-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LW8qcxwnJfBBw64em+QcYEdsCzcyi+3EAN4Y4YvVNwCUoi66yyUxemlNysVt7v47 VCp1zHSQh0PWM4CskRgI3Q== 0000893220-02-000320.txt : 20020415 0000893220-02-000320.hdr.sgml : 20020415 ACCESSION NUMBER: 0000893220-02-000320 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DECODE GENETICS INC CENTRAL INDEX KEY: 0001022974 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 043326704 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-30469 FILM NUMBER: 02588318 BUSINESS ADDRESS: STREET 1: LYNGHALS 1 STREET 2: REYJKAVIK CITY: ICELAND STATE: K6 ZIP: 00000 BUSINESS PHONE: 0113545701900 MAIL ADDRESS: STREET 1: LYNGHALSI 1 STREET 2: REYKJAVIK CITY: ICELAND STATE: K6 ZIP: 00000 10-K 1 w58844e10-k.txt DECODE GENETICS, INC - FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 MARK ONE [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NO. 000-30469 DECODE GENETICS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 04-3326704 (STATE OR JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) STURLUGATA 8, REYKJAVIK, ICELAND (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) + 354-570-1900 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the equity stock held by non-affiliates of the Registrant: $190,410,861 at March 22, 2002 based on the last sales price on that date. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of March 22, 2002.
CLASS NUMBER OF SHARES ----- ---------------- Common Stock, $.001 par value 45,298,115
DOCUMENTS INCORPORATED BY REFERENCE The Proxy Statement to be filed with respect to the 2002 Annual Meeting of Stockholders is incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS OVERVIEW deCODE is a genomics and health informatics company which is developing products and services for the healthcare industry. We use our comprehensive population data and proprietary datamining tools to identify and analyze the genetic factors involved in common diseases. We use this information in the development of new drugs, DNA-based diagnostics and bioinformatics systems and tools. We also develop and apply modern informatics technology to discover new knowledge about health and disease through data-mining. Our approach to the discovery of knowledge about the nature of health and disease brings together three key types of anonymized data on the Icelandic population: public-domain genealogical data, and genotypic and clinical data gathered from volunteer participants in our gene research programs. Our research approach is based on four sets of information: - genealogy records of almost all living Icelanders and most of their ancestors for whom records exist, dating back in some cases to the settlement of Iceland in the ninth century; - genotype data from consenting Icelanders; - clinical data from Icelandic patients and family members participating in our disease-gene research; and - other public and proprietary data to which we have access. Our three avenues of commercialization are as follows: Discovery Services. We believe that the development and application of proprietary datasets and informatics in the context of an appropriate population will accelerate our ability to discover disease-related genes and associated drug targets. We have adopted this strategy to derive value both from development of diagnostic and therapeutic products and from pharmacogenomic services. We are currently working on discovery and product development in these areas on our own and in collaboration with a number of pharmaceutical and biotechnology companies. Our partners include: F.Hoffmann-La Roche, or Roche; Roche Diagnostics; Affymetrix; Genmab and Medarex; and Pharmacia. We expect to seek additional partners for this part of our business. Database Services. We have also developed and are marketing the Clinical Genome Miner(TM), a computer based discovery system that allows users to perform real-time analysis to study the association between variation in human genes and human disease. The system is being offered under a multi-year license to research organizations to enable the discovery and validation of novel therapeutic and diagnostic targets, based on the pathology and genetics of human disease. The Clinical Genome Miner(TM) combines bioinformatics software and anonymized data on the medical condition, genotypes and genealogy of tens of thousands of Icelandic individuals who have participated in deCODE disease studies and contributed samples and information under informed consent. We are developing the deCODE Combined Data Processing system, a tool which, subject to ongoing compliance with regulatory requirements, will cross-reference genealogical records, data from the Icelandic Health Sector Database and genotypes of consenting participants. Informatics. The third area of focus, informatics, is derived from our discovery and database services. Our informatics business has two principal components: bioinformatics and healthcare informatics. - Bioinformatics. Our population research into the genetic factors that contribute to common diseases involves, in the first stage, the gathering, management and genotyping of thousands of biological samples. In order to carry out this work efficiently we have developed proprietary software and systems specifically suited to these tasks. In order to analyze this large amount of genotypic data, we have also developed what we believe are some of the fastest and most powerful mathematical algorithms and software systems for carrying out linkage analysis. These products enable us to efficiently study the inheritance of genetic markers across large families, an approach which indicates specific regions of the 1 genome containing genes involved in the pathogenesis of specific diseases. We are now marketing these products in partnership with Applied Biosystems Group, by integrating them for use with Applied Biosystems' bioanalytical instruments and data-capture software. - Healthcare Informatics. In the future, the integration of genetics and medicine will add a new level of complexity to the decision-making process in the delivery of healthcare. The need for medical decision support systems for healthcare providers is expected to increase over the next several years. We are developing medical decision-support systems, which will include insights from the Clinical Genome Miner(TM) and, when it is operational, the Icelandic Health Sector Database. In this report, references to we or us refer to deCODE genetics, Inc. and our wholly-owned subsidiary, Islensk erfoagreining ehf., and its subsidiaries deCODE cancer ehf. and Encode ehf., each an Icelandic private limited company. After the closing of the acquisition of MediChem Life Sciences Inc. on March 18th 2002 we or us also refers to MediChem, a wholly owned subsidiary of deCODE genetics, Inc., and to Medichem's wholly owned subsidiaries. deCode was incorporated in Delaware in 1996. SCIENTIFIC BACKGROUND In February 2001, Celera Genomics and the Human Genome Project presented the initial sequencing and analysis of the human genome. The next great challenge is to transform these raw sequence data into specific knowledge about disease and healthcare. GENOMICS The blueprint of all biological activity, which consists of deoxyribonucleic acid, or DNA, is located within the nucleus of every cell and is commonly referred to as the genome. The genome is the total DNA content of an organism. DNA is composed of four bases. The sequence or order of these bases is the code that ultimately determines structure and function in all organisms. The human genome is broken up into 23 pairs of chromosomes and every individual inherits a set of 23 chromosomes from each parent. Genes are segments of DNA located throughout the genome. The human genome consists of approximately three billion bases and has been estimated to contain 30,000 - 35,000 protein-coding genes. Each cell uses or "expresses" only those genes (approximately 30% of the 30,000 - 35,000 genes) necessary for its specific role. Accordingly, different types of cells express different sets of genes. When a gene is turned on or expressed, it produces a derivative copy of its DNA sequence called messenger RNA, which is used as a template to direct the production of a protein. Proteins are large molecules composed of amino acids and control all biological processes. The order of the bases in DNA determines the order of amino acids in a protein. Proteins in turn make up molecular pathways, which cells use to carry out their specific functions. Diseases can occur when a mutated or a defective gene upsets or blocks a molecular pathway in a normal biological function. The ability to detect a mutation and to understand the process by which it contributes to disease is crucial to understanding the fundamental mechanisms of a disease. In the simplest form, genetic diseases result from a mutation in only one gene and the disease is usually passed from generation to generation. Common diseases are thought to have a complex genetic basis; they generally skip one or more generations and may result from interactions between genes or from the interaction between genetic and environmental factors. The human genome sequence is now nearly completed and has been estimated to contain 30,000 - 35,000 protein-coding genes and more than two million markers to help map disease-causing genes. We believe that by itself, this knowledge is of limited value and that the importance of this discovery will only reach its full potential if this sequence data is explored along with detailed knowledge about health history, genetic profile and genealogy. POPULATION GENOMICS Population genomics is a field of genomics which applies modern genetic and molecular biology techniques to an entire population to discover how genetic factors contribute to the cause of diseases. Since almost all common diseases have a genetic component, the discovery of the cause of disease can often be 2 reduced to finding the gene or genes mutated in patients who have the disease as compared to those who do not. Since this approach does not require a preconceived notion about which tissues or proteins or genes are important in the disease, it represents a systematic strategy for creating specific knowledge about disease. We believe that the challenge is to find a population which is small enough to allow the necessary cooperation but large enough to deliver meaningful results. FUNCTIONAL GENOMICS Functional genomics is a field of genomics that attempts to determine the manner in which disease genes specifically impact the disease process. It is the study of the function of genes, including how expression of a particular gene is regulated and the function of the protein that the gene encodes. Researchers employing functional genomics techniques may analyze large numbers of genes to compare patterns of gene expression in diseased and healthy tissues or may compare genes in humans to those in other species, in each case in an effort to determine the molecular pathways that cause disease. GENOMICS AND HEALTHCARE PRODUCTS Genomics and Diagnostics. Gene-based diagnostic tests for both disease diagnoses and management represent an important tool that physicians can use to identify and monitor patients with increased risk of a disease. These tests can complement clinical tests and may lead to more cost-effective use of expensive tests and to a greater level of accuracy. Knowledge of predisposition towards a disease may allow patients to alter their lifestyles or to take medication that prevents the disease. Genomics and Therapeutics. The lack of precise knowledge about the causes of diseases makes it difficult for the pharmaceutical industry to select targets for new drugs. Identifying specific disease genes may result in very specific and, therefore, potentially more valuable drug targets than are otherwise available. The disease gene products themselves may be attractive drug targets. In addition, they mark a key molecular pathway that is composed of several other potential drug targets. Genomics and Drug Response. The efficacy and safety of existing and new drugs may be enhanced by pharmacogenomics. Pharmacogenomics is the application of genomics technology to the analysis and identification of genes involved in drug response. It is believed that genomics will permit the identification of the genetic differences that cause people to respond differently to the same drugs. This may lead to tailor-made treatments for individuals, maximizing efficacy and minimizing side effects. DECODE'S UNIQUE APPROACH POPULATION GENOMICS AND THE VALUE OF THE ICELANDIC POPULATION We believe that our unique approach, coupled with the application of extensive bioinformatics to population genomics, has a number of distinct advantages because of the following characteristics of the Icelandic nation: Extensive Genealogy. Genealogy is a national pastime in Iceland. According to Icelandic history books and old manuscripts from as early as the thirteenth century, Iceland was settled in the ninth and tenth centuries. Since very early stages of their history, Icelanders wrote detailed accounts of Icelandic facts and events, including genealogy. The library of the University of Iceland and other institutions contain manuscripts on genealogy dating from the middle ages, which form a bridge between the time of settlement and official records kept in the Icelandic National Archives from the time when church and government officials began systematic registration of the population in the seventeenth century. Numerous sources of genealogical information, including parish records, census data and written manuscripts, such as the Icelandic sagas, are readily available. Genealogical data can facilitate the identification of genes that cause a specific disease by enabling researchers to compare the genes of family members with and without the disease over the generations. The genealogical data can go back as far as 35 generations and we believe it provides sufficient genealogical information for our purposes. In addition, the fact that there has been little immigration means that most Icelanders living today are descendants of the original "founding" settlers and can, therefore, trace their ancestry to the early middle ages. 3 Relative Genetic Homogeneity. Diseases which are prevalent in developed countries, such as cancer and heart disease, have a large number of genetic causes. In an isolated population that is genetically simpler, the number of genetic causes is likely to be fewer than in more genetically diverse populations. Thus, studying a more homogeneous population, like the Icelanders, simplifies the problem of finding and subsequently understanding disease genes and mutations causing common diseases. The Icelandic population was founded by Norwegian and British settlers who arrived in Iceland in the ninth and tenth centuries. Because Iceland has experienced little immigration over the last eleven centuries, most of the 280,000 living Icelanders are descended from these original "founding" settlers. Our ability to trace the Icelandic population back approximately 1,100 years also facilitates gene discovery. Specific genes are associated with the appearance and existence of specific diseases. For example, the BRCA2 gene is known to carry mutations in some individuals that can cause breast cancer. Because many present-day Icelanders may share a gene carrying a mutation that causes a particular disease with one of the founding settlers, they may also have such "disease gene" in common with other Icelanders. We can make use of this "founder" effect to facilitate the identification of disease genes. It has been demonstrated that the disease genes found in Iceland are, in general, also found in other populations. Even if the disease genes in Iceland are different from those found in other populations, the identification of any disease gene can lead to discovery of a key molecular pathway likely to be involved in the disease and, consequently, to the discovery of disease genes in other populations which cause anomalies in the particular pathway. Therefore, we believe the discovery of a disease gene in Iceland may enhance the identification of drug targets for any population. Centralized Healthcare System. Iceland has had a centralized national healthcare system since 1915. It presently consists of a base of 55 primary care centers, a large University hospital in Reykjavik which has recently been formed on the basis of a merger of the country's two largest hospitals, one central hospital in Akureyri, and several smaller ones. Outside the primary care centers, the healthcare system is highly specialized. Specialty clinics care for most of the patients with major illnesses. Our clinical collaborators work at these specialty clinics, as well as in the major hospitals. This centralization of the healthcare system means that the data is centralized and easily accessible for scientific research. Well-educated Population. The level of public education is high in Iceland and illiteracy is negligible. Historically, the Icelandic population has been cooperative when approached by physicians and scientists working on biomedical research in the Icelandic community. We believe that the Icelandic population meets the criteria of being small enough to allow necessary cooperation but large enough to deliver meaningful results. While the Icelandic population is characterized by relative genetic homogeneity, it is large enough to prevent an increased incidence of recessive genetic conditions which can arise as a result of intermarriage. At the same time, the population is small enough, and the amount of immigration is limited enough, that the total genome of Icelanders is less variable than the genomes of larger, less historically isolated nations. COMPARISON TO OTHER APPROACHES Some companies are using an approach to locate disease genes that relies on correlating DNA variations such as single nucleotide polymorphisms, known as SNPs, throughout the genome or in candidate genes to patients. We believe that this approach is analogous to searching for a single needle that is present in one of a hundred haystacks. We believe that our population genomics approach will allow us to find the haystack using our large families before we begin searching for the needle using SNPs and other variations to narrow down or fine-map genes. Other companies are using functional genomics to help select potential drug targets. Most of these approaches depend on expression analysis using DNA chips that compare the genes turned on or off in diseased tissue with those in normal tissue. We, on the other hand, apply functional genomics more selectively, focusing on the disease genes identified through our population genomics approach to more specifically define their molecular pathways. There may be some limitations to our population genomics approach because disease genes found in Iceland may not always be directly relevant in other populations, although there is much overlap in disease genes that have been found in Iceland over the last 15 years and the rest of the world. The Icelandic 4 population is probably too small to study diseases that are not common. However, our aim is to continue to focus on the diseases in Iceland that have the greatest public health prevalence worldwide. DISCOVERY SERVICES The extensive genealogy database and associated bioinformatics that we have built in Iceland are the core of our novel genealogical approach to identifying human disease genes and associated drug targets. We believe that working with the Icelandic population puts us in a position to accelerate the discovery and development of new proprietary diagnostic and therapeutic products capable of addressing diseases at their root causes, rather than simply identifying and treating their symptoms. These programs may permit doctors to make earlier diagnoses, use healthcare resources more cost-effectively and select safer and more effective drugs for patients on the basis of their genetic make-up. The genealogical approach that we have developed depends on a genealogical database and bioinformatics tools that we have built. In the study of any particular disease, we first define the disease classification broadly but rigorously. (For example, we first labeled stroke patients as "stroke" rather than as a series of less common subtypes of stroke). After our clinical collaborators compile a list of all patients who have been diagnosed with the disease, the list is encrypted and run through our genealogy database which yields very large extended families of patients, sometimes containing hundreds of individuals. The genealogy naturally links together those patients who are likely to share a gene or genes for the disease. The patients are genotyped to determine which genes or pieces of chromosomes they have in common. The genealogical approach compensates for the inadequacies of "consensus criteria" for disease classification, which utilizes specific symptoms accepted by a consensus committee of physicians to determine who is "affected" by the disease, and increases the chance that the form of the disease studied is the one actually inherited. We believe that no other organization uses genealogy in this manner. Our unique approach to human genetics has allowed us to map genes in diseases in which many others have previously failed. By using this approach, we expect to be able to assign function to the raw data contained in the human genome sequence. The following describes our approach to gene discovery. Genetic Mapping We have developed an extensive computerized genealogy database that currently includes approximately 620,000 individuals or almost all the approximately 280,000 living Icelanders along with most of their ancestors for whom records exist. This represents most of the Icelanders who are known through records ever to have lived to adulthood in Iceland. Research that our scientists conducted on 26 extended families containing hundreds of individuals, which the American Journal of Human Genetics published in its May 2000 issue, showed that the accuracy of maternal connections in the database is 99.3%. Before we start a study looking for genes that cause or contribute to a particular disease, we obtain approvals from both the Icelandic Bioethics Committee and the Data Protection Authority. All patients who participate in our research program by giving a blood sample sign an informed consent form approved by the Bioethics Committee. We have developed a sophisticated encryption system to protect the personal privacy of all participating volunteers. In our present disease-based research projects the first step of our genealogical approach is for our clinical collaborators to compile a list of patients who have been diagnosed with a particular disease in Iceland. After the patient list has been encrypted, it is sent to us and run through an encrypted version of our genealogy database. The genealogy database and associated data-mining tools that we have developed enable us to determine the relationships among all members of a large patient list and demonstrate information flow through the generations. Using DNA from participating patients and their relatives, who grant us informed consent, we are able to generate high-resolution genotypes with our genotyping facility using 1,000 microsatellite markers. A microsatellite marker is a segment of DNA containing variable short repeats that can be used to derive a genotype. Our high-throughput genotyping facility and bioinformatics systems substantially decrease the amount of labor involved in reading the genotypes. 5 We have developed a statistical informatics program that is used to determine which portion of the genome is shared among most or all of the patients within a family. This technique can systematically screen every segment of the human genome for shared genotypes and can narrow the location of a disease gene or genes to a small fraction (1/1000) of the human genome. That segment marks the location of the disease gene that is mutated in the patients with the disease. We use stringent criteria to determine that we have successfully found a disease gene location before moving onto the next step of gene discovery. Physical Mapping, Fine-Mapping, and Sequencing Once we have narrowed the chromosomal region containing the disease gene to two to three million base pairs, we develop a higher resolution map. To accomplish this, we construct a physical map using large overlapping pieces of human DNA. We have developed an automated high-throughput physical mapping method which is based on sophisticated proprietary software we have developed and uses robotics. By integrating a robust hybridization system (i.e., matching of a small piece of DNA to large segments of DNA), automated analysis of the hybridization data and data-mining techniques, we construct a high-resolution map of the human genome. We use low-resolution and high-resolution physical maps to find new microsatellite markers and genetic variations known as single nucleotide polymorphisms, or SNPs which allows us to create more precise sets of genotypes of the patients. SNP markers differ from microsatellite markers in several ways. SNPs represent a single base change in the genomic sequence and microsatellite markers represent short repeats of sequence. Microsatellite markers contain more information than SNPs (one microsatellite marker typically contains three to five times more information than a SNP) and, therefore, are well-suited for our genetic studies using large families. Currently, the cost of genotyping microsatellite markers is much less than genotyping SNPs (especially given the relative information content). However, the SNPs are more numerous than microsatellite markers and therefore more useful for fine-mapping and association studies. Many patients may share several closely spaced genotypes which serve to narrow the region containing a disease gene. We believe that the relative genetic homogeneity and the age of the Icelandic population will enable us to reduce the size of the chromosomal region containing the disease gene to as few as 250,000 base pairs. We believe that this segment would generally contain fewer than ten candidate genes, thus reducing the amount of time required to screen the genes for mutations. Once we have narrowed a region, we sequence this narrow region using automated DNA sequencers and then use our bioinformatics tools to identify new genes. The genes are screened in turn for mutations that occur in patients with the disease and rarely in those without. Typically, only one gene in this segment will be the disease gene, but we may find disease genes on other chromosomes that can be discovered in the same manner. We believe that our ability to go from gene mapping to disease gene identification will be further enhanced as the sequencing of the human genome is completed. Functional Genomics After we have succeeded in identifying a disease gene using our population genomics approach, we seek to define molecular pathways in which the disease gene plays a role. This is essential information both for understanding the biology of the disease and also for identifying additional specific drug targets that interact with the disease genes. We have established three complementary systems designed to isolate specific drug targets from "upstream," "downstream" and "proximal" pathways that may be involved in the disease process. We believe these three functional approaches will expand the number of potential drug targets that are associated with the specific disease genes identified using our population genomics approach. Our proximal analysis identifies proteins that physically interact with the disease gene product. As very few proteins work alone in the body, these partner proteins are likely to be involved in the normal biology of the disease gene. We carry out the screening in yeast cells, using methods which involve increasing stringency in order to eliminate false positive protein-protein interactions. We are also able to crossmatch the genes identified as partners of the first disease gene with additional population genomics data since they might be mutated in the same disease. 6 Potential drug targets from upstream pathways include proteins that control the expression level of the disease gene (i.e., those gene products that are responsible for turning the disease gene on or off in particular tissues or under particular conditions). We plan to link the control region of newly identified disease genes to a "reporter" gene and establish precisely which region governs expression. DNA from this region will be used to retrieve specific binding proteins that are responsible for turning the disease on. Finally, we plan to perform gene expression analysis using Affymetrix GeneChip technology to validate our conclusions and to identify other genes which are regulated in tandem with the disease gene. Our downstream analysis is designed to uncover genes that are influenced by the overexpression, underexpression or misexpression of the disease gene. We have established efficient systems to turn a gene on or off in cells, as well as to express mutated versions revealed in the course of gene discovery. We employ DNA chip technology in our efforts to find genes whose expression patterns are altered by different scenarios of disease gene expression. Some of these genes may play a role together with the disease gene product in disrupting the normal biology and leading to disease. DATABASE SERVICES At present, our focus in database services is on the commercialization and continued development of the deCODE Clinical Genome Miner(TM) and on the development and launch of the Icelandic Health Sector Database and the deCODE Combined Data Processing system. Description of the deCODE Clinical Genome Miner(TM) The deCODE Clinical Genome Miner(TM) (CGM) is the first bioinformatics system in the world that enables the cross-referencing of genetic, phenotypic and genealogical data on a large scale and in real time. The CGM contains uniquely comprehensive and integrated proprietary data for the analysis of the interplay between genetics and environmental factors involved in the development of common diseases. These include our anonymized genealogical data, as well as genoyptic and clinical medical data on over 50,000 volunteer participants in more than 30 of our disease research programs. The datamining tools and two principal components of the CGM -- the Disease Miner(TM) and Genome Miner(TM) -- enable users to find correlations between genetic variation and disease, based on queries starting from either endpoint. Users can define a phenotype, conduct a genome-wide, population linkage scan and drill down to find the known genes in any chromosomal region of interest. They can also identify a gene, place it within the most detailed genetic and physical maps of the genome available -- developed by deCODE -- and view the population linkage correlations between the chromosomal location of the gene and more than 30 diseases. The CGM thereby enables subscribers to answer in a matter of minutes questions that would likely take years to answer through experimentation, and to ask the questions in a relatively hypothesis-free manner. We believe that the CGM will be valuable to subscribers as a discovery platform, as a means of verifying results, and, perhaps most importantly, as an efficient means for pharmaceutical and biotechnology companies to characterize and prioritize large numbers of drug and diagnostic targets whose links to disease may not be well understood. We believe that this represents one of the most daunting challenges in employing genomics to create new diagnostic tools and therapeutics to improve healthcare. CGM users' interactions with the system are confined to the query layer; users will not have direct access to the data itself, which remains proprietary to deCODE. We are marketing the CGM on the basis of non-exclusive, multi-year subscriptions. Description of the deCODE Combined Data Processing system We are developing the deCODE Combined Data Processing system, a tool which, subject to ongoing compliance with regulatory requirements, will cross-reference genealogical records, data from the Icelandic Health Sector Database and genotypes of consenting participants. The healthcare data contained in the Icelandic Health Sector Database will include, in addition to disease diagnosis details of laboratory results, treatments and outcomes. Under the terms of the Icelandic Health Sector Database license we will be able to process medical information, environmental exposure information and resource use information from the Icelandic healthcare 7 system. A computerized network of medical records will be organized in each participating healthcare institution. Information processed in the Icelandic Health Sector Database will take place in a manner designed to ensure that personal data remains non-personally identifiable. The type of healthcare data may include admission data, diagnostic work-up and results, diagnoses, treatment and operations for each patient visit, medical and social history, allergies, risk factor exposure, pharmaceutical treatment and outcomes. INFORMATICS BIOINFORMATICS We believe that our population approach to genetics -- through which we use population- and genome-wide genotypic analysis to identify key genetic components in common, complex diseases -- has proven to be an efficient and effective means of identifying drug targets and diagnostic markers rooted in the biology of disease. With over 50 diseases now under research and one of the largest high-throughput genotyping laboratories in the world, we believe that deCODE is a world leader in the generation and analysis of genotypic data. We have in the course of our research developed mathematical algorithms and software systems for managing tens of thousands of samples and identifying locations and levels of genetic sharing in large groups of patients because we conduct linkage analysis on such a large scale. HEALTHCARE INFORMATICS We believe that the rapidly increasing volume of clinical information and medical research data available to physicians and healthcare providers, combined with the data processing capabilities of modern computer and software systems, have created a need for effective healthcare informatics tools and the means to meet this need. Key areas of healthcare informatics include personalized medicine, privacy protection and disease management. We believe that our experience in using advanced privacy protection systems and our broad range of data, including anonymized population-based data on genetics and disease, will enable us to develop innovative products in these fields. OUR STRATEGY Our strategy is to use its population-based approach to transform genomic and healthcare data into products and services for the healthcare sector. The key elements of our strategy are as follows: Gene and Drug Target Discovery. We are pursuing gene and drug target discovery and the characterization of genes that contribute to the causes of common diseases. In addition, we are using studies of gene expression and protein-protein interaction systems to define molecular pathways, which may contain drug targets. We are focusing on diseases that have the potential to result in the discovery of new proteins and drug candidates. We intend to pursue the development of these targets to create new therapeutics, both in-house and in alliance with corporate partners. In addition knowledge about genes and polymorphisms that contribute to the cause of disease can be used to develop novel diagnostic markers and tests. Our acquisition in early 2002 of MediChem Life Sciences, Inc., a U.S.-based drug discovery and development company, provides us with medicinal chemistry and structural biology expertise to pursue the downstream development of drug targets on a proprietary basis. Pharmacogenomics Partnerships. In collaboration with pharmaceutical and biotechnology companies, we are working to apply pharmacogenomics to understand differences in drug response among individuals. Our approach enables the identification of the genetic differences that cause people to respond differently to the same drugs. As a result, we believe that it will be possible to individualize the selection of drugs for patients. We believe that our population approach and resources give us an advantage in identifying key genes involved in responsiveness to drugs, and we are combining this approach with large-scale gene expression studies to design accurate DNA-based tests to indicate whether individual patients are likely to respond to a given drug. Furthermore, we believe that the integration of medical treatment and outcome information with genetic information will give us and our partners an advantage in the generation and analysis of pharmacogenomics information, as well as in the commercialization of pharmacogenomic tests. Database Subscriptions. We have built the deCODE Clinical Genome Miner database and discovery system, and will continue to extend and enhance this system through the development of the Icelandic Health 8 Sector Database and the deCODE Combined Data Processing system. Services we plan to offer to future subscribers of our database and discovery systems will include principally gene discovery and drug target prioritization, pharmacogenomics, disease management and health management. We expect subscribers to include pharmaceutical companies, healthcare organizations, national health services and government agencies that will pay subscription fees and, in some cases, development milestones and a share of product revenues they generate as a result of using the database. Informatics Products and Services. We are pursuing market opportunities for software tools that we have developed in the course of our gene discovery efforts, in the development of the Clinical Genome Miner(TM). We also intend to pursue market opportunities for products we develop in healthcare informatics. PRODUCTS AND SERVICES Our current services and those under development can be classified into three categories, all of which are based on analyzing data from the Icelandic population using our proprietary bioinformatics tools: discovery services; database services; and informatics. DISCOVERY SERVICES Current Discovery Programs We are conducting gene discovery programs associated with over 50 common diseases. The inheritance patterns of many common diseases are complex, indicating that the diseases are probably caused by mutations in multiple genes and/or through interactions between genes and environment. We believe that these diseases represent large market opportunities for therapeutic and diagnostic products because: - their causes are not fully understood; - current treatments are of limited effectiveness; - there are currently no approaches to tailor treatment to cause; and - large numbers of individuals are affected by these diseases. We expect the identification of disease genes to provide insights into the causes of common diseases and to help the development of highly specific diagnostic and therapeutic products, including small molecule products, recombinant proteins, gene therapy and antisense therapy. A brief description of several of our discovery programs and achievements follows. Autoimmune Diseases. We are currently studying several autoimmune diseases such as atopy, inflammatory bowel disease (Crohn's and ulcerative colitis), insulin-dependent diabetes, psoriasis, rheumatoid arthritis and ankylosing spondilytis. These, like all our disease-gene research programs, are being researched using genome-wide linkage scans of patients and their relatives from across the population. We have located genes in atopy, psoriasis and rheumatoid arthritis. - Psoriasis. Psoriasis is a chronic inflammatory disease that leads to disfiguring skin lesions and arthritis. We have completed a genome-wide linkage scan of Icelandic familial material and have confirmed linkage and association to a region of the genome that regulates immune response known as the MHC. Our genome-wide scan also identified a novel region of the genome that interacts with the MHC to cause psoriasis. Our second location represents the second gene mapped outside the MHC that fulfills the criteria for genome-wide significance. We are in the process of fine-mapping both gene locations. - Rheumatoid arthritis. We have mapped the first gene with genome-wide significant linkage to rheumatoid arthritis outside the MHC region, and are currently fine-mapping this locus. Cardiopulmonary Diseases. We are studying a variety of common diseases such as asthma, chronic obstructive pulmonary disease (COPD), hypertension, myocardial infarction, peripheral arterial occlusive disease (PAOD), cerebrovascular disease (stroke) and obstructive sleep apnea syndrome. We have identified novel genes in PAOD and the common form of stroke, and located genes in asthma, COPD, Hypertension and myocardial infarction. 9 - Peripheral arterial occlusive disease (PAOD). PAOD is a vascular disorder characterized by narrowing of the arteries of the arms and legs, and obstruction of the blood flow. PAOD strikes between 2% and 5% of people over the age of 65 worldwide and results in pain, diminished mobility, the need for invasive surgery, and, in extreme cases, gangrene and loss of the affected limbs. By conducting a genome-wide analysis of 1300 Icelandic PAOD patients and family members, deCODE researchers were able to identify a small section of a single chromosome that shows significant genetic linkage to the disease. The patients who participated in the study were carefully selected by collaborating surgeons from the Icelandic Society of Vascular Surgery working at Iceland's National University Hospital. All had undergone previous angiography that documented the nature and extent of vascular lesions, and most had undergone surgery to bypass blocked arteries. The study marks an important advance in identifying the genetic mechanisms contributing to PAOD. This study may expand slightly to emphasize that we have validated a drug target which was linked to the disease. We have validated a drug target identified through analysis of the gene which we have linked to PAOD, and are now conducting ongoing drug discovery work on this target. - Cerebrovascular disease (stroke). Stroke represents diseases that directly or indirectly affect the blood vessels in the brain and cause central nervous system damage from either blockage of cerebral blood flow or rupture of an intracranial artery. It is the third leading cause of death. We have a research alliance with local physicians who care for a majority of the stroke patients diagnosed in Iceland. We have collected almost 2,000 DNA samples from informative families and genotyped most of them. Using our genealogical approach, we have identified the first gene ever linked to the common form of stroke and used this information to identify a drug target. We are conducting drug discovery work using this target. Central nervous system diseases. We are studying the genetic basis for several psychiatric and central nervous system diseases, including Alzheimer's disease, anxiety, bipolar disease/depression, familial essential tremor, multiple sclerosis, narcolepsy, Parkinson's disease, schizophrenia, autism, attention deficit and hyperactivity disorder, and migraine. - Alzheimer's disease. Alzheimer's disease is the most common cause of dementia. We have carried out a genome-wide scan involving 1,200 Icelanders and mapped a gene that contributes to the occurrence of late-onset Alzheimer's disease. We are fine-mapping this locus to identify the gene in question. - Schizophrenia. Schizophrenia is a debilitating psychiatric disorder. We have carried out a genome-wide scan with the participation of 400 Icelandic schizophrenia patients and we have identified a gene linked to schizophrenia. Through functional and proteomics studies we identified a protein coded for by this gene and another protein with which it interacts in the central nervous system. We are using the latter protein as a drug target. We have developed knock-out mice to gain additional information on this target, and have conducted high-throughput screening to identify potentially effective compounds for use against this target. - Parkinson's disease. We have mapped a gene contributing to late-onset Parkinson's disease, the first genetic factor ever mapped for the most common form of the disease. The gene was mapped to a small region of chromosome 1, through analysis of genotypic data from volunteer late-onset Parkinson's patients and their unaffected relatives from 51 families from across Iceland. - Familial essential tremor (FET). A genome-wide scan for FET genes was performed at deCODE, in a study of 16 Icelandic families with 75 affected individuals in whom FET was apparently inherited as a dominant trait. The scan revealed one locus of genome-wide significance. This locus is currently being fine-mapped. - Anxiety disorder and depression. The most common form of mental illness in industrialized countries, anxiety disorder and depression encompasses a constellation of conditions, including panic disorder, phobic disorders, obsessive-compulsive disorder, general anxiety disorder and depression. We approached anxiety as a broadly defined disorder that encompasses all of these complexities. Following a survey of more than 10,000 randomly-selected individuals conducted by collaborating physicians, some 500 respondents who had reported symptoms of anxiety agreed to be clinically examined and 10 genotyped. By focusing on extended families with at least one individual suffering from panic disorder, we mapped a gene strongly linked to all forms of clinical anxiety. We are now expanding this program by surveying 20,000 randomly-selected individuals for depression and have already identified 230 who have been further evaluated and are being genotyped along with their closest family members. Eye Disease. We are studying a range of eye diseases, including macular degeneration, cataracts, glaucoma, myopia and retinitis pigmentosa. We have mapped a gene linked to macular degeneration. Women's Health. We are studying the genetic causes of women's health problems including endometriosis and pre-eclampsia. We have located a susceptibility gene for pre-eclampsia on chromosome 2p13. In February 2002, we and a team from the National University Hospital in Reykjavik published a study utilizing our genealogical database to demonstrate the contribution of genetic factors in the development of endometriosis (Human Reproduction, 17:3, pp555-559). We are using this data as the basis for a study to identify key genes involved in the disease. Cancer. We conducting research in many forms of cancer, including lung cancer, melanoma, renal cancer, colon cancer, testicular cancer, thyroid cancer, prostate cancer and also for benign prostatic hypertrophy. Metabolic and Other Diseases and Conditions. We are studying the genetic basis for osteoarthritis, osteoporosis, non-insulin-dependent diabetes (NIDDM), obesity, familial combined hyperlipidemia, nocturnal enuresis, and longevity. We have mapped genes for the first four conditions and for longevity. - Osteoarthritis. We have mapped three genes linked to osteoarthritis. We are currently fine-mapping and sequencing these regions to search for the disease genes themselves. - Osteoporosis. Osteoporosis is a disorder of the bones characterized by the progressive thinning and weakening of bone tissue. It generally strikes people over the age of 50, and is four times more common in women than in men, making it one of the most challenging medical problems in women's health worldwide. We have mapped an osteoporosis gene to a small chromosomal region as a result of a genome-wide scan conducted with the participation of 139 Icelandic families, including more than 430 patients and 600 unaffected relatives. The discovery marks a major advance toward identifying one of the genes that, if present in a variant form, contribute to this important disease. - Non-insulin dependent diabetes. We located a gene linked to NIDDM to a small chromosomal region by utilizing the genotypes of 2700 volunteer patients and relatives grouped into 200 families from across Iceland. - Obesity. We located a gene whose variant forms contribute to obesity by analyzing genotypic data from more than 11,000 adult volunteers in Iceland -- representing a significant proportion of the population suffering from severe obesity. Using the Clinical Genome Miner(TM), we were able to correlate a wide range of clinical, behavioral, and genotypic data, and gained important new insights into the heritability of different aspects of obesity, as well as into the complex interplay between obesity and diabetes, stroke, heart disease, and hyperlipidemia. In this way we have also located a gene variant that appears to protect obese individuals from type-2 diabetes, an otherwise common complication. - Longevity. Using our genealogical database and datamining algorithms, we have found that individuals above the 95th percentile in longevity in Iceland are significantly more related than members of the population at large. Through the analysis of genotype data from volunteer members of families with significant numbers of individuals living beyond the 95th percentile, we have located a gene that appears to correlate with extreme longevity. We are fine-mapping this locus. Collaborations Our strategy for pursuing business opportunities is to attempt to turn our discoveries and resources into to a broad range of products for the market. In some instances we intend to pursue this research and product development on our own, and in others through alliances with pharmaceutical companies, biotechnology firms and other healthcare institutions. Depending on the nature of each prospective business opportunity, we may conduct the research in return for one or more of the following: up-front equity investments; direct payments for research funding; payments upon the achievement of scientific milestones; shared or exclusive rights to 11 diagnostics and therapeutics; and royalties on products that our collaborators market. In some instances, we may negotiate for access to our collaborators technologies, for example libraries of chemical compounds, to enhance our operations. F.Hoffmann-La Roche. In February 1998, we entered into a research collaboration and cross-license agreement with Roche to collaborate on the discovery of genetic variations which affect the cause of diseases for the purpose of developing new methods to diagnose diseases and obtain drug targets useful in drug discovery. The term of this agreement expired on February 1, 2002. In connection with the agreement, Roche Finance Ltd., or Roche Finance, an affiliate of Roche, purchased shares of our preferred stock and received an option to purchase additional shares at any time prior to the end of February 2001. Roche Finance also purchased warrants to buy shares of our preferred stock and received the right to purchase additional warrants if it exercised its option to acquire additional shares of preferred stock. These became warrants to purchase an equivalent amount of common stock upon the completion of our initial public offering. In April 2000, Roche Finance transferred these shares, warrants and options to an affiliate, SAPAC Corporation Ltd., or SAPAC. In June 2000, SAPAC exercised its option and purchased 555,556 shares of our preferred stock, which subsequently converted into an equivalent number of shares of common stock and a warrant to purchase 55,556 shares of our preferred stock, which currently allows for the purchase of the same number of shares of common stock. F.Hoffmann-La Roche. In January 2002, we formed with a new, three-year alliance with Roche focused on turning the achievements of our 1998 gene discovery collaboration into novel treatments for common diseases. Under our 1998 agreement, we used our population data to identify key genetic factors contributing to ten major diseases: osteoarthritis, Alzheimer's disease, schizophrenia, peripheral arterial occlusive disease (PAOD), stroke, osteoporosis, obesity, anxiety, type 2 diabetes and rheumatoid arthritis. The new alliance extends our partnership with Roche to leverage our expanding capabilities in drug discovery and development. Under this new alliance, Roche will provide us with research funding to increasingly focus over the next two years on downstream research in a selection of four of the diseases covered by the earlier agreement. The goal of the new alliance is to use the targets identified under the 1998 alliance to discover and develop new therapeutic compounds and to take these compounds into clinical trials. We will receive milestone payments for the development of compounds as well as royalties on the sales of drugs developed under the alliance. We retain therapeutic development rights to those targets identified under the 1998 alliance and not carried over into the new alliance. Pursuant to an agreement, we license our GeneMiner bioinformatic software product to Roche. Genmab and Medarex. In June 2001, we entered into two agreements with Genmab A/S. Under the first, we are conducting research aimed at developing a DNA-based test to predict individual clinical response to Genmab's antibody treatment for rheumatoid arthritis (RA). We and our subsidiary Encode are conducting studies using Icelandic patients and patients from broader populations to identify key genetic factors predictive of clinical response to treatments for moderate to severe RA. These studies will also specifically focus on genetic factors predictive of responsiveness to HuMax-CD4, a fully human monoclonal antibody developed by Genmab and now in Phase III clinical trials. With the results of this research, we plan to develop an RNA- or DNA-based test that can be employed by doctors to determine the best treatment regimes for individual RA patients. Exclusive of potential sales royalties, Genmab is providing deCODE with research funding and potential milestone payments for a successfully marketed product. We have also entered a broad-based collaboration with Genmab to develop new antibody therapeutic products. The partnership aims to utilize novel targets discovered in our research on the genetics of common diseases along with Genmab's fully human antibody technology to create and develop new products. This is a multi-target alliance covering a range of disease areas including cardiovascular and inflammatory diseases as well as cancer. We and Genmab will collaborate on the research, development, and commercialization of the new antibody products, and will share equally development costs and revenues generated from outlicensing or sales of these products. Given the scope of this multi-target alliance, Medarex, Inc., a leading antibody company based in the United States, will also contribute resources to the collaboration and will share certain costs and commercial rights. Medarex originally developed the UltiMAb(TM) platform, which Genmab has 12 licensed, and also has an agreement in which it may participate with Genmab in multi-target European genomics relationships, such as this one. Roche Diagnostics. In June 2001, we signed with Roche a five-year alliance to develop and market DNA-based diagnostics for major diseases. The alliance represents an important element in our strategy of turning our research platform and achievements into products on the market. The alliance aims to bring together what we believe are important deCODE and Roche assets: our comprehensive population genomics resources and bioinformatics expertise, and Roche's prominence in the development and marketing of molecular diagnostics. In addition to the development of novel DNA-based diagnostic and predisposition screening products, we will be working under this alliance to use our Clinical Genome Miner(TM) system to develop point-of-care informatics products that can assist doctors in evaluating the results of DNA-based diagnostic tests. We believe that our population data and informatics tools contained in the CGM give us an advantage in the development of such products, and that such products will be important in establishing the use of DNA-based diagnostic and pharmacogenomic tests as a useful part of everyday healthcare. Affymetrix. In July 2001, we formed a pharmacogenomics alliance with Affymetrix, Inc., under which we are developing DNA-based tests to predict the responsiveness of individual patients to treatments for common diseases. We are bringing together our population-based approach to pharmacogenomics and Affymetrix' GeneChip(R) technology, focusing initially on conducting gene expression analysis to understand the response to drugs used in the treatment of several common diseases. These include high-cholesterol, depression, asthma, hypertension, breast cancer, schizophrenia and migraine. Clinical work under this collaboration is being performed by Encode, our wholly-owned subsidiary. Through Encode, we will share the revenues from the sale of tests developed under the collaboration. Pharmacia. In December 2001, we formed a pharmacogenomics alliance with Pharmacia Corporation to identify the role of genetics in the development of advanced forms of heart disease. Under the agreement, we will employ our population resources and Clinical Genome Miner(TM) to find genetic markers that can be used to identify patients who are highly predisposed to progressing from an early to an advanced form of heart disease. The companies then hope to use this information as the basis for clinical trials. These trials would aim to establish the utility of these genetic markers in identifying patients likely to benefit from cardiovascular drugs under development at Pharmacia. We believe that this alliance underscores the potential of our pharmacogenomics approach for extending the applicability of a developmental treatment in a targeted manner, maximizing its potential benefits to patients. Through our pharmacogenomics subsidiary and CRO Encode, we will receive contract fees as part of the first phase of this agreement. If certain license options are exercised by Pharmacia, deCODE, through Encode, will receive royalties on sales of diagnostic tests as well as royalties on potential sales of cardiovascular drugs. Pharmacia may terminate this arrangement for a full refund through April 18, 2002 for certain defined circumstances. In addition, we have entered into the following collaborations: Partners HealthCare System, Inc. In May 2000, we entered into a three-year strategic alliance agreement and crosswalk development agreement with Partners HealthCare System, Inc., The General Hospital Corporation, d.b.a. Massachusetts General Hospital and The Brigham and Women's Hospital, Inc. (collectively, "Partners") pursuant to which (a) we will fund research by investigators of Partners pursuant to sponsored research agreements and/or clinical trial agreements to be entered into from time to time, (b) we will collaborate with Partners on, and provide funding for, development of an information technology bridge, called the crosswalk, to facilitate studies with the deCODE Combined Data Processing system and Partners' Research Patient Data Registry and (c) we will develop and market, in consultation with Partners, new information technology products and services relating to the use of the crosswalk for future pharmaceutical and biotechnology applications. We do not believe that the amount of funding we have agreed to provide over the term of the agreements is material to us. We will have an exclusive option to acquire an exclusive license to any patents or copyrights developed under such sponsored research or clinical trial agreements on financial terms to be negotiated by the parties based on pre-determined criteria contained in the strategic alliance agreement. Each party has the right to use the crosswalk to facilitate studies with the databases for non-commercial internal research purposes. Each party also has the right to use the crosswalk to facilitate studies with such party's own database to conduct 13 commercially sponsored research. Partners is required to pay us a royalty on revenue it receives from such use. In addition, we have the exclusive right to use the crosswalk to develop and market products and services, and we are obligated to pay Partners a royalty on revenue we receive from the sale of such products and services. Because we have not yet developed such products or services and Partners has not yet entered into any commercially sponsored research agreements, we cannot estimate the amount of royalties we may receive or be required to pay under the agreements. Other Hospital and Physician Collaborations. We have entered into collaboration agreements and arrangements with the Icelandic Heart Association and several physician groups. The goal of these collaborations is the discovery of genetic factors which contribute to the genesis of certain disorders on which the various physician groups maintain patient information. These collaborators contribute data and/or other clinical information to the project, while we provide our expertise in molecular genetics and experimental design, as well as necessary equipment and research supplies. We are responsible for the reimbursement of all expenses related to the projects. We share the ability to make management decisions regarding the projects with these collaborators, and we jointly form executive or steering committees to monitor the projects. Our collaboration agreements with these collaborators normally continue for a term of no more than five years. To further facilitate our research projects and enable us to construct lists of patients with specific diseases, we have also entered into collaboration agreements and arrangements with two of the largest hospitals in Iceland, one of which was recently founded by merging the two formerly largest hospitals in Iceland. Under the terms of these agreements, the hospitals contribute research data, and surveillance committees that we jointly appoint with the hospitals monitor our projects. We are obligated to pay all the hospitals' out-of-pocket expenses incurred as a result of the collaboration. Our agreements with the hospitals will continue until terminated by the parties. We have also entered into agreements with 19 Icelandic health institutions as required by the Icelandic Health Sector Database Act and License in order to get data from those institutions into the Health Sector Database. Pharmacogenomics In November 2000, we acquired Encode, a wholly owned subsidiary, to launch pharmacogenomics studies in Iceland, based on deCODE's approach. Encode also continues to conduct clinical trials for new and existing therapeutics for major pharmaceutical companies as a Contract Research Organization. We are now working with several pharmaceutical and biotechnology companies, including GenMab, Pharmacia and Affymetrix to develop and market pharmacogenomic tests. In this way, we believe that we will be able to assist pharmaceutical companies in tailoring drugs to specific parts of the patient population. Tailor-made drugs will better ensure both effectiveness and safety. In addition, genetic information may lead to faster and more successful clinical trials, which may result in cost savings. Pharmacogenomics may also enable pharmaceutical companies to explore the use of older chemical compounds which have been abandoned. As the development cost of these compounds has already been incurred, pharmacogenomics research may provide a cost-effective method to bring these abandoned products to market. Cancer In November 2000, we founded deCODE Cancer ehf., a wholly-owned subsidiary that has incorporated deCODE's cancer research. By creating a subsidiary with an exclusive focus on cancer, we believe that we will reinforce the ability of our researchers to continue to develop the particular skills and methods necessary for studying the complex biology involved in the study of cancer. deCODE Cancer also enjoy the flexibility to develop special alliances, while at the same time continuing to leverage deCODE's resources for population genomics research. Proprietary Discovery and Development Programs We also plan to work on some diseases without partnering with pharmaceutical companies, and we are currently pursuing approximately 45 disease projects independent of research sponsorships. In the event we complete any independent projects, we intend to pursue the commercial development of our gene and drug target discovery through the development and marketing of therapeutics and diagnostic products. We may do 14 this by using our own resources to turn discoveries from our internal projects into therapeutic or diagnostic products and developing our own marketing capabilities, by licensing our discoveries to others who would be required to pay us royalties on sales of any products they develop using the results of our gene discovery programs, or by entering into collaborative arrangements for the development and marketing of products from these programs. In March 2002, we acquired Medichem Life Sciences Inc. through a stock-for-stock exchange and merger agreement. We did so in order to gain the advanced drug discovery and development capabilities necessary to take our targets into proprietary development. Founded in 1987, MediChem is a full-service drug discovery technology and services company focused on using its high-throughput integrated chemistry platform to streamline genomics-based drug discovery and development. At the time of the acquisition, MediChem had 163 employees, including 107 chemists, 12 molecular biologists and 9 protein crystallographers. The company has substantial expertise in structural proteomics; lead discovery and optimization; combinatorial, computational and medicinal chemistry; biocatalysis; analytical and separations chemistry; chemical synthesis and scale-up; and clinical trials management and regulatory approvals. DATABASE SERVICES The deCODE Clinical Genome Miner(TM) and the deCODE Combined Data Processing system allow users to ask questions about relationships between genetic, genealogical data and disease. We believe the deCODE database services systems substantially enhances the value of human genome sequence data, expression data or studies of animal models by providing a human, medical and genetic context, which may facilitate the development of new human therapeutics. Products We expect pharmaceutical and biotechnology companies to use the deCODE Clinical Genome Miner(TM) and the deCode Combined Data processing system in gene discovery programs, gene validation and drug target prioritization as a way of confirming their own findings or providing an impetus for further research. Customers We believe that the potential customer base for our database services consists of members of the healthcare industry, including pharmaceutical and biotechnology companies. Pharmaceutical and biotechnology companies may use our database services in their gene discovery, gene validation and pharmacogenomics programs. We anticipate that our customers will pay for access to database products by means of a fixed subscription fee, in addition to potential share of product revenues they generate as a result of using the database. INFORMATICS We have identified two broad categories of product opportunities in informatics to leverage capabilities derived from our gene discovery and database operations: bioinformatics and healthcare informatics. Products Bioinformatics. To aid in our gene and drug target discovery work, we have developed numerous proprietary bioinformatics tools for genealogy analysis, project management, gene mapping, physical mapping, and gene identification that we hope to commercialize as independent products. Healthcare Informatics. In the course of our research, and in order to fulfill the Icelandic Data Protection Authority's requirements, we have developed substantial expertise in the protection and encryption of potentially sensitive personal data. All of the data used in our research, whether genealogical, genetic or medical, is used only in non-personally identifiable form, with the encryption of personal identifiers supervised by the Icelandic Data Protection Authority. We have designed efficient systems for meeting Iceland's data and privacy protection standards, which are at present among the strictest in the world. We believe that the opportunity to commercialize this expertise will grow as the healthcare industry seeks to take advantage of the 15 benefits that information technology offers to manage complex healthcare data while maintaining patient confidentiality. In addition to the increasing demand for privacy protection, we believe that the "information load" on physicians will continue to grow as the genetic dimension of healthcare leads to risk prediction and a shift from generalized treatment guidelines to personalized care and the development of informed strategies of preventive medicine. This trend toward personalized healthcare presents a number of opportunities in healthcare informatics. We believe our comprehensive data and software for mining this data for knowledge give us an advantage as we pursue these opportunities in areas including: - Personalized Medicine. We intend to use the knowledge that we gain from our discovery programs and the Clinical Genome Miner(TM) system to provide medical decision-support systems necessary to deliver and interpret this increased volume of data to a variety of end-users. We are working on integrating the CGM for use with DNA-based diagnostics under our alliance with Roche Diagnostics. We believe this will be useful not only in interpreting the results of such tests for assisting with clinical diagnosis of disease, but also for correlating results indicative of disease predisposition with other medical data in order to design novel and informed strategies of preventive medicine. - Disease Management. By carefully analyzing clinical data and correlating such data with genetic factors, healthcare providers may develop programs that cover the lifespan of the disease, from preventive actions to determining the most appropriate treatments for each individual. For a healthcare provider, which is constantly making the cost/quality tradeoff, this is a unique way to design programs which optimize both cost and quality. We believe the Clinical Genome Miner lends itself to this type of analysis, and its capabilities in this area will improve with the ability of users to cross-reference CGM data with the healthcare data to be included in the Icelandic Health Sector Database. Collaborations Applied Biosystems Group. In July 2001, we announced the formation of a three-year alliance with Applied Biosystems Group. Under this alliance we are adapting our genotyping software suite for integration with Applied Biosystems' laboratory management software to provide a full range of highly customizable solutions for the generation, management and analysis of genotyping data. We are also collaborating with ABG to develop new bioinformatics software to meet the evolving demands of life science customers. Applied Biosystems expects to integrate the new software and customers' existing software tools with its instruments to create fully integrated genotyping solutions. We will receive royalties on sales of the alliance software. Customers Bioinformatics. We believe that the customers for our bioinformatics tools will mainly consist of pharmaceutical and biotechnology companies. Healthcare informatics. We believe that privacy products can potentially be sold to any company handling sensitive data about individual persons, whether or not the data are healthcare-related. However, pharmaceutical companies, healthcare providers and payors with substantial quantities of individual data protected by privacy restrictions will serve as our primary target. We believe that products and services in the fields of personalized medicine and disease management have a broad potential customer base in the healthcare industry. Our initial focus will be on healthcare providers, national health systems, physicians and HMOs, all of whom use support tools that capture and analyze patient data to assist them in healthcare decision-making. RESEARCH AND DEVELOPMENT EXPENSES Our research and development expenses were $71,796,515 in the year ended December 31, 2001, $45,742,081 in 2000 and $33,213,557 in 1999. Of these amounts, we estimate that $26 million, $23 million and $22 million were spent on customer sponsored research and development activities in 2001, 2000 and 1999, respectively. 16 PATENTS AND PROPRIETARY RIGHTS We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. Accordingly, patents and other proprietary rights protections are an essential element of our business. We currently rely on patents, trade secret law and contractual non-disclosure and confidentiality arrangements to protect our proprietary information. We intend to seek patent protection in the United States and other jurisdictions to protect technology, inventions and improvements to inventions that are commercially important to the development of our business, including genes we discover, mutations of genes and related processes and inventions, technologies which may be used to discover and characterize genes, and therapeutic and diagnostic processes and other inventions based on these genes. As of year-end 2001, we had four issued U.S. patents, one European patent and had filed over 30 patent applications for our inventions in the United States. We have also filed numerous international patent applications under the Patent Cooperation Treaty, claiming priority from those of our U.S. applications that we consider to be of significant commercial value. We also intend to seek patent protection or rely upon trade secret rights to protect other technologies that may be used to develop databases and healthcare informatics products and services. We have obtained an exclusive license from The Beth Israel Deaconess Medical Center, or Beth Israel, in Boston, Massachusetts to develop and commercialize therapeutic and diagnostic products anywhere in the world based on Beth Israel's interest in patents and know-how relating to the linkage between a particular segment of DNA and multiple sclerosis. The license under the patents will expire upon the expiration of the last patent to expire and thereafter the license to the know-how will be perpetual. Under the terms of the agreement, we are obligated to pay license fees and other payments upon the achievement of specified milestones. We are also obligated to pay royalties to Beth Israel on the sales of products that may result from the licensed technology. We do not believe that payments under our agreement with Beth Israel will be material to us. COMPETITION We face, and will continue to face, intense competition in our gene discovery programs from organizations such as major pharmaceutical companies, specialized biotechnology firms, pharmacogenomics companies, universities and other research institutions, the Human Genome Project and other government-sponsored entities. A number of entities are attempting to rapidly identify and patent genes responsible for causing diseases or an increased susceptibility to diseases and to develop products based on these discoveries. Many of our competitors, either alone or together with their collaborative partners, have substantially greater financial resources and larger research and development staffs than we do. These competitors may discover, characterize or develop important genes, drug targets or drug leads before we or our collaborators do or may obtain regulatory approvals of their drugs more rapidly than we or our collaborators do. They may develop healthcare informatics and database products before we do or which are technically superior to ours or prove to be more useful to our potential customers. Developments by others may render pharmaceutical product candidates or technologies that we or our collaborators develop obsolete or non-competitive. Any product candidate that we or our collaborators successfully develop may compete with existing therapies that have long histories of safe and effective use. Our competitors may obtain patent protection or other intellectual property rights that could limit our rights, or our customers' ability, to use our technologies or databases, or commercialize therapeutic or diagnostics products. In addition, we face, and will continue to face, intense competition from other companies for collaborative arrangements with pharmaceutical and biotechnology companies, for establishing relationships with academic and research institutions and for licenses to proprietary technology. Our ability to compete successfully will depend, in part, on our ability, and that of our collaborators, to: - develop proprietary products; - develop and maintain products that reach the market first, and are technologically superior to and more cost effective than other products on the market; - obtain patent or other proprietary protection for our products and technologies; 17 - attract and retain scientific and product development personnel; - obtain required regulatory approvals; and - manufacture, market and sell products that we develop. GOVERNMENT REGULATION Regulation by governmental authorities will be a significant factor in our ongoing research and development activities and in our proposed business relating to the deCODE Combined Data Processing system. In addition, the development, production and marketing of any pharmaceutical products which we or a partner may develop is subject to regulation by governmental authorities. THE ICELANDIC HEALTH SECTOR DATABASE LICENSE On December 17, 1998, the Icelandic parliament passed the Icelandic Health Sector Database Act, or the Act, allowing the Ministry of Health and Social Security, or the Ministry, to grant an operating license to create and operate the Icelandic Health Sector Database. On January 22, 2000, the Ministry granted the Icelandic Health Sector Database license (the "License") to Islensk erfoagreining ehf., our wholly-owned Icelandic subsidiary. The License, which has a term of twelve years, allows us to collect data from medical records of Icelandic healthcare institutions and self-employed health professionals, and to transfer such data in encrypted form into a centralized database containing non-personally identifiable information. It also permits us to cross-reference the Icelandic Health Sector Database data with genealogical data and genotypic data obtained through consent. The Act provides that patients may request at any time, by giving notice to the Icelandic Director General of Public Health, that information about them not be entered into the Icelandic Health Sector Database. Pursuant to the terms of the License and the Act, before we can begin collecting information and transferring it into the Icelandic Health Sector Database, we must fulfill numerous conditions, such as paying fees and costs associated with the License and obtaining government approval of our privacy protection measures, and must enter into agreements with healthcare institutions and self-employed health professionals allowing us access to their medical records. Some medical professionals, including the board of directors of the Icelandic Medical Association, and the World Medical Association have opposed some aspects of the Icelandic Health Sector Database on ethical and privacy grounds. We do not believe that these views are representative of the Icelandic medical profession as a whole or that they will materially affect our ability to enter into such agreements. In August 2001 deCODE and the Icelandic Medical Association reached a certain mutual understanding about the dispute. To date we have entered into 19 such agreements with health institutions. Once we have entered into the required agreements, an independent security expert must verify that our information systems and operating procedures comply with the data security requirements of the Icelandic Data Protection Authority, or the Authority, before we can process the data we obtain from these healthcare providers. The deCODE Combined Data Processing system and the Icelandic Health Sector Database are subject to applicable Icelandic law. The Icelandic Health Sector Database will be developed and operated pursuant to a License from the Ministry and will be subject to the Act, the regulations promulgated under the Act, the License and an agreement between the licensee and the Ministry, all of which impose numerous requirements on our activities. As required by the License, concurrently with the issuance of the License, we, through our Icelandic subsidiary, entered into an agreement with the Ministry. This agreement provides that we must pay the Icelandic government a fixed annual fee for the license of 70 million Icelandic kronas (approximately $700,000 as of March 2002) and an additional annual fee of 6% of its net profit, as defined, of the licensee, up to a maximum of 70 million Icelandic kronas per year. The agreement also provides that our rights to the Icelandic Health Sector Database will be transferred to the Ministry on the expiration or termination of the license. 18 The license and the agreement under which we received the license also require us to: - pay the costs that the health institutions incur (including the costs of medical record software) in connection with the entering of data from medical records before transfer to the Icelandic Health Sector Database; - financially segregate the operation of the Icelandic Health Sector Database from our other activities by maintaining a separate operating unit and separate accounts for Icelandic Health Sector Database operations; - pay the costs of the governmental agencies which monitor our Icelandic Health Sector Database activities; - indemnify and agree not to sue the Icelandic government for any liability resulting from the passage of the legislation on the Icelandic Health Sector Database and its operation and/or the issuance of the Icelandic Health Sector Database license; and - observe international bioethics rules. The License prohibits us from, among other things: - abusing our position by charging unreasonable fees, refusing business to our competitors or discriminating among customers by imposing discriminatory or other onerous business terms on our customers; or - assigning or pledging our rights in the license. The Act places a number of duties on us, as the Icelandic Health Sector Database licensee, and imposes a number of conditions on the License. The Act prohibits us from allowing direct access to the Icelandic Health Sector Database and requires us keep the Icelandic Health Sector Database and processing of the database in Iceland. Our database employees and contractors must sign an irrevocable confidentiality oath prior to commencing employment or performing services on our behalf. At the expiration of the License, we are required to ensure that the Ministry or a party entrusted by the Ministry will receive, without payment of consideration, intellectual property rights necessary for the creation and operation of the database for public health purposes and for scientific research. The License may be revoked if we or our employees violate the terms of the Act, if we fail to fulfill the conditions of the License or if we become unable to operate the Icelandic Health Sector Database. If we or our employees or any person assigned to process data violate the provisions of the Act or applicable regulations with regard to confidentiality, the license requires us to compensate any persons to whom the data relate for financial loss which the violation causes. If results obtained from cross-referencing data in the deCODE Combined Data Processing system prove to be personally identifiable, the Data Protection Authority may, among other actions, order the destruction of such results in their entirety or in part or revoke its approval of the procedures and work processes applied by us to ensure privacy of the Icelandic Health Sector Database data. The License will be reviewed by the Ministry no later than October 1, 2008. During the course of the review, we and the Ministry will enter into discussions for the renewal of the License after its expiration in 2012 provided that we continue to meet the requirements of all applicable laws and regulations. The Ministry may also review the License from time to time following our request, on its own initiative or if the License contravenes any applicable laws or regulations. Our creation and operation of the Icelandic Health Sector Database and the deCODE Combined Data Processing system will involve oversight by the Ministry, with the assistance of an Icelandic Health Sector Database Monitoring Committee, an Interdisciplinary Ethics Committee, the Bioethics Committee of Iceland and the Data Protection Authority of Iceland. These bodies will help to ensure our compliance with applicable laws and regulations. The Monitoring Committee consists of three members which the Minister of Health and Social Security appoints. The Monitoring Committee will ensure that the licensee complies with the Act and applicable regulations by monitoring negotiations and agreements for the transfer of data and reporting any events of noncompliance with the Act to the Ministry. The Monitoring Committee is charged with protecting the 19 interests of the public health authorities, health institutions, self-employed health service workers and scientists in the process of making agreements between us and those parties. The Interdisciplinary Ethics Committee will review query types and monitor research projects for compliance with internationally accepted ethical standards for scientific research involving human beings. The Ministry has appointed members of the Interdisciplinary Ethics Committee which may halt any query or research project deemed by the committee to violate such standards. The Bioethics Committee of Iceland is a standing committee that oversees scientific research relating to human beings in Iceland. It has no direct supervisory function over our Icelandic Health Sector Database license but will provide ethical advice to the Monitoring Committee based upon quarterly reports containing lists of queries and patient data submitted to the Icelandic Health Sector Database. The Ministry appoints the members of the committee. Members of the Data Protection Authority (the "Authority") which is responsible for overseeing rights of privacy and data protection in Iceland. The Minister of Justice appoints the board members of the Authority. The Authority establishes the technology, security and organizational terms with which we must comply in the development of the Icelandic Health Sector Database pursuant to the License. The Authority may periodically review such terms in light of new technologies, experience or change of circumstances, and we will be required to comply with the revised data protection terms within the deadline established by the Authority. The Authority will monitor the security of the collection, use and access to patients' information and may intervene to prevent breaches of such security. The Authority will ensure that we comply with the privacy laws applicable in Iceland and will administer the access limitations to data and encryption methodology used for the Icelandic Health Sector Database. PHARMACEUTICAL PRODUCTS Our success will depend, in part, on the development and marketing of products based on our research and development. Strict regulatory controls on the clinical testing, manufacture, labeling, supply and marketing of the products will influence our ability and our partners' ability to successfully manufacture and market therapeutic or diagnostic products. Most countries require a company to obtain and maintain regulatory approval for a product from the relevant regulatory authority to enable the product to be marketed. Obtaining regulatory approval and complying with appropriate statutes and regulations is time-consuming and requires the expenditure of substantial resources. Most European countries and the United States have very high standards of technical appraisal and consequently, in most cases, a lengthy approval process for pharmaceutical products. The regulatory approval processes, which usually include pre-clinical and clinical studies, as well as post-marketing surveillance to establish a compound's safety and efficacy, can take many years and require the expenditure of substantial resources. Data obtained from such studies is susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Delays or rejections may also be encountered based upon changes in drug approval policies in applicable jurisdictions. There can be no assurance that we or our collaborative customers will obtain regulatory approval for any drugs or diagnostic products developed as the result of our gene discovery programs. Because many of the products which may result from our research and development programs are likely to involve the application of new technologies, various governmental regulatory authorities may subject such products to a greater degree of review. As a result, regulatory approvals for such products may require more time than for products using more conventional technologies. In addition, ethical concerns about the use of genetic predisposition testing, and in particular about the risk that such testing could lead to discrimination by insurance providers or employers, may lead to poor market acceptance or to regulatory controls that would adversely affect the development of or demand for diagnostic products based on our research. ENVIRONMENTAL deCODE's research facilities and laboratory are located in Reykjavik, Iceland. We operate under applicable Icelandic and European Union laws and standards, with which we believe that we comply, relating to environmental, hazardous materials and other safety matters. Our research and manufacturing activities 20 involve the generation, use and disposal of hazardous materials and wastes, including various chemicals and radioactive compounds. These activities are subject to standards prescribed by Iceland and the EU. We do not believe that compliance with these laws and standards will have any material effect upon our capital expenditures, earnings or competitive position, nor that we will have any material capital expenditures for environmental control facilities for the remainder of this fiscal year or any succeeding fiscal year. MediChem's activities involve the controlled use of hazardous materials. We are subject to U.S. federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although we believe that MediChem's activities currently comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed our resources. In addition, there can be no assurance that we will not be required to incur significant costs to comply with environmental laws and regulations in the future. EMPLOYEES As of December 31, 2001, we had approximately 592 employees, of whom approximately 566 were employed full-time, 87 held Ph.D. or M.D. degrees and approximately 295 held college degrees. 499 employees were engaged in, or directly supported, research and development activities, of whom 308 worked within the laboratory facilities and 149 held positions associated with the development of informatics. 56 employees were engaged in finance, administrative support and facilities management, and about 37 were engaged in other support functions such as Business Development, Legal, Communications, Human Resources and Clinical Collaboration. In addition, we utilized part-time employees and outside contractors and consultants as needed and plan to continue to do so. We anticipate continuing growth in recruitment in 2002. FORWARD LOOKING STATEMENTS AND CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS This report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential" or "continue" or the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially due to a number of factors, including those set forth in this section and elsewhere in this Form 10-K. These factors include, but are not limited to, the risks set forth below. DECODE MAY NOT ACHIEVE THE BENEFITS IT EXPECTED FROM THE ACQUISITION OF MEDICHEM, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON DECODE'S BUSINESS, FINANCIAL AND OPERATING RESULTS deCODE acquired MediChem with the expectation that the acquisition would result in benefits to it arising out of the combination of deCODE's unique population genomics approach to identifying novel targets in major therapeutic areas with MediChem's high-throughput integrated chemistry platform to facilitate drug discovery and development. These benefits may include operational efficiencies resulting from synergies between the companies and greater sales levels due to increases in product offerings and consolidation of sales and marketing expertise, among others. To realize any benefits from the acquisition, deCODE will face the following post-acquisition challenges: - integrating the complementary competencies of MediChem's chemistry research platform and deCODE's gene discovery capabilities; - retaining and assimilating the management and employees of each company; - developing new products that utilize the assets and resources of both companies; - retaining existing customers, strategic partners and suppliers of each company; - realizing expected cost savings and synergies from the acquisition; and - developing and maintaining uniform standards, controls, procedures, policies and information systems. 21 If deCODE is not successful in addressing these and other challenges, then the benefits of the acquisition will not be realized and, as a result, deCODE's operating results and the market price of deCODE's common stock may be adversely affected. These challenges, if not successfully met by deCODE, could result in possible unanticipated liabilities, unanticipated costs, diversion of management attention and loss of personnel. deCODE cannot assure you that it will successfully integrate MediChem's business or profitably manage the combined company. Further, deCODE cannot assure you its the growth rate after the acquisition will equal the historical growth rates experienced by deCODE before the acquisition. IF THE COSTS ASSOCIATED WITH THE MEDICHEM ACQUISITION EXCEED THE BENEFITS, DECODE MAY EXPERIENCE ADVERSE FINANCIAL RESULTS, INCLUDING INCREASED LOSSES deCODE will incur consolidation and integration expenses which it cannot accurately estimate at this time. Actual transaction costs may substantially exceed deCODE's current estimates and may affect its financial condition and operating results negatively. If the benefits of the acquisition do not exceed the costs associated with the acquisition, including any dilution to deCODE's stockholders resulting from the issuance of shares in connection with the acquisition, deCODE's financial results could be adversely affected, including increased losses. THE MARKET PRICE OF DECODE'S COMMON STOCK MAY DECLINE AS A RESULT OF THE MEDICHEM ACQUISITION The market price of deCODE's common stock may decline as a result of the acquisition for a number of reasons, including if: - the integration of deCODE and MediChem is not completed in a timely and efficient manner; - deCODE does not achieve the perceived benefits of the acquisition as rapidly or to the extent anticipated by financial or industry analysts; or - the effect of the acquisition on deCODE's financial results is not consistent with the expectations of financial or industry analysts. UNCERTAINLY REGARDING THE EFFECTS OF THE MEDICHEM ACQUISITION COULD CAUSE DECODE'S CUSTOMERS OR STRATEGIC PARTNERS TO DELAY OR DEFER DECISIONS deCODE's and/or MediChem's customers and strategic partners, in response to the acquisition, may delay or defer decisions, which could have a material adverse effect on deCODE's business. DECODE MAY NOT SUCCESSFULLY DEVELOP OR DERIVE REVENUES FROM ANY PRODUCTS OR SERVICES Discovery Services deCODE is still in the early stages of its gene discovery programs. deCODE uses its technology and research capabilities primarily to identify genes or gene fragments that are responsible for certain diseases, indicate the presence of certain diseases or cause or predispose individuals to certain complex diseases. Although deCODE has identified some genes that it believes are likely to cause certain diseases, deCODE may not be correct and may not be successful in identifying any other similar genes. Many experts believe that some of the diseases deCODE is targeting are caused by both genetic and environmental factors. Even if deCODE identifies specific genes that are partly responsible for causing diseases, any gene-based therapeutic or diagnostic products may not detect, prevent or cure a particular disease. Accordingly, even if deCODE is successful in identifying specific genes, its discoveries may not lead to the development of commercial products. Any pharmaceutical products that deCODE or its collaborators are able to develop will fail to produce revenues unless deCODE: - establishes that they are safe and effective; - successfully competes with other technologies and products; - does not infringe on the proprietary rights of others; - establishes that they can be manufactured in sufficient quantities at reasonable costs; - can market them successfully; and 22 - can maintain the goodwill and receive the cooperation of the Icelandic population. deCODE may not be able to meet these conditions. deCODE expects that it will be years, if ever, before it will recognize revenue from the development of therapeutic or diagnostic products. Database Services deCODE received a license to create and operate the Icelandic Health Sector Database, or the Database License, in January 2000, and deCODE is still in the early stages of developing this database and the deCODE Combined Data Processing system, a tool which, subject to ongoing compliance with regulatory requirements, will cross-reference genealogical records, data from the Icelandic Health Sector Database and genotypes of consenting participants. deCODE expects it will be several years before it fully develops the deCODE Combined Data Processing system. deCODE will devote substantial resources to the development of these systems and their components for the foreseeable future. Database Services include the Clinical Genome Miner which contains tools to discover or validate disease linked genes based on non-personally identifiable genotypic, genealogical and phenotypic data. deCODE cannot be sure that marketing the Clinical Genome Miner will lead to collaborations with potential clients nor that the deCODE Combined Data Processing system will result in marketable products or services. Although deCODE's intended method for cross-referencing genealogical, genotypic and healthcare data is central to the development of the deCODE Combined Data Processing system, it is unproven. The success of deCODE's database services depends on its ability to: - create database and cross reference software that is free from design defects or errors; - obtain the cooperation of the Icelandic healthcare system; - obtain blood samples from Icelanders and their consent to use their genotypic data; - effectively use the information derived from the deCODE Combined Data Processing system in disease management, analysis of drug response, gene discovery and drug target validation; and - develop marketing and pricing methods that the intended users of the deCODE Combined Data Processing system will accept. deCODE's development of the Icelandic Health Sector Database will be impaired if individual Icelanders refuse to allow information from their medical records to be included in the Icelandic Health Sector Database. As of December 31, 2001, approximately 7% of the population has exercised their rights to exclude their medical records from the database. Because only a small portion of the Icelandic population may carry certain mutations, the unwillingness of even a small portion of the population to participate in deCODE's programs could diminish its ability to develop and market information based on the use of genotypic data. If deCODE fails to successfully commercialize its database services, it will not realize revenues from this part of its business. Healthcare Informatics Only deCODE has tested its bioinformatics and privacy protection products. These products may not meet the needs of potential customers. deCODE is at a very early stage of development of its medical decision-support systems for healthcare providers. deCODE has generated little revenues from sales or licenses of bioinformatics, decision-support or privacy protection products. To date, deCODE has not produced any decision-support tools. deCODE cannot assure you that it can successfully develop or commercialize medical decision-support systems or that there will be a market for its bioinformatics, decision-support or privacy protection products. MediChem Services Development and commercialization of potential drug candidates depend not only on the achievement of research objectives by MediChem and its collaborators, but also on each of MediChem's client's own financial, competitive, marketing and strategic considerations and regulatory requirements imposed by governmental and other regulatory entities in the U.S. and other countries, all of which are beyond deCODE's control. Given the uncertainties inherent in the drug discovery and development process, deCODE's ability to realize revenues from the drug discovery and developmental business is highly speculative. 23 IF DECODE CONTINUES TO INCUR OPERATING LOSSES LONGER THAN ANTICIPATED, OR IN AMOUNTS GREATER THAN ANTICIPATED, IT MAY BE UNABLE TO CONTINUE ITS OPERATIONS deCODE incurred a net loss of $47,838,471 for the year ended December 31, 2001 and has an accumulated deficit of $158,592,171 at December 31, 2001. deCODE has never generated a profit and it has not generated revenues except for payments received in connection with its research and development collaborations with Roche, other recent collaborations and interest revenues. deCODE must increase its expenditures substantially over the next several years to develop its technologies and its internal research programs and to prepare the Clinical Genome Miner Service, the Icelandic Health Sector Database, the deCODE Combined Data Processing system and informatics. As a result, deCODE expects to incur operating losses for several years. If the time required to generate product revenues and achieve profitability is longer than deCODE currently anticipates or the level of operating losses is greater than deCODE currently anticipates, deCODE may not be able to continue its operations. IF DECODE'S ASSUMPTION ABOUT THE ROLE OF GENES IN DISEASE IS WRONG, IT MAY NOT BE ABLE TO DEVELOP USEFUL PRODUCTS The products deCODE hopes to develop involve new and unproven approaches. They are based on the assumption that information about genes may help scientists to better understand complex disease processes. Scientists generally have a limited understanding of the role of genes in diseases, and few products based on gene discoveries have been developed. Of the products that exist, all are diagnostic products. To date, deCODE knows of no therapeutic products based on disease gene discoveries. If deCODE's assumption about the role of genes in the disease process is wrong, its gene discovery programs may not result in products, the genetic data included in its database and informatics products may not be useful to its customers and those products may lose any competitive advantage. IF DECODE IS NOT ABLE TO OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET ITS EXPANDING CAPITAL REQUIREMENTS, DECODE MAY BE FORCED TO REDUCE OR TERMINATE ITS RESEARCH PROGRAMS AND PRODUCT DEVELOPMENT deCODE has spent substantial amounts of cash to fund its research and development activities and expects to spend substantially more over the next several years for research and development activities. deCODE expects to use cash to expand its research and development activities, develop the Clinical Genome Miner, construct the Icelandic Health Sector Database and the deCODE Combined Data Processing system, collect the genotype data, develop healthcare informatics products and conduct drug discovery and developmental activities. Many factors will influence its future capital needs, including: - the number, breadth and progress of its discovery and research programs; - its ability to attract customers; - its ability to commercialize its discoveries and the resources it devotes to commercialization; - the amount it spends to enforce patent claims and other intellectual property rights; and - the costs and timing of regulatory approvals. deCODE intends to rely on Roche and other existing and future collaborators for significant funding of its research efforts. In addition, deCODE may seek additional funding through public or private equity offerings and debt financings. deCODE may not be able to obtain additional financing when it needs it or the financing may not be on terms favorable to deCODE or its stockholders. Stockholders' ownership will be diluted if deCODE raises additional capital by issuing equity securities. If deCODE raises additional funds through collaborations and licensing arrangements, it may have to relinquish rights to some of its technologies or product candidates, or grant licenses on unfavorable terms. If adequate funds are not available, deCODE would have to scale back or terminate its discovery and research programs and product development. DECODE MAY NOT BE ABLE TO FORM AND MAINTAIN THE COLLABORATIVE RELATIONSHIPS THAT ITS BUSINESS STRATEGY REQUIRES AND THE RELATIONSHIPS MAY LEAD TO DISPUTES OVER TECHNOLOGY RIGHTS deCODE must form research collaborations and licensing arrangements with several partners at the same time to operate its business strategy. deCODE currently has only six substantial collaborative relationships, 24 including two with Roche. To succeed, deCODE will have to maintain these relationships and establish additional collaborations. deCODE cannot be sure that it will be able to establish the additional research collaborations or licensing arrangements necessary to develop and commercialize products using its technology or that it can do so on terms favorable to deCODE. If deCODE's collaborations are not successful or deCODE is not able to manage multiple collaborations successfully, its programs will suffer. If deCODE increases the number of collaborations, it will become more difficult to manage the various collaborations successfully and the potential for conflicts among the collaborators will increase. DEPENDENCE ON COLLABORATIVE RELATIONSHIPS MAY LEAD TO DELAYS IN PRODUCT DEVELOPMENT AND DISPUTES OVER RIGHTS TO TECHNOLOGY deCODE is dependent on collaborators for the pre-clinical study and clinical development of therapeutic and diagnostic products and for regulatory approval, manufacturing and marketing of any products that result from its technology. deCODE's agreements with collaborators typically allow them significant discretion in electing whether to pursue such activities. deCODE cannot control the amount and timing of resources collaborators will devote to its programs or potential products. AGREEMENTS WITH COLLABORATORS MAY HAVE THE EFFECT OF LIMITING THE AREAS OF RESEARCH THAT IT MAY PURSUE EITHER ALONE OR WITH OTHERS deCODE's arrangements may place responsibility for key aspects of information technology product development and marketing on its collaborative partners. If deCODE's collaborators fail to perform their obligations, deCODE's information technology products could contain erroneous data, design defects, viruses or software defects that are difficult to detect and correct and may adversely affect its revenues and the market acceptance of its products. deCODE's collaborators may stop supporting its products or providing services to it if they develop or obtain rights to competing products. Disputes may arise in the future over the ownership of rights to any technology developed with collaborators. These and other possible disagreements between deCODE's collaborators and deCODE could lead to delays in the collaborative research, development or commercialization of products. Such disagreements could also result in litigation or require arbitration to resolve. DECODE'S CURRENT FACILITIES AND STAFF ARE INADEQUATE FOR COMMERCIAL PRODUCTION AND DISTRIBUTION OF PRODUCTS If deCODE chooses in the future to engage directly in the development, manufacturing and marketing of certain products, it will require substantial additional funds, personnel and production facilities. BECAUSE REVENUES ARE CONCENTRATED, THE LOSS OF A SIGNIFICANT CUSTOMER WOULD HARM ITS BUSINESS Historically, a substantial portion of deCODE's and MediChem's revenue has been derived from contracts with a limited number of significant customers. deCODE's largest customer, Roche, accounted for approximately 80% of its consolidated revenue in 2001. MediChem's ten largest customers accounted for approximately 71% of its total contract revenues in 2001. The loss of any significant customer would significantly lower deCODE's revenues and affect deCODE's progression to profitability. DECODE'S RELIANCE ON THE ICELANDIC POPULATION MAY LIMIT THE APPLICABILITY OF ITS DISCOVERIES TO CERTAIN POPULATIONS The genetic make-up and prevalence of disease generally varies across populations around the world. Common complex diseases generally occur with a similar frequency in Iceland and other western countries. However, the populations of other western nations may be genetically predisposed to certain diseases because of mutations not present in the Icelandic population. As a result, deCODE and its partners may be unable to develop diagnostic and therapeutic products that are effective on all or a portion of the people with such diseases. Any difference between the Icelandic population and other populations may have an effect on the usefulness of the Icelandic Health Sector Database and the Clinical Genome Miner in studying populations outside of Iceland. For deCODE's business to succeed, it must be able to apply discoveries that it makes on the basis of the Icelandic population to other markets. 25 DECODE'S CREATION AND OPERATION OF THE ICELANDIC HEALTH SECTOR DATABASE DEPENDS ON ITS DATABASE LICENSE FROM THE ICELANDIC GOVERNMENT AND IS SUBJECT TO SUPERVISION AND REGULATION, WHICH MAY MAKE ITS DEVELOPMENT OF DATABASE PRODUCTS MORE EXPENSIVE AND TIME-CONSUMING THAN DECODE ANTICIPATES deCODE's construction and use of the Icelandic Health Sector Database is subject to the stipulations of the Database License. The Database License was granted to deCODE by the Ministry of Health and Social Security of Iceland, or the Health Ministry, pursuant to the Act on the Health Sector Database, no. 139/1998, or the Database Act. The Database License permits the processing of healthcare data from healthcare records and other relevant data into the Icelandic Health Sector Database. deCODE's data collection and use activities will be supervised by the Icelandic Health Sector Database Monitoring Committee, the Data Protection Authority of Iceland and an Interdisciplinary Ethics Committee. In addition, the Icelandic Bioethics Committee will review deCODE's operation of the database. Due to this oversight, deCODE is subject to the following additional risks: - the Health Ministry may withdraw the Database License in the event that deCODE violates the terms and conditions of the Database License, the Database Act or its rules; - the Icelandic parliament may amend the Database Act in ways which would adversely affect deCODE's ability to develop or market the database; - there is no precedent interpreting the Database Act or the rules on which deCODE can rely; - deCODE may fail to comply with existing data confidentiality requirements of the Database Act or the Database License, resulting in a loss of the Database License; - the Data Protection Authority may modify or impose additional technical requirements covering areas such as data encryption and privacy protection and may require greater technical capabilities than deCODE currently has or able to procure at reasonable cost to deCODE; and - the Interdisciplinary Ethics Committee may withdraw permission for any type of research program in the Icelandic Health Sector Database not conducted in accordance with international rules of bioethics. Compliance with these requirements can be expensive and time-consuming and may delay or increase the cost of development of the Icelandic Health Sector Database and the deCODE Combined Data Processing system and may limit their usefulness, which may negatively influence the commercial potential of the Processing System. Iceland is subject to both European Free Trade Association and European Union competition and public procurement rules. If it is determined that the Database Act or the Database License breaches such rules, the Database License could be revoked or diluted. Even if deCODE is able to successfully create and market the Icelandic Health Sector Database and the deCODE Combined Data Processing system, the Database License will expire in January 2012. There is no assurance that deCODE will obtain further access rights on favorable terms, if at all. IF DECODE FAILS TO PROTECT CONFIDENTIAL DATA ADEQUATELY, IT COULD INCUR LIABILITY OR LOSE ITS DATABASE LICENSE deCODE is required, under the Database Act and the Database License, to encrypt all patient data and to take other actions to ensure the confidentiality of data included in the Icelandic Health Sector Database and to restrict access to it. deCODE must develop the Icelandic Health Sector Database in accordance with the terms regarding technology, security and organizational established by the Data Protection Authority of Iceland. The Database Protection Authority may periodically review and amend such terms in light of new technology or change of circumstances. The customers for deCODE's products also may impose additional confidentiality requirements. deCODE may accidentally disclose confidential data as a result of technical failures or human error by its employees or those of its customers or collaborators. Any failure to comply fully with all confidentiality requirements could lead to liability for damages incurred by individuals whose privacy is violated, the loss of the Database License, the loss of its customers and reputation and the loss of the goodwill and cooperation of the Icelandic population, including healthcare professionals. 26 IF DECODE IS NOT ABLE TO ENTER INTO AGREEMENTS WITH MORE ICELANDIC HEALTH INSTITUTIONS IN ORDER TO COLLECT DATA, DECODE WILL NOT BE ABLE TO CONSTRUCT AND OPERATE THE ICELANDIC HEALTH SECTOR DATABASE deCODE is required by the Database License to enter into agreements with Icelandic health institutions and self-employed health service professionals regarding access to and the processing of information from medical records. To date, deCODE has only entered into agreements with nineteen Icelandic health institutions. deCODE cannot be certain that it will enter into agreements with enough additional health institutions or on terms favorable to it. deCODE's inability to enter into additional agreements on favorable terms or in a timely manner could have material adverse effect on its ability to construct and operate the Icelandic Health Sector Database. ETHICAL CONCERNS MAY LIMIT DECODE'S ABILITY TO DEVELOP AND USE THE ICELANDIC HEALTH SECTOR DATABASE AND THE DECODE COMBINED DATA PROCESSING SYSTEM AND MAY LEAD TO LITIGATION AGAINST DECODE OR THE ICELANDIC GOVERNMENT The Icelandic parliament's passage of the Database Act and the Health Ministry's granting of the Database License have raised ethical concerns in Iceland and internationally. These concerns may lead to litigation in U.S., Icelandic or other national or international courts (for example, on the basis of an alleged breach of the patient-doctor confidentiality, constitutional privacy issues, international conventions dealing with protection of privacy issues or human rights conventions). In February 2000, an Icelandic organization known as Mannvernd, or The Association of Icelanders for Ethics in Science and Medicine, and a group of physicians and other citizens issued a press release announcing their intention to file lawsuits against the State of Iceland and any other relevant parties, including deCODE, to test the constitutionality of the Database Act. According to the press release, the lawsuit will allege human rights violations and challenge the validity of provisions of the Database Act. To date no such suit has been brought against deCODE. One lawsuit has been brought in Icelandic courts against the Directorate of Public Health in Iceland challenging the constitutionality of the Database Act. In the event that the Icelandic State by a final judgment is found to be liable or subject to payment to any third party as a result of the passage of legislation on the Icelandic Health Sector Database and/or the issuance of the Database License, deCODE's agreement with the Health Ministry requires deCODE to indemnify the Icelandic State against all damages and costs incurred in connection with such litigation. In addition, the pendency of such litigation could lead to delay in the development of the Icelandic Health Sector Database and the deCODE Combined Data Processing system, and an unfavorable outcome could prevent deCODE from developing and operating the Icelandic Health Sector Database and the deCODE Combined Data Processing system. DECODE HAS AGREED TO INDEMNIFY AND HOLD HARMLESS THE ICELANDIC GOVERNMENT, WHICH MAY CAUSE DECODE TO INCUR DAMAGES AND MAY LIMIT ITS RIGHT TO TAKE CERTAIN LEGAL ACTIONS AGAINST THE GOVERNMENT deCODE is subject to a very extensive indemnity clause in its agreement with the Health Ministry, pursuant to which deCODE has agreed: - not to make any claim against the government if the Database Act or the Database License is amended as a result of the Database Act or rules relating to the Icelandic Health Sector Database are found to be inconsistent with the rules of the European Economic Area, or other international rules and agreements to which Iceland is or becomes a party; - that if the Icelandic State, by a final judgment, is found to be liable or subject to payment to any third party as a result of the passage of the Database Act and/or issuance of the Database License, deCODE will indemnify the state against all damages and costs in connection with the litigation; and - to compensate any third parties with whom the Icelandic government negotiates a settlement of liability claims arising from the Database Act and/or the issuance of the Database License, provided that the Icelandic government demonstrates that it was justified in agreeing to make payments pursuant to the settlement. 27 CONCERNS REGARDING THE USE OF GENETIC TESTING RESULTS MAY LIMIT THE COMMERCIAL VIABILITY OF ANY PRODUCTS DECODE DEVELOPS Other companies have developed genetic predisposition tests that have raised ethical concerns. It is possible that employers or others could discriminate against people who have a genetic predisposition to certain diseases. Concern regarding possible discrimination may result in governmental authorities enacting restrictions or bans on the use of all, or certain types of, genetic testing. Similarly, such concerns may lead individuals to refuse to use genetic tests even if permissible. These factors may limit the market for, and therefore the commercial viability of, products that deCODE's collaborators and deCODE develops. DECODE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES AND GOVERNMENT AGENCIES IN THE DEVELOPMENT AND MARKETING OF PRODUCTS AND SERVICES A number of companies are attempting to rapidly identify and patent genes that cause diseases or an increased susceptibility to diseases. Competition in this field and deCODE's other areas of business, including database services, healthcare informatics and drug discovery and development, is intense and is expected to increase. deCODE has numerous competitors, including major pharmaceutical and diagnostic companies, specialized biotechnology firms, universities and other research institutions, the United States-funded Human Genome Project and other government-sponsored entities and companies providing healthcare information products. deCODE's collaborators, including Roche, may also compete with deCODE. Many of deCODE's competitors have considerably greater capital resources, research and development staffs and facilities, and technical and other resources than deCODE does, which may allow them to discover important genes before deCODE does. deCODE believes that a number of its competitors are developing competing products and services that may be commercially successful and that are further advanced in development than its potential products and services. To succeed, deCODE, together with its collaborators, must discover disease-predisposing genes, characterize their functions, develop genetic tests or therapeutic products and related information services based on such discoveries, obtain regulatory and other approvals, and launch such services or products before competitors. Even if deCODE's collaborators or deCODE is successful in developing effective products or services, deCODE's products and services may not successfully compete with those of its competitors. deCODE's competitors may succeed in developing and marketing products and services that are more effective than deCODE's or that are marketed before deCODE's. Competitors have established, and in the future may establish, patent positions with respect to gene sequences related to deCODE's research projects. Such patent positions or the public availability of gene sequences comprising substantial portions of the human genome could decrease the potential value of deCODE's research projects and make it more difficult for deCODE to compete. deCODE may also face competition from other entities in gaining access to DNA samples used for research and development purposes. deCODE expects competition to intensify as technical advances are made and become more widely known. deCODE's future success will depend in large part on maintaining a competitive position in the genomics field. Others' or deCODE's rapid technological development may result in products or technologies becoming obsolete before deCODE recovers the expenses it incurs in developing them. Less expensive or more effective technologies could make future products obsolete. deCODE cannot be certain that it will be able to make the necessary enhancements to any products it develops to compete successfully with newly emerging technologies. OTHERS MAY CLAIM INTELLECTUAL PROPERTY RIGHTS TO DECODE'S GENEALOGY DATABASE, WHICH COULD PREVENT DECODE FROM USING SOME OR ALL OF ITS DATABASE AND IMPAIR ITS ABILITY TO DERIVE REVENUES FROM ITS DATABASE AND GENE DISCOVERY SERVICES There are other firms and agencies that have prepared, or are currently preparing, genealogy databases similar to the one deCODE has developed. If any parties claim that any of deCODE's databases infringes on their intellectual property rights, deCODE would have to defend against their claim, cease using the infringing property or pay them for the use of the infringing property. Two parties have filed a copyright infringement suit against deCODE in Iceland. They claim to hold copyrights to approximately 100 Icelandic genealogy books and claim that deCODE has used data from these books in the creation of its genealogy database, in violation 28 of their rights. The claimants seek to prevent deCODE's use of its genealogy database. They also seek monetary damages in the amount of approximately 616 million Icelandic kronas. deCODE believes that this suit is without merit and intends to defend it vigorously, but if it were successful it could have a material adverse effect on deCODE's database and gene discovery services. DECODE MAY NOT BE ABLE TO PROTECT THE PROPRIETARY RIGHTS THAT ARE CRITICAL TO ITS SUCCESS deCODE's success will depend on its ability to protect its genealogy database and genotypic data and any other proprietary databases that it develops and its proprietary software and other proprietary methods and technologies. Despite deCODE's efforts to protect its proprietary rights, unauthorized parties may be able to obtain and use information that deCODE regards as proprietary. deCODE's commercial success will depend in part on obtaining patent protection. The patent positions of pharmaceutical, biopharmaceutical and biotechnology companies, including deCODE's, are generally uncertain and involve complex legal and factual considerations. deCODE cannot be sure that any of its pending patent applications will result in issued patents, that it will develop additional proprietary technologies that are patentable, that any patents issued to deCODE or deCODE's partners will provide a basis for commercially viable products, will provide deCODE with any competitive advantages or will not be challenged by third parties, or that the patents of others will not have an adverse effect on deCODE's ability to do business. In addition, patent law relating to the scope of claims in the area of genetics and gene discovery is still evolving. There is substantial uncertainty regarding the patentability of genes or gene fragments without known functions. The laws of some European countries provide that genes and gene fragments may not be patented. The Commission of the EU has passed a directive that prevents the patenting of genes in their natural state. The U.S. Patent and Trademark Office initially rejected a patent application by the National Institutes of Health on partial genes. Accordingly, the degree of future protection for deCODE's proprietary rights is uncertain and, deCODE cannot predict the breadth of claims allowed in any patents issued to it to others. deCODE could also incur substantial costs in litigation if it is required to defend itself in patent suits brought by third parties or if it initiates such suits. Others may have filed and in the future are likely to file patent applications covering genes or gene products that are similar or identical to deCODE's products. deCODE cannot be certain that its patent applications will have priority over any patent applications of others. The mere issuance of a patent does not guarantee that it is valid or enforceable; thus even if deCODE is granted patents it cannot be sure that they would be valid and enforceable against third parties. Further, a patent does not provide the patent holder with freedom to operate in a way that infringes the patent rights of others. Any legal action against deCODE or its partners claiming damages and seeking to enjoin commercial activities relating to the affected products and processes could, in addition to subjecting deCODE to potential liability for damages, require deCODE or its partners to obtain a license in order to continue to manufacture or market the affected products and processes. There can be no assurance that its partners or deCODE would prevail in any action or that any license required under any patent would be made available on commercially acceptable terms, if at all. If licenses are not available, its partners or deCODE may be required to cease marketing its products or practicing its methods. If expressed sequence tags, single nucleotide polymorphisms, or SNPs, or other sequence information become publicly available before deCODE applies for patent protection on a corresponding full-length or partial gene, deCODE's ability to obtain patent protection for those genes or gene sequences could be adversely affected. In addition, other parties are attempting to rapidly identify and characterize genes through the use of gene expression analysis and other technologies. If any patents are issued to other parties on these partial or full-length genes or gene products or uses for such genes or gene products, the risk increases that the sale of deCODE's or its collaborators' potential products or processes may give rise to claims of patent infringement. The amount of supportive data required for issuance of patents for human therapeutics is highly uncertain. If more data than deCODE has available is required, our ability to obtain patent protection could be delayed or otherwise adversely affected. Even with supportive data, the ability to obtain patents is uncertain in view of evolving examination guidelines, such as the utility and written description guidelines that the U.S. Patent and Trademark Office has adopted. 29 While deCODE requires employees, academic collaborators and consultants to enter into confidentiality agreements, there can be no assurance that proprietary information will not be disclosed, that others will not independently develop substantially equivalent proprietary information and techniques, otherwise gain access to our trade secrets or disclose such technology, or that deCODE can meaningfully protect its trade secrets. If the information processed by the deCODE Combined Data Processing system is disclosed without deCODE's authorization, demand for its products and services may be adversely affected. REGULATORY APPROVALS FOR PRODUCTS RESULTING FROM DECODE'S GENE DISCOVERY PROGRAMS MUST BE OBTAINED OR DECODE WILL NOT BE ABLE TO DERIVE REVENUES FROM THESE PRODUCTS Government agencies must approve new drugs and diagnostic products in the countries in which they are to be marketed. deCODE cannot be certain that we can obtain regulatory approval for any drugs or diagnostic products resulting from its gene discovery programs. The regulatory process can take many years and require substantial resources. Because some of the products likely to result from deCODE's disease research programs involve the application of new technologies and may be based upon a new therapeutic approach, various government regulatory authorities may subject such products to substantial additional review. As a result, these authorities may grant regulatory approvals for these products more slowly than for products using more conventional technologies. Furthermore, regulatory approval may impose limitations on the use of a drug or diagnostic product. After initial regulatory approval, a marketed product and its manufacturer must undergo continuing review. Discovery of previously unknown problems with a product may have adverse effects on deCODE's business, financial condition and results of operations, including withdrawal of the product from the market. DECODE'S DEPENDENCE UPON A SINGLE THIRD PARTY FOR SEQUENCING MACHINES MAY IMPAIR ITS RESEARCH PROGRAMS deCODE currently uses a single manufacturer to supply the gene sequencing machines that it uses in its gene discovery program and their necessary supplies. While other types of gene sequencing machines are available from other manufacturers, deCODE does not believe that the other machines are as efficient as the machines it currently uses. deCODE cannot be sure that the gene sequencing machines or their necessary supplies will remain available in sufficient quantities at acceptable costs. If deCODE cannot obtain additional supplies for its gene sequencing machines at commercially reasonable rates, or if deCODE is required to change to a new supplier of gene sequencing machines, its gene discovery programs would be adversely affected. EFFORTS TO REDUCE HEALTHCARE COSTS MAY REDUCE MARKET ACCEPTANCE OF DECODE'S PRODUCTS deCODE's success will depend in part on the price and extent to which it will be paid for its products by government and health administration authorities, private health insurers and other third party payors. Reimbursement for newly approved healthcare products is uncertain. Third party payors, including Medicare in the United States, are increasingly challenging the prices charged for medical products and services. They are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for new therapeutic products. deCODE cannot be certain that any third party insurance coverage will be available to patients for any products deCODE discovers or develops. If third party payors do not provide adequate coverage and reimbursement levels for deCODE's products, the market acceptance of these products may be materially reduced. Numerous governments have undertaken efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with medical care providers and pharmaceutical companies. If cost containment efforts limit the profits that can be derived from new drugs, deCODE's customers may reduce their research and development spending which could reduce the business they outsource to deCODE. DECODE'S OPERATIONS MAY BE IMPAIRED UNLESS IT CAN SUCCESSFULLY MANAGE ITS GROWTH deCODE has recently experienced significant growth in the number of its employees and the scope of its operations and its facilities, and will continue to grow as a result of the MediChem acquisition. deCODE's management and operations are, and may continue to be, under significant strain due to this growth. To 30 manage deCODE's growth, deCODE must strengthen its management team and attract and retain skilled employees. deCODE cannot be sure that it will be able to retain qualified employees. deCODE's success will also depend on its ability to improve its management information, research information and operational control systems and to expand, train and manage its workforce. CHANGES IN OUTSOURCING TRENDS AND CONSOLIDATION IN THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES COULD ADVERSELY AFFECT DECODE'S GROWTH Economic factors and industry trends that affect deCODE's primary customers, pharmaceutical and biotechnology companies also affect deCODE's business. For example, the practice of many companies in these industries has been to outsource from organizations like deCODE to conduct genetic research, clinical research, sales and marketing projects and chemistry research and development projects. Some industry commentators believe that the rate of growth of outsourcing will trend downward. If these industries reduce their present tendency to outsource those projects, deCODE's operations, financial condition and growth rate could be materially and adversely affected. deCODE also believes it has been negatively impacted by pending mergers and other factors in the pharmaceutical industry, which appear to have slowed decision making by its customers and delayed certain trials. A continuation of these trends would have an ongoing adverse effect on its business. Our ability to generate new business could be impaired by general economic downturns in our customers' industries. SOME PARTS OF DECODE'S PRODUCT DEVELOPMENT SERVICES CREATE A RISK OF LIABILITY FROM CLINICAL TRIAL PARTICIPANTS AND THE PARTIES WITH WHOM IT CONTRACTS deCODE, through its subsidiary Encode ehf., contracts with drug companies to perform a wide range of services to assist them in bringing new drugs to market. deCODE also contracts with physicians to serve as investigators in conducting clinical trials. deCODE's services include: - supervising clinical trials; - data and laboratory analysis; - patient recruitment; - acting as investigators in conducting clinical trials; and - engaging in Phase I clinical trials. If, in the course of these trials or activities: - deCODE does not perform its services to contractual or regulatory standards; - patients or volunteers suffer personal injury caused by or death from adverse reactions to the test drugs or otherwise; - there are deficiencies in the professional conduct of the investigators with whom deCODE contracts; - one of deCODE's laboratories inaccurately reports or fails to report lab results; or - deCODE's informatics products violate rights of third parties; then, deCODE would have a risk of liability from the drug companies with whom it contracts or the study participants. deCODE maintains insurance to cover ordinary risks but any insurance might not be adequate, and it would not cover the risk of a customer deciding not to do business with deCODE as a result of poor performance. USE OF THERAPEUTIC OR DIAGNOSTIC PRODUCTS DEVELOPED AS A RESULT OF DECODE'S PROGRAMS MAY RESULT IN PRODUCT LIABILITY CLAIMS FOR WHICH DECODE HAS INADEQUATE INSURANCE The users of any therapeutic or diagnostic products developed as a result of deCODE's discovery or research programs or the use of its database or medical decision-support products may bring product liability claims against deCODE. deCODE currently does not carry liability insurance to cover such claims. deCODE is not certain that its collaborators or it will be able to obtain such insurance or, if obtained, that sufficient coverage can be acquired at a reasonable cost. If deCODE cannot protect against potential liability claims, deCODE's collaborators or deCODE may find it difficult or impossible to commercialize products. 31 DECODE MAY BE UNABLE TO HIRE AND RETAIN THE KEY PERSONNEL UPON WHOM ITS SUCCESS DEPENDS deCODE depends on the principal members of its management and scientific staff, including Dr. Kari Stefansson, Chairman, President and Chief Executive Officer, Hannes Smarason, Senior Vice President and Business Officer, and Dr. Jeffrey Gulcher, Vice President, Research and Development, among others, and, since the MediChem acquisition, key management and scientific staff of MediChem. deCODE has not entered into agreements with any of these persons that bind them to a specific period of employment, except that two key employees of MediChem's wholly-owned subsidiary, Emerald BioStructures, Inc., have entered into employment agreements with deCODE for a term of one year. If any of these people leaves deCODE, deCODE's ability to conduct its operations may be negatively affected. deCODE's future success also will depend in part on its ability to attract, hire and retain additional personnel. There is intense competition for such qualified personnel and deCODE cannot be certain that it will be able to continue to attract and retain such personnel. Failure to attract and retain key personnel could have a material adverse effect on deCODE. In addition, the success of deCODE's business depends in part on the continued service of key MediChem personnel. Despite deCODE's efforts to retain quality employees, it might lose some of MediChem's key employees. In addition, the acquisition may have caused current and prospective deCODE and/or MediChem employees to experience uncertainty about their future roles with deCODE. This may adversely affect deCODE's ability to attract and retain key management, technical, sales and marketing personnel. CURRENCY FLUCTUATIONS MAY NEGATIVELY AFFECT DECODE'S FINANCIAL CONDITION deCODE publishes its consolidated financial statements in U.S. dollars. Currency fluctuations can affect its financial results because a portion of its cash reserves and its operating costs are in Icelandic kronas. A fluctuation of the exchange rates of the Icelandic krona against the U.S. dollar can thus adversely affect the "buying power" of deCODE's cash reserves and revenues. Most of deCODE's long-term liabilities are U.S. dollar denominated. However, deCODE may enter into hedging transactions if it has substantial foreign currency exposure in the future. deCODE may have increased exposure as a result of investments or payments from collaborative partners. DECODE'S CONTRACTS MAY BE TERMINABLE UPON SHORT NOTICE MediChem's contracts are generally terminable upon 10 to 90 days' notice. deCODE's contracts thus will be subject to termination for numerous reasons, any of which may be beyond its control such as a reduction or reallocation of a customer's research and development budget or a change in a customer's overall financial condition. The loss of a large contract or multiple smaller contracts, or a significant decrease in revenue derived from a contract, could significantly reduce deCODE's profitability and require it to reallocate under- utilized physical and professional resources. ITEM 2. PROPERTIES In January 2002, deCODE moved its headquarters and laboratories, to an approximately 150,000 square feet, three-story building owned by us and located on property subject to a 50-year ground lease at Sturlugata 8 Reykjavik, Iceland. Furthermore, we own a total of 28,000 square feet and have leased an additional 3,000 square feet in a building at Krokhals 5, Reykjavik, to house additional laboratory facilities and storage. We also lease approximately 6,500 square feet of office space in Waltham, Massachusetts, for business development and finance, approximately 3,000 square feet at Geirsgata 9, Reykjavik for Encode's operation and maintain a facility for approximately 15 genealogist located in Thverholt 14, Reykjavik. MediChem's principal executive offices and discovery laboratories center are located in Woodridge, Illinois, and encompass approximately 100,000 square feet. MediChem has the capability to expand its offices and laboratories to 200,000 square feet. MediChem occupies approximately 50,000 square feet of additional leased office and laboratory space in Lemont, Illinois, which lease expires in October 2003. MediChem also occupies 15,000 square feet of additional laboratory space in Des Plaines, Illinois, which lease runs through October 2002, with an option to lease on a year-to-year basis. At December 31, 2001, three satellite business development offices were leased in South San Francisco, California, for 1,460 square feet, in New London, Connecticut, for 1,630 square feet and in La Jolla Del Mar, California, for 150 square feet. Emerald 32 BioStructures, a wholly-owned subsidiary of MediChem, operates from an 8,500 square feet leased facility located near Seattle, Washington. ITEM 3. LEGAL PROCEEDINGS We are not a party to any material legal proceedings except as follows: In January 2000, Thorsteinn Jonsson and Genealogia Islandorum hf., the alleged holders of copyrights to approximately 100 books of genealogical information, commenced an action against us in the District Court of Reykjavik in Iceland. They allege that our genealogy database infringes their copyrights and seek damages in the amount of approximately 616 million Icelandic kronas and a declaratory judgment to prevent us from using the allegedly infringing data. We believe the suit is without merit and intend to defend this action vigorously; however, the ultimate resolution of this matter cannot yet be determined. In February 2000, Mannvernd, an organization known as the Association of Icelanders for Ethics in Science and Medicine, issued a press release announcing its intention to file lawsuits against the State of Iceland and any other relevant parties, including us, to test the constitutionality of the Act. In its press release, Mannvernd indicated that it hopes to halt the construction and/or operation of the Icelandic Health Sector Database. In April 2001, a lawsuit was filed against the Icelandic Directorate of Public Health but Mannvernd has not commenced litigation against us; however, the ultimate resolution of this matter cannot yet be determined. In April 2000, Ernir Snorrason, an original stockholder of deCODE, filed a complaint in the Court of Chancery of the State of Delaware for New Castle County alleging that we improperly exercised an option to repurchase 256,637 shares of common stock that we issued to Mr. Snorrason in 1996 pursuant to a Founders' Stock Purchase Agreement and seeking an order requiring us to recognize Mr. Snorrason as the owner of these shares. In June 2001, the parties settled the matter without admission or adjudication of any issue of fact or law and 166,814 shares of our common stock were issued to Mr. Snorrason for $0.001 per share, the par value, with the resulting loss ($1,292,642) being recorded as a general and administrative expense at that time. Although we have not yet been served with copy of the complaint, management is aware that on December 6, 2001, a purported class action alleging violations of federal securities laws was filed in the United States District Court for the Southern District of New York on behalf of certain purchasers of deCODE common stock. The complaint names us, two of our current executive officers (the "Individual Defendants"), and the two lead underwriters (the "Underwriter Defendants") for our initial public offering in July 2000 (the "IPO") as defendants. The plaintiff alleges violations of Section 11 of the Securities Act of 1933 against us and the Individual Defendants, violations of Section 15 of the Securities Act of 1933 against the Individual Defendants and violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (and Rule 10b-5 promulgated thereunder) against the Underwriter Defendants. Generally, the complaint alleges that the Underwriter Defendants: (i) solicited and received excessive and undisclosed commissions from certain investors in exchange for which the Underwriter Defendants allocated to those investors material portions of the shares of our stock sold in the IPO and (ii) entered into agreements with customers whereby the Underwriter Defendants agreed to allocate shares of our stock sold in the IPO to those customers in exchange for which the customers agreed to purchase additional shares of our stock in the aftermarket at pre-determined prices. The complaint further alleges that the prospectus incorporated into the registration statement for the IPO was materially false and misleading in that it failed to disclose these arrangements. The suit seeks unspecified monetary and recissionary damages and certification of a plaintiff class consisting of all persons who purchased shares of our common stock from July 7, 2000 to December 6, 2000. We are aware that similar allegations have been made in hundreds of other lawsuits filed (many by some of the same plaintiff law firms) against numerous underwriter defendants and issuer companies (and certain of their current and former officers) in connection with various public offerings conducted in recent years. All of the lawsuits that have been filed in the Southern District of New York have been consolidated for pretrial purposes before Honorable Judge Shira A. Scheindlin. 33 We believe that the allegations against us and our officers are without merit and we intend to contest them vigorously. The litigation is, however, in the preliminary stage, and we cannot predict its outcome and the ultimate effect, if any, on our financial condition. In addition, it is possible that further lawsuits alleging substantially similar claims will be filed against us and our officers. If we are required to pay significant monetary damages as a result of such litigation, our business could be significantly harmed. Even if such suit or suits conclude in our favor, we may be required to expend significant funds to defend against the allegations. We are unable to estimate the range of possible loss from the litigation and no amounts have been provided for such matters in our financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has been traded on the Nasdaq National Market and the EASDAQ Market under the symbol "DCGN" since July 17, 2000. The following table sets forth, for the calendar periods indicated, the range of high and low sale prices for the Common Stock of the Company on the Nasdaq National Market:
2000 HIGH LOW - ---- ------ ------ Third Quarter (commencing July 17, 2000).................... $31.50 $22.00 Fourth Quarter.............................................. $26.63 $ 8.94 2001 - ---- First Quarter............................................... $11.25 $ 6.56 Second Quarter.............................................. $15.15 $ 5.28 Third Quarter............................................... $12.25 $ 5.75 Fourth Quarter.............................................. $10.60 $ 5.92
As of March 22, 2002, there were 5,876 holders of record of the Common Stock, with beneficial stockholders in excess of such amount. On March 22, 2002, the last sale price reported on the Nasdaq National Market for the Common Stock was $5.79 per share. On November 15, 2001, we issued 94,444 shares of our common stock to Medical Science Partners II, L.P. upon the net exercise of a warrant for 100,000 shares with an exercise price of $1.00 per share. The issuance of these securities was deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) as a transaction not involving any public offering. The transferee made appropriate representations as part of the settlement and had, or had access to, adequate information about deCODE. Appropriate legends are affixed to the stock certificate that was issued. We commenced an initial public offering of our common stock, $.001 par value, on July 17, 2000 pursuant to registration statements on Form S-1 (Registration Nos. 333-31984 and 333-41598), which were declared effective by the Securities and Exchange Commission on July 17, 2000. Net proceeds to us after 34 deduction of expenses were approximately $182.0 million. Through December 31, 2001, we have used approximately $120.4 million dollars of the proceeds as follows: Discovery and research programs............................. $ 61.0 ABI Prism 3700 DNA Analyzers................................ 13.1 Construction of executive office and laboratory facilities................................................ 23.7 Construction of other laboratory facilities................. 2.7 Computer equipment.......................................... 3.0 Other laboratory equipment.................................. 4.3 Other property and equipment................................ 0.9 General and administrative activities....................... 9.5 Installment payments on capital lease obligations........... 1.8 Interest.................................................... 0.4 ------ $120.4 ======
Pending use, we have invested the remaining proceeds primarily in U.S. dollar denominated money market, checking and other accounts but also partly in Icelandic krona denominated accounts. 35 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the notes to those statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report. The consolidated statement of operations data for the fiscal years ended December 31, 1999, 2000 and 2001 and the consolidated balance sheet data at December 31, 2000 and 2001 are derived from consolidated financial statements included elsewhere in this Annual Report that have been audited by PricewaterhouseCoopers ehf., independent auditors. The consolidated statement of operations data for the fiscal years ended December 31, 1997 and 1998 and the consolidated balance sheet data at December 31, 1997, 1998 and 1999, are derived from statements that have been audited by PricewaterhouseCoopers ehf. and are not included in this Annual Report. Historical results are not necessarily indicative of future results.
AS OF DECEMBER 31, ----------------------------------------------------------------------- 1997 1998 1999 2000 2001 ----------- ------------ ------------ ------------ ------------ Revenue...................................... $ 0 $ 12,705,000 $ 16,591,485 $ 21,545,656 $ 31,550,626 Operating expenses Research and development................. 6,080,096 19,282,364 33,213,557 45,742,081 71,796,515 General and administrative............... 1,967,684 4,893,202 8,220,758 15,373,223 12,402,283 ----------- ------------ ------------ ------------ ------------ Total operating expenses..................... 8,047,780 24,175,566 41,434,315 61,115,304 84,198,798 ----------- ------------ ------------ ------------ ------------ Operating loss............................... (8,047,780) (11,470,566) (24,842,830) (39,569,648) (52,648,172) Interest Income.............................. 163,076 922,230 2,187,695 8,866,604 6,925,135 Other non-operating income and (expense), Net........................................ (171,537) (359,894) (1,133,312) (415,459) (2,115,434) Taxes........................................ 0 0 0 0 0 ----------- ------------ ------------ ------------ ------------ Net loss..................................... (8,056,241) (10,908,230) 23,788,447) (31,118,503) (47,838,471) ----------- ------------ ------------ ------------ ------------ Accrued dividends and Amortized discount on preferred stock(2)......................... (620,385) (2,571,523) (7,542,787) (7,540,879) 0 Premium on repurchase of preferred stock..... 0 0 (30,887,044) 0 0 ----------- ------------ ------------ ------------ ------------ Net loss available to common stockholders(2)............................ $(8,676,626) $(13,479,753) $(62,218,278) $(38,659,382) $(47,838,471) =========== ============ ============ ============ ============ Basic and diluted net loss per share......... $ (3.85) $ (3.06) $ (9.65) $ (1.63) $ (1.08) Shares used in computing basic and diluted net loss per share(1)(2)................... 2,254,413 4,400,576 6,446,055 23,671,113 44,289,911 Other non-GAAP Financial Data: Pro forma basic and diluted net loss per share(3)................................... $ (0.86) $ (0.85) Shares used in computing pro forma basic and diluted net loss per share(3).............. 27,559,365 36,483,034
AS OF DECEMBER 31, ----------------------------------------------------------------------- 1997 1998 1999 2000 2001 ----------- ------------ ------------ ------------ ------------ CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................... $ 2,714,225 $ 25,075,844 $ 29,845,664 $194,144,688 $153,061,132 Total assets................................ 6,770,492 38,540,115 80,526,534 248,900,567 256,359,169 Total long-term liabilities................. 1,331,156 6,946,330 5,471,054 3,519,114 46,278,564 Redeemable, convertible preferred stock(2).................................. 12,603,990 43,158,079 121,589,367 0 0 Total stockholders' equity (deficit)(2)..... (9,907,939) (18,222,123) (72,772,138) 216,269,166 175,341,933 ----------- ------------ ------------ ------------ ------------
- --------------- (1) See notes to the consolidated financial statements for an explanation of the determination of the shares used in computing basic and diluted net loss per share. (2) Effective upon the closing of our initial public offering in 2000, the outstanding shares of preferred stock were converted into shares of common stock and retired. (3) Pro forma basic and diluted net loss per share is computed as if the preferred shares had converted into common shares immediately upon their issuance. Accordingly, in the calculation of pro forma net loss per share, net loss has not been increased for the accumulated dividends or amortized discounts on preferred stock. 36 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. You should read this section in conjunction with our consolidated financial statements and related notes thereto appearing elsewhere in this document. OVERVIEW deCODE was incorporated in August 1996. We are a genomics and health informatics company that provides products and services for the healthcare industry. Our approach to the discovery of healthcare knowledge brings together three key types of non-personally identifiable population data derived from the Icelandic nation: information from the healthcare system, information about genealogical relationships among individuals covered by this system and associated molecular genetics data. We are developing three avenues of commercialization: Discovery Services, Database Services and Informatics related to analysis of human genome data and healthcare. The Discovery Services focus on gene and drug target discovery, the development and marketing of DNA-based diagnostics for major diseases and pharmacogenomics, or the discovery of genes related to drug response. Database Services include the Clinical Genome Miner, containing tools to discover or validate disease-linked genes based on non-personally identifiable genotypic, genealogical and phenotypic data. In addition, deCODE intends to construct and commercialize the Icelandic Health Sector Database and the deCODE Combined Data Processing system. The Icelandic Health Sector Database contains non-personally identifiable data from Icelandic healthcare records, and the deCODE Combined Data Processing system allows cross-referencing of data from the Icelandic Health Sector Database with genealogical and genotypic data. Informatics will encompass the building of tools for computerized analysis of healthcare data and of genetic and disease related data, as well as software relating to computer security, privacy protection and encryption. We have incurred losses since our inception, principally as a result of research and development and general and administrative expenses in support of our operations. As of December 31, 2001 we had an accumulated deficit of $158,592,171. We anticipate incurring additional losses over at least the next several years as we expand our internal and collaborative gene discovery efforts, continue our commercialization of discovery efforts, technology development and construction of database services and informatics. We expect that our losses will fluctuate from quarter to quarter and that such fluctuations may be substantial especially because progress in our scientific work and milestone payments that are related to progress can fluctuate between quarters. COLLABORATIONS AND ALLIANCES In February 1998, we entered into a research collaboration and cross-license agreement with F. Hoffmann-La Roche, or Roche, regarding research into the genetic causes of twelve diseases. Under the terms of the agreement, Roche has made equity investments and funded gene discovery programs in the twelve diseases through January 2002 when the term of the agreement expired. In June 2001, we entered into a collaboration and cross-license agreement with Roche regarding diagnostics. Under the terms of this new agreement, we are collaborating on the development and marketing of DNA-based diagnostics for major diseases. We are working with Roche to identify and validate molecular targets which are useful for developing products and services that accurately establish a patient's current diagnosis, predict future risk of disease, predict drug response and determine responses to treatment or the health status of individuals and enable early prevention or treatment of disease. We will also be focusing on developing informatics products and services, which will include software tools and databases. Under the agreement we will receive payments including research funding, research milestones and royalties on any products that are commercialized. The research term under the agreement is five years. In June 2001, we entered into a collaboration agreement with Genmab A/S and Medarex, Inc. pursuant to which we are collaborating on the research, development, and commercialization of new antibody therapeutic products. Under this five-year collaboration, we are utilizing novel targets discovered in our research on the genetics of common diseases along with Genmab's human antibody technology. The 37 collaboration covers a broad range of disease areas including cardiovascular disease, inflammatory disease and cancer. Together with Genmab and Medarex, we will share equally in the development costs and revenues generated from the outlicensing or sales of products developed under the agreement. Under the terms of this collaboration, Medarex will also contribute resources and will share certain costs and commercial rights. In June 2001, we entered into an agreement to provide Genmab A/S with research and development services to develop DNA-based tests to predict individual clinical response to Genmab's antibody treatment for rheumatoid arthritis and possible related novel therapeutics. We will be paid as stages of the research program are completed. In July 2001, we entered into a pharmacogenomics collaboration and license agreement with Affymetrix, Inc. Under the terms of the agreement the parties are collaborating in the research and development of gene expression tests and nucleic acid based tests to predict the response of individual patients to various drugs. We are undertaking the initial research activities to be performed with respect to the initial ten drugs to be studied under the collaboration. Affymetrix will supply various chips in connection with the research. We will share revenues resulting from the collaboration, including those from licensing and product commercialization, with Affymetrix. In July 2001, we entered into a joint development and commercialization agreement with Applied Biosystems Group, or ABG. Under the terms of the agreement, we are working with ABG to jointly develop and commercialize software products for the collection, organization and analysis of genotyping information. The agreement provides for the development to be overseen by a joint steering committee that has specific responsibilities for the implementation and management of the joint development and joint commercialization programs. Under this agreement, ABG and we have granted to each other licenses to products developed under the joint development program. In December 2001, we formed a pharmacogenomics alliance with Pharmacia Corporation to identify the role of genetics in the development of advanced forms of heart disease. Under the agreement, we will employ our population resources and Clinical Genome Miner discovery system to find genetic markers that can be used to identify patients who are highly predisposed to progressing from an early to an advanced form of heart disease. If the results of the first phase are encouraging, Pharmacia has the option to use the genetic markers as the basis for clinical trials of cardiovascular drugs under development at Pharmacia. We will receive contract fees as part of the first phase of this agreement and, in addition, royalties on sales of diagnostic tests as well as royalties on potential sales of cardiovascular drugs should Pharmacia exercise its licensing options in the alliance. In January 2002, we entered into a new Collaboration and Cross-License Agreement with Roche. This new, three-year alliance leverages our expanding capabilities in drug discovery into developing novel treatments for common diseases. Under this new alliance, Roche will provide research funding for a minimum of the next two years for us to conduct downstream research in a selection of four diseases, with the goal of using the targets identified to discover and develop new therapeutic compounds and to take these compounds into clinical trials. Also, we will receive development and regulatory approval milestone payments for therapeutic drug compounds developed pursuant to the agreement as well as royalties on Roche's sales of drugs developed under the agreement. Additionally, we will pay Roche royalties should we develop and market drugs for certain common diseases. We have a number of collaborative agreements with local medical institutions and doctors regarding particular disease research. These agreements generally extend for a period of five years. Under the agreements, these institutions and/or physicians contribute data or other clinical information and we contribute equipment, research supplies and our molecular genetics and experimental design expertise. The agreements also require us to reimburse all project-related expenses. If we sell project results, the agreements require us to make specified payments and pay a portion of performance-based milestone payments that we receive. 38 We have a settlement agreement with a U.S. medical institution whereby we are committed to pay royalties and milestone payments if we are successful in developing and commercializing products that result from a particular technology jointly owned by the medical institution and us. ACQUISITION OF MEDICHEM In March 2002, we acquired MediChem Life Sciences, Inc. in a stock-for-stock exchange to be accounted for as a purchase transaction. The acquisition gives us capabilities in chemistry and structural proteomics that will be used in the implementation of its strategy of turning its targets identified by applying population genomics to common diseases into novel drugs for the market. Building upon the acquisition of MediChem, we will be creating an integrated biopharmaceutical company capable of bringing our own targets into proprietary drug discovery. Through the acquisition we added approximately 160 new employees and facilities in Illinois and Washington. In the first quarter of 2002, we will record the transaction as a purchase for accounting purposes and allocate the purchase price (approximately $86.7 million), based upon independent valuations, to the assets purchased and liabilities assumed based upon their respective fair values. We will allocate the excess of the purchase price over the estimated fair market value of net tangible assets acquired to identified intangibles, including developed technology, patents, customer and other contracts and agreements that have estimated useful lives ranging from three to ten years. Based upon a preliminary review, we estimate the charge to earnings for acquired in-process research and development to be approximately $0.5 million and the annual amortization charge for other identifiable intangibles to amount to approximately $1.2 million. Also based on this preliminary review, we estimate resulting goodwill will be approximately $58.3 million. The amount allocated to identified intangibles will be determined upon the completion of independent appraisals and, therefore, may differ from our current estimate. Our consolidated financial statements will include the cash flows and results of MediChem from March 18, 2002 and the integration of MediChem will impact our results of operations and our financial position. With MediChem, our revenues will increase but our operating expenses and likely our net losses will also increase. In addition, we expect to fund the working capital needs and operating activities of MediChem in the near term. The extent to which MediChem will ultimately impact our results of operations and financial condition is largely dependant upon how quickly and in what proportion MediChem's capacity is brought to bear on our in-house programs and how much of their existing contract services business is maintained and developed. GENERAL We anticipate that collaborations will remain an important element of our business strategy and future revenues. Our ability to generate revenue growth and become profitable is dependent, in part, on our ability to enter into additional collaborative arrangements, and on our ability and our collaborative partners' ability to successfully commercialize products incorporating, or based on, our work. There can be no assurance that we will be able to maintain or expand our existing collaborations, enter into future collaborations to develop applications based on existing or future research agreements or successfully commercialize the deCODE Combined Data Processing system. We intend to invest in discovery services, database services and healthcare informatics, and expect to report net losses for the next several years. If the costs of these investments are greater than anticipated, or if they take longer to complete, or if losses are incurred from strategic investments, we may incur losses for a longer period of time. Our failure to successfully develop and market products over the next several years, or to realize product revenues, would have a material adverse effect on our business, financial condition and results of operations. We do not expect to receive royalties or other revenues from commercial sales of products developed using our technologies for at least several years, if at all. 39 We have made and intend to continue to make strategic equity investments in, and acquisitions of, technologies and businesses that are complementary to our business. As a result, we may record losses or expenses related to our proportionate ownership interest in such long-term equity investments, record charges for the acquisition of in-process technologies, or record charges for the recognition of the impairment in the value of the securities underlying such investments. Our operating results through December 31, 2001 reflect the expenses incurred in our gene discovery activities, partly offset by the revenues received pursuant to our research and development collaborations with Roche and other recent collaborations in connection with these activities. We will continue these activities, but our operating results will also reflect the substantial costs we expect to incur in building technology and services for the Clinical Genome Miner and commencing the development of the Icelandic Health Sector Database and the deCODE Combined Data Processing system. While we intend to enter into collaborations to help fund and develop the these database services, until we do so there will be no revenue from our database service activities to offset against these costs. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with generally accepted accounting principles requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. On an ongoing basis we evaluate our estimates, which include, among others, those related to collaborative arrangements, property and equipment, income taxes, litigation and other contingencies, materials and supplies, derivatives, intangible assets, and bad debts. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. The impact and any associated risks related to these and our other accounting policies on our business or operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, please refer to our notes to the Consolidated Financial Statements. There can be no assurance that actual results may not differ from the estimates referred to above. Collaborations and Revenue. Our collaborative arrangements and the recognition of revenue in such arrangements is the accounting policy most critical to us. We have formed and will continue to form strategic alliances with collaborative partners. These agreements will consist of a variety of disease-focused programs under which we have or will conduct research funded by our partners, form alliances that combine the transfer of intellectual property with collaborative research and/or development in respect of a specific disease, therapeutic or diagnostic approach, and license intellectual property developed as a result of our proprietary research and development. Currently a substantial portion of our revenues relate to funded research collaborations. Under these arrangements, we perform research in a specific disease area or disease areas aimed at discoveries leading to novel pharmaceutical and diagnostic products. These arrangements generally have fixed terms and renewal periods specific to each agreement. Under these agreements we are entitled to receive committed payments for which we recognize revenue over the term of the associated contract, inclusive of renewal periods to which the company is contractually bound. In addition, we generally receive contractually agreed milestone payments upon the achievement of specific research and product development milestones. We recognize milestones when acknowledgement of having achieved applicable performance requirements is received. Upon notification of the achievement of the milestone a portion of the milestone payment equal to the percentage of the collaboration completed through that date is recognized, with the remainder recognized as services are performed (generally straight-line) over the remaining estimated term of the collaboration. We record revenue earned from our research contracts in accordance with the applicable performance requirements and terms of our various contracts; that is, when payment becomes contractually due. Revenue is 40 generally recorded as contract research costs are incurred, including the percentage of completion basis, for non-refundable up-front fees or upon the achievement of milestones. "Revenue recorded" is a focal metric for us as it is, we believe, an important measure of value we create in a given reporting period. As such, we discuss both revenue recognized under GAAP in our income statement and revenue recorded to our balance sheet in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Annual Report. Given the nature of some of our contractual obligations, we may invoice in advance of the work being completed or we may be required to recognize revenue under GAAP in advance of being contractually permitted to invoice for our services. Revenue invoiced in advance of satisfying the applicable criteria for revenue recognition remains as deferred revenue in our balance sheet at any reporting date and then is recognized a revenue as we provide the related services. Revenue recognized prior to the time we are contractually entitled to invoice is reported as unbilled costs and fees. In considering whether to recognize unbilled revenues we assess the likelihood of successfully fulfilling our obligations under the arrangement as well as the risk of collection. However, to date there have been no losses recorded with respect to such contracts. We are also entitled to royalties or profit sharing under the terms of our agreements. Due to the extended time period for the development and commercialisation of a saleable product or therapy, we have not yet received royalties or profit sharing under any of our contracts. Although we currently depend upon funded research arrangements for a significant portion of our revenue, we are increasing our investment in proprietary research and we will incur the costs of such research. In the near term, this will require us to continue to make significant investments to expand our in-house capabilities for downstream development which we believe will better position us capture the most value to us in our discoveries. As we identify promising discoveries for further development, we may choose to continue the development ourselves into and through clinical trials, regulatory clearances and manufacture, distribution and marketing. In other cases we are or will be working to varying degrees with partners. This shift from primarily funded research activities to more proprietary research activities will, we believe, increase the potential reward to us from our research. In doing so, we may trade-off and amount of revenue guaranteed for the short-term -- i.e., research funding -- that would go to support these activities. We have undertaken this shift with the view of increasing our stake in the long-term value of our discoveries. Other. We consider certain other accounting matters related to property and equipment, foreign exchange transactions, income taxes and litigation and other contingencies to also be important policies for us. - Property and Equipment. Our property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. We periodically review property and equipment for potential impairments and to assess whether their service lives have been affected by continued technological change and development. For example, in 2001 we reduced the service lives of our gene sequencing machines from five years to four years to better reflect our estimate of the service lives of these machines. The change resulted in an increase to depreciation expense of $1.4 million in 2001. Should we determine that the pace of technological change or other matters dictate that we change the estimated service lives of other of our assets, there will be an impact on depreciation expense from the date of the change. Should we determine that there has been an impairment of our fixed assets, goodwill or other intangible assets we would suffer an increase to our net loss or a reduction of our net income in the period such a determination is made. - Foreign exchange transactions. Our functional currency is the U.S. dollar. However, in light of the significance of our operations outside the United States, an important element of our cost base is or will be denominated in Icelandic krona, including much of our payroll and other operating expenses and some of our recent long-term borrowings. To manage our exposure to fluctuations in exchange rates, we have entered into and will likely continue to enter into derivative instruments to hedge our exposure to such fluctuations. 41 - Income Taxes. The preparation of financial statements requires us to evaluate the positive and negative evidence bearing upon the realizability of our deferred tax assets resulting from deductible operating losses and other items. Due to primarily to our history of operating losses and the expectation that such losses will continue into the foreseeable future, we have concluded that currently there is insufficient positive evidence exists to justify the recognition of our net deferred tax assets in our balance sheet. Although there can be no assurance that losses generated to date will be used to offset future taxable income, an adjustment to the valuation of our current net deferred tax assets in the future would increase income in the period that we made a determination that such an adjustment was appropriate. Income tax in Iceland is payable in Icelandic krona. Consequently, the US dollar value of our net operating loss carryforwards and other deferred tax assets and liabilities is subject to fluctuations in exchange rates. Such fluctuations over time may increase or reduce the reported US dollar balance of our deferred tax assets and liabilities, and there would be a corresponding gain or loss reported in our income statement. - Litigation and Other Contingencies. We consider litigation and other claims and potential claims or contingencies in preparing our financial statements under generally accepted accounting principles. We maintain accruals for litigation and other contingencies when we believe a loss to be probable and reasonably estimated. We base our accruals on information available at the time of such determination. Although we are party to litigation and other actual or potential claims, our legal counsel and we are unable to estimate the probability of an unfavourable outcome or estimate any resulting loss. Consequently, we have not included an accrual for such costs in our financial statements. Changes or developments in the relevant action or our strategy in such proceedings could materially affect our results of operations for any particular quarterly or annual period. Since the recognition of a loss is dependent upon factors not completely in the control of management, timing of a charge, if any, is difficult to predict with certainty. RESULTS OF OPERATIONS Our results of operations have fluctuated from period to period and may continue to fluctuate in the future based upon, among other things, the timing and composition of funding under our various collaborative agreements, as well as the progress of our own research and development efforts and how quickly and in what proportion MediChem's capacity is brought to bear on our in-house programs. Results of operations for any period may be unrelated to results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results. We are subject to risks common to companies in our industry and at our stage of development, including risks inherent in our research and development efforts, reliance upon collaborative partners, development by us or our competitors of new technological innovations, ability to market products or services, dependence on key personnel, dependence on key suppliers, protection of proprietary technology, ability to obtain additional financing, ability to negotiate collaborative arrangements, reliance on the license to create and run the Icelandic Health Sector Database, and compliance with governmental and other regulations. In order for a product to be commercialized based on our research, we and our collaborators must conduct preclinical tests and clinical trials, demonstrate the efficacy and safety of our product candidates, obtain regulatory approvals or clearances and enter into manufacturing, distribution and marketing arrangements, as well as obtain market acceptance. We do not expect to receive revenues or royalties based on therapeutic or diagnostic products for a period of years, if at all. 42 Revenues. The following is a summary of deferred revenue:
DECEMBER 31, ----------------------------------------- 1999 2000 2001 ----------- ----------- ----------- Revenue recorded during the year ended...... $17,674,818 $23,712,322 $40,292,874 Revenue recognized during the year ended.... (16,591,485) (21,545,656) (31,550,626) ----------- ----------- ----------- 1,083,333 2,166,666 8,742,248 Deferred revenue at beginning of year....... 1,155,000 2,238,333 4,404,999 ----------- ----------- ----------- Deferred revenue at end of year............. $ 2,238,333 $ 4,404,999 $13,147,247 =========== =========== ===========
Our revenues increased to $31,550,626 for the year-ended December 31, 2001 as compared to $21,545,656 and $16,591,485 for the years ended December 31, 2000 and 1999, respectively. Revenues attributable to our research collaboration agreement with Roche were $25,158,038 for the year ended December 31, 2001 as compared $20,693,333 and $15,776,667 for the years ended December 31, 2000 and 1999, respectively. The $10,004,970 or 46% increase in total revenues from 2000 to 2001 principally results from the recognition of revenue from new milestone achievements under our 1998 research collaboration with Roche but also from the new diagnostics collaboration with Roche and the joint development and commercialization with ABG. The $4,954,171 or 30% increase in revenues from 1999 to 2000 primarily resulted from new milestones having been achieved under the agreement with Roche in 2000. At December 31, 2001, the total amount of deferred research revenue that will be recognized in future periods aggregated $13,147,247. Revenues recorded increased to $40,292,874 for the year-ended December 31, 2001 as compared to $23,712,322 and $17,674,818 for the years ended December 31, 2000 and 1999, respectively. The $16,580,552 or 70% increase in recorded revenues from 2000 to 2001 is principally attributable to our new diagnostics collaboration with Roche and other recent collaborations, but also results from greater milestone achievements under our 1998 research collaboration with Roche. The $6,037,504 or 34% increase in recorded revenues from 1999 to 2000 is principally attributable to greater milestone achievements under the 1998 research collaboration with Roche. Research and Development Expenses. Our research and development expenses increased to $71,796,515 for the year-ended December 31, 2001 as compared to $45,742,081 and $33,213,557 for the years ended December 31, 2000 and 1999, respectively. We have continued to expand our research and development operations, including hiring of additional research personnel with the resulting salary and benefits costs, an expansion of our laboratory facilities and equipment acquisitions, and the resulting depreciation, purchase and use of consumables, and our increased research efforts. The $26,054,434 or 57% increase in research and development expenses from 2000 to 2001 is primarily attributable to depreciation on the expanded asset base and increased purchases of consumables in support of, among other things, our new ABI Prism 3700 DNA Analyzers, salaries and contractor services, and the disposal of laboratory equipment. The $12,528,524 or 38% increase in research and development expenses from 1999 to 2000 resulted from depreciation on the expanded asset base and salaries and contractor services and also from license fee costs payable to the Icelandic government, as required by the Icelandic Health Sector Database operating license, that were recorded in the year ended December 31, 2000 but no such costs were recorded in the year ended December 31, 1999 because the license had not yet been issued. We expect to continue to increase research and development spending as we pursue and expand our efforts. We also expect research and development to increase with the establishment of our new subsidiaries, MediChem, Encode, and deCODE Cancer as well as a result of our new diagnostics development contract with Roche, therapeutics development contract with Roche and other recent collaborations. General and Administrative Expenses. Our general and administrative expenses were $12,402,283 for the year-ended December 31, 2001 as compared to $15,373,223 and $8,220,758 for the years ended December 31, 2000 and 1999, respectively. Without regard to a $1.3 million of non-cash litigation settlement charge in the year ended December 31, 2001, $3.2 million of stock-based contributions in the year ended December 31, 2000, and stock-based compensation and remuneration charges during all periods, general and administrative expense increased approximately $2.2 million or 28% from 2000 to 2001 and $2.8 million or 43 60% from 1999 to 2000 as a result of added salaries, contractor services and other general and administrative expenses in the continued expansion of our operations. We expect general and administrative expenses will increase as we continue to build our operations, notably with the inclusion and integration of MediChem into the business. Stock-Based Compensation and Remuneration Expense. Stock-based compensation and remuneration expense decreased to $4,650,739 for the year-ended December 31, 2001 as compared to $8,686,507 and $9,045,865 for the years ended December 31, 2000 and 1999, respectively. With little compensation being attributed to our more recent stock option grants, stock-based compensation and remuneration expense has been decreasing as grants made to employees in earlier years become fully vested. Historical stock-based compensation and remuneration is not necessarily representative of the effects on reported income or loss for future years due to, among other things, the vesting period of the stock options, the value of stock options that have been granted in recent times and the value of additional options that may be granted in future years. Interest Income. Our interest income was $6,925,135 for the year-ended December 31, 2001 as compared to $8,866,604 and $2,187,695 for the years ended December 31, 2000 and 1999, respectively. The decrease of $1,941,469 or 22% from 2000 to 2001 is attributable to the decline of prevailing interest rates but also from an overall decrease in our cash balance as we continue to use the proceeds of our initial public offering for operations. The increase of $6,678,909 or 305% from 1999 to 2001 resulted from overall higher cash reserves as a result of our initial public offering. Other non-operating income and expense, net. Our other non-operating income and expense, net increased to a net expense of $2,115,434 for the year-ended December 31, 2001 as compared to $415,459 and $1,133,312 for the years ended December 31, 2000 and 1999, respectively. The increase in net other non-operating expense primarily results from foreign exchange losses in the current periods. Income Taxes. As of December 31, 2001, we had an accumulated deficit of $158,592,171 and did not owe any Icelandic or U.S. federal income taxes nor did we pay any in the years ended December 31, 1999, 2000 or 2001. Realization of deferred tax assets is dependent on future earnings, if any. As of December 31, 2001, we had net operating losses able to be carried forward for U.S. federal income tax purposes of approximately $4.1 million to offset future taxable income in the United States that expire at various dates through 2021. Also, as of December 31, 2001 our foreign subsidiaries had net operating loss carryforwards of approximately $22.0 million that expire in varying amounts beginning in 2004. Net Loss and Basic and Diluted Net Loss Per Share. Net loss and basic and diluted net loss per share were $47,838,471 and $1.08 for the year ended December 31, 2001, respectively, as compared to $31,118,503 and $1.63 for the year ended December 31, 2000 and $23,788,447 and $9.65 for the year ended December 31, 2001, respectively. This is an increase of 54% in net loss and a decrease of 34% in basic and diluted net loss per share from 2000 to 2001 and an increase of 31% in net loss and a decrease of 83% in basic and diluted net loss per share from 1999 to 2000. Although net loss has increased in the three years ended December 31, 2001, basic and diluted net loss per share has decreased primarily as a result of the greater number of average shares outstanding as a result of our initial public offering in July 2000. Pro Forma Basic and Diluted Net Loss Per Share. Pro forma basic and diluted net loss per share is computed for periods prior to our initial public offering as if the preferred shares had converted into common shares immediately upon their issuance. Accordingly, in the calculation of pro forma net loss per share for such periods, net loss has not been increased for the dividends accumulated or discounts on preferred stock amortized during such periods. Basic and diluted net loss per share increased to $1.08 for the year ended December 31, 2001 as compared to pro forma basic and diluted net loss per share of $0.85 and $0.86 for the years ended December 31, 2000 and 1999, respectively. LIQUIDITY AND CAPITAL RESOURCES We have financed our operations primarily through funding from collaborative agreements and the issuance of equity securities and debt instruments. For the previous three years, we have received cash of approximately $66 million from collaborative research agreements, $183 million from the issuance of common 44 stock, $76 million from the issuance of preferred stock and warrants, and $44 million from privately placed bonds, bank loans and equipment financing. During 1999, 2000 and 2001 we received total research and development funding of $62 million from Roche. As of December 31, 2001, future funding under terms of our existing agreements is approximately $88 million excluding milestone payments and royalties that we may earn under such collaborations. Cash and Cash Equivalents. As of December 31, 2001, we had $167,061,132 in cash and cash equivalents, including part of a bridge loan ($14 million) that is restricted as to its use as of December 31, 2001. Available cash is invested in accordance with our investment policy's primary objectives of liquidity, safety of principal and diversity of investments. Our cash is deposited only with financial institutions in Iceland, the United Kingdom and the United States having a high credit standing. This cash is largely invested in U.S. dollar denominated money market and checking accounts and also in Icelandic krona denominated accounts. Inflation has been significant in Iceland during the year ended December 31, 2001 but has not had a material effect on our business. Operating Activities. Funds from working capital sources provided $8,249,064 of cash for operating activities for year ended December 31, 2001 as compared to a use of funds of $2,928,466 for the year ended December 31, 2000 and $392,927 provided for the year ended December 31, 1999. As a result, although net loss increased $16,719,968 for the year ended December 31, 2001 as compared to December 31, 2000, net cash used in operating activities increased just $5,345,238 to $21,470,233 in the year ended December 31, 2001 as compared to a use of funds of $16,124,995 in the year ended December 31, 2000. Investing Activities. Our investing activities have consisted of capital expenditures and long-term strategic equity investments in, and acquisitions of, technologies and businesses that are complementary to our business. Purchases of property and equipment during the year ended December 31, 2001 were $47,680,574 as compared to $15,469,623 in the year ended December 31, 2000 and $2,885,644 in the year ended December 31,1999, primarily due to the expansion of our facilities and operations. Particularly, during the year ended December 31, 2001 we expended $23.7 million in respect of the new building to house our operations in the University District of Reykjavik and we paid for the fifty new ABI Prism 3700 DNA Analyzers acquired late in 2000 ($13.1 million). Net cash used in investing activities may in the future fluctuate significantly from period to period due to the timing of our capital expenditures and other investments. Financing Activities. Net cash of $28,076,941 was provided in financing activities in the year ended December 31, 2001 as compared to $196,865,248 provided in the year ended December 31, 2000 and $19,553,293 in the year ended December 31, 1999. Net cash provided by financing activities in 2000 was largely due to approximately $182 million of net proceeds from our July 2000 initial public offering. Net cash provided by financing activities in 2001 was principally due to the financing of certain equipment and of our new headquarters facility. In December 2001, we established a bridge loan with an Icelandic financial institution for the purposes of financing the construction of our new headquarters facility. Total borrowing was $27.5 million and carried an annual interest rate equal to a short-term LIBOR rate plus 0.5%. Portions of the bridge loan expired upon settlement in January and March 2002 out of the proceeds of Tier A bonds and the Tier C bonds/Tier D bank loan, respectively, as discussed below. Monies received in respect of the Tier A bonds ($13.5 million) are included in cash and cash equivalents at December 31, 2001 and monies received in respect of the Tier C bonds and the Tier D bank loan ($14.0 million) are included in restricted cash as a result of the contractual terms with the financial institution. In December 2001, we borrowed $17.8 million from an Icelandic bank for the construction of our new headquarters facility. The borrowing is collateralized by the property and improvements and consists of: privately placed bonds (Tier A) approximately $13.8 million denominated in Icelandic krona and linked to the Icelandic Consumer Price Index that is payable annually beginning December 2002 and bears annual interest of 8.5% that is payable annually beginning December 2002; and, a $4.0 million bank loan (Tier B) -- denominated in U.S. dollars that is payable quarterly beginning March 2002 and bears annual interest of three-month LIBOR plus 3.0% that is payable quarterly beginning March 2002. The lender may demand 45 prepayment of the Tier B bank loan in certain circumstances. The Tier A bonds and the Tier B bank loan were placed in January 2002 and December 2001, respectively. Concurrently, we entered into a cross-currency swap as an economic hedge against foreign exchange rate fluctuations that may occur on Tier A bonds. As of December 31, 2001 we had this outstanding contract with a face amount of $13.8 million bearing annual interest of three-month LIBOR plus 2.85%. In March 2002, we borrowed a further $13.8 million from an Icelandic bank for the construction of our new headquarters facility. The borrowing is collateralized by the property and improvements and consists of: privately placed bonds (Tier C) -- approximately $7.3 million denominated in Icelandic krona and linked to the Icelandic Consumer Price Index that is payable in March 2007 and bears annual interest of 12.0% that is payable annually beginning March 2003; and, a $6.6 million bank loan (Tier D) -- denominated in U.S. dollars that is payable in March 2007 and bears annual interest of three-month LIBOR plus 6.0% that is payable quarterly beginning June 2002. Tier C bonds may be prepaid at each interest payment date and the Tier D bank loan may be prepaid on the anniversary date of the loan starting December 2003. Concurrently, we entered into a cross-currency swap as an economic hedge against foreign exchange rate fluctuations that may occur on the Tier C bonds. This contract with a face amount of $7.3 million expires in March 2007 and bears annual interest of twelve-month LIBOR plus 6%. In connection with the Tier C bonds and the Tier D bank loan, we issued a warrant giving the holder the right to purchase a total of 933,800 shares of our common stock at $15.00 per share, as adjusted. The warrants expire in March 2007 and convert to shares of our common stock automatically in the event the market value of a share of our common stock should exceed $24.00 for thirty consecutive days of trading. Contractual Commitments. Our major outstanding contractual commitments relate to the privately placed bonds and bank loans, equipment lease financings, our license for the Icelandic health sector database, a minimum purchase commitment to ABG and the remaining construction costs with respect to our new headquarters facility. Our contractual commitments as of December 31, 2001 were as follows:
PAYMENTS DUE BY PERIOD -------------------------------------------------------- LESS THAN DUE TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS THEREAFTER ------- --------- --------- --------- ---------- (IN THOUSANDS) Long-term debt.......................... $31,500 $ 2,571 $ 5,143 $5,143 $18,643 Capital lease obligations, including interest.............................. 16,263 5,533 9,356 786 588 Operating leases........................ 3,922 1,004 1,794 1,017 107 Icelandic health sector database license............................... 6,800 680 1,360 1,360 3,400 Minimum purchase commitment to ABG...... 16,300 16,300 New building construction............... 3,700 3,700 ------- ------- ------- ------ ------- $78,485 $29,788 $17,653 $8,306 $22,738 ======= ======= ======= ====== =======
General. We expect cash requirements to continue to increase significantly as we: invest in genotyping, sequencing and bioinformatics capabilities; integrate MediChem into our operations, invest in software and hardware to support the continuing development of the database services; continue to seek access to technologies through investments, research and development alliances, license agreements and/or acquisitions; and continue to make improvements in existing facilities and invest in new facilities. Based upon our current plans, and taking into consideration the proceeds of the initial public offering and recent debt financings, we believe that our existing resources will be adequate to satisfy our capital needs for several years. Our cash requirements depend on numerous factors, including our ability to obtain new research collaboration agreements, to obtain subscription and collaboration agreements for the database services; expenditures in connection with alliances, license agreements and acquisitions of and investments in complementary technologies and businesses; competing technological and market developments; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; the purchase of additional capital equipment, including capital equipment necessary to ensure that our sequencing and 46 genotyping operations remain competitive; and capital expenditures required to expand our facilities. Changes in our research and development plans or other changes affecting our operating expenses may result in changes in the timing and amount of expenditures of our capital resources. We will require significant additional capital in the future, which we may seek to raise through further public or private equity offerings, additional debt financing or added collaborations and licensing arrangements. No assurance can be given that additional financing or collaborations and licensing arrangements will be available when needed, or that if available, will be obtained on favorable terms. If adequate funds are not available when needed, we may have to curtail operations or attempt to raise funds on unattractive terms. Recent Accounting Pronouncements. In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. Under SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized. With respect to goodwill and intangible assets acquired prior to July 1, 2001, we are required to adopt SFAS No. 142 for fiscal year 2002 and we are currently in the process of evaluating the impact SFAS No. 142 will have on our financial position and results from operations. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. We are required to adopt SFAS No. 143 for fiscal year 2003 and we do not believe its adoption will have a significant impact on our financial position or results of operations. In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of long Lived Assets to Be Disposed Of" and provides a single accounting model for long-lived assets to be disposed of. We are required to adopt SFAS No. 144 for fiscal year 2002 and do not believe its adoption will have a significant impact on our financial position or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary objective of our investment activities is to preserve principal while maximizing income we receive from our investments without significantly increasing risk. Some of the securities in our investment portfolio may be subject to market risk. This means that a change in prevailing interest rates may cause the market value of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the market value of our investment will probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds and government and non-government debt securities. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. As of December 31, 2001, all of our cash and cash equivalents were in money market and checking accounts. We are exposed to market risks from changes in foreign currency exchange rates, interest rates and investment prices. These changes may adversely affect our operating results and financial condition. We seek to manage these risks through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We control and manage foreign exchange risk, interest rate risk, and investment price risk by continually monitoring changes in key economic indicators and market information. As a consequence of the nature our business and operations our reported financial results and cash flows are exposed to the risks associated with fluctuations in the exchange rates of the U.S. dollar, the Icelandic krona and other world currencies. We continue to monitor our exposure to currency risk but have not yet 47 purchased instruments to hedge these risks through the use of derivative financial instruments, principally foreign currency forward exchange contracts. We hold various interest rate sensitive assets and liabilities to manage the liquidity and cash needs of our day-to-day operations. As a result, we are exposed to risks due to changes in interest rates. In order to mitigate risks associated with interest rate sensitive liabilities we use interest rate derivative instruments, such as interest rate swaps, and may in future use other instruments to achieve the desired interest rate maturities and asset/liability structures. We are exposed to credit (or repayment) risk, as well as market risk from the use of derivative instruments. If the counterparty fails to fulfill its performance obligations under a derivative contract, our credit risk will equal the positive market value in a derivative. Consequently, when the fair market value of a derivative contract is positive, this indicates that the counterparty owes us, thus creating a repayment risk for us. When the fair market value of a derivative contract is negative, we owe the counterparty and therefore, assume no repayment risk. In order to minimize the credit risk in derivative instruments, we enter into transactions with high quality counterparties such as financial institutions that satisfy our established credit approval criteria. We review the credit ratings of such counterparties on a regular basis. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K. A list of the financial statements filed herewith is found at "Index to Financial Statements and Schedules" on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY For information concerning this item, see the information under "Election of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement to be filed with respect to the 2002 Annual Meeting of Stockholders, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION For information concerning this item, see the information under "Executive Compensation" in the Company's Proxy Statement to be filed with respect to the 2002 Annual Meeting of Stockholders, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT For information concerning this item, see the information under "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement to be filed with respect to the 2002 Annual Meeting of Stockholders, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For information concerning this item, see the information under "Certain Relationships and Related Transactions" in the Company's Proxy Statement to be filed with respect to the 2002 Annual Meeting of Stockholders, 2001, which information is incorporated herein by reference. 48 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are included as part of this Annual Report on Form 10-K: 1. Financial Statements:
PAGE ---- Report of Independent Accountants........................... F-2 Consolidated Statements of Operations....................... F-3 Consolidated Balance Sheets................................. F-4 Consolidated Statements of Changes in Stockholders' Equity.................................................... F-5 Consolidated Statements of Cash Flows....................... F-7 Notes to Consolidated Financial Statements.................. F-8
2. All schedules are omitted as the information required is inapplicable or the information is presented in the consolidated financial statements or the related notes. 3. Exhibits:
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1 Agreement and Plan of Merger dated as of January 7, 2002, by and among deCODE genetics, Inc., Saga Acquisition Corp, and MediChem Life Sciences, Inc. (Incorporated by reference to Annex A to the Proxy Statement/Prospectus included in Pre-Effective Amendment No. 1 to deCODE's Registration Statement on Form S-4 (Registration No. 333-81848) filed on February 12, 2002). 3.1 Amended and Restated Certificate of Incorporation, as further amended (Incorporated by reference to Exhibit 3.1 and Exhibit 3.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 3.2 Bylaws, as amended (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 4.1 Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 4.2 Form of Warrant to Purchase Series A Preferred Stock (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 4.3 Form of Warrant to Purchase Series C Preferred Stock (Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.1 Form of License from The Icelandic Data Protection Commission (now, The Icelandic Data Protection Authority) to Islensk erfoagreining ehf. and its Clinical Collaborators to Use and Access Patient Records and Other Clinical Data Relating to Individuals (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.2* 1996 Equity Incentive Plan, as amended (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-56996) filed on March 14, 2001.
49
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.3* Form of Non-Statutory Stock Option Agreement, as executed by employees and officers of deCODE genetics, Inc. who received non-statutory stock options (Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K filed March 23, 2001). 10.4* Form of Employee Proprietary Information and Inventions Agreement (Incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.5 Agreement on the Collaboration of Friorik Skulason (FS) and Islensk erfoagreining ehf. (IE) on the Creation of a Database of Icelandic Genealogy, dated April 15, 1997 (Incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.6* Consultancy Contract between deCODE genetics, Inc. and Vane Associates, dated December 1, 1997, together with Nondisclosure Agreement executed by Vane Associates as of December 1, 1997, as amended (Incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.7* Indemnity Agreement between deCODE genetics, Inc. and Sir John Vane, dated December 1, 1997 (Incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.8* Amended and Restated Non-Recourse Promissory Note between deCODE genetics, Inc. and Hannes Smarason, dated March 24, 1999 (Incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.9+ Research Collaboration and Cross-license Agreement among F. Hoffman-La Roche Ltd, Hoffman-La Roche Inc. and deCODE genetics, Inc., dated February 1, 1998 (Incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.10 Amended and Restated Investor rights Agreement of deCODE genetics, Inc., dated as of February 2, 1998, as further amended and restated (Incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.11* Employment Agreement between Islensk erfoagreining ehf. and Kristjan Erlendsson, dated September 4, 1998 (Incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.12 Co-operation Agreement between Reykjavik Hospital and Islensk erfoagreining ehf., dated November 4, 1998 (Incorporated by reference to Exhibit 10.22 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.13 Co-operation Agreement between the Iceland State Hospital and Islensk erfoagreining ehf., dated December 15, 1998 (Incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.14* Non-Recourse Promissory Note between deCODE genetics, Inc. and Hannes Smarason, dated September 15, 1999 (Incorporated by reference to Exhibit 10.35 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
50
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.15 Research Collaboration Agreement by and between Islenskar hveraorverur ehf. (now Prokaria, ehf.) and Islensk erfoagreining ehf., dated December 28, 1999 (Incorporated by reference to Exhibit 10.38 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.16 Agreement between The Minister for Health and Social Security and Islensk erfoagreining ehf. relating to the Issue of an Operating License for the Creation and Operation of a Health Sector Database, dated January 21, 2000 (Incorporated by reference to Exhibit 10.39 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.17 Operating License issued to Islensk erfoagreining ehf., for the Creation and Operation of a Health Sector Database, dated January 22, 2000 (Incorporated by reference to Exhibit 10.40 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.18 Agreement between The University of Iceland, Islensk erfoagreining ehf., and the City of Reykjavik, dated February 15, 2000 (Incorporated by reference to Exhibit 10.42 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.19* Form of Employee Confidentiality, Invention Assignment and Non-Compete Agreement executed by certain officers (Incorporated by reference to Exhibit 10.44 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.20 Series C Preferred Stock and Warrant Purchase Agreement between Roche Finance Ltd and deCODE genetics, Inc., dated as of February 1, 1998 (Incorporated by reference to Exhibit 10.45 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.21+ Strategic Alliance Agreement between Partners HealthCare System, Inc., The General Hospital Corporation, d.b.a. Massachusetts General Hospital, The Brigham and Women's Hospital, Inc. and deCODE genetics Ltd. (Islensk erfoagreining), dated May 11, 2000 (Incorporated by reference to Exhibit 10.48 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.22+ Crosswalk Development Agreement between Partners HealthCare System, Inc., The General Hospital Corporation, d.b.a. Massachusetts General Hospital, The Brigham and Women's Hospital, Inc. and deCODE genetics Ltd. (Islensk erfoagreining), dated May 11, 2000 (Incorporated by reference to Exhibit 10.49 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.23* Employment Agreement between Islensk erfoagreining ehf. and Hakon Guobjartson, dated May 5, 1999 (Incorporated by reference to Exhibit 10.52 to the Company's Annual Report on Form 10K filed March 23, 2001). 10.24 Form of Contract on the Processing of Clinical Data and their Transfer to a Health Sector Database between several Health Institutions and Islensk erfoagreining ehf. (Incorporated by reference to Exhibit 10.58 to the Company's Annual Report on Form 10-K filed March 23, 2001). 10.25* Amended and Restated Promissory Note, dated January 1, 2001, by Hannes Smarason and the Company (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2001).
51
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.26 Work Contract dated March 15, 2001 between Islensk erfdagreining ehf. and Eykt ehf., an Icelandic civil-works engineer, on concrete casting, external finish work, conduits and ventilation systems, electrical and specialized systems in Sturlugata 8, Reykjavik (Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2001). 10.27* Employment and Amended and Restated Employee Confidentiality, Invention Assignment and Non-Compete Agreement between deCODE genetics, Inc. and Mark Gurney, dated as of August 21, 2000 and signed on August 13, 2001 (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001). 10.28* Employment and Employee Confidentiality, Invention Assignment and Non-Compete Agreement between deCODE genetics, Inc. and Lance Thibault, dated February 1, 2001 and signed on June 20, 2001 (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001). 10.29* Employment Agreement between deCODE genetics, Inc. and Michael W. Young dated June 4, 2001 (Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001). 10.30+ Collaboration Agreement between Genmab A/S, Medarex, Inc. and deCODE genetics, ehf. dated June 12, 2001 (Incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001). 10.31+ Contract Services Agreement Re. Gene Expression Profiles In Rheumatoid Arthritis between Encode ehf. and Genmab A/S dated June 12, 2001 (Incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001). 10.32+ Collaboration and Cross-License Agreement Re. Diagnostics between F. Hoffman-La Roche Ltd. AG and deCODE genetics, ehf dated as of June 29, 2001 (Incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001). 10.33+ Joint Development and Commercialization Agreement between deCODE genetics, ehf. and PE Corporation (NY) through its Applied Biosystem Group dated July 16, 2001 (Incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001). 10.34+ Reagent Supply Agreement between deCODE genetics, ehf and PE Corporation (NY) through its Applied Biosystem Group dated July 16, 2001 (Incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001). 10.35+ Pharmacogenomics Collaboration and License Agreement between Encode ehf. and Affymetrix, Inc. dated July 16, 2001 (Incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001). 10.36 Contract on Financial Leasing between Lysing hf, and Islensk erfoagreining ehf., dated as of December 13, 2001. 10.37 Land Lease Agreement between the City of Reykjavik and Islensk erfoagreining ehf., dated as of December 21, 2001. 10.38 Agreement on the Details of the Arrangement of Encumbrances in the Site Agreement between the University of Iceland and Islensk erfoagreining ehf., dated as of December 21, 2001. 10.39 Annex to the Agreement on the Details of the Arrangement of Encumbrances in the Site Agreement between the University of Iceland and Islensk erfoagreining ehf., dated as of January 4, 2002. 10.40# Loan Agreement between Sturlugata 8, ehf. and Islandsbanki-FBA, hf., dated as of December 21, 2001.
52
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.41# Loan Agreement between Sturlugata 8, ehf. and Islandsbanki-FBA, hf., dated as of December 27, 2001. 10.42 Currency Exchange Agreement between Sturlugata 8 ehf. and Islandsbanki-FBA hf., dated as of December 21, 2001. 10.43# Agreement on the Sale and Listing of Bonds Issued by Sturlugata 8 ehf. between Islandsbanki-FBA, hf. and Islensk erfoagreining ehf., dated as of December 21,2001. 10.44 General Bond with Consumer Price Index between Islandsbanki-FBA, hf. and Sturlugata 8 ehf., dated as of December 21, 2001. 10.45 General Bond with Consumer Price Index between Islandsbanki-FBA, hf. and Sturlugata 8 ehf., dated as of December 21, 2001. 10.46# Research Collaboration and Cross-License Agreement among F.Hoffman-La Roche Ltd and Hoffman-La Roche Inc. and deCODE genetics, ehf. (Islensk erfoagreining), effective as of February 1, 2002. 10.47 Loan Agreement between Kristjan Erlendsson and Islensk erfoagreining ehf., dated as of October 11, 2001. 21.1 Subsidiaries of deCODE genetics, Inc. 23.1 Consent of PricewaterhouseCoopers ehf., independent public accountants. 99.1 Government Regulation on a Health Sector Database, dated January 22, 2000 (Incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 99.2 Act. No. 139/1998 on a Health Sector Database (Incorporated by reference to Exhibit 99.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
- --------------- + Certain portions of this exhibit have been granted confidential treatment by the Commission. The omitted portions have been separately filed with the Commission. * Constitutes a management contract or compensatory plan or arrangement. # A request for confidential treatment had been submitted with respect to this exhibit. The copy which was filed as an exhibit omits the information subject to the request for confidential treatment. (b) REPORTS ON FORM 8-K We did not file any reports on Form 8-K during the quarter ended December 31, 2001. 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. deCODE genetics, Inc. By: /s/ DR. KARI STEFANSSON MARCH 27, 2002 ------------------------------------ Dr. Kari Stefansson, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ DR. KARI STEFANSSON Chairman, President, Chief March 27, 2002 - --------------------------------------------------- Executive Officer (principal Dr. Kari Stefansson executive officer) and Director /s/ LANCE THIBAULT Chief Financial Officer and March 27, 2002 - --------------------------------------------------- Treasurer (principal Lance Thibault financial officer and principal accounting officer) /s/ JEAN-FRANCOIS FORMELA Director March 27, 2002 - --------------------------------------------------- Jean-Francois Formela /s/ TERRANCE MCGUIRE Director March 27, 2002 - --------------------------------------------------- Terrance McGuire /s/ SIR JOHN VANE Director March 27, 2002 - --------------------------------------------------- Sir John Vane
54 deCODE GENETICS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................... F-2 Consolidated Statements of Operations....................... F-3 Consolidated Balance Sheets................................. F-4 Consolidated Statements of Changes in Stockholders' Equity.................................................... F-5 Consolidated Statements of Cash Flows....................... F-7 Notes to Consolidated Financial Statements.................. F-8
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and stockholders of deCODE genetics, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows present fairly, in all material respects, the consolidated financial position of deCODE genetics, Inc. (deCODE) at December 31, 2000 and 2001 and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 2001, in conformity with generally accepted accounting principles in the United States. These financial statements are the responsibility of deCODE's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers ehf. Reykjavik, Iceland March 8, 2002 F-2 deCODE GENETICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------- 1999 2000 2001 ------------ ------------ ------------ Revenue.......................................... $ 16,591,485 $ 21,545,656 $ 31,550,626 Operating expenses Research and development....................... 33,213,557 45,742,081 71,796,515 General and administrative..................... 8,220,758 15,373,223 12,402,283 ------------ ------------ ------------ Total operating expenses............... 41,434,315 61,115,304 84,198,798 ------------ ------------ ------------ Operating loss................................... (24,842,830) (39,569,648) (52,648,172) Interest income.................................. 2,187,695 8,866,604 6,925,135 Other non-operating income and (expense), net.... (1,133,312) (415,459) (2,115,434) Taxes............................................ 0 0 0 ------------ ------------ ------------ Net loss......................................... (23,788,447) (31,118,503) (47,838,471) Accrued dividends and amortized discount on preferred stock................................ (7,542,787) (7,540,879) 0 Premium on repurchase of preferred stock......... (30,887,044) 0 0 ------------ ------------ ------------ Net loss available to common stockholders........ $(62,218,278) $(38,659,382) $(47,838,471) ============ ============ ============ Basic and diluted net loss per share............. $ (9.65) $ (1.63) $ (1.08) Shares used in computing basic and diluted net loss per share................................. 6,446,055 23,671,113 44,289,911
The accompanying notes are an integral part of the Consolidated Financial Statements. F-3 deCODE genetics, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------------ 2000 2001 ------------- ------------- ASSETS Current assets: Cash and cash equivalents................................. $ 194,144,688 $ 153,061,132 Restricted cash........................................... 0 14,000,000 Receivables and other current assets...................... 14,482,336 26,043,029 ------------- ------------- Total current assets.............................. 208,627,024 193,104,161 Property and equipment, net................................. 37,100,690 61,207,537 Other long-term assets and deferred charges................. 3,172,853 2,047,471 ------------- ------------- Total assets...................................... $ 248,900,567 $ 256,359,169 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses..................... $ 22,957,481 $ 21,164,576 Current portion of capital lease obligations.............. 1,749,807 4,855,420 Current portion of long-term debt......................... 0 2,571,429 Deferred research revenue................................. 4,404,999 6,147,247 ------------- ------------- Total current liabilities......................... 29,112,287 34,738,672 Capital lease obligations, net of current portion........... 2,801,853 9,922,318 Long-term debt, net of current portion...................... 0 28,928,571 Deferred research revenue................................... 0 7,000,000 Other long-term liabilities................................. 717,261 427,675 Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value; Authorized: 6,716,666 shares; Issued and outstanding: none........................... 0 0 Common stock, $0.001 par value; Authorized: 60,000,000 shares; Issued and outstanding: 45,041,969 at December 31, 2000; and 45,328,227 and 45,257,386, respectively, at December 31, 2001...................................... 45,042 45,328 Additional paid-in capital................................ 350,398,909 351,960,182 Notes receivable.......................................... (11,850,953) (10,788,635) Deferred compensation..................................... (11,568,776) (6,173,592) Accumulated deficit....................................... (110,753,700) (158,592,171) Accumulated other comprehensive income.................... (1,356) 52,596 Treasury stock............................................ 0 (1,161,775) ------------- ------------- Total stockholders' equity........................ 216,269,166 175,341,933 ------------- ------------- Total liabilities and stockholders' equity........ $ 248,900,567 $ 256,359,169 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. F-4 deCODE GENETICS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
DIVIDENDS ACCRETED ON SHARES REDEEMABLE, ---------------------- ADDITIONAL CONVERTIBLE PAR PAID-IN NOTES DEFERRED PREFERRED ACCUMULATED COMMON STOCK VALUE CAPITAL RECEIVABLE COMPENSATION STOCK DEFICIT ------------ ------- ------------ ------------ ------------ ----------- ------------- BALANCE AT DECEMBER 31, 1998........................ 9,381,500 $ 9,382 $ 17,842,611 $ (4,033,347) $(8,549,906) $(3,215,628) $ (20,275,235) Issuance of common stock..... 68,000 68 1,449,012 Forfeiture of unvested Founder stock and unvested common stock issued upon early exercise of stock options..................... (359,655) 219,111 513,424 Exchange of common stock for Series B preferred stock.... (333,333) 750,000 Issuance of common stock upon exercise of stock options... 847,500 154 663,392 (5,895,594) Deferred compensation arising from stock options.......... 12,941,712 (12,941,712) Cancellation of stock options previously giving rise to deferred compensation....... (115,072) 115,072 Amortization of deferred compensation................ 8,313,365 Payments of notes receivable.................. 112,000 Premium on repurchase of preferred stock............. 582,514 (31,469,558) Beneficial conversion feature of issuance of Series C preferred stock............. 1,540,920 Accretion of dividends and amortization of discount on preferred stock............. (5,751,837) (1,790,950) Comprehensive income (loss): Net loss for the period...... (23,788,447) Other comprehensive income (loss): Foreign currency translation................. Total comprehensive income (loss):..................... ---------- ------- ------------ ------------ ------------ ----------- ------------- BALANCE AT DECEMBER 31, 1999........................ 9,604,012 $ 9,604 $ 35,072,575 $ (9,597,830) $(12,549,757) $(8,384,951) $ (77,324,190) ---------- ------- ------------ ------------ ------------ ----------- ------------- ACCUMULATED OTHER COMPREHENSIVE TOTAL INCOME TREASURY STOCKHOLDERS' (LOSS) STOCK EQUITY (DEFICIT) ------------- --------------- ---------------- BALANCE AT DECEMBER 31, 1998........................ $ 0 $ 0 $(18,222,123) Issuance of common stock..... 1,449,080 Forfeiture of unvested Founder stock and unvested common stock issued upon early exercise of stock options..................... (732,895) (360) Exchange of common stock for Series B preferred stock.... (4,500,000) (3,750,000) Issuance of common stock upon exercise of stock options... 5,232,895 847 Deferred compensation arising from stock options.......... 0 Cancellation of stock options previously giving rise to deferred compensation....... 0 Amortization of deferred compensation................ 8,313,365 Payments of notes receivable.................. 112,000 Premium on repurchase of preferred stock............. (30,887,044) Beneficial conversion feature of issuance of Series C preferred stock............. 1,540,920 Accretion of dividends and amortization of discount on preferred stock............. (7,542,787) Comprehensive income (loss): Net loss for the period...... (23,788,447) Other comprehensive income (loss): Foreign currency translation................. 2,411 2,411 ------------ Total comprehensive income (loss):..................... (23,786,036) ----------- --------------- ------------ BALANCE AT DECEMBER 31, 1999........................ $ 2,411 $ 0 $(72,772,138) ----------- --------------- ------------
The accompanying notes are an integral part of the consolidated financial statements. F-5 deCODE GENETICS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) -- (CONTINUED)
DIVIDENDS ACCRETED ON SHARES REDEEMABLE, ---------------------- ADDITIONAL CONVERTIBLE PAR PAID-IN NOTES DEFERRED PREFERRED ACCUMULATED COMMON STOCK VALUE CAPITAL RECEIVABLE COMPENSATION STOCK DEFICIT ------------ ------- ------------ ------------ ------------ ----------- ------------- BALANCE AT DECEMBER 31,1999..................... 9,604,012 $ 9,604 $ 35,072,575 $ (9,597,830) $(12,549,757) $(8,384,951) $ (77,324,190) Common stock issued upon initial public offering, net of issuance cost............ 11,040,000 11,040 181,940,726 Issuance of common stock upon exercise of warrants........ 306,943 307 (307) Other issuances of common stock....................... 165,910 166 3,670,002 (665,700) Redeemable, convertible preferred stock converted to to common stock............. 23,737,081 23,737 118,735,067 13,614,823 Beneficial conversion feature of issuance of Series C preferred stock............. 2,040,880 Accretion of dividends and amortization of discount on preferred stock............. (5,229,872) (2,311,007) Forfeiture of unvested common stock issued upon early exercise of stock options... (26,977) 109,325 185,676 Issuance of common stock upon exercise of stock options... 215,000 188 2,130,417 (2,362,448) Deferred compensation arising from stock options.......... 6,809,549 (6,809,549) Amortization of deferred compensation................ 8,270,554 Comprehensive income (loss): Net loss for the period...... (31,118,503) Other comprehensive income (loss): Foreign currency translation................. Total comprehensive income (loss):..................... ---------- ------- ------------ ------------ ------------ ----------- ------------- BALANCE AT DECEMBER 31, 2000........................ 45,041,969 45,042 350,398,909 (11,850,953) (11,568,776) 0 (110,753,700) Issuance of common stock upon exercise of warrants........ 94,444 94 (94) Other issuances of common stock....................... 191,814 192 1,555,117 Forfeiture of unvested common stock issued upon early exercise of stock options... (70,841) 409,509 750,695 Payment of notes............. 652,809 Deferred compensation arising from stock options.......... 6,250 (6,250) Amortization of deferred compensation................ 4,650,739 Comprehensive income (loss): Net loss for the period...... (47,838,471) Other comprehensive income (loss): Foreign currency translation................. Total comprehensive income (loss)...................... ---------- ------- ------------ ------------ ------------ ----------- ------------- BALANCE AT DECEMBER 31, 2001........................ 45,257,386 $45,328 $351,960,182 $(10,788,635) $(6,173,592) $ 0 $(158,592,171) ========== ======= ============ ============ ============ =========== ============= ACCUMULATED OTHER COMPREHENSIVE TOTAL INCOME TREASURY STOCKHOLDERS' (LOSS) STOCK EQUITY (DEFICIT) ------------- --------------- ---------------- BALANCE AT DECEMBER 31,1999..................... $ 2,411 $ 0 $(72,772,138) Common stock issued upon initial public offering, net of issuance cost............ 181,951,766 Issuance of common stock upon exercise of warrants........ 0 Other issuances of common stock....................... 3,004,468 Redeemable, convertible preferred stock converted to to common stock............. 132,373,627 Beneficial conversion feature of issuance of Series C preferred stock............. 2,040,880 Accretion of dividends and amortization of discount on preferred stock............. (7,540,879) Forfeiture of unvested common stock issued upon early exercise of stock options... (295,028) (27) Issuance of common stock upon exercise of stock options... 295,028 63,185 Deferred compensation arising from stock options.......... 0 Amortization of deferred compensation................ 8,270,554 Comprehensive income (loss): Net loss for the period...... (31,118,503) Other comprehensive income (loss): Foreign currency translation................. (3,767) (3,767) ------------ Total comprehensive income (loss):..................... (31,122,270) ----------- --------------- ------------ BALANCE AT DECEMBER 31, 2000........................ (1,356) 0 216,269,166 Issuance of common stock upon exercise of warrants........ 0 Other issuances of common stock....................... 1,555,309 Forfeiture of unvested common stock issued upon early exercise of stock options... (1,161,775) (1,571) Payment of notes............. 652,809 Deferred compensation arising from stock options.......... 0 Amortization of deferred compensation................ 4,650,739 Comprehensive income (loss): Net loss for the period...... (47,838,471) Other comprehensive income (loss): Foreign currency translation................. 53,952 53,952 ------------ Total comprehensive income (loss)...................... (47,784,519) ----------- --------------- ------------ BALANCE AT DECEMBER 31, 2001........................ $ 52,596 $ (1,161,775) $175,341,933 =========== =============== ============
The accompanying notes are an integral part of the consolidated financial statements. F-6 deCODE GENETICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------ 1999 2000 2001 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................... $(23,788,447) $(31,118,503) $(47,838,471) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................. 3,374,039 5,203,715 10,028,378 Amortization of deferred stock compensation............... 8,313,365 8,270,554 4,650,739 Other stock-based remuneration and stock contributions.... 732,500 3,609,930 52,500 Loss on disposal of equipment............................. 0 0 1,607,583 Litigation settlement..................................... 0 0 1,292,642 Equity in net loss of affiliate........................... 486,366 738,359 461,948 Accrued interest on receivable from share issuance........ (893,836) 893,836 0 Equipment received for services provided.................. (414,000) 0 0 Other..................................................... 0 (794,420) 25,384 Changes in operating assets and liabilities: Receivables and other current assets...................... (1,748,007) (11,671,110) (6,560,693) Accounts payable and accrued expenses..................... 906,977 6,315,817 11,357,095 Deferred research revenue................................. 1,083,333 2,166,666 8,742,248 Unbilled research revenue................................. 0 0 (5,000,000) Other long-term liabilities............................... 150,624 260,161 (289,586) ------------ ------------ ------------ Net cash used in operating activities................... (11,797,086) (16,124,995) (21,470,233) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment........................ (2,885,644) (15,469,623) (47,680,574) Investment in affiliated company, net..................... (104,324) (446,345) 0 Acquisitions and investments, net......................... 3,581 (350,471) 0 Other..................................................... 0 (174,790) (9,690) ------------ ------------ ------------ Net cash used in investing activities................... (2,986,387) (16,441,229) (47,690,264) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of preferred stock and warrants.................. 41,658,444 34,534,276 0 Issuance of common stock, net............................. 848 182,014,951 0 Repurchase of preferred stock............................. (20,310,555) (17,467,077) 0 Repayment of notes receivable for common stock............ 112,000 0 652,809 Forfeiture of common stock................................ (360) (27) (1,571) Proceeds from financing of facility....................... 0 0 17,199,625 Proceeds from equipment sale-leaseback financing.......... 12,000,000 Installment payments on capital lease obligations......... (1,907,084) (2,216,875) (1,773,922) ------------ ------------ ------------ Net cash provided by financing activities............... 19,553,293 196,865,248 28,076,941 ------------ ------------ ------------ Net increase (decrease) in cash............................. 4,769,820 164,299,024 (41,083,556) Cash and cash equivalents at beginning of period............ 25,075,844 29,845,664 194,144,688 ------------ ------------ ------------ Cash and cash equivalents at end of period.................. $ 29,845,664 $194,144,688 $153,061,132 ============ ============ ============ Supplemental cash flow information: Cash paid for interest.................................... $ 574,226 $ 495,143 $ 388,005 Supplemental schedule of non-cash transactions: Series A preferred stock issued in settlement of current liability............................................... 150,000 0 0 Receivable from share issuance............................ 33,143,836 0 0 Payable to preferred shareholders......................... 17,467,077 0 0 Series B Preferred Stock issued in exchange for shares in affiliate............................................... 779,064 0 0 Common stock issued in exchange for shares in subsidiary.............................................. 1,449,080 2,394,523 210,000 Supplies received in exchange for services provided....... 239,600 0 0 Payable for laboratory equipment.......................... $ 0 $ 13,150,000 $ 0
The accompanying notes are an integral part of the consolidated financial statements. F-7 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE COMPANY References in this report to deCODE and "we" and "us" refer to deCODE genetics, Inc., a Delaware corporation, and deCODE genetics, Inc.'s wholly owned subsidiary, Islensk erfoagreining ehf., an Icelandic company registered in Reykjavik, and its subsidiaries Encode ehf., deCODE Cancer ehf. and Vetrargardurinn ehf. deCODE is a genomics and health informatics company which applies and develops modern informatics to collect and analyze data about the Icelandic population in order to develop products and services for the healthcare industry. Founded in 1996, deCODE conducts its operations and has its facilities in Reykjavik, Iceland, with business offices also in Massachusetts. BASIS OF PRESENTATION These financial statements are reported in United States dollars, deCODE's functional currency, and prepared in accordance with generally accepted accounting principles in the United States. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts and operations of deCODE genetics, Inc. and its wholly owned subsidiary, Islensk erfoagreining ehf., including its subsidiaries. deCODE conducts its operations through Islensk erfoagreining ehf. No dividends have been paid by this subsidiary. All significant intercompany accounts and transactions are eliminated upon consolidation. Investments in which deCODE has significant influence, but does not control, are accounted for using the equity method. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. UNCERTAINTIES deCODE is subject to risks common to companies in the biotechnology industry including, but not limited to, development by deCODE or its competitors of new technological innovations, ability to market products or services, dependence on key personnel, dependence on key suppliers, protection of proprietary technology, ability to obtain additional financing, ability to negotiate collaborative arrangements, reliance on the license to create and run the Icelandic Health Sector Database, and compliance with governmental and other regulations. CONCENTRATION OF RISK deCODE has no significant off-balance sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. Financial instruments that potentially subject deCODE to concentrations of credit risk consist principally of temporary cash investments. deCODE's cash is deposited only with financial institutions in Iceland, United Kingdom and the United States having a high credit standing. Deposits with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk. F-8 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of short-term financial instruments, including cash and cash equivalents, restricted cash, receivables, certain other current assets, trade accounts payable, certain accrued liabilities, and other current liabilities approximates their carrying amount in the financial statements due mainly to the short maturity of such instruments. Based on borrowing rates currently available to deCODE for loans and capital lease obligations with similar terms, the carrying value of its debt obligations approximates fair value. CASH EQUIVALENTS deCODE considers all highly liquid investments with a maturity of ninety days or less at the date of purchase to be cash equivalents. MATERIALS & SUPPLIES Materials and supplies are valued at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets of generally fifty years for buildings, three to four years for laboratory equipment, five years for furniture and fixtures, and three to five years for other equipment. Maintenance and repairs are expensed as incurred, while major betterments are capitalized. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation or amortization are eliminated from the accounts and any resulting gain or loss is reflected in the statement of operations. IMPAIRMENT OF LONG-LIVED ASSETS deCODE reviews long-lived assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held for use is measured by comparing the carrying amount of an asset to the undiscounted estimated future cash flows expected to be generated by the asset. In estimating expected future cash flows for determining whether an asset is impaired, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. If any such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceeds its fair value. deCODE has made no adjustments to the carrying values of long-lived assets during the years ended December 31, 1999, 2000 or 2001. CAPITAL LEASES Assets acquired under capital lease agreements are recorded at the present value of the future minimum rental payments using interest rates appropriate at the inception of the lease. Property and equipment subject to capital lease agreements are amortized over the shorter of the life of the lease or the estimated useful life of the asset unless the lease transfers ownership or contains a bargain purchase option, in which case the leased asset is amortized over the estimated useful life of such asset. F-9 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FINANCE COSTS RELATED TO LONG-TERM DEBT Costs associated with obtaining long-term debt are deferred and amortized over the term of the debt. DERIVATIVE FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) as amended by SFAS 137 and SFAS 138 and as interpreted by the Derivatives Implementation Group, was adopted by deCODE effective as of January 1, 2001. SFAS 133 established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. SFAS 133 prescribes requirements for designation and documentation of hedging relationships and ongoing assessments of effectiveness in order to qualify for hedge accounting. deCODE evaluates contracts for embedded derivatives and considers whether any embedded derivatives have to be bifurcated, or separated, from the host contracts in accordance with SFAS 133 requirements. Embedded derivatives may have terms that are not clearly and closely related to the terms of the host contract in which they are included. If embedded derivatives exist and are not clearly and closely related to the host contract, they are accounted for separately from the host contract as derivatives, with changes in their fair value recorded in current earnings. deCODE did not hold any derivative instruments or contracts that contained embedded derivatives as of January 1, 2001, the date of adoption of SFAS 133. Further, deCODE did not designate any derivative instruments as being part of a qualified hedging relationship under SFAS 133 at December 31, 2001. REVENUE Revenues consist of fees earned from research and development collaboration agreements and are recorded and recognized in accordance with the applicable performance requirements and terms of the respective contracts either as contract research costs are incurred, including the percentage of completion basis, or upon the achievement of certain milestones. Research revenues are recorded and recognized on an accrual basis as services are provided and are recorded with reference to contracted rates. Such funding payments are not refundable in the event that the related efforts are not successful. Non-refundable up-front payments are deferred and recognized on a straight-line basis over the research term. Milestone payments are recorded when acknowledgement of having achieved applicable performance requirements is received and are recognized as revenue on a retrospective basis over the contractual term of the underlying agreement. Accordingly, upon achievement of the milestone a portion of the milestone payment equal to the percentage of the collaboration completed through that date is recognized, with the remainder recognized as services are performed (generally straight-line) over the remaining estimated term of the collaboration. Unbilled costs and fees represent revenue recognized prior to billing. Contractual payments due to deCODE are recorded as deferred revenue until earned. F-10 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of deferred revenue:
DECEMBER 31, -------------------------------------------- 1999 2000 2001 ------------ ------------ ------------ Revenue recorded during the year ended........... $ 17,674,818 $ 23,712,322 $ 40,292,874 Revenue recognized during the year ended......... (16,591,485) (21,545,656) (31,550,626) ------------ ------------ ------------ 1,083,333 2,166,666 8,742,248 Deferred revenue at beginning of year............ 1,155,000 2,238,333 4,404,999 ------------ ------------ ------------ Deferred revenue at end of year.................. $ 2,238,333 $ 4,404,999 $ 13,147,247 ============ ============ ============
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS All research and development costs, including costs associated with the development of computer software to be used in deCODE's research and development activities, are expensed as incurred. PATENT COSTS Patent application costs are charged to expense as incurred. STOCK-BASED COMPENSATION deCODE follows Statement of Financial Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation. The provisions of SFAS No. 123 allow companies to either expense the estimated fair value of stock options granted to employees or to follow the intrinsic value method set forth in Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, and disclose the pro forma effects on net loss and net loss per share had the estimated fair value of the options granted to employees been expensed. SFAS No. 123 requires companies to expense the estimated fair value of stock options granted to non-employees. deCODE has elected to follow the intrinsic value method in accounting for its employee stock options and follows the fair value method in accounting for its non-employee stock options. FOREIGN CURRENCY TRANSLATION deCODE's functional currency is the U.S. dollar. Islensk erfoagreining also consolidates its subsidiaries, several of which use the local currency, the Icelandic krona, as the functional currency. For these entities, the assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. Gains and losses from translation are included in accumulated other comprehensive income. Foreign currency transaction gains and losses are reported according to the exchange rates prevailing on the transaction date and are included in the consolidated statements of operations. Net transaction gains (losses) were $(97,798), $1,488,599 and $(1,264,196) in 1999, 2000 and 2001, respectively. INCOME TAXES deCODE accounts for income taxes using the liability method, which requires the recognition of deferred tax assets or liabilities for the temporary differences between the financial reporting and tax bases of deCODE's assets and liabilities and for tax loss carryforwards at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. In addition, valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. F-11 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEGMENT INFORMATION Management is organizing deCODE's main business units along three avenues of commercialization: discovery services, database services, and healthcare informatics. Discovery services include the development and applications of proprietary bioinformatics tools to discover disease-related genes and associated drug targets, the development and marketing of DNA-based diagnostics for major diseases, and pharmacogenomic services. deCODE intends that this business unit will also ultimately encompass therapeutic products. The database services business unit involves the commercialization of the Clinical Genome Miner, containing tools to discover or validate disease linked genes based on non-personally identifiable genotypic and phenotypic data and deCODE's genealogical database. The healthcare informatics business unit will seek to commercialize bioinformatics tools developed in deCODE's gene and drug target discovery and database efforts. Products of the healthcare informatics business unit are expected to include medical decision-support systems designed to assist the decision making process in the delivery of healthcare and privacy protection products derived from deCODE's expertise in encryption tools for complex and sensitive medical and genetic data. To date deCODE's efforts have largely been directed toward discovery services and financial information available for evaluation by senior management and members of the Board in deciding how to allocate resources and assess performance is that of the business as a whole. For these reasons, deCODE has a single reportable segment. All of deCODE's revenue from inception have been generated in Iceland, and all of deCODE's significant long-lived assets are located in Iceland. Roche accounted for 95%, 96% and 80% of consolidated revenue in the years ended December 31, 1999, 2000 and 2001, respectively. COMPUTATION OF NET LOSS PER COMMON SHARE Basic net loss per share is computed using net loss available to common stockholders and the weighted-average number of common shares outstanding. The weighted-average number of common shares outstanding during the period is the number of shares determined by relating the portion of time within a reporting period that common shares have been outstanding to the total time in that period. Net loss available to common stockholders consists of the following:
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------- 1999 2000 2001 ----------- ----------- ----------- Net loss............................................ $23,788,447 $31,118,503 $47,838,471 Accrued dividends on Series A, Series B and Series C preferred stock................................... 5,751,837 5,229,872 0 Amortized discount on Series A and Series C preferred stock................................... 1,790,950 2,311,007 0 ----------- ----------- ----------- Accrued dividends and amortized discount on preferred stock................................... 7,542,787 7,540,879 0 Premium on repurchase of preferred stock............ 30,887,044 0 0 ----------- ----------- ----------- Net loss available to common stockholders........... $62,218,278 $38,659,382 $47,838,471 =========== =========== ===========
Diluted net loss per share is computed using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of potential common shares. Diluted net loss per share does not differ from basic net loss per share in all periods presented as potential common shares are antidilutive for all such F-12 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) periods and are, therefore, excluded from the calculation. Potential common shares excluded from the calculation of diluted net loss per share as their inclusion would have been antidilutive were:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------ 1999 2000 2001 ---------- --------- --------- (SHARES) (SHARES) (SHARES) Preferred stock convertible into shares of common stock.................................................. 22,969,544 0 0 Warrants to purchase shares of common stock.............. 2,110,037 1,167,500 1,067,500 Options to purchase shares of common stock............... 45,000 823,000 1,919,604
COMPREHENSIVE INCOME Comprehensive income generally represents all changes in stockholders' equity except those resulting from investments or contributions by stockholders. Amounts reported in other comprehensive income include foreign currency translation adjustments and gains and losses on derivative financial instruments designated and effective as part of a foreign cash-flow hedge transaction. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. Under SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. With respect to goodwill and intangible assets acquired prior to July 1, 2001, deCODE is required to adopt SFAS No. 142 for fiscal year 2002. deCODE is currently in the process of evaluating the impact SFAS No. 142 will have on its financial position and results of operations. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. deCODE is required to adopt SFAS No. 143 for fiscal year 2003 and does not believe its adoption will have a significant impact on its financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and provides a single accounting model for long-lived assets to be disposed of. deCODE is required to adopt SFAS No. 144 for fiscal year 2002 and does not believe its adoption will have a significant impact on its financial position or results of operations. F-13 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECEIVABLES AND OTHER CURRENT ASSETS Receivables and other current assets consist of the following:
DECEMBER 31, -------------------------- 2000 2001 ----------- ----------- Receivables................................................. $ 8,000,000 $ 9,145,182 Receivables, related party.................................. 1,347,946 379,690 Unbilled costs and fees..................................... 0 2,302,086 Unbilled and deferred revenue............................... 0 5,000,000 Materials and supplies...................................... 0 6,024,351 Value added taxes........................................... 3,662,206 1,447,771 Other current assets........................................ 1,472,184 1,743,949 ----------- ----------- Total............................................. $14,482,336 $26,043,029 =========== ===========
INVESTMENTS AND OTHER GAGNALIND HF. AND eMR HF. In January and February 1999, deCODE acquired equity interests totalling 25.2% in Gagnalind hf. (Gagnalind) in exchange for $254,444 in cash and 70,824 shares of Series B preferred stock. On the date of issuance, these Series B shares had an aggregate estimated value of $779,064, or $11.00 per share. In November 1999, deCODE entered into an agreement in which it acquired common shares of eMR hf. (eMR), an Icelandic software company, in an integrated series of transactions as follows: - On November 19, 1999, deCODE issued 68,000 shares of common stock to two Icelandic companies in exchange for an additional 30.4% equity interest in Gagnalind. On this date, these common shares had an aggregate estimated value of $1,449,080, or $21.31 per share. - In March and April 2000, deCODE acquired 29,925,000 common shares (35.0%) in eMR in exchange for $341,436 in cash and 31,169,112 shares (55.6%) in Gagnalind. - On April 19, 2000, deCODE sold 12,825,000 common shares (15.0%) in eMR to the Icelandic Investment Bank for $963,568. deCODE's investment in Gagnalind was accounted for under the equity method until November 19, 1999. On this date, deCODE acquired a majority interest and Gagnalind was consolidated. deCODE's equity in net loss of Gagnalind for the period through November 19, 1999 included in other non-operating income and expense is comprised of deCODE's share of the loss of Gagnalind and amortization of the difference between deCODE's cost and the underlying equity in the net assets of Gagnalind at acquisition. Minority interest in the loss of Gagnalind (44.4%) from November 19, 1999 to year-end 1999 and in the year ended December 31, 2000 was $2,842 and $(32,149), respectively, and is included in other non-operating income and expense. eMR has not declared nor paid any dividends to date. In December 2000, the Icelandic Investment Bank and deCODE nullified the previous sale of 12,825,000 common shares (15%) in eMR. deCODE's investment in the common shares of eMR (35%) is accounted for under the equity method and is included in other long-term assets, amounting to $920,274 and $458,326 at December 31, 2000 and 2001, respectively. Equity in net loss of affiliate in the years ended December 31, 2000 and 2001 included in other non-operating expense is comprised of deCODE's share of the loss of eMR from March 2000 and amortization of the difference between deCODE's cost and the underlying equity in the net assets of eMR at acquisition. F-14 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PROKARIA EHF. Prokaria ehf. (Prokaria), a consolidated affiliate for a time, underwent a recapitalization during 2000 resulting in its deconsolidation from deCODE and resulting in a gain of $786,794. Such gain is included in other non-operating income and expense in the year ended December 31, 2000. The cash flows and results of Prokaria are included in the consolidated financial statements through September 2000, revenues and net loss for the period being $32,367 and $699,418, respectively. Two of deCODE's executive officers own an aggregate 37.5% of the share capital and are board members of Prokaria. Subsequent to Prokaria's recapitalization, deCODE and Prokaria entered into a collaboration and research licensing agreement, the terms of which include: - Prokaria settled non-interest bearing debts owed deCODE amounting to $540,654. - deCODE sold certain intellectual property rights to certain research, including a patent application, to Prokaria in exchange for: $508,754 cash; royalties on revenue Prokaria may receive from the rights related to the patent application; and, a license for the use of the patent application rights in deCODE's own operations for the duration of the patent. The payment of $508,754 has been recognized and is included in other revenue in the year ended December 31, 2000. - deCODE agreed to provide certain sequencing and advisory services in exchange for appropriate fees. deCODE recognized $31,600 in other revenue in respect of such sequencing services provided during the period October to December 2000 and $322,021 in the year ended December 31, 2001. - Prokaria agreed to reimburse deCODE in respect of certain legal costs incurred by deCODE on Prokaria's behalf. PROPERTY AND EQUIPMENT Property and equipment, substantially all located in Iceland, consist of the following:
DECEMBER 31, --------------------------- 2000 2001 ----------- ------------ Building construction-in-progress........................ $ 3,539,184 $ 27,263,789 Buildings................................................ 8,123,169 10,763,285 Laboratory equipment..................................... 32,400,291 29,706,265 Furniture and fixtures................................... 1,940,895 2,812,332 Other equipment.......................................... 605,141 1,004,039 ----------- ------------ 46,608,680 71,549,710 Less: accumulated depreciation and amortization.......... (9,507,990) (10,342,173) ----------- ------------ Total.......................................... $37,100,690 $ 61,207,537 =========== ============
The total depreciation and amortization of property and equipment for the years ended December 31, 1999, 2000 and 2001 was, $2,791,449, $4,723,967 and $8,870,263 respectively. In January 1998, deCODE purchased the building then housing its research operations and corporate headquarters for total consideration amounting to $2,375,803, comprised of cash and 74,670 shares of Series B preferred stock. In June 1998, deCODE sold the building for $2,403,846 of cash proceeds and leased it back from the counter-party (an Icelandic bank). As ownership of the property will be transferred to deCODE at the end of the lease without any further payment, the transaction has been recorded as a financing and no immediate gain was recognized. F-15 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During 1999, laboratory equipment and consumables were received by deCODE from a customer as consideration for equipment testing services provided. Revenue was recorded, and fair value was determined with reference to list prices for such laboratory equipment and consumables. Laboratory equipment valued at $414,000 has been capitalized and is being depreciated according to deCODE's normal depreciation policy and consumables valued at $239,600 were expensed in 1999. During 2000, deCODE paid $1,423,000 and was granted permission to construct a building of approximately 15,000 square meters in the University District which will house the operations of deCODE. deCODE began excavation on the site during October 2000 and, in January 2001, engaged a contractor for the construction of the building itself. Total project cost is estimated to be approximately $31 million. The building was placed into service during January 2002 at which time depreciation of the capitalized costs commenced. In September 2000, deCODE acquired fifty new gene sequencing machines in exchange for $13,150,000 and twenty-four of its used gene sequencing machines. This laboratory equipment was placed into service in September and October 2000 and depreciation on the equipment commenced at that time. No gain was recognized in the exchange of deCODE's used equipment. The $13,150,000 is included in accounts payable and accrued liabilities at December 31, 2000. Payment was made in February 2001 and included in investing cash flows for the purchase of property and equipment during the year ended December 31, 2001. In light of current conditions and pace of technological change, effective from April 1, 2001 deCODE changed the estimated useful life of sequencing instruments for purposes of depreciation to 4 years. This change in estimate had the effect of increasing depreciation expense $1.4 million in the year ended December 31, 2001. In December 2001, deCODE sold certain laboratory equipment for $12 million of cash proceeds and leased the equipment back from the counter-party (an Icelandic leasing company) for a three-year term. As ownership of the equipment will be transferred to deCODE at the end of the lease without any further significant payment, the transaction has been recorded as a financing and no immediate gain was recognized. In connection with this lease, deCODE has an amount equal to 75% of the remaining lease payments on deposit with an Icelandic bank. In addition to the building and equipment pursuant to the above sale-and-leaseback transactions, property and equipment also includes amounts for certain fixed assets financed under other capital lease obligations. Total cost and accumulated amortization relating to all of deCODE's property and equipment subject to capital lease obligations was $10,590,668 and $4,975,162, respectively, as of December 31, 2000 and $16,488,241 and $1,520,934, respectively, as of December 31, 2001. deCODE's capital lease obligations are collateralized by the assets to which the obligations relate. deCODE has an option to purchase all of the leased property and equipment for 0.2-3% of the original lease amount at lease end, with the exception of the leased building, in which ownership transfers upon lease expiration. ACQUISITIONS CYCLOPS EHF. In November 2000, deCODE acquired the outstanding shares of Cyclops ehf. (Cyclops), an Icelandic company performing research involving the solubility and absorption of drugs, in exchange for 107,910 shares of deCODE's common stock. In addition, deCODE issued 30,000 shares of its common stock to the selling shareholders of Cyclops in connection with the continuing employment by the two former owners of Cyclops and that are subject to repurchase by deCODE. deCODE also agreed that the same two former owners of Cyclops would receive a portion of any net royalties deCODE may earn from certain ongoing projects of F-16 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Cyclops. The consolidated financial statements include the cash flows and results of Cyclops from the date of acquisition. The acquisition was accounted for using the purchase method, whereby the total purchase price ($2,394,523) has been allocated to Cyclops' assets and liabilities based on their estimated fair values on the date of acquisition. The excess of purchase price over the fair value of the net tangible assets acquired has been allocated to patents that are being amortized using the straight-line method over three years. Other long-term assets include the recorded amount of patents less accumulated amortization on such, together amounting to $2,252,579 and $1,199,856 as of December 31, 2000 and 2001, respectively. In addition, compensation in respect of the 30,000 shares of deCODE common stock issued to the selling shareholder of Cyclops ($665,700) is not part of the purchase price but has been recorded as deferred compensation, a component of stockholders' equity, and is being recognized as expense over four years from the date of the acquisition. ENCODE EHF. In November 2000, deCODE acquired the outstanding shares of Islenskar lyfjarannsoknir ehf. (Encode), an Icelandic research company serving the pharmaceutical industry. The acquisition was accounted for using the purchase method, whereby the total purchase price has been allocated to Encode's assets and liabilities based on their estimated fair values on the date of acquisition. The consolidated financial statements include the cash flows and results of Encode from the date of acquisition. DIGITALIS EHF. In January 2001, deCODE issued 20,000 shares of its common stock to several persons, including four of its employees, in consideration for all the outstanding capital stock of Digitalis ehf. (Digitalis), an Icelandic software company. The acquisition was accounted for using the purchase method, whereby the total purchase price ($210,000) has been allocated to Digitalis' assets and liabilities based on estimated fair values on the date of acquisition. The excess of purchase price over the fair value of the net tangible assets acquired has been allocated to intangibles that are being amortized using the straight-line method over two years. The consolidated financial statements include the cash flows and results of Digitalis from the date of acquisition. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following:
DECEMBER 31, -------------------------- 2000 2001 ----------- ----------- Suppliers................................................. $ 5,501,428 $14,223,265 Salaries and other employee benefits...................... 2,583,131 4,285,176 Other..................................................... 1,722,922 2,656,135 Payable for laboratory equipment.......................... 13,150,000 0 ----------- ----------- Total........................................... $22,957,481 $21,164,576 =========== ===========
DEBT In December 2001, deCODE established a bridge loan with an Icelandic financial institution for the purposes of financing the construction of its new headquarters facility. Total borrowing was $27.5 million and carried an annual interest rate equal to a short-term LIBOR rate plus 0.5%. Portions of the bridge loan expired upon settlement in January and March 2002 out of the proceeds of Tier A bonds and the Tier C bonds/Tier D F-17 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) bank loan, respectively, as discussed below. As deCODE intended to and did refinance the bridge loan on a long-term basis subsequent to year-end, the bridge loan has been classified as long-term as of December 31, 2001. Monies received in respect of the Tier A bonds ($13.5 million) are included in cash and cash equivalents at December 31, 2001 and monies received in respect of the Tier C bonds and the Tier D bank loan ($14.0 million) are included in restricted cash as a result of the contractual terms with the financial institution. In December 2001, deCODE borrowed $17.8 million from an Icelandic bank for the construction of its new headquarters facility. The borrowing is collateralized by the property and improvements and consists of: privately placed bonds (Tier A) -- approximately $13.8 million denominated in Icelandic krona and linked to the Icelandic Consumer Price Index that is payable annually beginning December 2002 and bears annual interest of 8.5% that is payable annually beginning December 2002; and, a $4.0 million bank loan (Tier B) -- denominated in U.S. dollars that is payable quarterly beginning March 2002 and bears annual interest of three-month LIBOR plus 3.0% that is payable quarterly beginning March 2002. The lender may demand prepayment of the Tier B bank loan in certain circumstances. The Tier A bonds and the Tier B bank loan were placed in January 2002 and December 2001, respectively. Concurrently, deCODE entered into a cross-currency swap as an economic hedge against foreign exchange rate fluctuations that may occur on Tier A bonds. As of December 31, 2001 deCODE had this outstanding contract with a face amount of $13.8 million bears annual interest of three-month LIBOR plus 2.85%. Fair value of the outstanding contract at December 31, 2001 was $14.0 million. In March 2002, deCODE borrowed a further $13.8 million from an Icelandic bank for the construction of its new headquarters facility. The borrowing is collateralized by the property and improvements and consists of: privately placed bonds (Tier C) -- approximately $7.3 million denominated in Icelandic krona and linked to the Icelandic Consumer Price Index that is payable in March 2007 and bears annual interest of 12.0% that is payable annually beginning March 2003; and, a $6.6 million bank loan (Tier D) -- denominated in U.S. dollars that is payable in March 2007 and bears annual interest of three-month LIBOR plus 6.0% that is payable quarterly beginning June 2002. Tier C bonds may be prepaid at each interest payment date and the Tier D bank loan may be prepaid on the anniversary date of the loan starting December 2003. Concurrently, deCODE entered into a cross-currency swap as an economic hedge against foreign exchange rate fluctuations that may occur on the Tier C bonds. This contract with a face amount of $7.3 million expires in March 2007 and bears annual interest of twelve-month LIBOR plus 6%. In connection with the Tier C bonds and the Tier D bank loan, deCODE issued a warrant giving the holder the right to purchase a total of 933,800 shares of deCODE common stock at $15.00 per share, as adjusted. The warrants expire in March 2007 and convert into shares of deCODE common stock automatically in the event the market value of a share of deCODE common stock should exceed $24.00 for thirty consecutive days of trading. Debt maturities, excluding capital leases, total $2,571,429 per year in each of the next five years. DERIVATIVE FINANCIAL INSTRUMENTS During the normal course of business, deCODE is exposed to foreign currency risk and interest rate risk. These risks can create volatility in earnings and cash flows from period to period. deCODE's objective is to reduce volatility of earnings and cash flows associated with market risks. Derivative instruments held by the Company are used for hedging and non-speculative purposes. As of December 31, 2001, deCODE had entered into just the one cross-currency swap for purposes of managing these risks. deCODE seeks to maintain a desired level of floating-rate debt with respect to its overall debt portfolio denominated in US Dollars. To this end, deCODE uses interest rate and cross-currency swaps to manage F-18 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) interest rate and foreign currency risk arising from long-term debt obligations in Icelandic krona. For the year ended December 31, 2001 deCODE had a loss of $223,136 recorded in other non-operating expense related to a derivative instrument designated as an economic hedge of fixed rate foreign currency debt, but not qualifying for hedge accounting under SFAS 133. This instrument was recorded in other long-term liabilities as of December 31, 2001. The fair value of derivative instruments is sensitive to movements in the underlying market rates and variables. deCODE monitors the fair value of derivative instruments on a periodic basis. Fair values are calculated for each derivative using common market valuation methods with reference to available market data as of the balance sheet date. LEASE COMMITMENTS deCODE leases certain property, laboratory equipment and other assets under obligations that expire at varying dates through 2007. At December 31, 2001, future minimum lease payments under all noncancelable leases with terms in excess of one-year are as follows:
OPERATING CAPITAL ---------- ----------- 2002............................................... $1,003,964 $ 5,524,141 2003............................................... 950,708 4,667,721 2004............................................... 843,097 4,671,449 2005............................................... 663,483 385,071 2006............................................... 353,875 383,458 2007 and thereafter................................ 106,976 571,348 ---------- ----------- Total minimum lease payments....................... $3,922,103 16,203,188 ========== Less amount representing interest.................. (1,425,450) ----------- Present value of future minimum lease payments..... 14,777,738 Less: current portion.............................. (4,855,420) ----------- Long-term portion.................................. $ 9,922,318 ===========
Rental expense for operating leases was $871,851 in the year ended December 31, 2001. Included in operating and capital lease commitments are leases on facilities that deCODE is or will be vacating during 2002 as a result of the move to the new headquarters facility. Total remaining minimum lease payments on these facilities are $3.4 million as of December 31, 2001. Management is currently assessing its alternatives with respect to these leased facilities. SETTLEMENT AGREEMENT On December 31, 1997, deCODE entered into a settlement agreement (the Agreement) with The Beth Israel Deaconess Medical Center (Beth Israel) in respect of deCODE's past use of the institution's research facilities. Among other terms, the Agreement provides for the joint ownership of a specific technology associated with the linkage of a segment of DNA to the multiple sclerosis trait that was developed at the research facilities. deCODE has obtained an exclusive license from Beth Israel to develop and commercialize therapeutic and diagnostic products worldwide based on Beth Israel's interest in patents and know-how relating to the linkage between this particular segment of DNA and multiple sclerosis. The license under the patents will expire upon the expiration of the last patent to expire and thereafter the license to the know-how will be perpetual. Pursuant to the Agreement, on December 31, 1999 deCODE issued 10,000 shares of Series A preferred stock. The value of the shares issued ($217,500), which resulted from the difference between the contractual F-19 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) share issuance price and the estimated fair value of the shares on the date of issuance, has been expensed in the statement of operations as stock-based remuneration for the year ended December 31, 1999. Under the terms of the Agreement, deCODE is obligated to pay license fees and other payments upon the achievement of established milestones leading to the discovery of defined products. deCODE is also required to pay royalties to Beth Israel on certain royalty bearing products which may result from the licensed technology. Such royalties are to be paid for a period up to and potentially exceeding 15 years. COLLABORATIVE PARTIES F. Hoffman-La Roche. In February 1998, deCODE entered into a research collaboration and cross-license agreement with Roche to collaborate on the discovery of genetic variations that affect the cause of diseases for the purpose of developing new methods to diagnose diseases and obtain drug targets useful in drug discovery. Under the agreement, deCODE conducted research activities and Roche funded the collaborative gene discovery programs in twelve diseases by making specified payments according to a payment schedule. Roche's obligation under the agreement to fund these programs continued until February 1, 2002 when the term of the agreement expired. In addition to research funding payments, Roche made payments to deCODE upon the achievement of specified scientific development milestones. Partners HealthCare System, Inc. In May 2000, deCODE entered into a strategic alliance agreement and crosswalk development agreement with Partners HealthCare System, Inc., The General Hospital Corporation, d.b.a. Massachusetts General Hospital, and The Brigham and Women's Hospital, Inc. (collectively Partners) pursuant to which deCODE will (a) fund research by investigators of Partners pursuant to sponsored research agreements and/or clinical trial agreements to be entered into from time to time, (b) collaborate with Partners on, and provide funding for, development of an information technology bridge, called the crosswalk, to facilitate studies with the deCODE Combined Data Processing system and Partners' Research Patient Data Registry and (c) develop and market, in consultation with Partners, new information technology products and services relating to the use of the crosswalk for future pharmaceutical and biotechnology applications. The strategic alliance agreement provides that a steering committee, the membership of which is equally divided between the parties, will oversee the alliance (including the development of the crosswalk) and select the research projects and/or clinical trials that deCODE will fund at Partners. deCODE has an exclusive option to acquire an exclusive license to any patents or copyrights developed under such sponsored research or clinical trial agreements on financial terms to be negotiated by the parties based on pre-determined criteria contained in the strategic alliance agreement. Each party has the right to use the crosswalk to facilitate studies with the databases for non-commercial internal research purposes. Each party also has the right to use the crosswalk to facilitate studies with such party's own database to conduct commercially sponsored research. Partners is required to pay deCODE a royalty on revenue it receives from such use. In addition, deCODE has the exclusive right to use the crosswalk to develop and market products and services but are obligated to pay Partners a royalty on revenue from the sale of such products and services. The agreements are for a three-year term, which, in the case of the strategic alliance agreement, may be extended for an additional two-year term by the mutual agreement of the parties and, in the case of the crosswalk development agreement, may be extended for an additional term to be agreed upon by the parties. The agreements may also be terminated by either party if the other party is in default. In addition, deCODE may terminate the agreements under certain circumstances, including infeasibility of the alliance or if the alliance jeopardizes the mission or objectives of either party. F. Hoffman-La Roche. In June 2001, deCODE entered into a collaboration and cross-license agreement with Roche regarding diagnostics. Under the terms of this new agreement, deCODE is collaborating on the development and marketing of DNA-based diagnostics for major diseases, working with Roche to identify F-20 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and validate molecular targets that are useful for developing products and services that accurately establish a patient's current diagnosis, predict future risk of disease, predict drug response and determine responses to treatment or the health status of individuals and enable early prevention or treatment of disease. deCODE will also be focusing on developing informatics products and services, which will include software tools and databases. As part of the alliance deCODE has also provided Roche with access to intellectual property, including deCODE's Clinical Genome Miner. Under the agreement deCODE is or will receive payments including research funding, research milestones and royalties on any products which are commercialized. The research term under the agreement is five years. Genmab. In June 2001, deCODE entered into a collaboration agreement with Genmab A/S and Medarex, Inc. pursuant to which the parties are collaborating on the research, development, and commercialization of new antibody therapeutic products. Under this five year collaboration, deCODE is utilizing novel targets discovered in its research on the genetics of common diseases along with Genmab's human antibody technology. The collaboration covers a broad range of disease areas including cardiovascular disease, inflammatory disease and cancer. Together with Genmab and Medarex, deCODE will share equally in the development costs and revenues generated from the outlicensing or sales of products developed under the agreement. In June 2001, deCODE entered into an agreement to provide Genmab A/S with research and development services to develop DNA-based tests to predict individual clinical response to Genmab's antibody treatment for rheumatoid arthritis and possible related novel therapeutics. deCODE will be paid as stages of the research program are completed. Additionally, deCODE will receive milestone and royalty payments on commercialized products should Genmab A/S exercise its option for first opportunity to enter into a royalty-bearing license agreement. Affymetrix Inc. In July 2001, deCODE entered into a pharmacogenomics collaboration and license agreement with Affymetrix, Inc. Under the terms of the agreement the parties are collaborating in the research and development of gene expression tests and nucleic acid based tests to predict the response of individual patients to various drugs. deCODE is undertaking the initial research activities to be performed with respect to the initial ten drugs to be studied under the collaboration. Affymetrix will supply various chips in connection with the research. The parties will share revenues resulting from the collaboration, including those from licensing and product commercialization. Applied Biosystems Group. In July 2001, deCODE entered into a joint development and commercialization agreement with Applied Biosystems Group (ABG). Under the terms of the agreement, the parties are collaborating to develop and commercialise software products for the collection, organization and analysis of genotyping information. Under this agreement, deCODE and ABG have granted to each other licenses to products developed under the joint development program. In July 2001, deCODE also entered into a separate three-year reagent supply agreement with ABG. Under the terms of the agreement, ABG has agreed to supply and deCODE has agreed to purchase reagents and other supplies over three years, including a remaining minimum of $16.3 million through September 2002. Pharmacia. In December 2001, deCODE formed a pharmacogenomics alliance with Pharmacia Corporation (Pharmacia) to identify the role of genetics in the development of advanced forms of heart disease. Under the agreement, deCODE will employ its population resources and Clinical Genome Miner discovery system to find genetic markers that can be used to identify patients who are highly predisposed to progressing from an early to an advanced form of heart disease. If the results of the first phase are encouraging, Pharmacia has the option to use the genetic markers as the basis for clinical trials of cardiovascular drugs under development at Pharmacia. deCODE will receive contract fees as part of the first phase of this agreement. In addition, deCODE will receive royalties on sales of diagnostic tests as well as royalties on potential sales of cardiovascular drugs should Pharmacia exercise its licensing options in the F-21 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) alliance. Pharmacia may terminate this arrangement for a full refund through April 18, 2002 for certain defined circumstances. Hospital and Physician Collaborations. deCODE has entered into collaboration agreements and arrangements with the Icelandic Heart Association and several physician groups. The goal of these collaborations is the discovery of genetic factors which contribute to the genesis of certain disorders on which the various physician groups maintain patient information. Under the agreements, these institutions and/or physicians contribute data or other clinical information and deCODE contributes equipment, research supplies and our molecular genetics and experimental design expertise. The agreements also require deCODE to reimburse all project-related expenses. If deCODE sells project results, the agreements require it to make specified payments and pay a portion of any performance-based milestones and royalties that it receives. deCODE has already sold the results of many of these projects to a third party, Roche. deCODE shares the ability to make management decisions regarding the projects with the physician groups, and jointly forms an executive or steering committee to monitor the project. deCODE's collaboration agreements with the physician groups normally continue for a term of no more than five years. To further facilitate deCODE's research projects and enable it to construct lists of patients with specific diseases, deCODE has also entered into collaboration agreements and arrangements with two of the largest hospitals in Iceland. Under the terms of these agreements, the hospitals provide research data. deCODE's projects are monitored by a surveillance committee that is jointly appointed with the hospitals. deCODE is obligated to pay all of the expenses (other than the hospitals' administrative expenses) incurred as a result of the collaboration. The agreements with the hospitals will continue until terminated by the parties. The Icelandic Health Sector Database license requires deCODE to enter into agreements with Icelandic health institutions and self-employed health service workers regarding access to and the processing of information from medical records. To date, deCODE has entered into such agreements with nine Icelandic health institutions. ICELANDIC HEALTH SECTOR DATABASE LICENSE On January 22, 2000, the Ministry of Health and Social Security, or the Ministry, granted deCODE an operating license to create and run the Icelandic Health Sector Database, or the License. The License, which has a term of twelve years, allows deCODE to collect data from medical records of Icelandic healthcare institutions and self-employed healthcare professionals and to transfer such data in encrypted form into a centralized database. As required by the License and concurrently with the issuance of the License, deCODE entered into an agreement with the Ministry whereby deCODE must pay the Icelandic government a fixed annual fee of 70 million Icelandic kronas and an additional annual fee of 6% of its net profit, up to a maximum of 70 million Icelandic kronas per year. At December 31, 2001, $1,356,590 in respect of these annual fees has been provided and is included in accounts payable and other accrued expenses. The agreement also provides that deCODE's rights to the Icelandic Health Sector Database will be transferred to the Ministry on the expiration or termination of the license, January 2012. deCODE's preparation of the Icelandic Health Sector Database is subject to technical requirements imposed by the Icelandic Data Protection Authority, or the Authority, in areas such as data encryption and privacy protection. These requirements are subject to change from time to time and may require greater technical capabilities than deCODE currently has. Compliance with these requirements can be expensive and time-consuming and may delay the development of the Icelandic Health Sector Database and the deCODE Combined Data Processing system or make such development more expensive than anticipated. In addition, deCODE's compliance is subject to evaluation by the agencies imposing these requirements. deCODE cannot control the time required for this evaluation, and accordingly, the evaluation process may lead to delay in the development of the Icelandic Health Sector Database and the deCODE Combined Data Processing system. F-22 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) deCODE is subject to a very extensive indemnity clause in the agreement with the Ministry, pursuant to which it has: - agreed not to make any claim against the government if the Act or the License are amended as a result of the Act or rules relating to the Icelandic Health Sector Database being found to be inconsistent with the rules of the European Economic Area or other international rules and agreements to which Iceland is or becomes a party; - agreed that if the Icelandic state by a final judgment is found to be liable or subject to payment to any third party as a result of the passage of legislation on the Icelandic Health Sector Database and/or issuance of the License, deCODE will indemnify it against all damages and costs in connection with the litigation; and - agreed to compensate any third parties with whom the Icelandic government negotiates a settlement of liability claims arising from the legislation on the Icelandic Health Sector Database and/or the issue of the License, provided that the Icelandic government demonstrates that it was justified in agreeing to make payments pursuant to the settlement. The License and the agreement under which deCODE received the license also require it to: - pay the costs incurred by the health institutions (including the costs of medical record software) in connection with the entering of data from medical records before transfer to the Icelandic Health Sector Database; - financially segregate the operation of the Icelandic Health Sector Database from its other activities by maintaining a separate operating unit, and separate accounts for the Icelandic Health Sector Database; - pay the costs of the governmental agencies which monitor deCODE's Icelandic Health Sector Database activities; - indemnify and agree not to sue the Icelandic government for any liability resulting from the passage of the legislation on the Icelandic Health Sector Database and its operation and/or the issuance of the Icelandic Health Sector Database; and - observe international science ethics rules. The License prohibits deCODE from, among other things, abusing its position by charging unreasonable fees, refusing business to our competitors or discriminating among customers by imposing discriminatory or other onerous business terms on our customers; or assigning or pledging our rights in the License. The Icelandic Health Sector Database license will expire in January 2012, unless an extension is granted. LITIGATION In January 2000, Thorsteinn Jonsson and Genealogia Islandorum hf., the alleged holders of copyrights to approximately 100 books of genealogical information, commenced an action against deCODE in the District Court of Reykjavik in Iceland. They allege that deCODE's genealogy database infringes their copyrights and seek damages in the amount of approximately 616 million Icelandic kronas and a declaratory judgment to prevent deCODE from using the allegedly infringing data. deCODE believes the suit is without merit and intends to defend this action vigorously; however, the ultimate resolution of this matter cannot yet be determined. In February 2000, Mannvernd, an organization known as the Association of Icelanders for Ethics in Science and Medicine, issued a press release announcing its intention to file lawsuits against the State of Iceland and any other relevant parties, including deCODE, to test the constitutionality of the Act. In its press release, Mannvernd indicated that it hopes to halt the construction and/or operation of the Icelandic Health F-23 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Sector Database. In April 2001, a lawsuit was filed against the Icelandic Directorate of Public Health but Mannvernd has not commenced litigation against deCODE; however, the ultimate resolution of this matter cannot yet be determined. In April 2000, Ernir Snorrason, an original stockholder of deCODE, filed a complaint in the Court of Chancery of the State of Delaware for New Castle County alleging that deCODE improperly exercised an option to repurchase 256,637 shares of common stock that deCODE issued to Mr. Snorrason in 1996 pursuant to a Founders' Stock Purchase Agreement and seeking an order requiring deCODE to recognize Mr. Snorrason as the owner of these shares. In June 2001, the parties settled the matter without admission or adjudication of any issue of fact or law and 166,814 shares of deCODE common stock were issued to Mr. Snorrason for $0.001 per share, the par value, with the resulting loss ($1,292,642) being recorded as a general and administrative expense at that time. Although deCODE has not yet been served with copy of the complaint, management is aware that on December 6, 2001, a purported class action alleging violations of federal securities laws was filed in the United States District Court for the Southern District of New York on behalf of certain purchasers of deCODE common stock. The complaint names deCODE, two of its current executive officers (the "Individual Defendants"), and the two lead underwriters (the "Underwriter Defendants") for our initial public offering in July 2000 (the "IPO") as defendants. The plaintiff alleges violations of Section 11 of the Securities Act of 1933 against deCODE and the Individual Defendants, violations of Section 15 of the Securities Act of 1933 against the Individual Defendants and violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (and Rule 10b-5 promulgated thereunder) against the Underwriter Defendants. Generally, the complaint alleges that the Underwriter Defendants: (i) solicited and received excessive and undisclosed commissions from certain investors in exchange for which the Underwriter Defendants allocated to those investors material portions of the shares of deCODE's stock sold in the IPO and (ii) entered into agreements with customers whereby the Underwriter Defendants agreed to allocate shares of deCODE's stock sold in the IPO to those customers in exchange for which the customers agreed to purchase additional shares of deCODE's stock in the aftermarket at pre-determined prices. The complaint further alleges that the prospectus incorporated into the registration statement for the IPO was materially false and misleading in that it failed to disclose these arrangements. The suit seeks unspecified monetary and recissionary damages and certification of a plaintiff class consisting of all persons who purchased shares of deCODE common stock from July 7, 2000 to December 6, 2000. deCODE is aware that similar allegations have been made in hundreds of other lawsuits filed (many by some of the same plaintiff law firms) against numerous underwriter defendants and issuer companies (and certain of their current and former officers) in connection with various public offerings conducted in recent years. All of the lawsuits that have been filed in the Southern District of New York have been consolidated for pretrial purposes before Honorable Judge Shira A. Scheindlin. deCODE believes that the allegations against deCODE and its officers are without merit and intends to contest them vigorously. The litigation is, however, in the preliminary stage, and deCODE cannot predict its outcome and the ultimate effect, if any, on deCODE's financial condition. In addition, it is possible that further lawsuits alleging substantially similar claims will be filed against deCODE and its officers. If deCODE is required to pay significant monetary damages as a result of such litigation its business could be significantly harmed. Even if such suit or suits conclude in its favor, deCODE may be required to expend significant funds to defend against the allegations. deCODE is unable to estimate the range of possible loss from the litigation and no amounts have been provided for such matters in its financial statements. F-24 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PREFERRED STOCK Prior to deCODE's initial public offering of common stock, deCODE was authorized to issue a total of 32,641,926 shares of preferred stock. Of these shares, 11,041,926 shares, 10,300,000 shares, and 4,583,334 shares had been designated Series A, Series B and Series C, respectively, and 6,716,666 remain undesignated. In accordance with the terms of the then outstanding preferred stock, shares of Series A, Series B, and Series C preferred stock were converted into 9,624,282, 10,046,132 and 4,066,667 shares of common stock, respectively, effective upon the closing of deCODE's initial public offering in July 2000. Effective concurrently with the initial public offering, all authorized shares of Series A, Series B and Series C preferred stock were retired. In respect of the remaining undesignated shares of preferred stock, deCODE's Board of Directors is authorized, except as otherwise limited by Delaware law, without further action by the stockholders to: - issue shares of preferred stock in one or more series; - fix or alter the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption price or prices, and liquidation preferences of any wholly unissued series of preferred stock; - designate the number of shares constituting, and the designation of, any series of preferred stock; and - increase or decrease the number of shares of a series subsequent to the issue of shares of that series, but not below the number of shares of that series then outstanding. F-25 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NUMBER OF SHARES AMOUNT ------------------------------------- ------------------------------------------- SERIES A SERIES B SERIES C SERIES A SERIES B SERIES C PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED STOCK STOCK STOCK STOCK STOCK STOCK TOTAL ---------- ----------- ---------- ------------ ------------- ------------ ------------- BALANCE AT DECEMBER 31, 1997.................... 11,790,375 0 0 $ 12,603,990 $ 0 $ 0 $ 12,603,990 Issuance of Series A preferred stock......... 120,000 366,000 366,000 Issuance of Series B preferred stock......... 4,712,990 22,616,316 22,616,316 Issuance of Series C preferred stock warrants and options............. 2,500,000 5,000,250 5,000,250 Accretion of dividends and amortization of discount on preferred stock...... 1,042,473 1,113,560 415,490 2,571,523 ---------- ----------- ---------- ------------ ------------- ------------ ------------- BALANCE AT DECEMBER 31, 1998.................... 11,910,375 4,712,990 2,500,000 14,012,463 23,729,876 5,415,740 43,158,079 Repurchase and retirement of Series A preferred... (2,358,074) (2,916,259) (2,916,259) Exchange of common stock for Series B preferred............... 250,000 3,750,000 3,750,000 Repurchase of Series B preferred stock......... (250,000) (3,750,000) (3,750,000) Repurchase of Series C preferred stock and held in treasury............. (100,000) (224,329) (224,329) Issuance of Series A preferred stock......... 10,000 367,500 367,500 Issuance of Series B preferred stock......... 5,180,824 71,869,064 71,869,064 Issuance of Series C preferred stock and warrants................ 1,111,111 1,792,525 1,792,525 Accretion of dividends and amortization of discount on preferred stock...... 942,183 4,266,212 2,334,392 7,542,787 ---------- ----------- ---------- ------------ ------------- ------------ ------------- BALANCE AT DECEMBER 31, 1999.................... 9,562,301 9,893,814 3,511,111 12,405,887 99,865,152 9,318,328 121,589,367 Issuance of Series A preferred stock upon exercise of warrants.... 61,981 61,981 61,981 Issuance of Series B preferred stock......... 152,318 3,000,000 3,000,000 Issuance of Series C preferred stock and warrants upon exercise of option............... 555,556 181,400 181,400 Accretion of dividends and amortization of discount on preferred stock...... 494,980 4,418,652 2,627,247 7,540,879 Redeemable, convertible preferred stock converted to common stock................... (9,624,282) (10,046,132) (4,066,667) (12,962,848) (107,283,804) (12,126,975) (132,373,627) ---------- ----------- ---------- ------------ ------------- ------------ ------------- BALANCE AT DECEMBER 31, 2000 AND 2001........... 0 0 0 $ 0 $ 0 $ 0 $ 0 ========== =========== ========== ============ ============= ============ =============
SERIES A PREFERRED STOCK In connection with the sale of 5,090,376 shares of Series A preferred stock in October 1997, deCODE issued 1,137,814 warrants to purchase Series A preferred stock for $1.00 per share. The total consideration received under the issuance was allocated between the preferred shares and the warrants based upon their relative fair values at the date of issuance. The consideration allocated to the warrants was $650,240, and the resulting discount on the preferred shares was being amortized over seven years, the earliest redemption date F-26 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of the Series A preferred stock. One stockholder exercised 61,981 warrants in March 2000 and, in connection with deCODE's initial public offering and in accordance with the their terms, the remaining 1,075,833 warrants were converted in July 2000 into warrants to purchase the same number of shares of common stock. SERIES B PREFERRED STOCK In January 2000, deCODE and the Icelandic Ministry for Health and Social Security agreed to jointly establish an independent foundation, the objective of which is to tend to matters of interest for children in Iceland. In May 2000, deCODE provided capital to the foundation in the amount of 150,000 shares of deCODE's Series B preferred stock for $0.001 per share; such issuance resulting in $3 million being recorded immediately as a contribution expense. SERIES C PREFERRED STOCK Pursuant to a stock and warrant purchase agreement signed in February 1998, Roche purchased 2,500,000 shares of Series C preferred stock at $2.00 per share in February 1998, 555,555 shares of Series C preferred stock at $3.00 per share in February 1999, 555,556 shares of Series C preferred stock at $3.00 per share in May 1999, and 555,556 shares of Series C preferred stock at $4.00 per share in June 2000. There are no future performance obligations or any stated or unstated rights or privileges associated with these purchases of Series C preferred stock by Roche. In connection with these share purchases, Roche also obtained warrants to purchase an additional 416,667 shares of Series C preferred stock for a weighted-average exercise price of $2.53 per share. The total consideration received under these issuances was allocated between the preferred shares and the warrants based upon their relative fair values at the dates of issuance. Options and warrants to purchase 861,112 shares of Series C preferred stock were issued to Roche in February 1998. The consideration allocated to these options and warrants was $400,250, and the resulting discount on the preferred shares was being amortized over seven years, the earliest redemption date of the Series C preferred stock. An option to purchase 555,556 shares of Series C preferred stock and an option to purchase warrants in respect of 55,556 shares of Series C preferred stock were exercised in June 2000 (refer above and below). The remaining 250,000 warrants expire in February 2007. The consideration allocated to the 55,555 warrants issued in February 1999 was $41,668, and the resulting discount on the preferred shares was being amortized over seven years, the earliest redemption date of the Series C preferred stock. These warrants expire in February 2008. The consideration allocated to the 55,556 warrants issued in May 1999 was $125,804 resulting in the preferred shares being issued at a discount. As the preferred shares issued with these warrants were issued with beneficial conversion features, the remaining consideration to be allocated was recorded as additional paid-in capital resulting in no consideration being allocated to the preferred shares. This resulting discount on the preferred shares was amortized entirely on the date of issuance, as the preferred shares are convertible upon issuance. These warrants expire in May 2009. The consideration allocated to the 55,556 warrants issued in June 2000 was $181,400 resulting in the preferred shares being issued at a discount. As the preferred shares issued with these warrants were issued with beneficial conversion features, the remaining consideration to be allocated was recorded as additional paid-in capital resulting in no consideration being allocated to the preferred shares. This resulting discount on the preferred shares was amortized entirely on the date of issuance, as the preferred shares are convertible upon issuance. These warrants expire in June 2009. In connection with deCODE's initial public offering and in accordance with the their terms, the remaining Series C preferred stock warrants outstanding (416,667) were converted in July 2000 into warrants to purchase the same number of shares of common stock. F-27 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ISSUANCE OF SERIES B PREFERRED STOCK On June 30, 1999, deCODE entered into a Stock Purchase Agreement (the Purchase Agreement) to sell five million shares of Series B preferred stock at $7.50 per share (the Purchase Price) to a Luxembourg-based financial buyer (the Buyer). The sale closed on August 8, 1999. Contemporaneously with the execution of the Purchase Agreement, deCODE and the Buyer entered into an agreement pursuant to which the parties agreed upon the following: - Sales of Series B preferred stock in the Icelandic market shortly before the date of the Purchase Agreement indicated that the market price was approximately $15 per share; - The Buyer would sell the Series B preferred stock to Icelandic investors at the market price; - The Purchase Price at which the Buyer would buy the Series B shares from deCODE would be increased to $15.00 per share (the Adjusted Purchase Price) if (i) the Buyer was able to sell at least 50% of the Series B shares at or above the Adjusted Purchase Price and (ii) the trading price in the Icelandic market remained at or above the Adjusted Purchase Price from the time of such resale through the end of 1999; - In the event that deCODE received the incremental Adjusted Purchase Price proceeds from the Buyer, deCODE would also receive interest on such amount at a rate of 6% per annum from the closing date; and - The Buyer would receive a commission of 7% of the proceeds from the sale of the Series B preferred stock for the placement of deCODE's stock. This commission would only become payable in the event that the Purchase Price was subsequently increased to the Adjusted Purchase Price. On August 8, 1999, the closing date, the Buyer advised deCODE that it had arranged for the sale of at least 50% of the Series B shares at a price of $15.00 per share. EXCHANGE OF COMMON STOCK FOR SERIES B PREFERRED STOCK On August 8, 1999, deCODE exchanged 333,333 shares of common stock held by deCODE's chief executive officer, or CEO, for 250,000 shares of newly issued Series B preferred stock. At that time, the common shares were estimated to have a fair value equal to 90% of the fair value of the Series B preferred shares. This exchange resulted in a deemed contribution by deCODE's CEO of $750,000 being recorded. The 333,333 shares of common stock were held in treasury and subsequently re-issued during 1999. REPURCHASE OF SERIES A, SERIES B AND SERIES C PREFERRED STOCK On August 8, 1999, deCODE repurchased the 250,000 shares of Series B preferred stock issued to its CEO pursuant to a Resolution adopted by the Board of Directors. The 250,000 shares of Series B preferred stock were held in treasury and subsequently re-issued during 1999. On August 11, 1999, deCODE repurchased and retired 2,358,074 shares of Series A preferred stock. On August 24, 1999, deCODE repurchased and held in treasury 100,000 shares of Series C preferred stock. Pursuant to the Series A and Series C preferred stock repurchase agreements and the Board Resolution, the initial repurchase price deCODE paid for such shares of Series A, Series B and Series C preferred stock was $7.50 per share (the Repurchase Price). deCODE paid the Repurchase Price to the selling shareholders in August 1999. However, pursuant to agreements between the respective stockholders and deCODE on July 12, 1999, it was agreed that the repurchase price paid for the Series A, Series B and Series C preferred F-28 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) stock would be equal to the Purchase Price per share, net of any commission payable to the Buyer, at which deCODE sold shares of its Series B preferred stock in the August 8, 1999 offering. ADJUSTMENT TO ISSUANCE AND REPURCHASE PRICES On December 28, 1999, the conditions requiring an increase of the Purchase Price were met, and deCODE and the Buyer agreed on an Adjusted Purchase Price of $15.00 per share for the five million shares of Series B preferred stock sold to the Buyer on August 8, 1999. It was also agreed that the Buyer would receive the commission in the amount of $5,250,000, representing 7% of the total aggregate Adjusted Purchase Price for the Series B shares. As of December 31, 1999, deCODE had recorded a receivable from the Buyer in the amount of $33,143,836 representing the incremental amount due from the Buyer with respect to the Adjusted Purchase Price of $37,500,000, less commissions and plus accrued interest. The receivable from the Buyer was paid in February 2000. The total amount received was $33,476,712. As a result of the Purchase Price being adjusted, on December 28, 1999, deCODE and the Series A stockholders, deCODE's CEO and the Series C stockholder agreed upon an adjusted repurchase price for the Series A, Series B and Series C preferred stock of $13.95 per share, that being the Adjusted Purchase Price of $15.00 per share less a commission of 7% of the Adjusted Purchase Price. This adjustment to the repurchase price resulted in the Series A and Series C shares being repurchased for total premiums of $29,978,873 and $1,170,671, respectively, and the Series B shares being repurchased for a net discount of $262,500. The incremental repurchase price per share of $6.45, or $17,467,077 in aggregate, was paid to the respective sellers of Series A, Series B and Series C preferred stock in February 2000, and accordingly, was reflected in the balance sheet at December 31, 1999 as a current liability. COMMON STOCK The total authorized shares of common stock, par value $0.001, of deCODE is 60,000,000 shares. Holders of shares of common stock are entitled to one vote at all meetings of stockholders for each share held by them. The common stock has no preemptive rights or other rights to subscribe for additional shares, no conversion right and no right of redemption. Subject to the rights and preferences of the holders of any preferred stock, the holders of the common stock are entitled to receive such dividends as, when and if declared by the Board of Directors out of funds legally available for that purpose. In July 2000, deCODE completed its initial public offering of common stock. A total of 11,040,000 shares were sold by deCODE at a price of $18.00 per share. The offering resulted in net proceeds to deCODE of approximately $182.0 million, net of an underwriting discount of $13.9 million and offering expenses of $2.9 million. Of the 6,015,000 shares of common stock that were issued and paid at the inception of deCODE, 5,789,438 were issued to the founders of deCODE subject to certain vesting provisions (Founder Stock). The unvested shares of Founder Stock were subject to repurchase by deCODE at the original issue price in the event that a founder did not continue in employment, according to individual terms. All remaining Founder Stock is fully vested as of December 31, 2001. Of the Founder Stock, 3,125,292 shares of common stock are entitled to piggyback registration rights with respect to the registration of such shares under the Securities Act. Should deCODE propose to register any further shares of common stock under the Securities Act either for deCODE's own account or for the account of other security holders, the holders of shares having piggyback rights are entitled to receive notice of the registration and are entitled, with some limitation, to include their shares in the registration. F-29 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Forfeited unvested Founder Stock and unvested common stock issued upon early exercise of stock options totaling 26,977 in 2000 and 2001 were held in treasury and subsequently re-issued during those same years. At December 31, 2001, forfeited unvested common stock issued upon early exercise of stock options totaling 70,841 shares were held in treasury. At December 31, 2001, 375,020 shares of common stock that were issued upon early-exercise of stock options remained unvested. Notes receivable provided in connection with the purchase of common stock are collateralized only by the shares to which they relate, are payable after a fixed period of generally four years and bear a fixed interest rate of generally six percent per annum. Upon the closing of deCODE's public offering in July 2000, warrants to purchase 1,075,833 shares of Series A preferred stock and warrants and options to purchase 416,667 shares of Series C preferred stock automatically converted into warrants and options to purchase the same number of shares of common stock. Of these warrants, 325,000 were exercised during the period from the public offering and December 31, 2000 and 100,000 were exercised in the year ended December 31, 2001. At December 31, 2001, 1,067,500 warrants to purchase the same number of shares of common stock are outstanding. Holders of such warrants and options have the right to require deCODE to file a registration statement under the Securities Act covering the registration of their shares at any time after 180 days from the effective date of an initial registration statement if the holders of 50% of such shares demand registration. Such registration rights are subject to conditions and limitations, including the right of the underwriters of an offering to limit the number of shares of common stock which security holders may include in a registration. Further, deCODE may defer a registration for a period of 90 days if deCODE furnishes to the holders requesting registration a certificate signed by the chairman of the board stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to deCODE and its stockholders for the requested registration to be effected at that time. deCODE is generally required to bear all of the expenses of such registrations, except underwriting discounts and selling commissions. Registration of any of the shares of common stock held by security holders with registration rights would result in such shares becoming freely tradable without restriction under the Securities Act immediately upon effectiveness of such registration. STOCK OPTION PLAN In August 1996, deCODE adopted the deCODE genetics, Inc. 1996 Equity Incentive Plan (the "Plan"). A total of 7,000,000 options are reserved for grants under the terms of the Plan. The Plan provides for grants of stock options to employees, members of the Board of Directors, consultants and other advisors who are not employees. Options granted to date generally vest over a period of four years, generally have a maximum term of 10 years, and may contain early-exercise provisions allowing for company-provided financing of the exercise price. As of December 31, 2001, 950,188 shares were available for grant under the Plan. F-30 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Options transactions pursuant to the Plan are summarized as follows:
EXERCISE PRICE EXERCISE PRICE EXERCISE PRICE GREATER THAN GRANT EQUALS GRANT LESS THAN GRANT DATE STOCK FAIR VALUE DATE STOCK FAIR VALUE DATE STOCK FAIR VALUE TOTAL ---------------------- ---------------------- ---------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE ---------- --------- ---------- --------- ---------- --------- --------- -------- Outstanding at December 31, 1998........ 17,000 $ 4.00 15,000 $ 4.00 15,000 $0.20 47,000 $ 2.79 Granted.................... 0 0.00 0 0.00 855,500 5.85 855,500 5.85 Exercised.................. (7,000) 4.00 0 0.00 (840,500) 5.62 (847,500) 5.61 Cancelled.................. (10,000) 4.00 0 0.00 0 0.00 (10,000) 4.00 ------- ------ --------- ------ -------- ----- --------- ------ Outstanding at December 31, 1999........ 0 0.00 15,000 4.00 30,000 9.25 45,000 7.50 Granted.................... 5,000 18.00 658,500 15.02 420,500 8.39 1,084,000 12.46 Exercised.................. 0 0.00 (140,000) 12.54 (75,000) 0.84 (215,000) 8.46 Cancelled.................. 0 0.00 (93,000) 17.86 0 0.00 (93,000) 17.86 ------- ------ --------- ------ -------- ----- --------- ------ Outstanding at December 31, 2000........ 5,000 18.00 440,500 14.83 375,500 9.97 821,000 12.63 Granted.................... 100,000 7.42 1,049,000 8.23 0 0.00 1,149,000 8.16 Exercised.................. 0 0.00 0 0.00 0 0.00 0 0.00 Cancelled.................. 0 0.00 (50,396) 12.04 0 0.00 (50,396) 12.04 ------- ------ --------- ------ -------- ----- --------- ------ Outstanding at December 31, 2001........ 105,000 $ 7.92 1,439,104 $10.12 375,500 $9.97 1,919,604 $ 9.97 ======= ====== ========= ====== ======== ===== ========= ======
The following table summarizes information about stock options outstanding at December 31, 2001:
OUTSTANDING ----------------------- VESTED AND WEIGHTED EXERCISABLE AVERAGE -------------------- REMAINING WEIGHTED CONTRACTUAL AVERAGE NUMBER LIFE NUMBER EXERCISE EXERCISE PRICE OF SHARES (IN YEARS) OF SHARES PRICE -------------- --------- ----------- --------- -------- $1.00 to $8.00........................................ 654,500 9.53 84,000 $ 2.86 $8.13 to $8.65........................................ 588,500 9.30 56,004 8.13 $10.00 to $18.29...................................... 676,604 8.69 249,589 14.45 --------- ---- ------- ------ $1.00 to $18.29....................................... 1,919,604 9.16 389,593 $11.04 ========= ==== ======= ======
deCODE records deferred compensation for employee stock options based on the difference between the exercise price and the common stock fair value on the measurement date (i.e., the date on which both the number of shares to be issued and the exercise price are fixed and determinable) and records interim estimates of deferred compensation between the grant date and the measurement date. deCODE records deferred compensation for non-employee stock options based on the grant date fair value of options granted as estimated by the Black-Scholes option pricing model. Deferred compensation is amortized and recorded as compensation expense ratably over the vesting period of the options. Stock-based compensation expense of $5,815,010, $8,246,419 and $4,597,989 was recognized in the statements of operations during the years ended December 31, 1999, 2000 and 2001 for employee stock options, and stock-based remuneration expense of $2,498,355, $24,135 and $52,750 was recognized in the statements of operations during the years ended December 31, 1999, 2000 and 2001 for non-employee stock options. F-31 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Each employee option grant generally vests twenty-five percent on the first anniversary date of an employee's commencement of employment and 1/48th of the original grant each month thereafter for the following three years. Non-employee option grants generally have not contained vesting provisions. All options granted from inception through 1999 and two option grants in 2000 have contained a provision for early-exercise according to the terms of the Plan with company-provided financing of the exercise price made available. In almost all cases, employees took advantage of their right to early-exercise and to fund such exercise with a company-provided loan. The company-provided loans are due after a fixed term of generally four years and bear a fixed interest rate of six percent per annum. Employee stock options granted in 1997 and 1998 were amended in March 1999. Such amendment eliminated prepayment terms with respect to principal and interest pursuant to the company-provided note and fixed the interest rate at 6%. With this, these option grants, which were originally variable awards, became fixed. Total compensation measured at March 1999 with respect to the options granted in 1997 and 1998 aggregated $14,872,579. Of this amount, $1,265,947 was recognized as compensation in the consolidated statements of operations in the period January through March 1999. Compensation deferred as of and to be recognized subsequent to March 1999 with respect to the options granted in 1997 and 1998, amounted to $8,939,134. OTHER STOCK AND STOCK OPTION ARRANGEMENTS In February 1998, deCODE granted a stock option to a collaborator that was not granted under the provisions of the Plan. This option was for 80,000 shares of common stock at an exercise price of $0.40 per share. The option had no vesting provisions and was immediately exercised using company-provided financing that was subsequently paid in 1999. In 2000, deCODE issued 20,000 shares of common stock to collaborators amounting to $415,953 in exchange for services provided. This remuneration amount was charged to expense in the statement of operations in the year ended December 31, 2000. PRO FORMA NET LOSS PER COMMON SHARE Had compensation cost for all stock options been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123, deCODE's net loss and basic and diluted net loss per share would have been changed to the pro forma amounts indicated below:
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------- 1999 2000 2001 ----------- ----------- ----------- Net loss attributable to common stockholders -- as reported.......................................... $62,218,278 $38,659,382 $47,838,471 Net loss attributable to common stockholders -- proforma.......................... 58,348,278 35,862,382 49,818,838 Basic and diluted net loss per share as reported -- proforma.............................. 9.65 1.63 1.08 Basic and diluted net loss per share................ 9.05 1.52 1.12
Pro forma net loss and net loss per share for the years ended December 31, 1999 and 2000 is less than net loss and net loss per share as reported as a result of deCODE's employee stock options initially being accounted for as variable awards under APB No. 25. The variable award accounting combined with the growth in the estimated fair value of deCODE's common stock during these years resulted in significant stock-based compensation expense being recognized in the statements of operations for 1999, 2000 and 2001 under APB No. 25. Recent stock option awards are accounted for as fixed awards under APB No. 25 with little or no compensatory element. The effects of applying the provisions of SFAS No. 123 on net loss and net loss per share as stated above is not necessarily representative of the effects on reported income or loss for future years due to, among other F-32 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) things, the vesting period of the stock options and the fair value of additional stock options that may be granted in future years. The weighted-average grant date fair values using the Black-Scholes option pricing model were:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1999 2000 2001 --------- --------- -------- Exercise price greater than grant date stock fair value..... $ -- $ -- $7.42 Exercise price equals grant date stock fair value........... $ -- $ 9.82 $8.23 Exercise price less than grant date stock fair value........ $11.89 $17.65 $ --
The fair values of the options granted during 1999, 2000 and 2001 are estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: no dividends, expected volatility of 60%, 80% and 100%, respectively; expected terms of 3.9 years, 5.0 years and 5.0, respectively; and risk-free interest rates of 5.74%, 5.42% and 4.39%, respectively. STOCK-BASED COMPENSATION AND REMUNERATION Stock-based compensation represents the expense charged in the statements of operations relating to employee and non-employee stock options granted. Stock-based remuneration represents the expense charged in the statements of operations relating to shares of stock issued to non-employees in exchange for services provided. Stock-based compensation and remuneration are included in the statements of operations in the following captions:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------- 1999 2000 2001 ---------- ---------- ---------- Research and development expense....................... $5,566,897 $4,072,819 $3,313,456 General and administrative expense..................... 3,478,968 4,613,688 1,337,283 ---------- ---------- ---------- Total........................................ $9,045,865 $8,686,507 $4,650,739 ========== ========== ==========
Included in the above is $131,250 that was paid in the form of shares 20,669 of deCODE common stock that were issued in March 2002. Compensation related to these shares has been expensed in December 2001 and is included in accrued expenses at December 31, 2001. In addition, general and administrative expenses in the year ended December 31, 2000 include charitable contributions of 150,000 shares of Series B preferred stock amounting to $3.0 million and of 8,000 shares of common stock amounting to $193,992 and general and administrative expenses in the year ended December 31, 2001 include a charitable contribution of 5,000 shares of its common stock amounting to $52,500. DEFINED CONTRIBUTION BENEFITS deCODE contributes to relevant pension organizations for personnel in Iceland. Certain other discretionary contributions may be made. Contributions are based on employee salaries paid and deCODE has no further liability in connection with these plans. Total contributions were $747,939, $979,306, and $1,434,368 for the years ended December 31, 1999, 2000 and 2001, respectively. Effective December 1, 2001, deCODE adopted a 401(k) pension plan available to eligible full-time employees in the United States. deCODE made contributions of $773 in the year ended December 31, 2001. INCOME TAXES Deferred income taxes include the net effects of temporary differences between the carrying amounts for assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. F-33 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) deCODE's deferred tax assets (liabilities) are comprised of the following:
DECEMBER 31, ---------------------------- 2000 2001 ------------ ------------ Net Operating Losses........................................ $ 6,221,000 $ 5,583,000 Capitalized Research and Development Costs.................. 6,375,000 5,064,000 Deferred Revenue............................................ 908,000 881,000 Fixed Asset Depreciation.................................... (616,000) 837,000 Patents..................................................... (710,000) (355,000) Other....................................................... 268,000 503,000 ------------ ------------ Total deferred tax asset, net..................... 12,446,000 12,513,000 Valuation Allowance......................................... (12,446,000) (12,513,000) ------------ ------------ $ 0 $ 0 ============ ============
The table below reconciles the expected U.S. federal income tax rate to the recorded income tax rate :
FOR THE YEARS ENDED DECEMBER 31, -------------- 2000 2001 ----- ----- Income taxes at federal statutory rates..................... (34.0)% (34.0)% State income taxes, net of federal benefit.................. 0.0 (0.6) Non-deductible equity compensation.......................... 7.4 3.8 Non-deductible goodwill amortization........................ 4.0 0.8 Foreign rate differential................................... 10.9 3.6 Foreign deferred tax asset adjustment....................... 0.0 15.0 Foreign inflation adjustment................................ (0.6) (8.9) Foreign currency adjustment................................. (0.6) 20.1 Other....................................................... 0.7 0.1 Net Change in valuation allowance........................... 12.2 0.1 ----- ----- 0.0% 0.0% ===== =====
As of December 31, 2001, deCODE had U.S. federal net operating loss ("NOL") carryforwards of approximately $4.1 million that may be available to offset future U.S. federal income tax liabilities and expire at various dates through 2021. Also as of December 31, 2001, deCODE's Icelandic subsidiaries had NOL carryforwards of approximately $22.0 million that begin to expire in 2004. Management has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets and has established a full valuation allowance for such assets, which are comprised principally of net operating loss carryforwards and capitalized research and experimentation costs. Management re-evaluates the positive and negative evidence periodically. Ownership changes, as defined in the Internal Revenue Code, may have limited the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income. Subsequent ownership changes could further affect the limitation in future years. In December 2001, the Government of Iceland enacted a change in the corporate tax rate from 30% to 18% with an effective date of January 1, 2002. As a result, the carrying value of the Icelandic deferred tax assets at December 31, 2001 were re-computed at the 18% rate, resulting in a decrease in deCODE's deferred tax assets and liabilities which was offset by a reduction in the tax valuation allowance of $7.2 million. For F-34 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Icelandic tax purposes, the Income Tax and Capital Tax Act of 1981, as amended, contains provisions that stipulate that an inflation adjustment be taken into account in the annual reporting of taxable income. For the years ended December 31, 2000 and 2001, the adjustment to taxable income was a benefit of approximately $0.7 million and 14.1 million, respectively. For periods beginning on or after January 1, 2002, the Income Tax and Capital Tax Act was amended to remove these provisions. During the year ending December 31, 2001, there was a foreign currency adjustment caused by the devaluation of the Icelandic krona against the U.S. dollar, resulting in a decrease in deCODE's deferred tax assets and liabilities which was offset by a reduction in the tax valuation allowance of $32.4 million. SUBSEQUENT EVENTS MediChem. In March 2002, deCODE completed the acquisition of MediChem Life Sciences, Inc. (MediChem) in a stock-for-stock exchange to be accounted for as a purchase transaction. The acquisition gives deCODE capabilities in chemistry and structural proteomics that will be used in the implementation of its strategy of turning its targets identified by applying population genomics to common diseases into novel drugs for the market. Under the terms of the merger agreement, MediChem shareholders received 0.3099 shares of newly issued deCODE common stock in exchange for each MediChem share of common stock, or approximately 8.4 million shares of deCODE common stock. In addition, options to purchase approximately 1.9 million shares of MediChem common stock that vested immediately upon consummation of the merger have been assumed by deCODE, resulting in the issuance of approximately 0.6 million options to purchase deCODE common stock. Under the terms of the merger agreement, deCODE will also grant a further 136,356 deCODE stock options to certain employees of MediChem under the 1996 Equity Incentive Plan. The total cost of the acquisition is currently estimated to be $86.8 million consisting of the following:
(IN THOUSANDS) Market value of deCODE common stock issued in exchange for outstanding MediChem common stock......................... $79,677 Fair value of MediChem employee stock options assumed....... 3,860 Estimated direct transaction costs of deCODE, consisting primarily of financial advisory, legal and accounting fees...................................................... 3,300 ------- $86,837 =======
deCODE's common stock has been valued using an average price for the period from three days before to three days after the companies reached agreement and the proposed merger was announced. The fair value of options to be assumed is estimated using the Black-Scholes method. The terms of MediChem's outstanding stock options provided that the options fully vested upon a change of control; that is, there were no unvested options upon consummation of this merger. deCODE will account for the acquisition of MediChem under the purchase method of accounting for business combinations as defined by Statement of Financial Accounting Standard No. 141 "Business Combinations" and, accordingly, the purchase price will be allocated to the tangible and identifiable intangible assets of MediChem acquired by deCODE and liabilities of MediChem assumed by deCODE on the basis of F-35 deCODE GENETICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) their fair values on the acquisition date. deCODE has preliminarily allocated the total cost of the merger to the net assets of MediChem as follows:
(IN THOUSANDS) Net tangible assets acquired................................ $22,095 In-process research and development......................... 483 Identifiable intangible assets.............................. 5,975 Goodwill.................................................... 58,284 ------- $86,837 =======
The allocation of the purchase price is preliminary and deCODE will be finalizing independent valuations of MediChem's assets and liabilities and, as such, the preliminary allocation of the purchase price could be subject to significant change. Intangible assets of MediChem identified to-date include developed technology, patents, customer and other contracts and agreements that have estimated useful lives ranging from three to ten years. The amounts attributed to MediChem's tangible assets and liabilities acquired, as well as to identifiable intangible assets, their estimated useful lives and the amount attributed to acquired in-process research and development will ultimately be determined upon completion of the appraisals and, therefore, may be different from that presented above. F.Hoffman-La Roche. In January 2002, deCODE and Roche entered into a new Collaboration and Cross-License Agreement. This new, three-year alliance leverages deCODE's expanding capabilities in drug discovery into developing novel treatments for common diseases. Under this new alliance, Roche will provide research funding for a minimum of the next two years for deCODE to conduct downstream research in a selection of four diseases, with the goal of using the targets identified to discover and develop new therapeutic compounds and to take these compounds into clinical trials. Also, deCODE will receive development and regulatory approval milestone payments for therapeutic drug compounds developed pursuant to the agreement as well as royalties on Roche's sales of drugs developed under the agreement. Additionally, deCODE will pay Roche royalties should deCODE develop and market drugs for certain common diseases. SELECTED QUARTERLY DATA (UNAUDITED) The following is a summary of quarterly financial results:
FOR THE THREE MONTHS ENDED --------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ----------- ----------- ------------ ----------- FISCAL 2000 Revenue............................. $ 4,618,386 $ 3,828,527 $ 5,576,112 $ 7,522,631 Operating loss...................... 7,562,319 10,937,571 10,560,229 10,509,529 Net loss............................ 6,898,139 10,391,448 7,575,366 6,253,550 Basic and diluted net loss per share............................ 1.25 1.94 0.23 0.14 FISCAL 2001 Revenue............................. $ 5,032,986 $ 6,197,906 $ 9,720,955 $10,598,779 Operating loss...................... 18,185,871 13,861,572 9,946,666 10,654,063 Net loss............................ 16,087,763 12,290,505 8,867,423 10,592,780 Basic and diluted net loss per share............................ 0.37 0.28 0.20 0.24
F-36 EXHIBIT INDEX
Exhibit Number Description - ------ ----------- 2.1 Agreement and Plan of Merger dated as of January 7, 2002, by and among deCODE genetics, Inc., Saga Acquisition Corp, and MediChem Life Sciences, Inc. (Incorporated by reference to Annex A to the Proxy Statement/Prospectus included in Pre-Effective Amendment No. 1 to deCODE's Registration Statement on Form S-4 (Registration No. 333-81848) filed on February 12, 2002). 3.1 Amended and Restated Certificate of Incorporation, as further amended (Incorporated by reference to Exhibit 3.1 and Exhibit 3.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 3.2 Bylaws, as amended (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 4.1 Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 4.2 Form of Warrant to Purchase Series A Preferred Stock (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 4.3 Form of Warrant to Purchase Series C Preferred Stock (Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.1 Form of License from The Icelandic Data Protection Commission (now, The Icelandic Data Protection Authority) to Islensk erfoagreining ehf. and its Clinical Collaborators to Use and Access Patient Records and Other Clinical Data Relating to Individuals (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.2* 1996 Equity Incentive Plan, as amended (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-56996) filed on March 14, 2001. 10.3* Form of Non-Statutory Stock Option Agreement, as executed by employees and officers of deCODE genetics, Inc. who received non-statutory stock options (Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K filed March 23, 2001). 10.4* Form of Employee Proprietary Information and Inventions Agreement (Incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.5 Agreement on the Collaboration of Friorik Skulason (FS) and Islensk erfoagreining ehf. (IE) on the Creation of a Database of Icelandic Genealogy, dated April 15, 1997 (Incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.6* Consultancy Contract between deCODE genetics, Inc. and Vane Associates, dated December 1, 1997, together with Nondisclosure Agreement executed by Vane Associates as of December 1, 1997, as amended (Incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.7* Indemnity Agreement between deCODE genetics, Inc. and Sir John Vane, dated December 1, 1997 (Incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.8* Amended and Restated Non-Recourse Promissory Note between deCODE genetics, Inc. and Hannes Smarason, dated March 24, 1999 (Incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.9+ Research Collaboration and Cross-license Agreement among F. Hoffman-La Roche Ltd, Hoffman-La Roche Inc. and deCODE genetics, Inc., dated February 1, 1998 (Incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.10 Amended and Restated Investor rights Agreement of deCODE genetics, Inc., dated as of February 2, 1998, as further amended and restated (Incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.11* Employment Agreement between Islensk erfoagreining ehf. and Kristjan Erlendsson, dated September 4, 1998 (Incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.12 Co-operation Agreement between Reykjavik Hospital and Islensk erfoagreining ehf., dated November 4, 1998 (Incorporated by reference to Exhibit 10.22 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.13 Co-operation Agreement between the Iceland State Hospital and Islensk erfoagreining ehf., dated December 15, 1998 (Incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.14* Non-Recourse Promissory Note between deCODE genetics, Inc. and Hannes Smarason, dated September 15, 1999 (Incorporated by reference to Exhibit 10.35 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.15 Research Collaboration Agreement by and between Islenskar hveraorverur ehf. (now Prokaria, ehf.) and Islensk erfoagreining ehf., dated December 28, 1999 (Incorporated by reference to Exhibit 10.38 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.16 Agreement between The Minister for Health and Social Security and Islensk erfoagreining ehf. relating to the Issue of an Operating License for the Creation and Operation of a Health Sector Database, dated January 21, 2000 (Incorporated by reference to Exhibit 10.39 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
10.17 Operating License issued to Islensk erfoagreining ehf., for the Creation and Operation of a Health Sector Database, dated January 22, 2000 (Incorporated by reference to Exhibit 10.40 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.18 Agreement between The University of Iceland, Islensk erfoagreining ehf., and the City of Reykjavik, dated February 15, 2000 (Incorporated by reference to Exhibit 10.42 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.19* Form of Employee Confidentiality, Invention Assignment and Non-Compete Agreement executed by certain officers (Incorporated by reference to Exhibit 10.44 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.20 Series C Preferred Stock and Warrant Purchase Agreement between Roche Finance Ltd and deCODE genetics, Inc., dated as of February 1, 1998 (Incorporated by reference to Exhibit 10.45 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.21+ Strategic Alliance Agreement between Partners HealthCare System, Inc., The General Hospital Corporation, d.b.a. Massachusetts General Hospital, The Brigham and Women's Hospital, Inc. and deCODE genetics Ltd. (Islensk erfoagreining), dated May 11, 2000 (Incorporated by reference to Exhibit 10.48 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.22+ Crosswalk Development Agreement between Partners HealthCare System, Inc., The General Hospital Corporation, d.b.a. Massachusetts General Hospital, The Brigham and Women's Hospital, Inc. and deCODE genetics Ltd. (Islensk erfoagreining), dated May 11, 2000 (Incorporated by reference to Exhibit 10.49 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 10.23* Employment Agreement between Islensk erfoagreining ehf. and Hakon Guobjartson, dated May 5, 1999 (Incorporated by reference to Exhibit 10.52 to the Company's Annual Report on Form 10K filed March 23, 2001). 10.24 Form of Contract on the Processing of Clinical Data and their Transfer to a Health Sector Database between several Health Institutions and Islensk erfoagreining ehf. (Incorporated by reference to Exhibit 10.58 to the Company's Annual Report on Form 10-K filed March 23, 2001). 10.25* Amended and Restated Promissory Note, dated January 1, 2001, by Hannes Smarason and the Company (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2001). 10.26 Work Contract dated March 15, 2001 between Islensk erfdagreining ehf. and Eykt ehf., an Icelandic civil-works engineer, on concrete casting, external finish work, conduits and ventilation systems, electrical and specialized systems in Sturlugata 8, Reykjavik (Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2001). 10.27* Employment and Amended and Restated Employee Confidentiality, Invention Assignment and Non-Compete Agreement between deCODE genetics, Inc. and Mark Gurney, dated as of August 21, 2000 and signed on August 13, 2001 (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001).
10.28* Employment and Employee Confidentiality, Invention Assignment and Non-Compete Agreement between deCODE genetics, Inc. and Lance Thibault, dated February 1, 2001 and signed on June 20, 2001 (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001). 10.29* Employment Agreement between deCODE genetics, Inc. and Michael W. Young dated June 4, 2001 (Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001). 10.30+ Collaboration Agreement between Genmab A/S, Medarex, Inc. and deCODE genetics, ehf. dated June 12, 2001 (Incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001). 10.31+ Contract Services Agreement Re. Gene Expression Profiles In Rheumatoid Arthritis between Encode ehf. and Genmab A/S dated June 12, 2001 (Incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001). 10.32+ Collaboration and Cross-License Agreement Re. Diagnostics between F. Hoffman-La Roche Ltd. AG and deCODE genetics, ehf dated as of June 29, 2001 (Incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001). 10.33+ Joint Development and Commercialization Agreement between deCODE genetics, ehf. and PE Corporation (NY) through its Applied Biosystem Group dated July 16, 2001 (Incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001). 10.34+ Reagent Supply Agreement between deCODE genetics, ehf and PE Corporation (NY) through its Applied Biosystem Group dated July 16, 2001 (Incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001). 10.35+ Pharmacogenomics Collaboration and License Agreement between Encode ehf. and Affymetrix, Inc. dated July 16, 2001 (Incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2001). 10.36 Contract on Financial Leasing between Lysing hf, and Islensk erfoagreining ehf., dated as of December 13, 2001. 10.37 Land Lease Agreement between the City of Reykjavik and Islensk erfoagreining ehf., dated as of December 21, 2001. 10.38 Agreement on the Details of the Arrangement of Encumbrances in the Site Agreement between the University of Iceland and Islensk erfoagreining ehf., dated as of December 21, 2001. 10.39 Annex to the Agreement on the Details of the Arrangement of Encumbrances in the Site Agreement between the University of Iceland and Islensk erfoagreining ehf., dated as of January 4, 2002. 10.40# Loan Agreement between Sturlugata 8, ehf. and Islandsbanki-FBA, hf., dated as of December 21, 2001. 10.41# Loan Agreement between Sturlugata 8, ehf. and Islandsbanki-FBA, hf., dated as of December 27, 2001. 10.42 Currency Exchange Agreement between Sturlugata 8 ehf. and Islandsbanki-FBA hf., dated as of December 21, 2001.
10.43# Agreement on the Sale and Listing of Bonds Issued by Sturlugata 8 ehf. between Islandsbanki-FBA, hf. and Islensk erfoagreining ehf., dated as of December 21,2001. 10.44 General Bond with Consumer Price Index between Islandsbanki-FBA, hf. and Sturlugata 8 ehf., dated as of December 21, 2001. 10.45 General Bond with Consumer Price Index between Islandsbanki-FBA, hf. and Sturlugata 8 ehf., dated as of December 21, 2001. 10.46# Research Collaboration and Cross-License Agreement among F.Hoffman-La Roche Ltd and Hoffman-La Roche Inc. and deCODE genetics, ehf. (Islensk erfoagreining), effective as of February 1, 2002. 10.47 Loan Agreement between Kristjan Erlendsson and Islensk erfoagreining ehf., dated as of October 11, 2001. 21.1 Subsidiaries of deCODE genetics, Inc. 23.1 Consent of PricewaterhouseCoopers ehf., independent public accountants. 99.1 Government Regulation on a Health Sector Database, dated January 22, 2000 (Incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000). 99.2 Act. No. 139/1998 on a Health Sector Database (Incorporated by reference to Exhibit 99.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-31984) which became effective on July 17, 2000).
- ----------------- + Certain portions of this exhibit have been granted confidential treatment by the Commission. The omitted portions have been separately filed with the Commission. * Constitutes a management contract or compensatory plan or arrangement. # A request for confidential treatment had been submitted with respect to this exhibit. The copy which was filed as an exhibit omits the information subject to the request for confidential treatment. EX-10.36 3 w58844ex10-36.txt CONTRACT ON FINANCIAL LEASING... OFFICER'S CERTIFICATE I do hereby certify and represent that: 1. I am the duly elected Secretary of deCODE genetics, Inc., a Delaware corporation. 2. Pursuant to Rule 306(a) of Regulation S-T, the following exhibit 10.36 to deCODE genetics, Inc.'s Annual Report on Form 10-K is a fair and accurate English translation of a document prepared in the Icelandic language. IN WITNESS WHEREOF, I have signed this Officer's Certificate in my capacity as Secretary of deCODE genetics, Inc. on this 21 day of March, 2002. By: /s/ Tanya Zharov ----------------------------------- Name: Tanya Zharov Title: Secretary and Corporate Counsel Exhibit 10.36 CONTRACT ON FINANCIAL LEASING LYSING HF. WWW.LYSING.IS Suourlandsbraut 22, 108 Reykjavik Tel: +354-540-1500, Fax: +354-540-1505, Freephone: +354-800-6515 CONTRACT ON NO. 105591 COPY FINANCIAL LEASING LYSING HF. LYSING HF. STATE REG. NO. 621101-2420 Document drawn up by: Sveinn Por Stefansson AS LESSOR AND CURRENCY LINKED Lessee: Islensk erfoagreining ehf. State Reg. No 691295-3549 Domicile: Lynghals 1 Tel: 570-1900 Postal address: 110 Reykjavik Tel: HEREINAFTER TERMED THE LESSEE, ENTER INTO THE FOLLOWING CONTRACT ON FINANCIAL LEASE: ARTICLE 1 THE LEASED PROPERTY: Research equipment and instruments pursuant to invoice No. 0206 dated 12 Dec. 2001 with serial numbers pursuant to attached document No 3 and photocopies of foreign invoices ARTICLE 2 BASE AMOUNT OF LEASE
- ------------------------------------------------------------------------------------------------------ Division of ISK Rate Foreign lease amount currency indexed to USD - ------------------------------------------------------------------------------------------------------ Amount ISK 1,291,800,000 1,291,800,000 107.65 12,000,000 of lease - --------------------------------------------- ------------------------------------- VAT ISK 316,491,000 - --------------------------------------------- ------------------------------------- Total ISK 1,608,291,000 - ------------------------------------------------------------------------------------------------------ Total exc. VAT ISK 1,291,800,000 - ------------------------------------------------------------------------------------------------------
ARTICLE 3 SELLER: Islensk erfoagreining direct importation State Reg. No. 691295-3549 ARTICLE 4 INITIAL TERM OF LEASE From: 10 January 2002 To: 9 January 2005 Date of first lease payment: 10 January 2002 Number of payments: 36 Date of payment: 14 December 2001 Number of months: 36 ARTICLE 5 ARRANGEMENT OF PAYMENTS DURING INITIAL TERM OF LEASE 10 January 2002 to 10 January 2005 No. of payments: 36 Lease indexed to USD: ISK 38,468,518 Total exc. VAT: ISK 38,468,518.- 2 Payment frequency: Monthly Subject to VAT ARTICLE 6 MONTHLY CONTINUATION OF LEASE FOLLOWS END OF INITIAL TERM OF LEASE from 10 January 2005 Lease indexed to USD: ISK 3,205,710.- Total exc. VAT: ISK 3,205,710.- ARTICLE 7 INSURED BY: Vatryggingarfelag Islands hf. Insurance amount ISK: 1,291,800,000 Collection of premiums Directly from the Lessee ARTICLE 8 SURETY Bill of Exchange MORTGAGED PROPERTY: deCode Genetics Inc., USA ARTICLE 9 ATTACHMENTS TO THE CONTRACT: Attached document 1: annex dated 10 December 2001 Attached document 2: letter dated 22 October 2001 Attached document 3: list of serial numbers ARTICLE 10 SPECIAL TERMS Upon signature of this Contract the Lessee shall pay an initial fee of ISK 6,459,000.- plus VAT and with the first lease payment the interest of the paid-out amount, estimated at ISK 6,510,938. Calculations based on LIBOR interest rate 1.94% (10 December 2001) 3 ARTICLE 11: THE LEASED PROPERTY The leased property is specified in Article 1 of this Contract. The amount of the lease of this Contract is specified in Article 2. In addition, documents describing the leased property in detail are appended to this Contract, and form a part hereof. ARTICLE 12: TERM OF LEASE The term of lease is specified in articles 4 and 6. The Lessee may terminate this Contract with one month's notice when one month is remaining of the initial term of lease under the terms of Article 4. In the event that the Lessee does not terminate the Contract as specified above, the Contract shall be automatically extended without time limits. The Lessee may terminate the extended lease in writing with one month's notice. In the event that the Lessee terminates this Contract, the terms of Article 29 shall apply to the return of the leased property and costs accruing. ARTICLE 13: LEASE PAYMENTS The Lessee shall make payments on the lease under the terms of Article 5 on the agreed payment dates. The payment is payable in advance, the first date of payment being at the beginning of the initial term of the lease under the terms of Article 4. Should Lysing hf. pay the full or partial price of the leased property before the beginning of the initial term of the lease under the terms of Article 4, the Lessee shall pay, in addition to the first payment under the terms of Article 5, interest as of the date of payment to the first date of the initial term of lease under the terms of Article 4. If the Contract is in Icelandic kronur, Lysing hf. may adjust the lease amount specified in Articles 5 and 6 in accordance with changes in the credit terms of Lysing hf. Lysing hf. may adjust the indexed lease pursuant to Articles 5 and 6 in accordance with changes in the LIBOR-interest rate on the foreign currency or currencies in which the lease is denominated, or to the credit terms of Lysing hf. ARTICLE 14: INDEXATION If the lease payment is index-linked, the Lessee shall pay, in addition to the lease payment, an indexation adjustment. The adjustment shall be calculated on the basis of changes from the base consumer price index to which this Contract is linked under the terms of Article 2, to the index as current on each date of payment on the lease. However, an index which is lower than the base index of this Contract shall not be applied. Lease payments indexed to the changes in the exchange rate of a currency abroad and/or the exchange rate of foreign currencies against the Icelandic krona (ISK) are specified in ISK. The lease payment is payable in ISK. Calculation shall be based upon the posted selling rate of the Central Bank of Iceland for the currency or currencies in question on the date of issue of the invoice. 4 ARTICLE 15: OWNERSHIP Lysing hf. is the sole owner of the leased property. The company may request the leased property to be labelled as its property with a label supplied by the company to the Lessee. The label shall not be removed during the term of lease. At the Lessee's expense, Lysing hf. will register its ownership of the leased property, if such registration is obligatory by law or regarded as necessary by the company. The Lessee may not undertake any declaration of legal consequence regarding the leased property, and it is not subject to enforcement procedures in respect of the Lessee's debts. The Lessee may not permit others the use of the leased property, nor deliver it to another party in any other manner, without the consent of Lysing hf. ARTICLE 16: INSPECTION The Lessee has chosen the leased property, and shall undertake on behalf of Lysing hf. to inspect it, as the purchaser is obliged to do by the terms of the Act on the Sale of Goods No. 39/1922 and/or other rules of law. Lysing hf. takes no responsibility for the leased property. Lease payments must be made even if the Lessee is not satisfied with the leased property, or if it does not have the characteristics which the Lessee expected. ARTICLE 17: DELIVERY The Lessee assumes the risk of the leased property being destroyed or damaged or deteriorating after the seller has delivered the leased property, or after the risk has passed from the seller to the purchaser under the terms of the Act on the Sale of Goods No. 39/1922 and/or other rules of law. The Lessee confirms that the leased property described above has been delivered to him and that he has accepted it without reservation and has verified, through necessary inspection and testing, that the leased property is without defect and possesses the agreed characteristics agreed. The lease amount pursuant to Article 2 of this Contract is in accordance with agreements made between the Lessee and the Seller. ARTICLE 18: COST OF SHIPMENT AND REGISTRATION All costs incurred due to the packaging and shipment of the leased property from the seller to the lessee, as well as all costs pertaining to installation of the leased property at the place of use, are the Lessee's responsibility and payable by the Lessee. Furthermore, the Lessee shall pay all costs pertaining to registration and transfer of ownership. ARTICLE 19: SELLER'S DEFAULT The Lessee shall inform Lysing hf. in writing or by other equally verifiable means, should the leased property prove defective, or if a delay occurs in delivery by the seller, so that all necessary measures can be taken against the seller in respect of the default. The Lessee shall pay lease payments, even if the seller defaults on his contract with Lysing hf. and/or the Lessee. However, the Lessee may be entitled to a discount, damages or reimbursement as follows: a) Default on the part of the seller which leads to a discount on the purchase price, or damages payable by the seller, shall benefit the Lessee fully in 5 the form of reduced lease payments. The Lessee shall have no further claim on Lysing hf. In other respects, this Contract shall remain valid. b) In the event that the seller's default is of such a serious nature that the Sale Contract may be cancelled, Lysing hf. shall make this decision and notify the seller of its decision. When the sale contract has been cancelled and a settlement with the seller has not been reached within 30 days of the Contract being cancelled, Lysing hf. may claim settlement from the Lessee under the terms of Article 30. Refunds of the purchasing price of the leased property from the seller shall be fully deductible from the claims of Lysing hf. against the Lessee on the date of payment. Possible damages shall also be payable to the Lessee if they stem from damage suffered by the Lessee in the matter, provided that the Lessee is not in debt to Lysing hf. The Lessee shall pay the expense of claims made against the seller resulting from the seller's default, irrespective of whether the claim is made in the name of Lysing hf. or of the Lessee on behalf of the company. ARTICLE 20: TREATMENT OF LEASED PROPERTY The Lessee shall maintain the leased property in good condition, and have all damage and malfunctions repaired as soon as they occur, and observe the rules of the manufacturer/seller regarding its use. The Lessee shall attend all service inspections recommended by the agent, and have the manufacturer/seller or a party recognised by them attend to all maintenance and repair of the leased property, at the expense of the Lessee and without right to reimbursement from Lysing hf. In addition, the Lessee shall in all cases have the equipment lubricated and the oil and filters changed as specified in the service manual. In the case of vehicles this shall be carried out at least every 5,000km and shall be registered in the lubrication record that shall accompany the vehicle. The Lessee shall ensure that laws are obeyed regarding all treatment and use of the leased property. Special care shall be taken that the leased property is equipped with required protective and safety equipment, in order to avoid the risk of accidents and disease. Any removal of safety equipment is at the Lessee's risk. The Lessee shall consult with public monitoring authorities if required by law or regulations. The Lessee shall pay all resulting costs without the right to reimbursement. The Lessee bears responsibility for the equipment being used only within the limits prescribed by insurance companies for the use of the equipment, and by those who are insured during its use. For example, the equipment may not be sub-leased, used for training or competitive events, except with the written approval of Lysing hf. The Lessee may not modify the leased property. Should the Lessee, in spite of the above, have modified the leased property, he shall restore it to its original condition at his own expense. The Lessee may attach the leased property to items belonging to the Lessee or other parties, provided that there is no risk to the right of title of the Lessee. In the case of a vehicle, the Lessee may attach a towbar to the leased property, provided that the equipment is especially insured for the towing operation to be carried out, and that it is within the capacity of the equipment, according to the information provided by the seller. The place of use shall be the Lessee's place of business, unless the Lessee specifically requests a different location, which, provided that it is accepted by Lysing hf., shall be specified in this Contract. If the property to which the leased property is attached is 6 subject to any lien, the Lessee shall exempt the leased property from the lien by registering a declaration stating Lysing hf.'s ownership of the leased property on the form for registration of liens pertaining to the item to which the leased property is attached, together with a statement of consent of the holder of the lien. In subsequent documents regarding the lien, it shall also be stated that the leased property is exempted from the lien. The Lessee may not transport the leased property out of the country without the written approval of Lysing hf. ARTICLE 21: DAMAGE TO THE LEASED PROPERTY The Lessee shall be responsible for, and must compensate Lysing hf. for, all damage which may befall the leased property when it is in the Lessee's custody, or when the Lessee is otherwise responsible for it. The Lessee shall notify Lysing hf. immediately of such damage in writing, or by other equally reliable means. If repair of the leased property is possible in the view of Lysing hf., the Lessee shall have the leased property repaired without delay. The Lessee is responsible for ensuring that repair following such damage is carried out in the repair shop of the seller, or a party referred to by the seller, in a satisfactory manner and without delay. The Lessee's obligation to make payments is not affected by the leased property being unusable owing to damage or malfunction. If damage of the leased property is so substantial that it is doubtful whether it would be feasible to repair it, the final decision shall be made by Lysing hf. and the Lessee shall abide by that decision. Should the conclusion be that repair of the leased property is not feasible, the contracting parties shall have the following options: a) Should the Lessee wish to renew the leased property, and if the insurance compensation suffices for the purchase of a comparable property for lease, the terms of this Contract shall remain valid without change regarding payments, term of lease etc. b) The Lessee may request that the leased property is replaced by another similar or identical item, even if the price of the new item is up to 10% higher than the insurance compensation for the leased property lost or destroyed. The terms of the original contract shall apply, but payments until the end of the period shall be adjusted. c) Should the Lessee not desire to renew the leased property, or the purchase price of the new leased property exceeds the insurance compensation by more than 10%, a settlement shall be made between the parties within 30 days, under the terms of Article 30. The insurance compensation is deductible from the claim of Lysing hf. against the Lessee, or is payable to the Lessee if a settlement has been made between the Lessee and Lysing hf. before the insurance compensation is paid. ARTICLE 22: DAMAGE CAUSED BY THE LEASED ITEM During the term of this Contract, the Lessee is responsible for damage which the leased property may cause, directly or indirectly. In the event that Lysing hf. is compelled to pay compensation for such damage, the company shall have the right to claim reimbursement from the Lessee. 7 ARTICLE 23: INSURANCE The leased property shall be insured during the term of lease. Lysing hf. may purchase the necessary insurance for the leased property at the expense of the Lessee. Insurance premiums are variable according to the terms of insurance policies. During the term of lease, the amount of the insurance shall be based on the purchase price of the leased property. The insurance does not cover transport of the equipment from the place of delivery to the place of use, additional equipment, installation or connection of the leased property. Such expense shall be paid by the Lessee. The Lessee must insure these items specifically. The Lessee may purchase additional insurance for the leased property, provided that such purchase does not affect the rights of Lysing hf. The Lessee shall be liable for deductibles [excess] pursuant to the terms of insurance as well as all claims on the part of the insurance company in relation to non-compliance with the terms of insurance. Invoices for premiums are sent directly to the Lessee. However, in the event that the Lessee does not pay such premiums within the period allowed, Lysing hf. may, at the request of the insurance company, pay the premium and claim reimbursement from the Lessee, together with penalty interest, counted as of the payment date, and collection costs, cf. Article 27. ARTICLE 24: RIGHT OF INSPECTION A member of the staff of Lysing hf. and/or a representative of the company is entitled to inspect the leased property during the term of lease. In the case of a vehicle, the Lessee acknowledges the right of Lysing hf. to call the leased property in for inspection in writing at any time with seven days' notice, so that its condition may be examined and its instruments read. In the event that the Lessee does not comply with the request for inspection, employees of Lysing hf. may inspect the item at its place of use or remove it to a place of inspection, at the expense of the Lessee, wherever the item may be found, without an enforcement order. For this purpose, the Lessee shall grant the Lessor full access to the leased property and the site where the leased property is kept. ARTICLE 25: CHANGE OF ADDRESS The Lessee shall notify Lysing hf. immediately of any change of address. ARTICLE 26: TAXES AND DUTIES In addition to lease payments, the Lessee shall pay Lysing hf. a fee as stated in the company's rates schedule as well as all taxes and fees which may be increased or levied upon the leased property, the lease contract or the lease itself, including value-added tax, excise tax on motor vehicles and diesel weight tax, if the Lessee has not paid on the due date, as well as collecting costs, including the collecting costs of Lysing hf. in accordance with their rates schedule. The Lessee is also responsible for all costs pertaining to the use or custody of equipment. The Lessee shall also pay all fines which may be levied, such as police fines etc. ARTICLE 27: DEFAULT Should the Lessee not pay lease payments and other required payments on the payment date, the Lessee shall pay Lysing hf. the maximum permitted penalty interest on the amount outstanding, together with the costs according to the submitted rates 8 schedule for services of Lysing hf., and all other costs which may be incurred, such as legal fees and charges. Lysing hf. may continue to apply price or currency indexation to the outstanding amount. ARTICLE 28: CANCELLATION Lysing hf. may cancel this Contract without prior notice should the Lessee default or violate the terms of the lease. For example: a) If the Lessee does not pay the payments stipulated by this Contract on the due dates, or if Lysing hf. has had to pay unpaid compensation, duties or fines for which the registered owner is responsible vis-a-vis a third party, cf. articles 22 and 26 of this Contract. b) If the Lessee neglects to bring in the equipment for inspection or neglects its maintenance or repair of damage, as stated in the Contract, or otherwise fails to comply with the terms of Article 20 on the handling of the leased property. c) If the Lessee does not grant the Lessor or other person nominated by the Lessor access to the leased property on request. d) If the Lessee transports the leased property out of the country without the written approval of the Lessor. e) If the Lessee or anyone else is arrested for driving under the influence of alcohol while driving the vehicle or the Lessee's driving licence is suspended. f) If the conditions of cancellation apply to other leasing contracts or loan agreements between Lysing hf. and the Lessee. Lysing hf. may also terminate this Contract, without prior notice, on the following grounds: a) If the estate of the Lessee (or, if the Lessee is a company with unlimited liability, the estate of one of its owners) is subject to bankruptcy proceedings or the Lessee seeks composition with creditors. b) If the financial standing of the Lessee (or, if the Lessee is a company with unlimited liability, the financial standing of one of its owners) deteriorates seriously. c) If any changes are made to the operations or organisation of the Lessee's business which can impede the fulfilment of his obligations under this Contract. ARTICLE 29: RETURN OF LEASED PROPERTY In the event that this Contract is terminated pursuant to the terms of articles 12, 19 or 21, or cancelled under the terms of Article 28, the Lessee shall without delay return the leased property to the place specified by Lysing hf. The leased property shall be returned undamaged and in normal condition as might be expected from normal use, cf. Article 20 of the Contract. Lysing hf. may remove the leased property and have it inspected for the purpose of sale by the agent or a recognised workshop where the cost of restoring the leased property to the condition described in this Contract and the inspection manual is assessed. Lysing hf. may have the trade-in value of the leased property assessed by the agent, or another competent party at the discretion of Lysing hf. Costs resulting from sales inspections and repairs shall be paid by the Lessee. The Lessee may remove all accessories which did not come with the leased property on the making of this Contract and cannot be counted as maintenance, but all damage caused by such attachment must be repaired. The leased property shall be returned 9 with a registration certificate, if the equipment is registered, service records and manuals from the manufacturer. Until the leased property has been returned, it is the responsibility of the Lessee. The Lessee shall bear all costs pertaining to returning the leased property, such as costs of disconnection, packing, loading, shipment and insurance. He is also responsible for all taxes and duties accruing to the leased property as well as insurance during the sales procedure or until full settlement has taken place, in addition to all costs for cleaning, checking, repairing and legal inspection of the leased property. In the event that the Lessee does not return the equipment as stipulated above, he acknowledges by signature of this Contract the right of the owner to repossess the leased property whenever and wherever it can be found without enforcement order. The Lessee shall for this purpose grant the Lessor full access to the storage location of the leased property. ARTICLE 30: SETTLEMENT Settlement between Lysing hf. and the Lessee owing to termination of the Contract under the terms of articles 19, 21 or 28, shall be as follows: 1) The Lessee shall pay all outstanding lease payments as specified in articles 5 and 6, together with penalty interest and cost, pursuant to Article 27. 2) The Lessee shall pay all non-payable lease payments as specified in Article 5 of the Contract as well as taxes and duties pursuant to Article 26, insurance pursuant to Article 23 and all other costs pertaining to the leased property. 3) The Lessee shall pay all costs pursuant to Article 29 pertaining to the cancellation or termination of the Contract and debt collection measures, including any collecting and legal costs of an attorney in accordance with a rates schedule, together with compensation for any loss which Lysing hf. may suffer as a result of the cancellation of the Contract before the initial term of lease has expired. However, Lysing hf. shall not claim compensation unless the Contract is cancelled on the grounds of default by the Lessee. 4) Penalty interest shall be charged on items 2-3 should a settlement not be concluded within 15 days immediately following the termination or cancellation of the Contract. 5) From the payment of the Lessee to Lysing hf., as specified in items 2-4 above, the value of the leased property shall be deducted, when it has been returned and sold or leased to another party, or assessed pursuant to Article 29 and the new selling/assessment price shall be the basis of calculation, after deduction of sales costs, including trade-in of equipment and repairs and other costs pursuant to Article 29. Should this evaluation and/or the cost of repairs be disputed, and the parties fail to reach an agreement, the lessor may have the lease property sold at public auction by the District Commissioners of Reykjavik, Hafnarfjorour or Kopavogur in accordance with Article 8 of Act No. 90/1991, in the condition that it is in, provided that the Lessee has made a written objection to the evaluation or settlement within ten days from the date that he should have been aware of such evaluation or settlement. Otherwise, the Lessee must abide by such evaluation or settlement. Similarly, reimbursement or damages from the seller of the leased property resulting from defects or default pursuant to Article 19, and insurance compensation, if the leased property is destroyed or lost pursuant to Article 21, shall be deducted from the payment from the Lessee to Lysing hf. under items 2-4 above. 10 Should the settlement of the lease result in credit payable to the Lessee, Lysing hf. may, instead of paying this balance to the Lessee, balance it against other claims or leases in effect between the two parties. ARTICLE 31. LATENT DEFECTS AND OUTSTANDING CLAIMS Should compensation or repair costs be incurred by Lysing hf. owing to latent defects or neglect, which was known or should have been known by the Lessee, but which was not made known when the leased property was returned, or when delivered to a new lessee Lysing hf. is entitled to reimbursement from the Lessee, together with all costs incurred as a result, including legal costs. The same applies to all claims payable by the Lessee, such as taxes, duties and fines, that were not known when the lease ended or the settlement was made. ARTICLE 32: ACCOUNTING The method by which payments are entered in the accounts of the Lessee is the responsibility of the Lessee and his auditor. ARTICLE 33: TRANSFER Lysing hf. may transfer this Contract to a bank or other leasing company, provided that such a transfer does not affect the legal rights of the Lessee. The Lessee may not transfer rights under this Contract without the consent of Lysing hf. ARTICLE 34. AMENDMENTS Amendments to this Contract may only be made by means of a written annex, signed by both contracting parties. ARTICLE 35: JURISDICTION Disputes arising in relation to this Contract may be referred to the District Court of Reykjavik. 11 THE UNDERSIGNED LESSEE AND GUARANTORS HAVE EXAMINED AND HAVE NO OBJECTIONS TO ALL THE CONDITIONS OF THIS CONTRACT, ARTICLES 1 TO 35 AND ESPECIALLY ARTICLE 20 ON THE HANDLING OF THE LEASED PROPERTY AND ARTICLES 19, 22 AND 22, WHICH LIMIT THE RESPONSIBILITY OF THE LESSOR, THE TERMS ON CANCELLATION IN ARTICLE 28, THE SPECIAL RIGHTS OF THE LESSOR TO REPOSSESS THE LEASED PROPERTY WITHOUT ENFORCEMENT ORDER, DEFINED IN ARTICLES 24 AND 29, AND THE TERMS OF SETTLEMENT IN ARTICLE 30. FURTHERMORE, THE LESSEE AND THE GUARANTORS HAVE CAREFULLY EXAMINED ALL DOCUMENTS ATTACHED TO THE CONTRACT. THE LESSEE AUTHORISES LYSING HF. TO MAKE ENQUIRIES ABOUT HIS BANKING AFFAIRS DURING THE TERM OF EFFECT OF THIS CONTRACT. WITH THEIR SIGNATURE, THE LESSEE AND HIS GUARANTORS AUTHORISE LYSING HF. TO REQUEST REGISTRATION WITH LANSTRAUST HF. FOR ANY EVENTS OF DEFAULT ON THIS CONTRACT, WHEN SUCH DEFAULTS HAVE CONTINUED FOR AT LEAST 40 DAYS, TO BE PUBLISHED IN THE LANSTRAUST HF. REGISTRY OF DEFAULTS ETC. Place: Reykjavik Date: 13 December 2001 On behalf of Lysing hf. Lessor: [Company Signature] On behalf of Islensk erfoagreining ehf., Tomas Sigurosson [sign] On behalf of deCode Genetics Inc. Tomas Sigurosson[sign.] Witnesses to the correct signatures, date and financial competence of the parties: Elin Poroardottir [sign.] Id. No. 060763-4969 Karl Porsteins [sign.] Id. No. 131064-4899 12 EX-10.37 4 w58844ex10-37.txt LEASE AGREEMENT OFFICER'S CERTIFICATE I do hereby certify and represent that: 1. I am the duly elected Secretary of deCODE genetics, Inc., a Delaware corporation. 2. Pursuant to Rule 306(a) of Regulation S-T, the following exhibit 10.37 to deCODE genetics, Inc.'s Annual Report on Form 10-K is a fair and accurate English translation of a document prepared in the Icelandic language. IN WITNESS WHEREOF, I have signed this Officer's Certificate in my capacity as Secretary of deCODE genetics, Inc. on this 21 day of March, 2002. By: /s/ Tanya Zharov ----------------------------------- Name: Tanya Zharov Title: Secretary and Corporate Counsel Exhibit 10.37 Address Coding Guide 1.633.501 Unique Property Reference 189552 D-188, D-1727 THE MAYOR OF THE CITY OF REYKJAVIK MAKES KNOWN: Pursuant to a decision of the Municipal Executive Board on 3 October 2000 ISLENSK ERFOAGREINING EHF., STATE REG. NO. 691295-3549, LYNGHALS 1, REYKJAVIK is the lessee of the site Sturlugata No. 8, described in Article 1 below with the following conditions: 1. The area covered by the site STURLUGATA NO. 8, in the City of Reykjavik is 18,271 M(2). Its shape and situation is shown in the attached plan of the Survey Department dated 21 December 2001, which is an integral part of this Agreement. Regarding the site, implementations and activities thereon, as well as the right of first refusal/purchase right of the University of Iceland, the Agreement between the University of Iceland, Islensk erfoagreining ehf. and the City of Reykjavik, dated 15 February, shall apply. Furthermore, the land use plan, approved by the Municipal Executive Board on 1 August 2000, shall apply to the site as well as general allocation terms issued by the Reykjavik Chief Municipal Engineer in November 1999, as applicable. The City of Reykjavik will use 50% of the selling price of the building rights of the site, excluding the basement, in support of the University of Iceland. Utilities charges for sewer systems shall be paid on demand. The site is subject to the following encumbrances: 1.1 The University of Iceland holds the unconditional right of first refusal to the facilities on the site. In the event that the University of Iceland is invited to exercise its right of first refusal at a price that the institution does not accept, it may redeem the buildings at assessment value, i.e. the value of the real estate excluding furniture and internal fixtures and other chattels. The price and payment terms shall be decided by two court-appointed assessors and shall be based on the replacement value of the buildings, taking into account their condition. The parties agree that the site is part of the University campus. Through its allocation to Islensk erfoagreining ehf. the University of Iceland is establishing closer links to Icelandic industry, especially growth industries involved in the creation of knowledge and high technology. In the event that Islensk erfoagreining ceases operation on the site, the purchase option of the University of Iceland shall become active pursuant to item four of the Agreement dated 15 February 2000. 1.2 Encumbrances involve 1 parking space per 50 m(2) floor space in the buildings pursuant to terms and parking spaces for the handicapped. Their arrangement is shown in the attached plan. 1.3 Encumbrance involving a substation owned by Reykjavik Energy, installation of underground cable to the substation as well as accessibility to the substation. In addition there are general encumbrances regarding all kinds of cables or pipes of the Municipal Treasury or its agencies that may be needed The Siteholder is under obligation to comply with the terms of the Reykjavik Chief Municipal Engineer regarding facilities on the site, utilities, cables and finishing work on the site. 2. The site is leased for scientific and professional activities in the field of health science and biotechnology research, and the use of the facilities on the site is restricted to high-technology, research activities and university-level teaching. 3. The Siteholder under obligation to complete all finishing work on the site in accordance with the zoning plan. In the event that such finishing work has not been completed within two years, as of the signing of the site lease, the Reykjavik Chief Municipal Engineer may have the relevant finishing work carried out at the expense of the Siteholder. 4. The site is leased for 50 years, starting 1 December 2001. 5. The Siteholder shall pay all public taxes and levies that are imposed, or may be imposed, on the leased site. Property taxes, the site rent, public levies, taxes, interest and penalty interest are subject to attachment. 6. Annual rent of the site is decided in accordance with a regulation on rent for industrial sites in Reykjavik. 7. Collection and due dates of the rent are governed by the rules on property tax collection in Reykjavik as current at any time. The same rules shall apply to interest and penalty interest. Property taxes, the site rent, public levies, taxes, interest and penalty interest are secured by a lien on the buildings and installations. The Siteholder and his mortgagees are under the obligation to comply in the event that legislation is amended to the effect that property taxes, site rent, public levies, taxes, interest and penalty interest shall take priority over mortgages on the property. 8. In the event that the Mayor, at the close of the lease term, decides that the buildings, situated at that time on the site, shall be removed, the Mayor shall pay the Siteholder the actual worth of the building in accordance with the appraisal of two court-appointed persons. 9. The University of Iceland shall have limited use of lecture rooms, meeting facilities, teaching facilities and student facilities in the buildings of Islensk erfoagreining ehf. insofar as the activities of the company permit. Islensk erfoagreining ehf. may assign construction rights or facilities on the site to a third party on the terms and with the duties and obligations inherent in the Agreement of 15 February 2000. Thus, Islensk erfoagreining ehf. may e.g. contract with a financing company to construct, own or operate buildings on the site, on the condition that this does not in any way adversely affect or curtail the rights of the University of Iceland or its interests. Islensk erfoagreining ehf. may redeem the construction rights or buildings on the site from a third party without activating the right of first refusal of the University of Iceland pursuant to Section 4. The Siteholder may sell or pledge the lease rights to the site as a whole, including buildings and facilities constructed on it, with the restrictions described above. The Siteholder shall pay the cost of registration and stamping of the Lease Agreement. Three copies are made of this Lease Agreement of which one is intended for registration. The Mayor of Reykjavik, 21 December 2001 In confirmation of our agreement to the above For Islensk erfoagreining ehf. Tomas Sigurosson [sign.] Real estate assessment of the site ISK 115,087,000.- Annual rent 1% ISK 1,150,870.- Witnessed by: Sturlugata 8 Guorun E Andradottir [sign.] Id. No. 200958-6759 Regina H. Siguroardottir [sign.] Id. No. 090678-3379 EX-10.38 5 w58844ex10-38.txt AGREEMENT ON DETAIL - ARRANGEMENT OF ENCUMBRANCES OFFICER'S CERTIFICATE I do hereby certify and represent that: 1. I am the duly elected Secretary of deCODE genetics, Inc., a Delaware corporation. 2. Pursuant to Rule 306(a) of Regulation S-T, the following exhibit 10.38 to deCODE genetics, Inc.'s Annual Report on Form 10-K is a fair and accurate English translation of a document prepared in the Icelandic language. IN WITNESS WHEREOF, I have signed this Officer's Certificate in my capacity as Secretary of deCODE genetics, Inc. on this 21 day of March, 2002. By: /s/ Tanya Zharov ----------------------------------- Name: Tanya Zharov Title: Secretary and Corporate Counsel Exhibit 10.38 AGREEMENT ON THE DETAILS OF THE ARRANGEMENT OF ENCUMBRANCES IN THE SITE AGREEMENT On 15 February 2000, the University of Iceland (UI), Islensk erfoagreining ehf. (IE) and the City of Reykjavik entered into an Agreement on the allocation of a building site to IE. The aim of the Agreement is to promote co-operation and encourage the development of vigorous scientific and industrial activities in the field of health science and biotechnological research in the University campus area. The Agreement contains provisions, inter alia, on the purchase rights and right of first refusal at assessment value for UI, to be further defined in a Site Agreement. IE and UI have now agreed on the following arrangements of the above encumbrances in the final Site Agreement for the property. 1. UI has the right of first refusal to the property. UI shall be offered the right of first refusal in writing and in a verifiable manner at a price that shall be the lower of the two following options: (a) the offered selling price or (b) the depreciated replacement value of installations on the site pursuant to public records plus the restated purchasing price of the site rights. The selling price and other terms shall be specified in detail in the offer submitted for first refusal and the offer shall be accompanied by a copy of the purchase offer that UI is invited to take over. In the event of an exchange of properties, the purchase offer shall specify the estimated cash value of the offered rights and that amount shall be used in the determination of the price presented to the holder of the right of first refusal. In the event that the price offered to the holder of the right of first refusal is the depreciated replacement value of installations on the site and the public valuation of the site, UI shall pay the purchasing price in cash within 15 days from the date that the University accepted the offer to exercise its right of first refusal. UI shall reply in writing to the offer to exercise its option within 30 days from the date of receipt by the University of the offer. In the event that UI neglects to answer within that time the University shall forfeit its right to purchase. 2. In the event that IE ceases its activities on the site, UI shall be invited to purchase the property at the depreciated replacement value of installations on the site and the adjusted purchasing price of the site rights pursuant to item 2 above. The activities of IE are not regarded as having ceased if: a) IE is merged with another company, whether the merger is effected through the take-over by IE of another company, the take-over of IE by another company or the establishment of a new company where the merged company continues activities on the site. b) IE is divided into more than one company and one of these continues activities on the site, provided that the activities on the site constitute high-tech industry, research and university-level teaching. In witness of the above, the parties attach their signatures to this annex in the presence of witnesses. Reykjavik, 21 December 2001 For the University of Iceland For Islensk erfoagreining ehf. Pall Skulason [sign.] Tanja Zharov [sign.] Witnesses [Illegible signature] Tomas Sigurosson [sign.] Kari Stefansson, [sign.] 180966-3159 EX-10.39 6 w58844ex10-39.txt ANNEX TO THE AGREEMENT... OFFICER'S CERTIFICATE I do hereby certify and represent that: 1. I am the duly elected Secretary of deCODE genetics, Inc., a Delaware corporation. 2. Pursuant to Rule 306(a) of Regulation S-T, the following exhibit 10.39 to deCODE genetics, Inc.'s Annual Report on Form 10-K is a fair and accurate English translation of a document prepared in the Icelandic language. IN WITNESS WHEREOF, I have signed this Officer's Certificate in my capacity as Secretary of deCODE genetics, Inc. on this 21 day of March, 2002. By: /s/ Tanya Zharov ----------------------------------- Name: Tanya Zharov Title: Secretary and Corporate Counsel Exhibit 10.39 ANNEX TO THE AGREEMENT ON THE DETAILS OF THE ARRANGEMENT OF ENCUMBRANCES IN THE SITE AGREEMENT On 15 February 2000 the University of Iceland (UI), Islensk erfoagreining ehf. (IE) and the City of Reykjavik entered into an Agreement on the allocation of a site to IE. The aim of the Agreement is to promote co-operation and encourage the development of vigorous scientific and industrial activities in the field of health science and biotechnological research in the University campus area. UI and IE entered into an Agreement on 21 December 2001 on the execution of encumbrances in the Site Agreement. IE and UI agree to make the following amendments to their Agreement from 21 December 2001: 1. The following paragraph in item 1 of the agreement: "In the event that the price offered to the holder of the right of first refusal is the depreciated replacement value of installations on the site and the public valuation of the site, UI shall pay the purchasing price within 15 days from the date that the University accepted the offer to exercise its right of first refusal" shall be replaced by the following: "In the event that the price offered to the holder of the right to first refusal is the depreciated replacement value of installations and the restated purchasing price of the site rights, UI shall pay the purchasing price within 15 days from the date that the University accepted the offer to exercise its right of first refusal." 2. With reference to item 9 of the above Agreement from 15 February, the UI waives its right of first refusal to the property Sturlugata 8, Reykjavik in respect of the sale of the property from IE to Sturlugata 8 ehf. and also in respect of any potential sale of the property from Sturlugata 8 ehf. back to IE. In witness of the above the parties attach their signatures to this annex in the presence of witnesses. Reykjavik, 4 January 2002 For the University of For Islensk erfoagreining ehf. Iceland Tomas Sigurosson [sign.] Pall Skulason [sign.] Witnesses For Sturlugata 8 ehf. [signature] Tomas Sigurosson [sign.] EX-10.40 7 w58844ex10-40.txt LOAN AGREEMENT DATED DECEMBER 21, 2001... OFFICER'S CERTIFICATE I do hereby certify and represent that: 1. I am the duly elected Secretary of deCODE genetics, Inc., a Delaware corporation. 2. Pursuant to Rule 306(a) of Regulation S-T, the following exhibit 10.40 to deCODE genetics, Inc.'s Annual Report on Form 10-K is a fair and accurate English translation of a document prepared in the Icelandic language. IN WITNESS WHEREOF, I have signed this Officer's Certificate in my capacity as Secretary of deCODE genetics, Inc. on this 21 day of March, 2002. By: /s/ Tanya Zharov ----------------------------------- Name: Tanya Zharov Title: Secretary and Corporate Counsel Exhibit 10.40 [NOTE: CERTAIN PORTIONS OF THIS DOCUMENT HAVE BEEN MARKED TO INDICATE THAT CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS CONFIDENTIAL INFORMATION. THESE PORTIONS HAVE BEEN MARKED WITH THE CLAUSE "CONFIDENTIAL TREATMENT REQUESTED" AND/OR TWO ASTERISKS ENCLOSED IN BRACKETS (i.e., [**]). THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.] LOAN AGREEMENT (Loan in foreign currency) BETWEEN STURLUGATA 8 EHF (as borrower) and ISLANDSBANKI-FBA HF. as lender Table of Contents 1. AMOUNT OF LOAN AND DISBURSEMENT 3 2. REPAYMENT 3 3. INTEREST, INTEREST ADJUSTMENTS AND PAYMENT OF INTEREST 4 4. COSTS 5 5. INSURANCE 5 6. CONDITIONS FOR DISBURSEMENT 5 7. DECLARATIONS OF THE BORROWER 6 8. PAYMENT OF TAXES IN CONNECTION WITH THE CONCLUSION OF THE AGREEMENT 6 9. COVENANTS 7 10. EVENTS OF DEFAULT - REMEDIES 7 11. NOTICES 8 12. FORCE MAJEURE 9 13. FURTHER PROVISIONS 9 ANNEX 1 - LOAN DISBURSEMENT APPLICATION 10 ANNEX 2 - FOREIGN CURRENCY ACCOUNTS 11
2 Islandsbanki-FBA hf., State Reg. No. 550500-3530, Kirkjusandur 2, 155 Reykjavik, hereinafter referred to as the Lender, and Sturlugata 8 ehf., State Reg. No. 581201-2190, Sturlugata 8, Reykjavik, hereinafter referred to as the Borrower, enter into the following LOAN AGREEMENT on a loan for 7 years to the amount of USD 4,000,000.- FOUR MILLION 00/100 US DOLLARS- on the terms described herein. 1. Amount of Loan and Disbursement The Borrower undertakes to borrow, and the Lender undertakes to lend the agreed amount. The loan is available for disbursement as of the signature of this Agreement until 31 January 2002. The loan shall be disbursed to the Borrower in a single payment. The Borrower shall send to the Lender a disbursement application with at least 2 working days' notice. The application shall contain an account number for the deposit of the disbursement. A disbursement application form is attached to this agreement as Annex 1. In the event that the Borrower has not sent a written request for disbursement before 29 January 2002 the loan offer of the Lender shall be withdrawn without notice and without warning, provided that the Lender has not given written confirmation to the contrary. In the event that the commitment of the Lender is withdrawn pursuant to the above the Borrower shall pay the Lender all costs incurred by the Lender as a result of this Agreement. The Borrower intends to use the loan to finance his purchase of the property Sturlugata 8, Reykjavik, from Islensk Erfoagreining ehf. 2. Repayment The Borrower undertakes to repay the loan in 28 equal instalments every 3 months, starting on 1 MARCH 2002. The loan shall be repaid into the foreign currency account of the Lender, identified in Annex 2. In the event that the payment date of instalments and/or interest does not fall on a banking day, the payment date shall be transposed to the banking day immediately following, unless such day is in the following month, in which case the payment date shall be transposed to the immediately preceding banking day. The real estate assessment for the property Sturlugata 8, Reykjavik is not available at the time of signature of this Loan Agreement. In the event that the real estate assessment of the property, i.e. the site and buildings, is valued at less than ISK 2,250,000,000.-, the Borrower undertakes to pay a separate instalment on the loan on the first instalment date. The amount of the instalment shall be equal to the difference between the real estate assessment and the amount of ISK 2,250,000,000.- mentioned above, and the payment shall be made in US dollars. 3 In the period from the disbursement of the loan until 31 December 2004, the Lender may require an advance payment on the loan if the conversion value of the US dollar, as posted by the Central Bank of Iceland on the due date of the interest and instalments, has fallen by more than 15% from the posted rate of the Central Bank of Iceland on the disbursement date of the loan and the restated position of the bonds issued on 1 January 2002, 1st class, by Sturlugata 8 ehf. in the total amount of ISK 1,400,000,000.- and adjusted debts pursuant to this Agreement are higher than, the lesser of ISK 2,000,000,000 or 80% of the discounted replacement value of installations on the site in accordance with public records plus the added restated price of the rights to the site. The amount of this refund shall be calculated so that the outstanding balance of the loan, restated in Icelandic kronur on the due date, shall not be in excess of the restated amount of the loan in relation to the price of the US dollar on the date of disbursement, having taken into account the prepayment pursuant to this provision. A banking day is a working day when banks are open in Reykjavik and London. The place of payment is with the Lender. 3. INTEREST, INTEREST ADJUSTMENTS AND PAYMENT OF INTEREST (a) The loan shall carry an interest rate equivalent to 3-MONTH LIBOR RATES as determined for US dollar, as current at any time, plus a margin of 3.0% - THREE-POINT-ZERO PERCENT. LIBOR (London Inter Bank Offered Rate) interest refers to interest on the London Interbank Market as posted at 11 a.m., local time, in London on the Reuter BBA screen. (b) In the event of default by the Borrower on a debt pursuant to this Loan Agreement, the Borrower shall pay penalty interest corresponding to the base interest rate plus the margin referred to in item (a) above, plus the added default premium of 3.0% - THREE-POINT-ZERO PERCENT of the due amount or called-in amount from the due date to the date of payment. (c) In the event of default by the Borrower on the loan pursuant to this Loan Agreement, the Lender may, furthermore, convert the loan into Icelandic kronur in accordance with the posted selling rate of the Lender for the currencies of which the loan is comprised at the close of the date of calling. Default interest shall then be paid pursuant to the decision of the Central Bank of Iceland at any time on default interest rates and default margins, cf. Article 6, Paragraph 1 of the Interest Act No. 38/2001, on the due or called-in amount from the due date to the date of payment. The Lender shall notify the Borrower of the date of the intended conversion of the debt with a prior notice of at least one week. Once the loan has been converted into Icelandic kronur it may not be converted back into the original currency without the written approval of the Borrower. Interest is calculated from the date of disbursement of the loan. The interest shall be calculated so that on an annual basis the actual number of days is used to multiply and then divided by 360. The interest is determined in advance for three months at a time, two days prior to the beginning of the next interest period. The first interest period may be longer or shorter, as it begins on the date of the disbursement of the loan and ends on 1 March 2002. The interest is payable every three months on the same due dates as the instalments. 4 Unpaid default interest, in accordance with items (b) or (c) above, shall accrue to the principal of the loan every 12 months, for the first time 12 months after the first date of default. The Lender may adjust the interest margin unilaterally on the due date 1 MARCH 2005. No later than 30 days prior to the stated due date, the Lender shall notify the Borrower of the applicable margin as of that due date. In the event that the Lender's decision on the margin is unacceptable to the Borrower, the Borrower may pay the loan, including accrued interest and costs, in full, on the review date of the interest without payment of a separate acceleration fee, provided that he has informed the Lender of such intention with one weeks notice. 4. Costs The Borrower shall pay a facility fee of [CONFIDENTIAL TREATMENT REQUESTED] of the total amount, to be deducted from the first disbursement of the loan. The Borrower undertakes to pay the collection costs of each interest or instalment payment pursuant to the rates schedule of the Lender as current at any time as well as any costs which may arise from collection measures taken as a result of his default, at no cost to the Lender. In addition, the Borrower shall pay the costs of individual support services of the Lender pursuant to the rates schedule of the Lender as current at any time, such as costs resulting from transfers and the cost of delivering payments to the Lender. 5. Insurance As surety for the prompt and full payment of the loan the Borrower will issue a General Bond to the Lender, in the amount of USD 4,000,000.- , secured by a first-rank mortgage in the property Sturlugata 8, Reykjavik along with a General Bond in the amount of USD 400,000.- secured by a second-rank mortgage on the property Sturlugata 8, Reykjavik, concurrently, the second-rank mortgage secures a General Bond in the amount of ISK 140,000,000.-, issued on 21 December 2001. The first-rank mortgage secures concurrently a General Bond in the amount of ISK 1,400,000,000.-, issued 21 December 2001. As surety for the prompt and full payment of the loan, Islensk erfoagreining ehf., State Reg. No. 691295-3549, Lynghals 1, Reykjavik pledges all shares in Sturlugata 8 ehf. to the Lender. By their signature of this Loan Agreement and as surety for the prompt and full payment of the loan, deCode genetics Inc, Delaware, US and Islensk erfoagreining ehf., Lynghals 1, Reykjavik, assume liability for the loan, in solidum, as guarantors. The guarantee covers the payment of the amount of the loan including all interest and costs of any kind. The guarantee shall remain in effect regardless of whether a payment deferral is granted on one or more occasion, until such time as the loan is fully discharged. 6. Conditions for Disbursement The Borrower's delivery of the following documents to the Lender, of the content and in the form acceptable to the Lender, is a prerequisite for the disbursement of the loan pursuant to this agreement: 1. The Articles of Association of the Borrower and guarantors. 2. Decision of the Board of Directors of the Borrower on the borrowing and mortgage. 3. Decision of the Board of Directors of Islensk erfoagreining ehf. on the mortgaging of assets and guarantee pursuant to Section 5 hereof and power of attorney to sign the loan documents. 5 4. Decision of deCode genetics Inc. on a guarantee pursuant to Section 5 hereof and power of attorney to sign the loan documents. 5. Certification that the Borrower has purchased insurance for the mortgaged property. 6. Registered Bonds pursuant to Section 5 in the amount of USD 4,000,000.- and USD 400,000.- 7. Written disbursement instructions. 8. Certified copy of the Site Lease Agreement for the site Sturlugata 8. 9. Certified copy of the Lease Agreement between Islensk erfoagreining ehf. and Sturlugata 8 ehf. concerning the property Sturlugata 8. 10. Confirmation from the share registry of Sturlugata 8 ehf. that the mortgaging of the shares pursuant to Section 5 has been entered in the Company's share register. 7. Declarations of the Borrower By his signature on this Loan Agreement the Borrower declares to the Lender that: a) all the necessary decisions taken on the part of the borrower in order to establish a binding agreement were made in a lawful manner, b) the Agreement is signed on behalf of the Borrower by parties legally entitled to do so and a contract has been established which is binding for the Borrower in every respect, c) the Agreement does not violate the Articles of Association of the Borrower or any agreement that the Borrower has entered into with any third party or its parent company or any subsidiary, d) the Borrower is not engaged in any litigation or disputes that could have a substantial negative impact on his financial standing or qualification to fulfil his obligations under the provisions hereof, e) none of the events of default described in Section 10 are present, f) he has provided the Lender with all the information necessary to evaluate his financial standing, g) the information contained in the Agreement or that the Borrower has given in connection with its content, is adequate and materially correct, and h) the accounts of the Borrower are in accordance with applicable laws and generally accepted accounting standards. The above information from the Borrower shall be regarded as repeated on the due dates of the interest and / or instalments unless specifically stated otherwise by the Borrower. 8. Payment of Taxes in Connection with the Conclusion of the Agreement The Borrower shall pay all public levies which may be imposed on the Agreement or payments pursuant to the Agreement at no cost to the Lender. 6 9. Covenants The Borrower and the guarantors undertake to observe the following terms until the debt pursuant to the Loan Agreement is paid in full: i. NOTICE OF DEFAULT: The Borrower and the guarantors undertake to notify the Lender in writing without delay if it comes to their attention that an event of default has taken place. ii. ANNUAL ACCOUNTS AND INTERIM ACCOUNTS: The Borrower and the guarantors undertake to send to the Lender audited Annual Accounts as well as reviewed semi-annual accounts no later than four months following the close of the accounting period. The Annual Accounts shall be audited and prepared in accordance with legislation and accepted accounting standards. iii. SALE OF MORTGAGED PROPERTY: The Borrower and Islensk erfoagreining ehf. undertake not to sell the property mortgaged in security of this Agreement without the prior approval of the Lender. iv. BAN ON MERGERS OR DEMERGERS: The Borrower undertakes not to merge with another company or companies or to divide the company into two or more independent limited liability companies without the approval of the Lender. v. INSURANCE: The Borrower undertakes to insure the mortgaged property for its actual worth for the entire term of the Agreement. vi. RESTRICTIONS ON CHANGING THE OPERATION OR OBJECT OF THE BORROWER. The Borrower undertakes to not to change his operations in such a way as to require amendment of the Company's object in its Articles of Association. vii. DISPOSAL OF INSURANCE COMPENSATION, NOTIFICATION REQUIREMENT: the Borrower undertakes to inform the Lender immediately if circumstances arise where the Borrower is, or may be, entitled to insurance compensation in respect of damage to the mortgaged property if the damage is valued in excess of ISK 10,000,000.- Furthermore, the Borrower undertakes not to dispose of such payments except in consultation with and with the approval of the Lender. viii. DELIVERED STATEMENTS: The Borrower warrants that the information provided in connection with this Agreement is correct. The Lender is entitled to request confirmation that such information is correct at any time during the term of effect of the Agreement. ix. DISPOSAL OF THE LOAN: The Borrower undertakes to dispose of the loan for the purpose that it was intended. 10. Events of Default - Remedies The following shall constitute events of default on the part of the Borrower under this Agreement: i. the Borrower fails to pay on the correct due date or in the correct currency, and such default continues for longer than 14 days from the due date; ii. The Borrower repeatedly fails to pay at the correct time and in the correct currency; iii. a debt or commitment of the Borrower, extraneous to this Agreement, amounting to over USD 1,000,000.- or an equivalent amount in any other currency, is defaulted in such a way that it gives rise to the right to call in the debt, unless such default is the result of a reasonable protest on the part of the Borrower to such a claim and that a proper defence is maintained. 7 iv. the debt of the Borrower, according to the General Bonds issued concurrently with this loan (first-class 2002), is defaulted and such default continues for longer than 14 days from the due date, v. the Borrower and/or the guarantors violate Section 9 concerning the insurance of the mortgaged property (v) and the sale of the mortgaged property (iii), vi. the Borrower and/or the guarantors violate other provisions of Section 9 than those described in Section 10 (iv) and such violation continues for longer than 15 days after the Lender has sent the Borrower a request for remedy, vii. the Borrower's or the guarantor's assets are subjected to attachment, a request is submitted for the enforced auction of their assets, they petition for a moratorium on debts, they seek formal or informal composition agreements with their creditors on the cancellation of debts or a request is made for their estates to be subjected to bankruptcy proceedings, viii. a request is made that the Borrower's company or the guarantor's company be dissolved ix. any information from the Borrower or the guarantor and/or the obligations undertaken by the Borrower or the guarantor in accordance with this Agreement prove to be substantially wrong, inadequate or misleading when they were submitted to the Lender in such a way that it would probably have affected the Lender's willingness to grant the loan, x. any instances or circumstances are present that may, in the opinion of the Lender, have a substantial negative effect on the Borrower's or the guarantor's ability to fulfil their obligations pursuant to this Agreement. In the event of default, as defined in this Section, the lender may, without notice or warning, call in the entire remainder of the loan together with accrued interest and other payments due from the Borrower pursuant to this Agreement. The Borrower shall pay default interest on the due or called-in amount pursuant to Section 3 of the Agreement. When the loan is due in accordance with the above, the Lender is entitled, without further notice, to seek enforcement of his claims in the security provided by the Borrower to the Lender. The Lender may decide, at its sole discretion, whether to seek enforcement of all the security given or any part of the security, and, if the latter, in what order. 11. Notices All notices sent by the parties to one another pursuant to this Agreement shall be sent as specified below: Islandsbanki, Attn. Corporate Finance Division, Kirkjusandur 2, 155 Reykjavik. Fax. 580-5110 Sturlugata 8 ehf., Attn. Management, Sturlugata 8, 101 Reykjavik. Fax. 570-1981 Islensk erfoagreining, Attn. Chief Financial Officer, Sturlugata 8, 101 Reykjavik. Fax 570-1981 deCode genetics Inc., Attn. CEO, Sturlugata 8, 101 Reykjavik. Fax 570-1981 Notices may be sent by fax, provided that the sender takes full responsibility that such notices are received by the recipient. The Borrower will notify the Lender promptly of any change in his address, telephone number, e-mail address or other comparable information. 8 12. Force Majeure In the event of a substantial change in the business terms of the Lender as a result of events for which the Lender cannot be held responsible, and do not relate to his financial standing and lending capacity all other things being equal, e.g. changes in loan markets, government decisions, war, nuclear accidents or incidents that can be classified as events of force majeure incidents, with the result that the Lender is unable to obtain overseas loan capital for the financing of this Loan Agreement on similar terms as those anticipated on its negotiation, the Lender may, following prior notification to the Borrower, call in the balance of the loan with 60 days' of notice. The Lender is not responsible for any potential losses incurred by the Borrower in connection with such a calling in of the balance. 13. Further Provisions Headings in this Agreement are solely for convenience and have no substantive significance for this Agreement. Any disputes arising in respect of this Agreement shall be referred to the District Court of Reykjavik. This Agreement is concluded in 11 numbered pages [Icelandic original: 10 pages] and in two copies, one for each party. In witness whereof, the parties have signed this agreement in the presence of witnesses to the correct date and signature. Witnesses to the correct date, Reykjavik, 21 December 2001 signature and financial competence of the parties: Sigurgeir Guolaugsson [sign.] On the Board of Directors of Id. No. 290876-3709 Sturlugata 8 ehf. Steinunn Kristin Poroardottir [sign.] Tomas Sigurosson [sign.] Id. No. 090472-4379 In agreement with the above as guarantors: For Islandsbanki-FBA hf. For Islensk erfoagreining ehf. signature illegible Tomas Sigurosson [sign.] Erlendur Magnusson [sign.] For deCODE genetics, Inc. Tomas Sigurosson [sign.] 9 ANNEX 1 - LOAN DISBURSEMENT APPLICATION Islandsbanki Corporate Finance Division Kirkjusandur 2 155 Reykjavik [Place], [Date] Subject: Request for disbursement of loan. Pursuant to Section 1 of the Loan Agreement between [the Borrower] and Islandsbanki-FBA hf., dated [date] on a loan in the amount of [currency] [amount]-, a request is hereby submitted for the loan to be disbursed as follows: Loan[or part thereof in [currency]:] Date of Disbursement: Recipient of Disbursement: [Name, Id. No., Address] Account Number Receiving Bank Notes [if appropriate] Respectfully, 10 ANNEX 2 - FOREIGN CURRENCY ACCOUNTS Foreign currency accounts for the payment of loans when paying in foreign currency Islandsbanki Corporate Finance Division Kirkjusandur 2 155 Reykjavik DOMESTIC USD ACCOUNT
BRANCH ACCT. TYPE NO. ACCOUNT NO CURRENCY 500 38 119160 USD
OVERSEAS USD ACCOUNT
Currency banki Swiftcode Account number - -------------------------------------------------------------------------------- USD Chase Manhattan Bank, New York CHASU33 544-7-21738
11 EX-10.41 8 w58844ex10-41.txt LOAN AGREEMENT DATED DECEMBER 27, 2001... OFFICER'S CERTIFICATE I do hereby certify and represent that: 1. I am the duly elected Secretary of deCODE genetics, Inc., a Delaware corporation. 2. Pursuant to Rule 306(a) of Regulation S-T, the following exhibit 10.41 to deCODE genetics, Inc.'s Annual Report on Form 10-K is a fair and accurate English translation of a document prepared in the Icelandic language. IN WITNESS WHEREOF, I have signed this Officer's Certificate in my capacity as Secretary of deCODE genetics, Inc. on this 21 day of March, 2002. By: /s/ Tanya Zharov ----------------------------------- Name: Tanya Zharov Title: Secretary and Corporate Counsel Exhibit 10.41 [NOTE; CERTAIN PORTIONS OF THIS DOCUMENT HAVE BEEN MARKED TO INDICATE THAT CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS CONFIDENTIAL INFORMATION. THESE PORTIONS HAVE BEEN MARKED WITH THE CLAUSE "CONFIDENTIAL TREATMENT REQUESTED" AND/OR TWO ASTERISKS ENCLOSED IN BRACKETS (i.e., [**]), THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.] LOAN AGREEMENT (Loan in foreign currency) BETWEEN STURLUGATA 8 EHF as borrower and ISLANDSBANKI-FBA HF. as lender 1 Table of Contents 1. AMOUNT OF LOAN AND DISBURSEMENT 3 2. REPAYMENT 3 3. INTEREST, INTEREST ADJUSTMENTS AND PAYMENT OF INTEREST 4 4. COSTS 4 5. INSURANCE 5 6. CONDITIONS FOR DISBURSEMENT 5 7. DECLARATIONS OF THE BORROWER 5 8. PAYMENT OF TAXES IN CONNECTION WITH THE CONCLUSION OF THE AGREEMENT 6 9. COVENANTS 6 10. EVENTS OF DEFAULT - REMEDIES 7 11. NOTICES 7 12. FORCE MAJEURE 8 13. FURTHER PROVISIONS 8 ANNEX 1 - LOAN DISBURSEMENT APPLICATION 9 ANNEX 2 - NOTICE OF CURRENCY CHANGES 10
2 Islandsbanki-FBA hf., State Reg. No. 550500-3530, Kirkjusandur 2, 155 Reykjavik, hereinafter referred to as the Lender, and Sturlugata 8 ehf., State Reg. No. 581201-2190, Sturlugata 8, Reykjavik, hereinafter referred to as the Borrower, enter into the following LOAN AGREEMENT on a loan until 31 January 2002 in the amount of USD 27,500,000.- TWENTY-SEVEN MILLION FIVE HUNDRED THOUSAND 00/100 US DOLLARS- on the terms described herein. 1. Amount of Loan and Disbursement Subject to the fulfilment of disbursement conditions, the Lender undertakes to disburse to the Borrower the loan in a single payment no later than 10 January 2002. The Borrower shall send to the Lender a disbursement application with at least 2 working days' notice. The application shall contain an account number for the deposit of the loan or the loan section. A disbursement application form is attached to this agreement as Annex 1. In the event that the Borrower has not sent a written request for disbursement before 8 January 2002 the loan offer of the Lender shall be withdrawn without notice, provided that the Lender has not given written confirmation to the contrary. In the event that the commitment of the Lender is withdrawn pursuant to the above the Borrower shall pay the Lender all costs incurred by the Lender as a result of this Agreement. The Borrower intends to use the loan to bridge his financial needs until the sale of the bonds issued by the Borrower on 3 January 2002, amounting to a total of ISK 1,400,000,000.- and convertible bonds issued early 2002 amounting to a total of USD 14,000,000.- 2. Repayment The Borrower undertakes to repay the loan in one payment on 31 January 2002. The loan shall be paid in the currency in which it is denominated. The Borrower may pay the loan in full or in part on the interest due dates, having notified the Lender of the intended prepayment with at least two days notice. The minimum payment in excess of payment obligations is USD 1,000,000.- one million US dollars. In the event that the payment date of instalments and/or interest does not fall on a banking day, the payment date shall be transposed to the banking day immediately following, unless such day is in the following month, in which case the payment date shall be transposed to the immediately preceding banking day. A banking day is a day on which banks are open: a). in Reykjavik, and b). in connection with the LIBOR interest determination, in London, and The place of payment is with the Lender. 3 3. Interest, Interest Adjustments and Payment of Interest (a) The loan shall carry interest equivalent to 2-WEEK LIBOR RATES for the first interest period and subsequently 1-WEEK LIBOR INTEREST RATES as determined for the relevant currency at any time, plus a margin of 0.50% - THREE POINT ZERO PERCENT. LIBOR (London Inter Bank Offered Rate) interest refers to interest on the London Interbank Market as posted at 11 a.m., local time, in London on the Reuter BBA screen. (b) In the event of default by the Borrower on a debt pursuant to this Loan Agreement, the Borrower shall pay penalty interest corresponding to the base interest rate plus the margin referred to in item (a) above, plus the added default margin of 3.0% - THREE-POINT-ZERO PERCENT of the due amount or called-in amount from the due date to the date of payment. (c) In the event of default by the Borrower on the loan pursuant to this Loan Agreement, the Lender may, furthermore, convert the loan into Icelandic kronur in accordance with the posted selling rate of the Lender for the currencies of which the loan is comprised at the close of the date of calling. Default interest shall then be paid pursuant to the decision of the Central Bank of Iceland at any time on default interest rates and default margins, cf. Article 6, Paragraph 1 of the Interest Act No. 38/2001, on the due or called-in amount from the due date to the date of payment. The Lender shall notify the Borrower of the date of the intended conversion of the debt with a prior notice of at least one week. Once the loan has been converted into Icelandic kronur it may not be converted back into the original currency without the written approval of the Borrower. Interest is calculated from the date of disbursement of the loan. The interest shall be calculated so that on an annual basis the actual number of days is used to multiply and then divided by 360. The interest shall be predetermined for the first interest period, starting on the disbursement date of the loan and ending on 10 January 2002, the interest rate for this period shall be 2.5600%. The interest periods of the loan shall be a total of four and shall end: 10 January 2002, 17 January 2002, 24 January 2002 and 31 January 2002. Unpaid penalty interest, in accordance with items (b) or (c) above, shall accrue to the principal of the loan every 12 months, for the first time 12 months after the first date of default. 4. Costs The Borrower shall pay a facility fee amounting to [CONFIDENTIAL TREATMENT REQUESTED], to be deducted from the first disbursement of the loan. The Borrower undertakes to pay any collection costs arising from each interest and/or instalment payment pursuant to the rates schedule of the Lender as current at any time as well as any costs which may arise from collection measures taken as a result of his default, at no cost to the Lender. In addition, the Borrower shall pay the costs of individual support services of the Lender pursuant to the rates schedule of the Lender as current at any time, such as costs resulting from transfers and the cost of delivering the payments to the Lender. 4 5. Insurance As surety for the prompt and full payment of the loan the Borrower will issue two General Bonds to the Lender, on the one hand, to the amount of ISK 1,400,000.- secured by a first-rank mortgage on the property Sturlugata 8, Reykjavik, and on the other, a General Bond to the amount of ISK 140,000.- secured by a second-rank mortgage on the same property. The second-rank mortgage concurrently secures a General Bond in the amount of ISK 140,000,000.- issued 21 December 2001. The first-rank mortgage secures concurrently a General Bond in the amount of ISK 1,400,000,000.-, issued 21 December 2001. As surety for the prompt and full payment of the loan the Borrower also mortgages his money market account deposit in the amount of USD 27,500,000.- A separate agreement has been made for this mortgage. 6. Conditions for Disbursement The Borrower's delivery of the following documents to the Lender, of the content and in the form acceptable to the Lender, is a prerequisite for the disbursement of the loan pursuant to this agreement: 1. Approval of the Borrower 2. Decision of the Board of Directors of the Borrower on the borrowing and mortgage. 3. Power of Attorney to the Managing Director to negotiate the agreement and sign documents pertaining to it. 4. Certification that the Borrower has purchased insurance for the principal properties. 5. General Bonds pursuant to Section 5 to the amount of USD 1.400.000.000.- and USD 140.000.000.-, registered without comment. 6. Collateral declaration pursuant to Section 5. 7. Written disbursement instructions. 7. Declarations of the Borrower By his signature on this Loan Agreement the Borrower declares to the Lender that: a) all the necessary decisions taken on the part of the borrower in order to establish a binding agreement have been made in a lawful manner, b) the Agreement is signed on behalf of the Borrower by parties legally entitled to do so and the established Agreement is binding for the Borrower in every respect, c) the Agreement does not violate the Articles of Association of the Borrower or any agreement that the Borrower has entered into with a third party or parent company or subsidiary, d) the Borrower is not engaged in any litigation or disputes that could have a substantial negative impact on his financial standing or qualification to fulfil his obligations under the provisions hereof, e) none of the events of default described in Section 10 are present, f) he has provided the Lender with all the information necessary to evaluate his financial standing, g) the information contained in the Agreement or that the Borrower has given in connection with its content, is adequate and materially correct, and h) the accounts of the Borrower are in accordance with applicable laws and generally accepted accounting standards. 5 The above information from the Borrower shall be regarded as repeated on the due dates of the interest and / or instalments unless the Borrower specifically states otherwise. 8. Payment of Taxes in Connection with the Conclusion of the Agreement The Borrower shall pay all public levies which may be imposed on the Agreement or payments pursuant to the Agreement at no cost to the Lender. 9. Covenants The Borrower undertakes to observe the following terms until the debt pursuant to the Loan Agreement is paid in full: i. NOTICE OF DEFAULT: The Borrower undertakes to notify the lender in writing without delay if it comes to his attention that an event of default has taken place. ii. ANNUAL ACCOUNTS AND INTERIM ACCOUNTS: The Borrower undertakes to send to the Lender audited Annual Accounts as well as endorsed semi-annual accounts no later than four months following the close of the accounting period. The Annual Accounts shall be audited and prepared in accordance with legislation and accepted accounting standards. iii. SALE OF MORTGAGED PROPERTY: The Borrower undertakes not to sell the property mortgaged in security of this Agreement without the prior approval of the Lender. iv. BAN ON MERGERS OR DEMERGERS: The Borrower undertakes not to merge with another company or companies or to divide the company into two or more independent limited liability companies without the approval of the Lender. v. INSURANCE: The Borrower undertakes to insure the mortgaged property for its actual worth for the entire term of the Agreement. vi. RESTRICTIONS ON CHANGING THE OPERATION OR OBJECT OF THE BORROWER. The Borrower undertakes to not to change his operations in such a way as to require amendment of the Company's object in its Articles of Association. vii. DISPOSAL OF INSURANCE COMPENSATION, NOTIFICATION REQUIREMENT: the Borrower undertakes to inform the Lender immediately if circumstances arise where the Borrower is, or may be, entitled to insurance compensation due to damage of the mortgaged property if the damage is valued in excess of ISK 10,000,000.- Furthermore, the Borrower undertakes not to dispose of such payments except in consultation with and with the approval of the Lender. viii. DELIVERED STATEMENTS: The Borrower warrants that the information provided in connection with this Agreement is correct. The Lender is entitled to request confirmation that such information is correct at any time during the term of effect of the Agreement. ix. DISPOSAL OF THE LOAN: The Borrower undertakes to dispose of the loan for the purpose that it was intended. 6 10. Events of Default - Remedies The following shall constitute events of default on the part of the Borrower under this Agreement: i. the Borrower fails to pay on the correct due date or in the correct currency, and such default continues for longer than 14 days from the due date; ii. The Borrower repeatedly fails to pay at the correct time and in the correct currency; iii. a debt or commitment of the Borrower, extraneous to this Agreement, amounting to over USD 1,000,000.- or an equivalent amount in any other currency, is defaulted in such a way that it gives rise to the right to call in the debt, unless such default is the result of a reasonable protest on the part of the Borrower to such a claim and that a proper defence is maintained. iv. the debt of the Borrower, according to the General Bonds issued concurrently with this loan (first-class 2002), is defaulted and such default continues for longer than 14 days from the due date, v. the Borrower violates Section 9 on the insurance of the mortgaged property (v) and the sale of the mortgaged property (iii), vi. the Borrower violates other provisions of Section 9 than those described in Section 10 (iv) and that such violation continues for longer than 15 days after the Lender has sent the Borrower a request for remedy, vii. the Borrower's assets are subjected to attachment, a request is submitted for the enforced auction of his assets, he petitions for a moratorium on debts, he seeks formal or informal composition agreements with his creditors on the cancellation of debts or a request is made for his estate to be subjected to bankruptcy proceedings, In the event of default, as defined in this Section, the lender may, without notice or warning, call in the entire remainder of the loan together with accrued interest and other payments due from the Borrower pursuant to this Agreement. The Borrower shall pay default interest on the due or called-in amount pursuant to Section 3 of the Agreement. When the loan is due in accordance with the above, the Lender is entitled, without further notice, to seek enforcement of his claims in the security provided by the Borrower to the Lender. The Lender may decide, at its sole discretion, whether to seek enforcement of all the security given or any part of the security, and, if the latter, in what order. 11. Notices All notices sent by the parties to one another pursuant to this Agreement shall be sent as specified below: Islandsbanki, Attn. Corporate Finance Division, Kirkjusandur 2, 155 Reykjavik. Fax. 580-5110 Sturlugata 8 ehf., Attn. Management, Sturlugata 8, 101 Reykjavik. Fax. 570-1981 Notices may be sent by fax, provided that the sender takes full responsibility that such notices are received by the recipient. The Borrower will notify the Lender promptly of any change in his address, telephone number, e-mail address or other comparable information. 7 12. Force Majeure In the event of a substantial change in the business terms of the Lender as a result of events for which the Lender cannot be held responsible, and do not relate to his financial standing and lending capacity all other things being equal, e.g. changes in loan markets, government decisions, war, nuclear accidents or incidents that can be classified as events of force majeure incidents, with the result that the Lender is unable to obtain overseas loan capital for the financing of this Loan Agreement on similar terms as those anticipated on its negotiation, the Lender may, following prior notification to the Borrower, call in the balance of the loan with 60 days' of notice. The Lender is not responsible for any potential losses incurred by the Borrower in connection with such a calling in of the balance. 13. Further Provisions Headings in this Agreement are solely for convenience and have no substantive significance for this Agreement. Any disputes arising in respect of this Agreement shall be referred to the District Court of Reykjavik. This Agreement is concluded in 11 numbered pages [Icelandic original: 9 pages] and in two copies, one for each party. In witness whereof, the parties have signed this agreement in the presence of witnesses to the correct date and signature. Witnesses to the correct date, Reykjavik, 27 December 2001 signature and financial competence of the parties: Alexander Kristjan Guomundsson [sign.] On the Board of Directors of Id. No. 111170-5259 Sturlugata 8 ehf. Guomundur P Guomundsson [sign.] Id. No. 180966-4559 Tomas Sigurosson [sign.] For Islandsbanki-FBA hf. Erlendur Magnusson [sign.] [Jonas ?] signature illegible 8 ANNEX 1 - LOAN DISBURSEMENT APPLICATION Islandsbanki Corporate Finance Division Kirkjusandur 2 155 Reykjavik [Place], [Date] Subject: Request for disbursement of loan. Pursuant to Article 1 of the Loan Agreement between [the Borrower] and Islandsbanki-FBA, dated [date] on a loan in the amount of [currency] [amount]-, a request is hereby submitted for the loan to be disbursed as follows: Loan [or part thereof in [currency]:] Date of Disbursement: Recipient of Disbursement: [Name, Id. No., Address] Account Number Receiving Bank Notes [if appropriate] Loan[or part thereof in [currency]:] Date of Disbursement: Recipient of Disbursement: [Name, Id. No., Address] Account Number Receiving Bank Notes [if appropriate] Respectfully, 9 ANNEX 2 - NOTICE OF CURRENCY CHANGES Islandsbanki Corporate Finance Division Kirkjusandur 2 155 Reykjavik [Place], [Date] Subject: Notice of currency change. With reference to Article 4 of the Loan Agreement between [the Borrower] and Islandsbanki-FBA dated [date] the undersigned submits a request for a change in the currency of the loan as follows: LOAN/LOAN SECTION [OLD CURRENCY] Current amount of loan section in currency: [ ] [old currency] [amount] changes into: [new currency ] [old currency] [amount] changes into: [new currency ] as of [reference date ] LOAN/LOAN SECTION [OLD CURRENCY] Current amount of loan section in currency: [ ] [old currency] [amount] changes into: [new currency ] [old currency] [amount] changes into: [new currency ] as of [reference date ] Respectfully, 10 EX-10.42 9 w58844ex10-42.txt CURRENCY EXCHANGE AGREEMENT... OFFICER'S CERTIFICATE I do hereby certify and represent that: 1. I am the duly elected Secretary of deCODE genetics, Inc., a Delaware corporation. 2. Pursuant to Rule 306(a) of Regulation S-T, the following exhibit 10.42 to deCODE genetics, Inc.'s Annual Report on Form 10-K is a fair and accurate English translation of a document prepared in the Icelandic language. IN WITNESS WHEREOF, I have signed this Officer's Certificate in my capacity as Secretary of deCODE genetics, Inc. on this 21 day of March, 2002. By: /s/ Tanya Zharov ----------------------------------- Name: Tanya Zharov Title: Secretary and Corporate Counsel Exhibit 10.42 Currency Swap Contract Identification: 0500/GMVT/01122701 Contracting parties: Sturlugata 8 ehf., State Reg. No. 581201-2490, Sturlugata 8, 101 Reykjavik, hereinafter referred to as the Customer and Islandsbanki-FBA hf., State Reg. No. 550500-3530, Kirkjusandur 2, 155 Reykjavik, hereinafter referred to as the Bank. Contract Date: 21 December 2001 First interest day: 1 January 2002 Final date: 1 December 2008 Exchange of amounts during the The Contracting Parties pay their principals term of the Contract: in 7 equal instalments annually, starting on 1 December 2002. Customer commitment:
Principal: Currency Foreign amount Initial Initial ISK conversion value Equivalent ------------------------------------------------------------------ USD 13,789,027.87 101.53 1,400,000,000.- ------------------------------------------------------------------ Total ISK 1,400,000,000.-
Interest term 3 months at a time First due date Interest 1 March 2002. Instalments 1 December 2002 Instalments The above principals shall be paid in 7 equal instalments annually. Rate of interest LIBOR-BBA in accordance with the below + 2.85% margin annually
Initial rate of interest Currency Base interest Margin (%) Total interest (%) rate ------------------------------------------------------------------ USD 2.85 ------------------------------------------------------------------ The interest determination will be 28 December 2001
Banking day rule The following banking day. Day rule A/360 and 30/360 for ISK. Payment terms The Bank shall withdraw from the account of the Customer on the due dates as follows:
Currency Account Number USD xxx-38-xxxxxx
Bank's commitment Principal ISK 1,400,000,000.- Indexation The principal is linked to the consumer price index Base index 219.5 Interest term One year at a time First due date 1 December 2002 Instalments The above principal shall be paid in 7 equal instalments. Due dates of instalments and interest are the same. Rate of interest The fixed interest rate is 8.5% per year. Banking day rule The following banking day. Day rule 30/360 Payment terms The Bank shall deposit on the Customer's bank account No. xxx-xx-xxxxxx on the due dates.
Gjaldmiolaskiptasamningur Sturlugotu 8 ehf. Numer:0500GMVT01122701 og Islandsbanka-FBA General terms: In the event that the losses of the Customer as a result of the Contract exceed 50% of the market value of the collateral placed as security for the trading, ISFBA my require the customer to provide security/additional security, which ISFBA considers adequate, within 3-7 days. The same applies even if there is no loss on the Contract if the market value of the collateral falls. Requests for collateral will be made by telephone, e-mail or fax. Notification shall be regarded as sent to the correct address if it has been sent to the e-mail address / fax number supplied by the Customer. A notice given over the telephone is regarded as being immediately notified to the Customer. In the event that the Customer does not provide security/additional security within the time limit set, ISFBA may, without any obligation to do so, call in or terminate the Contract without notice. In addition to the provisions of this Contract, the General Terms for the Market Transactions of Islandsbanki-FBA and the General Terms on Interest and Currency Swaps published by the Icelandic Bankers' Association and the Icelandic Savings Banks' Association in February 1998 (1 Edition) shall apply. The Customer has acquainted himself with these terms. In the event of conflicts between this Contract and the General Terms the provisions of this Contract shall apply. Signature: In witness hereof, the parties have signed this Contract in two identical copies, one copy to be retained by each party. By his signature the Customer authorises the above account transfers. The Customer furthermore confirms by his signature that he has acquainted himself with the nature of currency and interest swap contracts and that he has had the benefit of advice from an expert outside the Bank before he signed the Contract.
Reykjavik, 27 December 2001 Islandsbanki-FBA hf. Sturlugata 8 ehf. Guomundur P Guomundsson [sign.] Tomas Sigurosson [sign.] Porvaldur Egilsson [sign.]
EX-10.43 10 w58844ex10-43.txt AGREEMENT ON THE SALE AND LISTING OF BONDS... OFFICER'S CERTIFICATE I do hereby certify and represent that: 1. I am the duly elected Secretary of deCODE genetics, Inc., a Delaware corporation. 2. Pursuant to Rule 306(a) of Regulation S-T, the following exhibit 10.43 to deCODE genetics, Inc.'s Annual Report on Form 10-K is a fair and accurate English translation of a document prepared in the Icelandic language. IN WITNESS WHEREOF, I have signed this Officer's Certificate in my capacity as Secretary of deCODE genetics, Inc. on this 21 day of March, 2002. By: /s/ Tanya Zharov ----------------------------------- Name: Tanya Zharov Title: Secretary and Corporate Counsel Exhibit 10.43 [NOTE: CERTAIN PORTIONS OF THIS DOCUMENT HAVE BEEN MARKED TO INDICATE THAT CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS CONFIDENTIAL INFORMATION. THESE PORTIONS HAVE BEEN MARKED WITH THE CLAUSE "CONFIDENTIAL TREATMENT REQUESTED" AND/OR TWO ASTERISKS ENCLOSED IN BRACKETS (i.e., [**]). THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.] ISLANDSBANKI CONFIDENTIAL. The signatories hereto, Islandsbanki FBA hf. (ISB), State Reg. No. 491298-2439, Kirkjusandur, 155 Reykjavik, on the one hand, and Islensk erfoagreining ehf. (BUYER), State Reg. No. 691295-3549, Lynghals 1, 110 Reykjavik, enter into the following: AGREEMENT ON THE SALE AND LISTING OF BONDS ISSUED BY STURLUGATA 8 EHF. 1. THE UNDERTAKING The BUYER entrusts to ISB and ISB undertakes to sell and to list on the Iceland Stock Exchange bonds to be issued for the purpose of financing the construction of buildings at Sturlugata 8, Reykjavik, which will house the new headquarters of the BUYER, in accordance with the terms of attached document No. 1 to this Agreement, which is the approved offer of ISB and the BUYER, dated 26 November 2001 (the OFFER). This Agreement further defines Section A of the offer, i.e. the sale and listing of bonds in the amount of up to ISK 1,800 million, issued by the BUYER or a subsidiary of the BUYER. The total amount of the bonds pursuant to this issue is ISK 1,400 million, nominal value. The bonds will only be sold to professional investors in units of at least ISK 5 million and ISB will not, therefore, conduct due diligence in respect of the BUYER, the bonds or other data relating to the issue. ISB guarantees the sale of all the bonds at a yield of 8.5% and undertakes to buy for its own account the remaining bonds to make up the difference and bring the nominal value of the sold bonds to ISK 1,400 million and to pay to the BUYER the selling price of the sold bonds no later than 31 January 2002, provided that there are no reservations under Article 6 to preclude payment, nor any dispute on the conditions or sale of the bonds between ISB and the BUYER or as regards the purchasers of the bonds. 2. FEES AND CONTRACT PAYMENT 2.1 Underwriting fee The BUYER shall pay to ISB a fixed fee of [CONFIDENTIAL TREATMENT REQUESTED] for the underwriting service. This fee is non-refundable. 2.2 Commission The BUYER shall pay ISB a commission amounting to [CONFIDENTIAL TREATMENT REQUESTED] on: a) the discounted principal of the bonds, in accordance with their terms, in the event that the underwriting falls due prior to the date of issue of the bonds; b) the principal of the bonds in the event that the underwriting falls due on the date of issue of the bonds; or c) the restated principal of the bonds, in accordance with their terms, in the event that the underwriting falls due after the date of issue. 3. DILIGENCE AND LIABILITY ISB relies entirely on information provided by the BUYER as well as information regarded as public. ISB does not guarantee that the information is exhaustive. ISB is not responsible for any losses, direct or indirect, that the BUYER, investors or others may incur as a result of decisions made on the basis of this Agreement or investments in the bonds, unless the losses may be directly attributed to intent or gross negligence on the part of an employee of ISB. 4. CONFIDENTIAL INFORMATION The BUYER will provide ISB with all necessary information in the possession of the company, as well as any other information that may facilitate the furtherance of the undertaking in accordance with this Agreement. For this reason, the parties to the Agreement undertake to handle such information in the strictest confidentiality. This entails: a) Not to exploit the information in any way except to the extent necessary to attain the aims of this Agreement b) Not delivering such information to a third party, except with the approval of the other party, and the parties thus receiving information shall undertake to be subject to the provisions of this agreement as regards confidentiality. c) Not reproducing in any manner material received by the parties to the Agreement, such as by photocopying, recording, scanning or other means. Material containing confidential information shall be returned on the request of the party that delivered them. The term "confidential information" does not cover information that is publicly available or will become public otherwise than by a violation of this Agreement. The same applies to information provided in a lawful manner from parties other than the BUYER. In the event that either party to the Agreement violates the substance of this provision the general rules of the law of tort shall apply to any financial losses incurred by the parties as a result. In other respects, confidential information shall be subject to Chapter V of Act No. 13/1996 on Securities Transactions. 5. COMMUNICATION WITH THE PRESS The parties to the Agreement shall not issue statements on the substance or the progress of the undertaking to the press without the approval of the other party. 6. RESERVATIONS The commitment of ISB to underwriting and delivery of payments pursuant to this Agreement is subject to the parties' reaching an agreement on the final documentation, including but not restricted to: The form of the bonds, prospectus, the making of a Loan Agreement for a USD 4 million loan (Tier B), the final details of the first refusal option of the University of Iceland, the making of a Site Lease Agreement, the mortgaging of the property at Sturlugata 8, Reykjavik and all the shares in the company Sturlugata 8 ehf. 7. TIME-FRAME, THE TERM OF EFFECT OF THE AGREEMENT AND TERMINATION This Agreement is effective until its provisions have been fulfilled, but no longer than until 31 January 2002, provided that at that point in time there are no discussions in progress and/or agreements being made on the sale of the bonds. No later than 15 days prior to the end of the term of the Agreement, the parties shall review the term of effect of the Agreement and establish a new term of effect if a consensus is reached. If, on the other hand, this Agreement has expired pursuant to the above. Amendments to this Agreement shall be in writing and signed by all parties to the Agreement. In the event that one party to the Agreement violates the provisions of this Agreement the other party may terminate the Agreement and the party against whom the Agreement is being terminated shall be notified of the termination in writing. 8. VENUE Any dispute regarding the substance of this Agreement or its performance shall be resolved before the District Court of Reykjavik. This Agreement is made in two identical copies, one to be held by each party to the Agreement. Reykjavik, 21 December 2001 For Islandsbanki FBA For Islensk erfoagreining ehf. Erlendur Magnusson [sign.] Tomas Sigurosson [sign.] EX-10.44 11 w58844ex10-44.txt GENERAL BOND WITH CONSUMER PRICE INDEX... OFFICER'S CERTIFICATE I do hereby certify and represent that: 1. I am the duly elected Secretary of deCODE genetics, Inc., a Delaware corporation. 2. Pursuant to Rule 306(a) of Regulation S-T, the following exhibit 10.44 to deCODE genetics, Inc.'s Annual Report on Form 10-K is a fair and accurate English translation of a document prepared in the Icelandic language. IN WITNESS WHEREOF, I have signed this Officer's Certificate in my capacity as Secretary of deCODE genetics, Inc. on this 21 day of March, 2002. By: /s/ Tanya Zharov ----------------------------------- Name: Tanya Zharov Title: Secretary and Corporate Counsel Exhibit 10.44 Islandsbanki ISLANDSBANKI-FBA HF. GENERAL BOND with consumer price index PROPERTY LIEN Sturlugata 8 ehf. State Reg. No. 581201-2190 Sturlugata 8, Reykjavik MAKES KNOWN: AS SURETY for the prompt and full payment of all debts and financial commitments according to 1). The Loan Agreement with Islandsbanki-FBA, dated 21 December 2001, amounting to a total of USD 4,000,000.- and 2) Bonds issued by Sturlugata 8 ehf. on 3 January 2002, class 1, 2002, amounting to a total of 1,400,000,000.- whether the amount at stake is the principal, price-level adjustments, translation difference, penalty interest, collection costs or costs, of whatever kind, in aggregate ISK 1,400,000,000.- ONE THOUSAND FOUR HUNDRED MILLION ICELANDIC KRONUR AND USD 4,000,000.- FOUR MILLION DOLLARS 407,040,000.- [hand-written-transl.] Islandsbanki-FBA is hereby pledged, for our own part and on behalf of the owners of the above bonds, as current at any time, by second-rank mortgage with promotion rights, the property: Sturlugata 8 in Reykjavik, and permanent number. The amount in Icelandic kronur is linked to the consumer price index, based on the base index rate, the base index of the bond being 218.5 points, and is adjusted proportionally to the index, but never to a lower index than the base index of this bond, in addition to penalty interest and all costs resulting from collecting activities. The issuer/mortgagor is not aware of any other registered liens or encumbrances on the property. The lien extends to the insurance amount of the mortgaged property and the lien holder is entitled, should any insurance be paid out, to request that the insurance company pay to him directly as much of the insurance amount as would cover the debt secured by this lien together with all interest, penalty interest and collecting costs. In such an event the lien holder has full authorisation to take delivery of the insurance money and dispose of it as payment for the debts. The mortgagor is under obligation to insure the mortgaged property and provide the lien holder with documented evidence that the secured property is properly insured; failing this the lien holder may, without any obligation to do so, insure the property at the mortgagor's expense and shall thereby hold a lien on the property for the total amount of paid-out costs for insurance as well as for the debt itself. The property is mortgaged with all appurtenances, including subsequent additions, cf. Articles 16-18 of Act No 75/1997 on Contractual Liens. The mortgagor is under obligation to ensure that all necessary safety measures required by applicable laws and regulations, as current at any time, are observed with respect to the mortgaged property. The mortgagor shall also take responsibility for the maintenance of the pledged property and ensure, to the extent possible, that it maintains its value so that the mortgage rights are not curtailed. In the event of any default on the payment of instalments or interest of the debt(s) covered by this lien or any other breach of the obligations of the issuer/mortgagor to the lien holder, the total amount of the debt(s) may be called in immediately and without notice and this mortgage may then be foreclosed. The same applies if the value of the secured property is substantially reduced, there is a change in ownership of the property without the mortgagee's consent or if the issuer's/mortgagor's other creditors enforce any claims against the property, or if the issuer's/mortgagor's or his guarantor's estate securing the debt, one or more, enter into receivership or seek composition. The issuer shall pay the stamp duty and registration tax for this lien. In the event of any dispute in respect of this lien or the debt that it covers such dispute shall be referred to the District Court of Reykjavik. In witness whereof, the signatures of the issuer, the mortgagor and the spouse of the registered owner (issuer/mortgagor) are attached hereto in the presence of witnesses. Reykjavik, 21 December 2001 ON THE BOARD OF DIRECTORS OF STURLUGATA 8 EHF. Tomas Sigurosson [sign.] Witnesses to the correct date and signature and financial standing of issuer, mortgagor and spouse of registered owner Sigurgeir Guolaugsson [sign.] 290876-3709 - ----------------------------------------------- Name Id. No. Alexander Kristjan Guomundsson [sign.] 111170-5259 - ------------------------------------------------------- Name Id. No. Hereby in agreement with the above on behalf of Islandsbanki-FBA hf. NB: Note on the Deed of Conveyance of the right of first refusal of the University of Iceland Registered 28 Dec. 2001 EX-10.45 12 w58844ex10-45.txt GENERAL BOND WITH CONSUMER PRICE INDEX... OFFICER'S CERTIFICATE I do hereby certify and represent that: 1. I am the duly elected Secretary of deCODE genetics, Inc., a Delaware corporation. 2. Pursuant to Rule 306(a) of Regulation S-T, the following exhibit 10.45 to deCODE genetics, Inc.'s Annual Report on Form 10-K is a fair and accurate English translation of a document prepared in the Icelandic language. IN WITNESS WHEREOF, I have signed this Officer's Certificate in my capacity as Secretary of deCODE genetics, Inc. on this 21 day of March, 2002. By: /s/ Tanya Zharov ----------------------------------- Name: Tanya Zharov Title: Secretary and Corporate Counsel Exhibit 10.45 Islandsbanki ISLANDSBANKI-FBA HF. GENERAL BOND with consumer price index PROPERTY LIEN Sturlugata 8 ehf. State Reg. No. 581201-2190 Sturlugata 8, Reykjavik MAKES KNOWN: AS SURETY for the prompt and full payment of all debts and financial commitments according to 1). The Loan Agreement with Islandsbanki-FBA, dated 21 December 2001, amounting in total USD 4,000,000.- and 2) Bonds issued by Sturlugata 8 ehf. on 3 January 2002, 1 class 2002, amounting to a total of 1,400,000,000.- whether the amount at stake is the principal, price-level adjustments, translation difference, penalty interest, collection costs or costs, of whatever kind, in aggregate ISK 140.000.000.- ONEHUNDREDFORTYMILLION ICELANDIC KRONUR AND USD 400,000.- FOUR HUNDRED THOUSAND DOLLARS OR THE EQUIVALENT OF THAT AMOUNT IN ANOTHER FOREIGN CURRENCY OR ICELANDIC KRONUR, 40.704.000,- [hand-written] Islandsbanki-FBA is hereby pledged, for our own part and on behalf of the owners of the above bonds, as current at any time, by second-rank mortgage with promotion rights, the property: Sturlugata 8 in Reykjavik, the entire property, permanent number.
following: MORTGAGE. PRINCIPAL CLAIMANT DATE OF ISSUE I ISK 1,400,000,000 USD 4,000,000,- Islandsbanki-FBA hf. 21.12.2001
The amount in Icelandic kronur is linked to the consumer price index, based on the base index 218.5 points, and is adjusted proportionally to the index, but never to a lower index than the base index of this bond, in addition to penalty interest and all costs resulting from collecting activites. The issuer/mortgagor is not aware of any other registered liens or encumbrances on the property. The lien extends to the insurance amount of the mortgaged property and the lien holder is entitled, should any insurance be paid out, to request that the insurance company pay to him directly as much of the insurance amount as would cover the debt secured by this lien together with all interest, penalty interest and collecting costs. In such an event the lien holder has full authorisation to take delivery of the insurance money and dispose of it as payment for the debts. The mortgagor is under obligation to insure the mortgaged property and provide the lien holder with documented evidence that the secured property is properly insured; failing this the lien holder may, without any obligation to do so, insure the property at the mortgagor's expense and shall thereby hold a lien on the property for the total amount of paid-out costs for insurance as well as for the debt itself. The property is mortgaged with all appurtenances, including subsequent additions, cf. Articles 16-18 of Act No 75/1997 on Contractual Liens. The mortgagor is under obligation to ensure that all necessary safety measures required by applicable laws and regulations, as current at any time, are observed with respect to the mortgaged property. The mortgagor shall also take responsibility for the maintenance of the pledged property and ensure, to the extent possible, that it maintains its value so that the mortgage rights are not curtailed. In the event of any default on the payment of instalments or interest of the debt(s) covered by this lien or any other breach of the obligations of the issuer/mortgagor to the lien holder, the total amount of the debt(s) may be called in immediately and without notice and this mortgage may then be foreclosed. The same applies if the value of the secured property is substantially reduced, there is a change in ownership of the property without the mortgagee's consent or if the issuer's/mortgagor's other creditors enforce any claims against the property, or if the issuer's/mortgagor's or his guarantor's estate securing the debt, one or more, enter into receivership or seek composition. The issuer shall pay the stamp duty and registration tax for this lien In the event of any dispute in respect of this lien or the debt that it covers such dispute shall be referred to the District Court of Reykjavik. In witness whereof, the signatures of the issuer, the mortgagor and the spouse of the registered owner (issuer/mortgagor) are attached hereto in the presence of witnesses. Reykjavik, 21 December 2001 ON THE BOARD OF DIRECTORS OF STURLUGATA 8 EHF. Tomas Sigurosson [sign.] Witnesses to the correct date and signature and financial standing of issuer, mortgagor and spouse of registered owner Sigurgeir Guolaugsson [sign.] 290876-3709 - ----------------------------------------------- Name Id. No. Alexander Kristjan Guomundsson [sign.] 111170-5259 - ------------------------------------------------------- Name Id. No. Hereby in agreement with the above For Islandsbanki-FBA hf. NB: Note on the Deed of Conveyance of the right of first refusal of the University of Iceland Registered 28 Dec. 2001 EX-10.46 13 w58844ex10-46.txt RESEARCH COLLABORATION... Exhibit 10.46 [NOTE: CERTAIN PORTIONS OF THIS DOCUMENT HAVE BEEN MARKED TO INDICATE THAT CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THIS CONFIDENTIAL INFORMATION. THESE PORTIONS HAVE BEEN MARKED WITH THE CLAUSE "CONFIDENTIAL TREATMENT REQUESTED" AND/OR TWO ASTERISKS ENCLOSED IN BRACKETS (i.e., [**]). THE CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.] RESEARCH COLLABORATION AND CROSS-LICENSE AGREEMENT AMONG F.HOFFMANN-LA ROCHE LTD AND HOFFMANN-LA ROCHE INC. AND deCODE GENETICS, EHF. Effective as of February 1, 2002 THIS RESEARCH COLLABORATION AND CROSS-LICENSE AGREEMENT ("Agreement") effective as of February 1, 2002 ("Effective Date") is by and among Hoffmann-La Roche Inc., a corporation duly organized and existing under the laws of the state of New Jersey and having offices at 340 Kingsland Street, Nutley, New Jersey 07110 ("Roche-Nutley") and F.Hoffmann-La Roche Ltd, a corporation duly organized and existing under the laws of Switzerland and having offices at Grenzacherstrasse 124, CH-4070 Basel, Switzerland ("Roche-Basel"), and deCODE genetics, ehf. (Islensk erfoagreining ehf.), a limited liability company duly organized and existing under the laws of Iceland, having offices at Lynghalsi 1, IS-110 Reykjavik, Iceland ("deCODE"). PRELIMINARY STATEMENTS A. deCODE has expertise in conducting research in the field of human genetics and genomics, and wishes to establish an operation for pharmaceutical product development. B. Roche-Nutley and Roche-Basel (collectively "Roche") has expertise in drug discovery, and in developing, manufacturing and marketing pharmaceutical products. C. The Parties wish to conduct collaborative research and development activities for the purpose of discovery and development of certain pharmaceutical products. D. The Parties recognize the importance of making the results of research into the genetics of human diseases publicly available. They also recognize the interest of participants in genetic studies of human disease to have the results of such studies made publicly available. deCODE and Roche do, however, consider it the most important interest of the participants to have the results of genetic studies turned into methods to prevent, treat and/or diagnose diseases. - 1 - NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and agreements of the Parties contained in this Agreement, the Parties agree as follows: 1. DEFINITIONS "Active Alliance Disease" shall mean a human disease for which the Steering Committee is allocating FTE's pursuant to Section 7.3. Exhibit A lists the four (4) Active Alliance Diseases as of the Effective Date (the initial Active Alliance Diseases). "Affiliate" with respect to any Party, shall mean (a) an organization at least fifty percent (50%) of which is owned and/or controlled directly or indirectly, by stock ownership or otherwise, by a Party, (b) an organization which directly or indirectly owns and/or controls a Party, by stock ownership or otherwise; or (c) an organization, the majority of which is directly owned or indirectly common to the majority ownership of a Party. Genentech, Inc., 460 Point San Bruno Boulevard, South San Francisco, California shall not be an Affiliate of Roche unless Roche, in its sole discretion, notifies deCODE that Genentech shall so be considered an Affiliate. "Alliance Disease" shall mean an Active Alliance Disease or a Successful Alliance Disease. "Alliance Disease Compound" shall mean, with respect to an Alliance Disease, a pharmaceutically active agent that is a protein, small molecule or an antibody (excluding Antisense Agents and Gene Therapy Agents), for which a Party or its sublicensees used a Gene, or another member of the Biological Pathway of which such Gene is a member, to discover Utility of such pharmaceutically active agent related to such Alliance Disease, such discovery occurring at any time commencing on the Effective Date and ending seven (7) years after the Effective Date. "Alliance Disease Compound Type 1" shall mean, with respect to an Alliance Disease, an Alliance Disease Compound with respect to which [**]. - 2 - "Alliance Disease Compound Type 2" shall mean, with respect to an Alliance Disease, an Alliance Disease Compound that (i) is not an Alliance Disease Compound Type 1 and (ii) [**]. "Alliance Disease Compound Type 3" shall mean, with respect to an Alliance Disease, an Alliance Disease Compound that is other than an Alliance Disease Compound Type 1 or Alliance Disease Compound Type 2. "Alliance Disease Efforts" shall mean, for each Alliance Disease, reasonable commercial efforts directed to the discovery, development and commercialization of at least one Alliance Disease Product having Utility for such Alliance Disease. For a given Alliance Disease Product, reasonable commercial efforts shall be consistent with sound and reasonable business practices and judgment, comparable to efforts exerted by Roche for its own products of a like kind and at a like stage of development and having similar potential, taking into account scientific, business and marketing considerations. "Alliance Disease Know-How" shall mean any and all Technical Information, including any invention, that is developed or conceived and reduced to practice solely by a Party, or jointly by both Parties, as a result of an Alliance Disease Program; provided, however, that any Technical Information that is - 3 - developed or conceived and reduced to practice as a result of an Alliance Disease Program solely by one or more Representatives of deCODE and relating to generalized methods for conducting genomics research and characterizing the function of genes or any raw data useful in generalized genomics research tools shall be considered deCODE Generalized Technology but not Alliance Disease Know-How. "Alliance Disease Product" shall mean any pharmaceutical product (excluding all diagnostic applications) that comprises, in whole or as a component thereof, as its pharmaceutically active agent, an Alliance Disease Compound. "Alliance Disease Program" shall mean the collaboration between the Parties hereunder, conducted during the Program Term and related to an Active Alliance Disease. "Alliance Patent" shall mean any Patent claiming an Invention. "Antisense Agent" shall mean any pharmaceutically active agent which (a) binds nucleic acids as they exist in a cell, and (b) consists of nucleic acid or a functional analog, derivative or homolog thereof, and (c) is complementary to a segment of DNA of a given Gene, or such Gene's transcribed RNA or a gene that encodes another member of the Biological Pathway of which the product of such Gene is a member, and (d) upon delivery by any means, compensates, either completely or partially, for the genetic defect that underlies the disease, the pathogenesis of which is affected by the Gene, and (e) is conceived and reduced to practice at any time commencing on the Effective Date and ending seven (7) years after the Effective Date. "Biological Materials" shall mean any and all tissue samples, plasma samples and cell lines provided by deCODE to Roche under this Agreement. "Biological Pathway" shall have that meaning as determined by a Decision, made as necessary for the purposes of this Agreement and consistent with the criteria set forth in Section 8.2(p). - 4 - "Clinical Candidate" shall mean, with respect to a Deselected Disease that was once an Alliance Disease, a Deselected Disease Compound that, as reflected in a Decision and Minutes, in the conduct of its past Alliance Disease Program was the subject of (1) formal toxicology in more than one non-human animal species, (2) absorption, distribution, metabolism and excretion testing in at least one non-human animal species, and (3) a scale-up strategy for synthesis. "COGS" shall mean the manufacturing cost of a given Alliance Disease Product sold or transferred by Roche, its Affiliates or sublicensees, calculated in accordance with international accounting standards consistently applied by such party. COGS shall include, without limitation, direct labor and materials, a reasonable allocation of indirect labor, facilities expense (including utilities and depreciation over the expected life of the buildings and equipment), administration cost, costs associated with process development, and initial non-commercialized batches for regulatory approval. "Combination Product" shall mean (a) an Alliance Disease Product containing both (i) at least one pharmaceutically active agent that is an Alliance Disease Compound and (ii) one or more pharmaceutically active agents that are not an Alliance Disease Compound or (b) a Deselected Disease Product containing both (i) at least one pharmaceutically active agent that is a Deselected Disease Compound and (ii) one or more pharmaceutically active agents that are not a Deselected Disease Compound. "Confidential Information" shall mean any and all Technical Information that is (i) disclosed by one Party ("Disclosing Party") to the other Party ("Receiving Party") pursuant to this Agreement, the 1998 Agreement, as amended, or the Secrecy Agreement between the Parties dated September 5, 1997, and which at the time of disclosure is clearly marked as "Confidential," but not Technical Information which is orally or visually disclosed to a Receiving Party unless such oral or visual disclosure is described or summarized in a writing, marked as "Confidential" and provided to the Receiving Party within forty-five (45) days after such oral or visual disclosure, or (ii) Alliance Disease Know-How. - 5 - "Cover" or "Covered" shall mean, for a given activity, that the performance of such activity would infringe a claim of a patent or patent application (if that claim were to issue in a patent) in the absence of rights under such patent, as determined on a country-by-country basis. "Decision" shall mean a decision pursuant to Section 8.4 and shall be effective as of the date the Minutes reflecting the decision are finalized as provided in Section 8.5. "deCODE Generalized Technology" shall mean any Technical Information relating to generalized methods for conducting genomics research and characterizing the function of genes or any raw data useful in generalized genomics research tools which at any time owned or controlled by deCODE or its Affiliates (provided deCODE or its Affiliates have the right to license or otherwise make available such Technical Information to Roche). "deCODE Know-How" shall mean any Technical Information, excluding deCODE Generalized Technology, owned or controlled by deCODE or its Affiliates prior to the Effective Date or during the Program Term (provided deCODE or its Affiliates have the right to license or otherwise make available such Technical Information to Roche) and which is necessary or useful for Roche to fulfill its obligations and exploit its rights under this Agreement, including any Technical Information which deCODE or its Affiliates own jointly with Roche or its Affiliates. "deCODE Patents" shall mean any Patents, excluding Patents claiming deCODE Generalized Technology, owned or controlled by deCODE or its Affiliates prior to the Effective Date or during the term of the Agreement (provided deCODE or its Affiliates have the right to license or otherwise make available such Patents to Roche), including any such Patents which deCODE or its Affiliates own jointly with Roche or its Affiliates. "Deselected Disease" shall mean (i) a human disease that is not an Alliance Disease or a Pool Disease, or (ii) a disease which was an Alliance Disease and for which the Steering Committee has ceased to allocate FTE's under - 6 - Section 7.3, but which is not a Successful Alliance Disease. Exhibit B lists the initial Deselected Diseases. "Deselected Disease Compound" shall mean, with respect to a Deselected Disease, a pharmaceutically active agent that is a protein, small molecule or an antibody (including, without limitation, Anti-sense Agents and Gene Therapy Agents), for which a Party or its sublicensees used a Gene, or another member of the Biological Pathway of which such Gene is a member, to discover Utility of such pharmaceutically active agent related to such Deselected Disease, such discovery occurring at any time commencing on the Effective Date and ending seven (7) years after the Effective Date. "Deselected Disease Compound Type 1" shall mean, with respect to a Deselected Disease, a Deselected Disease Compound [**]. "Deselected Disease Compound Type 2" shall mean, with respect to a Deselected Disease, a Deselected Disease Compound that (i) is not a Deselected Disease Compound Type 1 and (ii) [**]. - 7 - "Deselected Disease Compound Type 3" shall mean, with respect to a Deselected Disease, a Deselected Disease Compound that (i) is not a Deselected Disease Compound Type 1 or Deselected Disease Compound Type 2 and (ii) [**]. "Deselected Disease Product" shall mean any pharmaceutical product (excluding all diagnostic applications) that comprises, in whole or as a component thereof, as its pharmaceutically active agent, (1) an Antisense Agent, (2) a Gene Therapy Agent or (3) a Deselected Disease Compound. "Designated Disease" shall mean an Alliance Disease for which Roche provides to deCODE a Designated Disease Notice under Section 3.1(a)(ii). "EIH" shall mean, for a given Alliance Disease Compound, the entry in the conduct of an Alliance Disease Program of the first volunteer into a Phase I Clinical Study for the Alliance Disease Compound. "Europe" shall mean the United Kingdom, France, Germany, Italy and Spain. Executive Officers" shall mean the Chief Executive Officer of deCODE, or such other similar position designated by deCODE from time to time, and the Global Head of Pharma at Roche, or such similar position designated by Roche from time to time, collectively. "FDA" shall mean the USA Food and Drug Administration, or the successor thereto, or any corresponding foreign registration or regulatory authority. - 8 - "First Commercial Sale" shall have the following meanings: (a) with respect to an Alliance Disease Product: in a country of the Territory, the first commercial sale to a Third Party by Roche, its Affiliates or sublicensees, as the case may be, of the Alliance Disease Product in the country, after obtaining Registration for the Alliance Disease Product in the given country or, if for a country where no Registration for the Alliance Disease Product is required, the date of first commercial sale of such Alliance Disease Product by Roche, its Affiliate or sublicensees to a Third Party in the country. "First Commercial Sale" shall not mean the sale of an Alliance Disease Product for use in a clinical trial or for compassionate use. (b) with respect to a Deselected Disease Product: in a country of the Territory, the first commercial sale to a Third Party by deCODE, its Affiliates or sublicensees, as the case may be, of the Deselected Disease Product in the country, after obtaining Registration for the Deselected Disease Product in the given country or, if for a country where no Registration for the Deselected Disease Product is required, the date of first commercial sale of such Deselected Disease Product by deCODE, its Affiliate or sublicensees to a Third Party in the country. "First Commercial Sale" shall not mean the sale of a Deselected Disease Product for use in a clinical trial or for compassionate use. "FTE" shall mean a Representative of deCODE carrying out a full time equivalent scientific person year of scientific work on or in direct connection with this Agreement. Scientific work on or in direct connection with an Alliance Disease Program includes, but is not limited to, experimental laboratory work, recording and writing of results, reviewing literature and references, holding scientific discussions, managing and leading scientific staff and carrying out project management duties. - 9 - "FTE Rate" shall mean [**] dollars ($[**]) per FTE. The FTE Rate shall include all personnel, equipment, reagents and all other expenses including support staff and overhead for or associated with an FTE. "Gene" shall mean a gene that is the subject of activities by either Party in the course of a Research Plan wherein the purpose of the activities is to be able to use the gene, or another member of the Biological Pathway of which such gene is a member, to discover a Utility for pharmaceutically active agents. "Gene Therapy Agent" shall mean any pharmaceutically active agent which (a) consists of nucleic acid or a functional analog, derivative or homolog thereof that encodes (i) a Gene or a part thereof or (ii) a gene or part thereof that encodes another member of a Biological Pathway of which the product of a Gene is a member, and (b) upon delivery by any means, compensates, either completely or partially, for the genetic defect that underlies the disease the pathogenesis of which is affected by the Gene, and (c) is conceived and reduced to practice at any time commencing on the Effective Date and ending seven (7) years after the Effective Date. "IND Filing" shall mean an Investigational New Drug application, as described in 21 CFR 312, as it may be amended from time to time, conducted or sponsored by Roche, its Affiliates or sublicensees, for initiating a Phase I Clinical Study in the USA, or any similar regulatory filing or notice given in connection with a study conducted or sponsored by or on behalf of Roche or its Affiliate or sublicensee regarding an Alliance Disease Product in a Major Country other than the USA. "Invention" shall mean Technical Information which is conceived or reduced to practice by one or more Representatives of a Party or jointly by Representatives of the Parties in the course of a Research Plan. "Joint Inventions" shall mean an Invention conceived or reduced to practice jointly by Representatives of the Parties. "Major Country" shall mean the USA, Europe or Japan. - 10 - "Minutes" shall mean the final minutes of a Steering Committee meeting, as finalized under Section 8.5. "NDA" shall mean a New Drug Application or a Biologics License Application, as the case may be, for an Alliance Disease Product, filed by or on behalf of Roche, its Affiliates or sublicensees, with the FDA in the USA or any corresponding foreign application, registration or certification in Europe (either in the EU using the centralized process or in one of the countries comprising Europe under a decentralized process) or Japan. "NDA Filing" shall mean, for a given NDA for a given Alliance Disease Product, a communication from the FDA that the NDA for such disease product has been accepted for review by the FDA in the USA, Europe or Japan, as the case may be. "Net Sales" and the related term "Adjusted Gross Sales" shall have the following meanings: (a) as to Roche: (i) "Adjusted Gross Sales" shall mean, with respect to any Alliance Disease Product, the amount of gross sales invoiced by Roche, its Affiliates or sublicensees to Third Parties for such Alliance Disease Product, commencing with the First Commercial Sale of such Alliance Disease Product, less deductions for the following items which are customarily included in the invoiced amounts and do not exceed reasonable and customary amounts in the country in which such sale occurred: (1) returns (including withdrawals and recalls), (2) rebates (price reductions including Medicaid and similar types of rebates, e.g. chargebacks), (3) volume (quantity) discounts granted at the time of invoicing, and (4) sales taxes and other taxes directly linked and included in the gross sales amount. Adjusted Gross Sales shall also include the amount or fair market value of all other consideration received by Roche, its Affiliates or sublicensees with respect to - 11 - Alliance Disease Products, whether such consideration is in cash, payment in kind, exchange or another form. (ii) "Net Sales" shall mean the amount calculated by subtracting from the Adjusted Gross Sales a lump sum deduction of [**] percent ([**]%) of Adjusted Gross Sales for those sales related deductions that are not accounted for on a product-by-product basis (e.g. outward freights, postage, transportation insurance, packing materials for dispatch of goods, custom duties, discounts granted later than at the time of invoicing, cash discounts and other direct expenses). (b) as to deCODE: (i) "Adjusted Gross Sales" shall mean, with respect to any Deselected Disease Product, the amount of gross sales invoiced by deCODE or its Affiliates to Third Parties for such Deselected Disease Product, commencing with the First Commercial Sale of such Deselected Disease Product, less deductions for the following items which are customarily included in the invoiced amounts and do not exceed reasonable and customary amounts in the country in which such sale occurred: (1) returns (including withdrawals and recalls), (2) rebates (price reductions including Medicaid and similar types of rebates, e.g. chargebacks), (3) volume (quantity) discounts granted at the time of invoicing, and (4) sales taxes and other taxes directly linked and included in the gross sales amount. Adjusted - 12 - Gross Sales shall also include the amount or fair market value of all other consideration received by deCODE or its Affiliates with respect to Deselected Disease Products, whether such consideration is in cash, payment in kind, exchange or another form. (ii) "Net Sales" shall mean the amount calculated by subtracting from the Adjusted Gross Sales a lump sum deduction of [**] percent ([**]%) of Adjusted Gross Sales for those sales related deductions that are not accounted for on a product-by-product basis (e.g. outward freights, postage, transportation insurance, packing materials for dispatch of goods, custom duties, discounts granted later than at the time of invoicing, cash discounts and other direct expenses). (c) For a Combination Product that is an Alliance Disease Product, the Parties shall meet approximately one (1) year prior to the commercial launch of such Combination Product to negotiate in good faith and agree to an appropriate adjustment to Net Sales to reflect the relative significance of each Alliance Disease Compound contained in the Combination Product. If, after good faith negotiations (not to exceed ninety (90) days, which can be extended by mutual agreement), the Parties can not agree to an appropriate adjustment, Net Sales shall be equal to Net Sales of the Combination Product multiplied by a fraction, the numerator of which is the reasonable fair market value of the Alliance Disease Compound(s) and the denominator of which is the reasonable fair market value of all pharmaceutically active agents contained in the Combination Product. In such event, Roche shall in good faith make a determination of the respective fair market values of the Alliance Disease Compound(s) and all other pharmaceutically active agents contained in such Combination Product, and shall provide deCODE with data to support such determination. deCODE shall have the right to review such determination and supporting data, and to notify Roche if it disagrees with such determination. (d) For a Combination Product that is a Deselected Disease Product, the Parties shall meet approximately one (1) year prior to the commercial launch of such Combination Product to negotiate in good faith - 13 - and agree to an appropriate adjustment to Net Sales to reflect the relative significance of each Deselected Disease Compound contained in the Combination Product. If, after good faith negotiations (not to exceed ninety (90) days, which can be extended by mutual agreement), the Parties can not agree to an appropriate adjustment, Net Sales shall be equal to Net Sales of the Combination Product multiplied by a fraction, the numerator of which is the reasonable fair market value of the Deselected Disease Compound(s) and the denominator of which is the reasonable fair market value of all pharmaceutically active agents contained in the Combination Product. In such event, deCODE shall in good faith make a determination of the respective fair market values of the Deselected Disease Compound(s) and all other pharmaceutically active agents contained in such Combination Product, and shall provide Roche with data to support such determination. Roche shall have the right to review such determination and supporting data, and to notify deCODE if it disagrees with such determination. "Participants" shall mean those persons who enroll to participate in harvesting programs or such other studies being conducted as part of an Alliance Disease Program. "Party" shall mean deCODE or Roche and, when used in the plural, shall mean deCODE and Roche. "Patents" shall mean all patents and patent applications throughout the Territory, and any extensions, renewals, continuations, continuations-in-part, divisions, patents-of-addition, reissues, reexaminations, registrations, patents of confirmation, patents of importation, and Supplementary Protection Certificates and foreign counterparts thereof. "Phase I Clinical Study" shall mean the first phase of human clinical trials, conducted or sponsored by or on behalf of Roche or its Affiliate or sublicensee in the USA, required by the FDA to determine the metabolism and pharmacological actions of an Alliance Disease Product in humans, the side effects associated with increasing doses of the product, and if possible, - 14 - to gain early evidence of effectiveness of the Alliance Disease Product, as described in 21 CFR 312, as it may be amended from time to time. "Pool Disease" shall mean human diseases that are identified as Pool Diseases from time to time in accordance with Section 7.1 (b). "Program Term" shall mean the period commencing on February 1, 2002 and ending February 1, 2005, unless earlier terminated or extended as provided in this Agreement. "Registration" shall mean, for a given country and a given Alliance Disease Product or Deselected Disease Product, ("Registration Product"), an official approval, resulting from an NDA Filing, which is required by the government or health authority of the given country for the Registration Product to be offered for sale in such country, including authorizations as may be required for the production, importation, pricing, reimbursement and sale of such Registration Product in such country, and for subsequent regulatory filings for line extensions and/or additional indications of such Registration Product. "Representative of a Party" shall mean an employee of a Party or any other person who is contractually required to assign or grant exclusive rights in and to Technical Information to a Party. "Research Plan" shall mean, for each Active Alliance Disease, a reasonably detailed description of (i) the goals and objectives of the Alliance Disease Program for the Active Alliance Disease, and (ii) the responsibilities, including without limitation scientific work assigned to, and to be conducted by, each Party in the conduct of the Alliance Disease Program for the Active Alliance Disease, as approved by the Steering Committee. "Roche Know-How" shall mean any Technical Information, owned or controlled by Roche or its Affiliates prior to the Effective Date or during the Program Term (provided Roche or its Affiliates have the right to license or otherwise make available such Technical Information to deCODE) and which is necessary or useful for deCODE to fulfill its obligations and exploit its rights - 15 - under this Agreement, including any Technical Information which Roche or its Affiliates own jointly with deCODE or its Affiliates. "Roche Patents" shall mean any Patents owned or controlled by Roche or its Affiliates prior to the Effective Date or during the term of the Agreement (provided Roche or its Affiliates have the right to license or otherwise make available such Patents to deCODE), including any such Patents which Roche or its Affiliates own jointly with deCODE or its Affiliates. Roche and its Affiliates do not have the right to license or otherwise make available to deCODE certain Patents to the extent they relate to PCR technology, including as represented by the patent portfolio at the Effective Date of Roche or its Affiliate, Roche Molecular Systems Inc. "Royalty Term" shall mean: (a) As to Roche, for a given Alliance Disease Product in a given country in the Territory, a period of time commencing on the First Commercial Sale of the given Alliance Disease Product in the given country and ending on the later of: (i) ten (10) years from the date of the First Commercial Sale of such Alliance Disease Product in such country or (ii) the last date on which the making, having made, using, offering for sale, selling or importing of the Alliance Disease Product in the given country by Roche, its Affiliates or sublicensees is Covered by a Valid Claim of a deCODE Patent or an Alliance Patent. (b) As to deCODE, for a given Deselected Disease Product in a given country in the Territory, a period of time commencing on the First Commercial Sale of the given Deselected Disease Product in the given country and ending on the later of: (i) ten (10) years from the date of the First Commercial Sale of such Deselected Disease Product in such country or (ii) the last date on which the making, having made, using, offering for sale, selling or importing of the Deselected Disease Product in the given country by deCODE, its Affiliates or sublicensees is Covered by a Valid Claim of a Roche Patent or an Alliance Patent. - 16 - (c) If, in a country in the Territory, the above definition of Royalty Term is unenforceable, then for such country, Royalty Term shall mean the longest term as may be enforceable under the applicable laws of such country, provided that in no event shall the Royalty Term in such country exceed the maximum term above. "Steering Committee" shall mean that body organized and acting pursuant to Article 8. "Sublicensing Income" shall mean all monetary consideration (for example, up-front payments, royalties, milestones and the like) received by deCODE or its Affiliate from a Third Party licensees with respect to a given Deselected Disease Product, but excluding (i) any amounts received from Third Party licensees to reimburse deCODE for research and development expenses of deCODE which deCODE can reasonably document and (ii) any consideration received for the issuance of securities at the fair market value for such securities. "Subject Diseases" shall mean the following eleven (11) human diseases: [**],[**],[**],[**],[**],[**],[**], osteoporosis, bipolar depression, obesity and [**]. "Successful Alliance Disease" shall mean an Alliance Disease for which Roche provides a Success Notice under Section 3.1(a)(i) or which is deemed a Successful Alliance Disease under Section 3.1(a)(iii). "Target Assessment" shall mean a Decision, as reflected in a Minutes, that in the conduct of an Alliance Disease Program for an Alliance Disease, the function of a Gene, or another member of the Biological Pathway of which such Gene is a member, is demonstrated as being capable of being modulated through interaction with a pharmaceutically active agent in a manner that reasonably correlates to treatment, cure and/or prevention of such Alliance Disease. - 17 - "Technical Information" shall mean information, data or know-how (whether patentable or unpatentable), including without limitation, ideas, concepts, formulas, manufacture, methods, procedures, designs, compositions of matter, plans, applications, specifications, drawings, techniques, materials (including without limitation biological materials such as tissue samples, plasma samples, cell lines, RNA, DNA, DNA fragments, organisms, proteins, polypeptides, plasmids, vectors and the like), compounds, samples, inventions, discoveries, and the like, as well as improvements related thereto. "Territory" shall mean the entire world. "Third Party" shall mean any party other than a Party or an Affiliate of a Party. "USA" shall mean the United States of America. "Utility" shall mean pharmacological or biological activity that reasonably correlates to treatment, cure and/or prevention of a human disease (excluding all diagnostic applications). "Valid Claim" shall mean (i) a claim of any issued and unexpired Patent that has not been disclaimed, revoked or held unpatentable, invalid or unenforceable by final decision of a court or other governmental agency of competent jurisdiction, which decision is unappealable or unappealed within the time allowed for appeal, and which is otherwise enforceable, or (ii) a claim of a patent application that is a Patent that has not been on file in a given country with the applicable patent office for more than five (5) years from the earliest date from which the patent application claims priority in the given country. 2. GRANT OF RIGHTS 2.1 Commercial License to Roche. Subject to the terms and conditions of this Agreement, deCODE grants to Roche (i) the sole and exclusive right and license, under deCODE Patents and deCODE Know-How, - 18 - with the right to sublicense to Third Parties and/or Affiliates of Roche, to make, have made, use, offer for sale, sell and import Alliance Disease Products in the Territory, and (ii) the non-exclusive right and license to use deCODE Generalized Technology, with the right to sublicense to Third Parties and/or Affiliates, to make, have made, use, offer for sale, sell and import Alliance Disease Products in the Territory. Roche shall advise deCODE of all sublicenses granted to Third Parties under this Section 2.1. If Roche grants a sublicense, all of the terms and conditions of this Agreement shall apply to the sublicensee to the same extent as they apply to Roche for all purposes. Roche guarantees and assumes responsibility for the performance of all obligations so imposed on such sublicensee by reason of operation of any such sublicense. 2.2 Research License to Roche. Subject to the terms and conditions of this Agreement, deCODE grants to Roche a fully paid-up, non-royalty bearing non-exclusive right and license, without the right to grant sublicenses (except to Affiliates of Roche), (i) under deCODE Patents and (ii) to use deCODE Know-How and deCODE Generalized Technology, for the sole and exclusive purpose of enabling Roche to fulfill its obligations under the Alliance Disease Programs. 2.3 Commercial License to deCODE. Subject to the terms and conditions of this Agreement, Roche grants to deCODE the sole and exclusive right and license, under Roche Patents and Roche Know-How, with the right to sublicense to Third Parties and/or Affiliates of deCODE, to make, have made, use, offer for sale, sell and import Deselected Disease Products in the Territory. deCODE shall advise Roche of all sublicensees granted to Third Parties under this Section 2.3. If deCODE grants a sublicense, all of the terms and conditions of this Agreement shall apply to the sublicensee to the same extent as they apply to deCODE for all purposes. deCODE guarantees and assumes responsibility for the performance of all obligations so imposed on such sublicensee by reason of operation of any such sublicense. - 19 - 2.4 Research License to deCODE. Subject to the terms and conditions of this Agreement, Roche grants to deCODE a fully paid-up, non-royalty bearing non-exclusive right and license, without the right to grant sublicenses (except to Affiliates of deCODE), (i) under Roche Patents and (ii) to use Roche Know-How, for the sole and exclusive purposes of enabling deCODE (a) to fulfill its obligations under the Alliance Disease Programs, and (b) to conduct research and development relating to the Pool Diseases. 2.5 Commercial Rights to Compounds. Notwithstanding any provision in this Agreement to the contrary, if a Party or its sublicensee, uses a Gene or another member of the Biological Pathway of which such Gene is a member, to discover Utility of a pharmaceutically active agent at any time commencing on the Effective Date and ending seven (7) years after the Effective Date related to: (a) an Alliance Disease prior to the discovery of Utility of such agent related to a Deselected Disease and such agent is a protein, small molecule or an antibody (excluding Antisense Agents and Gene Therapy Agents), then such agent shall be deemed for all purposes to be an Alliance Disease Compound, or, alternatively, (b) a Deselected Disease prior to the discovery of Utility of such agent related to an Alliance Disease and such agent is a protein, small molecule or an antibody (including, without limitation, Antisense Agents and Gene Therapy Agents), then such agent shall be deemed for all purposes to be a Deselected Disease Compound. 3. DILIGENCE 3.1 Diligence Obligations. (a) Alliance Disease Efforts. (i) Success Notice. For each Alliance Disease, prior to the end of the Program Term, Roche shall have the right to provide to deCODE written notice of Roche's intention, independently or with a Third Party, to continue to seek to - 20 - discover, develop and/or commercialize at least one related Alliance Disease Product having Utility for such Alliance Disease ("Success Notice"). For each such Alliance Disease, after providing such notice Roche shall have the obligation to use Alliance Disease Efforts. (ii) Designated Disease Notice. For each Alliance Disease other than those for which Roche has provided a Success Notice under Section 3.1(a)(i), within sixty (60) days after the end of the Program Term, Roche may provide to deCODE a written notice of Roche's intention not to continue to seek to discover, develop and/or commercialize at least one related Alliance Disease Product having Utility for such Alliance Disease ("Designated Disease Notice"). Upon issuance of such a notice, the designated Alliance Disease shall be deemed to be a Designated Disease and the Parties rights and obligations shall be governed by Section 3.2 below. (iii) Successful Alliance Disease. To the extent that Roche has not issued either a Success Notice or a Designated Disease Notice, any non-designated Alliance Diseases shall be deemed to be Successful Alliance Diseases and Roche shall have an obligation to use Alliance Disease Efforts with respect to such Alliance Diseases. (b) Measurement of Alliance Disease Efforts. For a given Alliance Disease for which Roche has an Alliance Disease Efforts obligation, prior to the first Registration of an Alliance Disease Product having Utility for such Alliance Disease in any Major Country, Roche's exercise of Alliance Disease Efforts is to be determined by judging Roche's efforts taken - 21 - as a whole in the Major Countries. For a given Alliance Disease for which Roche has an Alliance Disease Efforts obligation, after the first Registration of an Alliance Disease Product having Utility for such Alliance Disease in any Major Country, Roche's exercise of Alliance Disease Efforts is to be determined by judging Roche's efforts taken on a Major Country-by-Major Country basis. (c) Deselected Disease Efforts. deCODE shall not be under any diligence obligation whatsoever with respect to the discovery, development or commercialization of any Deselected Disease Products. deCODE shall have the right, but not the obligation, to independently or with a Third Party to seek to discover, develop and/or commercialize Deselected Disease Products having Utility for Designated Diseases. 3.2 Designated Diseases. (a) Negotiation. For a given Designated Disease, for a period commencing on the date Roche provides a Designated Disease Notice and ending one year after such date ("Negotiation Period"), the Parties shall enter into good faith negotiations regarding finding a mutually acceptable way to collaboratively progress discovery, development and/or commercialization of a product for the Designated Disease. (b) deCODE's Right to Pursue Designated Diseases. For a given Designated Disease, notwithstanding any negotiations taking place pursuant to Section 3.2(a), commencing on the date Roche provides a Designated Disease Notice, as to both Parties, the rights and licenses granted pursuant to Section 2.3 with respect to Deselected Diseases shall also apply to such Designated Disease as if it were a Deselected Disease. (c) Failure of deCODE to Pursue Designated Diseases. If by the end of the Negotiation Period, (i) deCODE (independently or with an Affiliate and/or a Third Party) has not in good faith sought to discover, develop and/or commercialize a Deselected Disease Product for such Designated Disease, and (ii) the Parties fail to reach agreement on essential terms for a - 22 - mutually acceptable way to collaboratively progress discover, develop and/or commercialization of a product for the Designated Disease, then: (i) The sole and exclusive rights granted to deCODE under Section 3.2(b) shall terminate; (ii) As to Roche, the rights and licenses granted pursuant to Section 2.1 with respect to Alliance Diseases shall also apply to such Designated Disease as if it were an Alliance Disease, but on a non-exclusive basis; and (iii) As to deCODE, the rights and licenses granted pursuant to Section 2.3 with respect to Deselected Diseases shall also apply to such Designated Disease as if it were a Deselected Disease, but on a non-exclusive basis. 3.3 Judging Efforts. For a given Alliance Disease for which Roche has an obligation to perform Alliance Disease Efforts, prior to the first Registration in any Major Country of an Alliance Disease Product having Utility for such disease, if deCODE, (the "Complaining Party") reasonably believes that Roche (the "Responsible Party") is not using such efforts, the Complaining Party may provide the Responsible Party written notice specifying the reasons it believes that the Responsible Party, at the time, is not using such efforts with respect to such disease. Upon receipt of such notice, the Responsible Party shall have a period of ninety (90) days (an "Evidence Period") to present evidence to the Complaining Party that it, its Affiliate or sublicensee are using Alliance Disease Efforts, as applicable, with respect to such disease. If the Responsible Party presents evidence acceptable to the Complaining Party that the Responsible Party, its Affiliate or sublicensee is using Alliance Disease Efforts, as applicable, with respect to such disease, the Complaining Party's notice shall be deemed withdrawn and of no effect. Should there be a dispute as to whether the Responsible Party has, within the Evidence Period, presented evidence reasonably acceptable to demonstrate that the Responsible Party, its Affiliate or sublicensee is using Alliance Disease Efforts, as applicable, with respect to such disease, the - 23 - Parties shall conduct good faith discussions directed toward resolution of the dispute. If the Parties do not resolve the dispute after good faith discussions have been conducted for a period of thirty (30) days following the Evidence Period, the Parties shall submit such dispute for resolution in accordance with Section 17.13. If it is agreed by the Parties, or if it is resolved in accordance with Section 17.13, that the Responsible Party, within the Evidence Period, has not presented evidence reasonably acceptable to demonstrate that the Responsible Party, its Affiliate or sublicensee is using Alliance Disease Efforts, as applicable, with respect to such disease, then the Complaining Party shall be entitled to proceed under of Section 3.4 of this Agreement. 3.4 Effect of Failure of Efforts. If it is agreed by the Parties, or if it is resolved in accordance with Section 17.13, that the Responsible Party, within the Evidence Period provided for in Section 3.3, has not presented evidence reasonably acceptable to demonstrate that the Responsible Party, its Affiliate or sublicensee is using Alliance Disease Efforts, with respect to a disease, the Complaining Party shall be entitled, without prejudice to any of the Complaining Party's other rights conferred on the Complaining Party by this Agreement, and in addition to any other remedies available to it by law or in equity, and without affecting or altering the Responsible Party's other rights and obligations under this Agreement, to give a written notice terminating any rights licensed by the Complaining Party to the Responsible Party under this Agreement for all Alliance Disease Products having Utility for such Alliance Disease. The effective date of any such termination shall be the date that the Responsible Party receives such notice. After the effective date of termination, in no event shall the Responsible Party, its Affiliates or sublicensees make, have made, use, offer for sale, sell or import any Alliance Disease Products, as applicable, having Registration for treating or preventing such Alliance Disease. In addition, at the Complaining Party's request, within sixty (60) days after the effective date of such termination: (1) the Responsible Party shall transmit to the Complaining Party all reports, information and data in the possession or control of the Responsible Party, its Affiliates or its sublicensees relating to Alliance Disease Products having utility for such Alliance Disease, (2) the Responsible Party shall assign, and shall cause its Affiliates and sublicensees to assign, to the Complaining Party all regulatory - 24 - filings and Registrations in the possession or control of the Responsible Party, its Affiliates or its sublicensees; in each case, as would enable the Complaining Party to carry on the development and/or marketing of Alliance Disease Products having for Utility for such Alliance Disease, in the Territory, and (3) the Responsible Party hereby grants to the Complaining Party the right to use the Roche Patents and Roche Know-How in the Territory solely to the extent necessary to allow the Complaining Party to carry on the development and/or marketing of Alliance Disease Products having Utility for such Alliance Disease. 4. CONSIDERATION 4.1 Development Payments and Royalties to deCODE. Subject to Section 10.2(c), Roche shall pay Development Payments and royalties as set forth in Exhibit C. No payments or royalties shall be due from Roche to deCODE with respect to any Alliance Disease Products other than as set forth in Exhibit C. 4.2 Royalties to Roche. (i) Subject to Section 10.2(c), for a given Deselected Disease Product that comprises, in whole or as a component thereof, as its pharmaceutically active agent, an Antisense Agent, or a Gene Therapy Agent, during the Royalty Term for the Deselected Disease Product, deCODE shall pay to Roche a royalty of [**] percent ([**]%) on Net Sales of the given deCODE Product, on a country-by-country basis. (ii) Subject to Section 10.2(c), for a given Deselected Disease Product that comprises, in whole or as a component thereof, as its pharmaceutically active agent, a Deselected Disease Compound, during the Royalty Term for such Deselected Disease Product, deCODE shall pay to Roche a royalty on Net Sales of such Deselected Disease Product, on a country-by-country basis, as set forth in Table 1: - 25 - TABLE 1
DESELECTED DISEASE PRODUCT PERCENTAGE NET SALES [**] [**]% [**] [**]% [**] [**]%
For a given Deselected Disease Product, during the Royalty Term for the Deselected Disease Product, deCODE shall pay to Roche a percentage of the Sublicensing Income received by deCODE or its Affiliate from its sublicensees with respect to the given Deselected Disease Product, as set forth in Table 2: TABLE 2
PERCENTAGE OF DESELECTED DISEASE PRODUCT SUBLICENSING INCOME [**] [**]% [**] [**]% [**] [**]%
Except as expressly set forth in this Section 4.2, no payments or royalties shall be due from deCODE to Roche with respect to any Deselected Disease or any products arising therefrom. 5. ROYALTY ADJUSTMENTS. 5.1 Royalty Reductions. (a) No Valid Claim. The royalties otherwise due under Article 4 shall be reduced, on a country-by-country basis, by [**] percent ([**]%) (i) with respect to a given Alliance Disease Product in a given country if the making, having made, using, offering for sale, selling or importing of the Alliance Disease Product is not Covered by a Valid Claim of a deCODE Patent in such country and (ii) with respect to a given Deselected Disease Product in a given country if the making, having made, using, offering for sale, selling or importing of the Deselected Disease Product is not Covered by a Valid Claim of a Roche Patent in such country. (b) Generic Competition. The royalties otherwise due under Article 4 shall be reduced, on a country-by-country basis, by [**] - 26 - percent ([**]%) with respect to a given Alliance Disease Product in a given country if, in such country, in any Reporting Period, one or more Third Parties markets a product ("Alliance Third Party Product") having as a pharmaceutically active ingredient the same Alliance Disease Compound as the Alliance Disease Product, or its salt or ester, where the sale of such Alliance Third Party Product is not claimed by a Valid Claim of an issued deCODE Patent or Roche Patent in such country, and (2) the Alliance Third Party Product(s), in aggregate, have at least [**] ([**]%) of the aggregate unit volume of sales for such Alliance Disease Product in such country, as measured by IMS published data or such other index as the Parties may agree upon. The royalties otherwise due under Article 4 shall be reduced, on a country-by-country basis, by [**] percent ([**]%) with respect to a given Deselected Disease Product in a given country if, in such country, in any Reporting Period, one or more Third Parties markets a product ("Deselected Third Party Product") having as a pharmaceutically active ingredient the same Deselected Disease Compound as the Deselected Disease Product, or its salt or ester, where the sale of such Deselected Third Party Product is not claimed by a Valid Claim of an issued deCODE Patent or Roche Patent in such country, and (2) the Deselected Third Party Product(s), in aggregate, have at least [**] ([**]%) of the aggregate unit volume of sales for such Deselected Disease Product in such country, as measured by IMS published data or such other index as the Parties may agree upon. (c) Third Party Royalties. If, for a given Alliance Disease Product or Deselected Disease Product in a given country, a Party believes that the making, having made, using, offering for sale, selling or importing the given Alliance Disease Product or Deselected Disease Product would represent a significant risk of infringement of a Third Party Patent, the Party shall notify the other Party in writing, and the Parties will in good faith discuss the need to obtain a license from the Third Party ("Third Party License"). If the Parties fail to agree as to the need for such Third Party License, the Parties will submit the matter to patent counsel acceptable to both Parties for - 27 - a legal opinion about the need to obtain such Third Party License. The Parties will equally share the costs associated with such legal action. If the Parties agree on the need for the Third Party License, or if patent counsel provides reasons as to why the making, having made, offering for sale, selling or importing of the given Alliance Disease Product or Deselected Disease Product in the given country would represent a significant risk of infringement of the Third Party Patent, then (i) the royalties otherwise due to deCODE under Article 4 shall be reduced by [**] percent ([**]%) of the royalties and payments paid by Roche or its Affiliate to such Third Party under the Third Party License and (ii) the royalties otherwise due to Roche under Article 4 shall be reduced by [**] percent ([**]%) of the royalties and payments paid by deCODE or its Affiliate to such Third Party under the Third Party License. Notwithstanding the above, (i) for a given Alliance Disease Product, in no event shall such reduction apply to a Third Party License from a Third Party where the Third Party License results from a collaboration having as its subject the Alliance Disease Product and (ii) for a given Deselected Disease Product, in no event shall such reduction apply to a Third Party License from a Third Party where the Third Party License results from a collaboration having as its subject the Deselected Disease Product. (d) Limit. Notwithstanding anything to the contrary, the royalties due under Article 4 may not be reduced for any Reporting Period on account of any reductions provided for in this Section 5.1 by an amount which would reduce the amount of royalties otherwise due to a Party under Article 4 by more than [**] percent ([**]%). Any amount of reductions in royalties which exceed the foregoing limits for a given Reporting Period may be applied in subsequent Reporting Periods, subject again to the foregoing limitations. The limitations to the royalty reductions provided in this Section 5.1 shall not apply against additional credits or reductions or deductions under any other Sections of this Agreement. - 28 - 5.2 Sales Among Affiliates/Sublicensees. The obligation to pay royalties under Article 4 is imposed only once with respect to the same unit of Alliance Disease Product and Deselected Disease Product, regardless of the number of Patents pertaining thereto. There shall be no obligation to pay royalties under Article 4 on sales of Alliance Disease Product among Roche and its Affiliates and its sublicensees, but in such instances the obligation to pay royalties shall arise only upon the sale by Roche, its Affiliates or its sublicensees to Third Parties. There shall be no obligation to pay royalties under Article 4 on sales of Deselected Disease Product among deCODE and its Affiliates and its sublicensees, but in such instances the obligation to pay royalties shall arise only upon the sale by deCODE or its Affiliates to Third Parties. 5.3 Supply Obligation. During the Royalty Term, Alliance Disease Products and Deselected Disease Products shall be supplied in quantities necessary for or as required by the persons who are both citizens and residents of Iceland at no charge. 5.4 Barred Royalties. If the royalties set out in this Agreement, after giving effect to all reductions and credits to such royalties allowable under this Agreement, are higher than the maximum royalties permitted by the law or regulations of a given country, the royalty payable for such country shall be equal to the maximum permitted under such law or regulations. 6. ROYALTY PAYMENTS AND REPORTS. 6.1 Payment. Except as otherwise provided in this Agreement, all royalties due hereunder and the amount of Sublicensing Income due hereunder shall be calculated quarterly as of March 31, June 30, September 30 and December 31 (each as being the last day of a calendar quarter) and shall be paid by within sixty (60) days after the end of each calendar quarter for which Net Sales underlying such royalties or for which Sublicensing Income are calculated. Each such payment shall be accompanied by a statement, Product-by-Product and country-by-country, of the amount of Net - 29 - Sales, the amount of royalties due on such Net Sales, or the amount of Sublicensing Income due, as the case may be. 6.2 Mode of Payment. Each Party shall make all payments required under this Agreement as directed by the other Party from time to time in United States Dollars or such other currency as the Parties may mutually agree. (a) For Roche and its Affiliates. For Roche and its Affiliates, whenever for the purpose of calculating royalty conversion from any foreign currency shall be required, such conversion shall be made as follows: when calculating the Adjusted Gross Sales, the amount of such sales in foreign currencies shall be converted into Swiss Francs as computed in the central Roche's Swiss Francs Sales Statistics for the countries concerned, using the average monthly rate of exchange at the time for such currencies as retrieved from the Reuters System; and when calculating the royalties on Net Sales, such conversion shall be at the average rate of the Swiss Franc to the Dollar, as retrieved from the Reuters System for the applicable calendar quarter. (b) For a Sublicensee of Roche in a Country. For a sublicensee of Roche, whenever for the purpose of calculating royalty conversion from any foreign currency shall be required, such conversion shall be made as follows: when calculating the Adjusted Gross Sales, the amount of such sales shall be reported by the sublicensee to Roche within thirty (30) days from the end the calendar quarter, after having converted each applicable monthly sales in foreign currency into the Dollar using the average rates of exchange published in The Wall Street Journal (or some other source agreed upon in writing by the Parties for the country) for each respective month of the applicable calendar quarter. (c) For deCODE and its Affiliates. For deCODE and its Affiliates, whenever for the purpose of calculating royalty conversion from any foreign currency shall be required, such conversion shall be made as follows: when calculating the Adjusted Gross Sales and Net Sales, the amount of such sales in foreign currencies shall be converted into Dollars, as computed for the - 30 - country concerned using the average monthly rate of exchange listed in The Wall Street Journal (or some other source agreed upon in writing by the Parties for the country) for each applicable month of the applicable calendar quarter. (d) For a Sublicensee of deCODE in a Country. For a sublicensee of deCODE, the Sublicensing Income shall be calculated by conversion of such amount from the currency in which it was paid to deCODE into Dollars as computed for the country concerned using the average monthly rate of exchange listed in The Wall Street Journal (or some other source agreed upon in writing by the Parties for the country) for each applicable month of the applicable calendar quarter. 6.3 Records Retention. Roche shall keep, and require its Affiliates and sublicensees to keep, full, true and accurate books of account in accordance with generally accepted accounting principles, consistently applied ("Roche Books of Account") containing all particulars that may be necessary for the purpose of calculating all royalties payable to deCODE under this Agreement for a period of three (3) calendar years after the end of the calendar year in which such sales occurred. Such Roche Books of Account shall be kept at the principal place of business of Roche, its Affiliates or its sublicensees, as the case may be. deCODE shall keep, and require its Affiliates and sublicensees to keep, full, true and accurate books of account in accordance with generally accepted accounting principles, consistently applied ("deCODE Books of Account") containing all particulars that may be necessary for the purpose of calculating all royalties and Sublicensing Income payable to Roche under this Agreement for a period of three (3) calendar years after the end of the calendar year in which such sales occurred. Such deCODE Books of Account shall be kept at the principal place of business of deCODE, its Affiliates or its sublicensees, as the case may be. 6.4 Audit Request. A Party ("Auditing Party") or its authorized independent public accountant has the right to engage, at the Auditing Party's - 31 - expense, the other Party's ("Audited Party") independent public accountant to perform, on behalf of the Auditing Party or its independent public accountant, an audit, conducted in accordance with generally accepted auditing standards in the USA, of such Books of Account of the Audited Party, its Affiliates and sublicensees that are deemed necessary by the Audited Party's independent public accountants to report on Adjusted Gross Sales, Net Sales and Sublicensing Income of the Alliance Disease Products or Deselected Disease Products, as the case may be, for the period or periods requested by the Auditing Party. Results of any such examination shall be made available to both Parties. The Auditing Party or its authorized independent public accountant shall have the right to review the reports prepared by the Audited Party's independent public accountant and make inquiries of the Audited Party's independent public accountant regarding such reports. Such audit shall not be performed more frequently than once per calendar year nor more frequently than once with respect to Books of Account covering any specific period of time, upon at least thirty (30) working days' prior written notice, and shall be conducted during regular business hours in such a manner as to not unnecessarily interfere with the Audited Party's normal business activities. All Books of Account referred to under this Section shall be used only for the purpose of verifying royalty statements or compliance with this Agreement and shall be treated by the Auditing Party as Confidential Information hereunder. The failure of the Auditing Party to request verification of any royalty calculation during the period when Books of Account have to be retained shall be considered acceptance of the accuracy of such reporting. In the event that such audit shall indicate that in any calendar year the royalties which should have been paid by the Audited Party are greater than those which were actually paid by the Audited Party, then the Audited Party shall promptly pay the underpaid amount to the Auditing Party and, if the royalties which should have been paid by the Audited Party are at least five - 32 - percent (5%) greater than those which were actually paid by the Audited Party, then the Audited Party shall also reimburse the Auditing Party for the reasonable cost of such audit. In the event that such audit shall indicate that in any calendar year the royalties which were actually paid by the Audited Party are greater than those which should have been paid, then, at the Audited Party's option, the Auditing Party shall promptly reimburse to the Audited Party the overpaid amount or the Audited Party shall deduct the overpaid amount from the next royalty payment to be paid the Auditing Party. 6.5 Taxes. All amounts owing to a Party specified in this Agreement shall be paid by the owing Party net of all applicable taxes, fees, and other charges excluding only taxes on the owing Party's income. In particular, any tax required to be withheld by the owing Party under the laws of any country for the account of the owed Party ("Withholding Taxes"), shall be promptly paid by the owing Party for and on behalf of the owed Party to the appropriate governmental authority, and the owing Party shall furnish the owed Party with proof of payment of such tax. Any such tax actually paid on the owed Party's behalf shall be deducted from royalty payments due the owed Party. The owing Party will reasonably assist the owed Party in minimizing the Withholding Taxes applicable to any payment made by the owing Party and in claiming tax refund at the owed Party's request. 6.6 Blocked Currency. In each country where the local currency is blocked by applicable law and cannot be removed from such country, royalties accrued in that country shall be paid in such country in local currency by deposit in a local bank designated by the Party entitled to such payment. 6.7 Interest on Late Payments. Any payment under this Agreement that is not paid on or before the date such payment is due shall bear interest, to the extent permitted by applicable law, at the rate of one-month London Interbank Offered Rate (=LIBOR) as reported on page BBA Reuters at 11:00 a.m. London time on the day such payment is due, plus two percent (2%), calculated for the number of days such a payment is overdue. - 33 - 6.8 Mechanism for Adjustment to Royalties. For the first calendar quarter of each calendar year during the term of this Agreement, a Party ("Paying Party") shall be entitled to deduct from the royalties owed to the other Party for that quarter any reductions, deductions or credits on royalties allowed under this Agreement during the previous calendar year provided the Paying Party did not otherwise previously take such reductions or credits. In the event that any reductions, deductions or credits otherwise allowable to the Paying Party in the last calendar year during the term of the Agreement have not been fully utilized by the Paying Party upon the expiration of this Agreement, then the other Party shall reimburse the Paying Party for the allowable amount. 7. ALLIANCE RESEARCH PROGRAM 7.1 Diseases. (a) Alliance Diseases. Roche shall designate four (4) Subject Diseases to become the initial Active Alliance Diseases. The initial Alliance Diseases are set forth in Exhibit A. During the Program Term there shall be at all times no more than four (4) Active Alliance Diseases. The parties recognize the possibility that after February 1, 2004 there may be no Active Alliance Diseases, in which case the Program Term shall end. Each Active Alliance Disease shall be the subject of a separate and independent Research Plan. In the event Roche gives deCODE written notice of its desire to increase the number of Active Alliance Diseases beyond four (4), the Parties shall enter into good faith negotiations regarding the terms and conditions upon which any such additional Active Alliance Diseases shall be added to this Agreement. If at any time, deCODE identifies a Third Party as a potential partner for any Alliance Disease or otherwise wishes to independently develop Technical Information necessary or useful to make, have made, use, offer for sale, sell or import Alliance Disease Products, then deCODE may request that Roche elect to have such Alliance Disease become a Deselected - 34 - Disease, which Roche may decline at its sole discretion and for any reason whatsoever. (b) Pool Diseases. Roche shall designate [**] Subject Diseases to become the initial Pool Diseases. The initial Pool Diseases are set forth in Exhibit A. During the period commencing on February 1, 2002 and ending February 1, 2003 there shall be at all times up to [**] Pool Diseases as selected by Roche. During the period commencing on February 1, 2003 and ending February 1, 2004 there shall be at all times up to [**] Pool Diseases as selected by Roche. After February 1, 2004, there shall be [**] Pool Diseases. In the event deCODE wishes to obtain a Third Party licensee for a Pool Disease prior to such disease becoming a Deselected Disease, deCODE shall provide to Roche written notice of such intention. Roche will have thirty (30) days from such notice to determine whether it is interested in selecting such Pool Disease to become an Active Alliance Disease, provided that Roche may not have more than four (4) Active Alliances Diseases at any one time (which means that Roche may need to designate an existing Active Alliance Disease as a Successful Disease, a Pool Disease or a Deselected Disease to make room to move a Pool Disease to an Active Alliance Disease). If Roche does so, then the Joint Steering Committee will develop a Research Plan for, and reallocate FTE's to support such, new Alliance Research Program. If Roche does not do so, deCODE shall promptly make to Roche a one-time [**] Dollar payment. Upon Roche's receipt of such payment, such Pool Disease shall become a Deselected Disease and, with respect to such disease, the Parties shall have all of the rights and obligations as set forth for Deselected Diseases. (c) Deselected Diseases. As set forth on Exhibit B, Roche has designated three (3) Subject Diseases to be initial Deselected Diseases. On or about December 1, 2002, Roche shall designate a sufficient number of Subject Diseases to become Deselected Diseases such that for the period from February 1, 2003 until February 1, 2004 no more than [**]Subject Diseases are either Alliance Diseases or Pool Diseases. On or about - 35 - December 1, 2003, Roche shall designate a sufficient number of Subject Diseases to become Deselected Diseases such that for the period from February 1, 2004 until the end of the Alliance Disease Program Term no more than [**] Subject Diseases are Alliance Diseases. (d) Research Plans. The Steering Committee will discuss and prepare the first Research Plan for each initial Active Alliance Disease, on or prior to thirty (30) days after the Effective Date. Before the end of the first Research Plan for a given Active Alliance Disease, the Steering Committee will formulate a proposed updated Research Plan for the remainder of the Program Term. Each iteration of the Research Plan for a given Active Alliance Disease shall be signed and dated by a representative of each Party on the Steering Committee. Each Research Plan may be amended from time to time upon Steering Committee approval. Any such amendment shall be signed and dated by a representative of each Party on the Steering Committee. The Parties shall conduct, at their cost except as otherwise provided herein, those activities that are assigned in each Research Plan for each Active Alliance Disease. The Steering Committee shall oversee the activities of each Party in the conduct of each Research Plan. 7.2 Switching and Adding Diseases (a) Selecting New Alliance Diseases. If at any time during the Program Term there are less than [**], and if desired by Roche, then (i) Roche may select a Pool Disease to become an Active Alliance Disease or (ii) Roche may request in writing that the Parties discuss the selection of a disease other than a Pool Disease to be an Active Alliance Disease. In the event that Roche selects a Pool Disease or the Parties agree to include a disease other than a Pool Disease as an Active Alliance Disease, such disease shall be deemed an Active Alliance Disease. The Steering Committee shall, within sixty (60) days thereafter, discuss, prepare and finalize a Research Plan for the new Active Alliance Disease. The Parties shall, within thirty (30) days of finalization by the Steering Committee of such Research Plan, commence - 36 - activities for the new Active Alliance Disease as described in the Research Plan. Nothing in this Section 7.2(a) shall obligate deCODE to agree to include any disease other than a Pool Disease as an Active Alliance Disease. Roche shall select for new Active Alliance Diseases based on the following priority: Roche shall select new Active Alliance Diseases first from the Pool Diseases, second from diseases other than Pool Diseases actively pursued by deCODE provided deCODE has the right to license or otherwise make available such disease to Roche, which selection shall be subject to the consent of deCODE, and third from diseases not actively pursued by deCODE provided deCODE has the right to license or otherwise make available such disease to Roche, which selection shall be subject to the consent of deCODE. (b) Adding New Pool Diseases. If at any time during the first year of the Program Term there are less than [**] Pool Diseases or during the second year of the Program Term there are less than [**] Pool Diseases, then Roche may request in writing that an Active Alliance Disease become a Pool Disease or that the Parties discuss the selection of a new disease to become a Pool Disease. In the event that Roche requests an Active Alliance Disease be a Pool Disease or the Parties agree to include a new disease as a Pool Disease, such disease shall be deemed a Pool Disease. Nothing in this Section 7.2(b) shall obligate deCODE to agree to include any new disease as a Pool Disease. (c) Making an Alliance Disease or Pool Disease a Deselected Disease. Roche may, for any reason and at any time during the Program Term, designate an Alliance Disease or Pool Disease to be a Deselected Disease by giving deCODE written notice of such designation ("Deselection Notice"). In such event the date that such human disease becomes a Deselected Disease shall be the date Roche provides such Deselection Notice. In addition, at deCODE's request, within sixty (60) days after the date of such designation, Roche shall transmit to deCODE all reports, information and data in the possession or control of Roche or its - 37 - Affiliate for such designated Disease generated or developed as a result of the associated Alliance Disease Program. 7.3 deCODE Support. During the Alliance Disease Program Term, deCODE shall allocate such FTE's and supplies, at the FTE Rate, as decided by the Steering Committee in the Research Plans. The Parties acknowledge that deCODE's utilization of FTE's and supplies of deCODE during the course of the Alliance Disease Programs may fluctuate during the Program Term and that deCODE's obligation to allocate FTE's and supplies to a given Alliance Disease as provided by the Steering Committee, and satisfaction of such obligation, will be based on such allocation calculated over the course of a given year of the Program Term. 7.4 Funding by Roche. Roche shall pay deCODE the following amounts, which shall be due and payable as follows: (1) [**] dollars (USD $[**]), due on February 1, 2002 and payable within thirty (30) days after receipt by Roche of an invoice for such sum; (2) [**] dollars (USD $[**]), due on May 1, 2002 and payable within thirty (30) days after receipt by Roche of an invoice for such sum; (3) [**] dollars (USD $[**]), due on August 1, 2002 and payable within thirty (30) days after receipt by Roche of an invoice for such sum; (4) [**] dollars (USD $[**]), due on November 1, 2002 and payable within thirty (30) days after receipt by Roche of an invoice for such sum; (5) [**] dollars (USD $[**]), due on February 1, 2003 and payable within thirty (30) days after receipt by Roche of an invoice for such sum; - 38 - (6) [**] dollars (USD $[**]), due on May 1, 2003 and payable within thirty (30) days after receipt by Roche of an invoice for such sum; (7) [**] dollars (USD $[**]), due on August 1, 2003 and payable within thirty (30) days after receipt by Roche of an invoice for such sum; (8) [**] dollars (USD $[**]), due on November 1, 2003 and payable within thirty (30) days after receipt by Roche of an invoice for such sum; (9) [**] dollars (USD $[**]) for each Alliance Disease Program in effect on February 1, 2004, due on February 1, 2004 and payable within thirty (30) days after receipt by Roche of an invoice for such sum; (10) [**] dollars (USD $[**]) for each Alliance Disease Program in effect on May 1, 2004, due on May 1, 2004 and payable within thirty (30) days after receipt by Roche of an invoice for such sum; (11) [**] dollars (USD $[**]) for each Alliance Disease Program in effect on August 1, 2004, due on August 1, 2004 and payable within thirty (30) days after receipt by Roche of an invoice for such sum; and (12) [**] dollars (USD $[**]) for each Alliance Disease Program in effect on November 1, 2004, due on - 39 - November 1, 2004 and payable within thirty (30) days after receipt by Roche of an invoice for such sum. Payments for additional years when an Alliance Disease Program is in effect are to be decided by the Parties if such situation arises. (b) Use of Funds. deCODE will use funding provided under this Section of the Agreement only in support of the Alliance Disease Programs. deCODE will not use any Third Party funding in direct support of the Alliance Disease Programs. The use of any Third Party funding by deCODE in indirect support of the Alliance Disease Programs shall not adversely impact Roche's rights and licenses under this Agreement. (c) Other Expenses. Except as provided in this Section, each Party shall be responsible for its own costs and expenses related to the Alliance Disease Programs. (d) Method of Payment. Payments under this Section from Roche to deCODE shall be made by Roche to deCODE by wire transfer as instructed to Roche in writing by deCODE. 7.5 Roche Review Right. (a) Within thirty (30) days following the end of each quarter of the Program Term, deCODE shall prepare and submit to Roche a statement setting forth for each Alliance Disease the number of deCODE scientists who actually worked on such Alliance Disease during the previous quarter and the portion of a full time equivalent scientific person year of scientific work on or in direct connection with the Alliance Disease that each such deCODE scientist worked on such Alliance Disease. (b) deCODE shall keep full, true and accurate books of account containing all information necessary to determine the correctness of the number of deCODE scientists who actually worked on any Alliance Disease during any period of the Program Term, and the portion of an FTE of scientific - 40 - work on or in direct connection with the Alliance Disease that each such deCODE scientist worked on any such Alliance Disease, and the total cost of such work based on the FTE Rate. Such books of account shall be kept at deCODE 's principal place of business. Not more than once per contract year during the Program Term, Roche or its authorized independent public accountant shall have the right to engage deCODE's independent public accountant, at reasonable times and upon reasonable notice, to examine on deCODE's premises, such records of deCODE. Results of any such examination shall be made available to both Parties. Roche shall bear the cost of such audit, unless such audit indicates an overstatement of (i) the number of FTE's that worked on any Alliance Disease or (ii) the portion of a full time equivalent scientific person year of scientific work on or in direct connection with the Alliance Disease that each such deCODE scientist worked on any such Alliance Disease, by five percent (5%) or more, in which event deCODE shall bear the costs of such audit. 7.6 Conduct. Each Party shall for each Alliance Disease: (i) conduct activities for such Alliance Disease as described in the Research Plan for such Alliance Disease; (ii) use reasonable diligence to (1) perform the activities assigned to such Party under the Research Plan for such Alliance Disease and (2) complete such activities on a timely basis; (iii) conduct such Research Plan in good scientific manner, and in compliance in all material respects with all requirements of applicable laws, rules and regulations, and all other requirements of any applicable good laboratory practices to attempt to achieve its objectives efficiently and expeditiously; (iv) no later than fourteen (14) days prior to each Steering Committee meeting during the Program Term, furnish the other Party with written reports summarizing (1) all scientific work performed by such Party and (2) Program Know-How developed by such Party (including without - 41 - limitation a summary of Inventions and results and data generated) in the conduct of the Alliance Disease Programs, each to the extent not already summarized in a prior report; (v) as requested by the Steering Committee for a given Alliance Disease, furnish to the other Party a detailed written report relating to (1) all scientific work performed by such Party and (2) Program Know-How developed by such Party (including without limitation a summary of Inventions and results and data generated), in the conduct of the Alliance Disease Program for such Alliance Disease; (vi) promptly disclose Inventions to the other Party; and (vii) during the Program Term, allow Representatives of the other Party, during normal business hours and with reasonable frequency, to visit the offices and laboratories of such Party, and consult informally, during such visits or by telephone, with such Party's Representatives performing scientific work on or in direct connection with Alliance Diseases; provided, however, that (1) such Representatives of the other Party are under an agreement binding such Representatives to protect Confidential Information to at least the same extent or greater as is required of such other Party under this Agreement and (2) the Party allowing any such visit approves in writing prior to such visit the other Party's Representatives, which approval shall not be unreasonably withheld. Any such visit shall not unreasonably interrupt the operations of the Party that is visited. 7.7 Records. (a) During the Program Term and for each Alliance Disease, deCODE and Roche each shall maintain records in sufficient detail and in such good scientific manner as to, in all material aspects, completely and accurately reflect all scientific work performed and results achieved (including all Inventions and results and data generated). Such records shall be maintained in separate, bound laboratory notebooks for each Alliance - 42 - Disease. The Parties shall maintain such records in a form required under all applicable laws and regulations of the Major Countries. (b) During the Program Term and for each Alliance Disease, deCODE and Roche each shall have the right, during normal business hours and upon reasonable notice, and subject to such reasonable procedures as the other Party may require, to inspect all such records of the other Party relating to the Alliance Disease Program for a given Alliance Disease. deCODE and Roche each shall maintain such records of the other Party contained therein as Confidential Information in accordance with this Agreement and shall not use such records except to the extent otherwise permitted by this Agreement. 7.8 Alliance Disease Research Term. (a) Program Term. The Parties shall conduct the Alliance Disease Programs during the Program Term. The Alliance Disease Program shall terminate prior to February 1, 2005 upon the mutual agreement of the Parties, or as otherwise specifically provided in this Agreement. (b) Extension of Program Term.The Program Term may be extended beyond February 1, 2005 for further renewable periods of one (1) year upon mutual agreement of the Parties. In the event that a Party wishes such an extension, it shall so notify the other Party in writing no later than six (6) months prior to expiration of the Program Term. The amount of funding to be provided by Roche during such extension shall remain unchanged. Such extensions shall be deemed to be included in the Program Term for all purposes under this Agreement. Nothing in this Section 7.8(b) shall obligate either Party to agree to any such extension. 8. STEERING COMMITTEE 8.1 Members. The Parties shall establish a Steering Committee that shall consist of six (6) members, three (3) members from each Party. The initial members of the Steering Committee are set forth on Exhibit D. - 43 - During the Program Term, two (2) members from each Party must be both (i) a member of senior management and (ii) a scientist. Members of the Steering Committee may be represented at any meeting by a designee appointed by such member for such meeting. The chairperson during the initial contract year of the Program Term shall selected by deCODE. Thereafter, during the term of this Agreement, the chairperson of the Steering Committee for a given contract year shall be selected within thirty (30) days of the beginning of such given contract year on an alternating basis between the Parties, and shall serve as chairperson during such given contract year. The secretary during the initial contract year of the Program Term shall be selected by Roche. Thereafter, during the term of this Agreement, the secretary of the Steering Committee for a given contract year shall be selected within thirty (30) days of the beginning of such given contract year on an alternating basis between the Parties, and shall serve as secretary during such given contract year. Each Party shall be free to change its members, on prior written notice to the other Party. Each Party may, in its discretion, invite non-Committee Representatives of such Party, provided that each Party approves the other Party's invitee(s) in advance. 8.2 Responsibilities. The Steering Committee shall: (a) oversee the activities of each Party in the conduct of each Research Plan; (b) oversee the exchange of Technical Information by the Parties in the conduct of the Alliance Disease Programs. (c) discuss and prepare the first Research Plans for each Active Alliance Disease and updates thereof, as provided herein, and sign and date the same; (d) decide upon approval of proposed amendments or modifications to any Research Plan, and sign and date the same; (e) discuss, prepare and finalize a Research Plan for any new Active Alliance Disease; - 44 - (f) during the Program Term, decide upon the allocation of FTE's and supplies to the Alliance Disease Programs; (g) for a given Active Alliance Disease, review written reports furnished under Section 7.6(iv) detailing all scientific work performed and Program Know-How developed in the conduct of the Alliance Disease Programs; (h) decide, for a given disease, whether a given Gene prior to the Effective Date or in the conduct of an Alliance Disease Program for such disease, was confirmed to play a role in the pathogenesis of such disease; (i) determine Target Assessment of Genes from time to time; (j) decide which Alliance Disease Compounds, in the conduct of an Alliance Disease Program, are to be subjected to (1) formal toxicology in more than one non-human animal species, (2) absorption, distribution, metabolism and excretion testing in at least one non-human animal species, and (3) a scale-up strategy for synthesis; (k) decide if there is a need for plasma samples to be provided by deCODE to Roche and, if so, the number of plasma samples reasonably required for the Alliance Disease Programs; (l) from time to time, if necessary, adjust the fee for plasma samples to reflect the actual cost and expenses incurred by deCODE in connection with providing such plasma samples to Roche; (m) decide if there may be a scientific need for cell lines and/or tissue samples for each Alliance Disease Program and, if so, determine from time to time the number of cell lines and/or tissue samples reasonably required for each Alliance Disease Program, which shall - 45 - not be more than from ten (10) Participants with a given Alliance Disease and ten (10) Participants acting as control subjects with respect to the given Alliance Disease; (n) if cell lines and/or tissue samples are determined to be required for an Alliance Disease Program by the Steering Committee, determine the amount Roche shall reimburse to deCODE for each such cell line and/or tissue sample provided to Roche, which amount shall equal all reasonable out-of-pocket costs and expenses actually incurred by deCODE in connection with providing such cell lines and tissue samples to Roche; (o) monitor (but not oversee or approve any aspect of) the progress of research regarding Pool Diseases; and (p) as and when necessary for the purposes of this Agreement, decide whether a gene is another member of a Biological Pathway of which a Gene is a member, based on documented evidence that work on that gene was derived from the discovery of the Gene. 8.3 Meetings. During the Program Term and until one (1) year after the end of the Program Term the Steering Committee shall meet at least once every contract quarter, and more frequently as the Parties deem appropriate, on such dates, places and at such times as the Parties shall agree. Thereafter, during the term of this Agreement, the Steering Committee shall meet on an as needed basis on such dates, places and at such times as the Parties shall agree. The meetings shall alternate between the offices of the Parties unless the Parties otherwise agree. The Steering Committee may convene or be polled or consulted from time to time by means of telecommunications, video conference or correspondence, as deemed necessary or appropriate; provided, however, that the Steering Committee meet in person at least once every contract quarter during the Program Term and until one (1) year after the end of the Program Term. - 46 - 8.4 Decisions. (a) The Steering Committee may decide on any subject matter that is subject to the Steering Committee decision-making authority. All decisions of the Steering Committee shall be made by consensus of the members (or their designees) present at any meeting. Such consensus shall require that at least two (2) members of each Party are present at such meeting. (b) In the event that consensus cannot be reached by the Steering Committee after good faith discussions with respect to a matter that is subject to its decision-making authority, then the matter shall be referred for further review and resolution by the Executive Officers. The Executive Officers of each Party shall use reasonable efforts to resolve the matter within thirty (30) days after the matter is referred to them. If the Executive Officer cannot resolve the matter within thirty (30) days, then: (i) if the matter pertains to relations with Participants, or research sites, consultants, investigators or vendors in Iceland, or any governmental authority in Iceland, the matter shall be decided by the Executive Officer of deCODE in good faith, giving appropriate consideration to the reasonable business and scientific concerns of Roche; and (ii) if the matter does not relate to Sections 8.2 (c), (d), (e), (f), (h), (i), (k), (l) and/or (p) (the "Sensitive Matters"), the matter shall be decided by the Executive Officer of Roche in good faith, giving appropriate and due consideration to the reasonable business and scientific concerns of deCODE. (c) If any dispute regarding any Sensitive Matter is not resolved by the Executive Officers (or their designees) within thirty (30) business days after an issue is referred to them, or such longer period as the Executive Officers (or their respective designees) may collectively agree, then any Party shall have the right to refer such dispute regarding such Sensitive Matter to an Expert for expedited arbitration as set forth in subparagraphs (i) through (iii) below. (i) Upon written request by either Party to the other Party, the Parties shall promptly negotiate in good - 47 - faith to appoint a mutually acceptable disinterested, conflict-free individual not affiliated with any Party, with scientific, technical and regulatory experience with respect to the development of products that share many of the same characteristics of Alliance Disease Products necessary to resolve such dispute regarding a Sensitive Matter (an "Expert"). If the Parties are not able to agree within five (5) business days after the receipt by a Party of the written request in the immediately preceding sentence, the American Arbitration Association shall be responsible for selecting an Expert within ten (10) business days of being approached by a Party. The fees and costs of the Expert and the American Arbitration Association, if applicable, shall be shared equally by the Parties. (ii) Within five (5) business days after the designation of the Expert, the Parties shall each simultaneously submit to the Expert and one another a written statement of their respective positions on such disagreement. Each Party shall have fifteen (15) business days from receipt of any other Party's submission to submit to the Expert and the other Party a written response thereto, which shall include any scientific and technical information in support thereof. The Expert shall have the right to meet with the Parties, either alone or together, as necessary to make a determination. (iii) No later than thirty (30) business days after the designation of the Expert, the Expert shall make a determination by selecting the resolution proposed by one of the Parties that the Expert deems as a whole to be the most fair and reasonable to the Parties in light of the totality of the circumstances. The Expert shall provide - 48 - the Parties with a written statement setting forth the basis of the determination in connection therewith. The decision of the Expert shall be final and conclusive. (d) No decision, either by the Steering Committee, an Executive Officer or an Expert, on any matter that is subject to the Steering Committee's decision-making authority, may have the effect of materially increasing the economic burdens or responsibilities of a Party under this Agreement without the prior written approval of such Party. 8.5 Minutes. Promptly after each Steering Committee meeting, the secretary of the Steering Committee shall prepare and distribute to the chairperson draft minutes of the meeting, which shall provide a description in reasonable detail of the discussions had at the meeting and a list of actions, decision or determinations approved by the Steering Committee and a list of issues to be resolved by the Executive Officers. The chairperson may then comment on the draft minutes. The secretary shall discuss with the chairperson any comments of the chairperson and circulate a final draft of the minutes to all members of the Steering Committee within ten (10) days of the meeting. The members of the Steering Committee shall then have ten (10) days after circulation of the final draft minutes to provide their comments thereon to the secretary of the Steering Committee. If a member of the Steering Committee does not comment to the secretary on the draft minutes within the ten (10) day period after circulation, said member is deemed to have agreed to the final draft minutes. Upon the expiration of the ten (10) day period after circulation, the secretary and the chairperson of the Steering Committee shall have an additional seven (7) days to discuss the other members' comments and finalize the minutes. The secretary and chairperson shall each sign the final minutes. The signature of the chairperson and the secretary on the final minutes shall indicate each Party's assent to the minutes. With the sole exception of specific items of the meeting minutes to which the chairperson and the secretary cannot agree and which are escalated as provided below, final minutes of all Steering Committee meetings shall be finalized no later than twenty seven (27) days after the meeting to which the minutes pertain. If at any time during the preparation - 49 - and finalization of the Steering Committee meeting minutes the secretary and the chairperson of the committee do not agree on any issue with respect to the minutes, this issue shall be resolved by the escalation process provided in Section 9.4(b). The decision resulting from the escalation process shall be recorded by the secretary of the Steering Committee in an amended finalized minutes for said meeting. All other issues in the minutes which are not subject to such escalation shall be finalized within the above-mention twenty seven (27) days. 8.6 Expenses. Each Party shall be responsible for all travel and related costs and expenses for its members and non-Committee invitees to attend meetings of, and otherwise participate on, the Steering Committee. 9. MATERIAL TRANSFER 9.1 Plasma Samples. deCODE shall (i) harvest plasma samples from Participants and (ii) preserve such harvested plasma samples. The Steering Committee shall determine if there is a scientific need for plasma samples to be provided by deCODE to ROCHE and, if so, the number of plasma samples reasonably required from each Alliance Disease Program. If the Steering Committee determines that there is a scientific need for plasma samples to be provided by deCODE to ROCHE, deCODE shall provide to Roche one five milliliter (5 ml) sample of Citrate-plasma and one five milliliter (5 ml) sample of EDTA-plasma from such number of Participants as the Steering Committee determines is reasonably required for the Alliance Disease Program. Upon receipt of both one five milliliter (5 ml) sample of Citrate-plasma and one five milliliter (5 ml) sample of EDTA-plasma from a Participant, Roche shall pay deCODE a fee of fifty dollars ($50) within thirty (30) days after receipt of an invoice from deCODE. Such fee shall be subject to adjustment from time to time by the Steering Committee to reflect the actual costs and expenses incurred by deCODE in connection with providing such plasma samples. 9.2 Cell Lines and Tissue Samples. If the Steering Committee determines that there may be a scientific need for cell lines and/or tissue samples for any Alliance Disease Program, deCODE shall use reasonable efforts to harvest - 50 - and preserve both cell lines and/or tissue samples from ten (10) Participants with such Alliance Disease and ten (10) Participants acting as control subjects with respect to such Alliance Disease. At the request of the Steering Committee, deCODE shall provide Roche, as they become available, with cell lines and/or tissue samples from such number of Participants with such Alliance Disease and such number of Participants acting as control subjects with respect to such Alliance Disease as requested by the Steering Committee. Roche shall reimburse deCODE for cell lines and/or tissue samples provided by deCODE to Roche, at the fee therefor determined by the Steering Committee, within thirty (30) days after receipt by Roche of an invoice from deCODE. 9.3 Biological Materials Transfer. (a) For any Biological Material, deCODE shall provide Roche with all related deCODE Know-How and shall inform Roche of any hazards or precautions which need to be taken with respect to the Biological Material that deCODE is aware of, or becomes aware of, during the term of this Agreement. deCODE shall properly label, package, and transport the Biological Material in accordance with all applicable laws and regulations and as reasonably requested by Roche. Nothing herein shall be construed as giving Roche any title or ownership to any Biological Materials. Roche may not use any Biological Material except in the conduct of an Alliance Disease Program without the prior written consent of deCODE. Roche shall not supply any Biological Material to any Third Party, other than Collaborators, without the prior written consent of deCODE. In no event shall Roche use any Biological Materials to harvest DNA. Upon deCODE's written request during the Program Term or one (1) year thereafter, Roche shall destroy all unused Biological Materials. (b) THE BIOLOGICAL MATERIALS ARE PROVIDED "AS IS" AND WITHOUT ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR ANY PARTICULAR PURPOSE OR ANY WARRANTY THAT THE USE OF THE BIOLOGICAL - 51 - MATERIALS WILL NOT INFRINGE OR VIOLATE ANY PATENT OR OTHER PROPRIETARY RIGHTS OF ANY THIRD PARTY. 10. OWNERSHIP; PATENTS. 10.1 Ownership. (a) Technical Information. Except as otherwise provided in this Agreement, this Agreement does not grant either Party any rights in or to Technical Information, or any Patents related thereto, owned or controlled by the other Party. (b) Inventions. deCODE shall solely own deCODE Inventions and resulting Patents. Roche shall solely own Roche Inventions and resulting Patents. The Parties shall jointly own Joint Inventions and resulting Patents. The determination of inventorship shall be made in accordance with the patent laws of the relevant countries of the Territory. 10.2 Patent Filing, Maintenance and Prosecution Regarding Inventions. (a) Disclosure. As soon as a Party concludes that an Invention has been made, it shall promptly inform the Steering Committee, and provide a summary of the Invention. Should a Party be faced with a possible loss of rights in a Major Country, such communication may take place promptly after filing a priority patent application for the Invention. (b) Filing. (i) deCODE Inventions and Roche Inventions. For deCODE Inventions and Roche Inventions, the Party owning the Invention shall have the first right of election to prepare and file a priority patent application for the Invention, at its own cost. Should the Party owning the Invention elect not to prepare and/or file any such patent application, it shall (i) provide the other Party with written notice as soon as reasonably possible after making such election but in any event no later than sixty (60) days before the other Party - 52 - would be faced with a possible loss of rights in a Major Country, (ii) give the other Party the right, at the other Party's election and sole expense, to prepare and file the priority application, and (iii) offer reasonable assistance to the other Party in connection with such preparation and filing at no cost to the other Party except for reimbursement of reasonable out-of-pocket expenses incurred by the Party owning the Invention in rendering such assistance. The filing Party shall perform corresponding foreign filings at its own cost, after having discussed the countries for foreign filings with the non-filing Party within nine (9) months after the priority filing. Should the Parties not agree on the countries for foreign filings, either Party will have the right to file the subject of the priority application in the name of both Parties in any country of its own choice at its own cost in any country where the Parties do not agree as to filing. (ii) Joint Inventions. For Joint Inventions, the Parties shall consult and agree upon (i) which Party shall have the first right of election to prepare and file a priority patent application for the Joint Invention, in the name of both Parties, and (ii) sharing of costs. The Party having the first right of election may elect to prepare and file any such patent application at its own cost. Notwithstanding anything to the contrary, if the Parties agreed to share costs, the non-filing Party shall reimburse the filing Party in an amount equal to one-half of the reasonable out-of-pocket expenses incurred by the filing Party in preparing and filing such patent application, within thirty (30) days after receipt of an itemized invoice from the filing Party. Should the Party having the first right of election elect not to prepare and/or file any such patent application, it shall (i) provide the other Party with written notice as soon as reasonably possible after making such election but in any event no later than sixty (60) days before the other Party would be faced with a possible loss of rights in a Major Country, (ii) give the other Party the right, at the other Party's election and sole expense, to prepare and file the priority application in the name of both Parties, and (iii) - 53 - offer reasonable assistance to the other Party in connection with such preparation and filing at no cost to the other Party except for reimbursement of reasonable out-of-pocket expenses incurred by the Party owning the Invention in rendering such assistance. The filing Party shall perform corresponding foreign filings, at its own cost and in the name of both Parties, after having discussed the countries for foreign filings with the non-filing Party within nine (9) months after the priority filing. Notwithstanding anything to the contrary, for corresponding foreign filings filed in agreed upon countries, if the Parties agreed to share costs, the non-filing Party shall reimburse the filing Party in an amount equal to one-half of the reasonable out-of-pocket expenses incurred by the filing Party in preparing and filing such corresponding foreign filings, within thirty (30) days after receipt of an itemized invoice from the filing Party. Should the Parties not agree on the countries for foreign filings, either Party will have the right to file the subject of the priority application in the name of both Parties in any country of its own choice at its own cost in any country where the Parties do not agree as to filing. (c) Prosecution and Maintenance. (i) deCODE Inventions and Roche Inventions. The filing Party shall prosecute and reasonably maintain applications filed under Section 10.2(b)(i) and patents resulting therefrom at its own expense. On request of the filing Party, the non-filing Party will cooperate in all reasonable ways in connection with the prosecution and maintenance of such applications and patents resulting therefrom, at the expense of the filing Party for all out-of-pocket expenses incurred by the non-filing Party as a result of such cooperation. Upon written request, the filing Party shall inform the non-filing Party of the issuance of such patent application, initiation of an appeal of a rejection of such patent application, or initiation of an interference involving or an opposition to any such patent application or patent resulting therefrom. The filing Party shall provide the non-filing Party, upon the non-filing Party's written request, with copies of substantive communications to and from patent offices regarding such patent applications and patents resulting therefrom in - 54 - sufficient time before the due date for response in order to give the non-filing Party an opportunity to comment on the content thereof. Should the filing Party no longer wish to prosecute and/or maintain any such patent application or patent resulting therefrom, the filing Party shall (i) provide the non-filing Party with written notice of its wish no later than sixty (60) days before the patent or patent application would otherwise become abandoned, (ii) give the non-filing Party the right, at the non-filing Party's election and sole expense (subject to the credit set forth below), to prosecute and/or maintain such patent or patent application, and (iii) offer reasonable assistance to the non-filing Party in connection with such prosecution and/or maintenance at no cost to the non-filing Party except for reimbursement of the filing Party's reasonable out-of-pocket expenses incurred by the filing Party in rendering such assistance. The non-filing Party shall be entitled to recoup one hundred percent (100%) of such Party's documented reasonable out-of-pocket expenses incurred to prosecute and/or maintain such patents and/or patent applications by taking a credit against any royalty payment otherwise due, as shown on the Net Sales statement provided under Section 6.1, up to a maximum credit, when combined with the credit provided pursuant to Section 10.2(c)(ii), in any given calendar quarter equal to twenty-five percent (25%) of such royalty payments otherwise due, until such amount has been fully credited. (ii) Joint Inventions. The filing Party shall prosecute and reasonably maintain applications filed under Section 10.2(b)(ii) and patents resulting therefrom. For a given patent application filed under Section 10.2(b)(ii), should the non-filing Party have had an obligation under Section 10.2(b)(ii) to reimburse the filing Party in an amount equal to one-half of the reasonable out-of-pocket expenses incurred by the filing Party in preparing and filing such patent application, then the non-filing Party shall reimburse the filing Party in an amount equal to one-half of the reasonable out-of-pocket expenses incurred by the filing Party in prosecuting and maintaining such application and patents resulting therefrom, within thirty (30) days after receipt of an - 55 - itemized invoice from the filing Party. For a given patent application filed under Section 10.2(b)(ii), should the non-filing Party have had no obligation under Section 10.2(b)(ii) to reimburse the filing Party in an amount equal to one-half of the reasonable out-of-pocket expenses incurred by the filing Party in preparing and filing such patent application, then the filing Party shall prosecute and reasonably maintain such application and patents resulting therefrom at its own cost. On request of the filing Party, the non-filing Party will cooperate in all reasonable ways in connection with the prosecution and maintenance of such applications and patents resulting therefrom, at the expense of the filing Party for all out-of-pocket expenses incurred by the non-filing Party as a result of such cooperation. Upon written request, the filing Party shall inform the non-filing Party of the issuance of such patent application, initiation of an appeal of a rejection of such patent application, or initiation of an interference involving or an opposition to any such patent application or patent resulting therefrom. The filing Party shall provide the non-filing Party, upon the non-filing Party's written request, with copies of substantive communications to and from patent offices regarding such patent applications and patents resulting therefrom in sufficient time before the due date for response in order to give the non-filing Party an opportunity to comment on the content thereof. Should the filing Party no longer wish to prosecute and/or maintain any such patent application or patent resulting therefrom, the filing Party shall (i) provide the non-filing Party with written notice of its wish no later than sixty (60) days before the patent or patent application would otherwise become abandoned, (ii) give the non-filing Party the right, at the non-filing Party's election and sole expense (subject to the credit set forth below), to prosecute and/or maintain such patent or patent application, and (iii) offer reasonable assistance to the non-filing Party in connection with such prosecution and/or maintenance at no cost to the non-filing Party except for reimbursement of the filing Party's reasonable out-of-pocket expenses incurred by the filing Party in rendering such assistance. The non-filing Party shall be entitled to recoup the percentage of such Party's documented reasonable out-of-pocket expenses incurred to prosecute and/or maintain - 56 - such patents and/or patent applications as the filing Party had agreed was its share of costs relating thereto pursuant to the first paragraph of Section 10.2(b)(ii). Such amount shall be recouped by the non-filing Party by taking a credit against any royalty payment otherwise due, as shown on the Net Sales statement provided under Section 6.1, up to a maximum credit, when combined with the credit provided pursuant to Section 10.2(c)(i), in any given calendar quarter equal to twenty-five percent (25%) of such royalty payments otherwise due, until such amount has been fully credited. 11. PATENT ENFORCEMENT AND INFRINGEMENT. 11.1 Patent Enforcement. (a) Notice. Each Party shall promptly provide written notice to the other Party during the term of this Agreement of any (i) known infringement or suspected infringement of a Alliance Research Program Patent, (ii) institution by a Third Party of a proceeding for the purpose of revoking or holding unpatentable, invalid or unenforceable a claim of a Alliance Research Program Patent, or (iii) unauthorized use or misappropriation of any Alliance Research Program Know-How by a Third Party of which it becomes aware. (b) Responsible Party. For Alliance Research Program Patents and Alliance Research Program Know-How solely owned by a Party, the Party owning such Patent or such Know-How shall have the first right of election to (i) initiate an infringement suit or (ii) take such appropriate action as is reasonably required to defend against such potential revoking or holding unpatentable, invalid or unenforceable a claim of such Patent, or (iii) take such other appropriate action as is required to restrain or otherwise prevent such known or suspected infringement or unauthorized use or misappropriation ("Responsible Party"). For Alliance Research Program Patents and Alliance Research Program Know-How jointly owned by the Parties, within thirty (30) days after written notice under Section 11.1(a), the Parties shall consult and agree upon which Party shall be the Responsible Party. - 57 - (c) Initiation of Suit or Action. Within a period of one hundred and twenty (120) days after the Responsible Party provides or receives written notice under Section 11.1(a), the Responsible Party, in its sole discretion, shall decide whether or not to (i) initiate an infringement suit, (ii) take such appropriate action as is reasonably required to defend against such potential revoking or holding unpatentable, invalid or unenforceable a claim of a Alliance Research Program Patent, or (iii) take such other appropriate action as is reasonably required to restrain or otherwise prevent such known or suspected infringement or unauthorized use or misappropriation ("Suit or Action", collectively). If, within the one hundred and twenty (120) day period, the Responsible Party advises the other Party of a decision to initiate a Suit or Action, the Responsible Party, at its own cost, shall promptly initiate such Suit or Action and provide written notice to the other Party of such initiation. In the event that the Responsible Party does not advise the other Party within the one hundred and twenty (120) day period a decision to initiate such Suit or Action, or if the Responsible Party advises the other Party within the one hundred and twenty (120) day period a decision not to initiate such Suit or Action, the other Party shall thereafter have the right, at its own cost, to initiate such Suit or Action. The Party initiating the Suit or Action ("Initiating Party") shall provide written notice to the Responsible Party of such initiation. The Initiating Party shall keep the other Party informed of the status of any such Suit or Action and, upon the other Party's written request, shall provide the other Party with copies of all substantive documents filed in, and all substantive communications relating to such Suit or Action. If necessary, the other Party shall join as a party to the Suit or Action but shall be under no obligation to participate except to the extent such participation is required as the result of being named party to the suit or proceeding. At the Initiating Party's written request, the other Party shall offer reasonable assistance to the Initiating Party at no charge except for reimbursement of reasonable out-of-pocket expenses incurred by the other Party in rendering such assistance. - 58 - Reasonable assistance shall include, without limitation, the execution of such legal papers as are reasonably necessary for the prosecution, settlement or compromise of such Suit or Action. Each party shall have the right to be represented in any such Suit or Action by counsel of its own choice at its own expense. (d) Recovery. Any recovery obtained by any Party as a result of any Suit or Action shall be applied first to reimburse each Party for all costs and expenses related to such Suit or Action, and if after such reimbursement any funds shall remain from such recovery, such remaining funds shall be allocated 80% to the Party instituting such Suit or Action, and 20% to the other Party, but in no event shall the other Party be entitled to receive more than the amount such other Party would have received if the infringing Third Party's sales were deemed to be Net Sales under this Agreement. (e) Settlement. Neither Party shall settle or compromise any such Suit or Action in a manner which would restrict the scope or enforceability of any Alliance Research Program Patent or Alliance Research Program Know-How jointly owned by the Parties without the prior written consent of the other Party, which consent shall not be unreasonably withheld. 11.2 Notice of Certification. Notwithstanding anything to the contrary in Section 11.1, for a Alliance Research Program Patent claiming the making, having made, using, offering for sale, selling or importing of a Deselected Disease Product, should either Party receive a certification from a Third Party under the Drug Price Competition and Patent Term Restoration Act of 1984 (Public Law 98-417), as amended, or its comparable law in a country other than the USA, then such Party shall immediately give written notice to the other Party of such certification. The Responsible Party shall have twenty-one (21) days from the date such Party received the certification to initiate suit. In the event the twenty-one (21) day period expires without the Responsible Party having initiated a suit, the other Party shall have the right, but not the obligation, to immediately bring suit against the Third Party that - 59 - filed the certification. If either Party initiates a suit within the forty-five (45) day period, it will immediately notify the other Party. 11.3 Infringement Actions by Third Parties. Each Party shall promptly notify the other Party in the event that a Third Party at any time provides written notice to, or commences an action, suit or proceeding against such Party or such Party's Affiliates or sublicensees accusing infringement of patent rights or unauthorized use or misappropriation of its technology owned or controlled by such Third Party, based on an assertion or claim arising out of (i) Roche's, its Affiliate's or its sublicensees making, having made, using, offering for sale, selling or importing Alliance Disease Products in the Territory, including, without limitation, making, having made, or using of Alliance Research Program Know-How by Roche, its Affiliates or its Collaborators to research and/or develop Alliance Disease Products; (ii) deCODE's, its Affiliate's or its sublicensees making, having made, using, offering for sale, selling or importing Deselected Disease Products in the Territory, including, without limitation, the making, having made, or using of Alliance Research Program Know-How, by deCODE, its Affiliates or its Collaborators to research and/or develop Deselected Disease Products; (iii) either Party's fulfilling its obligations under this Agreement. The accused Party shall defend, settle or compromise such action, suit or proceeding at its own discretion and at its own cost; provided, however, that at the accused Party's written request, the other Party shall offer reasonable assistance to the accused Party at no charge except for reimbursement of reasonable out-of-pocket expenses incurred by the other Party in rendering such assistance. Reasonable assistance shall include, without limitation, the execution of such legal papers as are reasonably necessary for the defense, settlement or compromise of such action, suit or proceeding. Each party shall have the right to be represented in any such action, suit or proceeding by counsel of its own choice at its own expense. 12. INDEMNIFICATION. 12.1 Research Activities. Each Party agrees to indemnify, defend and hold the other Party, its Affiliates and its sublicensees, if any, and their respective - 60 - directors, officers, employees and agents, harmless from and against any and all liabilities, damages, losses, or reasonable costs and expenses (including the reasonable fees of attorneys and other professionals) (collectively "Claims") arising out of the activities of the indemnifying Party in the conduct of the Drug Discovery Research Program, except to the extent such Claims arose out of or resulted from the negligence, recklessness or wrongful intentional acts or omissions of the other Party, its Affiliates, or its sublicensees, if any, and their respective directors, officers, employees and agents. 12.2 Product Liability. deCODE shall indemnify, defend and hold Roche, its Affiliates and their respective directors, officers, employees and agents, harmless from and against any and all Claims arising out of the manufacture, use, distribution or sale of any Deselected Disease Product by deCODE, its Affiliates or its sublicensees due to any negligence, recklessness or wrongful intentional acts or omissions by, or strict liability of, deCODE, its Affiliates or its sublicensees, if any, and their respective directors, officers, employees and agents, except, in each case, to the extent such Claims are due to the negligence, recklessness or wrongful intentional acts or omissions of Roche or its Affiliates or their respective directors, officers, employees and agents. Roche shall indemnify, defend and hold deCODE, its Affiliates and their respective directors, officers, employees and agents, harmless from and against any and all Claims arising out of the manufacture, use, distribution or sale of any Alliance Disease Product by Roche, its Affiliates or its sublicensees due to any negligence, recklessness or wrongful intentional acts or omissions by, or strict liability of, Roche, its Affiliates or its sublicensees, if any, and their respective directors, officers, employees and agents, except, in each case, to the extent such Claims are due to the negligence, recklessness or wrongful intentional acts or omissions of deCODE or its Affiliates or their respective directors, officers, employees and agents. 12.3 Notice. In the event that either Party is seeking indemnification under Section 12.1 or 12.2, such Party shall inform the indemnifying Party of a Claim as soon as reasonably practicable after it receives notice of the Claim, shall - 61 - permit the indemnifying Party to assume direction and control, at its expense, of the defense of the Claim (including the sole right to settle the claim at the sole discretion of the indemnifying Party, provided that such settlement does not impose any material financial obligation on the indemnified Party), and shall cooperate as requested (at the expense of the indemnifying Party) in the defense of the Claim. The indemnified Party may, at its option and expense, be represented in the defense of the Claim by counsel of its own choice. 13. PUBLICATION; NON-DISCLOSURE. 13.1 Publication. (a) Manuscript. Both Parties recognize that each may wish to publish the results of their scientific work relating to the Research Programs. However, both Parties also recognize the importance of acquiring patent protection and of maintaining Confidential Information as proprietary. Consequently, subject to any applicable laws or regulations obligating either Party to do otherwise, any proposed publication or oral presentation by either Party shall comply with this Section 13.1. At least ninety (90) days before a manuscript is to be submitted to a publisher, the publishing Party will provide the chairperson and secretary of the Steering Committee with a copy of the manuscript. If the publishing Party wishes to make an oral presentation, it will provide the other Party ("Reviewing Party") with a copy of the abstract (if one is submitted) at least forty (40) days before it is to be submitted. The publishing Party will also provide to the Reviewing Party a copy of the text of the presentation, including all slides, posters, and any other visual aids, at least forty (40) days before the presentation is made. (b) Review of Manuscript. The Reviewing Party in good faith will review the manuscript, abstract, text or any other material provided under Section 13.1(a) ("Proposed Publication") to determine whether the Proposed Publication (i) contains an Invention for which the Reviewing Party desires patent protection or (ii) could reasonably be expected to have a material adverse effect on the commercial value of any Confidential Information that the Reviewing Party reasonably wishes to have remain proprietary. The - 62 - Reviewing Party will notify (each, a "Withdrawal Notice") the publishing Party within thirty (30) days of receipt of the Proposed Publication if the Reviewing Party, in good faith, determines that the Proposed Publication (i) contains an Invention for which the Reviewing Party desires patent protection or (ii) could reasonably be expected to have a material adverse effect on the commercial value of any Confidential Information that the Reviewing Party reasonably wishes to have remain proprietary. (c) Delay or Withdrawal. If the Reviewing Party provides a Withdrawal Notice that the Proposed Publication (i) contains an Invention for which the Reviewing Party desires patent protection, the publishing Party shall delay its publication or presentation for a period of ninety (90) days from the date of such Withdrawal Notice, extendible upon mutual agreement, to allow for the filing of a priority patent application claiming the Invention. If the Reviewing Party provides a Withdrawal Notice that the Proposed Publication could reasonably be expected to have a material adverse effect on the commercial value of any Confidential Information that the Reviewing Party reasonably wishes to have remain proprietary, the Reviewing Party shall recommend changes it reasonably believes necessary to preserve the Confidential Information as proprietary. If the Proposed Publication contains Confidential Information that was disclosed by the Reviewing Party to the publishing Party under this Agreement, the publishing Party shall incorporate such recommended changes. For all other Confidential Information, the Parties will consult in good faith and agree on mutually acceptable modifications to the Proposed Publication to avoid disclosure of such Confidential Information. 13.2 Non-Disclosure and Non-use; Exceptions. During the term of this Agreement and for five (5) years thereafter, a Receiving Party shall (i) treat Confidential Information provided by a Disclosing Party under this Agreement as it would treat its own Confidential Information of a similar nature and take all reasonable precautions not to disclose such Confidential Information to third parties except Affiliates or potential sublicensees who agree to be bound by the same terms and conditions as found in this Section 13, without the Disclosing Party's prior written authorization and (ii) not use such Confidential - 63 - Information for other than fulfilling its obligations under this Agreement. The provisions of this Section 13.2 shall not apply to such Confidential Information which the Receiving Party can demonstrate by competent written proof: (a) was known or used by the Receiving Party or its Affiliates prior to the date of disclosure to the Receiving Party or its Affiliates by the Disclosing Party; or (b) either before or after the date of the disclosure to the Receiving Party or its Affiliates, is lawfully disclosed to the Receiving Party or its Affiliates by a third party rightfully in possession of such Confidential Information and not under an obligation of confidentiality to the Disclosing Party with respect to such Confidential Information; or (c) either before or after the date of the disclosure to the Receiving Party or its Affiliates, becomes published or generally known to the public through no fault or omission on the part of the Receiving Party or its Affiliates, but such inapplicability applies only after such Confidential Information is published or becomes generally known; or (d) is independently developed by the Receiving Party or its Affiliates without reference to or reliance upon Confidential Information of the Disclosing Party or its Affiliates; or (e) is required to be disclosed by the Receiving Party, its Affiliates or its sublicensees to comply with applicable laws, to defend or prosecute litigation or to comply with governmental regulations; provided, however, the Receiving Party, its Affiliate or sublicensee provides prior written notice of such disclosure to the Disclosing Party or its Affiliates and, to the extent practicable, takes reasonable and lawful actions to avoid and/or minimize the degree of such disclosure. 13.3 Authorized Disclosure. The provisions of Section 13.2 shall not prevent either Party from (i) preparing, filing, prosecuting, defending or maintaining patent applications or patents related to an Invention or a - 64 - Product, or (ii) disclosing Confidential Information to persons working on behalf of the Receiving Party (provided such persons agree to maintain the confidential nature of such Confidential Information to the same extent as if they were a Party to this Agreement) or to governmental agencies, to the extent the Receiving Party reasonably believes it is required or desirable to secure government approval for the development or marketing of a Product, (iii) upon imminent Registration of a Alliance Disease Product or Deselected Disease Product, as the case may be, in a country, disclosing Confidential Information to the extent reasonably necessary to promote the use and sale of such Alliance Disease Product or Deselected Disease Product in such country, or (iv) disclosing Confidential Information under confidentiality obligations no less restrictive than those contained within this Agreement to an Affiliate of a Party or a Third Party with whom such Party has made contact as authorized under this Agreement. 13.4 Injunctive Relief. The Parties acknowledge that monetary damages alone may not adequately compensate the Disclosing Party in the event of a breach by the Receiving Party of this Section 13, and that, in addition to all other remedies available to the Disclosing Party at law or in equity, it may be entitled to injunctive relief for the enforcement of its rights under this Section 13 and to an accounting of profits made during the period of any breach of the Receiving Party's obligations under this Section 13. 13.5 Third Parties. Unless otherwise agreed to in writing, each Party shall require all Third Parties, including consultants, subcontractors, sublicensees or agents involved in fulfilling its obligations under this Agreement, to be bound by the same terms and conditions as found in this Section 13. 14. TERM; TERMINATION. 14.1 Term; Expiration. (a) As to Roche, this Agreement shall commence as of the Effective Date and, unless sooner terminated as provided hereunder, shall expire in each country upon the expiration of the Royalty Term with respect to - 65 - each Alliance Disease Product in such country. Following expiration of the term of this Agreement with respect to an Alliance Disease Product in a country in the Territory, Roche shall have the fully-paid, royalty-free, perpetual right and license to continue to make, have made, use, offer for sale, sell and import such Alliance Disease Product in such country. (b) As to deCODE, this Agreement shall commence as of the Effective Date and, unless sooner terminated as provided hereunder, shall expire in each country upon the expiration of the Royalty Term with respect to each Deselected Disease Product in such country. Following expiration of the term of this Agreement with respect to a Deselected Disease Product in a country in the Territory, deCODE shall have the fully-paid, royalty-free, perpetual right and license to continue to make, have made, use, offer for sale, sell and import such Deselected Disease Product in such country. - 66 - 14.2 Termination Without Cause Commencing at the end of the Research Term, at any time during the term of this Agreement, deCODE may, for any reason, without affecting any other obligations under this Agreement, terminate all rights and licenses from Roche to deCODE under this Agreement for a given Deselected Disease Product by giving six (6) months prior notice to Roche. The effective date of such termination shall be the date six (6) months after deCODE provides such written notice to Roche. After the effective date of such termination, in no event shall deCODE, its Affiliates or its sublicensees make, have made, use, offer for sale, sell or import such Deselected Disease Product in any country. In addition, at Roche's request, within sixty (60) days after the date of such termination, (1) deCODE shall transmit to Roche all reports, information and data in the possession or control of deCODE, its Affiliates or its sublicensees relating to such Deselected Disease Product (provided deCODE has the right to make available such information to Roche), and (2) deCODE shall assign, and shall cause its Affiliates and sublicensees to assign, to Roche all regulatory filings and Registrations in the possession or control of deCODE, its Affiliates or its sublicensees; in each case, as would enable Roche to carry on the development and/or marketing of such Deselected Disease Product in the Territory. Commencing at the end of the Research Term, at any time during the term of this Agreement, Roche may, for any reason, without affecting any other obligations under this Agreement, terminate all rights and licenses from deCODE to Roche under this Agreement for a given Alliance Disease Product by giving six (6) months prior notice to Roche. The effective date of such termination shall be the date six (6) months after Roche provides such written notice to deCODE. After the effective date of such termination, in no event shall Roche, its Affiliates or its sublicensees make, have made, use, offer for sale, sell or import such Alliance Disease Product in any country. In addition, at deCODE's request, within sixty (60) days after the date of such termination, (1) Roche shall transmit to deCODE all reports, information and data in the possession or control of Roche, its Affiliates or its sublicensees relating to such Alliance Disease Product (provided Roche has the right to make - 67 - available such information to deCODE), and (2) Roche shall assign, and shall cause its Affiliates and sublicensees to assign, to deCODE all regulatory filings and Registrations in the possession or control of Roche, its Affiliates or its sublicensees; in each case, as would enable deCODE to carry on the development and/or marketing of such Alliance Disease Product in the Territory. 14.3 Breach. (a) Procedure. (i) Except as provided in Section 3.4 with respect to Alliance Disease Efforts, failure by a Party ("Breaching Party") to comply with any of its material obligations contained in this Agreement, shall entitle the other Party ("Non-breaching Party") to give to the Breaching Party written notice ("Default Notice") specifying the nature of the default and specifically stating that the Non-breaching Party intends to terminate this Agreement in the event the Breaching Party should fail to cure the default. (ii) The Breaching Party shall have a period ("Cure Period") of thirty (30) days after a Default Notice to cure such default in the case of a payment default, and ninety (90) days after a Default Notice in the case of all other defaults. Such ninety (90) day period shall be extended to end one hundred and twenty (120) days after a Default Notice, or otherwise as the Parties may agree, if the Breaching Party within sixty (60) days after such Default Notice in good faith commences and diligently continue actions to cure such default. (iii) If, after a Cure Period, the Breaching Party does not cure the relevant default, the Non-breaching Party shall be entitled, without prejudice to any of its other rights conferred on it by this Agreement, and in addition to any other remedies available to it by law or in equity, to give a written notice terminating this Agreement in its entirety or in part. - 68 - (iv) The effective date of any such termination shall be the date that the Breaching Party receives such notice pursuant to the preceding clause. (b) Effect of Such Breach. (i) If the Non-breaching Party terminates this Agreement in its entirety, after the effective date of termination, in no event shall the Breaching Party, its Affiliates or sublicensees make, have made, use, offer for sale, sell or import any Deselected Disease Product. (ii) If the Breaching Party is deCODE and Roche, without affecting or altering deCODE's other obligations under this Agreement, terminates all rights licensed by Roche to deCODE under this Agreement in whole (in which event Roche shall be entitled to continue to exercise the rights granted to it under this Agreement), then after the effective date of such termination in no event shall deCODE, its Affiliates or sublicensees make, have made, use, offer for sale, sell or import any Deselected Disease Product. In addition, at Roche's request, within sixty (60) days after the effective date of such termination: (1) deCODE shall transmit to Roche all reports, information and data in the possession or control of deCODE, its Affiliates or its sublicensees relating to Deselected Disease Products (provided that deCODE has the right to make available such information to Roche), and (2) at Roche's request, deCODE shall assign, and shall cause its Affiliates and sublicensees to assign, to Roche all regulatory filings and Registrations in the possession or control of deCODE, its Affiliates or its sublicensees; in each case, as would enable Roche to carry on the development and/or marketing of Deselected Disease Products in the Territory. (iii) If the Breaching Party is Roche and deCODE, without affecting or altering Roche's other obligations under this Agreement, terminates all rights licensed by deCODE to Roche under this Agreement in whole (in which event deCODE shall be entitled to continue to exercise the rights granted to it under this Agreement), then after the effective date of such termination in no event shall Roche, its Affiliates or sublicensees make, have - 69 - made, use, offer for sale, sell or import any Alliance Disease Product. In addition, at deCODE's request, within sixty (60) days after the effective date of such termination: (1) Roche shall transmit to deCODE all reports, information and data in the possession or control of Roche, its Affiliates or its sublicensees relating to Alliance Disease Products (provided that Roche has the right to make available such information to deCODE), and (2) at deCODE's request, Roche shall assign, and shall cause its Affiliates and sublicensees to assign, to deCODE all regulatory filings and Registrations in the possession or control of Roche, its Affiliates or its sublicensees; in each case, as would enable deCODE to carry on the development and/or marketing of Alliance Disease Products in the Territory. 14.4 Obligations. In no event shall a termination under Article 14 release a Party or its Affiliates or sublicensees from any obligation to make payments or to pay royalties or a percentage of Sublicensing Income to the other Party under this Agreement that accrued prior to the effective date of termination. 14.5 Termination of Sublicenses. Upon any termination under Article 14, all sublicenses granted by either deCODE or Roche under this Agreement with respect to the respective rights and licenses being terminated shall terminate simultaneously. 14.6 Surviving Obligations. Termination, relinquishment or expiration of this Agreement for any reason shall be without prejudice to any rights that shall have accrued to the benefit of any Party prior to such termination, relinquishment or expiration. Such termination, relinquishment or expiration shall not relieve any Party from obligations which are expressly indicated to survive termination or expiration of this Agreement. All obligations which are not expressly indicated to survive termination or expiration of this Agreement shall terminate upon the termination or expiration of this Agreement. The respective rights and obligations of the Parties hereto contained in Sections 6.3 to 6.7 (inclusive), 7.7, 10, 12, 13.2 to 13.5 (inclusive), 14 and 17 shall survive the expiration or earlier termination of this Agreement. - 70 - 14.7 No Waiver. The right of a Party to terminate under Article 14 shall not be affected in any way by a waiver or failure to take action with respect to any previous default. An election of remedy by a Party for a material breach of this Agreement under this Article 14 on one occasion shall not constitute a waiver as to any other remedy that may be available to such Party under this Article 13 as to any material breach on another occasion. 14.8 Dispute. And any dispute concerning whether a Party is in default under the terms of this Agreement shall be referred for resolution in accordance with Section 17.13. The effectiveness of any notice given pursuant to this Section shall be tolled during and until such resolution of such dispute. 15. REPRESENTATIONS AND WARRANTIES. 15.1 Representations and Warranties of Both Parties. Each Party represents and warrants to the other Party that, as of the last date on which a party becomes a signatory to this Agreement: (a) such Party is duly organized and validly existing under the laws of the state or country of its incorporation and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof; and (b) such Party has taken all corporate action necessary to authorize the execution and delivery of this Agreement and the fulfilling of its obligations under this Agreement; and (c) such Party is not aware of any impediment which would inhibit its ability to fulfill the terms and conditions imposed on it by this Agreement; and (d) such Party has disclosed all material information in its possession or control requested by the other Party relating to the subject matter of this Agreement and other material information in its possession or - 71 - control, which, in its reasonable opinion, would be material to the other Party entering into this Agreement, and to its knowledge such information does not contain any untrue statement of material fact or omit to state a material fact; and (e) such Party, without having conducted a formal investigation, is not aware of any patent rights or other proprietary rights of any Third Party which might be infringed by either Party carrying out its obligations under this Agreement; and (f) such Party has the right to grant the other Party the rights and licenses hereby granted under this Agreement. 15.2 Representations of deCODE. deCODE represents and warrants to Roche that: (a) As of the last date on which a party becomes a signatory to this Agreement, there are no patents or patent applications that deCODE owns or controls in the Territory which could preclude Roche from exercising its rights or carrying out its obligations under this Agreement and which deCODE does not have the right to license or otherwise make available to Roche; and (b) all Participants have signed, or will have signed before becoming a Participant, an informed consent form, the contents of which deCODE and Roche mutually agreed upon. 16. FORCE MAJEURE. Neither Party shall be held liable or responsible to the other Party nor be deemed to be in default under or in breach of any provision of this Agreement for failure or delay in fulfilling or performing any obligation of this Agreement when such failure or delay is due to force majeure, and without the fault or negligence of the Party so failing or delaying. For purposes of this Agreement, force majeure is defined as causes beyond the control of the Party, including, without limitation, acts of God; acts, regulations, or laws of any government; war; civil commotion; destruction of production facilities or materials by fire, flood, earthquake, explosion or storm; - 72 - labor disturbances; epidemic; and failure of pubic utilities or common carriers. In such event Roche or deCODE, as the case may be, shall immediately notify the other Party of such inability and of the period for which such inability is expected to continue. The Party giving such notice shall thereupon be excused from such of its obligations under this Agreement as it is thereby disabled from performing for so long as it is so disabled and the thirty (30) days thereafter. The disabled Party shall also give notice immediately upon the termination of the force majeure. To the extent possible, each Party shall use reasonable efforts to minimize the duration of any force majeure. 17. MISCELLANEOUS. 17.1 Relationship of Parties. Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency, employer-employee or joint venture relationship between the Parties. Each Party's performance under this Agreement is that of a separate entity. 17.2 Assignment. Neither Party shall be entitled to assign its rights hereunder without the express written consent of the other Party hereto, except that both Roche and deCODE may otherwise assign their respective rights and transfer their respective duties hereunder to any assignee of all or substantially all of their respective businesses (or that portion thereof to which this Agreement relates) or in the event of their respective merger or consolidation or similar transaction. No assignment and transfer shall be valid or effective unless and until the assignee/transferee shall agree in writing to be bound by the provisions of this Agreement. Notwithstanding anything to the contrary, during the Collaborative Research Term, in no event shall deCODE be entitled to assign its rights hereunder without the express written consent of Roche. Notwithstanding anything to the contrary, without notice to the other Party, either Party may at any time and for any reason assign all or certain rights and obligations to its Affiliates who agree to be bound by the terms and conditions of this Agreement; provided that such Party shall remain liable for all obligations assigned to its Affiliates. - 73 - 17.3 Disclaimer of Warranties. THE PARTIES EXPRESSLY DISCLAIM ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT OF THIRD PARTY RIGHTS, UNLESS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT. 17.4 Further Actions. Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement. 17.5 Notice. Any notice or request required or permitted to be given under or in connection with this Agreement shall be deemed to have been sufficiently given if in writing and personally delivered or sent by certified mail (return receipt requested), or overnight express courier service (signature required), prepaid, to the Party for which such notice is intended, at the address set forth for such Party below: (a) In the case of Roche, to: F.Hoffmann-La Roche Ltd Grenzacherstrasse 124 CH-4070 Basel Switzerland Attention: Corporate Law and to: Hoffmann-La Roche Inc. 340 Kingsland Street Nutley, New Jersey 07110 Attention: Corporate Secretary (b) In the case of deCODE, to: deCODE genetics, ehf. Lynghalsi 1 IS-110 Reykjavik ICELAND Attention: President - 74 - or to such other address for such Party as it shall have specified by like notice to the other Party, provided that notices of a change of address shall be effective only upon receipt thereof. If delivered personally, the date of delivery shall be deemed to be the date on which such notice or request was given, unless otherwise set forth in this Agreement. If sent by overnight express courier service, the date of delivery shall be deemed to be the next business day after such notice or request was deposited with such service, unless otherwise set forth in this Agreement. If sent by certified mail, the date of delivery shall be deemed to be the third business day after such notice or request was deposited with the U.S. Postal Service, or the foreign equivalent thereto, unless otherwise set forth in this Agreement. 17.6 Use of Name. Except as otherwise provided herein, neither Party shall have any right, express or implied, to use in any manner the name or other designation of the other Party or any other trade name or trademark of the other Party for any purpose, without the prior written consent of the other Party. 17.7 Public Announcements. (a) Disclosure of Agreement and Press Release. Except as required by law (including, without limitation, disclosure requirements of the U.S. Securities and Exchange Commission, Nasdaq or any other stock exchange on which securities issued by deCODE are traded) and as permitted by Section 13.1, neither Party shall make any public announcement concerning this Agreement, the 1998 Agreement, Series C Preferred Stock and Warrant Purchase Agreement between Roche Finance Ltd and deCODE entered into prior to or contemporaneously with the 1998 Agreement, or the subject matter hereof or thereof, without the prior written consent of the other Party, which shall not be unreasonably withheld. It shall not be unreasonable for a Party to withhold consent with respect to any public announcement containing any Confidential Information of such Party or the financial terms of this Agreement. In the event of a required public announcement, the Party making such announcement shall provide the other Party with a copy of the proposed text prior to such announcement sufficiently in advance of the - 75 - scheduled release of such announcement to afford such other Party a reasonable opportunity to review and comment upon the proposed text, which comment shall be incorporated unless prohibited by law, as determined by counsel to the Party required to make such public announcements. (b) Exceptions. Nothing in Section 13 or Section 17.7 shall prevent deCODE in connection with efforts to secure financing at any time during the term of this Agreement, from issuing statements as to achievements made or the status of the work being done by the Parties under this Agreement ("Statements"), so long as such Statements do not jeopardize the ability to obtain patent protection on Inventions or disclose Confidential Information; provided (except in the case of a public offering) the recipients of such Statements agree in writing to maintain such Statements in confidence. Nothing in Section 13 or Section 17.7 shall prevent deCODE from issuing Statements necessary to comply with applicable law (including the disclosure requirements of the U.S. Securities and Exchange Commission, Nasdaq or any other stock exchange on which securities issued by deCODE are traded); provided that deCODE shall provide Roche with a copy of the proposed text of such Statements sufficiently in advance of the scheduled release thereof to afford Roche a reasonable opportunity to review and comment upon the proposed text and discuss any disagreements thereon. 17.8 Waiver. A waiver by either Party of any of the terms and conditions of this Agreement in any instance shall not be deemed or construed to be a waiver of such term or condition for the future, or of any subsequent breach hereof. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be in limitation of any other remedy, right, undertaking, obligation or agreement of either Party. 17.9 Compliance with Law. Nothing in this Agreement shall be deemed to permit a Party to export, reexport or otherwise transfer any Technical Information or Product under this Agreement without compliance with applicable laws. - 76 - 17.10 Severability. When possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 17.11 Amendment. No amendment, modification or supplement of any provisions of this Agreement shall be valid or effective unless made in writing and signed by a duly authorized officer of each Party. 17.12 Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware. 17.13 Arbitration. (a) Escalation. In the event the Parties are unable to resolve any dispute, controversy or claim arising out of this Agreement, or the breach, termination or invalidity thereof ("Dispute"), the Parties shall refer such Dispute for further review and resolution to the Executive Officers of each Party. The Executive Officers of each Party shall use reasonable efforts to resolve the matter within thirty (30) days after the matter is referred to them. Any dispute regarding any Sensitive Matter shall be resolved in accordance with Section 8.4(c). (b) Binding Arbitration. If the Executive Officers cannot resolve the Dispute within thirty (30) days, then such Dispute shall be settled by final and binding arbitration pursuant to the then current commercial arbitration rules of the American Arbitration Association ("AAA") as provided below: (i) The Arbitration Tribunal shall consist of three (3) arbitrators. Each Party shall nominate in the request for arbitration and the answer thereto one (1) arbitrator and the two (2) arbitrators so named will then jointly appoint the third arbitrator as chairman of the Arbitration Tribunal. - 77 - If one Party fails to nominate its arbitrator or, if the Party's arbitrators cannot agree on the person to be named as chairman within sixty (60) days, the AAA shall make the necessary appointments of arbitrator or chairman. (ii) The place of arbitration shall be in New York, New York and the arbitration proceedings shall be held in English. (iii) The award of the Arbitration Tribunal shall be final and judgment upon such an award may be entered in any competent court or application may be made to any competent court for juridical acceptance of such an award and order of enforcement. (c) Injunctive Relief. Section 17.13(b) shall not prohibit a Party from seeking injunctive relief from a court of competent jurisdiction in the event of a breach or prospective breach of this Agreement by the other Party which would cause irreparable harm to the first Party. 17.14 Entire Agreement. This Agreement, together with the Exhibits, which are attached hereto and made a part hereof, sets forth the entire agreement and understanding between the Parties as to the subject matter hereof and merges all prior discussions, negotiations and agreements between them related to the subject matter hereof, and neither of the Parties shall be bound by any conditions, definitions, warranties, understandings or representations with respect to such subject matter other than as provided herein or as duly set forth on or subsequent to the date hereof in writing and signed by a proper and duly authorized officer or representative of the Party to be bound thereby. 17.15 Parties in Interest and Bankruptcy. (a) All the terms and provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by the Parties hereto and their respective permitted successors and assigns under Section 17.2. (b) Notwithstanding anything to the contrary, in the event that either Party shall become insolvent, shall make an assignment to the benefit of - 78 - creditors, or shall have a petition in bankruptcy filed for or against it (which, in the case of an involuntary petition, is not dismissed or stayed within sixty (60) days after such petition is filed) ("Bankrupt Party"), the other Party shall have the right to terminate this entire Agreement immediately upon written notice of such termination and the provisions of Section 14, as the case may be, shall apply. All rights and licenses granted by the Bankrupt Party under this Agreement are, and shall otherwise be deemed to be, for purposes of Section 365(n) of Title 11, US Code (the "Bankruptcy Code"), licenses of rights to "intellectual property" as defined under Section 101(60) of the Bankruptcy Code. Unless the other Party elects to terminate this Agreement under this Section 17.15(b), the Parties agree that the other Party, as a licensee of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the Bankruptcy Code, subject to the continued fulfillment of its obligations under this Agreement. 17.16 Descriptive Headings. The descriptive headings of this Agreement are for convenience only, and shall be of no force or effect in construing or interpreting any of the provisions of this Agreement. 17.17 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, any one of which need not contain the signature of more than one Party but all such counterparts taken together shall constitute one and the same agreement. 17.18 Interpretation. All defined terms used in this Agreement shall have the meaning assigned to such term under this Agreement whether used in the singular or plural. * * * - 79 - IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be executed by its duly authorized representative as of the Effective Date. F.HOFFMANN-LA ROCHE LTD By: /s/ N. Sheail _____________________________ Name: N. SHEAIL _____________________________ Title: GLOBAL LICENSING DIRECTOR ____________________________ HOFFMANN-LA ROCHE INC. By: /s/ Lee E. Babiss ______________________________ Name: Lee E. Babiss _____________________________ Title: Vice President, Preclinical ____________________________ Research & Development ____________________________ deCODE GENETICS, EHF. By: /s/ Kari Stefansson _______________________________ Name: Kari Stefansson _____________________________ Title: President & CEO ____________________________ - 80 - Exhibit A Active Alliance Diseases [**] [**] [**] [**] [**] [**] [**] [**] Pool Diseases [**] [**] [**] [**] [**] [**] [**] [**] On or before February 28, 2002, the Parties shall reach agreement as to the initial designation of four Active Alliance Diseases and four Pool Diseases and shall memorialize such agreement in a definitive signed restatement of this Exhibit A that omits this paragraph. If no such agreement has been reached by such date, this Exhibit A shall be deemed to be restated as listing all eight diseases set forth above as Pool Diseases. - 81 - Exhibit B Deselected Diseases osteoporosis bipolar depression obesity - 82 - Exhibit C A. Type of Alliance Disease Product: 1. Contains an Alliance Disease Compound Type [**]: Development Payments:
Event Payment (USD mio.) ----- ------- Commencement of Phase III [**] NDA Filing for Major Country [**] First Commercial Sale in USA [**] First Commercial Sale in Europe [**] First Commercial Sale in Japan [**]
Royalties: For a given Alliance Disease Product for a given calendar year during the Royalty Term for the Alliance Disease Product, Roche shall pay deCODE a royalty on Net Sales, on a country-by-country basis, as follows: TABLE 3
Worldwide Annual Net Sales (in billions USD) Royalty Rate as a Percentage Net Sales [**] to Less than or equal to [**] [**]% Greater than [**] to Less than or equal to [**] [**]% Greater than [**] to Less than or equal to [**] [**]% Greater than [**] [**]%
Notwithstanding the above, if the COGS of the Alliance Disease Product exceeds [**] percent ([**]%) of the total worldwide Net Sales of the Alliance Disease Product, the total royalty due to deCODE under Table 3 shall be reduced by an amount equal to one half of the difference between the COGS and [**] percent ([**]%) of the total worldwide Net Sales of the Alliance Disease Product, but in no event - 83 - shall the total royalty due to deCODE be reduced to less than [**] percent ([**]%) as a result of such reduction. 2. Contains a Alliance Disease Compound Type [**]: Development Payments:
Event Payment (USD mio.) IND Filing for Major Country [**] NDA Filing for Major Country [**] First Commercial Sale in USA [**] First Commercial Sale in Europe [**] First Commercial Sale in Japan [**]
Royalties: [**]% of Net Sales during the Royalty Term for the Alliance Disease Product 3. Contains a Alliance Disease Compound Type [**]: Development Payments:
Event Payment (USD mio.) IND Filing for Major Country [**] NDA Filing for Major Country [**] First Commercial Sale in USA [**] First Commercial Sale in Europe [**] First Commercial Sale in Japan [**]
Royalties: [**]% of Net Sales during the Royalty Term for the Alliance Disease Product - 84 - B. Development Payment Limitations: For a given Alliance Disease Product, Roche will make each of the Development Payments only once, for the first occurrence of an Event for the Alliance Disease Product, independent of the number of occurrences of the Event for the Alliance Disease Product. In the event that clinical development by Roche, its Affiliates or sublicensees of any Alliance Disease Product for an Alliance Disease (an "Original Product") terminates and, at or after the time of such termination, another Alliance Disease Product becomes engaged in clinical development by Roche, its Affiliates or sublicensees for the same Alliance Disease (a "Replacement Product"), then Roche shall be entitled to a credit against development payments due with respect to the Replacement Product in an amount equal to all development payments actually paid with respect to the Original Product prior to termination of development thereof. - 85 - EXHIBIT D STEERING COMMITTEE MEMBERS Roche: 1. 2. 3. deCODE: 1. 2. 3. - 86 - TABLE OF CONTENTS
Page 1. DEFINITIONS................................................................. 2 2. GRANT OF RIGHTS............................................................. 18 2.1 Commercial License to Roche............................................ 18 2.2 Research License to Roche.............................................. 19 2.3 Commercial License to deCODE........................................... 19 2.4 Research License to deCODE............................................. 20 2.5 Commercial Rights to Compounds......................................... 20 3. DILIGENCE................................................................... 20 3.1 Diligence Obligations.................................................. 20 3.2 Designated Diseases.................................................... 22 3.3 Judging Efforts........................................................ 23 3.4 Effect of Failure of Efforts........................................... 24 4. CONSIDERATION............................................................... 25 4.1 Development Payments and Royalties to deCODE........................... 25 4.2 Royalties to Roche..................................................... 25 5. ROYALTY ADJUSTMENTS......................................................... 26 5.1 Royalty Reductions..................................................... 26 5.2 Sales Among Affiliates/Sublicensees.................................... 29 5.3 Supply Obligation...................................................... 29 5.4 Barred Royalties....................................................... 29 6. ROYALTY PAYMENTS AND REPORTS................................................ 29 6.1 Payment................................................................ 29 6.2 Mode of Payment........................................................ 30 6.3 Records Retention...................................................... 31 6.4 Audit Request.......................................................... 31 6.5 Taxes.................................................................. 33 6.6 Blocked Currency....................................................... 33 6.7 Interest on Late Payments.............................................. 33 6.8 Mechanism for Adjustment to Royalties.................................. 34 7. ALLIANCE RESEARCH PROGRAM................................................... 34 7.1 Diseases............................................................... 34 7.2 Switching and Adding Diseases.......................................... 36 7.3 deCODE Support......................................................... 38 7.4 Funding by Roche....................................................... 38 7.5 Roche Review Right..................................................... 40 7.6 Conduct................................................................ 41 7.7 Records................................................................ 42 7.8 Alliance Disease Research Term......................................... 43 8. STEERING COMMITTEE.......................................................... 43 8.1 Members................................................................ 43 8.2 Responsibilities....................................................... 44 8.3 Meetings............................................................... 46 8.4 Decisions.............................................................. 47
8.5 Minutes................................................................ 49 8.6 Expenses............................................................... 50 9. MATERIAL TRANSFER........................................................... 50 9.1 Plasma Samples......................................................... 50 9.2 Cell Lines and Tissue Samples.......................................... 50 9.3 Biological Materials Transfer.......................................... 51 10. OWNERSHIP; PATENTS.......................................................... 52 10.1 Ownership.............................................................. 52 10.2 Patent Filing, Maintenance and Prosecution Regarding Inventions........ 52 11. PATENT ENFORCEMENT AND INFRINGEMENT......................................... 57 11.1 Patent Enforcement..................................................... 57 11.2 Notice of Certification................................................ 59 11.3 Infringement Actions by Third Parties.................................. 60 12. INDEMNIFICATION........................................................ 60 12.1 Research Activities.................................................... 60 12.2 Product Liability...................................................... 61 12.3 Notice................................................................. 61 13. PUBLICATION; NON-DISCLOSURE................................................. 62 13.1 Publication............................................................ 62 13.2 Non-Disclosure and Non-use; Exceptions................................. 63 13.3 Authorized Disclosure.................................................. 64 13.4 Injunctive Relief...................................................... 65 13.5 Third Parties.......................................................... 65 14. TERM; TERMINATION........................................................... 65 14.1 Term; Expiration....................................................... 65 14.2 Termination Without Cause.............................................. 67 14.3 Breach................................................................. 68 14.4 Obligations............................................................ 70 14.5 Termination of Sublicenses............................................. 70 14.6 Surviving Obligations.................................................. 70 14.7 No Waiver.............................................................. 71 14.8 Dispute................................................................ 71 15. REPRESENTATIONS AND WARRANTIES.............................................. 71 15.1 Representations and Warranties of Both Parties......................... 71 15.2 Representations of deCODE.............................................. 72 16. FORCE MAJEURE............................................................... 72 17. MISCELLANEOUS............................................................... 73 17.1 Relationship of Parties................................................ 73 17.2 Assignment............................................................. 73 17.3 Disclaimer of Warranties............................................... 74 17.4 Further Actions........................................................ 74 17.5 Notice................................................................. 74 17.6 Use of Name............................................................ 75 17.7 Public Announcements................................................... 75 17.8 Waiver................................................................. 76 17.9 Compliance with Law.................................................... 76 17.10 Severability........................................................... 77 17.11 Amendment.............................................................. 77 17.12 Governing Law.......................................................... 77 17.13 Arbitration............................................................ 77 17.14 Entire Agreement....................................................... 78 17.15 Parties in Interest and Bankruptcy..................................... 78 17.16 Descriptive Headings................................................... 79 17.17 Counterparts........................................................... 79 17.18 Interpretation......................................................... 79
EX-10.47 14 w58844ex10-47.txt LOAN AGREEMENT, OCTOBER 11, 2001 OFFICER'S CERTIFICATE I do hereby certify and represent that: 1. I am the duly elected Secretary of deCODE genetics, Inc., a Delaware corporation. 2. Pursuant to Rule 306(a) of Regulation S-T, the following exhibit 10.47 to deCODE genetics, Inc.'s Annual Report on Form 10-K is a fair and accurate English translation of a document prepared in the Icelandic language. IN WITNESS WHEREOF, I have signed this Officer's Certificate in my capacity as Secretary of deCODE genetics, Inc. on this 21 day of March, 2002. By: /s/ Tanya Zharov ----------------------------------- Name: Tanya Zharov Title: Secretary and Corporate Counsel Exhibit 10.47 LOAN AGREEMENT (Loan in foreign currency) BETWEEN KRISTJAN ERLENDSSON as borrower and ISLENSK ERFOAGREINING as lender Table of Contents
1. AMOUNT OF LOAN AND DISBURSEMENT 3 2. REPAYMENT 3 3. INTEREST, INTEREST ADJUSTMENTS AND PAYMENT OF INTEREST 3 4. DEFAULT INTEREST 4 5. INSURANCE 4 6. PAYMENT OF TAXES RELATING TO THE CONCLUSION OF THE AGREEMENT 4 7. COVENANTS 4 8. EVENTS OF DEFAULT - REMEDIES 4 9. FURTHER PROVISIONS 5 ANNEX 1 - LOAN DISBURSEMENT APPLICATION 6
2 Islensk erfoagreining ehf., State Reg. No. 691295-3549, Lynghals 1, Reykjavik, hereinafter referred to as the Lender, and Kristjan Erlendsson, Id. No. 300949-2669, Vaolasel 12, 109, Reykjavik, hereinafter referred to as the Borrower, enter into the following LOAN AGREEMENT on a loan for 1 year to the amount of USD 75.000.- SEVENTY-FIVE THOUSAND 00/100 US DOLLARS- on the terms described herein. 1. Amount of Loan and Disbursement The Borrower undertakes to borrow, and the Lender undertakes to lend the agreed amount. The loan is available for disbursement as of the signature of this Agreement until 15 October 2001. The Borrower shall send to the Lender a disbursement application with at least 2 working days' notice. The application shall contain an account number for the deposit of the loan or the loan section. A disbursement application form is attached to this agreement as Annex 1. 2. Repayment The Borrower undertakes to repay the debt in a single payment on 15 October 2002. The Borrower may pay the debt partially prior to the agreed payment date without any charge. The borrower shall inform the Lender of an intended early payment with at least 10 days' prior notice. In the event that the payment date of instalments and/or interest does not fall on a banking day, the payment date shall be transposed to the banking day immediately following, unless such day is in the following month, in which case the payment date shall be transposed to the immediately preceding banking day. A banking day is a day on which banks are open in Iceland, London and in the country of origin of the relevant currency. The place of payment is with the Lender. 3. Interest, Interest Adjustments and Payment of Interest The loan carries a fixed 6.0% rate of interest throughout the loan period. The interest shall be calculated so that on an annual basis the actual number of days is used to multiply and then divided by 360. The interest is calculated from the disbursement date and payable on the payment date. 3 4. Default Interest In the event of default by the Borrower on the loan pursuant to this Loan Agreement, the Lender may convert the debt into Icelandic kronur in accordance with the posted selling rate of the Lender for the currencies of which the loan is constituted. Default interest shall then be paid comprising 12-month LIBOR interest, as determined for US dollars at any time, with a margin of 6.0% - six point zero percent - of the due amount or called-in amount from the due date to the date of payment. LIBOR (London Inter Bank Offered Rate) interest refers to interest on the London Interbank Market as posted at 11 a.m., local time, in London on the Reuter BBA screen. . 5. Insurance As surety for the prompt and full payment of the principal of the debt together with all interest and cost of whatever kind, the Borrower pledges the following shares as collateral. 125,0001 shares in deCODE genetics Inc. 6. Payment of Taxes Relating to the Conclusion of the Agreement The Borrower shall pay all public levies or taxes which may be imposed on the Agreement or payments pursuant to the Agreement at no cost to the Lender. 7. Covenants The Borrower undertakes to observe the following terms until the debt pursuant to the Loan Agreement is paid in full: i. NOTICE OF DEFAULT: The Borrower undertakes to notify the lender in writing without delay if it comes to his attention that an event of default has taken place. 8. Events of Default - Remedies The following shall constitute events of default on the part of the Borrower under this Agreement: i. the Borrower fails to pay on the correct due date or in the correct currency, and such default continues for longer than 14 days from the due date; or ii. the Borrower's assets are subjected to attachment, a request is submitted for the enforced auction of his assets, he seeks composition or his estate is subjected to bankruptcy proceedings. 4 In the event of default, as defined in this Article, the lender may, without notice or warning, call in the entire remainder of the debt together with accrued interest and other payments due from the Borrower pursuant to this Agreement. The Borrower shall pay default interest on the due or called-in amount pursuant to Article 3 of the Agreement. When the debt is due pursuant to the above, the Lender may proceed against the assets pledged to Lender and seek enforcement of the debt without prior court judgement, conciliation or attachment. 9. Further Provisions Headings in this Agreement are solely for convenience and have no substantive significance for this Agreement. Any disputes arising in respect of this Agreement shall be referred to the District Court of Reykjavik. This Agreement is concluded in 6 numbered pages and in two copies, one for each party. In witness whereof, the parties have signed this agreement in the presence of witnesses to the correct date and signature. Witnesses to the correct date, Reykjavik, 11 October 2001 signature and financial competence of the parties: Elin Poroardottir [sign.] Kristjan Erlendsson [sign.] Id. No. 060763-4969 Tanya Zharov [sign.] For Islensk erfoagreining ehf. Id. No. 080966-4749 Kari Stefansson, [sign.] Chief Executive Officer 5 ANNEX 1 - LOAN DISBURSEMENT APPLICATION Islensk erfoagreining ehf. Lynghals 1 110 Reykjavik Reykjavik, 15 October 2001 Subject: Request for disbursement of loan. Pursuant to Article 1 of the Loan Agreement between the undersigned and yourself dated 11 October 2001, on a loan in the amount of USD 75.000.-, a request is hereby submitted for the loan to be disbursed as follows: Amount USD 75,000,- Disbursement date 15 October 2001 Payment instructions: The loan shall be disbursed and paid into account No. 3009 Seljar Branch, Islandsbanki Respectfully, Kristjan Erlendsson [sign.] 6 EX-21.1 15 w58844ex21-1.txt SUBSIDIARIES OF DECODE GENETICS. EXHIBIT 21.1 SUBSIDIARIES OF deCODE GENETICS, INC 1. Islensk erfdagreining ehf., an Icelandic private limited company (English name: deCODE genetics ehf,) 2. MediChem Life Sciences, Inc., a Delaware corporation SUBSIDIARIES OF ISLENSK ERFDAGREINING EHF. 1. Islenskar lyfjarannsoknir ehf., an Icelandic private limited company (English name: Encode ehf.) 2. Islenskar krabbameinsrannsoknir ehf., an Icelandic private limited company (English name: deCODE Cancer ehf.) 3. Vetrargardurinn ehf., an Icelandic private limited company (formerly known as Sturlugata 8, ehf.) SUBSIDIARIES OF MEDICHEM LIFE SCIENCES, INC. 1. Emerald BioStructures, Inc., a Washington corporation 2. ThermoGen, Inc., an Illinois corporation 3. Advanced X-Ray Analytical Services, Inc., an Illinois corporation 4. MediChem Research, Inc., an Illinois corporation 5. MediChem Management, Inc., a Delaware corporation EX-23.1 16 w58844ex23-1.txt CONSENT OF PRICEWATERHOUSECOOPERS EHF Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-66374) and S-8 (No. 333-56996) of deCODE genetics, Inc. ("deCODE") of our report dated March 8, 2002 relating to the consolidated financial statements, which appear in deCODE's Annual Report on Form 10-K for the year ended December 31, 2001. We also consent to the references to us under the headings "Experts" in the Registration Statement on Form S-3 and Form S-8 and under "Selected Financial Data" in the Registration Statement on Form S-3. PricewaterhouseCoopers ehf Reykjavik, Iceland March 27, 2002 -----END PRIVACY-ENHANCED MESSAGE-----