ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations as of March 31, 2009 and for the three-month periods ended March 31, 2009 and 2008 should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto set forth in Item 1 of this report.
This quarterly report on Form 10-Q contains forward-looking statements, including our expectations of future industry conditions, strategic plans and forecasts of operational results. Various risks may cause our actual results to differ materially. A description of some of the risks and uncertainties is contained below and in the risk factors referred to in Part II, Item 1A.
Overview
Headquartered in Reykjavik, Iceland, DECODE is a bio-pharmaceutical company developing and marketing products to improve the treatment, diagnosis and prevention of common diseases. DECODE applies its discoveries in human genetics to bring to market DA-based reference laboratory tests and consumer genome analysis services to assess individual risk of common diseases and applies its capabilities in chemistry and structural biology to the development of drugs in major therapeutic areas.
In the context of limited financial resources the Company's principal focus continues to be to maximize near-term value creation, utilizing our success in gene discovery to advance the commercial opportunities in our diagnostics and deCODEme (TM) businesses. We are also pursuing partnerships that provide a parallel means of capturing the commercial potential of the intellectual property coming out of our gene discovery work. In April 2009 we entered into non-exclusive, worldwide licensing agreements with Celera, Inc., under which Celera can incorporate our genetic markers for risk of certain cardiovascular and metabolic diseases into Celera's risk assessment tests and services, and for which we have received an upfront payment and will receive royalties on sales of products utilizing our Celera markers. We have been seeking to continue the development of our therapeutics programs through partnerships and have select advanced preclinical programs while employing our drug discovery capabilities to generate service contract revenue.
At March 31, 2009, we had liquid funds available for operating activities (cash and cash equivalents) of $ 6.1 million as compared to $ 3.7 million at December 31, 2008. The net utilization of cash in operating activities for the quarter ended March 31, 2009 was $ 8.2 million as compared to $ 20.0 million during the quarter ended March 31, 2008 and $ 54.5 million during the year ended December 31, 2008. In January 2009, we transferred our Auction Rate Securities (ARS) to an Icelandic financial institution for an aggregate price of approximately $ 11.3 million. This transaction has been accounted for as a secured borrowing. In April 2009 we entered into a licensing deal with Celera Corporation ( "Celera") which provided us with a $ 10.0 million upfront payment. With the collateralized borrowing and the licensing deal with Celera we believe we have sufficient funds to sustain our operations only through the second quarter of 2009. DECODE's management and the Board of Directors are exploring a variety of possibilities for obtaining additional funds, including partnerships similar to that recently announced with Celera. However, if DECODE is unable to raise additional capital through one or more of these options, it will be able to continue operations through the second quarter of 2009 and thereafter may be forced to discontinue its operations and liquidated its remaining assets.
Diagnostics. We are applying our expertise and unique discoveries in human genetics and genotyping to the development of reference laboratory DNA-based tests for assessing individual risk of a growing range of common diseases. Since April 2007 we have launched six reference laboratory DNA-based diagnostic tests to detect single-letter variations in the human genome (called SNPs) that we have linked to increased risk of several common diseases:
* DECODE T2 (TM) - which detects SNPs we discovered to be associated with increased risk of type 2 diabetes.
* DECODE AF (TM) - which detects SNPSs we discovered to be associated with increased risk of stroke and atrial Fibrillation
* DECODE MI (TM) - which detects SNPs we discovered to be associated with early-onset heart attack (myocardial infarction, or MI)
* DECODE ProstateCancer (TM) - which detects SNPs we have linked to increased risk of prostate cancer
* DECODE Glaucoma (TM) - which detects SNPs we have linked to increased risk of exfoliation glaucoma
* DECODE BreastCancer (TM) - which detects SNPs we and others have linked to risk of the most common forms of breast cancer
Beginning in 2008, DECODE initiated billing to commercial insurance companies on behalf of physicians ordering these tests and has received reimbursement from several health insurance companies. All of our diagnostic tests are offered by DECODE via direct sales efforts to physicians in the United States, through marketing collaborations with other organizations in the U.S. and other countries, as well as through our dedicated website diagnostics, www.decodediagnostics.com. DECODE also has an alliance with Illumina, Inc. to develop DNA-based diagnostic kits utilizing DECODE's gene discoveries in certain diseases and Illumina's platform for SNP genotyping.
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In April 2009, we entered into non-exclusive, worldwide licensing agreements with Celera, mentioned above, and we are exploring similar opportunities as a pathway to complement our own diagnostics business, commercial deriving additional value from our intellectual property by leveraging third-party marketing and outreach.
deCODEme (TM). In November 2007, we launched the first consumer genetic analysis service: deCODEme (TM). This service takes advantage of DECODE's leadership in human genetics and the capabilities of its high-throughput genotyping laboratory, which is CLIA registered for analytical and clinical validation. Through deCODEme (TM), subscribers can put themselves in the context of the latest discoveries in genetics, learning what their own DNA says about their ancestry and certain physical traits, as well as whether they have genetic variants that have been associated with higher or lower than average risk of a range of common diseases. This information is continually updated as new discoveries are made, and is presented in subscribers' secure individual web pages. Recently, we launched two focused disease scans, deCODEme Cardio (TM) for cardiovascular-related diseases and deCODEme Cancer (TM) for several common types of cancer. These scans offer subscribers an opportunity to understand their risk of groups of diseases that may be of particular interest without ordering the full genome scan. deCODEme (TM) products are offered through a dedicated website, www.decodeme.com.
Drug Discovery and Development. The expertise of our chemistry and structural biology units enables us to discover novel small-molecule therapeutic compounds targeted pathways identified by us or against novel targets identified by us in known pathways, take candidate compounds through pre-clinical testing, and manufacture sufficient quantities for early -stage clinical trials. Our integrated approach to medicinal chemistry and protein crystallography have helped us to discover compounds that bind selectively to our targets and at sites that may offer better safety and tolerability profiles than existing compounds for certain indications. DECODE is actively exploring drug development partnerships and out-licensing opportunities in order to advance the development of its therapeutics programs.
Our lead drug development programs include:
* DG041 for the prevention of arterial thrombosis. DG041 is our novel, first-in-class antagonist of the EP3 receptor for Prostaglandins E2, which we are developing as a next-generation oral anti-platelet therapy aimed at preventing arterial thrombosis without increasing bleeding risk.
* DG051 and DG031 for the prevention of heart attack. We have completed Phase I and Phase IIa clinical studies for DG051, our leukotriene A4 hydrolase (LTA4H) inhibitor being developed for the prevention of heart attack. We successfully completed our reformulation of DG031, our Phase III 5-lipoxygenase activating protein (FLAP) inhibitor, in-licensed from a third party and which is also being developed for the prevention of heart attack.
* DG071 for Alzheimer's and other cognitive disorders. In October 2008 we filed an investigational new drug (IND) application for DG071, a novel small-molecule modulator of phosphodiesterase 4 (PDE4), being developed for Alzheimer's and other cognitive disorders.
For our most significant research and development programs we have cumulatively invested $ 47.5 million, $ 24.5 million and $ 16.0 million in our heart attack (myocardial infarction, or MI), arterial thrombosis and stroke programs, respectively, from the beginning of 2003 to date (March 31 , 2009). Inception to-date costs are not available as these costs were not historically tracked by program.
Contract genotyping services
At our research facility in Reykjavik, we have one of the largest and most advanced genotyping laboratory in the world. We have extensive expertise in microsatellite genotyping and also conduct genome-wide single nucleotide polymorphisms (SNP) association analyzes. We utilize these capabilities for both in-house gene discovery work and contract genotyping services to fee paying customers. We have in place efficient, automated systems for all stages of the genotyping process, from DNA isolation and amplification to plate preparation and the generation, storage and analysis of volumes of genotypic data. Our customers for genotyping services include pharmaceutical companies, research consortia and academic institutions. Our reference laboratory is Clinical Laboratory Improvement Act of 1998 as amended (CLIA) registered.
Drug discovery and development services
In order to offset the cost of maintaining its proprietary drug development infrastructure, DECODE utilizes its capabilities in chemistry, structural biology and clinical trials to offer contract services to fee-paying customers, principally pharmaceutical and biotechnology companies.
* Our chemistry subsidiary, DECODE chemistry, Inc., based in Woodridge, Illinois, provides a full range of drug discovery technology and services using multiple integrated high-throughput technologies to streamline the drug discovery process.
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* Our structural biology subsidiary, DECODE biostructures, Inc., based in Bainbridge Island, near Seattle, determines three-dimensional X-ray crystal structures of target proteins for structure-based drug design and development.
* Our proteomics tools subsidiary, Emerald Biosystems, Inc., based in Bainbridge Island, commercializes a series of instruments, consumables and software products for structural proteomics research.
Results of Operations for the Three-Month Periods Ended March 31, 2009 and 2008
This Management's Discussion and Analysis of Financial Condition and Results of Operations as of March 31, 2009 and for the three-month periods ended March 31, 2009 and 2008 should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto set forth in Item 1 of this report.
This quarterly report on Form 10-Q contains forward-looking statements, including our expectations of future industry conditions, strategic plans and forecasts of operational results. Various risks may cause our actual results to differ materially. A description of some of the risks and uncertainties is contained below and in the risk factors referred to in Part II, Item 1A.
Overview
Headquartered in Reykjavik, Iceland, DECODE is a bio-pharmaceutical company developing and marketing products to improve the treatment, diagnosis and prevention of common diseases. DECODE applies its discoveries in human genetics to bring to market DA-based reference laboratory tests and consumer genome analysis services to assess individual risk of common diseases and applies its capabilities in chemistry and structural biology to the development of drugs in major therapeutic areas.
In the context of limited financial resources the Company's principal focus continues to be to maximize near-term value creation, utilizing our success in gene discovery to advance the commercial opportunities in our diagnostics and deCODEme (TM) businesses. We are also pursuing partnerships that provide a parallel means of capturing the commercial potential of the intellectual property coming out of our gene discovery work. In April 2009 we entered into non-exclusive, worldwide licensing agreements with Celera, Inc., under which Celera can incorporate our genetic markers for risk of certain cardiovascular and metabolic diseases into Celera's risk assessment tests and services, and for which we have received an upfront payment and will receive royalties on sales of products utilizing our Celera markers. We have been seeking to continue the development of our therapeutics programs through partnerships and have select advanced preclinical programs while employing our drug discovery capabilities to generate service contract revenue.
At March 31, 2009, we had liquid funds available for operating activities (cash and cash equivalents) of $ 6.1 million as compared to $ 3.7 million at December 31, 2008. The net utilization of cash in operating activities for the quarter ended March 31, 2009 was $ 8.2 million as compared to $ 20.0 million during the quarter ended March 31, 2008 and $ 54.5 million during the year ended December 31, 2008. In January 2009, we transferred our Auction Rate Securities (ARS) to an Icelandic financial institution for an aggregate price of approximately $ 11.3 million. This transaction has been accounted for as a secured borrowing. In April 2009 we entered into a licensing deal with Celera Corporation ( "Celera") which provided us with a $ 10.0 million upfront payment. With the collateralized borrowing and the licensing deal with Celera we believe we have sufficient funds to sustain our operations only through the second quarter of 2009. DECODE's management and the Board of Directors are exploring a variety of possibilities for obtaining additional funds, including partnerships similar to that recently announced with Celera. However, if DECODE is unable to raise additional capital through one or more of these options, it will be able to continue operations through the second quarter of 2009 and thereafter may be forced to discontinue its operations and liquidated its remaining assets.
Diagnostics. We are applying our expertise and unique discoveries in human genetics and genotyping to the development of reference laboratory DNA-based tests for assessing individual risk of a growing range of common diseases. Since April 2007 we have launched six reference laboratory DNA-based diagnostic tests to detect single-letter variations in the human genome (called SNPs) that we have linked to increased risk of several common diseases:
* DECODE T2 (TM) - which detects SNPs we discovered to be associated with increased risk of type 2 diabetes.
* DECODE AF (TM) - which detects SNPSs we discovered to be associated with increased risk of stroke and atrial Fibrillation
* DECODE MI (TM) - which detects SNPs we discovered to be associated with early-onset heart attack (myocardial infarction, or MI)
* DECODE ProstateCancer (TM) - which detects SNPs we have linked to increased risk of prostate cancer
* DECODE Glaucoma (TM) - which detects SNPs we have linked to increased risk of exfoliation glaucoma
* DECODE BreastCancer (TM) - which detects SNPs we and others have linked to risk of the most common forms of breast cancer
Beginning in 2008, DECODE initiated billing to commercial insurance companies on behalf of physicians ordering these tests and has received reimbursement from several health insurance companies. All of our diagnostic tests are offered by DECODE via direct sales efforts to physicians in the United States, through marketing collaborations with other organizations in the U.S. and other countries, as well as through our dedicated website diagnostics, www.decodediagnostics.com. DECODE also has an alliance with Illumina, Inc. to develop DNA-based diagnostic kits utilizing DECODE's gene discoveries in certain diseases and Illumina's platform for SNP genotyping.
Table of Contents
In April 2009, we entered into non-exclusive, worldwide licensing agreements with Celera, mentioned above, and we are exploring similar opportunities as a pathway to complement our own diagnostics business, commercial deriving additional value from our intellectual property by leveraging third-party marketing and outreach.
deCODEme (TM). In November 2007, we launched the first consumer genetic analysis service: deCODEme (TM). This service takes advantage of DECODE's leadership in human genetics and the capabilities of its high-throughput genotyping laboratory, which is CLIA registered for analytical and clinical validation. Through deCODEme (TM), subscribers can put themselves in the context of the latest discoveries in genetics, learning what their own DNA says about their ancestry and certain physical traits, as well as whether they have genetic variants that have been associated with higher or lower than average risk of a range of common diseases. This information is continually updated as new discoveries are made, and is presented in subscribers' secure individual web pages. Recently, we launched two focused disease scans, deCODEme Cardio (TM) for cardiovascular-related diseases and deCODEme Cancer (TM) for several common types of cancer. These scans offer subscribers an opportunity to understand their risk of groups of diseases that may be of particular interest without ordering the full genome scan. deCODEme (TM) products are offered through a dedicated website, www.decodeme.com.
Drug Discovery and Development. The expertise of our chemistry and structural biology units enables us to discover novel small-molecule therapeutic compounds targeted pathways identified by us or against novel targets identified by us in known pathways, take candidate compounds through pre-clinical testing, and manufacture sufficient quantities for early -stage clinical trials. Our integrated approach to medicinal chemistry and protein crystallography have helped us to discover compounds that bind selectively to our targets and at sites that may offer better safety and tolerability profiles than existing compounds for certain indications. DECODE is actively exploring drug development partnerships and out-licensing opportunities in order to advance the development of its therapeutics programs.
Our lead drug development programs include:
* DG041 for the prevention of arterial thrombosis. DG041 is our novel, first-in-class antagonist of the EP3 receptor for Prostaglandins E2, which we are developing as a next-generation oral anti-platelet therapy aimed at preventing arterial thrombosis without increasing bleeding risk.
* DG051 and DG031 for the prevention of heart attack. We have completed Phase I and Phase IIa clinical studies for DG051, our leukotriene A4 hydrolase (LTA4H) inhibitor being developed for the prevention of heart attack. We successfully completed our reformulation of DG031, our Phase III 5-lipoxygenase activating protein (FLAP) inhibitor, in-licensed from a third party and which is also being developed for the prevention of heart attack.
* DG071 for Alzheimer's and other cognitive disorders. In October 2008 we filed an investigational new drug (IND) application for DG071, a novel small-molecule modulator of phosphodiesterase 4 (PDE4), being developed for Alzheimer's and other cognitive disorders.
For our most significant research and development programs we have cumulatively invested $ 47.5 million, $ 24.5 million and $ 16.0 million in our heart attack (myocardial infarction, or MI), arterial thrombosis and stroke programs, respectively, from the beginning of 2003 to date (March 31 , 2009). Inception to-date costs are not available as these costs were not historically tracked by program.
Contract genotyping services
At our research facility in Reykjavik, we have one of the largest and most advanced genotyping laboratory in the world. We have extensive expertise in microsatellite genotyping and also conduct genome-wide single nucleotide polymorphisms (SNP) association analyzes. We utilize these capabilities for both in-house gene discovery work and contract genotyping services to fee paying customers. We have in place efficient, automated systems for all stages of the genotyping process, from DNA isolation and amplification to plate preparation and the generation, storage and analysis of volumes of genotypic data. Our customers for genotyping services include pharmaceutical companies, research consortia and academic institutions. Our reference laboratory is Clinical Laboratory Improvement Act of 1998 as amended (CLIA) registered.
Drug discovery and development services
In order to offset the cost of maintaining its proprietary drug development infrastructure, DECODE utilizes its capabilities in chemistry, structural biology and clinical trials to offer contract services to fee-paying customers, principally pharmaceutical and biotechnology companies.
* Our chemistry subsidiary, DECODE chemistry, Inc., based in Woodridge, Illinois, provides a full range of drug discovery technology and services using multiple integrated high-throughput technologies to streamline the drug discovery process.
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* Our structural biology subsidiary, DECODE biostructures, Inc., based in Bainbridge Island, near Seattle, determines three-dimensional X-ray crystal structures of target proteins for structure-based drug design and development.
* Our proteomics tools subsidiary, Emerald Biosystems, Inc., based in Bainbridge Island, commercializes a series of instruments, consumables and software products for structural proteomics research.
Results of Operations for the Three-Month Periods Ended March 31, 2009 and 2008
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