10-K Part 4:
MANUFACTURING
We have employed a proprietary, modular, object-oriented design methodology
to develop and manufacture a number of successful analytical systems for
clinical diagnosis. Our Analyst and Acquest product lines and our clinical
diagnostics and research products are manufactured and assembled at our
facilities in Sunnyvale, California. This manufacturing process consists of
purchasing custom and other components from third parties and performing
sub-assembly, final assembly, and quality assurance functions in-house. We
believe that our manufacturing infrastructure for our Analyst and Acquest
product lines is sufficient for at least the next few years.
We intend to initially manufacture our assay kits internally. We may
consider outsourcing the manufacture of assay kits, if it is determined to be
cost-effective. In addition, we have expanded our relationships with vendors of
plastic disposables to have them manufacture our 96-well and 384-well high
throughput microplates according to our specifications.
Our success will depend in part on the expansion of our operations and the
effective management of these expanded operations. Manufacturers often encounter
difficulties in scaling up production of new products, including:
- problems involving quality control and assurance,
- component supply and
- shortages of qualified personnel.
Difficulties encountered by us in manufacturing scale-up could have a material
adverse effect on our business, financial condition and results of operations.
NEW TECHNOLOGY RISKS
The pharmaceutical, biotechnology and genomics instrumentation and reagents
markets are characterized by rapid technological change and frequent new product
introductions by many competitors. Our future success will depend on our ability
to enhance and maintain our current and planned CRITERION product line products
and to develop and introduce, on a timely basis, new technologies and products
that address the evolving needs of our customers. These new technologies and
products include but are not limited to fluorescence-based reagents and assay
kits, products based on our ScreenStation-TM-, FLARe-TM- and SmartOptics-TM-
technologies, as well as future additions to our SNP genotyping platform.
Development of these new technologies subjects us to significant risks and
uncertainties, as we may encounter unantipated technical issues that may cause
development delays. These technical issues may require us to cancel such
development programs altogether, if we are unable to find solutions to these
issues. Even if development is successful, we anticipate that production units
for these new products may not be available for several months or years, if at
all. The production of CRITERION product line instruments, microplates,
fluorescence-based reagents and assay kits may present manufacturing challenges.
We may experience difficulties that could delay or prevent the successful
manufacturing, introduction and marketing of our new products or our product
enhancements. Any failure to manufacture and introduce products in a timely
manner in response to changing market demands or customer requirements could
have a material adverse effect on our business, financial condition and results
of operations.
COMPETITION
The market for high throughput instrumentation, assays for drug discovery
and SNP genotyping is highly competitive. We anticipate that competition will
increase significantly as more customers adopt high throughput tools for drug
discovery and SNP genotyping, and as competitors enter the market with new
advanced technologies and products. We are competing in many areas, including
high throughput instruments, assay development, consumables and reagent sales.
We compete with companies that directly market high throughput products. In
addition, pharmaceutical and biotechnology companies, academic
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institutions, governmental agencies and other research organizations are
conducting research and developing products in various areas which compete with
our technology platform, either on their own or in collaboration with others. As
a result, our potential customers may choose not to purchase our products. Our
potential customers may assemble and run high throughput systems by purchasing
products from competitors or making their own. Further, certain companies offer
screening and genotyping services on a contract or collaborative basis, and
these services could eliminate the need for a potential customer to purchase our
products. Our technological approaches may be rendered obsolete or uneconomical
by advances in existing technological approaches or the development of different
approaches by one or more of our current or future competitors. Many of these
competitors have greater financial and personnel resources, and more experience
in research and development, sales and marketing and other areas than us.
INTELLECTUAL PROPERTY RISKS
Our success will depend in part on our ability to obtain patents, maintain
trade secret protection and operate without infringing the proprietary rights of
others. As of January 31, 2000, LJL held five U.S. patents and had fourteen
pending U.S. patent applications, one pending European patent application, one
pending Israeli patent application, one pending Japanese patent application,
eleven pending international patent applications, and twenty-three pending U.S.
provisional patent applications. To supplement our proprietary technology, we
have licensed, and expect to continue to license from time to time, certain
patent rights from third parties. In the event of a material breach by us, these
licenses may be terminated. Furthermore, under some of these agreements, the
licensors may elect to convert the exclusive rights into non-exclusive rights in
the event that we fail to make certain minimum royalty payments. If the
licensors were to terminate certain of these licenses due to a material breach
of the license by us, then we would lose the right to incorporate the licensed
technology into our products, which would require us to exclude this certain
technology from our existing and future products and either license or
internally develop alternative technologies. There can be no assurance that we
would be able to license alternative technologies on commercially acceptable
terms, or at all, or that we would be capable of internally developing such
technologies. Furthermore, other companies may independently develop technology
with functionality similar or superior to the licensed technology that does not
or is claimed not to infringe the licensed patents or that otherwise circumvents
the technology we have licensed.
We are aware of third party patents that contain issued claims that may
cover certain aspects of our reagent technologies. In the future we may be
required to license third-party patents to produce certain reagents, assay kits
and related products. Licenses for such patents may not be available on
commercially acceptable terms, if at all. Any action against us claiming damages
and seeking to enjoin commercial activities relating to the affected
technologies could subject us to potential liability for damages. We could incur
substantial costs in defending patent infringement claims, obtaining patent
licenses, engaging in interference and opposition proceedings or other
challenges to our patent rights or intellectual property rights made by third
parties, or in bringing such proceedings or enforcing any patent rights against
third parties. Our inability to obtain necessary licenses or our involvement in
proceedings concerning patent rights could have a material adverse effect on our
business, financial condition and results of operations.
The patent positions of life science product companies, including ours, are
uncertain and involve complex legal and factual questions. In addition, the
coverage claimed in a patent application can be significantly reduced before the
patent is issued. Consequently, there can be no assurance that our patent
applications or those of our licensors will result in patents being issued or
that any issued patents will provide protection against competitive technologies
or will be held valid if challenged or circumvented. Others may independently
develop products similar to our products, or design around or otherwise
circumvent patents issued to us. In the event that any relevant claims of
third-party patents are upheld as valid and enforceable, we could be prevented
from practicing the subject matter claimed in such patents, or would be required
to obtain licenses from the patent owners of each of such patents or to redesign
our products or processes to avoid infringement. There can be no assurance that
such licenses would be
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available or, if available, would be on terms acceptable to us or that we would
be successful in any attempt to redesign our products or processes to avoid
infringement. If we do not obtain the necessary licenses, we could be subject to
litigation and encounter delays in product introductions while we attempt to
design around such patents. Alternatively, the development, manufacture or sale
of such products could be prevented. Litigation would result in significant
costs to us as well as diversion of management time. Adverse determinations in
any such proceedings could have a material adverse effect on our business,
financial condition and results of operations.
We also rely on trade secret and copyright law, as well as employee and
third-party nondisclosure agreements to protect our intellectual property rights
in our products and technology. There can be no assurance that these agreements
and measures will provide meaningful protection of our trade secrets,
copyrights, know-how, or other proprietary information in the event of any
unauthorized use, misappropriation or disclosure. In addition, others may
independently develop substantially equivalent proprietary technologies.
Litigation to protect our trade secrets or copyrights would result in
significant costs to us as well as diversion of management time. Adverse
determinations in any such proceedings or unauthorized disclosure of our trade
secrets could have a material adverse effect on our business, financial
condition and results of operations. In addition, the laws of certain foreign
countries do not protect our intellectual property rights to the same extent as
U.S. laws. There can be no assurance that we will be able to protect our
intellectual property in these markets.
GOVERNMENT REGULATION
While we believe that none of the products in our CRITERION product line
will be regulated as medical devices or otherwise subject to FDA regulation, our
clinical diagnostics products, including the Luminometer, Q2000, Horizon and a
microplate heater, are subject to FDA regulation as medical devices, as well as
similar foreign regulation. The process of obtaining and maintaining required
regulatory clearances and approvals and otherwise remaining in regulatory
compliance in the U.S. and certain other countries is lengthy, expensive and
uncertain. Although we have phased out production of the Luminometer, Q2000 and
the microplate heater, we will continue to manufacture the Horizon on an
original equipment manufacturing basis during 2000 but do not expect to
manufacture the Horizon after 2000. The Horizon is used in research and clinical
laboratories to perform in vitro diagnostic tests, which are exempt from
investigational device exemption requirements, including the need to obtain the
FDA's prior approval, provided that, among other things:
- the testing is noninvasive;
- the product is not used as a diagnostic procedure without confirmation by
another medically established test or procedure; and
- distribution controls are established to assure that in vitro diagnostic
products distributed for research are used only for those purposes.
To our knowledge, our original equipment manufacturing customers have met
these conditions. However, the FDA may not agree that our original equipment
manufacturing customers' distribution of our clinical diagnostic products meets
and have met the requirements for investigational device exemption. Failure by
us, our original equipment manufacturing customers or the recipients of our
clinical diagnostic products to comply with the investigational device exemption
requirements could result in enforcement action by the FDA, which could
adversely affect us or our original equipment manufacturing customers' ability
to gain marketing clearance or approval of these products or could result in the
recall of previously distributed products.
Applicable law requires that we comply with the FDA's regulations for the
manufacture of the Horizon. The FDA monitors compliance with its regulations by
subjecting medical product manufacturers to periodic FDA inspections of their
manufacturing facilities. The FDA has recently revised its regulations, and the
new regulations impose design controls and make other significant changes in the
requirements
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applicable to manufacturers. We are also subject to other regulatory
requirements, and may need to submit reports to the FDA, including adverse event
reporting. Failure to comply with current FDA regulations or other applicable
legal requirements can lead to, among other things:
- warning letters;
- seizure of violative products;
- suspension of manufacturing, government injunctions; and
- potential civil or criminal liability on our part and the part of the
responsible officers and employees.
In addition, the government may halt or restrict continued sale of such
instruments. In conjunction with the export of our clinical diagnostics
instruments, we maintain International Organization for Standardization ("ISO")
9001 certification and apply the CE mark to certain products that are exported,
which subjects our operations to periodic surveillance audits. While we believe
we are currently in compliance with all applicable regulations and standards,
there can be no assurance that our operations will be found to comply with these
regulations or standards or other applicable legal requirements in the future or
that we will not be required to incur substantial costs to maintain our
compliance with existing or future manufacturing regulations, standards or other
requirements. Any such noncompliance or increased cost of compliance could have
a material adverse effect on our business, results of operations and financial
condition.
We are also subject to numerous federal, state and local laws relating to
safe working conditions, manufacturing practices, environmental protection,
storage, use and disposal of hazardous or potentially hazardous substances. Any
material failure to comply with such laws could require us to incur significant
costs and would have a material, adverse effect upon our ability to do business.
Changes in existing requirements or adoption of new requirements or policies
relating to government regulations could materially and adversely affect our
ability to comply with such requirements.
EMPLOYEES
As of December 31, 1999, we had 91 employees, of which 13 are employed in
manufacturing, 36 in research and development, and 42 in marketing, sales and
administration. Our future success depends upon the continued service of our key
scientific, technical and senior management personnel and our continuing ability
to attract and retain highly qualified technical and managerial personnel. None
of our employees are represented by a labor union or covered by a collective
bargaining agreement. We consider our relations with our employees to be
satisfactory.
FACILITIES
Our headquarters are located in Sunnyvale, California, and are comprised of
approximately 25,000 square feet of office, research and development and
manufacturing space. Our lease and subleases of these premises expire at various
dates between June 30, 2000 and December 31, 2002. The lease of office space for
our UK subsidiary in Leatherhead, Surrey, England converts into a
quarter-to-quarter lease effective May 2000. As we hire additional research and
development, administrative and marketing personnel, we plan to either lease
additional space or to move our headquarters within the next 24 months in order
to support our projected growth. We expect that additional space will be
available on commercially reasonable terms. |
