that have been proven
safe and effective against human disease and using that knowledge in the design
of scaffolds and chemical building blocks for the generation of large numbers of
new drug-like compounds. We can rapidly reassemble these building blocks to
generate optimization libraries when we identify a hit against one of our in
vivo-validated targets, enabling us to rapidly optimize those hits and
accelerate our medicinal chemistry efforts.
Our medicinal chemistry technology is housed in a state-of-the-art 76,000
square foot facility in Hopewell, New Jersey. Our lead optimization chemistry
groups are organized around specific discovery targets and work closely with
their pharmaceutical biology counterparts in our facilities in The Woodlands,
Texas. The medicinal chemists optimize lead compounds in order to select
clinical candidates with the desired absorption, distribution, metabolism,
excretion and physicochemical characteristics. We have the capability to profile
our compounds using the same battery of in vivo assays that we use to
characterize our drug discovery targets. This provides us with valuable detailed
information relevant to the selection of the highest quality compounds for
clinical development.
OMNIBANK LIBRARY AND LEXVISION DATABASE
We have capitalized on these core elements of our technology platform by
developing our OmniBank library of gene knockout clones and our LexVision
database cataloging the functions of certain in vivo-validated drug targets.
OmniBank Library. We have used our gene trapping technology in an
automated process to create our OmniBank library of more than 200,000 frozen
gene knockout embryonic stem cell clones, each identified by DNA sequence in a
relational database. Each OmniBank mouse clone contains a single genetic
mutation that can model the action of future drugs. We estimate that our
OmniBank library currently contains gene knockout clones for more than half of
all genes in the mammalian genome and believe it is the largest library of its
kind. We believe our OmniBank library permits us to generate knockout mice at a
significantly higher rate than is possible using other methods and, therefore,
provides us with a significant strategic advantage in the discovery of in vivo
gene function.
LexVision Database. Our LexVision database is a comprehensive, relational
database of in vivo-validated drug targets that catalogs the physiological
functions of genes that we have knocked out using our gene targeting and gene
trapping technologies. Our LexVision collaborators obtain non-exclusive access
to the LexVision database for the discovery of small molecule drugs. We are
committed to include 1,250 in vivo-validated drug targets in our LexVision
database over a period of five years. We deposit such targets in our LexVision
database on a quarterly basis. As of June 30, 2003, we had deposited a total of
631 targets.
OUR COMMERCIALIZATION STRATEGY
We are working both independently and through strategic collaborations and
alliances with leading pharmaceutical and biotechnology companies, research
institutes and academic institutions to commercialize our technology and turn
our discoveries into drugs. Consistent with this approach, we intend to develop
and commercialize certain of our drug discovery programs internally and retain
exclusive rights to the benefits of such programs and to collaborate with third
parties with respect to the development and commercialization of other drug
discovery programs.
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We apply our internal resources to our drug discovery programs in order to
commercialize our technology and turn our discoveries into drugs. As we advance
targets into our drug discovery programs, we allocate our internal resources in
a manner designed to maximize our ability to commercialize opportunities
presented by these programs. Our prioritization and allocation of internal
resources among these programs are based on our expectations regarding their
relative likelihood of success and the relevant medical market, as well as
progress realized in our drug discovery efforts for the program. We revise our
prioritization and resource allocation among programs as necessary in order to
capitalize on new discoveries and opportunities.
Our collaboration and alliance strategy involves drug discovery alliances
to discover and develop therapeutics based on our drug target discoveries,
particularly when the alliance enables us to obtain access to technology and
expertise that we do not possess internally or is complementary to our own.
These strategic collaborations, as well as our licenses with pharmaceutical and
biotechnology companies, research institutes and academic institutions, enable
us to generate near-term revenues in exchange for access to some of our
technologies and discoveries for use by these third parties in their own drug
discovery efforts. These collaborations and licenses also offer us the
potential, in many cases, to receive milestone payments and royalties on
products that our collaborators and licensees develop using our technology.
ALLIANCES, COLLABORATIONS AND LICENSES
DRUG DISCOVERY ALLIANCES
We have entered into the following alliances for the discovery and
development of therapeutics based on our in vivo drug target discovery efforts:
Genentech, Inc. We established a drug discovery alliance with Genentech in
December 2002 to discover novel therapeutic proteins and antibody targets. Under
the alliance agreement, we are using our target validation technologies to
discover the functions of secreted proteins and potential antibody targets
identified through Genentech's internal drug discovery research. Genentech will
have exclusive rights to the discoveries resulting from the collaboration for
the research, development and commercialization of therapeutic proteins and
antibodies. We will retain certain other rights to those discoveries, including
non-exclusive rights, along with Genentech, for the development and
commercialization of small molecule drugs. We received an up-front payment and
are entitled to receive performance payments for our work in the collaboration
as it is completed. We are also entitled to receive milestone payments and
royalties on sales of therapeutic proteins and antibodies for which Genentech
obtains exclusive rights. The agreement has an expected collaboration term of
three years.
Abgenix, Inc. We established a drug discovery alliance with Abgenix in
July 2000 to discover novel therapeutic antibodies using our target validation
technologies and Abgenix's technology for generating fully human monoclonal
antibodies. We and Abgenix expanded and extended the alliance in January 2002,
with the intent of accelerating the selection of in vivo-validated antigens for
antibody discovery and the development and commercialization of therapeutic
antibodies based on those targets. Under the alliance agreement, we and Abgenix
will each have the right to obtain exclusive commercialization rights, including
sublicensing rights, for an equal number of qualifying therapeutic antibodies,
and will each receive milestone payments and royalties on sales of therapeutic
antibodies from the alliance that are commercialized by the other party or a
third-party sublicensee. Each party bears its own expenses under the alliance.
The expanded alliance also provides us with access to Abgenix's XenoMouse(R)
technology for use in some of our own drug discovery programs. The collaboration
period, as extended, expires in July 2004, subject to the right of the parties
to extend the term by mutual agreement for up to three additional one-year
periods.
Incyte Corporation. We established a drug discovery alliance with Incyte
in June 2001 to discover novel therapeutic proteins using our target validation
technologies in the discovery of the functions of secreted proteins identified
in Incyte's LifeSeq(R) Gold database. The alliance agreement provides that up to
250 secreted proteins will be jointly selected for functional characterization,
and we expect 150 to be selected in the first three years. Under the alliance
agreement, we receive research funding from Incyte during the term of the
collaboration. In addition, we and Incyte will each have the right to obtain
exclusive commercialization rights, including sublicensing rights, for an equal
number of qualifying therapeutic proteins, and will each receive
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milestone payments and royalties on sales of therapeutic proteins from the
alliance that are commercialized by the other party or a third-party
sublicensee. The collaboration period has a term of five years, although either
party may terminate the collaboration period on June 27, 2004.
LEXVISION COLLABORATIONS
We have entered into the following collaborations for access to our
LexVision database of in vivo-validated drug targets:
Bristol-Myers Squibb Company. We established a LexVision collaboration
with Bristol-Myers Squibb in September 2000, under which Bristol-Myers Squibb
has non-exclusive access to our LexVision database and OmniBank library for the
discovery of small molecule drugs. We receive annual access fees under this
agreement and are entitled to receive milestone payments and royalties on
products Bristol-Myers Squibb develops using our technology. The collaboration
period extends through December 31, 2005, although either party may terminate
the collaboration period on December 31, 2003.
Incyte Corporation. We established a LexVision collaboration with Incyte
in June 2001, under which Incyte has non-exclusive access to our LexVision
database and OmniBank library for the discovery of small molecule drugs. We
receive annual access fees under this agreement, and are entitled to receive
milestone payments and royalties on products Incyte develops using our
technology. The collaboration period extends through December 31, 2005, although
either party may terminate the collaboration period at the end of three years.
TARGET VALIDATION COLLABORATIONS
We have established target validation collaboration agreements with a
number of leading pharmaceutical and biotechnology companies. Under these
collaboration agreements, we generate and, in some cases, analyze knockout mice
for genes requested by the collaborator. In addition, we grant non-exclusive
licenses to the collaborator for use of the knockout mice in its internal drug
discovery programs and, if applicable, analysis data that we generate under the
agreement. Some of these agreements also provide for non-exclusive access to our
OmniBank library. We typically receive annual subscription fees and fees for
knockout mice with annual minimum commitments and, under some of these
agreements, may receive royalties on products that our collaborators discover or
develop using our technology. Each of these agreements has a specified access
period during which the collaborator may request new projects, although, in most
cases, the agreement remains in effect as we continue to conduct work until the
projects requested during the access period are completed, typically within 12
to 24 months following the end of the access period.
We have entered into target validation collaboration agreements with the
following companies:
DATE OF END OF
COMPANY NAME AGREEMENT ACCESS PERIOD
---------------------------------------------------- ------------- -------------
Amgen, Inc.......................................... July 2001 July 2003
Abgenix, Inc........................................ January 2001 January 2004
Tularik, Inc........................................ October 2000 October 2003
Wyeth............................................... March 2000 March 2003
Boehringer Ingelheim Pharmaceuticals, Inc........... February 2000 February 2004
Pharmacia Corp...................................... January 2000 January 2003
Johnson & Johnson Pharmaceutical Research and
Development L.L.C................................. December 1999 December 2003
N.V. Organon........................................ December 1999 December 2002
We have also entered into target validation collaboration agreements with a
number of additional companies and academic institutions under which we receive
research fees for the generation of knockout mice and, with participating
academic institutions, certain rights to license inventions or royalties on
products discovered using such mice.
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TECHNOLOGY LICENSES
We have granted non-exclusive, internal research-use sublicenses under
certain of our gene targeting patent rights to a total of 11 leading
pharmaceutical and biotechnology companies. Many of these agreements have terms
of one to three years, in some cases with provisions for subsequent renewals.
Others extend for as long as the life of the patents. We typically receive
up-front license fees and, in some cases, receive additional license fees or
milestone payments on products that the sublicensee discovers or develops using
our technology.
RESEARCH AND DEVELOPMENT EXPENSES
During the fiscal years ended December 31, 2002, 2001 and 2000, we spent
approximately $74.9 million, $53.4 million and $31.6 million, respectively, on
research and development activities, all of which was company-sponsored,
including $5.2 million, $5.5 million and $10.9 million of stock-based
compensation expenses.
PATENTS AND PROPRIETARY RIGHTS
We will be able to protect our proprietary rights from unauthorized use by
third parties only to the extent that those rights are covered by valid and
enforceable patents or are effectively maintained as trade secrets. Accordingly,
patents and other proprietary rights are an essential element of our business.
Therefore, we have sought or plan to seek patent protection for:
-- the sequences of genes that we believe to be novel, including
full-length human genes and partial human and mouse gene sequences,
the proteins they encode and their predicted utility as a drug target
or therapeutic protein;
-- the utility of genes and the drug targets or therapeutic proteins
they encode based on our discoveries of their biological functions
using knockout mice;
-- drug discovery assays for our in vivo-validated targets;
-- chemical compounds and their use in treating human diseases and
conditions; and
-- various enabling technologies in the fields of mutagenesis, embryonic
stem cell manipulation and transgenic or knockout mice.
We own or have exclusive rights to six issued United States patents that
are directed to our gene trapping technology, 23 issued United States patents
that are directed to full-length sequences of potential drug targets identified
in our gene discovery programs, and five issued United States patents that are
directed to specific knockout mice and discoveries of the functions of genes
made using knockout mice. We have licenses under 60 additional United States
patents, and corresponding foreign patents and patent applications, directed to
gene targeting, gene trapping and genetic manipulation of mouse embryonic stem
cells. These include patents to which we hold exclusive rights in certain
fields, including a total of six United States patents directed to the use of
gene targeting technologies known as positive-negative selection and isogenic
DNA targeting, as well as patents directed to the use of site specific genetic
recombination technology known as Cre/lox technology.
We have filed or have exclusive rights to more than 500 pending patent
applications in the United States Patent and Trademark Office, the European
Patent Office, the national patent offices of other foreign countries or under
the Patent Cooperation Treaty, directed to our gene trapping technology, the DNA
sequences of genes, the uses of specific drug targets, drug discovery assays,
and other products and processes. Collectively, these patent applications are
directed to, among other things, approximately 200 full-length human gene
sequences, more than 50,000 partial human gene sequences, and more than 45,000
knockout mouse clones and corresponding mouse gene sequence tags. Patents
typically have a term of no longer than 20 years from the date of filing. The
issued patents that we own or license have expiration dates ranging from 2009 to
2022.
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As noted above, we hold rights to a number of these patents and patent
applications under license agreements with third parties. In particular, we
license our gene targeting technologies from GenPharm International, Inc. and
our Cre/lox technology from DuPont Pharmaceuticals Company. Our patent licenses
typically are royalty bearing or require some other form of payment to the
licensor and impose diligence obligations on us. Many of these licenses are
nonexclusive, although some are exclusive in specified fields. Most of the
licenses have terms that extend for the life of the licensed patents. In the
case of our license from GenPharm, the license generally is exclusive in
specified fields, subject to specific rights held by third parties, and we are
permitted to grant sublicenses.
All of our employees, consultants and advisors are required to execute a
proprietary information agreement upon the commencement of employment or
consultation. In general, the agreement provides that all inventions conceived
by the employee or consultant, and all confidential information developed or
made known to the individual during the term of the agreement, shall be our
exclusive property and shall be kept confidential, with disclosure to third
parties allowed only in specified circumstances. We cannot assure you, however,
that these agreements will provide useful protection of our proprietary
information in the event of unauthorized use or disclosure of such information.
COMPETITION
The biotechnology and pharmaceutical industries are highly competitive and
characterized by rapid technological change. We face significant competition in
each of the aspects of our business from for-profit companies such as Human
Genome Sciences, Inc., Millennium Pharmaceuticals and Exelixis, Inc., among
others, many of which have substantially greater financial, scientific and human
resources than we do. In addition, the Human Genome Project and a large number
of universities and other not-for-profit institutions, many of which are funded
by the United States and foreign governments, are also conducting research to
discover genes and their functions.
While we are not aware of any other commercial entity that is using gene
trapping technology on a large scale, we face significant competition from
entities using gene targeting technology and other technologies. Several
companies, including Regeneron Pharmaceuticals, Inc., Deltagen, Inc. and DNX,
which is a subsidiary of Xenogen Corporation, and a large number of academic
institutions create knockout mice for third parties using these more traditional
methods, and a number of companies create knockout mice for use in their own
research.
Many of our competitors in drug discovery and development have
substantially greater research and product development capabilities and
financial, scientific, marketing and human resources than we do. As a result,
our competitors may succeed in developing products earlier than we do, obtaining
approvals from the FDA or other regulatory agencies for those products more
rapidly than we do, or developing products that are more effective than those we
propose to develop. Similarly, our collaborators face similar competition from
other competitors who may succeed in developing products more quickly, or
developing products that are more effective, than those developed by our
collaborators. We expect that competition in this field will intensify.
We believe that our OmniBank library of more than 200,000 frozen gene
knockout embryonic stem cell clones and our gene knockout and evaluative
technologies, combined with our facilities, which are among the largest and most
sophisticated of their kind in the world, permit us to generate and analyze
knockout mice at a significantly higher rate than our competitors. We believe
that these factors provide us with a significant strategic advantage in the
discovery of in vivo gene function.
GOVERNMENT REGULATION
REGULATION OF PHARMACEUTICAL PRODUCTS
The development, manufacture and sale of any pharmaceutical or biological
products developed by us or our collaborators will be subject to extensive
regulation by United States and foreign governmental authorities, including
federal, state and local authorities. In the United States, new drugs are
subject to regulation under
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the Federal Food, Drug and Cosmetic Act and the regulations promulgated
thereunder, or the FDC Act, and biological products are subject to regulation
both under certain provisions of the FDC Act and under the Public Health
Services Act and the regulations promulgated thereunder, or the PHS Act. The FDA
regulates, among other things, the development, preclinical and clinical
testing, manufacture, safety, efficacy, record keeping, reporting, labeling,
storage, approval, advertising, promotion, sale, distribution and export of
drugs and biologics. The process of obtaining FDA approval has historically been
costly and time-consuming.
The standard process required by the FDA before a pharmaceutical or
biological product may be marketed in the United States includes:
-- preclinical laboratory and animal tests performed under the FDA's
current Good Laboratory Practices regulations;
-- submission to the FDA of an Investigational New Drug application, or
IND, which must become effective before human clinical trials may
commence;
-- adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug or biologic in our intended
application;
-- for drugs, submission of a New Drug Application, or NDA, and, for
biologics, submission of a Biologic License Application, or BLA, with
the FDA; and
-- FDA approval of the NDA or BLA prior to any commercial sale or
shipment of the product.
Among other things, the FDA reviews an NDA to determine whether a product is
safe and effective for its intended use and a BLA to determine whether a product
is safe, pure and potent and the facility in which it is manufactured,
processed, packed, or held meets standards designed to assure the product's
continued safety, purity and potency.
In addition to obtaining FDA approval for each product, each drug or
biologic manufacturing establishment must be inspected and approved by the FDA.
All manufacturing establishments are subject to inspections by the FDA and by
other federal, state and local agencies and must comply with current Good
Manufacturing Practices requirements. Non-compliance with these requirements can
result in, among other things, total or partial suspension of production,
failure of the government to grant approval for marketing and withdrawal,
suspension or revocation of marketing approvals.
Preclinical studies can take several years to complete, and there is no
guarantee that an IND based on those studies will become effective to even
permit clinical testing to begin. Once clinical trials are initiated, they take
years to complete. In addition, the FDA may place a clinical trial on hold or
terminate it if, among other reasons, the agency concludes that clinical
subjects are being exposed to an unacceptable health risk. After completion of
clinical trials of a new drug or biologic product, FDA marketing approval of the
NDA or BLA must be obtained. An NDA or BLA, depending on the submission, must
contain, among other things, information on chemistry, manufacturing controls
and potency and purity, non-clinical pharmacology and toxicology, human
pharmacokinetics and bioavailability and clinical data. The process of obtaining
approval requires substantial time and effort and there is no assurance that the
FDA will accept the NDA or BLA for filing and, even if filed, that approval will
be granted. The FDA's approval of an NDA or BLA can take years and can be
delayed if questions arise. Limited indications for use or other conditions
could also be placed on any approvals that could restrict the commercial
applications of products.
Once the FDA approves a product, a manufacturer must provide certain
updated safety and efficacy information. Product changes as well as certain
changes in a manufacturing process or facility would necessitate additional FDA
review and approval. Other post-approval changes may also necessitate further
FDA review and approval. Additionally, a manufacturer must meet other
requirements including those related to adverse event reporting and record
keeping.
Violations of the FDC Act, the PHS Act or regulatory requirements may
result in agency enforcement action, including voluntary or mandatory recall,
license suspension or revocation, product seizure, fines, injunctions and civil
criminal penalties.
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In addition to regulatory approvals that must be obtained in the United
States, a drug or biological product is also subject to regulatory approval in
other countries in which it is marketed, although the requirements governing the
conduct of clinical trials, product licensing, pricing, and reimbursement vary
widely from country to country. No action can be taken to market any drug or
biological product in a country until the regulatory authorities in that country
have approved an appropriate application. FDA approval does not assure approval
by other regulatory authorities. The current approval process varies from
country to country, and the time spent in gaining approval varies from that
required for FDA approval. In some countries, the sale price of a drug or
biological product must also be approved. The pricing review period often begins
after marketing approval is granted. Even if a foreign regulatory authority
approves a drug or biological product, it may not approve satisfactory prices
for the product.
OTHER REGULATIONS
In addition to the foregoing, our business is and will be subject to
regulation under various state and federal environmental laws, including the
Occupational Safety and Health Act, the Resource Conservation and Recovery Act
and the Toxic Substances Control Act. These and other laws govern our use,
handling and disposal of various biological, chemical and radioactive substances
used in and wastes generated by our operations. We believe that we are in
material compliance with applicable environmental laws and that our continued
compliance with these laws will not have a material adverse effect on our
business. We cannot predict, however, whether new regulatory restrictions on the
production, handling and marketing of biotechnology products will be imposed by
state or federal regulators and agencies or whether existing laws and
regulations will not adversely affect us in the future.
EMPLOYEES
We believe that our success will be based on, among other things, achieving
and retaining scientific and technological superiority and identifying and
retaining capable management. We have assembled a highly qualified team of
scientists as well as executives with extensive experience in the biotechnology
industry.
As of June 30, 2003, we employed 610 persons, of whom 130 hold M.D., Ph.D.
or D.V.M. degrees and another 83 hold other advanced degrees. We believe that
our relationship with our employees is good.
PROPERTIES
We currently lease approximately 300,000 square feet of space for our
corporate offices and laboratories in buildings located in The Woodlands, Texas,
a suburb of Houston, and approximately 118,000 square feet of space for offices
and laboratories near Princeton, New Jersey.
Our facilities in The Woodlands, Texas include two state-of-the-art animal
facilities totaling approximately 100,000 square feet. These facilities,
completed in 1999 and 2002, respectively, were custom designed for the
generation and analysis of knockout mice and are accredited by the Association
for Assessment and Accreditation of Laboratory Animal Care. These facilities
enable us to maintain in-house control over our entire in vivo validation
process, from the generation of embryonic stem cell clones through the
completion of in vivo analysis, in a specific pathogen free environment. We
believe these facilities, which are among the largest and most sophisticated of
their kind in the world, provide us with significant strategic and operational
advantages relative to our competitors. Because of the size and sophistication
of our facilities, it would require the investment of significant resources over
an extended period of time for any competitor to develop facilities with the
scale, efficiency and productivity with respect to the analysis of the
functionality of genes that our facilities provide.
In October 2000, we entered into a synthetic lease agreement under which
the lessor purchased our existing laboratory and office buildings and animal
facility in The Woodlands, Texas and agreed to fund the construction of an
additional laboratory and office building and a second animal facility. The
synthetic lease agreement was subsequently expanded to include funding for the
construction of a central plant facility for the distribution of utilities and
related services among our facilities. However, we intend to replace this
synthetic lease agreement. For a description of the synthetic lease agreement
and our plan to replace it, see
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
In May 2002, our subsidiary, Lexicon Pharmaceuticals (New Jersey), Inc.,
entered into a ten-year lease for a 76,000 square-foot laboratory and office
facility in Hopewell, New Jersey. For a description of this lease agreement, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
We believe that our facilities are well maintained, in good operating
condition and acceptable for our current operations.
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MANAGEMENT
The names, ages and positions of our executive officers and directors as of
June 30, 2003 are as follows:
NAME AGE POSITION
------------------------------------------ --- ------------------------------------------
Arthur T. Sands, M.D., Ph.D. ............. 41 President and Chief Executive Officer and
Director (Class III)
C. Thomas Caskey, M.D. ................... 64 Chairman of the Board of Directors (Class
III)
William A. McMinn......................... 72 Director (Class III)
Sam L. Barker, Ph.D. ..................... 60 Director (Class II)
Patricia M. Cloherty...................... 60 Director (Class II)
Robert J. Lefkowitz, M.D. ................ 60 Director (Class I)
Julia P. Gregory.......................... 50 Executive Vice President and Chief
Financial Officer
Jeffrey L. Wade, J.D. .................... 38 Executive Vice President and General
Counsel
Brian P. Zambrowicz, Ph.D. ............... 41 Executive Vice President of Research
Walter F. Colbert......................... 53 Senior Vice President of Human Resources
and Corporate Services
Alan J. Main, Ph.D. ...................... 49 Senior Vice President, Lexicon
Pharmaceuticals
James R. Piggott, Ph.D. .................. 46 Senior Vice President of Pharmaceutical
Biology
Randall B. Riggs.......................... 36 Senior Vice President of Business
Development
David A. Boulton.......................... 45 Vice President of Technology Operations,
Lexicon Pharmaceuticals
Philip M. Brown, M.D., J.D., FCLM......... 42 Vice President of Clinical Development
William E. Heydorn, Ph.D. ................ 48 Vice President of Preclinical Development
Lance K. Ishimoto, Ph.D., J.D. ........... 44 Vice President of Intellectual Property
S. David Kimball, Ph.D. .................. 53 Vice President of Medicinal Chemistry
Stephen J. McAndrew, Ph.D. ............... 49 Vice President of Pharmaceutical Business
Development
Christophe Person......................... 36 Vice President of Informatics
Arthur T. Sands, M.D., Ph.D. co-founded our company and has been our
President and Chief Executive Officer and a director since September 1995. From
1992 to September 1995, Dr. Sands served as an American Cancer Society
postdoctoral fellow in the Department of Human and Molecular Genetics at Baylor
College of Medicine, where he studied the function of the p53 gene in cancer
formation and created the XPC knockout mouse, a model for skin cancer. He
received his B.A. in Economics and Political Science from Yale University and
his M.D. and Ph.D. from Baylor College of Medicine.
C. Thomas Caskey, M.D. became Chairman of our Board of Directors in April
2000. Dr. Caskey has been President and Chief Executive Officer of CoGene
Biotech Ventures, Ltd., a venture capital firm, since April 2000. He served as
Senior Vice President, Research at Merck Research Laboratories, a division of
Merck & Co., Inc., a pharmaceutical company, from 1995 to March 2000 and as
President of the Merck Genome Research Institute from 1996 to March 2000. Before
joining Merck, Dr. Caskey served 25 years at Baylor College of Medicine in a
series of senior positions, including Chairman, Department of Human and
Molecular Genetics and Director, Human Genome Center. He is a member of the
National Academy of Sciences. Dr. Caskey serves as a director of Luminex
Corporation and several private companies. He received his B.A. from the
University of South Carolina and his M.D. from Duke University Medical School.
William A. McMinn has been a director since September 1997 and was the
Chairman of our Board of Directors from July 1999 until April 2000. Mr. McMinn
has served as Chairman of the Board of Texas Petrochemicals Corporation since
1996. He was Corporate Vice President and Manager of the Industrial Chemical
Group of FMC Corporation, a manufacturer of machinery and chemical products,
from 1973 through 1985. He became President and Chief Executive Officer of Cain
Chemical Inc. in 1987, and served in that capacity until its acquisition by
Occidental Petroleum in May 1988. He became Chairman of the board of
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directors of Arcadian Corporation in August 1990 and served in that capacity
until it was sold in April 1997. Mr. McMinn received his B.S. from Vanderbilt
University.
Sam L. Barker, Ph.D. has been a director since March 2000. Since March
2001, Dr. Barker has served as a founder and principal of Clearview Projects,
Inc., a company engaged in providing partnering and transaction services to
biotechnology companies. Dr. Barker served in a series of senior domestic and
international management positions at Bristol-Myers Squibb Company, a
pharmaceuticals and healthcare products company, until his retirement in 1998.
His positions at Bristol-Myers Squibb included service as Executive Vice
President, Worldwide Franchise Management and Strategy during 1998, President,
United States Pharmaceutical Group from 1995 to 1997 and President, United
States Pharmaceuticals from 1992 to 1995. Dr. Barker received his B.S. from
Henderson State College, his M.S. from the University of Arkansas and his Ph.D.
from Purdue University.
Patricia M. Cloherty has been a director since May 1998. Ms. Cloherty has
served as Chairman of the United States Russia Investment Fund, established by
the United States government to invest in Russian companies, since President
Clinton appointed her to that position in 1995. From 1973 through 1999, she was
General Partner of Patricof & Co. Ventures, Inc., an international venture
capital company, and successively served as Senior Vice President, President and
Co-Chairman of that company. Ms. Cloherty served as deputy administrator of the
United States Small Business Administration from 1977 to 1978. She is past
president and chairman of the National Venture Capital Association. Ms. Cloherty
serves as a director of several private companies and philanthropies. She holds
a B.A. from the San Francisco College for Women and an M.A. and an M.I.A. from
Columbia University.
Robert J. Lefkowitz, M.D. has been a director since February 2001 and a
consultant to our company since March 2003. Dr. Lefkowitz is the James B. Duke
Professor of Medicine, Professor of Biochemistry and a Howard Hughes Medical
Institute investigator at Duke University Medical Center, where he has served on
the faculty since 1973. He is a member of the National Academy of Sciences. Dr.
Lefkowitz received his B.A. from Columbia University and his M.D. from Columbia
University College of Physicians and Surgeons.
Julia P. Gregory has been our Executive Vice President and Chief Financial
Officer since February 2000. From 1998 to February 2000, Ms. Gregory served as
the Head of Investment Banking for Punk, Ziegel & Company, a specialty
investment banking firm focusing on technology and healthcare and, from 1996 to
February 2000, as the Head of the firm's Life Sciences practice. From 1980 to
1996, Ms. Gregory was an investment banker with Prime Charter Ltd. and then
Dillon, Read & Co., Inc., where she represented life sciences companies
beginning in 1986. Ms. Gregory is a member of the board of directors and the
scientific advisory board of the Estee Lauder Foundation's Institute for the
Study of Aging, Inc. and a member of The International Council for George
Washington University's Elliott School of International Affairs. She received
her B.A. in International Affairs from George Washington University and her
M.B.A. from the Wharton School of the University of Pennsylvania.
Jeffrey L. Wade, J.D. has been our Executive Vice President and General
Counsel since February 2000 and was our Senior Vice President and Chief
Financial Officer from January 1999 to February 2000. From 1988 through December
1998, Mr. Wade was a corporate securities and finance attorney with the law firm
of Andrews & Kurth L.L.P., for the last two years as a partner, where he
represented companies in the biotechnology, information technology and energy
industries. Mr. Wade is a member of the boards of directors of the Texas
Healthcare and Bioscience Institute and the Texas Life Sciences Foundation. He
received his B.A. and J.D. from The University of Texas.
Brian P. Zambrowicz, Ph.D. has been our Executive Vice President of
Research since August 2002. Dr. Zambrowicz served as our Senior Vice President
of Genomics from February 2000 to August 2002, Vice President of Research from
January 1998 to February 2000 and Senior Scientist from April 1996 to January
1998. From 1993 to April 1996, Dr. Zambrowicz served as a National Institutes of
Health, or NIH, postdoctoral fellow at The Fred Hutchinson Cancer Center in
Seattle, Washington, where he studied gene trapping and gene targeting
technology. Dr. Zambrowicz received his B.S. in Biochemistry from the University
of Wisconsin. He received his Ph.D. from the University of Washington, where he
studied tissue-specific gene regulation using transgenic mice.
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Walter F. Colbert has been our Senior Vice President of Human Resources and
Corporate Services since May 2002. Mr. Colbert served as our Vice President of
Human Resources from December 2000 to May 2002. From September 1997 to December
2000, Mr. Colbert was Vice President, Human Resources and Public Affairs at the
Sony Technology Center--San Diego of Sony Electronics Inc., a manufacturer of
electronic equipment. From September 1995 to September 1997, Mr. Colbert served
as Vice President, Human Resources for The NutraSweet Kelco Company, Monsanto
Company's food ingredients business unit. From 1976 through September 1995, Mr.
Colbert served in a variety of human resources positions in the United States
and Europe with Ford Motor Company and Monsanto Company. He received his B.A. in
Political Science from Stanford University and his M.A. in International Affairs
from The Fletcher School of Law and Diplomacy at Tufts University.
Alan J. Main, Ph.D. has been our Senior Vice President, Lexicon
Pharmaceuticals since July 2001. Dr. Main was President and Chief Executive
Officer of Coelacanth Corporation, a leader in using proprietary chemistry
technologies to rapidly discover new chemical entities for drug development,
from January 2000 until our acquisition of Coelacanth in July 2001. Dr. Main was
formerly Senior Vice President, United States Research at Novartis
Pharmaceuticals Corporation, the United States affiliate of Swiss-based Novartis
AG, a diversified healthcare company, where he worked for 20 years before
joining Coelacanth. Dr. Main holds a B.Sc. from the University of Aberdeen,
Scotland and a Ph.D. in Organic Chemistry from the University of Liverpool,
England and completed postdoctoral studies at the Woodward Research Institute.
James R. Piggott, Ph.D. has been our Senior Vice President of
Pharmaceutical Biology since January 2000. From 1990 through October 1999, Dr.
Piggott worked for ZymoGenetics, Inc., a subsidiary of Novo Nordisk, a company
focused on the discovery, development and commercialization of therapeutic
proteins for the treatment of human disease, most recently as Senior Vice
President-Research Biology from 1997 to October 1999. Dr. Piggott's
pharmaceutical research experience also includes service at the Smith Kline &
French Laboratories Ltd. unit of SmithKline Beecham plc and the G.D. Searle &
Co. unit of Monsanto Company. Dr. Piggott received his B.A. and Ph.D. from
Trinity College, Dublin.
Randall B. Riggs has been our Senior Vice President of Business Development
since February 2000 and served as our Vice President of Business Development
from December 1998 to February 2000. From January through November 1998, Mr.
Riggs was director of Business Development for the Infectious Disease Business
Unit of GeneMedicine, Inc., a genetics-based pharmaceuticals company. From 1992
to January 1998, Mr. Riggs was employed by Eli Lilly and Company, a
pharmaceutical company, for the last two years as Manager, Corporate Business
Development at Eli Lilly's Indianapolis, Indiana headquarters. Before joining
Eli Lilly, Mr. Riggs' experience included service as a business analyst for the
National Aeronautics and Space Administration and a subsidiary of Amoco
Production Company. He received his B.B.A. from Texas A&M University and his
M.B.A. from The University of Houston.
David A. Boulton has been our Vice President of Technology Operations,
Lexicon Pharmaceuticals since July 2001. Mr. Boulton co-founded Coelacanth and
served as its Vice President of Technology Operations from October 1996 until
our acquisition of Coelacanth in July 2001. From April 1994 to October 1996, Mr.
Boulton was Senior Director of Automated Synthesis at ArQule, Inc., where he was
instrumental in developing ArQule's chemical automation platform. Before joining
ArQule, he served for 15 years in chemistry research and development at Merck &
Co., Inc. and was a founding member of Merck's automated synthesis group. He
holds a B.S. in Chemistry from Lafayette College.
Philip M. Brown, M.D., J.D., FCLM has been our Vice President of Clinical
Development since April 2003. Dr. Brown served as Vice President of Clinical
Development for Encysive Pharmaceuticals Inc. (formerly Texas Biotechnology
Corporation), a biopharmaceutical company, from June 2000 until April 2003, and
was Senior Medical Director within the organization from December 1998 until
June 2000. From July 1994 to December 1998, Dr. Brown served as Associate Vice
President of Medical Affairs for Pharmaceutical Research Associates, a clinical
research organization. He has conducted numerous clinical trials as an
investigator in a variety of therapeutic areas, as well as managed programs from
IND through NDA and product commercialization. He is a fellow of the American
College of Legal Medicine and serves as an adjunct faculty member at the
Massachusetts General Hospital, Institute of Health Professions in Boston. He
S-49
received his B.A. from Hendrix College, his M.D. from Texas Tech University
School of Medicine, and his J.D. from the University of Texas School of Law.
William E. Heydorn, Ph.D. has been our Vice President of Preclinical
Development since June 2003. Dr. Heydorn was employed by Forest Laboratories,
Inc., a pharmaceutical company, from March 1999 until June 2003, for the last
three years as Director. From 1993 through March 1999, Dr. Heydorn worked for
Synaptic Pharmaceutical Corporation, a biopharmaceutical company, most recently
as Director of Pharmaceutical Operations. Dr. Heydorn's experience also includes
service at Marion Merrell Dow Pharmaceuticals, Inc., the FDA and the NIH. Dr.
Heydorn received his B.S. in Pharmacy from the Philadelphia College of Pharmacy
and Science and his Ph.D. in Pharmacology from the University of Pennsylvania.
Lance K. Ishimoto, J.D., Ph.D. has been our Vice President of Intellectual
Property since July 1998. From 1994 to July 1998, Dr. Ishimoto was a
biotechnology patent attorney at the Palo Alto, California office of the law
firm of Pennie & Edmonds LLP. Dr. Ishimoto received his B.A. and Ph.D. from the
University of California at Los Angeles, where he studied molecular mechanisms
of virus assembly and the regulation of virus ultrastructure. After receiving
his Ph.D., Dr. Ishimoto served as an NIH postdoctoral fellow at University of
Washington School of Medicine. He received his J.D. from Stanford University.
S. David Kimball, Ph.D. has been our Vice President of Medicinal Chemistry
since August 2002 and served as our Senior Director of Medicinal Chemistry from
August 2001 to August 2002. Before joining Lexicon, Dr. Kimball spent 19 years
at the Bristol-Myers Squibb Pharmaceutical Research Institute, a research
organization dedicated to discovering and developing innovative, cost-effective
medicines, most recently as Research Fellow in the Division of Medicinal
Chemistry, Princeton, New Jersey, from June 2001 to August 2001 and as Associate
Director from May 1998 to May 2001. During his tenure at the Institute, Dr.
Kimball led several significant drug discovery and development research efforts
involving molecular targets in oncology, serine protease inhibitors of blood
coagulation and ion channel modulators for the treatment of hypertension and
angina. Dr. Kimball has been an Associate Member of the Graduate Faculty at
Rutgers University School of Pharmacy since 1989. Dr. Kimball earned a B.A. and
a Ph.D. in Organic Chemistry/Chemical Biology from the State University of New
York at Stony Brook.
Stephen J. McAndrew, Ph.D. has been our Vice President of Pharmaceutical
Business Development since January 2002. From March 1990 to December 2001, he
held increasing levels of responsibility at Bristol-Myers Squibb Company,
leading to his final position of Executive Director of Biotechnology Licensing
at the Bristol-Myers Squibb Pharmaceutical Research Institute from October 2001
to December 2001. In this position, he was primarily responsible for
identifying, evaluating and negotiating numerous preclinical lead compound
collaborations and platform technology alliances. Before his 11-year career at
Bristol-Myers Squibb, Dr. McAndrew spent seven years conducting basic research
at the Roche Institute of Molecular Biology at Hoffmann LaRoche. He received his
B.S. from State University College at Oswego, New York and holds a Ph.D. in
molecular and cellular biology from Ohio University.
Christophe Person has been our Vice President of Informatics since November
1999 and served as our Director of Informatics from May 1997 to November 1999.
From 1994 to May 1997, Mr. Person was the Senior Scientific Programmer for the
Center for Theoretical Neurosciences at Baylor College of Medicine. From 1990 to
1994, Mr. Person was the CEPH Database Manager at the Human Polymorphism Studies
Center in Paris, France. Mr. Person received his degree in Electrical
Engineering from Groupe ESTE/ESIEE (Ecole Superieure de Technologie
Electronique/Ecole Superieure d'Ingenieurs en Electrotechnique et Electronique).
S-50
PRINCIPAL STOCKHOLDERS
The following table presents information regarding the beneficial ownership
of our common stock as of July 14, 2003 by:
-- our chief executive officer and each of our four other most highly
compensated executive officers for the fiscal year ended December 31,
2002;
-- each of our directors;
-- each person, or group of affiliated persons, who is known by us to
beneficially own more than five percent of our common stock; and
-- all current directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC
computing the number of shares beneficially owned by a person and the percentage
ownership of that person. Shares of common stock under options held by that
person that are currently exercisable or exercisable within 60 days of July 14,
2003 are considered outstanding for purposes of calculating the percentage
beneficially owned by the person holding such options, but are not considered
outstanding for purposes of calculating the percentage beneficially owned by
each other person. We issued options to purchase an aggregate of 2,169,873
shares of common stock to our employees in 2002.
Except as indicated in the footnotes to this table and pursuant to state
community property laws, each stockholder named in the table has sole voting and
investment power for the shares shown as beneficially owned by such stockholder.
Percentage of ownership is based on 52,533,651 shares of common stock
outstanding on July 14, 2003 and 62,533,651 shares of common stock to be
outstanding upon completion of this offering. Unless otherwise indicated in the
footnotes, the address of each of the individuals named below is: c/o Lexicon
Genetics Incorporated, 8800 Technology Forest Place, The Woodlands, Texas 77381.
BENEFICIAL OWNERSHIP
----------------------------------------------------------
SHARES ISSUABLE
PURSUANT TO
OPTIONS PERCENTAGE PERCENTAGE
NUMBER OF EXERCISABLE BENEFICIALLY BENEFICIALLY
SHARES WITHIN OWNED OWNED
NAME AND ADDRESS OF CURRENTLY 60 DAYS OF AFTER BEFORE
BENEFICIAL OWNER OWNED JULY 14, 2003 OFFERING OFFERING
-------------------------------------- ---------- --------------- ------------ ------------
Mary H. Cain and James D. Weaver(1)... 8,002,000 8,500 12.8% 15.2%
Royce & Associates, LLC(2)............ 6,575,300 -- 10.5 12.5
Robert C. McNair(3)................... 5,949,400 -- 9.5 11.3
Baylor College of Medicine(4)......... 4,461,105 -- 7.1 8.5
Arthur T. Sands, M.D., Ph.D.(5)....... 1,032,300 2,522,490 5.5 6.5
Julia P. Gregory(6)................... 75,047 499,688 * 1.1
Jeffrey L. Wade, J.D. ................ 3,000 553,627 * 1.0
Alan J. Main, Ph.D.................... -- 282,631 * *
Brian P. Zambrowicz, Ph.D............. -- 919,019 1.4 1.7
C. Thomas Caskey, M.D.(7)............. 1,683,200 153,122 2.9 3.5
Sam L. Barker, Ph.D................... 7,000 32,500 * *
Patricia M. Cloherty.................. -- 27,500 * *
Robert J. Lefkowitz, M.D.............. -- 21,000 * *
William A. McMinn(8).................. 7,746,091 12,000 12.4 14.8
All directors and executive officers
as a group(5)(6)(7)(8)(20
persons)............................ 10,589,954 6,402,650 24.6 28.8
------------
* Represents beneficial ownership of less than 1%.
(footnotes on next page)
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(1) The number of shares beneficially owned by Mrs. Cain and Mr. Weaver includes
6,687,000 shares held by the estate of Gordon A. Cain, of which Mrs. Cain
and Mr. Weaver are co-executors and with respect to which they share voting
and investment power; 1,300,000 shares owned by the Gordon and Mary Cain
Foundation, of which Mrs. Cain is Chairman and Mr. Weaver is President and
with respect to which they share voting and investment power; and 15,000
shares owned by Mr. Weaver. The shares held by the estate of Gordon A. Cain
are subject to a proxy held by William A. McMinn, as described in note 8
below. The address for Mrs. Cain and Mr. Weaver is c/o Gordon Cain &
Associates, 8 Greenway Plaza, Suite 702, Houston, Texas 77046.
(2) Based upon a Schedule 13G filed with the SEC on February 3, 2003, reflecting
the beneficial ownership of our common stock by Royce & Associates, LLC, an
investment advisor. The address for Royce & Associates, LLC is 1414 Avenue
of the Americas, New York, New York 10019.
(3) The number of shares beneficially owned by Mr. McNair includes 4,270,000
shares held by RCM Financial Services, L.P., of which Mr. McNair owns,
directly or indirectly, all of the partnership interests, and 1,679,400
shares held by Cogene Biotech Ventures, L.P., of which Mr. McNair is
Chairman. The address for Mr. McNair is 4400 Post Oak Parkway, Suite 1400,
Houston, Texas 77027. 949,400 of these shares have been pledged to a third
party.
(4) Based upon a Schedule 13G filed with the SEC on January 15, 2003, reflecting
the beneficial ownership of our common stock by Baylor College of Medicine
and BCM Technologies, Inc., a wholly owned subsidiary of Baylor College of
Medicine. The number of shares beneficially owned includes 222,280 shares
held by BCM Technologies, Inc. The address of Baylor College of Medicine is
One Baylor Plaza, T-128, Houston, Texas 77030-3498.
(5) The number of shares beneficially owned by Dr. Sands includes 60,000 shares
held in the name of his minor children and 817,500 shares owned by Sands
Associates LP. The general partners of Sands Associates LP are ATS
Associates, L.L.C., owned by Dr. Sands, and MES Associates, L.L.C., owned by
Dr. Sands' wife.
(6) The number of shares beneficially owned by Ms. Gregory includes 6,647 shares
held in the name of her minor children and trusts for their benefit, of
which she serves as a trustee.
(7) The number of shares beneficially held by Dr. Caskey includes 1,679,400
shares held by Cogene Biotech Ventures, L.P., of which Dr. Caskey is
President and Chief Executive Officer. Dr. Caskey disclaims beneficial
ownership of these shares.
(8) The number of shares beneficially owned by Mr. McMinn includes 6,687,000
shares owned by the estate of Gordon A. Cain, which are subject to a proxy
granted to Mr. McMinn by Mr. Cain to vote these shares in the event of Mr.
Cain's incapacity or death. The proxy will terminate upon the distribution
of the shares from Mr. Cain's estate. Mr. McMinn disclaims beneficial
ownership of these shares.
S-52
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus supplement, the underwriters named
below have severally agreed to purchase, and we have agreed to sell to them,
severally, the number of shares indicated below:
NUMBER OF
NAME SHARES
---- ----------
Morgan Stanley & Co. Incorporated...........................
UBS Securities LLC..........................................
CIBC World Markets Corp. ...................................
Punk, Ziegel & Company, L.P.................................
----------
Total..................................................... 10,000,000
==========
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered by this prospectus
supplement and the accompanying prospectus are subject to the approval of
various legal matters by their counsel and to other conditions. The underwriters
are obligated to take and pay for all of the shares of common stock offered by
this prospectus supplement and the accompanying prospectus if any such shares
are taken. However, the underwriters are not required to take or pay for the
shares covered by the underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus supplement and part to certain dealers at a price that
represents a concession not in excess of $ a share under the public
offering price. Any underwriter may allow, and such dealers may reallow, a
concession not in excess of $ a share to other underwriters or to
certain dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus supplement, to purchase up to an aggregate of
1,500,000 additional shares of common stock at the public offering price set
forth on the cover page of this prospectus supplement, less underwriting
discounts and commissions. The underwriters may exercise this option solely for
the purpose of covering over-allotments, if any, made in connection with the
offering of the shares of common stock offered by this prospectus supplement and
the accompanying prospectus. To the extent the option is exercised, each
underwriter will become obligated, subject to certain conditions, to purchase
about the same percentage of the additional shares of common stock as the number
listed next to the underwriter's name in the preceding table bears to the total
number of shares of common stock listed next to the names of all underwriters in
the preceding table. If the underwriters' option is not exercised, the total
underwriters' discounts and commissions would be $ , or $ a
share. If the underwriters' option is exercised in full, the total price to the
public would be $ , or $ a share, the total underwriters'
discounts and commissions would be $ , or $ a share, and total
proceeds to us would be $ , or $ a share.
The estimated offering expenses payable by us, in addition to the
underwriting discounts and commissions, are approximately $400,000, or $.04 a
share, which includes legal, accounting and printing costs and various other
fees associated with registering and listing the common stock.
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We, our directors and executive officers and certain of our stockholders
have agreed, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, during the period ending 90 days
after the date of this prospectus supplement, not to:
-- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose
of directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for common
stock; or
-- enter into any swap or other arrangement that transfers to another,
in whole or in part, any of the economic consequences of ownership of
the common stock;
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise. The restrictions
described in this paragraph do not apply:
-- in our case, to (1) the sale of the common stock offered hereby; (2)
the issuance by us of any shares of common stock upon the exercise of
an option or warrant or the conversion of a security outstanding on
the date of this prospectus supplement; and (3) the grant of options
to purchase our common stock under our stock option plans; or
-- in the case of our directors, executive officers and stockholders, to
(1) the sale of any shares of common stock to the underwriters; (2)
the transfer of shares of common stock or other securities to an
immediate family member or any trust established for the benefit of
the transferor or an immediate family member or a corporation,
partnership, limited partnership or limited liability company wholly
owned by the transferor or any combination of the transferor and
members of his or her immediate family, provided that, in each case,
the transferee agrees in writing to be bound by the restrictions set
forth above and (3) transactions relating to shares of common stock
or other securities acquired in open market transactions after the
completion of this offering or, in certain cases, pledged to third
parties as of the date of this prospectus supplement.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may sell more shares
than they are obligated to purchase under the underwriting agreement, creating a
short position. A short sale is covered if the short position is no greater than
the number of shares available for purchase by the underwriters under the
over-allotment option. The underwriters can close out a covered short sale by
exercising the over-allotment option or purchasing shares in the open market. In
determining the source of shares to close out a covered short sale, the
underwriters will consider, among other things, the open market price of shares
compared to the price available under the over-allotment option. The
underwriters may also sell shares in excess of the over-allotment option,
creating a naked short position. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the common stock in the open market after
pricing that could adversely affect investors who purchase in the offering. As
an additional means of facilitating the offering, the underwriters may bid for,
and purchase, shares of common stock in the open market to stabilize the price
of the common stock. The underwriting syndicate may also reclaim selling
concessions allowed to an underwriter or a dealer for distributing the common
stock in the offering, if the syndicate repurchases previously distributed
common stock to cover syndicate short positions or to stabilize the price of the
common stock. These activities may raise or maintain the market price of the
common stock above independent market levels or prevent or retard a decline in
the market price of the common stock. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise. The
underwriters are not required to engage in these activities, and may end any of
these activities at any time.
The underwriters and dealers may engage in passive market making
transactions in our common stock in accordance with Rule 103 of Regulation M
promulgated by the SEC. In general, a passive market maker may not bid for, or
purchase, our common stock at a price that exceeds the highest independent bid.
In addition, the net daily purchases made by any passive market maker generally
may not exceed 30% of its average daily
S-54
trading volume in our common stock during a specified two-month prior period, or
200 shares, whichever is greater. A passive market maker must identify passive
market making bids as such on the Nasdaq electronic inter-dealer reporting
system. Passive market making may stabilize or maintain the market price of our
common stock above independent market levels. The underwriters and dealers are
not required to engage in passive market making and may end passive market
making activities at any time.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
The maximum underwriting compensation payable in connection with this
offering will not exceed 8% of the aggregate offering proceeds.
LEGAL MATTERS
Vinson & Elkins L.L.P., Houston, Texas, will pass upon the validity of the
shares of common stock offered by this prospectus supplement and the
accompanying prospectus for us. Certain legal matters in connection with this
offering will be passed upon for the underwriters by Hale and Dorr LLP, Boston,
Massachusetts.
EXPERTS
The consolidated financial statements of Lexicon Genetics Incorporated at
December 31, 2002 and for the year ended December 31, 2002, incorporated by
reference in this prospectus supplement and the accompanying prospectus, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon (which contains one explanatory paragraph describing the audit
procedures relating to certain revisions to the 2001 and 2000 financial
statements for reclassification adjustments and conforming disclosures that were
applied to revise the 2001 and 2000 financial statements described in Note 4 to
the consolidated financial statements; the 2001 and 2000 financial statements
were audited by other auditors who have ceased operations and for which Ernst &
Young LLP has expressed no opinion or other form of assurance on the 2001 and
2000 financial statements taken as a whole), and are included in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing.
The financial statements as of December 31, 2000 and 2001 and for each of
the two years in the period ended December 31, 2001, incorporated by reference
in this prospectus supplement and the accompanying prospectus, have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing. Arthur Andersen
LLP has not consented to the inclusion of their report in this prospectus
supplement and the accompanying prospectus, and we have not obtained their
consent to do so in reliance upon Rule 437a of the Securities Act. Because
Arthur Andersen LLP has not consented to the inclusion of their report in this
prospectus supplement and the accompanying prospectus, you will not be able to
recover against Arthur Andersen LLP under Section 11(a) of the Securities Act
for any untrue statement of a material fact contained in the financial
statements audited by Arthur Andersen LLP or any omission to state a material
fact required to be stated therein.
S-55
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12,000,000 Shares
(Lexicon Logo)
Lexicon Genetics Incorporated
COMMON STOCK
------------------------
WE MAY OFFER SHARES OF OUR COMMON STOCK FROM TIME TO TIME IN ONE OR MORE
OFFERINGS IN AMOUNTS, AT PRICES AND ON TERMS TO BE DETERMINED IN LIGHT OF MARKET
CONDITIONS AT THE TIME OF SALE. EACH TIME WE SELL SHARES OF OUR COMMON STOCK, WE
WILL PROVIDE A SUPPLEMENT TO THIS PROSPECTUS THAT CONTAINS SPECIFIC INFORMATION
ABOUT THE OFFERING. THE SUPPLEMENT MAY ALSO ADD, UPDATE OR CHANGE INFORMATION
CONTAINED IN THIS PROSPECTUS. YOU SHOULD CAREFULLY READ THIS PROSPECTUS AND ANY
SUPPLEMENT BEFORE YOU INVEST.
OUR COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL
"LEXG". THE LAST REPORTED SALE PRICE ON NOVEMBER 26, 2002 WAS $4.15 PER SHARE.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 2.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is December 6, 2002.
TABLE OF CONTENTS
PAGE
----
Lexicon Genetics Incorporated........ 1
Risk Factors......................... 2
Special Note Regarding
Forward-Looking Statements......... 2
Use of Proceeds...................... 2
Plan of Distribution................. 2
PAGE
----
Legal Matters........................ 4
Experts.............................. 4
Change in Independent Public
Accountants........................ 4
Where You Can Find More
Information........................ 5
Documents Incorporated by
Reference.......................... 5
------------------------
We have filed a registration statement on Form S-3 to register with the
Securities and Exchange Commission the offering of the shares described in this
prospectus. This prospectus is part of that registration statement. As allowed
by the SEC's rules, this prospectus does not contain all of the information you
can find in the registration statement or the exhibits to the registration
statement. Please see "Where You Can Find More Information" on page 5.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION CONTAINED IN THIS PROSPECTUS AND ANY
SUPPLEMENTS TO THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATES OF THEIR
RESPECTIVE COVERS OR EARLIER DATES AS SPECIFIED THEREIN, REGARDLESS OF THE TIME
OF DELIVERY OF THIS PROSPECTUS OR ANY SUPPLEMENT TO THIS PROSPECTUS OR OF ANY
SALE OF OUR COMMON STOCK.
------------------------
In this prospectus, "Lexicon," "Lexicon Genetics," "we," "us" and "our"
refer to Lexicon Genetics Incorporated and its subsidiary.
------------------------
The Lexicon name and logo, LexVision(R) and OmniBank(R) are registered
trademarks and Genome5000(TM) and e-Biology(TM) are trademarks of Lexicon
Genetics Incorporated.
LEXICON GENETICS INCORPORATED
Lexicon Genetics is a biopharmaceutical company focused on the discovery of
breakthrough treatments for human disease. We are using gene knockout technology
to systematically discover the physiological functions of genes in living
mammals, or in vivo. Our gene function discoveries fuel therapeutic discovery
programs in cancer, cardiovascular disease, immune disorders, neurological
disease, diabetes and obesity. We have established drug discovery alliances and
functional genomics collaborations with leading pharmaceutical and biotechnology
companies, research institutes and academic institutions throughout the world to
commercialize our technology and further develop our discoveries.
We generate our gene function discoveries using knockout mice -- mice whose
DNA has been altered to disrupt, or "knock out," the function of the altered
gene. Our patented gene trapping and gene targeting technologies enable us to
rapidly generate these knockout mice by altering the DNA of genes in a special
variety of mouse cells, called embryonic stem (ES) cells, which can be cloned
and used to generate mice with the altered gene. We employ an integrated
platform of advanced medical technologies to systematically discover and
validate, in vivo, the functions and pharmaceutical utility of the genes we have
knocked out and the potential targets for therapeutic intervention, or drug
targets, they encode.
We employ internal resources and drug discovery alliances to discover
potential small molecule drugs, therapeutic antibodies and therapeutic proteins
for in vivo-validated drug targets that we consider to have high pharmaceutical
value. We use our own sophisticated libraries of drug-like chemical compounds
and an industrialized medicinal chemistry platform to identify small molecule
drug candidates for our in vivo-validated drug targets. We have established
alliances with Abgenix, Inc. for the discovery and development of therapeutic
antibodies based on our drug target discoveries and with Incyte Genomics, Inc.
for the discovery and development of therapeutic proteins. In addition, we have
established collaborations and license agreements with many other leading
pharmaceutical and biotechnology companies under which we receive fees and, in
many cases, are eligible to receive milestone and royalty payments, for access
to some of our technologies and discoveries for use in their own drug discovery
efforts.
We believe that our industrialized approach of discovering and validating
drug targets in vivo, together with our capabilities in small molecule drug
discovery and the integration of our own capabilities with those of our alliance
partners in therapeutic antibody and therapeutic protein discovery, will
significantly increase our likelihood of success in discovering breakthrough
treatments for human disease. We believe our system will reduce the risk, time
and expense of discovering and developing therapeutics for new drug targets.
Together, we believe that these factors will provide us with substantial
strategic advantages in the competition to discover and develop genomics-based
pharmaceutical products.
Lexicon Genetics was incorporated in Delaware in July 1995, and commenced
operations in September 1995. Our corporate headquarters are located at 8800
Technology Forest Place, The Woodlands, Texas 77381, and our telephone number is
(281) 863-3000. Our corporate website is located at www.lexicon-genetics.com.
Information found on our website should not be considered part of this
prospectus.
1
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus and incorporated into it by reference
before purchasing our common stock. Investing in our common stock involves a
high degree of risk. For a discussion of these risks, please see:
-- Our most recent Annual Report on Form 10-K, and
-- Our other SEC filings that are incorporated by reference into this
prospectus.
For more information about our SEC filings, please see "Where You Can Find
More Information" and "Documents Incorporated By Reference" on page 5 of this
prospectus. See also "Special Note Regarding Forward-Looking Statements" below.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. We have attempted
to identify forward-looking statements by terminology including "anticipate,"
"believe," "can," "continue," "could," "estimate," "expect," "intend," "may,"
"plan," "potential," "predict," "should" or "will" or the negative of these
terms or other comparable terminology. These statements are only predictions and
involve known and unknown risks, uncertainties and other factors, including the
risks referred to under "Risk Factors," that may cause our or our industry's
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels or activity, performance or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are not under any duty to update any
of the forward-looking statements after the date of this prospectus to conform
these statements to actual results, unless required by law.
USE OF PROCEEDS
Except as otherwise described in the prospectus supplement relating to an
offering, we intend to use the net proceeds from the sale(s) of shares of our
common stock offered pursuant to this prospectus and any prospectus supplement
for research and development and general corporate purposes, including capital
expenditures and working capital needs. We may also use some or all of the net
proceeds to acquire or invest in businesses, products and technologies that are
complementary to our own.
The amounts that we actually expend for working capital purposes,
investments or acquisitions will vary significantly depending on a number of
factors, including future revenue growth, if any, the amount of cash we generate
from operations and the progress of our product development efforts.
Accordingly, our management will retain broad discretion in the allocation of
the net proceeds from the sale(s) of the offered securities. If we elect at the
time of the issuance of the securities to make different or more specific use of
proceeds other than as described in this prospectus, the change in use of
proceeds will be described in the applicable prospectus supplement.
PLAN OF DISTRIBUTION
We may sell shares of our common stock under this prospectus from time to
time in any one or more of the following ways:
- to or through underwriters;
- through brokers or dealers;
- directly to other purchasers; or
- through agents.
2
We may sell shares of our common stock under this prospectus from time to
time in one or more transactions:
- at a fixed price or prices, which may be changed;
- at market prices prevailing at the time of sale;
- at prices related to such prevailing market prices; or
- at negotiated prices.
The prospectus supplement relating to the shares of common stock will set
forth the terms of the offering of such shares, including the names or names of
any underwriters, brokers, dealers or agents, the name or names of any managing
underwriter or underwriters, the purchase price of the shares and the net
proceeds to us from such sale, any delayed delivery arrangements, any
underwriting discounts and commissions and other items constituting
underwriters' compensation, any public offering price and any discounts or
concessions allowed or reallowed or paid to dealers and any commissions paid to
agents.
If we use underwriters in the sale of shares of common stock, the
underwriters will acquire the shares for their own account. The underwriters may
resell the shares from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of sale. Underwriters may offer shares to the public
either through underwriting syndicates represented by one or more managing
underwriters or directly by one or more firms acting as underwriters. Unless we
inform you otherwise in the prospectus supplement, the obligations of the
underwriters to purchase the shares will be subject to certain conditions, and
the underwriters will be obligated to purchase all of the offered shares if they
purchase any of them. The underwriters may change from time to time any public
offering price and any discounts or concessions allowed or reallowed or paid to
dealers.
In connection with the sale of shares of our common stock, underwriters,
brokers, dealers or agents may receive compensation from us or purchasers of
securities for whom they may act as agents, in the form of discounts,
concessions or commissions. Underwriters, dealers and agents that participate in
the distribution of our common stock may be deemed to be underwriters, and any
discounts or commissions received by them from us and any profit on the resale
of securities by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933. Any person who may be deemed to be an
underwriter will be identified, and the compensation received from us will be
described, in the prospectus supplement.
During and after an offering through underwriters, the underwriters may
purchase and sell the securities in the open market. These transactions may
include over-allotment and stabilizing transactions and purchases to cover
syndicate short positions created in connection with the offering. The
underwriters may also impose a penalty bid, whereby selling concessions allowed
to syndicate members or other broker-dealers for the securities sold for their
account may be reclaimed by the syndicate if those securities are repurchased by
the syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the securities,
which may be higher than the price that might otherwise prevail in the open
market, and, if commenced, may be discontinued at any time.
If dealers or brokers acting as dealers are used in the sale of the shares
of common stock, we will sell the shares to such dealers or brokers as
principals. The dealers or brokers acting as dealers may then resell such shares
to the public at varying prices to be determined by such dealers or brokers at
the time of resale. The names of dealers or brokers acting as dealers and the
terms of the transaction will be set forth in the prospectus supplement relating
to such shares. We may sell the shares of common stock directly or through
agents designated by us from time to time. Any agent involved in the offer or
sale of the shares will be named, and any commissions that we pay to such agent
will be set forth, in the prospectus supplement relating to such shares. Unless
otherwise indicated in the prospectus supplement, any such agent will be acting
on a best efforts basis for the period of its appointment.
We may sell shares of common stock directly. In this case, no underwriters
or agents would be involved. We may sell shares directly to institutional
investors or others who may be deemed to be underwriters within the meaning of
the Securities Act of 1933 with respect to any sale of those shares.
3
If so indicated in the prospectus supplement, we will authorize agents,
underwriters, brokers or dealers to solicit offers from certain types of
institutions to purchase shares of common stock at the public offering price set
forth in the prospectus supplement pursuant to delayed delivery contracts
providing for payment and delivery on a specified date in the future. Such
contracts will be subject only to those conditions set forth in the prospectus
supplement, and the prospectus supplement will set forth also the commission
payable for solicitation of such contracts.
We may have agreements with the underwriters, dealers and agents to
indemnify them against specific civil liabilities, including liabilities under
the Securities Act of 1933, or to contribute with respect to payments which the
underwriters, dealers or agents may be required to make as a result of those
specific civil liabilities.
Underwriters and agents and their affiliates may be customers of, engage in
transactions with, or perform services for us or our subsidiaries in the
ordinary course of their businesses.
LEGAL MATTERS
The validity of the issuance of the common stock offered by this prospectus
will be passed upon for us by Vinson & Elkins L.L.P., Houston, Texas.
EXPERTS
The financial statements, as of December 31, 2000 and 2001, and for each of
the three years in the period ended December 31, 2001, incorporated by reference
in this prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report. Arthur Andersen LLP has not consented to the inclusion of their report
in this prospectus, and we have not obtained their consent to do so in reliance
upon Rule 437a of the Securities Act of 1933. Because Arthur Andersen LLP has
not consented to the inclusion of their report in this prospectus, you will not
be able to recover against Arthur Andersen LLP under Section 11(a) of the
Securities Act for any untrue statements of a material fact contained in the
financial statements audited by Arthur Andersen LLP or any omissions to state a
material fact required to be stated therein.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
On March 26, 2002, our Board of Directors and Audit Committee dismissed
Arthur Andersen LLP as our independent public accountants and engaged Ernst &
Young LLP to serve as our independent public accountants for the year ending
December 31, 2002. The appointment of Ernst & Young was ratified at our 2002
annual meeting of stockholders held on May 8, 2002.
Arthur Andersen LLP's reports on our consolidated financial statements for
the years ended December 31, 2001 and 2000 did not contain an adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles.
During the years ended December 31, 2001 and 2000 and through March 26,
2002, there were no disagreements with Arthur Andersen LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which, if not resolved to Arthur Andersen LLP's satisfaction,
would have caused them to make reference to the subject matter in connection
with their report on our consolidated financial statements for such years; and
there were no reportable events as defined in Item 304(a)(1)(v) of Regulation
S-K.
We provided Arthur Andersen LLP with a copy of the foregoing disclosures.
Attached as Exhibit 16.1 to our report on Form 8-K dated March 29, 2002, which
is incorporated into this registration statement by reference, is a copy of
Arthur Andersen LLP's letter, dated March 29, 2002, stating its agreement with
such statements.
4
During the two-year period ended December 31, 2001 and through the date of
the Board of Directors' decision, we did not consult Ernst & Young LLP with
respect to the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on our consolidated financial statements, or any other matters or
reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-3 under the Securities Act of 1933 regarding our offering
and sale of shares of our common stock by this prospectus. This prospectus,
which constitutes a part of that registration statement, does not contain all of
the information contained in the registration statement or the exhibits to the
registration statement, as permitted by the rules and regulations of the SEC.
For further information about us and our common stock, please review the
registration statement and the exhibits filed as a part of it. Statements made
in this prospectus that describe documents may not necessarily be complete. We
recommend that you review the documents that we have filed with the registration
statement to obtain a more complete understanding of these documents. A copy of
the registration statement, including the exhibits filed as a part of it, may be
inspected at the SEC's Public Reference Room, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of all or any part of the registration
statement may be obtained from the SEC upon the payment of fees prescribed by
it. You may obtain information on the Public Reference Room by calling the SEC
at 1-800-SEC-0330. The SEC maintains a Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding companies that file electronically with it.
We are subject to the information and reporting requirements of the
Securities Exchange Act of 1934 and will file periodic reports, proxy statements
and other information with the SEC. You may inspect any of these documents as
described in the preceding paragraph. These reports, proxy statements and other
information may also be inspected at the offices of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.
DOCUMENTS INCORPORATED BY REFERENCE
The Securities and Exchange Commission allows us to "incorporate by
reference" into this prospectus information that we file with the SEC in other
documents. This means that we can disclose important information to you by
referring to other documents that contain that information. The information
incorporated by reference is considered to be part of this prospectus, except
for information superseded by information in this prospectus. Information that
we file later with the SEC will automatically update and supercede the
information incorporated by reference in this prospectus. We incorporate by
reference the documents listed below that we have previously filed with the SEC
and any future filings we make with the SEC under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, prior to the termination of the
offering of the securities covered by this prospectus:
-- our annual report on Form 10-K for the year ended December 31, 2001;
-- our quarterly reports on Form 10-Q for the quarterly periods ended
March 31, 2002, June 30, 2002 and September 30, 2002;
-- our current report on Form 8-K dated March 29, 2002; and
-- the description of our common stock contained in our registration
statement on Form 8-A filed with the Commission on March 27, 2000
pursuant to Section 12 of the Securities Exchange Act of 1934,
including any amendments and reports filed for the purpose of
updating such description.
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this prospectus will be deemed to be modified or
superseded for purposes of this prospectus to the extent that a statement
contained in this prospectus or in any other subsequently filed document which
also is or is deemed to be incorporated by reference in this prospectus modifies
or supersedes that statement. Any statement that is modified or superseded will
not constitute a part of this prospectus, except as so modified or superseded.
5
Upon your written or oral request, we will provide you at no cost a copy of
any or all of the documents incorporated by reference in this prospectus, other
than the exhibits to those documents, unless the exhibits are specifically
incorporated by reference into this prospectus. You may request a copy of these
documents by contacting:
Investor Relations
Lexicon Genetics Incorporated
8800 Technology Forest Place
The Woodlands, Texas 77381-1160
Telephone: (281) 863-3000
6
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