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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________________ to __________________.
Commission file number 0-22170
EPOCH BIOSCIENCES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 91-1311592
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21720 23rd Drive SE, #150, Bothell, WA 98021
(Address of principal executive office, including zip code)
(425) 482-5555
(Issuer's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
YES X NO
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Class Outstanding at May 7, 2000
---------------------------- --------------------------
Common Stock, $.01 par value 25,639,677
Page 1 of 16
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EPOCH BIOSCIENCES, INC.
INDEX TO FORM 10-Q
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements........................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................... 15
Note: Items 1, 2, 3, 4, and 5 are omitted, as they are
not applicable.
Signature ................................................................ 16
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EPOCH BIOSCIENCES, INC.
BALANCE SHEETS
(unaudited)
ASSETS
DECEMBER 31, MARCH 31,
2000 2001
------------ ------------
Current assets:
Cash and cash equivalents ........................... $ 12,122,461 $ 8,958,977
Accounts receivable ................................. 197,686 736,735
Inventory ........................................... 77,201 188,426
Prepaid expenses and other assets ................... 340,782 310,299
------------ ------------
Total current assets .............................. 12,738,130 10,194,437
Property and equipment, net ........................... 3,596,652 3,665,292
Intangible assets, net ................................ 3,938,453 3,837,027
Restricted cash ....................................... 629,622 640,724
Other assets .......................................... 31,905 30,790
------------ ------------
Total assets ...................................... $ 20,934,762 $ 18,368,270
============ ============
Current liabilities:
Accounts payable .................................... $ 1,651,173 $ 236,497
Accrued liabilities ................................. 793,506 601,913
Deferred revenue - current portion .................. 337,611 337,611
Obligations under capital leases - current portion .. 32,889 24,579
------------ ------------
Total current liabilities ......................... 2,815,179 1,200,600
Deferred revenue - less current portion ............... 2,040,578 1,980,322
Deferred rent ......................................... -- 52,461
Obligations under capital leases - less current portion 18,602 14,313
Stockholders' equity:
Preferred stock, par value $.01; 10,000,000 shares
authorized; no shares issued and outstanding ...... -- --
Common stock, par value $.01; 50,000,000 shares
authorized; shares issued and outstanding:
24,969,118 at December 31, 2000 and 25,610,117
at March 31, 2001 ................................. 249,691 256,101
Additional paid-in capital .......................... 82,302,448 82,649,384
Deferred compensation ............................... (63,922) (51,934)
Accumulated deficit ................................. (66,427,814) (67,732,977)
------------ ------------
Total stockholders' equity ........................ 16,060,403 15,120,574
------------ ------------
Total liabilities and stockholders' equity ........ $ 20,934,762 $ 18,368,270
============ ============
See accompanying notes to financial statements.
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EPOCH BIOSCIENCES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 2001
------------ ------------
Revenue:
Product sales ........................ $ 85,200 $ 1,021,243
License fees and royalty income ...... 13,186 28,152
Contract research revenue ............ -- 500,000
------------ ------------
Total revenue ...................... 98,386 1,549,395
Operating expenses:
Cost of product sales ................ 17,040 878,728
Research and development ............. 832,324 1,131,789
Selling, general and administrative .. 601,606 1,002,778
------------ ------------
Total operating expenses ........... 1,450,970 3,013,295
Operating loss ..................... (1,352,584) (1,463,900)
Interest income, net ................... 126,190 158,737
------------ ------------
Net loss ........................... $ (1,226,394) $ (1,305,163)
============ ============
Net loss per share - basic and diluted . $ (0.06) $ (0.05)
============ ============
Weighted average number of common shares
outstanding - basic and diluted ...... 21,518,898 25,434,684
See accompanying notes to financial statements.
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EPOCH BIOSCIENCES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------
2000 2001
------------ ------------
Cash flows from operating activities:
Net loss ........................................... $ (1,226,394) $ (1,305,163)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization:
Property and equipment ......................... 35,325 161,746
Intangible assets .............................. -- 101,426
Deferred compensation .......................... 11,988 11,988
Issuance of common stock warrants for services ... -- 3,001
Interest accrued on restricted cash .............. (2,807) (11,102)
Deferred revenue ................................. (13,186) (60,256)
Deferred rent .................................... -- 52,461
Changes in operating assets and liabilities, net
of acquisition:
Accounts receivable ............................ (85,072) (539,049)
Inventory ...................................... -- (111,225)
Prepaid expenses and other assets .............. 14,036 31,598
Accounts payable ............................... 50,488 (151,676)
Accrued liabilities ............................ 109,383 (83,901)
------------ ------------
Net cash used in operating activities ........ (1,106,239) (1,900,152)
------------ ------------
Cash flows from investing activities:
Security deposit on new facilities ............... (592,893) --
Acquisition of property and equipment ............ (98,232) (1,243,386)
Acquisition of Synthetic Genetics ................ -- (357,692)
------------ ------------
Net cash used in investing activities ........ (691,125) (1,601,078)
Cash flows from financing activities:
Repayment of capital leases ...................... -- (12,599)
Proceeds from sale of common stock ............... 10,000,039 --
Proceeds from exercise of warrants ............... 8,318,302 332,376
Proceeds from exercise of stock options .......... 54,833 17,969
------------ ------------
Net cash provided by financing activities .... 18,373,174 337,746
------------ ------------
Net increase (decrease) in cash and cash equivalents 16,575,810 (3,163,484)
Cash and cash equivalents at beginning of period ... 1,772,274 12,122,461
------------ ------------
Cash and cash equivalents at end of period ......... $ 18,348,084 $ 8,958,977
============ ============
Supplemental disclosure of cash flow information -
Interest payments ................................ $ 155 $ 4,173
============ ============
See accompanying notes to financial statements.
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EPOCH BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
Epoch Biosciences, Inc. is developing and commercializing proprietary
technologies to enhance the study of genes. Our scientists are applying their
expertise in nucleic acid chemistry to develop products that improve current
methods of studying the genetic sequence, or genomes, of humans, animals and
plants. Our technology is based on our expertise in DNA chemistry, which allows
us to design, synthesize and modify synthetic DNA strands, or probes, that
selectively bind to the gene being studied. Using our DNA technology, we are
developing molecular tools and chemical compounds for improved genetic analysis.
We also manufacture and distribute specialty oligonucleotides through our San
Diego facility.
We have adapted our chemical compounds and techniques to genetic analysis
systems developed by Applied Biosystems and Third Wave Technologies. Our
technology has broad potential in the developing field of genomics, or the study
of genes. Applications include the detection of infectious diseases, diagnosis
of inheritable diseases through prenatal testing, screening populations to
identify genetic markers that correlate with disease risk or drug response, as
well as any other genetic analysis based on DNA sequence determination.
Our technologies are compatible with many of the genetic analysis systems
currently in use or in development. Just as microprocessors are found in
essentially all electronic appliances, our chemistries and technologies have the
potential to be incorporated in all genetic analysis systems.
(b) BASIS OF PRESENTATION
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required to be presented for complete financial
statements. The accompanying financial statements include all adjustments
(consisting only of normal recurring accruals), which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. Certain 2000 balances have been reclassified to conform with
the 2001 presentation.
The financial statements and related disclosures have been prepared with
the presumption that users of the interim financial information have read or
have access to the audited financial statements for the preceding fiscal year.
Accordingly, these financial statements should be read in conjunction with the
audited financial statements and the related notes included in Epoch's 2000
Annual Report on Form 10-KSB as filed with the Securities and Exchange
Commission.
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(c) LOSS PER SHARE
Basic loss per share is computed based on weighted average shares
outstanding during the reporting period and excludes any potential dilution.
Diluted loss per share reflects potential dilution from the exercise or
conversion of securities into common stock or from other contracts to issue
common stock. Our capital structure includes common stock options and common
stock warrants, all of which have been excluded from net loss per share
calculations as they are antidilutive, as follows:
AT MARCH 31,
------------------------
2000 2001
--------- ---------
Outstanding options 1,571,166 2,123,194
Outstanding warrants 2,020,590 883,333
(d) REVENUE RECOGNITION
We earn product revenues through sales of chemical products and reagents to
manufacturers for incorporation into their products, from the sale of specialty
oligonucleotides to end users in the research fields of genomics and molecular
diagnostics, from license fees for the use of our proprietary technology and
know-how, and by providing services to third parties for performing research and
development on their behalf. We also have product royalty agreements that result
in royalties to us upon ultimate sales of products by our partners.
Revenues from product sales that require no ongoing obligations are
recognized when shipped to the customer and title has passed.
Up front license fees are recognized over the term of the agreement to
which the license fees correspond, which may extend to the expiration of the
underlying patents, and based on the terms and future performance obligations in
the underlying agreements. Deferred revenue principally represents license fees
received in advance.
Contract research revenues are recognized as the research and development
activities are performed under the terms of commercial collaboration and supply
agreements and government grants. Direct costs related to these contracts and
grants are reported as research and development expenses.
Royalty revenues are recognized when earned under the terms of the related
agreements, which is generally upon sale of products containing our component
products by our partner.
(e) CONCENTRATION OF CREDIT RISK
Credit is extended based on an evaluation of a customer's financial
condition and collateral is generally not required. The majority of revenues are
derived from private and public companies and public enterprises in the research
market in the United States.
One customer accounted for approximately 53% of revenues in the current
quarter and 100% of revenues in the comparable quarter of the prior year.
Accounts receivable from this customer amounted to $654,000 at March 31, 2001,
and $37,000 at December 31, 2000.
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2. SYNTHETIC GENETICS ACQUISITION
The Company acquired the assets of Synthetic Genetics, a provider of
specialty oligonucleotides in San Diego California, on November 15, 2000 in a
transaction accounted for as a purchase business combination. Accordingly, the
assets and liabilities of Synthetic Genetics were recorded at their estimated
fair values at the acquisition date, and the results of Synthetic Genetics
operations included in the Company's results from the acquisition date. The
purchase price amounted to $3,788,194.
The following summary, prepared on a pro forma basis, presents the combined
results of operations for the three months ended March 31, 2000 as if the
acquisition had been consummated as of January 1, 2000, after including the
impact of certain adjustments such as depreciation and amortization on assets
acquired.
Revenues $ 512,678
Net loss (1,345,225)
Net loss per share $ (0.06)
The pro forma results are not necessarily indicative of what actually might
have occurred if the acquisition had been completed as of the beginning of the
period presented. In addition, they are not intended to be a projection of
future results of operations and do not reflect any of the synergies that might
be achieved from combined operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. That
Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about themselves so long as they
identify these statements as forward-looking and provide meaningful, cautionary
statements identifying important factors that could cause actual results to
differ from the projected results.
Other than statements of historical fact, all statements in this Quarterly
Report on Form 10-Q and, in particular, any projections of or statements as to
our expectations or beliefs concerning our future financial performance or
financial position or as to future trends in our business or in our markets, are
forward-looking statements. Forward-looking statements reflect our current
expectations and are inherently uncertain and our actual results in future
periods may differ materially from our expectations concerning our projections
of those results or of future business trends described in this Quarterly Report
on Form 10-Q. The sections below entitled "Certain Factors that May Affect Our
Business and Future Results" under Item 2, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," describe some, but not all,
of the factors, risks and uncertainties that could cause these differences,
including but not limited to the possibility that potential products utilizing
the Company's technology may be ineffective or, although effective, may be
uneconomical to market; that third parties hold proprietary rights that preclude
Epoch or its licensees from marketing its products; or that third parties may
market superior products. Readers of this Quarterly Report on Form 10-Q are
urged to read those sections in their entirety. In light of the significant
uncertainties inherent in the forward-looking information included in this
document, the inclusion of information should not be regarded as a
representation by us or any other person that our objectives or plans will be
achieved. The forward-looking statements contained in this Quarterly Report on
Form 10-Q are made only as of the date of this Quarterly Report on Form 10-Q and
Epoch undertakes no obligation to update or revise the forward-looking
statements, whether as a result of new information, future events or otherwise.
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The following discussion of Epoch's financial condition and results of
operations should be read in conjunction with the financial statements and the
related notes thereto included elsewhere in this Quarterly Report on Form 10-Q
and other documents Epoch files from time to time with the Securities and
Exchange Commission, including subsequent Current Reports on Form 8-K, Quarterly
Reports on Form 10-Q and Annual Reports on Form 10-K.
RESULTS OF OPERATIONS
OVERVIEW
The Company develops proprietary products with commercial applications in
the fields of genomics and molecular diagnostics, including specialty
chemistries, probes and other genomic detection systems. We sell some of our
products to end users, and also provide chemical intermediate products that are
utilized by our collaborative partners and other parties in the manufacture of
end-user products by those parties. The sale of chemical intermediates began in
December 1999, and grew steadily throughout calendar 2000 as our technologies
became more known and validated, and as we executed collaborative agreements
with Applied Biosystems and Third Wave Technologies, among others. In November
2000, we acquired the assets of Synthetic Genetics, a provider of specialty
probes. The transaction was accounted for using the purchase method of
accounting.
We report revenues in three categories:
o Product Sales, which include revenues from sales of chemical
intermediates, probes, and related genetic detection systems;
o License fees and royalty income, which reflects amortization of license
fees received for the transfer of technology and know-how to our
partners, plus contractual royalty; payments received for the sale by
third parties of products that include our technologies.
o Contract research revenue, representing payments for research and
development performed under various collaborative agreements.
REVENUES
Product Sales. Product sales increased to $1 million in the quarter ended
March 31, 2001 from $85,700 in the comparable quarter of the prior year as a
result of higher levels of chemical intermediate sales to our collaborative
partners and others, and from the sales of specialty probes and genetic
detection chemistries to end users.
License Fees. License fees and royalty income increased to $28,000 in the
quarter ended March 31, 2001 from $13,000 in the comparable quarter of the prior
year due to license fee payments being received during 2000 pursuant to
collaborative agreements which are being amortized over the lives of such
agreements. Royalty income is immaterial in both periods.
Contract Research Revenue. Contract research revenue increased to $500,000
in the quarter ended March 31, 2001 as the result of research and development
activities under our agreements with Applied Biosystems that began in August
2000 and with Third Wave Technologies that began in January 2001.
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OPERATING EXPENSES
Cost of Product Sales. Cost of product sales increased to $879,000 in the
quarter ended March 31, 2001, from $17,000 in the comparable quarter in the
prior year as a result of the increase in product sales. Costs as a percentage
of product sales rose from 20% in first quarter 2000 to 86% this quarter for a
number of reasons, including a significantly different product mix due in part
to inclusion of Synthetic Genetics' specialty probe business, the impact of
building manufacturing capacity through investments in capital equipment and
personnel that is not yet being fully utilized, and the existence of contractual
product pricing levels for certain chemical intermediate products.
Research and Development. Research and development expenses increased to
$1.1 million in the quarter ended March 31, 2001 from $832,000 in the comparable
quarter in the prior year. The primary reasons for the increase include:
o Personnel costs of $282,000, primarily as a result of incentive
compensation costs and increased headcount;
o Facilities and equipment expenses of $168,000 related to the new Bothell
headquarters facility occupied in late 2000;
o An increase in chemical reagents and operating supplies expense of
$105,000 resulting from increased headcount and activity; and
o Costs of $314,000 included in cost of product sales for personnel and
other costs related to product manufacturing. This amount will fluctuate
quarterly depending on the time and availability of personnel to conduct
research and development activities.
Selling, General, and Administrative. Selling, general, and administrative
expenses increased to $1.0 million in the quarter ended March 31, 2001 from
$602,000 in the comparable quarter in the prior year. The primary reasons for
the increase include:
o Facilities related expenses of $170,000 related to the new Bothell
headquarters facility occupied in late 2000;
o Intangible asset amortization charges of $92,000 resulting from the
acquisition of Synthetic Genetics;
o Recruiting and compensation expenses of $109,000 related to the addition
of two vice presidents late in the first quarter; and
o Increased sales and administrative expenses of $46,000 from the
Synthetic Genetics division acquired in late 2000.
Interest Income, net. Interest income, net, increased to $159,000 in the
first quarter of 2001 compared to $126,000 in the first quarter of 2000 as a
result of higher average cash balances available for investment.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents amounted to $8,959,000 at March 31, 2001, a
$3,163,000 decrease from December 31, 2000 balances.
Cash used in operations during the quarter ended March 31, 2001 amounted to
$1,900,000 as a result of our net loss of $1,305,000 adjusted for certain
non-cash reconciling items and fluctuations in working capital accounts,
including:
o An increase in accounts receivable of $539,000 as a result of increased
product sales and timing of certain shipments and cash receipts; and
o An increase in inventory of $111,000 as a result of stocking higher
levels of chemical intermediates and other materials to support higher
product sales.
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Cash used in investing activities amounted to $1,601,000 in the current
quarter. Acquisition of property and equipment totaled $1,243,000, including
$1,013,000 in payments for capital expenditures made during the fourth quarter
2000 for leasehold improvements and capital equipment for our new facilities. We
also paid $358,000 in acquisition related costs during the quarter for our
November 2000 purchase of Synthetic Genetics.
Cash provided by financing activities amounted to $338,000 for the quarter,
including the receipt of $332,000 from the exercise of common stock warrants.
We anticipate that existing cash balances and projected cash from
operations will be sufficient to meet our anticipated working capital and
capital expenditure needs through at least 2002.
CERTAIN FACTORS THAT MAY AFFECT OUR BUSINESS AND FUTURE RESULTS
We have never been profitable and anticipate future losses
We have never been profitable. Since our formation in 1985, we have
generated limited revenues. As of March 31, 2001, we had an accumulated deficit
of approximately $68 million. We expect to incur additional losses as we expand
our research and development and related product commercialization efforts.
There is no assurance that we will ever become profitable or that we will
sustain profitability if we do become profitable. Should we experience continued
or unforeseen operating losses, our capital requirements would increase and our
stock price would likely decline.
There is a risk that our technology may not be effective or might not work
The science and technology of synthetic DNA-based products is rapidly
evolving. While we are beginning to produce and supply products to customers for
commercial use, the majority of our products and proposed products are in the
discovery or early development stage. The proposed products will require
significant further research, development, and testing. We face the risk that
any or all of our products and proposed products could prove to be ineffective
or unsafe, or be an inferior product to products marketed by others because our
products are based on new and unproven innovative technologies. Some of our
current research and development activities may not result in any commercially
viable products. If we do not have commercially viable products, we will not be
able to generate funds internally to support operations.
We have limited manufacturing experience
While we have experience in researching and developing unique, proprietary
technologies to enhance the study of genes, and in manufacturing
oligonucleotides, our experience in manufacturing other chemical reagent
products is relatively limited. While we are beginning to produce and supply
products to customers for commercial use, we do not currently have the capacity
for high-volume production of our reagents. We will need to expand our reagent
manufacturing capacity in connection with our continued development and
commercialization of our products. Any delay or inability to expand our reagent
manufacturing capacity could materially adversely affect our reagent
manufacturing ability.
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Energy shortages may adversely impact operations
California and Washington states, among other areas, are currently
experiencing shortages of electrical power and other energy sources. In
California, this condition has periodically resulted in rolling blackouts, or
the temporary and generally unannounced loss of the primary electrical power
source. The computer and manufacturing equipment and other systems in our
operating locations in San Diego, California and Bothell, Washington are powered
by electricity. Currently, we do not have secondary electrical power sources to
mitigate the impacts of temporary or longer-term electrical outages. It is not
anticipated that the power shortages will abate soon, and therefore, our
operating facilities may experience brown-outs, black-outs, or other
consequences of the shortage, and may be subject to usage restrictions or other
energy consumption regulations that could adversely impact or disrupt our
commercial manufacturing and other activities. We are evaluating the cost
effectiveness of secondary power systems that would reduce our dependency on our
primary power sources. The cost of such systems is not currently known.
There is a risk that we do not own exclusive rights to our technology and our
competition may have access to our technology, which may prevent us from selling
our products
We attempt to protect our proprietary technology by relying on several
methods including United States patents. We also have international patent
applications that correspond to many of the U.S. patents and patent
applications. The issued patents and pending patent applications cover
inventions relating to the components of our core technologies. The expiration
dates of these patents range from January 2010 to June 2015. We make no
guarantee that any issued patents will provide us with significant proprietary
protection, that pending patents will be issued, or that products incorporating
the technology from our issued patents or pending applications will be free from
challenges by competitors. Further, third parties may hold proprietary rights,
which precede our claims and, therefore, could prohibit us from marketing the
proposed products.
Some of our technology might infringe on the rights of others, which may prevent
us from selling our products
There is a great deal of litigation regarding patents and other
intellectual property rights in the biomedical industry. We were defendants in
one action of this kind, which we settled prior to 1997. Although patent and
intellectual property disputes in the biomedical area are sometimes settled
through licensing or similar arrangements, this kind of solution can be
expensive, if a license can be obtained at all. An adverse determination in a
judicial or administrative proceeding or our failure to obtain necessary
licenses could prevent us from manufacturing and selling our products. This
would substantially hurt our business.
We face numerous competitors and changing technologies which could make our
products obsolete
Many companies do research and development and market products designed to
diagnose conditions based on a number of technologies and are developing
additional products using gene-based technologies. Many of these companies have
substantially greater capital resources, larger research and development and
marketing staffs and facilities and greater experience in developing products
than we have. Furthermore, our specific field in which we operate is subject to
significant and rapid technological change. Even if we successfully introduce
our products or proposed products, our technologies could be replaced by new
technologies or our products or proposed products might be obsolete or
non-competitive.
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We will be dependent upon our Agreement with Applied Biosystems for a
significant portion of our revenues for 2001, and a reduction of sales under or
early termination of this Agreement would seriously harm our revenues and
operating results and would likely cause our stock price to decline
In January 1999, Epoch and Applied Biosystems entered into a License and
Supply Agreement pursuant to which we licensed some of our technology to Applied
Biosystems for use in its TaqMan(R) 5'-nuclease real-time PCR assays, or tests
(Taqman(R) is a registered trademark of Roche Molecular Systems, Inc.). In July
1999, we licensed our proprietary software, which speeds the design of chemical
tools used in the study of genes, to Applied Biosystems. In August 2000, the
agreement was amended to include Epoch manufacturing product for Applied
Biosystems. We will depend upon product sales to Applied Biosystems under this
agreement, and royalties from Applied Biosystems' sales of its Taqman(R) assays,
for a significant portion of our revenues for 2001 and future periods. In
addition, we have incurred significant expenditures to date to equip our
facilities for the development of the assays we are developing under this
agreement.
Either party may terminate the agreement upon 180 days written notice. In
the event that this agreement is terminated, our revenues would be adversely
affected. We would also have a major investment in facilities and equipment that
we might be unable to redeploy for new projects. These events would seriously
harm our business, financial condition and operating results and would likely
cause our stock price to decline.
The loss of key personnel could adversely affect operations by impairing our
research and our efforts to commercialize and license our products
Our performance is greatly dependent upon our key management including our
Chief Executive Officer, Dr. William Gerber, and technical personnel and
consultants. Our future success will depend in part upon our ability to retain
these people and to recruit additional qualified personnel. We must compete with
other companies, universities, research entities and other organizations in
order to attract and retain highly qualified personnel. Although we have entered
into agreements with our key executive officers, we make no guarantee that we
will retain these highly qualified personnel or hire additional qualified
personnel. We currently maintain no key man life insurance on any of our
management or technical personnel.
The value of our common stock could change significantly in a very short time
The market price of our common stock may fluctuate significantly. For
example, in the year 2000, our stock traded as high as $25.00 and as low as
$2.88. The rapid price changes Epoch has experienced recently, and throughout
our history, place your investment in our common stock at risk of total loss
over a short period of time. We are in the biotechnology industry and the market
price of securities of biotechnology companies have fluctuated significantly and
these fluctuations have often been unrelated to the companies' operating
performance. Announcements by us or our competitors concerning technological
innovations, new products, proposed governmental regulations or actions,
developments or disputes relating to patents or proprietary rights, and other
factors that affect the market generally could significantly impact our business
and the market price of our securities.
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Public opinion regarding ethical issues surrounding the use of genetic
information may adversely affect demand for our products
Public opinion regarding ethical issues related to the confidentiality and
appropriate use of genetic testing results may influence governmental
authorities to call for limits on, or regulation of the use of, genetic testing.
In addition, these authorities could prohibit testing for genetic predisposition
to certain conditions, particularly for those that have no known cure.
Furthermore, adverse publicity of public opinion relating to genetic research
and testing, even in the absence of any governmental regulation, could harm our
business. Any of these scenarios could reduce the potential markets for our
products and technologies, which could materially and adversely affect our
revenues.
Government regulation of genetic research or testing may adversely affect the
demand for our products and impair our business and operations
Federal, state and local governments may adopt regulations relating to the
conduct of genetic research and genetic testing. These regulations could limit
or restrict genetic research activities as well as genetic testing for research
or clinical purposes. In addition, if state and local regulations are adopted,
these regulations may be inconsistent with, or in conflict with, regulations
adopted by other state or local governments. Regulations relating to genetic
research activities could adversely affect our ability to conduct our research
and development activities. Regulations restricting genetic testing could
adversely affect our ability to market and sell our products and our
technologies. Accordingly, any regulations of this nature could harm our
business.
Health care cost containment initiatives could limit the adoption of genetic
testing as a clinical tool, which would harm our revenues and prospects
In recent years, health care payers as well as federal and state
governments have focused on containing or reducing health care costs. We cannot
predict the effect that any of these initiatives may have on our business, and
it is possible that they will adversely affect our business. In particular,
gene-based therapeutics, if successfully developed and commercialized, are
likely to be costly compared to currently available drug therapies. Health care
cost containment initiatives focused either on gene-based therapeutics or on
genetic testing could cause the growth in the clinical market for genetic
testing to be curtailed or slowed. In addition, health care cost containment
initiatives could also cause pharmaceutical companies to reduce research and
development spending. In either case, our business and our operating results
would be harmed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Epoch's financial instruments include cash and short-term investment grade
debt securities. At March 31, 2001 the carrying values of Epoch's financial
instruments approximated their fair values based on current market prices and
rates. It is Epoch's policy not to enter into derivative financial instruments.
Epoch does not currently have material foreign currency exposure as the majority
of its international transactions are denominated in U.S. currency. Accordingly,
Epoch does not have a significant currency exposure at March 31, 2001.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8K
On January 26, 2001, Epoch filed a report on Form 8-K/A, amending
its earlier report on Form 8-K filed November 27, 2001, to include
Item 7(a), the financial statements of the business acquired, with
respect to Epoch's purchase of substantially all of the assets of
the Synthetic Genetics division of Immune Complex Corporation, a
privately held California corporation.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Epoch Biosciences, Inc.
Date: May 14, 2001 By: /s/ Bert W. Hogue
------------------------------
Bert W. Hogue
Vice President and
Chief Financial Officer
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