S-1 DRS
Table of Contents

As confidentially submitted to the Securities and Exchange Commission on May 10, 2013.

This draft registration statement has not been publicly filed with the Securities and Exchange Commission

and all information herein remains strictly confidential

Registration No. 333-          

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

Intrexon Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Virginia  

8731

  26-0084895

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

20374 Seneca Meadows Parkway

Germantown, Maryland 20876

Telephone: (301) 556-9900

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Randal J. Kirk

Chairman of the Board, President and Chief Executive Officer

Intrexon Corporation

2875 South Ocean Boulevard

Suite 215

Palm Beach, Florida 33480

Telephone: (561) 855-7831

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

    Copies to:    

John Owen Gwathmey

David I. Meyers

Troutman Sanders LLP

1001 Haxall Point

Richmond, Virginia 23219

Telephone: (804) 697-1200

 

Donald P. Lehr

Chief Legal Officer

Intrexon Corporation

20374 Seneca Meadows Parkway

Germantown, Maryland 20876

Telephone: (301) 556-9809

 

Mitchell S. Bloom

Michael H. Bison

Michael D. Maline

Goodwin Procter LLP

Exchange Place

Boston, Massachusetts 02109

Telephone: (617) 570-1000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to be Registered    Proposed Maximum Aggregate
Offering Price(1)(2)
   Amount of Registration Fee

Common Stock, no par value per share

   $                $            

 

 

(1)   Includes shares that may be purchased by the underwriters upon exercise of their option to purchase additional shares of common stock.
(2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject To Completion. Dated                     , 2013.

Shares

 

LOGO

Common Stock

This is an initial public offering of shares of common stock of Intrexon Corporation.

We are offering                  shares to be sold in this offering.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $         and $        . We intend to apply to list our common stock on                      under the symbol “         .”

We are an “emerging growth company” as defined under the federal securities laws, and as such, may elect to comply with certain reduced public company reporting requirements. See “Risk factors” beginning on page 11 to read about factors you should consider before buying shares of our common stock.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

      Per share      Total  

Initial public offering price

   $                    $                

Underwriting discount

   $         $     

Proceeds to us, before expenses

   $         $     

We have granted the underwriters an option for a period of 30 days to purchase up to                 additional shares of common stock from us at the initial public offering price less the underwriting discount.

The underwriters expect to deliver the shares on or about                     , 2013.

 

J.P. Morgan    Barclays
  

Prospectus dated                     , 2013.


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Table of contents

 

Prospectus summary      1   
Summary consolidated financial data      8   
Risk factors      11   
Special note regarding forward-looking statements      38   
Use of proceeds      40   
Dividend policy      41   
Capitalization      42   
Dilution      44   
Selected consolidated financial data      47   
Management’s discussion and analysis of financial condition and results of operations      49   
Business      76   
Management      98   
Executive and director compensation      108   
Certain relationships and related person transactions      123   
Principal shareholders      133   
Description of capital stock      135   
Shares eligible for future sale      142   
Certain material U.S. federal income and estate tax considerations      145   
Underwriting      149   
Legal matters      154   
Experts      154   
Market and industry data      154   
Where you can find more information      154   
Information not required in prospectus      II-1   
Signatures      II-5   

Through and including                     , 2013 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

We are responsible for the information contained in this prospectus. We have not authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

 

 

For investors outside the United States: Neither we nor any of the underwriters have taken any action to permit a public offering of the shares of our common stock or the possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

This prospectus includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe these industry publications and third-party research, surveys and studies are reliable, we have not independently verified such data.


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Prospectus summary

This summary highlights information included elsewhere in this prospectus and does not contain all of the information you should consider before buying shares of our common stock. You should read the entire prospectus carefully, especially the “Risk factors” section and our consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in shares of our common stock. Unless the context requires otherwise, references in this prospectus to “Intrexon,” “the Company,“ “we,” “us” and “our” refer to Intrexon Corporation.

Company overview

At present rates of global industrialization and population growth, food and energy supplies and environmental and healthcare resources are becoming more scarce and/or costly. We believe it is not a viable option for mankind to continue on this path — new solutions will be necessary to preserve and globally expand a high quality of life. We believe that synthetic biology is a solution.

Intrexon is a leader in the field of synthetic biology, an emerging and rapidly evolving discipline that applies engineering principles to biological systems. Using our suite of proprietary and complementary technologies, we design, build and regulate gene programs and cellular systems to enable the development of new and improved products and manufacturing processes across a variety of end markets, including healthcare, food, energy and environmental sciences. Our synthetic biology capabilities include the ability to precisely control the amount, location and modification of biological molecules to control the function and output of living cells and optimize for desired results at an industrial scale.

Working with our collaborators, we seek to create more effective, less costly and more sustainable solutions than can be provided through current industry practices. We believe our approach to synthetic biology can enable new and improved biotherapeutics, increase the productivity and quality of food crops and livestock, create sustainable alternative energy sources and chemical feedstocks and provide for enhanced environmental remediation. Our business model is to commercialize our technologies through exclusive channel collaborations, or ECCs, with collaborators that have industry expertise, development resources and sales and marketing capabilities to bring new and improved products and processes to market.

Our technologies combine the principles of precision engineering, statistical modeling, automation and production at an industrial scale. We efficiently engineer precise and complex gene programs across many cell types. We apply the engineering principle of a design-build-test-learn continuum, through which we accumulate knowledge about the characteristics and performance of gene programs and cell lines. This process of continuous learning allows us to enhance our ability to design and build improved and more complex gene programs and cellular systems.

We believe our technologies are broadly applicable across many diverse end markets, including some end markets that have failed to recognize the applicability of synthetic biology or failed to utilize biologically based processes to produce products. We have devised our business model to bring many different commercial products to market through the formation of ECCs with

 

 

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collaborators that have expertise within specific industry segments. In our ECCs, we provide expertise in the engineering, fabrication and modification of gene programs and cellular systems, and our collaborators are responsible for providing market and product development expertise, as well as regulatory, sales and marketing capabilities. Generally, our collaborators compensate us through technology access fees, royalties, milestones and reimbursements of certain costs. This business model allows us to leverage our capabilities and capital across a broader landscape of product opportunities and end markets than we would be capable of addressing on our own.

We began entering into ECCs in 2011 and are currently party to nine such agreements. Under these ECCs, we are developing products in the fields of healthcare and food. In healthcare, our ECCs include programs in oncology, anti-infectives, antibiotics and tissue repair. In food, we are working to increase the productivity and nutritional value of salmon and other fish. We are also working to establish ECCs in the areas of energy and environmental sciences.

While the field of synthetic biology is still emerging, the addressable markets that may benefit from this approach are large and well-established. In healthcare, synthetic biology may provide new approaches to treating diseases, as well as improvements to the manufacture of existing products. It is estimated that the global human pharmaceuticals market is over $900 billion and that biological therapeutics represent approximately $150 billion of this market. While genetically modified salmon or trout may be considered new products, the global market for aquaculture was valued at approximately $110 billion in 2011. Genetically modified agricultural plants are already grown on more than 170 million hectares around the world and are worth an estimated $65 billion dollars. In energy, we are working to create novel, highly engineered organisms that use specific feed stocks to create commercially valuable end products, such as isobutanol, which already has a variety of technical and industrial applications and is also being investigated as a gasoline alternative.

Our competitive strengths

We believe that our technologies and our approach to synthetic biology — design-build-test-learn — give us a competitive advantage over traditional industrial processes as well as current approaches to synthetic biology.

We believe that we have the following competitive strengths:

 

 

We have a suite of proprietary and complementary technologies.    We have built a suite of proprietary and complementary technologies that provides us with a comprehensive ability to design, create, modify and regulate gene programs and cellular systems.

 

 

Our design-build-test-learn continuum allows us to design and build improved and more complex gene programs.    We have developed a core expertise and technologies to design, build, and test complex gene programs, as well as technologies to isolate cells that best express the desired biological output. We have also developed an extensive bioinformatic network that enables us to continually learn and create optimal conditions for our gene programs.

 

 

We are a leader in synthetic biology.    We believe we are the first company focused exclusively on applying synthetic biology across a broad spectrum of end markets and have been working in the field since 1998. Over the last 15 years, we have accumulated extensive knowledge and

 

 

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experience in design, modification and regulation of gene programs. We believe all of these factors, coupled with our suite of proprietary and complementary technologies, provide us with a first-mover advantage in synthetic biology.

 

 

We serve large and diverse end markets with high built-in demand.    A vast number of the products consumed globally are or can be produced using biologically based processes. Natural resources are becoming more scarce as demand exceeds supply creating unmet needs for improvements in development and manufacturing. Because synthetic biology has the potential to deliver against these unmet needs, we believe that significant demand already exists for improved products enabled by synthetic biology. Additionally, there are markets utilizing traditional industrial processes that have failed to recognize the significant improvement in performance that could be achieved using synthetic biology.

 

 

We have a scalable ECC business model to leverage the broad potential of synthetic biology.    Under our ECC business model, our collaborators are primarily responsible for providing market and product development expertise, as well as sales, marketing and regulatory capabilities. Our ECC business model allows us to participate in the potential upside from products that are enabled by our technologies across an extensive range of industries, without the need for us to invest considerable resources in bringing individual programs to market. Moreover, we believe that we will increasingly engage in ECCs in new fields at an accelerating pace with well-recognized collaborators.

 

 

We have experienced management and employees.    Our management team, including our Chief Executive Officer, Randal J. Kirk, and our Chief Operating Officer, Krish Krishnan, consists of executives with a track record of success in building and managing research and development-driven companies, including New River Pharmaceuticals Inc., which was sold in 2007 to Shire plc for $2.6 billion. Our Chief Science Officer, Thomas D. Reed, was responsible for the initial conception and creation of our UltraVector technology platform. We have 163 employees primarily engaged in research and development, 78 of whom hold advanced degrees in engineering and biology or other sciences, including either a Ph.D., M.D. or D.V.M.

Our markets

Synthetic biology has applicability across many diverse end markets. Our goal is to be a leader in the application of synthetic biology for products currently utilizing biologically based processes, and a leader in the replacement of conventional processes and products with biologically based ones. Through the application of our suite of proprietary and complementary technologies, we believe we can create optimized biological processes and create substitutes for traditional industrial techniques, leading to improved products that are developed and manufactured faster and more cost-effectively. Our markets include healthcare (therapeutics, bioproduction and diagnostics), food (food animals and agriculture), energy and chemicals and environmental sciences (biosensors, bioremediation and specialty processes).

Our business model

We believe that because synthetic biology has applicability across many diverse end markets, we cannot take full advantage of synthetic biology with internal development programs alone. To address this, we have devised our business model to allow us to focus on our core expertise in

 

 

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synthetic biology while bringing many different commercial products to market via collaborations in a broad range of industries or end markets, thus minimizing and leveraging the use of our own capital.

Our business model is built around the formation of ECCs. An ECC is an agreement with a collaborator to develop products based on our technologies in a specifically defined field. We seek collaborators that have expertise within a specific industry segment and the commitment to provide resources for the development and commercialization of products within that industry segment. In our ECCs, we provide expertise in the engineering of gene programs and cellular systems, and our collaborators are responsible for providing market and product development expertise, as well as regulatory, sales and marketing capabilities.

Risks associated with our business

Our business is subject to numerous risks, as more fully described in the section entitled “Risk factors” immediately following this prospectus summary. You should read these risks before you invest in our common stock. We may be unable, for many reasons, including those that are beyond our control, to implement our business strategy. In particular, risks associated with our business include:

 

 

We have incurred net losses since our inception. We anticipate that we will continue to incur losses and negative cash flow from operating activities for the foreseeable future, and we may never achieve or maintain profitability. We expect a significant period of time will pass before the achievement of contractual milestones and the realization of royalties on products commercialized under our ECCs.

 

 

We expect that we may need substantial additional funding in the future in order to fund our business. This may cause dilution to our existing shareholders, restrict our operations or require us to relinquish rights to our technologies or product candidates. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

 

 

Ethical, legal and social concerns about synthetic biologically engineered products and processes could limit or prevent the use of products or processes using our technologies and limit our revenues.

 

 

If we fail to maintain and successfully manage our existing, or enter into new, ECCs, we may not be able to develop and commercialize our technologies and achieve or sustain profitability.

 

 

We rely on our collaborators to develop, commercialize and market products, and they may not be successful.

 

 

To date, no commercial products have been enabled by our technologies, and, even if our technologies prove to be effective, they still may not lead to commercially viable products.

 

 

Our ability to compete may decline if we do not adequately protect our propriety technologies or if we lose some of our intellectual property rights through costly litigation or administrative proceedings.

 

 

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If we lose key personnel, including key management personnel, or are unable to attract and retain additional personnel, it could delay our product development programs, harm our research and development efforts, and we may be unable to pursue collaborations or develop our own products.

Corporate information

We were founded by Thomas D. Reed, Ph.D., in 1998. We are a Virginia corporation. Since 2005, we have been controlled, managed and primarily funded by Randal J. Kirk, our Chairman and Chief Executive Officer and his affiliates for the purposes of developing our synthetic biology technologies. Our principal executive offices are located at 20374 Seneca Meadows Parkway, Germantown, Maryland 20876, and our telephone number is (301) 556-9900. Our website address is www.dna.com. The information contained on, or that can be accessed through, our website is not a part of this prospectus. We have included our website address in this prospectus solely as an inactive textual reference.

UltraVector®, RheoSwitch Therapeutic System® and RTS® are our registered trademarks in the United States and LEAP™ and mAbLogix™ are our common law trademarks in the United States. Other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

 

 

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The offering

 

Common stock offered by us

        shares

 

Common stock to be outstanding after this offering

        shares

 

Option to purchase additional shares from us

We have granted the underwriters an option for a period of up to 30 days to purchase up to             additional shares from us.

 

Use of proceeds

We estimate that the net proceeds from the sale of shares of our common stock that we are selling in this offering will be approximately $             million (or approximately $         million if the underwriters’ option to purchase additional shares in this offering is exercised in full), based upon an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We intend to use the net proceeds from this offering to fund continued investment in our research and development platforms, further our business development efforts to consummate new collaboration agreements with new companies across our various commercial divisions and for general corporate purposes. See “Use of proceeds” on page 40.

 

Proposed         symbol

“            “

 

 

The number of shares of common stock to be outstanding after this offering is based on (i) 9,907,669 shares of common stock outstanding on December 31, 2012, (ii) 112,906,464 shares of common stock into which all of our redeemable convertible preferred stock outstanding as of December 31, 2012 will be converted upon the completion of this offering, (iii) 19,047,619 shares of common stock into which the shares of Series F preferred stock issued between December 31, 2012 and April 30, 2013 will be converted upon the completion of this offering, and (iv) the conversion of aggregate dividends on our series preferred stock of         into approximately         shares of our common stock, based on an initial public offering price of $         per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus, upon completion of this offering and excludes:

 

 

4,048,672 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $3.37 per share, of which 1,415,109 shares are vested as of December 31, 2012;

 

 

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5,111,066 shares of our common stock reserved for future issuance under our 2008 Equity Incentive Plan as of December 31, 2012; and

 

 

894,423 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2012 at a weighted average exercise price of $0.45 per share.

Except as otherwise noted, all information in this prospectus assumes:

 

 

the filing and effectiveness of our amended and restated articles of incorporation in Virginia and the adoption of our amended and restated bylaws, each of which will occur immediately prior to the closing of this offering; and

 

 

no exercise by the underwriters of their option to purchase up to              additional shares of common stock from us to cover over-allotments.

 

 

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Summary consolidated financial data

The following table summarizes our consolidated financial data. We derived the summary consolidated statement of operations data for the years ended December 31, 2012 and 2011 and the consolidated balance sheet data as of December 31, 2012 from our audited consolidated financial statements and related notes appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be achieved in the future. The summary consolidated financial data should be read together with our consolidated financial statements and related notes, as well as “Selected consolidated financial data” beginning on page 47 and “Management’s discussion and analysis of financial condition and results of operations,” beginning on page 49. Our audited consolidated financial statements have been prepared in U.S. dollars in accordance with U.S. GAAP.

 

      Years ended December 31,  
     2012     2011  

 

 
     (In thousands, except share
and per share amounts)
 

Statement of Operations Data:

    

Revenues:

    

Collaboration revenues

   $ 13,706      $ 5,118   

Other revenues

     219        3,053   
  

 

 

   

 

 

 

Total revenues

     13,925        8,171   
  

 

 

   

 

 

 

Operating expenses:

    

Research and development

     64,185        70,386   

General and administrative

     24,897        18,300   

Other operating expenses

            1,912   
  

 

 

   

 

 

 

Total operating expenses

     89,082        90,598   
  

 

 

   

 

 

 

Loss from operations

     (75,157     (82,427
  

 

 

   

 

 

 

Total other expense, net

     (6,443     (2,853

Equity in net loss of affiliate

     (274       
  

 

 

   

 

 

 

Net loss

   $ (81,874   $ (85,280
  

 

 

   

 

 

 

Accretion of dividends on redeemable convertible preferred stock, not declared

     (21,994     (13,868
  

 

 

   

 

 

 

Net loss attributable to common shareholders

   $ (103,868   $ (99,148
  

 

 

   

 

 

 

Net loss attributable to common shareholders per share, basic and diluted

   $ (10.73   $ (10.81
  

 

 

   

 

 

 

Weighted average shares outstanding, basic and diluted

     9,683,984        9,171,140   

Unaudited Pro forma information(1)

    

Pro forma net loss attributable to common shareholders

    
    

Pro forma net loss per share, basic and diluted

    
    

Pro forma shares used in computation of pro forma net loss per share, basic and diluted

    

 

 
(1)  

Pro forma net loss and pro forma net loss per share, basic and diluted have been calculated after giving effect to (i) the issuance of 19,047,619 shares of Series F preferred stock issued between December 31, 2012 and April 30, 2013 and the conversion of those shares into 19,047,619 shares of common stock upon the completion of this offering; (ii) the conversion of 112,906,464 shares of our preferred stock outstanding as of December 31, 2012 into 112,906,464 shares of common stock upon the completion of this offering; and (iii) the conversion of aggregate cumulative dividends on our series preferred stock

 

 

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of $                 into approximately         shares of our common stock, based on an initial public offering price of $                 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, upon completion of this offering.

The following summary consolidated balance sheet data as of December 31, 2012 is presented:

 

 

on an actual basis;

 

 

on a pro forma basis after giving effect to (i) the issuance of 19,047,619 shares of Series F preferred stock issued between December 31, 2012 and April 30, 2013 and the conversion of those shares into 19,047,619 shares of common stock upon completion of this offering; (ii) the receipt of gross proceeds of $150.0 million, net of issuance costs of $3.1 million, from the issuance of Series F preferred stock between December 31, 2012 and April 30, 2013; (iii) the conversion of 112,906,464 shares of our preferred stock outstanding as of December 31, 2012 into 112,906,464 shares of common stock upon completion of this offering; and (iv) the conversion of aggregate cumulative dividends on our series preferred stock of $50,459 into approximately             shares of our common stock, based on an initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, upon completion of this offering; and

 

 

on a pro forma as adjusted basis after giving effect to the pro forma adjustments and giving further effect to the sale of             shares of common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The summary unaudited pro forma as adjusted consolidated balance sheet is for information purposes only and does not purport to indicate consolidated balance sheet information as of any future date.

 

      As of December 31, 2012
     Actual     Pro forma     Pro forma as
adjusted(1)

 

           (unaudited)
    

(In thousands)

Balance Sheet Data:

      

Cash and cash equivalents

   $ 10,403      $ 157,303     

Other current assets

     3,130        3,130     

Equity securities

     83,116        83,116     

Other long-term assets

     54,997        54,997     

Total assets

     151,646        298,546     

Accounts payable, accrued expenses and other current liabilities, excluding current portion of deferred revenue

     6,754        6,754     

Deferred revenue, current and non-current

     58,636        58,636     

Other long-term liabilities

     1,150        1,150     

Redeemable convertible preferred stock

     406,659            

Additional paid in capital

            553,559     

Accumulated deficit

     (321,553     (321,553  

Total shareholders’ equity (deficit)

     (321,553     232,006     

 

  

 

 

   

 

 

   

 

(1)  

Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) each of pro forma as

 

 

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adjusted cash and cash equivalents, total assets and total shareholders’ equity (deficit) by approximately $         million, assuming that the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same and the underwriters do not exercise their over-allotment option. Depending on market conditions and other considerations at the time we price this offering, we may sell a greater or lesser number of shares than the number set forth on the cover page of this prospectus. An increase (decrease) of 1.0 million shares in the number of shares we are offering would increase (decrease) each of pro forma as adjusted cash and cash equivalents, total assets and total shareholders’ equity (deficit) by approximately $         million, assuming an initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions payable by us. An increase of 1.0 million shares in the number of shares we are offering, together with a $1.00 increase in the public offering price per share, would increase each of pro forma as adjusted cash and cash equivalents, total assets and total shareholders’ equity (deficit) by approximately $        . A decrease of 1.0 million shares in the number of shares we are offering, together with a $1.00 decrease in the public offering price per share, would decrease each of pro forma as adjusted cash and cash equivalents, total assets and total shareholders’ equity (deficit) by approximately $        million.

 

 

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Risk factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with the other information contained in this prospectus, including our consolidated financial statements and the related notes appearing at the end of this prospectus, before making your decision to invest in shares of our common stock. We cannot assure you that any of the events discussed in the risk factors below will not occur. These risks could have a material and adverse impact on our business, results of operations, financial condition or prospects. If that were to happen, the trading price of our common stock could decline, and you could lose all or part of your investment.

This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this prospectus. See “Special note regarding forward-looking statements” for information relating to these forward-looking statements.

Risks related to our financial position, operating results and need for additional capital

We have a history of net losses, and we may not achieve or maintain profitability.

We have incurred net losses since our inception, including losses of $81.9 million and $85.3 million in 2012 and 2011, respectively. As of December 31, 2012, we had an accumulated deficit of $321.6 million. We may incur losses and negative cash flow from operating activities for the foreseeable future. To date, we have derived a substantial portion of our revenues from exclusive channel collaborations, or ECCs, with our collaborators and expect to derive a substantial portion of our revenues from these and additional ECCs for the foreseeable future. If our existing collaborators terminate their ECCs with us or we are unable to enter into new ECCs, our revenues could be adversely affected. In addition, certain of our ECCs provide for milestone payments, future royalties and other forms of contingent consideration, the payment of which are uncertain as they are dependent on our collaborators’ abilities and willingness to successfully develop and commercialize products. We expect a significant period of time will pass before the achievement of contractual milestones and the realization of royalties on products commercialized under our ECCs. As a result, we expect that our expenses will exceed revenues for the foreseeable future, and we may not achieve profitability. If we fail to achieve profitability, or if the time required to achieve profitability is longer than we anticipate, we may not be able to continue our business. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

We may need substantial additional capital in the future in order to fund our business.

We expect our future capital requirements will be substantial, particularly as we continue to develop our business and expand our synthetic biology technology platform. Although we believe that, based on our current level of operations and anticipated growth, our existing cash and cash equivalents and cash expected to be received from our current collaborators will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements through at least the next 12 months, we may need additional capital if our current plans and assumptions change. Our need for additional capital will depend on many factors, including:

 

 

the commercial success of our ECCs;

 

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whether we are successful in obtaining payments from our collaborators;

 

 

whether we can enter into additional ECCs;

 

 

the progress and scope of the collaborative and independent research and development projects performed by us and our collaborators;

 

 

whether an existing obligation under our ECC with ZIOPHARM Oncology, Inc. is triggered that could require us to provide up to $29 million to them, the timing of which is not within our control;

 

 

the effect of any acquisitions of other businesses or technologies that we may make in the future;

 

 

whether we decide to develop internal development or manufacturing capabilities;

 

 

the costs associated with being a public company; and

 

 

the filing, prosecution and enforcement of our intellectual property.

If our capital resources are insufficient to meet our capital requirements, and we are unable to enter into or maintain ECCs with collaborators that are able or willing to fund development efforts or commercialize products enabled by our technologies, we will have to raise additional funds to continue the development of our technologies and complete the commercialization of products, if any, resulting from our technologies. If future financings involve the issuance of equity securities, our existing shareholders would suffer dilution. If we raise debt financing, we may be subject to restrictive covenants that limit our ability to conduct our business. We may not be able to raise sufficient additional funds on terms that are favorable to us, if at all. If we fail to raise sufficient funds and continue to incur losses, our ability to fund our operations, take advantage of strategic opportunities, develop products or technologies, or otherwise respond to competitive pressures could be significantly limited. If this happens, we may be forced to delay or terminate research or development programs or the commercialization of products resulting from our technologies, curtail or cease operations or obtain funds through ECCs or other collaborative and licensing arrangements that may require us to relinquish commercial rights, or grant licenses on terms that are not favorable to us. If adequate funds are not available, we will not be able to successfully execute our business plan or continue our business.

Our quarterly and annual operating results may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of research analysts or investors, which could cause our stock price to decline.

Our financial condition and operating results have varied significantly in the past and may continue to fluctuate from quarter to quarter and year to year in the future due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the following factors, as well as other factors described elsewhere in this prospectus:

 

 

our ability to achieve or maintain profitability;

 

 

our relationships, and the associated exclusivity terms, with collaborators in our target end markets;

 

 

our ability to develop and maintain technologies that our collaborators continue to use and that new collaborators are seeking;

 

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our ability to enter into ECCs;

 

 

the feasibility of producing and commercializing products enabled by our technologies;

 

 

obligations to provide resources to our collaborators or to the collaborations themselves pursuant to the terms of the relevant ECC;

 

 

our ability to manage our growth;

 

 

the outcomes of research programs, clinical trials, or other product development and approval processes conducted by our collaborators;

 

 

the ability of our collaborators to develop and successfully commercialize products enabled by our technologies;

 

 

risks associated with the international aspects of our business;

 

 

our ability to integrate any businesses or technologies we may acquire with our business;

 

 

potential issues related to our ability to accurately report our financial results in a timely manner;

 

 

our dependence on, and the need to attract and retain, key management and other personnel;

 

 

our ability to obtain, protect and enforce our intellectual property rights;

 

 

our ability to prevent the theft or misappropriation of our intellectual property, know-how or technologies;

 

 

potential advantages that our competitors and potential competitors may have in securing funding or developing competing technologies or products;

 

 

our ability to obtain additional capital that may be necessary to expand our business;

 

 

our exposure to the volatility associated with recording the fair value of securities of our collaborators held by us;

 

 

our collaborators’ ability to obtain additional capital that may be necessary to develop and commercialize products under our ECCs;

 

 

business interruptions such as power outages and other natural disasters;

 

 

public concerns about the ethical, legal and social ramifications of genetically engineered products and processes; and

 

 

our ability to use our net operating loss carryforwards to offset future taxable income.

Due to the various factors mentioned above, and others, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance.

We have a limited operating history, which may make it difficult to evaluate our current business and predict our future performance.

We have been in existence since 1998. From 1998 until 2010, our operations focused primarily on organizing and staffing our Company and developing our technologies. Our current business model has not been tested. In January 2011, we recognized our first revenues from our first ECC.

 

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Because our revenue growth has occurred in recent periods, our limited operating history may make it difficult to evaluate our current business and predict our future performance. Any assessments of our current business and predictions made about our future success or viability may not be as accurate as they could be if we had a longer operating history. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries. If we do not address these risks successfully, our business will be harmed. If we engage in any acquisitions, we will incur a variety of costs and may potentially face numerous risks that could adversely affect our business and operations.

We may pursue strategic acquisitions and investments which could have an adverse impact on our business if they are unsuccessful.

We have made acquisitions in the past, and if appropriate opportunities become available, we may acquire additional businesses, assets, technologies or products to enhance our business in the future. In connection with any future acquisitions, we could:

 

 

issue additional equity securities, which would dilute our current shareholders;

 

 

incur substantial debt to fund the acquisitions; or

 

 

assume significant liabilities.

Although we conduct due diligence reviews of our acquisition targets, such processes may fail to reveal significant liabilities. Acquisitions involve numerous risks, including:

 

 

problems integrating the purchased operations, technologies or products;

 

 

unanticipated costs and other liabilities, diversion of management’s attention from our core businesses;

 

 

adverse effects on existing business relationships with current and/or prospective collaborators, customers and/or suppliers;

 

 

risks associated with entering markets in which we have no or limited prior experience; and

 

 

potential loss of key employees.

We do not have extensive experience in managing the integration process, and we may not be able to successfully integrate any businesses, assets, products, technologies or personnel that we might acquire in the future without a significant expenditure of operating, financial and management resources. The integration process could divert management time from focusing on operating our business, result in a decline in employee morale and cause retention issues to arise from changes in compensation, reporting relationships, future prospects or the direction of the business. Acquisitions also may require us to record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges, incur amortization expenses related to certain intangible assets, and incur large and immediate write-offs and restructuring and other related expenses, all of which could harm our operating results and financial condition. In addition, we may acquire companies that have insufficient internal financial controls, which could impair our ability to integrate the acquired company and adversely impact our financial reporting. If we fail in our integration efforts with respect to any of our acquisitions and are unable to efficiently operate as a combined organization, our business and financial condition may be adversely affected.

 

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We own equity interests in several of our collaborators and have exposure to the volatility and liquidity risks inherent in holding their common stock.

In connection with our ECCs, we generally receive technology access fees. Because several of our collaborators are private companies or public corporations with limited capital, we allow them to pay our access fee in stock. As a result, we own equity interests in several of our collaborators. We may continue to provide this alternative to our collaborators. Owning equity in our collaborators further increases our exposure to the risks of our collaborators’ businesses beyond our dependence on these collaborators to provide market and product development expertise, as well as sales, marketing and regulatory capabilities. Our equity ownership in our collaborators exposes us to volatility and the potential for negative returns. In many cases, our equity position is a minority position which exposes us to further risk as we are not able to exert control over the companies in which we hold securities.

We select collaborators based on a variety of factors such as their capabilities, capacity and expertise in a defined field. As described above, we may allow the collaborator to pay our access fee in cash or equity securities. As a result, the process by which we obtain equity interests in our collaborators and the factors we consider in deciding whether to acquire, hold or dispose of these equity positions may differ significantly from those that an independent investor would consider when purchasing equity interests in the collaborator. One significant factor would include our own expectation as to the success of our efforts to assist the collaborator in developing products enabled by our technologies.

We own common stock of several publicly traded companies and the values of those equity interests are subject to market price volatility. For each collaborator where we own equity securities, we make an accounting policy election to present them at either the fair value at the end of each reporting period or using the cost or equity method depending on our level of influence. We have adopted the fair value method of accounting for certain of these securities, and therefore, have recorded them at fair value at the end of each reporting period with the unrealized gain or loss recorded as a separate component of other expense, net for the period. As of December 31, 2012 the aggregate original cost basis of these securities was $92.1 million and the market value was $83.1 million. Through April 30, 2013, the market value of these equity securities, exclusive of equity securities received in 2013, has decreased approximately $32.1 million from the market value at December 31, 2012. The fair value of these securities is subject to fluctuation in the future due to the volatility of the stock market, changes in general economic conditions and changes in the financial conditions of one or more collaborators.

The common stock of our collaborators may not be publicly traded, and if it is traded publicly, the trading market could be limited or have low trading volume. In some cases, we could hold unregistered shares and we may not have demand registration rights with respect to those shares. We evaluate whether any discounts for trading restrictions or other basis for lack of marketability should be applied to the fair value of the securities at inception of the ECC. In the event we conclude that a discount should be applied, the fair value of the securities is adjusted at inception of the ECC and re-evaluated at each reporting period thereafter. In all of these instances, we have substantial liquidity risk related to these holdings, and we may not be able to sell, or sell quickly, all or part of these equity interests.

In connection with future ECCs, we may, from time to time, receive from collaborators, both public and private, warrants, rights and/or options, all of which involve special risks. To the extent we receive warrants or options in connection with future ECCs, we would be exposed to

 

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risks involving pricing differences between the market value of underlying securities and our exercise price for the warrants or options, a possible lack of liquidity and the related inability to close a warrant or options position, all of which could ultimately have an adverse effect.

We rely on our collaborators and other third parties to deliver timely and accurate information in order to accurately report our financial results in the time frame and manner required by law.

We need to receive timely, accurate and complete information from a number of third parties in order to accurately report our financial results on a timely basis. We rely on our collaborators to provide us with complete and accurate information regarding revenues, expenses and payments owed to or by us on a timely basis. In addition, we intend to rely on current and future collaborators under our ECCs to provide us with product sales and cost saving information in connection with royalties, if any, owed to us. If the information that we receive is not accurate, our consolidated financial statements may be materially incorrect and may require restatement, and we may not receive the full amount of consideration to which we are entitled under our ECCs. Although we have audit rights with these parties, performing such an audit could be expensive and time consuming and may not be adequate to reveal any discrepancies in a timeframe consistent with our reporting requirements. We own a significant equity position in several of our ECC collaborators, including a majority position in one of our ECC collaborators, AquaBounty Technologies, Inc., or AquaBounty. In March 2013, we began to consolidate the financial statements of AquaBounty into our consolidated financial statements. In the future, we may need to consolidate the financial statements of one or more other collaborators into our consolidated financial statements. Although we have contractual rights to receive information and certifications allowing us to do this, such provisions may not ensure that we receive information that is accurate or timely. As a result, we may have difficulty completing accurate and timely financial disclosures, which could have an adverse effect on our business.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

As of December 31, 2012, we had net operating loss carryforwards of approximately $207.0 million for U.S. federal income tax purposes available to offset future taxable income and U.S. federal and state research and development tax credits of $5.8 million, prior to consideration of annual limitations that may be imposed under Section 382 of the Internal Revenue Code of 1986, as amended, or Section 382. These carryforwards begin to expire in 2022. Our past issuances of stock and mergers and acquisitions have resulted in ownership changes within the meaning of Section 382. As a result, the utilization of portions of our net operating losses may be subject to annual limitations. These annual limitations may result in a significant portion of our net operating losses and research and development tax credits expiring prior to utilization. Future changes in stock ownership may also trigger an ownership change and, consequently, a Section 382 limitation.

 

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Risks related to our technologies and business operations

Ethical, legal and social concerns about synthetic biologically engineered products and processes could limit or prevent the use of products or processes using our technologies and limit our revenues.

Our technologies involve the use of synthetic biologically engineered products or synthetic biological technologies. Public perception about the safety and environmental hazards of, and ethical concerns over, genetically engineered products and processes could influence public acceptance of our technologies, products and processes. If we and our collaborators are not able to overcome the ethical, legal and social concerns relating to synthetic biological engineering, products and processes using our technologies may not be accepted. These concerns could result in increased expenses, regulatory scrutiny, delays or other impediments to our programs or the public acceptance and commercialization of products and processes dependent on our technologies or inventions. The ability of our collaborators to develop and commercialize products, or processes using our technologies could be limited by public attitudes and governmental regulation.

The subject of genetically modified organisms has received negative publicity, which has aroused public debate. This adverse publicity could lead to greater regulation and trade restrictions on imports of genetically altered products. Further, there is a risk that products produced using our technologies could cause adverse health effects or other adverse events, which could also lead to negative publicity.

The synthetic biological technologies that we develop may have significantly enhanced characteristics compared to those found in naturally occurring organisms, enzymes or microbes. While we produce our synthetic biological technologies only for use in a controlled laboratory and industrial environment, the release of such synthetic biological technologies into uncontrolled environments could have unintended consequences. Any adverse effect resulting from such a release could have a material adverse effect on our business and financial condition, and we may have exposure to liability for any resulting harm.

We may become subject to increasing regulation in the future.

Our ongoing research and development relies on evaluations in animals, which may become subject to bans or additional regulations, and, as described above, our research operations are subject to various environmental regulations. However, most of the laws and regulations concerning synthetic biology relate to the end products produced using synthetic biology, but that may change. For example, the Presidential Commission for the Study of Bioethical Issues in December 2010 recommended that the federal government oversee, but not regulate, synthetic biology research. The Presidential Commission also recommended that the government lead an ongoing review of developments in the synthetic biology field and that the government conduct a reasonable risk assessment before the field release of synthetic organisms. Synthetic biology may become subject to additional government regulations as a result of the recommendations, which could require us to incur significant additional capital and operating expenditures and other costs in complying with these laws and regulations.

To date, no commercial products have been enabled by our technologies and even if our technologies prove to be effective, they still may not lead to commercially viable products.

To date, none of our collaborators has received marketing approval or has commercialized any products enabled by our technologies. There is no guarantee that we or our collaborators will be

 

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successful in creating products enabled by our technologies. Even if our collaborators are successful in using our technologies, they may not be able to commercialize the resulting products or may decide to use other methods competitive with our technologies that do not utilize synthetic biology.

The FDA has not yet approved any gene therapies for use in humans or animals.

The U.S. Food and Drug Administration, or FDA, has not yet approved any gene therapies for use in humans or animals. The field of gene therapies is experimental and has not yet proven successful in many clinical trials. Clinical trials with gene therapies have encountered a multitude of significant technical problems in the past, including unintended integration with host DNA leading to serious adverse events, poor levels of protein expression, transient protein expression, viral overload, immune reactions to either viral capsids utilized to deliver DNA, DNA itself, proteins expressed or cells transfected with DNA. There can be no assurance that our development efforts or those of our collaborators will be successful, that we or they will receive the regulatory approvals necessary to initiate clinical trials, where applicable, or that we will ever be able to successfully commercialize a product enabled by our technologies. To the extent that we or our collaborators utilize viral constructs or other systems to deliver gene therapies and the same or similar delivery systems demonstrate unanticipated and/or unacceptable side effects in preclinical or clinical trials conducted by ourselves or others we may be forced to, or elect to, discontinue development of such products.

If we lose key personnel, including key management personnel, or are unable to attract and retain additional personnel, it could delay our product development programs, harm our research and development efforts, and we may be unable to pursue collaborations or develop our own products.

Our business involves complex operations across a variety of markets and requires a management team and employee workforce that is knowledgeable in the many areas in which we operate. The loss of any key members of our management, including our Chief Executive Officer, Randal J. Kirk, or our Chief Science Officer, Thomas D. Reed, or the failure to attract or retain other key employees who possess the requisite expertise for the conduct of our business, could prevent us from developing and commercializing our products for our target markets and entering into collaborations or licensing arrangements to execute on our business strategy. We currently maintain key man insurance on Dr. Reed; however, that coverage would be inadequate to compensate for the loss of his services. In addition, the loss of any key scientific staff, or the failure to attract or retain other key scientific employees, could prevent us from developing our technologies for our target markets and entering into collaborations or licensing arrangements to execute on our business strategy. We may not be able to attract or retain qualified employees in the future due to the intense competition for qualified personnel among biotechnology, synthetic biology and other technology-based businesses, or due to the unavailability of personnel with the qualifications or experience necessary for our business. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience staffing constraints that will adversely affect our ability to meet the demands of our collaborators and customers in a timely fashion or to support our internal research and development programs. In particular, our product and process development programs are dependent on our ability to attract and retain highly skilled scientists. Competition for experienced scientists and other technical personnel from numerous companies and academic and other research institutions may limit our ability to attract and retain such personnel on

 

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acceptable terms. All of our employees are at-will employees, which means that either the employee or we may terminate their employment at any time.

Our planned activities will require additional expertise in specific industries and areas applicable to the products and processes developed through our technologies or acquired through strategic or other transactions, especially in the end markets that we seek to penetrate. These activities will require the addition of new personnel, and the development of additional expertise by existing personnel. The inability to attract personnel with appropriate skills or to develop the necessary expertise could impair our ability to grow our business.

We may encounter difficulties managing our growth, which could adversely affect our business.

Currently, we are working simultaneously on multiple projects targeting several market sectors, including activities in human therapeutics, protein production, animal sciences, agricultural biotechnology and industrial products. These diversified operations place increased demands on our limited resources and require us to substantially expand the capabilities of our administrative and operational resources and to attract, train, manage and retain qualified management, technicians, scientists and other personnel. As our operations expand domestically and internationally, we will need to continue to manage multiple locations and additional relationships with various customers, collaborators, suppliers and other third parties. Our ability to manage our operations, growth and various projects effectively will require us to make additional investments in our infrastructure to continue to improve our operational, financial and management controls and our reporting systems and procedures and to attract and retain sufficient numbers of talented employees, which we may be unable to do effectively. As a result, we may be unable to manage our expenses in the future, which may negatively impact our gross margins or operating margins in any particular quarter. In addition, we may not be able to successfully improve our management information and control systems, including our internal control over financial reporting, to a level necessary to manage our growth.

Competitors and potential competitors may develop products and technologies that make ours obsolete or garner greater market share than ours.

The synthetic biologics industry and each of the commercial sectors we have targeted are characterized by rapid technological change and extensive competition. Our future success will depend on our ability to maintain a competitive position with respect to technological advances. Academic institutions also are working in this field. Technological development by others may result in our technologies, as well as products developed by our collaborators using our technologies, becoming obsolete.

Our ability to compete successfully will depend on our ability to develop proprietary technologies that can be used by our collaborators to produce products that reach the market in a timely manner and are technologically superior to and/or are less expensive than other products on the market. Certain of our competitors may benefit from local government subsidies and other incentives that are not available to us or our collaborators. As a result, our competitors may be able to develop competing and/or superior technologies and processes, and compete more aggressively and sustain that competition over a longer period of time than we or our collaborators can. As more companies develop new intellectual property in our markets, a competitor could acquire patent or other rights that may limit products using our technologies, which could lead to litigation.

 

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We may be sued for product liability.

Each of our ECCs requires the collaborator to indemnify us for all liability related to products produced pursuant to the ECC and to obtain insurance coverage related to product liability. Even so, we may be named in product liability suits relating to products that are produced by our collaborators using our technologies. These claims could be brought by various parties, including other companies who purchase products from our collaborators or by the end users of the products. We cannot guarantee that our collaborators will not breach the indemnity and insurance coverage provisions of the ECCs. Further, insurance coverage is expensive and may be difficult to obtain, and may not be available to us or to our collaborators in the future on acceptable terms, or at all. We cannot assure you that our collaborators will have adequate insurance coverage against potential claims. In addition, although we currently maintain product liability insurance for our technologies in amounts we believe to be commercially reasonable, if the coverage limits of these insurance policies are not adequate, a claim brought against us, whether covered by insurance or not, could have a material adverse effect on our business, results of operations, financial condition and cash flows. This insurance may not provide adequate coverage against potential losses, and if claims or losses exceed our liability insurance coverage, we may go out of business. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Regardless of the merits or eventual outcome, liability claims may result in:

 

 

reduced resources of our management to pursue our business strategy;

 

 

decreased demand for products enabled by our technologies;

 

 

injury to our or our collaborators reputation and significant negative media attention;

 

 

withdrawal of clinical trial participants;

 

 

initiation of investigations by regulators;

 

 

product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

 

significant costs to defend resulting litigation;

 

 

substantial monetary awards to trial participants or patients;

 

 

loss of revenue; and

 

 

the inability to commercialize any products using our technologies.

We depend on sophisticated information technology and infrastructure.

We rely on various information systems to manage our operations. These systems are complex and include software that is internally developed, software licensed from third parties and hardware purchased from third parties. These products may contain internal errors or defects, particularly when first introduced or when new versions or enhancements are released. Failure of these systems could have an adverse effect on our business, which in turn may materially adversely affect our operating results and financial condition.

 

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We may incur significant costs complying with environmental, health and safety laws and regulations, and failure to comply with these laws and regulations could expose us to significant liabilities.

We use hazardous chemicals and radioactive and biological materials in our business and are subject to a variety of federal, state, local and international laws and regulations governing, among other matters, the use, generation, manufacture, transportation, storage, handling, disposal of, and human exposure to these materials both in the United States and overseas, including regulation by governmental regulatory agencies, such as the Occupational Safety and Health Administration and the U.S. Environmental Protection Agency. We have incurred, and will continue to incur, capital and operating expenditures and other costs in the ordinary course of our business in complying with these laws and regulations.

Risks associated with our ECC business model

If we fail to maintain and successfully manage our existing, or enter into new, ECCs, we may not be able to develop and commercialize our technologies and achieve or sustain profitability.

Our ability to enter into, maintain and manage collaborations in our target markets is fundamental to the success of our business. We currently rely, and intend to rely for the foreseeable future, on our collaborators to develop products enabled by our technologies and then to manufacture, market, distribute and sell these products. We intend to enter into other strategic ECCs to produce, market and sell products enabled by the technologies that we have developed and will continue to develop. However, we may not be successful in entering into ECCs with future strategic collaborators. Any failure to enter into ECCs in our target market sectors on favorable terms could delay or hinder our ability to develop and commercialize our technologies and could increase our costs of development and commercialization.

We have entered into ECCs with strategic collaborators to develop products enabled by our technologies. There can be no guarantee that we can successfully manage these ECCs. Under the ECCs, we must use diligent efforts to carry out development activities under the ECC. The exclusivity provisions of the ECCs restrict our ability to commercialize our technologies in the designated field covered by the ECC. In most cases, the collaborator may terminate the ECC with us for any reason upon 90 days’ notice. In all cases, the ECC may be terminated if we fail to exercise diligent efforts or breach, and fail to cure, other provisions of the ECC. In addition, since our efforts to date have focused on a small number of collaborators in certain targeted sectors, our business would be adversely affected if one or more of these collaborators terminate their ECCs, fail to use our technologies or fail to develop commercially viable products enabled by our technologies.

Dependence on ECCs also will subject us to other risks, including:

 

 

we have relinquished important rights regarding the commercialization, marketing and distribution of products and we may disagree with our collaborators’ plans in these areas;

 

 

although we retain broad rights with respect to intellectual property developed under the ECCs, our collaborators have the right, under certain circumstances, to take control of the enforcement of such intellectual property;

 

 

we may have lower revenues than if we were to develop, manufacture, market and distribute products enabled by our technologies ourselves;

 

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a collaborator could, without the use of our synthetic biology technologies, develop and market a competing product either independently or in collaboration with others, including our competitors;

 

 

our collaborators could be undercapitalized or fail to secure sufficient resources to fund the development and/or commercialization of the products enabled by our technologies in accordance with the ECC;

 

 

our collaborators could become unable or less willing to expend their resources on research and development or commercialization efforts with respect to our technologies due to general market conditions, their financial condition or other circumstances beyond our control;

 

 

we may be unable to manage multiple simultaneous ECCs or fulfill our obligations with respect thereto;

 

 

disagreements with a collaborator could develop and any conflict with a collaborator could reduce our ability to enter into future ECCs and negatively impact our relationships with one or more existing collaborators;

 

 

our collaborators could terminate our ECC with them, in which case, our collaborators may retain rights related to certain products, we may not be able to find another collaborator to develop different products in the field and we may not be able to develop different products in the field ourselves;

 

 

our business could be negatively impacted if any of our collaborators undergo a change of control to a third party who is not willing to work with us on the same terms or commit the same resources as our current collaborator; and

 

 

our collaborators may operate in countries where their operations could be adversely affected by changes in the local regulatory environment or by political unrest.

If any of these events occur, or if we fail to maintain our ECCs with our collaborators, we may not be able to commercialize our existing and potential technologies, grow our business or generate sufficient revenues to support our operations.

We rely on our collaborators to develop, commercialize and market products, and they may not be successful.

We depend on our collaborators to commercialize the products enabled by our technologies. If our collaborators are not able to successfully develop the products enabled by our technologies, none of our enabled products will become commercially available and we will receive no back-end payments under our ECCs. Because we do not currently and may never possess the resources necessary to independently develop and commercialize all of the potential products that may result from our technologies, our ability to succeed in markets we have currently targeted depends on our ability to enter into ECCs to develop and commercialize potential products. Some of our existing collaborators do not themselves have the resources necessary to commercialize products and they in turn will need to rely on additional sources of financing or third party collaborations. In addition, pursuant to our current ECCs and similar ECCs that we may enter into in the future, we have limited or no control over the amount or timing of resources that any collaborator is able or willing to devote to developing products or collaborative efforts. Any of our collaborators may fail to perform its obligations under the ECC. Our collaborators may

 

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breach or terminate their ECCs with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. If any of these events were to occur, our revenues, financial condition and results of operations could be adversely affected.

The sales process for our ECCs may be lengthy and unpredictable, and we may expend substantial funds and management effort with no assurance of successfully entering into new collaborations to commercialize our technologies.

The sales process for our ECCs may be lengthy and unpredictable. Our sales and licensing efforts may require the effective demonstration of the benefits, value, differentiation, validation of our technologies and services and significant education and training of multiple personnel and departments within the potential collaborator’s organization. Though we have made efforts to standardize our ECCs, we may be required to negotiate ECCs containing terms unique to each collaborator, which would lengthen the sales cycle. We may expend substantial funds and management effort with no assurance that we will execute an ECC or otherwise sell our technologies or services. In addition, this lengthy sales cycle makes it more difficult for us to accurately forecast revenue in future periods and may cause revenues and operating results to vary significantly in such periods.

We have entered into a limited number of ECCs to date, and we require collaborators to successfully commercialize the products enabled by our technologies.

Our success depends upon entering into ECCs with a number of collaborators across a broad spectrum of industries. There is a risk that we may not be able to demonstrate the value proposition of our technologies with enough collaborators across enough industries for us to be successful. We intend to pursue additional ECCs, but may be unable to do so on terms satisfactory to us, or at all. Our current ECCs and any new ECCs we are able to enter into in one or more of the markets we have targeted may not be successful. Moreover, because we have limited financial and managerial resources, we will be required to prioritize our application of resources to particular development efforts. Any resources we expend on one or more of these efforts could be at the expense of other potentially profitable opportunities. If we focus our efforts and resources on one or more of these markets and they do not lead to commercially viable products, our revenues, financial condition and results of operations could be adversely affected.

Many of our current collaborators have no experience producing products at the commercial scale needed for the development of their business, and they will not succeed if they cannot effectively commercialize their products.

In addition to developing products using our technologies, our collaborators must demonstrate the ability to utilize our technologies to produce desired products at the commercial scale and on an economically viable basis or they must collaborate with others to do so. The products and processes developed using our technologies may not perform as expected when applied at commercial scale, or our collaborators may encounter operational challenges for which we and they are unable to devise a workable solution. For example, contamination in the production process could decrease process efficiency, create delays and increase our collaborators’ costs. Moreover, under the terms of our ECCs, we limit the ability of our collaborators to partner their programs with third parties. We and our collaborators may not be able to scale up our production in a timely manner, if at all, even if our collaborators successfully complete product development in their laboratories and pilot and demonstration facilities. If this occurs, the ability of our collaborators to commercialize products and processes using our technologies will be

 

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adversely affected, and, with respect to any products that are brought to market, our collaborators may not be able to lower the cost of production, which would adversely affect our ability to increase the future profitability of our business.

The markets in which our collaborators are developing products using our technologies are subject to extensive regulation, and we rely on our collaborators to comply with all applicable laws and regulations.

Our technologies are used in products that are subject to extensive regulation by governmental authorities. We depend on our collaborators to comply with these laws and regulations with respect to products they produce using our technologies and we do not independently monitor whether our collaborators comply with applicable laws and regulations. If our collaborators fail to comply with applicable laws and regulations, we are subject to substantial financial and operating risks because we depend on our collaborators to produce the end products enabled by our technologies for sale, and because in many cases we have a substantial equity interest in our collaborators. These regulatory risks are extensive and include the following:

 

 

complying with these regulations, including seeking approvals, the uncertainty of the scope of future regulations, and the costs of continuing compliance with regulations could affect the sales and profitability of our collaborators and materially impact our operating results;

 

 

our business could be adversely affected if the processes used by our collaborators to manufacture their final products fail to be approved by the applicable regulatory authorities;

 

 

where products are subject to regulatory approval, the regulatory approval process can be lengthy, costly, time consuming and inherently unpredictable, and if our collaborators are ultimately unable to obtain regulatory approval for products using our technologies, our business will be substantially harmed;

 

 

even if our collaborators are able to commercialize products using our technologies, the product may become subject to post-approval regulatory requirements unfavorable pricing regulations, third-party payor reimbursement practices or regulatory reform initiatives that could harm our business;

 

 

we and our collaborators conduct on-going research and development that relies on evaluations in animals, which may become subject to bans or additional regulations;

 

 

compliance with existing or future environmental laws and regulations could have a material adverse impact on the development and commercialization of products using our technologies; and

 

 

to the extent products produced using our technologies are commercialized outside the United States, they will be subject to additional laws and regulations under the jurisdictions in which such products are commercialized.

The markets in which our collaborators are developing products using our technologies are highly competitive.

The markets in which our collaborators are developing products are, and will continue to be, highly competitive, and there can be no assurance that we or our collaborators will be able to compete effectively. There are numerous companies presently in these markets that are developing products that may compete with, and could adversely affect the prices for, any

 

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products developed by our collaborators using our technologies. Many of these competitors and potential competitors are well-established companies with significant resources and experience, along with well-developed distribution systems and networks for their products, valuable historical relationships with potential customers and extensive sales and marketing programs for their products. Some of these competitors may use these resources and their market influence to impede the development and/or acceptance of the products developed by our collaborators using our technologies.

To the extent that any of our collaborators’ competitors are more successful with respect to any key competitive factor or our collaborators are forced to reduce, or are unable to raise, the price of any products enabled by our technologies in order to remain competitive, our operating results and financial condition could be materially adversely affected. Competitive pressure could arise from, among other things, safety and efficacy concerns, limited demand or a significant number of additional competitive products being introduced into a particular market, price reductions by competitors, the ability of competitors to capitalize on their economies of scale, the ability of competitors to produce or otherwise procure products similar or equivalent to those of our collaborators at lower costs and the ability of competitors to access more or newer technology than our collaborators can access (including our own).

Our right to terminate our ECCs is limited.

Generally, we do not have the right to terminate an ECC except in limited circumstances such as the collaborator’s failure to exercise diligent efforts in performing its obligations under the ECC, including its development of products enabled by our technologies, or its breach of a term of the ECC that remains uncured for a specified period of time. Moreover, each of our collaborators receives an exclusive license to use all of our technologies in a designated field, potentially in perpetuity. The collaborators we choose in particular fields may not be in the best position to maximize the value of our technologies in that field, if they are capable of commercializing any products at all. In addition, the scope of the field for a particular ECC may prove to be too broad and result in the failure to maximize the value of our technologies in that field.

Risks related to our intellectual property

Our ability to compete may decline if we do not adequately protect our proprietary technologies or if we lose some of our intellectual property rights through costly litigation or administrative proceedings.

Our success depends in part on our ability to obtain patents and maintain adequate protection of our intellectual property in the United States and abroad for our suite of technologies and resultant products and potential products. We have adopted a strategy of seeking patent protection in the United States and abroad with respect to certain of the technologies used in or relating to our products and processes. We have also in-licensed rights to additional patents and pending patent applications in the United States and abroad. However, some of these in-licensed patents will expire as early as 2014, and some of our own patents will expire as early as 2017. We intend to continue to apply for patents relating to our technologies, methods and products as we deem appropriate.

The enforceability of patents involves complex legal and factual questions and, therefore, the extent of enforceability cannot be guaranteed. Issued patents and patents issuing from pending applications may be challenged, invalidated or circumvented. Moreover, the United States Leahy-

 

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Smith America Invents Act, enacted in September 2011, brought significant changes to the U.S. patent system, which include a change to a “first to file” system from a “first to invent” system and changes to the procedures for challenging issued patents and disputing patent applications during the examination process, among other things. The effects of these changes on our patent portfolio and business have yet to be determined, as the final substantive provisions of the America Invents Act took effect on March 16, 2013. The United States Patent and Trademark Office, or the USPTO, only recently finalized the rules relating to these changes and the courts have yet to address the new provisions. These changes could increase the costs and uncertainties surrounding the prosecution of our patent applications and the enforcement or defense of our patent rights. Additional uncertainty may result from legal precedent handed down by the United States Court of Appeals for the Federal Circuit and United States Supreme Court as they determine legal issues concerning the scope and construction of patent claims and inconsistent interpretation of patent laws by the lower courts. Accordingly, we cannot ensure that any of our pending patent applications will result in issued patents, or even if issued, predict the breadth of the claims upheld in our and other companies’ patents. Given that the degree of future protection for our proprietary rights is uncertain, we cannot ensure that we were the first to invent the inventions covered by our pending patent applications, we were the first to file patent applications for these inventions, the patents we have obtained, particularly certain patents claiming nucleic acids, proteins, or methods, are valid and enforceable, and the proprietary technologies we develop will be patentable.

In addition, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technologies, particularly in certain foreign countries where the local laws may not protect our proprietary rights as fully as in the United States. Moreover, third parties could practice our inventions in territories where we do not have patent protection. Such third parties may then try to import into the United States or other territories products, or information leading to potentially competing products, made using our inventions in countries where we do not have patent protection for those inventions. If competitors are able to use our technologies, our ability to compete effectively could be harmed. Moreover, others may independently develop and obtain patents for technologies that are similar to or superior to our technologies. If that happens, we may need to license these technologies, and we may not be able to obtain licenses on reasonable terms, if at all, which could harm our business.

We also rely on trade secrets to protect our technologies, especially in cases when we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While we require our employees, academic collaborators, collaborators, consultants and other contractors to enter into confidentiality agreements, we may not be able to adequately protect our trade secrets or other proprietary or licensed information. If we cannot maintain the confidentiality of our proprietary and licensed technologies and other confidential information, our ability and that of our licensor to receive patent protection and our ability to protect valuable information owned or licensed by us may be imperiled. Enforcing a claim that a third-party entity illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.

 

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Litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend significant time and money and could prevent us from commercializing our technologies or impact our stock price.

Our commercial success also depends in part on not infringing patents and proprietary rights of third parties, and not breaching any licenses or other agreements that we have entered into with regard to our technologies, products and business. We cannot ensure that patents have not been issued to third parties that could block our or our collaborators’ ability to obtain patents or to operate as we would like. There may be patents in some countries that, if valid, may block our ability to make, use or sell our products in those countries, or import our products into those countries, if we are unsuccessful in circumventing or acquiring the rights to these patents. There also may be claims in patent applications filed in some countries that, if granted and valid, also may block our ability to commercialize products or processes in these countries if we are unable to circumvent or license them.

The biotechnology industry is characterized by frequent and extensive litigation regarding patents and other intellectual property rights. Many companies have employed intellectual property litigation as a way to gain a competitive advantage. Our involvement in litigation, interferences, opposition proceedings or other intellectual property proceedings inside and outside of the United States, to defend our intellectual property rights or as a result of alleged infringement of the rights of others, may divert management time from focusing on business operations and could cause us to spend significant amounts of money. Some of our competitors may have significantly greater resources and, therefore, they are likely to be better able to sustain the cost of complex patent or intellectual property litigation than we could. The uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our business or to enter into addition collaborations with others. Furthermore, any potential intellectual property litigation also could force us or our collaborators to do one or more of the following:

 

 

stop selling, incorporating or using products that use the intellectual property at issue;

 

 

obtain from the third party asserting its intellectual property rights a license to sell or use the relevant technology, which license may not be available on reasonable terms, if at all; or

 

 

redesign those products or processes that use any allegedly infringing technology, or relocate the operations relating to the allegedly infringing technology to another jurisdiction, which may result in significant cost or delay to us, or which could be technically infeasible.

The patent landscape in the field of synthetic biology is particularly complex. We are aware of United States and foreign patents and pending patent applications of third parties that cover various aspects of synthetic biology including patents that some may view as covering aspects of our technologies. In addition, there may be patents and patent applications in the field of which we are not aware. In many cases, the technologies we develop are early-stage technologies and we are and our collaborators are just beginning the process of designing and developing products using these technologies. Although we will seek to avoid pursuing the development of products that may infringe any patent claims that we believe to be valid and enforceable, we and our collaborators may fail to do so. Moreover, given the breadth and number of claims in patents and pending patent applications in the field of synthetic biology and the complexities and uncertainties associated with them, third parties may allege that we or our collaborators are infringing upon patent claims even if we do not believe such claims to be valid and enforceable.

 

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Although no third party has asserted a claim of infringement against us, others may hold proprietary rights that could prevent products using our technologies from being marketed. Any patent-related legal action against persons who license our technologies, our collaborators or us claiming damages and seeking to enjoin commercial activities relating to products using our technologies or our processes could subject us to potential liability for damages and require our licensor or us to obtain a license to continue to manufacture or market such products or any future product candidates that use our technologies. We cannot predict whether we or our licensor would prevail in any such actions or that any license required under any of these patents would be made available on commercially acceptable terms, if at all. In addition, we cannot be sure that any such products or any future product candidates or processes could be redesigned to avoid infringement, if necessary. Accordingly, an adverse determination in a judicial or administrative proceeding, or the failure to obtain necessary licenses, could prevent our collaborators from developing and commercializing products using our technologies, which could harm our business, financial condition and operating results.

If any of our competitors have filed patent applications or obtained patents that claim inventions also claimed by us, we may have to participate in interference proceedings declared by the USPTO to determine priority of invention and, thus, the right to the patents for these inventions in the United States. These proceedings could result in substantial cost to us even if the outcome is favorable. Even if successful, an interference may result in loss of certain of our important claims.

Any litigation or proceedings could divert our management’s time and efforts. Even unsuccessful claims could result in significant legal fees and other expenses, diversion of management time, and disruption in our business. Uncertainties resulting from initiation and continuation of any patent or related litigation could harm our ability to compete.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. Given the size of our intellectual property portfolio, compliance with these provisions involves significant time and expense. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.

If we do not obtain additional protection under the Hatch-Waxman Amendments and similar foreign legislation by extending the patent terms and obtaining data exclusivity for our technologies, our business may be materially harmed.

Depending upon the timing, duration and specifics of FDA marketing approval of products using our technologies, one or more of the U.S. patents we own or license may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, we may not be granted an

 

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extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, our competitors may obtain approval of competing products following our patent expiration, and our ability to generate revenues could be materially adversely affected.

Enforcing our intellectual property rights may be difficult and unpredictable.

If we were to initiate legal proceedings against a third party to enforce a patent claiming one of our technologies, the defendant could counterclaim that our patent is invalid and/or unenforceable or assert that the patent does not cover its manufacturing processes, manufacturing components or products. Proving patent infringement may be difficult, especially where it is possible to manufacture a product by multiple processes. Furthermore, in patent litigation in the United States, defendant counterclaims alleging both invalidity and unenforceability are commonplace. Although we believe that we have conducted our patent prosecution in accordance with the duty of candor and in good faith, the outcome following legal assertions of invalidity and unenforceability during patent litigation is unpredictable. With respect to the validity of our patent rights, we cannot be certain, for example, that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would not be able to exclude others from practicing the inventions claimed therein. Such a loss of patent protection could have a material adverse impact on our business. Even if our patent rights are found to be valid and enforceable, patent claims that survive litigation may not cover commercially valuable products or prevent competitors from importing or marketing products similar to our own, or using manufacturing processes or manufacturing components similar to those used to produce the products using our technologies.

Although we believe we have obtained assignments of patent rights from all inventors, if an inventor did not adequately assign their patent rights to us, a third party could obtain a license to the patent from such inventor. This could preclude us from enforcing the patent against such third party.

We may not be able to enforce our intellectual property rights throughout the world.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to synthetic biology. This could make it difficult for us to stop the infringement of our patents or misappropriation of our other intellectual property rights. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate.

 

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If our technologies or products using our technologies are stolen, misappropriated or reverse engineered, others could use the technologies to produce competing technologies or products.

Third parties, including our collaborators, contract manufacturers, contractors and others involved in our business often have access to our technologies. If our technologies, or products using our technologies, were stolen, misappropriated or reverse engineered, they could be used by other parties that may be able to reproduce our technologies or products using our technologies for their own commercial gain. If this were to occur, it would be difficult for us to challenge this type of use, especially in countries with limited intellectual property protection.

Confidentiality agreements with employees and others may not adequately prevent disclosures of trade secrets and other proprietary information.

We have taken measures to protect our trade secrets and proprietary information, but these measures may not be effective. We require our new employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements also generally provide that inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. Nevertheless, our proprietary information may be disclosed, third parties could reverse engineer our technologies or products using our technologies and others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Risks related to AquaBounty

Because we own a majority of the issued and outstanding shares of AquaBounty, the following risk factors that are applicable to AquaBounty’s business also apply to us.

AquaBounty will need additional capital.

In order for AquaBounty to execute on its business plan as announced by its management, AquaBounty will have future capital requirements, and we may be required to invest additional funds in AquaBounty. If we fail to invest these additional funds, we may not retain control over AquaBounty.

There is significant uncertainty regarding regulatory approval for AquaBounty’s AquAdvantage® Salmon.

As a genetically modified animal for human consumption, AquAdvantage® Salmon, or AAS, will require approval from the FDA and regulatory bodies in other countries before it can be sold. To date, there have been significant delays in the regulatory process. There is no guarantee that any approvals granted, if granted, will not be subject to onerous obligations. Any change to AAS or the development of a new product, including pursuant to our ECC, will require AquaBounty to again obtain approval from the FDA and regulatory bodies in other countries.

 

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The loss of AquaBounty broodstock would result in the loss of AquaBounty’s commercial technology.

AquaBounty’s AAS intellectual property resides in the broodstock themselves; destruction of AAS broodstocks by whatever means would result in the loss of the commercial technology. Live animals are subject to disease that may, in some cases, prevent or cause delay in the export of fish or eggs to customers. Disease organisms may be present undetected and transferred inadvertently. Such events may cause loss of revenue.

AquaBounty is exposed to exchange rate fluctuation.

As a consequence of the international nature of its business, AquaBounty is exposed to risks associated with changes in foreign currency exchange rates. AquaBounty is based in the United States and presents its financial statements in U.S. dollars and the majority of AquaBounty’s cash resources are held in U.S. dollars or in Canadian dollars. Some of AquaBounty’s future expenses and revenues are expected to be denominated in currencies other than in U.S. dollars. Therefore, movements in exchange rates to translate to foreign currencies may have an impact on AquaBounty’s reported results of operations, financial position and cash flows.

Risks related to our common stock and this offering

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. Based on the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $             per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the assumed initial public offering price. Purchasers of common stock in this offering will have contributed approximately              percent of the aggregate price paid by all purchasers of our stock but will own only approximately              percent of our common stock outstanding after this offering, excluding any shares of our common stock that they may have acquired prior to this offering. Furthermore, if the underwriters exercise their over-allotment option or our previously issued options and warrants to acquire common stock at prices below the assumed initial public offering price are exercised, you will experience further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution” elsewhere in this prospectus.

No public market for our common stock currently exists and an active trading market may not develop or be sustained following this offering.

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations with the underwriters. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. Although we intend to apply to list our common stock on             , an active trading market for our shares may never develop or, if developed, be maintained following this offering. If an active market for our common stock does not develop or is not maintained, it may be difficult for you to sell shares you purchase in this

 

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offering without depressing the market price for the shares or at all. An inactive trading market also may impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration. The lack of an active market also may reduce the fair market value of your shares.

We have broad discretion in the use of net proceeds from this offering and may not use them effectively.

Although we currently intend to use the net proceeds from this offering in the manner described in “Use of proceeds” elsewhere in this prospectus, we will have broad discretion in the application of the net proceeds and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Our failure to apply these net proceeds effectively could result in financial losses that could have a material adverse effect on our business, cause the price of our common stock to decline and delay the development of our product candidates. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

The price of our shares of common stock is likely to be volatile, and you could lose all or part of your investment.

The trading price of our shares of common stock is likely to be volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control, including limited trading volume. In addition to the factors discussed in this “Risk factors” section and elsewhere in this prospectus, these factors include:

 

 

developments concerning our collaborators;

 

 

competition from existing technologies and products or new technologies and products that may emerge;

 

 

announcements of new ECCs, significant acquisitions, strategic partnerships, joint ventures, new products, capital commitments or other events by us or our competitors;

 

 

the inability to establish ECCs or terminate ECCs;

 

 

actual or anticipated variations in our quarterly operating results;

 

 

failure to meet the estimates and projections of the investment community or that we may otherwise provide to the public;

 

 

our cash position;

 

 

announcement or expectation of additional financing efforts;

 

 

issuances of debt or equity securities;

 

 

our inability to successfully enter new markets or develop additional products, whether with our collaborators or independently;

 

 

actual or anticipated fluctuations in our competitors’ or our collaborators’ operating results or changes in their respective growth rates;

 

 

fluctuations in the market value of collaborators for which we own equity interests, particularly in light of our use of equity accounting for certain of these investments;

 

 

sales of our shares of common stock by us, or our shareholders in the future;

 

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trading volume of our shares of common stock on the                     ;

 

 

market conditions in our industry;

 

 

overall performance of the equity markets and general political and economic conditions;

 

 

introduction of new products or services by us or our competitors;

 

 

additions or departures of key management, scientific or other personnel;

 

 

publication of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by securities or industry analysts;

 

 

changes in the market valuation of similar companies;

 

 

disputes or other developments related to intellectual property and other proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

 

 

changes in accounting practices;

 

 

significant lawsuits, including patent or shareholder litigation; and

 

 

other events or factors, many of which are beyond our control.

Furthermore, the public equity markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our shares of common stock. If the market price of our shares of common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment.

We do not anticipate paying cash dividends, and accordingly, shareholders must rely on stock appreciation for any return on their investment.

We have never declared or paid cash dividends on our capital stock. We do not anticipate paying cash dividends in the future and intend to retain all of our future earnings, if any, to finance the operations, development and growth of our business. As a result, only appreciation of the price of our common stock, which may never occur, will provide a return to shareholders. Investors seeking cash dividends should not invest in our common stock.

If securities or industry analysts do not publish research or reports, or publish inaccurate or unfavorable research or reports about our business, our share price and trading volume could decline.

The trading market for our shares of common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If no securities or industry analysts commence coverage of us, the trading price for our shares of common stock may be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our shares of common stock, changes their opinion of our shares or publishes inaccurate or unfavorable research about our business, our share price would likely decline. If one or more of

 

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these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our shares of common stock could decrease and we could lose visibility in the financial markets, which could cause our share price and trading volume to decline.

If our executive officers, directors and largest shareholders choose to act together, they may be able to control our management and operations, acting in their own best interests and not necessarily those of other shareholders.

As of April 30, 2013, our executive officers, directors and beneficial holders of five percent or more of our outstanding stock owned approximately 71 percent of our voting stock, including shares subject to outstanding options and warrants, and we expect that upon completion of this offering, the same group will continue to hold at least         percent of our outstanding voting stock. As a result, these shareholders, acting together, would be able to significantly influence all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions, as well as our management and affairs. The interests of this group of shareholders may not always coincide with the interests of other shareholders, and they may act in a manner that advances their best interests and not necessarily those of other shareholders. This concentration of ownership control may:

 

 

delay, defer or prevent a change in control;

 

 

entrench our management and/or the board of directors; or

 

 

impede a merger, consolidation, takeover or other business combination involving us that other shareholders may desire.

We have engaged in transactions with companies in which Randal J. Kirk, our Chief Executive Officer, and his affiliates have an interest.

We have engaged in a variety of transactions with companies in which Mr. Kirk and affiliates of Mr. Kirk have an interest. Among these transactions are our ECCs with Genopaver, LLC and Fibrocell Science, Inc., our research collaboration with Biolife Cell Bank, Inc., and our licensing arrangement with Halozyme Therapeutics, Inc. We believe that each of these transactions was on terms no less favorable to us than terms we could have obtained from unaffiliated third parties, and each of these transactions was approved by at least a majority of the disinterested members of our board of directors. In addition, subsequent to our consummation of the ECCs with Oragenics, Inc. and Synthetic Biologics, Inc., Mr. Kirk and his affiliates invested in these companies. Furthermore, as we execute on these ECCs going forward, a conflict may arise between our interests and those of Mr. Kirk and his affiliates. It is our intention to ensure that all future transactions, if any, between us and our officers, directors, principal shareholders and their affiliates, are approved by the audit committee or a majority of the independent and disinterested members of the board of directors in accordance with our written related person transaction policy, and are on terms no less favorable to us than those that we could obtain from unaffiliated third parties.

Randal J. Kirk will control approximately         percent of our common stock after completion of this offering and will be able to control or significantly influence corporate actions, which may result in Mr. Kirk taking actions contrary to the desires of our other shareholders.

We have historically been controlled, managed and principally funded by Randal J. Kirk, our Chief Executive Officer, and affiliates of Mr. Kirk. As of April 30, 2013, Mr. Kirk and shareholders affiliated with him beneficially own approximately 71 percent of our voting stock. Following this offering, Mr. Kirk and his affiliates will control approximately                     percent of our common

 

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stock. Mr. Kirk will be able to control or significantly influence all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of Mr. Kirk may not always coincide with the interests of other shareholders, and he may take actions that advance his personal interests and are contrary to the desires of our other shareholders.

A significant portion of our total outstanding shares of common stock is restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. If Mr. Kirk or any of his affiliates were to sell a substantial portion of the shares they hold, it could cause our stock price to decline. Based on shares outstanding as of             , upon completion of this offering, we will have         outstanding shares of common stock, assuming no exercise of the underwriters’ over-allotment option to purchase additional shares. This includes the         shares that we are selling in this offering. As of the date of this prospectus, of the remaining shares, approximately         million shares of common stock will be subject to a 180-day contractual lock-up with the underwriters, and an additional approximately         shares of common stock will be subject to a 180-day contractual lock-up with us.

In addition, as of                                 , there were                     shares subject to outstanding options that will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, the lock-up agreements and Rules 144 and 701 under the Securities Act of 1933, as amended. Moreover, after this offering, holders of an aggregate of approximately         shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other shareholders.

We also intend to register         shares of common stock that we may issue under our Intrexon Corporation 2013 Equity and Cash Incentive Plan, or the 2013 Plan, plus the shares of common stock reserved for future grant or issuance under our Intrexon Corporation 2008 Equity Incentive Plan that remain unissued. Once we register these shares, they can be freely sold in the public market upon issuance and once vested, subject to the 180-day lock-up periods under the lock-up agreements described in the “Underwriting” section of this prospectus.

We are subject to anti-takeover provisions in our articles of incorporation and bylaws and under Virginia law that could delay or prevent an acquisition of our Company, even if the acquisition would be beneficial to our shareholders.

Certain provisions of Virginia law, the commonwealth in which we are incorporated, and our articles of incorporation and bylaws could hamper a third party’s acquisition of us, or discourage a third party from attempting to acquire control of us. These provisions include:

 

 

a provision allowing our board of directors to issue preferred stock with rights senior to those of the common stock without any vote or action by the holders of our common stock. The issuance of preferred stock could adversely affect the rights and powers, including voting rights, of the holders of common stock;

 

 

establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on at shareholder meetings;

 

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the inability of shareholders to convene a shareholders’ meeting without the support of shareholders owning together 25 percent of our common stock;

 

 

the application of Virginia law prohibiting us from entering into a business combination with the beneficial owner of 10 percent or more of our outstanding voting stock for a period of three years after the 10 percent or greater owner first reached that level of stock ownership, unless we meet certain criteria;

 

 

allow the authorized number of our directors to be changed only by resolution of our board of directors;

 

 

limit the manner in which shareholders can remove directors from the board;

 

 

require that shareholder actions must be effected at a duly called shareholder meeting and prohibit actions by our shareholders by written consent; and

 

 

limit who may call a special meeting of shareholder meetings.

These provisions also could limit the price that certain investors might be willing to pay in the future for shares of our common stock. In addition, these provisions make it more difficult for our shareholders, should they choose to do so, to remove our board of directors or management. See “Description of capital stock.”

We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our shares of common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in this prospectus, our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our shares of common stock held by non-affiliates exceeds $700.0 million as of any June 30 before that time or if we have total annual gross revenue of $1.0 billion or more during any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December 31, or if we issue more than $1.0 billion in non-convertible debt during any three-year period before that time, in which case we would no longer be an emerging growth company immediately. We cannot predict if investors will find our shares of common stock less attractive because we may rely on these exemptions. If some investors find our shares of common stock less attractive as a result, there may be a less active trading market for our shares of common stock and our share price may be more volatile.

Under the JOBS Act, emerging growth companies also can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting

 

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standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, shareholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

The financial reporting obligations of being a public company in the United States are expensive and time consuming, and may place significant additional demands on our management.

Prior to the consummation of this offering, we have not been subject to public company reporting obligations in the United States. The additional obligations of being a public company in the United States require significant additional expenditures and place additional demands on our management, including costs resulting from public company reporting obligations under the Exchange Act and the rules and regulations regarding corporate governance practices, including those under the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the listing requirements of on which our securities are to be listed. Our management and other personnel will need to devote a substantial amount of time to ensure that we comply with all of these requirements. Moreover, despite recent reforms made possible by the JOBS Act, the reporting requirements, rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly, particularly after we are no longer an “emerging growth company.” Any changes that we make to comply with these obligations may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis, or at all.

We also expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These factors also could make it more difficult for us to attract and retain qualified persons to serve on our board of directors, particularly to serve on our audit and compensation committees, or as executive officers.

 

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Special note regarding forward-looking statements

This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future events, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:

 

 

our current and future ECCs;

 

 

developments concerning our collaborators;

 

 

our ability to successfully enter new markets or develop additional products, whether with our collaborators or independently;

 

 

competition from existing technologies and products or new technologies and products that may emerge;

 

 

actual or anticipated variations in our operating results;

 

 

actual or anticipated fluctuations in our competitors’ or our collaborators’ operating results or changes in their respective growth rates;

 

 

our cash position;

 

 

market conditions in our industry;

 

 

our ability, and the ability of our collaborators, to protect our intellectual property and other proprietary rights and technologies;

 

 

our ability, and the ability of our collaborators, to adapt to changes in laws or regulations and policies;

 

 

the ability of our collaborators to secure any necessary regulatory approvals to commercialize any products developed under the ECCs;

 

 

the rate and degree of market acceptance of any products developed by a collaborator under an ECC;

 

 

our ability to retain and recruit key personnel;

 

 

our expectations related to the use of proceeds from this offering; and

 

 

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing.

Forward-looking statements may also concern our expectations relating to AquaBounty Technologies, Inc. We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

 

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We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk factors” section beginning on page 11, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.

You should read this prospectus, the documents that we reference in this prospectus and the documents that we have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

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Use of proceeds

We estimate that the net proceeds from our issuance and sale of      shares of our common stock in this offering will be approximately $     million, assuming an initial public offering price of $     per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds from this offering will be approximately $     million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

A $1.00 increase or decrease in the assumed initial public offering price of $     per share would increase or decrease the net proceeds from this offering by approximately $     million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. Similarly, each increase or decrease of $1.0 million in the number of shares of common stock offered by us would increase or decrease the net proceeds that we receive from this offering by approximately $     million, assuming the assumed initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions.

The principal purposes of this offering are to increase our financial flexibility, create a public market for our common stock and facilitate our access to the public equity markets. We currently intend to use the net proceeds from this offering, together with our existing cash resources to fund continued investment in our research and development platforms (including up to approximately $29.0 million to fund our stock purchase commitments in conjunction with our ECC with ZIOPHARM Oncology, Inc.), further our business development efforts to consummate new ECCs with companies across various end markets, and for working capital and other general corporate purposes.

This expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the status of and results from ongoing research and development and additional ECCs into which we may enter. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering. We may find it necessary or advisable to use the net proceeds from this offering for other purposes, and we will have broad discretion in the application of net proceeds. Although we may use a portion of the net proceeds of this offering for the acquisition or licensing, as the case may be, of additional technologies, other assets or businesses, we have no current understandings, agreements or commitments to do so.

Although it is difficult to predict future liquidity requirements, we believe that our existing cash and cash equivalents and cash expected to be received from our current collaborators will be sufficient to fund our operations for at least the next 12 months.

Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments, certificates of deposit and direct or guaranteed obligations of the U.S. government.

 

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Dividend policy

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain earnings, if any, to finance the growth and development of our business. We do not expect to pay any cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments, provisions of applicable law and other factors the board deems relevant.

 

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Capitalization

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2012 on:

 

 

an actual basis;

 

 

on a pro forma basis after giving effect to (i) the issuance of 19,047,619 shares of Series F preferred stock between December 31, 2012 and April 30, 2013 and the conversion of those shares into 19,047,619 shares of common stock upon completion of this offering; (ii) the receipt of gross proceeds of $150.0 million, net of issuance costs of $3.1 million, from the issuance of Series F preferred stock between December 31, 2012 and April 30, 2013; (iii) the conversion of 112,906,464 shares of our preferred stock outstanding as of December 31, 2012 into 112,906,464 shares of common stock upon completion of this offering; and (iv) the conversion of aggregate cumulative dividends on our series preferred stock of $50,459 into approximately             shares of our common stock, based on an assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, upon completion of this offering; and

 

 

a pro forma as adjusted basis after giving effect to the pro forma adjustments and giving further effect to the sale of             shares of common stock by us in this offering at the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

You should read the following table in conjunction with our consolidated financial statements and related notes, “Selected consolidated financial data” and “Management’s discussion and analysis of financial condition and results of operations” appearing elsewhere in this prospectus.

 

      As of December 31, 2012
     Actual     Pro forma    

Pro forma as

adjusted

 

          

(Unaudited)

     (In thousands, except share amounts)

Cash and cash equivalents

   $ 10,403      $ 157,303     
  

 

 

   

 

 

   

 

Redeemable convertible preferred stock, no par value; 112,906,464 shares authorized, issued and outstanding, actual; 131,954,083 shares authorized and no shares issued and outstanding, pro forma; and             shares authorized and no shares issued and outstanding, pro forma as adjusted

     406,659            

Shareholders’ equity (deficit):

      

Common stock, no par value, 160,000,000 shares authorized, 9,907,699 shares issued and outstanding, actual;             shares authorized and             shares issued and outstanding, pro forma;             shares authorized and             issued and outstanding, pro forma as adjusted

                

Additional paid-in capital

            553,559     

Accumulated deficit

     (321,553     (321,553  
  

 

 

   

 

 

   

 

Total shareholders’ equity (deficit)

     (321,553     232,006     
  

 

 

   

 

 

   

 

Total capitalization

     85,106        232,006     

 

 

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The pro forma and pro forma as adjusted tables above do not include:

 

 

4,048,672 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $3.37 per share, of which 1,415,109 shares are vested as of December 31, 2012;

 

 

5,111,066 shares of our common stock reserved for future issuance under our 2008 Equity Incentive Plan as of December 31, 2012;

 

 

894,423 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2012 at a weighted average exercise price of $0.45 per share; and

 

 

            shares of our common stock that will be made available for future issuance under our 2013 Equity and Cash Incentive Plan upon completion of this offering.

A $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, increase or decrease, as applicable, each of the pro forma as adjusted cash and cash equivalents, additional paid-in capital, total shareholder’s equity and total capitalization by $             million, assuming the shares offered by us as set forth on the cover of this prospectus remain the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

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Dilution

If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Dilution results from the fact that the initial public offering price per share is substantially in excess of the book value (deficit) per share attributable to the existing shareholders for the presently outstanding stock. As of December 31, 2012, our net tangible book value was $55.6 million, or $5.61 per share of common stock. Net tangible book value per share represents the amount of our total tangible assets, which excludes intangible assets, less total liabilities, divided by 9,907,669, the number of shares of common stock outstanding on December 31, 2012.

Our pro forma net tangible book value (deficit) as of December 31, 2012 was $         million, or $         per share of common stock. Pro forma net tangible book value (deficit) per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of our common stock outstanding, as of December 31, 2012, after giving effect to (i) the issuance of 19,047,619 shares of Series F preferred stock between December 31, 2012 and April 30, 2013, resulting in the receipt of gross proceeds of $150.0 million, net of issuance costs of $3.1 million, and the conversion of those shares into 19,047,619 shares of common stock upon completion of this offering; (ii) the conversion of 112,906,464 shares of our preferred stock outstanding as of December 31, 2012 into 112,906,464 shares of common stock upon completion of this offering; and (iii) the conversion of aggregate dividends on our series preferred stock of         into approximately         shares of our common stock, based on the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, upon completion of this offering.

After giving effect to the pro forma adjustments and giving further effect to the sale of         shares of our common stock in this offering, assuming an initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2012 would have been $         million, or $         per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to our existing shareholders and an immediate dilution in pro forma as adjusted net tangible book value of approximately $         per share to investors purchasing shares of our common stock in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after the offering from the amount of cash that an investor paid for a share of common stock.

 

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The following table illustrates this dilution on a per share basis:

 

    

Assumed initial public offering price per share

     $            

Historical net tangible book value per share as of December 31, 2012

   $ 5.61     

Increase per share due to the issuance of Series F preferred stock and the conversion of those shares into common stock

   $              

Decrease per share due to conversion of our preferred stock into common stock

   $ (         )  

Decrease per share due to conversion of dividends on our preferred stock into shares of common stock

   $              

Pro forma net tangible book value per share as of December 31, 2012

     $            

Increase per share attributable to investors purchasing shares in this offering

   $              

Pro forma net tangible book value per share after the offering

     $            

Dilution per share to investors purchasing shares in this offering

     $            

 

 

If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value per share after giving effect to the offering would be $         per share. This represents an increase in pro forma as adjusted net tangible book value of $         per share to existing shareholders and dilution in pro forma as adjusted net tangible book value of $         per share to investors purchasing shares in this offering.

A $1.00 increase or decrease in the assumed initial public offering price of $        , the mid-point of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value after this offering by $         million and the pro forma as adjusted net tangible book value per share after this offering by $             per share and would increase (decrease) the dilution per share to investors purchasing shares in this offering by $             per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. The information discussed above is illustrative only and may change based on the actual initial public offering price and other terms of the offering determined at pricing.

The following table summarizes, on a pro forma as adjusted basis as of December 31, 2012, the total number of shares purchased from us, the total consideration paid, or to be paid, and the average price per share paid, or to be paid, by existing shareholders and by investors purchasing shares in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus before deducting underwriting discounts and commissions and estimated offering expenses payable by us. As the table shows, investors purchasing shares in this offering will pay an average price per share substantially higher than our existing shareholders paid.

 

    
     Shares purchased      Total consideration      Average price Per
share
 
     Number      %      Amount      %     

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Existing investors before this offering

     141,861,752         %       $ 510,052,531         %       $ 3.60   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Investors purchasing shares in this offering

               $     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

        100%            100%       $     

 

 

 

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The table above is based on (i) 9,907,669 shares of common stock outstanding on December 31, 2012, (ii) 112,906,464 shares of common stock into which all of our preferred stock outstanding as of December 31, 2012 will be converted upon the completion of this offering and (iii) 19,047,619 shares of common stock into which the shares of Series F preferred stock issued between December 31, 2012 and April 30, 2013 will be converted upon the completion of this offering.

The table above does not include:

 

 

4,048,672 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $3.37 per share, of which 1,415,109 shares are vested as of December 31, 2012;

 

 

5,111,066 shares of our common stock reserved for future issuance under our 2008 Equity Incentive Plan as of December 31, 2012;

 

 

894,423 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2012 at a weighted average exercise price of $0.45 per share;

 

 

the conversion of aggregate dividends on our series preferred stock of         into approximately shares of our common stock, based on the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, upon completion of this offering; and

 

 

            shares of our common stock that will be made available for future issuance under our 2013 Equity and Cash Incentive Plan upon completion of this offering.

If the underwriters exercise their option to purchase additional shares in full, the following will occur:

 

 

the percentage of shares of our common stock held by existing shareholders will decrease to approximately              percent of the total number of shares of our common stock outstanding after this offering; and

 

 

the number of shares of our common stock held by investors purchasing shares in this offering will increase to or approximately         percent of the total number of shares of our common stock outstanding after this offering.

To the extent that outstanding options or warrants are exercised, you will experience further dilution. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities may result in further dilution to our shareholders.

 

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Selected consolidated financial data

The following table sets forth our selected consolidated financial data for the periods and as of the dates indicated. You should read the following selected consolidated financial data in conjunction with our audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus and the “Management’s discussion and analysis of financial condition and results of operations” section of this prospectus beginning on page 49.

The consolidated statement of operations data for the years ended December 31, 2012 and 2011, and the consolidated balance sheet data as of December 31, 2012 and 2011, are derived from our audited consolidated financial statements included elsewhere in this prospectus. Our audited consolidated financial statements have been prepared in U.S. dollars in accordance with U.S. GAAP.

Our historical results are not necessarily indicative of the results that may be expected in the future.

 

 

 
      Years ended December 31,  
     2012     2011  

 

  

 

 

   

 

 

 
     (In thousands, except share
and per share amounts)
 

Statement of Operations Data:

    

Revenues:

    

Collaboration revenues

   $ 13,706      $ 5,118   

Other revenues

     219        3,053   
  

 

 

   

 

 

 

Total revenues

     13,925        8,171   
  

 

 

   

 

 

 

Operating expenses:

    

Research and development

     64,185        70,386   

General and administrative

     24,897        18,300   

Other operating expenses

            1,912   
  

 

 

   

 

 

 

Total operating expenses

     89,082        90,598   
  

 

 

   

 

 

 

Loss from operations

     (75,157     (82,427
  

 

 

   

 

 

 

Total other expense, net

     (6,443     (2,853

Equity in net loss of affiliate

     (274       
  

 

 

   

 

 

 

Net loss

   $ (81,874   $ (85,280
  

 

 

   

 

 

 

Accretion of dividends on redeemable convertible preferred stock, not declared

     (21,994     (13,868
  

 

 

   

 

 

 

Net loss attributable to common shareholders

   $ (103,868   $ (99,148
  

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (10.73   $ (10.81
  

 

 

   

 

 

 

Weighted average shares outstanding, basic and diluted

     9,683,984        9,171,140   

Unaudited pro forma information(1)

    

Pro forma net loss attributable to common shareholders

    
    

Pro forma net loss per share, basic and diluted

    
    

Pro forma shares used in computation of pro forma net loss per share, basic and diluted             

    

 

 

 

(1)  

Pro forma net loss and pro forma net loss per share, basic and diluted have been calculated after giving effect to (i) the issuance of 19,047,619 shares of Series F preferred stock issued between December 31, 2012 and April 30, 2013 and the conversion of those shares into 19,047,619 shares of common stock upon completion of this offering; (ii) the conversion of

 

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112,906,464 shares of our preferred stock outstanding as of December 31, 2012 into 112,906,464 shares of common stock upon completion of this offering; and (iii) the conversion of aggregate cumulative dividends on our series preferred stock of $             into approximately             shares of our common stock, based on an initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, upon completion of this offering.

 

 

 
      December 31,  
     2012(2)     2011  

 

 
     (In thousands, except share
and per share amounts)
 

Balance Sheet Data:

    

Cash and cash equivalents

   $ 10,403      $ 19,628   

Other current assets

     3,130        3,350   

Equity securities

     83,116        39,097   

Other long-term assets

     54,997        52,753   

Total assets

     151,646        114,828   

Accounts payable, accrued expenses and other current liabilities, excluding current portion of deferred revenue

     6,754        16,197   

Deferred revenue, current and non-current

     58,636        16,921   

Other long-term liabilities(1)

     1,150        1,288   

Redeemable convertible preferred stock

     406,659        301,681   

Total shareholders’ deficit

     (321,553     (221,259

 

 

 

(1)   Other long-term liabilities includes $42 related to capital leases.
(2)   We acquired four businesses in 2011: Agarigen, Inc. on January 26, 2011; Neugenesis Corporation on April 18, 2011; GT Life Sciences, Inc. on October 5, 2011; and Immunologix, Inc. on October 21, 2011.

 

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Management’s discussion and analysis

of financial condition and results of operations

You should read the following discussion and analysis of our financial condition and results of operations together with “Selected consolidated financial data” beginning on page 47 and our consolidated financial statements and the related notes. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk factors” beginning on page 11.

Overview

Intrexon is a leader in the field of synthetic biology, an emerging and rapidly evolving discipline that applies engineering principles to biological systems. Using our suite of proprietary and complementary technologies, we design, build and regulate gene programs and cellular systems to enable the development of new and improved products and manufacturing processes across a variety of end markets, including healthcare, food, energy and environmental sciences. Intrexon’s synthetic biology capabilities include the ability to precisely control the amount, location and modification of biological molecules to control the function and output of living cells and optimize for desired results at an industrial scale.

We have devised our business model to bring many different commercial products to market through the formation of exclusive channel collaborations, or ECCs, with collaborators that have expertise within specific industry segments. In our ECCs, we provide expertise in the engineering, creation and modification of gene programs and cellular systems, and our collaborators are responsible for providing market and product development expertise, as well as regulatory, sales and marketing capabilities. Generally, our collaborators compensate us through payment of technology access fees, royalties, milestones and reimbursement of certain costs. This business model allows us to leverage our capabilities and capital across a broader landscape of product opportunities and end markets than we would be capable of addressing on our own.

We began entering into ECCs in 2011 and are currently party to nine such agreements. Under these ECCs, we are developing products in the fields of healthcare and food. In healthcare, our ECCs include programs in oncology, anti-infectives, antibiotics and tissue repair. In food, we are working to increase the productivity and nutritional value of salmon and other fish. We are also working to establish ECCs in the areas of energy and environmental sciences. Please see “Business—Our ECCs.”

Mergers and acquisitions

We completed several acquisitions in 2011 in order to enhance our capabilities and service offerings. On January 26, 2011, we acquired Agarigen, Inc., or Agarigen, a North Carolina-based company that allowed us to expand our capabilities in the agricultural sector. On August 31, 2011, we acquired the LEAP platform technology from Cyntellect, Inc., or Cyntellect. On October 5, 2011, we acquired the cell systems informatics technology from GT Life Sciences, Inc., or GT Life. On October 21, 2011, we acquired the mAbLogix antibody platform from Immunologix, Inc., or Immunologix. See the footnotes to our audited consolidated financial

 

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statements found elsewhere in this prospectus for additional information with respect to these business combinations. See “Business — Our suite of proprietary and complementary technologies.”

Cyntellect was a related party to us through affiliates of Third Security, LLC. We recorded this transaction as a transaction between entities under common control and therefore, the results of operations of Cyntellect are presented in our consolidated financial statements for all periods presented. The results of operations for each of the other entities that we acquired have been included in our consolidated results of operations after the respective dates of acquisition. Because they represented significant acquisitions, the stand-alone audited financial statements for the period January 1, 2011 through the respective acquisition dates for GT Life and Immunologix are found elsewhere in this prospectus.

Financial overview

We have incurred significant losses since our inception. We anticipate that we may continue to incur significant losses for the foreseeable future, and we may never achieve or maintain profitability. We have never generated any royalty revenues from sales of products by our collaborators and may never be profitable.

We expect our future capital requirements will be substantial, particularly as we continue to develop our business and expand our synthetic biology technology platform. Although we believe that, based on our current level of operations and anticipated growth, our existing cash and cash equivalents and cash expected to be received from our current collaborators will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements through at least the next 12 months, we may need additional capital if our current plans and assumptions change.

Sources of revenue

We derive our revenues through the execution of ECCs for the development and commercialization of products enabled by our technologies. Generally, the terms of our ECCs provide that we receive some or all of the following: (i) technology access fees upon consummation of such ECC; (ii) reimbursements of costs incurred by us for our research and development and/or manufacturing efforts related to the specific application provided for in the ECC; (iii) milestone payments upon the achievement of specified development, regulatory and commercial activities; and (iv) royalties on sales of products arising from the collaboration.

Our technology access fees and milestone payments may be in the form of cash or securities of the collaborator. Because our ECCs contain multiple arrangements, we typically defer much of the technology access fees and milestone amounts received and recognize such revenues in the future over the anticipated performance period. We are also entitled to sublicensing revenues in those situations where our collaborators choose to license our technologies to other parties.

Research and development expenses

We recognize research and development expenses as they are incurred. Our research and development expenses consist primarily of:

 

 

salaries and related overhead expenses for personnel in research and development functions;

 

 

fees paid to consultants and contract research organizations who perform research on our behalf and under our direction;

 

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costs related to lab supplies used in our research and development efforts;

 

 

depreciation of leasehold improvements, laboratory equipment and computers;

 

 

amortization of patents and related technologies acquired in mergers and acquisitions;

 

 

rent and utility costs for our research and development facilities; and

 

 

costs related to stock options granted to personnel in research and development functions.

General and administrative expenses

General and administrative expenses consist primarily of salaries and related costs for employees in executive, operational, finance and legal functions. Other significant general and administrative expenses include rent and utilities, insurance, legal services and expenses associated with obtaining and maintaining our intellectual property.

Other income (expense), net

We hold equity securities received and/or purchased from certain collaborators. Other than securities accounted for using the equity method discussed below, we elected the fair value option to account for our equity securities held in these collaborators. These equity securities are recorded at fair value at each reporting date. Unrealized appreciation (depreciation) resulting from fair value adjustments are reported as other income (expense) in the consolidated statement of operations. As such, we bear the risk that fluctuations in the securities’ share prices may significantly impact our results of operations.

Interest income consists of interest earned on our cash and cash equivalents. We expect our interest income to increase following the completion of this offering as we invest the net proceeds from this offering pending their use in our operations.

Interest expense pertains to equipment currently under four capitalized leases. Two of these capitalized leases mature in 2013, one matures in 2014, and the last one matures in 2015 and, as such, we will no longer be subject to the interest expense under these capitalized leases as of those dates.

Equity in net income (loss) of affiliate

For the year ended December 31, 2012, equity in net loss of affiliate is our pro-rata share of our equity method investment’s operating results, adjusted for accretion of basis difference. As of December 31, 2012, we accounted for our investment in AquaBounty Technologies, Inc., or AquaBounty, using the equity method of accounting as we had the ability to exercise significant influence over, but not control of, the operating activities of AquaBounty. On March 15, 2013, we acquired 18,714,814 additional shares of AquaBounty increasing our ownership in AquaBounty to 53.82 percent. We will consolidate AquaBounty beginning on March 15, 2013.

 

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Results of operations

Comparison of the year ended December 31, 2012 and the year ended December 31, 2011

The following table summarizes our results of operations for the years ended December 31, 2012 and 2011, together with the changes in those items in dollars and as a percentage:

 

      Years ended
December 31,
   

Dollar

change

    %
Change
 
     2012     2011      

 

 
     (In thousands)        

Revenues:

        

Collaboration revenues

   $ 13,706      $ 5,118      $ 8,588        167.8%   

Other revenues

     219        3,053        (2,834     (92.8)%   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     13,925        8,171        5,754        70.4%   

Operating expenses:

        

Research and development

     64,185        70,386        (6,201     (8.8)%   

General and administrative

     24,897        18,300        6,597        36.0%   

Other operating expenses

            1,912        (1,912     (100.0)%   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     89,082        90,598        (1,516     (1.7)%   

Operating loss

     (75,157     (82,427     7,270        (8.8)%   

Total other expense, net

     (6,443     (2,853     (3,590     125.8%   

Equity in net loss of affiliate

     (274            (274     100.0%   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (81,874   $ (85,280   $ 3,406        (4.0)%   

 

 

 

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Revenues

Revenues were $13.9 million for the year ended December 31, 2012 compared to $8.2 million for the year ended December 31, 2011 resulting in an increase of $5.7 million, or 70.4 percent. The following table shows the collaboration revenue recognized for upfront and milestone payments received from each of our collaborators and reimbursements received for research and development services provided to each of our collaborators for the years ended December 31, 2012 and 2011, together with the changes in those items:

 

      Upfront and milestone
payments
     Research and
development services
     Total  
     Years ended
December 31,
    

Dollar

change

     Years ended
December 31,
    

Dollar

change

     Years ended
December 31,
    

Dollar

change

 
     2012      2011         2012      2011         2012      2011     

 

 
     (In thousands)  

ZIOPHARM Oncology, Inc.

   $ 5,068       $ 2,372       $ 2,696       $ 6,333       $ 2,724       $ 3,609       $ 11,401       $ 5,096       $ 6,305   

Synthetic Biologics, Inc.

     293         22         271         327                 327         620         22         598   

Elanco, Inc.

     12                 12         587                 587         599                 599   

Oragenics, Inc.

     320                 320         516                 516         836                 836   

Fibrocell Science, Inc.

     158                 158         61                 61         219                 219   

Other

                             31                 31         31                 31   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,851       $ 2,394       $ 3,457       $ 7,855       $ 2,724       $ 5,131       $ 13,706       $ 5,118       $ 8,588   

 

 

The $8.6 million increase in collaboration revenue from 2011 to 2012 is the result of the following:

 

 

Collaboration revenue recognized for upfront and milestone payments received from ZIOPHARM Oncology, Inc., or ZIOPHARM, increased in 2012 primarily as a result of a collaboration milestone being achieved in October 2012. We received $18.3 million of milestone consideration and recognized $3.8 million as collaboration revenue in 2012. The milestone was not deemed substantive and the remaining $14.5 million of milestone consideration was recorded as deferred revenue and will be recognized over the expected life of our technology platform using a straight-line approach. Reimbursements from research and development services provided to ZIOPHARM increased $3.6 million in 2012 as a result of an increase of new programs initiated in 2012 with ZIOPHARM under our collaboration and continued progression of the research for the collaboration programs initiated in 2011;

 

 

Collaboration revenue for upfront payments received from Synthetic Biologics, Inc., or Synthetic Biologics, increased in 2012 as a result of a full year of revenue from the amortization of the upfront payment received for our first ECC with Synthetic Biologics in November 2011 as well as a partial year of revenue from the upfront payment received for our second ECC with Synthetic Biologics in August 2012. Our research and development services provided in 2012 have primarily consisted of initial research of the fields specified in the ECCs;

 

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Our ECC with Elanco, the animal health division of Eli Lilly and Company, or Elanco, commenced in late November 2011 and we began providing research and development services in 2012; and

 

 

Our ECC with Oragenics, Inc., or Oragenics, commenced in June 2012 and we have recognized $0.3 million of collaboration revenue from the amortization of the upfront payment received upon the execution of the ECC. Our research and development services provided in 2012 have primarily consisted of research on improving production in the field of use specified in the ECC and developing and validating these improved production methods.

Our 2011 amounts of other revenues include $2.7 million of revenue related to Cyntellect.

In future periods, our revenues will depend on the number of ECCs into which we enter, the advancement and creation of programs within our ECCs and the extent to which our collaborators bring products enabled by our technologies to market. In light of our limited operating history and experience in consummating new ECCs, there can be no assurance as to the timing, magnitude and predictability of revenues to which we might be entitled.

Research and development expenses

Research and development expenses were $64.2 million for the year ended December 31, 2012 compared to $70.4 million for the year ended December 31, 2011 resulting in a decrease of $6.2 million, or 8.8 percent. The $6.2 million net decrease in research and development expenses is the result of the following.

 

 

Expenses related to licensing agreements for in-licensed technologies were $1.8 million for the year ended December 31, 2012 compared to $9.3 million for the year ended December 31, 2011 resulting in a decrease of $7.5 million. In 2011, we entered into an exclusive licensing agreement with Halozyme Therapeutics, Inc., or Halozyme, for the use of Halozyme’s proprietary enzyme. Under the terms of the agreement, we paid a license fee of $9.0 million upon execution of this agreement, which was expensed when paid in 2011. In 2012, we paid and expensed an annual exclusivity fee of $1.0 million. This decrease was offset by an increase in contractual payments for other license agreements;

 

 

Expenses related to consultants and third party contract research organizations were $5.5 million for the year ended December 31, 2012 compared to $10.8 million for the year ended December 31, 2011 resulting in a decrease of $5.3 million. The decrease in 2012 is the result of our reducing the level of research and development being performed by third parties and, where practical, performing this research and development internally;

 

 

Lab supply expenses were $10.4 million for the year ended December 31, 2012, compared to $11.9 million for the year ended December 31, 2011, resulting in a decrease of $1.5 million. Supplies used in DNA manufacturing in 2012 decreased $2.6 million as we improved the efficiency of our production process and reduced the potential for manufacturing errors. We also transitioned away from focusing on building our parts inventory towards manufacturing specific DNA parts for current and prospective collaborators. This decrease was partially offset by an increase of $1.1 million in additional supplies required for those technologies which we acquired in 2011;

 

 

Salaries, benefits and other personnel expenses were $29.4 million for the year ended December 31, 2012, compared to $24.8 million for the year ended December 31, 2011, resulting

 

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in an increase of $4.6 million. Of this increase, $3.4 million was the result of an increase in the average number of research and development employees of 26 employees from 2011 to 2012 as we expanded the capabilities acquired through merger and acquisition activity in 2011 and developed specific capabilities to support new and prospective collaborators. We also incurred $1.2 million of performance bonuses in 2012 and we paid no bonuses to employees in 2011;

 

 

Depreciation and amortization expense was $7.2 million for the year ended December 31, 2012, compared to $3.2 million for the year ended December 31, 2011, resulting in an increase of $4.0 million. Amortization expense for the patents and related technologies acquired in 2011 increased $1.8 million in 2012 as a result of a full year of amortization. The remaining increase is related to increased depreciation expense on property and equipment purchased in 2012 as well as a full year of depreciation for equipment acquired in 2011. We purchased $7.5 million and $13.0 million of property and equipment in 2012 and 2011, respectively, to scale up our DNA manufacturing capacity and for use in new facilities for our agricultural and industrial operations;

 

 

Rent and utilities expenses were $5.4 million for the year ended December 31, 2012, compared to $4.3 million for the year ended December 31, 2011, resulting in an increase of $1.1 million. The increase is due to a full year of rent incurred related to the addition of four new research and development facilities as a result of our acquisitions; and

 

 

Our 2011 amounts include $1.2 million of research and development expenses related to Cyntellect.

We expect that our research and development expenses will increase as we continue to enter into ECCs and operate as a public company. We believe these increases will likely include increased costs related to the hiring of additional personnel in research and development functions, increased costs paid to consultants and contract research organizations and increased costs related to lab supplies

General and administrative expenses

General and administrative expenses were $24.9 million for the year ended December 31, 2012 compared to $18.3 million for the year ended December 31, 2011 resulting in an increase of $6.6 million, or 36.0 percent. The $6.6 million net increase in general and administrative expenses is the result of the following.

 

 

Salaries, benefits and other personnel expenses were $13.2 million for the year ended December 31, 2012, compared to $5.3 million for the year ended December 31, 2011, resulting in an increase of $7.9 million. Of this increase, $5.2 million was the result of an increase in the average number of general and administrative employees of 16 employees from 2011 to 2012, which was primarily the result of increasing our general and administrative personnel to support our acquired operations and additional collaborators. In addition to our increase in general and administrative employees, our non-employee, non-compensated Chief Executive Officer began serving the role on a full-time basis at the beginning of 2012, resulting in a non-cash increase to our general and administrative expenses of $1.4 million. Lastly, we paid bonuses of $1.3 million for 2012 whereas we did not pay bonuses for 2011;

 

 

Legal and professional fees were $6.4 million for the year ended December 31, 2012, compared to $9.1 million for the year ended December 31, 2011, resulting in a decrease of $2.7 million. These expenses in 2012 and 2011 are primarily comprised of fees for external legal counsel,

 

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obtaining and maintaining patents and intellectual property, assistance with ECC transactions, external consulting and recruiting services. The decrease in these expenses is primarily the result of the lack of merger and acquisition activity in 2012; and

 

 

Our 2011 amounts include $0.1 million of general and administrative expenses related to Cyntellect.

We expect that our general and administrative expenses will increase as we operate as a public company. We believe that these increases will likely include increased costs for director and officer liability insurance, costs related to the hiring of additional personnel and increased fees for outside consultants, lawyers and accountants. We also expect to incur increased costs to comply with corporate governance, internal controls and similar requirements applicable to public companies.

Other operating expenses

Other operating expenses of $1.9 million for the year ended December 31, 2011 relate to Cyntellect.

Total other expense, net

Total other expense, net is primarily comprised of unrealized depreciation in fair value of equity securities which was $(6.3) million for the year ended December 31, 2012 compared to unrealized depreciation of $(2.7) million for the year ended December 31, 2011 resulting in a change of $3.6 million. This change is the result of market depreciation as of December 31, 2012 for the equity securities we hold in other entities.

Equity in net income (loss) of affiliate

In November 2012, we purchased a 47.56 percent interest in AquaBounty and through December 31, 2012, we accounted for this investment using the equity method. Our equity in net loss of AquaBounty’s operations for the period subsequent to investment through December 31, 2012 of $0.3 million reflects our portion of the net losses of AquaBounty for the period from the date of our investment through December 31, 2012. On March 15, 2013, we acquired 18,714,814 additional shares of AquaBounty increasing our ownership in AquaBounty to 53.82 percent. As such AquaBounty will be consolidated on our results of operations and financial position beginning on March 15, 2013.

Liquidity and capital resources

Sources of liquidity

We have incurred losses from operations since our inception in 1998 and as of December 31, 2012, we had an accumulated deficit of $321.6 million. Since our inception through December 31, 2012, we have funded our operations principally with the proceeds received from $359.0 million of preferred stock and the receipt of $12.5 million in prepayments of services by our collaborators. As of December 31, 2012, we had cash and cash equivalents of $10.4 million. Cash in excess of immediate requirements is invested in money market funds in order to maintain liquidity and capital preservation.

 

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Between March 1, 2013 and April 30, 2013, we received gross proceeds of $150.0 million, net of offering expenses of $3.1 million, from the issuance of 19,047,619 shares of Series F preferred stock.

Cash flows

The following table sets forth the significant sources and uses of cash for the periods set forth below:

 

      Years ended,
December 31,
 
     2012     2011  

 

 
     (in thousands)  

Net cash provided by (used in):

    

Operating activities

   $ (61,529   $ (81,758

Investing activities

     (23,636     (64,097

Financing activities

     75,940        148,111   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (9,225   $ 2,256   

 

 

Cash flows from operating activities:

Net cash used in operating activities was $61.5 million for the year ended December 31, 2012 compared to $81.8 million for the year ended December 31, 2011. The change from 2011 to 2012 is primarily the result of the receipt of $12.5 million from two of our collaborators for prepayments of research and development services in conjunction with our ECCs of which $7.2 million remains in deferred revenue. Deferred revenue also increased as a result of upfront and milestone payments received in the form of the collaborators’ securities in 2012 in conjunction with new and existing ECCs. Non-cash charges such as depreciation and amortization, unrealized depreciation on equity securities and non-cash compensation expense for our non-compensated Chief Executive Officer increased in 2012 compared to 2011.

Cash flows from investing activities:

Net cash used in investing activities was $23.6 million for the year ended December 31, 2012 compared to $64.1 million for the year ended December 31, 2011. In 2011, we used $28.7 million, net of cash received, to pay for the acquisitions of four businesses; we paid $22.6 million to purchase shares of common stock of ZIOPHARM; and we used $13.0 million for property and equipment purchases primarily to scale up our DNA manufacturing capacity. In 2012, we used $6.0 million to purchase a 47.56 percent interest in AquaBounty; we paid $10.0 million to purchase additional shares of common stock of ZIOPHARM; and we paid $7.5 million for property and equipment used in our DNA manufacturing operations and lab equipment for use in our agricultural and industrial operations.

Cash flows from financing activities:

Net cash provided by financing activities was $75.9 million for the year ended December 31, 2012 compared to $148.1 million for the year ended December 31, 2011. In 2011, we received $26.4 million of proceeds from the issuance of our Series D Redeemable Convertible Preferred Stock, $99.2 million of proceeds, net of issuance costs, from the issuance of our Series E Redeemable Convertible Preferred Stock, or Series E Preferred Stock, proceeds from the issuance of short-term

 

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borrowings, which, along with accrued interest, converted into $15.2 million of Series E Preferred Stock and $7.4 million of subscriptions for our Series E Preferred Stock. In 2012, we received $75.5 million of proceeds, net of issuance costs, from the issuance of our Series E Preferred Stock.

Future capital requirements

We established our current strategy and business model of commercializing our technologies through collaborators with development expertise in 2010. From January 6, 2011 through December 31, 2012, we consummated six new collaborations with five new collaborators. As a result of these new collaborations, we received (i) upfront and milestone consideration totaling $59.6 million, of which $51.4 million has been deferred and will be recognized over future periods; and (ii) reimbursement of our costs incurred for work performed on behalf of our collaborators of $10.5 million. We believe that we will continue to consummate ECCs with new companies across our various market sectors, which will result in additional upfront, milestone and cost recovery payments in the future.

We believe that our existing cash and cash equivalents, and cash expected to be received through our current collaborators will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. We intend to devote the net proceeds from this offering to continued investment in our research and development platforms, further our business development efforts to consummate new ECCs, and to support our existing collaborations. We may also use these proceeds as consideration for acquisitions of technologies or companies that we believe may be complementary to our current technologies and for which we believe may provide near term value to us.

We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Our future capital requirements will depend on many factors, including:

 

 

progress in our research and development programs, as well as the magnitude of these programs;

 

 

the timing, receipt and amount of upfront, milestone and other payments, if any, from present and future collaborators, if any;

 

 

the timing, receipt and amount of sales and royalties, if any, from our potential products;

 

 

the timing, receipt and amount of funding under future government contracts, if any;

 

 

our ability to maintain and establish additional collaborative arrangements and/or new business initiatives;

 

 

the resources, time and cost required for the preparation, filing, prosecution, maintenance and enforcement of patent claims;

 

 

the costs associated with legal activities, including litigation, arising in the course of our business activities and our ability to prevail in any such legal disputes; and

 

 

the timing and extent of our obligation to participate in up to $29.0 million in equity financings of ZIOPHARM.

 

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Until such time, if ever, as we can generate positive operating cash flows, we may finance our cash needs through a combination of equity offerings, debt financings, government or other third-party funding, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our common shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common shareholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

Contractual obligations and commitments

The following table summarizes our significant contractual obligations and commercial commitments at December 31, 2012 and the effects such obligations are expected to have on our liquidity and cash flows in future periods:

 

      Total      Less than
1 year
     1-3 years      3-5 years      More
than
5 years
 

 

 
     (In thousands)  

Operating Leases(1)

   $ 11,097       $ 2,825       $ 5,410       $  2,790       $  72   

Capital Leases

     99         54         45                   

License Payments

     1,000         1,000                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,196       $ 3,879       $ 5,455       $ 2,790       $ 72   

 

 
(1)   We lease our facilities and certain equipment under noncancelable operating leases.

In addition to the obligations in the table above, as of December 31, 2012 we also have the following significant contractual obligations described below.

In conjunction with our ECC with ZIOPHARM in 2011, we agreed to purchase up to $50.0 million of ZIOPHARM common stock in conjunction with securities offerings that may be conducted by ZIOPHARM in the future, subject to certain conditions and limitations. We purchased $10.0 million and $11.0 million in 2012 and 2011, respectively, of ZIOPHARM common stock in such securities offerings. The remaining obligation on this purchase commitment is approximately $29.0 million at December 31, 2012. This amount is not included in the table above due to the fact that the timing of such securities purchases cannot be predicted.

In June 2011, we entered into an exclusive licensing agreement with Halozyme for the use of Halozyme’s proprietary enzyme in one of our targeted therapeutics. We are related parties with Halozyme through common ownership by Third Security, LLC. Under the terms of this agreement, we are required to pay a non-refundable, annual exclusivity fee of $1.0 million on each anniversary of the agreement effective date until a certain development event occurs. The agreement requires us to pay up to $54.0 million of milestone payments upon the achievement of certain regulatory events. We are obligated to pay tiered royalties on net sales of an approved product developed with Halozyme’s proprietary enzyme. We may terminate this agreement in whole or on a product-by-product basis at any time upon 90 days’ prior written notice to

 

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Halozyme. Only the $1.0 million payment due June 6, 2013 is included in the table above. All other contingent payments related to this agreement are not included in the table above due to uncertainties surrounding the number of annual payments that will be required and the unpredictability of the timing and likelihood of achieving the milestones.

We acquired 100 percent of the outstanding capital stock of Immunologix in October 2011. The transaction included a contingent consideration arrangement which may require us to pay the selling shareholders 50 percent, subject to a maximum of $2.0 million, of revenue generated from Immunologix’s technology applied towards a specific target as defined in the agreement up to a maximum of $2.0 million. This amount is not included in the table above due to the uncertainty of whether, if ever, we will pay this contingent consideration.

In conjunction with our ECC with Oragenics, we have the right, but not the obligation, to purchase up to 30 percent of securities offerings that may be conducted by Oragenics in the future, subject to certain conditions and limitations.

In March 2012, we received $10.0 million from ZIOPHARM as a prepayment of research and development services to be provided in conjunction with our ECC. Any remaining balance of this prepayment is refundable to ZIOPHARM in the event the ECC is terminated. ZIOPHARM may voluntarily terminate the ECC upon 90 days’ written notice to us. The remaining balance of this prepayment is $4.9 million at December 31, 2012 and is not included in the table above due to the uncertainty of the timing of the provision of these services by us and the unlikely termination of this ECC by either party.

In December 2012, we received $2.5 million from Synthetic Biologics as prepayment of research and development services to be provided to Synthetic Biologics. Any remaining balance of this prepayment is refundable to Synthetic Biologics in the event our August 2012 ECC is terminated. Synthetic Biologics may voluntarily terminate the ECC upon 90 days’ written notice to us provided that no voluntary termination by Synthetic Biologics can be made during the first 18 months of the ECC. The remaining balance of this prepayment is $2.4 million at December 31, 2012 and is not included in the table above due to the uncertainty of the timing of the provision of these services by us and the unlikely termination of the ECC by either party.

We are also party to in-licensed research and development agreements with various academic and commercial institutions where we could be required to make future payments for annual maintenance fees as well as for milestones and royalties we might receive upon commercial sales of products which incorporate their technologies. These agreements are generally subject to termination by us and therefore no amounts are included in the tables above. At December 31, 2012, we had research and development commitments with third parties totaling $3.2 million of which $1.4 had not yet been incurred.

Net operating losses

As of December 31, 2012, we had loss carryforwards of approximately $207.0 million for U.S. federal income tax purposes available to offset future taxable income and U.S. federal and state research and development tax credits of $5.8 million, prior to consideration of annual limitations that may be imposed under Section 382 of the Internal Revenue Code of 1986, as amended, or Section 382. These carryforwards begin to expire in 2022.

 

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Our past issuances of stock and mergers and acquisitions have resulted in ownership changes within the meaning of Section 382. As a result, the utilization of portions of the net operations losses may be subject to annual limitations. These annual limitations may result in a significant portion of our net operating losses and research and development tax credits expiring prior to utilization. Future changes in stock ownership may also trigger an ownership change and, consequently, a Section 382 limitation.

Off-balance sheet arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, other than operating leases as mentioned above, as defined under Securities and Exchange Commission, or SEC, rules.

Quantitative and qualitative disclosure about market risk

The following sections provide quantitative information on our exposure to interest rate risk, stock price risk, and foreign currency exchange risk. We make use of sensitivity analyses which are inherently limited in estimating actual losses in fair value that can occur from changes in market conditions.

Interest rate risk

We had cash, cash equivalents and short term investments of $10.7 million at December 31, 2012. These funds were primarily invested in money market funds and certificates of deposit. Due to the relatively short-term nature of our investment portfolio, we believe that we do not have any material exposure to changes in the fair value of these instruments as a result of changes in interest rates. We believe that a hypothetical 100 basis point increase in interest rates would not materially affect the fair value of our interest-sensitive financial instruments. Because we believe that we have the ability to liquidate these instruments, we do not expect our operating results or cash flows to be materially affected to any significant degree by a sudden change in market interest rates.

Investments in publicly traded companies

We have common stock investments in several publicly traded companies that are subject to market price volatility. We have adopted the fair value method of accounting for these investments, except for our investment in AquaBounty as further described below, and therefore, have recorded them at fair value at the end of each reporting period with the unrealized gain or loss recorded as a separate component other income (expense), net for the period. As of December 31, 2012 the original aggregate cost basis of these investments was $92.1 million and the market value was $83.1 million. The fair value of these investments is subject to fluctuation in the future due to the volatility of the stock market, changes in general economic conditions and changes in the financial conditions of these companies. The fair value of these investments would be approximately $91.0 million and $66.0 million, respectively, based on a hypothetical 10 percent increase or 20 percent decrease in the value of the investments. Through April 30, 2013, our balance of equity securities, exclusive of securities we received in 2013, has decreased approximately $32.1 million from the balance as of December 31, 2012.

In November 2012, we acquired 47.56 percent of the outstanding common stock of AquaBounty and we accounted for this investment under the equity method of accounting for the period

 

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from acquisition date through March 15, 2013. On March 15, 2013, we acquired 18,714,814 additional shares of AquaBounty common stock for $4.9 million, thereby increasing our aggregate ownership to 53.82 percent upon closing. Accordingly, effective upon closing of the acquisition of the additional shares, we consolidated the assets and operating results of AquaBounty in our consolidated financial statements. The common stock of AquaBounty is traded on the London Stock Exchange and the fair value of our investment in AquaBounty at December 31, 2012 was $14.3 million. The fair value of our investment in AquaBounty as of that date would be approximately $15.7 million and $11.4 million, respectively, based on a hypothetical 10 percent increase or 20 percent decrease in the share price of AquaBounty.

Foreign currency exchange risk

Because the common stock of AquaBounty is traded on the London Stock Exchange, the fair value of our holdings is subject to fluctuations in foreign currency rates. In addition, some of AquaBounty’s current expenses are denominated in Canadian dollars. We do not hedge our foreign currency exchange rate risk. The effect of a hypothetical 10 percent change in foreign currency exchange rates applicable to our business would not have a material impact on our consolidated financial statements.

Critical accounting policies and estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in this prospectus, we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.

Revenue recognition

Our ECCs typically contain multiple elements, or deliverables, including technology licenses, research and development services, and in certain cases manufacturing services. Our ECCs may provide for various types of payments to us including upfront payments or technology access fees, funding of research and development and/or manufacturing services, milestone payments, profit sharing and royalties on product sales. Effective January 1, 2011, we adopted the provisions of Accounting Standards Update, or ASU, No. 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements, or ASU 2009-13. In accordance with the provisions of ASU 2009-13, we identify the deliverables within the ECCs and evaluate which deliverables represent separate units of accounting. Analyzing the ECCs to identify deliverables requires the use of judgment. A deliverable is considered a separate unit of accounting when the

 

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deliverable has value to the collaborator on a standalone basis based on the consideration of the relevant facts and circumstances for each ECC.

Consideration received is allocated at the inception of the ECC to all identified units of accounting based on their relative selling price. When available, the relative selling price for each deliverable is determined using vendor specific objective evidence, or VSOE, of selling price or third-party evidence of selling price, if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, we use our best estimate of the selling price for the deliverable. The amount of allocable consideration is limited to amounts that are fixed or determinable. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units. We recognize the revenue allocated to each unit of accounting as we deliver the related goods or services. If we determine that we should treat certain deliverables as a single unit of accounting, then we recognize the revenue using either a proportional performance or straight-line method, depending on whether we can reasonably estimate the level of effort required to complete our performance obligations under an arrangement and whether such performance obligations are provided on a best-efforts basis. As we cannot reasonably estimate our performance obligations related to our collaborations, we recognize revenue on a straight-line basis over the period we expect to complete our performance obligations.

Typically, we must estimate our period of performance when the ECCs we enter into do not clearly define such information. Our estimated period of performance for our ECCs has been the expected life of our technologies based on the lack of significant experience we have with these types of agreements and the possibility for multiple products and/or treatments for each ECC’s defined field of use.

Our ECCs typically provide for milestone payments upon achievement of specified development, regulatory and commercial activities. Effective January 1, 2011, we adopted ASU No. 2010-17, Revenue Recognition – Milestone Method, or the Milestone Method. Under the Milestone Method, we recognize consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety. A milestone is considered substantive when it meets all of the following criteria:

 

 

The consideration is commensurate with either the entity’s performance to achieve the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the entity’s performance to achieve the milestone;

 

 

The consideration relates solely to past performance; and

 

 

The consideration is reasonable relative to all of the deliverables and payment terms with the arrangement.

In the event that a milestone is not considered substantive, we recognize the milestone consideration as revenue using the same method applied to the upfront payments.

Research and development services are a deliverable satisfied by us in accordance with the terms of the ECCs and we consider these services to be inseparable from the license to the core technology; thus reimbursements of services provided are recognized as revenue. Further, because reimbursement (i) is contingent upon performance of the services by us, (ii) does not include a profit component and (iii) does not relate to any future deliverable, the revenue is

 

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recognized during the period in which the related services are performed and collection of such amounts is reasonably assured. Payments received for manufacturing services will be recognized when the process related to the manufactured materials has been completed. Royalties to be received under our ECCs will be recognized as earned.

We recognized $13.7 million and $5.1 million of collaboration revenue in the years ended December 31, 2012 and 2011, respectively. As of December 31, 2012, we have $51.4 million of deferred revenue related to our receipt of upfront and milestone payments.

We also generate revenue from other licenses of certain technologies and rental and other income from sublease agreements. License revenue is recognized on a straight-line basis over the term of the license agreement. Deferred revenue is recorded on the consolidated balance sheet when cash is received prior to the period in which the revenue is earned. Sublease and laboratory services revenues are recognized in the period in which they are earned.

Valuation of investments

We consider all highly liquid investments with remaining maturities of 90 days at date of purchase to be cash equivalents. Our short-term investments have maturities between 90 days and one year. The carrying amount of short-term investments approximate fair value due to the short maturities of these instruments, and there are no unrealized gains or losses associated with these instruments.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset and liability. We use a three-tier fair value hierarchy to prioritize the inputs used in our fair value measurements. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets, which includes our cash equivalents, short-term investments and certain investments in equity securities of our publicly held collaborators; Level 2, defined as inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly, which includes certain investments in equity securities of our publicly held collaborators; and Level 3, defined as unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available.

We have equity securities in publicly held companies that we have received and/or purchased from certain collaborators. For each collaborator where we own equity securities, we make an accounting policy election to present them either (i) at the fair value at the end of each reporting period or (ii) using the cost or equity method depending on our level of influence. We have elected to account for certain of these equity securities in publicly held collaborators using the fair value option. These equity securities in publicly held collaborators are recorded at fair value at each reporting date. Unrealized gains and losses resulting from fair value adjustments are reported as other income (expense) in the consolidated statement of operations. As of December 31, 2012, our equity securities received from collaborators are valued at $83.1 million.

We record the fair value of securities received on the date the collaboration is consummated or the milestone is achieved upon the closing, quoted price of the collaborator’s security on that date, assuming the transfer of the consideration is considered perfunctory. If the transfer of the consideration is not considered perfunctory, we consider the specific facts and circumstances to

 

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determine the appropriate date on which to evaluate fair value. We also evaluate whether any discounts for trading restrictions or other basis for lack of marketability should be applied to the fair value of the securities at inception of the collaboration. In the event we conclude that a discount should be applied, the fair value of the securities is adjusted at inception of the collaboration and re-evaluated at each reporting period thereafter.

We account for investments in which we have the ability to exercise significant influence over, but not control, the operating activities of the investee using the equity method. Under the equity method, we include our pro-rata share of the investee’s operating results, adjusted for accretion of basis difference, in our consolidated statement of operations with the corresponding increase or decrease applied to the carrying value of the investment. The excess cost over our pro-rata share of the investee’s net assets is equity-method goodwill. This equity-method goodwill is not amortized; however, the investment is analyzed for impairment on a periodic basis or if an event occurs or circumstances change that indicates the carrying amount may be impaired. The carrying value of our equity method investment in AquaBounty is $5.7 million at December 31, 2012. On March 15, 2013, we acquired 18,714,814 additional shares of AquaBounty increasing our ownership in AquaBounty to 53.82 percent. As such AquaBounty will be consolidated on our results of operations and financial position beginning on March 15, 2013.

Valuation allowance for net deferred tax assets

We record a valuation allowance to offset any net deferred tax assets if, based upon the available evidence, it is more likely than not that we will not recognize some or all of the deferred tax assets. We have had a history of net losses since inception, and as a result, we have established a 100 percent valuation allowance for our net deferred tax assets. If circumstances change and we determine that we will able to realize some or all of these net deferred tax assets in the future, we will record an adjustment to the valuation allowance.

Consolidation of variable interest entities

We identify entities as variable interest entities, or VIEs, either: (i) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (ii) in which the equity investors lack an essential characteristic of a controlling financial interest. We perform an initial and on-going evaluation of the entities with which we have variable interests to determine if any of these entities are VIEs. If an entity is identified as a VIE, we perform an assessment to determine whether we have both: (i) the power to direct activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) have the obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE. If we have both these criterion, we are identified as the primary beneficiary of the VIE. As of December 31, 2012, we have identified AquaBounty, our investment in an affiliate, as a VIE. We are not the primary beneficiary for this entity as we do not have the power to direct the activities that most significantly impact the economic performance of the VIE.

Valuation of long-lived assets

We evaluate long-lived assets, which include property and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Conditions that would necessitate an impairment assessment

 

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include a significant decline in the observable market value of an asset, a significant change in the extent or manner an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable.

Stock-based compensation

We record the fair value of stock options issued to employees and non-employees as of the grant date as stock-based compensation expense. Stock-based compensation expense for employees and non-employees is recognized over the requisite service period, which is typically the vesting period. Stock-based compensation expense recorded as research and development expenses and general and administrative expenses amounted to $0.4 million and $1.1 million, respectively, for the year ended December 31, 2012, and $0.8 million and $0.2 million, respectively, for the year ended December 31, 2011. We utilize the Black-Scholes option-pricing model to estimate the grant-date fair value of all stock options. The Black-Scholes option-pricing model requires the use of weighted average assumptions for estimated expected volatility, estimated expected term of stock options, risk-free rate, estimated expected dividend yield, and the fair value of the underlying common stock at the date of grant. Because we do not have sufficient history to estimate the expected volatility of our common stock price, expected volatility is based on the average volatility of peer public entities that are similar in size and industry. We estimate the expected term of all stock options based on previous history of exercises. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the stock option. The expected dividend yield is 0 percent as we have not declared any common stock dividends to date and do not expect to declare common stock dividends in the near future. The fair value of the underlying common stock at the date of grant is discussed below. We estimate forfeitures based on our historical analysis of actual stock option forfeitures. Actual forfeitures are recorded when incurred and estimated forfeitures are reviewed and adjusted at least annually. The assumptions used in the Black-Scholes option-pricing model for the years ended December 31, 2012 and 2011 are set forth below:

 

      Years ended December 31,  
     2012      2011  

 

 

Valuation Assumptions

     

Expected dividend yield

     0%         0%   

Expected volatility

     71% - 76%         68% - 72%   

Expected term (years)

     6.00         5.37 - 6.23   

Risk-free interest rate

     0.80% - 1.10%         1.34% - 2.51%   

 

 

We had 4,048,672 options outstanding as of December 31, 2012 of which 1,415,109 were exercisable. Total unrecognized stock-based compensation expense related to non-vested awards at December 31, 2012 was $4.9 million and is expected to be recognized over a weighted-average period of approximately three years. The weighted average grant date fair value for options granted in 2012 was $2.63.

 

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Common stock valuations

Due to the absence of an active market for our common stock, the fair value of our common stock was determined in good faith by our board of directors, with the assistance and upon the recommendation of management, based on a number of objective and subjective factors consistent with the methodologies outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, referred to as the AICPA Practice Aid, including:

 

 

the shares of common stock involved illiquid securities in a private company;

 

 

the prices of each of our series of preferred stock sold by us to outside investors at arm’s length transactions and the rights, preferences and privileges of each of these series of preferred stock relative to our common stock;

 

 

our consolidated results of operations, financial position and the status of our research and development efforts;

 

 

the composition of our management team and board of directors;

 

 

the material risks related to our business;

 

 

our business strategy;

 

 

our entry into ECCs as contemplated by our business strategy;

 

 

the market performance of publicly traded companies in the life sciences and biotechnology sectors;

 

 

the likelihood of achieving a liquidity event for the holders of our shares of common stock, such as a sale of the company or an initial public offering given prevailing market conditions;

 

 

external market conditions affecting the life sciences and biotechnology industry sectors; and

 

 

contemporaneous valuations of our shares of common stock.

We have engaged independent third-party valuation consultants to perform contemporaneous valuations of our common stock since 2007. We typically evaluate the valuation of our common stock upon the closing of a series of preferred financing round and also upon the occurrence of significant events affecting us or our achievement of significant milestones, to the extent that they are not contemplated in the enterprise valuation prepared in conjunction with a series of preferred stock financing.

 

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The following table presents the issuance of each series of preferred stock financing and stock options granted from May 27, 2011 through March 1, 2013, as well as the estimated fair value of the options and the underlying common stock on the grant date.

 

Preferred shares

    

Stock options

 
Date of issuance    Shares issued    Price per
share
     Date of grant    Options
issued
    

Estimated

fair value
per common

share at
grant date

 

 

 

May 26, 2011

   19,047,619 shares of Series E Preferred Stock    $ 5.25       May 27, 2011-January 10,2012      3,471,750       $ 4.07   

January 10, 2012

   9,523,810 shares of Series E Preferred Stock    $ 5.25       January 11, 2012-April 12, 2012      346,500       $ 4.07   

April 12, 2012

   4,761,905 shares of Series E Preferred Stock    $ 5.25       April 13, 2012-November 13, 2012      445,500       $ 4.07   

November 13, 2012

   4,761,905 shares of Series E Preferred Stock    $ 5.25       November 14, 2012-March 1, 2013      3,000       $ 4.07   

March 1, 2013 and April 30, 2013

   19,047,619 shares of Series F Preferred Stock    $ 7.88       N/A      N/A       $ 5.53   

 

 

Stock options granted from May 27, 2011 through January 10, 2012

On May 26, 2011, we sold $100.0 million of Series E Preferred Stock. A majority of the shares of Series E Preferred Stock were sold to new unrelated third party investors, at a price per share of $5.25. During the period from May 27, 2011 through January 10, 2012, we issued to new employees 3,471,750 options to purchase shares of our common stock at a price of $4.07 per share. In establishing the price per share of common stock of $4.07, we considered the factors above as well as the May 26, 2011 contemporaneous valuation of our common stock.

In the May 26, 2011 contemporaneous valuation, the fair value of our common stock of $4.07 was established using the Probability-Weighted Expected Return Method, or PWERM, pursuant to which the value of an enterprise’s common stock is estimated based upon an analysis of current and future values for the enterprise assuming possible liquidity events. The PWERM approach employs various market approach and income approach calculations depending upon the likelihood of a given liquidation scenario and considers the terms of each series of preferred stock, including the rights for each share class, at the date in the future upon which those rights will either be executed or abandoned. Application of the PWERM includes:

 

 

for each liquidity event, enterprise value or range of values is established based on available company-specific and market data;

 

 

for each liquidity event, the rights and preferences of each shareholder class are considered in order to determine the appropriate allocation of value between the classes;

 

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for calculating the potential value for each liquidity event, the return is discounted to present value using an appropriate discount rate;

 

 

a probability is estimated for each liquidity event based on the facts and circumstances as of the valuation date; and

 

 

the returns for each liquidity event are weighted by the probability assigned and summed to conclude the expected return for the common stock.

For the May 26, 2011 valuation, we calculated values under each scenario based on the assumptions and methodology as follows:

Near-Term Initial Public Offering:

 

 

Assumed a 40 percent probability of closing of an initial public offering by mid-2012 at an enterprise value substantially greater than the post-closing enterprise value of our most recent Series E Preferred Stock sale. We believe this was appropriate because we had just executed our first ECC with ZIOPHARM in January 2011 under our new ECC business model and believed that we would sign additional ECCs across our target markets during 2011; and

 

 

Applied a discount rate of 12 percent.

Long-Term Initial Public Offering:

 

 

Assumed a 16 percent probability of closing an initial public offering by mid-2013 at an enterprise value substantially greater than the post-closing enterprise value of our most recent Series E Preferred Stock sale. We assumed that we would sign additional ECCs across our target markets by the end of 2012 and would require us to raise additional financing to execute on our ECC business model; and

 

 

Applied a discount rate of 12 percent.

Remain as a Private Company:

 

 

Assumed a 38 percent probability of remaining as a private company. We assumed that we would need to raise additional capital in 2012 in order to continue to execute on our ECC business model, however, even with the additional financing we would be unsuccessful in sufficiently executing our ECC business model to achieve a valuation in excess of the aggregate liquidation preference of the preferred stock. This results in zero value afforded to the holders of common stock.

Liquidation:

 

 

Assumed a 6 percent probability of a liquidation scenario occurring by mid 2012. We assumed under this scenario that we could not execute on our business model using the proceeds from the Series E Preferred Stock offering nor raise additional capital and would therefore liquidate in 2012. Because of the preferences afforded to the holders of preferred stock, liquidation would result in zero value afforded to the holders of common stock.

We then applied the probabilities of each liquidity scenario to their respective price per share of common stock to arrive at a value per share of $4.07.

We believed each of these weightings to be appropriate in light of the current status of and risks associated with the market and our Company, including the execution of our initial ECC with ZIOPHARM, our deal pipeline, the development of our technologies, our available cash and anticipated future cash requirements.

 

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On January 10, 2012, we completed the sale of an additional $50.0 million of Series E Preferred Stock, at a price per share of $5.25. We determined that the events and circumstances that occurred between May 26, 2011 and January 10, 2012 did not indicate a significant change in the value of common stock during this period. We considered the following events that occurred during this period:

 

 

the issuance of additional Series E Preferred Stock at the same price and with the same rights and preferences as the original issuance of Series E Preferred Stock on May 26, 2011. The original issuance of the Series E Preferred Stock implied a value per share of our common stock of $4.07;

 

 

the acquisition of certain assets required to operate the cell processing business of Cyntellect on August 31, 2011;

 

 

the acquisition of technology for the development of high value production cells lines from GT Life on October 5, 2011;

 

 

the acquisition of a therapeutic antibody platform technology from Immunologix on October 21, 2011;

 

 

the execution of an ECC with Synthetic Biologics; and

 

 

the execution of an ECC with Elanco, the animal health division of Eli Lilly and Company.

Each of the three acquisitions was for technologies we believe are complementary to our technologies, however we did not acquire any existing or imminent revenue streams as part of those transactions. Execution of the ECCs represented the second and third such ECCs by us as contemplated in our operating plan for 2011.

Stock options granted from January 11, 2012 through April 12, 2012

On April 12, 2012, we completed the sale of an additional $25.0 million of Series E Preferred Stock, at a price per share of $5.25. During the period from January 11, 2012 through April 12, 2012, we issued to new employees 346,500 options to purchase shares of common stock at a price of $4.07 per share. Based on the lack of intervening events during this period and the fact that we issued additional shares of Series E Preferred Stock at the same price and on the same terms as prior issuances, we determined there was no basis for a significant change in the value of common stock during this period.

Stock options granted from April 13, 2012 through November 13, 2012

On November 13, 2012, we completed the sale of an additional $25.0 million of Series E Preferred Stock, at a price per share of $5.25. During the period from April 13, 2012 through November 13, 2012, we issued to new employees 445,500 options to purchase shares of common stock at a price of $4.07 per share. We determined that the events and circumstances which occurred during this period did not indicate a significant change in the value of common stock. We considered the following events that occurred during this period:

 

 

the issuance of additional Series E Preferred Stock at the same price and with the same rights and preferences as the prior issuances of Series E Preferred Stock, which implied a value per share of our common stock of $4.07;

 

 

execution of an ECC with Oragenics, Inc., in June 2012;

 

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execution of our second ECC with Synthetic Biologics, Inc., in August 2012;

 

 

execution of an ECC with Fibrocell Science, Inc, in October 2012; and

 

 

initiation of a Phase 2 clinical trial using our technologies by ZIOPHARM, Inc., thereby triggering our receipt of $18.3 million of additional consideration pursuant to our ECC with them, in October 2012.

The execution of the three ECCs during this time period was originally contemplated when setting the original price per share of our Series E Preferred Stock in May 2011. We believe that the initiation of the Phase 2 clinical trial with ZIOPHARM may have resulted in an increase in value of our common stock. We did not perform a valuation of common stock, however, because we believe the resulting value per share of common stock would have been insignificant based on the small number of stock options granted between the date of achievement of this milestone and the date of initial closing of our Series F Preferred Stock financing discussed below. Based on these factors and that we issued additional shares of Series E Preferred Stock at the same price and on the same terms as prior issuances, we determined there was no basis for a significant change in the value of common stock for this period.

Stock options granted from November 14, 2012 through March 1, 2013

From March 1, 2013 to April 30, 2013, we completed the sale of $150.0 million Series F Redeemable Convertible Preferred Stock, which we refer to as the Series F Preferred Stock. The increase in share price of the Series F Preferred Stock compared to the share price of the Series E Preferred Stock was due primarily to the preference in liquidation and dividends provided in the terms of the Series F Preferred Stock. Of the $150.0 million of Series F Preferred Stock sold, approximately $79.0 million (or 52 percent) was received from new unrelated third party investors. During the period from November 14, 2012 through March 1, 2013, we issued to new employees 3,000 options to purchase shares of common stock at a price of $4.07 per share. On November 16, 2012, we purchased 47.56 percent of the then outstanding shares of common stock of AquaBounty Technologies, Inc., which we refer to as AquaBounty. We determined that the only significant event that occurred during the period from November 14, 2012 through March 1, 2013 was the December 22, 2012 notification by the FDA of the publication for comment of the Environmental Assessment of AquaBounty’s most advanced product, thereby we believe significantly increasing the likelihood that such product might be sold commercially for human consumption. While we believe this notification may have resulted in an increase in the value of our common stock, we did not perform a valuation of common stock based on our plans to close our Series F Preferred Stock financing round in the first quarter of 2013.

Transactions involving shares of our common stock from March 2, 2013 through April 30, 2013

In conjunction with the initial closing of the Series F Preferred Stock financing, we initiated a contemporaneous valuation of our common stock, effective March 1, 2013 and temporarily suspended the granting of options to purchase new shares of common stock to new employees as well as the issuance of stock options and shares of our common stock to members of our board of directors pursuant to our Director Compensation Plan until such valuation was completed and approved by our board of directors. We utilized the PWERM approach, which we believed to be appropriate based on initiating discussions for an initial public offering. We calculated values under each scenario based on the assumptions and methodology as follows:

 

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Near Term Initial Public Offering:

 

 

Assumed a 35 percent probability of closing of an initial public offering before September 2013 at an enterprise value of approximately 25 percent greater than the post-closing enterprise value of our most recent Series F Preferred Stock sale; and

 

 

Applied a discount rate of 30% to arrive at a per share price of $8.50.

Low Initial Public Offering:

 

 

Assumed a 35 percent probability of closing an initial public offering before November 2013 at the same post-closing enterprise value of our most recent Series F Preferred Stock sale; and

 

 

Applied a discount rate of 30 percent to arrive at a per share price of $6.44.

Deferred Initial Public Offering:

 

 

Assumed a 12 percent probability of closing an initial public offering before July 2014 at an enterprise value substantially greater than our most recent Series F Preferred Stock sale; such value was assumed to be significantly higher than the near-term scenario because we assumed we would continue to make progress in implementing our ECC business plan prior to the closing date; and

 

 

Applied a discount rate of 30 percent to arrive at a per share price of $9.02.

Remain as Private Company:

 

 

Assumed a 12 percent probability of remaining a private company at an enterprise value substantially less than our most recent Series F Preferred Stock sale; and

 

 

allocated the enterprise value to various classes of shares using the option pricing model using a volatility of 55 percent to arrive at an implied share price of $1.62.

IP Sale/Dissolution:

 

 

Assumed a 6 percent probability of dissolution of our Company with no value to common shareholders; and

 

 

Used the same approach as the scenario above that we would remain a private company with an enterprise value equal to our cumulative historical research and development investment.

We then applied the probabilities of each liquidity scenario to their respective price per share of common stock to arrive at a value per share of $6.50. Based upon our evaluation of the market and input received from our independent third-party valuation consultant, we determined that a 15% discount for lack of marketability was appropriate, resulting in a value per share of $5.53.

We believed each of these weightings to be appropriate in light of the current status of and risks associated with the market and the Company, including the execution of the additional ECCs, our deal pipeline, the development of our technologies, our available cash and anticipated future cash requirements.

 

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Estimated offering price

On                     , 2013, we and the underwriters determined the estimated price range for this offering. The midpoint of the estimated range was $             per share. In comparison, our estimate of the fair value of our common stock was $5.53 per share as of March 1, 2013. We note that, as is typical in initial public offerings, the estimated price range for this offering was not derived using a formal determination of fair value, but was determined based upon discussions between us and the underwriters. Among the factors considered in setting the estimated range were prevailing market conditions and estimates of our business potential, as described above. In addition to this difference in purpose and methodology, we believe that the difference in value reflected between the midpoint of the estimated range and the board of directors’ determination of the fair value of our common stock on March 1, 2013 was primarily the result of the following factors:

 

 

The March 1, 2013 valuation used a probability weighting of     % that the initial public offering would occur at a premium to our prior preferred stock financing round. However, the estimated initial public offering price range, which was determined based upon discussions between us and the underwriters, necessarily assumes that the initial public offering has occurred, that a public market for our common stock has been created and that all outstanding shares of our preferred stock have been converted into common stock in connection with the initial public offering, and therefore excludes any discount for lack of marketability of our common stock, which was factored in the March 1, 2013 valuation. As such, the previously used private company valuation methodology is no longer applicable.

 

 

Our preferred stock currently has substantial economic rights and preferences superior to our common stock. The midpoint of the estimated price range assumes the conversion of our preferred stock upon the completion of this offering and the corresponding elimination of such economic rights and preferences, resulting in an increased common stock valuation, which more than offsets the dilutive impact of the conversion of our preferred stock to common stock.

 

 

The proceeds of a successful initial public offering would substantially strengthen our consolidated balance sheet by increasing our cash and cash equivalents. Additionally, the completion of this offering would provide us with access to the public company debt and equity markets. These projected improvements in our consolidated financial position influenced the increased common stock valuation indicated by the midpoint of the estimated price range.

Jumpstart Our Business Startups Act of 2012

On April 5, 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

 

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We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if as an “emerging growth company” we choose to rely on such exemptions, we may not be required to, among other things, (i) provide an auditor’s attestation report on our systems of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply until we no longer meet the requirements of being an “emerging growth company.” We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of this offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

Recent accounting pronouncements

 

In May 2011, the Financial Accounting Standards Board, or FASB, issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The new standards do not extend the use of fair value but, rather, provide guidance about how fair value should be applied where it already is required or permitted under U.S. GAAP or International Financial Reporting Standards, or IFRS. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS. We adopted this amendment on January 1, 2012. The adoption of this amendment did not have a material impact on our consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, or ASU 2011-05. Under this ASU, an entity will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. The ASU eliminates the option in U.S. GAAP to present other comprehensive income in the statement of changes in equity. An entity should apply the ASU retrospectively. In December 2011, the FASB decided to defer the effective date of those changes in ASU 2011-05 that relate only to the presentation of reclassification adjustments in the statement of income by issuing ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for the Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. We implemented the provisions of ASU 2011-05 as of January 1, 2012. The adoption of this amendment did not have a material impact on our consolidated financial statements.

In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, or ASU 2013-02. ASU 2013-02 requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated

 

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other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, companies would instead cross reference to the related footnote for additional information. ASU 2013-02 is effective for interim and annual reporting periods beginning after December 15, 2012. We will implement the provisions of ASU 2013-02 as of January 1, 2013. We believe that the recent pronouncement will not have a material impact on our results of operations and financial condition.

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, or ASU 2011-11. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position, and to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under IFRS. The new standards are effective for annual periods beginning January 1, 2013 and interim periods within those annual periods. Retrospective application is required. We will implement the provisions of ASU 2011-11 as of January 1, 2013. We believe that the recent pronouncement will not have a material impact on our results of operations and financial condition.

 

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Business

Overview

At present rates of global industrialization and population growth, food and energy supplies and environmental and healthcare resources are becoming more scarce and/or costly. We believe it is not a viable option for mankind to continue on this path — new solutions will be necessary to preserve and globally expand a high quality of life. We believe that synthetic biology is a solution.

Intrexon is a leader in the field of synthetic biology, an emerging and rapidly evolving discipline that applies engineering principles to biological systems. Using our suite of proprietary and complementary technologies, we design, build and regulate gene programs and cellular systems to enable the development of new and improved products and manufacturing processes across a variety of end markets, including healthcare, food, energy and environmental sciences. Our synthetic biology capabilities include the ability to precisely control the amount, location and modification of biological molecules to control the function and output of living cells and optimize for desired results at an industrial scale.

Working with our collaborators, we seek to create more effective, less costly and more sustainable solutions than can be provided through current industry practices. We believe our approach to synthetic biology can enable new and improved biotherapeutics, increase the productivity and quality of food crops and livestock, create sustainable alternative energy sources and chemical feedstocks and provide for enhanced environmental remediation. Our business model is to commercialize our technologies through exclusive channel collaborations, or ECCs, with collaborators that have industry expertise, development resources and sales and marketing capabilities to bring new and improved products and processes to market.

Our technologies combine the principles of precision engineering, statistical modeling, automation and production at an industrial scale. We efficiently engineer precise and complex gene programs across many cell types. We apply the engineering principle of a design-build-test-learn continuum, through which we accumulate knowledge about the characteristics and performance of gene programs and cell lines. This process of continuous learning allows us to enhance our ability to design and build improved and more complex gene programs and cellular systems.

We believe our technologies are broadly applicable across many diverse end markets, including some end markets that have failed to recognize the applicability of synthetic biology or failed to efficiently utilize biologically based processes to produce products. We have devised our business model to bring many different commercial products to market through the formation of ECCs with collaborators that have expertise within specific industry segments. In our ECCs, we provide expertise in the engineering, fabrication and modification of gene programs and cellular systems, and our collaborators are responsible for providing market and product development expertise, as well as regulatory, sales and marketing capabilities. Generally, our collaborators compensate us through technology access fees, royalties, milestones and reimbursements of certain costs. This business model allows us to leverage our capabilities and capital across a broader landscape of product opportunities and end markets than we would be capable of addressing on our own.

 

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We began entering into ECCs in 2011 and are currently party to nine such agreements. Under these ECCs, we are developing products in the fields of healthcare and food. In healthcare, our ECCs include programs in oncology, anti-infectives, antibiotics and tissue repair. In food, we are working to increase the productivity and nutritional value of salmon and other fish. We are also working to establish ECCs in the areas of energy and environmental sciences.

While the field of synthetic biology is still emerging, the addressable markets that may benefit from this approach are large and well-established. In healthcare, synthetic biology may provide new approaches to treating diseases, as well as improvements to the manufacture of existing products. It is estimated that the global human pharmaceuticals market is over $900 billion and that biological therapeutics represent approximately $150 billion of this market. While genetically modified salmon or trout may be considered new products, the global market for aquaculture was valued at approximately $110 billion in 2011. Genetically modified agricultural plants are already grown on more than 170 million hectares around the world and are worth an estimated $65 billion dollars. In energy, we are working to create novel, highly engineered organisms that use specific feed stocks to create commercially valuable end products, such as isobutanol, which already has a variety of technical and industrial applications and is also being investigated as a gasoline alternative.

What is synthetic biology?

History

Synthetic biology entails the application of engineering principles to biological systems for the purpose of designing and constructing new biological systems or redesigning/modifying existing biological systems. Biological systems are governed by DNA, the building blocks of gene programs, which controls cellular processes by coding for the production of proteins and other molecules that have a functional purpose and by regulating the activities of these molecules. This regulation occurs via complex biochemical and cellular reactions working through intricate cell signaling pathways, and control over these molecules modifies the output of biological systems.

In the early 1970s, scientists utilized basic tools and procedures for transferring DNA from one organism to another. Foundational tools included: gene programs contained in vectors, which are segments of DNA used as a vehicle to transmit genetic information; enzymes that could cut DNA at specific sites; and enzymes that could “glue” two complementary segments of DNA together. Developments between 1980 and the end of the 20th century advanced the field of genetic engineering, including automated DNA sequencing, DNA amplification via PCR and the creation of genetically modified organisms. However, the simplistic “cut-and-paste” nature of the available tools, and the absence of genomic sequence information, significantly restricted the scope of early synthetic biology efforts.

More recently, synthetic biology has been enabled by the application of information technology and advanced statistical analysis, also known as bioinformatics, to genetic engineering, as well as by improvements in DNA synthesis. Synthetic biology aims to engineer gene-based programs or codes to modify cellular function to achieve a desired biological outcome. For example, applications may consist of the replacement of a defective protein with a functional protein to treat a broad range of human and animal disease states, or the production of multiple proteins through the regulation of several genes in a cell to produce petrochemicals.

 

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Our approach

The essence of our approach is to apply synthetic biology by using an iterative process that is rapid, automated and highly reproducible, in which we:

 

 

Design genes of interest and gene programs utilizing knowledge of cellular pathways and protein function;

 

 

Build biological molecules, gene programs and their variants to optimize performance of the biological system;

 

 

Test gene programs by inserting them into cellular systems and comparing the result(s) to the intended effects; and

 

 

Learn by utilizing information gained in our iterative processes to create better DNA vectors and gene programs using a more informed and efficient process to achieve improved outcomes.

As a result of our approach, we have developed extensive knowledge about many classes of DNA components and the rules governing their expression and activity. We have also assembled an inventory of these DNA components that we can use to rationally construct unique vectors rapidly and with predictable outcomes. The knowledge embedded in our DNA database allows us to create single gene and highly complex multigenic gene programs (an individual gene program containing multiple genes).

To support our approach, we have developed, on our own and through acquisitions, a unique suite of technologies, and we continue to expand upon their capabilities. These technologies include: our UltraVector gene design and fabrication platform, and its associated library of modular DNA components; Cell Systems Informatics; Laser-Enabled Analysis and Processing, or LEAP; and mAbLogix. These technologies are complementary in nature and share the following key characteristics:

 

 

Platform neutral — outcome oriented.    We can work across different cell types with the objective of achieving the intended biological outcome allowing for product development across a broad spectrum of end markets.

 

 

Knowledge driven.    We use statistical modeling tools and computational analysis to continually acquire more knowledge about biological systems and their design to continually improve our ability to develop new and improved products and processes for our collaborators.

 

 

Rationally designed.    Our knowledge of biological systems and components allows us to design, build and select gene programs and predict the probable outcome of these programs.

 

 

Capable of complexity.    Our technologies enable the design and precise control of complex biological molecules and multigenic gene programs.

 

 

Industrial scale.    We use engineering principles and automation to enable products based on synthetic biology that are commercially viable.

 

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Our competitive strengths

We believe that our technologies and our approach to synthetic biology — design-build-test-learn — give us a competitive advantage over traditional industrial processes as well as current approaches to synthetic biology.

We believe that we have the following competitive strengths:

We have a suite of proprietary and complementary technologies

We have built a suite of proprietary and complementary technologies that provides us with a comprehensive ability to design, create, modify and regulate gene programs and cellular systems. By virtue of the complementary nature of our technologies, we are able to provide our collaborators with a diverse array of capabilities, representing a “one stop shop” to potentially develop and commercialize new and differentiated products enabled by synthetic biology.

Our design-build-test-learn continuum allows us to design and build improved and more complex gene programs

We have developed a core expertise and technologies to design, build and test complex gene programs, as well as technologies to isolate cells that best express the desired biological output. We have also developed an extensive bioinformatic network that enables us to continually learn and create optimal conditions for our gene programs. Our approach allows us to build improved and more complex gene programs.

We are a leader in synthetic biology

We believe we are the first company focused exclusively on applying synthetic biology across a broad spectrum of end markets and have been working in the field since 1998. Over the last 15 years, we have accumulated extensive knowledge and experience in design, modification and regulation of gene programs. We believe all of these factors, coupled with our suite of proprietary and complementary technologies, provide us with a first-mover advantage in synthetic biology.

We serve large and diverse end markets with high built-in demand

A vast number of products consumed globally are or can be produced using biologically based processes. Natural resources are becoming more scarce as demand exceeds supply creating unmet needs for improvements in development and manufacturing. As a result, the need for complex biologically engineered molecules such as those enabled by our synthetic biology technologies is large and spans multiple industries, including healthcare, food, energy and environmental sciences. Each of these markets faces unique challenges, however all have unmet needs for improvements in product development and manufacturing that can result in savings of both cost and time as compared to traditional means of industrial design and production. Because synthetic biology has the potential to deliver against these unmet needs, we believe that significant demand already exists for improved products enabled by synthetic biology. Additionally, there are markets utilizing traditional industrial processes that have failed to recognize the significant improvement in performance that could be achieved using synthetic biology.

 

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We have a scalable ECC business model that allows us to leverage the broad potential of synthetic biology

We believe our ECC business model is a capital efficient and rapid way for us to participate in a more diversified range of product opportunities and industrial end markets than would otherwise be possible, including healthcare food, energy and environmental sciences. Our collaborators are primarily responsible for providing market and product development expertise, as well as sales, marketing and regulatory capabilities. Generally, our collaborators compensate us through technology access fees, royalties, milestones and reimbursements of certain costs. Our ECC business model allows us to participate in the potential upside from products that are enabled by our technologies across an extensive range of industries, without the need for us to invest considerable resources in bringing individual programs to market. Moreover, we believe that we will increasingly engage in ECCs in new fields at an accelerating pace with well-recognized collaborators.

We have experienced management and employees

Our management team, including our Chief Executive Officer, Randal J. Kirk, and our Chief Operating Officer, Krish Krishnan, consists of executives with a track record of success in building and managing research and development-driven companies, including New River Pharmaceuticals Inc., which was sold in 2007 to Shire plc for $2.6 billion. Our Chief Science Officer, Thomas D. Reed, was responsible for the initial conception and creation of our UltraVector technology platform. We have 163 employees primarily engaged in research and development, 78 of whom hold advanced degrees in engineering and biology or other sciences, including either a Ph.D., M.D. or D.V.M.

Our suite of proprietary and complementary technologies

We apply the potential of synthetic biology through our suite of proprietary and complementary technologies that combine the principles of precision engineering, statistical modeling, automation and production at an industrial scale. This enables us to engineer precise and complex gene programs across many cell types rapidly and inexpensively. Our technologies include the following:

The UltraVector gene design and fabrication platform

Biological processes have the potential to be designed or redesigned for improved performance for a given application. One of the main challenges is to engineer and introduce the appropriate genetic parts that will yield a product with the desired outcome, such as enhanced biological function, decreased cost of goods or therapeutic effect. This has traditionally been done via a trial and error approach. However, in order to quickly optimize a product it is often necessary to explore multiple variables simultaneously to efficiently sample a broad experimental space. Doing so requires several components, including a robust DNA construction platform capable of constructing large targeted libraries of DNA designs with the appropriate complexity and scale, a powerful set of statistical tools to guide efficient sampling of a large biological sample space, high-throughput screening capacity matched to library requirements, and a suite of statistical tools to enable recognition and then recombination of improved performers.

Our gene program design platform, which we refer to as UltraVector, is an integrated suite of tools comprising advanced DNA construction technology or components, cellular and protein

 

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engineering, computational models and statistical methods which facilitate the rapid design, build and testing of complex systems. The UltraVector platform allows us to translate complex gene programs into standard components that can be designed, manufactured and tested in a robust, automated format. This technology enables us to engineer at the cellular level from biological sources.

UltraVector DNA design is computer-automated and utilizes a proprietary set of defined construction rules to rapidly assemble components that are stored in our DNA library. These rules are derived from UltraVector’s object-oriented DNA programming language that enables the hierarchical assembly of DNA parts, which can be a single base pair or thousands of base pairs in length. This allows us to rapidly assemble gene programs from defined and controlled DNA components imparting a desired biological outcome.

Following the design of the DNA vector, the UltraVector-driven build phase is performed via a proprietary modular assembly platform that incorporates a broad spectrum of DNA assembly methodologies. More important than any one DNA assembly technique, however, is the underlying algorithm for determining the best approach to efficiently assemble our DNA, regardless of complexity or scale. By accommodating multigenic complexity and industrial scale production, we provide our collaborators with multiple options for efficiently optimizing DNA-based functions.

In addition to the growing number of gene components in our UltraVector library, we are continually designing and creating enzymatic and regulatory components that provide more precise control over genome integration and gene regulation. For example, our RheoSwitch Therapeutic System is a three-component transcriptional regulator that provides inducible gene expression. The RheoSwitch Therapeutic System provides the ability to not only express proteins/enzymes of interest, but also the ability to control the level and timing of expression to achieve a biological outcome. Both in vivo and ex vivo applications have demonstrated highly controllable expression when the RheoSwitch Therapeutic System is incorporated into UltraVector-designed vectors. Other ongoing programs include our Attsite recombinases, which mediate predictable gene exchange into host cells thereby eliminating many of the difficulties seen with traditional gene insertion.

Cell Systems Informatics

Cell systems informatics permits faster design as well as efficient testing and learning about new gene targets or product pathways. Our proprietary bioinformatics software and database systems for mapping cellular pathways when combined with our genome-scale modeling and experimental data, including, for example, gene expression profiling and protein engineering, enable us to optimize selection and development of gene programs and cellular systems for our collaborators.

Our computational modeling and simulation platform enables the development of predictive computer models of organisms, from microbes to humans. This platform builds virtual cells from their basic molecular components, and can simulate the activity of the cell’s complete reaction network, serving as an advanced biological knowledge management system with proven predictive capabilities. Reconstructed models can be used as the basis for computer simulations of the biological systems providing a mechanism for high-throughput testing. The capabilities of these systems can be used to predict the outcomes of adaptive evolution, identify undiscovered pathways or reactions in the network based on necessary biomass components, test the effect of

 

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adding and/or eliminating genes or reactions to the network, design metabolic networks to support and optimize the production of a specific metabolite or protein and examine conditions consistent with disease and healthy states. Our computational modeling infrastructure allows scientists to rapidly examine a large experimental space in silico and then focus on the most promising conditions to be validated experimentally. Furthermore, this platform allows us to bridge experimental and computational research efforts by enabling models to be refined and improved as more data for an organism becomes available, thereby creating a highly effective method of rapid learning from the results of our research and development efforts.

Our bioinformatics platform is also central to our protein engineering expertise, which focuses on designing proteins with enhanced stability, solubility and post-translational modifications. We are also working to develop novel enzyme inhibitors and fusion proteins for a variety of applications in human and animal therapeutics. Our protein engineering utilizes the proprietary component library, generation of component variants sequence phylogenetic analysis and structure-based sequence alignment, computer-aided drug discovery, de novo and comparative protein modeling, molecular dynamics simulation and free energy analysis, antibody design and humanization, epitope prediction, protein pharmacokinetics optimization, in silico support of enzyme engineering to obtain novel catalysis activities, and quantitative structure-function relationships with machine learning algorithms to optimize, facilitate and prioritize protein variant libraries for the advancement of our collaborators.

LEAP — cell identification and selection

Our proprietary Laser-Enabled Analysis and Processing technology, or LEAP, is an instrument that merges semiconductor manufacturing technologies for cell processing applications to provide high levels of control and scale to cell purification and stem cell culture management. Capable of operating at the single cell level by utilizing a wide range of image-based assays to charactize cell population, the LEAP platform can identify and purify cells of interest from large libraries of cells created by our UltraVector and bioinformatics technologies using a laser-based purification process, thereby providing a mechanism of testing the degree of protein expression in genetically modified cells as well as rapid means to learn from the genetic building process. Combining the flexibility of image-based selection with the precision of laser purification, LEAP provides a platform to identify and purify high value cells.

Coupled with our UltraVector platform capability to rapidly generate large libraries of vector variants, the LEAP instrument provides a platform to identify and test the individual UltraVector-transfected cell expressing the protein of interest at optimal levels. The rapid cycle time of the linked processes enables the creation of complex, synthetic biology solutions in an iterative, variation/selection fashion, applying an evolutionary approach, but at a much accelerated time scale, thereby significantly enhancing our ability to learn about the genetic vectors we create. Applied to cell line generation, a core step in the generation of biomanufacturing cell lines for the production of therapeutic proteins such as antibodies, LEAP generates more highly purified cell lines of higher expressing cells, with greater productivity and in less time than conventional approaches can provide. This leads to cost and time savings both at the research and development stage and for cost of goods of manufactured products.

A unique feature of the LEAP platform is its ability to purify cells while they remain attached to the plate surface where they are grown. Many cell types, including many stem cells, do not maintain cell health and viability when processed with conventional, flow-based purification instrumentation. LEAP allows these cells to be efficiently processed and purified, while

 

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maintaining high viability. Applied to stem cells, LEAP enables the scale up and automation of stem cell processing that has historically been largely manual, providing a solution for scale-up.

mAbLogix — antibody discovery

Our proprietary mAbLogix antibody discovery platform, or mAbLogix platform, enables production of B-cell libraries for discovery of antibodies. An antibody, also known as an immunoglobulin, is a protein produced in response to and counteracting a specific antigen, or marker, on cells and infectious agents, such as virus and bacteria, that identify them as foreign or non-self. Monoclonal antibodies, or mAbs, have become an important therapeutic that can be used in a number of ways including anti-infectives and oncology indications. The mAbLogix platform permits antigen targeting using “fully human” monoclonal and polyclonal antibodies.

Our mAbLogix antibody discovery process is comprised of two major activities: the build of human B-cell libraries expressing a large number of unique antibodies; and the testing of these libraries based on an analysis of B-cells that positively express antibodies in response to a specifically chosen antigen. Our proprietary discovery process is differentiated by the large size of human B-cell libraries generated and by the rapid, cell-based screening process. Together these capabilities allow us to quickly explore the entire human antibody repertoire and generate fully human mAbs against diverse antigens.

Utilization of complementary synthetic biology technologies to facilitate the creation of unique biological products

In order to create a highly functional biological system, we recognize the complexity of cellular processes and the necessity to create an optimized gene program in conditions reflective of the natural environment to allow for the creation of the optimal biological product. This requires a rigorous understanding of cell signaling pathways as well as the interactions that influence the expression of protein. This knowledge is captured in our advanced bioinformatics systems, which uses statistical modeling and other analytic frameworks to determine the most efficient pathways for an intended biochemical result. Our bioinformatics platform also plays a critical role in our research and development as this library of information allows us to explore new targets of potential interest to our current or future collaborators.

In addition to creating the optimized gene program via the most efficient cell signaling pathway and in the relevant cellular environments, we have a growing library of DNA components that facilitate quantitative dose-proportionate control over the amount and timing of the target protein generated, thereby providing another mechanism to closely control activity of the newly constructed gene program.

Our LEAP technology facilitates the automated identification of an individual cell with the highest levels of expression, quality and potency from a population of over 100,000 cells. Traditional cloning techniques are manual and only allow the generation of a few hundred clones while still being subject to human error. Following LEAP’s identification of the cell of interest, we clone the cell, thereby generating millions of cells that produce high concentrations of the biological molecule of interest.

Our mAbLogix platform complements UltraVector with a library of human antibodies that exceeds 500 million. By immortalizing human tonsils which are comprised of lymphatic tissue containing B-cells, our mAbLogix platform creates a B-cell library that can generate antibodies against an almost infinite number of new antigens.

 

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Antigens of interest could include cancer cells, bacteria/infective organisms or proteins that require inhibition, such as oncogenes. Following exposure of the antigen to the immortalized B-cell library, we are able to identify the B-cell that contains the reactive antibody. This antibody can then be isolated via LEAP, sequenced, manipulated, regulated and reconstructed using the UltraVector system.

Our markets

Synthetic biology has applicability across many diverse end markets. Our goal is to be a leader in the application of synthetic biology for products currently utilizing biologically based processes, and a leader in the replacement of conventional processes and products with biologically based substitutes. Through the application of our suite of proprietary and complementary technologies, we believe we can create optimized biological processes and create substitutes for traditional industrial techniques, leading to improved products that are developed and manufactured faster and more cost-effectively.

Healthcare

It is estimated that the global human pharmaceuticals market is approximately $900 billion and that biological therapeutics represent approximately $150 billion of this market. Additionally, the market for animal health therapeutics is currently estimated to be valued at more than $20 billion globally. The aging population in developed markets, and the population growth and increasing middle class in emerging markets, suggest that there will be a steadily increasing utilization of therapeutics. However, the global biopharmaceutical industry continues to face challenges in cost-effectively developing and producing new therapeutics. These demographic trends, as well as food production resource constraints, suggest similar trends in the animal health medicines and vaccines market.

In this market, we are focused on:

 

 

Therapeutics.    Both in health and animal health, synthetic biology has the potential to enable the development of highly complex biological molecules as well as the ability to regulate complex biological processes, with advantages as compared to traditional therapeutics, both in vivo and ex vivo. It may be possible, for example, to create highly targeted precision therapeutics with few off-target or adverse effects.

 

 

Bioproduction.    Synthetic biology allows new biologically based manufacturing techniques that have the potential to significantly lower the cost of goods for highly complex biological molecules, including both existing and novel biopharmaceuticals as well as small molecules.

 

 

Diagnostics.    By utilizing the sensing and reporting capabilities of cells and specific cellular mechanisms, it may be possible to create highly sensitive diagnostics, to report on a patient’s health and provide advance warning of changes in the state of the patient’s health.

Food

The Food and Agriculture Organization of the United Nations, or the FAO, predicts that by 2050 the world’s population will reach 9.1 billion, 2 billion more than today. To feed a larger, more urban and wealthier population, food production must increase by 70 percent. Annual cereal production will need to rise to about 3 billion tons from 2.1 billion today and annual meat production will need to rise to 470 million tons from today’s 270 million tons.

 

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In this market, we are focused on:

 

 

Food animals.    Within the United States, beef, pork and chicken sales are in excess of $125 billion per year. Dairy sales provide an additional $28 billion in annual sales of animal byproduct. The global market for meat is approximately 5 times larger than the US market, and the global dairy market is 10 times the size of the US market. Traditional methods of genetic selection in animals is an inefficient and slow process, requiring many generations in order to evolve and select for desired traits. However, selective breeding techniques have resulted in increased size of cattle and hogs, increased milk production in cows and other valuable attributes. By applying our suite of technologies, we believe we can more rapidly develop livestock with commercially valuable attributes such as enhanced nutritional content, resistance to disease and increased growth efficiency.

 

 

Agriculture.    The FAO estimates that 90 percent of the production increases necessary to feed the future population will come from increases in crop yield and cropping intensity through enhanced traits. Current methods of crop yield and productivity enhancement are no longer keeping pace with demand. Genetically modified agricultural plants are already grown on more than 170 million hectares around the world and are worth an estimated $65 billion dollars. We believe we have the potential to create improved crops by simultaneously incorporating multigenic traits into plants that are designed to enhance the efficiency of water, carbon and nitrogen utilization. We also believe that we can use our gene expression and gene regulation technologies to provide highly complex traits related to enhanced nutritional content, product quality and disease resistance.

Energy and chemicals

A significant challenge of industrial markets, such as the energy and the petrochemical industries, is their large scale, which can require hundreds of millions and even billions of pounds per year of production, and corresponding price sensitivity. For these industries, the production of any product must allow for scalability and end-to-end economic viability. It has long been recognized that biology offers promising alternatives to energy production as well as alternatives to resource intensive synthetic chemistry. For more than a decade, efforts have been made to produce fuels from bacteria, yeast and other organisms with little success. We believe that the many and complex changes to any organism’s DNA that must be made to result in significant energy production cannot be effected without the use of an engineered approach to synthetic biology.

Our UltraVector platform, by enabling high through-put gene program design and construction, allows us to identify the relevant pathways within an organism for the production of complex biological molecules, design a variety of alternative solutions to their expression, and rapidly build and evaluate solution sets to select the most promising alternatives. We believe our novel biological solutions can increase yield and productivity, which are critical in the development of alternative energy and the production of chemicals.

In this market, we are focused on:

 

 

Energy.    The development of engineered microbes for biological conversion of natural gas to alcohols as drop-in fuels can be accomplished with synthetic biology. We have already achieved as proof of concept the conversion by engineered bacteria of methane to isobutanol, which is an alternative alcohol-based fuel.

 

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Chemicals.    The chemical industry is highly dependent on crude petroleum as a feedstock. Increased demand for petroleum and continued declines in new reserves, as well as declines in the productivity of existing and proven reserves, has led to increased costs for consumers and reduced margins for many manufacturers. Economically viable alternatives to carbon feed stocks are critical to the future and sustainability of the chemical industry.

Environmental sciences

This sector embodies a diverse set of applications that we believe can be enhanced and expanded with the use of our suite of proprietary and complementary technologies. With the goal of entering into ECCs, we plan to focus our development activities on platform tailoring and selective third party enabling technology collaboration in the following areas:

 

 

Biosensors.    The biosensor global market is forecasted to exceed $12 billion by 2016 and opportunities exist to capture a portion of this market through design and construction of unique biosensors that leverage our suite of proprietary and complementary technologies.

 

 

Bioremediation.    The global market for microbial and associated bioremediation products is forecasted to reach over $1 billion by 2016. Industrial sources of soil and groundwater contamination present major environmental, policy and health issues because of the adverse effects of contaminants on humans and ecosystems. Bioremediation, which we believe our technologies have the potential to enable, can provide an environmentally friendly, socially acceptable, effective and economically viable solution.

 

 

Specialty Processes.    We believe our suite of proprietary and complementary technologies has the potential to be used to introduce effective solutions for applications such as activated microbial filtration, waterborne pathogen elimination, and de-nitrification of waste and surface water.

Our business model

We believe that because synthetic biology has applicability across many diverse end markets, we cannot take full advantage of synthetic biology with internal development programs alone. To address this, we have devised our business model to allow us to focus on our core expertise in synthetic biology while bringing many different commercial products to market via collaborations in a broad range of industry markets, thus minimizing and leveraging the use of our own capital.

Our business model is built around the formation of ECCs. An ECC is an agreement with a collaborator to develop products based on our technologies in a specifically defined field. We seek collaborators that have expertise within a specific industry segment and the commitment to provide resources for the development and commercialization of products within that industry segment. In our ECCs, we provide expertise in the engineering of gene programs and cellular systems, and our collaborators are responsible for providing market and product development expertise, as well as regulatory, sales and marketing capabilities.

This business model allows us to leverage our capabilities and capital across numerous product development programs and a broader landscape of end markets than we would be capable of addressing on our own. Our ECC business model also allows us to participate in the potential upside from products that are enabled by our technologies across an extensive range of

 

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industries, without the need for us to invest considerable resources in bringing individual progress to market. Additionally, the flexibility of the business model allows us to collaborate with a range of counterparts, from small innovative companies to global multinational conglomerates.

We began signing ECCs in 2011 and we are currently party to nine such agreements.

Our ECCs

Our ECCs typically share a number of key features. Each ECC is an agreement with a collaborator to develop products based on our technologies in one or more specifically defined fields. These fields may be narrowly defined (representing, for example, a specific therapeutic approach for a single indication) or may be broad (representing, for example, an entire class of related products). In each case, we and the collaborator precisely define the field based on factors such as the expertise of the collaborator, the relative markets for the prospective products, the collaborator’s resources available to commit to the ECC and our expectations as to other prospective ECCs in related areas. Regardless of the size of the field, under each ECC we grant the collaborator exclusive rights to our services and our suite of technologies to develop and commercialize products within the field. So long as our collaboration continues, the parties agree that each will not, alone or with another party, develop and commercialize products within the field of the ECC. The licensed technologies include those that we control as of the execution of the ECC as well as any technologies that we develop or acquire throughout the duration of the ECC.

We realize three general categories of revenue under our ECCs. First, for providing access to our technologies, we generally receive technology access fees either in cash or as an equity interest in the collaborator. These payments may be upfront or upon the achievement of developmental milestones or both. Second, through the duration of the ECC, we receive reimbursements from our collaborator to cover our time and material costs expended performing our obligations under the ECC. Reimbursable expenses may be for the time of our own personnel, materials we produce at our facilities or pass-through costs for the time and materials of third-party contractors. Third, we share in the potential future revenues, through royalties or other similar arrangements, derived from the commercialization of the product(s) that are enabled by our technologies.

Each of our ECCs is designed to continue in perpetuity unless terminated. Given the relatively long development cycle for many of the products that could be enabled by our technologies, as well as our belief that we can enable the continual improvement of product offerings, it is our expectation that our ECCs will continue for many years and result in the development of multiple products. Each of our collaborators, however, retains the right to terminate the ECC for any reason by providing us written notice a certain period of time prior to such termination, generally ninety days. The ECC is also terminable by either party upon the other party’s breach of material provisions of the ECC. The failure of our collaborator to exercise diligent efforts to develop products within the field of the ECC constitutes such a breach.

In the event one of our ECCs terminates we are entitled to immediately pursue another collaboration within the field of the terminated ECC. Moreover, technologies and product candidates in a relatively early stage of development revert to us, along with data, materials and the rights to all applicable regulatory filings related to the reverted products, enabling us to develop those products ourselves or incorporate them into a future collaboration. Product candidates that are at a more advanced stage of development, such as those already generating revenue or being considered for approval by the applicable regulatory body, for example, at the time of the ECC’s termination are retained by the former collaborator. The

 

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collaborator has the right to develop and commercialize such retained products although we are entitled to the royalties or other compensation to which we would be entitled as if the ECC were still in effect. Upon termination, we retain any technology access fees or other payments to which we are entitled through the date of termination.

In our ECCs, we retain rights to our existing intellectual property and generally any intellectual property developed using, or otherwise incorporating, our technologies. In addition, we are generally responsible for controlling the prosecution and enforcement of this intellectual property with the exception of the enforcement of patents directed solely and specifically to products developed within the field of each ECC.

Each of our ECCs requires the collaborator to indemnify us for all liability related to products produced pursuant to the ECC and to obtain insurance coverage related to product liability.

ZIOPHARM Oncology

Effective January 6, 2011, we entered into an ECC with ZIOPHARM Oncology, Inc. (NASDAQ: ZIOP), or ZIOPHARM, a publicly traded small molecule late-stage oncology drug development company, to develop and commercialize therapeutics in the field of cancer treatment in humans. The lead product candidates of this ECC include DC-IL-12 and Ad-IL-12 for the treatment of melanoma and breast cancer. DC-IL-12 has completed a Phase I human clinical trial to establish the drug’s safety. Ad-IL-12 is currently in multiple Phase II human clinical studies.

Both of these programs are focused on the regulatable expression of Interleukin-12 (IL-12). IL-12 is a naturally occurring anticancer cytokine central to the initiation and regulation of cellular anti-cancer immune responses. Until now, the use of IL-12 as a cancer therapeutic has been limited due to significant toxicities observed with its systemic use at doses high enough to exhibit a therapeutic effect.

Both of the IL-12 programs of this ECC deliver genetic vectors coding for the IL-12 gene directly to tumors. DC-IL-12 uses a patient’s own dendritic cells as the delivery vehicle, whereas Ad-IL-12 uses adenovirus. Once the vector is delivered intratumorally, it is controlled by Intrexon’s proprietary on/off biologic switch called the RheoSwitch Therapeutic System, or RTS. RTS maintains the gene program in an inactive state within a cell, until such a time as the patient takes a pill containing an orally available small molecule ligand. In the presence of the ligand, which is otherwise biologically inert, RTS is activated allowing expression of IL-12 at a specified therapeutic level and for a predetermined duration. RTS thereby regulates IL-12 expression to achieve a targeted clinically active level of IL-12 at the tumor while limiting broader systemic exposure and toxicities from the cytokine.

This ECC is also investigating the use of IL-12 in combination therapy with selected immunomodulators for solid tumors. This Multi-Inducible Cancer Immunomodulator, or MICI, program has multiple ongoing projects designed to identify proper cytokine candidates and develop vectors for cancer therapeutic applications. Three programs have been selected for development. Each is based on our multigenic expression platform, where two or more therapeutic proteins are expressed from a single DNA vector. Recent results from the MICI program have demonstrated successful expression of multigenic therapeutic proteins. Under both the DC-IL-12 and Ad-IL-12 programs, we are responsible for manufacturing the drug product and small molecule activator ligand. ZIOPHARM reimburses us for these manufacturing costs.

 

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Pursuant to the ECC, ZIOPHARM received a license to our technologies within the field of cancer treatment in humans as defined more specifically in the ECC. We received 3,636,926 shares of ZIOPHARM’s common stock valued at $17.5 million as an upfront technology access fee. On October 24, 2012 upon the dosing of the first patient of a Phase II clinical trial, we received 3,636,926 shares of ZIOPHARM’s common stock valued at $18.3 million as milestone consideration. Subject to certain expense allocations, ZIOPHARM will pay us 50 percent of the quarterly net profits derived from the sale of products developed under the ECC.

Upon execution of this ECC, we purchased 2,426,235 shares of ZIOPHARM common stock with a value of $11.6 million, and we agreed to purchase up to $50.0 million of ZIOPHARM common stock in conjunction with securities offerings that may be conducted by ZIOPHARM in the future, subject to certain conditions and limitations. To date, we have purchased approximately $21.0 million of ZIOPHARM common stock in such securities offerings, and our remaining obligation on this purchase commitment is approximately $29.0 million.

Elanco

Effective November 28, 2011, we entered into an ECC with Elanco, the animal health division of Eli Lilly and Company (NYSE: LLY). Elanco is a world leader in developing products and services that enhance animal health, wellness and performance. The lead programs of this ECC are currently in the research phase for various applications with respect to the treatment and prevention of diseases in companion animals and livestock.

Pursuant to the ECC, we received an upfront technology access fee in cash and are entitled to additional amounts up to an aggregate of $2.25 million per product candidate based on the occurrence of separate performance, regulatory and sales-based milestones. Elanco will pay us royalties in the mid- to upper-single digits and lower- double digits based on net sales of products developed under the ECC. Elanco holds a right of first refusal to participate in the development of any product outside of the field intended to treat one of the target indications covered by the ECC.

Fibrocell

Effective October 5, 2012, we entered into an ECC with Fibrocell Science, Inc. (OTCBB: FCSC), or Fibrocell, a publicly traded biotechnology company commercializing fibroblasts for therapeutic applications. The lead therapeutic program of this ECC is currently in the research phase for the treatment of recessive dystrophic epidermolysis bullosa, or RDEB, a rare, genetically based blistering disorder. RDEB is an autosomal recessive disorder characterized by the loss of collagen type VII, an important protein component of the anchoring fibers that connect the dermis to the epidermis. Our proposed treatment for this disease will provide collagen VII produced by autologous, gene-modified fibroblasts.

We are also working with Fibrocell to improve the process efficiency and cost of goods related to the manufacture of LAVIVTM, Fibrocell’s autologous cellular product indicated for improvement of the appearance of moderate to severe nasolabial fold wrinkles in adults.

Pursuant to the ECC, Fibrocell received a license to our technologies to develop and commercialize genetically modified and non-genetically modified autologous fibroblasts and autologous dermal cells in the United States for both aesthetic and therapeutic indications. We received a technology access fee of 1,317,520 shares of Fibrocell’s common stock valued at $7.6

 

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million as upfront consideration. The number of shares received reflects a 1-for-25 reverse stock split of Fibrocell’s common stock effective April 30, 2013. On a quarterly basis, Fibrocell will pay us royalties of 7 percent of net sales up to $25.0 million and 14 percent of net sales above $25.0 million on products developed from the ECC. If Fibrocell uses our technologies to improve the production of LAVIV or new Fibrocell products not developed under the ECC, Fibrocell will pay us a quarterly royalty equal to 33 percent of the cost of goods sold savings generated by the improvement.

Oragenics

Effective June 5, 2012, we entered into an ECC with Oragenics, Inc. (OTCBB: OGEN), or Oragenics, a publicly traded company in the field of oral care probiotics and a developer of therapeutic products including novel antibiotics. The lead therapeutic program of this ECC is currently in the research phase. The objective of this ECC is to develop and commercialize lantibiotics, a novel class of broad-spectrum antibiotics, for the treatment of infectious diseases in humans and companion animals.

Pursuant to the ECC, Oragenics received a license to our technologies within the field of lantibiotics for the treatment of infectious diseases in humans and companion animals. We received a technology access fee of 4,392,425 shares of Oragenics’ common stock valued at $6.6 million as upfront consideration. Upon the achievement of certain milestones, we are entitled to receive additional consideration equal, in aggregate, to 10 percent of Oragenics’ outstanding shares, excluding shares issuable upon the conversion of certain derivative securities. At Oragenics’ option, such consideration can be paid in stock or cash, in which case such payment shall be based on the fair market value of the shares otherwise issuable. Oragenics will pay us 25 percent of the quarterly profits derived from the sale of products developed from the ECC on a product-by-product basis.

Synthetic Biologics

Effective August 6, 2012, we entered into an ECC with Synthetic Biologics, Inc. (NYSE: SYN), or Synthetic Biologics. The lead therapeutic program of this ECC is currently in preclinical development.

Pursuant to the ECC, Synthetic Biologics received a license to our technologies to develop and commercialize a series of monoclonal antibody therapies for the treatment of certain infectious diseases defined in the ECC. Upon shareholder approval on October 5, 2012, we received 3,552,210 shares of Synthetic Biologics common stock valued at $7.8 million as an upfront technology access fee. We are entitled to additional consideration payable either in cash or common stock at the option of Synthetic Biologics upon the achievement of certain regulatory milestones for each product candidate developed under the ECC. The ECC initially targets three infectious diseases, and Synthetic Biologics may elect to target up to five more infectious diseases by paying us a field expansion fee of $2.0 million in either cash or common stock for each additional infectious disease selected. On a quarterly basis, Synthetic Biologics will pay us tiered royalties as a percentage in the upper-single to lower-double digits of net sales of products developed under the ECC.

Previously, in November 2011, we entered into an ECC with Synthetic Biologics to develop and commercialize a gene therapeutic product using RTS for the treatment of pulmonary arterial hypertension. In April 2013, we terminated the ECC for lack of support by Synthetic Biologics.

 

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AquaBounty

AquaBounty Technologies, Inc. (AIM: ABTX), or AquaBounty, is a biotechnology company using biological sciences and molecular technology to enable the large-scale, efficient, and environmentally sustainable production of high quality finfish. Its lead product, AquAdvantage Salmon®, or AAS, is a new strain of salmon capable of reaching marketable size in around half the time of conventional salmon. By placing the salmon growth hormone under the control of an alternative promoter (gene switch) from the ocean pout, an edible arctic fish, AquaBounty is able to provide a consistent level of salmon growth hormone which speeds growth throughout the early stages of the salmon’s development. Although these fish do not reach a larger final size than conventional salmon, by accelerating growth in the early stages, AAS can reach a marketable size in around half the time. In the case of salmon, this can reduce farming time from approximately 28 to 36 months to approximately 18 months, depending on the desired marketable weight of the fish. The AAS was developed by AquaBounty without using any of our technologies.

On November 16, 2012, we acquired 47.56 percent of AquBounty’s common stock from two shareholders. We subsequently acquired additional shares from AquaBounty in a private placement. Also, on February 14, 2013, three individuals designated by us, including one of our employees, were appointed to AquaBounty’s board of directors and we have the right to appoint a fourth director at AquaBounty’s next stockholder meeting.

Effective February 14, 2013, we entered into an ECC with AquaBounty. The objective of this ECC, which is in the research phase, is to develop and commercialize genetically modified finfish for human consumption that are more nutritious, have increased muscle mass, and grow quickly to maturity. Pursuant to the ECC, we will receive 16.66% of quarterly gross profits for each product.

AmpliPhi

Effective March 29, 2013, we entered into an ECC with AmpliPhi BioSciences Corp. (OTCBB: APHB), or AmpliPhi, a developer of bacteriophage-based antibacterial therapies to treat drug resistant infections. The objective of this ECC is to develop and commercialize new bacteriophage-based therapies to target specific antibiotic resistant infections. The target indications of this ECC may include treatment of bacterial infections associated with acute and chronic wounds, the treatment of acute and chronic P. aeruginosa lung infections, and the treatment of infections of C. difficile. The lead therapeutic program of this ECC is currently in the research phase.

Pursuant to the ECC, we received 24,000,000 shares of common stock of Ampliphi as an upfront technology access fee. We are entitled to various milestone payments, payable in either cash or equity in the lower to mid-single-digit millions of dollars, upon achievement of certain events. We also are entitled to tiered royalties as a percentage in the upper-single digits of the net product sales of a product developed under the ECC.

Genopaver

Effective March 29, 2013, we entered into an ECC with Genopaver, LLC, or Genopaver, a limited liability company formed by affiliates of Third Security, LLC. Genopaver was formed for the express purpose of entering into the ECC and developing and commercializing products in the field of the fermentative production of alkaloids through genetically modified cell-lines and

 

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substrate feeds for use as active pharmaceutical ingredients or as commercially sold intermediates in the manufacture of active pharmaceutical ingredients. Programs under this ECC are in the research phase.

Pursuant to the ECC, we received a $3.0 million cash payment as an upfront technology access fee. We are entitled to a royalty as a percentage in the lower-double digits on the gross profits of product sales from a product developed under the ECC.

Soligenix

Effective April 27, 2013, we entered into an ECC with Soligenix, Inc. (OTCQB: SNGX), or Soligenix, a clinical stage biopharmaceutical company focused on developing products to treat inflammatory diseases and biodefense countermeasures. The objective of this ECC is to develop and commercialize human monoclonal antibody therapies for the treatment of melioidosis. Melioidosis is caused by B. pseudomallei, a Gram-negative bacteria that is highly resistant to antibiotic treatment regimens. Melioidosis is endemic in Southeast Asia and Northern Australia. It is also considered a high-priority biodefense threat as defined in the 2012 Public Health Emergency Medical Countermeasures Enterprise Strategy established by the US Department of Health and Human Services with the potential for widespread dissemination through aerosol. The lead therapeutic program of this ECC is currently in the research phase.

Pursuant to the ECC, we received 1,034,483 shares of common stock of Soligenix as an upfront technology access fee. We are entitled to milestone payments payable in either cash or equity in the lower- to mid-single digit millions of dollars, upon the achievement of development milestones. We are also entitled to a royalty as a percentage in the upper-single to lower-double digits on the net sales generated from a product developed under the ECC.

Competition

We believe that we are a leader in synthetic biology. We do not believe that we have any direct competitors who provide similar technologies which fully enable the commercialization of products developed using synthetic biology across a broad spectrum of biologically based industries. As a result, we believe our competition is more indirect and general in nature, and falls into three broad categories:

 

 

Synthetic biology service providers.    There are companies that have competing technologies for individual pieces of our suite of complementary technologies. For example, there are companies that can synthesize DNA, and there are companies that can develop monoclonal antibodies.

 

 

Industrial companies who may develop their own approach to synthetic biology.    Rather than becoming a collaborator with us, potential collaborators may decide to invest time and capital to internally develop their own synthetic biology capabilities. For example, large biopharmaceutical companies, energy companies, and ag-bio companies may pursue a proprietary synthetic biology strategy.

 

 

Industrial companies who may develop competing products using other technologies.     Products enabled by our synthetic biology will face competition in the market, including from products which have been developed using other industrial technologies. For example, large biopharmaceutical companies pursue other technologies for drug development, and large ag-bio companies pursue other technologies for the development of genetically modified crops.

 

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Intellectual property

As we advance technologies across multiple platforms and synthetic biology areas, correspondingly, we apply a multilayered approach for protecting intellectual property relating to the inventions we have developed internally as well as those we have acquired from third parties, such as by assignment or by in-license. We seek patent protection in the United States and in other countries for our inventions and discoveries, and we develop and protect our key know-how and trade secrets relating to our platform technologies as well as to the products we are developing with our collaborators.

We seek patent protection for our platform technologies, including but not limited to our (i) switch technology, (ii) activator ligands for our switch technology and (iii) cell identification and selection platform. In addition, we seek patents covering specific collaborator’s products. With respect to a particular collaborator’s product, we may seek patent protection on some or all of the following: the compound itself, its commercial composition, its production and its methods of use.

Through the use of our various platform technologies we seek to design and build proprietary compounds, vectors, methods and processes across a variety of end markets. In particular, we focus our intellectual property on synthetic biology technologies that provide platforms for the design and creation of cells, vectors and components for our collaborators. In addition, we may pursue intermediate and product-specific patents associated with our collaborators’ lead programs.

Our success depends, in part, upon our ability to obtain patents and maintain adequate protection for our intellectual property relating to our technologies and products and potential products. We have adopted a strategy of seeking patent protection in the United States and in other jurisdictions globally we deem appropriate under the circumstances, with respect to certain of the technologies used in or relating to our products and processes. As of April 30, 2013, we own at least              issued U.S. patents and              pending U.S. patent applications relating to certain aspects of our technologies, and we have pursued counterpart patents and patent applications in other jurisdictions around the world, as we have deemed appropriate. We continue to actively develop our portfolio through the filing of new patent applications, divisionals and continuations relating to our technologies, methods and products as we and our collaborators deem appropriate.

We have strategic positioning with respect to our key technologies including patent portfolios directed to: our switch technology covering aspects of our gene switches, such as our RheoSwitch Therapeutic System, and gene modulation systems, vectors, cells and organisms containing these switches, and their use; our activator ligand technology covering aspects of our activator ligands and their use; and our cell identification and selection technology covering aspects of our cell identification and selection platform, including our cell purification, isolation, characterization and manipulation technologies. In these portfolios, the issued U.S. patents and applications, if granted, are scheduled to expire from 2017 to 2032. We have also filed counterpart patents and patent applications in other countries as we have deemed appropriate.

Additionally, we complement our intellectual property portfolio with exclusive and non-exclusive patent licenses and options for licenses to third party technologies.

 

 

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A principal component of our strategy is maximizing the value of our ECCs through our intellectual property that covers our technologies, which is accentuated by intermediate and program-specific intellectual property protections. In addition to owned and in-licensed patents, we solidify our intellectual property protection through a combination of trade secrets, know-how, confidentiality, nondisclosure and other contractual provisions, and security measures to protect our confidential and proprietary information related to each platform and collaborator program. We regularly assess and review the risks and benefits of protecting our developments through each aspect of intellectual property available to us.

Because we rely on trade secrets, know-how and continuing technological advances to protect various aspects of our core technology, we require our employees, consultants and scientific collaborators to execute confidentiality and invention assignment agreements with us to maintain the confidentiality of our trade secrets and proprietary information. Our confidentiality agreements generally provide that the employee, consultant or scientific collaborator will not disclose our confidential information to third parties. These agreements also provide that inventions conceived by the employee, consultant or scientific collaborator in the course of working for us will be our exclusive property. Additionally, our employees agree to take certain steps to facilitate our assertion of ownership over such intellectual property. These measures may not adequately protect our trade secrets or other proprietary information. If they do not adequately protect our rights, third parties could use our technologies, and we could lose any competitive advantage we may have. In addition, others may independently develop similar proprietary information or techniques or otherwise gain access to our trade secrets, which could impair any competitive advantage we may have.

Regulatory environment

Regulations affecting Intrexon

Our ongoing research and development relies on evaluations in animals, which may become subject to bans or additional regulations, and, as described below, our research operations are subject to various environmental regulations. However, most of the laws and regulations concerning synthetic biology relate to the end products produced using synthetic biology, but that may change. For example, the Presidential Commission for the Study of Bioethical Issues in December 2010 recommended that the federal government oversee, but not regulate, synthetic biology research. The Presidential Commission also recommended that the federal government lead an ongoing review of developments in the synthetic biology field and that the federal government conduct a reasonable risk assessment before the field release of synthetic organisms. As discussed below, the products our collaborators produce are subject to extensive regulation.

 

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Regulations affecting our ECC collaborators

As discussed above in “Risk factors — Risks associated with our ECC business model,” the products produced by our collaborators using our technologies are subject to extensive regulation by federal and state governmental authorities in the United States, including the U.S. Food and Drug Administration, the U.S. Department of Agriculture and the U.S. Environmental Protection Agency, and to regulation in foreign countries, including by the European Medicines Agency, or EMA, and under a chemical regulatory program known as REACH (Registration, Evaluation, Authorization and Restriction of Chemical Substances). Our ECCs with our collaborators provide that our collaborators are responsible for compliance with laws and regulations applicable to the products produced under these collaborations. We rely on our collaborators’ compliance with laws and regulations applicable to the products they produce using our technologies, and we do not monitor or provide input to their compliance programs, nor do we independently monitor whether our collaborators comply with applicable laws and regulations. Please see the risk factor entitled “We depend upon our collaborators’ compliance with regulations and we do not independently monitor their compliance with laws and regulations applicable to the products they produce using our technologies.”

Regulations affecting AquaBounty

On December 26, 2012, the FDA published its environmental assessment, or EA, for AAS, along with its Finding of No Significant Impact, or FONSI, in the Federal Register, confirming that an approval of the pending New Animal Drug Application would not have an adverse effect on the environment and opened up a 60 day period for public comment. On February 13, 2013 the FDA extended the period for public comment by an additional 60 days, which expired April 26, 2013.

Prior to the publication of the EA and FONSI, in September 2010, the FDA had held a public meeting of its Veterinary Medicine Advisory Committee to review its findings regarding AAS.

The conclusion of its panel of experts was that AAS is indistinguishable from other farmed Atlantic salmon, is safe to eat and does not pose a threat to the environment under its conditions of use. Subsequently, the FDA initiated an EA in compliance with its obligations under the U.S. National Environmental Policy Act, which requires that all federal agencies consider the possible environmental impacts of any action that they authorize.

While we do not expect any further requirements prior to FDA approval for sale to the public and the public comment period on the EA and FONSI have closed as re-scheduled, the FDA has not provided AquaBounty with an indication of the process or associated timing that will occur subsequent to the conclusion of the re-scheduled period for public comment.

Research and development

As of April 30, 2013, we had 163 employees dedicated to research and development. Of these employees, 78 hold advanced degrees. We incurred expenses of $64.2 million in 2012 and $70.4 million in 2011 on research and development activities. We anticipate that our research and development expenditures will increase substantially as we investigate other applications for our synthetic biotechnologies. Our primary research and development operations are located in leased laboratory facilities in San Diego, California, San Carlos, California, Germantown, Maryland, Durham, North Carolina and Blacksburg, Virginia.

 

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As of April 30, 2013, AquaBounty had seven employees dedicated to research and development. We anticipate that AquaBounty’s research and development expenditures will increase as it focuses on bringing AAS to market. AquaBounty’s research and development operations are located in laboratory facilities in Massachusetts and Canada.

Manufacturing

In general, we produce small quantities of our compounds in our laboratory facilities for investigational purposes and testing.

AquaBounty has a production facility in the Republic of Panama. This facility is currently used for the purpose of producing AAS.

Sales and marketing

We do not currently have a sales and marketing force related to the end products that are being developed by our collaborators with our technologies, as those efforts must generally be undertaken by the collaborators, nor do we intend to develop such a sale and marketing force in the future. However, we are actively seeking new ECCs and marketing our technological capabilities.

AquaBounty has one employee who works in sales and marketing.

Legal proceedings

We are not party to any legal proceedings the outcome of which, we believe, if determined adversely to us, would individually or in the aggregate have a material adverse effect on our future business, consolidated results of operations, cash flows or financial position. We may, from time to time, be subject to legal proceedings and claims arising from the normal course of business activities.

Facilities

We lease approximately 187,000 square feet of laboratory or combined laboratory and office space which is used in our research and development efforts. We establish the geographic locations of our research and development operations based on proximity to the relevant market expertise and access to available talent pools. Our primary lab operations under lease include locations in San Diego, California, San Carlos, California, Germantown, Maryland, Durham, North Carolina and Blacksburg, Virginia. We lease an additional 27,000 square feet of administrative offices in Foster City, California, West Palm Beach, Florida, Germantown, Maryland, and Blacksburg, Virginia. The original terms of our leases range from one to five years. See also “Management’s discussion and analysis of financial condition and results of operations — Contractual obligations and commitments” beginning on page 59. The following table shows information about our primary lab operations as of April 30, 2013:

 

Location    Square footage  

 

 

Blacksburg, VA

     35,456   

Durham, NC

     32,008   

Germantown, MD

     56,258   

San Carlos, CA

     37,076   

San Diego, CA

     23,409   

 

 

 

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AquaBounty’s primary operations include locations in Massachusetts, Canada, and Panama. AquaBounty leases or owns 18,000 square feet of laboratory space.

Employees

As of April 30, 2013, we had 214 employees, 163 of whom were primarily engaged in research and development activities. Our workforce includes 78 employees with either a Ph.D., M.D. or D.V.M. and an additional 106 employees with Bachelors or Masters Degrees. None of our employees is represented by a labor union and we consider our employee relations to be good.

As of April 30, 2013, AquaBounty had 13 employees, seven of whom were primarily engaged in research and development activities.

Corporate information

We were founded by Thomas D. Reed, Ph.D., in 1998, as an Ohio limited liability company under the name Genomatix LTD. We were reincorporated as a Virginia corporation in 2004 and changed our name to Intrexon Corporation in 2005. Our principal executive offices are located at 20374 Seneca Meadows Parkway Germantown, Maryland 20876, and our telephone number is (301) 556-9900. Our website is www.dna.com.

 

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Management

Executive officers and directors

The following table sets forth certain information regarding our executive officers and directors as of April 30, 2013.

 

Name    Age    Position(s)

 

Executive Officers

     

Randal J. Kirk

   59    Chief Executive Officer and Chairman of the Board

Krish S. Krishnan

   48    Chief Operating Officer

Thomas D. Reed, Ph.D.

   47    Chief Science Officer and Director

Rick L. Sterling

   49    Chief Financial Officer

Donald P. Lehr

   38    Chief Legal Officer

Suma M. Krishnan

   48    Senior Vice President — Regulatory Affairs

Darryl Webster

   53    Senior Vice President — Intellectual Property

Samuel Broder

   68    Senior Vice President — Health Sector

Thomas R. Kasser, Ph.D.

   58    Senior Vice President — Food Sector

Robert F. Walsh, III

   55    Senior Vice President — Energy and Chemicals Sector

Nick Macris

   45    Vice President — Environmental Sector

Non-Employee Directors

     

Cesar L. Alvarez

   65    Director

Steven Frank

   53   

Director

Larry D. Horner

   79    Director

Jeffrey B. Kindler

   57    Director

Dean J. Mitchell

   57    Director

Robert B. Shapiro

   75    Director

 

Executive officers

Randal J. Kirk, Chief Executive Officer and Chairman of the Board.    Mr. Kirk has served as our Chief Executive Officer since April of 2009 and Chairman of the Board since February 2008. Mr. Kirk provides a wealth of strategic, operational and management experience. Mr. Kirk currently serves as the Senior Managing Director and Chief Executive Officer of Third Security, LLC, an investment management firm founded by Mr. Kirk in March 1999. Additionally, Mr. Kirk founded and became Chairman of the Board of New River Pharmaceuticals Inc. (previously traded on NASDAQ prior to its acquisition by Shire plc in 2007) in 1996, and was President and Chief Executive Officer between October 2001 and April 2007. Mr. Kirk currently serves in a number of additional capacities including as a member of the board of directors of Halozyme Therapeutics, Inc. (NASDAQ: HALO) since May 2007 and as a member of the board of directors of ZIOPHARM Oncology, Inc. (NASDAQ: ZIOP) since January 2011. Previously, Mr. Kirk served as a member of the board of directors of Scios, Inc. (previously traded on NASDAQ prior to its acquisition by Johnson & Johnson) between February 2000 and May 2002, and as a member of the board of

 

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directors of Clinical Data, Inc. (previously traded on NASDAQ prior to its acquisition by Forest Laboratories, Inc. in April 2011) from September 2002 to April 2011, and was Chairman of the board of directors from December 2004 to April 2011. Mr. Kirk served on the board of visitors of Radford University from July 2003 to June 2009, was Rector of the board of directors from September 2006 to September 2008, and served on the board of directors of the Radford University Foundation, Inc. from September 1998 to May 2011. He served on the board of visitors of the University of Virginia and Affiliated Schools from July 2009 to October 2012, on the Virginia Advisory Council on Revenue Estimates from July 2006 to October 2012 and on the Governor’s Economic Development and Jobs Creation Commission from April 2010 to October 2012. Mr. Kirk received a B.A. in Business from Radford University and a J.D. from the University of Virginia. We believe that Mr. Kirk’s business experience, including his extensive business experience as chief executive officer of multiple companies, his experience as an investor, his service on committees of academic institutions and other public company boards, combined with his business acumen and judgment, provide our board of directors with valuable strategic and operational expertise and leadership skills.

Krish S. Krishnan, M.S., M.B.A., Chief Operating Officer.    Mr. Krishnan has served as our Chief Operating Officer since 2011. Mr. Krishnan brings many years of experience in the life sciences industry, having held key executive roles at several companies including, most notably, his tenure as Chief Financial Officer and Chief Operating Officer from April 2004 until April 2007, and a member of the board of directors from March 2003 until April 2007 of New River Pharmaceuticals, Inc. (previously traded on NASDAQ prior to its acquisition by Shire plc in 2007). Previously, he served as a Senior Managing Director of Third Security, LLC between 2001 and 2008 and as a board member of Biotie Therapies Oyj (BTH1V:Helsinki) between 2008 and 2009. Mr. Krishnan started his career as an engineer with E.I. Dupont de Nemours in Wilmington, Delaware. He received a B.S. in Mechanical Engineering from the Indian Institute of Technology, an M.S. in Engineering from the University of Toledo, and an M.B.A. in Finance from The Wharton School at the University of Pennsylvania.

Thomas D. Reed, Ph.D., Chief Science Officer and Director.    Dr. Reed co-founded Intrexon in 1998 and has served as Chief Science Officer since then and has served on the board of directors since 1998. Dr. Reed is a molecular geneticist with over 20 years of experience in recombinant DNA technology. He has developed sophisticated transgenic model systems for studying the role of gene products in neuronal, cardiovascular, and cancer systems. Dr. Reed has published numerous peer-reviewed articles in the fields of subcellular modulation, gene regulation and cardiac function and is an inventor on numerous patents. Dr. Reed received his B.S. in Genetics from the University of California-Davis, an M.S. in Biological Science from Wright State University, and a Ph.D. in Molecular and Developmental Biology from the University of Cincinnati.

Rick L. Sterling, Chief Financial Officer.    Mr. Sterling has served as our Chief Financial Officer since 2007. Prior to joining us, he was with KPMG where he worked in the audit practice for over 17 years, with a client base primarily in the healthcare, technology and manufacturing industries. Mr. Sterling’s experience includes serving clients in both the private and public sector, including significant experience with SEC filings and Sarbanes-Oxley compliance. He received a B.S. in Accounting and Finance from Virginia Polytechnical Institute and State University and is a licensed Certified Public Accountant.

Donald P. Lehr, Chief Legal Officer.    Mr. Lehr has served as our Chief Legal Officer since 2011. From 2009 to 2011 he served as our Associate General Counsel. Mr. Lehr has broad experience in the areas of corporate, securities, and general business law. Prior to joining us, he was at Hogan

 

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Lovells LLP (formerly Hogan & Hartson, LLP) in Baltimore, Maryland from 2002 to 2009. While at Hogan, his practice included the representation of privately and publicly held corporations across many industries, including biotechnology, pharmaceuticals, health care, software, technology, and manufacturing. Prior to his time at Hogan, Mr. Lehr served as a judicial clerk for the Honorable Irma S. Raker of the Court of Appeals of Maryland. Mr. Lehr received a B.A. from Swarthmore College and received a J.D. from the University of Maryland School of Law.

Suma M. Krishnan, Senior Vice President — Regulatory Affairs.    Mrs. Krishnan has served as our Senior Vice President — Regulatory Affairs since 2012. Previously, Mrs. Krishnan was Vice President, Product Development at New River Pharmaceuticals Inc. from September 2002 until its acquisition by Shire plc in April 2007. Mrs. Krishnan has 22 years’ experience in drug development. Prior to serving at New River Pharmaceuticals Inc., Mrs. Krishnan served in the following capacities: Director, Regulatory Affairs at Shire Pharmaceuticals, Inc., a specialty pharmaceutical company; Senior Project Manager at Pfizer, Inc., a multi-national pharmaceutical company; and a consultant at the Weinberg Group, a pharmaceutical and environmental consulting firm. Mrs. Krishnan began her career as a discovery scientist for Janssen Pharmaceuticals, Inc., a subsidiary of Johnson & Johnson, a multi-national pharmaceutical company, in May 1991. Mrs. Krishnan received an M.S. in Organic Chemistry from Villanova University, an M.B.A. from Institute of Management and Research (India) and an undergraduate degree in Organic Chemistry from Ferguson University (India).

Darryl Webster, Senior Vice President, Intellectual Property.    Mr. Webster has served as our Senior Vice President, Intellectual Property since 2010. Mr. Webster has over 25 years of legal experience. During his law firm experience and 20 plus years of corporate IP practice, he has worked in scientific areas that match each of the markets we are targeting. Prior to joining us, Mr. Webster was most recently Senior Patent Counsel at Wyeth Pharmaceuticals, Inc. (now Pfizer Inc.), where he worked from 1993 to 2010. During his sixteen years at Wyeth, he was the lead patent counsel for several key products and areas including a $6B biological, the Asia Pacific Region, and the Wyeth Nutrition business. Before his work at Wyeth, he worked for more than four years in the core chemical and biochemical areas at AlliedSignal Inc., now Honeywell International Inc. Mr. Webster received Bachelors’ degrees in Chemistry (Biological Specialization) and Economics from Duke University and a J.D. from the University of Maryland School of Law.

Samuel Broder, Ph.D., Senior Vice President — Health Sector.    Dr. Broder has served as our Senior Vice President — Health Sector since 2012. Dr. Broder is an oncologist and medical researcher with particular expertise in the relationship between disorders of the immune system and cancer. Dr. Broder previously served as a science consultant for Intrexon from January 2012 to August 2012. Dr. Broder served as Executive Vice President for Medical Affairs and Chief Medical Officer of Celera Corporation (now a Division of Quest Diagnostics Incorporated) from 1998 to 2010. From 2010 to 2012, Dr. Broder was self-employed as an industry consultant. In the mid-1980s, Dr. Broder’s laboratory played a significant role in developing the first three therapeutic agents approved by the U.S. Food and Drug Administration to treat the AIDS virus. In 1989, Dr. Broder received a Presidential appointment to serve as Director of the National Cancer Institute. Dr. Broder held this position for six years, during which time he oversaw the development of several anti-cancer therapeutic agents. Dr. Broder received both his undergraduate and medical degrees from the University of Michigan.

Thomas R. Kasser, Ph.D., Senior Vice President — Food Sector.    Dr. Kasser has served as Senior Vice President — Food Sector since May 2013. Dr. Kasser served as President of Animal Sciences

 

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and Agricultural Biotechnology Divisions and Senior Vice President from April 2012 to May 2013 and, prior to that, as President of the Animal Sciences Division from March 2011. Dr. Kasser brings over 25 years of business management experience in the biotechnology and life sciences industries. He was most recently President and Chief Executive Officer of Angionics, Inc., an early-stage biotech company focused on novel anti-angiogenic technology directed at therapies for cancer and ocular diseases from June 2009 to March 2011. Prior to Angionics, he was a Covance Corporate Vice President and General Manager of Covance Research Products Inc. Dr. Kasser had over 20 years of experience at Monsanto Company both in commercial as well as scientific leadership roles, including tenures as General Manager of Monsanto Choice Genetics, Inc., directing new product development for the Nutrition and Consumer products business, and managing clinical safety and efficacy trials under the jurisdiction of the Food and Drug Administration’s Center for Veterinary Medicine. Dr. Kasser was designated a Monsanto Fellow in recognition of his scientific and technical excellence. He currently serves on the Board of Directors for AquaBounty Technologies, Inc., an aquaculture biotechnology company. Dr. Kasser received an M.S. in Animal Nutrition from The Pennsylvania State University, an M.B.A. from Washington University — St. Louis and a Ph.D. in Nutrition from the University of Georgia.

Robert F. Walsh, III, Senior Vice President Energy Sector, and President Industrial Products Division.    Mr. Walsh has served as our Senior Vice President Energy Sector and President Industrial Products Division since 2013. Mr. Walsh has over 30 years of experience in the petroleum and chemical industries. Mr. Walsh served as Chief Commercial Officer of ZeaChem Inc., a cellulosic biofuel and biochemical company, from 2013 to 2011. Prior to his time at ZeaChem, Mr. Walsh served as Chief Executive Officer of Aurora Algae, Inc., an algae production company, from 2008 to 2010, and President of LS9, Inc., from 2007 to 2008, an industrial biotechnology company. Mr. Walsh received a B.S. in Chemical Engineering from Purdue University.

Nick Macris, Vice President — Environmental Sector.    Mr. Macris has served as our Vice President — Environmental Sector since May 2013 and previously served as our Vice President, Business Development — Agricultural Biotechnology Division from April 2013 to May 2013. Mr. Macris’ career spans 15 years in the specialty chemical, water treatment, agricultural chemical and biopesticide industries with many large and small companies including 3M Company, Rohm and Haas (now The Dow Chemical Company) and FMC Corporation. Mr. Macris previously served as the Vice President of Business Development at Marrone Bio Innovations, a natural pesticides company, from May 2007 until March 2013. Mr. Macris has a successful track record of business development, strategy and manufacturing leadership. Mr. Macris earned both a B.S. in Chemistry/Biophysics and an M.E.S in Chemical/Biochemical Engineering from the University of Western Ontario and later an M.B.A from University of Western Ontario — Richard Ivey School of Business.

Non-employee directors

Cesar L. Alvarez.    Mr. Alvarez has served as a board member since February 2008. Mr. Alvarez has served since February 2010 as the Executive Chairman of the international law firm of Greenberg Traurig, LLP, and previously served as its Chief Executive Officer from 1997 until his election as Executive Chairman. Mr. Alvarez also serves on the board of directors of Mednax, Inc. (NYSE:MD), a provider of physician services including newborn, maternal-fetal, pediatric

 

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subspecialties, and anesthesia care, Watsco, Inc. (NYSE:WSO), a distributor of air conditioning, heating and refrigeration equipment and related parts and supplies, St. Joe Co. (NYSE:JOE), a real estate development company, and Fairholme Funds, Inc., a family of publicly traded focused investment funds. Mr. Alvarez holds a Bachelor of Science, an M.B.A., and a J.D. from the University of Florida. Mr. Alvarez’s qualifications to serve on the board of directors include his management experience at one of the nation’s largest law firms with professionals providing services in multiple locations across the country and abroad as well as his many years of corporate experience, both counseling and serving on the boards of directors of publicly traded and private companies.

Steven Frank.    Mr. Frank has served as a board member since February 2008. Mr. Frank joined J.P. Morgan Securities, LLC in June 2008 and currently serves as Chairman of Global Healthcare Investment Banking. Mr. Frank had previously been the head of Bear Stearns’ Worldwide Health Care Investment Banking group in New York for 16 years and has provided general investment banking services to all types of health care companies. Specifically, Mr. Frank has led or played major roles in hundreds of mergers and acquisitions and financing transactions across the spectrum of deal structures. He has specialized in transactions involving pharmaceutical, medical device and biotechnology companies. Prior to joining Bear Stearns in 1993, Mr. Frank served over ten years as an institutional investor, primarily at State Farm Insurance Company, where he managed a life sciences portfolio in excess of $4 billion. Mr. Frank holds a B.S. from Illinois State University and an M.B.A. from the University of Chicago. We believe Mr. Frank’s extensive knowledge of our industry and of finance and capital structure strengthen the board of directors’ collective qualifications, skills and experience.

Larry D. Horner.    Mr. Horner has served as a board member since February 2008. Mr. Horner served as a director of Clinical Data, Inc., a provider of physicians’ office and hospital laboratory products, and of New River Pharmaceuticals Inc., a publicly traded specialty pharmaceutical company focused on developing novel pharmaceuticals and improved versions of widely-prescribed drugs, from 1999 until its acquisition by Shire plc in April 2007. From 1994 to 2001, Mr. Horner served as Chairman of the Board of Pacific USA Holdings Corporation, a holding company of companies in real estate and financial services. From 1997 to 2001, Mr. Horner served as Chairman of the Board of Asia Pacific Wire & Cable, Ltd., a publicly traded manufacturer of wire and cable products for the telecommunications and power industries in the Asia Pacific Region. From 1991 to 1994, he served as Managing Director of Arnhold & S. Bleichroeder, Inc., an equity market trading and corporate finance firm. Prior to that, he served as Chairman and Chief Executive Officer of the accounting firm KPMG Peat Marwick. Mr. Horner has served on the boards of directors of Atlantis Plastics, Inc., a manufacturer of plastic films and plastic components, TOUSA, Inc., a homebuilder, and UTStarcom, Inc., a provider of wireline, wireless, optical, and access switching solutions, all of which were then public companies; Mr. Horner served on the audit committee of all three of these companies and as the audit committee financial expert for Atlantis Plastics, Inc. and UTStarcom, Inc. He also previously served on the boards of directors of ConocoPhillips, an energy company, and American General Company. Mr. Horner received a B.S. from the University of Kansas and is a graduate of the Stanford Executive Program. We believe Mr. Horner’s extensive management experience as the former Chairman and Chief Executive Officer of one of the world’s largest accounting firms, his accounting and financial expertise, and his experience in serving on the boards of directors of publicly traded and private companies make him well-qualified to serve on our board of directors.

 

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Jeffrey B. Kindler.    Mr. Kindler has served as a board member since November 2011. Mr. Kindler is a venture partner with Lux Capital, a venture capital firm; a director of Starboard Capital Partners, a private equity firm; and a principal at Paragon Pharmaceuticals, a private pharmaceutical company. He was Chief Executive Officer and Chairman of the Board of Pfizer, Inc. (NYSE:PFE), a pharmaceutical company, from 2006 until his retirement in December 2010. Prior to that, he was Vice Chairman and General Counsel of Pfizer from 2005 to 2006, Executive Vice President and General Counsel from 2004 to 2005, and Senior Vice President and General Counsel from 2002 to 2004. Prior to joining Pfizer, he was Chairman of Boston Market Corporation from 2000 to 2001, and President of the Partner Brands group of McDonald’s Corporation during 2001. Mr. Kinder serves on the board of directors of Chipotle Mexican Grill, Inc. (NYSE: CMG), a chain of Mexican restaurants, and Siga Technologies, Inc (Nasdaq:SIGA) a developer of vaccines and anti-virals). Mr. Kindler serves as a board member for a number of privately-held companies as well as several civic, charitable, educational and other organizations. He brings leadership, extensive business, operating, legal and policy, and corporate strategy experience to our board of directors, as well as tremendous knowledge of our industry and the fundamentals of our business. Mr. Kindler received a B.A. from Tufts University and a J.D. from Harvard Law School.

Dean J. Mitchell.    Mr. Mitchell has served as a board member since March 2009. In July 2010, Mr. Mitchell was appointed President and Chief Executive Officer of Lux Biosciences, Inc., a private biopharmaceutical company, and also was appointed a member of its board of directors. He also currently serves on the board of directors of ISTA Pharmaceuticals, Inc., a multi-specialty pharmaceutical company. In 2009, he was appointed as a non-executive director of Talecris Biotherapeutics, Inc., a biopharmaceutical company and producer and marketer of plasma-derived protein therapies. He was previously President and Chief Executive Officer of Alpharma Inc., a global specialty pharmaceutical company, and also was appointed a member of its board of directors in July 2006. Alpharma Inc. was acquired by King Pharmaceuticals, Inc. in December 2008, and Mr. Mitchell ceased to be an officer and a director of Alpharma Inc. on December 29, 2008. Prior to this, he was President and Chief Executive Officer of Guilford Pharmaceuticals Inc., a public company, from December 2004 until its acquisition by MGI Pharma Inc., a public biopharmaceutical company focused in oncology and acute care, in October 2005, and was a non-executive director of MGI Pharma Inc. until its acquisition by Eisai Co., Ltd. in January 2008. Mr. Mitchell was at Bristol-Myers Squibb, a public company, from 2001 until 2004 in several roles including President International, President U.S. Primary Care and Vice President, Strategy. He also spent 15 years at Glaxo SmithKline, a public company, and its predecessor companies, most recently as Senior Vice President, Clinical Development and Product Strategy from 1999 to 2001, and prior to that as Vice President and General Manager, Specialty Divisions, Strategic Planning and Business Development, from 1995 to 1999. He received an M.B.A. from City University Business School, in London, U.K., and a B.Sc. degree in Biology from Coventry University, U.K. Mr. Mitchell has served as a member of the boards of directors of Alpharma, Inc., Guilford Pharmaceuticals, Inc., a pharmaceutical company that produced products for the hospital and neurology markets, MGI Pharma Inc., and Talecris Biopharmaceuticals, all of which were then public companies. Mr. Mitchell brings to our board of directors extensive experience in the pharmaceutical industry, specifically in the areas of management, business and corporate development, sales and marketing and clinical development, as well as his vast experience in service on boards of directors of companies in our industry.

Robert. B. Shapiro.    Mr. Shapiro has served as a board member since November 2011. Mr. Shapiro is Co-Founder and Managing Director of Sandbox Industries, a development firm

 

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that creates, launches and manages new business concepts. Sandbox Industries also manages venture funds, including the BlueCross BlueShield Venture Partners fund. Mr. Shapiro has served as the Managing Director of Sandbox Industries since its formation in 2004. He was formerly Chairman and Chief Executive Officer of Monsanto from 1995 to 2000. Upon the merger of Monsanto with Pharmacia & Upjohn, he served as Chairman of the newly-formed Pharmacia Corporation. Previously, Mr. Shapiro was President and Chief Operating Officer of Monsanto from 1992 to 1995 and President of Monsanto’s Agriculture Group from 1990 to 1992, Chairman and Chief Executive Officer of The NutraSweet Company, a subsidiary of Monsanto, from 1985 to 1990 and President of the NutraSweet Group of G.D. Searle & Co., or Searle, from 1982 to 1985, where he previously served as Vice President and General Counsel. Before joining Searle, Mr. Shapiro was Vice President and General Counsel of General Instrument Corporation from 1972 to 1979. Prior to this, he practiced law in New York City; served in government as Special Assistant to the General Counsel and later to the Undersecretary of the U.S. Department of Transportation; and served as a professor of law at Northeastern University in Boston and the University of Wisconsin in Madison. Mr. Shapiro has served on the boards of directors of the New York Stock Exchange (later NYSE Euronext), Citigroup Inc., Rockwell International, Silicon Graphics Inc., and Sequus Pharmaceuticals, Inc. He currently serves as a director of Theranos Inc., AgraQuest, Inc., Elevance Renewable Sciences, Inc. and Sapphire Energy Inc., all privately-held corporations. Mr. Shapiro has also served on the President’s Advisory Committee on Trade Policy, and on the White House Domestic Policy Review of Industrial Innovation. He is a Fellow of the American Academy of Arts and Sciences. Mr. Shapiro is a graduate of Harvard College and holds a J.D. from Columbia University School of Law. As a result of these and other professional experiences, we believe Mr. Shapiro possesses particular knowledge and experience in: strategic planning and leadership of complex organizations; accounting, finance and capital structure; legal, regulatory and government affairs; people management; and board practices of other entities, which strengthen the board of directors’ collective qualifications, skills and experience.

Family relationships

There are no family relationships among any of our directors or executive officers, except that Krish S. Krishnan, our Chief Operating Officer, and Suma M. Krishnan, our Senior Vice President of Regulatory Affairs, are husband and wife. Suma M. Krishnan reports directly to our Chief Executive Officer.

Board composition

Our board of directors currently consists of eight members, all of whom were elected as directors pursuant to a shareholders’ agreement that we entered into with the holders of our preferred stock. The shareholders’ agreement will terminate upon the closing of this offering and there will be no further contractual obligations regarding the election of our directors. Our directors hold office until their successors have been elected and qualified or until the earlier of their resignation or removal.

Our amended and restated articles of incorporation and bylaws that will become effective upon the closing of this offering provide that the authorized number of directors may be changed only by resolution of the board of directors. Our amended and restated articles of incorporation and bylaws that will become effective upon the closing of this offering also provide that any vacancy on our board of directors, including a vacancy resulting from an enlargement of our board of directors, may be filled only by vote of a majority of our directors then in office, although less than a quorum or by a sole remaining director.

 

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We have no formal policy regarding board diversity. Our priority in selection of board members is identification of members who will further the interests of our shareholders through his or her established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members, knowledge of our business and understanding of the competitive landscape.

Director independence

Rule             of the             requires a majority of a listed company’s board of directors to be composed of independent directors within one year of listing. In addition, the             require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and corporate governance committees be independent and that audit committee members also satisfy independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Under Rule , a director will only qualify as an “independent director” if, in the opinion of our board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee, accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries or otherwise be an affiliated person of the listed company or any of its subsidiaries.

In              2013, our board of directors undertook a review of the composition of our board of directors and its committees and the independence of each director. Based upon information requested from and provided by each director concerning his background, employment and affiliations, including family relationships, our board of directors has determined that each of our directors, with the exception of             , is an “independent director” as defined under Rule             of the            . Our board of directors also determined that             ,              and             , who will compose our audit committee following this offering, and             ,              and             , who will comprise our compensation committee following this offering, satisfy the independence standards for such committees established by the Securities and Exchange Commission, or SEC, and the             listing rules, as applicable. In making such determinations, our board of directors considered the relationships that each such non-employee director has with our Company and all other facts and circumstances our board of directors deemed relevant in determining independence, including the beneficial ownership of our capital stock by each non-employee director.

Board committees

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. Each of these committees will operate under a charter that has been approved by our board of directors.

Audit committee

Effective at the time of this offering, the members of our audit committee will be             ,              and             .             is the chair of the audit committee. Our board of directors has determined that each of these directors is independent within the meaning of Rule 10A-3 under the Exchange Act. In addition, our board of directors has determined that the chairman qualifies as an audit committee financial expert within the meaning of SEC regulations and the             listing rules. In making this determination, our board has considered the formal education and nature and scope of

 

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his previous experience, coupled with past and present service on various audit committees. Our audit committee assists our board of directors in its oversight of our accounting and financial reporting process and the audits of our financial statements. Following this offering, our audit committee’s responsibilities will include, among other things, overseeing:

 

 

our accounting and financial reporting processes;

 

 

the reliability of the our financial statements;

 

 

the effective evaluation and management of the our financial risks;

 

 

our compliance with laws and regulations; and

 

 

the maintenance of an effective and efficient audit of our annual financial statements by a qualified and independent auditor.

Compensation committee

Effective at the time of this offering, the members of our compensation committee will be             ,              and             .              is the chair of the compensation committee. Our compensation committee assists our board of directors in the discharge of its responsibilities relating to the compensation of our executive officers. Following this offering, the compensation committee’s responsibilities will include, among other things:

 

 

developing and maintaining an executive compensation policy and monitor the results of that policy;

 

 

recommending to the board for approval compensation and benefit plans;

 

 

reviewing and approving annually corporate and personal goals and objectives to serve as the basis for the Chief Executive Officer’s compensation, evaluating the Chief Executive Officer’s performance in light of those goals and objectives and determining the Chief Executive Officer’s compensation based on that evaluation;

 

 

determining and approving the annual compensation for other executive officers;

 

 

retaining or obtaining the advice of a compensation consultant, outside legal counsel or other advisor;

 

 

approving any grants of stock options, restricted stock, performance shares, stock appreciation rights, and other equity-based incentives to the extent provided under the our equity compensation plans;

 

 

reviewing and making recommendations to the board regarding the compensation of non-employee directors;

 

 

reviewing and discussing with management the “Compensation Discussion and Analysis” to the extent required by SEC rules;

 

 

preparing the compensation committee report required by SEC rules; and

 

 

reviewing and recommending to the board for approval our approach with respect to the advisory vote on executive compensation, or say-on-pay, and the frequency of the say-on-pay advisory vote.

 

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Nominating and corporate governance committee

Effective at the time of this offering, the members of our nominating and corporate governance committee will be             ,              and             .              is the chair of the nominating and corporate governance committee. Upon the completion of this offering, the nominating and corporate governance committee’s responsibilities will include, among other things:

 

 

considering and reviewing periodically the desired composition of the board;

 

 

establishing any qualifications and standards for individual directors;

 

 

identifying, nominating and evaluating candidates for election to the board;

 

 

ensuring that the board is composed of a sufficient number of independent directors to satisfy SEC and requirements and that at least three directors satisfy the             financial and accounting experience requirements and the heightened independence standards of the SEC and that at least one of such three members qualifies as an “audit committee financial expert”;

 

 

making recommendations to the board regarding the size of the board, the tenure and classifications of directors, and the composition of the board’s committees;

 

 

monitoring compliance with federal law limitations on direct competition between companies with overlapping officers or directors; and

 

 

considering other corporate governance and related matters as requested by the board.

Compensation committee interlocks and insider participation

None of our executive officers serves, or in the past has served, as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any entity that has one or more executive officers who serve as members of our board of directors or our compensation committee. None of the members of our compensation committee is an officer or employee of our Company, nor have they ever been an officer or employee of our Company.

Code of business conduct and ethics

We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Following this offering, a copy of the code will be made available on the Corporate Governance section of our website, which is located at www.dna.com. If we make any substantive amendments to, or grant any waivers from, the code of business conduct and ethics for any officer or director, we will disclose the nature of such amendment or waiver on our website or in a current report on Form 8-K.

 

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Executive and director compensation

In preparing to become a public company, we have begun a thorough review of all elements of our executive and director compensation program, including the function and design of our equity incentive programs. We have begun, and we expect to continue in the coming months, to evaluate the need for revisions to our executive compensation program to ensure our program is competitive with the companies with which we compete for executive talent and is appropriate for a public company.

The tables and discussion below present compensation information for our chief executive officer and our two other most highly compensation officers for the year ended December 31, 2012, whom we refer to collectively as our named executive officers. These officers are:

 

 

Randal J. Kirk, Chief Executive Officer and Chairman of the Board;

 

 

Krish S. Krishnan, Chief Operating Officer; and

 

 

Thomas D. Reed, Ph.D., Chief Science Officer and Director.

Summary compensation table

The following table sets forth the compensation paid or accrued during the fiscal years ended December 31, 2012 and 2011 to our named executive officers.

 

 

 
Name and principal
position
  Year    

Salary

($)(1)

   

Bonus

($)(2)

   

Stock

awards

($)

    Option
awards
($)(3)
   

Non-Equity

incentive plan
compensation($)

   

Change in

pension value

and

nonqualified

deferred

compensation

earnings($)

   

All other

compensation
($)(4)(5)

   

Total

($)

 

 

 

Randal J. Kirk(6)

Chief Executive Officer and Chairman of the Board

   

 

2012

2011

  

  

   

 


  

  

   

 


  

  

   

 


  

  

   

 


110

  

  

   

 


  

  

   

 


  

  

   

 


  

  

   

 


110

  

  

Krish S. Krishnan

Chief Operating Officer

   

 

2012

2011

  

(7) 

   

 

566,667

33,564

  

  

   

 

600,000

  

  

   

 


  

  

   

 

645,126

45,820

  

  

   

 


  

  

   

 


  

  

   

 

26,658

  

  

   

 

1,838,451

79,384

  

  

Thomas D. Reed, Ph.D.

Chief Science Officer and Director

   

 

2012

2011

  

  

   

 

379,167

300,000

  

  

   

 

120,000

  

  

   

 


  

  

   

 


2,660

  

  

   

 


  

  

   

 


  

  

   

 

73,556

20,549

  

  

   

 

572,723

323,209

  

  

 

 
(1)   Represents salaries before any employee contributions under our 401(k) Plan.

 

(2)   Represents discretionary cash incentive awards paid to Mr. Krishnan and Dr. Reed for performance during the 2012 fiscal year. The actual awards were paid on April 3, 2013.

 

(3)   Represents the grant date fair value computed by us for financial reporting purposes, computed in accordance with FASB ASC Topic 718. For a full description of the assumptions we used in computing these amounts, see Note 11 to our consolidated financial statements for the years ended December 31, 2012 and 2011 which are included elsewhere in this prospectus. The actual value a named executive officer may receive depends on market prices and there can be no assurance that the amounts reflected in the Option Awards column will actually be realized. No gain to a named executive officer is possible without an appreciation in stock value after the date of grant.

 

(4)   For 2012, includes the following items and amounts. For Mr. Krishnan: 401(k) Plan matching contribution of $7,500; and welfare and life benefits employer premiums of $19,158. For Dr. Reed: 401(k) Plan matching contribution of $7,500; welfare and life benefits employer premiums of $13,664; and relocation expenses of $52,392.

 

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(5)   For 2011, includes the following items and amounts. For Dr. Reed: 401(k) Plan matching contribution of $7,350; welfare and life benefits employer premiums of $13,199.

 

(6)   We did not compensate Mr. Kirk prior to this offering.

 

(7)   Prior to his commencement of employment with us, we paid Mr. Krishnan $11,000 in consulting fees during 2011.

Narrative to summary compensation table

In 2012, we paid base salaries to Mr. Krishnan and Dr. Reed of $566,667 and $379,167, respectively. As of April 30, 2013, the base salaries of Mr. Krishnan and Dr. Reed are $700,000 and $432,000, respectively. We did not compensate Mr. Kirk for his services during 2012, however, as of the closing of this offering, Mr. Kirk will receive an annual salary. Base salaries are used to recognize the experience, skills, knowledge and responsibilities required of all of our employees, including our named executive officers. None of our named executive officers is currently party to an employment agreement or other agreement or arrangement that provides for automatic or scheduled increases in base salary.

Our board of directors may, at its discretion, award bonuses to our named executive officers from time to time. We typically establish bonus targets for our named executive officers and evaluate their performance based on our achievement of corporate goals and the achievement of specified goals and objectives by each individual employee. Our management may propose bonus awards to the compensation committee of the board of directors primarily based on such achievements. Our board of directors makes the final determination of the eligibility requirements for and the amounts of such bonus awards. For the fiscal year ended December 31, 2012, we awarded bonuses to Mr. Krishnan and Dr. Reed in the amounts of $600,000 and $120,000, respectively, based on achievement of our corporate goals and their individual achievements of specified objectives.

Although we do not have a formal policy with respect to the grant of equity incentive awards to our executive officers, or any formal equity ownership guidelines applicable to them, we believe that equity grants provide our executives with a strong link to our long-term performance, create an ownership culture, and help to align the ownership interests of our executives and our shareholders. In addition, we believe that equity grants with a time-based vesting feature promote executive retention because this feature incentivizes our executive officers to remain in our employment during the vesting period.

 

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Outstanding equity awards at fiscal year end

The following table sets forth specified information concerning unexercised stock options and equity incentive plan awards for each of the named executive officers outstanding as of December 31, 2012.

 

 

 
      Option awards  
            Number of securities
underlying
unexercised options
                   
Name    Grant
date
     Exercisable     
Unexercisable
    Equity
incentive
plan
awards:
Number of
securities
underlying
unexercised
unearned
options
   Option
exercise
price
($)
     Option
expiration
date
 

 

 

Randal J. Kirk

    

 

2/20/2008

2/20/2009

  

  

    

 

15,000

5,000

  

  

    

 


  

  

     $

$

1.57

1.88

  

  

    

 

2/20/2018

2/20/2019

  

  

Krish S. Krishnan

     12/5/2011         250,000         750,000 (1)       $ 4.07         12/5/2021   

Thomas D. Reed

    

 

 

 

2/7/2006

11/15/2007

2/20/2008

2/20/2009

  

  

  

  

    

 

 

 

108,400

50,000

15,000

5,000

  

  

  

  

    

 

 

 


  

  

  

  

     $

$

$

$

0.77

1.57

1.57

1.88

  

  

  

  

    

 

 

 

2/7/2016

11/15/2017

2/20/2018

2/20/2019

  

  

  

  

 

 
(1)   These options will vest annually in increments of 250,000 per year on each of December 5, 2013, 2014 and 2015.

Employment agreements with named executive officers

We do not have formal employment agreements with Mr. Kirk or Mr. Krishnan. On August 31, 2006, we entered into a Second Amended and Restated Employment Agreement with Dr. Reed. The employment agreement provides for an indefinite term and “at will” employment. The employment agreement provides for an initial annual base salary of $120,000, which was subsequently increased to $432,000 in 2013, and the ability to receive an annual performance bonus. Under the employment agreement, Dr. Reed has agreed (i) not to solicit our customers for a period of 15 months after the termination of his employment, (ii) not to solicit our employees for a period of 15 months after the termination of his employment, (iii) to protect our confidential information and trade secrets and (iv) to assign to us related intellectual property developed during the course of his employment.

Compensation recovery policies

It is the board’s policy that in the event the board determines that a significant restatement or correction of our financial results or other metrics is required for the prior fiscal year for which audited financial statements have been completed, and, had the results or metrics been properly calculated, our officers would have received less compensation, the board has the authority to obtain reimbursement of any portion of any performance based compensation paid or awarded, whether cash or equity based, to the officers and to other employees responsible for accounting errors resulting in the restatement or correction that is greater than would have been paid or awarded calculated based upon the restated or corrected financial results or metrics. Further, it is the policy of the board to seek recoupment in all instances where Section 304 of the Sarbanes-Oxley Act of 2002 requires us to seek recoupment.

 

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Equity compensation plans and other benefit plans

Intrexon Corporation 2008 Equity Incentive Plan

The Intrexon Corporation 2008 Equity Incentive Plan, as amended, which we refer to as the 2008 Plan, was first adopted by our board of directors and our shareholders in April 2008.

The 2008 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, or SARs, restricted stock awards, restricted stock unit awards and incentive awards. Our employees, directors, consultants and advisors, and the employees, directors, consultants and advisors of our affiliated entities, are eligible to receive awards under the 2008 Plan; however, incentive stock options may only be granted to our employees or the employees of our affiliated entities. In accordance with the terms of the 2008 Plan, the compensation committee of our board of directors administers the 2008 Plan and, subject to any limitations in the 2008 Plan, selects the recipients of awards and determines, among other things:

 

 

the number of shares of common stock covered by options and the dates upon which those options become exercisable;

 

 

the exercise prices of options;

 

 

the duration of options (subject to certain limitations set forth in the plan);

 

 

the methods of payment of the exercise price of options;

 

 

the number of shares of common stock subject to any SARs and the terms and conditions of those rights, including the term (subject to certain limitations set forth in the plan), the conditions for exercise and payment upon exercise;

 

 

the number of shares of common stock subject to any restricted stock awards and restricted stock unit awards and the terms and conditions of those awards, including the price, if any, restriction period (subject to certain limitations set forth in the plan) and conditions for repurchase (with respect to restricted stock awards); and

 

 

the number of shares of common stock subject to any incentive awards and the terms and conditions of those awards, including the payment terms and award or the dollar amount of any incentive award period (subject to certain limitations set forth in the plan).

In the event of a change in control, as defined in the 2008 Plan, the compensation committee has the discretion to take one or more of the following actions with respect to outstanding awards on or before the date of the change in control:

 

 

provide, upon notice to the participant, that some or all of the outstanding awards shall terminate on or before the change in control without payment to the holder of such award if not exercised by the holder (to the extent such awards are then exercisable or exercisable by the change in control) within a specified reasonable period of time;

 

 

provide that all outstanding awards shall terminate on or before the change in control in consideration for payment to the holders (to the extent such awards are then exercisable or exercisable by the change in control) of the excess, if any, of the fair market value of the common stock subject to the award minus the exercise price or initial value (as applicable); and

 

 

take such other action as the compensation committee determines reasonable to permit the holder of the award to realize the value of the award (to the extent such awards are then exercisable or exercisable by the change in control).

 

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As of December 31, 2012, there were options to purchase an aggregate of 4,048,672 shares of common stock outstanding under the 2008 Plan at a weighted-average exercise price of $3.37 per share. As of December 31, 2012, there were 5,111,066 shares of common stock reserved for future issuance under the 2008 Plan. On and after the effective date of the Intrexon Corporation 2013 Equity and Cash Incentive Plan described below, which we refer to as the 2013 Plan, we will grant no further stock options or other awards under the 2008 Plan.

Intrexon Corporation 2013 Equity and Cash Incentive Plan

The 2013 Plan was adopted by our board of directors and approved by our shareholders on                     , 2013, and will become effective upon the closing of this offering. The 2013 Plan will replace the 2008 Plan. The material terms of the 2013 Plan are summarized below.

Summary of the material terms of the 2013 Plan

Purpose.    We established the 2013 Plan to attract, retain and motivate our employees, officers and directors, to promote the success of our business by linking the personal interests of our employees, officers consultants, advisors and directors to those of our shareholders and to encourage stock ownership on the part of management. The 2013 Plan is intended to permit the grant of stock options (both incentive stock options, or ISOs and non-qualified stock options, or NQSOs or, collectively Options, SARS, restricted stock awards, or Restricted Stock Awards, restricted stock units, or RSUs, incentive awards, or Incentive Awards, other stock-based awards, or Stock Based Awards and dividend equivalents, or Dividend Equivalents.

Administration.    The 2013 Plan is administered by our Compensation Committee, who has the authority to grant awards to such persons and upon such terms and conditions (not inconsistent with the provisions of the 2013 Plan) as it may consider appropriate. Our Compensation Committee may act through subcommittees or, with respect to awards granted to individuals who are not subject to the reporting and other provisions of Section 16 of the Exchange Act and who are not members of our board of directors or the board of directors of our Affiliates (as defined by the 2013 Plan), delegate to one or more officers all or part of its duties with respect to such awards. Our Compensation Committee may, at its discretion, accelerate the time at which any award may be exercised, become transferable or nonforfeitable or become earned and settled only (i) in the event of the participant’s death, disability, retirement or involuntary termination of employment or service (including a voluntary termination of employment or service for good reason) or (ii) in connection with a Change in Control (as defined in the 2013 Plan).

Authorized Shares.    Under the 2013 Plan, we may issue a maximum aggregate of                  shares of common stock, all of which may be issued pursuant to Options, SARs, Restricted Stock Awards, RSUs, Incentive Awards, Stock-Based Awards or Dividend Equivalents. Each share issued in connection with an award will reduce the number of shares available under the 2013 Plan by one, and each share covered under a SAR will reduce the number of shares available under the 2013 Plan by one, even though the share is not actually issued upon settlement of the SAR. Shares relating to awards that are terminated by expiration, forfeiture, cancellation or otherwise without issuance of shares of common stock, settled in cash in lieu of shares, or exchanged prior to the issuance of shares for awards not involving shares, will again be available for issuance under the 2013 Plan. Shares not issued as a result of net settlement of an award, tendered or

 

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withheld to pay the exercise price, purchase price or withholding taxes of an award or shares purchased on the open market with the proceeds of the exercise price of an award will not again be available for issuance under the 2013 Plan.

Written Agreements.    All awards granted under the 2013 Plan will be governed by separate written agreements between the participants and us. The written agreements will specify the terms of the particular awards.

Transferability.    Generally, an award is non-transferable except by will or the laws of descent and distribution, and during the lifetime of the participant to whom the award is granted, the award may only be exercised by, or payable to, the participant. However, the Compensation Committee may provide that awards, other than ISOs or a Corresponding SAR that is related to an ISO, may be transferred by a participant to any of such class of transferees who can be included in the class of transferees who may rely on a Form S-8 Registration Statement under the Securities Act of 1933 to sell shares issuable upon exercise or payment of such awards. Any such transfer will be permitted only if (i) the participant does not receive any consideration for the transfer, (ii) the Committee expressly approves the transfer and (iii) the transfer is on such terms and conditions as are appropriate for the class of transferees who may rely on the Form S-8 Registration Statement. The holder of the transferred award will be bound by the same terms and conditions that governed the award during the period that it was held by the participant, except that such transferee may only transfer the award by will or the laws of descent and distribution.

Maximum Award Period.    No award shall be exercisable or become vested or payable more than ten years after the date of grant. An ISO granted to a Ten Percent Shareholder (as defined in the 2013 Plan) or a corresponding SAR that relates to such an ISO may not be exercisable more than five years after the date of grant.

Compliance With Applicable Law.    No award shall be exercisable, vested or payable except in compliance with all applicable federal and state laws and regulations (including, without limitation, tax and securities laws), any listing agreement with any stock exchange to which the Company is a party, and the rules of all domestic stock exchanges on which the Company’s shares may be listed.

Payment.    The exercise or purchase price of an award, and any taxes required to be withheld with respect to an award, may be paid in cash or, if the written agreement so provides, the Compensation Committee may allow a participant to pay all or part of the exercise or purchase price, and any required withholding taxes, by tendering shares of common stock, through a broker-assisted cashless exercise, by means of “net exercise” procedure, or any other specified medium of payment.

Shareholder Rights.    No participant shall have any rights as our shareholder as a result of issuance of an award until the award is settled by the issuance of common stock (other than a Restricted Stock Award or RSUs for which certain shareholder rights may be granted).

Forfeiture Provisions.    Awards do not confer upon any individual any right to continue in our employ or service or in the employ or service of our Affiliates. All rights to any award that a participant has will be immediately forfeited if the participant is discharged from employment or service for “Cause” (as defined in the 2013 Plan).

 

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Types of awards

Options.    Both ISOs and NQSOs may be granted under the 2013 Plan. Our Compensation Committee determines the eligible individuals to whom grants of Options will be made, the number of shares subject to each option, the exercise price per share, the time or times at which the option may be exercised, whether any performance or other conditions must be satisfied before a participant may exercise an option, the method of payment by the participant, the method of delivery of shares to a participant, whether the Option is an ISO or a NQSO, and all other terms and conditions of the award. However, the exercise price of an Option may not be less than the fair market value of a share of common stock on the date the Option is granted. No participant may be granted ISOs that are first exercisable in any calendar year for shares of common stock having an aggregate fair value (determined on the date of grant) that exceeds $100,000. With respect to an ISO granted to a participant who is a Ten Percent Shareholder (as defined in the 2013 Plan), the exercise price per share may not be less than 110 percent of the fair market value of the common stock on the date the Option is granted. At the Compensation Committee’s discretion, an Option may be granted with or without a Corresponding SAR (as defined below).

SARs.    A SAR entitles the participant to receive, upon exercise, the excess of the fair market value on that date of each share of common stock subject to the exercised portion of the SAR over the fair market value of each such share on the date of the grant of the SAR. A SAR can be granted alone or in tandem with an Option. A SAR granted in tandem with an Option is called a Corresponding SAR and entitles the participant to exercise the Option or the SAR, at which time the other tandem award expires with respect to the number of shares being exercised. The Compensation Committee is authorized to determine the eligible individuals to whom grants of SARs will be made, the number of shares of common stock covered by the grant, the time or times at which a SAR may be exercised and all other terms and conditions of the SAR. However, no participant may be granted Corresponding SARs that are related to ISOs which are first exercisable in any calendar year for shares of common stock having an aggregate fair market value (determined on the date of grant) that exceeds $100,000.

Restricted Stock Awards and RSUs.    A Restricted Stock Award is the grant or sale of shares of common stock, which may be subject to forfeiture for a period of time or subject to certain conditions. An RSU entitles the participant to receive, upon vesting, shares of our common stock. We will deliver to the participant one share of common stock for each RSU that becomes earned and payable. With regard to Restricted Stock Awards, the Compensation Committee is authorized to determine the eligible individuals to whom grants will be made, the number of shares subject to such grants, the purchase price, if any, to be paid for each share subject to the award of restricted stock, the time or times at which the restrictions will terminate, and all other terms and conditions of the restricted stock. With regards to RSUs, the Compensation Committee is authorized to determine the eligible individuals to whom grants will be made, the number of shares subject to such grants and the vesting conditions entitling a participant to settlement of the RSUs.

Incentive Awards.    An Incentive Award entitles the participant to receive cash or common stock when certain conditions are met. The Compensation Committee has the authority to determine the eligible individuals to whom grants are made and all other terms and conditions of the Incentive Award.

 

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Stock-Based Awards.    Stock-Based Awards may be denominated or payable in, valued by reference to or otherwise based on shares of common stock, including awards convertible or exchangeable into shares of common stock (or the cash value thereof) and common stock purchase rights and awards valued by reference to the fair market value of the common stock. The Compensation Committee has the authority to determine the eligible individuals to whom grants will be made and all other terms and conditions of Stock-Based Awards. However, the purchase price for the common stock under any Stock-Based Award in the nature of a purchase right may not be less than the fair market value of the shares of the common stock as of the date the award is granted. Cash awards, as an element of or supplement to any other award under the 2013 Plan, may also be granted.

Our Compensation Committee is also authorized under the 2013 Plan to grant shares of common stock as a bonus, or to grant shares of common stock or other awards in lieu of other obligations of the Company or any of our Affiliates to pay cash or to deliver other property under the 2013 Plan or under any other plans or compensatory arrangements of the Company or any of our Affiliates.

Dividend Equivalents.    Our Compensation Committee may also grant Dividend Equivalents under the 2013 Plan. A Dividend Equivalent is an award that entitles the participant to receive cash, shares of common stock, other awards or other property equal in value to all or a specified portion of dividends paid with respect to shares of our common stock. The Compensation Committee is authorized to determine the eligible individuals to whom grants are made and all other terms and conditions. However, no Dividend Equivalents may be awarded with an Option, SAR or Stock-Based Award in the nature of purchase rights.

Material terms of the performance-based compensation

Awards that are paid to Covered Employees (as defined in the 2013 Plan) are potentially subject to the tax deduction limitations of Section 162(m) of the Code. The limitations of Section 162(m) of the Code do not apply, however, to performance-based compensation that meets certain requirements, including shareholder approval of the eligibility requirements, business criteria for performance goals and individual award limits of the 2013 Plan pursuant to which such awards are made.

Eligibility.    Any of our employees or service providers, employees or service providers of our Affiliates (as defined in the 2013 Plan), and nonemployee members of our Board of Directors or of any Board of Directors of our Affiliates is eligible to receive an award under the 2013 Plan.

Award Limits.    In any calendar year, no participant may be granted awards that relate to more than                  shares of Common Stock. For these purposes, an Option and its corresponding SAR will be counted as a single award. For any award stated with reference to a specific dollar limit, the maximum amount payable with respect to any 12-month performance period to any one participant is $                 (pro-rated up or down for performance periods greater or less than 12 months). Award limits that are expressed as a number of shares are subject to the adjustment provisions of the 2013 Plan as described below.

Performance Criteria.    Our Compensation Committee has the discretion to establish objectively determinable performance conditions for when awards will become vested, exercisable and payable. Objectively determinable performance conditions generally are performance conditions (a) that are established in writing (i) at the time of the grant or (ii) no later than the earlier of (x) 90

 

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days after the beginning of the period of service to which they relate and (y) before the lapse of 25 percent of the period of service to which they relate; (b) that are uncertain of achievement at the time they are established and (c) the achievement of which is determinable by a third party with knowledge of the relevant facts. These performance conditions may be based on one or any combination of metrics related to our financial, market or business performance. The form of the performance conditions also may be measured on a company, affiliate, division, business unit or geographic basis, individually, alternatively or in any combination, subset or component thereof. Performance goals may reflect absolute entity performance or a relative comparison of entity performance to the performance of a peer group of entities or other external measure of the selected performance conditions. Profits, earnings and revenues used for any performance condition measurement may exclude any extraordinary or nonrecurring items. The performance conditions may, but need not, be based upon an increase or positive result under the aforementioned business criteria and could include, for example and not by way of limitation, maintaining the status quo or limiting the economic losses (measured, in each case, by reference to the specific business criteria). An award that is intended to become exercisable, vested or payable on the achievement of performance conditions means that the award will not become exercisable, vested or payable solely on mere continued employment or service. However, such an award, in addition to performance conditions, may be subject to continued employment or service by the participant. The performance conditions may include any or any combination of the following: total return to shareholders or on shareholders’ investment; cash flow; return on assets (net or otherwise), capital, equity or sales; stock price (including, but not limited to, growth measures); basic or diluted earnings per share; reduction of outstanding debt; gross, operating or net earnings; tangible net worth; return on investment; cash flow; book value; margins; fair market value of the Company; market share; expense levels; revenue; earnings before interest and taxes; earnings before interest, taxes, depreciation and/or amortization; EBIT (as defined in the 2013 Plan) or EBITDA (as defined in the 2013 Plan) less capital expenditures; productivity ratios; expense targets; working capital targets; economic value; competitive market metrics; employee retention; lifetime revenue; profits/earnings ratio; leverage ratio; accounts receivable; debt ratings; or peer group comparisons of any of the aforementioned performance conditions.

The foregoing performance conditions represent the criteria on which performance goals may be based under the 2013 Plan for awards that are intended to qualify for the “qualified performance-based compensation” exception to Section 162(m) of the Code. At its sole discretion, our Compensation Committee may grant an award that is subject to the achievement or satisfaction of performance conditions that are not set forth in the 2013 Plan to the extent our Compensation Committee does not intend for such award to constitute “qualified performance-based compensation” within the meaning of Section 162(m) of the Code.

Our Compensation Committee has the discretion to select one or more periods of time over which the attainment of one or more of the foregoing performance conditions will be measured for the purpose of determining when an award will become vested, exercisable or payable, except that the length of the performance period may not be less than one year, except in the case of newly-hired or newly-promoted employees or recapitalization, reorganization, liquidation, sale, spin-off or other disposition or similar event or in the event of the participant’s death, disability, retirement or involuntary termination of employment or service (including a voluntary termination of employment or service for good reason). The Compensation Committee has the authority to adjust goals and awards in the manner set forth in the 2013 Plan.

 

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Change in Control.    In the event of a “Change in Control” (as defined in the 2013 Plan) and, with respect to awards that are subject to Section 409A of the Internal Revenue Code of 1986, as amended, or the Code, and such awards, 409A Awards, only to the extent permitted by Section 409A of the Code, our Compensation Committee in its discretion may, on a participant-by-participant basis (a) accelerate the vesting of all unvested and unexercised Options, SARs or Stock-Based Awards in the nature of purchase rights and/or terminate such awards, without any payment therefore, immediately prior to the date of any such transaction after giving the participant at least seven days written notice of such actions; (b) fully vest and/or accelerate settlement of any awards; (c) terminate any outstanding Options, SARs or Stock-Based Awards in the nature of purchase rights after giving the participant notice and a chance to exercise such awards (to the extent then exercisable or exercisable upon the change in control); (d) cancel any portion of an outstanding award that remains unexercised or is subject to restriction or forfeiture in exchange for a cash payment to the participant of the value of the award; or (e) require that the award be assumed by the successor corporation or replaced with interests of an equal value in the successor corporation.

Amendment and Termination.    The 2013 Plan expires on                 , unless terminated earlier by our board of directors. Any award that is outstanding as of the date the 2013 Plan expires will continue in force according to the terms set out in the award agreement. Our board of directors may terminate, amend or modify the 2013 Plan at any time. However, shareholder approval may be required for certain types of amendments under applicable law or regulatory authority. Except as may be provided in an award agreement or the 2013 Plan, no amendment to the 2013 Plan may adversely affect the terms and conditions of any existing award in any material way without the participant’s consent.

An amendment will be contingent on approval of our shareholders, to the extent required by law, by the rules of any stock exchange on which our securities are then traded or if the amendment would (i) increase the benefits accruing to participants under the 2013 Plan, including without limitation, any amendment to the 2013 Plan or any agreement to permit a re-pricing or decrease in the exercise price of any outstanding awards, (ii) increase the aggregate number of shares of common stock that may be issued under the 2013 Plan, (iii) modify the requirements as to eligibility for participation in the 2013 Plan or (iv) change the stated performance conditions for performance-based compensation within the meaning of Section 162(m) of the Code. Additionally, to the extent the Compensation Committee deems necessary for the 2013 Plan to continue to grant awards that are intended to comply with the performance-based exception to the deduction limits of Section 162(m) of the Code, the Compensation Committee will submit the material terms of the stated performance conditions to our shareholders for approval no later than the first shareholder meeting that occurs in the fifth year following the year in which our shareholders previously approved the performance goals.

Material U.S. federal income tax consequences of awards under the 2013 Plan

The following discussion summarizes the principal federal income tax consequences associated with awards under the 2013 Plan. The discussion is based on laws, regulations, rulings and court decisions currently in effect, all of which are subject to change.

ISOs.    A participant will not recognize taxable income on the grant or exercise of an ISO (although the excess of the fair market value of the common stock over the exercise price will be included for alternative minimum tax purposes). A participant will recognize taxable income

 

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when he or she disposes of the shares of common stock acquired under the ISO. If the disposition occurs more than two years after the grant of the ISO and more than one year after its exercise, the participant will recognize long-term capital gain (or loss) to the extent the amount realized from the disposition exceeds (or is less than) the participant’s tax basis in the shares of common stock. A participant’s tax basis in the common stock generally will be the amount the participant paid for the stock. If common stock acquired under an ISO is disposed of before the expiration of the ISO holding period described above, the participant will recognize as ordinary income in the year of the disposition the excess of the fair market value of the common stock on the date of exercise of the ISO over the exercise price. Any additional gain will be treated as long-term or short-term capital gain, depending on the length of time the participant held the shares. Special rules apply if a participant pays the exercise price by delivery of common stock. We will not be entitled to a federal income tax deduction with respect to the grant or exercise of an ISO. However, in the event a participant disposes of common stock acquired under an ISO before the expiration of the ISO holding period described above, we generally will be entitled to a federal income tax deduction equal to the amount of ordinary income the participant recognizes.

NQSOs.    A participant will not recognize any taxable income on the grant of a NQSO. On the exercise of a NQSO, the participant will recognize as ordinary income the excess of the fair market value of the common stock acquired over the exercise price. A participant’s tax basis in the common stock is the amount paid plus any amounts included in income on exercise. Special rules apply if a participant pays the exercise price by delivery of common stock. The exercise of a NQSO generally will entitle us to claim a federal income tax deduction equal to the amount of ordinary income the participant recognizes.

SARs.    A participant will not recognize any taxable income at the time SARs are granted. The participant at the time of receipt will recognize as ordinary income the amount of cash and the fair market value of the common stock that he or she receives. We generally will be entitled to a federal income tax deduction equal to the amount of ordinary income the participant recognizes.

Restricted Stock Awards and RSUs.    With regard to Restricted Stock Awards, a participant will recognize ordinary income on account of a Restricted Stock Award on the first day that the shares are either transferable or not subject to a substantial risk of forfeiture. The ordinary income recognized will equal the excess of the fair market value of the common stock on such date over the price, if any, paid for the stock. However, even if the shares under a Restricted Stock Award are both nontransferable and subject to a substantial risk of forfeiture, the participant may make a special “83(b) election” to recognize income, and have his or her tax consequences determined, as of the date the Restricted Stock Award is made. The participant’s tax basis in the shares received will equal the income recognized plus the price, if any, paid for the Restricted Stock Award. We generally will be entitled to a federal income tax deduction equal to the ordinary income the participant recognizes. With regard to RSUs, the participant will not recognize any taxable income at the time RSUs are granted. When the terms and conditions to which the RSUs are subject have been satisfied and the RSUs are paid, the participant will recognize as ordinary income the fair market value of the common stock he or she receives. We generally will be entitled to a federal income tax deduction equal to the ordinary income the participant recognizes.

Incentive Awards.    A participant will not recognize any taxable income at the time an Incentive Award is granted. When the terms and conditions to which an Incentive Award is subject have been satisfied and the award is paid, the participant will recognize as ordinary income the

 

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amount of cash and the fair market value of the common stock he or she receives. We generally will be entitled to a federal income tax deduction equal to the amount of ordinary income the participant recognizes, subject to the deduction conditions and limits applicable under Section 162(m) of the Code.

Stock-Based Awards.    A participant will recognize ordinary income on receipt of cash or shares of common stock paid with respect to a Stock-Based Award. We generally will be entitled to a federal tax deduction equal to the amount of ordinary income the participant recognizes.

Dividend Equivalents.    A participant will recognize as ordinary income the amount of cash and the fair market value of any common stock he or she receives on payment of the Dividend Equivalents. To the extent the Dividend Equivalents are paid in the form of other awards, the participant will recognize income as otherwise described herein.

Limitation on Deductions.    The deduction for a publicly-held corporation for otherwise deductible compensation to a “covered employee” generally is limited to $1,000,000 per year. An individual is a covered employee if he or she is the chief executive officer or one of the three highest compensated officers for the year (other than the chief executive officer or chief financial officer). The $1,000,000 limit does not apply to compensation payable solely because of the attainment of performance conditions that meet the requirements set forth in Section 162(m) of the Code and the underlying regulations. Compensation is considered performance-based only if (a) it is paid solely on the achievement of one or more performance conditions; (b) two or more “outside directors” set the performance conditions; (c) before payment, the material terms under which the compensation is to be paid, including the performance conditions, are disclosed to, and approved by, the shareholders and (d) before payment, two or more “outside directors” certify in writing that the performance conditions have been met. The 2013 Plan has been designed to enable the Compensation Committee to structure awards that are intended to meet the requirements for performance-based compensation that would not be subject to the $1,000,000 per year deduction limit.

Other Tax Rules.    The 2013 Plan is designed to enable our Compensation Committee to structure awards that will not be subject to Section 409A of the Code, which imposes certain restrictions and requirements on deferred compensation. However, our Compensation Committee may grant awards that are subject to Section 409A of the Code. In that case, the terms of such 409A Award will be (a) subject to the deferral election requirements of Section 409A of the Code; and (b) may only be paid upon a separation from service, a set time, death, disability, a change in control or an unforeseeable emergency, each within the meanings of Section 409A of the Code. Our Compensation Committee shall not have the authority to accelerate or defer a 409A Award other than as permitted by Section 409A of the Code. Moreover, any payment on a separation from service of a “Specified Employee” (as defined in the 2013 Plan) will not be made until six months following the participant’s separation from service (or upon the participant’s death, if earlier) as required by Section 409A of the Code.

 

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Equity compensation plan information

The following table provides certain information with respect to our 2008 Plan as of December 31, 2012:

 

 

 
Number of securities to be issued upon exercise
of outstanding options,
warrants and rights(a)(1)
   Weighted-average
exercise price of
outstanding
options,
warrants and rights
(b)(1)
     Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
column (a)) (c)(1)
 

 

 

4,048,672

   $ 3.37         5,111,066   

 

  

 

 

    

 

 

 
(1)   Excludes securities to be issued upon exercise of 894,423 warrants at a weighted-average exercise price per share of $0.45 issued in conjunction with the acquisition of Agarigen, Inc. in 2011.

401(k) Plan

We provide a 401(k) Plan to all eligible employees as defined in the plan. Subject to annual limits set by the Internal Revenue Service, we match 100 percent of eligible employee contributions up to a maximum of 3 percent of an employee’s salary and vesting in our match is ratable over three years from an employee’s date of employment.

Limitation of liability and indemnification

Our amended and restated articles of incorporation provide that we will indemnify our directors and officers with respect to certain liabilities, expenses and other amounts imposed upon them because of having been a director or officer, except in the case of willful misconduct or a knowing violation of criminal law. See the “Description of capital stock—Indemnification and limitation of directors’ and officers’ liability” section of this prospectus for a further discussion of these arrangements.

Non-employee director compensation

Through May 9, 2013, all non-employee directors received annual compensation of $10,000, payable at the first meeting of the board of directors for the calendar year, and an additional $1,500 per meeting. Members of a board committee received $1,500 per committee meeting that did not take place in connection with a full meeting of the board of directors. Non-employee directors had the option in lieu of cash to receive payments in shares of common stock (valued at the fair market value at the time of issuance). Newly appointed non-employee directors received a one-time grant of options to purchase 40,000 shares of common stock (with an exercise price equal to the fair market value on the date of grant) with one-fourth of such options vesting each year on the anniversary of appointment to the board of directors. All non-employee directors received an annual grant of options to purchase 5,000 shares of common stock (with an exercise price equal to the fair market value on the date of grant), with one-fourth of such options vesting on January 1st of each year.

On May 9, 2013, the board of directors adopted an updated non-employee director compensation plan, to be effective as of the next meeting of the board of directors. Under the plan, all non-employee directors receive annual compensation of $35,000, payable at the first meeting of the board of directors for the calendar year, and an additional $1,500 per meeting ($750 per special telephonic meeting). Each board committee chair receives $5,000 annually,

 

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payable at the first regularly scheduled meeting of the board of directors for the calendar year and members of a board committee receive $750 per committee meeting. Non-employee directors also receive reimbursement for reasonable expenses incurred in attending board of directors and committee meetings. Non-employee directors have the option in lieu of cash to receive payments in shares of common stock (valued at the fair market value at the time of issuance). Newly appointed non-employee directors receive a one-time grant of options to purchase 40,000 shares of common stock (with an exercise price equal to the fair market value on the date of grant) with one-fourth of such options vesting each year on the anniversary of appointment to the board of directors, subject to continued board service. All non-employee directors are entitled to an annual grant of options to purchase 15,000 shares of common stock (with an exercise price equal to the fair market value on the date of grant), which options vest upon grant.

 

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The following table discloses all compensation provided to the non-employee directors for the most recently completed fiscal year ending December 31, 2012:

 

 

 
Name(1)    Equity
awards
($)(1)
     Option
awards
($)(2)
     Total($)  

 

  

 

 

    

 

 

    

 

 

 

Cesar L. Alvarez

   $ 17,509       $ 16,265       $ 33,774   

Steven Frank

   $ 16,007       $ 16,265       $ 32,272   

Larry D. Horner

   $ 17,509       $ 16,265       $ 33,774   

Jeffrey B. Kindler

   $ 16,007       $ 29,125       $ 45,132   

Dean J. Mitchell

   $ 17,509       $ 16,645       $ 34,154   

Robert B. Shapiro

   $ 17,509       $ 29,125       $ 46,634   

 

  

 

 

    

 

 

    

 

 

 
(1)   Our directors may elect to take any portion of their director fees in shares of our common stock instead of cash. During 2012, all of our directors elected to take all such director fees in shares of our common stock. Represents the grant date fair market value of such stock awards computed in accordance with FASB ASC Topic 718. This amount does not reflect the actual cash value that will be recognized by each of the non-employee directors when such shares are sold.

 

(2)   Represents the grant date fair market value of such stock awards computed in accordance with FASB ASC Topic 718. This amount does not reflect the actual cash value that will be recognized by each of the non-employee directors when such options are exercised and the underlying shares are sold. All outstanding option-based awards for the non-employee directors as of December 31, 2012, are set out in the following table:

 

 

 
      Option awards  
            Number of securities underlying
unexercised options
               
Name    Grant
date
     (#)
Exercisable
     (#)
Unexercisable
     Option
exercise
price
($)
     Option
expiration
date
 

 

 

Cesar L. Alvarez

    

 

 

 

 

 

2/20/2008

2/20/2009

6/30/2010

3/7/2011

12/2/2011

3/15/2012

  

  

  

  

  

  

    

 

 

 

 

 

15,000

5,000

2,500

1,250

3,750

  

  

  

  

  

  

    

 

 

 

 

 


2,500

3,750

11,250

5,000

  

  

  

  

  

  

   $

$

$

$

$

$

1.57

1.88

1.88

3.38

4.07

4.07

  

  

  

  

  

  

    

 

 

 

 

 

2/20/2018

2/20/2019

6/30/2020

3/7/2021

12/2/2021

3/15/2022

  

  

  

  

  

  

Steven Frank

    

 

 

 

 

 

2/20/2008

2/20/2009

6/30/2010

3/7/2011

12/2/2011

3/15/2012

  

  

  

  

  

  

    

 

 

 

 

 

15,000

5,000

2,500

1,250

3,750

  

  

  

  

  

  

    

 

 

 

 

 


2,500

3,750

11,250

5,000

  

  

  

  

  

  

   $

$

$

$

$

$

1.57

1.88

1.88

3.38

4.07

4.07

  

  

  

  

  

  

    

 

 

 

 

 

2/20/2018

2/20/2019

6/30/2020

3/7/2021

12/2/2021

3/15/2022

  

  

  

  

  

  

Larry D. Horner

    

 

 

 

 

 

2/20/2008

2/20/2009

6/30/2010

3/7/2011

12/2/2011

3/15/2012

  

  

  

  

  

  

    

 

 

 

 

 

15,000

5,000

2,500

1,250

3,750

  

  

  

  

  

  

    

 

 

 

 

 


2,500

3,750

11,250

5,000

  

  

  

  

  

  

   $

$

$

$

$

$

1.57

1.88

1.88

3.38

4.07

4.07

  

  

  

  

  

  

    

 

 

 

 

 

2/20/2018

2/20/2019

6/30/2020

3/7/2021

12/2/2021

3/15/2022

  

  

  

  

  

  

Jeffrey B. Kindler

    

 

12/2/2011

3/15/2012

  

  

    

 

10,000

  

  

    

 

30,000

5,000

  

  

   $

$

4.07

4.07

  

  

    

 

12/2/2021

3/15/2022

  

  

Dean J. Mitchell

    

 

 

 

 

3/17/2009

6/30/2010

3/7/2011

12/2/2011

3/15/2012

  

  

  

  

  

    

 

 

 

 

15,000

2,500

1,250

3,750

  

  

  

  

  

    

 

 

 

 


2,500

3,750

11,250

5,000

  

  

  

  

  

   $

$

$

$

$

1.88

1.88

3.38

4.07

4.07

  

  

  

  

  

    

 

 

 

 

3/17/2019

6/30/2020

3/7/2021

12/2/2021

3/15/2022

  

  

  

  

  

Robert B. Shapiro

    

 

12/2/2011

3/15/2012

  

  

    

 

10,000

  

  

    

 

30,000

5,000

  

  

   $

$

4.07

4.07

  

  

    

 

12/2/2021

3/15/2022

  

  

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Certain relationships and related person transactions

The following is a description of transactions since January 1, 2010 to which we have been a party, in which the amount involved exceeded or will exceed $120,000, and in which any of our directors, executive officers or beneficial owners of more than five percent of our voting securities, or affiliates or immediate family members of any of our directors, executive officers or beneficial owners of more than five percent of our voting securities, had or will have a direct or indirect material interest.

Our Company has historically been owned, funded and managed by, Randal J. Kirk, our Chief Executive Officer, and affiliates of Mr. Kirk, for the purpose of exploiting our synthetic biotechnology. As a result, we have engaged in a variety of financial and operational transactions with Mr. Kirk and these affiliates. In accordance with the requirements of the SEC, we describe below all such transactions in which we have engaged since January 1, 2010. All of these transactions have been approved by a majority of the independent and disinterested members of the board of directors.

We believe that each of these transactions were on terms no less favorable to us than terms we could have obtained from unaffiliated third parties. It is our intention to ensure that all future transactions, if any, between us and our officers, directors, principal shareholders and their affiliates or immediate family members, are approved by the nominating and governance committee or a majority of the independent and disinterested members of the board of directors, and are on terms no less favorable to us than those that we could obtain from unaffiliated third parties.

Private placements of securities

We have funded our operations over the past three years principally with proceeds from private placements of our preferred stock. Since January 1, 2010, we issued and sold an aggregate of 19,803,685 shares of our Series D convertible preferred stock at a purchase price per share of $3.38 for an aggregate purchase price of $66.9 million, 38,095,239 shares of our Series E convertible preferred stock at a purchase price per share of $5.25 for an aggregate purchase price of $200.0 million, and 19,047,619 shares of our Series F preferred stock at a purchase price per share of $7.88 for an aggregate purchase price of $150.0 million.

 

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The following table sets forth the number of shares of preferred stock that were issued to our directors, executive officers and holders of more than five percent of our voting securities, and affiliates or immediate family members of our directors, executive officers and holders of more than five percent of our voting securities, in connection with our various preferred stock financings and the aggregate cash purchase price paid by such persons and entities. Each share of preferred stock in the table below will convert into one share of our common stock upon completion of this offering.

 

 

 
Purchaser   Date of purchase     Class of
preferred
stock
   

Number of
shares
purchased*

(#)

    Price per
share*
($)
   

Aggregate
consideration

($)

 

 

 

Kirkfield, L.L.C.(1)(2)

    February 19, 2010        Series D        2,958,580        3.38        10,000,000   

Marcus E. Smith(3)

    February 19, 2010        Series D        14,793        3.38        50,000   

Robert M. Patzig(3)